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 March 31, 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 5,271,864
- ---------------------------- -----------------------------
(Class) (Outstanding at May 13, 2003)
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)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 4,086,000 $ 4,483,000
Accounts receivable, net 25,214,000 24,224,000
Inventories 11,363,000 10,518,000
Prepaids and other 3,012,000 2,699,000
------------- -------------
Total Current Assets 43,675,000 41,924,000
------------- -------------
Long-Term Assets:
Fixed assets, net 64,996,000 65,971,000
Goodwill 16,163,000 16,191,000
Other assets 2,320,000 2,300,000
------------- -------------
Total Long-Term Assets 83,479,000 84,462,000
------------- -------------
$ 127,154,000 $ 126,386,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt $ 2,635,000 $ 3,285,000
Line of credit 5,191,000 4,470,000
Accounts payable 12,511,000 13,571,000
Accrued liabilities 17,337,000 16,595,000
------------- -------------
Total Current Liabilities 37,674,000 37,921,000
------------- -------------
Long-Term Liabilities:
Long-term debt, less current maturities 52,528,000 52,278,000
Other liabilities 3,405,000 3,196,000
------------- -------------
Total Long-Term Liabilities 55,933,000 55,474,000
------------- -------------
Total Liabilities 93,607,000 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, 5,271,864 issued 53,000 53,000
Additional paid-in capital 22,353,000 22,353,000
Accumulated other comprehensive loss (953,000) (943,000)
Retained earnings 12,094,000 11,528,000
------------- -------------
Total Shareholders' Equity 33,547,000 32,991,000
------------- -------------
$ 127,154,000 $ 126,386,000
============= =============
See notes to consolidated condensed financial statements.
2
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
------------ ------------
Revenues:
Logistics services $ 48,475,000 $ 45,441,000
Product sales 16,664,000 19,199,000
------------ ------------
65,139,000 64,640,000
------------ ------------
Costs and Expenses:
Logistics expenses 43,159,000 40,386,000
Cost of product sales 13,904,000 15,582,000
Depreciation and amortization 1,914,000 2,080,000
Selling, general and administrative expenses 4,386,000 3,960,000
------------ ------------
63,363,000 62,008,000
------------ ------------
Earnings from Operations 1,776,000 2,632,000
Other Income (Expense):
Interest expense, net (756,000) (1,067,000)
Other income (expense) - (110,000)
------------ ------------
(756,000) (1,177,000)
------------ ------------
Earnings before income taxes
and minority interest 1,020,000 1,455,000
Income tax provision 454,000 577,000
------------ ------------
Earnings before minority interest 566,000 878,000
Minority interest - 125,000
------------ ------------
Net earnings $ 566,000 $ 753,000
============ ============
Basic net earnings per share $ 0.11 $ 0.15
============ ============
Diluted net earnings per share $ 0.10 $ 0.14
============ ============
Average number of shares outstanding 5,271,864 5,081,864
============ ============
Diluted number of shares outstanding 5,541,817 5,232,428
============ ============
See notes to consolidated condensed financial statements.
3
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003
(Unaudited)
Accumulated Current
Additional Other Year
($000) Common Paid-In Retained Comprehensive Comprehensive
Stock Capital Earnings Loss Income (Loss)
------------------------------------------------------------------
Balance, December 31, 2002 $53 $ 22,353 $11,528 $ (943)
Unrealized Losses on Interest Rate
Swaps for the Three Months Ended
March 31, 2003, net of tax (10) (10)
Net Earnings for the Three
Months ended March 31, 2003 566 566
---------------
Total Comprehensive Income $ 556
===============
-------------------------------------------------
Balance, March 31, 2003 $53 $ 22,353 $12,094 $ (953)
=================================================
See notes to consolidated condensed financial statements.
4
C2, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 30,
----------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 566,000 $ 753,000
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,914,000 2,080,000
Gain on sale of fixed assets (48,000) (59,000)
Minority interest in consolidated income of subsidiaries - 124,000
Changes in assets and liabilities:
Increase in accounts receivable (990,000) (6,262,000)
(Increase) decrease in other assets (1,157,000) 702,000
(Decrease) increase in accounts payable, accrued
Liabilities and other liabilities (119,000) 883,000
----------- -----------
Net cash provided by (used in) operating activities 166,000 (1,779,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (889,000) (1,150,000)
Proceeds from sale of assets 5,000 (296,000)
----------- -----------
Net cash used in investing activities (884,000) (1,446,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on credit lines 721,000 2,723,000
Net (payments) borrowings on notes and loans payable (400,000) 213,000
----------- -----------
Net cash provided by financing activities 321,000 2,936,000
----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (397,000) (289,000)
BEGINNING CASH AND CASH EQUIVALENTS 4,483,000 2,539,000
----------- -----------
ENDING CASH AND CASH EQUIVALENTS $ 4,086,000 $ 2,250,000
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 837,000 $ 1,135,000
Income taxes paid $ 391,000 $ 383,000
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 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 three
months ended March 31, 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, $28,000 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 March 31, 2003 and December 31, 2002, inventories
are comprised of the following:
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
Repair parts $ 177,000 $ 173,000
Commodities and other 1,725,000 1,651,000
Raw materials and work in process 5,570,000 5,682,000
Finished goods 3,891,000 3,012,000
----------- -----------
$11,363,000 $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 quarter
ended March 31, 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 (Inventory) -- (28,000) (28,000)
------------ ------------ ------------
Balance as of March 31, 2003 $ 4,882,000 $ 11,281,000 $ 16,163,000
============ ============ ============
7
NOTE 3 -- EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings per share for
the three months ended March 31, 2003 and 2002.
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
---------- ----------
Basic Net Earnings per Share:
Net earnings available to common shareholders $ 566,000 $ 753,000
Average shares of common stock outstanding 5,271,864 5,081,864
---------- ----------
Basic net earnings per share $ 0.11 $ 0.15
========== ==========
Diluted Net Earnings per Share:
Average shares of common stock outstanding 5,271,864 5,081,864
Incremental common shares applicable to
common stock options 269,953 150,564
---------- ----------
Average common shares assuming full dilution 5,541,817 5,232,428
---------- ----------
Diluted net earnings per share $ 0.10 $ 0.14
========== ==========
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
MARCH 31,
----------------------------
2003 2002
------------ ------------
Revenues:
Logistic services $ 48,475,000 $ 45,441,000
Product sales 16,664,000 19,199,000
------------ ------------
$ 65,139,000 $ 64,640,000
============ ============
Earnings from Operations:
Logistic services $ 1,941,000 $ 1,622,000
Product sales 98,000 1,271,000
Corporate (263,000) (261,000)
------------ ------------
$ 1,776,000 $ 2,632,000
============ ============
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 March 31, 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 March 31, 2003 was
$953,000, net of tax.
NOTE 6 -- COMPREHENSIVE INCOME
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
--------- ---------
Unrealized (loss) gain on cash flow hedges $ (10,000) $ 200,000
Net income 566,000 753,000
--------- ---------
Total Comprehensive Income $ 556,000 $ 953,000
========= =========
9
NOTE 7 -- STOCK-BASED EMPLOYEE COMPENSATION PLANS
At March 31, 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
MARCH 31,
--------------------------
2003 2002
----------- -----------
Net income, as reported $ 566,000 $ 753,000
Employee compensation expense determined under
fair value based method for all awards,
net of related tax effects (28,000) (32,000)
----------- -----------
Pro forma net income $ 538,000 $ 721,000
=========== ===========
Basic earnings per share:
As reported $ 0.11 $ 0.15
Pro forma 0.10 0.15
Diluted earnings per share:
As reported $ 0.10 $ 0.14
Pro forma 0.10 0.14
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General Business
The Company is comprised of two operating companies, Total Logistic Control 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 39 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 March 31, 2003 increased 0.8% to
$65,139,000 from $64,640,000 reported for the same period last year. The growth
in revenue was due to a 6.7% increase in logistics services revenue to
$48,475,000. This increase was due to both significant new business and growth
with existing customers in Dedicated Facility Services and Transportation
Operations at TLC. Product sales decreased 13.2% quarter-to-quarter to
$16,664,000, due primarily to lower volume in Food Distribution Services at TLC
and to a lesser extent, lower volume of refrigerated display case sales at Zero
Zone.
Logistics expenses as a percent of logistics services revenues were 89.0%, a
slight reduction in margin, compared to 88.9% reported for the same period last
year. Cost of product sales represented 83.4% of product sales, a 2.2 percentage
point decrease in margin, compared to 81.2% reported for the same period last
year. Lower sales of food products to Michigan school systems, lower volume in
refrigerated display case sales and higher warranty related expenses at Zero
Zone were the principal factors associated with the decrease in margin.
Selling, general and administrative expenses were 6.7% of total revenues for the
quarter, an increase of 0.6 percentage points, compared to 6.1% reported for the
same period last year. Both TLC and Zero Zone incurred increased SG&A expense.
TLC incurred higher employee related costs and additional office related
expenses all of which are related to the Company's growth. Zero Zone incurred
increased SG&A expenses related primarily to a full quarter's period in 2003
versus 2 months of expense at Zero Zone Refrigeration in the first quarter of
2002.
Consolidated earnings from operations for the first quarter of 2003 were
$1,776,000, compared to $2,632,000 for the same period in the previous year, a
decrease of 32.5%. The decrease in operating earnings for the quarter was
primarily attributable to lower volume as previously noted in Product Sales and
higher selling, general and administrative expense.
11
Net interest expense for the quarter of $756,000 decreased 29.1%, 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. Due to higher
operating earnings and lower debt at TLC, incentive price adjustments reduced
the spread over LIBOR by 125 basis points period-to-period, on which TLC
borrowing costs are determined.
The effective income tax rate for the three months ended March 31, 2003 was
44.5%, 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 March 31, 2003, decreased 24.8% to
$566,000, or $0.10 per fully diluted share, compared to $753,000, or $0.14 per
fully diluted share, reported for the same period last year. Increased net
earnings contributed by Logistics Services were offset by a small loss in
Product Sales.
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
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 March 31, 2003, the Company's operating subsidiaries had outstanding
debt of $60,354,000, all of which is borrowed under various facilities with
these banks. At March 31, 2003, unused borrowings under existing credit
facilities totaled approximately $30.6 million.
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 March 31, 2003, outstanding borrowings under these facilities were
$41,800,000. 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 March 31,
2003, borrowings under these facilities carried an average interest rate of
LIBOR plus 1.75%, or 3.403%. As of March 31, 2003, TLC was in compliance with
all required covenants.
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
12
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 March 31, 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 March 31,
2003, Zero Zone had $5,121,000 in outstanding borrowings under its $7,500,000
line of credit. The interest rate at March 31, 2003 was 2.84%.
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%.
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 March 31, 2003, C2, Inc. had available an unsecured line of credit in the
amount of $15,000,000. No borrowings were outstanding under this facility during
the quarter.
As of March 31, 2003, the Company had cash and cash equivalents on hand of
$4,086,000, compared to $4,483,000 at December 31, 2002.
Cash flows provided by operations for three months ended March 31, 2003, totaled
$166,000 compared to $1,779,000 used in operating activities in the prior year
period. The increase in comparative cash flows from operating activities was
primarily attributable to reduced growth of working capital accounts required to
fund the Company's higher volume.
Cash flows used in investing activities in the period totaled $884,000, compared
to $1,446,000 for the same period last year. In the three months ended March 31,
2003, the cash used was primarily related to routine capital expenditures, but
at a reduced level compared to the same period last year.
Cash flows provided by financing activities for the first three months of 2003
totaled $321,000 compared to $2,936,000 for the same period last year. In the
first three months of fiscal 2003, cash flows provided by financing activities
were related to funding lower working capital requirements and scheduled debt
payments. In the same period in 2002, the Company acquired Zero Zone
Refrigeration which required additional borrowings to fund assumed liabilities.
Critical Accounting Policies
Impairment of Long-Lived Assets
The Company evaluates the recoverability of the carrying amount of long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. The company evaluates the
recoverability of goodwill with indefinite lives annually, or more frequently if
13
events or circumstances indicate that an asset might be impaired. The Company
uses judgement when applying the impairment rules to determine when an
impairment test is necessary. Factors the Company considers which could trigger
an impairment review include significant underperformance relative to historical
or forecasted operating results, a significant decrease in the market value of
an asset, a significant decrease in warehouse volume/activity, and significant
changes in revenue sources.
Impairment losses are measured as the amount by which the carrying value of an
asset exceeds its estimated fair value. The Company is required to make
estimates of its future cash flows related to the asset subject to review. These
estimates require assumptions about demand for the Company's products or
services and future market conditions. Other assumptions include determining the
discount rate and future growth rates. Based on the assumptions above, the
Company is unaware of any impairment charges required for the quarter ended
March 31, 2003.
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.
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, cancellation or
non-renewal of supply or service agreement with customers.
- - 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 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. Not applicable.
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 99.1 Written Statement of Chief Executive Officer
Exhibit 99.2 Written Statement of Chief Financial Officer
b. Report on Form 8-K was filed January 7, 2003, to report the
acquisition of the minority interest in Zero Zone, Inc.
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: May 13, 2003 /s/ William T. Donovan
------------------ --------------------------------------------
William T. Donovan
President and Chief Executive Officer
Date: May 13, 2003 /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.
May 13, 2003
/s/ William T. Donovan
- --------------------------------------------
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.
May 13, 2003
/s/ William T. Donovan
- --------------------------------------------
William T. Donovan
Chief Financial Officer
21
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
Exhibit 99.1 Written Statement of Chief Executive Officer
Exhibit 99.2 Written Statement of Chief Financial Officer
22