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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, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
------- ---------
Commission File Number 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No /X/
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 5,275,864
- ---------------------------- --------------------------------
(Class) (Outstanding at August 11, 2003)
Page 1 of 22 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)
JUNE 30, DECEMBER 31,
2003 2002
------------- -------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 4,032,000 $ 4,483,000
Accounts receivable, net 27,285,000 24,224,000
Inventories 9,934,000 10,518,000
Prepaids and other 2,875,000 2,699,000
------------- -------------
Total Current Assets 44,126,000 41,924,000
------------- -------------
Long-Term Assets:
Fixed assets, net 63,790,000 65,971,000
Goodwill 16,162,000 16,191,000
Other assets 2,464,000 2,300,000
------------- -------------
Total Long-Term Assets 82,416,000 84,462,000
------------- -------------
$ 126,542,000 $ 126,386,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt $ 2,635,000 $ 3,285,000
Line of credit 6,052,000 4,470,000
Accounts payable 15,186,000 13,571,000
Accrued liabilities 16,019,000 16,595,000
------------- -------------
Total Current Liabilities 39,892,000 37,921,000
------------- -------------
Long-Term Liabilities:
Long-term debt, less current maturities 49,127,000 52,278,000
Other liabilities 3,536,000 3,196,000
------------- -------------
Total Long-Term Liabilities 52,663,000 55,474,000
------------- -------------
Total Liabilities 92,555,000 93,395,000
------------- -------------
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, 5,275,864 issued 53,000 53,000
Additional paid-in capital 22,458,000 22,353,000
Deferred compensation (84,000) --
Accumulated other comprehensive loss (1,049,000) (943,000)
Retained earnings 12,609,000 11,528,000
------------- -------------
Total Shareholders' Equity 33,987,000 32,991,000
------------- -------------
$ 126,542,000 $ 126,386,000
============= =============
See notes to consolidated condensed financial statements.
2
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
Revenues:
Logistic services $ 51,311,000 $ 53,291,000 $ 98,832,000 $ 98,732,000
Product sales 15,989,000 20,033,000 32,653,000 39,232,000
-------------------------------------------------------------------
67,300,000 73,324,000 131,485,000 137,964,000
-------------------------------------------------------------------
Costs and Expenses:
Logistic expenses 46,004,000 47,601,000 88,209,000 87,987,000
Cost of product sales 13,283,000 15,730,000 27,187,000 31,312,000
Depreciation and amortization 1,923,000 2,030,000 3,837,000 4,110,000
Selling, general and administrative expenses 4,430,000 5,002,000 8,816,000 9,096,000
-------------------------------------------------------------------
65,640,000 70,363,000 128,049,000 132,505,000
-------------------------------------------------------------------
Earnings from Operations 1,660,000 2,961,000 3,436,000 5,459,000
Other Income (Expense):
Interest expense, net (758,000) (1,105,000) (1,515,000) (2,172,000)
Other income (expense) -- (163,000) -- (139,000)
-------------------------------------------------------------------
(758,000) (1,268,000) (1,515,000) (2,311,000)
-------------------------------------------------------------------
Earnings before income taxes
and minority interest 902,000 1,693,000 1,921,000 3,148,000
Income tax provision 387,000 672,000 840,000 1,250,000
-------------------------------------------------------------------
Earnings before minority interest 515,000 1,021,000 1,081,000 1,898,000
Minority interest -- 160,000 -- 284,000
===================================================================
Net earnings $ 515,000 $ 861,000 $ 1,081,000 $ 1,614,000
===================================================================
Basic net earnings per share $ 0.10 $ 0.17 $ 0.21 $ 0.32
===================================================================
Diluted net earnings per share $ 0.09 $ 0.16 $ 0.20 $ 0.31
===================================================================
Average number of shares outstanding 5,273,853 5,081,864 5,272,858 5,081,864
===================================================================
Diluted number of shares outstanding 5,506,697 5,277,286 5,527,254 5,261,774
===================================================================
See notes to consolidated condensed financial statements.
3
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003
(Unaudited)
Accumulated Current
Additional Other Year
($000) Common Paid-In Deferred Retained Comprehensive Comprehensive
Stock Capital Compensation Earnings Loss Income (Loss)
--------------------------------------------------------------------------------
Balance, December 31, 2002 $53 $22,353 $11,528 $ (943)
Stock Options Exercises 16
Restricted Stock Issued 89 $ (89)
Vesting of Restricted Stock 5
Unrealized Losses on Interest Rate
Swaps for the Six Months Ended
June 30, 2003, net of tax (106) (106)
Net Earnings for the Six
Months ended June 30, 2003 1,081 1,081
-----------
Total Comprehensive Income $ 975
===========
-------------------------------------------------------------
Balance, June 30, 2003 $53 $22,458 $ (84) $12,609 $(1,049)
=============================================================
See notes to consolidated condensed financial statements.
4
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,081,000 $ 1,614,000
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 3,837,000 4,110,000
Gain on sale of fixed assets (19,000) (123,000)
Minority interest in consolidated income of subsidiaries -- 284,000
Amortization of restricted stock 5,000 --
Changes in assets and liabilities:
Increase in accounts receivable (3,061,000) (6,499,000)
Decrease in other assets 262,000 2,899,000
Increase in accounts payable, accrued
liabilities and other liabilities 1,273,000 2,647,000
------------ ------------
Net cash provided by operating activities 3,378,000 4,932,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (2,148,000) (2,763,000)
Proceeds from sale of assets 522,000 9,848,000
------------ ------------
Net cash (used in) provided by investing activities (1,626,000) 7,085,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on credit lines 1,582,000 876,000
Borrowings on notes and loans payable 3,046,000 70,000
(Payments) on notes and loans payable (6,847,000) (11,638,000)
Proceeds issuance of stock 16,000 --
------------ ------------
Net cash used in financing activities (2,203,000) (10,692,000)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (451,000) 1,325,000
BEGINNING CASH AND CASH EQUIVALENTS 4,483,000 2,539,000
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 4,032,000 $ 3,864,000
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 1,623,000 $ 2,231,000
Income taxes paid $ 593,000 $ 1,122,000
See notes to consolidated condensed financial statements.
5
C2, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America ("US GAAP") 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 2002
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, 2003 are not necessarily indicative of results that may be
expected for the year ending December 31, 2003.
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 was an independent producer of
refrigeration systems with annual revenues of approximately $10,000,000. The
company is now 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, acquisition expenses of $130,000 and the assumption of
liabilities of $6,214,000 was allocated as follows:
Cash $ 6,000
Receivables 530,000
Inventory 1,338,000
Other Assets 432,000
Goodwill 31,000
PP&E 4,007,000
----------
$6,344,000
==========
On December 31, 2002, C2, Inc. acquired the remaining 29.4% of Zero Zone, Inc.
that it did not previously own. The consideration paid to the minority interest
holders, all of whom are current members of Zero Zone's management team, was
190,000 shares of C2, Inc. common stock valued at approximately $2,561,000 based
on the average closing price of C2 for the five business days prior to the
transaction date of December 31, 2002. The Company has preliminarily allocated
$579,000 to fixed assets, $29,000 to
6
finished goods inventory, and the remainder of the purchase price over minority
interest is recorded as goodwill.
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 June 30, 2003 and December 31, 2002, inventories
are comprised of the following:
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
Repair parts $ 169,000 $ 173,000
Commodities and other 866,000 1,651,000
Raw materials and work in process 4,798,000 5,682,000
Finished goods 4,101,000 3,012,000
------------ ------------
$ 9,934,000 $ 10,518,000
============ ============
GOODWILL: Prior to 2002, goodwill was amortized on a straight-line basis over 40
years. Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 requires goodwill to be tested for
impairment annually, or more frequently under certain circumstances, and written
down when impaired, rather than being amortized as previous standards required.
Changes in the carrying amount of goodwill by reportable segment for the six
months ended June 30, 2003 are as follows:
LOGISTIC PRODUCT
SERVICES SALES TOTAL
------------- --------------- ---------------
Balance as of December 31, 2002 $ 4,882,000 $ 11,309,000 $ 16,191,000
Adjustment to Purchase Price Allocation for Zero Zone -- (29,000) (29,000)
------------ --------------- --------------
Balance as of June 30, 2003 $ 4,882,000 $ 11,280,000 $ 16,162,000
============ =============== ==============
7
NOTE 3 -- EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings per share for
the three months and six months ended June 30, 2003 and 2002.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------
Basic Net Earnings per Share:
Net earnings available to common shareholders $ 515,000 $ 861,000 $1,081,000 $1,614,000
Average Shares of common stock outstanding 5,273,853 5,081,864 5,272,858 5,081,864
----------------------------------------------------
Basic net earnings per share $ 0.10 $ 0.17 $ 0.21 $ 0.32
====================================================
Diluted Net Earnings per Share:
Average shares of common stock outstanding 5,273,853 5,081,864 5,272,858 5,081,864
Incremental common shares applicable to
common stock options 232,348 195,422 252,932 179,910
Restricted stock 496 -- 1,464 --
----------------------------------------------------
Average common shares assuming full dilution 5,506,697 5,277,286 5,527,254 5,261,774
----------------------------------------------------
Diluted net earnings per share $ 0.09 $ 0.16 $ 0.20 $ 0.31
====================================================
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,
fulfillment services, 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,
and 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.
Financial information by business segment is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2003
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenues:
Logistic services $ 51,311,000 $ 53,291,000 $ 98,832,000 $ 98,732,000
Product sales 15,989,000 20,033,000 32,653,000 39,232,000
------------- ------------- ------------- -------------
$ 67,300,000 $ 73,324,000 $ 131,485,000 $ 137,964,000
============= ============= ============= =============
Earnings from Operations:
Logistic services $ 1,957,000 $ 1,943,000 $ 3,898,000 $ 3,432,000
Product sales 61,000 1,335,000 159,000 2,605,000
Corporate (358,000) (317,000) (621,000) (578,000)
------------- ------------- ------------- -------------
$ 1,660,000 $ 2,961,000 $ 3,436,000 $ 5,459,000
============= ============= ============= =============
8
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, 2003, 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.
Unrealized depreciation on these Swap transactions at June 30, 2003 was
$1,049,000, net of tax.
NOTE 6 -- COMPREHENSIVE INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- ---------------------------
2003 2002 2003 2002
----------------------------- ---------------------------
Unrealized loss on cash flow hedges $ (96,000) $ (772,000) $ (106,000) $ (572,000)
Net earnings 515,000 861,000 1,081,000 1,614,000
-----------------------------------------------------------
Total Comprehensive Income $ 419,000 $ 89,000 $ 975,000 $ 1,042,000
===========================================================
9
NOTE 7 -- STOCK-BASED EMPLOYEE COMPENSATION PLANS
At June 30, 2003, the Company had one stock-based employee compensation plan,
which is described more fully in Note E to the Notes to Consolidated Financial
Statements of the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. The Company accounts for this stock-based plan under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based employee
compensation cost was reflected in previously reported results for any period,
as all options granted under this plan had an exercise price equal to the market
value of the underlying Common Stock on the measurement date. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," to stock-based employee
compensation.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------------
2003 2002 2003 2002
--------------------------- -------------------------------
Net income, as reported $ 515,000 $ 861,000 $ 1,081,000 $ 1,614,000
Employee compensation expense determined under fair value
based method for all awards,
net of related tax effects (28,000) (32,000) (56,000) (64,000)
----------- ----------- ------------- -------------
Pro forma net income $ 487,000 $ 829,000 $ 1,025,000 $ 1,550,000
=========== =========== ============= =============
Basic earnings per share:
As reported $ 0.10 $ 0.17 $ 0.21 $ 0.32
Pro forma 0.09 0.16 0.19 0.31
Diluted earnings per share:
As reported $ 0.09 $ 0.16 $ 0.20 $ 0.31
Pro forma 0.09 0.16 0.19 0.29
An amendment to the Company's 1998 Stock Incentive Plan was approved by the
shareholders at the Company's 2003 Annual Meeting of Shareholders on April 22,
2003. The amendment replaced the automatic grant of stock options to
non-employee directors of the Company upon election or appointment to the Board
with automatic grants of restricted stock to non-employee directors on an annual
basis on the date of the annual meeting of shareholders each year. In accordance
with this amendment, four non-employee directors of the Company were each
awarded 2,088 shares of restricted stock. The stock has a five year cliff
vesting.
NOTE 8 -- AMENDMENT TO DEBT AGREEMENT
Zero Zone has a financing package with a major commercial bank which contains
two bond issues and a demand line of credit. Zero Zone had $12,390,000
outstanding as part of this package at December 31, 2002. Due to lower operating
income in the second quarter at Zero Zone, certain financial covenants, Minimum
Fixed Charge Coverage and Maximum Funded Debt to EBITDA (a defined earnings
level), were not achieved. The Company received waivers from its bank related to
the non-compliance and negotiated amended covenants for which future compliance
is expected. Interest cost spreads over LIBOR or prime on Zero Zone's line of
credit increase by 50 basis points when the ratio of senior funded debt to
EBITDA is greater than or equal to 4 times. Similarly, Zero Zone's letters of
credit fee increases by 50 basis points when the ratio of senior funded
indebtedness to EBITDA is greater than or equal to 4 times. In both cases, the
prior incentive grid pricing remains intact and available as the ratio declines.
In connection
10
with the amended covenants, C2 corporate made a 6% unsecured, subordinated loan
to Zero Zone in the amount of $1,500,000. Interest is payable quarterly if
compliance with the amended covenants is maintained.
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, packaging and food processing. Operations are conducted through a
network of 40 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 400 tractors with over 700 refrigerated 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. In 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, 2003 decreased 8.2% to
$67,300,000 from $73,324,000 reported for the same period last year. Revenues
from logistic services for the second quarter were $51,311,000, approximately
$2,000,000 below last year's comparable period due primarily to reduced
throughput in certain fixed fee contracts, which does not alter the Company's
fee structure. Revenues from product sales totaled $15,989,000, a decline of
20.2% over those reported for last year's second quarter, due primarily to lower
volume of refrigerated display case sales at Zero Zone and lower volume in Food
Distribution Services at TLC. Sales of refrigerated display cases have been
impacted by reduced spending by retailers for new stores and refurbishments and
by consolidation in the grocery, convenience and drug store retailers.
Logistic expenses as a percent of logistic service revenues were 89.7%,
representing a slight reduction in margin compared to 89.3% reported for the
same period last year. Cost of product sales represented 83.1% of product sales,
a 4.6 percentage point decrease in margin compared to 78.5% reported for the
same period last year. Lower volume of product sales of refrigerated display
cases and higher product service related expenses at Zero Zone were the
principal factors associated with the decrease in margin generated by this
segment.
Selling, general and administrative expenses were 6.6% of total revenues for the
quarter, a decrease of 0.2 % compared to 6.8% reported for the same period last
year. Both TLC and Zero Zone incurred lower SG&A expense in this year's second
quarter when compared to the same period last year, reflecting aggressive cost
management and reduction initiatives. However, due to lower revenues in the
period, the ratio of SG&A expense to revenues reflected the small percentage
increase.
11
Consolidated earnings from operations for the second quarter of 2003 were
$1,660,000 compared to $2,961,000 for the same period in the previous year, a
decrease of 43.9%. The decrease in operating earnings for the quarter was
primarily attributable to lower volume of product sales and higher product
service related expenses as previously noted.
Interest expense, net for the quarter of $758,000 decreased 31.4% compared to
the same period last year, reflecting both lower interest rates on the Company's
borrowings and reduced debt at TLC.
The effective income tax rate for the three months ended June 30, 2003 was 42.9%
compared to 39.7% for the same period in the previous year. The change in the
effective rate is the result of increased state taxes attributable to growth in
logistic services.
Net earnings for the three months ended June 30, 2003, decreased 40.2% to
$515,000, or $0.09 per diluted share compared to $861,000, or $0.16 per diluted
share, reported for the same period last year. Increased net earnings
contributed by logistic services were offset by a small loss in product sales
and slightly higher corporate expenses for the period.
For the six months ended June 30, 2003, consolidated revenues decreased 4.7% to
$131,485,000 compared to $137,964,000 reported for the same period last year.
Revenues attributable to logistic services were slightly ahead of last year's
level despite the lower volume in certain fixed fee contracts. Revenues from
product sales declined 16.8% to $32,653,000 compared to the same period last
year, reflecting a substantial deferral of spending by retailers and lower
volume in food distribution services to Michigan school districts.
Consolidated earnings from operations for the six month period were $3,436,000
compared to $5,459,000 for the previous year's six month period, a decrease of
37.1% attributable primarily to lower volume in product sales and increase
product service related expenses.
Interest expense, net for the six months declined 30.2% to $1,515,000 compared
to the same period last year, reflecting lower rates on borrowings and lower
debt at TLC.
The effective income tax rate for the six months ended June 30, 2003 was 43.7%
compared to 39.7% reported for the same period last year. The increase in the
effective rate is the result of increased state taxes attributable to growth in
logistic services.
Net earnings for the six months ended June 30, 2003 totaled $1,081,000, or $0.20
per diluted share, a decline of 33% compared to $1,614,000, or $0.31 per diluted
share reported for the same period last year. Growth in logistic services at TLC
in both revenues and earnings were offset by lower volume and a small loss from
product sales and slightly higher corporate expense for the period.
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,
transportation operations, and product lines related to Zero Zone's operations.
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
12
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 and a corporate level line of
credit. At June 30, 2003, the Company's operating subsidiaries had outstanding
debt of $57,814,000, all of which is borrowed under various facilities with
these banks. At June 30, 2003, unused borrowing capacity under existing credit
facilities totaled approximately $29,039,000.
On June 8, 2001, TLC entered into an amended and restated credit agreement with
its bank group, which 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. The term loan amortizes $416,666 per quarter
commencing September 30, 2001, with a final payment of $17,000,342 due on June
30, 2006. At June 30, 2003, outstanding borrowings under these facilities were
$38,383,000. 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,
2003, borrowings under these facilities carried an average interest rate of
LIBOR plus 1.75%, or 3.054%. As of June 30, 2003, TLC was in compliance with all
required covenants under the credit agreement.
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 remaining balance at June 30, 2003
is $4,500,000. 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, 2003,
Zero Zone had $6,052,000 in outstanding borrowings under its $7,500,000 line of
credit. The interest rate at June 30, 2003 was 2.82%. Due to lower operating
income in the second quarter at Zero Zone, certain financial covenants, Minimum
Fixed Charge Coverage and Maximum Funded Debt to EBITDA, were not achieved. The
Company received waivers from its bank related to the non-compliance and
negotiated amended covenants for which future compliance is expected. Interest
cost spreads over LIBOR or prime on Zero Zone's line of credit increase by 50
basis points when the ratio of senior funded debt to EBITDA (a defined earnings
level) is greater than or equal to 4 times. Similarly, Zero Zone's letters of
credit fee increases by 50 basis points when the ratio of senior funded
indebtedness to EBITDA is greater than or equal to 4 times. In both cases, the
prior incentive grid pricing remains intact and available as the ratio declines.
In connection with the amended covenants, C2 corporate made a 6% unsecured,
subordinated loan to Zero Zone in the amount of $1,500,000. Interest is payable
quarterly if compliance with the amended covenants is maintained.
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 by
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%.
13
Zero Zone has unsecured senior subordinated indebtedness in the amount of
$350,000 to former and existing shareholders. The interest rate on this debt is
8% 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.
At June 30, 2003, C2, Inc. corporate 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, 2003, the Company had cash and cash equivalents on hand of
$4,032,000 compared to $4,483,000 at December 31, 2002.
Cash flows provided by operations for six months ended June 30, 2003 totaled
$3,378,000 compared to $4,932,000 in the prior year period. The decrease in
comparative cash flows from operating activities was primarily attributable to
lower net earnings, depreciation and amortization expense and the elimination of
minority interest in fiscal 2003.
Cash flows used in investing activities in the period totaled $1,626,000
compared to $7,085,000 provided in the same period last year. In the six months
ended June 30, 2003, the cash used was primarily related to routine capital
expenditures, but at a reduced level compared to the same period last year. Cash
provided by investing activities in the prior year included proceeds from the
sale and leaseback of assets in the amount of $9,848,000.
Cash flows used in financing activities for the first six months of 2003 totaled
$2,203,000 compared to $10,692,000 for the same period last year. In the first
six months of fiscal 2003, cash flows used in financing activities were related
to net reductions in and scheduled debt payments. In the same period in 2002,
the Company used proceeds from asset sales and cash flow from operating and
investing activities to reduce outstanding indebtedness. Also in the same
period, the Company acquired Zero Zone Refrigeration which required additional
borrowings to fund assumed liabilities.
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, 2002.
14
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), has evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period
covered by this report. Based on that evaluation, the CEO and CFO have
concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective in recording, processing,
summarizing and reporting on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under
the Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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:
o Demand for and profitability of warehousing, transportation, logistic
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.
o Growth in volume of services or products may be adversely affected by
reduced ability to identify and hire qualified employees, cancellation or
non-renewal of supply or service agreement with customers.
o 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.
o 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.
o Consolidations within the food industry, food retailers or drug and
convenience store chains could impact the Company's customers.
o 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 10-K for the year 2002 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. Submission of Matters to a Vote of Security Holders.
a. At the Company's 2003 Annual Meeting of Shareholders on April
22, 2003, the following Directors were elected for terms to
expire at the 2004 Annual Meeting of Shareholders. There were
5,271,864 shares of the company's common stock entitled to
vote. The Directors were elected by a vote of 5,064,242
shares.
John A. Becker
Nicholas F. Brady
William T. Donovan
David J. Lubar
Sheldon B. Lubar
William H. Lacy
b. At the 2003 Annual Meeting of Shareholders on April 22, 2003,
the amendments to the Company's 1998 Stock Incentive Plan as
described in the proxy statement were approved on a vote of
5,059,766 shares of the 5,271,864 shares of the Company's
common stock entitled to vote.
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Written Statement of Chief Executive Officer
and Chief Financial Officer
b. Report on Form 8-K was filed April 24, 2003, to report under
Item 12 the disclosure of Results of Operations for the three
months ended March 31, 2003.
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: August 11, 2003 /s/ William T. Donovan
--------------- ----------------------------------
William T. Donovan
President and Chief Executive Officer
Date: August 11, 2003 /s/ David J. Lubar
--------------- ----------------------------------
David J. Lubar
Chairman
17
Exhibit Index
Exhibit Number Description
- -------------- -----------
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Written Statement of Chief Executive Officer
and Chief Financial Officer
18