ITEM 1. BUSINESS
C2, INC.
C2, Inc. ("C2" or "the Company") was formed on December 11, 1997 for the purpose of consummating the acquisition of 66.67% of Total Logistic Control, LLC ("TLC") for $10.67 million in cash, and the assumption of TLC's liabilities, plus the assumption of contingent liabilities attributable to the historic operations or assets of Christiana Companies, Inc. ("Christiana").
The Company's strategy provides that a substantial part of its future growth will come from acquiring, either directly or through TLC, other businesses, which may or may not be related to TLC's current business. In line with that strategy, on March 12, 1999, C2, Inc. announced the purchase of Zero Zone, Inc., a Wisconsin-based manufacturer of refrigerated and freezer display cases. C2 invested $4.5 million in equity and capital notes for 70.6% of the outstanding common stock of Zero Zone with the balance being held by the President of Zero Zone and other members of its management team.
C2 completed its initial public offering on March 4, 1999. The offering resulted in the sale of 5,202,664 shares of C2 common stock at $4.00 per share raising $20,410,000 of initial equity capital, net of offering costs. From these proceeds, C2 used $10.67 million in the acquisition of 666.67 membership units, representing a 66.7% ownership interest in TLC as part of the merger of Christiana with and into a subsidiary of Weatherford International, Inc. ("Weatherford"). Christiana, now a wholly owned subsidiary of Weatherford owns the remaining 333.33 membership units of TLC representing at 33.3% ownership interest.
TOTAL LOGISTIC CONTROL, LLC
TLC was formed on June 30, 1997 through a combination of the operations of two wholly-owned subsidiaries of Christiana: Wiscold, Inc. ("Wiscold") and Total Logistic Inc. On September 1, 1992, Christiana acquired the assets of Wiscold, a company formed in 1915, which engaged in providing public refrigerated warehousing services, vegetable processing and individual quick freeze ("IQF") services, automated poly bag and bulk packaging services, and transportation services into and out of its facilities. On January 4, 1994, Christiana acquired Total Logistic Inc., a Zeeland, Michigan-based firm engaged in providing fully integrated third-party logistic services, which include warehouse, distribution and transportation services in both refrigerated and non-refrigerated facilities.
Today, TLC provides integrated third-party logistic services as well as full service public and contract warehousing in all ranges of frozen, refrigerated and ambient temperatures. Integrated logistic services generally combine transportation, warehousing and information services to manage the distribution channel for a customer's products from the point of manufacture to the point of consumption. TLC's transportation and distribution services include full service truckload, less-than-truckload and pooled consolidation in both temperature controlled and dry freight equipment, dedicated fleet services and specialized store-door delivery formats. Transportation and logistic services are provided utilizing company-owned equipment as well as through carrier management services utilizing third party common and contract carriers. TLC also provides product fulfillment services, international freight forwarding, food distribution, kitting, repackaging and just-in-time production supply services.
TLC's transportation fleet is comprised of 195 tractors and 233 refrigerated trailers and 58 dry trailers providing transportation services nationally.
TLC's customers consist primarily of national, regional and local firms engaged in food processing, consumer and industrial product manufacturing, wholesale distribution and retailing. During
1999, TLC's top 10 customers accounted for approximately 41.7% of total revenues. TLC services approximately 1,300 customers.
TLC believes it is the nation's seventh largest provider of public refrigerated warehouse space. All of TLC's refrigerated facilities are modern and efficient single story buildings at dock height elevation and fully insulated. TLC's refrigerated logistic centers are as follows:
- Rochelle Cold Storage campus, located in Rochelle, Illinois, is TLC's newest and largest refrigerated warehouse operation, initially constructed in 1986. Currently this location is comprised of 14,100,000 cubic feet of capacity in two separate buildings having undergone four capacity expansions in 1988, 1990, 1993 and 1996. All space is capable of temperatures of -20 degrees F to ambient. Rochelle Cold Storage is strategically located at the intersection of two main line East-West railroads, the Burlington Northern and the Chicago Northwestern, and the cross roads of two interstate highways, I-39 and I-88. Rochelle Cold Storage serves primarily distribution customers in the Midwest.
- Beaver Dam Logistic Center, located in Beaver Dam, Wisconsin, was originally constructed in 1975. Since 1975, this facility has undergone three freezer additions, the most recent in 1991, and today is comprised of 7,200,000 cubic feet of freezer storage space. Beaver Dam Logistic Center serves distribution related customers as well as vegetable and cranberry processors. This facility's unique capabilities involve value added services for vegetable processors including IQF, blanching, slicing, dicing and food service and retail poly bag packaging operations. Beaver Dam Logistic Center's IQF tunnels have the capacity to freeze 30,000 pounds of product per hour.
- Milwaukee Logistic Center, located in Wauwatosa, Wisconsin, was originally constructed in 1954. There have been six expansions of this facility, and today the Milwaukee Logistic Center facility comprises 4,300,000 cubic feet of which 3,754,000 cubic feet is freezer capacity and 546,000 cubic feet is cooler space. This facility has multi-temperature refrigerated storage ranging from -20 degrees F to +40 degrees F and daily blast freezing capacity of 750,000 pounds. This location has a 7-car private rail siding. An additional 3 million cubic feet of company owned refrigerated and processing space adjacent to the Milwaukee Logistic Center facility is leased on a long term basis to a third party retail grocery company.
- Kalamazoo Logistic Center, located in Kalamazoo, Michigan, has two distribution centers. Facility #1 is a 3,300,000 cubic foot facility with 1,100,000 cubic feet of freezer capacity, 400,000 cubic feet of cooler capacity and 1,800,000 cubic feet of dry storage capacity. This location services a number of distribution customers in the Midwest and is strategically located at the I-94 and US 31 crossroads in Michigan, equal distance between Chicago and Detroit. Facility #2 is located adjacent to Facility #1 and is comprised of 2,800,000 cubic feet of capacity. This facility contains 1,500,000 cubic feet of cooler capacity and 1,300,000 cubic feet of freezer capacity. Two large distribution customers utilize 85% of this space. These facilities are held under long-term leases.
- Also located at the Kalamazoo Logistic Center is a company owned 10,000 square foot transportation equipment maintenance center. Approximately 50% of TLC's fleet of over-the-road transportation units is domiciled in Kalamazoo, Michigan.
- Holland Logistic Center, located in Holland, Michigan, has undergone a number of expansions over the years, with a major reconstruction in 1983 after a fire destroyed approximately 50 percent of the facility. Today, this refrigerated facility comprises 2,100,000 cubic feet of storage capacity of which 1,300,000 cubic feet is freezer capacity, 400,000 cubic feet is cooler capacity and 400,000 cubic feet is convertible capacity between freezer and cooler. Holland Logistic Center services both distribution customers as well as fruit growers in the West Michigan area. This location is situated on a CSX rail spur with two refrigerated rail docks. This facility is held under a lease which expires December 31, 2000.
- As a Subsequent Event as described in Note H, TLC acquired a 2,500,000 cu. ft. refrigerated warehouse facility located in Paw Paw, Michigan. This facility is located 15 miles west of the Kalamazoo facilities on Interstate 94. This facility has 15 acres of land and can be expanded by an additional 300,000 cubic feet. In addition as a part of the acquisition, TLC received an option on 90 acres of land contiguous to the facility. The Paw Paw facility was initially constructed in 1991 and under went two expansions in 1984 and 1990.
In addition to the refrigerated distribution centers described above, TLC operates a network of owned and leased dry (non-refrigerated) distribution centers comprising approximately 1.0 million square feet of storage capacity. Dry distribution centers are located in Zeeland (2) and Kalamazoo, Michigan; Munster, Indiana and Dayton, New Jersey.
Competition in integrated logistic services is on both a national and local basis with a predominant emphasis on transportation services. At present, there are no direct competitors providing the full scope of warehousing and transportation services across the full range of temperatures provided by TLC. However, each of TLC's individual business segments is highly fragmented with many local, regional and national competitors, especially in the transportation and dry warehousing industries. TLC's competitive edge is its ability to provide fully integrated logistic services designed to its customers' distribution needs which may, but would not necessarily, include utilizing its network of strategically located refrigerated and dry distribution centers, transportation equipment, and carrier management services. TLC's revenues and earnings can be affected by changes in competitive pricing in both transportation and warehousing operations, particularly at the local level; harvest yields of certain vegetable and fruit crops grown in the Upper Midwest; changes in customers distribution patterns or channels, and general economic conditions.
TLC holds a trademark on its name and logo. No other trademarks, patents, licenses, franchises or concessions are considered material to its business.
Expenditures for research and development and compliance with environmental regulations have not been, and are not anticipated to be, significant.
ZERO ZONE
Zero Zone, headquartered in North Prairie, Wisconsin, manufactures frozen and refrigerated glass door reach-in display cases used by grocery, convenience and drug store chains for retail manufacturing of food, beverage and floral products.
Zero Zone currently operates two manufacturing facilities and uses one warehouse for offsite storage of finished goods. Zero Zone's headquarters was built in 1995. The original facility consisted of
61,000 square feet and was expanded during 1999 by an additional 52,000 square feet. Zero Zone is a light manufacturing environment consisting primarily of panel molding and assembly operations.
Zero Zone's second facility is located four miles to the east of North Prairie in Genesee, Wisconsin. This facility consists of 34,000 square feet. The Genesee facility is primarily utilized for production of self-contained equipment.
Zero Zone currently leases a warehouse in Waukesha, Wisconsin. The current arrangement includes 30,000 square feet of space with an option to add up to 120,000 additional square feet. Zero Zone intends on leasing an additional 25,000 square feet beginning February 1, 2000.
Competition in commercial refrigeration equipment varies dependent on the segment being served. Zero Zone is primarily a supplier to supermarkets and convenience stores, not the food service industry. The competition consists of larger companies that supply a complete line of refrigerated equipment while Zero Zone's specialty is glass door reach-in display cases. Zero Zone's competitive advantage has been product quality and performance, along with a flexible manufacturing process that allows for shorter lead times and responsiveness to customers.
Zero Zone sells primarily to large retail supermarket, drug and convenience chains, refrigeration contractors, dealers, and food wholesalers. Zero Zone's active customer list includes approximately 500 customers.
Zero Zone's revenues and earnings can be affected by a loss of a significant customer, changes in competitive pricing, raw material cost changes, changes in distribution channels, new construction and refurbishment of grocery and chain store retailers and general economic conditions.
EMPLOYEES
The following table shows the number of fulltime C2, TLC and Zero Zone employees at the dates indicated.
At February 29, 2000, TLC has 170 more employees than at the same date a year ago due primarily to expansion of its transportation fleet and a substantial increase in a warehousing and distribution program at the Rochelle Logistic Center.
ITEM 2.
ITEM 2. PROPERTIES
REFRIGERATED WAREHOUSING FACILITIES
At December 31, 1999, TLC owned or leased twelve facilities in five states. Of this total, seven are refrigerated with the balance being non-refrigerated facilities. Refrigerated operations are conducted through seven public refrigerated warehouses located in Wisconsin (2), Michigan (3), and Illinois (2).
TLC's refrigerated facilities are large single-story buildings constructed at dock height will full insulation and vapor barrier protection. Refrigeration is provided by screw-type compressors in ammonia-based cooling systems. The facilities are strategically located and well served by rail and truck.
TLC's refrigerated warehouse facilities are described in the following table:
(1) Leased Facility
(2) Includes 1.8 million cubic feet of non-refrigerated storage capacity.
(3) On January 5, 2000, TLC completed the acquisition of the assets of Paw Paw Freezer Corporation, a deep-frozen and refrigerated public warehouse in Paw Paw, Michigan. The acquisition of this facility, which includes 2,500,000 cubic feet of freezer space, brings the TLC network to 13 logistic centers with 36.3 million cubic feet of refrigerated capacity. See Note H, Subsequent Event.
At both the Rochelle and Beaver Dam Logistic Centers, the Company owns substantial additional acreage available for expansion. In addition, the Company has an option on 90 acres of contiguous land for future expansion and development at the Paw Paw facility.
At December 31, 1999, TLC operated 5 public non-refrigerated or dry warehouse distribution facilities located in Michigan (3), Indiana and New Jersey. Zeeland Distribution Center II, located in Zeeland, Michigan is a company owned facility. All other dry facilities are held under leases. Lease terms generally match underlying contracts with major customers served at each facility. These facilities are single story block or metal construction buildings. All dry facilities are constructed at dock height and are approved as food grade storage facilities.
TLC's dry warehouse facilities are described on the following table:
(1) Leased facility.
TLC owns and operates a 10,000 square foot truck maintenance facility located at the Kalamazoo Logistic Center. This facility is used for the maintenance of TLC transportation equipment.
Zero Zone currently operates two manufacturing facilities and uses one warehouse for offsite storage of finished goods. Zero Zone's headquarters was built in 1995. The original facility consisted of 61,000 square feet and was expanded during 1999 by an additional 52,000 square feet. Zero Zone is a light manufacturing environment consisting primarily of panel molding and assembly operations.
Zero Zone's second facility is located four miles to the east of North Prairie in Genesee, Wisconsin. This facility consists of 34,000 square feet. The Genesee facility is primarily utilized for production of self-contained equipment.
Zero Zone currently leases a warehouse in Waukesha, Wisconsin. The current arrangement includes 30,000 square feet of space with an option to add up to 120,000 additional square feet. Zero Zone intends on leasing an additional 25,000 square feet beginning February 1, 2000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
TLC and Zero Zone are involved in litigation incidental to the conduct of their business, none of which we believe is, individually or in the aggregate, material to our consolidated financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The common stock of the Company was originally listed on the NASDAQ Small Cap Market effective March 5, 1999. On June 4, 1999 the Company's common stock was listed on the NASDAQ National Market. The table below sets forth the reported high and low sales prices as reported by NASDAQ for the quarters ended March 31, 1999 through March 10, 2000.
* Ten weeks ended March 10, 2000
At March 3, 2000, there were approximately 141 shareholders of record. There have been no dividends paid, and based on the Company's strategic business plan of reinvesting cash flow and acquisitions, none are anticipated in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data is provided under the caption "Five Year Financial Information" which is included on page 33.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The Company's consolidated financial results for fiscal 1999 include a full 12 months of operations for TLC and a 9 1/2 month period for Zero Zone. Accounting convention requires the consolidated financial results reported by C2 for fiscal 1999 be compared to the financial results of TLC alone reported for fiscal 1998, even through TLC was a wholly owned limited liability company subsidiary of Christiana Companies, Inc and therefore did not provide for minority interest or a tax provision.
The Company's consolidated revenues for fiscal 1999 totaled $143,829,000 compared to $90,610,000 reported by TLC in fiscal 1998 reflecting an increase of 59%. Revenue growth was attributable to increased volume at TLC as Logistics Revenues increased 19% to $107,732,000 and the inclusion of Zero Zone for the 9 1/2 month period, which contributed revenues of $36,097,000. Revenue growth at TLC was driven primarily by new customers and increased volume in Logistics Management Services and increased capacity utilization in Refrigerated Warehousing operations. Revenues attributable to Zero Zone for the 9 1/2 month period since its acquisition on March 12, 1999 were $36,097,000 versus $25,055,000 reported for the comparable period in 1998 reflecting an increase of 44%. Zero Zone's growth is resulting from increased volume from both new and existing customers and is facilitated by an expansion of its manufacturing facility which approximately doubled its floor space and significantly increased manufacturing capacity. Revenue from one customer represented approximately 16% or $23,700,000 of total revenue in 1999.
Depreciation and amortization expense in fiscal 1999 was $7,519,000 compared to $6,254,000 reported by TLC in fiscal 1998 reflecting an increase of $1,265,000 or 20%. The increase is primarily attributable to the inclusion of Zero Zone in fiscal 1999 which had related depreciation and amortization charges of $759,000 in fiscal 1999. Depreciation and amortization expense at TLC increased $506,000 over the prior year.
Selling general and administrative expenses in fiscal 1999 totaled $13,460,000 compared to $7,140,000 reported by TLC in fiscal 1998, or an increase of 89%. The increase is due entirely to the inclusion of Zero Zone which reported $5,544,000 of selling general and administrative expense for fiscal 1999. This expense category at TLC declined $71,000 in fiscal 1999 due to aggressive cost management. Also included in this expense category is $847,000 of corporate related expense.
Consolidated earnings from operations for fiscal 1999 totaled $9,044,000 compared to $6,850,000 reported for TLC in fiscal 1998, or an increase of 32%. Growth in earnings from operations was attributable primarily to the inclusion of Zero Zone for the period which contributed $4,209,000 of earnings from operations. Earnings from operations contributed by TLC in fiscal 1999 totaled $5,682,000, a decline of $1,168,000 or 17% from the prior year due primarily to increased labor and warehousing costs for much of fiscal 1999 in Refrigerated Warehousing at two facilities resulting from significantly expanded distribution programs with two accounts. Operational and pricing changes were instituted which will enable TLC to earn its targeted profit levels in the future. Earnings from operations in fiscal 1999 also include $847,000 of corporate related expenses which are not reflected in the prior year's results.
Consolidated net interest expense in fiscal 1999 was $4,644,000 compared to $2,586,000 reported by TLC in fiscal 1998. Increased interest expense is primarily related to two factors: increased
debt at TLC related to the $20 million dividend and the repayment of a $3,000,000 note to Christiana, in connection with the merger transaction between Christiana and Weatherford, and secondly, the inclusion of Zero Zone in fiscal 1999 which had interest expense of $1,032,000 for the period. Corporate activities contributed $312,000 of interest income for the year.
During fiscal 1999 both TLC and Zero Zone incurred one-time charges related to merger or acquisition activities or debt refinancing. In the first half of fiscal 1999, TLC and Zero Zone incurred one-time merger or acquisition related charges totaling $349,000, net of tax and minority interest. In the third quarter of fiscal 1999, Zero Zone refinanced its senior debt which both reduced its average rate of interest and significantly extended its average maturity. Related to this debt refinancing transaction, Zero Zone incurred a one-time, extraordinary charge of $153,000, net of tax and minority interest.
Consolidated net earnings for fiscal 1999 before one-time and extraordinary charges as previously described totaled $1,757,000 or $0.34 per share compared to net earnings reported by TLC in fiscal 1998 of $4,375,000 or $0.84 per share. The decline in earnings is attributable to increased interest expense as previously noted, the inclusion of minority interest and a tax provision in fiscal 1999 related to both TLC and Zero Zone, one-time charges as previously noted and lower earnings from operations at TLC. Consolidated net earnings after one-time and extraordinary items in fiscal 1999 were $1,255,000, or $0.24 per share.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
TLC's consolidated revenues for the year ended December 31, 1998 were $90,610,000 compared to $90,100,000 for the year ended December 31, 1997, an increase of $510,000 or .6%. Revenue in 1998 attributable to Warehousing Services declined by $296,000 or .8% compared to the prior year due to the closure of two non-refrigerated warehousing operations in the third quarter of 1997. The remaining facilities generated revenue growth primarily through higher capacity utilization and to a lesser extent from price increases in 1998 compared to 1997. Logistic Service revenues in 1998 increased $806,000 or 1.6% in 1998 due primarily to a combination of continued high utilization of transportation assets and expanded volume attributable to the distribution services of food products for the State of Michigan Department of Education under a multi-year contract.
Earnings from operations reported by TLC in fiscal 1998 increased $644,000 or 10.4% to $6,850,000 compared to $6,206,000 reported for fiscal 1997. This increase is due primarily to the decline in depreciation and amortization expense of $499,000 year to date and improved operating profitability in Warehousing Operations. In fiscal 1998, warehouse facilities had higher utilization and improved productivity. Additionally, two non-refrigerated facilities which had low utilization and generated losses were closed.
Selling, general and administrative expenses, which includes marketing and advertising expenses, increased $196,000 or 2.8% in 1998 due to increased staffing in information technology, logistic engineering and sales to support the Company's growth strategy in non-asset based, third party logistic services offset by certain cost savings in other areas.
Income from operations for 1998 increased by $644,000 or 10.4% due primarily to improved gross profit, particularly from efficiencies resulting from higher utilization of refrigerated warehousing facilities and lower depreciation and amortization expenses.
Interest expense in fiscal 1998 was $2,586,000, a reduction of $367,000 from the prior year of $2,953,000. Interest expense in 1998 was reduced due to strong cash flow, which enabled over $7,700,000 of debt reduction during the year. At the end of 1998, a $10,000,000 dividend was paid to
Christiana, the Company's then parent, related to its merger transaction with Weatherford. This distribution was funded by borrowings under TLC's revolving credit facility.
Pretax earnings in 1998 totaled $4,375,000, an increase of $1,460,000 or 50.1% over 1997 pretax earnings of $2,915,000. Higher operating profit and lower interest expense were principal factors in this improvement. The net increase in other income of $899,000 over 1997 also contributed to the improvement in pretax earnings in 1998.
No provision for income tax was recorded in 1998, as TLC was a limited liability company for this period. In 1997, TLC recorded an income tax provision of $515,000 on earnings through June 30, 1997, the period during which TLC was a taxable entity. During 1997, TLC also recognized a non-recurring increase to earnings of $11,171,000 related to the removal of deferred income taxes due to its conversion from a taxable C Corporation to a nontaxable limited liability company.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash equivalents and short-term investments at December 31, 1999 totaled $4,953,000 compared to $9,000 at December 31, 1998. The Company's working capital at December 31, 1999 was $8,704,000 compared to a deficit of $1,146,000 at December 31, 1998.
Operating activities in 1999 provided cash of $4,374,000 derived primarily from net earnings of $1,255,000, depreciation and amortization of $7,519,000, offset by a net increase in working capital accounts of $5,280,000.
Net cash used in investing activities in fiscal 1999 totaled $19,616,000 and included capital expenditures totaling $7,435,000, the major components of which were: $3,408,000 related to warehousing operations, $1,732,000 related to information systems and equipment, $558,000 of transportation equipment and $1,531,000 for capital additions at Zero Zone primarily related to the expansion of its manufacturing facility; acquisition of businesses, net of cash totaling $13,089,000 and proceeds from the sale of fixed assets, primarily transportation equipment of $908,000. Businesses acquired include 66.7% of TLC for $10,667,000 and 70.6% of Zero Zone for $3,000,000 of equity and $1,500,000 in capital notes.
Cash flows from financing activities in fiscal 1999 totaled $20,186,000 the major components of which were $20,410,000 in net proceeds from the Company's initial public offering of common stock, $7,823,000 in debt reduction at both TLC and Zero Zone, $13,312,000 of distributions to Christiana related to the merger transaction with Weatherford and $2,769,000 in borrowings under Zero Zone's line of credit.
At December 31, 1999, TLC had a secured revolving credit facility that provided for borrowings up to $70,000,000. Outstanding indebtedness under this facility totaled $53,552,000 at December 31, 1999. During the third quarter Zero Zone refinanced its senior debt issuing a $3,420,000 tax exempt Industrial Revenue Bond and a $6,000,000 taxable Industrial Revenue Bond both of which were credit enhanced by a major commercial bank's letter of credit. In addition Zero Zone has a $7,500,000 secured line of credit facility which at year end had outstanding borrowings of $2,770,000. Zero Zone issued $4,401,000 of subordinated notes in connection with its acquisition by C2 on March 12, 1999.
At year end the Company had in place a $15,000,000 unsecured line of credit facility for general corporate purposes. There were no borrowings under this facility during fiscal 1999.
The Company's current sources of capital include: cash generated from operations, existing cash resources which at year end totaled $4,953,000 and unused borrowings under existing credit
facilities. The Company believes these resources are sufficient to fund projected cash requirements of its current operations.
The Company continues to evaluate new acquisitions in areas strategic to existing operations as well as in new lines of business. Future acquisitions may be funded through cash flows from operations, existing credit facilities and the issuance of equity securities under a rights offering to shareholders or otherwise, if desirable.
As of December 31, 1999, the Company had no material capital commitments.
This Form 10-K includes forward-looking statements. These include, among other, discussions of growth in the market and demand for services in third party logistics, the outlook for growth in the market for new construction or refurbishment of grocery, drug and convenience stores, and thus demand for Zero Zone's products. Although the Company believes its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements included herein include, among others, that consolidations within the food industry or food retailers accelerates and impacts the Company's customers; that the Company's market share may decrease as a result of new or increased competitive conditions in warehousing, transportation or display case manufacturing, and the costs of providing transportation services, including fuel are not able to be fully recovered in transportation revenues.
ITEM 8.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.
See Index to Financial Information on page 18.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The following table provides certain information, as of the date hereof, about the Company's Board of Directors and Executive Officers and also provides information about the beneficial ownership of the Company's capital stock by all of the directors and executive officers as a group. Directors of the Company are elected annually by a plurality of the votes cast by shareholders. Executive Officers are appointed annually by the Board of Directors.
(1) Previously, Secretary of the United States Department of the Treasury for over four years, and before that, Chairman of Dillon, Read & Co., Inc. He is also a director of Amerada Hess Corporation and H. J. Heinz Company, as well as a director (or trustee) of 27 Templeton Funds, which are registered investment companies. The shares listed are owned by a trust of which Mr. Brady is the beneficiary and a co-trustee. Mr. Brady disclaims beneficial interest of 3,300 of these shares held by a foundation. (2) Mr. Donovan has served in the capacity listed or in another capacity as an executive officer of Christiana for more than the last five years. He has also been a principal of Lubar & Co. for more than the last five years. Mr. Donovan is a director of Grey Wolf, Inc. Shares reported by Mr. Donovan include 20,000 shares held by a partnership in which Mr. Donovan is a General Partner. Mr. Donovan disclaims beneficial interest in 15,935 of these shares. (3) Shares reported by David Lubar include 501,628 shares over which he may be deemed to share voting power and investment power. David Lubar shares voting and investment power over 423,250 shares held by various Lubar family minor childrens' trusts. Of these shares, 50,000 are also included as beneficially owned by Sheldon Lubar and 78,378 represent shares for which Mrs. David Lubar shares voting and investment power. The remaining 417,536 shares are held by David Lubar directly.
(4) Sheldon Lubar has also been a principal of Lubar & Co. for more than the last five years. Sheldon Lubar is also a director of Ameritech Corporation, Weatherford International, Inc., Firstar Corporation, Massachusetts Mutual Life Insurance Co., Jeffries & Company, Inc. and MGIC Investment Corporation. (5) Shares reported by Sheldon Lubar include 182,000 shares held by various Lubar family minor children's' trusts over which Sheldon Lubar may be deemed to share voting power and investment power as a trustee. Of these shares, 50,000 shares are also included as beneficially owned by David Lubar. Also includes 415,615 shares held directly by Sheldon Lubar's wife and 8,312 shares held by the Lubar Family Foundation for which she may be deemed to have voting power and investment power as a director. The remaining 454,816 shares are held directly by Mr. Lubar or his retirement plans. (6) Albert O. Nicholas has been a Director of C2 since December 1997. Mr. Nicholas has been owner and President of Nicholas Company, Inc., a registered investment advisor located in Milwaukee, Wisconsin since December, 1967. Nicholas Company is the adviser to six registered investment companies: Nicholas Fund, Inc., Nicholas II, Inc., Nicholas Income Fund, Inc., Nicholas Limited Edition, Inc., Nicholas Money Market Fund, Inc. and Nicholas Equity Fund. Mr. Nicholas is the president and a director of each of those companies. Mr. Nicholas is also a director of Bando McGlocklin Capital Corporation. (7) Oyvind Solvang has been Vice President of C2 since December 1997. Mr. Solvang has served as President of Cleary Gull Rieland & McDevitt, Inc., an investment banking firm located in Milwaukee, Wisconsin from January 1996 to October 1996 and Chief Operating Officer from October 1995 to January 1996. Prior thereto, from May 1994 to September 1995, Mr. Solvang served as President of Scinticor, Incorporated, a manufacturer of cardiac imaging devices, located in Milwaukee, Wisconsin, and from August 1990 to April 1994 as Vice President and General Manager of Applied Power, Inc., a supplier of hydraulic systems, located in Butler, Wisconsin. Shares reported by Oyvind Solvang include 50,000 shares over which he may be deemed to share voting power and investment power as trustee, 433,086 shares held directly by his wife, and 143,000 shares over which his wife may be deemed to share voting power and investment power as a trustee. (8) Sheldon B. Lubar is the father of David J. Lubar and father-in-law of Oyvind Solvang.
During 1999, the Board of Directors met three times. Each director attended all meetings. The Board has established three standing committees: audit, finance and compensation. It has no standing nominating committee or any committee performing similar functions.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
During 1999, William T. Donovan, David J. Lubar and Oyvind Solvang were the most highly compensated officers, earning $155,000, $106,000 and $120,000, respectively. The Company anticipates that during 2000 its most highly compensated officers will be William T. Donovan, David J. Lubar and Oyvind Solvang, who will be paid salaries of $183,000, $125,500 and $125,500, respectively. On February 8, 1999 and in connection with C2's completion of its public offering, stock options were granted to the Company's Executive Officers and Board of Directors. Each independent director received an option to purchase 12,000 shares of C2, Inc. common stock at $4.00 per share. C2's Executive Officers received Incentive Stock options to purchase C2, Inc. common stock at $4.00 per share as follows:
All granted options vest ratably over a 5 year timeframe. In total, options to purchase 348,000 shares of C2, Inc. were granted. Of the 348,000 total options granted, 40,000 were issued to employees other than executive or directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table gives information, as of March 5, 1999 about the beneficial ownership of Common Stock of the Company by the persons known to the Board of Directors who own beneficially more than 5% of the outstanding Common Stock. As used in this Form 10K, "beneficial ownership" means, in general, the sole or shared power to vote or dispose of stock.
(1) Shares reported by Sheldon Lubar include 182,000 shares held by various Lubar family minor childrens' trusts over which he may be deemed to share voting power and investment power as a trustee. Of these shares, 50,000 shares are also included as beneficially owned by David Lubar. The remaining 454,816 shares are held directly by Mr. Lubar or his retirement plans.
(2) Shares reported by Marianne S. Lubar include 415,615 shares held by her directly and 8,312 shares held by the Lubar Family Foundation for which she may be deemed to have voting power and investment power as a director. (3) Shares reported by David Lubar include 501,628 shares over which he may be deemed to share voting power and investment power as a trustee. David Lubar shares voting and investment power over 423,250 shares held by various Lubar family minor children's' trusts. Of these shares, 50,000 are also included as beneficially owned by Sheldon Lubar and 78,378 represent shares for which Mrs. David Lubar shares voting and investment power. The remaining 417,536 shares are held by him directly. (4) Shares reported by Joan P. Lubar include 441,973 shares held by her directly and 143,000 shares for which she may be deemed to share voting power and investment power as a trustee. (5) Shares reported by Susan L. Solvang include 433,086 shares held by her directly, 22,000 shares held directly by her husband, 143,000 shares for which she may be deemed to share voting power and investment power as a trustee, and 50,000 shares for which her husband may be deemed to share voting power and investment power as a trustee. (6) Shares reported by Kristine L. MacDonald include 425,546 shares held by her directly and 213,368 shares for which she may be deemed to share voting power and investment power as a trustee.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Lubar family, Lubar & Co., Venture Capital Fund, L.P., a fund managed by Lubar & Co., and William T. Donovan own 5.3%, 0.8%, 6.0% and 0.7%, respectively of Emmpak Foods, Inc., a customer of TLC. During fiscal 1999, Emmpak Foods, Inc. accounted for approximately $ 2.8 million in gross revenue for TLC. David J. Lubar serves on the board of directors of Emmpak Foods, Inc.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Financial Statement and Schedules:
See Index on page 18.
Exhibits:
See Index on page 35.
Reports on Form 8-K:
In a Current Report filed on Form 8-K dated February 17, 1999, the Company reported the acquisition of two-thirds of the outstanding interests of Total Logistic Control, LLC for $10.67 million, as previously reported in the Form S-1 Registration Statement of C2, Inc.
In an Amended Report filed on Form 8-K dated March 15, 1999, the Company filed the required financial statements for the acquisition of two-thirds of the outstanding interests of Total Logistic Control, LLC.
In a Current Report filed on form 8-K dated March 29, 1999, the company reported the acquisition of 70.6% of the outstanding interests of Zero Zone, Inc. for $4,500,000.
In an amended report filed on Form 8-K dated April 12, 1999, the company filed the required financial statements for the acquisition of 70.6%, of the outstanding interests of Zero Zone, Inc.
SIGNATURES
Pursuant to the requirement of Section 13 of 15(d) 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.
Date: March 10, 2000 By: /s/ William T. Donovan ------------------------------------ William T. Donovan, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934 this 10-K report has been signed below on March 10, 2000 the following persons on behalf of the Registrant and in the capacity indicated.
Signature
/s/ William T. Donovan Chairman, Chief Financial Officer and - ------------------------------- a Director William T. Donovan
/s/David J. Lubar President and a Director - ------------------------------- David J. Lubar
/s/ Oyvind Solvang Vice President - ------------------------------- Oyvind Solvang
/s/ Betty J. White Treasurer, Controller and Assistant - ------------------------------- Secretary Betty J. White
/s/ David E. Beckwith Secretary - ------------------------------ David E. Beckwith
/s/ Nicholas F. Brady Director - ------------------------------ Nicholas F. Brady
/s/ Sheldon B. Lubar Director - ------------------------------ Sheldon B. Lubar
/s/ Albert O. Nicholas Director - ------------------------------ Albert O. Nicholas
C2, INC.
FINANCIAL INFORMATION
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
C2, INC. INDEX TO FINANCIAL INFORMATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of C2, Inc.:
We have audited the accompanying consolidated balance sheets of C2, Inc. and subsidiaries (a Wisconsin Corporation) as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 C2, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
February 3, 2000 Milwaukee, Wisconsin
C2, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998
See notes to financial statements.
C2, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
See notes to financial statements.
C2, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See notes to financial statements.
C2, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
See notes to financial statements
C2, INC AND SUBSIDIAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS: C2, Inc. is a Milwaukee-based public company principally engaged in third-party product distribution services and equipment manufacturing. C2, Inc.'s operating units include Total Logistic Control, LLC, a provider of refrigerated and non-refrigerated third-party integrated logistic services, and Zero Zone, Inc., a manufacturer of refrigerated and freezer display cases used in grocery, convenience and drug store chains for retail merchandising of food, beverage and floral products.
INITIAL PUBLIC OFFERING: On March 4, 1999, C2, Inc. common shares were issued to subscribers contemporaneous with the distribution of the cash merger consideration attributable to the Christiana Companies, Inc. (formerly NYSE:CST) ("Christiana") and Weatherford International, Inc. (NYSE:WFT) ("Weatherford") transaction which closed on February 8, 1999. The stock offering was fully subscribed and 5,202,664 shares were issued at $4.00 per share. Total proceeds to the Company were $20,410,000, net of offering costs of $400,000.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of C2, Inc. and its subsidiaries, Total Logistic Control LLC and Zero Zone, Inc. All material intercompany transactions have been eliminated in consolidation.
ACQUISITIONS: In conjunction with the above-mentioned merger, C2, Inc. acquired a two-thirds interest in Total Logistic Control, LLC ("TLC") for $10,667,000. TLC provides integrated third party logistic services which include refrigerated and non-refrigerated warehousing, transportation, transportation management, logistics management, food distribution, product fulfillment, international freight forwarding and packaging.
On March 12, 1999, C2, Inc. purchased 70.6 percent of the common stock of Zero Zone, Inc. ("Zero Zone") in connection with a $19,500,000 recapitalization plan. C2, Inc. invested $3,000,000 in common stock and $1,500,000 in capital notes.
These acquisitions have been accounted for as purchases.
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. Revenues and costs related to product sales are recognized when products are shipped to customers.
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.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash and U.S. Treasury securities having a maturity of less than 12 months.
ACCOUNTS RECEIVABLE: Accounts receivable are presented net of an allowance for uncollectible accounts of $330,000 and $200,000 at December 31, 1999 and 1998, respectively. The provision for bad debts was $82,000, $145,000, and $106,000 for the years ended December 31, 1999, 1998, and 1997, respectively.
INVENTORIES: Inventories at TLC consist of 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. At Zero Zone, inventories are stated at the lower of FIFO cost or market value and include materials, labor and manufacturing overhead. As of December 31, 1999 and 1998, inventories are comprised of the following:
PROPERTY, PLANT AND EQUIPMENT: 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:
GOODWILL: Goodwill is amortized on a straight-line basis over 40 years ($469,000 in 1999 and $157,000 in 1998 and 1997, respectively). The accumulated amortization at December 31, 1999 and 1998 was $1,227,000 and $758,000, respectively. C2, Inc. continually evaluates whether events and circumstances have occurred that indicate the remaining 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, C2, Inc. 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.
EXTRAORDINARY ITEM: During the third quarter of 1999, Zero Zone completed a refinancing of its senior debt, which entailed the issuance of both non-taxable and taxable industrial revenue bonds and an increase in its bank credit facility. An extraordinary charge of $362,000, related to the debt refinancing was incurred during the quarter. The charge to C2, Inc. was $153,000, net of tax and minority interest.
PRO FORMA RESULTS: C2, Inc was organized to acquire 66.7 percent of Total Logistic Control, LLC in connection with a merger transaction between Christiana and Weatherford completed on February 8, 1999. On March 12, 1999, C2, Inc. acquired 70.6 percent of Zero Zone, Inc. The consolidated financial statements for the year ended December 31, 1999 included herein reflect the results of TLC from January 1, 1999 and of Zero Zone from March 12, 1999. Because the controlling ownership of TLC is deemed to
be substantially the same before and after its acquisition by C2, Inc., comparable historical financial statements for the years ended December 31, 1998 and 1997 included herein present the results of operations of TLC only, without regard to minority interest or capital structure changes. The following unaudited pro forma results of operations have been prepared assuming the acquisitions had occurred on January 1, 1998. This pro forma information is not necessarily indicative of results of operations that would have occurred had the acquisitions been made on those dates, or of results which may occur in the future.
EARNINGS PER SHARE: Following is a reconciliation of basic and diluted earnings per share for the years ended December 31, 1999, 1998, and 1997. The proforma calculations for 1998 and 1997 are based on the common shares outstanding since the offering and assumes that such shares were issued and outstanding for each of the periods ended December 31, 1998 and 1997.
LONG-LIVED ASSETS: The Company continually evaluates whether events and circumstances have occurred that may indicate the remaining 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, the Company 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.
OTHER ASSETS: Other assets represent primarily deferred charges and cash surrender value of officer's life insurance.
RECLASSIFICATIONS: Certain reclassifications have been made in the 1998 and 1997 statements to conform with 1999 presentation.
B. RELATED PARTY TRANSACTIONS:
Sheldon B. Lubar and David J. Lubar are officers and directors of Lubar & Co. Incorporated, and own 50% each of its stock. The Company's headquarters shares offices with Lubar & Co. Incorporated. The office building is owned by 700 North Water LLC which is owned by Sheldon B. Lubar, David J. Lubar, the Lubar Family (90%) and William T. Donovan (5%). The Company pays its pro rata share of the rent, utilities and other expenses of these premises (approximately $7,000 per month).
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 and 1997. Prior to the combination of Wiscold and Total Logistic, Wiscold charged Christiana a management fee related to certain administrative services rendered by TLC on behalf of Christiana. The amount of the management fee was $120,000 for 1997, 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 Wiscold and TLC for 1998 and 1997 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. In 1999 TLC was required to make distributions to Christiana for income taxes of $1,757,000. Also during 1999 and 1998, TLC made distributions to Christiana of $13,312,000 and $10,000,000, respectively. These distributions to Christiana are reflected as reductions to Members' Equity in 1999, 1998, and 1997 as applicable.
C. INDEBTEDNESS:
The following is a summary of long term indebtedness as of December 31:
TLC has a revolving credit agreement that provides for borrowings at December 31, 1999 of up to
$70,000,000. Borrowings under this agreement mature on November 2, 2003 and bear interest, payable monthly at either LIBOR plus 175 basis points, or a floating rate at the bank's prime rate (8.5% at December 31, 1999) and are secured by substantially all of TLC's assets. The interest rate will vary over the term of the credit agreement pursuant to a pricing grid based on the ratio of funded debt to EBITDA (earnings before interest, taxes, depreciation, amortization and other non-recurring items) as defined. The weighted average interest rate on these borrowings was 6.85% in 1999. 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, 1999, TLC was in compliance with all covenants. No compensating balances are required under the terms of this credit facility.
Zero Zone completed a new 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 for $3,420,000 that was issued through the State of Wisconsin for the company's building addition. The bond has a 20 year life with no annual amortization and has a seven day variable interest rate, which was 5.75% at December 31, 1999. The second issue is a taxable Industrial Revenue Bond for $6,000,000 issued through a bank. This bond also has a 20 year maturity schedule with annual principal repayments of $500,000. The effective life of this bond is 12 years. The interest rate on the second bond is also a seven day variable interest rate, which was 6.75% at December 31, 1999. Both bonds are secured by Letters of Credit issued by a major commercial bank. Interest rate on the line is based on LIBOR plus an amount that varies according to a pricing grid determined by the ratio of funded debt to EBITDA. No amounts were outstanding at December 31, 1999. In addition, Zero Zone has $3,901,000 of subordinated notes which include $2,350,000 of notes to former shareholders of Zero Zone and bear the rate of 8%. The balance of $1,551,000 is a capital note bearing interest at 8.5% to a member of its management.
C2, Inc. has a $15,000,000 unsecured line of credit, renewable annually. Borrowings under this line bear interest at either the London Interbank Offered Rate ("LIBOR") plus 125 basis points, or prime at the Company's option. No compensating balances are required under the terms of this credit facility. There were no borrowings under this credit line in 1999 or 1998.
As of December 31, 1999, the future maturities of consolidated indebtedness are as follows:
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-along basis. Income taxes paid as shown in the statement of cash flows represents combined cash payments made to Christiana by TLC.
Effective June 20, 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. C2, Inc. is taxed as a C-Corporation. Taxes for TLC in fiscal 1999 are booked at the C2, Inc. level and only represent tax on income from the two-thirds ownership held by C2, Inc..
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 elimination of deferred taxes resulted in an increase in earnings of $11,171,000 in fiscal 1997. The $515,000 provision for income taxes for 1997 represents the combined Federal and state income tax provision for the period during which TLC was a C-Corporation. For 1998, there was no tax provision recorded by TLC. The tax provision recorded by C2, Inc. on its consolidated income statement for 1999 represents taxes booked at the C2, Inc. level for corporate activity, operations related to Zero Zone and for its share of TLC income.
The summary of the provision for income taxes is as follows:
The net deferred tax asset is classified in the consolidated balance sheet as follows:
A reconciliation of the statutory Federal income tax rate for the six months ended June 30, 1997 and the year ended December 31, 1999 is as follows:
E. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS:
The Company has 520,000 shares of its common stock reserved for issuance under a stock option plan, which permits the granting of options as well as appreciation rights and awards. During 1999, the first year of the stock option plan, options totaling 348,000 were granted at an exercise price of $4.00. No options were cancelled. At December 31, 1999 none of the total options granted were exercisable. Options are exercisable over the next five years.
The weighted-average exercise price of total stock options outstanding was $4.00. No options were currently exercisable. Additionally, the weighted average contractual life of stock options outstanding at December 31, 1999 was 4.9 years.
Changes in stock options outstanding are summarized as follows:
Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123 and has been determined as if the Company had accounted for its stock options under the fair value method as provided therein. The fair value of each option is estimated on the date of the grant using an option pricing model with the following weighted-average assumptions used for options issued in 1999: risk-free interest rate of 6.5%, expected remaining life of 5 years, expected volatility of 57.6%, and no expected dividends.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Set forth below is a summary of the Company's net earnings and earnings per share as reported and pro forma, as if the fair value based method of accounting defined in SFAS No. 123 had been applied.
The Company has a 401(k) plan covering substantially all of its employees. The costs under this plan have not been material. The Company does not provide post employment medical or life insurance benefits.
F. COMMITMENTS:
TLC and Zero Zone have operating leases for warehouse and office facilities and transportation equipment. Rental expense under these leases was $6,606,000, $6,017,000 and $6,965,000 in 1999, 1998 and 1997, respectively. At December 31, 1999, future minimum lease payments under operating leases are as follows:
G. ACCOUNTING PRONOUNCEMENTS:
During 1998, the Company 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. C2, Inc. does not have any other comprehensive income items. Accordingly, comprehensive income and net income are the same for all periods presented.
During 1998, the Financial Accounting 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 C2, Inc. does not use derivatives nor engage in hedging activities, this statement will not have a material impact on C2, Inc.'s financial position. Adoption of this statement is required beginning June 15, 2000.
H. SUBSEQUENT EVENT:
On January 5, 2000, TLC completed the acquisition of a deep-frozen and refrigerated public warehouse in Paw Paw, Michigan for $4,250,000. This purchase was funded by increased borrowings under TLC's existing revolving credit facility. The acquisition of this facility, which includes 2,500,000 cubic foot of freezer space, brings the TLC network to 13 logistic centers with 36.3 million cubic foot of refrigerated capacity.
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.
As of December 31, 1999, TLC's warehousing segments operated in twelve logistic centers consisting of seven refrigerated and five non-refrigerated. These logistic centers offer storage, order selection, product fulfillment, 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 food service distribution services. These services are provided using both company owned equipment and carrier management services utilizing third party owned equipment.
Zero Zone manufactures frozen and refrigerated glass door reach-in display cases referred to as Product Sales and are used primarily by grocery, convenience and drug store chains for retail merchandising of food, beverage and floral products.
The accounting policies used by TLC's business segments are the same accounting policies used in the preparation of TLC financial statements. Segment profit for 1999 and 1998 is revenues less direct and allocable operating expenses. Segment profit for 1997 reflects only the segment gross margin as TLC did not specifically allocate selling, general and administrative expenses to its warehousing and logistic segments during that year. Corporate items include interest income, amortization expense, selling, general and administrative expenses, other income/expense and income taxes. 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 non-operating fixed assets. Corporate capital expenditures consist primarily of computer equipment and software and other non-operating fixed assets.
Financial information by business segment is as follows:
(1) Segment profit in 1997 does not include an allocation for selling, general and administrative expenses.
(2) Corporate segment profit for 1997 includes selling, general and administrative expenses of TLC's warehousing and logistic segments. Included in segment profit during 1997 is the $11,171,000 adjustment of deferred income taxes related to TLC's change in tax status.
C2, INC AND SUBSIDIARIES QUARTERLY FINANCIAL INFORMATION (1) (unaudited)
(1) The unaudited quarterly data for 1998 reflects the historical financial information of TLC alone.
FIVE YEAR FINANCIAL INFORMATION (1)
(1) The fiscal years ended December 31, 1998, 1997, 1996 and 1995 reflect the historical financial information of TLC alone.
CORPORATE INFORMATION
DIRECTORS
Nicholas F. Brady David J. Lubar Chairman President Darby Overseas Investments, LTD C2, Inc.
William T. Donovan Sheldon B. Lubar Chairman Chairman C2, Inc. Lubar & Co.
William H. Lacy Albert O. Nicholas, Retired Chairman and CEO Chairman MGIC Investment Corporation Nicholas Company, Inc.
OFFICERS
William T. Donovan Betty J. White Chairman and Chief Financial Officer Treasurer, Controller and Assistant Secretary
David J. Lubar Gary R. Sarner President Chief Executive Officer Total Logistic Control, LLC
Oyvind Solvang Jack Van Der Ploeg Vice President Chief Executive Officer e-commerce and Business Development Zero Zone, Inc.
David E. Beckwith Secretary
TRANSFER AGENT AND REGISTRAR CORPORATE HEADQUARTERS
Firstar Trust Company 700 N. Water, Suite 1200 P.O. Box 2077 Milwaukee, WI 53202 Milwaukee, Wisconsin 53201 Telephone: (414) 291-9000 Facsimile: (414) 291-9061 www.c2-inc.com EXCHANGE LISTING
C2, Inc. common stock trades on the Nasdaq Stock Market (R) under the symbol: CTOO.
ANNUAL MEETING
C2, Inc. Annual Meeting of Shareholders will be held at 9:00 a.m. on April 27, 2000 at the Galleria Conference Room, Firstar Center, 777 East Wisconsin Avenue, Milwaukee, Wisconsin.
C2, INC. AND SUBSIDIARIES EXHIBITS
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1999
INDEX TO EXHIBITS
EXHIBIT NO. BRIEF DESCRIPTION OF EXHIBIT
2 Purchase Agreement dated as of December 22, 1997, as amended by subsidiary Weatherford International, Inc., TLC, Christiana Companies, Inc. and the Company [Incorporated by referenced to Annex A of the C2, Inc. Prospectus filed as part of Company's Form S-1 Registration Statement (Reg. No. 333-460270)].
3A Company's Amended and Restated Articles of Incorporation. [Incorporated by referenced to Exhibit 3.1 to Company's Form S-1 Registration Statement (Reg. No. 333-46027)].
10 Purchase agreement dated as of December 22, 1997, as amended by subsidiary Weatherford International, Inc., TLC, Christiana Companies, Inc. and the Company [Incorporated by referenced to Annex A of the C2, Inc. Prospectus filed as part of Company's Form S-1 Registration Statement (Reg. No. 333-46027)].
3B Company's Amended and Restated Bylaws. [Incorporated by reference to Exhibit 3.2 to Company's Form S-1 Registration Statement (Reg. No. 333-46027)].
21 Company's Subsidiaries.
27 Financial Data Schedule.