| QUALITY DISTRIBUTION INC ITEM 1A RISK FACTORS Risks Related to Our Business Our business is subject to general and industry- specific economic factors that are largely out of our control and could affect our operations and profitability |
| Our business is dependent on various economic factors over which we have little control, that include: • the availability of qualified drivers, • increases in fuel taxes and tolls, • excess capacity in the tank trucking industry, • changes in license and regulatory fees, • interest rate fluctuations, • downturns in customers’ business cycles, • reduction in customers’ shipping requirements; and • the US economy generally |
| As a result, we may experience periods of overcapacity, declining prices and lower profit margins in the future |
| We have a large number of customers in the chemical-processing and consumer-goods industries |
| If these customers experience fluctuations in their business activity due to an economic downturn, work stoppages or other industry conditions, the volume of freight transported by us on behalf of those customers may decrease |
| Loss of qualified drivers or other personnel could limit our growth and negatively affect operations |
| There is substantial competition for qualified drivers in the trucking industry |
| Furthermore, certain geographic areas have a greater shortage of qualified drivers than other areas |
| We operate in many of these geographic areas where there is a shortage of drivers and have turned down new business opportunities as a result of the lack of qualified new drivers |
| Difficulty in attracting qualified personnel, particularly qualified drivers, could require us to increase driver compensation, forego available customer opportunities and underutilize the tractors and trailers in our network |
| These actions could result in increased costs and decreased revenues |
| In addition, we may not be able to recruit other qualified personnel in the future |
| 13 ______________________________________________________________________ [49]Table of Contents Loss of affiliates and owner-operators could adversely affect our operations and profitability |
| We rely on participants in our affiliate program and independent owner-operators |
| A reduction in the number of owner-operators, whether due to capital requirements related to the expense of obtaining, operating and maintaining equipment or for other reasons, could have a negative effect on our operations and profitability |
| Similarly the loss of our more robust affiliates could adversely affect our profitability |
| Contracts with affiliates typically are for a one-year term that renew automatically for an additional year, and contracts with owner-operators may be terminated by either party on short notice |
| Although affiliates and owner-operators are responsible for paying for their own equipment and other operating costs, significant increases in these costs could cause them to seek a higher percentage of the revenue generated if we are unable to increase our rates commensurately |
| Conversely, a continued decline in the rates we pay to our affiliates and owner-operators could adversely affect our ability to maintain our existing affiliates and owner-operators and attract new affiliates, owner-operators and Company drivers |
| Existing trucking regulations are costly and burdensome and new trucking regulations may increase costs |
| As a motor carrier, we are subject to regulation by the US Department of Transportation and by various state agencies |
| These regulatory authorities exercise broad powers governing activities such as operating authority, safety, financial reporting and acquisitions |
| There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment, product-handling requirements and drug testing of drivers |
| The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services |
| Possible changes include: • increasingly stringent environmental regulations, • changes in the hours-of-service regulations, which govern the amount of time a driver may drive in any specific period, • onboard black box recorder devices, and • mandatory limits on vehicle weight and size |
| From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers |
| Increased unionization could increase our operating costs or constrain operating flexibility |
| Although only approximately 5prca of our driver workforce, including owner operators and employees of affiliates, are currently subject to collective bargaining agreements, unions such as the International Brotherhood of Teamsters have traditionally been active in the US trucking industry |
| Unionized workers could disrupt our operations by strike, work stoppage or other slowdown |
| In addition, our non-union workforce has been subject to unionization efforts in the past, and we could be subject to future unionization |
| Increased unionization of our workforce could result in higher compensation and working condition demands that could increase our operating costs or constrain our operating flexibility |
| Our operations involve hazardous materials, which could create environmental liabilities |
| Our activities are subject to environmental, health and safety laws and regulation by governmental authorities in the United States and Canada because we handle, transport and store bulk chemicals |
| 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 14 ______________________________________________________________________ [50]Table of Contents 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 |
| We believe we are in substantial compliance with all applicable requirements |
| However, 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 on us |
| 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 these substances |
| We have incurred remedial costs and regulatory penalties for chemical or wastewater spills and releases at our facilities or over the road, and, notwithstanding the existence of our environmental management program, we expect that additional similar obligations will be incurred in the future |
| Future liabilities and costs under environmental, health, and safety laws are not easily predicted, and such liabilities could result in a material adverse effect on our financial condition, results of operations or business reputation |
| As a result of environmental studies conducted at our facilities or at third party sites, in conjunction with our environmental management program, we have identified environmental contamination at certain sites that will require remediation |
| Our current reserves provided for these sites may prove insufficient, which would result in future charges against earnings |
| Our substantial leverage and restrictions contained in our debt agreements, including our credit facility and our indentures, could hamper our operations |
| At December 31, 2005, we had consolidated long-term indebtedness, including current maturities of long-term debt, of dlra289dtta1 million |
| The amount of our indebtedness could have important consequences, including the following: • using a portion of our cash flow to pay interest on our indebtedness will reduce the availability of our cash flow to fund working capital, capital expenditures, initiatives and other business activities, • it increases our vulnerability to adverse economic and industry conditions, • it limits our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, • it limits our ability in making strategic acquisitions or exploiting business opportunities, and • it limits our operational flexibility, including our ability to borrow additional funds |
| Our variable interest rate debt is dlra164dtta9 million |
| Therefore, increases in market rates of interest will increase our interest expense, which would decrease our earnings |
| We are self-insured and have exposure to certain claims from motor vehicles and other business activities The primary accident risks associated with our business are: • bodily injury and property damage, • workers’ compensation claims, and • cargo loss and damage |
| We are routinely subject to litigation for these types of claims, which involve substantial legal costs and penalties, and have uncertain outcomes |
| We currently maintain liability insurance against • bodily injury and property damage claims, covering all employees, owner operators and affiliates, and • workers’ compensation insurance coverage on our employees and Company drivers |
| 15 ______________________________________________________________________ [51]Table of Contents This insurance includes deductibles of dlra5dtta0 million per incident for bodily injury and property damage and a dlra1dtta0 million deductible for workers’ compensation |
| As such, we are subject to liability as a self-insurer to the extent of these deductibles under the applicable policy |
| The high deductible per incident could adversely affect our profitability |
| 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 also provide insurance coverage to our affiliates for property damage and general liability coverage and cargo loss and damage |
| 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 cashflow |
| The loss of one or more significant customers may adversely affect our business |
| We are dependent upon a limited number of large customers |
| Our top ten customers accounted for approximately 31dtta2prca of our total revenues during 2005 |
| In particular, our largest customer, The Dow Chemical Company, accounted for 10dtta2prca of our total revenues during 2005 |
| The loss of The Dow Chemical Company or one or more of our other major customers, or a material reduction in services performed for such customers, would have a material adverse effect on our results of operations |
| Our business may be harmed by terrorist attacks, future war or anti-terrorism measures |
| In the aftermath of the terrorist attacks of September 11, 2001, federal, state and municipal authorities have implemented and are implementing various security measures, including checkpoints and travel restrictions on large trucks and fingerprinting of drivers in connection with new hazardous materials endorsements on their licenses |
| Such existing measures and future measures may have significant costs associated with them which a motor carrier is forced to bear |
| Moreover, large trucks carrying toxic chemicals are a potential terrorist target, and we will be obligated to take measures, including possible capital expenditures, to harden our trucks |
| In addition, the insurance premiums charged for some or all of the coverages currently maintained by us could continue to increase dramatically or such coverages could be unavailable in the future |
| We depend on members of our senior management We believe that our ability to successfully implement our business strategy and to operate profitably depends in large part on the continued employment of our senior management team |
| If members of senior management become unable or unwilling to continue in their present positions, our business or financial results could be adversely affected |
| Interests of Apollo may conflict with your interests |
| At February 28, 2006, the Apollo Funds (“Apollo”) owned approximately 54dtta5prca of the common stock of QDI and approximately 52dtta6prca on a fully diluted basis after giving effect to stock options and warrants |
| As a result, Apollo can and will be able to substantially influence all matters requiring shareholder approval, including the election of directors, significant corporate transactions, such as acquisitions and mergers, or sales of substantially all of our assets |
| The interests of Apollo may conflict with your interests |
| For example, if we encounter financial difficulties, or are unable to pay our debts as they mature, Apollo may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investment, even though these transactions might involve risk to our shareholders or debtholders |
| Similarly, if our financial performance and creditworthiness significantly improve in the future, Apollo may have an interest in pursuing reorganizations, restructurings, or other transactions that could increase our leverage or impair our creditworthiness or otherwise, in their judgment, enhance Apollo’s equity investment in QDI, even though these transactions might involve risk to our shareholders or debtholders |
| 16 ______________________________________________________________________ [52]Table of Contents Risks Related to our Common Stock We have a majority shareholder who can substantially influence the outcome of all matters voted upon by our shareholders and prevent actions which a shareholder may otherwise view favorably |
| At February 28, 2006, Apollo and its affiliated funds owned approximately 54dtta5prca of our outstanding common stock |
| As a result, Apollo can influence substantially all matters requiring shareholder approval, including the election of directors, the approval of significant corporate transactions, such as acquisitions, the ability to block an unsolicited tender offer and any other matter requiring a vote of shareholders |
| This concentration of ownership could delay, defer or prevent a change in control of our Company or impede a merger, consolidation, takeover or other business combination which a shareholder, may otherwise view favorably |
| Our ability to issue “blank check” preferred stock and Florida law may prevent a change in control of our Company that a shareholder may consider favorable |
| Provisions of our articles of incorporation and Florida law may discourage, delay or prevent a change in control of our Company that a shareholder may consider favorable |
| These provisions include: • authorization of the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares in order to control a takeover attempt which the Board viewed unfavorably, • elimination of the voting rights of shareholders with respect to shares that are acquired without prior Board approval that would otherwise entitle such shareholder to exercise certain amounts of voting power in the election of directors, and • prohibition on business combinations with interested shareholders unless particular conditions are met |
| As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock |
| Future sales of our common stock in the public market may depress our stock price |
| The market price of our common stock could decline as a result of sales by our existing shareholders of a large number of shares of our common stock |
| These sales might also make it more difficult for us to sell additional equity securities at a time and price that we deem appropriate |
| As of February 28, 2006, there are approximately 19cmam053cmam988 shares of common stock outstanding |
| Approximately 11cmam012cmam311 shares of common stock are either “restricted securities” or affiliate securities as defined in Rule 144 under the Securities Act of 1933 |
| These restricted securities may be sold in the future without registration to the extent permitted under Rule 144 |
| In addition, shareholders holding approximately 10cmam684cmam448 outstanding shares of these restricted securities have registration rights, which could allow those holders to sell their shares freely through a registration statement filed under the Securities Act |
| In addition, as of December 31, 2005, we have 4cmam229cmam070 shares of common stock reserved for issuance under our stock option, restricted stock plans, and stock unit agreement with an officer |
| Options and stock units to purchase 2cmam214cmam035 shares were outstanding as of December 31, 2005 |
| We currently do not intend to pay dividends on our common stock |
| We do not expect to pay dividends on our common stock in the foreseeable future |
| In addition, the agreements governing our indebtedness restrict our ability to pay dividends |
| Accordingly, the price of our common stock must appreciate in order to realize a gain on your investment |