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VITRAN CORP INC 10-K 2008
e10vk
 

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                          to                                         .
Commission file number 0-19791
 
VITRAN CORPORATION INC.
(Exact name of registrant as specified in its charter)
 
     
Ontario, Canada
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
185 The West Mall, Suite 701, Toronto, Ontario, Canada, M9C 5L5
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
(416) 596-7664
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of each exchange on which registered
     
Common Shares   Toronto Stock Exchange — TSX®
    NASDAQ — National Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. oYes þNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. oYes þNo
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þYes oNo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). oYes þ No
The number of shares of common stock outstanding at February 07, 2008 was 13,448,159. The aggregate market value of the voting stock of the registrant, excluding directors, officers and registered holders of 10% as of February 07, 2008 was approximately $158,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
1) Definitive Proxy statement to be filed within 120 days of December 31, 2007 (Only those portions referenced herein are incorporated in this Annual Report on Form 10-K).
 
 

 


 

TABLE OF CONTENTS
             
Item       Page  
 
           
PART I
           
 
           
1.
  Business     3  
 
           
1. a
  Risk Factors     7  
 
           
1. b
  Unresolved Staff Comments     7  
 
           
2.
  Properties     7  
 
           
3.
  Legal Proceedings     7  
 
           
4.
  Submission of Matters to a Vote of Security Holders     7  
 
           
PART II
           
 
           
5.
  Market for Registrant’s Common Equity and Related Stockholder Matters     8  
 
           
6.
  Selected Financial Data     10  
 
7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     13  
 
           
7. a
  Quantitative and Qualitative Disclosures about Market Risk     26  
 
           
8.
  Financial Statements and Supplementary Data     27  
 
           
9.
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     62  
 
           
9. a
  Controls and Procedures     62  
 
           
9. b
  Other Information     64  
 
           
PART III
           
 
           
10.
  Directors and Executive Officers of the Registrant     64  
 
           
11.
  Executive Compensation     64  
 
           
12.
  Security Ownership of Certain Beneficial Owners and Management     65  
 
           
13.
  Certain Relationships and Related Transactions     65  
 
           
14.
  Principal Accounting Fees and Services     65  
 
           
PART IV
           
 
           
15.
  Exhibits, Financial Statements Schedules and Reports on Form 8-K     65  


 

Unless otherwise indicated all dollar references herein are in United States dollars.
PART I
ITEM 1—BUSINESS
OVERVIEW
          Vitran Corporation Inc. (“Vitran” or the “Company”) is a leading, predominantly non-union, provider of freight surface transportation and related logistics services throughout Canada and in 29 states in the eastern, central, southwestern, and western United States. Its business consists of Less-than-truckload services (“LTL”), Logistics services, and Truckload services. These services are provided by stand-alone business units within their respective regions. The business units operate independently or in a complementary manner to provide solutions depending on a customer’s needs. For the years ended December 31, 2007 and 2006, the Company had revenues of $670.5 million and $514.0 million, respectively.
CORPORATE STRUCTURE
          Vitran’s registered office is located at 185 The West Mall, Suite 701, Toronto, Ontario, Canada, M9C 5L5. Vitran Corporation Inc. was incorporated in Ontario under the Business Corporation Act (Ontario) on April 29, 1981.
          Vitran’s business is carried on through its subsidiaries which hold the relevant licenses and permits required to carry on business. The following are Vitran’s principal operating subsidiaries (including their jurisdiction of incorporation), all wholly owned as at December 31, 2007: Vitran Express Canada Inc. (Ontario); Can-Am Logistics Inc. (Ontario); Vitran Logistics Ltd. (Ontario); Expéditeur T.W. Ltée (Canada); Vitran Corporation (Nevada); Vitran Express Inc. (Indiana); R.A. Christopher Inc. (Kansas); Frontier Transport Corporation (Indiana); Vitran Logistics Corp. (Delaware); Vitran Logistics Inc. (Indiana); Vitran Express West Inc. (Nevada); PJAX, Inc. (Pennsylvania); and Las Vegas/L.A. Express, Inc. (California).
OPERATING SEGMENTS
          Segment financial information is included in Note 12 to the Consolidated Financial Statements.
LTL Services
          Vitran has grown organically and made strategic acquisitions to build a comprehensive LTL network throughout Canada and in the central, southwestern, and western United States. On May 31, 2005 Vitran expanded into the southwestern United States by acquiring Chris Truck Line (“CTL”), a Kansas-based regional less-than-truckload carrier serving 11 states. With the acquisition of CTL, Vitran obtained an additional 19 service centers covering 11 states, including new territory in Colorado, Kansas, Oklahoma, and Texas. On January 3, 2006 Vitran, through its subsidiary Vitran Express West Inc., expanded into the western United States by acquiring the assets of Sierra West Express (“SWE”), a Nevada-based regional less-than-truckload carrier serving three states. With the acquisition of SWE, Vitran expanded its footprint to California, Nevada, and Arizona. On October 2, 2006 Vitran expanded into the eastern United States by acquiring PJAX Freight System (“PJAX”), a Pennsylvania-based regional less-than-truckload carrier serving 11 states. With the acquisition of PJAX, Vitran obtained 22 service centers including expanded and new state coverage in New Jersey, Pennsylvania, Delaware, Maryland, West Virginia and Virginia.
          Vitran’s LTL business represented approximately 87.2% of its revenue for the year ended December 31, 2007. Within the United States, the Company operates primarily within the eastern, central, southwestern and western United States and delivers approximately 90.0% of its freight shipments within one or two days. In addition, the Company offers its services to the other regions in the United States (other than Alaska and Hawaii) through its strategic inter-regional relationships. The service is provided over-the-road, mostly by Company drivers, which allows more control in servicing these time-sensitive shipments. As an integral part of its service solution, the U.S.

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LTL business was one of the first regional LTL companies to offer an unconditional money back service guarantee to its customers. Vitran’s U.S. LTL regional business represented approximately 60.6% of the Company’s revenues for the year ended December 31, 2007.
          Within Canada, the Company provides next-day service within Ontario, Quebec and within parts of western Canada, and generates most of its revenue from the movement of LTL freight within the three- to five-day east/west service lanes. The majority of its trans-Canada freight is shipped intermodally, whereby the Company’s containers are loaded onto rail cars and trans-loaded to Vitran facilities where Vitran’s network of owner operators pick up and deliver the freight to various destinations. An expedited service solution is also offered nationally using over-the-road driver teams to complete these deliveries in a shorter time frame. Vitran’s Canadian LTL business represented approximately 26.6% of its revenues for the year ended December 31, 2007.
          Vitran’s Transborder Service Solution (inter-regional) provides over-the-road service between its Canadian LTL and U.S. LTL business units. This is the Company’s highest margin and fastest growing service, achieving approximately 26.9% year-over-year revenue growth for the year ended December 31, 2007.
Logistics
          Vitran’s Logistics business, which represented approximately 7.9% of its revenues for the year ended December 31, 2007, consists of two principal lines of business: (1) Supply Chain Solutions in Canada and the United States including warehousing, inventory management and flow-through distribution facilities; and (2) Freight Brokerage, which coordinates the transport of truck and container loads from sales offices in Toronto, Montreal, and Los Angeles.
          Supply Chain Solutions. Supply chain solutions involve the transportation and management of goods and the provision of information about such goods as they pass through the supply chain from manufacturer to end user. Vitran Logistics’ role is to design a supply chain network for a customer, contract with the necessary suppliers (including Vitran’s LTL services), implement the design and manage the logistical system. Vitran’s supply chain services unit offers a range of services in Canada and the United States including warehousing, inventory management and flow-through distribution facilities, focusing primarily on long-term logistics solutions.
          Over the past decade, Vitran has grown the supply chain business unit organically but on November 30, 2007 announced the strategic acquisition of Las Vegas/L.A. Express Inc. (“LVLA”) a retail supply chain management specialist based in Ontario, California. LVLA operates six facilities adding 470,000 square feet of logistics space bringing Vitran’s total to approximately 1.2 million square feet of warehouse and distribution space under management at December 31, 2007.
          Freight Brokerage. Vitran’s Freight Brokerage unit is headquartered in Toronto, Ontario, with sales offices in Toronto, Montreal and Los Angeles so as to capitalize on international traffic flows. Vitran Logistics coordinates the transport of truck and container loads directly from a customer’s facility to the customer’s consignee, anywhere in North America. The Freight Brokerage unit offers both intermodal and highway solutions to customers with any type of full load requirement. Vitran Logistics supports the movement of freight through direct computer links with both its carriers and customers. It provides customers with real-time tracking, customer support information and expediting as required.
Truckload
          Vitran’s Truckload business, operating as Frontier Transport Corporation (“Frontier”), provides truckload service within the United States. Frontier utilizes its company-controlled trailing equipment and tractor owner operators. The business is primarily dry van but also offers temperature controlled service in select markets. Frontier operates from two terminals, one in Atlanta and the other in Indianapolis where the main administration office is located. Frontier principally delivers within a 400-mile radius utilizing 229 owner operators with company-owned or leased trailing fleet.
THE TRUCKING INDUSTRY
          According to estimates made by the American Trucking Association, the United States trucking industry in 2005 accounted for approximately $739 billion, or approximately 88% of total domestic freight transportation

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revenue. Trucks provide freight transportation services to virtually every industry operating in the United States and Canada and generally offer higher levels of reliability, shipment integrity, and speed than other surface transportation options. The trucking industry is highly competitive on the basis of service and price. The LTL portion of the industry accounted for approximately $45 billion of revenue during 2005.
          LTL carriers transport freight for multiple customers to multiple destinations on each trailer. This service requires a network of local pick-up and delivery terminals, hub facilities, and driver fleets. The LTL business is capital intensive, and achieving significant density of operations in a given region can afford a competitive advantage since greater freight volumes are better able to support fixed costs. Vitran believes the regional LTL industry offers a favorable operating model and provides substantial growth opportunities for the following reasons:
    The trend among shippers toward minimal inventories, deferred air freight, and regional distribution has increased the demand for next-day and second-day delivery service.
 
    Regional carriers with sufficient scale and freight density to support local terminal networks can offer greater service reliability and minimize the costs associated with intermediate handling.
 
    Regional carriers are predominantly non-union, which offers cost savings, greater flexibility, and a lower likelihood of service disruptions compared with unionized carriers.
 
    There has been a reduction of capacity as weaker competitors exit the business.
MARKETING AND CUSTOMERS
          Vitran derives its revenue from thousands of customers from a variety of geographic regions and industries in Canada and the United States. The Company’s largest customer represents less than 3.0% of Vitran’s revenues.
          The LTL segment utilizes a computerized freight-costing model to determine the price level that is appropriate for each particular shipment of freight. When necessary, Vitran competes to secure revenue by participating in bid solicitations, provided its customer recognizes the Company as a core carrier over a contracted period of time.
          In the Logistics business, Vitran customizes each solution to fit the needs of the customer. The Logistics operation pursues opportunities that will not only increase the profitability of that segment but will supplement profitability in Vitran’s LTL segment as well.
          The Freight Brokerage business maintains sales offices in Toronto, Montreal, and Los Angeles to capitalize on international traffic flows. The Freight Brokerage unit offers both intermodal and over-the-road truckload solutions to clients.
EMPLOYEES
          At December 31, 2007, Vitran employed approximately 5,024 full- and part-time employees and contracted with approximately 488 owner operators.
          A total of 118 Vitran employees are represented by labor unions. The International Brotherhood of Teamsters and the Canadian Auto Workers Association represent dock workers in two of Vitran’s Canadian terminals. The Company has two collective agreements with its unionized employees. These agreements expire on March 31, 2008, and on September 30, 2008, respectively.
INFORMATION TECHNOLOGY
          Vitran uses technology to reduce costs, improve productivity, and enhance its customer service. Vitran allows its customers to access or exchange information with the Company via Vitran’s website, published web services, electronic data interchange, or over the telephone. The Company uses sophisticated freight handling software to maximize its load average, reduce freight handling, reduce transit times, and improve tracking of

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shipments through its system. Throughout 2007, Vitran’s U.S. LTL business unit has been in the process of migrating all of its U.S. LTL operations to a common transportation operating system that will further enhance the Company’s technology platform and help deliver superior service to its customers. The U.S. LTL business unit has achieved many milestones in this endeavor and anticipates completing the implementation in 2008.
SEASONALITY
          In the trucking industry for a typical year, the months of September and October usually have the highest business levels, while the months of December, January and February generally have the lowest business levels. Adverse weather conditions, generally experienced in the first quarter of the year, such as heavy snow and ice storms, have a negative impact on operating results. Accordingly, revenue and profitability are lowest in the first quarter.
REGULATION
          Regulatory agencies exercise broad powers over the trucking industry, generally governing such activities as authorization to engage in motor carrier operations, safety and financial reporting. The industry also may become subject to new or more restrictive regulations relating to fuel emissions, ergonomics, or limits on vehicle weight and size. Additional changes in the laws and regulations governing the trucking industry could affect the economics of the industry by requiring changes in operating practices or by influencing the demand for and the costs of providing services to customers.
          From time to time, various legislative proposals that might affect the trucking industry are introduced, including proposals to increase federal, state, provincial or local taxes, including taxes on motor fuels. Vitran cannot predict whether, or in what form, any increase in such taxes applicable to the Company will be enacted. Increased taxes could adversely affect Vitran’s profitability.
          Vitran’s employees and owner operators also must comply with the safety and fitness regulations promulgated by the U.S. Department of Transportation (“DOT”) and various regulatory authorities in Canada, including those relating to drug and alcohol testing and hours of service.
COMPETITION
          Vitran competes with many other transportation service providers of varying sizes within Canada and the United States. In the United States, Vitran competes mainly in the eastern, central, southwestern and western states. The transportation industry is highly competitive on the basis of both price and service. The Company competes with regional, inter-regional and national LTL carriers, truckload carriers, third party logistics companies and, to a lesser extent, small package carriers, air freight carriers and railroads. The Company competes effectively in its markets by providing high quality and timely service at competitive prices.
AVAILABLE INFORMATION
          Vitran makes available free of charge on or through its website at www.vitran.com its Annual Report on Form 10-K (including the MD&A at December 31, 2007), Quarterly Reports on Form 10-Q, current reports on Form 8-K and other information releases, including all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC) and System for Electronic Document Analysis and Retrieval (SEDAR). The information can also be accessed through EDGAR at www.sec.gov/edgar.shtml or SEDAR at www.sedar.com.

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ITEM 1. a—RISK FACTORS
RISKS AND UNCERTAINTIES
          Information on the risks and uncertainties relating to the Company appears in the Company management’s discussion and analysis (“MD&A”) for the year ended December 31, 2007, Item 7, reference to which is hereby made, and the information therein is incorporated herein by reference.
ITEM 1. b—UNRESOLVED STAFF COMMENTS
          None.
ITEM 2—PROPERTIES
          Vitran’s corporate office is located at 185 The West Mall, Suite 701, Toronto, Ontario, Canada, M9C 5L5. The 3,900 square foot office is occupied under a lease terminating in September 2010.
          Each of Vitran’s operating subsidiaries also maintains a head office as well as numerous operating facilities. Vitran has not experienced and does not anticipate difficulties in renewing existing leases on favorable terms or obtaining new facilities as and when required.
          Vitran operates 137 terminals, 27 of which are located in Canada and 110 of which are located in the United States. The Company’s LTL segment operates 121 terminals with a total of 3,246 loading doors in the United States and with a total of 617 loading doors in Canada. At December 31, 2007 Vitran was nearing completion of constructing a new 130-door facility on 21 acres for the Toronto market. The service center will replace the current leased facility. The 10 largest operating terminals in Vitran’s LTL segment, in terms of the number of loading doors, are listed below.
                 
Terminals   Doors   Owned/ Leased
Toronto
    132     Leased
Indianapolis
    116     Leased
Toledo
    101     Owned
Philadelphia
    92     Leased
Montreal
    85     Owned
Vancouver
    85     Owned
Chicago
    81     Leased
Pittsburgh
    80     Owned
Clinton
    80     Owned
Winsted
    78     Owned
          Vitran’s Logistics operates 16 facilities, nine in Canada, and seven in the United States, for major retailers in their respective markets. Vitran Logistics has approximately 1.2 million square feet of warehouse and distribution space under management at December 31, 2007. Vitran’s Truckload business operates two terminals, one in Indianapolis and the other in Atlanta.
ITEM 3—LEGAL PROCEEDINGS
          Vitran is subject to various legal proceedings and claims that have arisen in the ordinary course of its business that have not been fully adjudicated. Many of these are covered in whole or in part by insurance. The management of Vitran does not believe that these actions, when finally concluded and determined, will have a material adverse effect upon Vitran’s financial condition, results of operations or cash flows.
ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
          None

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PART II
ITEM 5— MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Description of Share Capital
          At December 31, 2007, there were an unlimited number of shares authorized and 13,448,159 common shares issued and outstanding. The holders of the common shares are entitled to one vote for each common share on all matters voted on at any meetings of Vitran’s shareholders, to any dividends that may be declared by the Company’s Board of Directors thereon and, in the event of the liquidation, dissolution or winding up of the Company, will be entitled to receive the remaining property.
          Vitran’s common shares trade on the Toronto Stock Exchange (“TSX”) and the NASDAQ National Market under the symbols VTN and VTNC respectively. On February 07, 2008, there were approximately 50 registered holders of record of the Company’s common shares.
          Vitran did not pay any dividends on common shares in fiscal 2007 and 2006. The Company ceased paying dividends in December 2001. The Board of Directors is responsible for determining the Company’s dividend policy and does not intend to declare dividends in the foreseeable future.
          The following table sets forth the high and low bid prices of our common stock for the periods indicated, as reported by the TSX and the NASDAQ:
                                                 
    TSX   NASDAQ
Quarter   High   Low   Volume   High   Low   Volume
    (in Canadian dollars)   (in United States dollars)
2007
                                               
Fourth Quarter
  $ 18.70     $ 12.50       533,100     $ 19.15     $ 12.55       2,979,500  
Third Quarter
  $ 23.20     $ 16.40       454,800     $ 22.32     $ 16.10       1,776,900  
Second Quarter
  $ 24.64     $ 20.88       353,900     $ 23.35     $ 18.50       1,660,200  
First Quarter
  $ 24.21     $ 19.30       126,700     $ 20.97     $ 15.76       1,381,300  
2006
                                               
Fourth Quarter
  $ 22.31     $ 18.10       381,700     $ 19.78     $ 16.03       1,860,000  
Third Quarter
  $ 27.99     $ 19.94       104,400     $ 25.72     $ 16.74       1,506,100  
Second Quarter
  $ 27.37     $ 21.01       340,500     $ 24.75     $ 19.00       3,273,000  
First Quarter
  $ 24.50     $ 21.50       425,800     $ 20.90     $ 18.61       1,654,500  
                                                 
    TSX   NASDAQ
2007 Monthly   High   Low   Volume   High   Low   Volume
    (in Canadian dollars)   (in United States dollars)
December
  $ 14.63     $ 12.92       111,400     $ 15.22     $ 13.03       1,055,800  
November
  $ 14.45     $ 12.50       163,800     $ 15.14     $ 12.55       1,129,200  
October
  $ 18.70     $ 12.65       257,900     $ 19.15     $ 13.14       794,500  
September
  $ 22.37     $ 16.40       60,600     $ 21.07     $ 16.10       570,600  
August
  $ 23.20     $ 20.40       352,400     $ 21.94     $ 18.93       451,300  
July
  $ 22.92     $ 20.68       41,800     $ 22.32     $ 19.21       755,000  
June
  $ 24.64     $ 21.00       47,500     $ 23.35     $ 20.21       516,600  
May
  $ 23.67     $ 21.83       99,900     $ 21.28     $ 19.96       696,800  
April
  $ 23.00     $ 20.88       206,500     $ 20.50     $ 18.50       446,800  
March
  $ 22.98     $ 21.67       71,900     $ 20.16     $ 18.36       510,200  
February
  $ 24.21     $ 20.92       17,100     $ 20.97     $ 15.76       511,300  
January
  $ 21.75     $ 19.30       37,700     $ 17.85     $ 16.38       359,800  

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Stock Option Plan
                         
                    Number of
                    securities
                    remaining available
    Number of           for future issuance
    securities to be           (excluding
    issued upon   Weighted average   securities
    exercise of   exercise price of   reflected in column
Plan Category   outstanding options   outstanding options   (a))
    (a)   (b)   (c)
Equity compensation plans approved by security holders
    820,200     $ 12.66       99,500  
Equity compensation plans not approved by security holders
                 
Total (1)
    820,200     $ 12.66       99,500  
 
 
(1)   As at December 31, 2007.
          Vitran maintains a stock option plan to assist in attracting, retaining and motivating its directors, officers and employees. The details of the Company’s authorized stock option plan are described in Note 9 of the Consolidated Financial Statements.
Purchases of Equity Securities
          On February 13, 2007 Vitran commenced a normal course issuer bid to repurchase up to 670,993 common shares by way of open market purchases through the facilities of the Toronto Stock Exchange. The normal course issuer bid will expire on February 12, 2008. All shares repurchased are cancelled. The following table summarizes the purchases in the fourth quarter of 2007:
                                 
                            Maximum number of
                    Total number of   common shares that
            Average price paid   common shares as   may yet be
    Number of common   per common share   part of a publicly   purchased under the
Period   shares purchased   (CAD)   announced plan   plan
 
 
Oct. 1 to Oct. 31, 2007
    21,400     $ 12.98       21,400       649,593  
Nov. 1 to Nov. 30, 2007
    8,800     $ 13.15       8,800       640,793  
Dec. 1 to Dec. 31, 2007
                      640,793  
 
Total
    30,200     $ 13.03       30,200          
 
Transfer Agents
             
  
  Computershare Investor Services Inc. Computershare Trust Company Inc.   Montreal, Toronto
Denver
  Canada
United States

9


 

ITEM 6—SELECTED FINANCIAL DATA
          The following selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes under Item 8 of this Annual Report on Form 10-K. For a summary of quarterly financial data for fiscal 2007 and 2006 please see the Supplemental Schedule of Quarterly Financial Information included in the Consolidated Financial Statements. For a summary of measurement and disclosure differences between United States and Canadian accounting policies please see Note 18 to the Consolidated Financial Statements.
Selected Financial Data (Thousands of dollars, except per share amounts)
                                         
Year   2007     2006     2005     2004     2003  
 
 
                                       
United States GAAP
                                       
Statements of Income
                                       
Revenue
  $ 670,517     $ 514,059     $ 428,192     $ 374,595     $ 331,826  
 
                                       
Income from continuing operations before depreciation and amortization expense (1)
    43,769       40,530       32,392       24,183       20,044  
 
                                       
Income from continuing operations
    22,999       28,040       25,427       18,977       14,550  
 
                                       
Net income from continuing operations
    13,710       19,258       17,938       14,943       10,336  
 
                             
 
                                       
Cumulative effect of change in accounting principle
          141                    
 
                             
 
                                       
Net income
  $ 13,710     $ 19,399     $ 17,938     $ 14,943     $ 10,336  
 
                             
 
                                       
Earnings per share basic:
                                       
Net income from continuing operations
  $ 1.02     $ 1.49     $ 1.43     $ 1.22     $ 1.07  
Net income (loss)
  $ 1.02     $ 1.50     $ 1.43     $ 1.22     $ 1.07  
Weighted average number of shares
    13,458,786       12,887,401       12,516,265       12,285,400       9,684,901  
 
                                       
Earnings per share diluted:
                                       
Net income from continuing operations
  $ 1.00     $ 1.47     $ 1.40     $ 1.17     $ 1.01  
Net income (loss)
  $ 1.00     $ 1.48     $ 1.40     $ 1.17     $ 1.01  
Weighted average number of shares
    13,651,799       13,124,865       12,848,360       12,740,477       10,263,211  
 
                                       
Canadian GAAP (2)
                                       
Statements of Income
                                       
Revenue
  $ 670,517     $ 514,059     $ 428,192     $ 374,595     $ 331,826  
Income from continuing operations before depreciation and amortization expense (1)
    41,551       40,530       32,392       24,183       20,308  
 
                                       
Income from continuing operations
    20,781       28,040       25,427       18,977       14,814  
 
                                       
Net income from continuing operations
    11,492       19,258       17,938       14,943       10,336  
 
                             
 
                                       
Net income (loss)
  $ 11,492     $ 19,258     $ 17,938     $ 14,943     $ 10,336  
 
                             

10


 

Selected Financial Data (continued) (Thousands of dollars, except per share amounts)
                                         
Year   2007     2006     2005     2004     2003  
 
Earnings per share basic:
                                       
Net income from continuing operations
  $ 0.85     $ 1.49     $ 1.43     $ 1.22     $ 1.07  
Net income (loss)
  $ 0.85     $ 1.49     $ 1.43     $ 1.22     $ 1.07  
Weighted average number of shares
    13,458,786       12,887,401       12,516,265       12,285,400       9,684,901  
 
                                       
Earnings per share diluted:
                                       
Net income from continuing operations
  $ 0.84     $ 1.47     $ 1.40     $ 1.17     $ 1.01  
Net income (loss)
  $ 0.84     $ 1.47     $ 1.40     $ 1.17     $ 1.01  
Weighted average number of shares
    13,651,799       13,124,865       12,848,360       12,740,477       10,263,211  
Dividends per share $US
  Nil   Nil   Nil   Nil   Nil
Dividends per share $CAD
  Nil   Nil   Nil   Nil   Nil
                                         
Year   2007     2006     2005     2004     2003  
 
Balance Sheets (United States GAAP)
                                       
Assets:
                                       
Current assets
  $ 95,464     $ 83,775     $ 71,017     $ 90,177     $ 85,046  
Property and equipment, net
    169,052       145,129       66,807       37,563       35,102  
Intangible assets
    13,645       15,888       2,456              
Goodwill, net
    124,375       117,146       61,448       45,304       44,865  
Other assets
          150             6        
 
                             
Total assets
  $ 402,546     $ 362,088     $ 201,728     $ 173,050     $ 165,013  
 
                             
 
                                       
Liabilities and Stockholders’ Equity:
                                       
Current liabilities
  $ 91,133     $ 88,669     $ 48,331     $ 38,806     $ 46,412  
Long-term debt
    109,831       93,139       8,588       11,507       17,931  
Other non-current liabilities
    11,414       6,983       5,007       3,546       2,715  
 
                                       
Total stockholders’ equity
  $ 190,168     $ 173,297     $ 139,802     $ 119,191     $ 97,955  
 
                                       
Balance Sheets (Canadian GAAP) (2)
                                       
Assets:
                                       
Current assets
  $ 95,464     $ 83,775     $ 71,017     $ 90,177     $ 85,046  
Property and equipment, net
    169,052       145,129       66,807       37,563       35,102  
Intangible assets
    13,645       15,888       2,456              
Goodwill, net
    124,375       117,146       61,448       45,304       44,865  
Other assets
                             
 
                             
Total assets
  $ 402,546     $ 361,938     $ 201,728     $ 173,044     $ 165,013  
 
                             
 
                                       
Liabilities and Stockholders’ Equity:
                                       
Current liabilities
  $ 91,133     $ 88,669     $ 48,331     $ 38,806     $ 46,412  
Long-term debt
    109,831       93,139       8,588       11,507       17,931  
Other non-current liabilities
    11,414       6,983       5,007       3,546       2,715  
 
                                       
Total stockholders’ equity
  $ 190,027     $ 173,171     $ 139,802     $ 119,185     $ 97,955  
 
                                       
Total commitments under operating leases
  $ 58,639     $ 38,827     $ 40,239     $ 46,564     $ 48,580  

11


 

Selected Financial Data (continued) (Thousands of dollars, except per share amounts)
                                         
Year   2007     2006     2005     2004     2003  
 
 
                                       
Operating Ratios (3)
                                       
Total company
    96.6 %     94.5 %     94.1 %     94.9 %     95.5 %
Less-than-truckload
    96.0 %     93.7 %     93.1 %     94.2 %     94.3 %
Logistics
    93.8 %     93.3 %     94.7 %     95.3 %     96.2 %
Truckload
    94.9 %     94.7 %     93.5 %     94.5 %     98.2 %
 
Notes:
 
(1)   Income from continuing operations before depreciation and amortization expense (“EBITDA”) is a non-GAAP financial measure which does not have any standardized meaning prescribed by GAAP. EBITDA represents net income, minus cumulative change in accounting policy, plus (minus) income tax expense (benefit), plus net interest expense, and plus depreciation and amortization. The Company uses EBITDA in evaluating its operating performance compared to that of other companies in its industry, as the calculation of EBITDA eliminates the effects of financing, income taxes and the accounting effects of capital spending, which items may vary for different companies for reasons unrelated to overall operating performance. When analyzing its operating performance, however, investors should use EBITDA in addition to, not as an alternative for, income from operations and net income, as those items are defined by GAAP. Investors should also note that the Company’s presentation of EBITDA may not be comparable to similarly titled measures used by other companies. EBITDA is reconciled to net income as follows:
                                         
    Year ended December 31,  
    2007     2006     2005     2004     2003  
     
Net income
  $ 13,710     $ 19,399     $ 17,938     $ 14,943     $ 10,336  
Cumulative change in accounting principle
          (141 )                  
Income tax expense
    863       6,122       7,191       3,983       3,158  
Interest expense, net
    8,426       2,660       298       51       1,320  
Depreciation and amortization
    20,770       12,490       6,965       5,206       5,494  
 
                             
EBITDA
  $ 43,769     $ 40,530     $ 32,392     $ 24,183     $ 20,308  
 
                             
 
(2)   Please see Note 18 to the Consolidated Financial Statements for differences between United States and Canadian GAAP.
 
(3)   Operating ratio (“OR”) is a non-GAAP financial measure which does not have any standardized meaning prescribed by GAAP. OR is the sum of operating expenses, selling, general and administrative expenses, other expenses (income), and depreciation and amortization expense, divided by revenue. OR allows management to measure the Company and its various segments’ operating efficiency. OR is a widely recognized measure in the transportation industry which provides a comparable benchmark for evaluating the Company’s performance compared to its competitors’. Investors should also note that the Company’s presentation of OR may not be comparable to similarly titled measures by other companies. OR is calculated as follows:
                                         
    Year ended December 31,  
    2007     2006     2005     2004     2003  
     
Operating expenses
  $ 565,094     $ 426,515     $ 357,960     $ 319,295     $ 282,016  
Selling, general and administrative expenses
    62,086       47,448       37,881       31,263       29,366  
Other expenses (income)
    (432 )     (434 )     (41 )     (146 )     136  
Depreciation and amortization expense
    20,770       12,490       6,965       5,206       5,494  
 
                             
 
  $ 647,518     $ 486,019     $ 402,765     $ 355,618     $ 317,012  
 
                             
Revenue
  $ 670,517     $ 514,059     $ 428,192     $ 374,595     $ 331,826  
 
                             
Operating ratio (“OR”)
    96.6 %     94.5 %     94.1 %     94.9 %     95.5 %
 
                             

12


 

ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements:
          This MD&A and the documents incorporated by reference contain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws concerning Vitran’s business, operations, and financial performance and condition.
          Forward-looking statements may be generally identifiable by use of the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, “may”, “plans”, “continue”, “will”, “focus”,” should”, “endeavor” or the negative of these words or other variation on these words or comparable terminology. These forward-looking statements are based on current expectations and are subject to uncertainty and changes in circumstances that may cause actual results to differ materially from those expressed or implied by such forward-looking statements.
          The MD&A and the documents incorporated by reference herein contain forward-looking statements regarding, but not limited to, the following:
    the Company’s objective to complete its LTL IT system and operating integration initiatives and realize superior service for its customers, linehaul optimization and new inter-regional marketing opportunities;
 
    the Company’s objective to expand, or acquire a less-than-truckload operation, in a new regional market;
 
    the Company’s objective to achieve profitable revenue growth in the less-than-truckload segment;
 
    the Company’s intention to improve results from yield improvement and operating efficiencies in the less-than-truckload segment;
 
    the Company’s intention to achieve above average transborder and inter-regional growth rates;
 
    the Company’s intention to develop profitable accounts in the Logistics segment;
 
    the Company’s intention to increase revenue and income from the previously announced new major supply chain contract in the Logistics segment;
 
    the Company’s ability to achieve margin and asset utilization gains in its Truckload segment;
 
    the Company’s ability to expand and diversity its customer base in the Truckload segment; and
 
    the Company’s intention to purchase a specified level of capital assets and to finance such acquisitions with cash flow from operations and, if necessary, from the Company’s unused credit facilities.
          Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Vitran’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that may cause such differences include but are not limited to technological change, increase in fuel costs, regulatory change, the general health of the economy, changes in labor relations, geographic expansion, capital requirements, availability of financing, claims and insurance costs, environmental hazards, availability of qualified drivers and competitive factors. More detailed information about these and other factors is included in the MD&A. Many of these factors are beyond the Company’s control; therefore, future events may vary substantially from what the Company currently foresees. You should not place undue reliance on such forward-looking statements. Vitran Corporation Inc. does not assume the obligation to revise or update these forward-looking statements after the date of this document or to revise them to reflect the occurrence of future unanticipated events, except as may be required under applicable securities laws.

13


 

          Unless otherwise indicated all dollar references herein are in U.S. dollars. The Company’s Annual Report on Form 10-K, as well as all the Company’s other required filings, may be obtained from the Company at www.vitran.com or from www.sedar.com or from www.sec.gov/edgar.shtml.
OVERVIEW
          Vitran Corporation Inc. (“Vitran” or the “Company”) is a leading, predominantly non-union, provider of freight surface transportation and related logistics services throughout Canada and in 29 states in the eastern, central, southwestern and western United States. Its business consists of three operating segments: (1) Less-than-truckload services (“LTL”), (2) Logistics services, and (3) Truckload services. These services are provided by stand-alone business units within their respective regions. Depending on a customer’s needs, the units can operate independently or in a complementary manner. As is more fully described in Item 1 “Business”, the LTL segment transports shipments in less than full trailer load quantities through freight service center networks, the Logistics segment provides supply chain solutions and freight brokerage services and the Truckload segment delivers full trailer loads point to point on a predominantly short haul basis.
          Vitran’s operating results are generally expected to depend on the number and weight of shipments transported, the prices received for the services provided, and the mix of services supplied to clients. Vitran must manage its fixed and variable operating cost infrastructure in the face of fluctuating volumes to realize appropriate margins while maintaining the quality service expected by its customers.
          The long-term mission of the Company is to build a North American transportation infrastructure with national and regional coverage in both Canada and the United States offering regional, inter-regional, national, and transborder LTL services. In conjunction with the LTL services, Vitran will also focus on logistics service offerings that are not only profitable as stand-alone business opportunities, but also increase the utilization of LTL freight service assets where appropriate.
          As a result of an increased number of U.S. shareholders and the continued expansion within the United States, the Company, commencing the first quarter of 2006, elected U.S. GAAP as its primary reporting standard. Therefore a reconciliation from U.S. GAAP to Canadian GAAP has been provided in note 18. This disclosure will no longer be required for Vitran commencing the first quarter of 2008 under the Ontario Securities Commission regulations.
EXECUTIVE SUMMARY
          The year ended December 31, 2007 was a challenging year for Vitran and the entire freight transportation industry in North America. The economic slowdown in North America that became apparent to Vitran in the third quarter of 2006 persisted throughout 2007. However, Vitran still managed to establish record annual revenue of $670.5 million and record cash flows from operations before working capital changes of $34.3 million for the year ended December 31, 2007. These general economic challenges resulted in intensified price competition in Vitran’s core regional LTL operations and the Company’s diluted earnings declined to $1.00 per share.
          Notwithstanding the economy, the Company remained committed to its strategic objectives in 2007. The Company completed its fourth acquisition in the past three years and its first logistics supply chain purchase, acquiring Ontario, California-based Las Vegas/L.A. Express Inc. (“LVLA”) on November 30, 2007. LVLA preceded three LTL acquisitions, PJAX Freight Systems (“PJAX”) on October 2, 2006, Sierra West Express (“SWE”) on January 3, 2006 and Chris Truck Line (“CTL”) on May 31, 2005. These three LTL acquisitions expanded Vitran’s LTL coverage from 16 U.S. central states to 29 U.S. states from New Jersey to California.
          LVLA added six leased facilities and 470,000 square feet of supply chain logistics space in the states of California, Arizona, Nevada and New Mexico to Vitran’s existing logistics operations, bringing the total to approximately 1.2 million square feet under management throughout the U.S. and Canada. The purchase price consideration was $6.3 million in cash, $1.9 million of assumed debt, $4.3 million of potential cash consideration contingent upon LVLA reaching specific financial objectives over the next two fiscal years and transaction costs totaling $0.3 million. The cash portion of the transaction was financed from Vitran’s syndicated operating facility.

14


 

          Within Vitran’s U.S. LTL business unit, significant progress was made on the strategic initiative to migrate all U.S. LTL operations to a new common transportation operating system. Considerable operating management and IT resources were consumed to ensure milestones were successfully realized in 2007 and to ensure effective system-wide migration would be complete in 2008. This new transportation operating system will allow for the successful integration of operations across all the acquired entities in the United States and enhance Vitran’s ability to provide superior service to its customers.
          Furthermore, the Company re-invested in its core operating segments in 2007 by purchasing all its rolling stock requirements and acquiring real estate in strategic markets. The LTL segment purchased and expanded service centers in Wichita, Kansas and Cincinnati, Ohio respectively and is nearing completion of construction of the new Toronto, Ontario, Canada service center. Furthermore the Company secured commitments for facilities in Las Vegas, Nevada and Kansas City, Kansas that will close early in the first quarter of 2008.
RESULTS OF OPERATIONS 2007 COMPARED TO 2006
CONSOLIDATED RESULTS
          The following table summarizes the Consolidated Statements of Income for the three years ended December 31:
                                         
(in thousands of dollars)   2007   2006   2005   2007 vs 2006   2006 vs 2005
 
 
                                       
Revenue
  $ 670,517     $ 514,059     $ 428,192       30.4 %     20.0 %
Operating expenses
    565,094       426,515       357,960       32.5 %     19.2 %
SG&A expenses
    62,086       47,448       37,881       30.9 %     25.3 %
Other expenses (income)
    (432 )     (434 )     (41 )     (.5 %)     958.5 %
Depreciation and amortization
    20,770       12,490       6,965       66.3 %     79.3 %
Income from Operations
    22,999       28,040       25,427       (18.0 %)     10.3 %
Interest expense, net
    8,426       2,660       298       216.8 %     792.6 %
Net income
  $ 13,710     $ 19,399     $ 17,938       (29.3 %)     8.1 %
                                         
    2007   2006   2005   2007 vs 2006   2006 vs 2005
 
Earnings per share:
                                       
Basic
  $ 1.02     $ 1.50     $ 1.43       (32.0 %)     4.9 %
Diluted
  $ 1.00     $ 1.48     $ 1.40       (32.4 %)     5.7 %
Operating ratio
    96.6 %     94.5 %     94.1 %                
          Revenue increased 30.4% to $670.5 million in 2007 from $514.1 million in 2006. Revenue in the LTL and Logistics segments increased 32.5% and 32.9% respectively and remained flat in the Truckload segment. The revenue increase in the LTL segment was impacted by the acquisition of PJAX on October 2, 2006. Income from operations declined 18.0% to $23.0 million in 2007 from $28.0 million in 2006. An increase in income from operations of 22.1% at the Logistics segment was offset by declines in income from operations at the LTL segment and Truckload segment of 17.4% and 3.2%, respectively. The Company’s consolidated operating ratio increased to 96.6% in 2007 from 94.5% in 2006. Detailed explanations for the fluctuations in revenue and income from operations are discussed below in “Segmented Results”.
          Selling, general and administrative expenses (“SG&A”) increased 30.9% to $62.1 million in 2007 from $47.4 million in 2006. The increase in SG&A expenses for the 2007 year can primarily be attributed to the acquisition of PJAX on October 2, 2006 not included in the 2006 annual SG&A for the first nine months of that year

15


 

as well as the inclusion of LVLA for one month in December 2007. Contributing to the remainder of the increase were increases in share-based compensation expense and salary and wage increases across all segments of the Company. With the addition of LVLA on November 30, 2007 and the increase in ongoing compensation-related expenses, SG&A will be higher in 2008 as compared to 2007.
          Depreciation and amortization expense increased 66.3% to $20.8 million in 2007 compared to $12.5 million in 2006. The increase is primarily attributed to the addition of PJAX on October 2, 2006 but also the increase in capital expenditures over the previous two years.
          Interest expense net of interest income was $8.4 million for 2007 compared to $2.7 million for 2006. This increase can be attributed to the draw downs on Vitran’s credit facilities to fund the acquisition of PJAX on October 2, 2006. Also on July 31, 2007, Vitran substantially changed its syndicated credit facilities resulting in a one-time write-off of $0.5 million of deferred financing costs attributable to its former syndication agreement. If not for this write-off, interest expense for the year would have been approximately $7.9 million.
          Income tax expense for 2007 was $0.9 million compared to $6.1 million in 2006. The effective tax rate was 5.9% for 2007 compared to 24.1% in 2006. The decline in income tax expense is due to a decline in earnings before tax and a decline in the effective tax rate. The decrease in the effective tax rate can be attributed to a higher proportion of income being earned in lower tax jurisdictions as well as a decline in future tax rates in Canada. On a consolidated basis, the Company generated taxable losses in the United States, which have been recognized as future tax assets. These taxable losses are the result of tax depreciation and amortization on capital assets and goodwill in excess of GAAP depreciation and amortization attributable to the Company’s acquired businesses over the last three years. Management believes the Company will generate sufficient taxable income to use these losses in the future.
          Net income before cumulative change in accounting principle declined by 28.8% to $13.7 million for 2007 compared to $19.3 in 2006. This resulted in basic and diluted earnings per share before change in cumulative change in accounting principle of $1.02 and $1.00 for the current year compared to $1.49 and $1.47 in 2006. Excluding the one-time write-off of previously deferred financing costs, basic and diluted earnings per share before cumulative effect of change in accounting principle would have been $1.04 and $1.03 for the current year(6). The weighted average number of shares for 2007 was 13.5 million basic and 13.7 million diluted compared to 12.9 million basic and 13.1 million diluted shares in 2006. The increase is attributable to the issuance of common shares as part of the purchase consideration for the PJAX acquisition and the exercise of stock options. Net income declined by 29.3% to $13.7 million for 2007, compared to $19.4 million in 2006. This resulted in basic and diluted earnings per share of $1.02 and $1.00 for the current year, compared to $1.50 and $1.48 in 2006.
          On January 1, 2006 the Company adopted SFAS 123(R), “Share-Based Payments”, using the modified prospective transition method. In accordance with the standard, the Company recognized $0.1 million of income as cumulative effect of change in accounting principle.
          On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, with no cumulative effect adjustment recorded at adoption. The adoption of this standard requires management to make estimates and assumptions that affect reported amounts of tax related assets and liabilities that will impact the effective tax rate of the Company. In addition the effective tax rate in all periods is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The income tax expense differs from the tax computed at the federal statutory income tax rate due primarily to state and provincial income taxes and earnings in foreign jurisdictions. Future effective tax rates could be adversely affected if earnings are lower than anticipated in jurisdictions with lower statutory rates, unfavourable changes in tax laws and regulations, or by adverse tax rulings.

16


 

SEGMENTED RESULTS
LTL (Less-than-truckload)
          The table below provides summary information for the LTL segment for the three years ended December 31:
                                         
(in thousands of dollars)   2007   2006   2005   2007 vs 2006   2006 vs 2005
 
 
                                       
Revenue
  $ 584,786     $ 441,499     $ 352,693       32.5 %     25.2 %
Income from operations
    23,153       28,029       24,494       (17.4 %)     14.4 %
Operating ratio
    96.0 %     93.7 %     93.1 %                
 
Number of shipments(1)
    4,040,306       3,007,985       2,484,064       34.3 %     21.1 %
Weight (000s of lbs)(2)
    5,989,123       4,669,777       3,922,323       28.3 %     19.1 %
Revenue per shipment(3)
  $ 144.74     $ 146.78     $ 141.99       (1.4 %)     3.4 %
Revenue per hundredweight(4)
    9.76       9.45       8.99       3.3 %     5.1 %
          Revenue in the LTL segment increased 32.5% to $584.8 million in 2007 compared to $441.5 million in 2006. This significant growth in revenue was driven primarily by the acquisition of PJAX on October 2, 2006 but was also augmented by a 26.9% increase in the cross border service offering. The new inter-regional service launched in 2007 represented in excess of 2.0% of total LTL revenue. The Canadian business unit posted historical revenue growth rates for 2007 despite being impacted by a slowdown in the Canadian economy in the fourth quarter of the year. The U.S. LTL business unit struggled with a sluggish U.S. domestic economy throughout 2007 that resulted in a deterioration of regional LTL revenues within all U.S. regions. The impact of the economic slowdown was most severe in the final month of the year.
          The LTL segment, which included a full year of PJAX results in 2007, increased shipments, tonnage and revenue per hundredweight compared to 2006 by 34.3%, 28.3% and 3.3% respectively. However, income from operations decreased 17.4% to $23.1 million in 2007 compared to $28.0 million in 2006. The aforementioned economic environment resulted in competitive pricing pressure that negatively impacted the operating margin of the segment. Income from operations was significantly impacted in the 2007 fourth quarter, particularly the month of December, as income from operations declined $6.1 million or 73.2% compared to the same quarter in 2006. The LTL segment operating ratio was 96.0% for 2007 compared to 93.7% in 2006.
Logistics
          The table below provides summary information for the Logistics segment for the three years ended December 31:
                                         
(in thousands of dollars)   2007   2006   2005   2007 vs 2006   2006 vs 2005
 
 
                                       
Revenue
  $ 52,845     $ 39,762     $ 40,261       32.9 %     (1.2 %)
Income from operations
    3,271       2,679       2,141       22.1 %     25.1 %
Operating ratio
    93.8 %     93.3 %     94.7 %                
          Revenue for the Logistics segment increased by 32.9% to $52.8 million compared to $39.8 million in 2006. Shipments within the Brokerage business unit declined 3.9% in 2007 compared to 2006. However the Supply Chain business unit grew revenue and income from operations acquiring new transactional and expanded dedicated contracts in 2007. Prior to the acquisition of LVLA, square footage under management at the Supply Chain unit was 750,000 square feet at December 31, 2007 compared to 622,000 square feet at December 31, 2006. Furthermore, the additional 470,000 square feet under management provided by the addition of LVLA for the month of December bolstered revenue and income from operations in the Supply Chain business unit. These factors resulted in an

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increase in income from operations of 22.1% to $3.3 million and an operating ratio of 93.8% in 2007 compared to 93.3% in 2006.
Truckload
          The table below provides summary information for the Truckload segment for the three years ended December 31:
                                         
(in thousands of dollars)   2007   2006   2005   2007 vs 2006   2006 vs 2005
 
 
                                       
Revenue
  $ 32,886     $ 32,798     $ 35,238       0.3 %     (6.9 %)
Income from operations
    1,678       1,734       2,308       (3.2 %)     (24.9 %)
Operating ratio
    94.9 %     94.7 %     93.5 %                
          Revenue for the Truckload segment increased 0.3% to $32.9 million in 2007 from $32.8 million in 2006. Revenue per mile(5) was flat and shipments increased 3.4% compared to 2006. This was offset by an increase in empty miles of 7.7%, resulting in a decline in income from operations of 3.2% to $1.7 million compared to 2006. The operating ratio was 94.9% in 2007 compared to 94.7% in 2006.
RESULTS OF OPERATIONS 2006 COMPARED TO 2005
CONSOLIDATED RESULTS
          Revenue increased 20.0% to $514.1 million in 2006 from $428.2 million in 2005. Revenue in the LTL segment increased 25.2% and declined in the Logistics and Truckload segments 1.2% and 6.9%, respectively. Income from operations improved 10.3% to $28.0 million in 2006 from $25.4 million in 2005. The LTL and Logistics segments contributed to the improvement, posting increases of 14.4% and 25.1%, respectively. Income from operations in the Truckload segment declined 24.9%, partially offsetting the increase in the other segments. The Company’s consolidated operating ratio increased to 94.5% in 2006 from 94.1% in 2005. Detailed explanations for the improvements in revenue and income from operations are discussed below in “Segmented Results”.
          Selling, general and administrative expenses (“SG&A”) increased 25.3% to $47.4 million in 2006 from $37.9 million in 2005. The increase in SG&A expenses for the 2006 year can primarily be attributed to the additions of SWE on January 3, 2006 and PJAX on October 2, 2006. Contributing to the remainder of the increase were increases in non-cash employee stock options expense, corporate advertising expense, director compensation, salary and wage increases across all segments of the Company. With the addition of PJAX and the increase in ongoing compensation-related expenses, SG&A will be higher in 2007 as compared to 2006.
          Depreciation and amortization expense increased 79.3% to $12.5 million in 2006 from $7.0 million in 2005. The increase is primarily attributed to the addition of CTL on May 31, 2005, which would include a full year of depreciation and amortization expense in 2006, as well as the acquisition of SWE on January 3, 2006 and PJAX on October 2, 2006.
          Interest expense net of interest income was $2.7 million for 2006 compared to $0.3 million for 2005. This increase was due to the draw downs on Vitran’s credit facilities to fund the acquisition of PJAX on October 2, 2006. The increase is also attributable to the interest expense of the assumed term debt facilities and capital leases of PJAX.
          Income tax expense for 2006 was $6.1 million compared to $7.2 million in 2005. The effective tax rate was 24.1% for 2006 compared to 28.6% in 2005. The decrease in the effective tax rate can be attributed to a higher proportion of income being earned in lower tax jurisdictions.
          On January 1, 2006 the Company adopted SFAS 123(R), “Share-Based Payments”, using the modified prospective transition method. In accordance with the standard the Company recognized $0.1 million of income as cumulative effect of change in accounting principle. Therefore net income after cumulative effect of a change in

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accounting principle for 2006 was $19.4 million resulting in basic and diluted earnings per share of $1.50 and $1.48, respectively.
          Net income improved by 8.1% to $19.4 million for 2006, compared to $17.9 million in 2005. This resulted in basic and diluted earnings per share of $1.50 and $1.48 for the current year, compared to $1.43 and $1.40 in 2005. Net income before cumulative change in accounting principle improved by 7.4% to $19.3 million compared to $17.9 in 2005. This resulted in basic and diluted earnings per share before change in cumulative change in accounting principle of $1.49 and $1.47, respectively. The weighted average number of shares for 2006 was 12.9 million basic and 13.1 million diluted compared to 12.5 million basic and 12.8 million diluted shares in 2005. The increase is attributable to the issuance of common shares as part of the purchase consideration for the PJAX acquisition and the exercise of stock options.
SEGMENTED RESULTS
LTL (Less-than-truckload)
          The LTL segment posted significant growth for 2006 compared to 2005, increasing revenue and expanding income from operations. Revenue increased 25.2% to $441.5 million in 2006 compared to $352.7 million in 2005, primarily driven by the acquisitions of CTL on May 31, 2005, SWE on January 3, 2006 and PJAX on October 2, 2006. These three acquisitions expanded Vitran’s LTL service footprint into the southwestern, western and eastern United States. Moreover, the legacy business units within the U.S. central states and Canada grew revenue 6.6%. Intermodal service issues that impacted growth in the Canadian national line of business for the previous two years were not factors in 2006 and the Canadian business unit posted historical growth rates. The unique transborder service offering between Vitran’s Canadian and U.S. LTL operations grew 22.6% in 2006 compared to 2005. Lastly, the LTL segment commenced its U.S. inter-regional sales initiatives in May of 2006 between the central and southwest regions and November 2006 between the central and western regions. With the addition of the PJAX’s eastern states to Vitran’s LTL service area and subsequent to the completion of an information technology migration across all U.S. LTL business units, above average revenue growth in the inter-regional line of business is expected in 2007.
          Income from operations increased 14.4% to $28.0 million in 2006 compared to $24.5 million in 2005. A stable pricing environment within the LTL segment, the acquisitions of CTL, SWE and PJAX, partially offset by a softening economy in the second half of 2006 resulted in increased shipments, tonnage and revenue per hundredweight of 21.1%, 19.1% and 5.1%, respectively. However, the LTL segment operating ratio was 93.7% for 2006 compared to 93.1% in 2005. The LTL segment operating ratio was negatively impacted by the noticeable slowdown in the economy in the fourth quarter, as well as increased workers compensation and healthcare expenses, within the legacy LTL central state region.
Logistics
          Revenue for the Logistics segment declined slightly by 1.2% to $39.8 million compared to 2005. Shipments within the Brokerage business unit declined 29%; however the Supply Chain Solutions business unit expanded its square footage under management with existing accounts and at December 31, 2006 had 622,000 square feet under management at 90% of capacity. This resulted in an increase in income from operations of 25.1% to $2.7 million and an improvement in operating ratio to 93.3% in 2006 compared to 94.7% in 2005.
Truckload
          Revenue for the Truckload segment decreased 6.9% to $32.8 million in 2006 from $35.2 million in 2005. With a stable pricing environment in the midwestern U.S. attributable to a tight driver market, the Company’s Truckload segment maintained a focus on better yielding freight. Consequently, revenue per total mile (5) compared to 2005 was flat while empty miles decreased by 9.3%. Nonetheless the slowdown in the economy during the second half of 2006 as well as an insufficient number of qualified drivers resulted in a 10% decline in shipments for 2006 compared to 2005. As a result income from operations declined 24.9% to $1.7 million for 2006 compared to $2.3 million for 2005.

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    Notes:
 
(1)   A shipment is a single movement of goods from a point of origin to its final destination as described on a bill of lading document.
 
(2)   Weight represents the total pounds shipped by each LTL business unit.
 
(3)   Revenue per shipment represents revenue divided by the number of shipments.
 
(4)   Revenue per hundredweight is the price obtained for transporting 100 pounds of LTL freight from point to point, calculated by dividing the revenue for an LTL shipment by the hundredweight (weight in pounds divided by 100) for a shipment.
 
(5)   Revenue per total mile represents revenue divided by the total miles driven.
 
(6)   Reconciliation to net income and earnings per share excluding the one-time write-off of previously deferred financing costs:
         
    Year ended December 31  
    2007  
Net income
  $ 13,710  
Financing costs written-off, net of tax
    304  
 
     
Adjusted net income
    14,014  
 
     
Weighted average shares outstanding:
       
Basic
    13,458,786  
Diluted
    13,651,799  
Adjusted earnings per share:
       
Basic
  $ 1.04  
Diluted
  $ 1.03  
GENERAL RISKS AND UNCERTAINTIES
          The Company is exposed to a number of general risks and uncertainties that could impact the results.
          The transportation industry is highly competitive on the basis of both price and service. The Company competes with regional, inter-regional and national LTL carriers, truckload carriers, third party logistics companies and, to a lesser extent, small package carriers, air freight carriers and railroads. The Company competes effectively in its markets by providing high quality and timely service at competitive prices.
          The Company’s business is sensitive to general economic conditions and seasonal fluctuations, although these factors are mitigated somewhat by the variable nature of many of the Company’s costs. Recessionary economic cycles and downturns in customer business cycles, as well as downturns in the principal regional economies where the Company’s operations are located, may affect results of operations. In the trucking industry for a typical year, the second and third quarters usually have the highest business levels, while the first and fourth quarters generally have the lowest business levels. The fourth quarter holiday season and adverse weather conditions generally experienced in the first quarter of the year, such as heavy snow and ice storms, have a negative impact on operating results. Accordingly, revenue and profitability are generally lowest in the first and fourth quarters.
          Vitran is dependent on a major railroad for its national LTL service in Canada. Any reduction in service by the railroad is likely to increase costs for the Company and reduce the reliability, timeliness and overall attractiveness of rail-based services.
          The Company’s exposure to credit risk is not significant as it is not dependent on any particular industry or customer. The Company’s single largest customer accounted for 2.9% of revenue in 2007. The general manufacturing industry at approximately 41% of total LTL revenue in 2007 represents the most significant industry serviced by the Company.

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          Labor represents Vitran’s most significant cost and key to service quality. The Company has a history of positive labor relations that will continue to be important to future success. The two unionized terminals in Canada, representing 2.1% of the Company’s labor force, are represented by the International Brotherhood of Teamsters and the Canadian Auto Workers Association. The collective bargaining agreements between the Company and its unionized employees expire on March 31, 2008 and on September 30, 2008, respectively.
          The Company is dependent on its ability to hire and retain qualified drivers including owner operators. Depending on the driver market, Vitran may adjust its compensation packages or operate with fewer drivers, all of which could impact profitability. Furthermore, the Company is dependent on certain key management personnel for the successful operation of the business. Loss of key personnel could harm Vitran’s operations and financial condition.
          While diesel fuel expenses represent an important cost component to Vitran, the extensive use of owner operators and the ability to share significant fuel increases with customers in the form of a fuel surcharge reduces this risk.
          The Company is subject to numerous laws and regulations by the DOT, Environmental Protection Agency (“EPA”), Internal Revenue Service, Canada Customs Regulation Agency and various other federal, state, provincial and municipal authorities. New or more comprehensive laws and regulation including but not limited to fuel emission, driver hours-of-service, taxation or other mandated regulation could impact profitability.
          Measures taken by the U.S. and Canadian governments to strengthen border security regulations could impact service levels. Vitran’s cross-border activity represented approximately 3.7% of the LTL segment revenue in 2007 and the Company has responded to the new requirements to ensure compliance and safety without jeopardizing the quality of service.
          In order to mitigate the exposure to interest rate risk in 2007 and for future periods, the Company entered into floating-to-fixed interest rate swap contracts with various expiry dates extending to December 31, 2011. At December 31, 2007, 65% of the Company’s syndicated credit facility was subject to fixed interest rate derivatives. Of Vitran’s total debt 73% is subject to fixed interest rates. Management continues to evaluate the Company’s need to fix interest rate exposure or unwind current interest rate swap contracts on an ongoing basis.
          The Company has exposure to foreign currency risk as fluctuations in the U.S. dollar against the Canadian dollar can impact the financial results of the Company. Management has designated the Company’s $72.2 million of U.S. dollar denominated long-term debt in Canada as a hedge to the foreign currency exposure generated by the Company’s U.S. operations. The Company’s Canadian operations realize foreign exchange gains and losses on the U.S. dollar revenue generated against expenses denominated in Canadian dollars. Furthermore, the Company reports its results in U.S. dollars thereby exposing the results of the Company’s Canadian operations to foreign currency fluctuations.
          The Company is subject to financial maintenance tests under its term and revolving credit facilities. These tests require maintenance of certain maximum leverage and minimum interest coverage ratios, among other restrictions, that could limit the availability of capital to fund future growth.
          Vitran Corporation Inc. is a holding company. The Company’s ability to meet its financial obligations is dependant primarily upon the receipt of interest and principal payments on intercompany advances, management fee payments, cash dividends and other payments from the Company’s subsidiaries together with the proceeds raised through the issuance of debt.
          The Company operates a highly capital intensive business. Vitran depends on operating leases, lines of credit, secured equipment financing and cash flow from operations to finance the purchase of tractors, trailing fleet, information technology hardware and terminals.
          The Company invests in new operating equipment and is dependent on the availability of rolling stock. Vitran’s investment in rolling stock is a significant part of the annual capital expenditure expense and the supply and price of such equipment may be adversely impacted by new regulations on engines. Vitran is also dependent on the availability and price of terminal facilities.

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          The Company is exposed to insurance and claims expenses. Vitran is exposed to claims resulting from cargo loss, auto liability and workers’ compensation. An increase in the number and severity of future claims could have an impact on profitability.
          The Company has indicated that it will integrate the information technology and operations of its acquired companies and future acquisitions within its U.S. LTL business unit. Integration initiatives may not realize the anticipated benefits due to operational issues, disruptions and distractions for employees and management, and potential failures in due diligence.
LIQUIDITY AND CAPITAL RESOURCES
          Cash flow from operations before working capital changes for the year increased to $34.3 million in 2007 compared to $34.1 million in 2006 due primarily to the increase in depreciation and amortization expense. Non-cash working capital changes consumed $1.3 million primarily due to an increase in accounts receivable offset by a decrease in accounts payable and accrued liabilities. The days sales outstanding was 38.9 days for 2007 compared to 37.7 days for 2006.
          On November 30, 2007 the Company acquired LVLA for an aggregate potential purchase price of $12.8 million, comprised of $6.3 million in cash, $1.9 million of assumed debt, $4.3 million of potential cash consideration contingent upon LVLA reaching specific financial objectives over the next two fiscal years and transaction costs totaling $0.3 million. The cash portion of the transaction was financed from draw downs on the Company’s revolving credit facility.
          During the third quarter of 2007 the Company signed a new five-year seven-bank syndication agreement, replacing the three-bank agreement expiring in 2009. Under this agreement, the Company increased liquidity, reduced its interest rate spreads and added a $50 million “Accordion” feature to facilitate additional borrowings if required. Under this new agreement at December 31, 2007 interest-bearing debt was $101.0 million consisting of $56 million of term debt and $45 million drawn under the revolving credit facility. In addition the Company had $2.9 million of additional term debt, $22.9 million of capital leases and a $1.2 million note payable for a total of $128.0 million of interest-bearing debt outstanding at December 31, 2007. At December 31, 2006, interest-bearing debt was $108.9 million consisting of $81.9 million of term debt, capital leases of $19.7 million and $7.2 million drawn under the revolving credit facility.
          During the year, the Company repaid $9.1 million of term debt and $7.8 million of capital leases and borrowed $22.4 million on the revolving credit facility as well as $10.4 million of new capital leases. At December 31, 2007, the Company had $27.9 million of unused credit facilities, net of outstanding letters of credit.
          Capital expenditures amounted to $33.2 million for 2007 and were primarily funded out of operating cash flows, new capital leases and the revolving credit facility. The majority of capital expenditures in 2007 were for replacement rolling stock and real estate related expenditures. The Company purchased a facility in Wichita, Kansas expanded its Cincinnati, Ohio facility and is nearing completion of construction of its new LTL service center in Toronto, Ontario. The table below sets forth the Company’s capital expenditures for the years ended December 31, 2007, 2006 and 2005.
                         
    Year ended December 31,  
(in thousands of dollars)   2007     2006     2005  
     
 
Real estate and buildings
  $ 10,728     $ 14,459     $ 7,632  
Tractors
    13,362       3,056       2,793  
Trailing fleet
    5,580       7,587       10,969  
Information technology
    1,471       761       938  
Leasehold improvements
    245       186       277  
Other equipment
    1,840       1,087       254  
     
Total
  $ 33,226     $ 27,136     $ 22,863  
     

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          Management estimates that cash capital expenditures for 2008 will be between $14.0 million and $21.0 million. This includes real estate purchase commitments for facilities in Las Vegas, Nevada and Kansas City, Kansas. The Company may potentially enter into operating leases to fund the acquisition of specific equipment with a capital cost of between $17.0 million and $23.0 million. The Company expects to finance its capital requirements with cash flow from operations, new capital or operating leases and if required, its $27.9 million of unused credit facilities.
          The Company has contractual obligations that include long-term debt consisting of term debt facilities, revolving credit facilities, capital leases for operating equipment and off-balance sheet operating leases primarily consisting of tractor, trailing fleet and real estate leases. Operating leases form an integral part of the Company’s financial structure and operating methodology as they provide an alternative cost effective and flexible form of financing. At December 31, 2007 the Company secured purchase commitments for the acquisition of facilities in Las Vegas, Nevada and Kansas City, Kansas that will close in the first quarter of 2008. The following table summarizes our significant contractual obligations and commercial commitments as of December 31, 2007:
                                         
 
(in thousands of dollars)   Payments due by period
Contractual Obligations   Total   2008   2009 & 2010   2011 & 2012   Thereafter
     
 
                                       
Term credit facilities
  $ 58,911     $ 9,020     $ 23,891     $ 26,000     $ Nil
Revolving credit facilities
    45,023     Nil     Nil       45,023     Nil  
Capital lease obligations
    22,860       7,943       9,260       5,657     Nil  
Note payable
    1,181       1,181     Nil     Nil     Nil  
 
Sub-total
    127,975       18,144       33,151       76,680     Nil  
Off-balance sheet commitments
                                       
Purchase Commitments
    5,000       5,000     Nil     Nil     Nil  
Operating leases
    58,639       17,425       23,169       13,838       4,207  
 
Total contractual obligations
  $ 191,614     $ 40,569     $ 56,320     $ 90,518     $ 4,207  
 
          In addition to the above-noted contractual obligations, the Company, as at December 31, 2007, utilized the revolving credit facility for standby letters of credit of $19.6 million. The letters of credit are used as collateral for self-insured retention of insurance claims.
          A significant decrease in demand for our services could limit the Company’s ability to generate cash flow and affect its profitability. The Company’s credit agreement contains certain financial maintenance tests that require the Company to achieve stated levels of financial performance, which, if not achieved, could cause an acceleration of the payment schedules. Management does not anticipate a significant decline in business levels or financial performance and expects that existing working capital, together with available revolving facilities, will be sufficient to fund operating and capital requirements in 2008 as well as service the contractual obligations.
OUTLOOK
          As previously mentioned, fiscal 2007 was a challenging year, with the continued sluggishness of the North American economy and pricing pressures with the Transportation sector impacting the operating results of all segments. Albeit Vitran established record revenue and cashflow from operations for the year, net income declined. The Company in 2007 reduced its claims ratio in the U.S. LTL operation. Significant milestones were achieved in the U.S. LTL IT systems migration with Vitran’s eastern region successfully going live in the third quarter of 2007. The LTL segment achieved a double digit transborder growth rate and both the Canadian LTL and U.S. LTL business units increased revenue and yield. The Logistics segment had a record financial year, expanded its customer base and made its first strategic acquisition with LVLA giving the Company new retail opportunities in North America.
          For 2008, Vitran’s LTL segment will remain opportunistic with its objective to acquire or extend its LTL operation into new regional markets. Management will continue to evaluate LTL expansion opportunities with a view to ensuring the appropriate fit to its existing LTL network. At December 31, 2007, the Company had $27.9 million of unused credit facilities. LTL management intends to continue its focus on the LTL transborder business with a view to maintaining above average year-over-year revenue growth.

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          The U.S. LTL business unit will focus on the completion of its IT systems migration initiative across the remaining U.S. LTL regions in the central, southwestern and western states. Upon completion, U.S. LTL management will focus on operational integration programs primarily in the legacy PJAX acquisition overlap states of Michigan, Ohio, Kentucky and Indiana. Benefits of the operational integration will be realized with linehaul optimization, elimination of service centre and rolling stock redundancy, and superior service to Vitran’s customers. Furthermore, this will lead to an incremental marketing opportunity as Vitran initiates its new inter-regional sales effort from the eastern U.S. states and back throughout the entire U.S. LTL network.
          The Canadian LTL business unit will endeavor to complete the construction of the new Toronto cross-dock facility, successfully move its national office and service centre resources, and achieve operational efficiencies.
          The Logistics segment will continue to concentrate on gaining new profitable business that also utilizes the services of the Company’s LTL infrastructure. Logistics management will focus on customer opportunities and operational initiatives within the newly acquired LVLA business. Preparations for the new major supply chain client, announced at the end of the 2007 second quarter, are underway and will expand revenue and income from operations in the second half of 2008.
          Truckload segment management will focus on expanding and diversifying its customer base, margin expansion and asset utilization. There are no capital expenditures budgeted in 2008 for the Truckload segment.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
          The Company prepares its financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States together with a reconciliation to Canadian GAAP, as disclosed in Note 18 to the Consolidated Financial Statements.
          The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant accounting policies and methods used in preparation of the financial statements are described in Note 1 to the Consolidated Financial Statements. The Company evaluates its estimates and assumptions on a regular basis, based on historical experience and other relevant factors. Significant estimates are used in determining, but not limited to, the allowance for doubtful accounts, deferred tax assets, claims and insurance accruals, share-based compensation, intangible asset values and the fair value of reporting units for purposes of goodwill impairment tests. Actual results could differ materially from those estimates and assumptions.
Revenue Recognition
          The Company’s LTL and Truckload business units and Freight Brokerage operations recognize revenue upon the delivery of the related freight and direct shipment costs as incurred. Revenue for the Logistics operations is recognized as the management services are provided.
Allowance for Doubtful Accounts
          The Company records an allowance for doubtful accounts related to accounts receivable that may potentially be impaired. The allowance is based on the Company’s knowledge of the financial condition of its customers, the aging of the receivables, current business environment, customer and industry concentrations, and historical experience. A change to these factors could impact the estimated allowance. The provision for bad debts is recorded in selling, general and administrative expenses.
Claims and Insurance Accruals
          Claims and insurance accruals reflect the estimated ultimate total cost of claims, including amounts for claims incurred but not reported, for cargo loss and damage, bodily injury and property damage, workers’ compensation, long-term disability and group health. In Canada, the Company has a $50,000 deductible and in the

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United States $350,000 self-insurance retention (“SIR”) per incident for auto liability, casualty and cargo claims. In the United States the Company has an $350,000 SIR per incident for workers’ compensation and $250,000 SIR per incident for employee medical. In establishing these accrued expenses, management evaluates and monitors each claim individually, and uses factors such as historical experience, known trends and third party estimates to determine the appropriate reserves for potential liability. Changes in severity of previously reported claims, significant changes in the medical costs and legislative changes affecting the administration of the plans could significantly impact the determination of appropriate reserves in future periods.
Goodwill and Intangible Assets
          The Company performs its goodwill impairment test annually, and more frequently if events or changes in circumstances indicate that an impairment loss may have occurred. Impairment is tested at the reporting unit level by comparing the reporting unit’s carrying amount to its implied fair value. The methodology used to measure fair value is the discounted cash flow method. The discounted cash flow method requires certain assumptions for growth in earnings before interest, taxes and depreciation, future tax rates, capital re-investment, fair value of the assets and liabilities, and discount rate. The discount rate is based on the Company’s estimated weighted average cost of capital. Actual recovery of goodwill could differ from these assumptions based on market conditions and other factors. In the event goodwill is determined to be impaired, a charge to earnings would be required. As at September 30, 2007, Vitran completed its annual goodwill impairment test and concluded that there was no impairment.
          The Company has not yet completed the allocation of purchase price to intangible assets for the LVLA acquisition in 2007.
Property and Equipment
          Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives. Management establishes appropriate useful lives for all property and equipment and continuously evaluates and updates these when circumstances warrant. Actual carrying value of assets could differ based on different assumptions, estimates or other factors.
Share-Based Compensation
          Under the Company’s stock option plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company and its affiliates by the Board of Directors or by the Company’s Compensation Committee. The Company accounts for stock options in accordance with SFAS Statement 123(R) with compensation expense amortized over the vesting period based on the Black-Scholes-Morton fair value on the grant date. The Company adopted SFAS 123(R) on January 1, 2006 and recorded $0.1 million in income related to the cumulative effect of change in accounting principle.
Income Taxes
          The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Significant judgment is required in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company adopted FIN 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007 with no cumulative effect adjustment recorded at adoption. FIN 48 requires that uncertain tax positions are evaluated in a two-step process, whereby (1) the Company determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company would recognize the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the related tax authority.

25


 

CHANGES IN ACCOUNTING POLICY
          See Note 1 to the accompanying consolidated financial statements for discussion of United States GAAP recent accounting pronouncements and see Note 18 for Canadian GAAP recent accounting pronouncements.
RELATED PARTIES
          None.
ITEM 7.a—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
          The Company is exposed to the impact of interest rate changes. The Company’s exposure to changes in interest rates is limited to borrowings under the term bank facilities and revolving credit facilities that have variable interest rates tied to the LIBOR rate. As a majority of the Company’s debt is tied to variable interest rates, we estimate that the fair value of the long-term debt approximates the carrying value.
                                         
 
(in thousands of dollars)   Payments due by period
Long-term debt   Total   2008   2009 & 2010   2011 & 2012   Thereafter
     
 
                                       
Variable Rate
                                       
Term bank facility
  $ 56,000     $ 8,000     $ 22,000     $ 26,000     $ Nil  
Average interest rate (LIBOR)
    6.08 %     6.08 %     6.08 %     6.08 %        
Term bank facility
    2,911       1,020       1,891     Nil     Nil  
Average interest rate (LIBOR)
    6.58 %     6.58 %     6.58 %                
Revolving bank facility
    30,900     Nil     Nil       30,900     Nil  
Average interest rate (LIBOR)
    6.08 %                     6.08 %        
Revolving bank facility
    14,123     Nil     Nil       14,123     Nil  
Average interest rate (CAD BA)
    5.64 %                     5.64 %        
 
                                       
Fixed Rate
                                       
Capital lease obligations
    22,860       7,943       9,260       5,657     Nil  
Average interest rate
    6.15 %     6.15 %     6.15 %     6.15 %        
Note payable
    1,181       1,181     Nil     Nil     Nil  
Average interest rate
    6.0 %     6.0 %                        
 
Total
  $ 127,975     $ 18,144     $ 33,151     $ 76,680     Nil  
 
          The Company uses variable-to-fixed interest rate swaps on its term and revolving debt facilities with a notional amount of $68.9 million at December 31, 2007. The average pay rate on the swaps is 4.94% and the average receive rate is the three-month LIBOR rate which is currently 4.83%.
          The Company is exposed to foreign currency risk as fluctuations in the United States dollar against the Canadian dollar can impact the financial results of the Company. The Company’s Canadian operations realize foreign currency exchange gains and losses on the United States dollar denominated revenue generated against Canadian dollar denominated expenses. Furthermore, the Company reports its results in United States dollars thereby exposing the results of the Company’s Canadian operations to foreign currency fluctuations. In addition, the Company’s United States dollar debt of $72.2 million is designated as a hedge of the investment in the United States’ self-sustaining foreign operations.
          In addition to the information disclosed above, further information required by Item 7A of Form 10-K appears in Item 7 of this Annual Report on Form 10-K under the headings “Liquidity and Capital Resources” and “General Risks and Uncertainties”.

26


 

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
          Consolidated Balance Sheets as at December 31, 2007, and 2006 and the Consolidated Statements of Income, Shareholders’ Equity and Cash Flow for the years ended December 31, 2007, 2006, and 2005, are reported on by KPMG LLP, Chartered Accountants.
          These statements are prepared in accordance with GAAP in the United States and in Canada. A reconciliation of the differences between United States and Canadian GAAP is included on Note 18 to the Consolidated Financial Statements.
MANAGEMENT RESPONSIBILITY OVER FINANCIAL REPORTING
          The Consolidated Financial Statements of the Company are the responsibility of management and have been prepared in accordance with Unites States GAAP with a reconciliation to Canadian GAAP and, where appropriate, reflect estimates based on management’s judgement. In addition, all other information contained in the Annual Report on Form 10-K is also the responsibility of management.
          The Company maintains systems of internal accounting and administrative controls designed to provide reasonable assurance that the financial information provided is accurate and complete and that all assets are properly safeguarded.
          The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately responsible for reviewing and approving the Consolidated Financial Statements. The Board appoints the Audit Committee, comprised of non-management directors, which meets with management and KPMG LLP, the external auditors, at least once a year to review, among other things, accounting policies, annual financial statements, the result of the external audit examination, and the management discussion and analysis included in the Annual Report on Form 10-K. The Audit Committee reports its finding to the Board of Directors so that the Board may properly approve the financial statements. Additional commentary on corporate governance appears in the Company’s proxy statement for the 2008 Annual and Special Meeting of its Shareholders and the information therein is incorporated herein by reference.

27


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Vitran Corporation Inc.
We have audited the accompanying consolidated balance sheets of Vitran Corporation Inc. (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007. Our audit also included the financial statement schedule listed in the Index under Part IV, Item 15(a)2. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vitran Corporation Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
U.S. generally accepted accounting principles vary in certain significant respects from Canadian generally accepted accounting principles. Information relating to the nature and effect of such differences is prescribed in note 18 to the consolidated financial statements.
As discussed in note 1 to the consolidated financial statements, on January 1, 2007, Vitran Corporation Inc. changed its method of accounting for income tax uncertainties in accordance with guidance provided in FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109 and on January 1, 2006, Vitran Corporation Inc. changed its method of accounting for stock-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards No. 123(R), Share-Based Payments.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vitran Corporation Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 7, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Chartered Accountants, Licensed Public Accountants
/s/ KPMG LLP
Toronto, Canada
February 7, 2008

28


 

Consolidated Balance Sheets
(Amounts in thousands of United States dollars)
December 31, 2007 and 2006
                 
 
    2007     2006  
 
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 5,131     $ 5,208  
Accounts receivable
    74,261       66,051  
Inventory, deposits and prepaid expenses
    11,325       10,796  
Income and other taxes recoverable
    2,232        
Deferred income taxes (note 8)
    2,599       1,720  
 
Total current assets
    95,548       83,775  
 
               
Property and equipment (note 4)
    169,062       145,129  
Intangible assets (note 5)
    13,645       15,888  
Goodwill (note 6)
    124,375       117,146  
Other
          150  
 
               
 
Total assets
  $ 402,630     $ 362,088  
 
 
               
Liabilities and Shareholders’ Equity
               
 
               
Current liabilities:
               
Bank overdraft
  $ 5,521     $ 3,754  
Accounts payable and accrued liabilities (note 1(q))
    67,468       67,916  
Income and other taxes payable
          1,275  
Current portion of long-term debt (note 7)
    18,144       15,724  
 
Total current liabilities
    91,133       88,669  
 
               
Long-term debt (note 7)
    109,831       93,139  
Other
    3,512        
Deferred income taxes (note 8)
    7,810       6,983  
 
               
Shareholders’ equity:
               
Common shares, no par value, unlimited authorized, 13,448,159 and 13,419,859 issued and outstanding in 2007 and 2006, respectively (note 9)
    77,246       76,913  
Additional paid-in capital
    2,436       1,607  
Retained earnings
    104,478       90,933  
Accumulated other comprehensive income (note 3)
    6,184       3,844  
 
Total shareholders’ equity
    190,344       173,297  
 
               
Lease commitments (note 14)
               
Contingent liabilities (note 16)
               
 
               
 
Total liabilities and shareholders’ equity
  $ 402,630     $ 362,088  
 
             
On behalf of the Board:
           
 
           
/s/ RICHARD D. McGRAW
      /s/ JOHN R. GOSSLING    
 
           
Chairman
      Director    
See accompanying notes to consolidated financial statements.

29


 

Consolidated Statements of Income
(Amounts in thousands of United States dollars, except per share amounts)
Years ended December 31, 2007, 2006 and 2005
                         
 
                    2005
    2007   2006   (US and
    (US GAAP)   (US GAAP)   CDN GAAP)
 
 
                       
Revenue
  $ 670,517     $ 514,059     $ 428,192  
 
                       
Operating expenses
    565,094       426,515       357,960  
Selling, general and administrative expenses
    62,086       47,448       37,881  
Other income
    (432 )     (434 )     (41 )
Depreciation and amortization
    20,770       12,490       6,965  
 
 
    647,518       486,019       402,765  
 
 
                       
Income from operations before the undernoted
    22,999       28,040       25,427  
 
                       
Interest on long-term debt
    (8,554 )     (2,887 )     (771 )
Interest income
    128       227       473  
 
 
    (8,426 )     (2,660 )     (298 )
 
 
                       
Income from operations before income taxes
    14,573       25,380       25,129  
 
                       
Income taxes (recovery) (note 8):
                       
Current
    1,638       4,177       3,506  
Deferred
    (775 )     1,945       3,685  
 
 
    863       6,122       7,191  
 
 
                       
Net income before cumulative effect of change in accounting principle
    13,710       19,258       17,938  
 
                       
Cumulative effect of change in accounting principle
          141        
 
                       
 
Net income
  $ 13,710     $ 19,399     $ 17,938  
 
 
                       
Income per share:
                       
 
                       
Basic:
                       
Net income before cumulative effect of change in accounting principle
  $ 1.02     $ 1.49     $ 1.43  
Cumulative effect of change in accounting principle
          0.01        
 
                       
 
Net income
  $ 1.02     $ 1.50     $ 1.43  
 
 
                       
Diluted:
                       
Net income before cumulative effect of change in accounting principle
  $ 1.00     $ 1.47     $ 1.40  
Cumulative effect of change in accounting principle
          0.01        
 
                       
 
Net income
  $ 1.00     $ 1.48     $ 1.40  
 
 
                       
Weighted average number of shares:
                       
Basic
    13,458,786       12,887,401       12,516,265  
Diluted
    13,651,799       13,124,865       12,848,360  
 
 
The cumulative effect of change in accounting principle is not applicable under Canadian GAAP for the year ended December 31, 2005.
See accompanying notes to consolidated financial statements.

30


 

Consolidated Statements of Shareholders’ Equity
(Amounts in thousands of United States dollars)
Years ended December 31, 2007, 2006 and 2005
                                                 
 
                                    Accumulated    
                    Additional           other   Total
    Common shares   paid-in   Retained   comprehensive   shareholders’
    Number   Amount   capital   earnings   income   equity
 
 
December 31, 2006
    13,419,859     $ 76,913     $ 1,607     $ 90,933     $ 3,844     $ 173,297  
Shares issued upon exercise of employee stock options
    58,500       571       (168 )                 403  
Shares repurchased for cancellation (note 9)
    (30,200 )     (238 )           (165 )           (403 )
Net income
                      13,710             13,710  
Other comprehensive income (note 3)
                            2,340       2,340  
Share-based compensation (note 9)
                997                   997  
 
 
December 31, 2007
    13,448,159     $ 77,246     $ 2,436     $ 104,478     $ 6,184     $ 190,344  
 
                                                 
 
                                    Accumulated    
                    Additional           other   Total
    Common shares   paid-in   Retained   comprehensive   shareholders’
    Number   Amount   capital   earnings   income   equity
 
 
December 31, 2005
    12,647,636     $ 63,604     $ 956     $ 71,553     $ 3,689     $ 139,802  
Shares issued upon exercise of employee stock options
    97,300       526       (47 )                 479  
Shares repurchased for cancellation (note 9)
    (2,000 )     (14 )           (19 )           (33 )
Net income
                      19,399             19,399  
Other comprehensive income (note 3)
                            155       155  
Share-based compensation (note 9)
                839                   839  
Shares issued upon acquisition of subsidiary (note 2)
    676,923       12,797                         12,797  
Cumulative effect of a change in accounting principle (note 1(l))
                (141 )                 (141 )
 
 
December 31, 2006
    13,419,859     $ 76,913     $ 1,607     $ 90,933     $ 3,844     $ 173,297  
 
                                                 
 
                                    Accumulated    
                    Additional           other   Total
    Common shares   paid-in   Retained   comprehensive   shareholders’
    Number   Amount   capital   earnings   income   equity
 
 
December 31, 2004
    12,419,678     $ 60,798     $ 323     $ 54,215     $ 3,855     $ 119,191  
Shares issued upon exercise of employee stock options
    85,300       303       (21 )                 282  
Shares repurchased for cancellation
    (59,800      (297 )           (600 )           (897 )
Net income
                      17,938             17,938  
Other comprehensive loss (note 3)
                            (166 )     (166 )
Share-based compensation (note 9)
                654                   654  
Shares issued upon acquisition of subsidiary (note 2)
    202,458       2,800                         2,800  
 
 
December 31, 2005
    12,647,636     $ 63,604     $ 956     $ 71,553     $ 3,689     $ 139,802  
 
See accompanying notes to consolidated financial statements.

31


 

Consolidated Statements of Cash Flows
(Amounts in thousands of United States dollars)
Years ended December 31, 2007, 2006 and 2005
                         
 
                    2005
    2007   2006   (US and
    (US GAAP)   (US GAAP)   CDN GAAP)
 
Cash provided by (used in):
                       
 
                       
Operations:
                       
Net income
  $ 13,710     $ 19,399     $ 17,938  
Items not involving cash from operations:
                       
Depreciation and amortization
    20,770       12,490       6,965  
Deferred income taxes
    (775 )     1,945       3,685  
Gain on sale of property and equipment
    (432 )     (434 )     (41 )
Share-based compensation expense
    997       839       654  
Cumulative effect of change in accounting principle
          (141 )      
Change in non-cash working capital components
    (1,274 )     1,026       (2,034 )
 
 
    32,996       35,124       27,167  
 
                       
Investments:
                       
Purchases of property and equipment
    (22,870 )     (27,136 )     (22,863 )
Proceeds on sale of property and equipment
    931       2,490       97  
Acquisition of subsidiary, net
    (5,990 )     (89,284 )     (28,192 )
Additional payments due to acquisition of subsidiary
    (8,901 )            
Acquisition of business assets
          (2,251 )      
Marketable securities
                31,974  
 
 
    (36,830 )     (116,181 )     (18,984 )
 
                       
Financing:
                       
Change in revolving credit facility and bank overdraft
    24,170       7,984       2,947  
Proceeds from long-term debt
          70,500        
Repayment of long-term debt
    (9,124 )     (5,825 )     (3,030 )
Repayment of capital leases
    (7,842 )     (1,644 )      
Financing cost
    (917 )            
Issue of common shares upon exercise of stock options
    403       479       282  
Repurchase of common shares
    (403 )     (33 )     (921 )
 
 
    6,287       71,461       (722 )
 
                       
Effect of translation adjustment on cash
    (2,530 )     212       (244 )
 
 
                       
Increase (decrease) in cash and cash equivalents
    (77 )     (9,384 )     7,217  
 
Cash and cash equivalents, beginning of year
    5,208       14,592       7,375  
 
 
Cash and cash equivalents, end of year
  $ 5,131     $ 5,208     $ 14,592  
 
 
                       
Change in non-cash working capital components:
                       
Accounts receivable
  $ (5,254 )   $ 2,278     $ (3,419 )
Inventory, deposits and prepaid expenses
    975       598       (1,963 )
Income and other taxes recoverable/payable
    (2,157 )     151       (1,275 )
Accounts payable and accrued liabilities
    5,162       (2,001 )     4,623  
 
 
 
  $ (1,274 )   $ 1,026     $ (2,034 )
 
 
                       
Supplemental cash flow information:
                       
Interest paid
  $ 8,827     $ 2,480     $ 769  
Income taxes paid
    6,997       5,586       5,063  
 
                       
Supplemental disclosure of non-cash transactions:
                       
Capital lease additions
    10,356              
Issuance of shares to seller in acquisition
          12,797       2,800  
 
 
See accompanying notes to consolidated financial statements.

32


 

Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
1.   Significant accounting policies:
  (a)   Description of the business:
 
      Vitran Corporation Inc. (“Vitran” or the “Company”) is a North American provider of freight services and distribution solutions to a wide variety of companies and industries. Vitran offers less-than-truckload (“LTL”) service throughout Canada and the United States. Vitran Logistics offers supply chain solutions in Canada and the United States, including warehousing, inventory management and flow-through distribution facilities, as well as freight brokerage services. Vitran also provides same-day and next-day truckload services in the United States.
 
  (b)   Basis of presentation:
 
      These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated on consolidation.
 
      These consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) with a reconciliation to Canadian generally accepted accounting principles in note 18. The Ontario Business Corporations Act (“OBCA”) regulations allow issuers that are required to file reports with the Securities and Exchange Commission in the United States to file financial statements under United States GAAP to meet their continuous disclosure obligations in Canada. Prior to 2006, Vitran prepared its consolidated financial statements in accordance with Canadian GAAP with a reconciliation to United States GAAP. Commencing the first quarter of 2008, the reconciliation to Canadian GAAP will no longer be required.
 
      All amounts in these consolidated financial statements are expressed in United States dollars, unless otherwise stated.
 
  (c)   New accounting pronouncements:
 
      FSP FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, amends FASB Interpretation No. 48, Accounting for Uncertainty in Income Tax, to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The FSP is to be adopted upon initial adoption of FIN 48 with retroactive treatment if required. The Company adopted FIN 48 January 1, 2007, consistent with the provisions of the FSP, with no cumulative effect adjustment recorded at adoption.

33


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
1.   Significant accounting policies (continued):
  (c)   New accounting pronouncements (continued):
 
      SFAS Statement 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of SFAS Statement 115, permits entities to choose to measure many financial instruments and certain warranty and insurance contracts at fair value on a contract-by-contract basis. SFAS Statement 159 will be adopted January 1, 2008, as required by the statement. The requirements of SFAS Statement 159 are not expected to have an effect on the Company’s consolidated financial statements.
 
      SFAS Statement 157, Fair Value Measurements, defines fair values, establishes a framework for measuring fair value in GAAP, and requires enhanced disclosures about fair value measurements. This statement applies when other accounting pronouncements require or permit fair value measurements. SFAS Statement 157 will be adopted January 1, 2008 as required by the statement.
 
      EITF 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards, requires that the tax benefit received on dividends associated with share-based awards that are charged to retained earnings should be recorded in additional paid-in capital and included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 will be adopted January 1, 2008 as required by the guidance. The requirement of EITF 06-11 will not have an effect on the Company’s consolidated financial statements.
 
  (d)   Foreign currency translation:
 
      A majority of the Company’s shareholders, customers and industry analysts are located in the United States. Accordingly, the Company has adopted the United States dollar as its reporting currency.
 
      The United States dollar is the functional currency of the Company’s operations in the United States. The Canadian dollar is the functional currency of the Company’s Canadian operations.
 
      Each operation translates foreign currency-denominated transactions into its functional currency using the rate of exchange in effect at the date of the transaction.
 
      Monetary assets and liabilities denominated in a foreign currency are translated into the functional currency of the operation using the year-end rate of exchange giving rise to a gain or loss that is recognized in income during the current period.

34


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
1.   Significant accounting policies (continued):
  (d)   Foreign currency translation (continued):
 
      For reporting purposes, the Canadian operations are translated into United States dollars using the current rate method. Under this method, all assets and liabilities are translated at the year-end rate of exchange and all revenue and expense items are translated at the average rate of exchange for the year. The resulting translation adjustment is recorded as a separate component of shareholders’ equity. United States dollar debt of $72.2 million (2006 — $85.2 million) is designated as a hedge of the investment in the United States dollar functional operation, such that related transaction gains and losses are recorded in the separate component of shareholders’ equity.
 
      In respect of other transactions denominated in currencies other than the Canadian dollar, the monetary assets and liabilities of the Company are translated at the year-end rates. Revenue and expenses are translated at rates of exchange prevailing on the transaction dates. All of the exchange gains or losses resulting from these other transactions are recognized in income.
 
  (e)   Revenue recognition:
 
      The Company’s LTL and truckload business units and freight brokerage operations recognize revenue upon the delivery of the related freight and direct shipment costs as incurred. Revenue for the logistics operations is recognized as the management services are provided.
 
  (f)   Accounts receivable:
 
      Accounts receivable are presented net of allowance for doubtful accounts of $2.5 million at December 31, 2007 (2006 — $2.2 million).
 
  (g)   Cash and cash equivalents:
 
      Cash and cash equivalents include cash on account and short-term investments with maturities of three months or less at the date of purchase and are stated at cost, which approximates market value.
 
  (h)   Inventory:
 
      Inventory consists of tires and spare parts and is valued at the lower of average cost and replacement cost.

35


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
1.   Significant accounting policies (continued):
  (i)   Property and equipment:
 
      Property and equipment are recorded at cost. Depreciation of property and equipment is provided on a straight-line basis from the date assets are put in service over their estimated useful lives as follows:
     
 
 
Buildings
  30—31.5 years
Leasehold interests and improvements
  Over term of lease
Vehicles:
   
Trailers and containers
  12 years
Trucks
  8 years
Machinery and equipment
  5—10 years
 
 
      Tires purchased as part of a vehicle are capitalized as a cost to the vehicle. Replacement tires are expensed when placed in service.
 
  (j)   Goodwill and intangible assets:
 
      As at September 30, 2007, the Company completed its annual goodwill impairment test and concluded there was no impairment. The change in goodwill is attributable to translating the Canadian dollar-denominated goodwill to the United States dollar reporting currency and to the acquisition of a subsidiary and acquisition of a business (note 2).
 
      Intangible assets consist of not-to-compete covenants and customer relationships and are amortized on a straight-line basis over their expected lives ranging from three to eight years.
 
  (k)   Income taxes:
 
      The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Significant judgment is required in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the date of enactment. The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty

36


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
1.   Significant accounting policies (continued):
  (k)   Income taxes (continued):
 
      in Income Taxes, on January 1, 2007 as described in note 8. FIN 48 requires that uncertain tax positions are evaluated in a two-step process, whereby (i) the Company determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, the Company would recognize the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the related tax authority.
 
  (l)   Share-based compensation:
 
      Under the Company’s stock option plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors or by the Company’s Compensation Committee. There are 820,200 options outstanding under the plan. The term of each option is 10 years and the vesting period is five years. The exercise price for options is the trading price of the common shares of the Company on The Toronto Stock Exchange on the day of the grant.
 
      For all stock option grants prior to January 1, 2003, share-based compensation to employees was accounted for based on the intrinsic value method under APB No. 25 and related interpretations. On January 1, 2003, in accordance with a transitional option permitted under amended SFAS 148, the Company had prospectively applied the fair-value-based method to all stock options granted on or after January 1, 2003. The Company recognized share-based compensation for all stock options granted on or after January 1, 2003 and presented the disclosures required by SFAS 123.
 
      On January 1, 2006, the Company adopted SFAS 123(R), Share-Based Payments, using the modified prospective transition method. In accordance with the modified prospective transition method, the consolidated financial statements have not been restated to reflect the impact of SFAS 123(R).
 
      Under SFAS 123(R), using the modified prospective method, compensation expense is recognized for all share-based payments granted prior to, but not yet vested as of, January 1, 2006 based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and compensation expense is recognized for all share-based payments granted on or after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

37


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
1.   Significant accounting policies (continued):
  (l)   Share-based compensation (continued):
 
      The Company recorded in income $0.1 million related to the cumulative effect of a change in accounting principle as of January 1, 2006. In accordance with SFAS 123, the Company recognized compensation expense assuming all awards will vest and reversed recognized compensation expense for forfeited awards only when the awards were actually forfeited. SFAS 123(R) requires an estimate of forfeitures when recognizing share-based compensation expense. Note 9(b) provides supplemental disclosure for the Company’s stock options.
 
  (m)   Advertising costs:
 
      Advertising costs are expensed as incurred. Advertising costs amounted to $784 in 2007 (2006 — $595; 2005 — $538).
 
  (n)   Impairment of long-lived assets:
 
      An impairment is recognized when the carrying amount of a long-lived asset to be held and used exceeds the sum of undiscounted cash flows expected from its use and disposal, and is measured as the amount by which the carrying amount of an asset exceeds its fair value. A long-lived asset should be tested when events or circumstances indicate that its carrying amount may not be recoverable. During 2007 and 2006, the Company has not identified any indicators that would require testing for an impairment.
 
  (o)   Derivative instruments:
 
      Derivative instruments are used to hedge the Company’s exposure to changes in interest rates. All derivatives are recognized on the Consolidated Balance Sheets at fair value based on quoted market prices and are recorded in either current or non-current assets or liabilities based on their maturity. Changes in the fair values of derivatives are recorded in income or other comprehensive income, based on whether the instrument is designated as a hedge transaction and, if so, the type of hedge transaction. Gains or losses on derivative instruments reported in other comprehensive income are reclassified to income in the period the hedged item affects income. If the underlying hedged transaction ceases to exist, any associated amounts reported in other comprehensive income are reclassified into income at that time. Any ineffectiveness is recognized in income in the current period.

38


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
1.   Significant accounting policies (continued):
  (p)   Claims and insurance accruals:
 
      Claims and insurance accruals reflect the estimated total cost of claims, including amounts for claims incurred but not reported, for cargo loss and damage, bodily injury and property damage, workers’ compensation, long-term disability and group health. In Canada and the United States, the Company has self-insurance retention amounts per incident for auto liability, casualty and cargo claims. In the United States, the Company has self-insurance retention amounts per incident for workers’ compensation and employee medical. In establishing these accruals, management evaluates and monitors each claim individually, and uses factors such as historical experience, known trends and third party estimates to determine the appropriate reserves for potential liability.
 
  (q)   Accounts payable and accrued liabilities:
                 
 
    2007     2006  
 
 
Accounts payable
  $ 33,988     $ 26,548  
Accrued wages and benefits
    11,458       10,075  
Accrued claims, self insurance and workers’ compensation
    9,314       8,672  
Amounts payable to vendors of acquisitions
          7,434  
Other
    12,708       15,187  
 
 
 
  $ 67,468     $ 67,916  
 
  (r)   Deferred share units:
 
      The Company maintains a deferred share unit (“DSU”) plan for all directors. Under this plan, all directors receive units at the end of each quarter based on the market price of common shares equivalent to Cdn. $2,500.00. The Company records compensation expense and the corresponding liability each period initially for Cdn. $2,500.00 and subsequently based on changes in the market price of common shares.
 
      In addition to the directors’ DSU plan, the Company adopted a DSU plan for senior executives. Under this plan, eligible senior executives receive units at the end of each quarter based on the market price of common shares equivalent to the senior executive’s entitlement. The entitlement amount varies based on the senior executive’s position in the Company and the years of eligible service. The maximum entitlement amount varies between $2,500.00 and $20,000.00 per annum. The Company records compensation expense and the corresponding liability each period based on the market price of common shares.

39


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
1.   Significant accounting policies (continued):
  (s)   Use of estimates:
 
      The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Significant estimates are used in determining, but not limited to, the allowance for doubtful accounts, deferred tax assets, claims and insurance accruals, share-based compensation, intangible asset values and the fair value of reporting units for purposes of goodwill impairment tests. Actual results could differ from those estimates.
2.   Acquisitions:
 
    Las Vegas/L.A. Express, Inc.
 
    On November 30, 2007, the Company acquired 100 percent of the outstanding shares of Las Vegas/L.A. Express, Inc. (“LVLA”). The aggregate purchase consideration was approximately $8.45 million (including transaction costs). This is comprised of $6.25 million in cash, $1.9 million in assumed debt and transaction costs of approximately $0.3 million. Further, approximately $4.35 million of additional cash consideration is contingent on the vendors meeting certain future financial metrics. All additional contingent consideration paid to the vendors will be allocated to goodwill. The results of operations of LVLA are included in the consolidated results of the Company commencing December 1, 2007. The cash portion of the transaction was financed from proceeds from the Company’s revolving credit facility. The Company has not completed the allocation of identifiable intangible assets and goodwill. The Company does not anticipate that the amortization of intangible assets would be material to 2007 results. The total amount of goodwill, once determined, will not be deductible for tax purposes.
 
    PJAX Freight System
 
    On October 2, 2006, the Company acquired 100 percent of the outstanding shares of PJAX, Inc. and all the real estate held by Woodhurst Realty LLC and Northridge Enterprises LP, collectively known as PJAX Freight System (“PJAX”). The aggregate purchase consideration was approximately $112.8 million (including transaction costs) excluding assumed debt. This is comprised of approximately $80.0 million in cash, Vitran common shares valued at $12.8 million (676,923 common shares valued at $18.90 per share) and holdbacks of $11.7 million payable during the year subsequent to the date of acquisition. During the 2006 fourth quarter, $9.8 million of the holdbacks were paid to the vendors. The remaining amount of holdbacks were paid in 2007. Transaction costs amounted to approximately $1.6 million. During the 2006 fourth quarter, Vitran executed a joint election with the seller to structure the transaction as an asset sale for tax purposes and approximately an additional $5.5 million of cash would be payable in April 2007. In addition, the Company assumed debt of approximately $27.1 million

40


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
    bringing the aggregate purchase consideration to $139.9 million. The results of operations of PJAX are included in the consolidated results of the Company commencing October 2, 2006. The cash portion of the transaction was financed from existing cash and proceeds from long-term debt. The total amount of goodwill is expected to be deductible for tax purposes. Based on the final calculations for the joint election, an additional $6.7 million of cash was paid in 2007. As such, an additional $1.2 million was recorded as an adjustment to goodwill.
 
    Sierra West Express Inc.
 
    On January 3, 2006, the Company acquired all the assets and selected liabilities of Sierra West Express Inc. (“SWE”), a private LTL carrier headquartered in Sparks, Nevada. SWE added eight new terminals to Vitran’s network in the states of Nevada, California and Arizona. The aggregate purchase price was $2.5 million, comprised of $2.3 million of cash and a $0.2 million note payable to the vendor in April 2007. The results of operations of SWE are included in the consolidated results of the Company commencing January 3, 2006. The cash portion of the transaction was financed from existing cash on-hand. The total amount of goodwill is expected to be deductible for tax purposes.
 
    Chris Truck Line
 
    On May 31, 2005, the Company acquired 100 percent of the outstanding shares of R.A. Christopher, Inc. and Kansas Motor Freight Corporation collectively operating as Chris Truck Line (“CTL”). CTL is a Kansas-based regional LTL carrier operating in 11 states in the Midwestern and Southwestern United States. The results of operations of CTL are included in the consolidated results of the Company commencing June 1, 2005. The aggregate purchase price was $31.0 million, comprised of $26.5 million of cash and 202,458 common shares valued at $2.8 million. During the 2005 third quarter, Vitran executed a joint election with the seller to structure the transaction as an asset sale for tax purposes and an additional $1.7 million of cash was paid in April 2006. The cash portion of the transaction was financed from existing cash and marketable securities balances. The total amount of goodwill is expected to be deductible for tax purposes.

41


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
2.   Acquisitions (continued):
 
    The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the acquisition, as based on independent appraisals and management estimates:
                                 
 
    2007   2006   2005
    LVLA   SWE   PJAX   CTL
 
 
Current assets
  $ 4,146     $ 1,776     $ 25,087     $ 3,557  
Property and equipment
    2,485       2,127       62,848       12,375  
Identifiable intangible assets:
                               
Covenants not-to-compete (3- to 6-year useful life)
          45       2,700       240  
Customer relationships (8-year useful life)
          540       11,000       2,300  
Other assets
                165        
Goodwill
    4,529       1,164       55,768       15,885  
 
 
    11,160       5,652       157,568       34,357  
 
Current liabilities
    2,565       3,155       17,646       3,362  
Deferred income tax liability
    92                    
Capital leases
    624             21,319        
Term loans
    1,285             5,785        
 
 
Net assets acquired
  $ 6,594     $ 2,497     $ 112,818     $ 30,995  
 
    The following pro forma financial information reflects the results of operations of Vitran as if the acquisition of LVLA had taken place on January 1, 2006. The pro forma financial information also reflects the results of operations of SWE and PJAX as if their respective acquisition had taken place on January 1, 2005. The pro forma financial information also reflects the results of operations of CTL from January 1, 2005 to May 31, 2005. The pro forma financial information is not necessarily indicative of the results as it would have been if the acquisition had been effected on the assumed date and is not necessarily indicative of future results:
                         
 
    2007     2006     2005  
 
 
                       
Pro forma revenue
  $ 694,869     $ 665,122     $ 620,025  
Pro forma net income
    14,525       16,740       18,370  
Pro forma diluted income per share
    1.06       1.23       1.35  
 
 

42


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
3.   Comprehensive income:
The components of other comprehensive income (loss), such as changes in foreign currency adjustments, are required to be added to the Company’s reported net income, net of tax to arrive at comprehensive income (loss). Other comprehensive income (loss) items have no impact on the reported net income as presented on the Consolidated Statements of Income.
                                 
 
    Foreign           Interest    
    currency   Marketable   rate    
    translation   securities   swap   Total
 
 
                               
Balance at December 31, 2004
  $ 3,849     $ 6     $     $ 3,855  
 
                               
Other comprehensive loss:
                               
Translation adjustment
    (160 )                 (160 )
Realized gain
          (8 )           (8 )
Tax effect
          2             2  
 
 
    (160 )     (6 )           (166 )
 
 
                               
Balance at December 31, 2005
    3,689                   3,689  
 
                               
Other comprehensive income (loss):
                               
Translation adjustment
    170                   170  
Unrealized loss
                (25 )     (25 )
Tax effect
                10       10  
 
 
    170             (15 )     155  
 
 
                               
Balance at December 31, 2006
    3,859             (15 )     3,844  
 
                               
Other comprehensive income (loss):
                               
Translation adjustment
    3,382                   3,382  
Unrealized loss
                (1,541 )     (1,541 )
Tax effect
                499       499  
 
 
    3,382             (1,042 )     2,340  
 
                               
 
Balance at December 31, 2007
  $ 7,241     $     $ (1,057 )   $ 6,184  
 
                         
 
    2007   2006   2005
 
 
                       
Net income
  $ 13,710     $ 19,399     $ 17,938  
Other comprehensive income (loss)
    2,340       155       (166 )
 
                       
 
Comprehensive income
  $ 16,050     $ 19,554     $ 17,772  
 

43


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
4.   Property and equipment:
                 
 
    2007   2006
 
 
               
Land
  $ 35,085     $ 32,295  
Buildings
    67,894       54,992  
Leasehold interests and improvements
    2,276       1,954  
Vehicles
    112,622       89,619  
Machinery and equipment
    26,361       21,182  
 
 
    244,238       200,042  
 
               
Less accumulated depreciation
    75,176       54,913  
 
               
 
 
  $ 169,062     $ 145,129  
 
Interest costs of $718 attributable to the construction of a new facility in Toronto have been capitalized for the year ended December 31, 2007 (2006 — $25).
5.   Intangible assets:
                 
 
    2007   2006
 
 
               
Customer relationships
  $ 13,840     $ 2,300  
Acquired customer relationships
          11,540  
 
 
    13,840       13,840  
 
               
Covenants not-to-compete
    2,985       240  
Acquired covenants not-to-compete
          2,745  
 
 
    2,985       2,985  
 
               
Less accumulated amortization
    3,180       937  
 
               
 
 
  $ 13,645     $ 15,888  
 

44


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
5.   Intangible assets (continued):
Amortization expense was $2.2 million in 2007 (2006 — $0.9 million). Amortization expense for the following five years and thereafter is estimated to be as follows:
         
 
 
       
Year ending December 31:
       
 
       
2008
  $ 2,243  
2009
    2,232  
2010
    2,216  
2011
    2,180  
2012
    2,068  
Thereafter
    2,706  
 
       
 
 
  $ 13,645  
 
6.   Goodwill:
                 
 
    2007     2006  
 
 
               
Opening balance
  $ 117,146     $ 61,448  
Foreign exchange
    1,527       (61 )
Adjustment to goodwill (note 2)
    1,173        
Acquired goodwill (note 2)
    4,529       55,759  
 
               
 
 
  $ 124,375     $ 117,146  
 

45


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
7.   Long-term debt:
                 
 
    2007     2006  
 
 
               
Term bank credit facilities (a)
  $ 58,911     $ 81,930  
Revolving credit facility (b)
    45,023       7,215  
Capital leases (c)
    22,860       19,718  
Note payable (d)
    1,181        
 
 
    127,975       108,863  
 
               
Less current portion
    18,144       15,724  
 
               
 
 
  $ 109,831     $ 93,139  
 
(a)   The term bank credit facility is secured by accounts receivable and general security agreements of the Company and of all its subsidiaries.
    During 2007, the Company refinanced its term debt under a new credit agreement. Deferred financing costs of $0.5 million related to the former credit facilities were written off during the year. The new credit agreement provides a $60 million term credit facility maturing July 31, 2012. The Company had $56.0 million bearing interest at 6.31%, outstanding under the term facility at December 31, 2007. The provisions of the term facility impose certain financial maintenance tests. At December 31, 2007, the Company was in compliance with these financial maintenance tests.
The Company had an additional $2.9 million, bearing interest at 4.74%, outstanding under a separate term credit facility maturing on September 30, 2010. This term credit facility was assumed as part of the acquisition of PJAX on October 2, 2006.
(b)   During 2007, the Company refinanced its revolving debt to provide up to $100 million, maturing July 31, 2012. The Company had $45.0 million, bearing interest at 5.94% to 6.45%, outstanding at December 31, 2007. The provisions of the revolving facility impose certain financial maintenance tests. At December 31, 2007, the Company was in compliance with these financial maintenance tests.
(c)   During 2007, the Company financed certain equipment by entering into additional capital leases of $10.4 million and assumed $0.6 million of capital leases as part of the LVLA acquisition. The Company had $22.9 million of capital leases remaining at December 31, 2007.

46


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
7.   Long-term debt (continued):
  (d)   As part of the LVLA acquisition the Company assumed a $1.3 million note payable to the vendor bearing interest at 6.0%. At December 31, 2007, $1.2 million of the note payable was outstanding.
At December 31, 2007, the required future principal repayments on all long-term debt and capital leases are as follows:
         
 
 
       
Year ending December 31:
       
 
       
2008
  $ 18,144  
2009
    16,424  
2010
    16,727  
2011
    19,389  
2012
    57,291  
 
       
 
 
  $ 127,975  
 
8.   Income taxes:
Income tax expense differs from the amount that would be obtained by applying statutory federal, state and provincial income tax rates to the respective year’s income from operations before income taxes as follows:
                         
 
    2007   2006   2005
 
 
                       
Effective statutory federal, state and provincial income tax rate
    36.12 %     36.12 %     36.12 %
 
 
                       
Effective tax expense on income before income taxes
  $ 5,264     $ 9,167     $ 9,077  
Increase (decrease) results from:
                       
Non-deductible share-based compensation expense
    354       303       237  
Income taxed at different rates in foreign jurisdictions
    (4,930 )     (3,072 )     (1,888 )
Other
    175       (276 )     (235 )
 
                       
 
Actual income tax expense
  $ 863     $ 6,122     $ 7,191  
 

47


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
8.   Income taxes (continued):
      Income tax expense:
                         
 
    2007   2006   2005
 
 
                       
Current income tax expense (recovery):
                       
 
                       
Canada:
                       
Federal
  $ 589     $ 2,922     $ 1,053  
Provincial
    304       1,695       625  
United States:
                       
Federal
    78       (602 )     1,339  
State
    364       12       208  
Other
    303       150       281  
 
 
    1,638       4,177       3,506  
Deferred income tax expense (recovery):
                       
 
                       
Canada:
                       
Federal
    483       (754 )     1,280  
Provincial
    250       (437 )     760  
United States:
                       
Federal
    (1,240 )     2,398       1,424  
State
    (268 )     738       221  
 
 
    (775 )     1,945       3,685  
 
                       
 
 
  $ 863     $ 6,122     $ 7,191  
 
A summary of the principal components of deferred income tax assets and liabilities is as follows:
                 
 
    2007   2006
 
 
               
Current deferred income tax assets:
               
Allowance for doubtful accounts
  $ 536     $ 397  
Insurance reserves
    2,063       1,229  
Financing costs
          94  
 
 
  $ 2,599     $ 1,720  
 
 
               
Non-current deferred income tax assets:
               
Financing costs
  $     $ 147  
Loss carryforwards
    9,935        
Other
          2,241  
 
 
    9,935       2,388  
 
               
Non-current deferred income tax liabilities:
               
Financing costs
    (27 )      
Property and equipment
    (11,061 )     (5,123 )
Goodwill and intangibles
    (6,317 )     (4,248 )
Other
    (340 )      
 
 
    (17,745 )     (9,371 )
 
               
 
 
  $ (7,810 )   $ (6,983 )
 

48


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
8.   Income taxes (continued):
 
    At December 31, 2007, the Company had approximately $23.7 million of net operating loss carryforwards available to reduce future years’ taxable income for which a deferred tax asset has been recognized. The net operating loss was generated in 2007 and will expire in 2027 if not utilized.
 
    The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. The implementation of Interpretation 48 did not result in a change in the estimated liability for unrecognized tax benefits at January 1, 2007. At December 31, 2007, the Company had unrecognized tax benefits of approximately $2.1 million, of which an estimated $1.9 million if recognized would have an impact on the effective tax rate.
 
    The Company recognizes interest and penalties related to unrecognized tax benefits in the tax provision. At December 31, 2007, the Company did not recognize a material amount of interest and penalties. The Company had approximately $0.6 million accrued for interest and penalties.
 
    The Company and its subsidiaries file income tax returns in U.S. and Canadian federal jurisdictions, and various states, provinces and foreign jurisdictions. The Internal Revenue Service and Canada Revenue Agency had in 2007 commenced examinations of the 2003, 2004 and 2005 income tax returns. The examinations are expected to be completed by 2008. These audits may impact the Company’s unrecognized tax benefits in the next 12 months; however, the estimated financial outcome is indeterminable at this time. Overall, the years 1999 to 2006 remain open to examination by tax authorities.
 
    A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
         
 
 
       
Balance at January 1, 2007
  $ 1,704  
Additions related to tax positions taken in the current year
    244  
Additional related to tax position taken in previous years
    109  
Reductions due to expiry of statute of limitations
    (237 )
Addition due to foreign exchange translation
    299  
 
       
 
Balance at December 31, 2007
  $ 2,119  
 

49


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
9.   Common shares:
  (a)   Normal course issuer bid:
 
      The Company purchased 30,200 common shares for cancellation during 2007 (2006 — 2,000) under a normal course issuer bid. The cost of the repurchase in excess of the book value of the shares in 2007 was $165 (2006 — $19).
 
  (b)   Stock options:
 
      The Company provides a stock option plan to key employees, officers and directors to encourage executives to acquire a meaningful equity ownership interest in the Company over a period of time and, as a result, reinforce executives’ attention on the long-term interest of the Company and its shareholders. Under the plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors or by the Company’s Compensation Committee. There are 820,200 options outstanding under the plan. The term of each option is 10 years and the vesting period is five years. The exercise price for options is the trading price of the common shares of the Company on the Toronto Stock Exchange on the day of the grant. The Company adopted SFAS Statement 123(R) on January 1, 2006 as described in note 1(l).
 
      The weighted average estimated fair value at the date of the grant for the options granted during 2007 was $7.12 (2006 — $7.69) per share.
 
      The fair value of each option granted was estimated on the date of grant using the Black-Scholes-Morton fair value option pricing model with the following assumptions:
                         
 
    2007     2006     2005  
 
 
                       
Risk-free interest rate
    4.20 %     4.19 %     3.88% — 4.24 %
Volatility factor of the future expected market price of the Company’s common shares
    31.76 %     33.22 %     33.84% — 34.39 %
Expected life of the options
  6 years     6 years     8 years  
 
                       
 

50


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
9.   Common shares (continued):
      Details of stock options are as follows:
                                 
 
    2007   2006
 
            Weighted           Weighted
            average           average
            exercise           exercise
    Number   price   Number   price
 
 
                               
Outstanding,
                               
beginning of year
    767,700     $ 11.42       777,500     $ 9.71  
Granted
    115,000       18.08       102,500       18.99  
Forfeited
    (4,000 )     16.31       (15,000 )     16.53  
Exercised
    (58,500 )     6.88       (97,300 )     4.92  
 
                               
 
Outstanding, end of year
    820,200       12.66       767,700       11.42  
 
 
                               
Exercisable, end of year
    465,400     $ 9.13       406,900     $ 7.48  
 
                               
 
At December 31, 2007, the range of exercise prices, the weighted average exercise price and the weighted average remaining contractual life are as follows:
                                         
 
    Options outstanding   Options exercisable
            Weighted                
            average   Weighted           Weighted
            remaining   average           average
Range of exercise   Number   contractual   exercise   Number   exercise
prices   outstanding   life (years)   price   exercisable   price
 
 
                                       
$2.20 — $2.61
    132,800       3.94     $ 2.29       132,800     $ 2.29  
$4.77 — $5.44
    127,500       1.23       4.93       127,500       4.93  
$15.23 — $18.99
    559,900       7.43       16.89       205,100       16.16  
 
                                       
 
$2.20 — $18.99
    820,200       5.90       12.66       465,400       9.13  
 
Compensation expense related to stock options was $997 for the year ended December 31, 2007 (2006 — $839; 2005 — $654).

51


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
10.   Computation of income per share:
                         
 
    2007   2006   2005
 
 
                       
Numerator:
                       
Net income
  $ 13,710     $ 19,399     $ 17,938  
 
                       
 
 
                       
Denominator:
                       
Basic weighted average shares outstanding
    13,458,786       12,887,401       12,516,265  
Dilutive stock options
    193,013       237,464       332,095  
Dilutive weighted-average shares outstanding
    13,651,799       13,124,865       12,848,360  
 
                       
 
 
                       
Basic income per share before cumulative effect of a change in accounting principle
  $ 1.02     $ 1.49     $ 1.43  
Effect of a change in accounting principle
          0.01        
Basic income per share
    1.02       1.50       1.43  
 
                       
Dilutive income per share before cumulative effect of a change in accounting principle
    1.00       1.47       1.40  
Effect of a change in accounting principle
          0.01        
Diluted income per share
    1.00       1.48       1.40  
 
                       
 
Diluted income per share excludes the effect of 559,900 (2006 — 465,900; 2005 — 383,000) anti-dilutive options.
11.   Risk management activities:
The Company is exposed to interest rate volatility with regard to existing variable rate debt. The Company has entered into variable-to-fixed interest rate swaps on variable rate term debt and revolving debt. The swaps are accounted for as cash flow hedges. The effective portions of changes in fair value of the interest rate swaps are recorded in Accumulated Other Comprehensive Income and are recognized into earnings in the same period in which the hedged forecasted transaction affects earnings. Ineffective portions of changes in fair value are recognized into earnings as they occur. At December 31, 2007, the notional amount of the swaps was $68.9 million, with the average pay rate being 4.94% and the average receive rate being 4.83%. The swaps mature at various dates up to December 31, 2011.

52


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
     
 
12.   Segmented information:
 
    The Company’s business operations are grouped into three operating segments: LTL, logistics and truckload, which provide transportation services in Canada and the United States.
 
    Segmented information is presented below for each of the years ended December 31, 2007, 2006 and 2005:
                                                 
 
    Less-than-                           Corporate   Consolidated
Year ended December 31, 2007   truckload   Logistics   Truckload   Total   office and other   totals
 
 
Revenue
  $ 584,786     $ 52,845     $ 32,886     $ 670,517     $     $ 670,517  
Operating, selling, general and administrative expenses
    543,095       48,887       30,173       622,155       5,025       627,180  
Other income
    (414 )     (1 )     (17 )     (432 )           (432 )
Depreciation and amortization expense
    18,952       688       1,052       20,692       78       20,770  
 
 
Income (loss) from operations before the undernoted
  $ 23,153     $ 3,271     $ 1,678     $ 28,102     $ (5,103 )     22,999  
             
 
Interest expense, net
                                            8,426  
Income taxes
                                            863  
 
 
Net income
                                          $ 13,710  
 
 
Capital expenditures
  $ 31,103     $ 1,379     $ 698     $ 33,180     $ 46     $ 33,226  
 
 
Goodwill
  $ 113,924     $ 5,686     $ 4,765     $ 124,375     $     $ 124,375  
 
 
Total assets
  $ 343,679     $ 27,485     $ 11,781     $ 382,945     $ 19,685     $ 402,630  
 

53


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
     
 
12. Segmented information (continued):
                                                 
 
    Less-than-                           Corporate   Consolidated
Year ended December 31, 2006   truckload   Logistics   Truckload   Total   office and other   totals
 
 
Revenue
  $ 441,499     $ 39,762     $ 32,798     $ 514,059     $     $ 514,059  
Operating, selling, general and administrative expenses
    402,729       36,661       30,217       469,607       4,356       473,963  
Other income
    (433 )           (1 )     (434 )           (434 )
Depreciation and amortization expense
    11,174       422       848       12,444       46       12,490  
 
 
Income (loss) from operations before the undernoted
  $ 28,029     $ 2,679     $ 1,734     $ 32,442     $ (4,402 )     28,040  
             
 
Interest expense, net
                                            2,660  
Income taxes
                                            6,122  
 
 
Net income before cumulative effect of change in accounting principle
                                            19,258  
Cumulative effect of change in accounting principle
                                            141  
 
 
Net income
                                          $ 19,399  
 
 
Capital expenditures
  $ 18,620     $ 6,966     $ 1,265     $ 26,851     $ 285     $ 27,136  
 
 
Goodwill
  $ 111,255     $ 1,126     $ 4,765     $ 117,146     $     $ 117,146  
 
 
Total assets
  $ 326,952     $ 12,409     $ 14,841     $ 354,202     $ 7,886     $ 362,088  
 
                                                 
 
    Less-than-                           Corporate   Consolidated
Year ended December 31, 2005   truckload   Logistics   Truckload   Total   office and other   totals
 
 
Revenue
  $ 352,693     $ 40,261     $ 35,238     $ 428,192     $     $ 428,192  
Operating, selling, general and administrative expenses
    322,262       37,745       32,373       392,380       3,461       395,841  
Other income
    (21 )           (20 )     (41 )           (41 )
Depreciation and amortization expense
    5,958       375       577       6,910       55       6,965  
 
 
Income (loss) from operations before the undernoted
  $ 24,494     $ 2,141     $ 2,308     $ 28,943     $ (3,516 )     25,427  
             
 
Interest expense, net
                                            298  
Income taxes
                                            7,191  
 
 
Net income
                                          $ 17,938  
 
 
Capital expenditures
  $ 19,240     $ 120     $ 3,488     $ 22,848     $ 15     $ 22,863  
 

54


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
     
 
12.   Segmented information (continued):
 
    Geographic information for revenue from point of origin and total assets is as follows:
                         
 
    2007     2006     2005  
 
 
                       
Revenue:
                       
Canada
  $ 212,974     $ 193,656     $ 175,805  
United States
    457,543       320,403       252,387  
 
 
 
  $ 670,517     $ 514,059     $ 428,192  
 
                 
 
    2007     2006  
 
 
               
Total assets:
               
Canada
  $ 82,868     $ 66,120  
United States
    319,762       295,968  
 
 
  $ 402,630     $ 362,088  
 
 
 
 
    2007       2006  
 
 
Total long-lived assets:
               
Canada
  $ 58,291     $ 40,603  
United States
    248,791       237,560  
 
 
  $ 307,082     $ 278,163  
 
Long-lived assets include property and equipment, goodwill and intangible assets.
13.   Financial instruments:
 
    The fair values of cash and cash equivalents, bank overdraft, accounts receivable, and accounts payable and accrued liabilities approximate the carrying values because of the short-term nature of these instruments. The fair value of the Company’s long-term debt, determined based on the future cash flows associated with each debt instrument discounted using an estimate of the Company’s current borrowing rate for similar debt instruments of comparable maturity, is approximately equal to the carrying value at December 31, 2007 and 2006.

55


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
     
 
14.   Lease commitments:
 
    At December 31, 2007, future minimum rental payments relating to operating leases for premises and equipment are as follows:
         
 
 
Year ending December 31:
       
 
2008
  $ 17,425  
2009
    13,419  
2010
    9,750  
2011
    7,666  
2012
    6,172  
Thereafter
    4,207  
 
 
 
    $58,639  
 
Total rental expense under operating leases was $15.6 million for the year ended December 31, 2007 (2006 — $16.3 million; 2005 — $17.3 million).
The Company has guaranteed a portion of the residual values of certain assets under operating leases. If the market value of the assets at the end of the lease terms is less than the guaranteed residual value, the Company must, under certain circumstances, compensate the lessor for a portion of the shortfall. The maximum exposure under these guarantees is $2.2 million.
15. Employee benefits:
The Company sponsors defined contribution plans in Canada and the United States. In Canada, the Company matches the employee’s contribution to their registered retirement savings plan up to a maximum contribution. In the United States, the Company sponsors 401(k) savings plans. The Company matches a percentage of the employee’s contribution subject to a maximum contribution. The expense related to the plans was $2.1 million for the year ended December 31, 2007 (2006 — $2.0 million).

56


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
     
 
16.   Contingent liabilities:
 
    The Company is subject to legal proceedings that arise in the ordinary course of business. In the opinion of management, the aggregate liability, if any, with respect to these actions, will not have a material adverse effect on the consolidated financial position, results of operations or cash flows. Legal costs are expensed as incurred.
 
17.   Comparative figures:
 
    Certain 2006 and 2005 figures have been reclassified to conform with the financial statement presentation adopted in 2007.
 
18.   United States and Canadian accounting policy differences:
 
    In accordance with the provisions of the OBCA, issuers that are required to file reports with the Securities and Exchange Commission in the United States are allowed to file financial statements under United States GAAP to meet their continuous disclosure obligations in Canada. Vitran has included a reconciliation highlighting the material differences between its consolidated financial statements prepared in accordance with United States GAAP compared to its consolidated financial statements prepared in accordance with Canadian GAAP as described below. This disclosure is required for a finite period of time under the Ontario Securities Commission regulations, subsequent to the adoption of United States GAAP. Prior to 2006, Vitran prepared its consolidated financial statements in accordance with Canadian GAAP with a reconciliation to United States GAAP.

57


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
     
 
18. United States and Canadian accounting policy differences (continued):
  (a)   Consolidated reconciliation of net income and shareholders’ equity:
                                                 
 
    Net income   Shareholders’ equity
    2007     2006     2005     2007     2006     2005  
 
 
Balance, December 31, based on United States GAAP
  $ 13,710     $ 19,399     $ 17,938     $ 190,168     $ 173,297     $ 139,802  
Effect of change in accounting principle (i)
          (141 )           (141 )     (141 )      
Foreign exchange adjustment (ii)
    (2,218 )                 (1,360 )     858       858  
Unrealized foreign exchange loss on derivative instrument
                      (101 )     (101 )     (101 )
Accumulated other comprehensive income adjustment (ii)
                      1,461       (757 )     (757 )
 
 
Balance, December 31, based on Canadian GAAP
  $ 11,492     $ 19,258     $ 17,938     $ 190,027     $ 173,156     $ 139,802  
 
 
(i)   The adoption of SFAS 123(R), Share-Based Payments, as described in note 1(l) only applies to United States GAAP. Therefore, the effect of a change in accounting principle does not impact Canadian GAAP net income or shareholders’ equity.
 
(ii)   The Company had foreign exchange losses of $2.2 million that did not represent a substantially complete liquidation of a foreign operation. In previous years, the Company had foreign exchange gains of $0.9 million that did not represent a substantially complete liquidation of a foreign operation. Under Canadian GAAP, these gains were recognized upon the transfer into income of the related cumulative translation adjustment. Under United States GAAP, there is no reduction of the cumulative translation adjustment account. Retained earnings under Canadian GAAP on a cumulative basis is decreased by $1.4 million (2006 — increased $0.9 million) with a corresponding increase (2006 — decrease) to the cumulative translation adjustment included in accumulated other comprehensive income.

58


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
18.   United States and Canadian accounting policy differences (continued):
(iii)
                         
 
    2007   2006   2005
 
 
                       
Income per share under
                       
Canadian GAAP:
                       
Basic — net income
  $ 0.85     $ 1.49     $ 1.43  
Diluted — net income
    0.84       1.47       1.40  
 
                       
 
 
                       
Weighted average number of shares:
                       
Weighted average number of shares outstanding
    13,458,786       12,887,401       12,516,265  
Potential exercise of stock options
    193,013       237,464       332,095  
 
                       
 
Diluted shares
    13,651,799       13,124,865       12,848,360  
 
  (b)   Share-based compensation:
 
      Effective January 1, 2006, the Company adopted SFAS 123(R) as described in note 1(l). SFAS 123(R) requires compensation expense be recognized for all share-based payments granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. This is not required under Canadian GAAP based on the transitional provision of CICA 3870, Stock-Based Compensation and Other Stock-Based Payments, which Vitran adopted January 1, 2003. Canadian GAAP requires pro forma net income and income per share disclosure for stock option grants during 2002.
 
      The following table outlines the impact if the compensation cost for the Company’s stock options granted from January 1, 2002 through to December 31, 2002 were determined under the fair value-based method. The Company has applied the pro forma disclosure provisions of the standard to these awards. The pro forma effect of awards granted prior to January 1, 2002 has not been included.
                 
 
    2006   2005
 
 
               
Net income, as reported under Canadian GAAP
  $ 19,258     $ 17,938  
Pro forma net income
    19,213       17,895  
Pro forma income per share — basic
    1.49       1.43  
Pro forma income per share — diluted
    1.46       1.39  
 
               
 

59


 

Notes to Consolidated Financial Statements (continued)
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2007, 2006 and 2005
 
18. United States and Canadian accounting policy differences (continued):
  (c)   Derivative accounting and financial instruments:
 
      Previously under Canadian GAAP, gains and losses on derivatives that are designated as hedges and that manage the underlying risks of anticipated transactions are not recorded until the underlying hedged item is recorded in net income and hedge ineffectiveness is not recorded until settlement. On January 1, 2007, the Company adopted CICA 3865, Hedges, in accordance with the transitional provisions. Under the transitional provisions, any hedging relationships that existed and satisfy all the conditions of CICA 3865 are adjusted to the carrying amounts that would have resulted had CICA 3865 always been applied. Based on the transitional provision there is no longer a difference in accounting for derivatives for the Company between United States and Canadian GAAP.
 
      On January 1, 2007, the Company adopted CICA 3855, Financial Instruments — Recognition and Measurement. Management evaluated the effect of the standard on the consolidated financial statements and concluded that the Company does not have a difference between United States and Canadian GAAP upon adoption of the standard.
 
  (d)   Comprehensive income:
 
      On January 1, 2007, the Company adopted CICA 1530, Comprehensive Income, in accordance with the appropriate provisions of the standard. The Company reports comprehensive income as part of its United States GAAP reporting, therefore, the adoption of this standard eliminates this presentation difference between United States and Canadian GAAP. However, there may be measurement differences between comprehensive income under United States and Canadian GAAP.

60


 

Consolidated Supplemental Schedule of Quarterly Financial Information
(In thousands of United States dollars, except per share amounts where noted)
United States and Canadian GAAP
                                 
    First     Second     Third     Fourth  
2007 (Unaudited)   quarter     quarter     quarter     quarter  
 
 
                               
Revenue:
                               
Less-than-truckload
  $ 136,157     $ 150,615     $ 150,283     $ 147,731  
Logistics
    9,663       11,225       13,690       18,267  
Truckload
    8,316       8,304       7,954       8,312  
 
                               
 
Total revenue
  $ 154,136     $ 170,144     $ 171,927     $ 174,310  
 
 
                               
Income from operations after depreciation and amortization
  $ 5,607     $ 9,073     $ 5,569     $ 2,750  
 
                               
Net income — United States GAAP
    3,387       5,533       3,121       1,669  
Net income — Canadian GAAP
    3,304       4,902       2,521       765  
 
                               
 
 
                               
Earnings per share:
                               
Basic — United States GAAP
  $ 0.25     $ 0.41     $ 0.23     $ 0.12  
Basic — Canadian GAAP
    0.25       0.36       0.19       0.06  
 
                               
Diluted — United States GAAP
    0.25       0.41       0.23       0.12  
Diluted — Canadian GAAP
    0.24       0.36       0.18       0.06  
 
 
                                 
    First     Second     Third     Fourth  
2006 (Unaudited)   quarter     quarter     quarter     quarter  
 
 
                               
Revenue:
                               
Less-than-truckload
  $ 97,423     $ 105,213     $ 102,858     $ 136,005  
Logistics
    9,412       10,251       10,419       9,680  
Truckload
    8,292       8,177       8,235       8,094  
 
                               
 
Total revenue
  $ 115,127     $ 123,641     $ 121,512     $ 153,779  
 
 
                               
Income from operations after depreciation and amortization
  $ 4,972     $ 8,128     $ 6,797     $ 8,143  
Net income — United States GAAP
    3,764       5,776       4,885       4,974  
Net income — Canadian GAAP
    3,623       5,776       4,885       4,974  
 
                               
 
 
                               
Earnings per share:
                               
Basic — United States GAAP
  $ 0.30     $ 0.45     $ 0.38     $ 0.37  
Basic — Canadian GAAP
    0.29       0.45       0.38       0.37  
Diluted — United States GAAP
    0.29       0.45       0.38       0.37  
Diluted — Canadian GAAP
    0.28       0.45       0.38       0.37  
 
Please refer to note 18 for differences between United States and Canadian GAAP.

61


 

ITEM 9  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
          During the Company’s last two fiscal years, there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused them to make reference to the subject matter of the disagreement in connection with their reports.
ITEM 9.a—CONTROLS AND PROCEDURES
          As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of its “disclosure controls and procedures”, as such term is defined in Rule 13a-15(e) of the Exchange Act. Based on this evaluation, the Company’s CEO and CFO have concluded that the Company’s “disclosure controls and procedures” are effective as of December 31, 2007 in alerting them on a timely basis to information required to be included in the Company’s submissions and filings with the SEC.
          There have been no significant changes in our internal controls, which we define to include our control environment, control procedures, and accounting systems, or in other factors that could materially affect or are reasonably likely to affect our internal control over financial reporting during the 2007 fourth quarter.
Management’s Report on Internal Control over Financial Reporting
          The management of Vitran Corporation Inc. (“Vitran”) is responsible for establishing and maintaining systems of adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
          In 2007 Vitran’s management team conducted tests of its internal control over financial reporting in accordance with the standards set forth by the Public Company Accounting Oversight Board (“PCAOB”) in the United States. In accordance with these standards, management assessed and tested, on a sample basis, Vitran’s internal control over financial reporting according to a comprehensive risk analysis using the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). It is management’s opinion that the testing methodology of the internal control framework is appropriate and provides reasonable assurance as to the integrity and reliability of the internal control over financial reporting.
          The above assessment excludes Las Vegas / L.A. Express, Inc (“LVLA”), which was acquired by Vitran on November 30, 2007; as such an assessment of internal control over financial reporting was not completed. LVLA’s revenue represents less than 1% of Vitran’s consolidated revenue and represents less than 3% of Vitran’s consolidated assets as at and for the year ended December 31, 2007. There have been no material changes to Vitran’s internal control over financial reporting due to the acquisition.
          In management’s opinion, based on the assessment completed as at December 31, 2007, the internal control over financial reporting is operating effectively.
          KPMG LLP, an independent public accounting firm registered with the PCAOB, has issued an attestation report on the effectiveness of Vitran’s internal control over financial reporting, as stated in their report which is included herein.
         
     
February 7, 2008  /s/ Richard E. Gaetz,    
  President and Chief Executive Officer   
 
  /s/ Sean P. Washchuk,    
  Vice President Finance and
Chief Financial Officer 
 
     

62


 

         
The Board of Directors and Shareholders,
Vitran Corporation Inc.
We have audited Vitran Corporation Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Vitran Corporation Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Vitran Corporation Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Vitran Corporation Inc. acquired Las Vegas/L.A. Express, Inc. during 2007, and management excluded from its assessment of the effectiveness of Vitran Corporation Inc.’s internal control over financial reporting as of December 31, 2007, Las Vegas/L.A. Express, Inc.’s internal control over financial reporting associated with total assets that represent less than 3% of Vitran Corporation Inc.’s total assets and total revenues that represents less than 1% of Vitran Corporation Inc.’s total revenues included in the consolidated financial statements of Vitran Corporation Inc. as of and for the year ended December 31, 2007. Our audit of internal control over financial reporting of Vitran Corporation Inc. also excluded an evaluation of the internal control over financial reporting of Las Vegas / L.A. Express, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vitran Corporation Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated February 7, 2008 expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Company’s adoption of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” on January 1, 2007 and Statement of Financial Accounting Standard No. 123(R) “Share Based Payments” on January 1, 2006. Our audit also included the financial statement schedule listed in the Index under Part IV, Item 15(a)2.
/s/ KPMG LLP
Toronto, Canada
February 7, 2008

63


 

ITEM 9.bOTHER INFORMATION
     None.
PART III
ITEM 10—DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
          The information for directors, Section 16(a) beneficial ownership reporting and other compliance as required by Item 407 of Regulation S-K, is reported in the Company’s definitive proxy statement filed pursuant to Regulation 14A and is incorporated herein by reference. The following table sets forth certain information concerning our executive officers:
                 
Name   Age   Position   History
 
Richard E. Gaetz (Mississauga, Canada)
    50     President and Chief Executive Officer   Mr. Gaetz has been working in the transportation and logistics industry for more than 25 years. He has been actively involved with the growth and development of Vitran and has been responsible for Vitran’s freight and logistics operations since he joined in 1989. He was elected to the Board of Directors of Vitran in 1995. Mr. Gaetz has extensive experience on both sides of the border. Prior to joining Vitran, he spent ten years with Clarke Transport, a large Canadian freight company, in various positions including Vice President. Mr. Gaetz received a Bachelor of Commerce degree from Dalhousie University in Halifax in 1979. He is a Director of the Ontario Trucking Association and the Canadian Trucking Alliance, and Director and Chairman of Drive Products Income Fund.
 
               
Sean P. Washchuk (Burlington, Canada)
    35     Vice President Finance and Chief Financial Officer   Mr. Washchuk joined Vitran in 2000 as the Corporate Controller and was appointed Chief Financial Officer and Vice President Finance in 2004. Prior to joining Vitran in 2000, he was a Controller at a North American plastics recycling company and was also a manager at PricewaterhouseCoope rs in the assurance and business advisory services practice. Mr. Washchuk is a Chartered Accountant with the Canadian Institute and received a Bachelor of Accounting degree from Brock University in Ontario. He is a Director of Roll-Tite Inc.
CODE OF ETHICS
          The Company has adopted a Code of Ethics and Professional Conduct (the “Code”) for all senior executives and directors, including the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer. The Code is available free of charge on the Company’s website at www.vitran.com. The Code requires that the Company’s senior executives and directors deal fairly with customers, suppliers, fellow employees and the general public. Acceptance of the Code is mandatory for the Company’s senior executives and directors.
ITEM 11—EXECUTIVE COMPENSATION
          The information required by Item 11 of Form 10-K appears in the Company’s definitive proxy statement for the 2008 Annual and Special Meeting of its Shareholders, reference to which is hereby made, and the information therein is incorporated herein by reference.

64


 

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
     The information required by Item 12 of Form 10-K appears in the Company’s proxy statement for the 2008 Annual and Special Meeting of its Shareholders, reference to which is hereby made, and the information therein is incorporated herein by reference.
ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
     None
ITEM 14—PRINCIPAL ACCOUNTING FEES AND SERVICES
     KPMG LLP has served as the Company’s auditors since 1989. For the fiscal years ended December 31, 2007 and 2006 fees billed by KPMG LLP to Vitran for services were:
                 
    Year ended December 31,  
    2007     2006  
Audit and audit-related fees
  $ 591,500     $ 598,078  
Tax fees
  Nil   Nil
All other fees
  Nil   Nil
 
           
 
  $ 591,500     $ 598,078  
 
           
     All services provided by KPMG to Vitran for 2007 and 2006 were approved by the Audit Committee. The Audit Committee pre-approves all non-audit services to be provided to the Company or its subsidiary entities by its independent auditors. For further details regarding the Audit Committee approval process please review the Audit Committee charter which is available free of charge on Vitran’s website at www.vitran.com.
     For information regarding the members and other applicable information of the Audit Committee please review the Company’s proxy statement for the 2008 Annual and Special Meeting of its Shareholders, reference to which is hereby made, and the information therein is incorporated herein by reference.
PART IV
ITEM 15—EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a)   (1) Financial Statements
          Consolidated Balance Sheets as at December 31, 2007 and 2006 and the Consolidated Statements of Income, Shareholders’ Equity and Cash Flow for the years ended December 31, 2007, 2006, and 2005, are reported on by KPMG LLP, Chartered Accountants.
     These statements are prepared in accordance with GAAP in the United States with a reconciliation of the differences between United States GAAP and Canadian GAAP included in Note 18 to the financial statements.

65


 

      (2) Financial Statements Schedule:
      Schedule II—Valuation and Qualifying Accounts
      Vitran Corporation Inc.
      Three years ended December 31, 2007
                                 
     
Allowance for Doubtful Accounts
(in thousands of dollars)   Balance at   Charges to           Balance
        beginning   costs and           at end
Description   of year   expenses   Deductions   of year
 
Year ended December 31, 2005
                               
Accounts receivable allowances for revenue adjustments and doubtful accounts
  $ 1,193     $ 757     $ (675 )   $ 1,275  
Year ended December 31, 2006
                                 
Accounts receivable allowances for revenue adjustments and doubtful accounts
  $ 1,275     $ 1,516     $ (592 )   $ 2,199  
Year ended December 31, 2007
                               
Accounts receivable allowances for revenue adjustments and doubtful accounts
  $ 2,199     $ 879     $ (588 )   $ 2,490  
 
      (3) Exhibits Filed
          The exhibits listed in the accompanying Exhibit Index are filed as part of this Annual Report on Form 10-K.
(b)   Separate Financial Statements
None

66


 

Exhibit Index
     
Exhibit No.   Document
1.1*
  Underwriting Agreement dated December 16, 1994 between the registrant and Midland Walwyn Capital Inc. and ScotiaMcLeod Inc.
 
   
1.2*
  Special Warrant Indenture dated December 16, 1994 between the registrant and Montreal Trust Company for Canada, as trustee
 
   
1.3*
  Escrow Agreement dated December 16, 1994 between the registrant and Messrs. Morris/Rose/Ledgett, Barristers and Solicitors, as trustee
 
   
1.4*
  Subscription Agreements
1.5*
  Stock Option Plan dated July 16, 1987
1.6*
  Employee Stock Option Plan approved May 17, 1995
1.7*
  Prospectus dated December 16, 2003
2.1*
  Purchase and Sale Agreement dated November 2, 1994 between the registrant and Carl Cook and Daniel L. Cook
 
   
3.(i).1*
  Articles of Incorporation effective April 29, 1981
3.(i).2*
  Articles of Amendment effective May 27, 1987
3.(i).3*
  Articles of Amendment effective July 16, 1987
3.(i).4*
  Articles of Amendment effective February 5, 1991
3.(i).5*
  Articles of Amendment effective April 22, 2004
3.(ii).1*
  By-laws effective May 27, 1987
3.(ii).2*
  By-law to authorize the directors to borrow and give security effective July 16, 1987
 
   
4.1*
  Cancellation of Stock Voting Agreement dated February 1, 2003 between Richard D. McGraw, Albert Gnat and Anthony F. Griffiths
 
   
9.1*
  Stock Voting Agreement dated July 15, 1987 between Richard D. McGraw, Albert Gnat and Anthony F. Griffiths
 
   
10.1*
  Credit Agreement between the registrant, its subsidiaries and the Royal Bank, dated April 25, 1995
 
   
10.2*
  Credit Agreement between the Overland Group and Bank One, dated February 4, 1994 (the “Overland Credit Agreement”)
 
   
10.3*
  First Amendment to the Overland Credit Agreement, effective July 1, 1994
10.4*
  Second Amendment to the Overland Credit Agreement, effective September 30, 1994
 
   
10.5*
  Third Amendment to the Overland Credit Agreement, dated December 14, 1994
 
   
10.6*
  Fourth Amendment to the Overland Credit Agreement, dated February 1, 1995
10.7*
  Fifth Amendment to the Overland Credit Agreement, effective December 31, 1994
 
   
10.8*
  Sixth Amendment to the Overland Credit Agreement, dated March 2, 1995
10.9*
  Operating Credit Agreement between Trans Western Express Inc. and The Bank of Nova Scotia, dated July 25, 1995
 
   
10.9.1*
  First Amending Agreement to Credit Agreement between Trans Western Express Inc. and The Bank of Nova Scotia, dated September 3, 1998
 
   
10.9.2*
  Second Amending Agreement to Credit Agreement between Trans Western Express Inc. and The Bank of Nova Scotia, dated January 8, 1999
 
   
10.9.3*
  Amended and Restated Credit Agreement between Vitran Corporation Inc. and Trans Western Express Inc. and The Bank of Nova Scotia, dated January 31, 2002
 
   
10.9.4*
  Second Amended and Restated Credit Agreement between Vitran Corporation Inc. and Vitran Express Canada Inc. and The Bank of Nova Scotia and Laurentian Bank of Canada, dated May 1, 2006
 
   
10.9.5*
  Third Amended and Restated Credit Agreement between Vitran Corporation Inc., Vitran Express Canada Inc., Vitran Corporation and The Bank of Nova Scotia, Laurentian Bank of Canada and JP Morgan Chase, dated September 20, 2006

67


 

     
Exhibit No.   Document
10.9.6*
  Credit Agreement between JPMorgan Chase Bank, N.A. as Agent and JPMorgan Chase Bank, N.A., JPMorgan Chase Bank, N.A., Toronto Branch, those other financial institutions whose names appear on the signature pages hereto and the other persons from time to time party hereto as Lenders as Lenders and J.P. Morgan Securities Inc.. as Lead Arranger and Sole Bookrunner and Bank of America, N.A. and Bank of Montreal as Co-Syndication Agents and National Bank of Canada and Fifth Third Bank as Co-Documentation Agents And Vitran Corporation Inc., Vitran Express Canada Inc. and Vitran Corporation as Borrowers Dated as of July 31, 2007
 
   
10.10*
  Note Purchase Agreement between Trans Western Express Inc., the registrant and certain purchasers, dated July 25, 1995
 
   
10.11*
  Amendment No. 1 to Note Agreement (“Amending Agreement”), dated June 28, 1996
 
   
10.12*
  Amendment No. 2 to Note Agreement (“Amending Agreement”), dated May 13, 1997
 
   
10.13*
  Credit Agreement between the registrant and The Bank of Nova Scotia, dated September 3, 1998
 
   
10.14*
  Credit Agreement between the registrant and The Bank of Nova Scotia and Laurentian Bank of Canada, dated October 13, 1999
 
   
10.15*
  Confidential Transportation Contract dated January 1, 1993 between Trans Western Express Inc. and Canadian National Railway Company
 
   
10.16*
  Agreement dated April 24, 1995 between the registrant, Borcross Limited, Carl Cook and Daniel L. Cook amending the terms of the Overland Note
 
   
10.17*
  Engagement Letter dated April 28, 1995 between the registrant and Banc One Capital Corporation
 
   
10.18*
  Offer of Employment dated September 30, 1998 from the registrant to Kevin Glass
 
   
10.19*
  Share Purchase Agreement between the registrant and Randall Quast, dated July 21, 1998
 
   
10.20*
  Employment agreement dated November 25, 2004 from the registrant to Sean P. Washchuk
 
   
10.21*
  Employment agreement dated April 29, 2004 from the registrant to Rick E. Gaetz
 
   
10.22*
  Employment agreement dated April 29, 2004 from the registrant to Kevin A. Glass
 
   
10.3*
  Share purchase agreement, by Vitran Corporation and Chris Dugan, dated May 30, 2005
 
   
10.31*
  Share purchase agreement, by Vitran Corporation and The Shareholders of PJAX, Inc., dated October 2, 2006
 
   
10.4*
  Deferred share unit plan, dated September 14, 2005
 
   
10.41*
  Deferred share unit plan, dated March 10, 2006
 
   
14.1*
  Code of Ethics and Professional Conduct for Directors, Senior Executives and Employees, dated August 3, 2004
31.1
  Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
  Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
*   Previously filed
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Toronto, Province of Ontario, on the 7th day of February, 2008.
         
  Vitran Corporation Inc.
 
 
  By:   /s/ SEAN P. WASHCHUK    
    Sean P. Washchuk   
    Vice President Finance and
Chief Financial Officer 
 

68


 

         
     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
Signatures   Title   Date
 
 
       
 
       
/s/ RICHARD D. McGRAW
 
  Chairman of the Board   February 7 2008
Richard D. McGraw
       
 
       
/s/ RICHARD E. GAETZ
 
  President and Chief Executive Officer, Director   February 7, 2008
Richard E. Gaetz
       
 
       
/s/ GEORGES L. HÉBERT
 
  Director   February 7, 2008
Georges L. Hébert
       
 
       
/s/ WILLIAM S. DELUCE
 
  Director   February 7, 2008
William S. Deluce
       
 
       
/s/ ANTHONY F. GRIFFITHS
 
  Director   February 7, 2008
Anthony F. Griffiths
       
 
       
/s/ JOHN R. GOSSLING
 
  Director   February 7, 2008
John R. Gossling
       
 
       
/s/ SEAN P. WASHCHUK
 
  Vice President Finance and Chief Financial Officer   February 7, 2008
Sean P. Washchuk
  (Principal Financial Officer)      
 
       
/s/ FAYAZ D. SULEMAN
 
  Corporate Controller   February 7, 2008
Fayaz D. Suleman
  (Principal Accounting Officer)ve     

69

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