-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Std2Ryt3SN0nr061/P33zmODhjzWniKTJk5sgvWrU1+bIy5VuLehllB9oTCT9fzp WlNTIiR4NUbXHtDzZt8k1Q== 0001193125-08-109478.txt : 20080509 0001193125-08-109478.hdr.sgml : 20080509 20080509141049 ACCESSION NUMBER: 0001193125-08-109478 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080509 DATE AS OF CHANGE: 20080509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUALITY DISTRIBUTION INC CENTRAL INDEX KEY: 0000922863 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 593239073 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24180 FILM NUMBER: 08817625 BUSINESS ADDRESS: STREET 1: 4041 PARK OAKS BOULEVARD STREET 2: SUITE 200 CITY: TAMPA STATE: FL ZIP: 33610 BUSINESS PHONE: 8136305826 MAIL ADDRESS: STREET 1: 4041 PARK OAKS BOULEVARD STREET 2: SUITE 200 CITY: TAMPA STATE: FL ZIP: 33610 FORMER COMPANY: FORMER CONFORMED NAME: MTL INC DATE OF NAME CHANGE: 19940509 10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2008

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: 000-24180

 

 

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.)

 

4041 Park Oaks Boulevard, Suite 200, Tampa, FL   33610
(Address of Principal Executive Offices)   (Zip Code)

813-630-5826

(Registrant’s telephone number, including area 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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    (Do not check if a smaller reporting company) Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

As of May 1, 2008, the registrant had 19,252,689 outstanding shares of Common Stock, no par value, outstanding.

 

 

 


Table of Contents

QUALITY DISTRIBUTION, INC.

CONTENTS

 

PART I — FINANCIAL INFORMATION

   1

ITEM 1 — FINANCIAL STATEMENTS

   1

Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007

   1

Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007

   2

Consolidated Statements of Shareholders’ Equity/(Deficit) for the Three Months Ended March 31, 2008 and 2007

   3

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007

   4

Notes to Consolidated Financial Statements

   5

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

   24

ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk

   41

ITEM 4 — Controls and Procedures

   42

PART II — OTHER INFORMATION

   43

ITEM 1 — Legal Proceedings

   43

ITEM 1A — Risk Factors

   43

ITEM 2 — Unregistered Sale of Equity Securities and Use of Proceeds

   44

ITEM 3 — Defaults Upon Senior Securities

   44

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

   44

ITEM 5 — Other Information

   44

ITEM 6 — Exhibits

   44

Signatures

   45


Table of Contents

QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

Consolidated Statements of Operations

(Unaudited — in 000’s, Except Per Share Amounts)

 

     Three months ended
March 31,
 
     2008     2007  

OPERATING REVENUES:

    

Transportation

   $ 149,259     $ 142,073  

Other service revenue

     26,745       16,968  

Fuel surcharge

     32,497       19,054  
                

Total operating revenues

     208,501       178,095  
                

OPERATING EXPENSES:

    

Purchased transportation

     119,972       115,947  

Compensation

     28,604       19,669  

Fuel, supplies and maintenance

     30,133       16,124  

Depreciation and amortization

     4,896       4,175  

Selling and administrative

     9,248       6,466  

Insurance claims

     5,562       6,638  

Taxes and licenses

     1,217       781  

Communication and utilities

     3,616       2,632  

(Gain) loss on disposal of property and equipment

     (544 )     209  
                

Total operating expenses

     202,704       172,641  
                

Operating income

     5,797       5,454  

Interest expense

     (9,151 )     (7,677 )

Interest income

     117       199  

Other expense

     (10 )     (37 )
                

Loss before income taxes

     (3,247 )     (2,061 )

Benefit from income taxes

     (1,328 )     (1,888 )
                

Net loss

   $ (1,919 )   $ (173 )
                

PER SHARE DATA:

    

Net loss per common share

    

Basic

   $ (0.10 )   $ (0.01 )
                

Diluted

   $ (0.10 )   $ (0.01 )
                

Weighted-average number of shares

    

Basic

     19,064       19,348  
                

Diluted

     19,064       19,348  
                

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

 

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QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In 000’s)

Unaudited

 

     March 31,
2008
    December 31,
2007
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 2,695     $ 9,711  

Accounts receivable, net

     105,952       99,081  

Prepaid expenses

     11,502       8,150  

Deferred tax asset, net

     20,483       20,483  

Other

     6,532       6,258  
                

Total current assets

     147,164       143,683  

Property and equipment, net

     127,231       121,992  

Goodwill

     172,790       173,575  

Intangibles, net

     23,932       24,167  

Non-current deferred tax asset, net

     17,385       16,203  

Other assets

     13,356       14,356  
                

Total assets

   $ 501,858     $ 493,976  
                

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Current maturities of indebtedness

   $ 1,895     $ 413  

Current maturities of capital lease obligations

     1,564       1,451  

Accounts payable

     16,604       17,428  

Affiliates and independent owner-operators payable

     17,568       12,597  

Accrued expenses

     30,167       25,957  

Environmental liabilities

     4,093       4,751  

Accrued loss and damage claims

     11,136       13,438  

Income tax payable

     —         555  
                

Total current liabilities

     83,027       76,590  

Long-term indebtedness, less current maturities

     348,156       343,575  

Capital lease obligations, less current maturities

     3,747       3,832  

Environmental liabilities

     6,418       6,418  

Accrued loss and damage claims

     16,657       18,474  

Other non-current liabilities

     16,116       15,954  
                

Total liabilities

     474,121       464,843  
                

Commitments and contingencies - Note 8

    

Minority interest in subsidiary

     1,833       1,833  

SHAREHOLDERS’ EQUITY

    

Common stock, no par value; 29,000 shares authorized; 19,410 issued and 19,253 oustanding at March 31, 2008 and 19,334 issued and 19,176 outstanding at December 31, 2007, respectively

     362,039       361,617  

Treasury stock, 158 shares at March 31, 2008 and December 31, 2007, respectively

     (1,564 )     (1,564 )

Accumulated deficit

     (128,065 )     (126,146 )

Stock recapitalization

     (189,589 )     (189,589 )

Accumulated other comprehensive loss

     (16,647 )     (16,748 )

Stock subscriptions receivable

     (270 )     (270 )
                

Total shareholders’ equity

     25,904       27,300  
                

Total liabilities, minority interest and shareholders’ equity

   $ 501,858     $ 493,976  
                

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

 

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QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity/(Deficit)

For the Three Months Ended March 31, 2008 and 2007

Unaudited (In 000’s)

 

     Shares
of
Common
Stock
   Shares
of
Treasury
Stock
    Common
Stock
    Treasury
Stock
    Accumulated
Deficit
    Stock
Recapitalization
    Accumulated
Other
Comprehensive
Loss
    Stock
Purchase
Warrants
    Stock
Subscription
Receivables
    Total
Shareholders’
Equity/
(Deficit)
 

Balance, December 31, 2006

   19,210    (172 )   $ 359,995     $ (1,527 )   $ (118,255 )   $ (189,589 )   $ (18,531 )   $ 21     $ (340 )   $ 31,774  
                                                                           

Net loss

   —      —         —         —         (173 )     —         —         —         —         (173 )

Issuance of restricted stock

      11       (25 )     25       —         —         —         —         —         —    

Forfeiture of restricted stock

   —      (1 )     (6 )     (6 )     6       —         —         —         —         (6 )

Amortization of restricted stock

   —      —         70       —         —         —         —         —         —         70  

Amortization of stock units

   —      —         8       —         —         —         —         —         —         8  

Amortization of non-employee options

   —      —         31       —         —         —         —         —         —         31  

Amortization of stock options

   —      —         298       —         —         —         —         —         —         298  

Stock warrant exercise

   79    —         21       —         —         —         —         (21 )     —         —    

FIN 48 Adjustment

   —      —         —         —         (328 )     —         —         —         —         (328 )

Translation adjustment, net of a deferred tax provision of nil

   —      —         —         —         —         —         (4 )     —         —         (4 )

Balance, March 31, 2007

   19,289    (162 )   $ 360,392     $ (1,508 )   $ (118,750 )   $ (189,589 )   $ (18,535 )   $ —       $ (340 )   $ 31,670  
                                                                           

Balance, December 31, 2007

   19,334    (158 )   $ 361,617     $ (1,564 )   $ (126,146 )   $ (189,589 )   $ (16,748 )   $ —       $ (270 )   $ 27,300  

Net loss

   —      —         —         —         (1,919 )     —         —         —         —         (1,919 )

Issuance of restricted stock

   76    —         —         —         —         —         —         —         —         —    

Amortization of restricted stock

   —      —         110       —         —         —         —         —         —         110  

Amortization of non-employee options

   —      —         31       —         —         —         —         —         —         31  

Amortization of stock options

   —      —         281       —         —         —         —         —         —         281  

Amortization of prior service costs, net of a tax provision of nil

   —      —         —         —         —         —         18       —         —         18  

Translation adjustment, net of a tax provision of nil

   —      —         —         —         —         —         83       —         —         83  
                                                                           

Balance, March 31, 2008

   19,410    (158 )   $ 362,039     $ (1,564 )   $ (128,065 )   $ (189,589 )   $ (16,647 )   $ —       $ (270 )   $ 25,904  
                                                                           

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

 

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QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited — In 000’s)

 

     Three Months Ended
March 31,
 
     2008     2007  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (1,919 )   $ (173 )

Adjustments to reconcile to net cash and cash equivalents used in operating activities:

    

Deferred income tax benefit

     (1,182 )     (1,764 )

Depreciation and amortization

     4,896       4,175  

Bad debt expense

     132       263  

(Gain) loss on disposal of property and equipment

     (544 )     209  

Stock based compensation

     422       401  

Amortization of deferred financing costs

     726       450  

Amortization of bond discount

     275       60  

Minority dividends

     36       36  

Changes in assets and liabilities:

    

Accounts and other receivables

     (5,573 )     (7,265 )

Prepaid expenses

     (3,352 )     (4,686 )

Other assets

     477       508  

Accounts payable

     (1,043 )     (2,780 )

Accrued expenses

     4,214       2,717  

Environmental liabilities

     (658 )     8  

Accrued loss and damage claims

     (4,119 )     2,126  

Affiliates and independent owner-operators payable

     4,971       4,024  

Other liabilities

     (39 )     1,238  

Current income taxes

     (625 )     —    
                

Net cash used in operating activities

     (2,905 )     (453 )
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (5,306 )     (2,421 )

Acquisition of businesses and assets

     (1,319 )     —    

Proceeds from sales of property and equipment

     2,534       616  
                

Net cash used in investing activities

     (4,091 )     (1,805 )
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from issuance of long-term debt

     1,049       —    

Principal payments on long-term debt

     (540 )     (350 )

Principal payments on capital lease obligations

     (354 )     (300 )

Proceeds from revolver

     28,900       —    

Payments on revolver

     (28,830 )     —    

Payments on acquisition notes

     (224 )     —    

Deferred financing costs

     (187 )     —    

Change in book overdraft

     212       162  

Minority dividends

     (36 )     (36 )
                

Net cash used in financing activities

     (10 )     (524 )
                

Effect of exchange rate changes on cash

     (10 )     15  
                

Net decrease in cash and cash equivalents

     (7,016 )     (2,767 )

Cash and cash equivalents, beginning of period

     9,711       6,841  
                

Cash and cash equivalents, end of period

   $ 2,695     $ 4,074  
                

Supplemental Disclosure of Cash Flow Information

    

Cash paid during the year for:

    

Interest

   $ 4,764     $ 4,357  
                

Income Taxes

     171       441  
                

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

 

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QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

Quality Distribution, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

In this quarterly report, unless the context otherwise requires or indicates, (i) the terms the “Company,” “our Company,” “Quality Distribution,” “QDI,” “we,” “us” and “our” refer to Quality Distribution, Inc. and its consolidated subsidiaries and their predecessors, (ii) the terms “Quality Distribution, LLC” and “QD LLC” refer to our wholly owned subsidiary, Quality Distribution, LLC, a Delaware limited liability company, and its consolidated subsidiaries and their predecessors, (iii) the term “QD Capital” refers to our wholly owned subsidiary, QD Capital Corporation, a Delaware corporation and (iv) the term “Boasso” refers to our wholly owned subsidiary, Boasso America Corporation, a Louisiana corporation.

We are primarily engaged in truckload transportation of bulk chemicals and also engaged in ISO tank container transportation and depot services, tank wash facility services, logistics and other value-added services. We conduct a significant portion of our business through a network of company terminals, affiliates and independent owner-operators. Affiliates are independent companies, which enter into various term contracts with the Company. Affiliates are responsible for paying for their own power equipment (including debt service), fuel and other operating costs. Certain affiliates lease trailers from us. Owner-operators are independent contractors, who, through a contract with us, supply one or more tractors and drivers for our use. Contracts with owner-operators may be terminated by either party on short notice. We charge affiliates and third parties for the use of tractors and trailers as necessary. In exchange for the services rendered, affiliates and owner-operators are normally paid a percentage of the revenues generated for each load hauled.

Our accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and notes required by accounting principles generally accepted in the United States (“U.S. GAAP”) 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. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2007, including the consolidated financial statements and accompanying notes. Certain prior-period amounts have been reclassified to conform to the current year’s presentation.

Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the entire fiscal year.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). This statement significantly changes the financial accounting and reporting of business combination transactions. The provisions of this statement are to be applied prospectively to business combination transactions in the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will depend on the nature, terms and size of business combinations completed after the effective date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for noncontrolling interests in subsidiaries. This statement requires the reporting of all noncontrolling interests as a separate component of stockholders’ equity, the reporting of consolidated net income (loss) as the amount attributable to both the parent and the noncontrolling interests and the separate disclosure of net income (loss) attributable to the parent and to the noncontrolling interests. In addition, this statement provides accounting and reporting guidance related to changes in noncontrolling ownership interests. Other than the reporting requirements described above which require retrospective application, the provisions of SFAS 160 are to be applied prospectively in the first annual reporting period beginning on or after December 15, 2008. We are currently evaluating the impact of this standard on our consolidated financial statements.

 

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Adoption of Statement of Financial Accounting Standards No. 157 and No. 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities,” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date. On January 1, 2008, we adopted the provisions of SFAS 159 and did not elect the fair value option to measure certain financial instruments.

On January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines fair value and provides guidance for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued a final Staff Position to allow a one-year deferral of adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We have elected this one-year deferral and thus will not apply the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial statements on a nonrecurring basis until our fiscal year beginning January 1, 2009. The FASB amended SFAS 157 to exclude FASB Statement No. 13 and its related interpretive accounting pronouncements that address leasing transactions.

SFAS 157 enables the reader of the financial statements to assess the inputs used to develop fair value measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. SFAS 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

We have approximately $0.1 million of cash equivalents for which the fair value is based on quoted prices in active markets for identical assets (Level 1).

We generally apply fair value techniques on a non-recurring basis associated with (1) valuing potential impairment loss related to goodwill and indefinite-lived intangible assets accounted for pursuant to SFAS No. 142 and (2) valuing potential impairment loss related to long-lived assets accounted for pursuant to SFAS No. 144.

Acquisition of Business Assets

Acquisition of Boasso America Corporation

On December 18, 2007, we acquired 100% of the stock of Boasso. The results of Boasso have been included in our results since the date of acquisition.

The purchase price of Boasso was initially allocated to the assets acquired and liabilities assumed according to their estimated fair values at the time of the acquisition. In April 2008, pursuant to the stock purchase agreement, and based on an evaluation of the net working capital as of the date of acquisition, approximately $1.3 million was refunded to us. The allocation of the purchase price is as follows (in thousands):

 

Working capital, net of cash

   $ 8,312  

Property and equipment

     7,209  

Other long-term assets

     81  

Non-compete agreements

     400  

Customer related intangibles

     11,900  

Tradename

     9,800  

Long-term debt and capital lease obligations

     (4,512 )

Deferred tax liabilities

     (9,435 )

Goodwill

     29,983  
        
   $ 53,738  
        

 

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The customer-related intangible assets relate to acquired customer relationships, and are being amortized over a twelve year weighted-average useful life on a straight-line basis. The tradename has an indefinite useful life. The allocation of the purchase price to the assets acquired and liabilities assumed may be subject to further adjustment. The goodwill acquired in this acquisition is not tax deductible.

Other Acquisitions

During 2008, we purchased two transportation companies for $1.7 million, in the aggregate, of which $1.3 million was paid in cash at closing and the remaining $0.4 million is payable over future periods. Of the total $1.7 million, we allocated $1.0 million to property and equipment, $0.5 million to goodwill, and $0.2 million to other intangible assets such as non-compete agreements.

Goodwill and Intangible Assets

Goodwill

Under SFAS 142, “Goodwill and Other Intangible Assets,” goodwill is subject to an annual impairment test as well as impairment assessments of certain triggering events. SFAS 142 requires us to compare the fair value of the reporting unit to its carrying amount to determine if there is a potential impairment. If the fair value of the reporting unit is less than its carrying amount, an impairment loss is recorded to the extent the carrying amount of the goodwill within the reporting unit is greater than the implied fair value of goodwill.

We perform our impairment test annually during the second quarter with a measurement date of June 30th. Projections for future cash flows were based on our recent operating trends which projected an average growth rate for revenue of approximately 5.2% over 5 years. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples were derived from other comparable publicly traded companies. The discount rate used to discount cash flows was based on our weighted average cost of capital of approximately 12.1%. No impairment was determined to have occurred as of June 30, 2007, since the calculated fair value exceeded the carrying amount. The factors used in deriving the estimate of the fair value included improving economic conditions, increasing revenues and operating income.

Our goodwill assets as of March 31, 2008 and December 31, 2007, were $172.8 million and $173.6 million, respectively. In 2008, goodwill increased $0.5 million in the first quarter due to the acquisition of two businesses offset by a decrease of $1.3 million related to a purchase price adjustment based upon net working capital as of the date of the acquisition of Boasso. In 2007, goodwill increased $30.0 million from the acquisition of Boasso and $3.3 million from the purchase of eight other businesses in 2007.

Intangible Assets

Intangible assets at March 31, 2008 were as follows:

 

     Gross value    Accumulated
amortization
    Net book
value
   Average lives
(in years)

Tradename

   $ 9,800    $ —       $ 9,800    Indefinite

Customer relationships

     11,998      (294 )     11,704    12

Non-compete agreements

     3,010      (582 )     2,428    3 – 5
                        
   $ 24,808    $ (876 )   $ 23,932   
                        

Intangible assets at December 31, 2007 were as follows:

 

     Gross value    Accumulated
amortization
    Net book
value
   Average lives
(in years)

Tradename

   $ 9,800    $ —       $ 9,800    Indefinite

Customer relationships

     11,998      (13 )     11,985    12

Non-compete agreements

     2,825      (443 )     2,382    3 – 5
                        
   $ 24,623    $ (456 )   $ 24,167   
                        

 

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Amortization expense for the three months ended March 31, 2008 and 2007 was $0.4 million and $0.1 million, respectively. Remaining intangible assets will be amortized to expense as follows (in thousands):

 

2008 remaining

   $ 1,276

2009

     1,655

2010

     1,606

2011

     1,430

2012 and after

     8,165
      

Total

   $ 14,132
      

2. Comprehensive Loss

Comprehensive loss is as follows (in thousands):

 

     Three months
ended

March 31,
 
     2008     2007  

Net loss

   $ (1,919 )   $ (173 )

Other comprehensive income (loss):

    

Amortization of prior service costs

     18       —    

Foreign currency translation adjustments

     83       (4 )
                

Comprehensive loss

   $ (1,818 )   $ (177 )
                

3. Loss Per Share

A reconciliation of the numerators and denominators of the basic and diluted loss per share computations follows (in thousands except per share amounts):

 

     Three months ended  
     March 31, 2008     March 31, 2007  
     Net loss
(numerator)
    Shares
(denominator)
   Per-share
amount
    Net loss
(numerator)
    Shares
(denominator)
   Per-share
amount
 

Basic loss available to common shareholders:

              

Net loss

   $ (1,919 )   19,064    $ (0.10 )   $ (173 )   19,348    $ (0.01 )

Diluted loss available to common shareholders:

              

Net loss

   $ (1,919 )   19,064    $ (0.10 )   $ (173 )   19,348    $ (0.01 )

There is no effect of our stock options and restricted stock in the computation of diluted earnings per share for the three months ended March 31, 2008 and 2007, respectively due to a net loss in both quarters.

 

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The following securities were not included in the calculation of diluted earnings per share because such inclusion would be anti-dilutive (in thousands):

 

     Three months
ended March 31,
     2008    2007

Stock options

   3,013    1,877

Unvested restricted stock

   188    66

Stock units

   —      5

4. Stock-Based Compensation

We maintain performance incentive plans under which stock options, restricted shares, and stock units may be granted to employees, non-employee directors, consultants and advisors. As of March 31, 2008, we have three stock-based compensation plans.

We recognize expense for stock-based compensation based upon estimated grant date fair value. We apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees. The resulting compensation expense is recognized over the requisite service period, which is generally the awards’ vesting term. Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated based on our historical experience and future expectations. All stock-based compensation expense is classified within “Compensation” on the Consolidated Statement of Operations. None of the stock-based compensation was capitalized during 2008.

The fair value of options granted during the first three months of 2008 and 2007 was based upon the Black-Scholes option-pricing model. The expected term of the options represents the estimated period of time until exercise giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For 2008, expected stock price volatility is based on the historical volatility of our common stock, which began trading on November 13, 2003. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant with an equivalent remaining term. The Company has not paid dividends in the past and does not currently plan to pay any dividends in the foreseeable future. The Black-Scholes model was used with the following assumptions:

 

     2008     2007  

Risk free rate

   3.28 %   4.65 %

Expected life

   5 years     5 years  

Volatility

   66.5 %   68.5 %

Expected dividend

   nil     nil  

We issued options for 227,000 shares to various employees with an exercise price of $4.50 on January 2, 2008. The exercise price of the options was based on the fair market value of our stock at the date of the grant. The total compensation expense that will be recognized over four years for these options (net of estimated shares forfeited) is approximately $0.3 million. We also issued 73,326 shares of restricted stock on January 2, 2008 to certain directors as part of their annual compensation package. We will recognize approximately $0.3 million as compensation expense over four years for these restricted shares (net of estimated shares forfeited).

 

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The following table summarizes stock-based compensation expense (in thousands):

 

     Three months ended
March 31,
     2008    2007

Stock options

   $ 281    $ 329

Restricted stock, net

     141      64

Stock units

     —        8
             
   $ 422    $ 401
             

The following table summarizes unrecognized stock-based compensation and the weighted average period over which such stock-based compensation is expected to be recognized as of March 31, 2008 (in thousands):

 

     In $    Remaining
years

Stock options

   $ 2,670    4

Restricted stock, net

     1,186    4
         
   $ 3,856   
         

These amounts do not include the cost of any additional awards that may be granted in future periods nor any changes in our forfeiture rate. No options were exercised during the three months ended March 31, 2008.

5. Employee Benefit Plans

We maintain two noncontributory defined benefit plans resulting from a prior acquisition that cover certain full-time salaried employees and certain other employees under a collective bargaining agreement. Retirement benefits for employees covered by the salaried plan are based on years of service and compensation levels. The monthly benefit for employees under the collective bargaining agreement plan is based on years of service multiplied by a monthly benefit factor. Pension costs are funded in accordance with the provisions of the applicable law.

We use a December 31st measurement date for both of our plans.

The components of estimated net periodic pension cost are as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2008     2007  

Service cost

   $ 54     $ 65  

Interest cost

     682       672  

Amortization of prior service cost

     23       —    

Amortization of loss

     88       110  

Expected return on plan assets

     (800 )     (807 )
                

Net periodic pension cost

   $ 47     $ 40  
                

We have not contributed to our pension plans during the three months ended March 31, 2008, but we expect to contribute $0.9 million during the remainder of 2008.

 

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6. Segment Reporting

Reportable Segments

Prior to 2008, we reported our financial information as a single segment. Beginning with the quarter ended March 31, 2008, we have two reportable business segments for financial reporting purposes that are distinguished primarily on the basis of services offered:

 

   

Trucking, which consists of truckload transportation of bulk chemicals; and

 

   

Container Services, specifically International Organization for Standardization, or ISO tank container transportation and depot services.

Due to the acquisition of Boasso in December 2007, we further enhanced our scope of services in the ISO tank container transportation and depot services market so that management now evaluates isolated revenues associated with these services and with trucking.

Segment revenues and operating income include the allocation of fuel surcharge. The operating income reported in our segments excludes amounts reported in Other operating income, such as corporate and other unallocated amounts. Corporate and unallocated amounts include depreciation and amortization, corporate overhead expense and stock-based compensation expense. Although these amounts are excluded from the business segment results, they are included in reported consolidated earnings. Included in Other revenue are revenues from our tank wash services and other value-added services. We have not provided specific asset information by segment, as it is not regularly provided to our chief operating decision maker for review.

Summarized segment data and a reconciliation to loss before income taxes are as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2008     2007  

Operating revenues:

    

Trucking

   $ 167,628     $ 161,118  

Container Services

     21,883       2,101  

Other revenue

     18,990       14,876  
                

Total

     208,501       178,095  
                

Operating income

    

Trucking

     6,278       8,160  

Container Services

     2,503       351  

Other operating income

     1,368       1,327  
                

Total segment operating income

     10,149       9,838  

Depreciation and amortization expense

     4,896       4,175  

Other (income) expense

     (544 )     209  
                

Total

     5,797       5,454  

Interest expense

     9,151       7,677  

Interest income

     (117 )     (199 )

Other (income) expense

     10       37  
                

Loss before income taxes

   $ (3,247 )   $ (2,061 )
                

 

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Geographic Segments

Our operations are located primarily in the United States, Canada and Mexico. Inter-area sales are not significant to the total revenue of any geographic area. Information about our operations in different geographic areas for the three months ended March 31, 2008 and 2007 is as follows (in thousands):

 

     Three Months Ended March 31, 2008
     U. S.    International    Consolidated

Total operating revenues

   $ 194,922    $ 13,579    $ 208,501

Operating income

     4,196      1,601      5,797
     As of March 31, 2008

Identifiable assets (1)

   $ 144,070    $ 7,093    $ 151,163
     Three Months Ended March 31, 2007
     U. S.    International    Consolidated

Total operating revenues

   $ 165,138    $ 12,957    $ 178,095

Operating income

     3,586      1,868      5,454
     As of December 31, 2007

Identifiable assets (1)

   $ 138,827    $ 7,332    $ 146,159

 

(1) Includes property and equipment, assets held-for-sale and intangible assets.

 

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7. Income Taxes

We adopted FASB Interpretation 48, “Accounting for Uncertain Income Tax Positions” (“FIN 48”), at the beginning of fiscal year 2007. As a result of the implementation, we recognized an increase to reserves for uncertain tax positions of $0.3 million. The increase to the reserve was accounted for as an adjustment to the beginning balance of retained earnings on the balance sheet.

At December 31, 2007, we had approximately $3.2 million of total gross unrecognized tax benefits. Of this total, $2.2 million (net of federal benefit on state tax issues) represents the amount of unrecognized tax benefits that, if recognized would favorably affect the effective income tax rate in any future periods. Included in the balance of gross unrecognized tax benefits at December 31, 2007, is $0.8 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months due to expiration of statue of limitations. For the three months ended March 31, 2008, there was no material change in our unrecognized tax benefits. Our total gross unrecognized tax benefit at March 31, 2008 is $3.2 million.

Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We had $1.3 million (net of federal tax benefit) accrued for interest and $0.5 million accrued for penalties at December 31, 2007. Total amount accrued for interest and penalties at March 31, 2008 is $1.9 million.

We are subject to the income tax jurisdiction of the U.S., Canada, and Mexico, as well as income tax of multiple state jurisdictions. We believe we are no longer subject to U.S. federal income tax examinations for years before 2005, to international examinations for years before 2003 and with few exceptions, to state exams before 2004.

The effective tax rates for the three months ended March 31, 2008 and 2007 were approximately 40.9% and 42.7% (exclusive of the $1.0 million tax benefit related to deferred tax asset discussed further below), respectively. The effective tax rates for the three months ended March 31, 2008 and 2007 represented a benefit. Additionally, the income tax benefit for the three months ended March 31, 2007 includes the recognition of a previously unrecognized $1.0 million deferred tax asset related to prior periods. We believe this item was not material to any of the prior periods affected nor material to our 2007 results. We expect our effective annual income tax rate for the year ended December 31, 2008 to range from approximately 39% to 44%.

8. Commitments and Contingencies

Environmental Matters

It is our policy to be in compliance with all applicable environmental, safety, and health laws. We also are committed to the principles of Responsible Care®, an international chemical industry initiative to enhance the industry’s responsible management of chemicals. We have obtained independent certification that our management system is in place and functions according to professional standards and we continue to evaluate and continuously improve our Responsible Care® Management System performance.

Our activities involve the handling, transportation and storage of bulk chemicals, both liquid and dry, many of which are classified as hazardous materials or hazardous substances. Our tank wash and terminal operations engage in the generation, storage, discharge and disposal of wastewater that may contain hazardous substances, the inventory and use of cleaning materials that may contain hazardous substances and the control and discharge of storm-water from industrial sites. In addition, we may store diesel fuel, materials containing oil and other hazardous products at our terminals. As such, we and others who operate in our industry or own and operate real property, are subject to environmental, health and safety laws and regulation by U.S. federal, state and local agencies as well as foreign governmental authorities. Environmental laws and regulations are complex, and address emissions to the air, discharge onto land or water, and the generation, handling, storage, transportation, treatment and disposal of waste materials. These laws change frequently and generally require us to obtain and maintain various licenses and permits. Environmental laws have tended to become more stringent over time, and most provide for substantial fines and potential criminal sanctions for violations. Some of these laws and regulations are subject to varying and conflicting interpretations.

Facility managers are responsible for environmental compliance at each operating location. Audits conducted by our staff assess operations, safety training and procedures, equipment and grounds maintenance, emergency response capabilities and waste management. We may also, if circumstances warrant, contract with independent environmental consulting firms to conduct periodic, unscheduled, compliance assessments that focus on unsafe conditions with the potential to result in releases of hazardous substances or petroleum, and that also include screening for evidence of past spills or releases. Our staff includes environmental professionals who develop guidelines and procedures, including audits of our terminals, tank cleaning facilities, and certain historical operations.

 

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We have incurred in the past, and expect to incur in the future, capital and other expenditures related to environmental compliance for current and planned operations. Such expenditures are generally included in our overall capital and operating budgets and are not accounted for separately. However, we do not anticipate that compliance with existing environmental laws in conducting current and planned operations will have a material adverse effect on our capital expenditures, earnings or competitive position.

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 under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), the Resource Conservation and Recovery Act of 1976 (“RCRA”), the Superfund Amendments and Reauthorization Act of 1986, and comparable state and foreign laws. Under certain of these laws, we could also be subject to allegations of liability for the activities of our affiliates or owner-operators. 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 on the road, and, notwithstanding the existence of our environmental management program, we cannot assure that such obligations will not be incurred in the future, predict with certainty the extent of future liabilities and costs under environmental, health, and safety laws, or assure that such liabilities will not result in a material adverse effect on our business, financial condition, operating results or cash flow.

In addition, we may face liability for alleged personal injury or property damage due to exposure to chemicals and other hazardous substances at our facilities or as the result of accidents and spills. Although these types of claims have not historically had a material impact on our operations, a significant increase in these claims could have a material adverse effect on our business, financial condition, operating results or cash flow.

As the result of environmental studies conducted at our facilities or third party sites in conjunction with our environmental management program, we have identified environmental contamination at certain sites that will require remediation. In addition, we have been named a potentially responsible party at various sites under the CERCLA and other similar state statutes.

Reserves

Our policy is to accrue remediation expenses when it is probable that such efforts will be required and the related expenses can be reasonably estimated. Estimates of costs for future environmental compliance and remediation are necessarily imprecise due to such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown potential remediation sites and the allocation of costs among the potentially responsible parties under applicable statutes. As of March 31, 2008 and December 31, 2007, we had reserves in the amount of $10.5 million and $11.2 million, respectively, for all environmental matters discussed below.

The balances presented include both long term and current environmental reserves. We expect these environmental obligations to be paid over the next five years. Additions to the environmental liability reserves are classified on the Consolidated Statements of Operations within the “Selling and administrative” category.

Property Contamination Liabilities

We have been named as (or are alleged to be) a potentially responsible party (“PRP”) under CERCLA and similar state laws at approximately 28 sites. At 17 of these sites, we are one of many parties with alleged liability and are negotiating with Federal, State or private parties on the scope of our obligations, if any. For example, we have been notified of potential liabilities involving the Lower Passaic River Study Area in New Jersey and two Quanta Resources sites in New York. We will be participating in the initial studies of these sites to determine site remediation objectives, goals and technologies. Since our overall liability cannot be estimated at this time, we have set reserves for only the initial remedial investigation phase at the three sites. Of the 17 sites, we have explicitly denied any liability for three sites and since there has been no subsequent demand for payment we have not established a reserve for these matters. We have estimated future expenditures for these off-site multi-party environmental matters, to be in the range of $1.7 million to $3.8 million.

We and our predecessors have also been named in three civil actions related to property contamination. One of these matters has been settled, subject to a $25,000 payment. The second matter involves plaintiffs seeking contribution for

 

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remediation at an offsite chemical distribution and re-packaging facility and the third matter involves claims for the remediation of and diminution in value of privately owned property near the Omega Chemical Superfund Site. However, we have sought and obtained defense and indemnification from the PRP Group in accordance with a previous de-minimis settlement agreement with the Omega PRP Group.

At eight sites, we are the only responsible party and are in the process of conducting investigations and/or remediation projects. Six of these projects relate to operations conducted by Chemical Leaman Corporation and its subsidiaries (“CLC”) prior to our acquisition of and merger with CLC in 1998. These six sites are: Bridgeport, New Jersey; William Dick, Pennsylvania; Charleston, West Virginia; Tonawanda, New York; Scary Creek, West Virginia; and East Rutherford, New Jersey. Each of these sites is discussed in more detail below. The remaining two investigations and potential remediation were triggered by the New Jersey Industrial Site Remediation Act (“ISRA”), which requires such investigations and remediation following the sale of industrial facilities. In addition to these eight sites, the current owner of one of our leased tank wash sites has agreed to take responsibility for complying with the investigation and remediation required by ISRA, and is currently investigating the site. We have estimated future expenditures for these eight properties to be in the range of $8.8 million to $16.7 million.

Bridgeport, New Jersey

QDI is required under the terms of two federal consent decrees to perform remediation at this operating truck terminal and tank wash site. CLC entered into consent orders with the U.S. Environmental Protection Agency (“USEPA”) in May 1991 for the treatment of groundwater (operable unit one or “OU1”) and October 1998 for the removal of contamination in the wetlands (“OU3”). In addition, we were required to assess the removal of contaminated soils (“OU2”).

In connection with OU1, USEPA originally required us to construct a large treatment plant with discharge via a two mile pipeline to the Delaware River watershed with construction to be completed by the end of 2001. We have negotiated an alternative remedy with USEPA which would call for a significantly smaller treatment facility, in place treatment of groundwater contamination via in-situ treatment and a local discharge. The treatment facility has been approved and construction was completed in early 2007. The plant is going through the start-up phase. USEPA has also approved an OU3 remedy for approximately 2.5 acres of affected wetland. This reflects a reduction from an approximate seven acre area that had been under negotiation. Site mobilization for the OU3 work took place in late May 2004 but was delayed due to weather-related issues. Field work was re-started in May 2005 and has been completed. Monitoring of the restoration work is on-going. Additional contamination has been remediated with localized restoration to be completed shortly. In regard to OU2, USEPA is now in the process of finalizing a Feasibility Study for the limited areas that show contamination and warrant additional investigation or work. USEPA also wants to include in OU2 the in-situ treatment previously described as part of OU1. The environmental projections for OU1 and OU2 have been changed to reflect the reallocation of the in-situ costs to OU2 and the proposed contract amount for the OU1 work. We have estimated expenditures to be in the range of $4.8 million to $8.5 million.

William Dick, Pennsylvania

CLC entered into a consent order with the Pennsylvania DEP (“PADEP”) and USEPA in October 1995 obligating it to provide a replacement water supply to area residents (“OU1”), treat contaminated groundwater (“OU2”), and perform remediation of contaminated soils (“OU3”) at this former wastewater disposal site. OU1 is complete. With respect to OU2, PADEP and USEPA have approved an interim remedy, which involves the construction of a treatment facility and discharge locally. We began construction of this facility in November 2006 and the work was completed in the fourth quarter 2007. The plant is going through the start-up phase. Based on recent data showing reduction in site groundwater contamination due to natural attenuation and the more extensive handling and removal of contaminated soils, we believe that the groundwater project can be completed over the five-year term of this interim remedy. The agencies have approved an OU3 remedy, which requires both thermal treatment of contaminated soils and treatment of residuals via soil vapor extraction (“SVE”). The OU3 remedy expanded in April 2004 to off-site shipment of contaminated soils because these soils were found to be incompatible with the thermal treatment unit, which started full-scale operation in May 2004. In 2004, we also discovered buried drums and associated contaminated material and soils, which required off-site disposal. In the third quarter of 2004, we determined that a latex liner waste material was present in the third pond, which needed to be excavated and removed for disposal offsite. This work was completed in early 2005. We also determined that the soils in pond three needed to be excavated to determine if they will be suitable for the originally planned SVE treatment. We excavated the pond’s soils into three discrete piles and determined the best approach to treat

 

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these soil piles. It was determined that most of the soil piles could be treated on site using SVE as originally planned. However, some modifications to the design had to be made in order to treat a limited number of soil piles. The SVE work began in 2006 and was completed in September 2007. Site sampling has been conducted to determine if soil clean-up objectives have been achieved. A report of findings will be transmitted to USEPA by May 2008. We have estimated expenditures to be in the range of $1.4 million to $3.4 million.

Other Properties

Scary Creek, West Virginia: CLC received a clean up notice from the State authority in August 1994 requiring remediation of contaminated soils and groundwater at this former wastewater disposal facility. However, the State and we have agreed that remediation can be conducted under the State’s voluntary clean-up program (instead of the state superfund enforcement program). We are currently completing the originally planned remedial investigation and the additional site investigation work that is required to completely delineate the extent of site contamination. Upon completion of the site investigation phase, a remedial feasibility study and design will be prepared to address contaminated soils, and, if applicable, groundwater. The expectation is that a remedy utilizing primarily in-situ treatment with limited soil removal will be conducted.

Tonawanda, New York: CLC entered into a consent order with the New York Department of Environmental Conservation on June 22, 1999 obligating it to perform soil and groundwater remediation at this former truck terminal and tank wash site. We have completed a remedial investigation and a feasibility study with the expectation that we will conduct a remedy that may include in-situ treatment, limited soil removal and monitored natural attenuation of the groundwater. The site will be in Remedial Design phase starting April 2008.

We have estimated future expenditures for Scary Creek and Tonawanda to be in the range of $2.6 million to $4.8 million.

Charleston, West Virginia: CLC completed a remediation of a former drum disposal area in 1995 at its active truck terminal and tank wash site under the terms of a state hazardous waste permit. The state has required supplemental groundwater monitoring in connection with the same permit. We have completed this work and believe that no additional remediation will be required.

East Rutherford, New Jersey: CLC entered into a Memorandum of Agreement with the State of New Jersey on June 11, 1996 obligating it to perform a Remedial Investigation and Remedial Action with respect to a subsurface loss of an estimated 7,000 gallons of fuel oil at this active truck terminal and tank wash site. We have completed the recovery of free product and conducted groundwater monitoring and are awaiting final approval of a plan to terminate further remedial action with some limited contamination left in place.

ISRA New Jersey Facilities: We are obliged to conduct investigations and remediation at three current or former New Jersey tank wash and terminal sites pursuant to the state’s Industrial Sites Remediation Act, which requires such remediation following the sale of facilities after 1983. The former owner has agreed to take responsibility for one of the sites and the other two are in the process of remedial investigation with projections set in contemplation of limited soil remediation expense for contaminated areas.

In addition, we received a letter from California regulatory agency in February 2008 concerning the status of a former tank wash on leased property in Hayward. At this time, our liability, if any, can not be reasonably estimated.

There can be no assurance that additional issues or sites for which we are responsible will not be discovered, that violations by us of environmental laws or regulations will not be identified or occur in the future, or that environmental, health and safety laws and regulations will not change in a manner that could impose material costs on us.

Other Legal Matters

We are from time to time involved in routine litigation incidental to the conduct of our business. We believe that no such routine 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.

 

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9. Subsequent Events

On April 14, 2008, we announced a plan to reduce our workforce. Most of the reductions occurred at the Company’s Tampa, Florida headquarters, where approximately 17% of the positions were eliminated. The reductions were substantially implemented by April 15, 2008. We eliminated approximately sixty positions with a projected payroll related cost in 2008 in excess of $5 million. In conjunction with this action, we expect to record a total pre-tax charge in the quarter ended June 30, 2008 of approximately $1.8 million, all for one-time termination benefits, the majority of which relates to cash expenditures.

10. Guarantor Subsidiaries

The 9% Senior Subordinated Notes due 2010 and the Senior Floating Rate Notes due 2012 issued by QD LLC and QD Capital are unconditionally guaranteed on a senior subordinated basis pursuant to guarantees by all of our direct and indirect domestic subsidiaries, and by QDI. Each of our direct and indirect subsidiaries, including QD LLC, is 100% owned. All non-domestic subsidiaries including Levy Transport, Ltd. are non-guarantor subsidiaries. QD Capital has no material assets or operations.

QD LLC conducts substantially all of its business through and derives virtually all of its income from its subsidiaries. Therefore, its ability to make required principal and interest payments with respect to its indebtedness depends on the earnings of subsidiaries and its ability to receive funds from its subsidiaries through dividend and other payments. The subsidiary guarantors are wholly owned subsidiaries of QD LLC and have fully and unconditionally guaranteed the 9% Senior Subordinated Notes and the Senior Floating Rate Notes on a joint and several basis.

We have 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 above-mentioned notes.

The following condensed consolidating financial information for QDI, QD LLC, QD Capital (which has no assets or operations), non-guarantor subsidiaries and combined guarantor subsidiaries presents:

 

   

Condensed consolidating balance sheets at March 31, 2008 and December 31, 2007 and condensed consolidating statements of operations for the three-month periods ended March 31, 2008 and 2007 and the condensed consolidating statements of cash flows for each of the three-month periods ended March 31, 2008 and 2007.

 

   

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

 

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QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

 

Consolidating Statements of Operations

Three Months Ended March 31, 2008

Unaudited – (In 000’s)

 

     QDI     QD LLC and
QD Capital
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenues:

            

Transportation

   $ —       $ —       $ 149,259     $ —       $ —       $ 149,259  

Other service revenue

     —         —         26,582       163       —         26,745  

Fuel surcharge

     —         —         32,497       —         —         32,497  
                                                

Total operating revenues

     —         —         208,338       163       —         208,501  

Operating expenses:

            

Purchased transportation

     —         —         119,972       —         —         119,972  

Compensation

     —         —         28,604       —         —         28,604  

Fuel, supplies and maintenance

     —         —         30,133       —         —         30,133  

Depreciation and amortization

     —         —         4,918       (22 )     —         4,896  

Selling and administrative

     —         —         9,229       19         9,248  

Insurance claims

     —         —         5,551       11       —         5,562  

Taxes and Licenses

     —         —         1,216       1       —         1,217  

Communication and utilities

     —         —         3,616       —         —         3,616  

(Gain)/loss on disposal of property and equipment

     —         —         (544 )     —         —         (544 )
                                                

Operating income (loss)

     —         —         5,643       154       —         5,797  

Interest (income) expense, non-related party, net

     (23 )     8,628       452       (23 )     —         9,034  

Interest expense (income), related party, net

     —         (1,565 )     1,695       (130 )     —         —    

Other expense (income)

     —         —         62       (52 )     —         10  
                                                

Income (loss) before taxes

     23       (7,063 )     3,434       359       —         (3,247 )

Income tax (benefit) provision

     —         —         (1,404 )     76       —         (1,328 )

Equity in (loss) earnings of subsidiaries

     (1,942 )     5,121       —         —         (3,179 )     —    
                                                

Net (loss) income

   $ (1,919 )   $ (1,942 )   $ 4,838     $ 283     $ (3,179 )   $ (1,919 )
                                                

 

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QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

 

Consolidating Statements of Operations

Three Months Ended March 31, 2007

Unaudited – (In 000’s)

 

     QDI     QD LLC and QD
Capital
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenues:

            

Transportation

   $ —       $ —       $ 142,073     $ —       $ —       $ 142,073  

Other service revenue

     —         —         16,736       232       —         16,968  

Fuel surcharge

     —         —         19,054       —         —         19,054  
                                                

Total operating revenues

     —         —         177,863       232       —         178,095  

Operating expenses:

            

Purchased transportation

     —         —         115,947       —         —         115,947  

Compensation

     —         —         19,669       —         —         19,669  

Fuel, supplies and maintenance

     —         —         16,124       —         —         16,124  

Depreciation and amortization

     —         —         4,002       173       —         4,175  

Selling and administrative

     —         —         6,429       37       —         6,466  

Insurance claims

     —         —         6,627       11       —         6,638  

Taxes and Licenses

     —         —         781       —         —         781  

Communication and utilities

     —         —         2,632       —         —         2,632  

Loss on disposal of property and equipment

     —         —         209       —         —         209  
                                                

Operating income

     —         —         5,443       11       —         5,454  

Interest expense

     —         (7,355 )     (441 )     —         119       (7,677 )

Interest income

     5       —         178       135       (119 )     199  

Other expense

     —         —         (29 )     (8 )     —         (37 )
                                                

Income (loss) before taxes

     5       (7,355 )     5,151       138       —         (2,061 )

Income tax (benefit) provision

     (1,007 )       (941 )     60       —         (1,888 )

Equity in (loss) earnings of subsidiaries

     (1,185 )     6,248       —         —         (5,063 )     —    
                                                

Net (loss) income

   $ (173 )   $ (1,107 )   $ 6,092     $ 78     $ (5,063 )   $ (173 )
                                                

 

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QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

 

Consolidating Balance Sheet

March 31, 2008

Unaudited – (In 000’s)

 

     QDI     QD LLC and
QD Capital
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

            

Current Assets:

            

Cash and cash equivalents

   $ —       $ —       $ 234     $ 2,461       $ 2,695  

Accounts receivable, net

     87       —         105,785       80         105,952  

Prepaid expenses

     —         71       11,412       19         11,502  

Deferred taxes asset, net

     —         —         20,483       —           20,483  

Other

     6       —         6,946       (420 )       6,532  
                                                

Total current assets

     93       71       144,860       2,140       —         147,164  

Property and equipment, net

     —         —         127,231       —           127,231  

Goodwill

     —         —         172,790       —           172,790  

Intangibles, net

     —         —         23,932       —           23,932  

Investment in Subsidiaries

     24,229       653,956       21,234       —         (699,419 )     —    

Non-current deferred tax assets, net

     1,007       —         16,378           17,385  

Other assets

     —         11,384       1,972       —           13,356  
                                                

Total assets

   $ 25,329     $ 665,411     $ 508,397     $ 2,140     $ (699,419 )   $ 501,858  
                                                

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY

 

       

Current Liabilities:

            

Current maturities of indebtedness

     —         —         1,895       —           1,895  

Current maturities of capital lease obligations

     —         —         1,564       —           1,564  

Accounts payable

     —         —         16,561       43         16,604  

Intercompany

     (575 )     295,966       (264,980 )     (5,259 )     (25,152 )     —    

Affiliates and independent owner-operators payable

     —         —         17,568           17,568  

Accrued expenses

     —         7,055       23,016       96         30,167  

Environmental liabilities

     —         —         4,093       —           4,093  

Accrued loss and damage claims

     —         —         11,136       —           11,136  
                                                

Total current liabilities

     (575 )     303,021       (189,147 )     (5,120 )     (25,152 )     83,027  

Long-term indebtedness, less current maturities

     —         342,529       5,627       —           348,156  

Long-term capital leases, less current maturities

     —         —         3,747           3,747  

Environmental liabilities

     —         —         6,418           6,418  

Accrued loss and damage claims

     —         —         16,657           16,657  

Other non-current liabilities

     —         —         15,473       643         16,116  
                                                

Total liabilities

     (575 )     645,550       (141,225 )     (4,477 )     (25,152 )     474,121  

Minority interest in subsidiary

     —         —         1,833       —           1,833  

Shareholders’ equity

            

Common Stock

     362,039       354,963       493,866       7,629       (856,458 )     362,039  

Treasury stock

     (1,564 )     —         —         —         —         (1,564 )

Accumulated deficit

     (128,065 )     (129,541 )     169,389       (451 )     (39,397 )     (128,065 )

Stock recapitalization

     (189,589 )     (189,589 )     —         (55 )     189,644       (189,589 )

Accumulated other comprehensive loss

     (16,647 )     (15,972 )     (15,466 )     (506 )     31,944       (16,647 )

Stock subscriptions receivable

     (270 )     —         —         —           (270 )
                                                

Total shareholders’ equity

     25,904       19,861       647,789       6,617       (674,267 )     25,904  
                                                

Total liabilities, minority interest and shareholders’ equity

   $ 25,329     $ 665,411     $ 508,397     $ 2,140     $ (699,419 )   $ 501,858  
                                                

 

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QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

 

Consolidating Balance Sheet

December 31, 2007

Unaudited – (In 000’s)

Quality Distribution, Inc

Guarantor/Non-Guarantor Subsidiaries

For the Twelve Months Ending December 31, 2007

Balance Sheet

 

     QDI     QD LLC and
QD Capital
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

            

Current Assets:

            

Cash and cash equivalents

   $ —       $ —       $ 7,339     $ 2,372       $ 9,711  

Accounts receivable, net

     64       —         98,916       101         99,081  

Prepaid expenses

     —         96       8,024       30         8,150  

Deferred taxes asset

     —         —         20,483       —           20,483  

Other

     6       —         6,248       4         6,258  
                                                

Total current assets

     70       96       141,010       2,507       —         143,683  

Property and equipment, net

     —         —         122,014       (22 )       121,992  

Goodwill

     —         —         173,575       —           173,575  

Intangibles

     —         —         24,167       —           24,167  

Investment in subsidiaries

     26,148       648,835       21,234       —         (696,217 )     —    

Non-current deferred tax

     1,007       —         15,196           16,203  

Other assets

     —         11,923       2,433       —           14,356  
                                                
   $ 27,225     $ 660,854     $ 499,629     $ 2,485     $ (696,217 )   $ 493,976  
                                                

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY (DEFICIT)

            

Current Liabilities:

            

Current maturities of indebtedness

     —         —         413       —           413  

Current maturities of capital leases

     —         —         1,451       —           1,451  

Accounts payable

     —         —         17,385       43         17,428  

Intercompany

     (75 )     288,656       (262,349 )     (4,998 )     (21,234 )     —    

Affiliates and independent owner-operators payable

     —         —         12,597           12,597  

Accrued expenses

     —         3,866       21,994       97         25,957  

Environmental liabilities

     —         —         4,751       —           4,751  

Accrued loss and damage claims

     —         —         13,438       —           13,438  

Income taxes payable

     —         —         90       465         555  
                                                

Total current liabilities

     (75 )     292,522       (190,230 )     (4,393 )     (21,234 )     76,590  

Long-term indebtedness, less current maturities

     —         342,184       764       627         343,575  

Long-term capital leases, less current maturities

     —         —         3,832           3,832  

Environmental liabilities

     —         —         6,418           6,418  

Accrued loss and damage claims

     —         —         18,474           18,474  

Other non-current liabilities

     —         —         15,954           15,954  
                                                

Total liabilities

     (75 )     634,706       (144,788 )     (3,766 )     (21,234 )     464,843  

Minority interest in subsidiaries

     —         —         1,833       —           1,833  

Shareholders’ equity (deficit):

            

Common Stock

     361,617       354,963       493,866       7,629       (856,458 )     361,617  

Treasury stock

     (1,564 )     —         —         —         —         (1,564 )

Accumulated deficit (retained earnings)

     (126,146 )     (122,478 )     164,551       (408 )     (41,665 )     (126,146 )

Stock recapitalization

     (189,589 )     (189,589 )     —         (55 )     189,644       (189,589 )

Accumulated other comprehensive income

     (16,748 )     (16,748 )     (15,833 )     (915 )     33,496       (16,748 )

Stock subscription receivable

     (270 )     —         —         —           (270 )
                                                

Total shareholders’ equity (deficit)

     27,300       26,148       642,584       6,251       (674,983 )     27,300  
                                                

Total liabilities, minority interest and shareholders’ equity (deficit)

   $ 27,225     $ 660,854     $ 499,629     $ 2,485     $ (696,217 )   $ 493,976  
                                                

 

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QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

 

Condensed Consolidating Statements of Cash Flows

Three Months Ended March 31, 2008

Unaudited – (In 000’s)

 

     QDI     QD LLC and
QD Capital
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

            

Net (loss) income

   $ (1,919 )   $ (1,942 )   $ 4,838     $ 283     $ (3,179 )   $ (1,919 )

Adjustments for non-cash charges

     1,919       (528 )     343       (152 )     3,179       4,761  

Net changes in assets and liabilities

     (23 )     3,753       (10,017 )     540       —         (5,747 )

Intercompany activity

     23       (1,283 )     1,820       (560 )     —         —    
                                                

Net cash (used in) provided by operating activities

     —         —         (3,016 )     111       —         (2,905 )
                                                

Cash flows from investing activities:

            

Capital expenditures

     —         —         (5,306 )     —         —         (5,306 )

Acquisition of businesses and assets

     —         —         (1,319 )     —         —         (1,319 )

Proceeds from sales of property and equipment

     —         —         2,556       (22 )     —         2,534  
                                                

Net cash (used in) provided by investing activities

     —         —         (4,069 )     (22 )     —         (4,091 )
                                                

Cash flows from financing activities:

            

Proceeds from the issuance of debt

     —         —         1,049       —         —         1,049  

Principal payments of long-term debt and capital lease obligations

     —         —         (894 )     —         —         (894 )

Proceeds from revolver

     —         28,900       —         —         —         28,900  

Payments on revolver

     —         (28,830 )     —         —         —         (28,830 )

Deferred financing fees

     —         (187 )     —         —         —         (187 )

Other

     —         (36 )     (12 )     —         —         (48 )

Intercompany activity

     —         153       (153 )     —         —         —    
                                                

Net cash (used in) provided by financing activities

     —         —         (10 )     —         —         (10 )
                                                

Effect of exchange rate changes on cash

     —         —         (10 )     —         —         (10 )
                                                

Net (decrease) increase in cash and cash equivalents

     —         —         (7,105 )     89       —         (7,016 )

Cash and cash equivalents, beginning of period

     —         —         7,339       2,372       —         9,711  
                                                

Cash and cash equivalents, end of period

   $ —       $ —       $ 234     $ 2,461     $ —       $ 2,695  
                                                

 

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QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES

 

Condensed Consolidating Statements of Cash Flows

Three Months Ended March 31, 2007

Unaudited – (In 000’s)

 

     QDI     QD LLC and
QD Capital
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

            

Net (loss) income

   $ (173 )   $ (1,107 )   $ 6,092     $ 78     $ (5,063 )   $ (173 )

Adjustments for non-cash charges

     173       (6,720 )     5,141       173       5,063       3,830  

Net changes in assets and liabilities

     —         3,749       (7,843 )     (16 )     —         (4,110 )

Intercompany activity

     —         4,078       (4,052 )     (26 )     —         —    
                                                

Net cash (used in) provided by operating activities

     —         —         (662 )     209       —         (453 )
                                                

Cash flows from investing activities:

            

Capital expenditures

     —         —         (2,421 )     —         —         (2,421 )

Proceeds from sales of property and equipment

     —         —         616       —         —         616  
                                                

Net cash used in investing activities

     —         —         (1,805 )     —         —         (1,805 )
                                                

Cash flows from financing activities:

            

Principal payments of long-term debt

     —         (350 )     —         —         —         (350 )

Principal payments of capital lease obligations

     —         —         (300 )     —         —         (300 )

Other

     —         —         126       —         —         126  

Intercompany activity

     —         350       (350 )     —         —         —    
                                                

Net cash used in financing activities

     —         —         (524 )     —         —         (524 )

Effect of exchange rate changes on cash

     —         —         15       —         —         15  

Net (decrease) increase in cash and cash equivalents

     —         —         (2,976 )     209       —         (2,767 )
                                                

Cash and cash equivalents, beginning of period

     —         —         5,386       1,455       —         6,841  
                                                

Cash and cash equivalents, end of period

   $ —       $ —       $ 2,410     $ 1,664     $ —       $ 4,074  
                                                

 

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ITEM 2 — 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. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ from results discussed in the forward-looking statements, see “Forward-Looking Statements and Certain Considerations” contained in this Item 2.

Overview

We operate the largest for-hire chemical bulk tank truck network in North America based on bulk service revenues, and we believe we have more than twice the revenues of our closest competitor in our primary chemical bulk transport market in the U.S. The bulk tank truck market in North America includes all products shipped by bulk tank truck carriers and consists primarily of liquid and dry bulk chemicals (which includes plastics) and bulk dry and liquid food-grade products. We are primarily engaged in truckload transportation of bulk chemicals and also engaged in ISO tank container transportation and depot services, tank wash facility services, logistics and other value-added services. We are a core carrier for many of the Fortune 500 companies engaged in chemical processing, including Dow Chemical, Procter & Gamble, DuPont and PPG Industries, and we provide services to most of the top 100 chemical producers with U.S. operations.

Our revenue is principally a function of the volume of shipments by the bulk chemical industry, the number of miles driven per load, our market share, and the allocation of shipments between tank truck transportation and other modes of transportation such as rail. The volume of shipments of chemical products is, in turn, affected by many other industries, including consumer and industrial products, automotive, paints and coatings, and paper, and tends to vary with changing economic conditions. Additionally, we provide leasing, tank cleaning, logistics and transloading services.

Our bulk service network consists primarily of company operated terminals, independently owned third-party affiliate terminals and independent owner-operator drivers. Affiliates are independent companies we contract with to operate trucking terminals and tank washes exclusively on our behalf in defined markets. The affiliates provide the capital necessary to service their contracted business and are also responsible for most of the operating costs associated with servicing the contracted business. Owner-operators are generally individual drivers who own or lease their tractors and agree to drive exclusively for us and our affiliate partners. We believe the use of affiliates and independent owner-operators provides the following key competitive advantages to us in the marketplace:

 

   

Locally owned and operated affiliate terminals can provide superior, tailored customer service.

 

   

Affiliates and independent owner-operators are paid a fixed, contractual percentage of revenue for each load they transport creating a variable cost structure that provides protection against cyclical downturns.

 

   

Reliance on affiliate and independent owner-operators creates an asset-light business model that generally reduces our capital investment.

We believe the most significant factors relevant to our future business growth are the ability to (i) obtain additional business from existing customers, (ii) acquire existing transportation related businesses in strategic markets, (iii) add new customers, and (iv) recruit and retain drivers. Revenue has been partially driven by pricing increases and we expect pricing increases to continue to positively impact our revenue growth. However, the trucking industry has experienced a slowdown in recent months due to slowing economic conditions. While a number of our customers operate their own private tank truck fleets and many of our customers source some of their logistics needs with rail, we expect our customers to continue to outsource a greater proportion of their logistics needs to full service tank truck carriers. As a result of our leading market position, strong customer relationships and flexible business model, we believe we are well-positioned to benefit from customers seeking consolidation of their shipping relationships and those opting to outsource a greater portion of their logistics needs to third-party tank truck carriers.

 

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Acquisitions

In December 2007, we acquired all of the outstanding capital stock of Boasso America Corporation (“Boasso”) for an aggregate purchase price of (i) $58.8 million in cash less the outstanding long-term indebtedness of Boasso, subject to a working capital adjustment, and (ii) a $2.5 million 7% promissory note with a two-year maturity for the benefit of Boasso’s principal stockholder, Walter J. Boasso (the “Boasso Note”) excluding fees and direct costs. In April 2008, approximately $1.3 million was refunded to us pursuant to a working capital adjustment, as provided for in the stock purchase agreement.

During 2008, we purchased two transportation companies for $1.7 million, in the aggregate, of which $1.3 million was paid in cash at closing and the remaining $0.4 million is payable over future periods. Of the total $1.7 million, we allocated $1.0 million to property and equipment, $0.5 million to goodwill, and $0.2 million to other intangible assets such as non-compete agreements.

Subsequent Reduction in Force

On April 14, 2008, we announced a plan to reduce our workforce. Most of the reductions occurred at our Tampa, Florida headquarters, where approximately 17% of the positions were eliminated. The reductions were substantially implemented by April 15, 2008. We eliminated approximately sixty positions, with a projected payroll related cost in 2008 in excess of $5.0 million. In conjunction with this action, we expect to record a total pre-tax charge in the quarter ended June 30, 2008 of approximately $1.8 million, all for one-time termination benefits, the majority of which relates to cash expenditures.

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. 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.

Property and equipment - Property and equipment expenditures, including tractor and trailer rebuilds that extend the useful lives of such equipment, are capitalized and recorded at cost. For financial statement purposes, these assets are depreciated using the straight-line method over the estimated useful lives of the assets to an estimated salvage value.

The asset lives used are presented in the following table:

 

     Average Lives
(in years)

Buildings and improvements

   10 - 25

Tractors and terminal equipment

   5 - 7

Trailers

   15 - 20

Furniture and fixtures

   3 - 5

Other equipment

   3 - 10

Tractor and trailer rebuilds, which are recurring in nature and extend the lives of the related assets, are capitalized and depreciated over the period of extension, generally 3 to 10 years, based on the type and extent of these rebuilds. Maintenance and repairs are charged directly to expense as incurred. Management estimates the useful lives of these assets based on historical trends and the age of the assets when placed in service. Any changes in the actual lives could result in material changes in the net book value of these assets. Additionally, we estimate the salvage values of these assets based on historical sales of disposals, and any changes in the actual salvage values could also affect the net book value of these assets.

Furthermore, we evaluate the recoverability of our long-lived assets whenever adverse events or changes in the business climate indicate that the expected undiscounted future cash flows from the related asset may be less than previously anticipated. If the net book value of the related asset exceeds the undiscounted future cash flows of the asset,

 

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the carrying amount would be reduced to the present value of its expected future cash flows and an impairment loss would be recognized. This analysis requires us to make significant estimates and assumptions in projecting future cash flows, and changes in facts and circumstances could result in material changes in the amount of any write-offs for impairment.

Goodwill - Goodwill is reviewed for impairment annually and whenever events or circumstances indicate that the book value of the asset may not be recoverable. We periodically evaluate whether events or circumstances indicate possible impairment. We identified four reporting units: trucking operations, container services, insurance operations and foreign operations. We allocated goodwill to the transportation operation as it principally resulted from the acquisition of Chemical Leaman Corporation in 1998. If the fair value of the reporting unit is less than its carrying amount, an impairment loss is recorded to the extent the carrying amount of the goodwill within the reporting unit is greater than the implied fair value of goodwill. We performed our annual assessment during the second quarter of fiscal year 2007. We used a combination of discounted cash flows and valuation of our capital structure to estimate the fair value. Projections for future cash flows were based on our recent operating trends and projected average growth rate for revenue of approximately 5.2% over 5 years. The discount rate used to discount cash flows was based on our weighted average cost of capital of approximately 12.1%. Even if our revenue projections were to decline by 10%, we would not have an impairment of our goodwill. If actual cash flows turn out to be significantly less than projections, then the impairment analysis could change, possibly resulting in future impairment charges.

Deferred tax asset - We use the liability method of accounting for income taxes as prescribed by SFAS No. 109. Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance that is recorded or released against our deferred tax assets.

We evaluate quarterly the positive and negative evidence regarding the realization of net deferred tax assets in accordance with SFAS No. 109, “Accounting for Income Taxes.” Included in this assessment are estimates of projected future taxable income. Significant management judgment is required in this process and although realization is not assured, based on our assessment, we concluded it is more likely than not, such assets will continue to be realized.

We project both aggregate U.S. pre-tax income as well as aggregate U.S. taxable income for the years 2008 through 2011 sufficient to absorb $86.0 million of the $94.0 million existing net operating loss carryforwards. At December 31, 2007 we had estimated $94.0 million in Federal net operating loss carryforwards, $2.6 million in alternative minimum tax credit carryforwards and $2.6 million in foreign tax credit carryforwards. The net operating loss carryforwards will expire in the years 2018 through 2027, while the alternative minimum tax credits may be carried forward indefinitely and the foreign tax credits may be carried forward for ten years. We do not have a history of net operating loss or tax credit carryforwards expiring unused; however, the Company determined based on the weight of available evidence that it is more likely than not that some portion of our $2.6 million foreign tax credits may not be realized. As a result, at December 31, 2007 a valuation allowance of $1.6 million was established against our foreign tax credit deferred tax asset.

We continue to believe it is more likely than not that the net deferred tax assets will be realizable because we are projecting positive pre-tax income for the year and our projection of future taxable income is adequate to absorb $86.0 million of our $94.0 million net operating loss carryforwards. We will continue to review our forecast quarterly in relation to actual results and expected trends on an ongoing basis. Failure to achieve our operating income targets may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our deferred tax assets. Any increase in a valuation allowance would result in additional income tax expense.

Environmental liabilities - We have reserved for potential environmental liabilities based on the best estimates of potential clean-up and remediation for known environmental sites. We employ a staff of environmental professionals 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. These cost projections are determined through previous experiences with other sites and through bids from third-party contractors. Management believes current reserves are reasonable based on current information.

Accident claims reserves - We currently maintain liability insurance for bodily injury and property damage claims, covering all employees, owner-operators and affiliates, and workers’ compensation insurance coverage on our employees and company drivers. This insurance included deductibles of $5 million per incident for bodily injury and

 

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property damage and $1 million for workers’ compensation for periods after September 15, 2002. Auto and general liability claims incurred on or after March 31, 2008 are subject to a deductible of $2.0 million per incident. As such, we are subject to liability as a self-insurer to the extent of these deductibles under the policy. We are self-insured for damage to the equipment we own or lease, and for cargo losses. In developing liability reserves, we evaluate historical loss run data and actuarial calculations to develop our insurance reserve estimates. The most significant assumptions used in the estimation process include determining the trends in loss costs, the expected consistency in the frequency and severity of claims incurred but not yet reported to prior year claims and expected costs to settle unpaid claims. Management believes reserves are reasonable given known information, but as each case develops, estimates may change to reflect the effect of new information.

Revenue recognition - Transportation revenues, including fuel surcharges and related costs are recognized on the date the freight is delivered. Other service revenues, consisting primarily of lease revenues from affiliates, owner-operators and third parties, are recognized ratably over the lease period. Tank wash revenues are recognized when the wash is completed. Service revenues on insurance policies are recorded as a contractual percentage of premiums received ratably over the period that the insurance covers. We have recognized all revenues on a gross basis as the principal and primary obligor with risk of loss in relation to our responsibility for completion of services as contracted by our customers.

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 our 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. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional allowance could be required. Absent a change in our collection efforts, a $50 million increase in our receivables (aged less than 30 days) resulting from transportation billings would increase our allowance for uncollectible receivables by less than $0.2 million.

Stock compensation plans - Stock compensation is determined by the assumptions required under Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)). The fair values of stock option grants are based upon the Black-Scholes option-pricing model and amortized as compensation expense on a straight-line basis over the vesting period of the grants. Restricted stock awards are issued and measured at market value on the date of grant and related compensation expense is recognized over time using graded vesting, which accelerates compensation expense into the first two years of the four year vesting period. Stock-based compensation expense related to stock options and restricted stock was $0.3 million and $0.1 million, respectively, for the quarters ended March 31, 2008 and 2007. As of March 31, 2008, there was approximately $3.9 million of total unrecognized compensation cost related to the unvested portion of our stock-based awards. The recognition period for the remaining unrecognized stock-based compensation cost is approximately four years. For further discussion on stock-based compensation, see Note 4 of Notes to Consolidated Financial Statements included in Item 1 of this report.

Pension plans - We maintain two noncontributory defined-benefit plans resulting from a prior acquisition that cover certain full-time salaried employees and certain other employees under a collective bargaining agreement. Both plans are frozen and, as such, no future benefits accrue. We record annual amounts relating to these plans based on calculations specified by GAAP, which include various actuarial assumptions such as discount rates (5.50% to 5.75%) and assumed rates of return (7.50% to 8.00%) depending on the pension plan. Material changes in pension costs may occur in the future due to changes in these assumptions. Future annual amounts could be impacted by changes in the discount rate, changes in the expected long-term rate of return, changes in the level of contributions to the plans and other factors.

The discount rate is based on a model portfolio of AA rated bonds with a maturity matched to the estimated payouts of future pension benefits. The expected return on plan assets is based on our expectation of the long-term rates of return on each asset class based on the current asset mix of the funds, considering the historical returns earned on the type of assets in the funds, plus an assumption of future inflation. The current investment policy target asset allocation differs between our two plans, but it is between 50% to 67% for equities and 33% to 50% for bonds. The current inflation assumption is 3.0%. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. The effects of the modifications are amortized over future periods.

 

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Assumed discount rates and expected return on plan assets have a significant effect on the amounts reported for the pension plan. At December 31, 2007, our projected benefit obligation (“PBO”) was $45.8 million. Our projected 2008 net periodic pension expense is $189,000. A 1.0% decrease in our assumed discount rate would increase our PBO to $50.6 million and decrease our 2007 net periodic pension expense to $169,000. A 1.0% increase in our assumed discount rate would decrease our PBO to $41.8 million and increase our 2007 net periodic pension expense to $191,000. A 1.0% decrease in our assumed rate of return would not change our PBO but would increase our 2007 net periodic pension expense to $596,000. A 1.0% increase in our assumed rate of return would not change our PBO but would decrease our 2007 net periodic pension expense to a credit of $219,000.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). This statement significantly changes the financial accounting and reporting of business combination transactions. The provisions of this statement are to be applied prospectively to business combination transactions in the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will depend on the nature, terms and size of business combinations completed after the effective date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for noncontrolling interests in subsidiaries. This statement requires the reporting of all noncontrolling interests as a separate component of stockholders’ equity, the reporting of consolidated net income (loss) as the amount attributable to both the parent and the noncontrolling interests and the separate disclosure of net income (loss) attributable to the parent and to the noncontrolling interests. In addition, this statement provides accounting and reporting guidance related to changes in noncontrolling ownership interests. Other than the reporting requirements described above which require retrospective application, the provisions of SFAS 160 are to be applied prospectively in the first annual reporting period beginning on or after December 15, 2008. We are currently evaluating the impact of this standard on our consolidated financial statements.

Adoption of Statement of Financial Accounting Standards No. 157 and No. 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities,” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date. On January 1, 2008, we adopted the provisions of SFAS 159 and did not elect the fair value option to measure certain financial instruments.

On January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines fair value and provides guidance for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB decided to issue a final Staff Position to allow a one-year deferral of adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We have elected this one-year deferral and thus will not apply the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial statements on a nonrecurring basis until our fiscal year beginning January 1, 2009. The FASB also decided to amend SFAS 157 to exclude FASB Statement No. 13 and its related interpretive accounting pronouncements that address leasing transactions.

SFAS 157 enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. SFAS 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

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We have approximately $0.1 million of cash equivalents for which the fair value is based on quoted prices in active markets for identical assets (Level 1).

We generally apply fair value techniques on a non-recurring basis associated with (1) valuing potential impairment loss related to goodwill and indefinite-lived intangible assets accounted for pursuant to SFAS No. 142 and (2) valuing potential impairment loss related to long-lived assets accounted for pursuant to SFAS No. 144.

 

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Results of Operations

The following table presents certain condensed consolidated financial information, as a percentage of revenue, for the three months ended March 31, 2008 and March 31, 2007:

 

     Three months ended
March 31,
 
     2008     2007  

OPERATING REVENUES:

    

Transportation

   71.6 %   79.8 %

Other service revenue

   12.8 %   9.5 %

Fuel surcharge

   15.6 %   10.7 %
            

Total operating revenues

   100.0 %   100.0 %

OPERATING EXPENSES:

    

Purchased transportation

   57.5 %   65.1 %

Compensation

   13.7 %   11.0 %

Fuel, supplies and maintenance

   14.5 %   9.1 %

Depreciation and amortization

   2.3 %   2.3 %

Selling and administrative

   4.4 %   3.7 %

Insurance claims

   2.7 %   3.7 %

Taxes and licenses

   0.6 %   0.4 %

Communication and utilities

   1.7 %   1.5 %

(Gain) loss on disposal of property and equipment

   -0.3 %   0.1 %
            

Total operating expenses

   97.1 %   96.9 %
            

Operating income

   2.9 %   3.1 %
            

Interest expense

   -4.4 %   -4.3 %

Interest income

   0.1 %   0.1 %

Other expense

   0.0 %   0.0 %
            

Loss before income taxes

   -1.4 %   -1.1 %

Benefit from income taxes

   -0.5 %   -1.1 %
            

Net loss

   -0.9 %   0.0 %
            

The following table shows the approximate number of terminals, drivers, tractors and trailers, that we managed (including affiliates and owner-operators) as of March 31:

 

     2008    2007

Terminals (1)

   168    163

Drivers

   3,435    3,301

Tractors (2)

   3,841    3,772

Trailers (3)

   7,663    7,675

Transportation billed miles (in thousands) (4)

   64,312    67,438

 

(1) excludes transload facilities
(2) excludes 26 tractors held as inventory for sale as of March 31, 2007
(3) excludes 117 and 230 trailers that are held-for-sale as of March 31, 2008 and 2007, respectively
(4) for the three months ended March 31, 2008 and 2007, respectively

 

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Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

For the quarter ended March 31, 2008, total revenues were $208.5 million, an increase of $30.4 million, or 17.1%, from revenues of $178.1 million for the same period in 2007. Transportation revenue increased by $7.2 million or 5.1% primarily due to a $10.1 million increase from the newly acquired Boasso operations offset by a $2.9 million decrease in our pre-existing business. In addition, we had a 3.9% decrease in the total number of billed miles and a decrease of 0.7% related to fewer workdays in 2008. This decrease in volume was offset by average rate increases of 2.9% as compared to the comparable prior year period.

Other service revenue increased $9.8 million, or 57.6%. This increase was primarily due to a $7.4 million increase in revenue generated by the newly acquired Boasso operations. Our tank wash business revenue increased $2.0 million resulting in part from the acquisition of a tank wash business on May 1, 2007. Fuel surcharge revenue increased $13.4 million, or 70.6%, primarily due to the increase in the average fuel price and to the acquisition of Boasso offset by a slight decrease in the total number of billed miles.

Purchased transportation increased by $4.0 million, or 3.5%, due primarily to $6.1 million of expense from the newly acquired Boasso operations offset by a reduction of $2.1 million due to the conversion of affiliates during the preceding twelve months to company-owned operations. Total purchased transportation as a percentage of transportation revenue and fuel surcharge revenue decreased to 66.0% for the current quarter versus 72.0% for the prior year quarter due primarily to the conversion of affiliate terminals to company-owned terminals. Our affiliates generated 50.5% of our transportation revenue and fuel surcharge revenue for the three months ended 2008 compared to 61.8% for the comparable prior year period. We pay our affiliates a greater percentage of revenues generated by them than is paid to Company owner-operators, so our purchased transportation costs will change as revenues generated by affiliates change as a percentage of total transportation revenue. During the first quarter of 2008 and 2007, we paid our affiliates approximately 85% of the transportation revenue while we typically paid Company owner-operators approximately 62% of the invoiced linehaul amount. During the 2008 quarter, we began testing a revenue per mile compensation approach with select owner-operators in lieu of our typical percentage of linehaul compensation approach. We believe this change will better compensate drivers for work performed, leading to increased productivity, better equipment utilization and a reduction of empty miles.

Compensation expense increased $8.9 million, or 45.4%, primarily due to a $4.5 million increase from the newly acquired Boasso operations, $3.9 million is due to an increase of wages and payroll taxes from new or converted Company terminals added over the prior year and, to a lesser extent, an increase in company-wide compensation increases.

Fuel, supplies and maintenance increased $14.0 million, or 86.9%, due to $5.1 million of expense from the newly acquired Boasso operations, $4.3 million of increased fuel costs due to costs associated with the shift of revenue from affiliates to company-owned terminals, $1.8 million of increased lease costs as we fund the addition of newer trailers and tractors to our fleet through the use of operating leases, costs associated with tires for our fleet, and increased maintenance expense of $1.3 million as we increased the capacity of our equipment and increased cleaning of our trailers.

Selling and administrative expenses increased by $2.8 million, or 43.0%, due to $1.1 million of expense from the newly acquired Boasso operations, $0.6 million in additional professional fees and $0.7 million in additional costs for facilities resulting from affiliate conversions offset by $0.3 million of decreased bad debt expenses from the comparable prior year period.

Insurance expense decreased by $1.1 million, or 16.2%, due primarily to a reduction in the number and severity of accidents in the current year quarter.

We generated a gain on disposal of assets of $0.5 million as compared to a loss of $0.2 million in the comparable prior year period. The gain in the current year resulted from the sale of three properties not used in our business offset by a loss on the sale of equipment, compared with a loss in prior year resulting from the disposals of certain tank wash equipment.

 

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For the quarter ended March 31, 2008, operating income totaled $5.8 million, an increase of $0.3 million or 6.3%, compared to $5.5 million for the same period in 2007. The operating margin for the quarter ended March 31, 2008, was 2.8% compared to 3.1% for the same period in 2007 as a result of the above-mentioned items.

Interest expense increased by $1.5 million or 19.2% in the quarter ended March 31, 2008 compared to the same period in 2007, primarily due to interest on our new $50 million of Senior Floating Rate Notes issued in December 2007. In conjunction with these notes, we are incurring increased amortization of the original issue discount related to these notes. In addition, the amortization of deferred financing costs has increased due to the refinancing of our senior credit facility in December 2007. Interest income was relatively flat as compared to the comparable prior year period.

The benefit for income taxes was $1.3 million for the quarter ended March 31, 2008 compared to a tax benefit of $1.9 million for the same period in 2007. In the comparable prior year period, our tax benefit was greater as a result of recognizing an additional income tax benefit from the identification of previously unrecognized deferred tax assets relating to prior periods. We believe these items were neither material to any of the prior periods affected nor material to our 2007 results. Our effective tax rate for the three months ended March 31, 2008 was approximately 40.9%. We expect our effective annual income tax rate for the year ended December 31, 2008 to range from 39% to 44%.

For the quarter ended March 31, 2008, our net loss was $1.9 million, compared to a net loss of $0.2 million for the same period last year.

Segment Operating Results

Prior to 2008, we reported our financial information as a single segment. Beginning with the quarter ended March 31, 2008, we have two reportable business segments for financial reporting purposes that are distinguished primarily on the basis of services offered:

 

   

Trucking, which consists of truckload transportation of bulk chemicals, and

 

   

Container Services, specifically International Organization for Standardization, or ISO tank container transportation and depot services.

Due to the acquisition of Boasso in December 2007, we further enhanced our scope of services in the ISO tank container transportation and depot services market so that management now evaluates isolated revenues associated with these services and with trucking.

Segment revenues and operating income include the allocation of fuel surcharge. The operating income reported in our segments excludes amounts reported in Other operating income, such as corporate and other unallocated amounts. Corporate and unallocated amounts include depreciation and amortization, corporate overhead expense and stock-based compensation expense. Although these amounts are excluded from the business segment results, they are included in reported consolidated earnings. Included in Other revenues are revenues from our tank wash services and other value-added services. We have not provided specific asset information by segment, as it is not regularly provided to our chief operating decision maker for review.

Summarized segment operating results are as follows (in thousands):

 

                           Change  
     2008    % of
Total
    2007    % of
Total
    $     %  

Operating revenues:

              

Trucking

   167,628    80.4 %   161,118    90.5 %   6,510     4.0 %

Container Services

   21,883    10.5 %   2,101    1.2 %   19,782     941.6 %

Other revenue

   18,990    9.1 %   14,876    8.3 %   4,114     27.7 %
                          

Total

   208,501    100.0 %   178,095    100.0 %    
                          

Operating income

              

Trucking

   6,278    61.9 %   8,160    82.9 %   (1,882 )   (23.1 %)

Container Services

   2,503    24.6 %   351    3.6 %   2,152     613.1 %

Other operating income

   1,368    13.5 %   1,327    13.5 %   41     3.1 %
                          

Total

   10,149    100.0 %   9,838    100.0 %    
                          

 

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Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

Operating revenue:

Trucking – revenues increased $6.5 million or 4.0% for the quarter ended March 31, 2008 compared to the same period for 2007 due to an increase of $11.2 million of fuel surcharge offset by a decrease of $4.7 million due to fewer billed miles and fewer workdays.

Container Services – revenues increased $19.8 million or 941.6% for the quarter ended March 31, 2008 compared to the same period for 2007 due to the newly acquired Boasso operations.

Other revenue – revenues increased $4.1 million or 27.7% for the quarter ended March 31, 2008 compared to the same period for 2007 due to an increase in our tank wash revenue, which includes the acquistion of a tank wash business acquired in May 2007.

Operating income:

Trucking – operating income decreased $1.9 million or 23.1% for the quarter ended March 31, 2008 compared to the same period for 2007 due to increased fuel costs and conversion of affiliates which increased facility costs, leasing costs, and maintenance costs.

Container Services – operating income increased $2.2 million or 613.1% for the quarter ended March 31, 2008 compared to the same period for 2007 due to the newly acquired Boasso operations.

Other operating income – operating income remained flat for the quarter ended March 31, 2008 compared to the same period for 2007

Liquidity and Capital Resources

The following summarizes our cash flows for the three months ended March 31, 2008 and 2007 as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements (in thousands):

 

     Three Months Ended
March 31,
 
     2008     2007  

Net cash used in operating activities

   $ (2,905 )   $ (453 )

Net cash used in investing activities

     (4,091 )     (1,805 )

Net cash used in financing activities

     (10 )     (524 )

Effect of exchange rate changes on cash

     (10 )     15  
                

Net decrease in cash and cash equivalents

     (7,016 )     (2,767 )

Cash and cash equivalents at beginning of period

     9,711       6,841  
                

Cash and cash equivalents at end of period

   $ 2,695     $ 4,074  
                

Historically, our primary source of liquidity has been cash flow from operations and borrowing availability under our credit agreement. Our primary cash needs consist of capital expenditures and debt service including our asset-based loan facility (“ABL Facility”), our 9% Senior Subordinated Notes due 2010 (“9% Notes”) and our Senior Floating Rate Notes due 2012 (“2012 Notes”). We incur capital expenditures for the purpose of purchasing tractors and trailers to meet our strategic needs during the year, and maintaining and improving our infrastructure.

 

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Net cash used in operating activities was $2.9 million for the three-month period ended March 31, 2008 compared to $0.5 million used in the comparable 2007 period. The $2.4 million change in cash used in operating activities was due in part to the payment of two large claims classified under accrued loss and damage claims offset by a smaller increase in accounts receivable.

Cash used in investing activities totaled $4.1 million for the three-month period ended March 31, 2008, compared to $1.8 million used in the comparable 2007 period. The increase of $2.3 million resulted from an increase in capital expenditures due in part to development costs associated with our new terminal in Newark, New Jersey, cash paid for business assets purchased, and proceeds from sales of property and equipment in 2008 as compared to 2007.

Cash used in financing activities was less than $0.1 million during the three-month period ended March 31, 2008, compared to net cash used in financing activities of $0.5 million for the same period in 2007. In 2008, cash was received and used to purchase equipment and pay down debt and capital lease obligations. In 2007, cash was used to pay down our previous term loan and capital lease obligations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined under Item 303(a)(4) of Regulation S-K.

Contractual Obligations and Commitments

The following is a schedule of our long-term contractual commitments, including the current portion of our long-term indebtedness at March 31, 2008 over the periods we expect them to be paid (in thousands):

 

     Total    Remainder
of 2008
   Year 2009    Year 2010    Year 2011    Year 2012    Year 2013
and after

Operating leases (1)

   $ 103,216    $ 20,106    $ 24,778    $ 18,923    $ 14,123    $ 10,610    $ 14,676

Total indebtedness (2)

     354,221      1,366      3,808      126,725      1,258      136,211      84,853

Capital leases

     5,311      1,227      1,693      1,677      548      150      16

Interest on indebtedness (3)

     102,419      21,706      28,841      27,151      17,225      5,640      1,856
                                                

Total

   $ 565,167    $ 44,405    $ 59,120    $ 174,476    $ 33,154    $ 152,611    $ 101,401
                                                

 

(1) These obligations represent the minimum rental commitments under all non-cancelable operating leases including the guaranteed residual values at the end of the leases.
(2) Excludes an unamortized original issue discount of $4.2 million.
(3) Amounts presented for interest payments assume that all long-term debt obligations outstanding as of March 31, 2008 will remain outstanding until maturity and interest rates on variable-rate debt in effect as of March 31, 2008 will remain in effect until maturity.

Other Liabilities and Obligations

We have $10.5 million of environmental liabilities, $7.7 million of pension plan obligations and $27.8 million of other insurance claim obligations. We expect to pay these various obligations over the next ten years. We also have $58.5 million in outstanding letters of credit. We are required to provide letters of credit to our insurance administrator to cover the payment of claims. The outstanding letters of credit as of March 31, 2008 for our insurance administrator totaled $47.1 million. If we fail to meet certain terms of our agreement, the insurance administrator may draw down the letters of credit. As of March 31, 2008, our FIN 48 liability is $3.2 million and represents total gross unrecognized tax benefits that may be paid in future periods. In addition, we have accrued $1.9 million of interest and penalties that may be paid in future periods.

 

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Long-term Debt

Long-term debt consisted of the following (in thousands):

 

     March 31,
2008
    December 31,
2007
 

Capital lease obligations

   $ 5,311     $ 5,283  

ABL Facility

     84,200       84,130  

Senior Floating Rate Notes due 2012

     135,000       135,000  

9% Senior Subordinated Notes due 2010

     125,000       125,000  

Boasso Note

     2,500       2,500  

Other Notes

     7,521       1,805  
                

Long-term debt, including current maturities

     359,532       353,718  

Discount on Senior Floating Rate Notes

     (4,170 )     (4,447 )
                
     355,362       349,271  

Less current maturities of long-term debt (including capital lease obligations)

     (3,459 )     (1,864 )
                

Long-term debt, less current maturities

   $ 351,903     $ 347,407  
                

Our principal debt sources at March 31, 2008 comprise $125 million aggregate principal amount of 9% Senior Subordinated Notes due 2010 (the “9% Notes”), $135 million principal amount of our Senior Floating Rate Notes due 2012 (the “2012 Notes”) and a $225 million asset-based loan facility (the “ABL Facility”).

The ABL Facility

The ABL Facility which was effective December 18, 2007, consists of a current asset-based revolving facility in an initial amount of $195.0 million (the “current asset tranche”) and a fixed asset-based revolving facility in an initial amount of $30.0 million (the “fixed asset tranche”), with the total commitments under the fixed asset tranche to be reduced, and the total commitments under the current asset tranche correspondingly increased by $5.0 million on each at December 18, 2009 and 2010. Borrowings of revolving loans under the ABL Facility are allocated pro rata to the current asset tranche and the fixed asset tranche based on the then-current asset borrowing base and the then-current fixed asset borrowing base. The ABL Facility matures June 18, 2013. The maturity date of the ABL Facility may be accelerated if we default on our obligations under the ABL Facility. The maturity date of the ABL Facility is also advanced to a date 91 days prior to the maturity date of the 2012 Notes or the 9% Notes (and replacement indebtedness) if the aggregate principal amount of the notes maturing in the 91-day period exceeds $50.0 million.

The ABL Facility includes borrowing capacity of up to $150.0 million for letters of credit, which are allocated pro rata between the two tranches based on the then-current borrowing base for each tranche (or, if the credit extensions under the fixed asset tranche are repaid and the commitments there under are terminated prior to the termination of the ABL Facility, to the current asset tranche), and up to $10.0 million for swingline borrowings on same-day notice, which are allocated under the current asset tranche. The proceeds of the ABL Facility were used, together with the proceeds from an additional private offering of $50 million of the 2012 Notes, to finance a portion of the Boasso acquisition. The ABL facility contains a fixed charge coverage ratio of 1.0 to 1.0 which only needs to be met if borrowing availability is less than $20 million. At March 31, 2008, we had $55.5 million of borrowing availability under the ABL facility.

Borrowings under the ABL Facility bear interest at a rate equal to an applicable margin plus, at our option, either a base rate or LIBOR. The applicable margin for borrowings under the current asset tranche at March 31, 2008 is 1.00% with respect to base rate borrowings and 2.00% with respect to LIBOR borrowings. The applicable margin for borrowings under the fixed asset tranche at March 31, 2008 is 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. The applicable margin for such borrowings will be reduced or increased based on aggregate borrowing base availability under the ABL Facility over the life of the ABL Facility. The base rate for the ABL Facility is the higher of the prime rate and the federal funds overnight rate plus 0.50%. We are also required to pay a fee for utilized commitments under the ABL Facility at a rate equal to 0.25% per annum. The ABL Facility is required to be prepaid only to the extent that aggregate amount of outstanding borrowings, unreimbursed letter of credit drawings and undrawn letters of credit under the relevant tranche exceeds the lesser of the applicable commitments and the applicable borrowing base in effect at such time for such tranche. The borrowing base for the current asset tranche consists of eligible accounts receivable, eligible inventory and eligible truck and trailer fleet, and the borrowing base for the fixed asset tranche consists of eligible real property and certain eligible equipment. We may voluntarily repay outstanding loans under the ABL Facility at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans. The interest rate on the ABL Facility at March 31, 2008 was 4.6%.

 

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All obligations under the ABL Facility are guaranteed by QDI and each of our wholly-owned domestic restricted subsidiaries (other than our immaterial subsidiaries). Obligations under the current asset tranche, and the guarantees of those obligations (as well as cash management obligations and any interest hedging or other swap agreements), are secured by a first priority lien on certain assets of QD LLC and the guarantors, including eligible accounts, eligible inventory and eligible truck and trailer fleet (“current asset tranche priority collateral”) and a second priority lien on all other assets of QD LLC and the guarantors, including eligible real property and certain eligible equipment (“fixed asset tranche priority collateral”). Obligations under the fixed asset tranche, and the guarantees of those obligations, are secured by a first-priority lien on fixed asset tranche priority collateral and a second priority lien on current asset tranche priority collateral.

We incurred $6.5 million in debt issuance costs relating to the ABL Facility. We are amortizing these costs over the term of the ABL Facility.

Senior Floating Rate Notes

On January 28, 2005, we consummated the private offering of $85 million in Senior Floating Rate Notes by QD LLC and QD Capital and guaranteed by QDI and domestic subsidiaries at 98% of the face value of the notes. On December 18, 2007, we consummated a private offering of $50 million in Senior Floating Rate Notes by QD LLC and QD Capital and guaranteed by QDI and domestic subsidiaries at 93% of the face value of the notes. The 2012 Notes, due January 15, 2012, pay interest quarterly on January 15, April 15, July 15, and October 15. Interest accrues at a floating rate per annum, reset quarterly, equal to LIBOR plus 4.5%. The net proceeds of the $85 million offering were used to repay approximately $70 million of a previous term loan and to make a distribution to QDI, which in turn used such proceeds to redeem all $7.5 million principal amount of previous outstanding debt. The balance was used for general corporate purposes, including the repayment of $5.8 million of indebtedness under the revolving credit portion of our previous credit facility. The net proceeds of the $50 million offering were used to repay a portion of the term loan under our previous credit facility. The interest rate on the $85 million of the 2012 Notes at March 31, 2008 and 2007 was 8.8% and 9.9%, respectively. The interest rate on the $50 million of the 2012 Notes at March 31, 2008 was 8.8%.

We incurred $2.4 million in debt issuance costs relating to the $85 million of the 2012 Notes and $2.1 million related to the $50 million of the 2012 Notes. We are amortizing these costs over the term of the notes.

We may redeem the 2012 Notes, in whole or in part from time to time, upon not less than 30 nor more than 60 days’ notice at the following redemption prices, expressed as percentages of the principal amount thereof, if redeemed during the twelve-month period commencing on January 15 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption:

 

Year

   Percentage

2008

   101.00

2009 and thereafter

   100.00

Previous Term Loan

Prior to entering into the ABL Facility, our term loan carried interest at our option at (a) 2.00% in excess of the defined Base Rate or (b) 3.00% in excess of the Eurodollar rate for Eurodollar Loans, subject in each case, to adjustment based upon the achievement of certain financial ratios and matured on November 12, 2009. The principal payments were payable quarterly on March 15, June 15, September 15 and December 15. The interest rate on the term loan upon refinancing with the new ABL Facility on December 18, 2007 was 9.7% and the weighted average interest rate during 2007 was 8.6%.

We incurred $3.4 million in debt-issuance costs relating to the term loan and wrote-off $1.1 million of the debt-issuance costs upon the $70 million partial repayment of the term loan in January 2005. We amortized the $2.3 million remaining debt-issuance costs over the term of the term loan to interest expense until we wrote off the balance of $0.7 million upon refinancing the term loan with the new ABL Facility.

 

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Previous Revolving Credit Facility

Prior to entering into the ABL Facility, our revolving credit facility comprised a $75.0 million revolver that was available until November 12, 2008 and a $20 million pre-funded letter of credit facility that was available until November 12, 2009. The revolver was used for working capital and general corporate purposes, including permitted acquisitions and additional letters of credit.

Interest on the revolver was, at our option, (a) 2.50% in excess of the Base Rate provided in the credit agreement or (b) 3.50% in excess of the Eurodollar rate for Eurodollar Loans, in each case subject to adjustments based upon the achievement of certain financial ratios. The interest rate on the revolver upon refinancing with the new ABL Facility on December 18, 2007 was 9.6% and the weighted average interest rate during 2007 was 10.6%.

The credit facility provided for payment by us in respect of outstanding letters of credit of an annual fee equal to the spread over the Eurodollar rate for Eurodollar Loans under the revolver from time to time in effect on the aggregate outstanding stated amounts of such letters of credit and a fronting fee equal to  1/4 of 1.0% on the aggregate outstanding stated amounts of such letters of credit. We paid a commitment fee equal to  1/2 of 1.0% per annum on the undrawn portion of the available commitment under the revolver, subject to decreases based on the achievement of certain financial ratios.

Voluntary prepayments and commitment reductions were permitted in whole or in part, subject to minimum prepayment or reduction requirements, without premium or penalty, provided that voluntary prepayments of Eurodollar Loans on a date other than the last day of the relevant interest period will be subject to payment of customary breakage costs, if any.

We incurred $1.5 million in debt issuance costs relating to the revolver and we amortized these costs over the term of the revolver. Upon the refinancing of the revolver with the new ABL Facility, we wrote off a balance of the debt issuance costs of $0.4 million.

9% Senior Subordinated Notes

The 9% Senior Subordinated Notes are unsecured obligations, due 2010, guaranteed on a senior subordinated basis by us and all of our direct and indirect domestic subsidiaries. The guarantees are full, unconditional, joint and several obligations of the guarantors.

We incurred $5.5 million in debt issuance costs relating to the 9% Senior Subordinated Notes. We are amortizing these costs over the term of the 9% Senior Subordinated Notes.

We may redeem the 9% Senior Subordinated Notes, in whole or in part from time to time, upon not less than 30 nor more than 60 days notice at the following redemption prices, expressed as percentages of the principal amount thereof, if redeemed during the twelve-month period commencing on November 15 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption:

 

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Year

   Percentage

2008

   102.25

2009 and thereafter

   100.00

Boasso Note

Included in the aggregate purchase price of the Boasso acquisition is a $2.5 million 7% promissory note with a maturity on December 18, 2009 for the benefit of a former Boasso shareholder. The shareholder has the right to demand payment on December 18, 2009. The Boasso Note is convertible into shares of our common stock following the first anniversary of the acquisition at the election of the holder at a price of $4.47 per share (the closing price of the shares reported on NASDAQ on the day before the acquisition). If the conversion option is exercised, we have the right, instead of issuing shares to pay the holder a cash amount equal to the number of shares of common stock into which the Boasso Note is then convertible multiplied by the average closing price plus any accrued and unpaid interest.

Collateral, Guarantees and Covenants

The ABL Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability, and the ability of our subsidiaries, to sell assets; incur additional indebtedness; prepay other indebtedness (including the notes); pay dividends and distributions or repurchase their capital stock; create liens on assets; make investments; make certain acquisitions; engage in mergers or consolidations; engage in certain transactions with affiliates; amend certain charter documents and material agreements governing subordinated indebtedness, including the Existing Subordinated Notes; change the business conducted by it and its subsidiaries; and enter into agreements that restrict dividends from subsidiaries. The ABL Facility also contains certain customary affirmative covenants and events of default.

The term loan and revolver were guaranteed by all of our existing and future direct and indirect domestic subsidiaries (collectively, the “subsidiary guarantors”). Our obligations under the term loan and revolver and our subsidiary guarantor obligations were collateralized by a first priority perfected lien on substantially all of our properties and assets and the subsidiary guarantors, now owned or subsequently acquired, including a pledge of all capital stock and notes owned by us and the subsidiary guarantors, subject to certain exceptions. In addition, in certain cases, no more than 65.0% of the stock of our foreign subsidiaries is required to be pledged. Such assets pledged also collateralize certain interest rate protection and other hedging agreements permitted by the credit facility that may be entered into from time to time by us.

The previous credit agreement contained restrictions on debt incurrence, investments, transactions with affiliates, creation of liens, asset dispositions, redeemable common stock, preferred stock issuance, capital expenditures, and the payment of dividends. At the time of refinancing our previous credit facility with the new ABL Facility, we were in compliance with all these debt covenants. The previous credit agreement included one financial covenant, the ratio of Senior Secured Debt (as defined) to Consolidated EBITDA (as defined).

QD LLC, has the ability to incur additional debt, subject to limitations imposed by the indentures governing the 9% Notes and the 2012 Notes. Under the indentures governing the 9% Notes and 2012 Notes, in addition to specified permitted indebtedness, QD LLC will be able to incur additional indebtedness so long as, on a pro forma basis, QD LLC’s consolidated fixed charge coverage ratio (the ratio of Consolidated EBITDA (as defined in the respective indentures for the QD LLC Notes) to consolidated fixed charges) is 2.00 to 1.0 or less. As of March 31, 2008 we were in compliance with this covenant.

We are in compliance with all covenants at March 31, 2008.

 

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Debt Retirement

The following is a schedule of our indebtedness at March 31, 2008 over the periods we are required to pay such indebtedness (in thousands):

 

     Remainder
of 2008
   2009    2010    2011    2012 and
after
   Total

Boasso Note (1)

   $ —      $ 2,500    $ —      $ —      $ —      $ 2,500

Capital lease obligations

     1,227      1,693      1,677      548      166      5,311

ABL Facility (2)

     —        —        —        —        84,200      84,200

9% Senior Subordinated Notes, due 2010

     —        —        125,000      —        —        125,000

Senior Floating Rate Notes, due 2012

     —        —        —        —        135,000      135,000

Other Notes

     1,366      1,308      1,725      1,258      1,864      7,521
                                         

Total

   $ 2,593    $ 5,501    $ 128,402    $ 1,806    $ 221,230    $ 359,532
                                         

 

(1) The holder of the Boasso Note has the right to require that we repay the Boasso Note in full on the first anniversary of the Boasso acquisition.
(2) The maturity date of the ABL Facility may be accelerated if we default on our obligations under the ABL Facility. The maturity date of the ABL Facility is also advanced to a date 91 days prior to the maturity date of the 2012 Notes or the 9% Notes (and replacement indebtedness) if the aggregate principal amount of the notes maturing in the 91-day period exceeds $50.0 million.

The above table does not include the remaining unamortized original issue discount of $4.2 million relating to the 2012 Notes.

The following is a schedule of our debt issuance costs at March 31, 2008 (in thousands):

 

     Issuance
Costs
   Accumulated
Amortization
   Balance

ABL Facility

   $ 6,464    $ 343    $ 6,121

9% Senior Subordinated Notes, due 2010

     5,496      3,474      2,022

Senior Floating Rate Notes, due 2012

     4,521      1,280      3,241
                    

Total

   $ 16,481    $ 5,097    $ 11,834
                    

We are amortizing these costs over the term of the debt instruments.

FORWARD-LOOKING STATEMENTS AND CERTAIN CONSIDERATIONS

This report, along with other documents that are publicly disseminated by us, contains 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 us with the SEC other than statements of historical fact, that address activities, events or developments that we or our management expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially. We claim the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. Examples of forward-looking statements include: (i) projections of revenue, earnings, capital structure and other financial items, (ii) statements of our plans and objectives, (iii) statements of expected future economic performance, and (iv) assumptions underlying statements regarding us or 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,” “could,” “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.

 

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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 following risks and other factors discussed under the Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007 as well as those discussed in this quarterly report on Form 10-Q. These factors include:

 

   

general economic conditions,

 

   

the availability of diesel fuel,

 

   

adverse weather conditions,

 

   

competitive rate fluctuations,

 

   

our substantial leverage and restrictions contained in our debt arrangements and interest rate fluctuations in our floating rate indebtedness,

 

   

the cyclical nature of the transportation industry due to various economic factors such as excess capacity in the industry, the availability of qualified drivers, changes in fuel and insurance prices, interest rate fluctuations, and downturns in customers’ business cycles and shipping requirements,

 

   

changes in demand for our services due to the cyclical nature of our customers’ businesses,

 

   

potential disruption at U.S. ports of entry could adversely affect our business, financial condition and results of operations,

 

   

our dependence on affiliates and owner-operators and our ability to attract and retain owner-operators, affiliates and Company drivers,

 

   

changes in the future, or our inability to comply with, governmental regulations and legislative changes affecting the transportation industry,

 

   

our material exposure to both historical and changing environmental regulations and the increasing costs relating to environmental compliance,

 

   

our liability as a self-insurer to the extent of our deductibles, as well as our ability or inability to reduce our claims exposure through insurance due to changing conditions and pricing in the insurance marketplace,

 

   

the cost of complying with existing and future anti-terrorism security measures enacted by federal, state and municipal authorities,

 

   

the potential loss of our ability to use net operating losses to offset future income due to a change of control,

 

   

increased unionization, which could increase our operating costs or constrain operating flexibility,

 

   

our ability to successfully integrate acquired businesses and converted affiliates, and

 

   

interests of Apollo Management, our largest shareholder, which may conflict with your interests.

In addition, there may be other factors that could cause our actual results and financial condition to be materially different from the results referenced in the forward-looking statements. For example, the cost estimates and expected cost savings for our recent reduction in workforce were determined based upon the operating information and upon certain assumptions that we believe to be reasonable. The estimates are subject to a number of assumptions, including assumptions regarding the number of employees accepting severance arrangements, which depend upon the actions of persons other than us or other factors beyond our control.

All forward-looking statements contained in this Quarterly Report on Form 10-Q are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we do not intend to update or otherwise revise the forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

ADDITIONAL INFORMATION AVAILABLE ON COMPANY WEBSITE

Our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports may be viewed or downloaded electronically or as paper copies from our website: http://www.qualitydistribution.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our recent press releases are also available to be viewed or downloaded electronically at http://www.qualitydistribution.com. We will also provide electronic or paper copies of our SEC filings free of charge on request. Any information on or linked from our website is not incorporated by reference into this Quarterly Report on Form 10-Q.

 

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ITEM 3 — Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risks from (i) interest rates due to our variable interest rate indebtedness, (ii) foreign currency fluctuations due to our international operations and (iii) increased commodity prices due to the diesel consumption necessary for our operations. During the three months ended March 31, 2008, we did not hold derivative instruments or engage in other hedging transactions to reduce our exposure to such risks.

Interest Rate Risk

We are exposed to the impact of interest rate changes primarily through our variable-rate borrowings under the ABL Facility and the 2012 Notes. With regard to the ABL Facility at QD LLC’s option, the applicable margin for borrowings under the current asset tranche at March 31, 2008 is 1.00% with respect to base rate borrowings and 2.00% with respect to LIBOR borrowings. The applicable margin for borrowings under the fixed asset tranche at March 31, 2008 is 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. The applicable margin for such borrowings will be reduced or increased based on aggregate borrowing base availability under the ABL Facility over the life of the ABL Facility. The base rate under the ABL Facility is equal to the higher of the prime rate and the federal funds overnight rate plus 0.50%. The base rate for our 2012 Notes is LIBOR plus 4.50%.

 

     Balance at
March 31,
2008

($ in 000s)
   Interest
Rate at
March 31,
2008
    Effect of
1%
Increase

($ in 000s)

ABL Facility

   $ 84,200    4.56 %   $ 842

Senior Floating Rate Notes - $50M

     50,000    8.76 %     500

Senior Floating Rate Notes - $85M

     85,000    8.76 %     850
               

Total

   $ 219,200      $ 2,192
               

At March 31, 2008, a 1% point increase in the current per annum interest rate for each would result in $2.2 million of additional interest expense during the next year. The foregoing calculation assumes an instantaneous one percentage point increase in the rates of all of our indebtedness and that the principal amount of each is the amount outstanding as of March 31, 2008. The calculation therefore does not account for the differences in the market rates upon which the interest rates of our indebtedness are based, our various options to elect the lower of two different interest rates under our borrowings or other possible actions, such as prepayment, that we might take in response to any rate increase.

Foreign Currency Exchange Rate Risk

Operating in international markets involves exposure to the possibility of volatile movements in foreign exchange rates. The currencies in each of the countries in which we operate affect:

 

   

the results of our international operations reported in U.S. dollars; and

 

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the value of the net assets of our international operations reported in U.S. dollars.

These exposures may impact future earnings or cash flows. Revenue from foreign locations (Canada and Mexico) represented approximately 6.5% of our consolidated revenue for the three months ended March 31, 2008 and 7.3% of our consolidated revenue for the three months ended March 31, 2007. The economic impact of foreign exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing and operating strategies. Therefore, to isolate the effect of changes in currency does not accurately portray the effect of these other important economic factors. As foreign exchange rates change, translation of the income statements of our international subsidiaries into U.S. dollars affects year-over-year comparability of operating results. While we may hedge specific transaction risks, we generally do not hedge translation risks because we believe there is no long-term economic benefit in doing so.

Assets and liabilities for our Canadian operations are matched in the local currency, which reduces the need for dollar conversion. Our Mexican operations use the U.S. dollar as their functional currency. Any foreign currency impact on translating assets and liabilities into dollars is included as a component of shareholders’ equity. Our revenue results for the three months ended March 31, 2008 were positively impacted by a $1.1 million foreign currency movement, primarily due to the strengthening of the Canadian dollar against the United States dollar.

Changes in foreign exchange rates that had the largest impact on translating our international operating profits for the three months ended March 31, 2008 related to the Canadian dollar versus the U.S. dollar. We estimate that a 1% adverse change in the Canadian dollar foreign exchange rate would have decreased our revenues by approximately $0.1 million for the three months ended March 31, 2008, assuming no changes other than the exchange rate itself. Our inter-company loans are subject to fluctuations in exchange rates primarily between the U.S. dollar and the Canadian dollar. Based on the outstanding balance of our inter-company loans at March 31, 2008, a change of 1% in the exchange rate for the Canadian dollar would cause a change in our foreign exchange result of less than $0.1 million.

Commodity Price Risk

The price and availability of diesel fuel are subject to fluctuations due to changes in the level of global oil production, seasonality, weather, global politics and other market factors. During the first three months of 2008, diesel fuel prices continued to rise to record levels. Historically, we have been able to recover a majority of fuel price increases from our customers in the form of fuel surcharges. The price and availability of diesel fuel can be unpredictable as well as the extent to which fuel surcharges could be collected to offset such increases. In the three months ended March 31, 2008 and 2007, a majority of fuel costs were covered through fuel surcharges.

ITEM 4 — Controls and Procedures

Evaluation of disclosure controls and procedures

As required by Exchange Act Rules 13a-15(b) and 15d-15(b), management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, management concluded our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of March 31, 2008 to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and were effective as of March 31, 2008 to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

Since the acquisition of Boasso in December 2007, we have been diligently working to integrate and assimilate Boasso’s operations into our internal operating procedures, information systems and accounting controls. While in this transition phase during the three months ended March 31, 2008, we reviewed the financial information obtained from Boasso and performed additional procedures with respect to such information in order to determine its accuracy and reliability. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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In accordance with guidance from the Division of Corporation Finance and Office of the Chief Accountant of the Securities and Exchange Commission, the Company will include an assessment of Boasso in management’s report on the effectiveness of the Company’s internal control over financial reporting in the Form 10-K for the year ended December 31, 2008.

PART II — OTHER INFORMATION

ITEM 1 — Legal Proceedings

Other than reported in “Item 3—Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2007, “Note 17. Commitments and Contingencies” to our audited consolidated financial statements contained in such Form 10-K and “Note 8. Commitments and Contingencies” to our unaudited consolidated financial statements included in this report, we are not currently a party to any material pending legal proceedings other than routine matters incidental to our business and no material developments have occurred in any proceedings described in such Form 10-K.

ITEM 1A — Risk Factors

You should carefully consider the factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007 included under Item 1A “Risk Factors” in addition to the other information set forth in this report (including the risk identified below). The risks described in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

We are self-insured and have exposure to certain claims and are subject to the insurance marketplace, all of which could affect our profitability.

The primary accident risks associated with our business are:

 

   

motor-vehicle related bodily injury and property damage,

 

   

workers’ compensation claims,

 

   

cargo loss and damage, and

 

   

general liability claims.

We currently maintain insurance for:

 

   

motor-vehicle related bodily injury and property damage claims, covering all employees, owner operators and affiliates,

 

   

workers’ compensation insurance coverage on our employees and company drivers, and

 

   

general liability claims.

Our insurance program includes a self insured deductible, in most cases, of $2.0 million per incident for both auto and general liability and a $1.0 million deductible for workers’ compensation. In addition, we currently maintain an umbrella insurance policy covering claims in excess of $5.0 million, up to an aggregate loss of $40.0 million per incident. The per incident deductible, could adversely affect our profitability, particularly in the event of an increase in the number or severity of incidents. Additionally, we are self-insured for damage to the equipment that we own and lease, for cargo losses, and for non-trucking pollution legal liability and such self-insurance is not subject to any maximum limitation. We extend insurance coverage to our affiliates for (i) motor vehicle related bodily injury, (ii) property damage, and (iii) cargo loss and damage. Under this extended coverage, affiliates are responsible for only a small portion of the applicable deductibles.

We are subject to changing conditions and pricing in the insurance marketplace and we cannot assure you that the cost or availability of various types of insurance may not change dramatically in the future. To the extent these costs cannot be passed on to our customers in increased freight rates, increases in insurance costs could reduce our future profitability and cash flow.

 

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We may be unable to identify or realize the intended benefits of potential acquisition candidates.

As part of our business strategy, we will evaluate potential acquisitions, some of which could be material, and engage in discussions with acquisition candidates. We cannot assure you that suitable acquisition candidates will be identified and acquired in the future, that the financing of any such acquisition will be available on satisfactory terms, that we will be able to complete any such acquisition or that we will be able to accomplish our strategic objectives as a result of any such acquisition. Nor can we assure you that our acquisition strategies will be successfully received by customers or achieve their intended benefits. Often acquisitions are undertaken to improve operating results of either or both of the acquirer or the acquired company, and we cannot assure you that we will be successful in this regard. The same risks exist when an acquired company was previously one of our operating affiliates. We will encounter various risks in acquiring other companies, including the possible inability to integrate an acquired business into our operations, diversion of management’s attention and unanticipated problems or liabilities, some or all of which could materially and adversely affect our business, financial condition or results of operations.

ITEM 2 — Unregistered Sale of Equity Securities and Use of Proceeds

None

ITEM 3 — Defaults Upon Senior Securities

None

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

None

ITEM 5 — Other Information

None

ITEM 6 — Exhibits

 

Exhibit No.

 

Description

10.1   2003 Stock Option Plan as Amended and Restated March 11, 2008
10.2   1998 Stock Option Plan as Amended and Restated March 11, 2008
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant To 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    QUALITY DISTRIBUTION, INC.
May 9, 2008  

/s/ Gary R. Enzor

  GARY R. ENZOR,
 

PRESIDENT AND CHIEF EXECUTIVE OFFICER

(PRINCIPAL EXECUTIVE OFFICER)

May 9, 2008  

/s/ Timothy B. Page

  TIMOTHY B. PAGE,
 

SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)

 

45

EX-10.1 2 dex101.htm 2003 STOCK OPTION PLAN 2003 Stock Option Plan

Exhibit 10.1

2003 STOCK OPTION PLAN

(as amended and restated March 11, 2008)

1. Purpose of this Plan.

The purpose of this QUALITY DISTRIBUTION, INC. 2003 STOCK OPTION PLAN (this “Plan”) is (i) to further the growth and success of QUALITY DISTRIBUTION, INC., a Florida corporation (the “Company”), by enabling directors, officers and employees of, advisors to, and independent consultants or independent contractors to, the Company or its Subsidiaries to acquire shares of the Common Stock of the Company (the “Common Stock”), thereby increasing their personal interest in such growth and success, and (ii) to provide a means of rewarding outstanding performance by such persons to the Company and its Subsidiaries. Options granted under this Plan may only be non-qualified stock options (“Options”). For purposes of this Plan, the term “Subsidiary” means “Subsidiary Corporation” as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended (the “Code”).

2. Administration of this Plan.

(a) The Committee. This Plan shall be administered by the Board of Directors of the Company (the “Board”) or by one or more committees of the Board (each, a “Committee”) each consisting of such number of persons appointed to such Committee from time to time by the Board consistent with applicable law. With respect to awards intended to satisfy the requirements for performance-based compensation under Section 162(m) of the Code, this Plan shall be administered by a Committee consisting solely of two or more outside directors (as this requirement is applied under Section 162(m) of the Code); provided, however, that the failure to satisfy such requirement shall not affect the validity of the action of any Committee otherwise duly authorized and acting in the matter. Award grants, and transactions in or involving awards, intended to be exempt under Rule 16b-3 (“Rule 16b-3”) under the Securities Exchange Act of 1934, as amended (the “1934 Act”), must be duly and timely authorized by the Board or a Committee consisting solely of two or more non-employee directors (as this requirement is applied under Rule 16b-3). To the extent required by any applicable listing agency, this Plan shall be administered by a Committee composed entirely of independent directors (within the meaning of the applicable listing agency). The members of a Committee may be removed at any time either with or without cause by the Board. Any vacancy on a Committee, whether due to action of the Board or any other cause, shall be filled by the Board. The term “Committee” shall, for all purposes of this Plan, other than this Section 2, be deemed to refer to the Board if the Board is administering this Plan or, if a committee of the Board is acting within its delegated authority in such matter, to the acting committee of the Board.

(b) Procedures. If this Plan is administered by a Committee of the Board, the Committee shall from time to time select a Chairman from among the members of the Committee. The Committee shall adopt such rules and regulations as it shall deem appropriate concerning the holding of meetings and the administration of this Plan. A majority of the entire Committee shall constitute a quorum and the actions of a majority of the members of the Committee present at a meeting at which a quorum is present, or actions approved in writing by all of the members of the Committee (but only to the extent permitted by applicable law and the applicable rules and regulations of the principal national securities exchange or national market system (if any) on which the Common Stock is a class of securities then listed or admitted for trading), shall be the actions of the Committee; provided, however, that if the Committee consists of only two members, both shall be required to constitute a quorum and to act at a meeting or to approve actions in writing.

(c) Interpretation. Except as otherwise expressly provided in this Plan, the Board (or other Committee acting within its delegated authority) shall have all powers with respect to the administration of this Plan, including, without limitation, full power and authority to (i) interpret the provisions of this Plan, any Option Agreement (as defined in Section 5(b)) and any other agreement or document executed pursuant to this Plan, (ii) resolve all questions arising under this Plan, any Option Agreement and any other such agreement or plan, (iii) correct any defect, supply any omission or reconcile any inconsistency in or among the Plan, any Option or any Option Agreement, (iv) grant waivers of Plan or Option conditions and (v) make all other determinations necessary or advisable for the administration of this Plan. All decisions of the Board or the Committee, as the case may be, shall be conclusive and binding on all participants in this Plan.


3. Shares of Stock Subject to the Plan.

(a) Number of Available Shares. Subject to the provisions of Section 9 (relating to adjustments upon changes in capital structure and other corporate transactions) and the further provisions of this Section 3(a), the number of shares of Common Stock available at any one time for issuance upon the exercise of Options granted under this Plan shall not exceed 2,210,000 shares of Common Stock (before making any adjustment under this Plan or otherwise for any stock split, stock dividend or similar recapitalization event occurring on or after the Effective Date (as defined in Section 11)). In addition, on each January 1, commencing January 1, 2004, the number of shares of Common Stock which may be available for issuance upon the exercise of Options granted under this Plan shall be increased automatically by that number of shares of Common Stock equal to two and one half percent (2.5%) of the total number of outstanding shares of Common Stock determined as of the last day of the immediately preceding fiscal year of the Company; provided, however, that the Board of Directors may, in its absolute discretion, determine in respect of any given January 1 that such automatic increase be less than two and one half percent (2.5%) or that no such automatic increase occur on such January 1, any such determination to be made by February 15 of the applicable year; and provided, further, that in no event shall more than 6,500,000 shares (before making any adjustment under this Plan or otherwise for any stock split, stock dividend or similar recapitalization event occurring after the Effective Date) of Common Stock be issued in the aggregate under the Plan. If, and to the extent that, (i) Options granted under this Plan terminate, expire or are canceled without having been fully exercised, new Options may be granted under this Plan for the shares of Common Stock constituting the unexercised portion of such terminated, expired or canceled Options, and (ii) any shares of Common Stock issued upon the exercise of Options granted under this Plan are forfeited to or repurchased by the Company, new Options may be granted under this Plan for up to an equivalent number of shares of Common Stock (but, in the case of any such repurchased share, only if such share is repurchased for consideration not greater than the purchase price for such share specified in the applicable Option).

(b) Character of Shares. The shares of Common Stock issuable upon the exercise of an Option granted under this Plan shall be (i) authorized but unissued shares of Common Stock, (ii) shares of Common Stock held in the Company’s treasury or (iii) a combination of the foregoing.

(c) Reservation of Shares. The number of shares of Common Stock reserved for issuance under this Plan shall at no time be less than the maximum number of shares of Common Stock which may be purchased at any time pursuant to outstanding Options.

4. Eligibility.

Options may be granted under this Plan only to persons who are directors, officers or employees of, advisors to, or independent consultants or independent contractors to, the Company or its Subsidiaries.

5. Grant of Options.

(a) General. Options may be granted under this Plan at any time and from time to time on or prior to the tenth anniversary of the Effective Date. Subject to the provisions of this Plan, the Committee shall have plenary authority and discretion, to determine:

(i) the persons (from among the classes of persons eligible to receive Options under this Plan) to whom Options shall be granted (the “Optionees”);

(ii) the form and terms of Options;

(iii) whether Options will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Options under this Plan or any other incentive or compensation plan of the Company or any Subsidiary of the Company;

(iv) the time or times at which Options shall be granted;

(v) the number of shares of Common Stock subject to each Option;


(vi) the Option Price of the shares of Common Stock subject to each Option; and

(vii) the time or times after grant when, and the term or terms under which, each Option and the shares of Common Stock covered thereby shall become vested and/or exercisable and the duration of the exercise and/or vesting periods.

(b) Option Agreements. Each Option shall be evidenced by a written agreement (each, an “Option Agreement”), containing such terms and conditions and in such form, not inconsistent with this Plan, as the Committee shall, in its discretion, provide. Each Option Agreement shall be executed by the Company and the Optionee.

(c) No Evidence of Employment or Service. Nothing contained in this Plan or in any Option Agreement shall confer upon any Optionee any right with respect to the continuation of his or her employment by, or services to, the Company or interfere in any way with the right of the Company (subject to the terms of any separate agreement to the contrary) at any time to terminate such employment or service or to increase or decrease the compensation of the Optionee from the rate in existence at the time of the grant of an Option to such Optionee.

(d) Date of Grant. The date of grant of an Option under this Plan shall be the date specified by the Committee for the grant of such option.

(e) Exchange and Buyout of Options. The Committee may, at any time or from time to time, authorize the grant of new Options under this Plan in exchange for the surrender and cancellation of any or all outstanding Options. The Committee may at any time buy from an Optionee an Option previously granted with payment in cash, securities of the Company or other consideration, based on such terms and conditions as the Company (acting through the Committee) and the Optionee may agree.

(f) Vesting of Options. Subject to the provisions of Section 7(b) and 9(c), Options granted under the Plan shall vest and become exercisable as follows:  1/4 of the Option shall vest and become exercisable on each of the first four anniversaries of the date upon which the Option is granted (or as otherwise determined by the Committee and set forth in the Option Agreement pursuant to which such Options are granted).

6. Option Price.

Subject to Section 9, the price (the “Option Price”) at which each share of Common Stock subject to an Option granted under this Plan may be purchased shall be determined by the Committee at the time the Option is granted; provided , however, that Options granted on the Effective Date shall have an Option Price equal to the Initial Public Offering Price (subject to adjustment pursuant to Section 9 hereof). The “Initial Public Offering Price” shall be the price per share at which shares of Common Stock are initially offered for sale to the public by the Company’s underwriters in the Company’s initial public offering of Common Stock (the “IPO”) pursuant to a registration statement on Form S-1 filed with the SEC under the Securities Act of 1933, as amended (the “1933 Act”).

7. Exercisability of Options.

(a) Committee Determination.

(i) Each Option and the shares of Common Stock covered thereby granted under this Plan shall be vested and/or exercisable at such time or times, or upon the occurrence of such event or events, upon such term or terms and for such number of shares of Common Stock subject to such Option or in such portions or amounts thereof, as shall be determined by the Committee and set forth in the Option Agreement evidencing such Option; provided , however, if the Company files a registration statement on Form S-1 with the SEC under the 1933 Act for the IPO, no Option granted under this Plan shall be exercisable as to any of the shares of Common Stock covered thereby during the one-year period immediately following the effective date of such registration statement (the “Lock-up Period”); and, provided, further, however, that at any time following the IPO, if the Company shall register additional shares of Common Stock under the 1933 Act for sale to the public, no Option granted under this Plan shall be exercisable as to any shares of Common Stock covered thereby, and no Optionee shall sell publicly, make


any short sale of, grant any option for the purchase of, or otherwise dispose publicly of, any capital stock of the Company, for such period, that shall commence 10 days prior to effectiveness of the registration statement pursuant to which such public offering shall be made and shall terminate that number of days following the date such registration statement is declared effective as the underwriters of such public offering, if any, or the Company may require (the “Secondary Lock-up Period”); and, provided, further, however, that if an Option by its terms is to expire during the Lock-up Period or the Secondary Lock-up Period, the Committee may extend the expiration date of such Option for a period equal in duration to that of the period from the commencement date of the Lock-up Period, or Secondary Lock-up Period, as applicable,

(ii) Subject to the provisions of clause (i) above, if an Option, or the shares of Common Stock covered thereby, are not at the time of grant of such Option immediately exercisable and/or fully vested, the Committee may (A) in the Option Agreement evidencing such Option, provide for the acceleration of the exercise or vesting date(s) of such Option, the acceleration of the vesting of all or a portion of the shares of Common Stock covered thereby, or the continuation of the vesting (whether before, on or after the date of Termination (as defined in Section 7(b)(ii)) of the Optionee to whom such Option is granted) of all or a portion of such Option and/or the shares of Common Stock covered thereby, upon the occurrence of specified events and/or (B) at any time prior to the complete termination of such Option, accelerate the exercise or vesting date(s) of such Option, accelerate the vesting of all or a portion of the shares of Common Stock covered thereby, or continue the vesting (whether before, on or after the date of Termination of the Optionee to whom such Option is granted) of all or a portion of such Option and/or the shares of Common Stock covered thereby, including in the case of this clause (B) upon the occurrence of or in connection with a Corporate Transaction (as defined in Section 9(b)).

(iii) The Committee may, in its discretion, amend any term or condition of an outstanding Option provided (i) such term or condition as amended is permitted by this Plan and (ii) any such amendment shall be made only with the consent of the Optionee to whom the Option was granted, or in the event of the death of the Optionee, the Optionee’s Representatives (as defined in Section 10(d)), if the amendment is materially adverse to the Optionee.

(b) Automatic Termination of Option. Except as otherwise determined by the Committee and set forth in the Option Agreement, the unexercised portion of any Option granted under this Plan shall automatically terminate and shall become null and void and be of no further force or effect upon the first to occur of the following:

(i) the ten-year anniversary of the date on which such Option is granted;

(ii) the three-month anniversary of the date on which the Optionee to whom such Option was granted ceases to be a director, officer or employee of, advisor to, or independent consultant or independent contractor to, the Company or any Subsidiary thereof (such event, a “Termination”), unless such Termination occurs by reason of such Optionee’s death or Disability (as defined in subparagraph (iii) below) or is for Cause (as defined below); provided, however, that if such Optionee shall die after the date of Termination but before the three-month anniversary of such Optionee’s date of Termination, the unexercised portion of such Option shall automatically terminate and become null and void and be of no further force or effect upon the 12-month anniversary of such date of Termination;

(iii) the 12-month anniversary of the date of Termination of the Optionee to whom such Option was granted, if such Termination occurs by reason of such Optionee’s (x) death or (y) permanent and total disability (within the meaning of Section 22(e)(3) of the Code) (a “Disability”);

(iv) the date of the Termination of the Optionee to whom such Option was granted, if such Termination is for Cause (as defined below) (a “Termination for Cause”);

(v) the expiration of such period of time or the occurrence of such event as the Committee in its discretion may provide in the Option Agreement; and

(vi) except to the extent permitted by Section 10(d), the date on which such Option or any part thereof or right or privilege relating thereto is transferred (other than by will or the laws of descent and distribution), assigned, pledged, hypothecated, attached or otherwise disposed of by the Optionee to whom such Option was granted.


Unless otherwise expressly provided by the Committee in the applicable Option Agreement, in no event shall an Option continue to vest after the date of Termination of the Optionee to whom such Option was granted.

For purposes of this Plan, the term “Cause” means, with respect to any Optionee, the Termination of such Optionee’s relationship with the Company because of (i) the commission by such Optionee of any act of fraud, theft or financial dishonesty with respect to the Company or any of its Subsidiaries, or such Optionee has been convicted of, or plead guilty to, a felony, (ii) any material breach by such Optionee of any material provision of any agreement or understanding (whether employment or otherwise) between the Company or any Subsidiary thereof on the one hand and such Optionee on the other hand (whether written or oral) regarding the terms of such Optionee’s service as a director, officer or employee of, or advisor, independent consultant or independent contractor to, the Company or any Subsidiary thereof, including, without limitation, the willful and continued failure or refusal of such Optionee to perform the material duties required of such Optionee as a director, officer or employee of, or as an advisor, independent consultant or independent contractor to, the Company or any Subsidiary thereof, other than as a result of such Optionee having a Disability, or a breach of any applicable invention assignment and confidentiality agreement or similar agreement between the Company or any Subsidiary thereof on the one hand and such Optionee on the other hand, (iii) such Optionee’s intentional or willful disregard of the policies of the Company or any Subsidiary thereof so as to cause loss, damage or injury to the property, reputation or employees of the Company or any Subsidiary thereof, or (iv) any other misconduct by such Optionee which is otherwise materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or a Subsidiary thereof. Anything contained in this Plan to the contrary notwithstanding, unless otherwise provided in the applicable Option Agreement, a Termination of an Optionee shall not be deemed to occur solely by reason of the Company’s change of the duties of the Optionee, so long as such Optionee continues to be a director, officer or employee of, advisor to, or independent consultant or independent contractor to, the Company or any Subsidiary thereof. For purposes of Section 7(b), an Optionee employed by the Company or any Subsidiary thereof shall not be deemed to have terminated his or her employment with the Company or such Subsidiary in the case of sick leave, military leave, or any other leave of absence approved by the Committee; provided, that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute.

8. Procedure for Exercise.

(a) Payment. At the time an Option is granted under this Plan, the Committee shall, in its sole discretion, specify one or more of the following forms of payment which may be used by an Optionee (but only to the extent permitted by applicable law) upon exercise of his or her Option:

(i) by cash (by wire transfer of immediately available funds to a bank account held by the Company designated by the Committee or a personal or certified check payable to the Company);

(ii) by cancellation of indebtedness of the Company to the Optionee;

(iii) by surrender of shares of Common Stock which either (A) have been owned by the Optionee for more than six months and have been paid for within the meaning of Rule 144 promulgated by the SEC under the 1933 Act (and, if such shares of Common Stock were purchased from the Company or any Subsidiary thereof by means of a promissory note, such note has been fully paid with respect to such shares); or (B) were obtained by the Optionee in the public market (but, subject in any case, to the applicable limitations of Rule 16b-3);

(iv) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that an Optionee who is not a director, officer or employee of the Company or any of its Subsidiaries will not be entitled to tender such a promissory note unless the note is adequately secured by collateral other than the shares of Common Stock being purchased upon the exercise of the Option;

(v) by waiver of compensation due or accrued to the Optionee for services rendered to the Company or any of its Subsidiaries;

(vi) if the Common Stock is a class of securities then listed or admitted to trading on any national securities exchange or traded on any national market system (including, but not limited to, The Nasdaq National Market), in compliance with any cashless exercise program authorized by the Committee for use in connection with this Plan at the time of such exercise (but, subject in any case, to the applicable limitations of Rule 16b-3); or


(vii) a combination of the methods set forth in clauses (i) through (vi).

(b) Notice. An Optionee (or other person, as provided in Section 10(d)) may exercise an Option granted under this Plan in whole or in part, as provided in the Option Agreement evidencing his or her Option, by delivering a written notice (the “Notice”) to the Committee (or such other person or entity designated by the Committee from time to time).

(c) Content of the Notice. The Notice shall:

(i) state that the Optionee elects to exercise the Option;

(ii) state the number of shares with respect to which the Option is being exercised (the “Optioned Shares”);

(iii) state the method of payment for the Optioned Shares (which method must be available to the Optionee under the terms of his or her Option Agreement);

(iv) state the date upon which the Optionee desires to consummate the purchase of the Optioned Shares (which date must be prior to the termination of such Option, be no later than 30 days from delivery of such Notice and be not otherwise prohibited under the terms of his or her Option Agreement);

(v) include any representations and warranties of the Optionee required pursuant to Section 10(b);

(vi) if the Option is exercised pursuant to Section 10(d) by any person other than the Optionee, include evidence to the satisfaction of the Company (or such other person or entity designated by the Committee from time to time) of the right of such person to exercise the Option; and

(vii) include such further provisions consistent with this Plan as the Committee (or such other person or entity designated by the Committee from time to time) may from time to time require.

(d) Issuance of Shares. The Company shall issue shares in the name of the Optionee (or such other person exercising the Option in accordance with the provisions of Section 10(d)) for the Optioned Shares with respect to which such Option is being exercised as soon as practicable after receipt of the Notice and payment of the aggregate Option Price for such shares. If the Company uses an electronic recordation system for ownership of shares, then, within a reasonable time after the issuance of the Optioned Shares, the Company shall send the shareholder a written statement of stock ownership as and to the extent required by the Company’s Amended and Restated By-laws or the Florida Business Corporate Act. Neither the Optionee nor any person exercising an Option in accordance with the provisions of Section 10(d) shall have any privileges as a stockholder of the Company with respect to any shares of stock subject to an Option granted under this Plan until the date of issuance of shares pursuant to this Section 8(d).

(e) 83(b) Elections. Each Optionee shall deliver to the Company a copy of any election filed by such Optionee with the Internal Revenue Service relating to any Optioned Shares no later than 30 days following the filing of such election with the Internal Revenue Service.

9. Adjustments.

(a) Changes in Capital Structure. Subject to Section 9(b), if the Common Stock is changed by reason of a stock split, reverse stock split, stock dividend or recapitalization, or converted into or exchanged for other securities as a result of a merger, consolidation or reorganization, the Committee shall make such adjustments in the number and class of shares of stock with respect to which Options may be granted under this Plan as shall be equitable and appropriate in order to make such Options, as nearly as may be practicable, equivalent to such Options immediately prior to such change. A corresponding adjustment changing the number and class of shares allocated to, and the Option Price of, each Option or portion thereof outstanding at the time of such change shall likewise be made.


(b) Corporate Transactions. In connection with the dissolution or liquidation of the Company, a reorganization, merger or consolidation in which the Company is not the surviving corporation, or a sale of all or substantially all of the capital stock or assets of the Company to another person or entity (a “Corporate Transaction”), each holder of an Option outstanding at such time shall be given (A) written notice of such Corporate Transaction at least 20 days prior to its proposed effective date (as specified in such notice) and (B) an opportunity, during the period commencing with delivery of such notice and ending 10 days prior to such proposed effective date, to exercise the Option to the full extent to which such Option would have been exercisable by the Optionee at the expiration of such 20-day period.

(c) Special Rules. The following rules shall apply in connection with Sections 9(a) and (b):

(i) anything contained in this Plan to the contrary notwithstanding, unless otherwise provided in the applicable Option Agreement any unvested Options held by such Optionee shall automatically vest and become exercisable upon the earlier to occur of (A) the first anniversary of the effective date of any Corporate Transaction, so long as such Optionee continues to be a director, officer or employee of, advisor to, or independent consultant or independent contractor to, the Company or any Subsidiary thereof on such date and (B) the Termination of such Optionee by the Company or any Subsidiary (other than Termination for Cause) at any time prior to the first anniversary of the effective date of any Corporate Transaction;

(ii) no fractional shares shall be issued as a result of any such adjustment, and any fractional shares resulting from the computations pursuant to Sections 9(a) or (b) shall be eliminated without any consideration due to any Optionees;

(iii) no adjustment shall be made for cash dividends or the issuance to stockholders of rights to subscribe for additional shares of Common Stock or other securities; and

(iv) any adjustments referred to in Sections 9(a) or (b) shall be made by the Committee in its sole discretion and shall be conclusive and binding on all persons holding Options granted under this Plan.

10. Restrictions on Options and Optioned Shares.

(a) Compliance With Securities Laws. No Options shall be granted under this Plan, and no shares of Common Stock shall be issued and delivered upon the exercise of Options granted under this Plan, unless and until the Company and/or the Optionees to whom such Options shall be granted shall have complied with all applicable Federal or state registration, listing and/or qualification requirements and all other requirements of law or of any regulatory agencies having jurisdiction. The Company may delay the issuance of shares of Common Stock upon the exercise of Options granted under this Plan until completion of any action or the receipt of any consent which the Company deems necessary under any applicable law (including, without limitation, state securities or “blue sky” laws).

(b) Representations and Warranties. The Committee in its discretion may, as a condition to the exercise of any Option granted under this Plan, require the Optionee to whom such Option shall be granted (i) to represent and warrant in writing that the shares of Common Stock to be received upon exercise of such Option are being acquired for investment only and not with a view to the distribution thereof (or any interest therein) and (ii) to make such other representations and warranties as are deemed appropriate by the Company.

(c) Legends. Each certificate issued by the Company (or its transfer agent) that represents shares of Common Stock acquired upon the exercise of Options that have not been registered under the Securities Act shall, unless otherwise directed by the Committee, be stamped or otherwise imprinted with a legend in substantially the following form (in addition to any other legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities laws, or any rules, regulations and other requirements of the SEC or any securities exchange or automated quotation system on which such the Common Stock may be listed, admitted for trading or traded, or any applicable agreement):


“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”). THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED.”

For any uncertificated shares of Common Stock acquired upon the exercise of Options that have not been registered under the Securities Act, the Company may, in its discretion, make a notation within any electronic recordation system for ownership of shares or utilize other reasonable means to evidence such have not been registered under the Securities Act.

(d) Nonassignability of Option Rights. Except as otherwise determined by the Committee and set forth in the applicable Option Agreement, no Option granted under this Plan shall be assignable or otherwise transferable by the Optionee except by will or by the laws of descent and distribution. Except as otherwise determined by the Committee and set forth in the Option Agreement, an Option may be exercised during the lifetime of the Optionee only by the Optionee. If an Optionee dies, his or her Option shall thereafter be exercisable, except as otherwise determined by the Committee and set forth on the Option Agreement, during the period specified in Section 7(b)(ii) or (iii), as applicable, by his or her executors or administrators (collectively, the “Representatives”) to the full extent to which such Option was exercisable by the Optionee at the time of his or her death.

11. Adoption and Stockholder Approval.

This Plan shall become effective on the date that it is approved by the Board (the “Effective Date”). This Plan shall be approved by the stockholders of the Company, consistent with applicable laws, within 12 months before or after the date this plan is approved by the Board. Upon the Effective Date, the Committee may grant Options pursuant to this Plan; provided, however, that (i) no Option may be exercised prior to initial stockholder approval of this Plan, (ii) no Option granted pursuant to an increase in the number of shares of Common Stock available under this Plan by the Board’s or the Committee’s amendment of this Plan may be exercised prior to the time such increase has been approved by the stockholders of the Company, consistent with applicable laws; (iii) in the event that initial stockholder approval of this Plan is not obtained within the time period provided herein, all Options granted under this Plan shall be canceled; and (iv) in the event that stockholder approval of any increase in the number of shares of Common Stock available under this Plan is not obtained within the time period provided herein, all Options granted under this Plan pursuant to such increase shall be canceled.

12. Expiration and Termination of the Plan.

Except with respect to Options then outstanding, this Plan shall expire on the first to occur of (i) the tenth anniversary of the date on which this Plan is adopted by the Board, (ii) the tenth anniversary of the date on which this Plan is approved by the stockholders of the Company in accordance with applicable laws and (iii) the date as of which the Board, in its sole discretion, determines that this Plan shall terminate (the “Expiration Date”). Any Options outstanding as of the Expiration Date shall remain in effect until they have been exercised or terminated or have expired by their respective terms.

13. Amendment of this Plan.

This Plan may be amended by the stockholders of the Company. This Plan may also be amended by the Board or the Committee, including, without limitation, to the extent necessary to qualify any or all outstanding Options granted under this Plan or Options to be granted under this Plan for favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, to the extent necessary to ensure the qualification of this Plan under Rule 16b-3, at such time, if any, as the Company has a class of stock registered pursuant to Section 12 of the 1934 Act, and to the extent necessary to qualify the shares of Common Stock issuable upon exercise of any outstanding Options granted, or Options to be granted, under this Plan for listing or admission for trading on any securities exchange or automated quotation system. Any amendment approved by the Committee which is of a scope that requires stockholder approval under applicable law or requires stockholder approval in order to ensure the compliance of this Plan with Rule 16b-3 at


such time, if any, as the Company has a class of capital stock registered pursuant to Section 12 of the 1934 Act, shall be subject to obtaining such stockholder approval. Any modification or amendment of this Plan shall not, without the consent of an Optionee, materially adversely affect his or her rights under an Option previously granted to him or her. With the consent of the Optionee affected, the Committee may amend such Optionee’s outstanding Option Agreements in a manner which may be materially adverse to such Optionee but which is not inconsistent with this Plan. In the discretion of the Committee, outstanding Option Agreements may be amended by the Committee in a manner which is not materially adverse to the Optionee.

14. Captions.

The use of captions in this Plan is for convenience. The captions are not intended to provide substantive rights or to affect the construction or interpretation of the provisions of this Plan.

15. Withholding Taxes.

In the event that any federal, state, or local income taxes, employment taxes, Federal Insurance Contributions Act withholdings or other amounts are required by applicable law or governmental regulation to be withheld from the Optionee’s salary, wages or other remuneration in connection with the exercise of an Option or a Disqualifying Disposition (as defined in Section 16), the Company may withhold from such Optionee’s wages, if any, or other remuneration, or may require the Optionee to advance in cash to the Company the amount of such withholdings unless a different withholding arrangement, including the use of shares of the Company’s Common Stock, is authorized by the Committee (and permitted by applicable law); provided, however, that with respect to persons subject to Section 16 of the 1934 Act, any such withholding arrangement shall be in compliance with any applicable provisions of Rule 16b-3 promulgated under Section 16 of the 1934 Act. For purposes of this Section 15, the fair market value of the shares of Common Stock (if any) withheld for purposes of payroll withholding shall be determined as of the most recent date practicable prior to the date of exercise and in the manner provided in Section 6(b). If the fair market value of the shares of Common Stock withheld is less than the amount of the payroll withholdings required, the Optionee may be required to advance the difference in cash to the Company. The Committee may condition the transfer of any shares of Common Stock or the removal of any restrictions on any Option on the satisfaction by the Optionee of the foregoing withholding obligations.

16. Other Provisions.

Each Option granted under this Plan may contain such other terms and conditions not inconsistent with this Plan as may be determined by the Committee, in its sole discretion.

17. Number and Gender.

With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, and vice-versa, as the context requires.

18. Nonexclusivity of this Plan.

Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan shall be construed as creating any limitations on the power of the Board or the Committee to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under this Plan, and such arrangements may be either generally available or applicable only in specific cases.

19. Governing Law.

The validity and construction of this Plan and the instruments evidencing the Options granted hereunder shall be governed by the laws of the State of Florida without regard to conflict of laws provisions thereunder.

EX-10.2 3 dex102.htm 1998 STOCK OPTION PLAN 1998 Stock Option Plan

Exhibit 10.2

MTL INC.

1998 STOCK OPTION PLAN

(as amended and restated March 11, 2008)

 

1. PURPOSE OF THE PLAN.

The purpose of the MTL, INC. 1998 STOCK OPTION PLAN (the “Plan”) is (i) to further the growth and success of MTL, Inc., a Florida corporation (the “Company”), by permitting employees of the Company to acquire shares of common stock, $.01 par value, of the Company (the “Shares”), thereby increasing such employees’ personal interest in such growth and success and (ii) to provide a means of rewarding outstanding contribution by such persons to the Company. Options granted under this Plan (the “Options”) are not intended to qualify as “incentive stock options” under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).

 

2. DEFINITIONS.

As used in this Plan, the following capitalized terms shall have the meanings set forth below:

“AFFILIATE” means any Person that is controlled by, controlling or under common control with the Company and shall include Apollo and each of its partners and each Person in which Apollo or such partners hold or have the right to acquire, collectively, more than 25% of the voting Equity Interest.

“APOLLO” means Apollo Management, L.P.

“BOARD” has the meaning set forth in Section 3(a).

“CAPITAL STOCK” means any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including all common stock and preferred stock.

“CODE” has the meaning set forth in Section 1.

“COMMITTEE” has the meaning set forth in Section 3(a).

“COMPANY” has the meaning set forth in Section 1.

“DISABILITY” shall have the meaning defined in an employment or similar agreement between the Company and the Optionee, or, if there is no employment or similar agreement between the Company and the Optionee that defines “disability” for purposes of such agreement, what constitutes a “disability” shall be determined by the Committee in good faith.

“EBITDA” means, for any period of determination thereof, Net Income of the Company and its subsidiaries plus, without duplication, (a) Interest Expense, (b) income tax expense, refunds or credits for such periods, and (c) depreciation and amortization expense of the Company and its subsidiaries, all determined in accordance with GAAP.

“EFFECTIVE DATE” means the date of consummation of the transactions contemplated under that certain Agreement and Plan of Merger by and between the Company and Sombrero Acquisition Corp. dated as of February 10, 1998.

“EQUITY INTEREST” means (a) with respect to a corporation, any and all Capital Stock or warrants, options or other rights to acquire Capital Stock (but excluding any debt security which is convertible into, or exchangeable for, Capital Stock) and (b) with respect to a partnership, limited liability company or similar Person, any and all units, interests, rights to purchase, warrants, options or other equivalents of, or other ownership interests in, any such Person.


“EXCHANGE ACT” means the Securities Exchange Act of 1934, as amended.

“EXPIRATION DATE” has the meaning set forth in Section 10.

“FAIR MARKET VALUE” means:

(a) if the Shares are publicly traded and reported on a closing price basis, the closing price on the principal national securities exchange, market or system on which the Shares are traded on the trading day immediately preceding the date of determination or, if no trades were made on such day, on the next preceding day on which trades were made, otherwise, the average of the high bid and low asked prices for the Shares on the trading day immediately preceding the date of determination in the over-the-counter market as reported by the Nasdaq National Market (“Nasdaq”) or, if not reported by Nasdaq, by an established quotation service for over-the-counter securities; or

(b) if there is no public trading market for the Shares, the fair value of such Shares on the date of any determination as reasonably determined in good faith by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation recent sale and offer prices of Shares in private transactions negotiated at arms’ length.

Notwithstanding anything contained in this Plan to the contrary, all determinations pursuant to this Section shall be made without regard to any restriction other than a restriction which, by its terms, will never lapse.

“GAAP” means generally accepted accounting principles in the United States, consistently applied, and statements and interpretations (if applicable) issued by the Financial Accounting Standards Board, or any successor body, as in effect from time to time, unless otherwise stated.

“INDEBTEDNESS” means (a) indebtedness for borrowed money, (b) reimbursement obligations with respect to letters of credit and similar instruments, (c) obligations incurred, issued or assumed as the deferred purchase price of property or services (other than accounts payable incurred in the ordinary course of business consistent with past practice), (d) obligations of others secured by (or, for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any lien on property or assets of the Company or any subsidiary, (e) capital lease obligations, (f) obligations in respect of guarantees of any of the foregoing or any “keep well” or other agreement to maintain any financial statement condition of another person, in each case, whether or not matured, liquidated, fixed, contingent, or disputed, and (g) any prepayment penalties or similar charges incurred by the Company in connection with any of the foregoing indebtedness or obligations.

“INTEREST EXPENSE” means, for any period, all interest (including capitalized interest) and all amortization of debt discount and expense on any particular Indebtedness (including, without limitation payment-in-kind, zero coupon and other like securities and the interest component of capital lease obligations applicable to such period) of the Company and its subsidiaries determined on a consolidated basis in accordance with GAAP.

“INVESTMENT” in any Person, means any loan or advance to such Person, any purchase or other acquisition of any Equity Interest or other ownership or profit interest, warrants, rights, options, obligations or other securities of such Person, any capital contribution to such Person or any other investment in such Person, including any arrangement pursuant to which an investing Person incurs Indebtedness of the types referred to in the definition of “Indebtedness” in respect of such Person.

“NET DEBT” means (a) all amounts owing by the Company in respect of outstanding Indebtedness (including principal, interest, fees, expenses and prepayment penalties), less (b) cash of the Company, all determined on a consolidated basis in accordance with GAAP.

“NET INCOME” means, for any period, the gross revenues of the Company and its consolidated subsidiaries for such period less all expenses and other proper charges, in each case determined in accordance with GAAP, but (a) excluding in any event Apollo’s annual management fee charged to the Company, (b) adjusted to reflect business acquisitions or dispositions occurring in the first two quarters of a year on a pro-forma combined


basis as if the transactions had occurred at the beginning of such year, taking into account synergies that are allowed to be included in pro-forma calculations under Regulation S-X promulgated by the SEC, and (c) adjusted to reflect business acquisitions or dispositions occurring in the last two quarters of a year as and to the extent deemed appropriate by the Committee in its sole discretion and (d) adjusted for the after-tax effect of extraordinary gains or losses other than business acquisitions and dispositions, and other non-recurring or non-operating gains or losses which affect Net Income as and to the extent deemed appropriate by the Committee in its sole discretion.

“OPTION” has the meaning set forth in Section 1.

“OPTION AGREEMENT” has the meaning set forth in Section 4(c).

“OPTION PRICE” has the meaning set forth in Section 5(a).

“OPTIONED SHARES” has the meaning set forth in Section 11(b).

“OPTIONEES” has the meaning set forth in Section 4(a).

“PER SHARE EQUITY VALUE” means, in respect of any Tranche B, Tranche C or Tranche D Performance Measurement Date or other applicable measurement date under the Shareholders’ Agreement, (a) the product of (i) EBITDA for the twelve-month period ending on such date, multiplied by (ii) 6.5, plus (b) (i) the aggregate amount of the consolidated cash on hand of the Company and its subsidiaries plus the aggregate Option Price for all Options that are “in the money” (as defined below), minus (ii) the liquidation value of the outstanding consolidated Indebtedness and Company preferred stock (as adjusted to reflect a Sale of the Company, if applicable, and excluding any debt or preferred stock associated with an acquisition, the earnings of which are not included in EBITDA), divided by (c) the sum of (i) the number of Shares outstanding as of the end of such twelve-month period and (ii) the number of Shares issuable upon the conversion of securities convertible into Shares or upon the exercise of options or warrants exercisable for Shares, in each case in this clause (c), which are “in the money.” For purposes hereof, an option or warrant is “in the money” if the exercise price or conversion price is less than the Per Share Equity Value, calculated without giving effect to such convertible securities, options or warrants. Notwithstanding the foregoing, in the case of a Qualified Public Offering, Per Share Equity Value shall have the meaning set forth in Sections 7(d), 8(d) and 9(d), as applicable, or, for certain purposes under the Shareholders’ Agreement, the average closing stock price for the 90 trading days immediately preceding the applicable measurement date (with the five highest and five lowest closing prices disregarded).

“PERSON” is to be construed in the broadest sense and means and includes any natural person, company, limited liability company, partnership, joint venture, corporation, business trust, or unincorporated organization or any national, federal, state, municipal, local, territorial, foreign or other government or any department, commission, board, bureau, agency, regulatory authority or instrumentality thereof, or any court, judicial, administrative or arbitral body or public or private tribunal.

“QUALIFIED PUBLIC OFFERING” means a public offering of Shares of the Company in which the proceeds to the Company, net of all fees, commissions, discounts and expenses, equals or exceeds $20 million.

“SALE OF THE COMPANY” means the occurrence of one or more of the following:

(a) a sale or series of sales to any Person or group of Persons in related transactions, other than an Affiliate of the Company, of all or substantially all of the assets of the Company;

(b) a sale or series of sales by the Company of Shares (whether by merger or otherwise), if any such sale or series of sales is made to a Person or group of Persons in related transactions, other than an Affiliate of the Company, which Person (or group of Persons), after giving effect to such sale or series of sales, will own more than 50% of the outstanding Capital Stock of the Company; or

(c) a sale or series of sales by the stockholders of the Company of Shares, if any such sale is made to a Person or group of Persons in related transactions, other than an Affiliate of the Company, which Person (or group of Persons), after giving effect to such sale or series of sales, will own more than 50% of the outstanding Shares.


“SEC” means the Securities and Exchange Commission.

“SHARES” has the meaning set forth in Section 1.

“SHAREHOLDERS’ AGREEMENT” means that certain Shareholders’ Agreement among the Company, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., Apollo U.K. Fund III, L.P. Charles J. O’Brien, Jr., Marvin Sexton, Richard Brandewie and Elton Babbitt dated as of February 10, 1998.

“SECURITIES ACT” has the meaning set forth in Section 13(b).

“TRANCHE A OPTIONS” has the meaning set forth in Section 4(d).

“TRANCHE B MISSED PERFORMANCE MEASUREMENT DATE” has the meaning set forth in Section 7(c).

“TRANCHE B OPTIONS” has the meaning set forth in Section 4(d).

“TRANCHE B PERFORMANCE MEASUREMENT DATE” has the meaning set forth in Section 7(a).

“TRANCHE B PER SHARE TARGET VALUE” has the meaning set forth in Section 7(a).

“TRANCHE B VESTING DATE” has the meaning set forth in Section 7(a).

“TRANCHE C MISSED PERFORMANCE MEASUREMENT DATE” has the meaning set forth in Section 8(c).

“TRANCHE C OPTIONS” has the meaning set forth in Section 4(d).

“TRANCHE C PERFORMANCE MEASUREMENT DATE” has the meaning set forth in Section 8(a).

“TRANCHE C PER SHARE TARGET VALUE” has the meaning set forth in Section 8(a).

“TRANCHE C VESTING DATE” has the meaning set forth in 8(a).

“TRANCHE D MISSED PERFORMANCE MEASUREMENT DATE” has the meaning set forth in Section 9(c).

“TRANCHE D OPTIONS” has the meaning set forth in Section 4(d).

“TRANCHE D PERFORMANCE MEASUREMENT DATE” has the meaning set forth in Section 9(a).

“TRANCHE D PER SHARE TARGET VALUE” has the meaning set forth in Section 9(a).

“TRANCHE D VESTING DATE” has the meaning set forth in 9(a).

“TRANSFERRED” means, with respect to any security (including any Option), sold, transferred, assigned, encumbered, pledged or otherwise disposed of, either voluntarily or involuntarily and with or without consideration (including, without limitation, by way of foreclosure or other acquisition by any lender with respect to any Shares pledged to such lender by an Optionee).

“VESTED OPTION” means an option which has vested and become exercisable in accordance with this Plan, or pursuant to an Option Agreement, as the case may be.


3. ADMINISTRATION OF THE PLAN.

(a) Stock Option Committee. This Plan shall be administered by a committee (the “Committee”) of the Board of Directors of the Company (the “Board”), appointed from time to time by the Board. The Committee shall have the power and authority to grant Options under this Plan. The Board may exercise any power to be exercised by the Committee hereunder.

(b) Procedures. The members of the Committee shall from time to time select a Chairman from among the members of the Committee. The Committee shall adopt such rules and regulations as it shall deem appropriate concerning the holding of meetings and the administration of this Plan. A majority of the entire Committee shall constitute a quorum and the actions of a majority of the members of the Committee present at a meeting at which a quorum is present, or actions approved in writing by all of the members of the Committee, shall be the actions of the Committee.

(c) Administration. Except as may otherwise be expressly reserved to the Board as provided herein, the Committee shall have all powers with respect to the administration of this Plan, including the interpretation of the provisions of this Plan and any Option Agreement and the making of all factual determinations and financial calculations required under the Plan. All decisions of the Board or the Committee, as the case may be, not inconsistent with the Plan or Option Agreement terms, shall be conclusive and binding on all participants in this Plan. No member of the Board or Committee will be liable for any action or determination made in good faith by the Board or Committee with respect to the Plan or any Option Agreement under it.

 

4. GRANT OF OPTIONS; SHARES SUBJECT TO THIS PLAN.

(a) Power to Grant Options. Subject to the provisions of this Plan, the Committee shall have the power and authority, in its sole discretion, to determine:

 

  (i) the persons (from among the class of persons eligible to receive Options under this Plan) to whom Options shall be granted (the “Optionees”);

 

  (ii) the time or times at which Options shall be granted; and

 

  (iii) the number of Shares subject to such Option.

Notwithstanding anything to the contrary contained herein, as of the Effective Date, each Person listed in Exhibit A shall be granted Options which shall represent the right to acquire, subject to Section 6, that number of Shares set forth opposite such Person’s name on Exhibit A.

(b) Eligibility. Options may be granted under this Plan at any time and from time to time on or prior to the tenth anniversary of the Effective Date to any person who is an employee of the Company or any of its Subsidiaries at the time of grant. Notwithstanding anything contained in Section 4(a) to the contrary, Options (other than Options granted as of the Effective Date to any Person listed in Exhibit A) may not be granted to any Person in any one taxable year of the Company in excess of 25% of the Options issued or issuable under this Plan. Notwithstanding any other provisions of this Plan to the contrary, the Committee may, in its discretion, provide that, with respect to any Option, the terms of the Option Agreement evidencing such Option shall control any conflicts between provisions of this Plan and provisions of such Option Agreement.

(c) Option Agreements. Each Option shall be evidenced by a written agreement (an “Option Agreement”), in substantially the form of Exhibit B, with such changes thereto as are consistent with this Plan as the Committee shall deem appropriate. Each Option Agreement shall be executed by the Company and the Optionee.

(d) Tranche A Options, Tranche B Options, Tranche C Options, and Tranche D Options. One half of the Options granted to each Optionee on the Effective Date shall vest in accordance with Section 6 (“Tranche A Options”), one-sixth of the options granted to each Optionee on the Effective Date shall vest in accordance with Section 7 (“Tranche B Options”), one-sixth of the options granted to each Optionee on the Effective Date shall vest


in accordance with Section 8 (“Tranche C Options) and one-sixth of the options granted to each Optionee on the Effective Date shall vest in accordance with Section 9 (“Tranche D Options”). Options granted after the Effective Date shall vest as determined by the Committee, in its sole and absolute discretion, and as set forth in the applicable Option Agreement.

(e) Date of Grant. Other than Options granted as of the Effective Date, the date of grant of an Option under this Plan shall be the date as of which the Committee approves the grant of the Option.

(f) Vesting of Options. Other than Options granted as of the Effective Date, Options granted under the Plan shall become vested and exercisable as determined by the Committee and set forth in the Option Agreement.

(g) Number of Shares. Subject to any equitable adjustments pursuant to Section 12 and subject to the vesting provisions set forth herein, each Option shall be exercisable for one Share. Subject to any equitable adjustments pursuant to Section 12, the number of Shares subject at any one time to Options granted under this Plan, and the number of Shares theretofore issued and delivered pursuant to the exercise of Options granted under this Plan, shall be 222,222 Shares. If and to the extent that Options granted under this Plan terminate, expire or are canceled without having been fully exercised, new Options may be granted under this Plan with respect to the Shares covered by the unexercised portion of such terminated, expired or canceled Options.

(h) Character of Shares. The Shares issuable upon exercise of Options granted under this Plan shall be (i) authorized but unissued Shares, (ii) Shares held in the Company’s treasury or (iii) a combination of the foregoing.

(i) Reservation of Shares. The Company shall ensure that the number of Shares reserved for issuance under this Plan shall at all times be equal to the maximum number of Shares which may be purchased at such time pursuant to outstanding Options.

 

5. OPTION PRICE.

(a) General. The exercise price (the “Option Price”) for each Share subject to an Option shall be determined by the Committee and set forth in the Option Agreement, except that the exercise price for Options granted on the Effective Date shall be $40.00 per share (subject to equitable adjustment pursuant to Section 12 hereof).

(b) Repricing of Options. Subsequent to the date of grant of any Option, the Committee may (i) in its discretion, establish a new Option Price for such Option so as to decrease the Option Price of such Option or (ii) with the consent of the Optionee, establish a new Option Price for such Option so as to increase the Option Price of such Option.

 

6. EXERCISABILITY AND VESTING OF TRANCHE A OPTIONS.

(a) Vesting Schedule. 25% of the Tranche A Options shall become Vested Options on each of the first four anniversaries of June 30, 1998 if the Optionee is employed by the Company on such anniversary date.

(b) Termination of Employment. Except as may otherwise be provided in the Option Agreement evidencing such Option, each Tranche A Option shall cease vesting as of the time that an Optionee’s employment with the Company is terminated for any reason, and any Tranche A Option that is not a Vested Option as of such time shall become null and void and be of no further force or effect.

 

7. EXERCISABILITY AND VESTING OF TRANCHE B OPTIONS

(a) Vesting Schedule. All of the Tranche B Options shall become Vested Options on the date that is nine years immediately following the date of grant (“Tranche B Vesting Date”) if the Optionee is employed by the Company on the Tranche B Vesting Date. However, if the Per Share Equity Value as of a Tranche B Performance Measurement Date indicated below (each a “Tranche B Performance Measurement Date”) equals or exceeds the corresponding Tranche B Per Share Target Value indicated below (the “Tranche B Per Share Target Value”) and the Optionee is employed by the Company on such Tranche B Performance Measurement Date, then 25% of the Tranche B Options shall vest on such Tranche B Performance Measurement Date.


TRANCHE B PERFORMANCE

MEASUREMENT DATE

   TRANCHE B PER SHARE
TARGET VALUE

June 30, 1999

   $ 56.00

June 30, 2000

   $ 78.40

June 30, 2001

   $ 109.76

June 30, 2002

   $ 153.66

(b) Acceleration Right. If the Tranche B Per Share Target Value is not achieved for any year, the Committee, upon consultation with management, will have the discretion to cause all or part of the applicable Tranche B Options to become Vested Options.

(c) Rollover Vesting. If both (i) the Per Share Equity Value as of any Tranche B Performance Measurement Date equals at least 80% of the Tranche B Per Share Target Value established for such Tranche B Performance Measurement Date (the “Tranche B Missed Performance Measurement Date”), but is less than 100% of the Tranche B Per Share Target Value established for such Tranche B Performance Measurement Date and (ii) either (A) the Per Share Equity Value as of the immediately subsequent Tranche B Performance Measurement Date equals or exceeds 100% of the Tranche B Per Share Target Value established for such subsequent Tranche B Performance Measurement Date or (B) both (x) the Per Share Equity Value as of the immediately subsequent Tranche B Performance Measurement Date equals at least 80% of the Tranche B Per Share Target Value established for such Tranche B Performance Measurement Date, but is less than 100% of the Tranche B Per Share Target Value established for such subsequent Tranche B Performance Measurement Date and (y) the Per Share Equity Value as of the second subsequent Tranche B Performance Measurement Date equals or exceeds 100% of the Tranche B Per Share Target Value established for such second subsequent Tranche B Performance Measurement Date, then the Tranche B Options shall become Vested Options as of the first or second anniversary of the Tranche B Missed Performance Measurement Date, as applicable, if the Optionee holding the applicable Tranche B Option is employed by the Company as of the first or second anniversary of the Tranche B Missed Performance Measurement Date, as applicable. Tranche B Options that have not become Vested Options as of the June 30, 2002 Tranche B Performance Measurement Date will no longer be subject to vesting under this Section 7(c).

(d) IPO Prior to Final Performance Measurement Date. Notwithstanding the foregoing provisions of this Section 7, if the Company sells Shares in a Qualified Public Offering prior to the June 30, 2002 Tranche B Performance Measurement Date, the Per Share Equity Value as of each Tranche B Performance Measurement Date following the Qualified Public Offering shall be the average closing stock price for the 90 trading days immediately preceding such Tranche B Performance Measurement Date (with the five highest and five lowest closing prices disregarded), subject to adjustment pursuant to Section 12 hereof.

(e) Sale of the Company. Notwithstanding the foregoing provisions of this Section 7, if a Sale of the Company shall occur prior to June 30, 2004 all of the Tranche B Options that have not previously become Vested Options shall become Vested Options as of the effective date of the Sale of the Company, subject to the conditions that the Optionee is employed by the Company on such date and that the Fair Market Value of the per share consideration received by the holders of Shares (after giving effect to the vesting described herein) equals or exceeds (i) the Tranche B Per Share Target Value for the Tranche B Performance Measurement Date immediately preceding such Sale of the Company, plus (ii) the product of (x) (A) the Tranche B Per Share Target Value for the Tranche B Performance Measurement Date immediately following such Sale of the Company, less (B) the Tranche B Per Share Target Value for the Tranche B Performance Measurement Date immediately preceding such Sale of the Company, multiplied by (y) a fraction, the numerator of which is the number of days elapsed as of the consummation of such Sale of the Company since the immediately preceding Tranche B Performance Measurement Date and the denominator of which is 365. If the foregoing conditions are not met, such Tranche B Options shall not become Vested Options upon the Sale of the Company, but such Tranche B Options shall remain eligible to become Vested Options on the Tranche B Vesting Date if the Optionee remains employed by the Company until the Tranche B Vesting Date. For purposes of this Section 7(e) only, any Tranche B Performance Measurement Dates for years after 2002 shall be deemed to occur on June 30 of each such year and any Tranche B Per Share Target Values for years after 2002 shall be calculated assuming the Tranche B Per Share Target Values set forth in Section 7(a) were extrapolated based on a progression rate consistent with such Tranche B Per Share Target Values.


(f) Calculations. Notwithstanding anything to the contrary contained in this Plan, the determination as to whether the Per Share Equity Value equals or exceeds the Tranche B Per Share Target Value shall be made after the Company’s audited financials for the applicable period become available. All decisions by the Committee with respect to any calculations pursuant to this Section (absent manifest error) shall be final and binding on all Optionees. The Committee shall provide each affected Optionee with a notice as to the results of its calculations as they relate to the vesting of Options within 60 days of the date the audited financials for the applicable period become available.

(g) Termination of Employment. Except as may otherwise be provided in the Option Agreement evidencing such Option, each Tranche B Option shall cease vesting as of the time that an Optionee’s employment with the Company is terminated for any reason, and no Tranche B Option which is not a Vested Option as of such time shall become a Vested Option thereafter.

 

8. EXERCISABILITY AND VESTING OF TRANCHE C OPTIONS.

(a) Vesting Schedule. All of the Tranche C Options shall become Vested Options on the date that is nine years immediately following the date of the grant (“Tranche C Vesting Date”) if the Optionee is employed by the Company on the Tranche C Vesting Date. However, if the Per Share Equity Value as of the Tranche C Performance Measurement Date indicated below (each a “Tranche C Performance Measurement Date”) equals or exceeds the corresponding Tranche C Per Share Target Value indicated below (the “Tranche C Per Share Target Value”) and the Optionee is employed by the Company on such Tranche C Performance Measurement Date indicated below, then 25% of the Tranche C Options shall vest on such Tranche C Performance Measurement Date.

 

TRANCHE C PERFORMANCE

MEASUREMENT DATE

   TRANCHE C PER SHARE
TARGET VALUE

June 30, 1999

   $ 54.00

June 30, 2000

   $ 72.90

June 30, 2001

   $ 98.42

June 30, 2002

   $ 132.86

(b) Acceleration Right. If the Tranche C Per Share Target Value is not achieved for any year, the Committee, upon consultation with management, will have the discretion to cause all or part of the applicable Tranche C Options, to become Vested Options.

(c) Rollover Vesting. If both (i) the Per Share Equity Value as of any Tranche C Performance Measurement Date equals at least 80% of the Tranche C Per Share Target Value established for such Tranche C Performance Measurement Date (the “Tranche C Missed Performance Measurement Date”), but is less than 100% of the Tranche C Per Share Target Value established for such Tranche C Performance Measurement Date and (ii) either (A) the Per Share Equity Value as of the immediately subsequent Tranche C Performance Measurement Date equals or exceeds 100% of the Tranche C Per Share Target Value established for such subsequent Tranche C Performance Measurement Date or (B) both (x) the Per Share Equity Value as of the immediately subsequent Tranche C Performance Measurement Date equals at least 80% of the Tranche C Per Share Target Value established for such Tranche C Performance Measurement Date, but is less than 100% of the Tranche C Per Share Target Value established for such subsequent Tranche C Performance Measurement Date and (y) the Per Share Equity Value as of the second subsequent Tranche C Performance Measurement Date equals or exceeds 100% of the Tranche C Per Share Target Value established for such second subsequent Tranche C Performance Measurement Date, then the Tranche C Options shall become Vested Options as of the first or second anniversary of the Tranche C Missed Performance Measurement Date, as applicable, if the Optionee holding the applicable Tranche C Option is employed by the Company as of the first or second anniversary of the Tranche C Missed Performance Measurement Date, as applicable. Tranche C Options that have not become Vested Options as of the June 30, 2002 Tranche C Performance Measurement Date will no longer be subject to vesting under this Section 8(c).

(d) IPO Prior to Final Performance Measurement Date. Notwithstanding the foregoing provisions of this Section 8, if the Company sells Shares in a Qualified Public Offering prior to the June 30, 2002 Tranche C Performance Measurement Date, the Per Share Equity Value as of each Tranche C Performance Measurement Date following the Qualified Public Offering shall be the average closing stock price for the 90 trading days immediately preceding such Tranche C Performance Measurement Date (with the five highest and five lowest closing prices disregarded), subject to adjustment pursuant to Section 12 hereof.


(e) Sale of the Company. Notwithstanding the foregoing provisions of this Section 8, if a Sale of the Company shall occur prior to June 30, 2004 all of the Tranche C Options that have not previously become Vested Options shall become Vested Options as of the effective date of the Sale of the Company, subject to the conditions that the Optionee is employed by the Company on such date and that the Fair Market Value of the per share consideration received by the holders of Shares (after giving effect to the vesting described herein) equals or exceeds (i) the Tranche C Per Share Target Value for the Tranche C Performance Measurement Date immediately preceding such Sale of the Company, plus (ii) the product of (x) (A) the Tranche C Per Share Target Value for the Tranche C Performance Measurement Date immediately following such Sale of the Company, less (B) the Tranche C Per Share Target Value for the Tranche C Performance Measurement Date immediately preceding such Sale of the Company, multiplied by (y) a fraction, the numerator of which is the number of days elapsed as of the consummation of such Sale of the Company since the immediately preceding Tranche C Performance Measurement Date and the denominator of which is 365. If the foregoing conditions are not met, such Tranche C Options shall not become Vested Options upon the Sale of the Company, but such Tranche C Options shall remain eligible to become Vested Options on the Tranche C Vesting Date if the Optionee remains employed by the Company until the Tranche C Vesting Date. For purposes of this Section 8(e) only, any Tranche C Performance Measurement Dates for years after 2002 shall be deemed to occur on June 30 of each such year and any Tranche C Per Share Target Values for years after 2002 shall be calculated assuming the Tranche C Per Share Target Values set forth in Section 8(a) were extrapolated based on a progression rate consistent with such Tranche C Per Share Target Values.

(f) Calculations. Notwithstanding anything to the contrary contained in this Plan, the determination as to whether the Per Share Equity Value equals or exceeds the Tranche C Per Share Target Value shall be made after the Company’s audited financials for the applicable period become available. All decisions by the Committee with respect to any calculations pursuant to this Section (absent manifest error) shall be final and binding on all Optionees. The Committee shall provide each affected Optionee with a notice as to the results of its calculations as they relate to the vesting of Options within 60 days of the date the audited financials for the applicable period become available.

(g) Termination of Employment. Except as may otherwise be provided in the Option Agreement evidencing such Option, each Tranche C Option shall cease vesting as of the time that an Optionee’s employment with the Company is terminated for any reason, and no Tranche C Option which is not a Vested Option as of such time shall become a Vested Option thereafter.

 

9. EXERCISABILITY AND VESTING OF TRANCHE D OPTIONS.

(a) Vesting Schedule. All of the Tranche D Options shall become Vested Options on the date that is nine years immediately following the date of the grant (“Tranche D Vesting Date”) if the Optionee is employed by the Company on the Tranche D Vesting Date. However, if the Per Share Equity Value as of the Tranche D Performance Measurement Date indicated below (each a “Tranche D Performance Measurement Date”) equals or exceeds the corresponding Tranche D Per Share Target Value indicated below (the “Tranche D Per Share Target Value”) and the Optionee is employed by the Company on such Tranche D Performance Measurement Date indicated below, then 25% of the Tranche D Options shall vest on such Tranche D Performance Measurement Date.

 

TRANCHE D PERFORMANCE

MEASUREMENT DATE

   TRANCHE D PER SHARE
TARGET VALUE

June 30, 1999

   $ 52.00

June 30, 2000

   $ 67.60

June 30, 2001

   $ 87.88

June 30, 2002

   $ 114.24

(b) Acceleration Right. If the Tranche D Per Share Target Value is not achieved for any year, the Committee, upon consultation with management, will have the discretion to cause all or part of the applicable Tranche D Options, to become Vested Options.


(c) Rollover Vesting. If both (i) the Per Share Equity Value as of any Tranche D Performance Measurement Date equals at least 80% of the Tranche D Per Share Target Value established for such Tranche D Performance Measurement Date (the “Tranche D Missed Performance Measurement Date”), but is less than 100% of the Tranche D Per Share Target Value established for such Tranche D Performance Measurement Date and (ii) either (A) the Per Share Equity Value as of the immediately subsequent Tranche D Performance Measurement Date equals or exceeds 100% of the Tranche D Per Share Target Value established for such subsequent Tranche D Performance Measurement Date or (B) both (x) the Per Share Equity Value as of the immediately subsequent Tranche D Performance Measurement Date equals at least 80% of the Tranche D Per Share Target Value established for such Tranche D Performance Measurement Date, but is less than 100% of the Tranche D Per Share Target Value established for such subsequent Tranche D Performance Measurement Date and (y) the Per Share Equity Value as of the second subsequent Tranche D Performance Measurement Date equals or exceeds 100% of the Tranche D Per Share Target Value established for such second subsequent Tranche D Performance Measurement Date, then the Tranche D Options shall become Vested Options as of the first or second anniversary of the Tranche D Missed Performance Measurement Date, as applicable, if the Optionee holding the applicable Tranche D Option is employed by the Company as of the first or second anniversary of the Tranche D Missed Performance Measurement Date, as applicable. Tranche D Options that have not become Vested Options as of the June 30, 2002 Tranche D Performance Measurement Date will no longer be subject to vesting under this Section 9(c).

(d) IPO Prior to Final Performance Measurement Date. Notwithstanding the foregoing provisions of this Section 9, if the Company sells Shares in a Qualified Public Offering prior to the June 30, 2002 Tranche D Performance Measurement Date, the Per Share Equity Value for each Tranche D Performance Measurement Date following the Qualified Public Offering shall be the average closing stock price for the 90 trading days immediately preceding such Tranche D Performance Measurement Date (with the five highest and five lowest closing prices disregarded), subject to adjustment pursuant to Section 12 hereof.

(e) Sale of the Company. Notwithstanding the foregoing provisions of this Section 9, if a Sale of the Company shall occur prior to June 30, 2004 all of the Tranche D Options that have not previously become Vested Options shall become Vested Options as of the effective date of the Sale of the Company, subject to the conditions that the Optionee is employed by the Company on such date and that the Fair Market Value of the per share consideration received by the holders of Shares (after giving effect to the vesting described herein) equals or exceeds (i) the Tranche D Per Share Target Value for the Tranche D Performance Measurement Date immediately preceding such Sale of the Company, plus (ii) the product of (x) (A) the Tranche D Per Share Target Value for the Tranche D Performance Measurement Date immediately following such Sale of the Company, less (B) the Tranche D Per Share Target Value for the Tranche D Performance Measurement Date immediately preceding such Sale of the Company, multiplied by (y) a fraction, the numerator of which is the number of days elapsed as of the consummation of such Sale of the Company since the immediately preceding Tranche D Performance Measurement Date and the denominator of which is 365. If the foregoing conditions are not met, such Tranche D Options shall not become Vested Options upon the Sale of the Company, but such Tranche D Options shall remain eligible to become Vested Options on the Tranche D Vesting Date if the Optionee remains employed by the Company until the Tranche D Vesting Date. For purposes of this Section 9(e) only, any Tranche D Performance Measurement Dates for years after 2002 shall be deemed to occur on June 30 of each such year and any Tranche D Per Share Target Values for years after 2002 shall be calculated assuming the Tranche D Per Share Target Values set forth in Section 9(a) were extrapolated based on a progression rate consistent with such Tranche D Per Share Target Values.

(f) Calculations. Notwithstanding anything to the contrary contained in this Plan, the determination as to whether the Per Share Equity Value equals or exceeds the Tranche D Per Share Target Value shall be made after the Company’s audited financials for the applicable period become available. All decisions by the Committee with respect to any calculations pursuant to this Section (absent manifest error) shall be final and binding on all Optionees. The Committee shall provide each affected Optionee with a notice as to the results of its calculations as they relate to the vesting of Options within 60 days of the date the audited financials for the applicable period become available.

(g) Termination of Employment. Except as may otherwise be provided in the Option Agreement evidencing such Option, each Tranche D Option shall cease vesting as of the time that an Optionee’s employment with the Company is terminated for any reason, and no Tranche D Option which is not a Vested Option as of such time shall become a Vested Option thereafter.


10. AUTOMATIC TERMINATION OF OPTION.

Each Vested Option that has not previously been exercised by an Optionee shall automatically terminate and shall become null and void and be of no further force or effect upon the first of the following to occur (the “Expiration Date”):

(a) the tenth anniversary of the date on which such Option is granted;

(b) if an Optionee’s employment with the Company is terminated for any reason other than the death or Disability of the Optionee, the thirtieth day following the later of (i) the date of such termination and (ii) the date on which the Optionee ceases to be a member of the Board;

(c) if an Optionee’s employment with the Company is terminated due to the death or Disability of the Optionee, six months after the date of such death or Disability; or

(d) notwithstanding the foregoing, the expiration of such other period of time or the occurrence of such other event as the Committee, in its discretion, may provide in the Option Agreement governing such Option, provided that no Option shall be exercisable after the tenth anniversary of the date on which such Option is granted.

 

11. PROCEDURE FOR EXERCISE.

(a) Payment. At the time an Option is granted under this Plan, the Committee shall, in its discretion, specify one or more of the following forms of payment which may be used by an Optionee upon exercise of his Vested Option:

(i) cash or personal or certified check payable to the Company in an amount equal to the aggregate Option Price of the Shares with respect to which the Option is being exercised;

(ii) stock certificates (in negotiable form) representing Shares having a Fair Market Value on the date of exercise equal to the aggregate Option Price of the Shares with respect to which the Option is being exercised; or

(iii) a combination of the methods set forth in clauses (i) and (ii), above.

(b) Notice. An Optionee (or other person, as provided in Section 13(c)) may exercise a Vested Option granted under this Plan in whole or in part (but for the purchase of whole Shares only), as provided in the Option Agreement evidencing his Option, by delivering a written notice (the “Notice”) to the Secretary of the Company. The Notice shall state:

(i) that the Optionee elects to exercise the Vested Option;

(ii) the number of Shares with respect to which the Vested Option is being exercised (the “Optioned Shares”);

(iii) the method of payment for the Optioned Shares (which method must be available to the Optionee under the terms of his Option Agreement);

(iv) the date upon which the Optionee desires to consummate the purchase (which date must be prior to the termination of such Option);

(v) a copy of any election filed by the Optionee pursuant to Section 83(b) of the Code; and

(vi) such further provisions consistent with this Plan as the Committee may from time to time require.


The exercise date of a Vested Option shall be the date on which the Company receives the Notice from the Optionee, or such later date as may be specified in the Notice from the Optionee.

(c) Issuance of Certificates. The Company shall issue shares in the name of the Optionee (or such other person exercising the Option in accordance with the provisions of Section 13(c)) for the Optioned Shares with respect to which such Option is being exercised as soon as practicable after receipt of the Notice and payment of the aggregate Option Price for such shares, provided, however, that the Company may, in its discretion, reduce the number of Shares issued by such number of Shares having an aggregate Fair Market Value equal to the Optionee’s outstanding indebtedness to the Company as of the exercise date of the Option (or any lesser amount). If the Company uses an electronic recordation system for the ownership of shares, then, within a reasonable time after the issuance of the Optioned Shares, the Company shall send the shareholder a written statement of stock ownership as and to the extent required by the Company’s Amended and Restated By-laws or the Florida Business Corporation Act. Neither the Optionee nor any person exercising an Option in accordance with the provisions of Section 13(c) shall have any privileges as a stockholder of the Company with respect to any shares of stock subject to an Option granted under this Plan until the date of issuance of shares pursuant to this Section 11(c).

 

12. ADJUSTMENTS.

(a) If the Company shall at any time change the number of issued Shares without new consideration to the Company (such as by stock dividend, stock split, recapitalization, reorganization, exchange of shares, liquidation, combination or other change in corporate structure affecting the Shares) or make a distribution of cash or property which has a substantial impact on the value of issued Shares, the number of Shares covered by each outstanding Option and the purchase price per Share under each outstanding Option shall be adjusted so that the aggregate consideration payable to the Company and the value of each such Option shall not be changed.

(b) Notwithstanding any other provision of the Plan, and without affecting the number of Shares reserved or available hereunder, the Committee shall authorize the issuance, continuation or assumption of outstanding Options or provide for other equitable adjustments after changes in the Shares resulting from any merger, consolidation, sale of assets, acquisition of property or stock, recapitalization, reorganization or similar occurrence in which the Company is the continuing or surviving corporation, upon such terms and conditions as it may deem necessary to preserve Optionees’ rights under the Plan.

(c) In the case of any sale of assets, merger, consolidation or combination of the Company with or into another corporation other than a transaction in which the Company is the continuing or surviving corporation and which does not result in the outstanding Shares being converted into or exchanged for different securities, cash or other property, or any combination thereof (an “Acquisition”), any Optionee who holds an outstanding Option shall have the right (subject to the provisions of the Plan and any limitation applicable to the Option) thereafter and during the term of the Option, to receive upon exercise thereof the Acquisition Consideration (as defined below) receivable upon the Acquisition by a holder of the number of Shares which would have been obtained upon exercise of the Option or portion thereof, as the case may be, immediately prior to the Acquisition. The term “Acquisition Consideration” shall mean (i) the kind and amount of securities of the surviving or new corporation, cash, or any combination thereof receivable in respect of Shares of the Company upon consummation of an Acquisition or (ii) the kind and amount of shares of the surviving or new corporation, cash, or any combination thereof (as determined by the Committee) having a fair market value equal to the fair market value of consideration other than cash or securities receivable in respect of Shares of the Company upon consummation of an Acquisition.

(d) Any adjustments or other determinations to be made as provided for in this Section 12 shall be made by the Committee in its discretion acting in good faith, and shall be conclusive and binding on all persons holding any Options granted under this Plan.

 

13. RESTRICTIONS ON OPTIONS AND OPTIONED SHARES.

(a) No Options shall be granted under this Plan, and no Shares shall be issued and delivered upon the exercise of Options granted under this Plan, unless and until the Company and/or the Optionee shall have complied with all applicable Federal or state registration, listing and/or qualification requirements and all other requirements of law or of any regulatory agencies having jurisdiction. The Company shall make all reasonable efforts to comply with such requirements that relate to the Company.


(b) The Committee in its sole and absolute discretion may, as a condition to the exercise of any Vested Option granted under this Plan, require an Optionee (i) to represent in writing that the Shares received upon exercise of a Vested Option are being acquired for investment and not with a view to distribution (ii) to make such other representations and warranties as are reasonably deemed appropriate by the Company to satisfy the requirements of applicable law, including, without limitation, an applicable private placement exemption of the Securities Act as determined by the Committee. Stock certificates representing Shares acquired upon the exercise of Vested Options that have not been registered under the Securities Act shall, if required by the Committee, bear the following legend and such additional legends as may be required by the Option Agreement evidencing a particular Option:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL TO THE ISSUER HEREOF THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.”

For any uncertificated shares of Common Stock acquired upon the exercise of Options that have not been registered under the Securities Act, the Company may, in its discretion, make a notation within any electronic recordation system for ownership of shares or utilize other reasonable means to evidence such have not been registered under the Securities Act.

(c) No Option granted under this Plan may be Transferred by the Optionee, except by will or by the laws of descent and distribution. A Vested Option may be exercised during the lifetime of the Optionee only by the Optionee. If an Optionee dies, his Vested Options shall thereafter be exercisable, during the period specified in Section 10(d) or the applicable Option Agreement (as the case may be), by his executors or administrators to the full extent (but only to such extent) to which such Options were exercisable by the Optionee at the time of his death.

(d) No Share issued upon exercise of an Option may be Transferred, except as otherwise provided in this Plan, in the Shareholders’ Agreement (if applicable to the Optionee), by will, by the laws of descent and distribution or to the Company or any of the Company’s Affiliates.

(e) The rights of an Optionee with respect to each Share issuable upon exercise of an Option granted under the Plan shall be subject to and benefit from the terms of the Shareholders’ Agreement (if applicable to the Optionee), and an Optionee shall be required, as a condition of exercising an Option, to execute and deliver all such agreements and other instruments required by the Company for such purpose.

(f) The Committee in its sole and absolute discretion may, as a condition to receiving an Option granted under the Plan (other than the Options granted on the Effective Date, which are subject to the Shareholders’ Agreement), require that the Optionee enter into a shareholders’ or similar agreement in the form approved by the Committee that shall provide for one or more of the following: transfer restrictions, right of first refusal, call option, drag-along rights, tag-along rights, option exercise “blackout” periods and other such rights or restrictions with respect to the Options and the Optioned Shares as the Committee in its discretion shall deem appropriate.

 

14. EFFECTIVE DATE AND TERMINATION OF THE PLAN.

(a) This Plan shall become effective on the Effective Date.

(b) No Options may be granted after the tenth anniversary of the Effective Date.

(c) Any Option outstanding as of the tenth anniversary of the Effective Date shall remain in effect until the earlier of the exercise thereof or the Expiration Date with respect to such Option.


15. WITHHOLDING TAXES.

When taxable compensation is realized by an Optionee in respect of an Option, such Optionee shall satisfy all applicable federal, state or local taxes required by law to be withheld at such time. The Option Agreement shall specify the manner in which the withholding obligation shall be satisfied with respect to the Option.

 

16. MISCELLANEOUS.

Each Option granted under this Plan may contain such other terms and conditions not inconsistent with this Plan as may be determined by the Committee, in its sole and absolute discretion.

(a) Number and Gender. With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, and vice-versa, as the context requires.

(b) Captions. The use of captions in this Plan is for convenience. The captions are not intended to provide substantive rights.

(c) Amendment of Plan. This Plan may be modified or amended in any respect by the Board, provided that no amendment or modification of the Plan shall in any manner affect any Option theretofore granted without the consent of the Optionee or the permitted transferee of such Option.

(d) Governing Law. All questions concerning the construction, interpretation and validity of this Plan and the instruments evidencing the Options granted hereunder shall be governed by and construed and enforced in accordance with the domestic laws of the State of Florida, without giving effect to any choice or conflict of law provision or rule (whether in the State of Florida or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Florida. In furtherance of the foregoing, the internal law of the State of Florida will control the interpretation and construction of this Plan, even it under such jurisdiction’s choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply.

(e) No Evidence of Employment or Service. Nothing contained in this Plan or in any Option Agreement shall confer upon any Optionee any right with respect to the continuation of his employment by or service with the Company or any of its subsidiaries or interfere in any way with the right of the Company or any such subsidiary (subject to the terms of any separate agreement to the contrary) at any time to terminate such employment or service or to increase or decrease the compensation of the Optionee from the rate in existence at the time of the grant of an Option.

(f) Integration. The provisions contained in this Plan and any Option Agreement shall supersede all prior plans, agreements and understandings with respect to the subject matter hereof, including, without limitation, the “Option Plan” term sheet set forth as Attachment A to the employment agreements dated as of February 10, 1998 by and between Montgomery Tank Lines, Inc., and Charles J. O’Brien, Jr., Marvin Sexton and Richard Brandewie.


EXHIBIT A

LIST OF OPTIONEES AND NUMBER OF OPTIONS AWARDED

 

Optionee

   Options
     Tranche A    Tranche B    Tranche C    Tranche D

Richard Brandewie

   11,000    3,667    3.667    3.666

Charles J. O’Brien, Jr.

   11,000    3,667    3,667    3.666

Marvin Sexton

   11,000    3,667    3,667    3,666
EX-31.1 4 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Gary R. Enzor, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Quality Distribution, Inc.:

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 9, 2008

/s/ Gary R. Enzor

GARY R. ENZOR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EX-31.2 5 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Timothy B. Page, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Quality Distribution, Inc.:

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 9, 2008

/s/ Timothy B. Page

TIMOTHY B. PAGE

SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

EX-32.1 6 dex321.htm SECTION 906 CEO AND CFO CERTIFICATION Section 906 CEO and CFO Certification

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned in connection with this Quarterly Report of Quality Distribution, Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the undersigned’s knowledge:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 9, 2008

/s/ Gary R. Enzor

GARY R. ENZOR

PRESIDENT AND CHIEF EXECUTIVE OFFICER

Date: May 9, 2008

/s/ Timothy B. Page

TIMOTHY B. PAGE

SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided to Quality Distribution, Inc. and will be retained by Quality Distribution, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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