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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 September 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 November 12, 2002)
Page 1 of 23 total pages No exhibits are filed with this report.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
ASSETS:
Current Assets:
Cash and cash equivalents $ 4,719,000 $ 2,539,000
Accounts receivable, net 25,432,000 22,525,000
Inventories 8,742,000 9,640,000
Prepaids and other 5,680,000 4,709,000
------------- -------------
Total Current Assets 44,573,000 39,413,000
------------- -------------
Long-Term Assets:
Fixed assets, net 65,752,000 73,079,000
Other assets, including Goodwill 15,939,000 16,259,000
------------- -------------
Total Long-Term Assets 81,691,000 89,338,000
------------- -------------
$ 126,264,000 $ 128,751,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt $ 3,195,000 $ 3,167,000
Line of credit 3,257,000 1,163,000
Accounts payable 12,266,000 14,181,000
Accrued liabilities 17,419,000 12,978,000
------------- -------------
Total Current Liabilities 36,137,000 31,489,000
------------- -------------
Long-Term Liabilities:
Long-term debt, less current maturities 56,297,000 66,272,000
Other liabilities 3,823,000 2,334,000
------------- -------------
Total Long-Term Liabilities 60,120,000 68,606,000
------------- -------------
Total Liabilities 96,257,000 100,095,000
------------- -------------
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 (loss) income (962,000) 344,000
Retained earnings 11,124,000 8,467,000
------------- -------------
Total Shareholders' Equity 30,007,000 28,656,000
------------- -------------
$ 126,264,000 $ 128,751,000
============= =============
See notes to consolidated condensed financial statements.
2
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Logistic services $ 50,127,000 $ 38,379,000 $ 148,859,000 $ 107,120,000
Product sales 16,344,000 14,483,000 55,576,000 49,599,000
------------- ------------- ------------- -------------
66,471,000 52,862,000 204,435,000 156,719,000
------------- ------------- ------------- -------------
Costs and Expenses:
Logistic expenses 43,824,000 33,869,000 131,850,000 93,501,000
Cost of product sales 13,137,000 11,762,000 44,448,000 39,217,000
Depreciation and amortization 1,966,000 2,116,000 6,077,000 6,401,000
Selling, general and administrative expenses 4,935,000 3,739,000 13,757,000 11,740,000
------------- ------------- ------------- -------------
63,862,000 51,486,000 196,132,000 150,859,000
------------- ------------- ------------- -------------
Earnings from Operations 2,609,000 1,376,000 8,303,000 5,860,000
Other Income (Expense):
Interest expense, net (840,000) (1,196,000) (3,012,000) (3,931,000)
Other income (expense) 121,000 (8,000) (18,000) (27,000)
------------- ------------- ------------- -------------
(719,000) (1,204,000) (3,030,000) (3,958,000)
------------- ------------- ------------- -------------
Earnings before income taxes
and minority interest 1,890,000 172,000 5,273,000 1,902,000
Income tax provision 816,000 105,000 2,301,000 869,000
------------- ------------- ------------- -------------
Earnings before minority interest 1,074,000 67,000 2,972,000 1,033,000
Minority interest 31,000 64,000 315,000 441,000
------------- ------------- ------------- -------------
Net earnings $ 1,043,000 $ 3,000 $ 2,657,000 $ 592,000
============= ============= ============= =============
Basic net earnings per share $ 0.21 $ 0.00 $ 0.52 $ 0.12
============= ============= ============= =============
Diluted net earnings per share $ 0.20 $ 0.00 $ 0.51 $ 0.11
============= ============= ============= =============
Average number of shares outstanding 5,081,864 5,081,864 5,081,864 5,081,864
============= ============= ============= =============
Diluted number of shares outstanding 5,253,109 5,213,665 5,258,795 5,224,070
============= ============= ============= =============
See notes to consolidated condensed financial statements.
3
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
Accumulated Current
Additional Other Year
Common Treasury Paid-In Retained Comprehensive Comprehensive
($000) Stock Stock Capital Earnings Income (Loss) Income (Loss)
- ------ ----- ----- ------- -------- ------------- -------------
Balance, December 31, 2001 $ 52 $ (578) $ 20,371 $ 8,467 $ 344
Unrealized Losses on Interest Rate
Swaps for the Nine Months Ended
September 30, 2002 (1,306) (1,306)
Net Earnings for the Nine
Months ended September 30, 2002 2,657 2,657
---------
Total Comprehensive Income $ 1,351
=========
------ ------- --------- -------- --------
Balance, September 30, 2002 $ 52 $ (578) $ 20,371 $ 11,124 $ (962)
====== ======= ========= ======== ========
See notes to consolidated condensed financial statements.
4
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,657,000 $ 592,000
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 6,077,000 6,401,000
Gain on sale of fixed assets (160,000) (127,000)
Minority interest in consolidated income of subsidiaries 315,000 441,000
Changes in assets and liabilities:
(Increase) in accounts receivable (2,895,000) (3,861,000)
Decrease (increase) in other assets 2,250,000 (48,000)
Increase in accounts payable, accrued
liabilities and other liabilities 227,000 2,664,000
------------ ------------
Net cash provided by operating activities 8,471,000 6,062,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (4,404,000) (3,003,000)
Proceeds from sale of assets 10,420,000 620,000
------------ ------------
Net cash provided by (used in) investing activities 6,016,000 (2,383,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on credit lines 1,362,000 (9,039,000)
Net (payments) borrowings on notes and loans payable (13,669,000) 5,104,000
------------ ------------
Net cash (used in) financing activities (12,307,000) (3,935,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,180,000 (256,000)
BEGINNING CASH AND CASH EQUIVALENTS 2,539,000 2,294,000
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 4,719,000 $ 2,038,000
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 3,160,000 $ 3,777,000
Income taxes paid $ 1,420,000 $ 1,530,000
See notes to consolidated condensed 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. These condensed
statements should 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 nine
months ended September 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, Inc. ("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 Total Logistic Control, LLC ("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 September 30, 2002 and December 31, 2001,
inventories are comprised of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
Repair parts $ 146,000 $ 108,000
Commodities and other 1,943,000 3,207,000
Raw materials and work in process 5,225,000 3,780,000
Finished goods 1,428,000 2,545,000
---------- ----------
$8,742,000 $9,640,000
========== ==========
NOTE 3 -- EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings per share for
the three months and nine months ended September 30, 2002 and 2001.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Basic Net Earnings per Share:
Net earnings available to common shareholders $ 1,043,000 $ 3,000 $ 2,657,000 $ 592,000
Average shares of common stock outstanding 5,081,864 5,081,864 5,081,864 5,081,864
----------- ----------- ----------- -----------
Basic net earnings per share $ 0.21 $ 0.00 $ 0.52 $ 0.12
=========== =========== =========== ===========
Diluted Net 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 171,245 131,801 176,931 142,206
----------- ----------- ----------- -----------
Average common shares assuming full dilution 5,253,109 5,213,665 5,258,795 5,224,070
----------- ----------- ----------- -----------
Diluted net earnings per share $ 0.20 $ 0.00 $ 0.51 $ 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 include
providing warehousing, transportation operations and management services, 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 and refrigeration control systems
manufactured and sold by Zero Zone. Products within this segment are sold
primarily to grocery, municipal school districts, convenience and drug store
chains throughout the United States. These operating segments are determined
based upon the primary services and product lines provided to customers.
7
Financial information by business segment is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Logistic services $ 50,127,000 $ 38,379,000 $ 148,859,000 $ 107,120,000
Product sales 16,344,000 14,483,000 55,576,000 49,599,000
------------- ------------- ------------- -------------
$ 66,471,000 $ 52,862,000 $ 204,435,000 $ 156,719,000
============= ============= ============= =============
Earnings from Operations:
Logistic services $ 2,651,000 $ 1,105,000 $ 6,318,000 $ 3,312,000
Product sales 275,000 531,000 2,880,000 3,315,000
Corporate (317,000) (260,000) (895,000) (767,000)
------------- ------------- ------------- -------------
$ 2,609,000 $ 1,376,000 $ 8,303,000 $ 5,860,000
============= ============= ============= =============
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 September 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% 5.92% 10/02/04
$5,000,000 4.47% 6.47% 06/30/06
$5,000,000 4.3175% 6.3175% 11/02/04
$5,000,000 3.6725% 5.6725% 06/30/06
Unrealized depreciation on these Swap transactions at September 30, 2002 was
$587,000, net of tax.
Zero Zone has two Interest Rate Swap agreements which effectively fix the
interest rate on the following debt which amortize on the same basis as the
underlying security:
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 September 30, 2002 was
$375,000, 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 third quarter and nine months of 2001 is
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net income:
Reported net income $ 1,043,000 $ 3,000 $ 2,657,000 $ 592,000
Goodwill amortization -0- 134,000 -0- 403,000
----------- --------- ----------- ---------
Adjusted net income $ 1,043,000 $ 137,000 $ 2,657,000 $ 995,000
----------- --------- ----------- ---------
Adjusted basic net income per share $ 0.21 $ 0.03 $ 0.52 $ 0.20
=========== ========= =========== =========
Adjusted diluted net income per share $ 0.20 $ 0.03 $ 0.51 $ 0.19
=========== ========= =========== =========
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 $118,000 for three and nine months
ended September 30, respectively. The related goodwill amortization for Product
Sales was $95,000 for the three months ended September 30, 2001 and $285,000 for
the nine months ended September 30, 2001.
NOTE 7 - COMPREHENSIVE INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Unrealized loss on cash flow hedges $ 734,000 $ -0- $ 1,306,000 $ -0-
Net income 1,043,000 3,000 2,657,000 592,000
----------- ---------- ----------- ----------
Total Comprehensive Income $ 309,000 $ 3,000 $ 1,351,000 $ 592,000
=========== ========== =========== ==========
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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 and management services, 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 35 logistic centers with 36.3 million cubic
feet of refrigerated capacity and more than 3 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 open and 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 September 30, 2002 increased 25.7%
to $66,471,000 from $52,862,000 reported for the same period last year. The
growth in revenue was due primarily to a 30.6% increase in logistic services
revenue to $50,127,000. 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 12.8% quarter-to-quarter to $16,344,000, aided by the addition of Zero
Zone Refrigeration which was acquired in January, 2002.
Logistic expenses as a percent of logistic services revenues were 87.4%, a .8
percentage point improvement in margin, compared to 88.2% reported for the same
period last year. Higher volume and strong cost control in operations
contributed to the improved margin. Cost of product sales represented 80.4% of
product sales, a .8 percentage point increase in margin, compared to 81.2%
reported for the same period last year. Increased volume in product sales at
Zero Zone, the addition of Zero Zone Refrigeration, offset by lower sales of
food products to Michigan school systems were the principal factors associated
with the increase in margin.
Selling, general and administrative expenses were 7.4% of total revenues for the
quarter, an increase of .3 percentage points, compared to 7.1% reported for the
same period last year. Zero Zone incurred increased expenses related to the
acquisition of Zero Zone Refrigeration which was not included in the prior year
period, higher information systems and engineering expenses. TLC recorded a
small increase in expenses in this category related primarily to increased
volume.
Consolidated earnings from operations for the third quarter of fiscal 2002 were
$2,609,000, compared to $1,376,000 for the same period in the previous year, an
increase of 89.6%. The increase in operating earnings for the quarter was
primarily attributable to increased volume at
10
TLC, the addition of Zero Zone Refrigeration, and the elimination of goodwill
amortization which for the prior year's quarter totaled $134,000, offset by an
increase of $1,196,000 in selling, general, and administrative expenses largely
related to increased volume.
Net interest expense for the quarter of $840,000 decreased 29.8%, 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 at TLC. On May 31, 2002,
TLC sold a refrigerated warehouse facility to Sara Lee Corp. for $9,800,000 and
reduced its revolving credit debt by a like amount.
The effective income tax rate for the three months ended September 30, 2002 was
43.2%, compared to 61.0% for the same period in the previous year. The change in
the effective rate is the result of elimination of goodwill amortization in the
current year.
Net earnings for the three months ended September 30, 2002, increased 347% to
$1,043,000, or $0.20 per fully diluted share, compared to $3,000, or $0.00 per
fully diluted share, reported for the same period last year. Of the $0.20 per
share increase, $0.03 per share was the result of the elimination of goodwill
amortization.
For the nine months ended September 30, 2002, consolidated revenues increased
30.4% to $204,435,000, compared to $156,719,000 reported for the same period
last year, driven by strong growth in integrated logistic services at TLC.
Product sales increased 12.1%, compared to the comparable period in the previous
year, aided in part by the addition of Zero Zone Refrigeration which was
acquired in January, 2002.
For the nine months ended September 30, 2002, logistic expenses as a percent of
logistic services revenues were 88.5%, compared to 87.3% recorded in the
previous year, an increase of 1.2 percentage points. Higher insurance, health
care and fuel costs, combined with a higher level of pass through costs in
dedicated facility services, were the principal factors impacting gross margin
in logistic services. Cost of product sales represents 80.0% of product sales
revenues in this period, compared to 79.1% last year, an increase of .9
percentage points. Increased competitive pricing and the inclusion of Zero Zone
Refrigeration in this year's period were the primary contributing factors to the
decline in gross margin in product sales.
Selling, general and administrative expenses for the nine month period were 6.7%
of total revenue, compared to 7.5% last year, a decrease of .8 percentage
points. During fiscal 2002, year-to-date revenue volume increased at a
significantly higher rate than did selling, general and administrative expenses,
resulting in the ratio improvement.
Consolidated earnings from operations for the nine month period were $8,303,000,
compared to $5,860,000 for the previous year nine month period, an increase of
41.7%. The increase in operating earnings for the nine months was attributable
to increased volume at TLC, the addition of Zero Zone Refrigeration and the
elimination of goodwill amortization in the amount of $403,000.
Net interest expense for the nine months of $3,012,000 declined 23.4%, compared
to fiscal 2001 reflecting lower rates on borrowings at both TLC and Zero Zone
and a lower debt level at TLC as previously noted.
The effective income tax rate for the nine months ended September 30, 2002 was
43.6%, compared to 45.7% 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.
11
Net earnings for the nine months totaled $2,657,000, or $0.51 per fully diluted
share, compared to $592,000, or $0.11 per fully diluted share, 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 32% 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 September 30, 2002, the
Company's operating subsidiaries had outstanding debt of $62,749,000, 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 included a $40 million, 5-year
reducing revolving credit agreement and a $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, further reduced by 50% of the proceeds from any future
sales of assets with a final maturity on June 30, 2006. At September 30, 2002,
the amount of TLC's revolving credit facility was $33,100,000 under which
outstanding borrowings at September 30, 2002 were $21,800,000. 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. 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 September 30, 2002, borrowings under these facilities
carried an average interest rate of LIBOR plus 2%, or 4.314%. As of September
30, 2002, TLC was in compliance with all required covenants.
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 interest
rate for each Swap was fixed at 3.92% and 4.47%, respectively, plus the LIBOR
spread which is subject to change based on TLC's leverage ratio as defined. At
September 30, 2002, the effective interest rates for the underlying principal
under the Swap transactions were 5.92% and 6.47%, 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 interest rate for each Swap was fixed at
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3.6725% and 4.3175%, respectively, plus the LIBOR spread which is subject to
change based on TLC's leverage ratio, as defined. At September 30, 2002, the
effective interest rates for the underlying principal under the Swap
transactions were 5.6725% and 6.3175%, respectively. These Swap transactions had
unrealized depreciation at September 30, 2002 of $587,000, net of tax, which was
recorded as a separate component of equity in other comprehensive income. The
Company does not anticipate realizing any gain or loss on these swap
transactions, as it is the present intention to hold them to maturity, thereby
providing a level of protection against higher interest rates.
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 original amount of
$6,000,000 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 September 30, 2002, Zero Zone had $3,257,000 in outstanding
borrowings under its $7,500,000 line of credit. The interest rate at September
30, 2002 was 3.32%.
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 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
$1,350,000 to former and existing shareholders. The interest rate on this debt
is 8%. Payment of $1,000,000 is due March 12, 2003 and 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 is due 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 original 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 September 30, 2002, these Swaps had unrealized
depreciation of $375,000, net of tax. The Company does not anticipate realizing
any gain or loss on these swap transactions, as it is the present intention to
hold them to maturity, thereby providing a level of protection against higher
interest rates.
At September 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 or first nine months of fiscal 2002.
13
As of September 30, 2002, the Company had cash and cash equivalents on hand of
$4,719,000, compared to $2,539,000 at December 31, 2001.
Cash flows provided by operations for nine months ended September 30, 2002,
totaled $8,471,000, compared to $6,062,000 provided in the prior year period.
The increase in comparative cash flows from operating activities was primarily
attributable to an increase in net earnings. Additionally, in 2002, TLC realized
a gain on sale of assets of $160,000, compared to $127,000 realized in the
comparable period last year. Included in the increase in accrued liabilities is
$734,000 representing the remaining gain on the sale of a warehouse facility
that has been deferred.
Cash flows provided by investing activities in the period totaled $6,016,000,
compared to a use of $2,383,000 for the same period last year. In the nine
months ended September 30, 2002, the cash provided was primarily 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 routine
capital expenditures, offset by sales of assets in the amount of $620,000.
Cash flows used in financing activities for the first nine months of fiscal 2002
totaled $12,307,000, compared to cash flows used in financing activities of
$3,935,000 for the same period last year. In the first nine months of fiscal
2002, cash flows used in financing activities were primarily related to the
acquisition of Zero Zone Refrigeration and the reduction of debt by TLC in the
amount of $11,950,000, 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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of our disclosure controls and procedures.
Based on that evaluation, the CEO and CFO have concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect the disclosure controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
14
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, dedicated facility
operations and product manufacturing.
- - 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 product 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.
15
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
16
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: November 12, 2002 /s/ William T. Donovan
---------------------------------------------
William T. Donovan
President and Chief Executive Officer
Date: November 12, 2002 /s/ David J. Lubar
---------------------------------------------
David J. Lubar
Chairman
17
WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. Section 1350
I, William T. Donovan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of C2, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
18
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
November 12, 2002
- -----------------------------------
William T. Donovan
President & Chief Executive Officer
19
WRITTEN STATEMENT OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. Section 1350
I, William T. Donovan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of C2, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
20
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
November 12, 2002
- -----------------------------------
William T. Donovan
President & Chief Financial Officer
21