QUALITY DISTRIBUTION LLC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended MARCH 31, 2003 or


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 333-98077

Quality Distribution, LLC

(Exact name of registrant as specified in its charter)


Delaware		04-3668323

(State or other jurisdiction of incorporation or organization)		I.R.S. Employer Identification No.)

3802 Corporex Park Drive, Tampa, FL (Address of Principal Executive Offices)		33619 (Zip Code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 o

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

APPLICABLE ONLY TO CORPORATE USERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at March 31, 2003

Membership Interest, No par value		100

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TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	ITEM 1 — FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		CONDENSED CONSOLIDATED STATEMENT OF MEMBERSHIP INTEREST
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
	ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4 — CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 4. Submission of Matters to a Vote of Security Holders
Signatures
CERTIFICATIONS
Ex-4.14 11/7/02 Sixth Amendment to Credit Agrmnt
Ex-10.32 2/5/03 Samuel Hensley Employment Agrmnt
Ex-99.1 CEO Certification
Ex-99.2 CFO Certification

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.)

INDEX


		Page No.

Part I	Financial Information
	Item 1. Financial Statements
	Condensed Consolidated Balance Sheets - March 31, 2003 (unaudited) and December 31, 2002	3-4
	Condensed Consolidated Statements of Operations - Three months ended March 31, 2003 (unaudited) and March 31, 2002 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2003 (unaudited) and March 31, 2002 (unaudited)	6
	Condensed Consolidated Statement of Membership Interest for the Three Months ended March 31, 2003 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8-22
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-25
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	27
	Item 4. Controls and Procedures	27
Part II	Other Information
	Item 1. Legal Proceedings	28
	Item 4. Submission of Matters to a Vote of Security Holders	28
	Item 6. Exhibits and Reports on Form 8-K	28
Signatures		28
	Certifications	29-30

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FORM 10-Q
PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
QUALITY DISTRIBUTION, LLC
(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED — In thousands)


				March 31,		December 31,
				2003		2002

ASSETS
Current assets:
	Cash and cash equivalents		$	1,346		$	661
	Accounts receivable			90,489			83,274
	Allowance for doubtful accounts			(7,747	)		(7,846	)
	Inventories			885			898
	Prepaid expenses			6,503			5,186
	Prepaid tires			8,224			7,894
	Other			2,824			2,578

		Total current assets		102,524			92,645
Property, plant and equipment				341,946			340,681
	Less — accumulated depreciation and amortization			(193,598	)		(187,120	)

		Property, plant and equipment, net		148,348			153,561
Goodwill, net				130,732			130,732
Intangibles, net				1,406			1,585
Other assets				8,931			8,742

		Total assets	$	391,941		$	387,265

The accompanying notes are an integral part of these condensed consolidated financial statements.

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				March 31,			December 31,
				2003			2002

LIABILITIES AND MEMBERSHIP INTEREST
Current liabilities:
	Current maturities of indebtedness			$	3,175		$	3,251
	Accounts payable and accrued expenses				55,238			57,604
	Affiliates and independent owner-operators payable				14,217			10,604
	Income taxes payable				1,892			1,569

			Total current liabilities		74,522			73,028
Long-term debt, less current maturities					378,252			378,939
Environmental liabilities					26,965			27,324
Other non-current liabilities					18,037			17,656
Deferred tax liability					1,612			1,361

			Total liabilities		499,388			498,308
Minority interest in subsidiary					1,833			1,833
COMMITMENTS AND CONTINGENCIES (NOTE 4)
MEMBERSHIP INTEREST:
		Membership interest, no par value, 1,000 authorized, 100 issued			—			—
		Additional paid-in-capital			176,432			176,436
		Accumulated (deficit)			(80,914	)		(83,892	)
		Stock recapitalization			(189,589	)		(189,589	)
		Accumulated other comprehensive (loss)			(15,209	)		(15,831	)

		Total membership interest			(109,280	)		(112,876	)

				$	391,941		$	387,265

The accompanying notes are an integral part of these condensed consolidated financial statements.

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		Three months ended
		March 31,

		2003			2002

Operating revenues:
	Transportation	$	119,424		$	105,728
	Other		17,773			17,058

	Total operating revenues		137,197			122,786
Operating expenses:
	Purchased transportation		83,719			70,877
	Depreciation and amortization		7,494			7,755
	Other operating expenses		36,523			36,832

Operating income			9,461			7,322
Interest expense, net			6,309			9,907
Other expense (income)			—			36
Income (loss) before taxes			3,152			(2,621	)
Provision for income taxes			138			189

Net income (loss) from continuing operations			3,014			(2,810	)
Discontinued operations:
	(Loss) from operations of discontinued division (net of tax of $0)		—			(235	)

	Total (loss) from discontinued operations		—			(235	)

Net income (loss) before cumulative effect of change in accounting principle			3,014			(3,045	)
Cumulative effect of a change in accounting principle (net of tax of $0)			—			(23,985	)

Net income (loss)			3,014			(27,030	)
Preferred stock dividends and accretions			(36	)		(602	)

Net income (loss) attributable to membership interest		$	2,978		$	(27,632	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FORM 10-Q
ITEM 1 — FINANCIAL STATEMENTS
QUALITY DISTRIBUTION, LLC
(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited — In thousands)


		Three months ended
		March 31,
		2003			2002

Cash flows provided by (used in) operating activities:
	Net income (loss)	$	3,014		$	(27,030	)
	Cumulative effect of change in accounting principle		—			23,985
	Adjustments for non-cash charges		8,003			8,985
	Changes in assets and liabilities		(7,137	)		(2,028	)

	Net cash provided by operating activities		3,880			3,912
Investing activities:
	Capital expenditures		(2,170	)		(2,939	)
	Proceeds from asset dispositions		328			1,008

	Net cash (used in) investing activities		(1,842	)		(1,931	)
Financing activities:
	Payment of debt obligations		(1,146	)		(2,169	)
	Other		(36	)		(263	)

	Net cash (used in) financing activities		(1,182	)		(2,432	)

Net increase (decrease) in cash			856			(451	)
Effect of exchange rate changes on cash			(171	)		126
Cash, beginning of period			661			2,212

Cash, end of period		$	1,346		$	1,887

Supplemental disclosures of cash flow information:
	Cash payments for:
	Interest	$	4,501		$	6,550
	Income taxes	$	15		$	73
Supplemental disclosures of non-cash activities:
	Preferred Stock Accretion	$	—		$	566
	Unrealized gain or (loss) on derivative instruments	$	—		$	(142	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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										Accumulated
										Other			Total
	Additional			Accumulated			Stock			Comprehensive			Membership
	Paid-in-capital			Deficit			Recapitalization			Loss			Interest

Balance December 31, 2002	$	176,436		$	(83,892	)	$	(189,589	)	$	(15,831	)	$	(112,876	)
Net income					3,014									3,014
Translation adjustment											622			622
Treasury stock acquired		(4	)											(4	)
Preferred stock dividend and accretion					(36	)								(36	)

Balance March 31, 2003	$	176,432		$	(80,914	)	$	(189,589	)	$	(15,209	)	$	(109,280	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FORM 10-Q
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
QUALITY DISTRIBUTION, LLC
(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

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 (The “Exchange Offer”), at which time QDI Inc. transferred all of its assets (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 results of operations for periods prior to the transfer represent the historical operating results for QDI Inc.

QD LLC and its subsidiaries are engaged primarily in truckload transportation of bulk chemicals in North America. The Company conducts a significant portion of its business through a network of company terminals, affiliates and independent owner-operators. Affiliates are independent companies, which enter into renewable one-year contracts with the Company. Affiliates are responsible for paying for their own power equipment (including debt service), fuel and other operating costs. Affiliates lease trailers from the Company. Owner-operators are independent contractors, who, through a contract with the Company, supply one or more tractors and drivers for the Company’s use. Contracts with owner-operators may be terminated by either party on short notice. The Company also charges affiliates and third parties for the use of tractors and trailers as necessary. In exchange for the services rendered, affiliates and owner-operators are generally paid a percentage of the revenues generated for each load hauled.

The accompanying unaudited condensed, consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation have been included.

Certain reclassifications have been made in the fiscal 2002 statements to conform to the 2003 presentation. Additionally, we reclassified our insurance subsidiary’s premium revenue and insurance loss expense to a gross basis from a net basis for 2002. The impact of those reclassifications increased other revenue and other operating expense by $568 thousand for the first quarter of 2002.

For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2002 included in the QDI Inc.’s annual report on Form 10-K.

Operating results for the first quarter ended March 31, 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year.

Discontinued Operations

Historical financial information contained herein has been adjusted to reflect the discontinued operations resulting from the sale of certain non-guarantor subsidiaries’ assets in the second quarter 2002. These subsidiaries consisted of the petroleum division and mining operation of Levy, and the internet load brokerage subsidiary of the Company (Bulknet).

The operations of the discontinued divisions for the first quarter of 2002 are as follows: (in thousands)

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	Three months ended
	March 31, 2002

Revenue	$	2,708
Operating expenses		2,943

Operating (loss)	$	(235	)

New Accounting Pronouncements:

Stock-Based Compensation

SFAS No. 123 “Accounting for Stock-Based Compensation, “ allows companies to measure compensation cost in connection with employees share option plans using a fair value based method or to continue to use an intrinsic value based method as defined by APB No. 25 “Accounting for Stock Issued to Employees, “ which generally does not result in a compensation cost. The Company accounts for stock-based compensation under APB 25, and does not recognize stock-based compensation expense upon the issuance of its stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. The following table illustrates the effect on net earnings and basic diluted earnings per share if the Company had recognized compensation expense upon issuance of the options for the three months ended March 31:


			2003			2002

Net income (loss) attributable to common stock or members interest (in thousands) as reported			$	2,978		$	(27,632	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects				—			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects				(38	)		(80	)

	Pro forma net income		$	2,940		$	(27,712	)
Earnings (loss) per common share:
	Basic and diluted - as reported		$	N/A		$	(13.83	)
		Basic and diluted - pro forma	$	N/A		$	(13.88	)

Goodwill And Other Intangible Assets

The Company conducted its initial test in accordance with the provisions of Financial Accounting Standard 142 “Goodwill and Other Intangible Assets” during the second quarter of 2002

In connection with the completion of the initial impairment test, the Company has restated its consolidated statements of operations for the period ended March 31, 2002. The following table presents the restated net loss (in thousands):


		Three months ended
		March 31,
		2002

Net loss:
	As reported	$	(3,045	)
	Cumulative effect of a change in accounting principle		(23,985	)

	As restated	$	(27,030	)

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In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement rescinds FASB Statement No.4, “Reporting Gains and Losses from Extinguishment of Debt, “and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement also rescinds FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends FASB Statement No. 13, “Account for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company’s management does not expect that the application of the provisions of this statement will have a material impact on the Company’s financial statements.

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. The Company does not anticipate any significant impact on its 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 are effective for us in the first calendar quarter of 2003. See Stock-Based Compensation within Footnote 1 for such disclosure.

2. COMPREHENSIVE INCOME:

Comprehensive income is as follows: (in thousands)


		Three months ended
		March 31,

		2003		2002

Net income (loss)		$	3,014	$	(27,030	)
Other comprehensive income (loss):
	Foreign currency translation adjustments		622		(79	)
	Unrealized gain (loss) on derivative instruments		—		933

Comprehensive income (loss)		$	3,636	$	(26,176	)</

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