Quality Distribution 10-Q 2003 Q2 Quarterly report

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 JUNE 30, 2003

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: 333-98077

Quality Distribution, LLC

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	04-3668323 I.R.S. Employer Identification No.)
3802 Corporex Park Drive, Tampa, FL (Address of Principal Executive Offices)	33619 (Zip Code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x

APPLICABLE ONLY TO CORPORATE USERS:

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

Class	Outstanding at June 30, 2003
Membership Interest, No par value	100

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.)

INDEX

		Page No.
Part I Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets—June 30, 2003 (unaudited) and December 31, 2002	3-4
	Condensed Consolidated Statements of Operations—Three and six months ended June 30, 2003 (unaudited) and June 30, 2002 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows—Six months ended June 30, 2003 (unaudited) and June 30, 2002 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7-20
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
Part II Other Information
Item 1.	Legal Proceedings	26
Item 2.	Changes in Securities	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits and Reports on Form 8-K	26
Signatures		27

2

FORM 10-Q

PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	June 30, 2003 (Unaudited)			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	2,232		$	661
Accounts receivable, net of allowance of $7,926 and $7,846		84,328			75,428
Inventories		911			898
Prepaid expenses		4,235			5,186
Prepaid tires		8,031			7,894
Other		3,292			2,578
Total current assets		103,029			92,645
Property, plant and equipment		341,809			340,681
Less—accumulated depreciation		(199,325	)		(187,120	)
Property, plant and equipment, net		142,484			153,561
Goodwill		130,732			130,732
Intangibles, net		1,256			1,585
Other assets		8,500			8,742
Total assets	$	386,001		$	387,265

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

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FORM 10-Q

PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands EXCEPT MEMBERSHIP INTEREST DATA)

(continued)

	June 30, 2003 (Unaudited)			December 31, 2002
LIABILITIES AND MEMBERSHIP INTEREST
Current liabilities:
Current maturities of indebtedness	$	15,557		$	3,251
Accounts payable and accrued expenses		53,464			57,604
Affiliates and independent owner-operators payable		13,461			10,604
Income taxes payable		1,909			1,569
Total current liabilities		84,391			73,028
Long-term debt, less current maturities		359,450			378,939
Environmental liabilities		26,325			27,324
Other non-current liabilities		17,978			17,656
Deferred tax liability		1,931			1,361
Total liabilities		490,075			498,308
Minority interest in subsidiary		1,833			1,833
COMMITMENTS AND CONTINGENCIES (NOTE 5)
MEMBERSHIP INTEREST:
Membership interest, no par value, 1,000 authorized, 100 issued		—			—
Additional paid-in-capital		176,428			176,436
Accumulated deficit		(77,073	)		(83,892	)
Stock recapitalization		(189,589	)		(189,589	)
Accumulated other comprehensive loss		(15,673	)		(15,831	)
Total membership interest		(105,907	)		(112,876	)
	$	386,001		$	387,265

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

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FORM 10-Q

PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited—In thousands)

	Three months ended June 30,						Six months ended June 30,
	2003			2002			2003			2002
Operating revenues:
Transportation	$	121,814		$	116,374		$	236,622		$	221,906
Fuel surcharge		4,060			1,416			8,676			1,612
Other		17,301			17,196			35,074			34,254
Total operating revenues		143,175			134,986			280,372			257,772
Operating expenses:
Purchased transportation		89,928			79,243			173,647			150,120
Depreciation and amortization		7,630			7,841			15,124			15,596
Other operating expenses		34,714			38,631			71,237			75,463
Operating income		10,903			9,271			20,364			16,593
Interest expense, net		5,982			9,577			12,291			19,484
Interest expense, transaction fees		—			10,077			—			10,077
Foreign currency transaction loss		937			—			937			—
Other expense		—			12			—			48
Income (loss) before taxes		3,984			(10,395	)		7,136			(13,016	)
Provision for income taxes		102			164			240			353
Net income (loss) from continuing operations		3,882			(10,559	)		6,896			(13,369	)
Discontinued operations:
Loss from operations of discontinued division (net of tax of $0)		—			(1,151	)		—			(1,386	)
Loss on disposal of discontinued division (net of tax of $0)		—			(308	)		—			(308	)
Total loss from discontinued operations		—			(1,459	)		—			(1,694	)
Net income (loss) before cumulative effect of change in accounting principle		3,882			(12,018	)		6,896			(15,063	)
Cumulative effect of a change in accounting principle (net of tax of $0)		—			—			—			(23,985	)
Net income (loss)		3,882			(12,018	)		6,896			(39,048	)
Distributions to minority interest/preferred stock dividends and accretions		(41	)		(430	)		(77	)		(1,032	)
Net income (loss) attributable to membership interest	$	3,841		$	(12,448	)	$	6,819		$	(40,080	)

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

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FORM 10-Q

ITEM 1—FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited—In thousands)

	Six months ended June 30,
	2003			2002
Cash flows from operating activities:
Net income (loss)	$	6,896		$	(39,048	)
Cumulative effect of change in accounting principle		—			23,985
Adjustments for non-cash charges		18,236			21,720
Changes in assets and liabilities		(11,661	)		3,274
Net cash provided by operating activities		13,471			9,931
Cash flows from investing activities:
Capital expenditures		(3,836	)		(6,520	)
Proceeds from asset dispositions		765			3,682
Net cash used in investing activities		(3,071	)		(2,838	)
Cash flows from financing activities:
Net payments on the revolver		(7,000	)		—
Payment of debt obligations		(1,532	)		(1,839	)
Exchange offer fees		—			(3,572	)
Other		236			(691	)
Net cash used in financing activities		(8,296	)		(6,102	)
Net increase in cash		2,104			991
Effect of exchange rate changes on cash		(533	)		58
Cash, beginning of period		661			2,212
Cash, end of period	$	2,232		$	3,261
Supplemental disclosures of non-cash activities:
Preferred stock accretion	$	—		$	1,032
Unrealized gain on derivative instruments	$	—		$	2,340

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

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FORM 10-Q

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

Quality Distribution, LLC (the “Company” or “QD LLC”) is a Delaware limited liability company formed on April 14, 2002. The Company’s sole member is Quality Distribution, Inc. (“QD Inc.”), a Florida corporation. On May 30, 2002, QD Inc. completed an exchange offer for its public debt (the “Exchange Offer”), at which time QD Inc. transferred nearly all of its assets and liabilities (other than certain contract rights which by their terms cannot be assigned without the consent of the other parties thereto) to the Company, consisting principally of the capital stock of QD Inc.’s operating subsidiaries. As a result, QD Inc. has no significant assets or operations other than the ownership of 100% of QD LLC’s membership units. The Company became the successor entity to QD Inc. The transfer of the net assets to the Company by QD Inc. has been accounted for as a transaction between companies under common control. As a result, QD Inc.’s historical accounting basis for the net assets has been carried over to the Company. The results of operations for periods prior to the transfer represent the historical operating results for QD Inc.

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

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

Certain reclassifications have been made in the fiscal 2002 statements to conform to the 2003 presentation. Additionally, we reclassified our insurance subsidiary’s premium revenue and insurance loss expense to a gross basis from a net basis for 2002. The impact of those reclassifications increased other revenue and other operating expense by $567 thousand and by $1,135 thousand for the three and six months ended June 30, 2002, respectively.

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

Operating results for the second quarter ended June 30, 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year.

Discontinued Operations

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

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

	Three months ended June 30, 2002			Six months ended June 30, 2002
Revenue	$	2,409		$	5,117
Operating expenses		3,560			6,503
Operating loss	$	(1,151	)	$	(1,386	)
Carrying value of assets sold at June 30, 2002:
Petroleum division	$	4,487
Bulknet		392
Proceeds		(4,571	)
Loss on sale of assets	$	308

2. COMPREHENSIVE INCOME:

Comprehensive income is as follows (in thousands):

	Three months ended June 30,						Six months ended June 30,
	2003			2002			2003		2002
Net income (loss)	$	3,882		$	(12,018	)	$	6,896	$	(39,048	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(464	)		530			158		451
Unrealized gain on derivative instruments		—			1,265			—		2,340
Comprehensive income (loss)	$	3,418		$	(10,223	)	$	7,054	$	(36,257	)

3. STOCK-BASED COMPENSATION:

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

	Three months ended June 30,						Six months ended June 30,
	2003			2002			2003			2002
Net income (loss) attributable to membership interest as reported	$	3,841		$	(12,448	)	$	6,819		$	(40,080	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		—			—			—			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(38	)		(79	)		(76	)		(159	)
Pro forma net income (loss) attributable to membership interest	$	3,803		$	(12,527	)	$	6,743		$	(40,239	)

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4. DERIVATIVES:

The Company utilized derivative financial instruments to reduce its exposure to market risks from changes in interest rates and foreign exchange rates. The instruments primarily used to mitigate these risks are interest rate swaps and foreign exchange contracts.

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

The Company had entered into interest rate swap agreements designated as a partial hedge of its’ variable rate debt. The purpose of these swaps was to fix interest rates on variable rate debt and reduce certain exposures to interest rate fluctuations. These agreements expired in the third quarter of 2002. As of June 30, 2003 and December 31, 2002, there were no outstanding interest rate swaps.

The nature of the Company’s business activities necessarily involves the management of various financial and market risks, including those related to changes in interest rates and currency exchange rates. The Company uses derivative financial instruments to mitigate or eliminate certain of those risks. The January 1, 2001 accounting changes of SFAS 133 described above affected only the pattern and the timing of the non-cash accounting recognition.

A reconciliation of current period changes in the component of accumulated other comprehensive income as it relates to derivatives is as follows (in thousands):

	Three months ended					Six months ended
	June 30,					June 30,
	2003		2002			2003		2002
Balance, beginning of period	$	—	$	(2,413	)	$	—	$	(3,346	)
Current period declines in fair value		—		(89	)		—		(231	)
Reclassifications to earnings		—		1,265			—		2,340
Balance, end of period	$	—	$	(1,237	)	$	—	$	(1,237	)

Hedges of Future Cash Flows

All hedges were effective at June 30, 2002, and as such, there were no earnings reclassifications at June 30, 2002 due to ineffective hedges. There were no amounts excluded from the measure of effectiveness related to the hedge of future cash flows.

For the six months ended June 30, 2002, $1.3 million was reclassified to earnings as interest expense. The $(1.2) million recorded in accumulated other comprehensive income at June 30, 2002 was reclassified to future earnings, contemporaneously with and partially offsetting changes in interest expenses on floating-rate instruments occurring subsequent to period end. The actual amount reclassified to earnings was $(3.6) million, which varied from the $(1.2) million as a result of changes in market conditions.

5. COMMITMENTS AND CONTINGENCIES—ENVIRONMENTAL MATTERS:

Our activities involve the handling, transportation, storage and disposal of bulk liquid chemicals, many of which are classified as hazardous materials, hazardous substances, or hazardous waste. Our tank wash and terminal operations engage in the storage or discharge of wastewater and storm-water that may have contained hazardous substances, and from time to time we store diesel fuel and other petroleum products at our terminals. As such, we are subject to environmental, health and safety laws and regulation by U.S. federal, state, local and Canadian government authorities. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. There can be no assurance that violations of such laws or regulations will not be identified or occur in the future, or that such laws and regulations will not change in a manner that could impose material costs to us.

Facility managers are responsible for environmental compliance. Self-audits conducted by our internal audit staff are required to assess operations, safety training and procedures, equipment and grounds maintenance, emergency response capabilities and waste

9

management. We may also contract with an independent environmental consulting firm that conducts periodic, unscheduled, compliance assessments which focus on conditions with the potential to result in releases of hazardous substances or petroleum, and which also include screening for evidence of past spills or releases. Our environmental management program has been extended to our affiliates. Our staff includes environmental experts who develop policies and procedures, including periodic audits of our terminals, tank cleaning facilities, and historical operations, in an effort to avoid circumstances that could lead to future environmental exposure.

As a handler of hazardous substances, we are potentially subject to strict, joint and several liability for investigating and rectifying the consequences of spills and other environmental releases of such substances either under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (“CERCLA”) and comparable state laws. From time to time, we have incurred remedial costs and regulatory penalties with respect to chemical or wastewater spills and releases at our facilities and, notwithstanding the existence of our environmental management program, we cannot assure that such obligations will not be incurred in the future, nor that such liabilities will not result in a material adverse effect on our financial condition, results of operations or our business reputation. As the result of environmental studies conducted at our facilities in conjunction with our environmental management program, we have identified environmental contamination at certain sites that will require remediation.

We have also been named a potentially responsible party (“PRP”), or have otherwise been alleged to have some level of responsibility, under CERCLA or similar state laws for cleanup of off-site locations at which our waste, or material transported by us, has allegedly been disposed of. We have asserted defenses to such actions and have not incurred significant liability in the CERCLA cases settled to date. While we believe that we will not bear any material liability in any current or future CERCLA matters, there can be no assurance that we will not in the future incur material liability under CERCLA or similar laws.

We are currently solely responsible for remediation of the following two federal Superfund sites:

BRIDGEPORT, NEW JERSEY. During 1991, CLC entered into a Consent Decree with the EPA filed in the U.S. District Court for the District of New Jersey, U.S. v. Chemical Leaman Tank Lines, Inc., Civil Action No. 91-2637 (JFG) (D.N.J.), with respect to its site located in Bridgeport, New Jersey, requiring CLC to remediate groundwater contamination. The Consent Decree required CLC to undertake Remedial Design and Remedial Action (“RD/RA”) related to the groundwater operable unit of the cleanup. A groundwater remedy design has subsequently been approved by the EPA and is under consideration.

In August 1994, the EPA issued a Record of Decision, selecting a remedy for the wetlands operable unit at the Bridgeport site at a cost estimated by the EPA to be approximately $7 million. In October 1998, the EPA issued an administrative order that requires CLC to implement the EPA’s wetlands remedy. A remedial design for this remedy is currently under consideration by EPA and the State of New Jersey. In April 1998, the federal and state natural resource damages trustees indicated their intention to bring claims against CLC for natural resource damages at the Bridgeport site. CLC finalized a consent decree on March 16, 2001 with the state and federal trustees and has resolved the natural resource damages claims. In addition, the EPA has investigated contamination in site soils. No decision has been made as to the extent of soil remediation to be required, if any.

WEST CALN TOWNSHIP, PA. The EPA has alleged that CLC disposed of hazardous materials at the William Dick Lagoons Superfund Site in West Caln, Pennsylvania. On October 10, 1995, CLC entered into a Consent Decree with the EPA which required CLC to:

–    pay the EPA for installation of an alternate water line to provide water to area residents;

–    perform an interim groundwater remedy at the site; and

–    conduct soil remediation. US v. Chemical Leaman Tank Lines, Inc., Civil Action No. 95-CV-4264 (RJB) (E.D. Pa.).

CLC has paid all costs associated with installation of the waterline. CLC has completed a groundwater study, and has submitted designs for a groundwater treatment plant to pump and treat groundwater. The EPA anticipates that CLC will conduct the groundwater remedy over the course of five years, at which time the EPA will evaluate groundwater conditions and determine whether further groundwater remedy is necessary. Field sampling for soil remediation and activities for the design of a soil remediation system have been completed. Soil remediation will include the use of both a low temperature thermal treatment unit and a soil vapor extraction system. The Consent Decree does not cover the final groundwater remedy or other site remedies or claims, if any, for natural resource damages.

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OTHER ENVIRONMENTAL MATTERS. CLC has been named as PRP under CERCLA and similar state laws at approximately 35 former waste treatment and/or disposal sites including the Helen Kramer Landfill Site where CLC previously settled its liability. In general, CLC is among several PRP’s named at these sites. CLC is also named as co-defendant in two civil toxic tort claims arising from alleged exposure to hazardous substances that were allegedly transported to disposal sites by CLC and other co-defendants. CLC is also incurring expenses resulting from the investigation and/or remediation of certain current and former CLC properties, including its facility in Tonawanda, New York and its former facility in Putnam County, West Virginia, and its facility in Charleston, West Virginia. As a result of our acquisition of CLC, we identified other owned or formerly owned properties that may require investigation and/or remediation, including properties subject to the New Jersey Industrial Sites Recovery Act (ISRA). CLC’s involvement at some of the above referenced sites could amount to material liabilities, and there can be no assurance that costs associated with these sites, individually or in the aggregate, will not be material. We currently have reserves in the amount of $31.6 million for liabilities associated with the Helen Kramer Landfill, CLC’s facility at Tonawanda, New York and CLC’s former facility in Putnam County, West Virginia and the other matters discussed above.

6. GEOGRAPHIC SEGMENTS

The Company’s 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 the Company’s operations in different geographic areas for the three and six months ended June 30, 2003 and 2002, is as follows (in thousands):

	Three months ended June 30, 2003
	U.S.		INTERNATIONAL			ELIMINATIONS			CONSOLIDATED
Operating revenues	$	136,013	$	7,162		$	—		$	143,175
Operating income		9,965		938			—			10,903
Identifiable assets		386,882		12,624			(13,505	)		386,001
Depreciation and amortization		7,044		586			—			7,630
Capital expenditures		1,652		514			—			2,166
	Three months ended June 30, 2002
	U.S.		INTERNATIONAL			ELIMINATIONS			CONSOLIDATED
Operating revenues	$	132,898	$	2,088		$	—		$	134,986
Operating income		9,275		(4	)		—			9,271
Identifiable assets		409,245		8,753			(5,131	)		412,867
Depreciation and amortization		7,501		340			—			7,841
Capital expenditures		5,669		851			—			6,520
	Six months ended June 30, 2003
	U.S.		INTERNATIONAL			ELIMINATIONS			CONSOLIDATED
Operating revenues	$	271,051	$	9,321		$	—		$	280,372
Operating income		19,433		931			—			20,364
Identifiable assets		386,882		12,624			(13,505	)		386,001
Depreciation and amortization		14,124		1,000			—			15,124
Capital expenditures		3,322		514			—			3,836
	Six months ended June 30, 2002
	U.S.		INTERNATIONAL			ELIMINATIONS			CONSOLIDATED
Operating revenues	$	253,507	$	4,265		$	—		$	257,772
Operating income		16,384		209			—			16,593
Identifiable assets		409,245		8,753			(5,131	)		412,867
Depreciation and amortization		14,874		722			—			15,596
Capital expenditures		3,866		484			—			4,350

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7. SUBSEQUENT EVENTS:

On August 11, 2003, the Company entered into the seventh amendment (the “Seventh Amendment”) to the credit agreement. The Seventh Amendment includes (i) a one year extension of the maturity of the revolving credit facility (the “Revolver”) and tranche A term loan to June 9, 2005, (ii) a $5.0 million permanent reduction in the Revolver, (iii) an increase in the quarterly principal payment of the tranche A term loan from $200 thousand to $2.1 million beginning with the quarter ending September 30, 2003, (iv) a conversion of $10.0 million of the outstanding Revolver into a new tranche (Tranche E) of the term loan maturing at the rate of $1.25 million per quarter beginning on September 30, 2003 and (v) a pricing increase to LIBOR + 4.25% for all tranches of the term loan and the Revolver. The Company paid an upfront fee to the creditors at closing of $3.3 million.

Scheduled maturities of long-term debt and capital lease obligation for the remainder of 2003, the following four years and thereafter under the revised credit agreement are as follows (in thousands):

YEAR ENDING

DECEMBER 31:

	TRANCHE A		TRANCHE B		TRANCHE C		TRANCHE D		TRANCHE E		REVOLVER		SERIES B NOTES		12 ½% SENIOR NOTES		CAPITAL LEASE OBLIGATION		TOTAL
2003	$	4,200	$	490	$	424			$	2,500							$	380	$	7,994
2004		8,400		984		845				5,000										15,229
2005		67,720		92,227		39,843				2,500	$	9,937								212,227
2006						39,208	$	5,000					$	25,600						69,808
2007																				—
After															$	57,548				57,548
	$	80,320	$	93,701	$	80,320	$	5,000	$	10,000	$	9,937	$	25,600	$	57,548	$	380		362,806
	Bond carrying value in excess of face value																			12,201
	Total indebtedness at 6/30/03																		$	375,007

8 GUARANTOR SUBSIDIARIES:

The 10% Series B Senior Subordinated Notes, Series B Floating Interest Rate Subordinated Term Notes and the Company’s 12.5% Senior Subordinated Secured Notes are unconditionally guaranteed on a senior subordinated basis pursuant to guarantees by all of the Company’s direct and indirect domestic subsidiaries (the “Guarantors”). Each of the Company’s direct and indirect subsidiaries is 100% owned. All non-domestic subsidiaries including Levy Transport Ltd. are non-guarantor subsidiaries.

The Company conducts substantially all of its business through and derives virtually all its income from its subsidiaries. Therefore, the Company’s ability to make required principal and interest payments with respect to all of the Company’s indebtedness, including the 12 ½% Senior Notes (“New Notes”) and other obligations, 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 the Company and have fully and unconditionally guaranteed the New Notes on a joint and several basis.

The Company has not presented separate financial statements and other disclosures concerning subsidiary guarantors because management has determined such information is not material to the holders of the New Notes and the Series B Notes. The following condensed consolidating financial information of the parent company, combined guarantor subsidiaries and non-guarantor subsidiaries presents:

1. Balance Sheets as of June 30, 2003 and December 31, 2002.

2. Statements of Operations for the three months ended June 30, 2003 and June 30, 2002.

3. Statements of Operations for the six months ended June 30, 2003 and June 30, 2002.

4. Statements of Cash Flows for the six months ended June 30, 2003 and June 30, 2002.

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

12

FORM 10-Q

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET

JUNE 30, 2003

(Unaudited—In thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	1,407		$	825		$	—		$	2,232
Accounts receivable, net		—			83,159			1,169			—			84,328
Inventories		—			775			136			—			911
Prepaid expenses and other current assets		—			15,168			390			—			15,558
Total current assets		—			100,509			2,520			—			103,029
Property and equipment, net		—			134,787			7,697			—			142,484
Intangibles and goodwill, net		—			131,560			428			—			131,988
Other assets		100,000			8,496			4			(100,000	)		8,500
Investment in subsidiaries		163,163			—			—			(163,163	)		—
	$	263,163		$	375,352		$	10,649		$	(263,163	)	$	386,001
LIABILITIES AND MEMBERSHIP INTEREST
Current liabilities:
Current maturities of indebtedness	$	15,557		$	—		$	—		$	—		$	15,557
Accounts payable and accrued expenses		—			52,054			1,410			—			53,464
Intercompany		—			13,373			(13,373	)		—			—
Affiliates and independent owner-operators payable		—			13,461			—			—			13,461
Income taxes payable		—			1,666			243			—			1,909
Total current liabilities		15,557			80,554			(11,720	)		—			84,391
Long-term debt, less current maturities		353,513			—			5,937			—			359,450
Environmental liabilities		—			26,325			—			—			26,325
Other non-current liabilities		—			117,978			—			(100,000	)		17,978
Deferred taxes		—			(996	)		2,927			—			1,931
Total liabilities		369,070			223,861			(2,856	)		(100,000	)		490,075
Minority interest in subsidiaries		—			1,833			—			—			1,833
Membership interest:
Membership interest and additional paid-in-capital		176,428			99,711			15,126			(114,837	)		176,428
(Accumulated deficit) retained earnings		(77,073	)		64,243			(189	)		(64,054	)		(77,073	)
Stock recapitalization		(189,589	)		—			(55	)		55			(189,589	)
Other comprehensive loss		(15,673	)		(14,296	)		(1,377	)		15,673			(15,673	)
Total membership interest		(105,907	)		149,658			13,505			(163,163	)		(105,907	)
	$	263,163		$	375,352		$	10,649		$	(263,163	)	$	386,001

13

FORM 10-Q

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2002

(Unaudited—In thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	284		$	377		$	—		$	661
Accounts receivable, net		—			82,876			(7,448	)		—			75,428
Inventories		—			792			106			—			898
Prepaid expenses and other current assets		—			15,367			291			—			15,658
Total current assets		—			99,319			(6,674	)		—			92,645
Property and equipment, net		—			145,946			7,615			—			153,561
Intangibles and goodwill, net		—			131,869			448			—			132,317
Other assets		100,000			8,738			4			(100,000	)		8,742
Investment in subsidiaries		164,314			—	��		—			(164,314	)		—
	$	264,314		$	385,872		$	1,393		$	(264,314	)	$	387,265
LIABILITIES AND MEMBERSHIP INTEREST
Current liabilities:
Current maturities of indebtedness	$	3,251		$	—		$	—		$	—		$	3,251
Accounts payable and accrued expenses		—			56,202			1,402			—			57,604
Intercompany		—			21,881			(21,881	)		—			—
Affiliates and independent owner-operators payable		—			10,571			33			—			10,604
Income taxes payable		—			1,268			301			—			1,569
Total current liabilities		3,251			89,922			(20,145	)		—			73,028
Long-term debt, less current maturities		373,939			—			5,000			—			378,939
Environmental liabilities		—			27,324			—			—			27,324
Other non-current liabilities		—			117,656			—			(100,000	)		17,656
Deferred income tax		—			(1,175	)		2,536			—			1,361
Total liabilities		377,190			233,727			(12,609	)		(100,000	)		498,308
Minority interest in subsidiaries		—			1,833			—			—			1,833
Membership interest:
Membership interest and additional paid-in capital		176,436			112,217			15,127			(127,344	)		176,436
(Accumulated deficit) retained earnings		(83,892	)		52,898			(42	)		(52,856	)		(83,892	)
Stock recapitalization		(189,589	)		—			(55	)		55			(189,589	)
Other comprehensive gain (loss)		(15,831	)		(14,803	)		(1,028	)		15,831			(15,831	)
Total membership interest		(112,876	)		150,312			14,002			(164,314	)		(112,876	)
	$	264,314		$	385,872		$	1,393		$	(264,314	)	$	387,265

* Condensed from audited financial statements.

14

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2003

(Unaudited—In thousands)

	Parent			Guarantor Subsidiaries		Noan-Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues:
Transportation	$	—		$	119,849	$	1,965		$	—		$	121,814
Fuel surcharge		—			3,923		137			—			4,060
Other		—			16,985		316			—			17,301
Total operating revenues		—			140,757		2,418			—			143,175
Operating expenses:
Purchased transportation		—			89,611		317			—			89,928
Depreciation and amortization		—			7,200		430			—			7,630
Other operating expenses		—			33,118		1,596			—			34,714
Operating income (loss)		—			10,828		75			—			10,903
Interest expense, net		5,911			—		71			—			5,982
Foreign currency transaction loss		—			937		—			—			937
Equity in earnings of subsidiaries		(5,810	)		—		—			5,810			—
Income (loss) before taxes		(101	)		9,891		4			(5,810	)		3,984
Income taxes		(3,983	)		4,055		30			—			102
Net income (loss)	$	3,882		$	5,836	$	(26	)	$	(5,810	)	$	3,882

15

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002

(Unaudited—In thousands)

	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues:
Transportation	$	—		$	114,383	$	1,991		$	—		$	116,374
Fuel surcharge		—			1,326		90			—			1,416
Other		—			17,189		7			—			17,196
Total operating revenues		—			132,898		2,088			—			134,986
Operating expenses:
Purchased transportation		—			78,939		304			—			79,243
Depreciation and amortization		—			7,501		340			—			7,841
Other operating expenses		—			37,183		1,448			—			38,631
Operating income (loss)		—			9,275		(4	)		—			9,271
Interest expense, net		19,615			—		39			—			19,654
Other (income) expense		—			12		—			—			12
Equity in earnings (loss) of subsidiaries		3,899			—		—			(3,899	)		—
Income (loss) before taxes		(15,716	)		9,263		(43	)		(3,899	)		(10,395	)
Income taxes		(3,698	)		3,798		64			—			164
Income (loss) from continuing operations		(12,018	)		5,465		(107	)		(3,899	)		(10,559	)
Loss from operations and disposal of discontinued division (net of tax)		—			—		(1,459	)		—			(1,459	)
Net income (loss)	$	(12,018	)	$	5,465	$	(1,566	)	$	(3,899	)	$	(12,018	)

16

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2003

(Unaudited—In thousands)

	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues:
Transportation	$	—		$	232,882	$	3,740		$	—		$	236,622
Fuel surcharge		—			8,431		245			—			8,676
Other		—			34,482		592			—			35,074
Total operating revenues		—			275,795		4,577			—			280,372
Operating expenses:
Purchased transportation		—			173,041		606			—			173,647
Depreciation and amortization		—			14,280		844			—			15,124
Other operating expenses		—			68,178		3,059			—			71,237
Operating income		—			20,296		68			—			20,364
Interest expense, net		12,134			—		157			—			12,291
Foreign currency transaction loss		—			937		—			—			937
Equity in earnings of subsidiaries		(11,275	)		—		—			11,275			—
Income (loss) before taxes		(859	)		19,359		(89	)		(11,275	)		7,136
Income taxes		(7,755	)		7,937		58			—			240
Net income (loss)	$	6,896		$	11,422	$	(147	)	$	(11,275	)	$	6,896

17

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC AND SUBSIDIARIES,

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2002

(Unaudited—In thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues:
Transportation	$	—		$	218,288		$	3,618		$	—		$	221,906
Fuel surcharge		—			1,402			210			—			1,612
Other		—			33,817			437			—			34,254
Total operating revenues		—			253,507			4,265			—			257,772
Operating expenses:
Purchased transportation		—			149,459			661			—			150,120
Depreciation and amortization		—			14,874			722			—			15,596
Other operating expenses		—			72,790			2,673			—			75,463
Operating income		—			16,384			209			—			16,593
Interest expense, net		29,466			—			95			—			29,561
Other expense		—			48			—			—			48
Equity in loss of subsidiaries		16,055			—			—			(16,055	)		—
Income (loss) before taxes		(45,521	)		16,336			114			16,055			(13,016	)
Income taxes		(6,473	)		6,698			128			—			353
Income (loss) from continuing operations		(39,048	)		9,638			(14	)		16,055			(13,369	)
Loss from operations and disposal of discontinued division (net of tax)		—			—			(1,694	)		—			(1,694	)
Income (loss) before cumulative effect of a change in accounting principle		(39,048	)		9,638			(1,708	)		16,055			(15,063	)
Cumulative effect of change in accounting principle (net of tax)		—			(23,985	)		—			—			(23,985	)
Net loss	$	(39,048	)	$	(14,347	)	$	(1,708	)	$	16,055		$	(39,048	)

18

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2003

(Unaudited—In thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	6,896		$	11,422		$	(147	)	$	(11,275	)	$	6,896
Adjustments for non-cash charges		(11,275	)		28,256			1,255			—			18,236
Changes in assets and liabilities		—			(14,107	)		(8,829	)		11,275			(11,661	)
Net cash provided by (used in) operating activities		(4,379	)		25,571			(7,721	)		—			13,471
Cash flows from investing activities:
Capital expenditures		—			(3,322	)		(514	)		—			(3,836	)
Proceeds from other dispositions		—			506			259			—			765
Net cash used in investing activities		—			(2,816	)		(255	)		—			(3,071	)
Cash flows from financing activities:
Net payments on the revolver		(7,000	)		—			—			—			(7,000	)
Payment of debt obligations		(1,532	)		—			—			—			(1,532	)
Other		11			225			—			—			236
Net change in intercompany balances		12,900			(21,429	)		8,529			—			—
Net cash provided by (used in) financing activities		4,379			(21,204	)		8,529			—			(8,296	)
Net increase (decrease) in cash		—			1,551			553			—			2,104
Effect of exchange rate changes on cash		—			(428	)		(105	)		—			(533	)
Cash, beginning of period		—			284			377			—			661
Cash, end of period	$	—		$	1,407		$	825		$	—		$	2,232

19

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW

SIX MONTHS ENDED JUNE 30, 2002

(Unaudited—In thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(39,048	)	$	(14,347	)	$	(1,708	)	$	16,055		$	(39,048	)
Adjustments for non-cash charges		39,048			2,261			4,396			—			45,705
Changes in assets and liabilities		—			25,900			(6,571	)		(16,055	)		3,274
Net cash provided by (used in) operating activities		—			13,814			(3,883	)		—			9,931
Cash flows from investing activities:
Capital expenditures		—			(5,669	)		(851	)		—			(6,520	)
Proceeds from asset dispositions		—			2,909			773			—			3,682
Net cash used in investing activities		—			(2,760	)		(78	)		—			(2,838	)
Cash flows from financing activities:
Proceeds from issuance of long term debt		(5,219	)		—			5,219			—			—
Payment of debt obligations		(1,774	)		—			(65	)		—			(1,839	)
Other		—			(4,263	)		—			—			(4,263	)
Net change in intercompany balances		6,993			(6,993	)		—			—			—
Net cash provided by (used in) financing activities		—			(11,256	)		5,154			—			(6,102	)
Net increase (decrease) in cash		—			(202	)		1,193			—			991
Effect of exchange rate changes on cash		—			58			—			—			58
Cash, beginning of period		—			1,910			302			—			2,212
Cash, end of period	$	—		$	1,766		$	1,495		$	—		$	3,261

20

FORM 10-Q

PART I—FINANCIAL INFORMATION

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Quality Distribution, LLC (the “Company” or “QD LLC”) is a Delaware limited liability company formed on April 14, 2002. The Company’s sole member is Quality Distribution, Inc., a Florida corporation (“QD Inc.”). On May 30, 2002, QD Inc. completed an exchange offer for its public debt, at which time QD Inc. transferred nearly all of its assets and liabilities (other than certain contract rights which by their terms cannot be assigned without the consent of the other parties thereto) to the Company, consisting principally of the capital stock of QD Inc.’s operating subsidiaries. As a result, QD Inc. has no significant assets or operations other than the ownership of 100% of the Company’s membership units. The Company became the successor entity to QD Inc.

Our revenue is principally a function of the volume of shipments by the bulk chemical industry, our market share as opposed to that of our competitors and the amount spent on tank truck transportation as opposed to other modes of transportation such as rail. The volume of shipments of chemical products are in turn affected by many other industries, including consumer and industrial products, automotive, paint and coatings, and paper, and tend to vary with changing economic conditions. Additionally, we also provide leasing, tank cleaning, and intermodal services presented as other revenue.

The principal components of our operating costs include purchased transportation, salaries, wages, benefits, annual tractor and trailer maintenance costs, insurance and fuel costs. We believe our use of affiliates and owner-operators provides a more flexible cost structure, increases our asset utilization and increases our return on invested capital. We have historically focused on maximizing cash flow and return on invested capital. Our affiliate program has greatly reduced the amount of capital needed for us to maintain and grow our terminal network. In addition, the extensive use of owner-operators reduces the amount of capital needed to operate our fleet of tractors, which have shorter economic lives than trailers. These factors allow us the opportunity to concentrate our capital spending on our trailer fleet where we can achieve superior returns on invested capital through our transportation operations and leasing to third parties and affiliates.

During the second quarter of 2002, the Company sold the Levy petroleum division and closed the Levy mining operation, as well as closed Bulknet, our internet-based load brokerage subsidiary. Revenue and operating expenses in the following discussion have been adjusted to reflect the discontinued operations from the sale of these divisions. Additionally, we reclassified our insurance subsidiary’s premium revenue and insurance loss expense to a gross basis from a net basis for 2002. The impact of those reclassifications increased other revenue and other operating expense by $567 thousand and by $1,135 thousand for the three months and six months ended June 30, 2002, respectively.

THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002

For the quarter ended June 30, 2003, revenues totaled $143.2 million, an increase of $8.2 million or 6.1% from revenues of $135.0 million for the same period in 2002. This increase is primarily attributable to increases in base business demand from shippers, as well as new business secured during the first and second quarters of 2003. During the last half of 2002 and the first half of 2003, five new affiliates joined QD LLC providing approximately $3.3 million of incremental transportation revenue in the second quarter 2003. Fuel surcharge was higher in the second quarter of 2003 by $2.6 million as a result of higher fuel prices and volume increases. Other revenue was consistent with the second quarter of 2002.

For the quarter ended June 30, 2003, operating income totaled $10.9 million, an increase of $1.6 million or 17.6% compared to $9.3 million for the same period in 2002. This increase is primarily the result of higher revenue, and the impact of several conversions of company terminals to affiliate operations begun in the fourth quarter of 2002 and continuing through the second quarter of 2003. Additional cost cutting measures taken in the fourth quarter of 2002 including employee downsizing and aggressive contract negotiations with major vendors produced additional savings for the second quarter 2003.

The operating ratio, which is the ratio of operating expenses to operating revenue, for the quarter ended June 30, 2003 was 92.4% compared to 93.1% for the same period in 2002.

21

Interest expense, net, decreased by $13.7 million in 2003 compared to 2002. Interest expense for the second quarter of 2002 included $10.1 million in exchange offer and consent solicitation transaction fees and credit facility amendment fees incurred in a debt restructuring during May 2002. The restructuring resulted in a $69.9 million reduction of the face amount of the debt. Excluding these fees, interest expense, net, decreased $3.6 million as a result of the debt refinancing and lower interest rates on the variable rate debt.

The provision for income taxes decreased slightly. The provision represents state franchise and foreign taxes. Federal income taxes for the three months ended June 30, 2003, have been offset by net operating loss carryforwards from previous years.

For the quarter ended June 30, 2003, the Company’s net income was $3.9 million compared to a $12.0 million loss for the same period last year. The results during 2002 include a loss of $1.5 million on discontinued operations. Net income from continuing operations increased $14.4 million as a result of the increase in business, cost cutting efforts and reduced interest expense. Additionally, during the quarter ended June 30, 2003, the Company recorded a loss of $0.9 million on foreign currency transactions related to debt denominated in Canadian dollars due to the significant weakening of the U.S. dollar compared to the Canadian dollar during the quarter.

As of June 30, 2003, a total of 100 membership units in the Company were outstanding, all of which were held by QD Inc.

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002

For the six months ended June 30, 2003, revenues increased $22.6 million, or 8.8%, to $280.4 million. Transportation revenue increased $14.7 million primarily as the result of an increase in organic business demand from existing customers and new business secured during the first half of 2003. Additionally, five new affiliates joined QD LLC since June 30, 2002 providing approximately $4.6 million of incremental transportation revenue for the six months ended June 30, 2003. Fuel surcharge increased $7.1 million during the first half of 2003 as a result of higher fuel prices and volume increases. Other revenue increased $0.8 million primarily from the growth of our insurance subsidiary.

Operating income increased $3.8 million, or 22.7%, for the six months ended June 30, 2003 as compared to the same period in the prior year. This increase is primarily the result of higher revenues combined with the conversion of several company terminals to affiliate operations at the end of 2002 through the second quarter of 2003. Additionally, the company cut costs during the fourth quarter of 2002 through employee downsizing and contract negotiations with major vendors. The reduction of costs from these actions is evidenced by the improvement of the operating ratio, the ratio of operating expenses to operating revenues, from 93.6% for the six months ended June 30, 2002 to 92.7% for the six months ended June 30, 2003.

Interest expense, net, decreased $17.3 million during the first six months of 2003 from the same period in the prior year. Interest expense for the six months ended June 30, 2002 included $10.1 million fees incurred in a debt restructuring during May 2002. Excluding these fees, interest expense, net, decreased by $7.2 million as a result of the reduction in debt and lower interest rates.

The provision for income taxes remained relatively consistent from period to period. This expense mainly represents state franchise and foreign taxes. Federal taxes for the six months ended June 30, 2003 have been offset by net operating loss carryforwards from previous years.

For the six months ended June 30, 2003, net income was $6.9 million compared to a net loss of $39.0 million during the same period in the previous year. The results in 2002 include a loss of $1.7 million on discontinued operations. Additionally, in 2002 the Company recorded a $24.0 million charge for the cumulative effect of a change in accounting principle to recognize impairment of goodwill related to the implementation of Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.” Net income from continuing operations increased $20.3 million as a result of the increase in business, cost cutting efforts and reduced interest expense. The increase for the six months ended June 30, 2003 is net of a loss of $0.9 million on foreign currency transactions related to debt denominated in Canadian dollars due to the significant weakening of the U.S. dollar compared to the Canadian dollar during 2003.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of liquidity are funds provided by operations and borrowing availability under its credit agreement. Net cash provided by operating activities was $13.5 million for the six months ended June 30, 2003, compared to $9.9 million for the same period in 2002, which was mainly related to the increase in net income.

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Cash used in investing activities totaled $3.1 million for the six month period ended June 30, 2003, compared to $2.8 million used for the comparable 2002 period. This increase is the result of reduced proceeds from the disposal of fixed assets offset by reduced capital expenditures.

Cash used in financing activities totaled $8.3 million during the six month period ended June 30, 2003, compared to $6.1 million used in the comparable period in 2002. The increase is the result of the repayment of $7.0 million of the revolving credit facility due to the increase in cash flows from operations.

The Company has $279 million outstanding at June 30, 2003 under a credit agreement with a group of banks. On August 11, 2003, the Company entered into a seventh amendment to the credit agreement, which consists of the following provisions:

• A one year extension of the maturity of the revolving credit facility (the “Revolver”) and Tranche A term loan to June 9, 2005,

• A permanent reduction of the Revolver by $5.0 million,

• An increase in the quarterly principal payment of the Tranche A term loan from $200 thousand to $2.1 million beginning with the quarter ending September 30, 2003,

• A conversion of $10.0 million of the outstanding Revolver into a new tranche (Tranche E) of the term loan maturing at the rate of $1.25 million per quarter beginning on September 30, 2003, and

• A pricing increase to LIBOR + 4.25% for all tranches of the term loan and the Revolver.

The following is a pro forma schedule at June 30, 2003 of our long-term contractual commitments, including the current portion of our long-term indebtedness, over the periods that we expect them to be paid under the revised credit agreement:

	BALANCE AT 6/30/03		Remainder 2003		2004		2005		2006		AFTER
Operating leases	$	—	$	1,575	$	2,072	$	1,759	$	1,190	$	—
Total indebtedness, including capital lease obligations		362,806		7,994		15,229		212,227		69,808		57,548
Total	$	362,806	$	9,569	$	17,301	$	213,986	$	70,998	$	57,548

The credit agreement includes a revolving credit facility in the amount of $75.0 million at June 30, 2003, which was reduced to $70.0 million with the seventh amendment. As of June 30, 2003, the Company had borrowing availability of $24.6 million under this revolving credit facility.

As of June 30, 2003, the Company was in compliance with the financial covenants in the credit agreement. However, continued compliance with these requirements could be affected by changes relating to economic factors, market uncertainties, or other events as described under FORWARD-LOOKING STATEMENTS AND CERTAIN CONSIDERATIONS. There can be no assurance that the Company will be able to comply with such revised financial covenants. The Company currently believes that it will be in compliance with the revised covenants in the credit agreement through 2003. The Company’s management believes that borrowings under the credit agreement, together with available cash and internally generated funds, will be sufficient to fund the Company’s cash obligations for the ensuing twelve months as revised by the seventh amendment to the credit agreement.

FORWARD-LOOKING STATEMENTS AND CERTAIN CONSIDERATIONS

This report along with other documents that are publicly disseminated by the Company and oral statements that are made on behalf of the Company contain or might contain forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended. All statements included in this report, and in any subsequent filings made by the Company with the Commission other than statements of historical fact, that address activities, events or developments that the Company or management expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements represent the Company’s reasonable judgment on the future and are subject to risks and uncertainties that could cause the Company’s actual results and financial position to differ materially. Examples of forward-looking statements include: (i) projections of revenue, earnings, capital structure and other financial items, (ii) statements of the plans and objectives of the Company and its management, (iii) statements of expected future economic performance and (iv) assumptions underlying statements regarding our business. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as “believes,” “expects,” “estimates,” “may,” “will,” “should,” “seeks,” “plans,” “intends,” “anticipates,” or “scheduled to” or the negatives of those terms, or other variations of those terms or comparable language, or by discussions of strategy or other intentions.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors

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and was derived using numerous assumptions. Important factors that could cause our actual results to be materially different from the forward-looking statements include the risks and other factors identified in the Company’s Registration Statement on Form S-4 (No. 333-98077) and the additional factors set forth below.

Substantial Leverage—We are highly leveraged, which may restrict our ability to fund or obtain financing for working capital, capital expenditures and general corporate purposes, making us more vulnerable to economic downturns, competition and other market pressures.

Ability To Extend Revolver Maturity Under Credit Agreement—Our revolving credit agreement becomes due in June 2005 and there are no assurances that we will be able to refinance this obligation. Our liquidity would be materially adversely affected if we did not have borrowing availability under a revolving credit facility and had to rely solely on our cash flow from operating activities.

Economic Factors—The trucking industry has historically been viewed as a cyclical industry due to various economic factors over which we have no control such as excess capacity in the industry, the availability of qualified drivers, changes in fuel and insurance prices, including changes in fuel taxes, changes in license and regulation fees, toll increases, interest rate fluctuations, and downturns in customer’s business cycles and shipping requirements.

Dependence on Affiliates and Owner–Operators—A reduction in the number of affiliates or owner-operators whether due to capital requirements or the expense of obtaining, or maintaining equipment or otherwise could have a material adverse impact on our operations and profitability. Likewise, a continued reduction in our freight revenue rates could lessen our ability to attract and retain owner-operators, affiliates and company drivers.

Regulation—We are regulated by the United States Department of Transportation (“DOT”) and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations, safety, financial reporting, and certain mergers, consolidations and acquisitions. The trucking industry is also subject to regulatory and legislative changes (such as increasingly stringent environmental regulations or limits on vehicle weight and size) that may affect the economics of the industry by requiring changes in operating practices or by affecting the cost of providing services. A determination by regulatory authorities that we violated applicable laws or regulations could materially adversely affect our business and operating results.

Environmental Risk Factors—We have material exposure to both changing environmental regulations and increasing costs relating to environmental compliance. While we make significant expenditures relating to environmental compliance each year, there can be no assurance that environmental issues will not have a material adverse effect on us.

Claims Exposure—We currently maintain liability insurance for bodily injury and property damage claims, covering all employees, owner-operators and affiliates, and worker’s compensation insurance coverage on our employees and company drivers. This insurance includes deductibles of $5 million dollars per incident for auto liability and $1 million dollars for workers compensation for periods after September 15, 2002. From January 1, 2002 through September 14, 2002 we carried a $2 million deductible for auto liability insurance. 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. We are subject to changing conditions and pricing in the insurance marketplace and there can be no assurance 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 by increased freight rates or surcharges, increases in insurance cost could reduce our future profitability.

Future War/Anti-Terrorism Measures—In the aftermath of the terrorist attacks of September 11, 2001, federal, state and municipal authorities have implemented and continue to implement various security measures, including checkpoints and travel restrictions on large trucks. Such existing measures and future measures may have significant costs which a motor carrier, such as us, is required to bear. In addition, war or risk of war may also have adverse effect on the economy and our business and on our ability to raise capital if the financial markets are impacted.

Other important factors that could cause our actual results to be materially different from the forward-looking statements include general economic conditions, cost and availability of diesel fuel, adverse weather conditions and competitive rate fluctuations.

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FORM 10-Q

PART I—FINANCIAL INFORMATION

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes primarily through our variable-rate borrowings under a credit agreement. With the adoption of the seventh amendment to the credit agreement, floating rates are based, at the Company’s option, upon the bank’s base rate plus a margin ranging from 1.00% to 3.25% or upon the Eurodollar rate plus a margin ranging from 2.00% to 4.25%. A 10% increase in the interest rate would result in $1.5 million additional interest expense for the Company.

The Company may incur economic losses due to adverse changes in foreign currency exchange rates, primarily with fluctuations in the Canadian dollar. A 10% adverse change in foreign currency exchange rates would result in an additional foreign currency transaction loss of $0.6 million.

ITEM 4—CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed by us under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of the end of the second quarter, the Company carried out an evaluation, under the supervision and with the participation of its management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer of the Company concluded that the Company’s disclosure controls and procedures are effective.

Our management, including our President and Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures, including our internal controls and procedures for financial reporting, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

There have been no significant changes in the Company’s internal controls or other factors that could significantly affect those controls subsequent to the date of their evaluation. In addition, there have been no changes in the Company’s internal control over financial reporting that have occurred during the Company’s most recent fiscal quarter that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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FORM 10-Q

QUALITY DISTRIBUTION, LLC

(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

Reference is made to Item 3 on page 13 of QD LLC’s Form 10-K for the year ended December 31, 2002. There have been no material changes in the Company’s legal proceedings since this filing.

ITEM 2. Changes in Securities

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 and Reports on Form 8-K

(a) Exhibits:

Exhibit No.	Description
4.15	Seventh Amendment to Credit Agreement dated as of August 11, 2003 among Quality Distribution, Inc., Quality Distribution, LLC, Levy Transport Ltd./Levy Transport LTEE, the Guarantors named therein, the financial institutions from time to time party thereto and Credit Suisse First Boston, as Administrative Agent.
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 Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

During the quarter ended June 30, 2003, the Company filed the following report on Form 8-K:

Date	Other Information Reported
05/16/03	Release announcing intention to offer senior secured notes.
No financial statements were filed with the above report.

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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, LLC
August 14, 2003	/s/    THOMAS L. FINKBINER
	THOMAS L. FINKBINER, PRESIDENT AND CHIEF EXECUTIVE OFFICER (DULY AUTHORIZED OFFICER)
August 14, 2003	/s/    SAMUEL M. HENSLEY
	SAMUEL M. HENSLEY, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER)

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