1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): March 12, 1999
C2, Inc.
(Exact name of registrant as specified in its charter.)
Wisconsin 001-14171 39-1915787
- ---------------------------- ---------------------- --------------------
(State of other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
700 North Water Street, Suite 1200, Milwaukee, WI 53202
------------------------------------------------------------------
(Address of principal executive offices including zip code.)
(414) 291-9000
--------------------------------------------
(Registrants' Telephone Number)
Page 1 of 22 pages
2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial statements of business acquired.
------------------------------------------
Included are the required financial statements of TLC. These
financial statements were not available on February 17, 1999 when the
Form 8-K was filed.
(b) Pro Forma Financial Information.
--------------------------------
Included is the required pro forma financial information relating to
the acquisition by the Company of two-thirds of the outstanding
interests of TLC. This pro forma financial information was not
available on February 17, 1999 when the Form 8-K was filed.
Page 2 of 22
3
PRO FORMA SUMMARY COMBINED FINANCIAL DATA
Set forth below is unaudited pro forma summary combined financial
statements as of and for the year ended December 31, 1998.
The pro forma summary combined statement of income for the year ended
December 31, 1998 reflects the effects on the historical results of operations
of C2 of the following transactions as if these transactions had occurred on
January 1, 1998.
- the sale of 5,202,664 shares of C2 common stock;
- the application of the proceeds for the purchase of 666.667
membership units (two-thirds) of TLC from Christiana for
approximately $10.7 million;
- the additional operating expenses associated with corporate
charges including officers salaries, professional, legal,
occupancy, public company and other corporate related expenses;
- the establishment of deferred income taxes for TLC; and
- the establishment of minority interest related to the one-third
ownership of TLC not held by C2.
In addition, the pro forma financial data reflects the following
pre-acquisition adjustments:
- the approximate $3 million repayment by TLC of a note to Christiana;
- $10 million of borrowings by TLC and subsequent payment of the
dividend to Christiana;
- the additional interest expense associated with these aforementioned
increases in outstanding debt and the adjustment to interest
expense to reflect the costs of borrowing under TLC's new
credit facility; and
- the cash payment to Christiana for income taxes related to TLC
earnings and certain expenses paid by Christiana on behalf of TLC.
The pro forma summary combined balance sheet reflects the affect of the
aforementioned transactions as if these transactions had occurred on December
31, 1998.
The pro forma financial data does not purport to represent what C2's
financial position or results of operations would actually have been if such a
transaction in fact had occurred on those dates or to project C2's financial
position or results of operations for any future period.
Page 3 of 22 pages
4
PRO FORMA SUMMARY COMBINED BALANCE SHEET
As of December 31, 1998
Historical Pro Forma Pro Forma Offering As
TLC Adjustments (1) C2, Inc. Adjustments Adjusted
-------------- --------------- ------------- -------------- ------------
Cash and cash equivalents $ 9,000 $ -- (5) $ 9,000 $20,484,000 (9) $ 9,826,000
(10,667,000) (10)
Other current assets 11,842,000 11,842,000 11,842,000
Total long-term assets 75,210,000 1,086,000 (4) 76,296,000 76,296,000
-------------- -------------- -------------- ------------- ------------
Total assets $87,061,000 $ 1,086,000 $88,147,000 $ 9,817,000 $97,964,000
============== ============== ============== ============ ============
Total current liabilities $12,997,000 $ 505,000 (4) $13,502,000 $13,502,000
Due to Parent company 3,000,000 (3,000,000) (2) -- --
Liability for purchase of
666.667 Membership
Units of TLC -- 10,667,000 (8) 10,667,000 (10,667,000) (10) --
Deferred income taxes -- 1,553,000 (7) 1,553,000 1,553,000
Long-term debt 35,277,000 10,000,000 (3) 50,566,000 50,566,000
3,000,000 (2)
2,289,000 (5)
Other liabilities 330,000 1,808,000 (4) 2,138,000 2,138,000
-------------- -------------- -------------- ------------ -------------
Total liabilities 51,604,000 26,822,000 78,426,000 (10,667,000) 67,759,000
Minority interest -- 7,313,000 (6) 7,313,000 7,313,000
Preferred stock --
Common stock -- 52,000 (9) 52,000
Additional paid-in capital -- 20,432,000 (9) 20,432,000
Retained earnings/
Member's equity 35,457,000 (10,000,000) (3) 2,408,000 2,408,000
(7,313,000) (6)
(1,553,000) (7)
(1,227,000) (4)
(2,289,000) (5)
(10,667,000) (8)
-------------- -------------- -------------- ------------ ------------
Total shareholders' equity 35,457,000 (33,049,000) 2,408,000 20,484,000 22,892,000
-------------- -------------- -------------- ------------ ------------
Total liabilities and
Shareholders' equity $87,061,000 $ 1,086,000 $88,147,000 $ 9,817,000 $97,964,000
============== ============== ============== ============ ============
Page 4 of 22 pages
5
NOTES TO PRO FORMA SUMMARY COMBINED BALANCE SHEET
(1) The acquisition of 666.667 Membership Units of TLC by C2 represents a
combination of entities under common control because a single group of
shareholders controlled TLC and will control C2. Accordingly, no
purchase accounting adjustments have been recorded and the difference
between the acquisition price and the historical cost basis of TLC has
been reflected as an equity adjustment.
(2) Represents a $3 million draw on TLC's revolving credit facility and
subsequent payment of the Christiana note prior to the acquisition of
two-thirds of TLC.
(3) Represents a $10 million draw on TLC's revolving credit facility
(interest at LIBOR plus 175 basis points) and subsequent payment of a
$10 million dividend to Christiana prior to the Acquisition. $10 million
of the required $20 million dividend was paid by TLC prior to December
31, 1998 and is reflected in the historical financial statements.
(4) Represents the book value of certain assets and liabilities of
Christiana which were contributed to TLC prior to the acquisition of
two-thirds of TLC:
ASSETS:
Long-term assets $ 1,086,000
LIABILITIES:
Accrued liabilities $ (505,000)
Other long-term liabilities (1,808,000)
====================
Reduction to equity related to asset/liability transfer $(1,227,000)
====================
(5) Represents the cash payment to Christiana, prior to the acquisition for
taxes related to TLC's earnings and certain expenses paid by Christiana
on behalf of TLC financed by the revolving credit facility.
(6) Represents the establishment of minority interest for the one-third
interest in TLC not owned by C2. Minority interest represents one-third
of TLC's member's equity subsequent to the dividend to Christiana and
contribution of certain Christiana assets and liabilities.
(7) Represents the establishment of a deferred income tax liability
attributed to temporary differences between the purchase price and
carryover basis of TLC assets and liabilities.
(8) Represents the liability for cash consideration to be paid to Christiana
related to the purchase of 666.667 membership units of TLC.
(9) Represents the amount of net proceeds associated with the sale of
5,202,664 shares of common stock offered by C2 at $4.00 per share, net
of expenses of $327,000.
(10) Represents the payment of the purchase price due to Christiana in
connection with the acquisition of two-thirds of TLC by C2.
Page 5 of 22 pages
6
PRO FORMA SUMMARY COMBINED STATEMENTS OF INCOME
For the Year Ended December 31, 1998
--------------------------------------------------------------------
Historical Pro Forma Pro Forma
TLC Adjustments C2, Inc.
------------------ --------------------- ---------------------
Revenues $90,610,000 $ -- $90,610,000
Operating expenses 83,760,000 1,000,000 (1) 84,760,000
Interest expense 2,586,000 1,615,000 (2) 4,201,000
Other income, net 111,000 -- 111,000
Income (loss) before minority interest and income taxes 4,375,000 (2,615,000) 1,760,000
Provision for income taxes -- 369,000 (3) 369,000
Minority interest expense -- 837,000 (4) 837,000
Net income (loss) 4,375,000 (3,821,000) 554,000
Basic and diluted net income per share of common stock $0.20 (5)
Weighted average shares outstanding (basic and diluted) 2,750,000 (5)
Page 6 of 22 pages
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NOTES TO PRO FORMA SUMMARY COMBINED STATEMENTS OF INCOME
(1) Represents additional operating expenses resulting from corporate
expenses, including officers' salaries, occupancy expenses,
professional, legal, public company and other corporate related
expenses.
For the Year
Ended
December 31, 1998
--------------------------
Officers' salaries $ 390,000
Occupancy expenses 150,000
Other corporate expenses 460,000
--------------------------
$1,000,000
==========================
(2) Represents the additional interest expense on the $20 million of
additional debt incurred in connection with the $20 million of dividends
to Christiana and the increase in interest expense related to higher
borrowing rates on the new revolving credit facility as follows:
For the Year
Ended
December 31, 1998
--------------------------
$20 million draw on TLC's revolving credit facility,
interest at an average rate of LIBOR + 175 basis points $1,450,000
Additional interest expense on historical outstanding debt bearing
interest at a rate of LIBOR + 175 basis points (revolving credit
facility rate) versus a historical
rate of LIBOR + 125 basis points 165,000
--------------------------
$1,615,000
==========================
(3) Represents the incremental provision of Federal and state income taxes
required on the earnings of TLC, in addition to the required adjustment
for the tax impact of the pro forma adjustments.
(4) Represents 33.3% of net income allocable to TLC's minority interest
owner, calculated as follows:
For the Year
Ended
December 31, 1998
--------------------------
Historical TLC income before minority interest and
income taxes $ 4,375,000
income taxes
Less: Pro forma interest expense (1,615,000)
Management fees (250,000)
--------------------------
2,510,000
Minority ownership percentage 33.3%
--------------------------
$ 837,000
==========================
(5) Basic and diluted income per share have been calculated using the number
of shares required to complete the TLC acquisition and pay the expenses
of the offering (2,750,000 shares).
Page 7 of 22 pages
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants..................................................................9
Balance Sheets as of December 31, 1998 and 1997..........................................................10
Statements of Income for the years ended December 31, 1998, 1997
and 1996............................................................................................11
Statements of Member's Equity for the years ended December 31, 1998, 1997
and 1996............................................................................................12
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996............................................................................................13
Notes to Financial Statements............................................................................14
Page 8 of 22 pages
9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Total Logistic Control, LLC:
We have audited the accompanying balance sheets of Total Logistic
Control, LLC (a Delaware limited liability company and wholly owned subsidiary
of Christiana Companies, Inc.) as of December 31, 1998 and 1997, and the related
statements of income, member's equity and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Total Logistic
Control, LLC as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
February 5, 1999
Page 9 of 22 pages
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TOTAL LOGISTIC CONTROL, LLC
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
1998 1997
---------------------- --------------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 9,000 $ 388,000
Accounts receivable, net 9,411,000 8,694,000
Inventories 2,346,000 703,000
Prepaids and other assets 85,000 233,000
---------------------- --------------------
Total current assets 11,851,000 10,018,000
---------------------- --------------------
Long-Term Assets:
Fixed assets, net 68,996,000 73,261,000
Goodwill 5,357,000 5,514,000
Other assets 857,000 641,000
---------------------- --------------------
Total long-term assets 75,210,000 79,416,000
---------------------- --------------------
Total Assets $87,061,000 $89,434,000
====================== ====================
LIABILITIES AND MEMBER'S EQUITY:
Current Liabilities:
Current maturities of long-term debt $ 1,848,000 $ 1,245,000
Accounts payable 6,519,000 4,804,000
Accrued liabilities 4,630,000 3,579,000
---------------------- --------------------
Total current liabilities 12,997,000 9,628,000
---------------------- --------------------
Due to Parent Company 3,000,000 3,000,000
Long-Term Liabilities:
Long-term debt, less current maturities 35,277,000 33,617,000
Other liabilities 330,000 350,000
---------------------- --------------------
Total long-term liabilities 38,607,000 36,967,000
---------------------- --------------------
Total liabilities 51,604,000 46,595,000
---------------------- --------------------
TOTAL MEMBER'S EQUITY 35,457,000 42,839,000
---------------------- --------------------
Total liabilities and member's equity $87,061,000 $89,434,000
====================== ====================
See notes to financial statements.
Page 10 of 22 pages
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TOTAL LOGISTIC CONTROL, LLC
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------------- -------------------- ------------------
Revenues:
Warehousing and logistic services $90,610,000 $90,100,000 $78,349,000
Operating Expenses:
Warehousing and logistic expenses 76,211,000 76,368,000 66,179,000
Selling, general and administrative expenses 7,549,000 7,526,000 6,937,000
------------------- -------------------- ------------------
83,760,000 83,894,000 73,116,000
------------------- -------------------- ------------------
Income from operations 6,850,000 6,206,000 5,233,000
Other (Income) Expenses:
Interest expense (2,586,000) (2,953,000) (3,067,000)
Gain (loss) on disposal of assets (212,000) 238,000 (1,281,000)
Other income (expenses), net 323,000 (576,000) (165,000)
------------------- -------------------- ------------------
(2,475,000) (3,291,000) (4,513,000)
------------------- -------------------- ------------------
Net income before income taxes 4,375,000 2,915,000 720,000
Provision for Income Taxes:
Current provision for income taxes -- 515,000 304,000
Adjustment of deferred income taxes
resulting from a change in tax status -- 11,171,000 --
------------------- -------------------- ------------------
Net income $ 4,375,000 $13,571,000 $ 416,000
=================== ==================== ==================
Basic and diluted income per membership unit $ 4,375 $ 13,571 $ 416
=================== ==================== ==================
Basic and diluted weighted average
membership units outstanding 1,000 1,000 1,000
=================== ==================== ==================
See notes to financial statements.
Page 11 of 22 pages
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TOTAL LOGISTIC CONTROL, LLC
STATEMENTS OF MEMBER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Membership Member's
Units Equity
------------------ ---------------------
BALANCE, DECEMBER 31, 1996 1,000 $31,594,000
Net income -- 13,571,000
Distribution to Christiana for promissory note retirement -- (2,326,000)
------------------ ---------------------
BALANCE, DECEMBER 31, 1997 1,000 42,839,000
Net income -- 4,375,000
Distribution to Christiana for income taxes -- (1,757,000)
Distribution to Christiana related to Merger Agreement (Note H) -- (10,000,000)
------------------ ---------------------
BALANCE, DECEMBER 31, 1998 1,000 $35,457,000
================== =====================
See notes to financial statements.
Page 12 of 22 pages
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TOTAL LOGISTIC CONTROL, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,375,000 $ 13,571,000 $ 416,000
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 6,254,000 6,753,000 6,690,000
(Gain) loss on disposal of assets 212,000 (238,000) 1,281,000
Deferred income tax provision -- (46,000) 52,000
Adjustment of deferred income taxes resulting
from a change in tax status -- (11,171,000) --
Changes in Assets and Liabilities:
(Increase) decrease in accounts receivable (717,000) 74,000 856,000
(Increase) decrease in inventories (1,643,000) (345,000) 631,000
(Increase) decrease in prepaids and others assets (67,000) 681,000 1,194,000
Increase (decrease) in accounts payable and accrued liabilities 2,746,000 2,312,000 (1,272,000)
------------ ------------ ------------
Net cash provided by operating activities 11,160,000 11,591,000 9,848,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (2,845,000) (2,602,000) (14,406,000)
Proceeds from sale of fixed assets 801,000 950,000 645,000
------------ ------------ ------------
Net cash used in investing activities (2,044,000) (1,652,000) (13,761,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on line of credit, net -- (1,735,000) (44,000)
Proceeds from issuance of long-term debt 10,000,000 -- 6,176,000
Payment of amounts due to Christiana -- (295,000) --
Payment of long-term debt (7,738,000) (5,703,000) (2,157,000)
Distribution to Christiana for promissory note retirement -- (2,326,000) --
Distribution to Christiana for income taxes (1,757,000) -- --
Distribution to Christiana related to merger agreement (10,000,000) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities (9,495,000) (10,059,000) 3,975,000
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (379,000) (120,000) 62,000
BEGINNING CASH AND CASH EQUIVALENTS, JANUARY 1 388,000 508,000 446,000
------------ ------------ ------------
ENDING CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 9,000 $ 388,000 $ 508,000
============ ============ ============
Supplemental Disclosures of Cash Flow Information
Interest paid $ 2,915,000 $ 3,065,000 $ 3,279,000
Amounts paid to Parent for income taxes $ 1,757,000 $ 300,000 $ 279,000
See notes to financial statements
Page 13 of 22 pages
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NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS: Total Logistic Control, LLC ("TLC") is a wholly
owned subsidiary of Christiana Companies, Inc. ("Christiana"). TLC was formed on
June 30, 1997 as a result of the combination of Wiscold, Inc. ("Wiscold") and
Total Logistic Control, Inc. ("Total Logistic"), both former wholly owned
subsidiaries of Christiana. The accompanying financial statements have been
restated to reflect this combination for all periods presented. The December 31,
1998 and 1997 balance sheets reflect the consolidated results of TLC. The
statements of earnings, member's equity and cash flows for the year ended
December 31, 1998 and for the period from July 1, 1997 through December 31, 1997
reflect the consolidated results of TLC. The statements of earnings, equity and
cash flows for the period from January 1, 1997 through June 30, 1997 and for the
year ended December 31, 1996 reflect the combined operations of Wiscold and
Total Logistic. All material intercompany transactions have been eliminated. TLC
operates in two industry segments (i) refrigerated and non-refrigerated
warehousing, and (ii) integrated third-party logistics services including
distribution and transportation services predominately in the Midwestern United
States.
REVENUE RECOGNITION: Transportation revenue is recognized when the goods
are delivered to the customer. Warehousing revenue is recognized as services are
provided. Costs and related expenses are recorded as incurred.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE: Accounts receivable are presented net of an allowance
for uncollectable accounts of $200,000 and $310,000 at December 31, 1998 and
1997, respectively. The provision for bad debts was $145,000, $106,000 and
$248,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
INVENTORIES: Inventories consist of transportation equipment repair parts
and commodities 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. As of December 31, 1998 and 1997, inventories are comprised of the
following:
1998 1997
----------------- ----------------
Transportation repair parts $ 137,000 $212,000
Commodities and other 2,209,000 491,000
----------------- ----------------
$2,346,000 $703,000
================= ================
Page 14 of 22 pages
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FIXED ASSETS: Fixed assets are carried at cost less accumulated
depreciation, which is computed using both straight-line and accelerated methods
for financial reporting purposes. The cost of major renewals and improvements
are capitalized; repair and maintenance costs are expensed as incurred. Tires
related to new equipment are included in the capitalized equipment cost and
depreciated using the same methods as equipment. Replacement tires are expensed
when placed in service. A summary of the cost of fixed assets, accumulated
depreciation and the estimated useful lives for financial reporting purposes is
as follows:
ESTIMATED
1998 1997 USEFUL LIVES
-------------------- -------------------- --------------------
Land $ 3,330,000 $ 3,330,000 --
Machinery and equipment 54,838,000 56,183,000 5-7 years
Buildings and improvements 41,047,000 41,570,000 30-32 years
Construction in progress 1,038,000 494,000
-------------------- --------------------
100,253,000 101,557,000
Less: Accumulated depreciation (31,257,000) (28,316,000)
-------------------- --------------------
$68,996,000 $73,261,000
==================== ====================
GOODWILL: Goodwill is amortized on a straight-line basis over 40 years
($157,000 in 1998, 1997 and 1996). The accumulated amortization at December 31,
1998 and 1997 was $758,000 and $601,000, respectively. TLC continually evaluates
whether events or circumstances have occurred that indicate the remaining
estimated useful life may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, TLC uses an estimate of the undiscounted cash
flows over the remaining life of the goodwill to measure whether the goodwill is
impaired. If impaired, a loss is recognized for the amount by which the carrying
value exceeds the fair value.
CASH AND CASH EQUIVALENTS: TLC considers all highly liquid investments with
original maturities of less than ninety days to be cash equivalents.
INCOME PER MEMBERSHIP UNIT: Basic and Diluted Income per Membership Unit
have been restated in accordance with SFAS 128, "Earnings per Share" and have
been computed based on the weighted number of units as if the units had been
outstanding for all periods presented. As TLC does not have dilutive financial
instruments, basic and diluted income per membership unit are the same for all
periods presented.
LONG-LIVED ASSETS: During 1997, TLC adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and Assets to be Disposed of." Adoption of this standard did
not have an impact on TLC's financial position or results of operations. TLC
continually evaluates whether events or circumstances have occurred that may
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance may not be recoverable. When factors
indicate that long-lived assets should be evaluated for possible impairment, TLC
uses an estimate of the undiscounted cash flows over the remaining life of the
long-lived assets to measure whether the long-lived assets are impaired. If
impaired, a loss is recognized for the amount by which the carrying value
exceeds the fair value.
Page 15 of 22 pages
16
B. RELATED PARTY TRANSACTIONS:
As of December 31, 1998 and 1997, TLC had amounts due to Christiana of
$3,000,000 which represented a note payable to Christiana that bears interest at
a rate of 8.0% per annum. Related party interest expense was $240,000 for 1998,
1997 and 1996. Prior to the combination of Wiscold and Total Logistic, Total
Logistic charged Christiana a management fee related to certain administrative
services rendered by TLC on behalf of Christiana. The amount of this management
fee was $120,000 and $240,000 for 1997 and 1996, respectively, and is reflected
as a reduction to selling, general and administrative expenses in the statement
of earnings. The amount of services rendered by Christiana on behalf of TLC for
1998, 1997 and 1996 is not material.
During 1997, TLC made a payment on behalf of Christiana to retire a
promissory note and accrued interest thereon in the amount of $2,326,000. TLC
also repaid $295,000 of debt to Christiana during 1997. TLC is required make
distributions to Christiana for current taxes payable attributable to TLC's
income. During 1998, TLC recorded distributions to Christiana for income taxes
of $1,757,000. Also during 1998, TLC made a distribution to Christiana of
$10,000,000 to fund Christiana's purchase of additional shares of Waterford
International, Inc. in accordance with a Merger Agreement (Note H). These
distributions to Christiana are reflected as reductions to Member's Equity in
1998 and 1997 as applicable.
C. INDEBTEDNESS:
The following is a summary of indebtedness as of December 31, 1998 and 1997:
1998 1997
------------ -------------
Revolving credit agreement $ 35,198,000 $ 29,573,000
Notes payable 163,000 3,525,000
Subordinated Note 1,764,000 1,764,000
------------ ------------
37,125,000 34,862,000
Less: Current portion of long-term debt (1,848,000) (1,245,000)
------------ ------------
Long-term debt $ 35,277,000 $ 33,617,000
============ ============
TLC has a revolving credit agreement that provides for borrowings at
December 31, 1998 of up to $70,000,000. Borrowings under this agreement mature
on November 2, 2003 and bear interest, payable monthly at either LIBOR plus 100
basis points, or a floating rate at the bank's prime rate (6.9% at December 31,
1998) and are secured by substantially all of TLC's assets. The revolving
credit agreement requires, among other things, that defined levels of net worth
and debt service coverage be maintained and restricts certain activities
including limitation on new indebtedness and the disposition of assets. As of
December 31, 1998, TLC was in compliance with all covenants. No compensating
balances are required under the terms of this credit facility.
TLC's subordinated note bears interest at 8% and is guaranteed by
Christiana.
Page 16 of 22 pages
17
As of December 31, 1998, the future maturities of consolidated indebtedness
are as follows:
1999 $ 1,848,000
2000 77,000
2001 --
2002 --
2003 35,200,000
The weighted average interest rate paid on short-term borrowings 7.69% and
7.65% for 1998 and 1997, respectively. The carrying value of TLC's debt
approximates fair value. The carrying amount of TLC's floating rate debt was
assumed to approximate its fair value. The fair value of TLC's fixed-rate,
long-term notes payable was based on the market value of debt with similar
maturities and interest rates. The fixed-rate subordinated note that was given
to a former owner of TLC was negotiated in the overall context of the
acquisition. TLC believes it is impracticable to obtain the current fair value
of this note because of the excessive costs that would have to be incurred to
obtain this information.
D. INCOME TAXES:
Prior to July 1, 1997, TLC was included in the consolidated income tax
return of Christiana. The amounts reflected in the financial statements are as
if TLC was filing on a stand-alone basis. Income taxes paid as shown in the
statement of cash flows represents combined cash payments made to Christiana by
TLC.
Effective June 30, 1997, TLC converted from a C-Corporation to a Limited
Liability Company. For purposes of taxation, all earnings of TLC are passed
through to its members and taxed at the member level. As TLC was no longer a
taxable entity as of June 30, 1997, all deferred taxes of TLC were removed from
the balance sheet. The removal of these deferred taxes due to TLC's change in
tax status resulted in an increase to earnings of $11,171,000 during fiscal
1997. The $515,000 and $304,000 provision for income taxes for 1997 and 1996,
respectively, represents the combined Federal and state income tax provision for
the periods during which TLC was a C-Corporation.
A summary of TLC's provision for income taxes is as follows:
1997 1996
--------------------- ----------------------
Current:
Federal $487,000 $219,000
State. 74,000 33,000
Deferred (46,000) 52,000
--------------------- ----------------------
$515,000 $304,000
===================== ======================
In the event that TLC was a taxable entity, a net deferred tax liability of
$11,477,000 and $11,523,000 as of December 31, 1998 and 1997 would have been
recorded on the balance sheet. The components are as follows:
Page 17 of 22 pages
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1998 1997
-------------------- --------------------
Deferred tax assets:
Accrued expenses $ 1,035,000 $ 853,000
Book over tax amortization 478,000 595,000
-------------------- --------------------
Total deferred tax assets $ 1,513,000 $ 1,448,000
==================== ====================
Deferred tax liabilities:
Tax over book depreciation $ 12,990,000 $ 12,971,000
-------------------- --------------------
Total deferred tax liabilities $ 12,990,000 $ 12,971,000
==================== ====================
A reconciliation of the statutory Federal income tax rate to TLC's effective
tax rate for the six months ended June 30, 1997, and for the year ended December
31, 1996, is as follows:
1997 1996
------------------- -------------------
Statutory Federal income tax rate 34% 34%
Increase in taxes resulting from 4 4
State income tax, net
Other, net 4 4
------------------- -------------------
42% 42%
=================== ===================
E. EMPLOYEE BENEFIT PLANS:
Prior to the combination of Wiscold and Total Logistic Control, TLC had two
401(k) plans covering substantially all employees. Upon formation of TLC these
plans were merged to form one continuing plan. The expense incurred by TLC
related to these plans is not material. TLC does not provide post employment
medical or insurance benefits.
F. COMMITMENTS:
TLC has operating leases for warehousing and office facilities along with
certain transportation equipment. Rental expense under these leases was
$6,017,000, $6,965,000 and $6,483,000 in 1998, 1997 and 1996, respectively. At
December 31, 1998, future minimum lease payments under these operating leases
are as follows:
1999 $4,563,000
2000 4,531,000
2001 3,822,000
2002 2,851,000
2003 2,016,000
Thereafter 9,308,000
G. ACCOUNTING PRONOUNCEMENTS:
During 1998, TLC adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive income and its
components. Components of comprehensive income are net income and all other
non-member changes in equity. TLC does not have any other comprehensive income
items. Accordingly, comprehensive income and net income are the same for all
periods presented.
Page 18 of 22 pages
19
During 1998, the Financial Accountings Standards Board released Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivatives and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. As TLC does not use derivatives nor
engage in hedging activities, this statement will not have an impact on TLC's
financial position. Adoption of this statement is required by TLC beginning on
January 1, 2000.
H. WEATHERFORD INTERNATIONAL, INC. MERGER AGREEMENT:
On December 12, 1997, Christiana entered in an agreement with Weatherford
International, Inc. ("Weatherford") whereby Weatherford would purchase all of
the outstanding shares of Christiana. The terms of the merger provided that each
Christiana common share would be converted into (i).7453 shares of Weatherford
International, Inc. common stock, (ii) cash in the approximate amount of $4.00,
depending upon the balance of certain assets and liabilities at the time of
closing and (iii) a contingent cash payment of approximately $1.92 after 5
years, subject to the incurrence of any indemnity claims by Weatherford during
this period.
On August 17, 1998, the shareholders of both Weatherford and Christiana
overwhelmingly approved the Merger agreement and sale of TLC to C2, Inc.
However, due to a decline in the value of Weatherford's common stock price, the
merger transaction was postponed until the conditions were met for Christiana's
shareholders to not recognize any taxable gain or loss on their exchange of
Christiana shares for Weatherford common stock in the merger. To meet this
requirement, Weatherford's stock price was to be approximately $30.00 per share.
On October 14, 1998, Weatherford and Christiana amended the merger agreement
in order to complete the merger on a partially tax-free basis. The revised
merger agreement eliminated the requirement for a contingent cash payment after
five years. This cash payment was instead used by Christiana to purchase
additional Weatherford common stock in the open market. Additionally, Christiana
agreed to spend up to $5 million of available cash to purchase additional shares
of Weatherford stock, if necessary. The share price of Weatherford stock needed
to consummate the merger was reduced from $30 to approximately $13 per share.
By its terms, the Merger Agreement was consummated on February 8, 1999. At
or prior to the completion of the merger:
(1) TLC declared and paid a $20,000,000 dividend to Christiana. $10,000,000
was declared and paid during 1998 while the remaining $10,000,000 was
declared and paid during 1999, prior to the merger.
(2) Christiana sold 666.667 Membership Units (two-thirds) of TLC to C2, Inc.
(a newly formed corporation) for $10,667,000.
(3) TLC agreed to indemnify Christiana for certain liabilities of
Christiana.
Page 19 of 20 pages
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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 hereunto duly authorized.
Date: March , 1999 C2, Inc.
By:
------------------------------------
William T. Donovan
Chairman
Page 22 of 22 pages
21
I. SEGMENT INFORMATION:
TLC divides its operations into two primary segments - warehousing services
and logistic services. These segments are determined based upon the primary
service lines provided to customers by TLC. However, TLC provides multiple
services from both segments to many customers.
TLC's warehousing segment operates twelve distribution warehouses consisting
of seven refrigerated and five non-refrigerated. These distribution centers
offer storage, order selection, assembly and repackaging services in addition to
inventory management services. In addition, TLC's refrigerated warehousing
operations offer temperature sensitive storage, blast freezing and individual
quick freeze (IQF) and packaging services.
TLC's logistic segment offers transportation and logistics management
services in addition to international transportation and foodservice
distribution services. These services are provided using both owned equipment
and third party carrier management services.
Segment profit for 1998 is revenues less direct and allocable operating
expenses. Segment profit for 1997 and 1996 reflects only the segment gross
margin as TLC did not specifically allocate selling, general and administrative
expenses to its warehousing and logistic segments during these years. Corporate
items include interest expense, interest income, amortization expense, other
income/expense and income taxes. Corporate items for 1997 and 1996 also include
all selling, general and administrative expenses. Beginning in 1998, all
corporate depreciation and amortization has been included as a component of
warehousing and logistic segment profit. Corporate assets are principally cash
and cash equivalents, goodwill, prepaid items and certain nonoperating fixed
assets. Corporate capital expenditures consist primarily of computer equipment
and software and other nonoperating fixed assets.
Page 20 of 22 pages
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Financial information by business segment is as follows:
Warehousing Logistic
Services Services Corporate Total
----------------- ------------------ ------------------ ---------------
1998
Revenues $38,099,000 $52,511,000 $ -- $90,610,000
Segment profit 4,609,000 2,241,000 (2,475,000) 4,375,000
Total assets 68,644,000 10,723,000 7,694,000 87,061,000
Capital expenditures 1,888,000 296,000 661,000 2,845,000
Depreciation and amortization 5,107,000 1,147,000 -- 6,254,000
1997
Revenues $38,395,000 $51,705,000 $ -- $90,100,000
Segment profit 9,414,000 (1) 4,318,000 (1) (161,000) 13,571,000
Total assets 71,927,000 10,424,000 7,083,000 89,434,000
Capital expenditures 2,146,000 102,000 354,000 2,602,000
Depreciation and amortization 4,998,000 1,216,000 539,000 6,753,000
1996
Revenues $44,274,000 $34,075,000 $ -- $78,349,000
Segment profit 8,273,000 (1) 3,897,000 (1) (11,754,000) 416,000
Total assets 76,087,000 10,899,000 7,838,000 94,824,000
Capital expenditures 13,106,000 994,000 306,000 14,406,000
Depreciation and amortization 4,652,000 1,578,000 460,000 6,690,000
(1) Segment profit in 1997 and 1996 does not include an allocation for
selling, general and administrative expenses.
Page 21 of 22 pages