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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 333-98077
Quality Distribution, LLC
(Exact Name of the Registrant as Specified in its Charter)
DELAWARE 04-3668323
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3802 Corporex Park Drive
Tampa, Florida 33619
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code:
813-630-5826
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
At June 30, 2002, the market value of registrant's common equity held by
non-affiliates was zero.
As of December 31, 2002, the registrant had 100 no par value membership
interest units outstanding, all of which were held by affiliates.
Documents Incorporated by Reference: None.
PART I
Item 1. BUSINESS
GENERAL
Quality Distribution, LLC (the "Company" or "QD LLC") is a Delaware
limited liability company formed on April 14, 2002. The Company's sole member is
Quality Distribution, Inc. ("QDI Inc."), a Florida corporation. On May 30, 2002,
QDI Inc. completed an exchange offer for its public debt, at which time QDI Inc.
transferred substantially all of its assets and liabilities (other than certain
contract rights which by their terms cannot be assigned without the consent of
the other parties thereto) to the Company, consisting principally of the capital
stock of QDI Inc.'s operating subsidiaries. As a result, QDI Inc. has no
significant assets or operations other than the ownership of 100% of QD LLC's
membership units. The Company became the successor entity to QDI Inc. The
transfer of the net assets to the Company by QDI Inc. has been accounted for as
a transaction between companies under common control. As a result, QDI Inc.'s
historical accounting basis for the net assets has been carried over to the
Company. The Company's results of operations for periods prior to the transfer
represent the historical operating results for QDI Inc. As used in this report,
the terms "we," "our," "ours," and "us" refer to QD LLC and its consolidated
subsidiaries and their predecessors, unless the context otherwise requires or
indicates.
We are the largest bulk tank truck carrier in North America based on
bulk service revenues. Through a network of 153 terminals located across the
United States, Canada and Mexico, we transport a broad range of chemical
products and provide our customers with supplementary transportation services
such as dry bulk hauling, transloading, tank cleaning, third-party logistics,
intermodal services and leasing. Many of the chemical and chemical-related
consumer products we transport require specialized trailers and experienced
personnel for safe, reliable and efficient handling. We are a core carrier for
many of the Fortune 500 companies who are engaged in chemical processing,
including Dow Chemical Company, Procter & Gamble Company, E.I. DuPont and PPG
Industries.
In addition to our own fleet operations, we use affiliates and
owner-operators. Affiliates are independent companies that, through
comprehensive contracts with us, operate their terminals exclusively for us.
Owner-operators are independent contractors who, through contracts with us,
supply one or more tractors and drivers for our own or our affiliate's use.
Management believes that the use of affiliates and owner-operators results in a
more flexible cost structure, increases our asset utilization and increases
return on invested capital. The Company is a holding company and operates
principally through three main transportation subsidiaries: Quality Carriers,
Inc ("QCI"), Transplastics ("TPI") and Levy Transport, Ltee ("Levy"), and
through Quala Systems, Inc. ("QSI"), a nation-wide tankwash subsidiary. Through
the principal transportation subsidiaries, as of December 31, 2002, we operated
7,565 trailers, of which 6,196 were owned or leased by us, and 3,363 tractors,
of which 793 were owned or held directly under lease by us.
The for-hire tank truck industry is highly fragmented and we believe
it consists of approximately 200 tank truck carriers, with the top five
carriers representing approximately $1.6 billion or approximately 31% of
estimated 2002 for-hire tank truck industry revenues. The industry continues to
experience consolidation. We believe such consolidation is primarily the result
of economies of scale in the provision of services to a larger customer base,
cost-effective purchasing of equipment, supplies and services by larger
companies, high insurance premiums and the decision by many smaller, capital
constrained operators to sell their trucking businesses rather than make
substantial investments to modernize their fleets. As a result of our leading
market position and decentralized operating structure, we believe we are well
positioned to benefit from these current industry trends.
DEVELOPMENT OF OUR COMPANY
Our parent company, QDI Inc., was formed in 1994, as a holding
company. One of our main transportation subsidiaries QCI, was the product of
the merger in 1998 of two large tank truck carriers, Montgomery Tank Lines,
Inc.("MTL") and Chemical Leaman Tank Lines, Inc. ("CLC" or "CLTL"). QDI Inc. is
owned principally by Apollo Investment Fund III, L.P., Apollo Overseas Partners
III, L.P., and Apollo (U.K.) Partners III, L.P., each of which is an affiliate
of Apollo Management, L.P. As of December 31, 2002, Apollo owned 87.2% of QDI
Inc.'s common stock, certain other investors owned 6.4% and our management
owned approximately 6.4%. On a fully diluted basis
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after giving effect to stock options and warrants, at December 31, 2002, Apollo
owned approximately 78.1% of QDI Inc.'s common stock, certain other investors
owned 13.5% and our management owned approximately 8.4%.
All of our domestic direct and indirect subsidiaries have guaranteed
our borrowings under our credit agreement and our senior subordinated secured
notes.
SERVICES PROVIDED
BULK TRANSPORTATION SERVICES
We are primarily engaged in the business of bulk transportation of
liquid and dry chemical products. Business services are provided through
Company-owned and affiliate terminals. As of December 31, 2002, 89 of 153
locations were company operations and the remaining locations were affiliate
operations. Owner-operators are heavily relied upon to fulfill driver and
tractor needs at both Company and affiliate terminals. We believe the
combination of the affiliate program and the emphasis on the use of
owner-operators result in an efficient and flexible operating structure that
provides superior customer service.
AFFILIATE PROGRAM
Affiliates are established and maintained by their owners as
independent companies with individualized, parochial profit incentives designed
to stimulate and preserve the entrepreneurial motivation common to small
business owners. Each affiliate enters into a comprehensive contract with QCI
pursuant to which the affiliate is required to operate its bulk tank truck
enterprise exclusively for and on behalf of QCI. Each affiliate is supported by
our corporate staff and is linked via computer to central management's
information systems located at the Tampa, Florida headquarters of QDI. New
affiliate candidates are ordinarily selected from QCI's management/employee
pool, thereby "jump-starting" the new business opportunity with an experienced,
savvy owner/manager, significantly reducing "ramp-up" time, while
simultaneously improving the chances for both operating and financial success.
Affiliates gain multiple benefits from their relationship with QCI,
such as improved equipment utilization through access to our network of
operating terminals, access to and enhancement of our broad national and local
customer relationships, national and local driver recruitment programs,
standardized safety training (for drivers, tankwashers and mechanics) at our
five (5) Safety Schools, and expanded marketing and sales resources, combined
with sophisticated marketplace/competitive research. Affiliates gain further
value from QCI's management information systems which provide essential
operating and financial reports, while simplifying daily operating situations
with system-wide technology support (TMW Systems, Incorporated ("TMW")
dispatch/billing platforms and Qualcomm en-route electronic linkage with each
vehicle). Affiliates also derive significant financial benefit through our
purchasing leverage on items such as insurance coverage, tractors, trailers,
fuel, tires, health care, and other significant operating requirements.
Affiliates predominantly operate under the marketing identity of
Quality Carriers and typically receive a percentage of gross revenues from each
shipment they transport. Affiliates are responsible for their own operating
expenses, such as fuel, licenses and worker's compensation insurance. We pay
affiliates each week on the basis of completed billings to customers from the
previous week. Our weekly settlement program automatically deducts any amounts
advanced to affiliates (and their individual drivers) for fuel, insurance,
loans or other miscellaneous operating expenses, including rental charges for
QCI's tank trailers. We reimburse affiliates for certain expenses billed back
to customers, including fuel, tolls and scaling charges.
Our contracts with affiliates typically carry a term ranging from one
to five years and thereafter renew on an annual basis, unless terminated by
either party. Affiliate contracts uniformly contain restrictive covenants
prohibiting them from competing directly with QCI for a period of one year
following termination of the contract. In addition, affiliates are required to
meet all QCI standard operating procedures as well as being required to submit
regular financial statements.
Affiliates engage and/or employ their own drivers and personnel. All
affiliate personnel must meet our operating standards/requirements.
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Affiliates are required to pay for and provide evidence of their own
workers' compensation coverage, which must meet both Company-established and
statutory coverage levels. Affiliates are provided, as part of their contract,
auto and general liability insurance, subject to certain deductibles per
incident. Expenses exceeding the prescribed deductible limits of the affiliate
are the responsibility of QCI or its insurer. For an additional fee, our
subsidiary, Power Purchasing Inc. ("PPI"), makes available additional insurance
to affiliates for physical damage coverage, operating a tractor without a
trailer, health care, life insurance, and garage-keepers insurance.
DRIVERS AND OWNER OPERATORS
At December 31, 2002, we utilized 3,182 drivers. Of this total, 1,859
were owner-operators, 875 were affiliate company drivers and 448 were company
drivers.
OWNER-OPERATORS
QCI terminals and affiliates extensively utilize owner-operators.
Owner-operators are independent contractors who, through an exclusive contract
with QCI, supply one or more tractors and drivers for QCI or affiliate use. QCI
retains owner-operators under contracts generally terminable by either party
upon short notice.
In exchange for the services rendered, owner-operators are generally
paid a fixed percentage of the revenues generated for each load hauled or on a
per mile rate. The owner-operator pays all tractor operating expenses such as
fuel, physical damage insurance, tractor maintenance, fuel taxes and highway use
taxes. However, we reimburse owner-operators for certain expenses passed through
to our customers, such as fuel surcharges, tolls and scaling charges. QCI
attempts to enhance the profitability of our owner-operators through purchasing
programs that take advantage of our significant purchasing power. These programs
cover such operating expenses as fuel, tires, occupational accidental and
physical damage insurance.
Owner-operators utilized by QCI or an affiliate must meet specified
guidelines for driving experience, safety records, tank truck experience and
physical examinations in accordance with U.S. Department of Transportation
("DOT") regulations. We emphasize safety to our independent contractors and
their drivers and maintain driver safety inspection programs, safety awards,
terminal safety meetings and stringent driver qualifications.
DRIVER RECRUITMENT AND RETENTION
QCI and its affiliates dedicate significant resources to recruiting
and retaining owner-operators and our own company drivers. Company drivers and
owner-operators are hired in accordance with specific guidelines regarding
safety records, driving experience and a personal evaluation by our staff. We
employ only qualified tank truck drivers with a minimum of two years of
over-the-road, tractor-trailer experience. These drivers are required to attend
a rigorous training program conducted at one of our five safety schools.
Driver recruitment and retention is a primary focus for all operations
personnel. Each terminal manager has direct responsibility for hiring drivers.
We use many of the traditional methods of driver recruitment as well as using
many newer methods of driver recruitment, including the use of the Internet and
the efforts of the President's Team.
The President's Team is a group consisting of our very best drivers,
whose mission it is to recruit and retain drivers while promoting QCI to
customers. The equipment utilized by the President's Team distinguishes these
drivers, thereby providing another tool in our continuous driver recruiting
efforts. The President's Team maintains contact with new candidates throughout
the hiring process. They also provide insight on the issues important to our
current drivers and owner-operators. In 2001, a comprehensive Driver Excellence
Program was implemented to reward our best drivers with recognition and awards
based on meeting standards of excellence in productivity, safety and positive
Company image. QCI added a centralized recruiting department at the Tampa
corporate office during 2002.
4
OTHER PERSONNEL
At December 31, 2002, we employed 836 support personnel, including 217
employed at our corporate office in Tampa, Florida. Our field operations
consist of 619 employees, including 85 mechanics, 204 tank cleaners and 330
other support, clerical and administrative personnel.
Where appropriate, the field management is responsible for hiring
mechanics, customer service and tank wash personnel. We provide our employees
with health, dental, vision, life, and other insurance coverages subject to
certain premium sharing and deductible provisions. These and other insurance
programs are available to affiliates and owner-operators for a fee.
UNION LABOR
At December 31, 2002, we had 268 employees in trucking, maintenance or
cleaning facilities and approximately 85 employees of three affiliate terminals
who were members of the International Brotherhood of Teamsters.
CUSTOMER SERVICE, QUALITY ASSURANCE AND BILLING
Our Quality Assurance Program is designed to enable the achievement of
superior customer service through the development and implementation of
Standardized Operating Procedures for each area within our company. The
procedures provide guidance in such areas as marketing, contracts, dispatch and
terminal operations, driver hiring, safety and training, trailer operations,
tractor operations, administrative functions, payroll, settlements, insurance,
data processing and fuel tax administration.
The Company also has an Internal Audit department which helps monitor
and ensure compliance.
We have implemented a Quality Corrective Action procedure to identify,
document and correct safety and service non-conformance. This procedure collects
non-conformance data so that all levels of the organization can better
understand where processes breakdown causing a non-conformance. This information
is also reported back to many of our customers in the form of monthly service
reports. Service reporting is required by an increasing number of chemical
shippers.
During the third quarter of 2002, QCI completed its initiative to
centralize the billing function for all Company terminals and some affiliate
terminals in order to gain better quality control over the billing and
invoicing processes. At the same time, QCI completed its conversion to the TMW
billing application, which integrated the dispatch and billing systems. See
"Technology" section below.
MOBILE COMMUNICATIONS
Over 90% of our entire tractor fleet is equipped with the OmniTRACS(R)
mobile satellite communications system. This system provides continuous
monitoring and two-way communications with tractors in transit. The information
generated by this system is used to track load status, optimize the use of
drivers and equipment and respond to emergency situations.
TECHNOLOGY
In 2001, QCI purchased and began implementing a new operating system
for dispatching trucks. The system was purchased from TMW, a company with over
500 customer installations and a 40% market share in the bulk trucking market.
The rollout of this program was completed in the third quarter of 2002 for all
U.S. operations.
The TMW software enhances our ability to track our drivers, tractors,
trailers and manage the business better at a tactical level. The software
handles order entry, resource planning, dispatch, and communications, through
Qualcomm (Omnitracs) integration and auto-rating of invoices. The software is
another step in the continued upgrading of systems utilized in our trucking
subsidiaries: installation of an IBM storage and multi-server network, which
centralized the data and increased reliability, adding TMW for resource
tracking, completing Qualcomm
5
installation for communications and equipment location updates, introduction of
imaging at all locations, and the incorporation of all of this data into our
website at http://www.qualitydistribution.com. Information on our website is
not part of this report. These projects add to the productivity of our
employees and equipment, which we believe result in improved value to our
customers.
LEASING
We lease tractors and trailers to affiliates and other third parties,
including shippers. Tractor lease terms range from 12 to 60 months and may
include a purchase option. Trailer lease terms range from 1 to 84 months and do
not include a purchase option. We have the largest stainless steel trailer
fleet in North America and derive a portion of our income from leasing these
units to customers and affiliates.
TANK WASH OPERATIONS
To maximize equipment utilization and efficiency we rely on 31 QSI, 1
affiliate-operated QSI, 2 TPI and 14 affiliate-owned tank wash facilities
located throughout our operating network. These facilities allow us to generate
additional tank washing fees from non-affiliated carriers and shippers.
Management believes that the availability of these facilities enables us to
provide an integrated service package to our customers and minimize the risk of
cost escalation associated with reliance on third party tank wash vendors.
INTERMODAL AND BULK RAIL OPERATIONS
We offer a wide range of intermodal services by transporting liquid
bulk containers on specialized chassis to and from a primary mode of
transportation such as rail, barge or vessel. We also provide rail transloading
services that enable products to be transloaded directly from rail car to
trailer. This allows shippers to combine the economy of long-haul rail
transportation with the flexibility of local truck delivery.
OWNER-OPERATOR AND AFFILIATE SERVICES
Through PPI we offer insurance products and other services to both our
internal and external fleet and to our owner-operators at favorable prices. By
offering purchasing programs that take advantage of our significant purchasing
power for products and services such as tractors, fuel and tires as well as
automobile, general liability and workers' compensation insurance, we believe
we strengthen our relationship with our owner-operators and improve driver
recruitment. We also actively market these products and services to other
customers.
LOAD BROKERAGE SERVICES
We provide load brokerage services to enhance our ability to handle
our customers' trucking requirements. To the extent that we do not have the
equipment necessary to service a particular shipment, we will broker the load
to another carrier, thereby meeting the customer's shipping needs and
generating additional revenues for us. Through our relationship with over sixty
independent bulk carriers, we can assure timely response to customer needs.
TRACTORS AND TRAILERS
As of December 31, 2002, we operated a fleet of 7,565 tank trailers.
The majority of these tanks are single compartment, chemical-hauling trailers.
The balance of the fleet is made up of multi-compartment trailers, dry bulk
trailers and special use equipment. The chemical transport units typically have
a capacity between 5,000 to 7,000 gallons and are designed to meet DOT
specifications for transporting hazardous materials. Each trailer is designed
for a useful service life of 15 to 20 years, though this can be greatly
extended through upgrades and modifications.
We acquire new tractors with an initial utilization period of five
years. The useful life of a tractor may be extended if restoration or an
overhaul is performed. As of December 31, 2002, we operated 3,363 tractors, of
which 793 were operated by our drivers, 1,768 were operated by owner-operators,
and 802 were operated by affiliate drivers.
6
Many of our and our affiliate terminals provide preventative
maintenance and receive computer-generated reports that indicate when
inspection and servicing of units are required. Our maintenance facilities are
registered with the DOT and are qualified to perform trailer inspections and
repairs for our fleet and equipment owned by third parties. We also rely on
unaffiliated repair shops for many major repairs. In 2002 we implemented a new
maintenance tracking, invoicing and reporting systems, which is scheduled to be
fully operational at all of our terminals by the end of the second quarter of
2003.
The following table shows the age of trailers and tractors we operated
that were in service as of December 31, 2002. All numbers are approximated as
of such date:
GREATER
LESS THAN THAN
TRAILERS (1) 3 YRS 3-5 YRS 6-10 YRS 11-15 YRS 16-20 YRS 20 YRS TOTAL
- ------------ --------- ------- -------- --------- --------- ------- -----
COMPANY 7 534 1,450 1,383 1,184 1,638 6,196
AFFILIATE 68 322 285 127 116 175 1,093
SHIPPER-OWNED 12 79 58 66 30 31 276
-- --- ----- ----- ----- ----- -----
Total 87 935 1,793 1,576 1,330 1,844 7,565
GREATER
LESS THAN THAN
TRACTORS 3 YRS 3-5 YRS 6-10 YRS 11-15 YRS 15 YRS TOTAL
- -------- --------- ------- -------- --------- ------- -------
COMPANY 160 166 415 18 34 793
AFFILIATE 236 326 196 36 8 802
OWNER-OPERATORS 160 633 793 125 57 1,768
--- ----- ----- --- -- -----
Total 556 1,125 1,404 179 99 3,363
(1) Age based upon original date of manufacture; trailer may be
substantially refurbished or re-manufactured.
MARKETING
We conduct our marketing activities at both the national and local
levels. We employ geographically dispersed sales managers who market our
services primarily to national accounts. These sales managers have extensive
experience in marketing specialized tank truck transportation services. The
corporate sales staff also concentrates on developing dedicated logistics
opportunities. Our senior management is actively involved in the marketing
process, especially in marketing to national accounts. In addition, significant
portions of our marketing activities are conducted locally by our terminal
managers and dispatchers who act as local customer service representatives.
These managers and dispatchers maintain regular contact with shippers and are
well positioned to identify the changing transportation needs of customers in
their respective geographic areas.
CUSTOMERS
Our revenue base consists of customers located throughout North
America, including many Fortune 500 companies such as the Dow Chemical Company,
Procter & Gamble, PPG Industries and E.I. Dupont. As of December 31, 2002 and
2001, approximately 85% of trade accounts receivable were due from companies in
the liquid chemical and bulk food products industries, respectively. During
2002, Dow Chemical accounted for 12.6% of our total revenues. In 2001 and 2000,
Dow Chemical accounted for approximately 12.5% and 7.5% of operating revenue,
respectively. For the fiscal year ended December 31, 2002, our 10 largest
customers accounted for 30.8% of revenues.
ADMINISTRATION
We operate 153 facilities throughout the United States, Canada and
Mexico. Company-owned and affiliate terminals operate as separate profit
centers and terminal managers are responsible and accountable for most
operational decisions. Effective supervision requires maximum personal contact
with customers and drivers. Therefore, to accomplish mutually defined operating
objectives, the functions of customer service, dispatch and general
administration typically rest within each terminal. Cooperation and
coordination is further encouraged by the QCI backhaul policy.
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From the corporate offices in Tampa, FL, management constantly
monitors each terminal's operating and financial performance, safety and
training record, accounts receivable and customer service efforts. Terminal
managers ensure the terminals remain in strict compliance with safety,
maintenance, customer service and other operating procedures. Senior corporate
executives, safety department personnel and audit department personnel conduct
unannounced visits to verify terminal compliance. We strive to achieve uniform
service and safety at all company-owned and affiliate terminals, while
simultaneously affording terminal managers the freedom to focus on generating
business in their region.
COMPETITION
The tank truck business is extremely competitive and fragmented. We
compete primarily with other tank truck carriers and private carriers in
various states and Canada. With respect to certain aspects of our business, we
also compete with intermodal transportation and railroads. Intermodal
transportation has increased in recent years as reductions in train crew size
and the development of new rail technology have reduced costs of intermodal
shipping. In 2001, a major competitor, Matlack Systems, Inc., went bankrupt and
ceased operations.
Competition for the freight transported by us is based primarily on
rates and service. Management believes that we enjoy significant competitive
advantages over other tank truck carriers because of our low fixed cost
structure, overall fleet size, national terminal network and tank wash
facilities.
Our largest competitors are Trimac Transportation Services Ltd.,
Schneider National, Inc. and Superior Carriers, Inc; however, there are many
other smaller recognized tank truck carriers, most of whom are primarily
regional operators.
We also compete with other motor carriers for the services of our
drivers and owner-operators. Our overall size and our reputation for good
relations with affiliates and owner-operators have enabled us to attract a
sufficient number of qualified professional drivers and owner-operators.
Competition from non-trucking modes of transportation and from
intermodal transportation would likely increase if state or federal fuel taxes
were to increase without a corresponding increase in taxes imposed upon other
modes of transportation.
RISK MANAGEMENT AND INSURANCE/SAFETY
The primary insurable risks associated with our business are bodily
injury and property damage, workers' compensation claims and cargo loss and
damage. We maintain insurance against these risks and are subject to liability
as a self-insurer to the extent of the deductible under each policy. We
currently maintain liability insurance for bodily injury and property damage
in the amount of $55 million per incident, with a $5 million per incident
deductible. There is no aggregate limit on this coverage.
We currently maintain a $1 million per incident deductible for
workers' compensation insurance coverage. We are insured over our deductible up
to the statutory requirement by state. We are self-insured for damage or loss
to the equipment we own or lease, and for cargo losses.
We employ a safety and insurance staff of 18 professionals. In
addition, we employ specialists to perform compliance checks and conduct safety
tests throughout our operations. We conduct a number of safety programs
designed to promote compliance with rules and regulations and to reduce
accidents and cargo claims. These programs include training programs, driver
recognition programs, safety awards, an ongoing Substance Abuse Prevention
Program, driver safety meetings, distribution of safety bulletins to drivers
and participation in national safety associations.
ENVIRONMENTAL MATTERS
Our activities involve the handling, transportation, storage and
disposal of bulk liquid chemicals, many of which are classified as hazardous
materials, hazardous substances, or hazardous waste. Our tank wash and terminal
operations engage in the storage or discharge of wastewater and storm-water
that may have contained hazardous
8
substances, and from time to time we store diesel fuel and other petroleum
products at our terminals. As such, we are subject to environmental, health and
safety laws and regulation by U.S. federal, state, local and Canadian
government authorities. Environmental laws and regulations are complex, change
frequently and have tended to become more stringent over time. There can be no
assurance that violations of such laws or regulations will not be identified or
occur in the future, or that such laws and regulations will not change in a
manner that could impose material costs to us.
Facility managers are responsible for environmental compliance.
Self-audits conducted by our internal audit staff are required to assess
operations, safety training and procedures, equipment and grounds maintenance,
emergency response capabilities and waste management. We may also contract with
an independent environmental consulting firm that conducts periodic,
unscheduled, compliance assessments which focus on conditions with the
potential to result in releases of hazardous substances or petroleum, and which
also include screening for evidence of past spills or releases. Our
relationship to our affiliates could, under certain circumstances, result in
our incurring liability for environmental contamination attributable to an
affiliate's operations, although we have not incurred any material derivative
liability in the past. Our environmental management program has been extended
to our affiliates. Our staff includes environmental experts who develop
policies and procedures, including periodic audits of our terminals, tank
cleaning facilities, and historical operations, in an effort to avoid
circumstances that could lead to future environmental exposure.
As a handler of hazardous substances, we are potentially subject to
strict, joint and several liability for investigating and rectifying the
consequences of spills and other environmental releases of such substances
either under the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended ("CERCLA") and comparable state laws. From
time to time, we have incurred remedial costs and regulatory penalties with
respect to chemical or wastewater spills and releases at our facilities and,
notwithstanding the existence of our environmental management program, we
cannot assure that such obligations will not be incurred in the future, nor
that such liabilities will not result in a material adverse effect on our
financial condition, results of operations or our business reputation. As the
result of environmental studies conducted at our facilities in conjunction with
our environmental management program, we have identified environmental
contamination at certain sites that will require remediation.
We have also been named a potentially responsible party ("PRP"), or
have otherwise been alleged to have some level of responsibility, under CERCLA
or similar state laws for cleanup of off-site locations at which our waste, or
material transported by us, has allegedly been disposed of. We have asserted
defenses to such actions and have not incurred significant liability in the
CERCLA cases settled to date. While we believe that we will not bear any
material liability in any current or future CERCLA matters, there can be no
assurance that we will not in the future incur material liability under CERCLA
or similar laws.
We are currently solely responsible for remediation of the following
two federal Superfund sites:
BRIDGEPORT, NEW JERSEY. During 1991, CLC entered into a Consent Decree
with the EPA filed in the U.S. District Court for the District of New Jersey,
U.S. v. Chemical Leaman Tank Lines, Inc., Civil Action No. 91-2637 (JFG)
(D.N.J.), with respect to its site located in Bridgeport, New Jersey, requiring
CLC to remediate groundwater contamination. The Consent Decree required CLC to
undertake Remedial Design and Remedial Action ("RD/RA") related to the
groundwater operable unit of the cleanup. A groundwater remedy design has
subsequently been approved by the EPA and is under consideration.
In August 1994, the EPA issued a Record of Decision, selecting a remedy
for the wetlands operable unit at the Bridgeport site at a cost estimated by the
EPA to be approximately $7 million. In October 1998, the EPA issued an
administrative order that requires CLC to implement the EPA's wetlands remedy. A
remedial design for this remedy is currently under consideration by EPA and the
State of New Jersey. In April 1998, the federal and state natural resource
damages trustees indicated their intention to bring claims against CLC for
natural resource damages at the Bridgeport site. CLC finalized a consent decree
on March 16, 2001 with the state and federal trustees and has resolved the
natural resource damages claims. In addition, the EPA has investigated
contamination in site soils. No decision has been made as to the extent of soil
remediation to be required, if any.
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CLC initiated litigation against its insurers to recover its costs in
connection with environmental cleanups at its sites. In a case captioned
Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Surety Co., et al., Civil
Action No. 89-1543 (SSB) (D.N.J.), Chemical Leaman sought from its insurers
reimbursement of substantially all past and future environmental cleanup costs
at the Bridgeport site. In a case captioned The Aetna Casualty and Surety
Company v. Chemical Leaman Tank Lines, Inc., et al., Civil Action No.
94-CV-6133 (E.D. Pa.), Chemical Leaman sought from its insurers reimbursement
of substantially all past and future environmental cleanup costs at its other
sites. In an agreement dated as of November 18, 1999, Chemical Leaman favorably
resolved these outstanding insurance claims for $33.0 million. We received
$21.5 million of the settlement proceeds in late 1999 and the balance in early
2000.
WEST CALN TOWNSHIP, PA. The EPA has alleged that CLC disposed of
hazardous materials at the William Dick Lagoons Superfund Site in West Caln,
Pennsylvania. On October 10, 1995, CLC entered into a Consent Decree with the
EPA which required CLC to:
- pay the EPA for installation of an alternate water line to
provide water to area residents;
- perform an interim groundwater remedy at the site; and
- conduct soil remediation. US v. Chemical Leaman Tank Lines,
Inc., Civil Action No. 95-CV-4264 (RJB) (E.D. Pa.).
CLC has paid all costs associated with installation of the waterline.
CLC has completed a groundwater study, and has submitted designs for a
groundwater treatment plant to pump and treat groundwater. The EPA anticipates
that CLC will conduct the groundwater remedy over the course of five years, at
which time the EPA will evaluate groundwater conditions and determine whether
further groundwater remedy is necessary. Field sampling for soil remediation
and activities for the design of a soil remediation system have been completed.
Soil remediation will include the use of both a low temperature thermal
treatment unit and a soil vapor extraction system. The Consent Decree does not
cover the final groundwater remedy or other site remedies or claims, if any,
for natural resource damages.
OTHER ENVIRONMENTAL MATTERS. CLC has been named as PRP under CERCLA
and similar state laws at approximately 35 former waste treatment and/or
disposal sites including the Helen Kramer Landfill Site where CLC previously
settled its liability. In general, CLC is among several PRP's named at these
sites. CLC is also named as co-defendant in two civil toxic tort claims arising
from alleged exposure to hazardous substances that were allegedly transported
to disposal sites by CLC and other co-defendants. CLC is also incurring
expenses resulting from the investigation and/or remediation of certain current
and former CLC properties, including its facility in Tonawanda, New York and
its former facility in Putnam County, West Virginia, and its facility in
Charleston, West Virginia. As a result of our acquisition of CLC, we identified
other owned or formerly owned properties that may require investigation and/or
remediation, including properties subject to the New Jersey Industrial Sites
Recovery Act (ISRA). CLC's involvement at some of the above referenced sites
could amount to material liabilities, and there can be no assurance that costs
associated with these sites, individually or in the aggregate, will not be
material. We currently have reserves in the amount of $33.0 million for
liabilities associated with the Helen Kramer Landfill, CLC's facility at
Tonawanda, New York and CLC's former facility in Putnam County, West Virginia
and the other matters discussed above.
REGULATION
As a motor carrier, we are subject to regulation. There are additional
regulations specifically relating to the tank truck industry, including testing
and specifications of equipment and product handling requirements. We may
transport most types of freight to and from any point in the United States over
any route selected by us. The trucking industry is subject to possible
regulatory and legislative changes that may affect the economics of the
industry by requiring changes in operating practices or by changing the demand
for common or contract carrier services or the cost of providing truckload
services. Some of these possible changes may include increasingly stringent
environmental regulations, changes in the hours-of-service regulations which
govern the amount of time a driver
10
may drive in any specific period of time, onboard black box recorder devices or
limits on vehicle weight and size. In addition, our tank wash facilities are
subject to stringent local, state and federal environmental regulations.
The Federal Motor Carrier Act of 1980 served to increase competition
among motor carriers and limit the level of regulation in the industry. The
Federal Motor Carrier Act also enabled applicants to obtain Interstate Commerce
Commission ("ICC") operating authority more readily and allowed interstate motor
carriers such as ourselves greater freedom to change their rates each year
without ICC approval. The law also removed many route and commodity restrictions
on the transportation of freight. A series of federal acts, including the
Negotiated Rates Act of 1993, the Trucking Industry Regulatory Reform Act of
1994 and the ICC Termination Act of 1995, further reduced regulation applicable
to interstate operations of motor carriers such as ourselves, and resulted in
transfer of interstate motor carrier registration responsibility to the Federal
Highway Administration of the DOT. On February 13, 1998, the Federal Highway
Administration published proposed new rules governing registration to operate by
interstate motor carriers. To this point in time adopted changes have not
adversely affected interstate motor carrier operations. During 1999, the Federal
Motor Carrier Safety Improvement Act of 1999 took effect establishing the
Federal Motor Carrier Safety Administration effective January 1, 2000. This
agency's principal assignment is to regulate and maintain safety within the
ranks of motor carriers.
Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT. To a large degree, intrastate motor carrier operations
are subject to safety and hazardous material transportation regulations that
mirror federal regulations. Such matters as weight and dimension of equipment
are also subject to federal and state regulations. DOT regulations mandate drug
testing of drivers. To date, the DOT's national commercial driver's license and
drug testing requirements have not adversely affected the availability of
qualified drivers to us. Alcohol testing rules were adopted by the DOT in
February 1994 and became effective in January 1995 for employers with 50 or
more drivers. These rules require certain tests for alcohol levels in drivers
and other safety personnel. These rules have not adversely affected the
availability of qualified drivers.
Title VI of The Federal Aviation Administration Authorization Act of
1994, which became effective on January 1, 1995, largely deregulated intrastate
transportation by motor carriers. This Act generally prohibits individual
states, political subdivisions thereof and combinations of states from
regulating price, entry, routes or service levels of most motor carriers.
However, the states retained the right to continue to require certification of
carriers, based upon two primary fitness criteria--safety and insurance--and
retained certain other limited regulatory rights. Prior to January 1, 1995, we
held intra-state authority in several states. Since that date, we have either
been "grandfathered in" or have obtained the necessary certification to
continue to operate in those states. In states in which we were not previously
authorized to operate intra-state, we have obtained certificates or permits
allowing us to operate.
From time to time, various legislative proposals are introduced
including proposals to increase federal, state, or local taxes, including taxes
on motor fuels. We cannot predict whether, or in what form, any increase in
such taxes applicable to us will be enacted.
SEASONALITY
Our business is subject to limited seasonality, with revenues
generally declining slightly during winter months, namely the first and fourth
fiscal quarters, and over holidays. Highway transportation can be adversely
affected depending upon the severity of the weather in various sections of the
country during the winter months. Our operating expenses also have been
somewhat higher in the winter months, due primarily to decreased fuel
efficiency, increased utility costs and increased maintenance costs of revenue
equipment in colder months.
ITEM 2. PROPERTIES
As of December 31, 2002, QDI's operating facilities were located in
the following cities:
QCI OPERATED QSI TPI AFFILIATE OPERATED
Albany, NY ** Albany, NY ** Chicago, IL ** Augusta, GA **
Appleton, WI Atlanta, GA ** Columbus, OH Baltimore, MD
Atlanta, GA ** Augusta, GA ** East Rutherford, NJ ** Barberton, OH **
11
Augusta, GA ** Barberton, OH ** Essexville, MI ** Baton Rouge, LA
Becancour, CDN Baton Rouge, LA Greer, SC Beaumont, TX
Bessemer, AL Branford, CT ** Kalamazoo, MI Bridgeport, NJ **
Branford, CT ** Bridgeport, NJ ** Laredo, TX Bristol, PA
Brunswick, GA E. Channelview, TX Montreal, Canada Bristol, WI
Calvert City, KY W. Channelview, TX*** North Haven, CT Chattanooga, TN **
Carteret, NJ Charleston, SC Palmer, MA ** Chattanooga, TN **
Castleton, VT Charleston, WV Port Arthur, TX ** Cincinnati, OH
Channelview, TX Chattanooga, TN ** Saddle Brook, NJ Cincinnati, OH **
N. Charleston, SC ** Freeport, TX Sarnia, Canada Danville, IL
Charleston, SC ** Friendly, WV ** South Point, OH Delaware, OH **
Chester, SC ** Geismer, LA Dumfries, VA
Columbus, OH Houston, TX ** Ft. Worth, TX **
Coteau du Lac, QUE ** Kalamazoo, MI ** Freeport, TX
E. St. Louis, IL Kent, WA ** Gary, IN **
Fall River, MA Lansing, IL Glennmoore, PA
Follansbee, WV Midland, MI ** Grimes, IA
Fort Worth, TX Newark, NJ ** Hagerstown, MD
Geismer, LA Pocatello, ID ** Houston, TX **
Geneva, NY Rahway, NJ Jacksonville, FL
Greenup, KY Rock Hill, SC ** Joliet, IL
Kalamazoo, MI ** Salt Lake City, UT ** Kansas City, MO
Kelso, WA San Pablo, CA ** Kent, WA
Kent, WA ** Sarnia, ON Lake Charles, LA
Ludington, MI ** Savannah, GA Lansing, IL
Mexico South Gate, CA Lima, OH
Midland, MI ** Spartanburg, SC ** Louisville, KY
Montreal Canada ** Sulphur, LA Luling, LA
Newark, NJ ** Wilmington, NC ** Mediapolis, IA
Oakville, ON Memphis, TN
Orlando, FL Memphis, TN
Pointe aux Trembles, PQ Memphis, TN
Pocatello, ID ** Mobile, AL
Richmond, CA Modesto, CA
Salt Lake City, UT ** Morgantown, WV **
South Gate, CA Nazareth, PA
St. Louis, MO New Castle, DE
Summit, IL New Castle, DE
Tonawanda, NY ** Niagara Falls, NY
Waterford, NY Norfolk, VA
Wilmington, NC ** Owensboro, KY
Parker, PA **
Pasadena, TX
Pearsburg, VA
Portland, OR
Roanoke, VA
Salisbury, NC
St. Gabriel, LA **
Savannah, GA
South Point, OH
Southern Cal., CA
Spartenburg, SC **
St. Albans, WV **
Tampa, FL
Thorofare, NJ
Toledo, OH
Triadelphia, WV
Tucker, GA
Warsaw, IN
Williamsport, PA **
** Indicates the terminal is owned by the Company.
*** QSI facility operated by affiliate as of November, 2002
12
In addition to the properties listed above, we also own property in
Croydon, PA, Syracuse, NY, and Hartford, WI. Our executive and administrative
offices are located in Tampa, Florida.
Item 3. LEGAL PROCEEDINGS
In addition to those items disclosed under Item 1. "Business -
Environmental Matters," we are from time to time involved in routine litigation
incidental to the conduct of our business. We believe that no litigation
currently pending against us, if adversely determined, would have a material
adverse effect on our consolidated financial position, results of operations or
cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during
the fourth quarter of the year covered by this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for our membership units
common equity. As of December 31, 2002, all membership units of the Company
were owned by QDI Inc. No distribution with respect to the membership interests
of the Company has ever been paid. Future payments of distributions, if any,
are limited by contractual restrictions in the Company's financing agreements.
For further information regarding these contractual restrictions, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
At December 31, 2002, the Company had no compensation plans (or
individual compensation arrangements) pursuant to which its membership
interests were authorized for issuance.
On May 30, 2002, the Company issued $54.5 million aggregate principal
amount of its 12-1/2% Senior Subordinated Secured Notes due 2008 (the "New
Notes") as part of the exchange offer and consent solicitation by QDI Inc. and
its subsidiaries. The Company issued the New Notes to holders of $83.9 million
principal amount of QDI Inc.'s outstanding 10% Series B Senior Subordinated
Notes due 2006 and Series B Floating Interest Rate Subordinated Term Securities
due 2006 (FIRSTS) (together, the "QDI Notes") that participated in the exchange
offer and consent solicitation. The Company did not receive any cash proceeds
as a result of the issuance of the New Notes in the May 30, 2002 transaction.
For further information regarding the May 30, 2002 exchange offer transaction,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and Note 8 to our
audited consolidated financial statements included at Item 8 of this report.
The Company believes that the issuance of the New Notes in the May 30, 2002
transaction was exempt from the registration requirements of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof or Regulation D
thereunder because this issuance did not involve a public offering or sale. No
underwriters, brokers or finders were involved in this transaction.
Item 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial information set forth
below is qualified in its entirety by reference to, and should be read in
conjunction with, our Consolidated Financial Statements and notes thereto
included elsewhere in this report and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The consolidated income statement and balance sheet information set
forth below for and as of each of the years in the five-year period ended
December 31, 2002 have been derived from our audited consolidated financial
statements.
13
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1999 2000 2001 2002
(RESTATED)(3)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA
Operating revenues $ 381,388 $ 569,597 $ 556,547 $ 510,701 $ 516,538
--------- --------- --------- --------- ---------
Costs and expenses:
Operating expenses, excluding
depreciation and amortization 330,285 491,662 491,672 448,972 457,432
Option expense 14,678
Depreciation and amortization 29,402 60,556 35,281 33,410 31,823
Interest expense, net 19,791 40,452 40,236 40,224 33,132
Transaction fees -- -- -- -- 10,077
Other expenses (income) (164) (134) (24) 22 126
--------- --------- --------- --------- ---------
Total costs and expenses 393,992 592,536 567,165 522,628 532,590
--------- --------- --------- --------- ---------
(Loss) before taxes (12,604) (22,932) (10,618) (11,927) (16,052)
Provision (benefit) for income taxes (4,201) (6,061) 31,225 1,135 1,443
Minority interest (74) (21) -- -- --
--------- --------- --------- --------- ---------
Income (Loss) from continuing
operations, before extraordinary
item (8,477) (16,892) (41,843) (13,062) (17,495)
Income (Loss) from discontinued
operations, net 1,389 1,462 56 (359) (2,913)
--------- -------- -------- -------- --------
(Loss) before extraordinary
item (7,088) (15,430) (41,787) (13,421) (20,408)
Extraordinary item (1) (3,077) -- -- -- --
--------- -------- -------- -------- --------
Loss before cumulative effect of
a change in accounting principle (10,165) (15,430) (41,787) (13,421) (20,408)
Cumulative effect of a change in
accounting principle (2) -- -- -- -- (23,985)
--------- --------- --------- --------- ---------
Net loss $ (10,165) $ (15,430) $ (41,787) $ (13,421) $ (44,393)
========= ========= ========= ========= =========
OTHER DATA
Net cash and cash equivalents
provided by operating activities $ 16,596 $ 9,169 $ 41,282 $ 7,468 $ 25,832
Net cash and cash equivalents used
in investing activities (289,275) (8,875) (18,721) (34,936) (7,169)
Net cash and cash equivalents (used
in) provided by financing activities 271,413 674 (20,171) 27,263 (19,998)
Capital expenditures 29,765 25,727 23,079 37,412 15,286
Number of terminals at end of Period 194 171 152 148 153
Number of trailers operated at
end of period 8,003 7,625 7,526 7,737 7,565
Number of tractors operated at
end of period 3,679 3,943 3,491 3,394 3,363
BALANCE SHEET DATA AT PERIOD END:
Total assets $ 583,246 $ 542,241 $ 453,073 $ 448,138 $ 387,265
Total indebtedness, including
current maturities 441,331 434,156 416,939 443,856 382,190
Redeemable securities 17,204 13,287 15,092 17,709 --
Membership interest (6) (48,320) (64,773) (110,866) (135,427) (112,876)
QDI INC. BALANCE SHEET DATA AT
DECEMBER 31, 2002
Total assets 387,265
Long-term indebtedness, including
current maturities (4) 397,613
Redeemable securities (5) 57,660
Stockholders' deficit (134,696)
(1) We incurred such extraordinary item in respect of an early debt
extinguishment.
(2) Adoption of FAS Statement 142 resulted in an impairment loss related
to goodwill.
14
(3) See Note 1 of Notes to Consolidated Financial Statements.
(4) Long-term indebtedness of QDI Inc. on a consolidated basis consists of
our long-term indebtedness and $15.4 million aggregate principal amount
of 12% junior subordinated paid-in-kind notes issued by QDI Inc.,
including note carrying value in excess of face value of $2.0 million.
(5) Redeemable securities of QDI Inc. on a consolidated basis consists of
$56.5 million of 13.75% mandatorily redeemable preferred stock and $1.2
million of mandatorily redeemable common stock issued by QDI Inc.
(6) Membership interest at December 31, 2002 reflects as a capital
contribution to us the value of the securities issued by QDI Inc. to
the holders of the QDI notes participating in the transactions and the
$10.0 million cash proceeds received by QDI Inc. in exchange for its
13.75% mandatorily redeemable preferred stock issued to Apollo.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this report.
OVERVIEW
Our revenue is principally a function of the volume of shipments by
the bulk chemical industry, our market share as opposed to that of our
competitors and the amount spent on tank truck transportation as opposed to
other modes of transportation, such as rail. The volume of shipments of
chemical products are in turn affected by many other industries, including
consumer and industrial products, automotive, paint and coatings, and paper,
and tend to vary with changing economic conditions. Additionally we also
provide leasing, tank cleaning, insurance products for drivers and affiliates,
and inter-modal services which are presented as other revenue.
The principal components of our operating costs include purchased
transportation, salaries, wages, benefits, tractor and trailer maintenance
costs, insurance, technology infrastructure and fuel costs. We believe our use
of affiliates and owner-operators provides a more flexible cost structure,
increases our asset utilization and increases our return on invested capital.
We have historically focused on maximizing cash flow and return on
invested capital. Our affiliate program has greatly reduced the amount of
capital needed for us to maintain and grow our terminal network. In addition,
the
15
extensive use of owner-operators reduces the amount of capital needed to
operate our fleet of tractors, which have shorter economic lives than trailers.
These factors have allowed us to concentrate our capital spending on our
trailer fleet where we can achieve superior returns on invested capital through
our transportation operations and leasing to third parties and affiliates.
Through several strategic asset purchases during the latter half of
2001, we were further able to expand our service capabilities and our
geographic coverage. We intend to continue providing these core services and
expand upon existing customer relationships by providing our supplementary
services as well as increasing the fleet size in these markets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with United States generally accepted accounting
principles ("GAAP"). We believe the following are the more critical accounting
policies that impact the financial statements, some of which are based on
management's best estimates available at the time of preparation. Actual future
experience may differ from these estimates.
Environmental liabilities - We have reserved for potential
environmental liabilities based on the best estimates of potential clean-up and
remediation estimates for known environmental sites. We employ a staff of
environmental experts to administer all phases of our environmental programs,
and use outside experts where needed. These professionals develop estimates of
potential liabilities at these sites based on projected and known remediation
costs. This analysis requires us to make significant estimates, and changes in
facts and circumstances could result in material changes in the environmental
accrual.
Accident claims reserves - We carry insurance for auto liability
claims, with a $5 million per occurrence deductible as of September 15, 2002,
and worker's compensation with a $1 million per accident deductible. For cargo
claims, we are self-insured. In developing liability reserves, we rely on
professional third party claims administrators, insurance company estimates and
the judgment of our own safety department personnel. This analysis requires us
to make significant estimates, and changes in facts and circumstances could
result in material changes in the accident claims reserves.
Revenue recognition - Transportation revenues and related costs are
recognized on the date the freight is delivered or the tank wash performed.
Other operating revenues, consisting primarily of lease revenues from
affiliates, independent operators and third parties, are recognized as earned.
Allowance for uncollectible receivables - The allowance for all
potentially uncollectible receivables is based on a combination of historical
data, cash payment trends, specific customer issues, write-off trends, general
economic conditions and other factors. These factors are continuously monitored
by management to arrive at the estimate for the amount of accounts receivable
that may be ultimately uncollectible. The receivables analyzed include trade
receivables, as well as loans and advances made to owner-operators and
affiliates. This analysis requires us to make significant estimates, and
changes in facts and circumstances and the economic environment could result in
material changes in the allowance for uncollectible receivables.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, we adopted the provisions of Financial
Accounting Standards No 142, "Goodwill and Other Intangible Assets" (Statement
142). As a result of the adoption of Statement 142, the amortization of
goodwill ceased, resulting in a decrease in the net loss of $3.9 million for
the year ended December 31, 2002. Under Statement 142, goodwill is subject to
an annual impairment test. We completed our initial impairment test during
2002. During our initial impairment analysis of goodwill, we determined that
approximately $4.6 million of goodwill had been classified as an offset against
accounts payable and accrued expenses. These amounts have been reclassified
into goodwill during 2002. As a result of our initial impairment test, an
impairment adjustment of $24.0 million was charged to earnings as a cumulative
effect of a change in accounting principle at January 1, 2002. There were
several factors that led to the conclusion that an impairment charge was
warranted. These factors included several consecutive years of declining base
business revenues and operating losses, an uncertain economic
16
environment exacerbated by the events of September 11, 2001, increased
insurance costs for the foreseeable future and the highly leveraged nature of
the Company. No tax benefit was recorded in connection with this charge. The
fair value was determined based on a combination of prices of comparable
businesses and present value techniques.
In July 2001, the FASB issued SFAS 143 Accounting for Asset Retirement
Obligations, which requires that companies recognize a liability for retirement
obligations of long-lived assets in the period the liability occurs. This
pronouncement is effective for fiscal years beginning after September 15, 2002.
We do not anticipate any significant impact on our financial results from
adoption of this standard.
In August 2001, the Financial Accounting Standards Board issued SFAS
144 Accounting for the Impairment or Disposal of Long-Lived Assets, which
supersedes SFAS 121. We currently assess whether there has been impairment of
long-lived assets and certain intangibles in accordance with SFAS 121 and have
continued to do so under the guidance provided by SFAS 144 in 2002
In September 2002, the FASB issued SFAS 146 Accounting for Costs
Associated with Exit or Disposal Activities. This pronouncement addresses
financial accounting and reporting for costs associated with exit or disposal
activities not covered under SFAS 144 and also supercedes EITF 94-3. This
pronouncement is effective for activities initiated after December 31, 2002. We
do not anticipate any significant impact on our financial results from adoption
of this standard.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantee of Indebtedness of Others. FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions
for initial recognition and measurement should be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The guarantor's
previous application may not be revised or restated to reflect the effect of
the recognition and measurement provisions of the interpretation. The
disclosure requirements are effective for financial statements of both interim
and annual periods that end after December 15, 2002. We are not a
guarantor under any significant guarantees and thus this interpretation is not
expected to have a significant effect on our financial position or
results of operations.
On December 31, 2002, the FASB issued FAS No. 148, Accounting for
Stock-based Compensation--Transition and Disclosure--an amendment of FAS 123,
Accounting For Stock-Based Compensation. FAS 148 does not change the provisions
of FAS 123 that permit entities to continue to apply the intrinsic value method
of APB 25, Accounting for Stock Issued to Employees. FAS 148 does require
certain new disclosures in both annual and interim financial statements. The
required annual disclosures were effective immediately for us. The new
interim disclosure provisions will be effective for us in the first
calendar quarter of 2003.
On January 17, 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No. 51.
The primary objectives of FIN 46 are to provide guidance on how to identify
entities for which control is achieved through means other than through voting
rights (variable interest entities "VIE" and how to determine when and which
business enterprise should consolidate the VIE. This new model for
consolidation applies to an entity in which either (1) the equity investors do
not have a controlling financial interest on (2) the equity investment at risk
is insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. We do
not expect the adoption of this standard to have any impact on the financial
position and results of operations.
RESULTS OF OPERATIONS
During the second quarter of 2002, the Company sold the Levy petroleum
division and closed the Levy mining operation, as well as closed Bulknet, our
internet-based load brokerage subsidiary. Revenue and operating expenses in the
following discussion have been adjusted to remove the revenues and expenses
associated with the operations of these divisions.
The consolidated financial statements as of and for the year ended
December 31, 2001 have been restated to reflect the correction of a clerical
error and establish a reserve for incurred but not reported insurance losses
relating to a subsidiary that markets insurance products. This correction
resulted in a decrease in net income of approximately $1 million. All financial
data in this section has been restated to reflect the correction of the error.
In addition, we reclassified our insurance subsidiary's premium revenue
and insurance loss expenses to a gross basis versus a net basis for 2000 and
2001. The impact of those reclassifications increased both other revenue and
insurance claims expense by $3.1 million and $2.4 million for 2000 and 2001,
respectively.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
17
The chemical industry overall remained weak for most of 2002,
continuing a decline that started in the third quarter of 2000. Total revenues
for 2002 were $516.5 million, an increase of $5.8 million or 1.1% compared to
2001 revenues. Transportation revenue increased by $3.1 million or .7% compared
to 2001. The increase in transportation revenue is partially attributable to
business acquired through strategic asset purchases in the last half of 2001
that was retained throughout 2002 ($7.3 million), offset by lower fuel
surcharge for the year ($4.5 million). New business gains and insurance
surcharge revenue accounted for $0.3 million of the net revenue increase in
2002. Non-trucking revenue increased by $2.8 million or 4.2% in 2002 versus
2001 primarily due to acquisitions during 2002 and the second half of 2001 by
QSI, our tank-wash subsidiary.
We operated 153 terminals at December 31, 2002 compared to 148
terminals at December 31, 2001. The increase is the result of strategic new
affiliate terminals opened in 2002, and new transload operations, offset by
further consolidation and rationalization of terminals from cost cutting
measures in response to decreased demand.
We operated a total of 7,565 trailers and 3,363 tractors at the end of
2002 compared to 7,737 trailers and 3,394 tractors for year ended December 31,
2001. The decline in tractors, many of which are owned by owner-operators, is
largely due to the sale of older equipment, and disposal of the Canadian
petroleum division, partially offset by new tractor purchases in the fourth
quarter of 2002. The decrease in trailers is due to better equipment
utilization allowing for the disposals of older equipment, plus the disposal of
our Levy petroleum division.
Operating expenses, excluding depreciation and amortization, totaled
$457.4 million in 2002, an increase of $8.4 million or 1.9% from 2001. The
increase in operating expenses was primarily attributable to higher purchased
transportation, driver compensation and insurance costs. Purchased
transportation increased $3.2 million as a result of the addition of several new
affiliate operations added in 2002. Driver wages and benefits increased by $2.1
million due primarily to escalating group health costs and workers compensation
premiums. Also significantly contributing to the operating expense increase was
insurance claims expense, which increased $1.7 million or 14.3% versus 2001.
These costs were negatively impacted by higher premiums due to a tight insurance
market, which was exacerbated by the events of September 11, 2001. Fuel expense
for company operations was $0.2 million lower in 2002 reflecting overall lower
annual fuel cost and conversions to affiliate locations. Additionally,
selling and administrative expense in 2002 includes a $6.4 million charge to
increase the reserve for uncollectible accounts, due to increased collection
efforts on trade receivables and receivables from terminated owner-operators
and affiliates. Selling and administrative cost also include a benefit from a
$6.0 million reduction in environmental liabilities reflecting lower than
anticipated environmental clean-up costs. Selling and administrative expenses
increased by $0.5 million as a result of our initiation of an aggressive
campaign on both driver retention and recruiting. Additionally, in 2002 we
increased our credit and collection staffing in an effort to improve cash flow
and decrease our days sales outstanding (DSO).
Our operating expenses have been impacted by several charges in both
2002 and 2001. We have incurred severance, benefits and other related expenses
from cost cutting measures and consolidating terminals that resulted in charges
of $1.8 million and $1.0 million in 2002 and 2001, respectively. In addition we
had charges related to the prior operations of CLC of $2.3 million and $2.4
million in 2002 and 2001, respectively, related to insurance claims associated
with the operations of predecessor companies incurred prior to the merger in
1998.
Depreciation and amortization totaled $31.8 million for 2002 versus
$33.4 million in 2001. The decrease is attributable to the implementation of FAS
142 in 2002 which eliminated the amortization of goodwill ($3.9 million) and to
tractor and trailer equipment acquired at the time of the merger with CLC that
became fully depreciated in 2002. These decreases were partially offset by
depreciation related to higher capital spending on computer related
infrastructure and acquisitions of equipment in 2002 and the end of 2001.
Total operating expenses, including depreciation and amortization as a
percentage of revenue, the "operating ratio," increased to 94.7% in 2002 versus
94.5% in 2001. Excluding the charges and restructuring mentioned above, our
operating ratio would have increased to 93.9% versus 93.8% in 2001, due largely
to the increases in insurance and benefit costs.
Interest expense was $33.1 million in 2002 versus $40.2 million during
2001. The reduction in interest expense was the result of an exchange offer
consummated during the second quarter of 2002 which reduced our overall level
of indebtedness. For a discussion of the Exchange Offer, see note 8 to the
consolidated financial
18
statements included elsewhere in this document. In connection with the Exchange
Offer, we recorded $10.1 million in transaction fees, including the write-off
of existing unamortized fees from prior credit amendments.
Discontinued operations accounted for a $1.4 million loss and $0.4
million loss in 2002 and 2001 respectively. The discontinued operations
consisted of the sale and disposal of the Canadian petroleum and mining
divisions of Levy, and the closure of Bulknet, our internet-based load brokerage
subsidiary. We incurred a $1.6 million loss on the ultimate disposition of the
operations, due largely to the write-off of goodwill, sale of assets associated
with the Canadian petroleum and mining division and write down of all software
and development costs at Bulknet.
During 2002 there was a change in accounting principle to recognize
the impairment of goodwill relating to implementation of FAS 142 of $24.0
million. See note 3 to the consolidated financial statements for further
discussion.
Income tax expense for 2002 was $1.4 million versus $1.1 million for
2001.
Our net loss after discontinued operations was $44.3 million for 2002
versus $13.4 million for 2001 for the reasons outlined above.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues for 2001 were $510.7 million, a decrease of $45.8 million or
8.2% compared to 2000 revenues. The revenue decline was largely attributable to
the sustained weak industrial production demand that began in the third quarter
of 2000 and has continued dropping throughout 2001. This decline in demand for
bulk transportation services was due to the overall slowing economic
conditions, downsizing and consolidation in the U.S. chemical industry, and
increased competition from other forms of transportation such as rail. This
environment has also intensified pricing competition in the bulk transportation
industry. In addition, the terrorist attack on the World Trade Center and other
locations on September 11, 2001, pushed overall demand lower in the fourth
quarter of 2001. The revenue decline was mitigated by new business of $36
million and business acquired through strategic asset purchases in 2001 of $8.7
million. The 2000 results include $15.7 million of fuel surcharge versus $11.9
million in 2001. This decline reflects both overall volume decreases and the
drop in fuel prices towards the end of 2001. We instituted an insurance
surcharge in October 2001 in response to dramatically rising insurance costs.
We operated 148 terminals at December 31,2001 compared to 152
terminals at December 31, 2000. The reduction is the result of further
consolidation and rationalization of terminals from cost cutting measures in
response to demand, offset by strategic new terminals acquired in 2001.
We operated a total of 7,737 trailers and 3,394 tractors at the end of
2001 compared to 7,526 trailers and 3,491 tractors for year ended December 31,
2000. The decline in tractors, many of which are owned by owner-operators, is
largely due to lower demand, offset by new tractor purchases in 2001. The
increase in trailers is due to several strategic asset purchases made in 2001,
offset by disposals of older equipment.
Operating expenses, excluding depreciation and amortization, totaled
$449.0 million in 2001, a decrease of $42.7 million or 8.7% from 2000. This
decrease in operating expenses was largely due to the lower shipment volume in
2001 that resulted in lower purchased transportation, compensation and other
operating costs due to personnel reductions and cost control. In addition, in
2001 we converted several less profitable terminals to affiliate operations.
Together, these factors resulted in reducing our driver wages ($1.0 million)
and reducing purchased transportation expense for owner-operators ($29.0
million). These decreases were offset by net increases in purchased
transportation for affiliates ($6.6 million) due to the conversions and the
pass through payments of fuel surcharge.
Cost cutting initiatives, volume related declines and the conversion
of our terminals to affiliate operations reduced overall compensation and
benefit expense in 2001 compared to 2000 by ($6.0 million, or 8.3%), as well as
selling and administrative costs ($3.8 million, or 21.8%). Fuel, supplies and
maintenance decreased $4.0 million in 2001. This decrease was largely the
result of ($1.0 million) decrease in our fuel expense due to fuel prices
dropping during the second half of the year, plus demand declines. Other volume
related operating expenses declined,
19
including declines in tank wash expense of ($1.8 million) and equipment
maintenance and other expenses ($1.2 million). Insurance and claims increased
($0.5 million) as a result of new vehicle and workers compensation insurance
policies starting in the third quarter of 2001. These higher insurance costs
reflect the current unfavorable insurance market for the trucking industry. We
were able to recoup a portion of these increased costs through implementation
of an insurance surcharge.
Our operating expenses have been impacted by several charges in both
2001 and 2000. We have incurred severance, benefits and other related expenses
from cost cutting measures and consolidating terminals that resulted in charges
of $1.0 million and $3.2 million in 2001 and 2000, respectively. In addition,
we had charges related to the prior operation of CLC of $2.4 million and $6.7
million in 2001 and 2000, respectively. These expenses related primarily to
pre-merger accounts receivable, poor experience on pre-merger insurance claims
and other expenses associated with the operations of the predecessor companies
prior to the merger in 1998. Excluding these charges, operating expenses would
have declined $38.1 million in 2001 versus 2000.
Depreciation and amortization totaled $33.4 million for 2001 versus
$35.3 million in 2000. The decrease is attributable to tractor and trailer
equipment acquired at the time of the merger with CLC that became fully
depreciated in 2001, offset by higher capital spending on computer related
infrastructure and acquisitions of equipment in 2001.
Total operating expenses, including depreciation and amortization, as
a percentage of revenue decreased to 94.5% of revenue in 2001 compared to 94.7%
of revenue in 2000. Excluding the charges and restructuring mentioned above,
the operating ratio would have increased in 2001 to 93.8% versus 92.9% in 2000.
This increase largely relates to the revenue decline in 2001 and the impact on
our fixed costs, along with increases in insurance expense incurred in 2001.
Interest expense remained unchanged at $40.2 million during 2001
compared to 2000. This was the result of lower interest rates on variable term
debt that were offset by losses on interest rate swaps on that debt, and
additional expenses associated with amending the credit agreement and increased
borrowing. Total debt increased in 2001 by $26.9 million primarily to finance
strategic terminal and tank wash assets purchased in several areas of the
country.
Income tax expense for 2001 was $1.1 million versus $31.2 million for
2000. In 2000, we established a $32.6 million valuation allowance on net
deferred tax assets as a result of cumulative losses in recent years.
Our net loss after discontinued operations was $13.4 million for 2001
versus $41.8 million loss in 2000. The decrease in the net loss was due
primarily to the valuation allowance on net deferred tax assets and the charges
in 2000 discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash flow from operations and
borrowing availability under our credit agreement. Our revolving credit
agreement becomes due in June of 2004. We generated $41.3 million, $7.5 million
and $25.8 million from operating activities in 2000, 2001 and 2002,
respectively. The increase in cash provided by operating activities in 2002
reflects a decrease in Days Sales Outstanding ("DSO") of accounts receivable
during 2002 largely as a result of our increased collection efforts, and timing
of payments on our self-insured auto claims and accounts and brokers payable. In
2000, we received $11.0 million of insurance proceeds for environmental claims.
Capital expenditures totaled $23.1 million, $37.4 million and $15.3
million in 2000, 2001 and 2002, respectively. As of December 31, 2002, we were
committed to purchase tractors for $2.0 million. In 2001, several major asset
purchases occurred including West Coast terminals and new tank wash facilities
totaling approximately $14.7 million. In 2002, capital was used to complete the
purchase of our new dispatch system and other computer infrastructure, new
tractors and a tank wash facility. Net cash used in investing activities in
2000, 2001 and 2002 was $18.7 million, $34.9 million and $7.2 million,
respectively. In 2002, we recognized proceeds of approximately $4.3 million in
connection with our disposal of the petroleum and mining divisions of Levy.
20
Net cash (used in) or provided by financing activities was ($20.2
million); $27.3 million and ($20.0 million) in 2000, 2001 and 2002,
respectively. The use of cash in 2002 is a result of paying down our revolving
debt and from transaction fees associated with the Exchange Offer. In 2001, we
reached an agreement with a minority interest shareholder to repurchase shares
of CLC preferred stock for the stated value of $2.6 million plus associated
cost. In 2001, we increased our total debt by $26.9 million to finance the
strategic asset purchases described above.
In 1998, our parent QDI Inc. was capitalized with $140.0 million
principal amount of QDI Notes, a $360.0 million credit agreement, $68.0 million
in equity investments by Apollo, other institutional investors and members of
our management and $31.9 million in preferred and common equity investments by
certain of our shareholders, including Apollo. Upon consummation of the CLC
merger, CLC and its subsidiaries became guarantors of the QDI Notes and
guarantors under our credit agreement. Our credit agreement currently provides
for a term-loan facility consisting of a $90.0 million Tranche A Term Loan
maturing on June 9, 2004, a seven-year $105.0 million Tranche B Term Loan
maturing on August 28, 2005, a $90.0 million Tranche C Term Loan maturing on
February 28, 2006, Tranche D Loan of $15 million, maturing on March 2, 2006 and
a $75 million revolving credit facility available until June 9, 2004. The
proceeds from the December 2001 Tranche D Loan were used to pay down $5 million
each on the Tranche A, B and C loans. On December 31, 2002 our total borrowing
under the credit agreement, including current maturities, was $286.7 million
and we had $26.9 million available for borrowings under the revolving credit
facility. At December 31, 2002 a 1 point change in our variable interest
bearing debt would result in an annual $2.9 million change in our interest
expense.
Our credit agreement includes financial covenants which require
certain ratios to be maintained. In 2001, a default, for which we received a
waiver in October 2001, occurred with respect to the financial covenants in the
credit agreement. In addition, during 2001 we separately amended our credit
agreement on June 4, 2001 and on December 14, 2001, to, among other things,
modify our financial covenants.
On April 5, 2002, we entered into a fifth amendment (the "Fifth
Amendment") to our credit agreement. The Fifth Amendment relates to the
financial covenants which were unlikely to be met beginning with the quarter
ending March 31, 2003, and further amended those financial covenants through
the date of the final maturity of our credit agreement in 2005. Such revised
covenants are less restrictive than the previously existing covenants for the
period beginning March 31, 2003 through final maturity of our credit agreement.
The revised financial covenants in the Fifth Amendment consist of the
following:
- - The Company must maintain a ratio of consolidated EBITDA to
consolidated interest expense of at least 1.75:1 for the twelve-month
period ended June 30, 2002. Thereafter, the minimum consolidated
interest coverage ratio we are required to maintain increases in
various amounts until the twelve-month period ending December 31, 2005
when it becomes 2:15:1 for such period.
- - The Company must maintain a ratio of consolidated senior debt to
consolidated EBITDA of no more that 4.80:1 for the twelve-month
period ended June 30, 2002. thereafter, the minimum leverage ratio the
Company is allowed decreases in various amounts until the twelve-month
period ending December 31, 2005, when it becomes 3.50:1.
As of December 31, 2002, the Company was in compliance with the
financial covenants in the credit agreement. However, continued compliance with
these requirements could be effected by changes relating to economic factors,
market uncertainties, or other events as described under "--Forward-Looking
Statements and Certain Considerations." Although there can be no assurance, the
Company currently believes that it will be in compliance with the financial
covenants in the credit agreements through December 31, 2003.
In 2002, QDI Inc. and its subsidiaries, pursuant to the terms of an
Offering Memorandum and Consent Solicitation Statement, dated as of April 10,
2002, as supplemented May 10, 2002 by Supplement No. 1 thereto dated as of May
10, 2002 (as so supplemented, the "Offering Memorandum"):
- commenced an offer to exchange up to $87.0 million principal
amount of QDI Inc.'s outstanding 10% Series B Senior
Subordinated Notes due 2006 and Series B Floating Interest
Rate Subordinated Term
21
Securities due 2006 (FIRSTS) (together, the "QDI Notes") for
a combination of certain debt and equity securities,
including the 12 1/2% Senior Subordinated Secured Notes due
2008 of the Company (the "New Notes");
- commenced a consent solicitation for certain proposed
amendments to the indenture governing the QDI Notes to
eliminate many of the restrictive covenants contained in that
indenture; and
- entered into lock-up agreements with certain affiliates of
Apollo Management, L.P., the Company's controlling
stockholder ("Apollo"), certain affiliates of Ares
Management, L.P. ("Ares") and certain members of QDI Inc.'s
management, who respectively held $29.5 million, $22.5
million and $1.0 million aggregate principal amount of the
QDI Notes.
The exchange offer for the QDI Notes and the consent solicitation were
consummated on May 30, 2002 (the "Exchange Offer"). On such date, QDI Inc.
accepted for exchange $61.4 million aggregate principal amount of the QDI Notes
(excluding the $53.0 million aggregate principal amount of the QDI Notes
covered by the lock-up agreements). All tendering holders received for each
$1,000 principal amount of QDI Notes tendered, a combination of debt and equity
securities consisting of:
- $650 principal amount of the Company's 12 1/2% Senior
Subordinated Secured Notes due 2008 (the "New Notes");
- $150 principal amount of QDI Inc.'s 12% Junior Subordinated
Pay-in-Kind Notes due 2009 (the "QDI Junior PIK Notes" and;
- 2.0415 warrants, each to purchase one share of QDI Inc.'s
common stock at an exercise price of $5 per share.
Pursuant to the terms of the lock-up agreements with Ares, Apollo and
QDI Inc.'s management, on May 30, 2002:
- Ares exchanged its QDI Notes for the same combination of debt
and equity securities indicated above for tendering holders;
- Apollo and QDI Inc.'s management group exchanged their
respective QDI Notes for shares of QDI Inc.'s 13.75%
preferred stock; and
- Apollo purchased for cash an additional $10 million of QDI
Inc.'s 13.75% preferred stock, all of the proceeds of which
were used by QDI to retire certain borrowings under our
credit agreement for which Apollo had provided credit
support.
In connection with the formation of the Company, all equity and
obligations of QDI Inc. were treated as additional paid-in capital of the
Company.
As a result of the transactions, on May 30, 2002, the Company issued
$54.5 million aggregate principal amount of its New Notes to the holders of QDI
Notes participating in the transactions and to Ares. The New Notes are
guaranteed on a senior subordinated basis by all of the Company's domestic
subsidiaries. The guarantees are full, unconditional, joint and several
obligations of the guarantors. The Company's obligations under the New Notes
and the guarantor's obligations under the guarantees are secured by a second
priority lien, subject to certain exceptions, on all of the Company's domestic
assets and the domestic assets of the guarantors that secure the credit
agreement and the interest rate protection and other hedging agreements
permitted thereunder, excluding capital stock and other securities owned or
held by the Company or the Company's existing and future subsidiaries. The New
Notes bear interest at a rate of 12 1/2% per annum, of which 7 1/4% per annum
is payable in cash and 5 1/4% per annum is payable in kind, subject to
increases in the cash portion if total leverage ratio or senior leverage ratio
targets are met.
The carrying amount of the New Notes has been adjusted by $14.3
million to reflect accounting under FAS 15 and will be amortized over the life
of the New Notes as a reduction in interest expense. After the closing of the
22
transactions, $25.6 million in aggregate principal amount and carrying amount
of the QDI Notes remains outstanding. In addition, as a result of the closing
of the transactions, the amendments to the financial covenants contained in the
Fifth Amendment to our credit agreement previously entered into by QDI Inc. and
the Company became effective as discussed below.
In connection with the Exchange Offer, deferred debt issue costs
relating to the fourth amendment of our credit agreement totaling approximately
$4.2 million and legal and advisory fees relating to the Exchange Offer
totaling approximately $5.9 million were recorded as transaction expenses.
Our primary cash needs consist of capital expenditures and debt
service under our credit agreement and the New Notes. We incur capital
expenditures for the purpose of replacing older tractors and trailers,
purchasing new tractors and trailers, and maintaining and improving
infrastructure, including the integration of the information technology system.
We have historically sought to acquire smaller local operators as part
of our program of strategic growth. We continue to evaluate potential accretive
acquisitions in order to capitalize on the consolidation occurring in the
industry and expect to fund such acquisitions from available sources of
liquidity, including borrowings under the revolving credit facility.
While uncertainties relating to environmental, labor and regulatory
matters exist within the trucking industry, management is not aware of any
trends or events likely to have a material adverse effect on liquidity or the
accompanying financial statements. Our credit rating is affected by many
factors, including our financial results, operating cash flows and total
indebtedness. We believe that based on current levels of operations and
anticipated growth, our cash flow from operations, together with available
sources of liquidity, including borrowings under the revolving credit facility,
will be sufficient to fund anticipated capital expenditures and make required
payments of principal and interest on our debt, including obligations under our
credit agreement and satisfy other long-term contractual commitments for the
next twelve months. The following is a schedule of our long-term contractual
commitments, including current portion of our long-term indebtedness at December
31, 2002, over the periods we expect them to be paid (dollars in thousands).
BALANCE
AT 12/31/02 2003 2004 2005 2006 AFTER
----------- ------ -------- -------- ------- -------
Operating leases -- $3,150 $ 2,072 $ 1,759 $ 1,190 $ --
Unconditional purchase commitment -- 2,000 -- -- -- 2,000
Total indebtedness, including
capital lease obligations $368,934 3,251 107,725 132,070 69,808 56,080
-------- ------ -------- -------- ------- -------
Total $368,934 $8,401 $109,797 $133,829 $70,998 $58,080
======== ====== ======== ======== ======= =======
Additionally we have $33.0 million of environmental liabilities, $17.6
million of pension plan and other long term insurance claim obligations and
$22.1 million in letters of credit outstanding we expect to pay out over the
next five to seven years.
The transactions that occurred on May 30, 2002 significantly changed
our capital structure and long-term contractual commitments from those that
existed on December 31, 2001. In particular, the transactions reduced our
overall level of indebtedness by exchanging $114.4 million principal amount of
the QDI notes which were outstanding at December 31, 2001 for approximately
$54.5 million principal amount of the new notes issued by us and the following
securities issued by our parent, QDI Inc.: approximately $14.8 million of 12%
Junior Subordinated Pay-in-Kind Notes due 2009; approximately $30.5 million of
13.75% preferred stock; and warrants to purchase 171,282 shares of QDI Inc.
common stock. Further, indebtedness outstanding under our credit agreement was
reduced by $10 million with the cash proceeds received by QDI Inc. from the
issuance of additional shares of 13.75% preferred stock. The transactions also
had the effect of reducing our annual cash debt service requirements because the
New Notes bear interest at a rate of 12 1/2% per annum, of which 7 1/4% per
annum is paid in cash and 5 1/4% per annum is paid in kind in the form of
additional notes, subject to certain exceptions.
The following is a schedule of our indebtedness, exclusive of capital
lease obligations, at December 31, 2002 over the periods we expect them to be
paid (dollars in thousands). With respect to the New Notes, the schedule
reflects the $54.5 million principal amount of notes originally issued on May
30, 2002 and the $20.1 million principal amount of new notes to be issued as
payable-in-kind interest accruing at the assumed rate of 5 1/4% per annum from
May 30, 2002 to June 15, 2008, but it does not reflect the cash interest that
accrues on the New Notes.
23
OUR CREDIT AGREEMENT
-------------------------------------------------------
TRANCHE A TRANCHE B TRANCHE C TRANCHE D REVOLVER QDI NOTES NOTES TOTAL
--------- --------- --------- --------- -------- --------- ------- --------
2003 $ 846 $ 985 $ 846 $ 2,677
2004 79,896 984 845 $26,000 107,725
2005 92,227 39,843 132,070
2006 39,208 $5,000 $25,600 69,808
Thereafter $74,587 74,587
------- ------- ------- ------ ------- ------- ------- --------
$80,742 $94,196 $80,742 $5,000 $26,000 $25,600 $74,587 $386,867
======= ======= ======= ====== ======= ======= ======= ========
If our operating cash flow and borrowings under our revolving credit
facility are not sufficient to satisfy our capital expenditures, debt service
and other long-term contractual commitments, we will be required to seek
alternative plans. These alternatives would likely include another
restructuring or refinancing of our long-term debt, the sale of a portion or
all of our assets or operations or the sale of additional debt or equity
securities. If these alternatives are not available in a timely manner or on
satisfactory terms, or are not permitted under our existing agreements, we may
default on some or all of our obligations. If we default on our obligations,
including our financial covenants required to be maintained under the credit
agreement, and the debt under our credit agreement or the indenture were to be
accelerated, our assets may not be sufficient to repay in full all of our
indebtedness, including the New Notes, and we may be forced into bankruptcy. In
a bankruptcy proceeding, our creditors could challenge the issuance of the New
Notes or the New Notes guarantees as preferential transfers or fraudulent
conveyances, respectively. If such challenges are successful, holders of New
Notes could become unsecured creditors of ours and their claims against us
could be subordinated to claims of creditors of our subsidiaries.
As a holding company with no significant assets other than ownership of
100% of our membership units, QDI Inc. also depends upon our cash flows to
service its debt. QDI Inc. is substantially more leveraged than us. At December
31, 2002, QDI Inc.'s consolidated long-term indebtedness, which consists
primarily of our long-term indebtedness, the QDI Inc. notes and the QDI Junior
PIK Notes was $397.6 million. In addition, the amount outstanding at the
aggregate liquidation preference of QDI Inc.'s 13.75% preferred stock, which is
mandatorily redeemable on September 15, 2006, was $56.5 million and QDI Inc.
also had $1.2 million of redeemable common stock. The following is a schedule of
QDI Inc.'s consolidated long-term contractual commitments, including the current
portion of long-term indebtedness, at December 31, 2002 over the period in which
they are required to be paid (dollars in thousands):
12% JUNIOR
SUBORDINATED MANDATORILY TOTAL
PAY-IN- REDEEMABLE QD LLC QDI INC.
KIND NOTES SECURITIES COMMITMENTS CONSOLIDATED
------------ ----------- ----------- ------------
2003 $ 1,209 $ 2,677 $ 3,886
2004 107,725 107,725
2005 132,070 132,070
2006 56,450 69,808 126,258
Thereafter $26,753 74,587 101,340
------- ------- -------- --------
$26,753 $57,659 $386,867 $471,279
======= ======= ======== ========
QDI Inc.'s 12% Junior PIK Notes become due on June 15, 2009 and bear
interest at a rate of 12% per annum, of which 1% per annum is payable in cash
and 11% per annum is payable in kind. The schedule reflects $12.6 million
principal amount of QDI Junior PIK Notes originally issued and $14.2 million
principal amount of new QDI Junior PIK Notes to be issued as payable-in-kind
interest accruing at the rate of 11% per annum from May 30, 2002 to June 15,
2009, but it does not reflect the cash interest that accrues on the QDI Junior
PIK Notes. Interest is payable semi-annually on June 15 and December 15
commencing June 15, 2002 and ending on June 15, 2009. The annual cash interest
payments range from $120,000 in 2002 to $250,000 in 2008. Neither we nor any of
our subsidiaries guarantee any of QDI Inc.'s obligations under the QDI Junior
PIK Notes.
QDI Inc's mandatorily redeemable securities consist of $56.5 million
of 13.75% mandatorily redeemable preferred stock, which becomes due on
September 15, 2006 and $1.2 million of redeemable common stock, which is
24
redeemable upon the stockholder's put right anytime after June 15, 2002. The
redemption amount for the redeemable common stock is based on a fair market
value calculation set forth under the terms of the agreement. Neither we nor
any of our subsidiaries guarantee any of QDI Inc.'s obligations under the
mandatorily redeemable preferred stock or the redeemable common stock.
Our ability to make distributions to QDI Inc. is restricted by the
covenants contained in our credit agreement and the indenture. However, Apollo
as the controlling shareholder of QDI Inc. may have an interest in pursuing
reorganizations, restructurings or other transactions involving us and QDI Inc.
that, in their judgment, could enhance their equity investment even though
those transactions might involve increasing our leverage or impairing our
creditworthiness in order to decrease QDI Inc.'s leverage. While the
restrictions in the indenture cover a wide variety of arrangements which have
traditionally been used to effect highly leveraged transactions, the indenture
may not afford the holders of the New Notes protection in all circumstances
from the adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction. Although QDI Inc. has no current
intention to engage in these types of transactions, there can be no assurance
it will not do so in the future if permitted under the terms of the credit
agreement and the indenture.
FORWARD-LOOKING STATEMENTS AND CERTAIN CONSIDERATIONS
This report along with other documents that are publicly disseminated
by the Company, and oral statements that are made on behalf of the Company
contain or might contain forward-looking statements within the meaning of the
Securities Exchange Act of 1934, as amended. All statements included in this
report, and in any subsequent filings made by the Company with the Commission
other than statements of historical fact, that address activities, events or
developments that the Company or management expect, believe or anticipate will
or may occur in the future are forward-looking statements. These statements
represent the Company's reasonable judgment on the future and are subject to
risks and uncertainties that could cause the Company's actual results and
financial position to differ materially. Examples of forward-looking statements
include: (i) projections of revenue, earnings, capital structure and other
financial items, (ii) statements of the plans and objectives of the Company and
its management, (iii) statements of expected future economic performance and
(iv) assumptions underlying statements regarding our business. Forward-looking
statements can be identified by, among other things, the use of forward-looking
language, such as "believes," "expects," "estimates," "may," "will," "should,"
"seeks," "plans," "intends," "anticipates," or "scheduled to" or the negatives
of those terms, or other variations of those terms or comparable language, or
by discussions of strategy or other intentions.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. Important factors that could cause our actual results to be
materially different from the forward-looking statements include the risks and
other factors identified in the Company's Registration Statement on Form S-4
(No. 333-98077) and the additional factors set forth below
Substantial Leverage- We are highly leveraged, which may restrict our
ability to fund or obtain financing for working capital, capital expenditures
and general corporate purposes, making us more vulnerable to economic
downturns, competition and other market pressures.
Ability To Extend Revolver Maturity Under Credit Agreement- Our
revolving credit agreement becomes due in June 2004 and there are no assurances
that we will be able to refinance this obligation. Our liquidity would be
materially adversely affected if we did not have borrowing availability under a
revolving credit facility and had to rely solely on our cash flow from operating
activities.
Economic Factors- The trucking industry has historically been viewed
as a cyclical industry due to various economic factors over which we have no
control such as excess capacity in the industry, the availability of qualified
drivers, changes in fuel and insurance prices, including changes in fuel taxes,
changes in license and regulation fees, toll increases, interest rate
fluctuations, and downturns in customer's business cycles and shipping
requirements.
Dependence on Affiliates and Owner-Operators- A reduction in the
number of affiliates or owner-operators whether due to capital requirements or
the expense of obtaining, or maintaining equipment or otherwise could have
25
a material adverse impact on our operations and profitability. Likewise, a
continued reduction in our freight revenue rates could lessen our ability to
attract and retain owner-operators, affiliates and company drivers.
Regulation- We are regulated by the United States Department of
Transportation ("DOT") and by various state agencies. These regulatory
authorities exercise broad powers, governing activities such as the
authorization to engage in motor carrier operations, safety, financial
reporting, and certain mergers, consolidations and acquisitions. The trucking
industry is also subject to regulatory and legislative changes (such as
increasingly stringent environmental regulations or limits on vehicle weight
and size) that may affect the economics of the industry by requiring changes in
operating practices or by affecting the cost of providing services. A
determination by regulatory authorities that we violated applicable laws or
regulations could materially adversely affect our business and operating
results.
Environmental Risk Factors- We have material exposure to both changing
environmental regulations and increasing