Edgar Filing: QUALITY DISTRIBUTION INC

e10-q

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 SECURITY EXCHANGE ACT OF 1934.

For the quarterly period ended SEPTEMBER 30, 2001




		or




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

For the transition period from ____________________ to ____________________

Commission File Number: 0-24180

Quality Distribution, Inc.

(Exact name of registrant as specified in its charter)


Florida		59-3239073





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

(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. (Box with an X) Yes (Empty Ballot Box) No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. (Empty Ballot Box) Yes No

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 SEPTEMBER 30, 2001





(Common Stock, $.01 par value)		2,011,428

TABLE OF CONTENTS


PART 1 — FINANCIAL INFORMATION
	CONDENSED CONSOLIDATED BALANCE SHEETS
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	Notes to Condensed Consolidated Financial Statements
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II — OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 4. Submission of Matters to a Vote of Security Holders
	ITEM 6. Exhibits
		Reports on Form 8-K
Signatures
Bank Consent & Waiver

QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

INDEX


		Page No.

Part I	Financial Information




	Item 1 Financial Statements




	Condensed consolidated balance sheets – September 30, 2001 (unaudited) and December 31, 2000		3-4




	Condensed consolidated statements of operations – three months and nine months ended September 30, 2001 and 2000 (unaudited)		5




	Condensed consolidated statements of cash flows – nine months ended September 30, 2001 and 2000 (unaudited)		6




	Notes to condensed consolidated financial statements		7-23




	Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations




	Management's discussion and analysis of financial condition and results of operations		24-26




Part II	Other Information




	Item 1 Legal proceedings		27




	Item 4 Submission of matters to a vote of security holders		27




	Item 6 Exhibits




	Reports on Form 8-K		27




	Signatures		27

FORM 10-Q
PART 1 — FINANCIAL INFORMATION
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)


		September 30,			December 31,
		2001			2000
		(Unaudited)			*

ASSETS




Current Assets




	Cash	$	827		$	2,636




	Accounts receivable		109,403			104,534




	Allowance for doubtful accounts		(10,029	)		(9,779	)




	Current maturities of other receivables		1,087			518




	Inventories		1,681			1,786




	Prepaid expenses		4,069			7,391




	Prepaid tires		7,999			8,156




	Income tax receivable		350			350




	Other		950			650

	Total current assets		116,337			116,242




Property, plant and equipment			338,371			326,989




	Less — accumulated depreciation and amortization		(167,504	)		(151,473	)

			170,867			175,516




Intangibles and goodwill, net			150,208			153,668




Other Assets			9,109			7,647

		$	446,521		$	453,073

•

Condensed from audited financial statements

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

FORM 10-Q
PART 1 — FINANCIAL INFORMATION
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(continued)


		September 30,			December 31,
		2001			2000
		(Unaudited)			*

LIABILITIES AND STOCKHOLDERS EQUITY




Current Liabilities




	Current maturities of indebtedness	$	2,890		$	3,619




	Accounts payable and accrued expenses		63,911			63,757




	Independent contractors payable		8,455			7,563




	Other current liabilities		1,149			3,340




	Income tax payable		350			834

	Total current liabilities		76,755			79,113




Long term debt, less current maturities			283,195			273,100




Capital lease obligations, less current maturities			—			220




Subordinated debt			140,000			140,000




Environmental liabilities			38,666			39,873




Other long term obligations			7,387			7,834




Accrued loss and damage claims			1,903			3,092




Deferred tax			1,760			1,182




Minority interest in subsidiaries			1,833			4,433




Manditoraly redeemable preferred stock			14,965			13,882




Redeemable common stock (30,239 shares)			1,210			1,210




Stockholders’ equity (deficit)




	Common stock		20			20




	Additional paid-in-capital		105,656			105,656




	Treasury stock		(237	)		(32	)




	Accumulated deficit		(28,612	)		(22,212	)




	Stock recapitalization		(189,589	)		(189,589	)




	Other comprehensive loss		(6,505	)		(2,823	)




	Note receivable		(1,886	)		(1,886	)

	Total stockholders’ equity (deficit)		(121,153	)		(110,866	)

		$	446,521		$	453,073

•

Condensed from audited financial statements.

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

FORM 10-Q
PART 1 — FINANCIAL INFORMATION
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)


		Nine months ended						Three months ended
		September 30,						September 30,

		2001			2000			2001			2000

Operating Revenues




Transportation		$	351,382		$	390,546		$	118,158		$	125,495




Other			47,182			49,776			15,985			16,466

			398,564			440,322			134,143			141,961




Operating Expenses




Purchased transportation			229,103			248,831			77,417			80,970




Depreciation and amortization			26,350			28,238			8,772			9,733




Other operating expenses			117,929			135,354			39,082			44,058

	Operating income		25,182			27,899			8,872			7,200




Interest expense, net			29,552			30,210			10,490			10,007




Other income			(6	)		(54	)		(4	)		(9	)

	Loss before taxes		(4,364	)		(2,257	)		(1,614	)		(2,798	)




Income tax expense			845			3,431			135			2,946




Minority interest			—			226			—			76

Net loss			(5,209	)		(5,914	)		(1,749	)		(5,820	)




Preferred stock dividends and accretions			(1,191	)		(1,086	)		(397	)		(364	)

Net loss attributable to common shareholders		$	(6,400	)	$	(7,000	)	$	(2,146	)	$	(6,184	)

Per Share Data:




Basic and diluted loss per common share		$	(3.18	)	$	(3.48	)	$	(1.07	)	$	(3.07	)

	Weighted average shares outstanding		2,015			2,014			2,012			2,014

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

FORM 10-Q
PART 1 — FINANCIAL INFORMATION
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) — (In thousands)


		Nine months ended
		September 30,

		2001			2000

Cash provided by (used for)




Operating activities:




	Net Loss	$	(5,209	)	$	(5,914	)




	Adjustments for non cash charges		28,484			31,598




	Changes in assets and liabilities		(11,162	)		4,900

	Net cash provided by operating activities		12,113			30,584




Investing activities:




	Capital expenditures		(21,994	)		(14,750	)




	Proceeds from asset dispositions		1,975			3,506

	Net cash (used for) investing activities		(20,019	)		(11,244	)




Financing activities:




	Proceeds from issuance of debt		11,500			—




	Payment of debt obligation		(2,356	)		(17,124	)




	Issuance of common stock		—			169




	Purchase of preferred stock		(2,600	)		—




	Other		769			—

	Net cash provided by (used for) financing activities		7,313			(16,955	)

Net increase (decrease)in cash			(593	)		2,385




Effect of exchange rate changes on cash			(1,216	)		(237	)




Cash, beginning of period			2,636			1,050

Cash, end of period		$	827		$	3,198

Cash payments for:




	Interest	$	22,303		$	24,426




	Income taxes	$	604		$	225




Non cash activities:




	Preferred Stock Accretion	$	1,083		$	1,086




Unrealized gain or (loss) on derivative instruments		$	(3,475	)		—

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

FORM 10-Q
Item 1. Financial Statements
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying unaudited condensed, consolidated financial statements of Quality Distribution, Inc. (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 2000 statements to conform to the 2001 presentation.

For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2000, included in the Company’s Form 10-K dated March 27, 2001.

Operating results for the third quarter ended September 30, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year.

2. COMPREHENSIVE INCOME:

In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive Income” (“SFAS 130”). SFAS 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the stockholders’ equity section of the consolidated balance sheets for annual financial statements. The Company adopted SFAS 130 in 1998 and accordingly, Comprehensive Income is as follows:


		Nine Months Ended						Three Months Ended
		September 30,						September 30,

		2001			2000			2001			2000

Net Income or (loss)		$	(5,209	)	$	(5,914	)	$	(1,749	)	$	(5,820	)




Other comprehensive income (loss):




	Foreign currency translation adjustments		(207	)		(541	)		(120	)		(291	)




	Unrealized gain or (loss) on derivative instruments		(3,475	)		—			(1,702	)		—

Comprehensive income (loss)		$	(8,891	)		(6,455	)	$	(3,571	)	$	(6,111	)

FORM 10 — Q
ITEM 1 — Financial Statements
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)-(continued)

3. DERIVATIVES:

The Company utilizes derivative financial instruments to reduce its exposure to market risks from changes in interest rates and foreign exchange rates. The instruments primarily used to mitigate these risks are interest rate swaps and foreign exchange contracts. The Company is exposed to credit related losses in the event of nonperformance by counterparties to these financial instruments however, counterparties to these agreements are major financial institutions; and the risk of loss due to nonperformance is considered by management to be minimal. The Company does not hold nor issue interest rate swaps or foreign exchange contracts for trading purposes.

The Financial Accounting Standards Board (“FASB”) issued, then subsequently amended, Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, which became effective for the Company on January 1, 2001. Under SFAS No. 133, as amended, all derivative instruments (including certain derivative instruments embedded in other contracts) are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair value is recorded temporarily in equity, then recognized in earnings along with the related effects of the hedged items. Any ineffective portion of a hedge is reported in earnings as it occurs.

The Company currently has approximately $335.7 million of variable interest debt. The Company has entered into interest rate swap agreements designed as cash flow hedges of the Company’s portfolio of variable rate debt. The purpose of these swaps is to fix interest rates on variable rate debt and reduce certain exposures to interest rate fluctuations.

The notional amounts do not represent a measure of exposure of the Company. The Company will pay counterparties interest at a fixed rate ranging from 4.765% to 5.16%, and the counterparties will pay the Company interest at a variable rate equal to LIBOR. The LIBOR rate applicable to these agreements at September 30, 2001 was 2.61%. These agreements mature and renew every three months and expire at dates ranging from July 2, 2002 to September 22, 2002. A 10% fluctuation in interest rates would have a $1.8 million impact, net of interest rate swap agreements, on future earnings.

The nature of the Company’s business activities necessarily involves the management of various financial and market risks, including those related to changes in interest rates and currency exchange rates. The Corporation uses derivative financial instruments to mitigate or eliminate certain of those risks. The January 1, 2001 accounting changes described above affected only the pattern and the timing of the non-cash accounting recognition.

A reconciliation of current period changes in owners’ equity follows.


	Nine Months Ended			Three Months Ended
	September 30, 2001			September 30, 2001

(In thousands)




Balance beginning of period	$	337		$	(1,773	)




Current period declines in fair value		(5,061	)		(2,313	)




Reclassifications to earnings		1,249			611

Balance at end of period	$	(3,475	)		(3,475	)

Additional disclosures required by SFAS No. 133, as amended, are provided in the following paragraphs.

Hedges of Future Cash Flows

Per FASB 133, the ineffective portion of changes in fair values of hedge positions should be reported in earnings. All hedges were effective at September 30, 2001, and as such, there are no earnings reclassification at September 30, 2001, due to ineffective hedges. There were no amounts excluded from the measure of effectiveness in 2001 related to the hedge of future cash flows.

In 2001, $0.2 million, $0.4 million, and $0.6 million were reclassified to earnings during the first, second and third quarters respectively and recorded in interest expense. The $(3.5) million recorded in other comprehensive income at September 30, 2001 is expected to be reclassified to future earnings, contemporaneously with and primarily offsetting changes in interest expenses on floating-rate instruments. The actual amounts that will be reclassified to earnings over the next twelve months will vary from this amount as a result of changes in market conditions.

4. LONG TERM DEBT:

Our credit agreements include financial covenants which were modified June 4, 2001 as part of an amendment thereto. The new financial covenants are less restrictive than the original covenants and remain in effect for eight consecutive calendar quarters. A technical default occurred with respect to these covenants. A waiver has been obtained from our creditors in connection with this default.

The Company paid a fee of $1.1 million which will be amortized as interest expense for the covenant modification period. The interest rate on the credit agreement was also increased by .25%. The Company’s Form 8-K dated June 8, 2001 contains full details relative to this amendment.

5. 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 contain hazardous 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 along with audits conducted by our internal audit staff are required to address operations, safety training and procedures, equipment and grounds maintenance, emergency response capabilities, and wastewater management. We 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 wholly-owned subsidiary, Quality Carriers, Inc., is staffed with environmental experts who manage our environmental exposure relating to historical operations and develop policies and procedures, including periodic audits of our terminals and tank cleaning facilities, 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 CERCLA or 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,” 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. See certain considerations — Environmental Risk Factors for a discussion of certain risks of our being associated with transporting hazardous substances.

CLC is 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.

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. 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 with the state and federal trustees that resolved the natural resource damages claims. In April 2001 the Company paid $4.2 million representing settlement in full of this consent decree. CLC has also entered into an agreement in principle to reimburse the EPA’s past costs in investigating and overseeing activities at the site over a three-year period for which we have established reserves. 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.

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 a Consent Decree with the EPA which required CLC to

	(1)		pay the EPA for installation of an alternate water line to provide water to area residents;

	(2)		perform an interim groundwater remedy at the site; and

	(3)		conduct soil remediation.


	U.S. 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 hydro-geologic study, and has commenced activities for construction of a groundwater treatment plant to pump and treat groundwater. The EPA anticipates that CLC will operate the plant for about five years, at which time the EPA will evaluate groundwater conditions and determine whether a final groundwater remedy is necessary. Field sampling for soil remediation recently commenced. 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 40 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 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 have established reserves for liabilities

associated with the Helen Kramer Landfill, CLC’s facility at Tonawanda, New York and CLC’s former facility in Putnam County.

6. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001 the Financial Accounting Standards Board (FASB) issued SFAS No. 141 Business Combinations and SFAS No. 142 Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 will be adopted by the Company on January 1, 2002. We expect the adoption of these accounting standards will have the impact of reducing our amortization of goodwill and intangibles commencing January 1, 2002; however, impairment reviews may result in future periodic write-downs.

7. GUARANTOR SUBSIDIARIES:

The 10% Series B Senior Subordinated Notes issued in June 1998 and due 2006 are unconditionally guaranteed on a senior unsecured basis pursuant to guarantees by all the Company’s direct and indirect domestic subsidiaries, except Bulknet (“The Guarantors”).

The Company conducts all of its business through and derives virtually all its income from its subsidiaries. Therefore, the Company’s ability to make required principal and interest payments with respect all to the Company’s debt depends on the earnings of subsidiaries and its ability to receive funds from its subsidiaries. The subsidiary guarantors are wholly owned subsidiaries of the Company and have fully and unconditionally guaranteed the Notes on a joint and several basis.

The Company has not presented separate financial statements and other disclosures concerning subsidiary guarantors because management has determined such information is not material to the holders of the Notes.

The following condensed consolidating financial information presents:

	1.		Balance Sheets as of September 30, 2001 and December 31, 2000.

	2.		Statements of Operations for the three months ended September 30, 2001 and 2000. 3. Statements of Operations for the nine months ended September 30, 2001 and 2000.

	4.		Statements of Cash Flows for the nine months ended September 30, 2001 and 2000.

	5.		The parent company and combined guarantor subsidiaries.

	6.		Elimination entries necessary to consolidate the parent company and all its subsidiaries.

FORM 10-Q
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2001
(Unaudited)
(In thousands)


						Non
				Guarantor		Guarantor		Elimin-			Consol-
		Parent		Subs		Subs		ations			idated

ASSETS




Current Assets




	Cash and cash equivalents	$	—	$	61	$	766	$	—		$	827




	Accounts receivable, net		—		98,299		1,075		—			99,374




	Inventories		—		1,464		217		—			1,681




	Prepaid expense and other Current assets		—		13,831		624		—			14,455

	Total Current Assets		—		113,655		2,682		—			116,337




	Property and equipment, net		—		153,764		17,103		—			170,867




	Intangibles & goodwill, net		—		149,375		833		—			150,208




	Other assets		100,000		9,105		4		(100,000	)		9,109




	Investment in subsidiaries		221,107		—		—		(221,107	)		—

		$	321,107	$	425,899	$	20,622	$	(321,107	)	$	446,521

FORM 10-Q
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2001
(Unaudited) — (In thousands, continued)


					Guarantor			Non-Guaran-						Consol-
		Parent			Subs			tor Subs			Elim's			idated

Current Liabilities




	Current maturities of indebtedness	$	2,890		$	—		$	—			—		$	2,890




	Accounts payable and accrued expense		—			62,027			1,884			—			63,911




	Inter-company					(919	)		919




Independent contractors payable			—			8,594			(139	)		—			8,455




	Other current liabilities		—			1,149			—			—			1,149




	Income tax payable		—			178			172			—			350

	Total Current Liabilities		2,890			71,029			2,836			—			76,755




Bank debt, less current maturities			283,195			—			—			—			283,195




Subordinated debt, less Current maturities			140,000			100,000			—			(100,000	)		140,000




Other long term liabilities			—			7,387			—			—			7,387




Environmental liabilities			—			38,666			—			—			38,666




Deferred income taxes			—			(539	)		2,299			—			1,760




Accrued loss and damage claims			—			1,903			—			—			1,903

	Total liabilities	$	426,085		$	218,446		$	5,135		$	(100,000	)	$	549,666




Minority interest in subs			—			1,833			—			—			1,833




Mandatorily redeemable preferred stock			14,965			—			—			—			14,965




Redeemable common stock			1,210			—			—			—			1,210




Stockholders’ Equity




	Common stock and Additional paid-in-capital		105,676			145,381			15,082			(160,463	)		105,676




	Retained earnings		(28,612	)		60,239			1,487			(61,726	)		(28,612	)




	Stock recapitalization		(189,589	)		—			(55	)		55			(189,589	)




	Treasury stock		(237	)		—			—			—			(237	)




	Other stockholders’ equity		(6,505	)		—			(1,027	)		1,027			(6,505	)




	Note receivable		(1,886	)		—			—			—			(1,886	)

	Total stockholders’ equity or (deficit)		(121,153	)		205,620			15,487			(221,107	)		(121,153	)

		$	321,107		$	425,899		$	20,622		$	(321,107	)	$	446,521

FORM 10-Q
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
(Unaudited)
(In thousands)


				Guarantor		Non-Guaran-					Consol-
		Parent		Subs		tor Subs		Elim's			idated*

ASSETS




Current Assets




	Cash and cash equivalents	$	—	$	2,469	$	167	$	—		$	2,636




	Accounts receivable, net		—		85,847		9,426		—			95,273




	Inventories		—		1,528		258		—			1,786




	Prepaid expenses and other current assets		—		15,889		658		—			16,547

	Total Current Assets		—		105,733		10,509		—			116,242




	Property and equipment, net		—		154,065		21,451		—			175,516




	Intangibles & goodwill, net		—		152,748		920		—			153,668




	Other assets		100,000		7,643		4		(100,000	)		7,647




	Investment in subsidiaries		221,098		—		—		(221,098	)		—

		$	321,098	$	420,189	$	32,884	$	(321,098	)	$	453,073

•

Condensed from audited financial statements.

FORM 10-Q
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
(Unaudited, in thousands, continued)


					Guarantor			Non-Guaran-						Consol-
		Parent			Subs			tor Subs			Elim's			idated*

Current Liabilities




	Current maturities of indebtedness	$	3,619		$	—		$	—			—		$	3,619




	Accounts payable and accrued expenses		—			66,782			315			—			67,097




	Inter Company		—			(14,225	)		14,225			—			—




	Independent contractors payable		—			7,497			66			—			7,563




	Other current liabilities		—			—			—			—			—




	Income tax payable		—			505			329			—			834

	Total Current Liabilities		3,619			60,559			14,935			—			79,113




Bank debt, less current maturities			273,253			—			67			—			273,320




Subordinated debt			140,000			—			—			—			140,000




Environmental liabilities			—			39,873			—			—			39,873




Other long term liabilities			—			110,926			—			(100,000	)		10,926




Deferred income taxes			—			(1,173	)		2,355			—			1,182




Minority interest in subs			—			4,433			—			—			4,433




Mandatorily redeemable preferred stock			13,882			—			—			—			13,882




Redeemable common stock			1,210			—			—			—			1,210




Stockholders’ Equity




	Common stock and Additional paid-in-capital		105,676			142,963			15,082			(158,045	)		105,676




	Retained earnings		(22,212	)		62,608			1,320			(63,928	)		(22,212	)




	Treasury stock		(32	)		—			—			—			(32	)




	Stock recapitalization		(189,589	)		—			(55	)		55			(189,589	)




	Other stockholders’ equity		(2,823	)		—			(820	)		820			(2,823	)




	Note receivable		(1,886	)		—			—			—			(1,886	)

	Total stockholders’ equity or (deficit)		(110,866	)		205,571			15,527			(221,098	)		(110,866	)

		$	321,098		$	420,189		$	32,884		$	(321,098	)	$	453,073

•

Condensed from audited financial statements.

FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DISTRIBUTION, INC. AND SUBS CONDENSED CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited) — (In thousands)


				Guarantor			Non-Guaran-					Consol-
	Parent			Subs			tor Subs		Elim's			idated

Operating Revenues




Transportation	$	—		$	112,176		$	5,982	$	—		$	118,158




Other		—			15,606			379		—			15,985

		—			127,782			6,361		—			134,143




Operating Expenses




Purchased transportation		—			76,900			517		—			77,417




Depreciation and amortization		—			7,986			786		—			8,772




Other operating expenses		—			34,471			4,611		—			39,082

Operating income (loss)		—			8,425			447		—			8,872




Interest expense, net		10,490			—			—		—			10,490




Other (income) expense		—			(4	)		—		—			(4	)




Equity in earnings (loss) of subsidiaries		5,355			—			—		(5,355	)		—

Income (loss) before taxes		(5,135	)		8,429			447		(5,355	)		(1,614	)




Income taxes		(3,386	)		3,456			65		—			135




Minority interest		—			—			—		—			—

Net Income or (loss)	$	(1,749	)	$	4,973		$	382	$	(5,355	)	$	(1,749	)


				Guarantor			Non-Guaran-						Consol-
	Parent			Subs			tor Subs			Elim's			idated

Operating Revenues




Transportation	$	—		$	118,359		$	7,136		$	—		$	125,495




Other		—			16,219			247			—			16,466

		—			134,578			7,383			—			141,961




Operating Expenses




Purchased transportation		—			80,196			774			—			80,970




Depreciation and amortization		—			8,778			955			—			9,733




Other operating expenses		—			38,383			5,675			—			44,058

Operating income (loss)		—			7,221			(21	)		—			7,200




Interest expense, net		9,960			—			47			—			10,007




Other (income) expense		—			(9	)		—			—			(9	)




Equity in earnings (loss) of subsidiaries		4,043			—			—			(4,043	)		—

Income (loss) before taxes		(5,917	)		7,230			(68	)		(4,043	)		(2,798	)




Income taxes		(97	)		2,964			79			—			2,946




Minority interest		—			76			—			—			76

Net Income or (loss)	$	(5,820	)	$	4,190		$	(147	)	$	(4,043	)	$	(5,820	)

FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DISTRIBUTION, INC. AND SUBS CONDENSED CONSOLIDATING STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited) — (In thousands)


					Guarantor			Non-Guaran-						Consol-
		Parent			Subs			tor Subs			Elim's			idated

Operating Revenues




Transportation		$	—		$	333,371		$	18,011		$	—		$	351,382




Other			—			45,964			1,218			—			47,182

			—			379,335			19,229			—			398,564




Operating Expenses




Purchased transportation			—			226,959			2,144			—			229,103




Depreciation and amortization			—			23,818			2,532			—			26,350




Other operating expenses			—			103,737			14,192			—			117,929

Operating income (loss)			—			24,821			361			—			25,182




Interest expense, net			29,552			—			—			—			29,552




Other expense			—			(4	)		(2	)		—			(6	)




Equity in earnings (loss) of subsidiaries			14,815			—			—			(14,815	)		—

Income (loss) before taxes			(14,737	)		24,825			363			(14,815	)		(4,364	)




Income taxes			(9,528	)		10,178			195			—			845

	Net income (loss)		(5,209	)		14,647			168			(14,815	)		(5,209	)


				Guarantor			Non-Guaran-					Consol-
	Parent			Subs			tor Subs		Elim's			idated

Operating Revenues




Transportation	$	—		$	368,856		$	21,690	$	—		$	390,546




Other		—			49,191			585		—			49,776

		—			418,047			22,275		—			440,322




Operating Expenses




Purchased transportation		—			246,409			2,422		—			248,831




Depreciation and amortization		—			25,343			2,895		—			28,238




Other operating expenses		—			119,170			16,184		—			135,354

Operating income (loss)		—			27,125			774		—			27,899




Interest expense, net		29,889			—			321		—			30,210




Other expense		—			(54	)		—		—			(54	)




Equity in earnings (loss) of subsidiaries		16,014			—			—		(16,014	)		—

Income (loss) before taxes		(13,875	)		27,179			453		(16,014	)		(2,257	)




Income taxes		(7,961	)		11,143			249		—			3,431




Minority Interest		—			226			—		—			226

Net income (loss)	$	(5,914	)	$	15,810		$	204	$	(16,014	)	$	(5,914	)

FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 (Unaudited) — (In thousands)


					Guarantor			Non-Guaran-						Consol-
		Parent			Subs			tor Subs			Elim's			idated

Cash provided by (used for)




Operating activities:




Net income (loss)		$	(5,209	)	$	14,647		$	168		$	(14,815	)	$	(5,209	)




Adjustments for non cash charges			5,209			20,828			2,447			—			28,484




Changes in assets/liabilities			—			(22,843	)		(3,134	)		14,815			(11,162	)

Net cash provided by operating activities			—			12,632			(519	)		—			12,113




Investing activities:




	Capital expenditures		—			(21,250	)		(744	)		—			(21,994	)




	Proceeds from asset dispositions		—			47			1,928			—			1,975

Net cash provided by (used for) investing activities			—			(21,203	)		1,184			—			(20,019	)




Financing activities:




Proceeds from issuance of long term debt			11,500			—			—			—			11,500




Payment of obligations			(2,291	)		—			(65	)		—			(2,356	)




Issuance of common stock			—			—			—			—			—




Redemption of preferred stock			(2,600	)		—			—			—			(2,600	)




Other			—			769			—			—			769




Net change in intercompany balances			(6,609	)		6,609			—			—			—

	Net cash provided by financing activities		—			7,378			(65	)		—			7,313

Net increase (decrease) in cash			—			(1,193	)		600			—			(593	)




Effect of exchange rate changes on cash			—			(1,215	)		(1	)		—			(1,216	)




Cash, beginning of period			—			2,469			167			—			2,636

Cash, end of period		$	—		$	61		$	766		$	—		$	827


					Guarantor			Non-Guaran-						Consol-
		Parent			Subs			tor Subs			Elim's			idated

Cash provided by (used for)




Operating activities:




Net income (loss)		$	(5,914	)	$	15,810		$	204		$	(16,014	)	$	(5,914	)




Adjustments for non cash charges			5,914			23,054			2,630			—			31,598




Changes in assets/liabilities			—			(20,501	)		9,387			16,014			4,900

Net cash provided by operating activities			—			18,363			12,221			—			30,584




Investing activities:




	Capital expenditures		—			(11,427	)		(3,323	)		—			(14,750	)




	Proceeds from asset dispositions		—			2,672			834			—			3,506

Net cash provided by (used for) investing activities			—			(8,755	)		(2,489	)		—			(11,244	)




Financing activities:




Proceeds from issuance of long term debt			10,499			—			(10,499	)		—			—




Payment of obligations			(17,415	)		—			291			—			(17,124	)




Issuance of common stock			169			—			—			—			169




Redemption of preferred stock			—			—			—			—			—




Other			—			—			—			—			—




Net change in intercompany balances			6,747			(6,747	)		—			—			—

	Net cash provided by financing activities		—			(6,747	)		(10,208	)		—			(16,955	)

Net increase (decrease) in cash			—			2,861			(476	)		—			2,385




Effect of exchange rate changes on cash			—			(237	)		—			—			(237	)




Cash, beginning of period			—			149			901			—			1,050

Cash, end of period		$	—		$	2,773		$	425		$	—		$	3,198

FORM 10-Q
PART 1 — FINANCIAL INFORMATION
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2001 COMPARED TO THE THIRD QUARTER 2000

The Company’s operating results are affected by shipments for the bulk chemical industry. 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. The Company also participates in the shipment of bulk food products through its food-grade division. The volumes of food products and certain other consumer products tend to be subject to fewer fluctuations due to swings in economic activity.

For the quarter ended September 30, 2001, revenues totaled $134.1 million, a 5.5% decrease from revenues of $142.0 million for the same period in 2000. This decrease is attributable to the continued soft demand for bulk transportation services which began in the third quarter of 2000, and continued throughout the third quarter of 2001 in the United States and Canada.

The decline in demand in the last several quarters is reflective of the softness in the manufacturing sector over the same period. The decline in base business demand, accompanied by flat pricing environment were offset partially by growth in new business as a result of successful competitive bids.

For the quarter ended September 30, 2001, operating income totaled $8.9 million, an increase of $1.7 million compared to $7.2 million for the same period in 2000. This increase in operating income was due to a $2.1 million restructuring charge taken in 2000, offset somewhat by a 0.7 special charge taken in 2001 related to employee reductions. Increases in natural gas prices led to significantly higher utility expense in 2001 versus 2000. These higher utility rates were partially offset by surcharges at some tank wash facilities.

The operating ratio for the quarter ended September 30, 2001 was 93.4% compared to 94.9% for the same period in 2000. This improvement was attributable to the reasons discussed above.

Net interest expense increased to $10.5 million in the quarter ended September 30, 2001, from $10.01 million in the quarter ended September 30, 2000. This increase is the result of the modification of our bank loan agreement.

The pretax loss for the quarter ended September 30, 2001 totaled $1.6 million compared to a $2.8 million loss for the same period in 2000.

Income tax expense decreased from $2.9 million to $0.1 million due to the relative impact of non-deductible items on the different pre tax amounts and the non-recognition of tax benefits.

For the quarter ended September 30, 2001, the Company’s net loss was $1.7 million compared with a $5.8 million loss for the same period last year.

Basic weighted average shares decreased to 2,012,000 in the third quarter of 2001 from 2,014,000 at September 30, 2000. As of September 30, 2001, a total of 2,011,428 shares were outstanding.

FORM 10-Q
PART 1 — FINANCIAL INFORMATION
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST NINE MONTHS 2001 COMPARED TO THE FIRST NINE MONTHS 2000

For the nine months ended September 30, 2001, revenues totaled $398.6 million, a 9.5% decrease from revenues of $440.3 million for the same period in 2000. This decrease is attributable to the continued decline in demand for bulk transportation services which began in the third quarter of 2000 and has since continued to intensify throughout the United States and Canada.

For the nine months ended September 30, 2001, operating income totaled $25.2 million, a decrease of $2.7 million compared to $27.9 million for the same period in 2000. This decrease was primarily the result of the overall decrease in transportation revenue. Proportional reductions occurred in purchased transportation, wages and fuel. Offsetting these reductions were additional start up costs for new business, costs associated with the continuing conversion of Company terminals to affiliate operations, higher fleet maintenance costs and continued higher than anticipated insurance payments on older claims. Additionally, increases in natural gas prices led to higher utility expense favorably offset by surcharges at some tank wash facilities.

The operating ratio for the nine months ended September 30, 2001 was 93.7% compared to 93.7% for the same period in 2000.

Net interest expense decreased to $29.6 million in the nine months ended September 30, 2001, from $30.2 million in the nine months ended September 30, 2000. This decrease is the result of lower interest rates on the variable interest portion of the Company’s debt, offset by increases due to the modification of our bank agreement.

The pretax loss for the nine months ended September 30, 2001 totaled $4.4 million compared to a $2.3 million loss for the same period in 2000.

Income tax expense decreased from $3.4 million to $0.8 million due to the relative impact of non-deductible items on the different pretax amounts and the non-recognition of tax benefits.

For the nine months ended September 30, 2001, the Company’s net loss was $5.2 million compared with a $5.9 million loss for the same period last year.

Basic weighted average shares increased to 2,015,000 in the third quarter of 2001 from 2,014,000 at September 30, 2000. As of September 30, 2001, a total of 2,011,428 shares were outstanding.

FORM 10-Q

PART 1 — FINANCIAL INFORMATION

QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

Liquidity and Capital Resources

The Company’s primary sources of liquidity are funds provided by operations and borrowings under various credit arrangements with financial institutions.

Net cash provided by operating activities totaled $12.1 million for the nine months ended September 30, 2001, versus $30.6 million for the same period in 2000. This difference is due largely to the receipt of insurance proceeds offset by payments against environmental and other accruals in the first quarter of 2000, and the timing of payments for environmental and accrued expenses in 2001.

Cash used by investing activities totaled $20.0 million for the nine month period ended September 30, 2001, compared to $11.2 million used for the comparable 2000 period. Capital was used primarily to acquire replacement revenue equipment and for significant upgrades to the Company’s computer infrastructure and new dispatch system in 2001.

Cash provided by financing activities totaled $7.3 million during the nine month period ended September 30, 2001, compared to $17.0 million used in the comparable period in 2000. This difference is due to the increased proceeds from borrowing in 2001.

The Company has a $285,000,000 credit facility with a group of banks maturing at various times from June of 2004 to 2006. Additionally, the Company has a revolving credit facility in the amount of $57.6 million until June 9, 2004. As of September 30, 2001, the Company has available $26.3 million under this revolving credit facility. The Company also has $100.0 million in 10% senior subordinated notes due in 2006 and $40.0 million in floating interest rate subordinated term securities also due in 2006.

Our credit agreements include financial covenants, recently modified, which require minimum or maximum ratios to be maintained. As of September 30, 2001, a technical default existed relative to one of these covenants. The Company has obtained a waiver from the lendors with respect to this default. 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 risk factors.

The Company’s management believes that borrowings under the line of credit, together with available cash and internally generated funds, will be sufficient to fund QDI’s continued growth and meet its working capital requirements for the foreseeable future.

FORM 10 -Q

PART 1 — FINANCIAL INFORMATION

Forward Looking Statements And Risk Factors

Some of the statements contained in this report discuss future expectations and contain projections of results of operations or financial condition or state other “forward-looking” information. Those 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. Please see the risk factors set forth in the Company’s 2000 Form 10-K which identify important risk factors such as the Company’s high leverage, dependence on affiliates and owner-operators, environmental risks and claims exposure.

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 general economic conditions, cost and availability of diesel fuel, adverse weather conditions and competitive rate fluctuations. Future financial and operating results of QDI may fluctuate as a result of these and other risk factors as detailed from time to time in company filings with the Securities and Exchange Commission.

FORM 10-Q

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

Reference is made to Item 2 on page 17 of the Company’s Form 10-K for the year ended December 31, 2000. There have been no material changes in the Company’s legal proceedings since this filing.

ITEM 4. Submission of Matters to a Vote of Security Holders

None

ITEM 6. (a) Exhibits:


Exhibit No.		Description

2.6		Bank Consent and Waiver

(b) Reports on Form 8-K: None

Signatures


		QUALITY DISTRIBUTION, INC.


November 13, 2001		/s/ THOMAS L. FINKBINER

		THOMAS L. FINKBINER, (CEO, PRESIDENT) (DULY AUTHORIZED OFFICER)

November 13, 2001		/s/ DENNIS R. FARNSWORTH

		DENNIS R. FARNSWORTH (SR.VP.FINANCE) (PRINCIPAL FINANCIAL OFFICER)

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