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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
- --------------------------------------------------------------------------------
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002
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 001-14171
C2, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Wisconsin 39-1915787
(State of Incorporation) (IRS Employer Identification No.)
700 N. Water Street, Suite 1200, Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 291-9000
---------------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $1.00 par value 5,081,864
- ---------------------------- -----------------
(Class) (Outstanding at August 12, 2002)
Page 1 of 18 total pages No exhibits are filed with this report.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 3,864,000 $ 2,539,000
Accounts receivable, net 29,176,000 22,525,000
Inventories 7,644,000 9,640,000
Prepaids and other 5,938,000 4,709,000
------------- -------------
Total Current Assets 46,622,000 39,413,000
------------- -------------
Long-Term Assets:
Fixed assets, net 66,772,000 73,079,000
Other assets, including Goodwill 15,983,000 16,259,000
------------- -------------
Total Long-Term Assets 82,755,000 89,338,000
------------- -------------
$ 129,377,000 $ 128,751,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt $ 3,202,000 $ 3,167,000
Line of credit 2,752,000 1,163,000
Accounts payable 18,297,000 14,181,000
Accrued liabilities 14,708,000 12,978,000
------------- -------------
Total Current Liabilities 38,959,000 31,489,000
------------- -------------
Long-Term Liabilities:
Long-term debt, less current maturities 57,412,000 66,272,000
Other liabilities 3,308,000 2,334,000
------------- -------------
Total Long-Term Liabilities 60,720,000 68,606,000
------------- -------------
Total Liabilities 99,679,000 100,095,000
------------- -------------
Shareholders' Equity:
Preferred stock, par value $.01 per share, -- --
10,000,000 shares authorized, none issued or
outstanding
Common stock, par value $.01 per share;
50,000,000 shares authorized, 5,206,064 issued 52,000 52,000
Additional paid-in capital 20,371,000 20,371,000
Treasury stock, at cost (124,200 shares) (578,000) (578,000)
Accumulated other comprehensive income (loss) (228,000) 344,000
Retained earnings 10,081,000 8,467,000
------------- -------------
Total Shareholders' Equity 29,698,000 28,656,000
------------- -------------
$ 129,377,000 $ 128,751,000
============= =============
See notes to condensed consolidated financial statements.
2
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------------------
Revenues:
Logistic services $ 53,291,000 $ 36,447,000 $ 98,732,000 $ 68,742,000
Product sales 20,033,000 18,481,000 39,232,000 35,116,000
----------------------------------------------------------------
73,324,000 54,928,000 137,964,000 103,858,000
----------------------------------------------------------------
Costs and Expenses:
Logistic expenses 47,601,000 32,161,000 87,987,000 59,631,000
Cost of product sales 15,730,000 14,218,000 31,312,000 27,455,000
Depreciation and amortization 2,030,000 2,144,000 4,110,000 4,285,000
Selling, general and administrative expenses 5,002,000 4,095,000 9,096,000 8,002,000
----------------------------------------------------------------
70,363,000 52,618,000 132,505,000 99,373,000
----------------------------------------------------------------
Earnings from Operations 2,961,000 2,310,000 5,459,000 4,485,000
Other Income (Expense):
Interest expense, net (1,105,000) (1,288,000) (2,172,000) (2,736,000)
Other income (expense) (163,000) (20,000) (139,000) (19,000)
----------------------------------------------------------------
(1,268,000) (1,308,000) (2,311,000) (2,755,000)
----------------------------------------------------------------
Earnings before income taxes
and minority interest 1,693,000 1,002,000 3,148,000 1,730,000
Income tax provision 672,000 439,000 1,250,000 764,000
----------------------------------------------------------------
Earnings before minority interest 1,021,000 563,000 1,898,000 966,000
Minority interest 160,000 256,000 284,000 377,000
----------------------------------------------------------------
Net earnings $ 861,000 $ 307,000 $ 1,614,000 $ 589,000
================================================================
Basic net earnings per share $ 0.17 $ 0.06 $ 0.32 $ 0.12
================================================================
Diluted net earnings per share $ 0.16 $ 0.06 $ 0.31 $ 0.11
================================================================
Average number of shares outstanding 5,081,864 5,081,864 5,081,864 5,081,864
================================================================
Diluted number of shares outstanding 5,277,286 5,223,411 5,261,774 5,227,245
================================================================
See notes to condensed consolidated financial statements.
3
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002
(Unaudited)
Accumulated Current
Additional Other Year
($000) Common Treasury Paid-In Retained Comprehensive Comprehensive
Stock Stock Capital Earnings Income Income (Loss)
------------------------------------------------------------------------------------
Balance, December 31, 2001 $52 $(578) $20,371 $8,467 $344
Unrealized Losses on Interest Rate
Swaps for the Six Months Ended
June 30, 2002 (572) (572)
Net Earnings for the Six 1,614 1,614
Months ended June 30, 2002 -----------------
Total Comprehensive Income $ 1,042
=================
-----------------------------------------------------------------
Balance, June 30, 2002 $52 $(578) $20,371 $10,081 $(228)
=================================================================
See notes to condensed consolidated financial statements.
4
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
----------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,614,000 $ 589,000
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 4,110,000 4,285,000
Gain on sale of fixed assets (123,000) (77,000)
Minority interest in consolidated income of subsidiaries 284,000 377,000
Changes in assets and liabilities:
(Increase) in accounts receivable (6,499,000) (125,000)
Decrease in other assets 2,899,000 1,938,000
Increase (decrease) in accounts payable, accrued
liabilities and other liabilities 2,647,000 (1,224,000)
------------ ------------
Net cash provided by operating activities 4,932,000 5,763,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (2,763,000) (1,887,000)
Proceeds from sale of assets 9,848,000 419,000
------------ ------------
Net cash provided by (used in) investing activities 7,085,000 (1,468,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on credit lines 876,000 (9,886,000)
Borrowing on notes and loans payable 70,000 5,484,000
(Payments) on notes and loans payable (11,638,000) (77,000)
------------ ------------
Net cash (used in) financing activities (10,692,000) (4,479,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,325,000 (184,000)
BEGINNING CASH AND CASH EQUIVALENTS 2,539,000 2,294,000
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 3,864,000 $ 2,110,000
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 2,231,000 $ 2,762,000
Income taxes paid $ 1,122,000 $ 750,000
See notes to condensed consolidated financial statements.
5
C2, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's 2001 Annual Report on Form 10-K.
In the opinion of management, the aforementioned statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results for the interim periods. Results for the six
months ended June 30, 2002, are not necessarily indicative of results that may
be expected for the year ending December 31, 2002.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION: Logistic service revenues are recognized when goods are
delivered to the customer or when services are provided. Costs and related
expenses are recorded as incurred. Revenues and costs related to product sales
are recognized when products are shipped to customers.
ACQUISITIONS: On February 5, 2002, Zero Zone acquired the assets and assumed
certain liabilities of Systematic Refrigeration, Inc. Additional consideration
is contingent upon Systematic achieving certain future performance targets
through 2006. Systematic, located in Ramsey, Minnesota, is a supplier of
refrigeration control systems to the retail grocery industry and various
industrial markets. Systematic is an independent producer of refrigeration
systems with annual revenues of approximately $10,000,000. The company will be
operated under the trade name Zero Zone Refrigeration. Results of operations
have been included in the accompanying statements of operations since the
acquisition date and are not material to the Company on a pro forma basis. The
purchase price included cash of $250,000, acquisition expenses of $130,000, plus
the assumption of liabilities of $5,830,000 and was allocated on a preliminary
basis as follows:
Receivables $ 530,000
Inventory 1,240,000
Other Assets 390,000
PP&E 4,050,000
--------------
$6,210,000
==============
6
INVENTORIES: Inventories at TLC consist of repair parts and commodities and
other food products held for distribution under an exclusive logistic contract.
These items are carried at their lower of FIFO (first-in, first-out) cost or
market value. At Zero Zone, inventories are stated at the lower of FIFO cost or
market value and include materials, labor and manufacturing overhead. As of June
30, 2002 and December 31, 2001, inventories are comprised of the following:
JUNE 30, DECEMBER 31,
2002 2001
---------- ----------
Repair parts $ 140,000 $ 108,000
Commodities and other 1,256,000 3,207,000
Raw materials and work in process 4,188,000 3,780,000
Finished goods 2,060,000 2,545,000
---------- ----------
$7,644,000 $9,640,000
========== ==========
NOTE 3 -- EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings per share for
the quarters and six months ended June 30, 2002 and 2001. The calculations are
based on the common shares outstanding since the offering and assumes that such
shares were issued and outstanding for each of the periods ended June 30, 2002
and 2001.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic Earnings per Share:
Net earnings available to common shareholders $ 861,000 $ 307,000 $1,614,000 $ 589,000
Average shares of common stock outstanding 5,081,864 5,081,864 5,081,864 5,081,864
---------- ---------- ---------- ----------
Basic earnings per share $ 0.17 $ 0.06 $ 0.32 $ 0.12
========== ========== ========== ==========
Diluted Earnings per Share:
Average shares of common stock outstanding 5,081,864 5,081,864 5,081,864 5,081,864
Incremental common shares applicable to
common stock options 195,422 141,547 179,910 145,381
---------- ---------- ---------- ----------
Average common shares assuming full dilution 5,277,286 5,223,411 5,261,774 5,227,245
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.16 $ 0.06 $ 0.31 $ 0.11
========== ========== ========== ==========
NOTE 4 -- SEGMENT INFORMATION
C2, Inc. is divided into two discrete segments - logistic services and product
sales. C2, Inc.'s subsidiary, TLC, operates increasingly as a fully integrated
third-party logistics provider. TLC's integrated logistic services includes
providing warehousing, transportation operations, supply chain management,
dedicated third-party facility and operations management, food distribution,
fulfillment services for e-commerce applications, packaging and food processing.
C2, Inc.'s product sales operating segment includes the purchase for resale of
certain food products by TLC and open and glass-door refrigerated and frozen
display cases manufactured and sold by Zero Zone. Products within this segment
are sold primarily to grocery, municipal school districts, convenience
7
and drug store chains through the United States. These operating segments are
determined based upon the primary services and product lines provided to
customers.
Financial information by business segment is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------- ------------- ------------- -------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues:
Logistic Services $ 53,291,000 $ 36,447,000 $ 98,732,000 $ 68,742,000
Product Sales 20,033,000 18,481,000 39,232,000 35,116,000
------------- ------------- ------------- -------------
$ 73,324,000 $ 54,928,000 $ 137,964,000 $ 103,858,000
============= ============= ============= =============
Earnings from Operations:
Logistics Services $ 1,943,000 $ 852,000 $ 3,432,000 $ 2,207,000
Product Sales 1,335,000 1,705,000 2,605,000 2,785,000
Corporate (317,000) (247,000) (578,000) (507,000)
------------- ------------- ------------- -------------
$ 2,961,000 $ 2,310,000 $ 5,459,000 $ 4,485,000
============= ============= ============= =============
NOTE 5 -- DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company has limited involvement with derivative financial instruments and
does not use them for trading purposes. As of June 30, 2002, interest rate swaps
are the only derivative financial instruments held by the Company. The interest
rate swaps were established during 2001 in an effort to manage certain interest
rate risks. The interest rate swaps, designated as cash flow hedging
relationships, were entered in an effort to mitigate the risk of rising interest
rates in future periods by converting certain floating rate debt instruments
into fixed rate debt. As these interest rate swaps are deemed to be effective,
gains and losses on these instruments are deferred in other comprehensive income
and recognized in interest expense over the period in which the Company accrues
interest expense on the related debt instruments.
In 2001, TLC entered into four Interest Rate Swap agreements at fixed rates plus
a LIBOR spread subject to reduction based on TLC's leverage ratio as follows:
Amount Fixed Rate Effective Rate Maturity Date
------ ---------- -------------- -------------
$5,000,000 3.92% 6.92% 10/02/04
$5,000,000 4.47% 7.47% 06/30/06
$5,000,000 4.3175% 7.3175% 11/02/04
$5,000,000 3.6725% 6.6725% 06/30/06
Unrealized depreciation on these Swap transactions at June 30, 2002 was
$130,000, net of tax.
Zero Zone has two Interest Rate Swap agreements which effectively fix the
interest rates on the following debt:
Amount Fixed Rate Maturity Date
------ ---------- -------------
$5,000,000 4.53% 08/01/11
$3,420,000 4.135% 01/03/12
Unrealized depreciation on these Swap transactions at June 30, 2002 was $98,000,
net of tax.
8
NOTE 6 - CHANGE IN ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
- ----------------------------------------------------------------------
On June 30, 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets". Under this new standard, goodwill acquired after June 30, 2001 is not
amortized and starting January 1, 2002, amortization expense is no longer
recorded for goodwill acquired on or before June 30, 2001. SFAS 142 requires
that goodwill be assessed at least annually for impairment by applying a
fair-value-based test.
The Company adopted the provisions of SFAS No. 142 effective January 1, 2002.
SFAS 142 requires that a new fair-market-value test be applied to determine if
goodwill and other intangible assets with indefinite lives are impaired based on
their values as of January 1, 2002. The Company completed this testing in the
first quarter, 2002 and found no instances of impairment of their recorded
goodwill.
In accordance with SFAS No. 142, the effect of this accounting change is
reflected prospectively. Supplemental comparative disclosure as if the change
had been retroactively applied to the second quarter and six months of 2001 is
as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
2002 2001 2002 2001
-------------------------------------------------
Net income:
Reported net income $ 861,000 $307,000 $ 1,614,000 $589,000
Goodwill amortization -0- 156,000 -0- 269,000
------------- -------- ----------- --------
Adjusted net income $ 861,000 $463,000 $ 1,614,000 $858,000
============= ======== =========== ========
Adjusted basic net income per share $ 0.17 $ 0.09 $ 0.32 $ 0.17
============= ======== =========== ========
Adjusted diluted net income per share $ 0.16 $ 0.09 $ 0.31 $ 0.16
============= ======== =========== ========
Goodwill recorded on the Balance Sheet amounts to $4,882,000 related to Logistic
Services and $8,749,000 related to Product Sales. The related amortization for
Logistic Services in 2001 was $39,000 and $79,000 for three and six months ended
June 30, respectively. The related goodwill amortization for Product Sales was
$117,000 for the three months ended June 30, 2001 and $190,000 for the six
months ended June 30, 2001.
NOTE 7 - COMPREHENSIVE INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------ ----------- ------------ -----------
2002 2001 2002 2001
-------------------------------------------------
Unrealized income (loss) $ (772,000)$ -0- $ (572,000)$ -0-
Net income 861,000 307,000 1,614,000 589,000
------------ ----------- ------------ -----------
Total Comprehensive Income $ 89,000 $ 307,000 $ 1,042,000 $ 589,000
============ =========== ============ ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
9
CONDITION AND RESULTS OF OPERATIONS
General Business
The Company is comprised of two operating companies, TLC and Zero Zone. TLC,
based in Zeeland, Michigan, is a national provider of integrated third-party
logistic services which include refrigerated and dry warehousing, transportation
operations, supply chain management, dedicated third-party facility and
operations management, food distribution, fulfillment services for e-commerce
applications, packaging and food processing. Operations are conducted through a
network of 28 logistic centers with 36.3 million cubic feet of refrigerated
capacity and more than 2 million square feet of dry warehouse space. TLC
operates a fleet of over 350 tractors, with 560 refrigerated trailers and dry
trailers.
Zero Zone, based in North Prairie, Wisconsin, manufactures glass-door
refrigerated and freezer reach-in display cases used in grocery, convenience and
drug store chains for retail merchandising of food, beverage and floral
products. On February 5, 2002, Zero Zone acquired a manufacturer of
refrigeration control systems located in Ramsey, Minnesota. Now known as Zero
Zone Refrigeration, this company manufactures refrigeration houses and racks
used to power and control the refrigeration systems, electrical panels, air
conditioning and stand-by power for supermarkets, convenience stores and
industrial applications.
Results of Operations
The Company's revenues for the quarter ended June 30, 2002 increased 33.5% to
$73,324,000 from $54,928,000 reported for the same period last year. The growth
in revenue was due primarily to a 46.2% increase in Logistic Services revenue to
a record $53,291,000. The increase was due to both significant new business and
growth with existing customers in Dedicated Facility Solutions, Logistic
Management Services and Transportation Operations at TLC. Product Sales
increased 8.4% quarter-to-quarter to $20,033,000, aided by the addition of Zero
Zone Refrigeration which was acquired in January, 2002.
Consolidated earnings from operations for the second quarter of fiscal 2002 were
$2,961,000 compared to $2,310,000 for the same period in the previous year, an
increase of 28.2%. The increase in operating earnings for the quarter was
primarily attributable to increased volume at TLC, the addition of Zero Zone
Refrigeration, and the elimination of goodwill amortization which for the prior
year's quarter totaled $156,000, offset by an increase of $907,000 in selling,
general, and administrative expenses largely related to increased volume.
Interest expense, net for the quarter decreased 14.2% compared to the same
period last year reflecting lower interest rates on the Company's borrowings at
both TLC and Zero Zone and reduced debt levels at TLC.
During the quarter, TLC completed the sale of a refrigerated warehouse to Sara
Lee Corporation which generated a realized pretax gain of $772,000. Due to a
technical form driven interpretation of the terms under which TLC will operate
this facility for Sara Lee Corporation, it is being deemed a sale-leaseback
transaction, consequently, the realized gain will be deferred over the six year
life of the operating agreement.
10
The effective income tax rate for the three months ended June 30, 2002 was 39.7%
compared to 43.8% for the same period in the previous year. The change in the
effective rate is the result of the elimination of goodwill amortization in the
current year.
Net earnings for the three months ended June 30, 2002, increased 180% to
$861,000, or $0.16 per fully diluted share, compared to $307,000, or $0.06 per
fully diluted share, reported for the same period last year. Of the $0.10 per
share increase, $0.03 per share was the result of the elimination of goodwill
amortization.
For the six months ended June 30, 2002, consolidated revenues increased 32.8% to
$137,964,000 compared to $103,858,000 reported for the same period last year,
driven by strong growth in integrated logistic services at TLC.
Consolidated earnings from operations for the six month period were $5,459,000
compared to $4,485,000 for the previous year six month period, an increase of
21.7%. The increase in operating earnings for the six months was attributable to
increased volume at TLC, the addition of Zero Zone Refrigeration and the
elimination of goodwill amortization in the amount of $269,000.
Interest expense, net for the six months declined 20.6% compared to fiscal 2001
reflecting lower rates on borrowings at both TLC and Zero Zone and a lower debt
level at TLC.
The effective income tax rate for the six months ended June 30, 2002 was 39.7%
compared to 44.2% for the previous year comparable period. The reduction in the
effective rate is the result of the elimination of goodwill amortization for the
year 2002.
Net earnings for the six months totaled $1,614,000, or $0.31 per fully diluted
share compared to $589,000 reported for the comparable period a year ago. TLC's
operating performance in this period reflected significant improvement, driven
by the addition of new projects in Dedicated Facility Solutions and 50% growth
in Logistic Management Services year-to-year.
Liquidity and Capital Resources
The Company's ongoing liquidity requirements arise primarily from its need to
service debt, fund working capital, service lease commitments, maintain and
improve warehouses, transportation and manufacturing facilities and equipment,
and make other investments. The company is active in the acquisition, leasing or
new construction of warehouse facilities, particularly refrigerated facilities.
Historically, bank financing, leasing and internally generated cash have
provided funding for these activities. With the acquisition of ProSource, Inc.
in 2000, TLC has developed the ability to grow in dedicated facility management
services which typically do not require the Company's direct investment in new
facilities. These facilities are generally owned by a third-party and leased to
the Company's customer, or are owned by the customer and made available to the
Company. To the extent that acquisitions or new facility development exceed
historical funding sources, the Company may consider issuing equity securities
in an underwritten stock offering, a rights offering or in private placement
transactions. Currently, the Company has significant subsidiary level credit
facilities with three major commercial banks. At June 30, 2002, the Company's
operating subsidiaries had outstanding debt of $63,366,000, all of which is
borrowed under various facilities with these banks.
On June 8, 2001, TLC entered into an amended and restated credit agreement with
its bank group. The new credit facilities include a $40 million, 5-year reducing
revolving credit agreement and a
11
$25 million, 5-year term loan. Both facilities are secured by liens or security
interests on substantially all of the assets of TLC and mortgages on its real
estate. The revolving credit facility was reduced by 50% of the proceeds from
the sale of a refrigerated warehouse, or $4,900,000 on May 31, 2002 and steps
down $2 million per year beginning July 1, 2002, with a final maturity on June
30, 2006. The term loan amortizes $416,666 per quarter commencing September 30,
2001, with a final payment of $17,083,346 due on June 30, 2006. At June 30,
2002, outstandings under these facilities totaled $45,750,000. The interest rate
on these facilities are LIBOR or prime rate based, at TLC's option, and vary
pursuant to a pricing grid based on the ratio of TLC's funded debt to EBITDA, as
defined in the credit agreement. At June 30, 2002, borrowings under these
facilities carried an average interest rate of LIBOR plus 3%, or 4.899%. As of
June 30, 2002, TLC was in compliance with all required covenants. Going forward,
TLC will qualify for a reduction in the LIBOR spread based on debt reduction and
EBITDA performance. It is anticipated, the reduction will be 100 basis points
beginning in the third quarter.
On September 28, 2001, TLC entered into two interest rate Swap agreements
("Swaps") which effectively fixed the interest rate payable by TLC on (a)
$5,000,000 of outstanding debt for the period to October 2, 2004, and (b)
$5,000,000 of outstanding debt for the period to June 30, 2006. The effective
interest rate for each Swap was fixed at 3.92% and 4.47%, respectively, plus the
LIBOR spread which is subject to reduction based on TLC's leverage ratio as
defined. At June 30, 2002, the fixed interest rates for the underlying principal
under the Swap transactions were 6.92% and 7.47%, respectively.
On October 31, 2001, TLC entered into two more Swaps which effectively fixed the
interest rate payable by TLC on (a) $5,000,000 of outstanding debt for the
period to November 2, 2004, and (b) $5,000,000 of outstanding debt through June
30, 2006. The effective interest rate for each Swap was fixed at 4.3175% and
3.6725%, respectively, plus the LIBOR spread which is subject to reduction based
on TLC's leverage ratio, as defined. At June 30, 2002, the fixed interest rates
for the underlying principal under the Swap transactions were 7.3175% and
6.6725%, respectively.
At TLC, the unrealized depreciation on these Swap transactions at June 30, 2002
was $130,000, net of tax, which was recorded as a separate component of equity
in other comprehensive income.
Zero Zone completed a financing package August 31, 1999 with a major commercial
bank. The package contains two bond issues and a demand line of credit. The
first is a tax-free Industrial Revenue Bond issue in the amount of $3,420,000
that was issued through the State of Wisconsin. This bond has a 20-year life
with no annual amortization and carries a seven-day variable interest rate. The
second issue is a taxable Industrial Revenue Bond in the amount of $5,000,000
issued through a bank. This bond has a 12-year maturity schedule with annual
principal repayments of $500,000. The interest rate on the second bond is also a
seven-day variable interest rate. Both bonds are secured by Letters of Credit
issued by a major commercial bank. The interest rate on the line of credit,
which is secured by Zero Zone's assets, is based on LIBOR plus an amount that
varies according to a pricing grid determined by the ratio of funded debt to
EBITDA. At June 30, 2002, Zero Zone had $2,752,000 in outstanding borrowings
under its $7,500,000 line of credit. The interest rate at June 30, 2002 was
3.34%.
As part of the acquisition of Zero Zone Refrigeration on February 5, 2002, two
notes were assumed. The first is a tax-free Bond for $3,100,000, issued by the
State of Minnesota. The bond issue date was April 1, 2000 and has a 20-year life
with annual principal payments of $85,000 in 2002, increasing to $285,000 in
2020. The interest rate on the bond began at 5.25% and increases to 7.25%. The
second is an Equipment Note from the City of Ramsey for $300,000. This note has
a
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10-year life with annual amortization of $34,766 of principal and interest. The
interest rate on this note is 3%.
Zero Zone has unsecured senior subordinated indebtedness in the amount of
$2,350,000 to former and existing shareholders. The interest rate on the senior
subordinated notes is 8%. Payments of $1,000,000 are payable March 12, 2002 and
2003. The final payment of $350,000 is due March 12, 2004. Zero Zone also has
$3,000,000 of unsecured junior subordinated indebtedness to existing
shareholders. The interest rate is 8.5% of which 3.4% is paid in cash and 5.1%
is payment-in-kind. Payment of $1,000,000 per year are payable beginning
December 31, 2005.
On November 2, 2001, Zero Zone entered into an Interest Rate Swap Agreement with
a major commercial bank. This agreement effectively fixes the interest rate
payable on the taxable Industrial Revenue Bond in the amount of $5,000,000 at
4.53% until August 1, 2011. On January 8, 2002, Zero Zone entered into a second
Interest Rate Swap Agreement. This agreement effectively fixes the interest rate
payable on the $3,420,000 tax-free Industrial Revenue Bond at 4.135% until
January 3, 2012. At June 30, 2002, these Swaps had unrealized depreciation of
$98,000, net of tax.
At June 30, 2002, C2, Inc. had available an unsecured line of credit in the
amount of $15,000,000. No borrowings were outstanding under this facility during
the quarter.
As of June 30, 2002, the Company had cash and cash equivalents on hand of
$3,864,000 compared to $2,539,000 at December 31, 2001.
Cash flows provided by operations for six months ended June 30, 2002, totaled
$4,932,000, compared to $5,763,000 provided in the prior year period. The
decrease in comparative cash flows from operating activities was primarily
attributable to a $6,499,000 increase in accounts receivable attributable to
the Company's increased revenues. Additionally, in 2002, TLC realized a
gain on sale of assets of $123,000, compared to $77,000 realized in the
comparable period last year. Included in the increase in accrued liabilities is
that portion of the gain on the sale of the warehouse facility to Sara Lee that
has been deferred amounting to $761,000.
Cash flows provided by investing activities in the period totaled $7,085,000,
compared to $1,468,000 used for the same period last year. In the six months
ended June 30, 2002, the cash provided was related to the sale of a warehouse
facility, offset by routine capital expenditures. In the previous year, the use
of cash in investing activities was due to capital expenditures, offset by sales
of assets in the amount of $419,000.
Cash flows used in financing activities for the first six months of fiscal 2002
totaled $10,692,000, compared to cash flows used in financing activities of
$4,479,000 for the same period last year. In the first six months of fiscal
2002, cash flows used in financing activities were primarily related to the
acquisition of Zero Zone Refrigeration and the payment of debt by Total Logistic
Control in the amount of $11,300,000, resulting from both the sale of a
refrigerated warehouse facility and internally generated cash.
ITEM 3. MARKET RISK
The Company has incurred no additional market risk beyond that disclosed in the
Form 10K for the year ended December 31, 2001.
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Forward-Looking Statements
This Form 10-Q contains forward-looking statements and other statements that are
not historical facts. Actual results may differ materially from management's
expectations. The forward-looking statements involve risks and uncertainties,
including but not limited to:
- - Demand for and profitability of warehousing, transportation, logistics
services and refrigerated systems and display cases may be adversely
affected by increases in interest rates, adverse economic conditions,
increased energy costs, weather or market conditions which adversely affect
vegetable and fruit crop yields, loss of a material customer or other
factors.
- - Growth in volume of services or products may be adversely affected by
reduced ability to identify and hire qualified employees.
- - The Company's profitability may be adversely affected by increases in
interest rates because a significant portion of the Company's capital
structure is debt, a portion of which bears interest at variable interest
rates.
- - The Company's profitability may be adversely affected by performance which
does not meet standards established in contractual agreements relating to
transportation operations, logistics management and dedicated facility
operations.
- - Consolidations within the food industry, food retailers or drug and
convenience store chains could impact the Company's customers.
- - Company's market share may be adversely affected as a result of new or
increased competitive conditions in warehousing, transportation or
refrigeration systems and display case manufacturing.
Additional information about risks and uncertainties discussed above, as well as
additional material risks in the Company's business may be found in the
Company's annual report on Form 10K for the year 2001 and other filings made by
the Company from time-to-time with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
Item 1. Not applicable.
Item 2. Not applicable.
Item 3. Not applicable.
Item 4. Not applicable.
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibit 99.1 Written Statement of Chief Executive Officer
Exhibit 99.2 Written Statement of Chief Financial Officer
b. Report on Form 8-K was filed June 17, 2002 to report
the appointment of Deloitte & Touche LLP as the
Company's independent auditors.
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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.
C2, Inc.
(Registrant)
Date: August 12, 2002 /s/ William T. Donovan
-------------------- --------------------------------------------
William T. Donovan
President and Chief Executive Officer
Date: August 12, 2002 /s/ David J. Lubar
-------------------- --------------------------------------------
David J. Lubar
Chairman
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