Attached files
file | filename |
---|---|
EX-32 - Clark Holdings Inc. | v181491_ex32.htm |
EX-31.1 - Clark Holdings Inc. | v181491_ex31-1.htm |
EX-31.2 - Clark Holdings Inc. | v181491_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For
the fiscal year ended January 2, 2010
¨
|
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
1-32735
CLARK
HOLDINGS INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
43-2089172
|
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification Number)
|
|
121
New York Avenue
Trenton,
New Jersey
|
08638
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(609)
396-1100
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
|
Name of Each Exchange on Which Registered
|
|
Units
consisting of one share of Common Stock, par value $.0001 per share, and
one Warrant
|
NYSE
Amex
|
|
Common
Stock, $.0001 par value per share
|
NYSE
Amex
|
|
Warrants
to purchase shares of Common Stock
|
NYSE
Amex
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.
Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirement for the
past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨ No ¨
Indicate
by check mark if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
July 2, 2009, the last business day of the registrant’s most recently completed
second fiscal quarter, the aggregate market value of the common stock held by
non-affiliates of the registrant was approximately $4,346,401.
As of
April 12, 2010, there were 12,032,193 shares of Common Stock, $.0001
par value per share, outstanding.
Documents
Incorporated by Reference: Definitive Proxy Statement on Schedule 14A for the
registrant’s 2009 annual meeting, to be filed within 120 days of January 2,
2010.
CLARK
HOLDINGS INC.
FORM
10-K
TABLE
OF CONTENTS
PAGE
|
||||
PART
I
|
||||
Item
1.
|
Business
|
1
|
||
Item
1A.
|
Risk
Factors
|
12
|
||
Item
1B.
|
Unresolved
Staff Comments
|
17
|
||
Item
2.
|
Properties
|
17
|
||
Item
3.
|
Legal
Proceedings
|
18
|
||
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
19
|
||
PART
II
|
||||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
|
20
|
||
Item
6.
|
Selected
Financial Data
|
21
|
||
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
||
Item
8.
|
Financial
Statements and Supplementary Data
|
39
|
||
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
40
|
||
Item 9A.
|
Controls
and Procedures
|
40
|
||
PART
III
|
||||
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
42
|
||
Item
11.
|
Executive
Compensation
|
42
|
||
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
42
|
||
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
42
|
||
Item
14.
|
Principal
Accountant Fees and Services
|
42
|
||
PART
IV
|
||||
Item
15.
|
Exhibits Financial
Statement Schedules
|
42
|
||
Signatures
|
|
|
74
|
[This
page intentionally left blank.]
ITEM 1.
BUSINESS
Our
Business Prior to the Acquisition
Clark
Holdings Inc.(formerly known as Global Logistics Acquisition Corporation) was
formed as a blank check company on September 1, 2005 to effect a merger, capital
stock exchange, asset acquisition or other similar business combination with an
operating business in the transportation and logistics sector and related
industries. References herein to “Holdings,” “CHI” and the “Company” and to
“we,” “us” or “our” refer to the Clark Holdings Inc. and, where the context
requires, its subsidiaries.
On
February 21, 2006, we closed our initial public offering (“IPO”) of 10,000,000
units, with each unit consisting of one share of our common stock and one
warrant, each to purchase one share of our common stock at an exercise price of
$6.00 per share. Concurrently with the closing of the IPO, our initial
stockholders collectively purchased 2,272,727 warrants (“Private Warrants”). The
Private Warrants were sold at an offering price of $1.10 per warrant, generating
gross proceeds of $2,500,000. On March 1, 2006, we closed on the sale of
an additional 1,000,000 units which were subject to an over-allotment
option. The units from the IPO (including the over-allotment option) were
sold at an offering price of $8.00 per unit, generating total gross proceeds of
$88,000,000. After deducting underwriting discounts and commissions and
offering expenses, the total net proceeds to us from the offering (including the
over-allotment option) were $80,997,000, of which $79,340,000 (plus the
$2,500,000 from the sale of the Private Warrants) was deposited into a trust
account (“Trust Account”). The remaining proceeds of $1,657,000 became
available to be used to provide for business, legal and accounting due diligence
on prospective business combinations and continuing general and administrative
expenses. The funds held in the Trust Account were not to be released
until the consummation of an initial business combination or our liquidation, if
earlier. The holders of the units issued in our IPO (including the
over-allotment option) are referred to herein as “Public Stockholders” and the
shares of common stock included in the units are referred to herein as “Public
Shares.” Our initial stockholders, including our officers and
directors prior to the business combination, are referred to herein as our
“Founders.”
We did
not engage in any substantive commercial business until we consummated our
business combination with The Clark Group, Inc. (“CGI”), as described under this
Item in the section entitled “The Acquisition,” at which point our business
became the business of CGI.
The
Acquisition
On May
18, 2007, we entered into a stock purchase agreement (“SPA”), as amended on
November 1, 2007, with CGI and the stockholders of CGI (“Sellers”), providing
for the purchase by us of all of CGI’s outstanding capital stock (the
“Acquisition”). In accordance with our certificate of incorporation as it
existed at the time, we called a special meeting in lieu of annual meeting of
stockholders (the “Special Meeting”) in order to obtain stockholder approval of
the Acquisition and other related proposals.
On
February 1 and February 8, 2008, we entered into agreements with Cherokee
Investments LLC (“Cherokee,” formerly Clark-GLAC Investment, LLC), pursuant to
which Cherokee purchased 3,200,000 Public Shares from holders of such shares who
had indicated their intention to vote against the Acquisition. On February
1, 2008, we also entered into an agreement with certain of our Founders,
pursuant to which they purchased 299,800 Public Shares from holders of such
shares who had indicated their intention to vote against the
Acquisition.
After
adjournments of the Special Meeting on February 7, 2008, and February 8, 2008,
the Public Stockholders approved the Acquisition and the other related proposals
on February 11, 2008. In accordance with our certificate of incorporation
as it existed at the time, holders of 1,802,983 of the Public Shares voted
against the Acquisition and elected to convert their shares into a pro rata
portion of the Trust Account (approximately $8.06 per share). In order to
receive payment, holders of such shares had to surrender them to us.
1,787,453 of such shares were surrendered within the required time period after
the consummation of the Acquisition. $14,536,911 was paid to the holders
of such shares and such shares were cancelled.
1
On
February 12, 2008, the Company consummated the Acquisition. At the
closing, the funds held in the Trust Account were released to us and were
used in part to purchase all of the issued and outstanding capital stock of CGI
for a total consideration of $75,000,000 (of which $72,527,472.53 was paid in
cash and $2,472,527.47 by the issuance of 320,276 shares of the Company’s common
stock valued at $7.72 per share, the average share price at the announcement of
the SPA) plus an adjustment of $495,067 based on CGI’s estimated working capital
at the closing. Subsequently, an additional adjustment of $257,000 was
paid to the stockholders of CGI based on CGI’s working capital at the closing as
finally determined. Of the consideration paid at closing, $8,300,000 was
placed in escrow, as described more fully below. In addition, certain of
our Founders placed 1,173,438 shares of common stock into escrow, to be released
from escrow if, and only if, prior to the fifth anniversary of the closing, the
last sales price of our common stock equaled or exceeded $11.50 per share for
any 20 trading days within a 30 day trading day period. As of April 19,
2010, such shares remained in escrow. In
connection with the closing of the Acquisition, we changed our name from Global
Logistics Acquisition Corporation to Clark Holdings Inc.
At the
closing of the Acquisition, we entered into an escrow agreement (“Escrow
Agreement”) with the stockholders of CGI, as sellers, providing for (i)
$7,500,000 as a fund for the payment of indemnification claims that may be made
by us as a result of any breaches of CGI’s covenants, representations and
warranties in the SPA (“Indemnification Escrow”), (ii) $500,000 as a fund to pay
us the amount, if any, by which the average of the working capital on the last
day of the month for the twelve months ended March 31, 2008, was higher (less
negative) than negative $1,588,462 (“Working Capital Escrow”), and (iii)
$300,000 as a fund to reimburse CGI and us for costs incurred in connection with
discontinuing certain of CGI’s operations in the United Kingdom (“Discontinued
Operations Escrow”). On August 14, 2008, one third of the Indemnification
Escrow, or $2.5 million, was released to former stockholders of CGI in
accordance with the terms of the SPA and the Escrow Agreement. On
September 15, 2008, the entire Discontinued Operations Escrow was released to
the former stockholders of CGI. By the end of the third quarter of 2008,
the entire Working Capital Escrow had been released, all of which was due to the
Company in accordance with the SPA and the Escrow Agreement, but $257,000 of
which was paid to the Sellers in satisfaction of the aforementioned adjustment
to the Acquisition consideration based on CGI’s working capital at closing as
finally determined. On December 31, 2009, the remainder of the Indemnification
Escrow was released, approximately $1,286,000 of which was paid to the
Company in settlement of all of its claim for indemnification under the SPA, as
more fully described under Item 3, and the remainder of which was paid to the
former stockholders of CGI.
2
Our
Business Model
The
Company is a niche provider of non-asset based transportation and logistics
services primarily to the print media industry throughout the United States and
between the United States and other countries. The Company operates
through a network of operating centers where it consolidates mass market
consumer publications so that the publications can be transported in larger,
more efficient quantities to common destination points. The Company refers
to each common destination point’s aggregated publications as a
“pool.” By building these pools, the Company offers cost effective
transportation and logistics services for time sensitive
publications.
The
Company generates revenues by arranging for the movement of its customers’
freight in trailers and containers. Generally, the Company bills its customers
based on pricing that is variable based upon the amount of tonnage tendered,
frequency of recurring shipments, origination, destination, product density and
carrier rates. The Company’s specified rates are subject
to weight variation, fuel surcharge, and timely availability of the customer’s
product. The Company provides ancillary services such as warehousing and
other services (e.g., product labeling). As part of its bundled service
offering, the Company tracks shipments in transit and handles claims for freight
loss or damage on behalf of its customers. Because the Company owns
relatively little transportation equipment, it relies on independent
transportation carriers.
3
The
Company is a principal and also provides limited brokerage of
transportation services. By accepting the customer’s order, it accepts
certain responsibilities for transportation of the shipment from origin to
destination. The Company selects carriers based upon myriad factors that
include service reliability and pricing. Carrier pricing is typically from
a pre-negotiated tariff rate table. The carrier’s contract is with the
Company, not its customer, and the Company is responsible for payment of carrier
charges. In the cases where the Company has agreed to pay for claims for damage
to domestic freight while in transit, when appropriate the Company will pursue
reimbursement from the carrier for the claims.
The
Company operates as a niche service provider. Its publisher and printer
customer relationships are long standing. Many domestic customers have the
Company handle a substantial portion of their freight transportation to single
copy magazine wholesalers. The Company’s principal competitors are the
in-house transportation and logistics capabilities of the larger
printers.
The
Company’s core business involves the shipment of mass market consumer magazines.
Its business is impacted by the specifics of its underlying publications
(including the number of copies shipped and the pages per copy which vary with
advertising), the mix of publication frequency (e.g. weekly, monthly, annual),
the number of destination points, and the service levels requested by its
customer publishers and printers. Except for special editions publications,
copies distributed of mass market consumer magazines is fairly consistent and
predictable. Mass market magazines generally do not experience material swings
in copy volume in the aggregate. However, while copies distributed in 2009 did
remain consistent with 2008 levels, a decrease in advertising pages in magazines
over the last twelve months did have a negative impact on business as the
average weight per copy shipped declined. Generally, demand for the Company’s
services increases with fragmentation and it is able to charge higher fees per
hundred weight for smaller quantity publications or tonnage going to a
destination point. Management expects its future freight pools, demand for
services and pricing to remain fairly consistent with its past
experience.
The
Company closely monitors the ratio of freight expense to gross revenue, or net
revenue margin, which can be positively or negatively impacted by numerous
factors including customer billing rates, the aggregate weight of a weekly pool
shipment, the fluctuation of per mile transportation costs, and the rise and
fall of crude oil prices. Fuel charge increases will artificially
contribute to a margin percentage decline because as surcharges are passed along
in the form of higher billing rates, revenues increase without a corresponding
change to gross profit. Conversely, fuel
decreases will artificially contribute to a margin percentage increase
because as surcharges are passed along in the form of lower billing rates,
revenues decrease without a corresponding change to gross profit. The Company’s
top 10 domestic customers’ revenue represented approximately 71% of its 2009
domestic revenue. The Company uses various performance indicators to
manage its business. The Company closely monitors margin and gains
and losses for its top 20 customers and loads with negative
margins. The Company also evaluates on-time performance, costs per
load by location and weekly revenue by location. Vendor cost changes
and vendor service issues are also monitored closely.
We
conduct our domestic operations through our subsidiaries, Clark Distribution
Systems, Inc. (“CDS”) and Highway Distribution Systems, Inc. (“HDS”), and our
international operations through our subsidiary, Clark Worldwide Transportation,
Inc. (“CWT”). Each of CDS, HDS and CWT is a wholly-owned subsidiary of
CGI.
History
of Our Business Prior to Its Acquisition
Our
predecessors founded the business in 1957 with the establishment of Clark
Transfer, Inc., a regional transportation company for film, magazines and
newspapers. Through a series of acquisitions and organic growth, Clark Transfer
expanded its service platform and geographic presence throughout the 1960s,
1970s and 1980s to include theatrical transportation and wholesale news
agencies. CDS was formed in 1984 to provide national freight consolidation for
books and magazines. J.E. Tompkins & Son, an international
freight-forwarding firm, was acquired by Clark Transfer in 1987, and
subsequently merged with Caribbean Worldwide, Inc. to become CWT.
During
the 1990s our predecessors acquired the operations of Magazine Shippers
Association, a consolidator of printed matter in Connecticut and Illinois, and
divested our theatrical transportation and wholesale news agency subsidiaries
along with the
“Clark Transfer” name. Since the acquisition of Magazine Shippers Association in
1991, all of the business’ growth has been organic. During this time, a new
umbrella corporation, CGI, was formed. CDS, HDS and CWT became subsidiaries of
CGI, out of which the business’ key divisions were
operated.
4
On
February 12, 2008, the predecessor (the Clark Group Inc.) was acquired by the
successor (Clark Holdings Inc.) as described above.
Industry
As a
transportation management and logistics services company whose core business is
the shipment of mass market consumer magazines, our business is a part of the
general transportation and logistics industry and is heavily affected by the
print media industry in general and the magazine segment of that industry
specifically. We believe our ability to provide a wide range of cost-effective
transportation and logistics solutions is a competitive advantage within the
print media industry as publishers and printers focus on their core
competencies, which often do not include freight transportation.
We
operate in a highly fragmented specialty market. We believe that this market
continues to grow based on a series of factors, including the growth of world
trade and the resulting complexity and length of supply chains; increased
outsourcing of manufacturers’ and retailers’ non-core operations, as they
increasingly focus on core competencies; and demand for specialized, value added
services which require logistics providers to tailor solutions to fit specific
client needs. Companies within this industry compete on the basis of pricing,
quality of service and customer relationships.
Key
Strengths
Management
believes that our most significant strengths include:
Niche Provider of Mission-Critical Supply Chain Solutions to the Print Media Industry. Our broad
portfolio of transportation management and logistics solutions, extensive
expertise with print media supply chains, nationwide presence and longstanding
customer relationships have contributed to our position as a niche provider of
third-party transportation and logistics services to the print media
industry.
Broad Portfolio of Third-Party Transportation and Logistics Services. We provide an
extensive range of transportation management and logistics services and
technology solutions including shipment optimization, load consolidation, mode
selection, carrier management, load planning and execution and web-based
shipment visibility. Management believes its ability to provide a wide range of
transportation and logistics solutions is a competitive advantage within the
print media industry.
Enduring Customer Relationships.
Management believes that we have developed into a trusted service provider to
the print media industry. Our customer base is highlighted by long-term
relationships where we play an integral role in customers’ distribution chains.
This role comprises much more than transportation, and often includes
specialized services such as time-definite deliveries, unlocking and securing
customers’ warehouses and “on the dock” freight movements. These value-added
services have entrenched us in our customers’ distribution chains and created a
high level of customer loyalty. Our top ten customers for 2009 have an average
tenure with us of 15 years and nine of the top ten have been a customer for at
least five years. Our top fifteen customers for 2009 have an average
tenure with us of 14 years of which twelve have been a customer for at least
five years.
Non-Asset Based Business Model. As a
non-asset based company, we maintain no print media inventory and rely
extensively on third-party or leased assets for transportation (ground, air and
ocean). Without substantial ownership of assets, we enjoy a highly variable cost
structure where a majority of our expenses fluctuate with business volumes.
While this model subjects us to unit and other cost increases by suppliers in
connection with such items as increased fuel costs and driver wages, we have
historically been successful in passing such increased costs to our customers
through increases in our service rates. Additionally, our management believes
that this highly variable cost structure permits us to better align our costs
with our revenues. We have also been able to address the risks associated with
the availability of third party services providers and access to required
quantities and quality of leased equipment by establishing long-standing
relationships with respected third party
vendors and being a provider of a significant source of business to those
vendors, and with respect to leased assets, entering into leases with favorable
and flexible terms. Management believes its successful mitigation of the risks
associated with a non-asset model has allowed us to achieve the benefit of
minimal capital expenditures, consistent cash flow and high returns on capital.
Management further believes this structure also provides us with the necessary
level of financial and operational flexibility to quickly adapt to changing
market conditions and capitalize on growth
opportunities.
5
Visible and Consistent Revenue. The
print media industry has proven to be a relatively stable component of the
United States economy, resulting in historically consistent demand for our
services. The newsstand distribution channel, in which we play a critical role,
is vital to the publishing industry in driving subscriptions and launching new
titles. Our loyal customer base and the predictability of our customers’ freight
patterns aid us in evaluating future operational and financial performance. The
visibility also plays an important role in management’s planning efforts,
including employee/asset deployment, capital expenditures and growth
initiatives.
Experienced Management
Team. With approximately 200 years of combined
experience at the company, our senior managers make up one of the channel’s most
established and experienced management teams. This experience has played a
critical role in our ability to maintain long-term customer relationships and
become entrenched in customers’ distribution chains.
Operations
We
conduct our domestic operations through our wholly-owned subsidiaries, CDS and
HDS, and our international operations through our wholly-owned subsidiary, CWT.
On a day-to-day basis, customers communicate their freight needs, typically on a
shipment-by-shipment basis, to one of our transportation offices/distribution
centers for dissemination to our operating companies for upload into the
respective systems each company utilizes to meet the specific requirements of
its customer base. Our employees ensure that all appropriate information about
each shipment is entered into our proprietary operating system. With the help of
information provided by the operating system, our employees then determine the
appropriate mode of transportation for the shipment and select a carrier or
carriers, based upon their knowledge of the carrier’s service capability,
equipment availability, freight rates, and other relevant factors. Many of these
activities are routine and recurring reflecting the scheduled frequency (e.g.,
weekly, monthly, quarterly) of magazine publications.
Domestic
Nationwide Distribution Services
Through
CDS, we provide domestic newsstand magazine distribution services throughout
North America. Essentially, CDS operates a “hub-and-spoke” network of operating
centers and professional traffic management services, which provide publishers
and printers with the benefits of scheduled delivery and reduced cost by
shipping in a consolidated weekly pool managed by CDS. Services provided include
pick-up at printing plants; break-bulk and sorting of individual wholesaler
orders by title; consolidation of multiple titles to common wholesaler delivery
points; and preparation of manifests, advance shipping notices and completion of
shipment notifications to national distributors. On average, CDS delivers
over 35 million magazines and books per week from over 90 print locations to
wholesalers across North America.
CDS
serves as a link between magazine printers/publishers and wholesalers, whose
responsibilities include distributing magazines to retailers for public
consumption. In this role, CDS is responsible for all aspects of distribution,
including shipment pickup, consolidation and final delivery to wholesalers. CDS’
freight flow is similar to the “hub-and-spoke” networks utilized in the airline
or less-than-truckload industries. Low volume shipments will be directed to one
of the six operating centers (Laflin, PA; LaVergne, TN; York, PA; Woodridge, IL;
Carrollton, TX; and Kansas City, MO) where they are consolidated and pooled with
other shipments destined for the same wholesaler. High volume shipments will
bypass the distribution center and be delivered directly to the
wholesaler. CDS’ disbribution centers are operated by HDS.
CDS
contracts with third-party transportation providers for approximately 75% of its
transportation moves. With a third-party carrier base of approximately 600,
CDS can ensure that its customers receive the appropriate balance between
service levels and transportation costs that each circumstance requires. In the
other 25% of
transportation moves, CDS utilizes the services of HDS. Although CDS’ business
model is heavily focused on the use of third-party assets and theoretically
could operate with 100% non-affiliated carriers, HDS plays an important role in
CDS’ network. CDS utilizes HDS dedicated fleet managed by a third party
carrier. As described below, in predictable, high density lanes, where
service standards are very demanding.
6
Domestic
Regional Disbrtbution Services
Through
HDS, we provide time-critical ground-based transportation services to the print
media industry. Our services include the transportation of specialized media
products such as magazines, mass market books, newspaper inserts, drop ship
mail, and motion picture film. HDS’ network includes the management of six
distribution centers and relationships with approximately 600 third-party
transportation providers through CDS. In addition, HDS has an agreement
with a large third party carrier to provide dedicated motor carrier services to
HDS for the transportation of goods. Under the Agreement, the third party
carrier manages the fleet of 40 company-leased tractors and 76
company-leased and 18 company-owned trailers that was previously operated by the
Company through its subsidiary, Evergreen Express Lines, Inc. (“EXL”), and uses
this fleet in providing the dedicated motor carrier services. As the
tractors and trailers in this fleet are removed from service, the third party
carrier will provide its own equipment. Approximately 40% of HDS’
transportation is hauled by the dedicated fleet managed by the third party
carrier and the remaining 60% is hauled by other third parties.
HDS’ core
business is providing traditional “break-up” services for printers and
publishers in regions surrounding the six distribution centers. The break-up
service is similar to a regional LTL (less-than-truckload) service, where
freight is picked up from a customer, transported to one of the HDS distribution
centers, pooled with other shipments headed in similar proximities and sent to
final destinations. Through the six distribution centers that it manages, HDS
provides break-up services in selected lanes throughout New England,
Mid-Atlantic, Midwest, Rocky Mountain, Southwest and Southeast regions of the
United States.
International
Freight Forwarding
Through
CWT, we offer consolidation and import/export transportation management and
logistics services to print media publishers, distributors and to their
respective import partners worldwide. With an operating model similar to
that of a traditional freight forwarder, CWT utilizes four distribution
centers to consolidate shipments and arrange for international transportation
utilizing third-party carriers (air, ocean or ground). CWT’s geographic
footprint encompasses the majority of the economically developed and
English-speaking overseas markets.
CWT’s
primary functions are break-bulk and sortation of hundreds of individual titles
and then consolidation into single consignee specific shipments, with us
providing commercial invoices and detailed packing list as an agent for the
export distributors. Once the sortation and assembly process is completed, CWT
then takes on the role of an international freight forwarder – scheduling and
booking freight with air and ocean carriers to ship to the import wholesalers
who then effect retail distribution in the local marketplace they serve.
Consolidation activities take place at one of its three distribution centers
strategically located near international freight gateways (Wayne, NJ;
Wilmington, CA; Atlanta, Georgia and Laredo, Texas). CWT relies on a
group of 60 air, ocean and ground freight carriers for transportation, with
approximately 75% of its shipments traveling via ocean carriers, 15% via air
carriers and 10% via trucks to Mexico.
In a
typical transaction, CWT is hired by an export distributor or directly by the
publisher to facilitate the transportation of its product to a foreign
distributor or wholesaler. The customer is responsible for transporting the
shipment to a CWT distribution center. The U.S. inland transport to CWT is
handled by the printers – or CDS for those publishers CDS ships in North America
– in bulk. CWT is responsible for providing break-bulk of the several hundred
magazine titles per data supplied electronically in advance and uploaded into
CWT’s information technology system and then CWT consolidates the multiple
individual titles into one bulk order packed by consignee for shipment (usually
weekly) via air and or ocean. At the distribution center, CWT employees pool the
customer’s shipments with other shipments headed to similar locations. Once load
space has been maximized, CWT arranges for the international movement of the
consolidated load.
Customers
We are
organized along three divisions that address the individual needs of our
customers. The customers of CDS consist primarily of publishers and printers
that have smaller quantities and require national distribution. HDS focuses
primarily on publishers and printers with regional distribution needs. CWT
focuses entirely on publishers and printers that require international
distribution (and international import distributors of this product that need a
U.S. consolidation and forwarding company).
7
Our
customers share several key common attributes. Customers’ product shares common
beginning and end points within the single copy distribution channel. Product is
printed by common printers and is distributed into the retail marketplace
through common single copy distributors. An individual customer’s product
destined for a distributor will be less-than-truckload quantities. As
such, we add value through aggregation and consolidation. Pools of
less-than-truckload quantities are consolidated so that full truck load
economies of scale are realized. Also, customer product is published with
targeted time periods in which it will be displayed at retail. Our established
routines ensure that these timelines are met in a cost effective
manner.
Customer
Relationships
We have
written service contracts with a select group of our major customers. In most
cases, and in particular with customers with whom we have a longstanding
relationship and dependable track record, we provide services based on an email
quotation or oral agreement.
In
general, CDS offers single blended rates based on exclusive distribution
throughout the entire United States and Canada; HDS offers point to point rates
within a defined geographic region; and CWT offers point to point rates
dependent upon mode of transport (air or ocean). Pricing is determined based
upon costing analysis for titles with similar distribution characteristics in
our existing distribution costing model or based upon building a separate
costing model for larger distributions or those with unique requirements.
Often pricing is variable based upon the amount of tonnage tendered,
frequency of recurring shipments, location of pick-up, destination, product
density and carrier rates. Pricing also includes fuel surcharges, and for air
freight, security surcharges. In the cases where we have agreed to pay for
claims for damage to domestic freight while in transit, when appropriate we
pursue reimbursement from the carrier for the claims. In the international
business, we only insure specific consignee shipments against loss or damage
while in transit. These overseas c.i.f. (cost, insurance and freight) shipments
are insured by us, with such insurance coverage included as part of our service
rate to customers.
As a
result of our logistics capabilities, many of our domestic customers have us
handle all, or a substantial portion, of their freight transportation
requirements to or from a particular manufacturing facility or distribution
center, including final delivery of shipments to single copy wholesalers. Our
commitment to handle the shipments is usually at specific rates, subject to
weight variation, fuel surcharge, and on time availability of the customer’s
product. As is typical in the transportation industry, most of our customer
agreements do not include specific volume commitments or “must haul”
requirements.
In the
course of providing day-to-day transportation services, we often identify
opportunities for additional logistics services as we become more familiar with
our customer’s daily operations and the nuances of its supply chain. These
include analyzing the customer’s current transportation rate structures, modes
of shipping, and carrier selection. These services are bundled with underlying
transportation services and are not typically priced separately.
Relationships
with Transportation Providers
Because
we own relatively little transportation equipment and do not employ the people
directly involved with the delivery of customers’ freight, our relationships
with reliable transportation providers are critical to our success.
As of
January 2, 2010, we had qualified approximately 600 domestic and 60
international segment transportation providers worldwide, of which the vast
majority are motor carriers. Our transportation providers are of all sizes,
including owner-operators of single trucks, small and mid-size fleets, private
fleets and large national trucking companies. Consequently, we are not dependent
on any one carrier. Our motor carrier contracts require that the carrier issue
invoices only to and accept payment solely from us, and we reserve the right to
withhold payment to satisfy previous claims or shortages.
While we
generally contract with transportation providers on a short-term basis or in
connection with specific shipments, and most of our transportation services are
provided on a per mile basis, the majority of our purchased transportation is
priced by our carriers at prenegotiated rates, and at times can be affected by
the spot market, or on a transactional basis. It is our policy to maintain
relationships with numerous motor, air and ocean carriers with respect to
specific traffic lanes to reduce risk of availability
and keep pricing at a competitive level. We also have intermodal marketing
contacts with railroads, including all of the major North American railroads,
giving us access to additional trailers and containers. Intermodal
transportation rates are typically negotiated between us and railroad
consolidators and brokers.
8
In our
international business, we have contracts with most of the major ocean and air
carriers which support a variety of service and rate needs for our customers. We
negotiate annual contracts that establish the predetermined rates we agree to
pay our ocean carriers. Air carrier rates are generally reviewed biannually. The
rates are negotiated based on expected volumes from our customers, specific
trade lane requirements, and anticipated growth in the international shipping
marketplace. These contracts are sometimes amended during the year to reflect
changes in market conditions for our business, such as additional trade lanes.
While most of our air freight ships under negotiated tariffs with the airlines,
we also move freight under lower spot market rates when possible.
Competition
CDS is
the only independent transportation and logistics provider of newsstand magazine
distribution in the United States. Given the specialized nature of these
services within the overall transportation and logistics industry, CDS’ primary
competition is the “in-house” distribution arms of the large major printers,
such as R.R. Donnelley, Quad Graphics including Quad’s recently
announced acquisition of World Color (previously Quebecor World), who all
provide services that are similar to ours in servicing newsstand copies of
monthly, bi-monthly and annual magazine publications of large print runs. All of
these printers have substantially greater financial and other resources than us.
Large major printer transportation services, however, generally do not address
weekly publications and are generally based on a specific company’s
manufacturing schedules, are focused primarily on postal requirements, and are
responsive almost exclusively to publication manufacturing needs, thereby
limiting their ability to effectively compete with our specialized single copy
services. As a result, certain of these printing companies actually contract
with us for our services. HDS faces competition from a handful of
independent, regional ground-based transportation specialty service providers,
none of which have achieved a material market share. We typically see these
competitors in “backhaul” lanes where we are transporting general
freight.
CWT is
the largest participant in the domestic magazine export market. CWT is also a
major participant in the export of domestic books. Its major competitors include
a small number of other specialized book and magazine importers/exporters and,
on a smaller scale, large freight forwarders of general goods.
Both
domestically and internationally, we face potential competition from
participants in the overall freight forwarding, logistics and supply chain
management industries, and specifically from national truckload carriers,
intermodal transportation service providers, less-than-truckload carriers,
railroads and third-party broker carriers that have the worldwide capabilities
to provide a breadth of services. Competition in this industry is intense and
many carriers and service providers have substantially greater financial and
other resources than us. We also could encounter competition from regional and
local third-party logistics providers, integrated transportation companies that
operate their own aircraft, cargo sales agents and brokers, surface freight
forwarders and carriers, airlines, associations of shippers organized to
consolidate their members’ shipments to obtain lower freight rates, and
internet-based freight exchanges.
Generally,
we believe that companies in this overall industry must be able to provide their
clients with integrated supply chain solutions. Among the factors we believe are
impacting the logistics industry are the outsourcing of supply chain activities,
increased global trade and sourcing, increased demand for time definite delivery
of goods, and the need for advanced information technology systems that
facilitate real-time access to shipment data, client reporting and transaction
analysis. Furthermore, as supply chain management becomes more complicated, we
believe companies are increasingly seeking full service solutions from a single
or limited number of partners that are familiar with their requirements,
processes and procedures and that can provide services globally. Our ability to
compete within the industry is primarily based on service, efficiency and
freight rates, with advantages resulting from, among other things, our niche
focus, a global network of transportation providers and our expertise in
outsourced transportation and logistics services.
9
Although
the non-asset based nature of our business makes capital barriers to entry
minimal, we believe other barriers to entry are high, primarily due to (i) the
relatively small size of the specialized print media transportation management
and logistics services industry and the inability of the major printers,
logistics and supply chain management providers to provide the cost
efficiencies and service levels necessary to operate in this specialized space;
(ii) the importance of customer relationships; and (iii) with respect to smaller
printers and transportation and logistics firms, the large level of critical
mass necessary to operate profitably. Prospective competitors not only have to
possess the required warehouse facilities staffed with experienced personnel,
operated with highly tailored information systems and located strategically
accessible to printing facilities, but would also need to overcome our unique
position and entrenchment in the single copy distribution channel, our long
standing customer relations, and knowledge of single copy newsstand circulation
and distribution and our ability to be a sole-source provider of transportation
and logistics services. To compete effectively, a potential competitor must also
form freight pools of publications that profitably deliver product to single
copy distributors, satisfying the time requirements of the underlying
publications.
Technology
and Information Systems
Our
technology allows us to provide our customers with the tracking and tracing of
shipments throughout the transportation process, and, depending on customer
requirements, may include complete shipment history, estimated charges and
electronic bill presentment. We maintain different informational websites that
can only be accessed by approved customers and, depending on the specific design
and customer requirements, can provide them with tracking and tracing
information of shipments, ship dates, arrival dates, manifests, packing lists,
and proof of deliveries. In addition, certain customers are able to
electronically transmit their transportation requirements to us from their own
networks and systems. We continue to evaluate potential enhancements to our
systems to permit our customers to obtain this information timely, as well as
increase the use of electronic interchange between us and our customers, which
in many instances will require both the cooperation and enhancement of our
customer’s system capabilities. We plan to continue investing management and
financial resources to maintain and upgrade our information systems in an effort
to increase the volume of freight we can handle in our network, improve the
visibility of shipment information and reduce our operating costs. The ability
to provide accurate and timely information on the status of shipments is
increasingly important.
We also
use technology to improve terminal operations. Recently, we increased the use of
hand-held RF scanners in the distribution centers to improve the efficiency of
handling incoming and outgoing freight and freight moving within the
distribution centers, as well as the accuracy of the associated information
regarding the freight.
Equipment
We do not
own or lease significant equipment assets. Our transportation service
capacity is pimarily handled through our network of third-party carriers,
which permit less direct investment and greater operational
flexibility.
Employees
As of
January 2, 2010, we had 230 employees, with 8 executives, 7 employees in IT Systems,
7 employees in accounting/finance/customer service, 13 employees in sales, 1
employee in human resources, 28 employees in operations management, 33 employees
in operations, 51 employees in clerical, and 82 warehouse hourly
employees. We believe that our future success will depend, in part, on our
continued ability to attract, hire and retain qualified personnel. None of our
employees are represented by a labor union, and we believe that employee
relations are good.
On
September 2, 2009, the Company entered into an agreement with a
large third party carrier to provide dedicated motor carrier services
to the Company for transportation of the goods that were being delivered by EXL,
a wholly owned subsidiary of the Company. As a result of this agreement,
the Company does not employ any drivers.
Insurance
We
maintain insurance coverage for general and fleet liability, property (including
property of others), ocean and surface cargo liability, employment practices,
employee health and workers compensation. In addition, our vendors are required
to provide evidence of fleet liability, cargo liability, workers compensation,
and in some cases, flood insurance coverage in an amount we deem sufficient. All
claims are administered by third party administrators, with the exception of
overage, shortage and damage claims that are made that are below our deductible
limits.
10
For all
insurance policies, except for medical and workers’ compensation, we are insured
with policies that have standard deductible limits. For medical and
workers’ compensation insurance, we are partially self-insured, with medical
capped at a $40,000 limit per claim and workers’ compensation capped at a
$225,000 limit per claim. Effective October 1, 2010, in conjunction with
the out sourcing of its fleet to a third party carrier, the Company changed its
workers compensation plan to a fixed premium plan. We believe that
the types of coverage, deductibles, reserves and limits on liability that are
currently in place are adequate.
Other
than with respect to health and workers’ compensation insurance, we have
reserved no material claim amounts in our financial statements and we have
experienced no material uninsured claims during the periods covered by our
financial statements. Our exposure to liability associated with accidents
incurred by other third party capacity providers who transport freight on behalf
of us is reduced by various factors including the extent to which they maintain
their own insurance coverage. A material increase in the frequency or severity
of accidents, cargo or workers’ compensation claims or the unfavorable
development of existing claims could be expected to materially adversely affect
our results of operations.
Government
Regulation
We, along
with the third-party carriers that handle the physical transportation of its
customers’ shipments, are subject to a variety of federal and state safety and
environmental regulations. Historically, compliance with the regulations
governing licensees in the areas in which we operate has not had a materially
adverse effect on our operations or financial condition.
Our
operations, as well as those of many of the third party transportation and other
service providers used by us, are subject to federal, state and local laws and
regulations in the Unites States pertaining to their business, including those
primarily related to safety and promulgated or administered by the Department of
Transportation (“DOT”), the Transportation Safety Administration (“TSA”) and the
Occupational Safety and Health Administration (“OSHA”).
We are
subject to licensing and regulation as a transportation broker and freight
forwarder and are re-licensed by the DOT to arrange for the transportation
of property by motor vehicle. The DOT prescribes qualifications for acting in
this capacity. We are subject to DOT regulations related to vehicular operating
safety which regulate, among other things, driver’s hours of service and require
us to maintain driver’s logs, driver’s information files and vehicle inspections
reports, conduct scheduled preventative vehicle maintenance, perform random
driver drug and alcohol tests, record and report motor vehicle accidents, and
maintain current vehicle registrations. Under certain circumstances, we provide
motor carrier transportation services that require registration with the DOT and
compliance with certain economic regulations administered by the DOT, including
a requirement to maintain insurance coverage in minimum prescribed
amounts.
We are
also subject to regulation by the Federal Maritime Commission as an ocean
freight forwarder for which we maintain a separate bond and license. Clark
Worldwide Transportation is registered with the TSA as an Indirect Air Carrier
(“IAC”) and is subject to regulation by the DOT, Federal Aviation Administration
and by the TSA. We operate within and according to such regulations which are
intended to ensure that the cargo presented to airlines for carriage is safe.
Among other things, we are required to comply with security requirements,
maintain the confidentiality of certain security information and procedures and
designate and use a security coordinator.
We are
also subject to a variety of federal and state safety and environmental
regulations, including certain OSHA regulations. We are subject to various OSHA
regulations that primarily deal with maintaining a safe workplace environment.
OSHA regulations require us, among other things, to maintain documentation of
work related injuries, illnesses and fatalities and files for recordable events,
complete workers’ compensation loss reports and review the status of outstanding
worker compensation claims, and complete certain annual filings and
postings.
Although
Congress enacted legislation in 1994 that substantially preempts the authority
of states to exercise economic regulation of motor carriers and brokers of
freight, some shipments for which we arrange transportation may be subject to
licensing, registration or permit requirements in certain states. We generally
rely on the carrier transporting the shipment to ensure compliance with these
types of requirements.
Recent
Events
Impairment
to Other Intangibles
Intangibles
assets with an indefinite life (i.e., trade names) were evaluated for impairment
at January 2, 2010, by management in accordance with FASB Topic ASC 350,
using the “relief from royalty” method. This evaluation resulted in
a $0.406 million impairment charge for the 52 weeks ended January 2, 2010,
which was included in the “impairment of goodwill and intangible assets” line
item in the consolidated statements of operations.
Due to
the continuing adverse economic impact on the Company’s market capitalization
along with the operating losses incurred during 2009, management evaluated
intangibles and fixed assets with definite lives for impairment as of January 2,
2010, in accordance with FASB Topic ASC
360. Management’s projections of undiscounted future cash
flows did not exceed the carrying amount of
the non-complete agreements, which resulted in $0.671 million impairment charge
which was included in the “impairment of goodwill and intangible assets” line
item in the consolidated statements of operations. However, Management’s
projections of undiscounted future cash flows exceeded the carrying amount of
the customer relationships identifiable intangible asset, which resulted in no
charge for impairment. It was determines that there was no impairment to
fixed assets.
The
impairment charge is included in the statement of operations for the year ended
January 2, 2010 and is summarized as follows:
Impairment
|
January 2, 2010
|
|||
Trade
names
|
406,000 | |||
Non-compete
agreements
|
671,000 | |||
Total
|
$ | 1,077,000 |
Credit
Facility with Cole Taylor Bank
On March
5, 2010, we entered into a credit and security agreement (“Credit Agreement”)
with Cole Taylor Bank (“Cole Taylor”). The Credit Agreement provides for a
revolving credit facility (“Facility”) of up to $6,000,000, with a $1,000,000
sublimit for letters of credit. Under the terms of the Credit
Agreement:
|
·
|
The
Company may borrow up to the lesser of (i) $6,000,000 and (ii) an amount
derived from the Company’s accounts receivable less certain specified
reserves. If the outstanding loans under the Facility at any time
exceed this amount, the Company must repay the
excess.
|
|
·
|
The
loans under the Facility (i) accrue interest at 2% over the prime rate for
borrowings based on the prime rate or at 4.5% over LIBOR for borrowings
based on LIBOR, with a floor of 6% in either case; (ii) mature on March 5,
2013; and (iii) are secured by substantially all of the Company’s
assets.
|
|
·
|
The
Company must comply with certain affirmative and negative covenants
customary for a credit facility of this type, including limitations on
liens, debt, mergers, consolidations, sales of assets, investments and
dividends.
|
|
·
|
The
Company may not permit its fixed charge coverage (as defined in the Credit
Agreement) to be less than 1.05:1.
|
Simultaneously
with entering into the Credit Agreement, the Company terminated its credit
agreement, dated as of February 12, 2008, with Bank of America, N.A.
(“BOA”). The Company made an initial draw under the new Facility, using a
portion of the proceeds , in combination with available cash, to repay the
balance of its then-outstanding loans from BOA.
Settlement
of Escrow Claim
On
December 31, 2009, the Company settled all of its claims for indemnification
under the SPA, as more fully described under Item 3. Pursuant to the
settlement agreement, among other things, approximately $1,286,000 of the funds
held in the Indemnification Escrow were released to the Company and the
remainder was released to the Sellers. The settlement agreement is more
fully described under Item 3.
11
ITEM 1A.
RISK FACTORS
In
addition to other information included in this report, the following factors
should be considered in evaluating our business and future
prospects.
Risks
Associated With Our Business
We
are subject to DOT, TSA, OSHA and other pertinent regulations and laws in the
United States that could cause us to incur significant compliance expenditures
and liability for noncompliance.
Our
operations are subject to federal, state and local laws and regulations in the
Unites States pertaining to our business, including those primarily related to
safety and promulgated or administered by the DOT, the TSA and OSHA.
Specifically, we are subject to the DOT regulations related to vehicular
operating safety which regulate, among other things, driver’s hours of service
and require us to maintain driver’s logs, driver’s information files and vehicle
inspections reports, conduct scheduled preventative vehicle maintenance, perform
random driver drug and alcohol tests, record and report motor vehicle accidents,
and maintain current vehicle registrations. In addition, our subsidiary, Clark
Worldwide Transportation, Inc. (“CWT”), is registered with the TSA as an IAC and
operates within and according to its regulations which are intended to ensure
that the cargo presented to airlines for carriage is safe. Among other things,
we are required to comply with security requirements, maintain the
confidentiality of certain security information and procedures and designate and
use a security coordinator. We are also subject to various OSHA regulations that
primarily deal with maintaining a safe workplace environment. OSHA regulations
require us, among other things, to maintain documentation of work related
injuries, illnesses and fatalities and files for recordable events, complete
workers’ compensation loss reports and review the status of outstanding worker
compensation claims, and complete certain annual filings and postings. We may be
involved from time to time in administrative and judicial proceedings and
investigation with these United States governmental agencies, including
inspections and audits by the applicable agencies related to our compliance with
these rules and regulations.
To date,
our compliance with these and other applicable regulations has not had a
material effect on its results of operations or financial condition. Our
failure, however, to comply with these and other applicable requirements in the
future could result in fines and penalties to us and require us to undertake
certain remedial actions or be subject to a suspension of our business, which,
if significant, could materially adversely effect our business or results of
operations. Moreover, our mere involvement in any audits and investigations or
other proceedings could result in substantial financial cost to us and divert
our management’s attention. Likewise, the failure by our third party service
providers to comply with applicable regulations which results in increased costs
of the services they provide to us or results in a disruption to their business
and ability to provide services to us could have a materially adverse effect on
us. Additionally, future events, such as changes in existing laws and
regulations, new laws or regulations or the discovery of conditions not
currently known to us, may give rise to additional compliance or remedial costs
that could be material.
We
depend on key personnel and we may not be able to operate and grow our business
effectively if we lose the services of any of our key personnel or are unable to
attract qualified personnel in the future.
We are
dependent upon the efforts of our key personnel and our ability to retain them
and hire other qualified employees. The loss of key personnel could affect our
ability to run our business effectively. Competition for senior management
personnel is intense and we may not be able to retain our personnel even though
we have entered into employment agreements with certain of them. The loss of any
key personnel requires the remaining key personnel to divert immediate and
substantial attention to seeking a replacement. An inability to find a suitable
replacement for any departing executive officer on a timely basis could
adversely affect our ability to operate and grow our business. Management and
execution of key operations related to supply chain solutions also requires
skilled and experienced employees. A shortage of such employees, or our
inability to retain such employees, could have an adverse impact on our
productivity and costs, our ability to expand, develop and distribute new
products and our entry into new markets.
Demand
for our services may decrease during economic recession.
12
The
transportation industry historically has experienced cyclical fluctuations in
financial results due to economic recession, downturns in business cycles of our
customers, fuel shortages, price increases by carriers, interest rate
fluctuations, and other economic factors beyond our control. Carriers can be
expected to charge higher prices to cover higher operating expenses, and our
gross profits and income from operations may decrease if we are unable to pass
through to our customers the full amount of higher transportation costs.
Furthermore, many of our customers’ business models are dependent on
expenditures by advertisers. These expenditures tend to be cyclical, reflecting
general economic conditions, as well as budgeting and buying patterns. If
economic recession or a downturn in our customers’ business cycles causes a
reduction in the volume of freight shipped by those customers, particularly to
the single copy distribution channel, our operating results could also be
adversely affected.
We
depend upon others to provide equipment and services.
We do not
own or control the vast majority of transportation assets that deliver our
customers’ freight. We control a limited number of trucks for dedicated customer
and company service through a dedicated fleet that is managed by a
large third party carrier. For the majority of our transportation needs we
do not employ the people directly involved in delivering freight. We are
dependent on independent third parties to provide most truck and all rail, ocean
and air services and to report certain events to us including delivery
information and freight claims. This reliance could cause delays in reporting
certain events, including recognizing revenue, expenses and claims. If we are
unable to secure sufficient equipment or other transportation services to meet
our commitments to our customers, our operating results could be materially and
adversely affected, and our customers could switch to our competitors
temporarily or permanently. Many of these risks are beyond our control
including:
|
·
|
equipment
shortages in the transportation industry, particularly among truckload
carriers,
|
|
·
|
interruptions
in service or stoppages in transportation as a result of labor
disputes,
|
|
·
|
changes
in regulations impacting transportation,
and
|
|
·
|
unanticipated
changes in transportation rates.
|
Our
business and results of operations could also be adversely affected by work
stoppages and other disruptive organized labor activities by those third party
truck, rail, ocean and air equipment and service providers that are unionized.
While we do not have definitive information as to the extent the carriers
servicing our domestic operations are unionized, we believe that a small
minority of such carriers we use are unionized. While we also do not have
definitive information as to the extent the carriers servicing our international
operations are unionized, and while we are unaware of any specific business
relationships involving unionized carriers, we expect that certain of these
international carriers are also unionized. These unionized international
carriers would be predominately carriers that transport our freight in
international markets between their facilities, airports and piers. It is also
generally known that stevedores, who may handle some of our ocean cargo
shipments, are often unionized. Furthermore, there are significant numbers of
unionized personnel working at air carriers which handle a portion of our
international business. These include, but are not limited to, airline pilots,
ground handlers and flight attendants.
To date,
we have not been materially adversely affected by the activities of organized
labor domestically or internationally with respect to any third party service
providers. The risk exists, however, that we could lose business in the event of
any significant work stoppage or slowdown with one or more of our domestic or
international carriers and that such a loss could materially adversely affect
our results of operation and financial condition. Rates for both domestic and
international transportation services are negotiated with individual carriers
only and not with union representatives.
Our
non-asset based transportation management, North American and international
freight forwarding and trucking businesses are subject to a number of factors
that are largely beyond our control, any of which could have a material adverse
effect on our results of operations.
These
businesses could be materially adversely affected by numerous risks beyond our
control including:
|
·
|
potential
liability to third parties and clients as a result of accidents involving
our employees, independent contractors or third party
carriers,
|
|
·
|
increased
insurance premiums, the unavailability of adequate insurance coverage, or
the solvency of our current insurance
providers,
|
13
|
·
|
recruitment
and retention of agents and
affiliates,
|
|
·
|
adverse
weather and natural disasters,
|
|
·
|
changes
in fuel taxes,
|
|
·
|
the
ability to effectively pass through fuel cost increases to our clients
through commonly accepted fuel
surcharges,
|
|
·
|
potentially
adverse effects from federal standards for new engine emissions,
and
|
|
·
|
a
carrier’s failure to deliver freight pursuant to client
requirements.
|
If any of
these risks or others occur, then our business and results of operations would
be adversely impacted.
We
face intense competition in the freight forwarding, logistics, domestic ground
transportation and supply chain management industry.
In
addition to competition from “in-house” distribution arms of large major
printers, we face competition from participants in the freight forwarding,
logistics, domestic ground transportation and supply chain management industry.
We believe this industry is intensely competitive and expect it to remain so for
the foreseeable future. We face competition from a number of companies,
including many that have significantly greater financial, technical and
marketing resources. There are a large number of companies competing in one or
more segments of the industry. We could also encounter competition from regional
and local third-party logistics providers, freight forwarders and integrated
transportation companies. Depending on the location of the client and the scope
of services requested, we might compete against truck brokerage niche players,
smaller printers, trucking companies, and larger competitors. In addition, in
some instances clients increasingly are turning to competitive bidding
situations involving bids from a number of competitors, including competitors
that are larger than us. We also face competition from air and ocean carriers,
consulting firms and contract manufacturers, many of which are beginning to
expand the scope of their operations to include supply chain related services.
Increased competition could result in reduced revenues, reduced margins or loss
of market share, any of which could damage our results of operations and the
long-term or short-term prospects of our business.
Our
industry is consolidating and if we cannot gain sufficient market presence in
our industry, we may not be able to compete successfully against larger, global
companies in our industry.
There
currently is a marked trend within our industry toward consolidation of niche
players into larger companies which are attempting to increase their global
operations through the acquisition of freight forwarders and contract logistics
providers. If we cannot maintain sufficient market presence in our industry
through internal expansion and additional acquisitions, we may not be able to
compete successfully against larger, global companies in its
industry.
If
we fail to develop and integrate information technology systems or we fail to
upgrade or replace our information technology systems to handle increased
volumes and levels of complexity, meet the demands of our clients and protect
against disruptions of our operations, we may lose inventory items, orders or
clients, which could seriously harm our business.
Our
continued success is dependent on our systems continuing to operate and to meet
the changing needs of our customers. Increasingly, we compete for clients based
upon the flexibility, sophistication and security of the information technology
systems supporting our services. The failure of the hardware or software that
supports our information technology systems, the loss of data contained in the
systems, or the inability to access or interact with our web site or connect
electronically, could significantly disrupt our operations, prevent clients from
placing orders, or cause us to lose inventory items, orders or clients. If our
information technology systems are unable to handle additional volume for our
operations as our business and scope of services grow, our service levels,
operating efficiency and future transaction volumes will decline. In addition,
we expect clients to continue to demand more sophisticated, fully integrated
information technology systems from their supply chain services
providers.
We have
internally developed the majority of our operating systems. We are reliant on
our technology staff to successfully implement changes to our operating systems
in an efficient manner. If we fail to hire or retain qualified persons to
implement, maintain and protect our information technology systems or we fail to
upgrade or replace our information technology
systems to handle increased volumes and levels of complexity, meet the demands
of our clients and protect against disruptions of our operations, we may lose
inventory items, orders or clients, which could seriously harm our
business.
14
Our
information technology systems are subject to risks which we cannot
control.
Our
information technology systems are dependent upon global communications
providers, web browsers, telephone systems and other aspects of the Internet
infrastructure which have experienced significant system failures and electrical
outages in the past. Our systems are susceptible to outages due to fire, floods,
power loss, telecommunications failures and similar events. Despite our
implementation of network security measures, our servers are vulnerable to
computer viruses, unauthorized access with malicious intent and similar
intrusions. The occurrence of any of these events could disrupt or damage our
information technology systems and inhibit our internal operations, our ability
to provide services to our clients or the ability of our clients to access our
information technology systems, or result in the loss or theft of
mission-critical information.
Our
business could be adversely affected by heightened security measures, actual or
threatened terrorist attacks, efforts to combat terrorism, military action
against a foreign state or other similar event.
We cannot
predict the effects on our business of heightened security measures, actual or
threatened terrorist attacks, efforts to combat terrorism, military action
against a foreign state or other similar events. It is possible that one or more
of these events could be directed at U.S. or foreign ports, borders, railroads
or highways. Heightened security measures or other events are likely to slow the
movement of freight through U.S. or foreign ports, across borders or on U.S. or
foreign railroads or highways and could adversely affect our business and
results of operations.
Any of
these events could also negatively affect the economy and consumer confidence,
which could cause a downturn in the transportation industry. In addition,
advertising expenditures by companies in certain sectors of the economy,
including the automotive, financial and pharmaceutical industries, represent a
significant portion of our customers’ advertising revenues. If any of these
events cause a significant reduction in the advertising spending in these
sectors, it could adversely affect our customers’ advertising revenues and, by
extension, our revenues.
Our
customers face significant competition for advertising and
circulation.
Our
customers face significant competition from several direct competitors and other
media, including the Internet. Our customers’ magazine operations compete for
circulation and audience with numerous other magazine publishers and other
media.
Our customers could face increased
costs and business disruption resulting from instability in the newsstand
distribution channel.
Our
customers operate within a national distribution business that relies on
wholesalers to distribute magazines published by customer publishers and other
publishers to newsstands and other retail outlets. Due to industry
consolidation, three wholesalers represent approximately 90% of the
wholesale magazine distribution business. There is a possibility of further
consolidation among these wholesalers and/or insolvency of one or more of these
wholesalers. Should such further consolidation occur, the number of locations to
which we transport product could be reduced. Fewer destination points could
reduce the need for our services or adversely affect our pricing to our
customers. While insolvency of a wholesaler would not be expected to adversely
affect our cash flow since we generally do not invoice wholesalers, such
insolvency would, however, adversely affect our customer publishers’ cash flows
and could impede the flow of product through the wholesale distribution channel.
A disruption in the wholesale channel due to wholesaler insolvency or any other
reason could adversely affect our customers’ ability to distribute magazines to
the retail market place and adversely affect our business and results of
operation.
Risks
Associated With Our Organization and Capital Structure
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our
internal controls over financial reporting and, starting in our current fiscal
year, an independent registered public accounting firm must report on our
assessment as to the effectiveness of internal controls over financial
reporting. Our assessment, and that of our accounting firm, is that our internal
controls over financial reporting need improvement.
15
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to document and test the
effectiveness of our internal controls over financial reporting in accordance
with an established internal control framework and to report on our conclusion
as to the effectiveness of our internal controls. Starting in our current fiscal
year, it will also require an independent registered public accounting firm to
test our internal controls over financial reporting and report on the
effectiveness of such controls. For the fiscal year ended January 2, 2010,
management performed its assessment of our internal controls over financial
reporting and reported on the effectiveness of such controls, which report is
set forth in Item 9A. Management’s assessment of material weaknesses in
our internal controls over financial reporting relates primarily to inadequate
or ineffective information technology system control processes. The Company has
devoted resources to assess, and has and will continue to take steps to
remediate, these material weaknesses.
Voting
control by our executive officers and directors may limit your ability to
influence the outcome of director elections and other matters requiring
stockholder approval.
Our
officers and directors collectively own approximately 24.2% of our voting stock.
Accordingly, they will be able to control the election of directors and,
therefore, our policies and direction. This concentration of ownership and
voting agreement could have the effect of delaying or preventing a change in our
control or discouraging a potential acquirer from attempting to obtain control
of us, which in turn could have a material adverse effect on the market price of
our common stock or prevent our stockholders from realizing a premium over the
market price for their shares of common stock.
If
the NYSE Amex delists our securities from quotation on its exchange
investors’ ability to make transactions in our securities could be limited and
subject us to additional trading restrictions.
Our
securities are listed on the NYSE Amex. We cannot assure you that our securities
will continue to be listed on the NYSE Amex in the future. If the NYSE
Amex delists our securities from trading on its exchange, we could face
significant material adverse consequences including:
|
·
|
a
limited availability of market quotations for our
securities;
|
|
·
|
a
determination that our common stock is a “penny stock” which will require
brokers trading in our common stock to adhere to more stringent rules and
possibly resulting in a reduced level of trading activity in the secondary
trading market for our common
stock;
|
|
·
|
a
limited amount of news and analyst coverage for our company;
and
|
|
·
|
a
decreased ability to issue additional securities or obtain additional
financing in the future.
|
An
effective registration statement may not be in place when an investor desires to
exercise warrants for our common stock, thus precluding such investor from being
able to exercise his, her or its warrants and causing such warrants to be
practically worthless.
None of
our outstanding warrants will be exercisable and we will not be obligated to
issue shares of common stock unless at the time a holder seeks to exercise such
warrant, a prospectus relating to the common stock issuable upon exercise of the
warrant is current and the common stock has been registered or qualified or
deemed to be exempt under the securities laws of the state of residence of the
holder of the warrants. Under the terms of our warrant agreement, we have agreed
to use our best efforts to meet these conditions and to maintain a current
prospectus relating to the common stock issuable upon exercise of the warrants
until the expiration of the warrants. However, we cannot assure you that we will
be able to do so, and if we do not maintain a current prospectus related to the
common stock issuable upon exercise of the warrants, holders will be unable to
exercise their warrants and we will not be required to settle any such warrant
exercise. If the prospectus relating to the common stock issuable upon the
exercise of the warrants is not current or if the common stock is not qualified
or exempt from qualification in the jurisdictions in which the holders of the
warrants reside, the warrants may have no value, the market for the warrants may
be limited and the warrants may expire worthless.
The
warrant agreement governing our warrants permits us to redeem the warrants and
it is possible that we could redeem the warrants at a time that is
disadvantageous to our warrant holders or at a time when a prospectus has not
been current, resulting in the warrant holder receiving less than fair value of
the warrant or the underlying common stock.
16
Under the
warrant agreement governing our outstanding warrants, we have the right to
redeem outstanding warrants, at any time prior to their expiration, at the price
of $0.01 per warrant, provided that the last sales price of our common stock has
been at least $11.50 per share on each of the 20 trading days within any 30
trading day period ending on the third business day prior to the date on which
notice of redemption is given. The warrant agreement does not require, as a
condition to giving notice of redemption, that we have in effect – during either
the redemption measurement period or at the date of notice of redemption – a
current prospectus relating to the common stock issuable upon exercise of our
warrants. Thus, it is possible that we could issue a notice of redemption of the
warrants following a time when holders of our warrants have been unable to
exercise their warrants and thereafter immediately resell the underlying common
stock under a current prospectus. Under such circumstances, rather than face
redemption at a nominal price per warrant, warrant holders could be forced to
sell the warrants or the underlying common stock for less than fair
value.
Furthermore,
redemption of the warrants could force the warrant holders (i) to exercise the
warrants and pay the exercise price at a time when it may be disadvantageous for
the holders to do so, (ii) to sell the warrants at the then current market price
when they might otherwise wish to hold the warrants, or (iii) to accept the
nominal redemption price which, at the time the warrants are called for
redemption, is likely to be substantially less than the market value of the
warrants. We expect most warrant holders hold their securities through one or
more intermediaries and consequently warrant holders are unlikely to receive
notice directly from us that the warrants are being redeemed. If you fail to
receive notice of redemption from a third party and your warrants are redeemed
for nominal value, you will not have recourse to the Company.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item 2.
Property
Since the
Acquisition, our corporate headquarters have been located at 121 New York
Avenue, Trenton, New Jersey. This facility is the only facility that we
own. The following is a list of the facilities in which we
operate:
17
Location
|
Operation
|
Approximate
Square Footage
|
Lease Expiration
|
||||
Owned
Facilities
|
|||||||
Trenton,
NJ
|
Headquarters
|
11,200
|
Owned
|
||||
Leased
Facilities
|
|||||||
CDS:
|
|||||||
Mechanicsburg,
PA
|
CDS
Administration
|
6,517
|
March
31, 2013
|
||||
HDS:
|
|||||||
Carrollton,
TX
|
HDS
Distribution Center
|
28,770
|
December
31, 2010
|
||||
Kansas
City, MO
|
HDS
Distribution Center
|
60,100
|
December
31, 2010
|
||||
LaVergne,
TN
|
HDS
Distribution Center
|
94,760
|
March
31, 2012
|
||||
Laflin,
PA
|
HDS
Distribution Center
|
63,360
|
June 30,
2010
|
||||
Woodridge,
IL
|
HDS
Distribution Center
|
57,525
|
April
30, 2011
|
||||
York,
PA
|
HDS
Distribution Center
|
37,000
|
June
30, 2010
|
||||
CWT:
|
|||||||
Laredo,
TX
|
CWT
Distribution Center
|
12,425
|
November
30, 2011
|
||||
Wayne,
NJ
|
CWT
Distribution Center
|
54,000
|
March
15, 2013
|
||||
Wilmington,
CA
|
CWT
Distribution Center
|
9,610
|
June
30, 2014
|
||||
Atlanta,
GA
|
CWT
Distribution Center
|
16,266
|
June
30, 2012
|
Prior to
the Acquisition, we maintained our executive offices at 330 Madison Avenue,
6th
Floor, New York, New York pursuant to an agreement with Blue Line Advisors, Inc.
(“Blue Line”), an affiliate of Gregory E. Burns, our president, chief executive
officer and a member of our board of directors. We paid Blue Line a monthly fee
of $7,500 for general and administrative services including office space,
utilities and secretarial support. We believe, based on rents and fees for
similar services in the New York City metropolitan area, that the fee charged by
Blue Line was at least as favorable as we could have obtained from an
unaffiliated person.
Item 3.
Legal Proceedings
On or
about July 10, 2009, Multi-Media International filed a complaint against CGI and
its subsidiaries, CDS, HDS, CWT and EXL, seeking class action status in the
United States District Court for the District of New Jersey by
alleging, among other things, (i) common law fraud, aiding and abetting fraud,
negligent misrepresentation, conversion and unjust enrichment, (ii) violation of
N.J. Stat. § 56:8-2 and (iii) breach of good faith and fair dealing, relating to
alleged excessive fuel surcharges by the Subsidiaries. The complaint
alleges a class period from June 25, 2002 through June 25, 2009. On behalf of
the putative class, plaintiff seeks to recover the alleged excessive fuel
charges, enjoin the alleged improper calculation of fuel charges by defendants
and impose punitive damages and attorney’s fees. The complaint did not specify
an amount of damages; however a prior complaint seeking similar relief on behalf
of the same class, which was withdrawn, sought compensatory damages in the
amount of $10 million and punitive damages in the amount of $30 million, as
described in the Company’s 2008 Form 10-K. On
October 23, 2009, the Company filed a motion to dismiss the Consumer Fraud Act
claim, dismiss Plaintiff’s counsel and its law firm from serving as counsel to
Plaintiff, and dismiss Plaintiff from acting as the representative in any class
action. The motion has been fully briefed and we are awaiting
decision from the Court. The Company believes that the allegations in the
lawsuit are without merit and it intends to vigorously defend itself. However,
the ultimate outcome of this action and the amount of liability that may result,
if any, is not presently determinable.
On
February 9, 2009, the Company issued a notice of claim for indemnification
under the SPA, stating that the Company, as buyer, was entitled to receive funds
from the Indemnification Escrow in the amount of $3,540,717. The
bulk of this claim (approximately 97%) pertained to damages incurred because the
Sellers failed to deliver the intellectual property required by the SPA in the
condition represented in the SPA. Damages to the Company included damages
to goodwill, the incremental costs of operating the Company’s computer system as
delivered versus as represented, and the costs of repairing and/or replacing the
computer system. On March 18, 2009, the Sellers made a demand for
arbitration for release to them of the Indemnification Escrow funds and, on
April 15, 2009, the Company made a counterclaim seeking recovery from the
Indemnification Escrow of no less than $3,600,000. On August 11, 2009, the
Company issued a second notice of claim for indemnification under the SPA,
stating that the Company was entitled to receive funds from the Indemnification
Escrow in the amount of $5,000,000, constituting the full amount remaining in
the escrow.
18
On
December 31, 2009, the Company settled all of the claims giving rise to the
arbitration. Pursuant to the settlement agreement, (i) approximately
$3,764,000 of the Indemnification Escrow funds were released to the Sellers and
approximately $1,286,000 of the Indemnification Escrow funds were released to
the Company (which together constituted all the funds remaining in escrow); (ii)
the parties through their respective counsel executed and filed an order
dismissing the arbitration; and (iii) the parties mutually released and
discharged each other from any and all claims from prior to the date of the
settlement agreement. Notwithstanding the foregoing, the settlement
agreement did not limit or otherwise alter the rights or obligations of any
party (i) under certain specified agreements with former executive officers of
CGI and (ii) under certain specified sections of the SPA. The settlement
agreement is more fully described in the Company’s Current Report on Form 8-K
dated December 31, 2009, filed on January 7, 2010.
Item 4.
Reserved
19
Item 5.
Market for Common Equity and Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market
Information
Our
units, common stock and warrants are listed on the NYSE Amex under the symbols
GLA.U, GLA and GLA.WS, respectively. The following table sets forth the range of
high and low sales prices for the units, common stock and warrants for the
periods indicated.
NYSE Amex
|
||||||||||||||||||||||||
Common Stock
|
Warrants
|
Units
|
||||||||||||||||||||||
High
|
Low
|
High
|
Low
|
High
|
Low
|
|||||||||||||||||||
2010
|
||||||||||||||||||||||||
First
Quarter*
|
$ | 0.70 | $ | 0.38 | $ | 0.02 | $ | 0.01 | $ | 0.55 | $ | 0.44 | ||||||||||||
2009
|
||||||||||||||||||||||||
Fourth
Quarter
|
$ | 0.65 | $ | 0.37 | $ | 0.01 | $ | 0.00 | $ | 0.92 | $ | 0.45 | ||||||||||||
Third
Quarter
|
$ | 0.82 | $ | 0.44 | $ | 0.01 | $ | 0.00 | $ | 0.96 | $ | 0.72 | ||||||||||||
Second
Quarter
|
$ | 0.92 | $ | 0.56 | $ | 0.01 | $ | 0.00 | $ | 0.88 | $ | 0.77 | ||||||||||||
First
Quarter
|
$ | 0.75 | $ | 0.56 | $ | 0.01 | $ | 0.00 | $ | 1.00 | $ | 0.59 | ||||||||||||
2008
|
||||||||||||||||||||||||
Fourth
Quarter
|
$ | 1.46 | $ | 0.50 | $ | 0.05 | $ | 0.00 | $ | 1.50 | $ | 0.50 | ||||||||||||
Third
Quarter
|
$ | 2.50 | $ | 0.97 | $ | 0.12 | $ | 0.01 | $ | 2.97 | $ | 1.00 | ||||||||||||
Second
Quarter
|
$ | 4.17 | $ | 2.58 | $ | 0.24 | $ | 0.11 | $ | 4.40 | $ | 2.95 | ||||||||||||
First
Quarter
|
$ | 7.98 | $ | 3.75 | $ | 0.60 | $ | 0.15 | $ | 8.25 | $ | 3.92 |
* Through
April 3, 2010
Holders
As of
April 14, 2010 there was one holder of record of our units, 36 holders of record
of our common stock and nine holders of record of our warrants.
Dividends
We have
not paid any cash dividends on our common stock to date. The payment of
cash dividends in the future will be contingent upon our revenues and earnings,
if any, our capital requirements, our credit facility with the Bank and our
general financial condition. The payment of any dividends will be within the
discretion of our board of directors. It is the present intention of our board
of directors to retain all earnings, if any, for use in our business operations
and, accordingly, our board does not anticipate declaring any dividends in the
foreseeable future.
20
Equity
Compensation Plan Information
As at
January 2, 2010, we have the following equity compensation plans that provide
for the issuance of options, warrants or rights to purchase our
securities.
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in the
first column)
|
||||||||||
Equity
compensation plans approved by security holders*
|
682,750
|
|
$ |
1.02
|
|
247,250
|
|
|||||
Equity
compensation plans not approved by security holders
|
N/A | N/A | N/A | |||||||||
Total
|
682,750 | $ | 1.02 | 247,250 |
|
*
|
Our
stockholders approved the 2007 Long-Term Incentive Equity Plan on February
11, 2008.
|
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking
Statements
The
information contained in this section should be read in conjunction with our
financial statements and related notes and schedules thereto appearing elsewhere
in this Annual Report. This Annual Report, including the Management’s Discussion
and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements that involve substantial risks and uncertainties.
These forward-looking statements are not historical facts, but rather are based
on current expectations, estimates and projections about our industry, our
beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,”
“plans,” “believes,” “seeks,” and “estimates” and variations of these words and
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties, and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. Such
risks, uncertainties and other factors include, including without limitation,
the risks, uncertainties and other factors we identify from time to time in our
filings with the Securities and Exchange Commission, including our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K.
Although
we believe that the assumptions on which these forward-looking statements are
based are reasonable, any of those assumptions could prove to be inaccurate, and
as a result, the forward-looking statements based on those assumptions also
could be incorrect. In light of these and other uncertainties, the inclusion of
a projection or forward-looking statement in this Annual Report should not be
regarded as a representation by us that our plans and objectives will be
achieved. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Annual Report. We undertake
no obligation to update such statements to reflect subsequent
events.
Summary
of Business
The
Company is a niche provider of non-asset based transportation management and
logistics services to the print media industry throughout the United States and
between the United States and other countries. The Company operates
through a network
of distribution centers where it consolidates mass market consumer
publications so that the publications can be transported in larger, more
efficient quantities to common destination points.
21
The
Company generates revenues by arranging for the movement of its customers’
freight in trailers and containers. Generally, the Company bills its
customers based on pricing that is variable dependent upon the amount of
tonnage tendered, frequency of recurring shipments, origination, destination,
product density and carrier rates. As part of its bundled service
offering, the Company tracks shipments in transit and handles claims for freight
loss or damage on behalf of its customers. Because the Company owns
relatively little transportation equipment, it relies on independent
transportation carriers.
On a
day-to-day basis, customers communicate their freight needs, typically on a
shipment-by-shipment basis, to one of the Company’s transportation
offices/distribution centers for dissemination to its operating companies for
upload into the respective computer systems each company utilizes to meet the
specific requirements of its customer base. The Company’s employees enter
information about each shipment into its proprietary computer system. With
the help of the computer system, the Company’s employees then
determine the appropriate mode of transportation for the shipment and select a
carrier or carriers, based upon their knowledge of the carrier’s service
capability, equipment availability, freight rates and other relevant
factors.
We
operate through our wholly-owned subsidiary, CGI. We conduct our domestic
operations through our indirect subsidiaries, CDS and HDS, and our international
operations through our indirect subsidiary, CWT. CDS, HDS and
CWT are wholly-owned subsidiaries of CGI.
CDS
Operations (Domestic Division)
CDS
provides domestic newsstand magazine distribution services throughout North
America. Essentially, CDS operates a “hub-and-spoke” network of operating
centers and professional traffic management services, which provide publishers
and printers with the benefits of scheduled delivery and reduced cost by
shipping in a consolidated weekly pool managed by CDS. On average, CDS
delivers over 35 million magazines and books per week from over 90 print
locations to wholesalers across North America. CDS utilizes HDS for about
25% of its transportation moves (the other 75% is done through
third-parties).
HDS
Operations (Domestic Division)
HDS provides ground-based
transportation services to the print media industry. HDS’
network includes the management of six distribution centers and relationships
with approximately 600 third-party transportation providers, through
CDS. In addition, HDS has an agreement with a large third party
carrier to provide dedicated motor carrier services to HDS for the
transportation of goods. Approximately 40% of HDS’ transportation is hauled by
the dedicated fleet managed by a large third party carrier and the
remaining 60% is hauled by other third parties.
HDS’ core
business is providing traditional “break-up” services for printers and
publishers in regions surrounding its four distribution centers. The
break-up service is similar to a regional less-than-truckload service, where
freight is picked up from a customer, transported to one of the HDS distribution
centers, pooled with other shipments headed in similar proximities and sent to
final destinations. Through its distribution centers HDS provides break-up
services throughout the country. HDS also offers full truckload services
throughout the United States. Distribution centers are located
in:
· York,
Pennsylvania;
· Kansas
City, Missouri;
· Carrollton,
Texas;
· Lavergne,
Tennessee;
· Woodridge,
Illinois; and
· Laflin,
Pennsylvania.
HDS
provides transportation services through the dedicated fleet managed by a
large third party carrier in each of the states where it has a distribution
center.
22
CWT
Operations (International Division)
CWT
offers consolidation and import/export transportation management and logistics
services to print media worldwide. CWT utilizes four distribution
centers to consolidate shipments and arrange for international transportation
utilizing third-party carriers. CWT’s primary functions are break-bulk and
sortation and re-consolidation of titles into single specific shipments.
Distribution centers are located in:
· Wayne,
New Jersey;
· Wilmington,
California;
· Laredo,
Texas; and
· Atlanta,
Georgia.
Recent
Events
Credit
Facility with Cole Taylor Bank
On March
5, 2010, the Company entered into the Credit Agreement with Cole Taylor
Bank. The Credit Agreement provides for a revolving credit facility of up
to $6,000,000, with a $1,000,000 sublimit for letters of credit. The
Credit Agreement is more fully described under Item 1 in the section entitled
“Recent Events – Credit Facility with Cole Taylor Bank.”
Settlement
of Escrow Claim
On
December 31, 2009, the Company settled all of its claims for indemnification
under the SPA, as more fully disclosed under Item 3. Pursuant to the
settlement agreement, among other things, approximately $1,286,000 of the funds
held in the Indemnification Escrow were released to the Company and the
remainder was released to the Sellers. The settlement agreement
is more fully described under Item 3.
Instability
in the Newsstand Distribution Channel
In the
first quarter of 2009, there was a disruption of the wholesaler distribution
supply channel, that caused a significant disruption of services for
approximately a four week period. Initially, two of the four wholesalers
demanded distribution surcharges from the publishers and national distributors
to cover their operating losses and threatened a suspension of service if these
price demands were not met. This resulted in two of the four wholesalers
ceasing distribution operations temporarily on February 1, 2009. One of
the wholesalers that had ceased delivery of product reached a settlement with
the national distributors and publishers concerning pricing and
distribution. The other wholesaler ceased operations in early February,
liquidated its holdings and filed a lawsuit in U.S. District Court (Southern
District of New York) against publishers, national distributors and other
wholesalers, alleging the defendants conspired to purge, and through coordinated
action have purged, plaintiff from the magazine (distribution) industry and have
destroyed plaintiff’s business. All of the defendants are existing
customers of ours and a settlement against them could affect our
business.
Impact
of Current Economic Recession
The
transportation industry historically has experienced cyclical fluctuations in
financial results due to economic recession, downturns in business cycles of our
customers, fuel shortages, price increases by carriers, interest rate
fluctuations, and other economic factors beyond our control. Many of the
Company's customers' business models are dependent on expenditures by
advertisers. These expenditures tend to be cyclical, reflecting general
economic conditions, as well as budgeting and buying patterns. If the
current economic recession or a downturn in its customers’ business cycles
causes a reduction in the volume of freight
shipped by those customers, particularly to the single copy distribution
channel, the Company's operating results could also be adversely
affected.
23
Accounting
for the Acquisition and Related Transactions
On
February 12, 2008, the Company consummated the Acquisition, as more fully
described under Item 1 in the section entitled “The Acquisition.” At
the closing of the Acquisition, the Company purchased all of the issued and
outstanding capital stock of CGI for a total consideration of $75,000,000 (of
which $72,527,472.53 was paid in cash and $2,472,527.47 by the issuance of
320,276 shares of the Company’s common stock valued at $7.72 per share, the
average share price at the announcement of the SPA) plus an adjustment of
$495,067 based on CGI’s estimated working capital at the closing.
Subsequently, an additional adjustment of $257,000 was paid to the stockholders
of CGI based on CGI’s working capital at the closing as finally
determined. In connection with the closing of the Acquisition, the Company
changed its name from Global Logistics Acquisition Corporation to Clark Holdings
Inc.
Holders
of 1,802,982 of the Company’s shares of common stock voted against the
Acquisition and 1,787,453 elected successfully to convert their shares into
a pro rata portion of the Trust Account (approximately $8.06 per share or an
aggregate amount of $14,563,911). After giving effect to (i) the issuance
of 320,276 shares in connection with the Acquisition and (ii) the conversion of
shares, there were 12,032,823 shares of common stock outstanding after the
Acquisition. In addition, the founders of the Company placed 1,173,438
shares of common stock into escrow pending the attainment of a specified market
price (restricted shares). As a result of the condition to which the
escrowed shares will be subject, such shares will be considered as contingently
issuable shares and, as a result, are not included in the earnings per share
calculations. Accordingly, the Company will recognize a charge based on
the fair value of the shares over the expected period of time it will take to
achieve the target price, if and only if the expected probability of the share
price attaining the specified market price exceeds 50 percent.
At the
closing of the Acquisition, we entered into the Escrow Agreement, providing for
the Indemnification Escrow, the Working Capital Escrow and the Discontinued
Operations Escrow, as more fully described under Item 1 in the section entitled
“The Acquisition.” On August 14, 2008, one third of the
Indemnification Escrow, or $2.5 million, was released to former stockholders of
CGI in accordance with the terms of the SPA and the Escrow Agreement. On
September 15, 2008, the entire Discontinued Operations Escrow was released to
the former stockholders of CGI. By the end of the third quarter of 2008,
the entire Working Capital Escrow had been released, all of which was due to the
Company in accordance with the SPA and the Escrow Agreement, but $257,000 of
which was paid to the Sellers in satisfaction of the aforementioned adjustment
to the Acquisition consideration based on the working capital at closing as
finally determined. On December 31, 2009, the remainder of the
Indemnification Escrow was released, approximately $1,286,000 of which was paid
to the Company in settlement of all of its claims for indemnification, as more
fully described under Item 3, and the remainder of which was paid to the former
stockholders of CGI.
The
Company has accounted for the Acquisition under the purchase method of
accounting. Accordingly, the cost of the Acquisition has been allocated to
the assets and liabilities based upon their respective fair values, including
identifiable intangibles and remaining cost allocated to goodwill.
The final
purchase price for the Acquisition at closing was determined based on the value
of the cash consideration paid by the Company, the average value of Company’s
common stock on or about the SPA arrangement date, and the direct acquisition
costs incurred. The aggregate purchase price of $77,106,830 represents the
sum of (i) $64,876,642 which represents cash consideration paid directly to
CGI’s shareholders, (ii) $8,300,000 deposited in three separate escrows, as
described above (iii) $493,196 of deferred acquisition costs paid at closing,
(iv) $964,465 of deferred acquisition costs paid prior to closing, and (v)
$2,472,527 for 320,276 shares of common stock that were issued to two executive
officers of CGI at closing.
24
Components
of the purchase price distribution are as follows:
Cash
to CGI shareholders
|
$ | 64,876,642 | ||
Cash
in escrow
|
8,300,000 | |||
Acquisition
costs paid at closing
|
493,196 | |||
Acquisition
costs paid prior to closing
|
964,465 | |||
Total
|
74,634,303 | |||
Issuance
of 320,276 shares of common stock at $7.72 per share
|
2,472,527 | |||
Total
purchase price
|
$ | 77,106,830 |
Reconciliation
of initial cash payment per the SPA to cash paid at closing of the Acquisition
is summarized as follows:
Initial
estimate of cash distribution
|
$ | 72,527,473 | ||
Cash
in escrow
|
(8,300,000 | ) | ||
Interim
working capital adjustment to purchase price
|
495,067 | |||
Reimbursement
of professional fees
|
154,102 | |||
Cash
to CGI shareholders
|
$ | 64,876,642 |
A
preliminary allocation of the purchase price of CGI to the estimated fair values
of the assets acquired and liabilities assumed of CGI on February 12, 2008, was
made and recorded during the 13 weeks ended March 29, 2008, and subsequently
amended. The preliminary allocation of the purchase price, including the
evaluation and allocation to identifiable intangible assets, recognition of
deferred taxes and allocation to goodwill resulting from the Acquisition, was
made by management.
During
the first three quarters of 2008, additional adjustments to the preliminary
purchase price allocation were recorded to goodwill. In the fourth
quarter, it became apparent to management after a detailed review of the
Information Systems, that the intangible with an original estimated value of
$1.197 million identified as software as of the purchase date, was deemed to
have no fair value. This resulted in a purchase price adjustment which
reclassified $1.197 million of the original fair value of the software to
goodwill. In addition, management also adjusted the purchase price allocation
after completing a review of the assumptions associated with the Non-Compete
Intangible, in which a technical error was discovered in the original
valuation. As a result, the Non-Compete Intangible’s value was considered
to be overstated by $4.727 million and understated goodwill by the like
amount. This adjustment was also recorded in the fourth quarter. These
adjustments resulted in a reclassification of $5.924 million from identifiable
intangibles to goodwill and the deferred tax liability associated with the
intangibles along with goodwill were both reduced by $2.366
million.
In the
fourth quarter of 2008, the Company, according to FASB Topic ASC 350, performed
its annual goodwill and intangible assets with indefinite lives impairment
tests, and determined that all the goodwill and a portion of the remaining
intangible assets had been impaired. Consequently, the Company recorded a
non-cash charge of $63.9 million for goodwill and $2.66 million for intangible
assets impairment during the fourth quarter of 2008, as discussed in this Item
under the section entitled “Impairment of Goodwill and Other
Intangibles.”
25
The final
allocation of the fair value of the assets acquired and liabilities assumed in
the Acquisition of CGI are as follows:
Preliminary
Allocation at
2/12/08
|
Adjustments to
Preliminary
Purchase Price
Allocation
|
Deferred Tax
Liability
Adjustment
Associated With
Final Purchase
Price Adjustments
|
Final Purchase
Price Allocation
|
|||||||||||||
Current
assets
|
$ | 6,956,000 | $ | 6,956,000 | ||||||||||||
Current
assets of discontinued operations
|
388,000 | 388,000 | ||||||||||||||
Property
and equipment
|
1,394,000 | 1,394,000 | ||||||||||||||
Intangibles
|
26,575,000 | (5,924,000 | ) | 20,651,000 | ||||||||||||
Goodwill
|
59,471,020 | 5,924,000 | (2,366,000 | ) | 63,029,020 | |||||||||||
Current
liabilities
|
(7,441,000 | ) | (7,441,000 | ) | ||||||||||||
Current
liabilities of discontinued operations
|
(132,000 | ) | (132,000 | ) | ||||||||||||
Deferred
tax liability
|
(10,104,020 | ) | 2,366,000 | (7,738,020 | ) | |||||||||||
Total
fair value of assets and liabilities
|
$ | 77,107,000 | $ | 0 | $ | 0 | $ | 77,107,000 |
Impairment
to Goodwill and Other Intangibles
Goodwill
Impairment for 2008
The
Company, during the fourth quarter of 2008, in accordance with FASB Topic ASC
350, performed its annual impairment test for goodwill and intangible assets
with an indefinite life. The Company concluded that its market
capitalization had been below its net book value for an extended period of
time. Management therefore assessed the fair value of its reporting units
using both an income approach with a discounted cash flow model and a market
approach using the observed market capitalization based on the quoted price of
our common stock. Management compared these values to each reporting
units’ carrying amount, including goodwill and identified an
impairment. The evaluation resulted in a $63.910 million
impairment charge which was included in the “impairment of goodwill and
intangible assets” line item in the consolidated statements of
operations.
The
changes in the carrying amount of goodwill for the year ending January 3, 2009,
are as follows:
Goodwill
associated with the acquisition of the Clark Group Inc.
|
$ | 63,029,000 | ||
Balance
at February 12, 2008
|
63,029,000 | |||
Adjustments
to Goodwill
|
881,000 | |||
Impairment
Charge
|
(63,910,000 | ) | ||
Balance
at January 3, 2009
|
$ | - |
Intangible
Asset Impairment for 2008
During
2008, CHI (formerly known as Global Logistics Acquisition Corporation)
acquired CGI resulting in acquisition-related intangible assets.
Acquisition-related intangible assets at January 3, 2009, and February 12, 2008,
as amended, consisted of the following:
26
January 3, 2009
|
|||||||||||||||||||
Amortization
Period
|
Balance 02/12/2008
|
Amortization Expense
|
Impairment
|
Balance: 01/03/2009
|
|||||||||||||||
Non-compete
agreements
|
5
|
$ | 1,684,000 | $ | (247,000 | ) | $ | - | $ | 1,437,000 | |||||||||
Trade
names
|
-
|
5,378,000 | - | (2,658,000 | ) | 2,720,000 | |||||||||||||
Customer
relationships
|
12
|
13,588,000 | (998,000 | ) | - | 12,590,000 | |||||||||||||
$ | 20,650,000 | $ | (1,245,000 | ) | $ | (2,658,000 | ) | $ | 16,747,000 |
As part
of the acquisition, the Company gained the rights to The Clark Group tradename.
The income approach indicates value based on the present worth of future
economic benefits. This approach explicitly recognizes that the current value of
an investment is premised on the expected receipt of future economic benefits
such as cash flows or cost savings. A variant of the income approach, known as
the “relief from royalty” approach, is used in the valuation of assets involving
fair royalty rates (e.g., trademarks, patents, etc.). This valuation methodology
is premised on the following hypothetical construct:
|
·
|
If
the owners/operators of a company wanted to continue to use tradename in
the conduct of their business, but found they did not actually have the
legal right to do so, they would be compelled to pay the rightful owner a
fair and reasonable royalty for that
right,
|
|
·
|
Since
ownership of a tradename relieves the company from making such payments,
the financial performance of the firm is enhanced – to the extent of the
royalty payments avoided, and
|
|
·
|
Capitalization
of the after tax effect of the royalty relief at an appropriate rate
yields the value of the tradename.
|
The
Company utilized the relief from royalty method in determining the fair value of
The Clark Group tradename. The reason for using this method is that management
deemed it impractical to determine the fair value of the tradename based upon a
market approach. The relief from royalty income approach estimates the portion
of a company’s earnings attributable to a tradename based upon the royalty rate
the company would have paid for the use of the tradename if it did not own it.
Therefore, a portion of the earnings, equal to the after-tax royalty that might
have been paid for the use of the tradename, can be attributed to its ownership
and therefore, the relief from royalty method, was deemed the most appropriate
valuation method.
Intangibles
assets with an indefinite life (i.e., trade names), were evaluated for
impairment at January 3, 2009 by management using the “relief from royalty”
method. This evaluation, based on this acceptable method of valuation, resulted
in a $2.658 million impairment charge which was included in the “impairment of
goodwill and intangible assets” line item in the consolidated statements of
operations.
During
the fourth quarter of 2008, we concluded that our market capitalization was
below our net book value for an extended period of time, and as a result, our
long lived assets were tested for recoverability. Due to the impact of the
weakening global economy, our revenue projections related to the intangible
assets acquired have declined. The trade name intangible, due to its indefinite
life, was evaluated using FASB Topic ASC 350
along with the goodwill. This evaluation resulted in a $2.658 million
impairment charge which was included in the “Impairment of goodwill and
intangible assets” line item in the condensed consolidated statements of
operations.
The
impairment charge taken was calculated as the difference between the book value
of the tradename and the calculated fair value by use of the relief from royalty
method as discussed above. Significant assumptions included in management’s
analysis were the determination of a royalty rate, projections of future
revenues and a discount rate. Profitability was deemed to be a significant
determinant for a royalty rate in that a company or an investor would not be
willing to pay a rate in excess of a reasonable percentage of the operating
income generated by the tradename. There was little change in management’s
expectation for the tradename from the date of acquisition through January 3,
2009, therefore, the royalty rate of 0.66% that was used in the initial
determination of the fair value of the tradename was used in impairment analysis
as of January 3, 2009. In calculating the royalty rate of 0.66%, management
estimated that royalty savings would equate to $500,000 per year. In estimating
this amount, management considered a variety of factors including but not
limited to the magnitude of the projected tradenames’ net sales and the asset’s
perceived marketing strength and recognition among customers and competitors.
Royalty savings of $500,000 per year corresponds to a royalty rate of 0.66% of
annual revenues based on total 2007 revenues. The future
revenues for the tradename valuation were based on sales growth rate forecasts
of the Company as of January 3, 2009. The sales growth rate forecasts as of
January 3, 2009 were substantially lower than they were as of February 12, 2008
(when The Clark Group, Inc. was acquired and the initial valuation performed) as
a result of the weakening global economy. The pretax royalty savings due to the
tradename was then calculated by the application of the estimated royalty rate
to the projected net sales. A 40% income tax rate was utilized to convert the
estimated pretax royalty savings to appropriate after-tax amounts. The future
annual cash flows attributable to the tradenames were then discounted to present
value at a new, higher risk-adjusted interest rate as of January 3, 2009. The
reason for a higher risk-adjusted interest rate was due to the higher cost of
capital incurred by the Company as of this time.
27
Intangibles
assets with an indefinite life (i.e., trade names), were evaluated for
impairment at January 3, 2009, by management in accordance with FASB Topic ASC
350, using the “relief from royalty” method. This evaluation resulted in a
$2.658 million impairment charge which was included in the “impairment of
goodwill and intangible assets” line item in the consolidated statements of
operations.
Total
Impairment for 2008
The
impairment in the statement of
operations for the year ending January 3, 2009, was calculated as
follows:
Impairment
|
Amount
|
|||
Goodwill
|
$ | 63,910,000 | ||
Trade
names
|
2,658,000 | |||
TOTAL
|
$ | 66,568,000 |
Intangible
Asset Impairment for 2009
Acquisition-related
identifiable intangible assets at January 3, 2009 and January 2, 2010, as
adjusted, consisted of the following:
January 2, 2010
|
|||||||||||||||||||
Amortization
Period
|
Balance 01/03/2009
|
Amortization Expense
|
Impairment
|
Balance:
01/02/2010
|
|||||||||||||||
Trade
names
|
-
|
2,720,000 | - | (406,000 | ) | 2,314,000 | |||||||||||||
Non-compete
agreements
|
5
|
$ | 1,437,000 | $ | (281,000 | ) | $ | (671,000 | ) | $ | 485,000 | ||||||||
Customer
relationships
|
12
|
12,590,000 | (1,132,000 | ) | - | 11,458,000 | |||||||||||||
$ | 16,747,000 | $ | (1,413,000 | ) | $ | (1,077,000 | ) | $ | 14,257,000 |
Intangibles
assets with an indefinite life (i.e., trade names), were evaluated for
impairment at January 2, 2010, by management in accordance with FASB Topic ASC 350,
using the “relief from royalty” method. This evaluation resulted in a
$406,000 impairment charge for the 52 weeks ended January 2, 2010, which was
included in the “impairment of goodwill and intangible assets” line item in the
consolidated statements of operations.
For the
calculation of the January 2, 2010 impairment charge of $0.406 million
associated with the trade names intangibles, management used the same valuation
method, i.e., the “relief from royalty”. This methodology is
described in more detail above and on the previous page. The
projections prepared by management reflected the continued economic recession
and the valuation method also included a higher discount rate to reflect the
both the economic recession and the Company’s operating losses for the 52 weeks
ended January 2, 2010. As in any valuation model, there are risks
inherent in the assumptions utilized and the achievability of these assumptions
is not certain.
Due to
the continuing adverse economic impact on the Company’s market capitalization
along with the operating losses incurred during 2009, management evaluated
intangibles and fixed assets with definite lives for impairment as of January 2,
2010, in accordance with FASB Topic ASC 360.
Management’s projections of undiscounted future cash flows did not exceed the carrying amount of the
Non-complete Agreements intangible asset. As a result of this undiscounted
future cash flow test (“step 1 test”), the net book value of the Non-compete
Agreements were lower than the undiscounted cash flow, the Company calculated
the fair value of these Non-Compete Agreements, which resulted in $671,000
impairment charge. This impairment charge was included in the
“impairment of goodwill and intangible assets” line item in the consolidated
statements of operations.
The fair value of these Non-compete
Agreements was calculated by determining the expected value of the cash flows
that would be lost due to competition from the executives and/or prior owners if
the Non-compete Agreement did not exist. The value of the non-compete
agreement is measured as the difference between the projected cash flows of the
Company if the executive/prior owners were free to compete considering the
probability of choosing to compete in a given year versus being prohibited from
competing. The probability considers the desire to compete and the likelihood to
competing effectively and taking business away from the acquired
company. Once the expected value of the future cash flows were
projected, the Company used a higher discount rate than used in the previous
year. This higher discount was used due to the continuing economic crisis and
the Company’s operating losses during the 52 weeks ended January 2,
2010. Included in any valuation
model there are risks inherent in the assumptions utilized and achievability of
these assumptions is not certain.
For the
Customer Relationships intangibles and fixed assets evaluation for the 52 weeks
ended January 2, 2010, Management’s projections of undiscounted future cash
flows did exceed the carrying amount of the Customer Relationship’s intangible
asset and fixed assets, which resulted in no charge for
impairment.
The
impairment in the statement of operations for the year ended January 2, 2010 is
as follows:
Impairment
|
January
2, 2010
|
|||
Trade
names
|
406,000 | |||
Non-compete
Agreements
|
671,000 | |||
Total
|
$ | 1,077,000 |
28
Related-Party
Transactions
The Company provided logistics and
transportation services for Anderson Merchandisers, LP, related through common
ownership. The revenue related to these services was $1,025,000 for the 52 weeks
ended January 2, 2010, $2,418,000 for the 47 weeks ended January 3, 2009, and
$388,000 for the 6 weeks ended February 12, 2008, and is included in gross
revenues. Accounts receivable included in the consolidated balance sheet from
Anderson Merchandisers, LP, were $0 and $333,000 as of January 2, 2010 and
January 3, 2009, respectively.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our financial
statements and the related notes and schedules thereto. In the following
discussion:
|
·
|
“CHI”
refers to Holdings, the entity formerly known as Global Logistics
Acquisition Corporation;
|
|
·
|
“predecessor”
refers to CGI prior to the
Acquisition;
|
|
·
|
“successor”
refers to Clark Holdings after the
Acquisition;
|
|
·
|
“2009
reporting period” refers to the 52 weeks ended January 2,
2010;
|
|
·
|
“2008
reporting period” refers to the 47 weeks ended January 3, 2009 (after the
Acquisition); and
|
|
·
|
“predecessor
period” refers to the 6 weeks ended February 11, 2008 (prior to the
Acquisition).
|
Reconciliation of Non-GAAP Financial
Measures.
Gross
profit is a non-GAAP financial measure that is equal to gross revenue less
freight expense. The Company uses this financial measure to evaluate its
historical performance, as well as its performance relative to its competitors.
Specifically, management uses this financial measure to further its own
understanding of the Company’s core operating performance, i.e., the
transportation of goods. The most directly comparable financial measure as
calculated and presented in accordance with GAAP is loss (income) from
operations. The following table reconciles gross profit to loss (income) from
operations for the 2009 reporting period, the 2008 reporting period and the 2008
predecessor period is as follows:
(In Thousands)
|
|||||||||||||
Clark Holdings Inc.
|
CGI
|
||||||||||||
Successor
|
Predecessor
|
||||||||||||
For 52 Weeks Ended
|
For 47 Weeks Ended
|
For 6 Weeks Ended
|
|||||||||||
January 2, 2010
|
January 3, 2009
|
January 3, 2009
|
|||||||||||
Loss
(income) from operations
|
(3,842 | ) | (63,956 | ) | 833 | ||||||||
Adjusted for
|
|||||||||||||
Depreciation
and amortization
|
(1,715 | ) | (1,424 | ) | (27 | ) | |||||||
Impairment
of goodwill and intangible assets
|
(1,077 | ) | (66,568 | ) | - | ||||||||
Selling,
operating and administrative expenses
|
(25,527 | ) | (22,184 | ) | (2,385 | ) | |||||||
Gross
profit
|
24,477 | 26,220 | 3,245 |
Results
of Operations – 52 Weeks Ended January 2, 2010, 47 Weeks Ended January 3, 2009
and 6 Weeks Ended February 11, 2008.
Revenues. The following table
summarizes the Company’s revenue by business segment (i.e., domestic versus
international, in thousands of dollars) for the 52 weeks ended January 2, 2010,
47 weeks ended January 3, 2009 and 6 weeks ended February 11,
2008.
Sucessor
|
Succesor
|
Predecessor
|
|||||||||||
52
weeks Ended
|
47
Weeks Ended
|
6
Weeks Ended
|
|||||||||||
January
2, 2010
|
January
3, 2009
|
February
11, 2008
|
|||||||||||
Domestic
|
$ | 54,817 | $ | 62,539 | $ | 7,051 | |||||||
International
|
11,849 | 13,234 | 1,343 | ||||||||||
Gross
Revenue
|
$ | 66,666 | $ | 75,773 | $ | 8,394 |
29
The following table shows selected
items in the consolidated statements of operations as a percentage of
revenue for the period.
Successor
|
Successor
|
Predecessor
|
|||||||||||
52
Weeks Ended
|
47
Weeks Ended
|
6
Weeks Ended
|
|||||||||||
January 2, 2010
|
January 3, 2009
|
February 11, 2008
|
|||||||||||
Gross
Revenue
|
100.0 | % | 100.0 | % | 100.0 | % | |||||||
Freight
Expense
|
63.3 | % | 65.4 | % | 61.3 | % | |||||||
Gross
Profit
|
36.7 | % | 34.6 | % | 38.7 | % | |||||||
Depreciation
and Amortization
|
2.6 | % | 1.9 | % | 0.4 | % | |||||||
Selling,
Operating & Administrative Expenses
|
38.3 | % | 29.3 | % | 28.4 | % | |||||||
Income
from Operations
|
-4.1 | % | 3.4 | % | 9.9 | % |
Domestic
revenue declined 12.3% to $54.8 million during the 2009 reporting period as
compared to the 2008 reporting period. The revenue decline was mitigated by the
5 week differential that exists between the 2009 and 2008 reporting periods,
with the 2008 predecessor period generating $7.1 million in gross revenue. The
decrease in gross revenue was the result of a decline in pool distribution
tonnage driven by weak economic conditions and a 25.6% reduction in advertising
pages in 2009 as compared to 2008. The sharp drop in oil prices during 2009
reporting period compared to 2008 reporting period also resulted in a decrease
in energy surcharge invoicing.
The
decrease in international gross revenues of 10.5% during the 2009 reporting
period as compared to the 2008 reporting period was attributable to tonnage
decreasing by approximately 28% in same store sales during the 2009 reporting
period as compared to the 2008 reporting period, with the revenue decline being
mitigated by the 5 week differential that exists between the reporting periods.
Gross revenue was $1.3 million for the 6 week predecessor period. An increase in
airfreight offset a portion of the decline in ocean tonnage during the 2009
reporting period. New non-print media customers were added representing 19.4% of
total gross revenue with new customer relationships in Europe, including the UK
and Asia, including China, Singapore, and the Philippines. The tonnage
reductions were the result of a decline in advertising pages for certain
customers’ publications mostly moving via ocean service to the U.K. and
Europe.
Gross Profit. The Company’s
overall gross profit declined in both the domestic and the international
business segments. The
following table summarizes gross profit (dollars in thousands) and gross margin
for the period:
Successor
|
Successor
|
Predecessor
|
|||||||||||||||||||||||
52
Weeks Ended
|
47
Weeks Ended
|
6
Weeks Ended
|
|||||||||||||||||||||||
January
2, 2010
|
January
3, 2009
|
February
11, 2008
|
|||||||||||||||||||||||
Gross
revenue domestic
|
$ | 54,817 | 100.0 | % | $ | 62,539 | 100.0 | % | $ | 7,051 | 100.0 | % | |||||||||||||
Purchased
transportation
|
27,331 | 49.9 | % | 31,183 | 49.9 | % | 3,131 | 44.4 | % | ||||||||||||||||
Other
transportation expense
|
|||||||||||||||||||||||||
Personnel
and related
|
3,212 | 5.9 | % | 3,898 | 6.2 | % | 481 | 6.8 | % | ||||||||||||||||
Insurance
|
447 | 0.8 | % | 478 | 0.8 | % | 44 | 0.6 | % | ||||||||||||||||
Tractor
rentals and maintenance
|
2,001 | 3.7 | % | 2,074 | 3.3 | % | 249 | 3.5 | % | ||||||||||||||||
Fuel
|
1,594 | 2.9 | % | 3,241 | 5.2 | % | 385 | 5.5 | % | ||||||||||||||||
Travel
expense
|
234 | 0.4 | % | 245 | 0.4 | % | 31 | 0.4 | % | ||||||||||||||||
Other
|
49 | 0.1 | % | 174 | 0.3 | % | 51 | 0.7 | % | ||||||||||||||||
Total
freight expense domestic
|
34,868 | 63.6 | % | 41,293 | 66.0 | % | 4,372 | 62.0 | % | ||||||||||||||||
Gross
profit domestic
|
19,949 | 36.4 | % | 21,246 | 34.0 | % | 2,679 | 38.0 | % | ||||||||||||||||
Gross
revenue international
|
11,849 | 100.0 | % | 13,234 | 100.0 | % | 1,343 | 100.0 | % | ||||||||||||||||
Freight
expense
|
7,321 | 61.8 | % | 8,260 | 62.4 | % | 777 | 57.9 | % | ||||||||||||||||
Gross
profit international
|
4,528 | 38.2 | % | 4,974 | 37.6 | % | 566 | 42.1 | % | ||||||||||||||||
Total
revenue
|
$ | 66,666 | 100.0 | % | $ | 75,773 | 100.0 | % | $ | 8,394 | 100.0 | % | |||||||||||||
TOTAL
GROSS PROFIT
|
$ | 24,477 | 36.7 | % | $ | 26,220 | 34.6 | % | $ | 3,245 | 38.7 | % |
30
Domestic
gross profit decreased by 6.1% during the 2009 reporting period in comparison to
the 2008 reporting period as declines in fuel driven purchased transportation
expenditures were outpaced by the decrease in gross revenue. As with gross
revenue, the decline in gross profit dollars generated was mitigated by the 5
week differential that exists between the 2009 and 2008 reporting periods. Gross
profit for the 6 week predecessor period was $2.7 million. The improved gross
margin profit percentage from 34.0% in the 2008 reporting period to 36.4% in the
2009 reporting period was the combined result of numerous initiatives to reduce
transportation cost. These initiatives include the use of intermodal
transportation and increasing our pool of carriers as we looked to achieve lower
rates per lane. The Company’s use of intermodal transportation in 2009 increased
33% over prior year, with rail transportation representing approximately 15% of
all the miles traveled in distributing the domestic pool tonnage in 2009.
Intermodal transportation is generally less expensive than road transportation
by as much as 30% in the transportation lanes where it is
used.
International
gross profit decreased by 9.0% during the 2009 reporting period in comparison to
the 2008 reporting period, with the gross profit decline being mitigated by the
5 week differential that exists between the 2009 and 2008 reporting periods.
This decrease is the result of the decline in tonnage and the change in the mix
of international’s services, which also resulted in an improvement in gross
margin percentage to 38.2% of gross revenue in the 2009 reporting period. Gross
profit for the 6 week predecessor period was $566,000.
Selling, Operating and
Administrative Expenses. The three tables below
summarize selling, operating and administrative expenses (one each for
company-wide, domestic and international expenses) for the 52 weeks ended
January 2, 2010, 47 weeks ended January 3, 2009, and 6 weeks ended February 11,
2008.
Successor
|
Successor
|
Predecessor
|
|||||||||||
52
Weeks Ended
|
47
Weeks Ended
|
6
Weeks Ended
|
|||||||||||
TOTAL
|
January
2, 2010
|
January
3, 2009
|
February
11, 2008
|
||||||||||
Salaries
and wages
|
$ | 13,562 | $ | 11,721 | $ | 1,348 | |||||||
Group
insurance
|
1,059 | 1,098 | 136 | ||||||||||
Profit
sharing
|
(29 | ) | 226 | 20 | |||||||||
Workers'
compensation
|
278 | 122 | 14 | ||||||||||
14,870 | 13,167 | 1,518 | |||||||||||
Packaging,
office, comp. supplies
|
907 | 1,048 | 114 | ||||||||||
Occupancy
expenses
|
3,002 | 2,749 | 315 | ||||||||||
Insurance
|
249 | 216 | 13 | ||||||||||
Cargo
loss & damage
|
229 | 89 | 16 | ||||||||||
Other
OSG&A(1)
|
6,269 | 4,915 | 409 | ||||||||||
10,656 | 9,017 | 867 | |||||||||||
25,526 | 22,184 | 2,385 | |||||||||||
Personnel
expense to gross revenue
|
22.3 | % | 17.4 | % | 18.1 | % | |||||||
All
other OSG&A to gross revenue
|
16.0 | % | 11.9 | % | 10.3 | % | |||||||
Total
OSG&A to gross revenue
|
38.3 | % | 29.3 | % | 28.4 | % |
(1)
|
Other
OSG&A consists of repairs and maintenance, travel expenses, dues and
subscriptions, warehouse equipment rentals, licenses, non-cash
compensation, legal and professional
fees.
|
Total Selling, Operating and
Administrative Expenses — Total
selling, operating and administrative expenses increased 15.2% to $25.6 million
during the 2009 reporting period in comparison to the 2008 reporting period. The
increase in selling, operating and administrative expense was primarily due to
$1.0 million of severance expense, $0.6 million of additional expenses
associated with new sales, information technology and administrative personnel,
$0.7 million of expenses relating to costs associated with arbitrating the
escrow claim, $0.1 million charge relating to additional bank fees and cost
associated with amending the credit facility, $0.5 million increase associated
with information technology consultants and recruiting costs, offset by a $0.2
million reduction of profit sharing associated with the elimination of the 401K
match by the Company and offset by $1.6 million of cost reductions that were
implemented during the third quarter of 2009. Approximately $2.0 million of the
increase in total selling, operating and administrative expense was the result
of the 5 week differential between the reporting periods
being compared. Total selling, operating and administrative expenses for the 6
week predecessor period were $2.4 million.
31
Successor
|
Successor
|
Predecessor
|
|||||||||||
52
Weeks Ended
|
47
Weeks Ended
|
6
Weeks Ended
|
|||||||||||
Domestic
Division
|
January
2, 2010
|
January
3, 2009
|
February
11, 2008
|
||||||||||
Salaries
and wages
|
$ | 10,864 | $ | 9,234 | $ | 1,052 | |||||||
Group
insurance
|
838 | 812 | 101 | ||||||||||
Profit
sharing
|
(29 | ) | 167 | 17 | |||||||||
Workers'
compensation
|
216 | 103 | 12 | ||||||||||
11,889 | 10,316 | 1,182 | |||||||||||
Packaging,
office, comp. supplies
|
686 | 682 | 69 | ||||||||||
Occupancy
expenses
|
2,218 | 2,006 | 221 | ||||||||||
Insurance
|
182 | 151 | 9 | ||||||||||
Cargo
loss & damage
|
202 | 71 | 13 | ||||||||||
Other
OSG&A
|
5,417 | 4,179 | 341 | ||||||||||
8,705 | 7,089 | 653 | |||||||||||
$ | 20,594 | $ | 17,405 | $ | 1,835 | ||||||||
Personnel
expense to gross revenue
|
21.7 | % | 16.5 | % | 16.8 | % | |||||||
All
other OSG&A to gross revenue
|
15.9 | % | 11.3 | % | 9.3 | % | |||||||
Total
OSG&A to gross revenue
|
37.6 | % | 27.8 | % | 26.1 | % |
Domestic Selling, Operating and
Administrative — Domestic
selling, operating and administrative expenses increased $3.2 million to $20.6
million in 2009 reporting period from $17.4 million in the 2008 reporting
period. Approximately $1.5 million of the increase is explained by the 5 week
report period differential that exists between the reporting periods. Domestic
personnel expenses increased $1.6 million as the Company strengthened its
accounting, information technology and sales and marketing departments at a cost
of $0.7 million, and incurred severance expense of $1.0 million offset by a $0.2
million reduction of profit sharing associated with the elimination of the
401(K) match by the Company. Personnel expenses were further reduced by more
than $1.0 million as a result of a reduction in work force initiative in the
third quarter of 2009. Approximately
$1.1 million of the $1.6 million increase in domestic personnel expenses is
explained by the 5 week difference between the reporting periods being compared.
Other OS&A costs increased by $1.2 million to $5.4 million in the 2009
reporting period versus $4.2 million in the 2008 reporting period. Costs
associated with arbitrating the escrow claim amount to approximately $0.7
million of the increase, with the remainder of the increase being the result of
a $0.1 million charge relating to additional bank fees and costs associated with
amending the credit facility, and a $0.4 million increase in information
technology consultants and recruiting costs. Domestic selling, operating and
administrative expenses for the 6 week predecessor period was $1.8
million.
32
Successor
|
Successor
|
Predecessor
|
|||||||||||
52
Weeks Ended
|
47
Weeks Ended
|
6
Weeks Ended
|
|||||||||||
International
Division
|
January
2, 2010
|
January
3, 2009
|
February
11, 2008
|
||||||||||
Salaries
and wages
|
$ | 2,698 | $ | 2,487 | $ | 296 | |||||||
Group
insurance
|
221 | 286 | 35 | ||||||||||
Profit
sharing
|
- | 59 | 3 | ||||||||||
Workers'
compensation
|
62 | 19 | 2 | ||||||||||
2,981 | 2,851 | 336 | |||||||||||
Packaging,
office, comp. supplies
|
221 | 366 | 45 | ||||||||||
Occupancy
expenses
|
784 | 743 | 94 | ||||||||||
Insurance
|
67 | 65 | 4 | ||||||||||
Cargo
loss & damage
|
27 | 18 | 3 | ||||||||||
Other
OSG&A
|
852 | 736 | 68 | ||||||||||
1,951 | 1,928 | 214 | |||||||||||
$ | 4,932 | $ | 4,779 | $ | 550 | ||||||||
Personnel
expense to gross revenue
|
25.2 | % | 21.5 | % | 25.0 | % | |||||||
All
other OSG&A to gross revenue
|
16.4 | % | 14.6 | % | 15.9 | % | |||||||
Total
OSG&A to gross revenue
|
41.6 | % | 36.1 | % | 40.9 | % |
International Selling, Operating and
Administrative — International selling,
operating and administrative expenses increased $0.1 million to $4.9 million in
the 2009 reporting period as compared to the 2008 reporting period, with the
entire increase being the result of the 5 week differential between the
reporting periods being compared. The Company continues to implement its
strategy of growing the international division and deploying more efficient
processes.
Liquidity,
Capital Resources and the Impact of the Impairment of Goodwill and Other
Intangibles
Our
primary cash requirements are for working capital, borrowing obligations and
capital expenditures. We believe that our existing cash and cash equivalents,
cash flow from operations and our amended bank credit facility are adequate to
meet our liquidity needs for the foreseeable future, including working capital,
capital expenditure requirements, taxes and the term loan amortization
obligations.
Simultaneously with the Acquisition, we
entered into a credit agreement with BOA (at the time known as LaSalle
Bank National Association), which was subsequently amended on April 17, 2009,
September 15, 2009 and February 26, 2010. The credit agreement with
BOA, as amended, provided for a term loan of $ 4.7 million and revolving
loans and letters of credit of up to $2.128 million. As of January 2,
2010, the outstanding balance of the term loan was $2.895 million, the
outstanding balance of the revolving loans was $ 0 and the outstanding balance
of the letters of credit was $0.718 million. On March 5, 2010, the
Company entered into the Credit Agreement with Cole Taylor Bank, using a portion
of the proceeds from its initial loan under the new Facility, in combination
with available cash, to repay its then-existing loans from BOA. Under
the new Facility, the Company received a financing commitment of up to $6
million. Interest on the new Facility is payable at 200 basis points
over the prime rate or 450 basis points over LIBOR. The new Facility
is secured by substantially all of the Company’s assets. The
Credit Agreement and the new Facility are more fully described under Item 1 in
the section entitled “Recent Events – Credit Facility with Cole Taylor
Bank.”
The
amortization of the identifiable intangibles is a $1.249 million charge per year
for financial statement purposes. This amortization is not deductible
for tax purposes. Consequently, our future outlays for income taxes
are expected to exceed our income tax expense by approximately $0.500 million
per year assuming a 40% effective tax rate. However, the Company has
sufficient ability to carry back $2.493 million of income against prior year
taxes, which will reduce the current year’s taxes paid.
In
October 2008, the Company signed a software and equipment agreement with an IBM
services partner to implement a new accounting and operational software (ERP)
package. Simultaneously, the Company is also updating and making selective improvements
to its infrastructure to support compliance with regulatory requirements and to
accommodate the new application suite. These projects will be funded through a
combination of internally generated cash flow, operating and /or capital
leases.
33
Cash
Flows
The
following table summarizes our historical cash flows:
(Thousands)
|
||||||||||||
CHI
|
CHI
|
CGI
|
||||||||||
Successor
|
Successor
|
Predecessor
|
||||||||||
Year
Ended
|
47
Weeks Ended
|
6
Weeks Ended
|
||||||||||
January
2, 2010
|
January
3, 2009
|
February
11, 2008
|
||||||||||
Cash
provided by operating activities
|
$ | 1,237 | $ | 3,304 | $ | 842 | ||||||
Cash
(used in) investing activities
|
$ | (908 | ) | $ | (396 | ) | $ | (7 | ) | |||
Cash
(used in) financing activities
|
$ | (1,365 | ) | $ | (10,169 | ) | $ | - |
The
discussion of our cash flows that follows is based on our historical cash flows
for the 52 weeks ended January 2, 2010, the 47 week period ended January 3, 2009
and the 6 week period ended February 12, 2008.
Cash Flow from Operating
Activities. Net cash provided
by operating activities for the 52 weeks ended January 2, 2010, the 47 week
period ended January 3, 2009, and the 6 week period ended February 12, 2008,
were approximately $1.2 million, $3.3 million and $0.8 million, respectively.
The decrease in cash flow in 2009 was associated with the economic recession and
the significant drop in advertising revenues of the products for which we
arrange the shipment.
Cash Flow from Investing
Activities. Net cash used in
investing activities for the 52 weeks ended January 2, 2010, the 47 week period
ended January 3, 2009, and the 6 week period ended February 12, 2008 was $0.9
million, $0.4 million and $0.0 million, respectively. Capital expenditures were
$0.9 million for 2009 versus $0.6 million for 2008.
Cash Flow from Financing
Activities. Net cash used in
financing activities for the 52 weeks ended January 2, 2010, the 47 week period
ended January 3, 2009, and the 6 week period ended February 12, 2008, were
approximately $1.4 million, $10.2 million and $0.0 million, respectively. The
net cash used by financing activities for the 52 weeks ended January 2, 2010 was
the repayment of the term loan of $1.4 million. The net cash used by the
financing activities for the 47 weeks ended January 3, 2009 resulted in
borrowing of $4.7 million under the Bank of America facility, offset by the
$14.4 million in payments to shareholders who chose to convert their shares as
part of the Acquisition and by the repayment of the term loan of $0.5
million.
Business
and Credit Concentration Risks
34
Domestically,
the Company maintains cash and cash equivalents in two banks. The bank balances
at year end were in non-interest bearing accounts, which are fully insured by
the FDIC. Under the Temporary Liquidity Guarantee Program, all non-interest
bearing transaction accounts are fully guaranteed by the FDIC for the entire
amount in the account through June 30, 2010.
Critical
Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”) requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Estimates
are used for, but not limited to, the accounting for the allowance for doubtful
accounts, inventories, assets held for sale, income taxes and loss
contingencies. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from these estimates under different
assumptions or conditions.
Basis of Presentation — In
June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162.” This statement modifies the U.S. GAAP
hierarchy by establishing only two levels of U.S. GAAP, authoritative and
non-authoritative accounting literature. Effective July 2009, the FASB
Accounting Standards Codification (“FASB ASC”), also known collectively as the
“Codification,” is considered the single source of authoritative U.S. accounting
and reporting standards except for additional authoritative rules and
interpretive releases issued by the SEC. Non-authoritative guidance and
literature would include, among other things, FASB Concepts Statements, American
Institute of Certified Public Accountants Issue Papers and Technical Practice
Aids and accounting textbooks. The Codification was developed to organize U.S.
GAAP pronouncements by topic so that users can more easily access authoritative
accounting guidance. It is organized by topic, subtopic, section and paragraph,
each of which is identified by a numerical designation. This statement applies
beginning in third quarter 2009. All accounting references have been updated,
and therefore SFAS references have been replaced with FASB ASC
references.
Fiscal Year End — The
accompanying consolidated statements of operations, cash flows and stockholder’s
equity are presented for two periods: Predecessor and Successor, which relate to
the period preceding the Acquisition and the period succeeding the Acquisition,
respectively. The Predecessor period pertains to CGI and includes activity for
the 6 weeks ended February 11, 2008. The Successor period pertains to CHI and
includes activity for the 47 weeks ended January 3, 2009. Starting with fiscal
year 2008, the Company, due to the Acquisition of CGI, has adopted CGI’s fiscal
year methodology of a 52 – 53 week fiscal year ending on the Saturday closest to
December 31. Until fiscal year 2008, the Company used a calendar year ending on
December 31, as its fiscal year.
Business Activity — The
Company is a logistics services company that provides ground, air and ocean
freight forwarding, contract logistics, customs clearances, distribution,
inbound logistics, truckload brokerage and other supply chain management
services. The Company serves its clients through a network of contract logistics
providers and distribution centers.
Consolidation — The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant inter-company transactions have been eliminated in consolidation.
The Company is a holding company with investments in operating entities; Clark
Group, Inc., Clark Distribution Systems, Inc., Clark Worldwide Transportation,
Inc, Highway Distribution Systems, Inc. and Evergreen Express Lines,
Inc.
Business Combinations — The
Company has accounted for the Acquisition under the purchase method of
accounting in accordance with FASB Topic ASC 805, “Business Combinations”.
Accordingly, the cost of the Acquisition has been allocated to the assets and
liabilities based upon their respective fair values, including identifiable
intangible assets (such as, non-compete agreements, trade names, and customer
relationships) and the remaining cost allocated to goodwill.
Recognition of Revenue
— Gross
revenues consist of the total dollar value of goods and services purchased from
the Company by our customers. FASB Topic ASC 605, “Revenue
Recognition”, establishes the criteria for recognizing revenues on a gross or
net basis. All transactions are recorded at the gross amount charged
to customers for service. In these transactions, the Company is the
primary obligor, a principal to the transaction, assumes all credit risk,
maintains substantially all risks and rewards, has discretion to select the
supplier, and has latitude in pricing decisions. The Company has no material
revenues relating to activities where these factors are not
present.
Gross
revenue for domestic ground freight is recognized based upon the relative
transit time in each reporting period with the freight costs recognized as
incurred. Domestic ground freight estimates are highly predictable
and are based on historical delivery data.
Gross
revenue and freight costs for international air and ocean freight forwarding
services are recognized based upon the estimated arrival date of the shipments.
International air and ocean freight transit estimates are based on published
third party carrier arrival schedules.
Cash and Cash
Equivalents — For purposes of the consolidated statements of cash flows,
the Company considers all short term, highly liquid investments with an original
maturity of less than 90 days to be cash equivalents.
35
Accounts
Receivable — Accounts receivable are recorded at management's estimate of
net realizable value. Management evaluates the adequacy of the allowance for
uncollectible accounts on a customer specific basis. These factors include
historical trends, general and specific economic conditions and local market
conditions. Accounts are written off when management determines collection is
doubtful. The balances for the allowance for uncollectible accounts were
$244,000 and $348,000 as of January 2, 2010, and January 3, 2009,
respectively.
Property and
Equipment — Property and equipment are stated at fair value as of the
date of the Acquisition of the Clark Group, Inc. Buildings and equipment are
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized using the straight-line method
over the shorter of the related lease term or useful lives of the assets. Gains
and losses on disposal of property and equipment are recognized when the asset
is sold. Expenditures for maintenance and repairs are expensed as incurred,
whereas expenditures for improvements and replacements are
capitalized.
Freight Expense — Freight
expense includes purchased transportation expenses and operating fleet expenses,
including equipment rents and leases, maintenance, fuel and driver personnel
expenses.
Selling Operating and Administrative
Expenses — Selling, operating and administrative expenses include all
operating expenses except freight. These expenses include personnel, occupancy,
packaging, supplies, insurance, cargo losses and depreciation.
Fair Value of Financial
Instruments — The Company's financial instruments consist of accounts
receivable, accounts payable and debt. The fair value of these financial
instruments approximates their carrying value.
Operating Leases — The
Company leases most of its distribution facilities and transportation equipment.
At inception, each lease is evaluated to determine whether the lease will be
accounted for as an operating or capital lease. The term used for this
evaluation includes renewal option periods only in instances in which the
exercise of the renewal can be reasonably assured and failure to exercise such
option would result in an economic penalty. The Company currently has no leases
that meet the capital lease requirements, therefore all leases are currently
accounted for as operating.
The
Company records rental expense on a straight-line basis.
Use of Estimates — The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and expenses
during the reporting period. Estimates are based on several factors including
the facts and circumstances available at the time the estimates are made,
historical experience, risk of loss, general economic conditions and trends, and
the assessment of the probable future outcome. Some of the more significant
estimates include accounting for doubtful accounts, useful lives of property and
equipment and intangible assets, purchase price allocations of acquired
businesses, valuation of assets including goodwill and other intangible assets,
estimates of the realizability of deferred tax assets, assumptions used in the
valuation of stock based compensation, incurred but not report claims and
estimates of delivery time. Actual results could differ from those estimates.
Estimates and assumptions are reviewed periodically, and the effects of changes,
if any, are reflected in the statement of operations in the period that they are
determined.
The
Company accrues freight expense for any transportation costs that have been
incurred, but have not been included in accounts payable. These estimates are
used to substantiate vendor invoices for purchased transportation for shipments
that have been completed at the end of the period. At any time we have about 3
weeks of freight expense accrued domestically and about 5 weeks accrued for
international operations. Clark maintains a relational database of all freight
purchases by vendor and by lane to assist in the purchase of freight and the
estimation of the accruals at period end.
The
Company uses a combination of insurance and self-insurance to provide for the
liabilities for workers’ compensation, healthcare benefits, general liability,
property insurance, and vehicle liability. Liabilities associated with the
self-insured risks are not discounted and are estimated, in part, by considering
historical claims experience, demographic factors, severity factors and other
assumptions. The estimated accruals for these liabilities, portions of which are
calculated by independent third party service providers, could be significantly
affected if future occurrences and claims differ from these assumptions and
historical trends. The self-insurance reserve for medical, dental and workers’
compensation was included in “accrued expense” on the balance sheets at January
2, 2010, and January 3, 2009, and was $244,000 and $395,000,
respectively.
Accounting for Goodwill, Intangibles
and Other Long-Lived Assets — The Company accounts for goodwill,
intangibles and other long-lived assets in accordance with FASB Topic ASC 350,
“Intangibles—Goodwill and Other”, and FASB Topic ASC 360, “Property, Plant, and
Equipment”.
Under
FASB Topic ASC 805, “Business Combinations”, goodwill represents the excess of
cost (purchase price) over the fair value of net assets acquired. Acquired
intangibles are recorded at fair value as of the date acquired using the
purchase method. Under FASB Topic ASC 350, “Intangibles—Goodwill and Other”,
goodwill and other intangible assets determined to have an indefinite life are
not amortized, but are tested for impairment at least annually or when events or
changes in circumstances indicate that the assets might be impaired. The
impairment test for intangible assets consists of a comparison of its fair value
with its carrying value, if the carrying amount exceeds its fair value, an
impairment loss is recognized.
36
The
goodwill impairment test is a two-step process. The first step involves a
comparison of the fair market value of a reporting unit with its carrying value.
If the fair market value is equal to or greater than the unit’s carrying value,
then goodwill of the reporting unit is not considered to be impaired.
Alternatively, if the carrying value of the reporting unit exceeds its fair
market value, a second step is performed to compute the amount of the impairment
by determining an “implied fair value” of goodwill. The annual impairment test
was performed in the fourth quarter.
Other
intangible assets, which include non-compete agreements and customer
relationships are amortized on a straight-line basis over the estimated useful
lives of 5 to 12 years.
Comprehensive Income — FASB
Topic ASC 220, “Comprehensive Income”, established standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income for the 52 weeks ended
January 2, 2010, 47 weeks ended January 3, 2009, and the 6 weeks ended February
12, 2008 were the same as net income for the Company.
Stock Based Compensation —
FASB Topic ASC 718, “Compensation – Stock Compensation” requires the Company to
recognize expense for its share-based compensation based on the fair value of
the awards that are granted. The fair value of stock options is estimated on the
date of grant using the Black-Scholes option pricing model. Option valuation
methods require the input of highly subjective assumptions, including the
expected stock price volatility. Measured compensation expense related to such
option grants, is recognized ratably over the vesting period of the related
grants. (Note 11) Prior to the acquisition there was no stock based
compensation.
Foreign Currency — For
consolidation purposes, assets and liabilities expressed in currencies other
than U.S. dollars are translated at the rates of exchange effective at the
balance sheet date. These gains and losses arising on re-measurement are
accounted for in the income statement. Gains and losses on translation were not
material.
Income Taxes — The Company
early adopted the provisions of FASB Topic ASC 740, “Income Taxes”. This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in the financial statements and requires companies to use a
more-likely-than-not recognition threshold based on the technical merits of the
tax position taken. For the 52 weeks ended January 2, 2010 and the 47 weeks
ended January 3, 2009, the Company had no material unrecognized income tax
benefits, expected changes to unrecognized income tax benefits or interest and
penalties.
The
Company’s accounting policy for recognition of interest and penalties related to
income taxes is to include such items as a component of income tax
expense.
CGI was a
subchapter S corporation through February 12, 2008, the date of acquisition.
Prior to February 12, 2008, CGI was not subject to federal or state income tax,
with the exception of certain states that do not recognize federal S corporation
status. CGI had evaluated the potential tax, interest and penalties relating to
this exposure as of December 29, 2007; it was determined to be immaterial. Upon
acquisition, CGI’s S corporation status was terminated, and after that date, the
Company will be taxed as a C corporation for federal and state income tax
purposes. The Company will file a consolidated income tax return for federal tax
purposes and in states where consolidated filings are allowed or required. The
Company will file income tax returns in the United Kingdom for its discontinued
foreign subsidiary for 2008. The Company will begin filing in all jurisdictions
determined by the Company to have potential exposure in 2008. In addition, the
Company, as a result of a nexus study, had determined that an increase in the
number of states the Company currently files in will be implemented. The impact
of these increased filings has been accounted for in the tax provision for the
53 weeks ended January 3, 2009. All tax years since 2006 have been filed or yet
to be filed are open to examination by the appropriate tax
authorities.
FASB Topic ASC 740,“Income Taxes” — Management
has developed control processes and procedures that will achieve the following
control objectives with respect to FASB Topic ASC 740 and uncertain tax
positions:
|
·
|
All
material tax positions taken or expected to be taken in tax returns are
identified.
|
|
·
|
The
appropriate unit of account is determined for each material tax
position.
|
|
·
|
Only
tax positions that meet the more-likely-than-not recognition threshold are
recognized.
|
|
·
|
All
tax positions that meet the more-likely-than-not recognition threshold are
recognized.
|
|
·
|
All
previously unrecognized tax positions that subsequently meet the
more-likely-than-not recognition threshold are recognized in the first
interim period in which the recognition threshold is
met.
|
37
|
·
|
All
previously recognized tax positions that subsequently fail to meet the
more-likely-than-not recognition threshold are derecognized in the first
interim period in which the recognition threshold is no longer
met.
|
|
·
|
The
amount of benefit recognized for each tax position is the largest amount
that is greater than 50 percent likely to be
realized.
|
|
·
|
New
information – such as new tax laws, regulations, and court cases – that
affects the recognition and measurement of the benefits of a tax position
is identified in a timely manner and properly
evaluated.
|
|
·
|
The
recognition and measurement of the benefits of a tax position reflect all
information available to management at the reporting date and do not take
into account facts and circumstances and developments occurring after the
reporting date but before the issuance of the financial
statements.
|
|
·
|
Interest
and penalties are properly measured and recorded for all uncertain tax
positions.
|
|
·
|
Amounts
recorded for unrecognized tax benefits, including interest and penalties,
are properly presented, classified, and disclosed in the consolidated
financial statements.
|
Earnings Per Common
Share (“EPS”) —
Prior to the Acquisition, the Company was privately held and did not calculate
earnings per share.
The
Company measures the effects of options and warrants on diluted EPS through
application of the treasury stock method, whereby the proceeds received by the
Company based on assumed exercise are hypothetically used to repurchase the
Company’s common stock at the average market price for the period. Dilution will
occur according to the treasury stock method only if the average market price of
the Company’s common stock is higher than the exercise price of either the stock
options and/or warrants. When the opposite is present (i.e., the average market
price is lower), the results are antidilutive, and the impact of either the
stock options and/or warrants is ignored.
The
average market price of the Company’s common stock from January 4, 2009, to
January 2, 2010, was $.65 and since it was lower than the exercise price of the
warrants, the impact of the warrants is excluded from the diluted EPS
calculation for the 52 week period ended January 2, 2010.
The
average market price of the Company’s common stock from January 12, 2008, to
January 3, 2009, was $2.20 and since it was lower than the exercise price of the
warrants, the impact of the warrants is excluded from the diluted EPS
calculation for the 47 week period ended January 3, 2009.
During
the 52 weeks ended January 2, 2010, the average market price of the Company’s
stock was not higher than the exercise price of certain options granted,
therefore, the impact of certain stock options is excluded in the diluted EPS
calculations for the 52 weeks ended January 2, 2010.
During
the 47 weeks ended January 3, 2009, the average market price of the Company’s
stock was not higher than the exercise price of certain options granted,
therefore, the impact of certain stock options is excluded in the diluted EPS
calculations for the 47 weeks ended January 3, 2009.
New
Accounting Standards
Fair
Value Measurements
In
September 2006, the FASB issued guidance that defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This guidance is contained in ASC Topic 820 “Fair Value
Measurements and Disclosures.” This guidance does not require any new fair value
measurements, but applies under other accounting
pronouncements that require or permit fair value measurements. The effective
date of this guidance for financial assets and liabilities that are recognized
or disclosed at fair value on a recurring basis was January 1, 2008, and the
Company did adopt the provisions of this guidance at that time as it related to
financial assets and liabilities recognized or disclosed at fair value on a
recurring basis. Effective January 1, 2009, pursuant to this guidance, the
Company adopted the provisions of this guidance as it relates to non financial
assets and liabilities that are not recognized or disclosed at fair value on a
recurring basis. The adoption of this guidance had no impact on the Company’s
financial statements.
38
In April
2009, the FASB issued guidance that extends the disclosure requirements
regarding the fair value of financial instruments to interim financial
statements of publicly traded companies. This guidance is primarily contained in
ASC Topic 825 “Financial Instruments” and ASC Topic 270 “Interim Reporting.”
This guidance is effective for interim periods ending after June 15, 2009. The
adoption of this guidance had no impact on the Company’s financial
statements.
Collaborative
Arrangements
In
December 2007, the FASB issued guidance to participants in a collaborative
arrangement which is contained in ASC Topic 808. A collaborative arrangement is
a contractual arrangement that involves a joint operating activity. These
arrangements involve two (or more) parties who are both (a) active participants
in the activity and (b) exposed to significant risks and rewards dependent on
the commercial success of the activity. Many collaborative arrangements involve
licenses of intellectual property, and the participants may exchange
consideration related to the license at the inception of the arrangement.
Participants in a collaborative arrangement shall report costs incurred and
revenue generated from transactions with third parties (that is, parties that do
not participate in the arrangement) in each entity's respective income statement
pursuant to such guidance. An entity should not apply the equity method of
accounting to activities of collaborative arrangements. This guidance is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The adoption
of this guidance had no material impact on the Company’s financial
statements.
Business
Combinations
On
January 4, 2009, we adopted the accounting pronouncements relating to business
combinations (primarily contained in ASC Topic 805 “Business Combinations”),
including assets acquired and liabilities assumed arising from contingencies.
These pronouncements established principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree as well as provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. In addition, these
pronouncements eliminate the distinction between contractual and non-contractual
contingencies, including the initial recognition and measurement criteria and
require an acquirer to develop a systematic and rational basis for subsequently
measuring and accounting for acquired contingencies depending on their nature.
Our adoption of these pronouncements will have an impact on the manner in which
we account for any future acquisitions.
Non-Controlling
Interests in Consolidated Financial Statements
On
January 4, 2009, we adopted the accounting pronouncement on non-controlling
interests in consolidated financial statements, which establishes accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This guidance is primarily contained in ASC
Topic 810 “Consolidation”. It clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. The adoption of
this standard has not had a material impact on our consolidated financial
statements.
Subsequent
Events
In May
2009, the FASB issued guidance that is intended to establish general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before the financial statements are issued or are available to be
issued. This guidance is contained in ASC Topic 855 “Subsequent Events.” It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. This guidance is effective for
interim and annual periods ending after June 15, 2009. The Company adopted the
provisions of this guidance as of June 30, 2009.
Other
In June
2009, an update was made to “Consolidation – Consolidation of Variable
Interest Entities.” Among other things, the update replaces the calculation for
determining which entities, if any, have a controlling financial interest in a
variable interest entity (VIE) from a quantitative based risks and rewards
calculation, to a qualitative approach that focuses on identifying which
entities have the power to direct the activities that most significantly impact
the VIE’s economic performance and the obligation to absorb losses of the VIE or
the right to receive benefits from the VIE. The update also requires ongoing
assessments as to whether an entity is the primary beneficiary of a VIE
(previously, reconsideration was only required upon the occurrence of specific
events), modifies the presentation of consolidated VIE assets and liabilities,
and requires additional disclosures about a Company’s involvement in VIEs. This
update will be effective for the Company beginning January 4, 2010. The
Company is evaluating the impact that this guidance will have on its financial
statements, if any.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Not
applicable.
Item
8. Financial Statements and Supplementary Data
39
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Item
9A(T). Control and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in reports filed under the
Exchange Act, is recorded, processed, summarized and reported within the
specified time periods and accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
Under the
supervision and with the participation of our management, including the chief
executive officer and chief financial officer, we conducted an evaluation of the
effectiveness of the Company’s disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation,
our chief executive officer and chief financial officer have concluded that
control deficiencies which constitute a material weakness, as discussed below,
existed in our internal control over financial reporting as of January 2, 2010.
We view our internal control over financial reporting as integral to our
disclosure controls and procedures. Because of these material weaknesses, our
chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were not effective at the reasonable
assurance level as of January 2, 2010.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining effective internal
control over financial reporting, as defined in Rule 13a-15(f) under the
Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America
(‘‘U.S. GAAP’’). Our internal control over financial reporting includes policies
and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect our transactions and
dispositions of our assets; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of consolidated financial
statements in accordance with U.S. GAAP, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
directors; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our consolidated financial
statements.
Our
management, with the participation of our chief executive officer and chief
financial officer, assessed the effectiveness of our internal control over
financial reporting as of January 2, 2010. In making the assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (‘‘COSO’’) in Internal Control — Integrated
Framework. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of a company’s annual or
interim financial statements will not be prevented or detected on a timely
basis. In our assessment of our internal control over financial reporting as of
January 2, 2010, our management identified the following material weaknesses in
the Company’s internal control over financial reporting:
|
·
|
We
determined that our information technology system control processes were
inadequate or ineffective.
|
|
·
|
We
determined that controls necessary to identify all adjustments required to
generate a consolidated financial report were inadequate or
ineffective.
|
Based on
our assessment and because of the material weaknesses described above, as well
as our inability to file timely the Form 10-K with the SEC, management concluded
that our internal control over financial reporting was not effective as of
January 2, 2010. The Company is in the process of remediating these material
weaknesses, as described below.
In light of the material
weaknesses described above, we performed additional analyses and other
post-closing procedures to determine that our financial statements included in
this report were prepared in accordance with U.S. GAAP. Accordingly, management
believes that the financial statements included in this report fairly present in
all material respects our financial condition, results of operations and cash
flows for the periods presented.
40
Remediation
Activities
Our
management has discussed the material weaknesses described above with our Audit
Committee. In an effort to remediate the identified material weaknesses, we have
initiated and/or undertaken the following actions:
(1)
|
Management
has hired, and will continue to hire, additional personnel with technical
knowledge, experience and training in the application of generally
accepted accounting principles commensurate with our financial reporting
and U.S. GAAP requirements. The particular areas where training and
experience are key aspects of the controls being strengthened and improved
are being used to form part of the criteria for future hires for IT;
additionally, in some cases, technology is being selectively deployed to
transition several areas with weak administrative controls and potential
exposures to enable an automated support framework. The use of experienced
external resources and training, a focus on improving these areas, and
revisions to roles and responsibilities will have a very positive effect
on remediation of these material weaknesses. In addition, internal
training and awareness programs, with improved documentation, will be
launched in the year to provide an understanding of the shared roles and
responsibilities of all employees to meet and maintain compliance
criteria.
|
(2)
|
Where
necessary, we will supplement personnel with qualified external advisors.
We have retained senior level and highly qualified personnel from well
known firms with strong training and experience to advise and consult in
specific areas of focus and remediation. Additionally, we have and will
continue to retain qualified vendors who are long term providers for key
technologies as well as accompanying procedures and guidelines that
support our short term and long range strategic objectives. We have
accelerated activities using additional external resources where
appropriate. As we initiate and progress in the projects and activities
focusing on both strengthening and improving our controls and the
associated procedures, processes and guidelines, we have and will continue
to leverage strong relationships with knowledgeable sources to bring in
and continue to improve our capabilities for compliance using both
administrative and technological
means.
|
(3)
|
Our
new financial system and software has been acquired, is in the
implementation process, and will be operational by the end of the
2nd
quarter of 2010. This software and system has been and is currently used
in many public companies, has a global presence and provides off the shelf
capabilities and features that reduce the complexity and intricacy of
designing and developing accounting and reporting controls and
capabilities, thus accelerating the implementation. The activities of
Business Requirements and Analysis have been completed, and we are
following a proven methodology of design and integration of the software
to meet the specific needs of Clark’s business. The new financial system
will integrate controls, administrative and management reporting
capabilities with improved security over the data and improved audit
capabilities. The use of this modern database-oriented financial and
accounting system will improve the Company’s ability to perform detailed
analysis and reporting, reduce the monthly, quarterly and annual
information cycles, as related to accounting and compliance reporting,
provide a higher level of automated control on system access and enable
user process workflow capabilities.
|
(4)
|
Through the
acquisition of The Clark Group, Inc. on February 12, 2008, and aggressive
recruiting, the Company has hired additional resources with expertise in
the selection and application of generally accepted accounting
principles commensurate with their financial reporting requirements.
Currently, there are 5 Certified Public Accountants (“CPAs”) within the
Company. In addition, the Company worked very closely with outside
consultants in their 404(a) assessment to improve the effective controls
to ensure a reasonable assurance that management review procedures were
properly performed over the accounts and disclosures of the financial
statements.
|
(5)
|
The
IT department, in conjunction with Company management and external
consultants, has developed a specific framework that is guiding the
scoping and initiation of a series of projects and initiatives targeting
specific remediation activities and change management issues relating to
the material weaknesses and improving the Company’s capabilities to manage
data, systems and software. A communications program is planned to reach
out to operations and support personnel across all of the Company in
support of these efforts. Areas where documentation, methodologies,
processes, procedures and guidelines are required to help meet compliance
targets are being reviewed and improvements are being made as we go
forward. In several cases, where technology can be used to improve and
augment administrative controls and compliance, investment options are
being investigated, selectively reviewed and appropriate recommendations
are being made.
|
41
Changes
in Internal Control Over Financial Reporting
Other
than as described above, there have not been
any changes in our internal control over financial reporting in the quarter
ended January 2, 2010, which have materially affected, or are likely to
materially affect, our internal control over financial reporting.
Limitation
on Effectiveness of Controls
All
internal control systems have inherent limitations, including the possibility of
circumvention and overriding the control. Accordingly, even effective disclosure
controls and procedures and internal control over financial reporting can
provide only reasonable assurance as to the reliability of financial statement
preparation and presentation. Further, because of changes in conditions, the
effectiveness of internal controls may vary over time.
Item
9B. Other Information
None.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance
See Item
14.
Item
11. Executive Compensation
See Item
14.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
See Item
14.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
See Item
14.
Item
14. Principal Accountant Fees and Services
The
information required by Items 10, 11, 12, 13 and 14 will be contained in, and is
incorporated by reference from, our Definitive Proxy Statement on Schedule 14A
for our 2010 annual meeting of stockholders, to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this annual report.
PART
IV
Item
15. Exhibits, Financial Statement Schedules
(a)
|
The
following documents are filed as part of this annual
report:
|
1.
|
Financial
Statements:
|
·
|
Report of
Independent Registered Public Accounting
Firm
|
42
|
Consolidated
Balance Sheets at January 2, 2010 and January 3,
2009
|
|
·
|
Consolidated
Statements of Operations for the years ended January 2, 2010 and January
3, 2009
|
|
·
|
Consolidated
Statements of Shareholders’ Equity for the years ended January 2, 2010 and
January 3, 2009
|
|
·
|
Consolidated
Statements of Cash Flows for the Years ended January 2, 2010 and January
3, 2009
|
|
·
|
Notes
to Consolidated Financial
Statements
|
2.
|
Financial
Statement Schedules:
|
None.
3.
|
Exhibits:
|
Exhibit No.
|
Description
|
|
2.1
|
Stock
Purchase Agreement, dated as of May 18, 2007, and amended on November 1,
2007, by and among Registrant, The Clark Group, Inc. and the stockholders
of The Clark Group, Inc.(1)
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of Registrant.(2)
|
|
3.2
|
Bylaws
of the Registrant.(3)
|
|
4.1
|
Specimen
Unit Certificate.(2)
|
|
4.2
|
Specimen
Common Stock Certificate.(2)
|
|
4.3
|
Specimen
Warrant Certificate.(2)
|
|
4.4
|
Warrant
Agreement.(4)
|
|
4.5
|
First
Supplemental Warrant Agreement by and between the Registrant and The Bank
of New York.(5)
|
|
10.1
|
Form
of Stock Transfer Agency Agreement entered into by and between The Bank of
New York and the Registrant.(4)
|
|
10.2
|
Form
of Registration Rights Agreement among the Registrant and the stockholders
listed on the signature page thereto.(4)
|
|
10.3
|
Agreement
dated February 1, 2008, among Clark-GLAC Investment, LLC, James J.
Martell, Gregory E. Burns, Maurice Levy, Mitchel Friedman and the
Registrant.(6)
|
|
10.4
|
Agreement
dated February 1, 2008, among James J. Martell, Gregory E. Burns, Donald
McInnes, Charles Royce, Edward Cook and the Registrant.(6)
|
|
10.5
|
Agreement
dated February 8, 2008, among Clark-GLAC Investment, LLC, James J.
Martell, Gregory E. Burns, Charles Royce and Mitchel Friedman, and the
Registrant.(7)
|
|
10.6
|
|
Stockholder
Escrow Agreement, dated February 12, 2008, by and among the Registrant,
the parties listed under Stockholders on the signature page thereto and
The Bank of New York.(1)
|
43
10.7
|
Registrant’s
2007 Long-Term Incentive Equity Plan.(1)
|
|
10.8
|
Employment
Agreement, dated October 27, 2009, by and between The Clark Group, Inc.
and Charles H. Fischer III.
|
|
10.9
|
Settlement
Agreement and Mutual Release, dated as of December 31, 2009, by and
between Clark Holdings, Inc. f/k/a Global Logistics Acquisition
Corporation, The Clark Group, Inc., Donald G. McInnes, Gregory E. Burns,
Brian Bowers, Edward W. Cook, Maurice Levy, Charles H. “Skip” Fischer III,
Brian Gillen, Stephen M. Spritzer, and Charles C. Anderson, Jr., or in his
absence Jay Maier, as representative of the sellers of the capital stock
of Clark Group, Cherokee Capital Management, LLC, Joel R. Anderson,
Charles C. Anderson, Jr., Delaware ESBT for Charles C. Anderson, Jr.,
Terry C. Anderson, Clyde B. Anderson, Harold M. Anderson, Charles C.
Anderson III, Frank Stockard, Bill Lardie, Jay Maier, Delaware ESBT for
Jay Maier, David Gillis, John Barry and Timothy Teagan.(8)
|
|
10.10
|
Credit
and Security Agreement, dated as of March 5, 2010, by and between Cole
Taylor Bank and Clark Holdings Inc., The Clark Group, Inc., Clark
Distribution Systems, Inc., Highway Distribution Systems, Inc., Clark
Worldwide Transportation, Inc. and Evergreen Express Lines, Inc.(9)
|
|
14.1
|
Registrant’s
Code of Ethics.(4)
|
|
21.1
|
List
of Subsidiaries.(2)
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
|
(1)
|
Incorporated
by reference to the Registrant’s Definitive Proxy Statement (No.
001-32735), filed January 28, 2008.
|
(2)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed March
7, 2008.
|
(3)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed
December 2, 2008.
|
(4)
|
Incorporated
by reference to the Registrant’s Registration Statement on Form S-1 (File
No. 333-128591).
|
(5)
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2006.
|
(6)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed
February 1, 2008.
|
(7)
|
Incorporated
by reference to the Registrant’s Amended Current Report on Form 8-K, filed
February 20, 2008.
|
(8)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed January
7, 2010.
|
(9)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, filed March
11, 2010.
|
44
CLARK
HOLDINGS INC.
(Formerly
Global Logistics Acquisition Corporation)
Report
of Independent Registered Public Accounting Firm
|
46
|
|
Financial
statements
|
||
Consolidated
Balance Sheets
|
47
|
|
Consolidated
Statements of Operations
|
48
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
49
|
|
Consolidated
Statements of Cash Flows
|
50
|
|
Notes
to Consolidated Financial Statements
|
51
|
45
Report
Of Independent Registered Public Accounting Firm
To the
Board of Directors and
Stockholders
of Clark Holdings, Inc.:
We have
audited the accompanying consolidated balance sheets of Clark Holdings, Inc.
(formerly Global Logistics Acquisition Corporation) and subsidiaries
(collectively, the “Company”) or (successor) as of January 2, 2010 and January
3, 2009, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for the 52 week period ended January 2,
2010 and the 47 week period ending January 3, 2009 and the consolidated
statements of operations, changes in stockholders’ equity, and cash flows of The
Clark Group, Inc. (predecessor) for the 6 week period ended February 11, 2008.
The Company’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Clark Holdings, Inc. as of
January 2, 2010 and January 3, 2009, and the results of its operations and its
cash flows for the 52 week period ended January 2, 2010 and the 47 week period
ended January 3, 2009 and the results of operations and cash flows of The Clark
Group, Inc. for the 6 week period ended February 11, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
ParenteBeard LLC
Philadelphia,
Pennsylvania
April 19,
2010
46
CONSOLIDATED
BALANCE SHEETS
(In
Thousands)
January 2, 2010
|
January 3, 2009
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 2,879 | $ | 3,915 | ||||
Restricted
cash
|
718 | — | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $244 and $348,
respectively (includes related party sales of $5 and $333,
respectively)
|
5,102 | 5,557 | ||||||
Other
receivables
|
52 | 62 | ||||||
Prepaid
expenses
|
759 | 1,594 | ||||||
Deferred
tax assets-current
|
483 | 718 | ||||||
Total
current assets
|
9,993 | 11,846 | ||||||
PROPERTY
AND EQUIPMENT, net of accumulated depreciation
|
2,529 | 1,925 | ||||||
INTANGIBLE
ASSETS, net of accumulated amortization
|
14,257 | 16,746 | ||||||
Total
assets
|
$ | 26,779 | $ | 30,517 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Current
portion of long term debt
|
$ | 2,895 | $ | 1,184 | ||||
Accounts
payable
|
3,502 | 2,500 | ||||||
Accrued
expenses and other payables
|
5,194 | 5,428 | ||||||
Total
current liabilities
|
11,591 | 9,112 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
Long
term debt
|
— | 3,076 | ||||||
Deferred
tax liabilities-non-current
|
5,267 | 6,576 | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Preferred
stock-$.0001 par value; 1,000,000 shares authorized; none
issued
|
— | — | ||||||
Common
stock-$.0001 par value; 400,000,000 shares authorized; 10,859,385 issued
and outstanding at January 2, 2010 and January 3, 2009
|
1 | 1 | ||||||
Additional
paid-in capital
|
73,535 | 73,427 | ||||||
Deficit
|
(63,615 | ) | (61,675 | ) | ||||
Total
stockholders' equity
|
9,921 | 11,753 | ||||||
Total
liabilities and stockholders' equity
|
$ | 26,779 | $ | 30,517 |
See
Notes to Consolidated Financial Statements
47
CLARK
HOLDINGS INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
Thousands, except share data)
Clark Holdings Inc.
|
CGI
|
||||||||||||
Successor
|
Predecessor
|
||||||||||||
For 52 Weeks Ended
|
For 47 Weeks Ended
|
For 6 Weeks Ended
|
|||||||||||
January 2, 2010
|
January 3, 2009
|
January 3, 2009
|
|||||||||||
Gross
revenues (includes related party sales of $1,223, $2,418 and $388
respectively)
|
$ | 66,666 | $ | 75,773 | $ | 8,394 | |||||||
Freight
expense
|
(42,189 | ) | (49,553 | ) | (5,149 | ) | |||||||
Depreciation
and amortization
|
(1,716 | ) | (1,424 | ) | (27 | ) | |||||||
Impairment
of goodwill and intangible assets
|
(1,077 | ) | (66,568 | ) | — | ||||||||
Selling,
operating and administrative expenses
|
(25,526 | ) | (22,184 | ) | (2,385 | ) | |||||||
(Loss)
income from operations
|
(3,842 | ) | (63,956 | ) | 833 | ||||||||
Interest
income
|
1 | 20 | 3 | ||||||||||
Other
income
|
1,286 | — | — | ||||||||||
Interest
expense
|
(206 | ) | (165 | ) | (2 | ) | |||||||
(Loss)
income before income taxes
|
(2,761 | ) | (64,101 | ) | 834 | ||||||||
Income
tax benefit
|
821 | 378 | — | ||||||||||
Net
(loss) income
|
$ | (1,940 | ) | $ | (63,723 | ) | $ | 834 | |||||
Weighted
average number of shares outstanding:
|
|||||||||||||
Basic
|
10,859 | 11,306 | |||||||||||
Diluted
|
10,859 | 11,306 | |||||||||||
Net
( loss ) per share:
|
|||||||||||||
Basic
|
$ | (0.18 | ) | $ | (5.64 | ) | |||||||
Diluted
|
$ | (0.18 | ) | $ | (5.64 | ) |
See
Notes to Consolidated Financial Statements
48
CLARK
HOLDINGS INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(In
Thousands, except share data)
Voting $1 Par Value
|
Non-Voting $1 Par Value
|
|||||||||||||||||||||||||||||||||||||||||||||||
Common Stock
|
Common Stock
|
|||||||||||||||||||||||||||||||||||||||||||||||
Number Of
|
Common
|
Number Of
|
Common
|
Additional
|
Retained
|
|||||||||||||||||||||||||||||||||||||||||||
Autorized
|
Shares
|
Stock
|
Autorized
|
Shares
|
Stock
|
Restricted
|
Paid-In
|
Earnings
|
||||||||||||||||||||||||||||||||||||||||
Shares
|
Outstanding
|
Voting
|
Shares
|
Outstanding
|
Non-Voting
|
Shares
|
Amount
|
Shares
|
Capital
|
(Deficit)
|
Total
|
|||||||||||||||||||||||||||||||||||||
Balance
- December 29, 2007
|
2,500 | 910 | 1 | 22,500 | 8,190 | 8 | 0 | 0 | 0 | 1,041 | 12,468 | 13,509 | ||||||||||||||||||||||||||||||||||||
Net
income for the year ended December 29, 2007
|
834 | 834 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance
- February 11, 2008
|
2,500 | 910 | 1 | 22,500 | 8,190 | 8 | 0 | 0 | 0 | 1,041 | 13,302 | 14,343 | ||||||||||||||||||||||||||||||||||||
CHI
|
||||||||||||||||||||||||||||||||||||||||||||||||
Successor
|
||||||||||||||||||||||||||||||||||||||||||||||||
Balance
- February 12, 2008
|
13,500,000 | $ | 1 | 67,174 | 2,048 | 69,223 | ||||||||||||||||||||||||||||||||||||||||||
Equity
issuance per Purchase Agreement
|
320,276 | 2,473 | 2,473 | |||||||||||||||||||||||||||||||||||||||||||||
Transfer
in from contingency for stock conversion, net
|
18,147 | 18,147 | ||||||||||||||||||||||||||||||||||||||||||||||
Reduction
due to stock conversion
|
(1,787,453 | ) | (14,429 | ) | (14,429 | ) | ||||||||||||||||||||||||||||||||||||||||||
Restricted
shares per Stockholders' Escrow Agreement
|
(1,173,438 | ) | 1,173,438 | — | ||||||||||||||||||||||||||||||||||||||||||||
Net
loss for 47 weeks ended January 3, 2009
|
(63,723 | ) | (63,723 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Adjustment
for option expense
|
62 | 62 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance
- January 3, 2009
|
10,859,385 | $ | 1 | 1,173,438 | $ | 73,427 | $ | (61,675 | ) | $ | 11,753 | |||||||||||||||||||||||||||||||||||||
Net
loss for 52 weeks ended January 2, 2010
|
(1,940 | ) | (1,940 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Adjustment
for option expense
|
108 | 108 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance
- January 2, 2010
|
10,859,385 | $ | 1 | 1,173,438 | $ | 73,535 | $ | (63,615 | ) | $ | 9,921 |
See
Notes to Consolidated Financial Statements
49
CLARK
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
Thousands)
Clark Holdings Inc.
|
CGI
|
|||||||||||
Successor
|
Predecessor
|
|||||||||||
52 Weeks
|
47 Weeks
|
6 Weeks
|
||||||||||
Ended
|
Ended
|
Ended
|
||||||||||
January 2, 2010
|
January 3, 2009
|
Feb 11,2008
|
||||||||||
Cash
Flows from Operating Activities:
|
||||||||||||
Net
(loss) income
|
$ | (1,940 | ) | $ | (63,723 | ) | $ | 834 | ||||
Adjustment
to reconcile net (loss) income to cash flows from operating
activities
|
||||||||||||
Depreciation
|
304 | 150 | 27 | |||||||||
Amortization
|
1,412 | 1,246 | — | |||||||||
Impairment
of goodwill and intangible assets
|
1,077 | 66,568 | — | |||||||||
Shared-based
compensation cost
|
108 | 62 | — | |||||||||
Deferred
income tax benefit
|
(1,074 | ) | (1,069 | ) | — | |||||||
Changes
in operating assets and liabilities:
|
||||||||||||
(Increase)
in restricted cash
|
(718 | ) | — | — | ||||||||
Decrease
in accounts receivable
|
455 | 160 | 645 | |||||||||
Decrease
in other receivables
|
10 | 283 | 13 | |||||||||
(Increase)
Decrease in prepaid expense
|
835 | (541 | ) | 53 | ||||||||
(Increase)
Decrease in currents assets of discontinued operations
|
— | 388 | 50 | |||||||||
Increase
(Decrease) in accounts payable
|
1,002 | (3,515 | ) | (770 | ) | |||||||
Increase
(Decrease) in accrued expenses and other payable
|
(234 | ) | 3,427 | (16 | ) | |||||||
Increase
(Decrease) in currents liabilities of discontinued
operations
|
— | (132 | ) | 6 | ||||||||
Net
cash provided by operating activities
|
1,237 | 3,304 | 842 | |||||||||
Cash
Flows from Investing Activities:
|
||||||||||||
Proceeds
from released escrow fund
|
— | 245 | — | |||||||||
Purchase
of property and equipment
|
(908 | ) | (641 | ) | (7 | ) | ||||||
Net
cash (used in) investing activities
|
(908 | ) | (396 | ) | (7 | ) | ||||||
Cash
Flows from Financing Activities:
|
||||||||||||
Proceeds
from term loan
|
— | 4,733 | — | |||||||||
Repayment
of term loan
|
(1,365 | ) | (473 | ) | — | |||||||
Costs
of stock conversion
|
— | (14,429 | ) | — | ||||||||
Net
cash (used in) financing activities
|
(1,365 | ) | (10,169 | ) | — | |||||||
Net
(decrease) increase in cash and cash equivalents
|
(1,036 | ) | (7,261 | ) | 835 | |||||||
Cash
and cash equivalents - beginning of period
|
3,915 | 11,176 | 1,472 | |||||||||
Cash
and cash equivalents - end of period
|
$ | 2,879 | $ | 3,915 | $ | 2,307 | ||||||
Cash
paid during the period
|
||||||||||||
Income
taxes
|
$ | 351 | $ | 326 | $ | — | ||||||
Interest
|
$ | 206 | $ | 165 | $ | 2 |
See
Notes to Consolidated Financial Statements
50
CLARK
HOLDINGS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION
AND BUSINESS OPERATIONS:
|
Clark
Holdings Inc. (formerly “GLAC”)
(the ‘‘Company’’ or “CHI”) entered into a Stock Purchase Agreement
with The Clark Group, Inc. (“CGI”) and CGI’s stockholders on May 18, 2007, the
“Acquisition”. The Stock Purchase Agreement was subsequently amended on
November 1, 2007. On February 12, 2008, the Company consummated the
Acquisition contemplated by the Stock Purchase Agreement. At the closing
of the Acquisition, the Company purchased all of the issued and outstanding
capital stock of CGI. The accompanying consolidated statements of
operations, cash flows and stockholder’s equity are presented for two periods:
Predecessor and Successor, which relate to the period preceding the Acquisition
and the period succeeding the Acquisition, respectively. The Predecessor period
pertains to CGI and includes activity for the 6 weeks ended February 11,
2008. The Successor period pertains to CHI and includes activity for the
47 weeks ended January 3, 2009. Starting with fiscal year 2008, the
Company, due to the Acquisition of CGI, has adopted CGI’s fiscal year
methodology of a 52 – 53 week fiscal year ending on the Saturday closest to
December 31. Until fiscal year 2008, the Company used a calendar year ending on
December 31, as its fiscal year.
The
Company is a niche provider of non-asset based transportation and logistics
services to the print media industry throughout the United States and between
the United States and other countries. The Company operates through a
network of operating centers where it consolidates mass market consumer
publications so that the publications can be transported in larger, more
efficient quantities to common destination points. The Company refers to
each common destination point’s aggregated publications as a
“pool.” By building these pools, the Company offers cost effective
transportation and logistics services for time sensitive
publications.
The
Company generates revenues by arranging for the movement of its customers’
freight in trailers and containers. Generally, the Company bills its customers
based on pricing that is variable based upon the amount of tonnage tendered,
frequency of recurring shipments, origination, destination, product density and
carrier rates. The Company’s specified rates are subject to weight
variation, fuel surcharge, and timely availability of the customer’s
product. The Company provides ancillary services such as warehousing and
other services (e.g., product labeling). As part of its bundled service
offering, the Company tracks shipments in transit and handles claims for freight
loss or damage on behalf of its customers. Because the Company owns
relatively little transportation equipment, it relies on independent
transportation carriers.
The
Company is a principal and also provides limited brokerage transportation
services. By accepting the customer’s order, it accepts certain
responsibilities for transportation of the shipment from origin to
destination. The Company selects carriers based upon myriad factors that
include service reliability and pricing. Carrier pricing is typically from
a pre-negotiated tariff rate table. The carrier’s contract is with the
Company, not its customer, and the Company is responsible for payment of carrier
charges. In the cases where the Company has agreed to pay for claims for damage
to domestic freight while in transit, when appropriate the Company will pursue
reimbursement from the carrier for the claims.
As shown
in the accompanying consolidated financial statements, the Company incurred a
net loss of approximately $1.940 million for the 52 weeks ended January 2,
2010. At the end of the second quarter of 2009, management completed a
series of cost restructurings including a reduction in workforce, wage freezes
and wage reductions that resulted in reducing the annual payroll by $2.4 million
per year. In addition, the Company reduced capital expenditure budgets
and secured a new credit facility agreement on March 9, 2010 (Note
9). Management believes that these actions taken to revise the Company’s
operating and financial requirements allows the Company to sustain its future
operations.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
|
Codification — In July 2009, the
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became the
single official source of authoritative, nongovernmental generally accepted
accounting principles (“US-GAAP” or “GAAP”) in the United States. This guidance
is contained in ASC Topic 105 “Generally Accepted Accounting Principles.” The
historical GAAP hierarchy was eliminated and the ASC became the only level of
authoritative GAAP, other than guidance issued by the Securities and Exchange
Commission. This guidance is effective for interim and annual periods ending
after September 15, 2009. The Company adopted the provisions of this guidance as
of September 30, 2009. The Company’s accounting policies were not affected by
the conversion to the ASC. However, references to specific accounting standards
have been changed to refer to the appropriate section of the
ASC.
51
Fiscal Year End — The accompanying
consolidated statements of operations, cash flows and stockholder’s equity are
presented for two periods: Predecessor and Successor, which relate to the period
preceding the Acquisition and the period succeeding the Acquisition,
respectively. The Predecessor period pertains to CGI and includes activity for
the 6 weeks ended February 11, 2008. The Successor period pertains to CHI
and includes activity for the 47 weeks ended January 3, 2009. Starting
with fiscal year 2008, the Company, due to the Acquisition of CGI, has adopted
CGI’s fiscal year methodology of a 52 – 53 week fiscal year ending on the
Saturday closest to December 31. Until fiscal year 2008, the Company used a
calendar year ending on December 31, as its fiscal year.
Consolidation — The consolidated
financial statements include the accounts of the Company and its
subsidiaries. All significant inter-company transactions have been
eliminated in consolidation. The Company is a holding company with 100
percent ownership in the following operating entities: Clark Group, Inc., Clark
Distribution Systems, Inc., Clark Worldwide Transportation, Inc., Highway
Distribution Systems, Inc. and Evergreen Express Lines, Inc.
Business Combinations — The
Company accounts for Acquisitions under the purchase method of
accounting in accordance with FASB Topic ASC 805, “Business Combinations”.
Accordingly, the cost of the Acquisition was allocated to the assets and
liabilities based upon their respective fair values, including identifiable
intangible assets (such as, non-compete agreements, trade names, and customer
relationships) and with the remaining cost allocated to goodwill.
Recognition of Revenue — Gross revenues
consist of the total dollar value of goods and services purchased from the
Company by our customers. FASB Topic ASC 605, “Revenue Recognition”,
establishes the criteria for recognizing revenues on a gross or net basis.
All transactions are recorded at the gross amount charged to customers for
service. In these transactions, the Company is the primary obligor, a
principal to the transaction, assumes all credit risk, maintains substantially
all risks and rewards, has discretion to select the supplier, and has latitude
in pricing decisions. The Company has no material revenues relating to
activities where these factors are not present.
Gross
revenue for domestic ground freight is recognized based upon the relative
transit time in each reporting period with the freight costs recognized as
incurred. Domestic ground freight estimates are highly predictable and are
based on historical delivery data.
Gross
revenue and freight costs for international air and ocean freight forwarding
services are recognized based upon the estimated arrival date of the shipments.
International air and ocean freight transit estimates are based on published
third party carrier arrival schedules.
Cash and Cash
Equivalents — For purposes of the consolidated statements of cash flows,
the Company considers all short term, highly liquid investments with an original
maturity of less than 90 days to be cash equivalents.
Accounts
Receivable — Accounts receivable are recorded at management's estimate of
net realizable value. Management evaluates the adequacy of the allowance
for uncollectible accounts on a customer specific basis by risk category and by
various percentages applied to the age of the invoice. These factors include
historical trends, general and specific economic conditions and local market
conditions. Accounts are written off when management determines collection
is doubtful.
Property and
Equipment — Property and equipment is stated at fair value as of the date
of the Acquisition of the Clark Group, Inc. Buildings and equipment are
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized using the straight-line
method over the shorter of the related lease term or useful lives of the
assets. Gains and losses on disposal of property and equipment are
recognized when the asset is sold. Expenditures for maintenance and
repairs are expensed as incurred, whereas expenditures for improvements and
replacements are capitalized.
Freight Expense — Freight
expense includes purchased transportation expenses and operating fleet expenses,
including equipment rents and leases, maintenance, fuel and driver personnel
expenses.
52
Selling, Operating and
Administrative Expenses — Selling, operating and administrative expenses
includes all operating expenses except freight. These expenses include
personnel, occupancy, packaging, supplies, insurance, cargo losses and
depreciation.
Fair Value of Financial
Instruments — The Company's financial instruments consist of accounts
receivable, accounts payable and debt. The fair value of these financial
instruments approximates their carrying value due to their short term
nature.
Operating Leases — The
Company leases most of its distribution facilities and transportation equipment.
At inception, each lease is evaluated to determine whether the lease will be
accounted for as an operating or capital lease. The term used for this
evaluation includes renewal option periods only in instances in which the
exercise of the renewal can be reasonably assured and failure to exercise such
option would result in an economic penalty. The Company currently has no
leases that meet the capital lease requirements, therefore all leases are
currently accounted for as operating. The Company records rental expense
on a straight-line basis.
Use of Estimates — The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and expenses
during the reporting period. Estimates are based on several factors including
the facts and circumstances available at the time the estimates are made,
historical experience, risk of loss, general economic conditions and trends, and
the assessment of the probable future outcome. Some of the more significant
estimates include accounting for doubtful accounts, useful lives of property and
equipment and intangible assets, purchase price allocations of acquired
businesses, valuation of assets including goodwill and other intangible assets,
estimates of the realizability of deferred tax assets, assumptions used in the
valuation of stock based compensation, incurred but not report claims and
estimates of delivery time. Actual results could differ from those estimates.
Estimates and assumptions are reviewed periodically, and the effects of changes,
if any, are reflected in the statement of operations in the period that they are
determined.
The
Company accrues freight expense for any transportation costs that have been
incurred, but have not been included in accounts payable. These estimates
are used to substantiate vendor invoices for purchased transportation for
shipments that have been completed at the end of the period.
The
Company is self insured for a portion of its workers’ compensation. In the
ordinary course of operations, employees may be injured and file a claim for
workers’ compensation. Based upon its review of open claims, management
adjusts the balance sheet accrual to maintain adequate reserves for its estimate
of incurred losses, including an estimate for incurred but not reported claims
(IBNR). IBNR includes future development of incurred losses. (See
Note 10) Actual results could differ from these
estimates.
Accounting for Goodwill and
Indefinite Intangibles. Under FASB
Topic ASC 805, “Business Combinations”, goodwill represents the excess of cost
(purchase price) over the fair value of net assets acquired. Acquired
intangibles are recorded at fair value as of the date acquired using the
purchase method.
Under
FASB Topic ASC 350, “Intangibles—Goodwill and Other”, goodwill and other
intangible assets determined to have an indefinite life are not amortized, but
are tested for impairment at least annually or when events or changes in
circumstances indicate that the assets might be impaired. The impairment test
for intangible assets consists of a comparison of its fair value with its
carrying value, if the carrying amount exceeds its fair value, an impairment
loss is recognized.
Accounting for Other Long-Lived Assets (Intangibles with Definite Lives
and Fixed Assets) Under FASB Topic ASC 805, “Business
Combinations”, acquired intangibles with definite lives and fixed assets are
recorded at fair value as of the date acquired using the purchase
method.
Under
FASB Topic ASC 360, “Property, Plant, and Equipment”, Other identifiable
intangible assets which have definite useful lives, such as the Company’s
non-compete agreements and customer relationships, are amortized on a
straight-line basis over the estimated useful lives of 5 to 12
years.
Stock Based Compensation —
FASB Topic ASC 718, “Compensation – Stock Compensation” requires the Company to
recognize expense for its share-based compensation based on the fair value of
the awards that are granted. The fair value of stock options is estimated
on the date of grant using the Black-Scholes option pricing model. Option
valuation methods require the input of highly subjective assumptions, including
the expected stock price volatility. Measured compensation expense related
to such option grants, is recognized ratably over the vesting period of the
related grants. Prior to the Acquisition there was no stock based
compensation.
Income Taxes — The Company
early adopted the provisions of FASB Topic ASC 740, “Income Taxes”. This
topic clarifies the accounting for uncertainty in income taxes recognized in the
financial statements and requires companies to use a more-likely-than-not
recognition threshold based on the technical merits of the tax position
taken. For the 52 weeks ended January 2, 2010 and the 47 weeks ended
January 3, 2009, the Company had no material unrecognized income tax benefits,
expected changes to unrecognized income tax benefits or interest and
penalties.
The
Company’s accounting policy for recognition of interest and penalties related to
income taxes is to include such items as a component of income tax
expense.
53
CGI, the
Predecessor, was a subchapter S corporation through February 12, 2008, the date
of acquisition. Prior to February 12, 2008, CGI was not subject to federal
or state income tax, with the exception of certain states that do not recognize
federal S corporation status. CGI had evaluated the potential tax,
interest and penalties relating to this exposure as of December 29, 2007; it was
determined to be immaterial. Upon acquisition, CGI’s S corporation status was
terminated.
The
Company files consolidated income tax returns for federal tax purposes and in
states where consolidated filings are allowed or required. In addition,
the Company, as a result of a nexus study, had determined that an increase in
the number of states the Company filed in would be implemented. The impact
of these increased filings was accounted for in the tax provision for the 52
weeks ended January 2, 2010 and the 47 weeks ended January 3, 2009. All
tax returns and/or extensions for years from 2006 have been filed and are open
to examination by the appropriate tax authorities.
FASB Topic ASC 740, “Income Taxes” — Management
has developed control processes and procedures that will achieve the following
control objectives with respect to FASB Topic ASC 740 and uncertain tax
positions:
|
·
|
All
material tax positions taken or expected to be taken in tax returns are
identified.
|
|
·
|
The
appropriate unit of account is determined for each material tax
position.
|
|
·
|
Only
tax positions that meet the more-likely-than-not recognition threshold are
recognized.
|
|
·
|
All
tax positions that meet the more-likely-than-not recognition threshold are
recognized.
|
|
·
|
All
previously unrecognized tax positions that subsequently meet the
more-likely-than-not recognition threshold are recognized in the first
interim period in which the recognition threshold is
met.
|
|
·
|
All
previously recognized tax positions that subsequently fail to meet the
more-likely-than-not recognition threshold are recognized in the first
interim period in which the recognition threshold is no longer
met.
|
|
·
|
The
amount of benefit recognized for each tax position is the largest amount
that is greater than 50 percent likely to be
realized.
|
|
·
|
New
information – such as new tax laws, regulations and court cases – that
affects the recognition and measurement of the benefits of a tax position
is identified in a timely manner and properly
evaluated.
|
|
·
|
The
recognition and measurement of the benefits of a tax position reflect all
information available to management at the reporting date and do not take
into account facts and circumstances and developments occurring after the
reporting date but before the issuance of the financial
statements.
|
|
·
|
Interest
and penalties are properly measured and recorded for all uncertain tax
positions.
|
|
·
|
Amounts
recorded for unrecognized tax benefits, including interest and penalties,
are properly presented, classified and disclosed in the consolidated
financial statements.
|
Earnings per Common
Share (“EPS”)
— Prior to the Acquisition, CGI was privately held and did not calculate
earnings per share.
The
Company measures the effects of options and warrants on diluted EPS through
application of the treasury stock method, whereby the proceeds received by the
Company based on assumed exercise are hypothetically used to repurchase the
Company’s common stock at the average market price for the period. Dilution will
occur according to the treasury stock method only if the average market price of
the Company’s common stock is higher during the year than the exercise price of
either the stock options and/or warrants. When the opposite is present
(i.e., the average market price is lower), the results are antidilutive, and the
impact of either the stock options and/or warrants is ignored.
The
average market price of the Company’s common stock from January 4, 2009, to
January 2, 2010, was $.65 and since it was lower than the exercise price of the
warrants, the impact of the warrants is excluded from the diluted EPS
calculation for the 52 week period ended January 2, 2010.
The
average market price of the Company’s common stock from February 12, 2008, to
January 3, 2009, was $2.20 and since it was lower than the exercise price of the
warrants, the impact of the warrants is excluded from the diluted EPS
calculation for the 47 week period ended January 3, 2009.
During
the 52 weeks ended January 2, 2010, the average market price of the Company’s
stock was not higher than the exercise price of certain options granted,
therefore, the impact of certain stock options is excluded in the diluted EPS
calculations for the 52 weeks ended January 2, 2010.
54
During
the 47 weeks ended January 3, 2009, the average market price of the Company’s
stock was not higher than the exercise price of certain options granted,
therefore, the impact of certain stock options is excluded in the diluted EPS
calculations for the 47 weeks ended January 3, 2009.
The
earnings per common share calculations for the 52 weeks ended January 2, 2010,
and 47 weeks ended January 3, 2009, are shown below. Earnings per share
was not calculated for the 6 weeks ended February 12, 2008.
52 Weeks Ended
|
47 Weeks Ended
|
|||||||
January 2, 2010
|
January 3, 2009
|
|||||||
Basic
EPS
|
||||||||
Net
loss
|
$ | (1,940,000 | ) | $ | (63,723,000 | ) | ||
Net
loss for common stock not subject to conversion
|
(1,940,000 | ) | (63,723,000 | ) | ||||
Weighted
average shares
|
10,859,385 | 11,306,000 | ||||||
Basic
loss per share
|
$ | (0.18 | ) | $ | (5.64 | ) | ||
Diluted
EPS
|
||||||||
Net
loss-see above
|
$ | (1,940,000 | ) | $ | (63,723,000 | ) | ||
Basic
weighted average shares
|
10,859,385 | 11,306,000 | ||||||
Dilutive
effect of warrants
|
— | — | ||||||
Dilutive
effect of stock options
|
— | — | ||||||
Diluted
weighted average shares
|
10,859,385 | 11,306,000 | ||||||
Diluted
loss per share
|
$ | (0.18 | ) | $ | (5.64 | ) |
Number
of Options and Warrants Excluded from EPS Calculation
|
||||
Weighted
average of outstanding warrants excluded
|
13,272,727 | |||
Weighted
average outstanding options excluded
|
419,076 | |||
Total
weighted average outstanding warrants and options excluded
|
13,691,803 |
New
Accounting Standards
Fair
Value Measurements
In
September 2006, the FASB issued guidance that defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This guidance is contained in ASC Topic 820 “Fair Value
Measurements and Disclosures.” This guidance does not require any new fair value
measurements, but applies under other accounting pronouncements that require or
permit fair value measurements. The effective date of this guidance for
financial assets and liabilities that are recognized or disclosed at fair value
on a recurring basis was January 1, 2008, and the Company did adopt the
provisions of this guidance at that time as it related to financial assets and
liabilities recognized or disclosed at fair value on a recurring basis.
Effective January 1, 2009, pursuant to this guidance, the Company adopted the
provisions of this guidance as it relates to non financial assets and
liabilities that are not recognized or disclosed at fair value on a recurring
basis. The adoption of this guidance had no impact on the Company’s financial
statements.
In April
2009, the FASB issued guidance that extends the disclosure requirements
regarding the fair value of financial instruments to interim financial
statements of publicly traded companies. This guidance is primarily contained in
ASC Topic 825 “Financial Instruments” and ASC Topic 270 “Interim Reporting.”
This guidance is effective for interim periods ending after June 15, 2009. The
adoption of this guidance had no impact on the Company’s financial
statements.
55
Business
Combinations
On
January 4, 2009, we adopted the accounting pronouncements relating to
business combinations (primarily contained in ASC Topic 805 “Business
Combinations”), including assets acquired and liabilities assumed arising from
contingencies. These pronouncements established principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree as well as provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. In addition, these pronouncements eliminate the distinction
between contractual and non-contractual contingencies, including the initial
recognition and measurement criteria and require an acquirer to develop a
systematic and rational basis for subsequently measuring and accounting for
acquired contingencies depending on their nature. Our adoption of these
pronouncements will have an impact on the manner in which we account for any
future acquisitions.
Non-Controlling
Interests in Consolidated Financial Statements
On
January 4, 2009, we adopted the accounting pronouncement on non-controlling
interests in consolidated financial statements, which establishes accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This guidance is primarily contained in
ASC Topic 810 “Consolidation”. It clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. The adoption of this standard has not had a material impact on
our consolidated financial statements.
Subsequent
Events
In May
2009, the FASB issued guidance that is intended to establish general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before the financial statements are issued or are available to be
issued. This guidance is contained in ASC Topic 855 “Subsequent Events”. It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. This guidance is effective for
interim and annual periods ending after June 15, 2009. The Company adopted the
provisions of this guidance as of June 30, 2009.
Other
In June
2009, an update was made to “Consolidation – Consolidation of Variable
Interest Entities”. Among other things, the update replaces the calculation for
determining which entities, if any, have a controlling financial interest in a
variable interest entity (VIE) from a quantitative based risks and rewards
calculation, to a qualitative approach that focuses on identifying which
entities have the power to direct the activities that most significantly impact
the VIE’s economic performance and the obligation to absorb losses of the VIE or
the right to receive benefits from the VIE. The update also requires ongoing
assessments as to whether an entity is the primary beneficiary of a VIE
(previously, reconsideration was only required upon the occurrence of specific
events), modifies the presentation of consolidated VIE assets and liabilities,
and requires additional disclosures about a Company’s involvement in VIEs. This
update will be effective for the Company beginning January 3, 2010. The
Company is evaluating the impact that this guidance will have on its financial
statements, if any.
56
3.
|
INITIAL
PUBLIC OFFERING OF GLAC (SPAC - SUCCESSOR
CORPORATION):
|
On
February 21, 2006, the Company sold 10,000,000 units (‘‘Units’’) in the Offering
for $8.00 per Unit. On March 1, 2006, pursuant to the underwriters’
over-allotment option, the Company sold an additional 1,000,000 Units for $8.00
per Unit. Each Unit consisted of one share of common stock, par value
$.0001 per share (“Share”), and one warrant to purchase one Share at an exercise
price of $6.00 per Share (“Warrant”). The warrants became exercisable upon
the completion of the Acquisition and expire on February 15, 2011. The
warrants were originally redeemable at a price of $.01 per warrant upon 30 days
notice after the warrants become exercisable, only in the event that the last
sale price of the common stock is at least $11.50 per share for any 20 trading
days within a 30 trading day period ending on the third day prior to the date on
which notice of redemption is given. Under the terms of the Warrant
Agreement governing the warrants, the Company is required to use its best
efforts to register the warrants and maintain such registration. After
evaluating the Company’s financial statement treatment with respect to the
accounting for derivative financial instruments pursuant to FASB Topic ASC 815,
“Derivatives and Hedging”, the Company entered into a First Supplemental Warrant
Agreement (the ‘‘Supplemental Agreement’’), dated August 21, 2006, with The Bank
of New York (the ‘‘Warrant Agent’’), to amend the Warrant Agreement, dated as of
February 15, 2006, between the Company and the Warrant Agent in order to clarify
that registered holders of the Company’s warrants do not have the right to
receive a net cash settlement or other consideration in lieu of physical
settlement in shares of the Company’s common stock.
4.
|
ACQUISITIONS
AND BUSINESS COMBINATION OF THE CLARK GROUP
INC.:
|
The
Company (Successor) entered into the Stock Purchase Agreement with CGI and CGI’s
stockholders (Predecessor) on May 18, 2007. The Stock Purchase Agreement
was subsequently amended on November 1, 2007.
On
February 12, 2008, the Company consummated the acquisition contemplated by the
Stock Purchase Agreement. At the closing of the Acquisition, the Company
purchased all of the issued and outstanding capital stock of CGI for a total
consideration of $75,000,000 (of which $72,527,473 was paid in cash and
$2,472,527 by the issuance of 320,276 shares of the Company’s common stock
valued at $7.72 per share, the average share price at the announcement of the
Purchase Agreement). In connection with the closing of the Acquisition,
the Company changed its name from Global Logistics Acquisition Corporation to
Clark Holdings Inc.
At the
closing of the Acquisition, an escrow agreement (‘‘Escrow Agreement’’) was
entered into providing for (i) $7,500,000 as a fund for the payment of
indemnification claims that may be made by the Company as a result of any
breaches of CGI’s covenants, representations and warranties in the Acquisition
Agreement (‘‘Indemnification Escrow’’), (ii) $500,000 as a fund to pay the
Company the amount, if any, by which the average of the working capital on the
last day of the month for the 12 months ended March 31, 2008, is higher (less
negative) than negative $1,588,462 (“Working Capital Escrow”), and (iii)
$300,000 as a fund to reimburse CGI and the Company for costs incurred in
connection with discontinuing certain of CGI’s operations in the United Kingdom
(“Discontinued Operations Escrow”). On September 15, 2008, in accordance
with the Escrow Agreement, the entire Discontinued Operations Escrow was
released to the former stockholders of CGI. Also in accordance with the
Escrow Agreement, $2.5 million of the Indemnification Escrow was released to
former stockholders of CGI on August 14, 2008. On February 9, 2009, the
Company issued a notice of claim against the Indemnification Escrow, stating
that the Company, as buyer, was entitled to receive funds from the escrow in the
amount of approximately $3,541,000. On March 18, 2009, the Sellers made a
demand for arbitration for release of the escrow funds and, on April 15, 2009,
the Company made a counterclaim seeking recovery from the funds held in escrow
of no less than $3,600,000. On August 11, 2009, the Company issued a
second notice of claim against the Indemnification Escrow, stating that the
Company was entitled to receive funds from the escrow in the amount of
$5,000,000, constituting the full amount remaining in the escrow. On
December 31, 2009, the Company settled the claims giving rise to the
arbitration. Pursuant to the settlement agreement, approximately
$3,764,000 of the escrow funds were released to the Sellers and approximately
$1,286,000 of the escrow funds were released to the Company (which together
constituted all the funds remaining in escrow). These funds were reported
as other income on the consolidated statements of operations.
Holders
of 1,802,983 of the Company’s shares of common stock voted against the
Acquisition and elected to convert their shares into a pro rata portion of the
Trust Account (approximately $8.06 per share or an aggregate amount of
$14,536,911). After giving effect to (i) the issuance of 320,276 shares in
connection with the Acquisition and (ii) the conversion of shares, there are
currently 10,859,385 shares of common stock outstanding. In addition, the
founders of the Company have placed 1,173,438 shares of common stock into escrow
pending the attainment of a specified market price (restricted shares) and these
are
excluded in authorized and outstanding shares at January 2, 2010 (Note
19). As a result of the condition to which the escrowed shares will be
subject, such shares will be considered as contingently issuable shares and, as
a result, are not included in the earnings per share calculations.
Accordingly, the Company will recognize a charge based on the fair value of the
shares over the expected period of time it will take to achieve the target
price, if and only if the expected probability of the share price attaining the
specified market price exceeds 50 percent.
57
The
Company has accounted for the Acquisition under the purchase method of
accounting. Accordingly, the cost of the Acquisition has been allocated to
the assets and liabilities based upon their respective fair values, including
identifiable intangibles and remaining cost allocated to goodwill.
The
accompanying consolidated statements of operations, cash flows and stockholder’s
equity are presented for three periods: Predecessor and Successor, which relate
to the period preceding the Acquisition and the period succeeding the
Acquisition, respectively. The Predecessor period pertains to CGI and includes
activity for the 6 weeks ended February 11, 2008. The Successor period
pertains to CHI and includes activity for the 47 weeks ended January 3, 2009 and
for the 52 weeks end January 2, 2010.
The final
purchase price for the Acquisition at closing was determined based on the value
of the cash consideration paid by the Company, the average value of Company’s
common stock on or about the Purchase Agreement arrangement date, and the direct
acquisition costs incurred. The aggregate purchase price of $77,106,830 is
comprised of the following:
Components
of the purchase price distribution are as follows:
Cash
to CGI shareholders
|
$ | 64,876,642 | ||
Cash
in escrow
|
8,300,000 | |||
Acquisition
costs paid at closing
|
493,196 | |||
Acquisition
costs paid prior to closing
|
964,465 | |||
Total
|
74,634,303 | |||
Issuance
of 320,276 shares of common stock at $7.72 per share
|
2,472,527 | |||
Total
purchase price
|
$ | 77,106,830 |
Reconciliation
of initial cash payment per the Purchase Agreement to cash paid at closing of
the Acquisition is summarized as follows:
Initial
estimate of cash distribution
|
$ | 72,527,473 | ||
Cash
in escrow
|
(8,300,000 | ) | ||
Interim
working capital adjustment to purchase price
|
495,067 | |||
Reimbursement
of professional fees
|
154,102 | |||
Cash
to CGI shareholders
|
$ | 64,876,642 |
A
preliminary allocation of the purchase price of CGI to the estimated fair values
of the assets acquired and liabilities assumed of CGI on February 12, 2008, was
made and recorded during the 13 weeks ended March 29, 2008, and subsequently
amended. The preliminary allocation of the purchase price, including the
evaluation and allocation to identifiable intangible assets, recognition of
deferred taxes and allocation to goodwill resulting from the Acquisition, was
made by management.
During
the first three quarters of 2008, additional adjustments to the preliminary
purchase price allocation were recorded to goodwill. In the fourth
quarter, it became apparent to management after a detailed review of the
information systems, that the intangible asset’s original estimated value of
$1.197 million identified as software as of the purchase date, was deemed to
have no fair value. This resulted in a purchase price adjustment which
reclassified $1.197 million of the original fair value of the software to
goodwill. In addition, management adjusted the purchase price allocation after
completing a review of the assumptions associated with the non-compete
intangible, in which a technical error was discovered in the original
valuation. As a result, the non-compete intangible asset’s value was
considered to be overstated by $4.727 million in which resulted in an additional
adjustment to goodwill. This adjustment was also recorded in the fourth
quarter. These adjustments resulted in a reclassification of $5.924 million from
identifiable intangibles to goodwill. The deferred tax liability
associated with these intangibles and goodwill were each reduced by $2.366
million.
58
In the
fourth quarter of 2008, the Company, in accordance with FASB Topic ASC
350-30-35-18, performed its annual goodwill and intangible assets with
indefinite lives impairment tests, and determined that all the goodwill and a
portion of the remaining intangible assets had been impaired.
Consequently, the Company recorded a non-cash charge of $63.9 million for
goodwill and $2.66 million for intangible assets, trademarks, impairment during
the fourth quarter of 2008.
The final
allocation of the fair value of the assets acquired and liabilities assumed in
the Acquisition of CGI are as follows:
Preliminary
Allocation at
2/12/08
|
Adjustments to
Preliminary
Purchase Price
Allocation
|
Deferred Tax
Liability
Adjustment
Associated with
Final Purchase
Price Adjustments
|
Final Purchase
Price Allocation
|
|||||||||||||
Current
assets
|
$ | 6,956,000 | $ | 6,956,000 | ||||||||||||
Current
assets of discontinued operations
|
388,000 | 388,000 | ||||||||||||||
Property
and equipment
|
1,394,000 | 1,394,000 | ||||||||||||||
Intangibles
|
26,575,000 | $ | (5,924,000 | ) | 20,651,000 | |||||||||||
Goodwill
|
59,471,020 | 5,924,000 | $ | (2,366,000 | ) | 63,029,020 | ||||||||||
Current
liabilities
|
(7,441,000 | ) | (7,441,000 | ) | ||||||||||||
Current
liabilities of discontinued operations
|
(132,000 | ) | (132,000 | ) | ||||||||||||
Deferred
tax liability
|
(10,104,020 | ) | 2,366,000 | (7,738,020 | ) | |||||||||||
Total
fair value of assets and liabilities
|
$ | 77,107,000 | $ | — | $ | — | $ | 77,107,000 |
The
changes in the carrying amount of goodwill for the year ending January 3, 2009,
are as follows:
Goodwill
associated with the
acquisition
of the Clark Group Inc.
|
63,029,000
|
|||
Balance
at February 12, 2008
|
63,029,000
|
|||
Adjustments
to Goodwill
|
881,000
|
|||
Impairment
Charge
|
(63,910,000
|
)
|
||
Balance
at January 3, 2009
|
$
|
—
|
At the
end of the 2008 fiscal year, the Company recognized an impairment to goodwill
and identifiable intangible assets in the amount of $66.568 million as shown
below:
|
Amount
|
|||
Goodwill
|
$ | 63,910,000 | ||
Trade
names
|
2,658,000 | |||
TOTAL
|
$ | 66,568,000 |
59
This
impairment was charged to operating expenses and reduced the Company’s total
assets from $95.264 million to $28.696 million as of January 3,
2009.
5.
|
RESTRICTED
CASH:
|
On September 15, 2009, the Company
entered into a cash collateral agreement with our agent bank to obtain letters
of credit secured by cash collateral which, in the aggregate, may not exceed
$718,000. The restricted cash is invested in a secured cash bank account. As of
January 2, 2010, the Company had restricted cash in the amount of $718,000 as
collateral related to our $718,000 of outstanding letters of credit (Note 9).
Restricted cash is classified as current as the underlying letters of credit
expire by September 30, 2010.
On March 18, 2010, the $718,000 of
restricted cash was released by Bank of America as part of the Cole Taylor Bank
refinancing of the Company’s credit facility (see Note 9) and the proceeds were
used to pay down the bank line.
6.
|
PROPERTY
AND EQUIPMENT:
|
Property
and equipment consist of:
Useful Lives
|
January 2, 2010
|
January 3, 2009
|
||||||||
Land
|
$ | 71,000 | $ | 71,000 | ||||||
Building
|
40
years
|
465,000 | 465,000 | |||||||
Leasehold
improvements
|
3-7
years
|
163,000 | 140,000 | |||||||
Furniture
& office equipment
|
3-7
years
|
1,074,000 | 745,000 | |||||||
Equipment
|
3-7
years
|
643,000 | 330,000 | |||||||
2,416,000 | 1,751,000 | |||||||||
Accumulated
depeciation
|
(481,000 | ) | (177,000 | ) | ||||||
Asset
not in service
|
594,000 | 351,000 | ||||||||
Property
and equipment, net
|
$ | 2,529,000 | $ | 1,925,000 |
Property
and equipment acquired in the Acquisition was assigned fair value of $1,394,000,
subsequently adjusted to $1,454,000.
7.
|
IMPAIRMENT
OF GOODWILL AND IDENTIFIABLE INTANGIBLE
ASSETS:
|
|
Goodwill
Impairment
|
The
changes in the carrying amount of goodwill for the year ending January 3, 2009,
are as follows:
Goodwill
associated with the
acquisition
of the Clark Group Inc.
|
$ |
63,029,000
|
||
Balance
at February 12, 2008
|
$ |
63,029,000
|
||
Adjustments
to Goodwill
|
881,000
|
|||
Impairment
Charge
|
(63,910,000
|
)
|
||
Balance
at January 3, 2009
|
$
|
—
|
60
In
accordance with FASB
Topic ASC 350, the Company, during the fourth quarter of 2008, performed
its annual impairment test for goodwill and intangible assets with an indefinite
life. The Company concluded that its market capitalization had been below
its net book value for an extended period of time. Management therefore
assessed the fair value of its reporting units using both an income approach
with a discounted cash flow model and a market approach using the observed
market capitalization based on the quoted price of our common stock.
Management compared these values to each reporting units’ carrying amount,
including goodwill, and identified an impairment. The
evaluation resulted in a $63.9 million impairment charge which was included in
the “impairment of goodwill and intangible assets” line item in the consolidated
statements of operations.
|
Impairment Intangible
Assets
|
Acquisition-related
identifiable intangible assets at February 12, 2008 and January 3, 2009, as
adjusted, consisted of the following:
January 3, 2009
|
||||||||||||||||||||
Amortization
Period
|
Balance
02/12/2008
|
Amortization
Expense
|
Impairment
|
Balance:
01/03/2009
|
||||||||||||||||
Non-compete
agreements
|
5
|
$
|
1,684,000 | $ | (248,000 | ) | $ | - | $ | 1,436,000 | ||||||||||
Trade
names
|
-
|
5,378,000 | - | (2,658,000 | ) | 2,720,000 | ||||||||||||||
Customer
relationships
|
12
|
13,588,000 | (998,000 | ) | - | 12,590,000 | ||||||||||||||
$
|
20,650,000 | $ | (1,246,000 | ) | $ | (2,658,000 | ) | $ | 16,746,000 |
Acquisition-related
identifiable intangible assets at January 3, 2009 and January 2, 2010, as
adjusted, consisted of the following:
January 2, 2010
|
||||||||||||||||||||
Amortization
Period
|
Balance
01/03/2009
|
Amortization
Expense
|
Impairment
|
Balance:
01/02/2010
|
||||||||||||||||
Non-compete
agreements
|
5
|
$ | 1,436,000 | $ | (280,000 | ) | $ | (671,000 | ) | $ | 485,000 | |||||||||
Trade
names
|
-
|
2,720,000 | - | (406,000 | ) | 2,314,000 | ||||||||||||||
Customer
relationships
|
12
|
12,590,000 | (1,132,000 | ) | - | 11,458,000 | ||||||||||||||
$ | 16,746,000 | $ | (1,412,000 | ) | $ | (1,077,000 | ) | $ | 14,257,000 |
Intangibles
assets with an indefinite life (i.e., trade names), were evaluated for
impairment at January 3, 2009 and January 2, 2010, by management in accordance
with FASB Topic ASC
350, using the “relief from royalty” method. This evaluation
resulted in a $2.658 million impairment charge for the 47 weeks ended
January 3, 2009 and a $0.406 million impairment charge for the 52
weeks ended January 2, 2010, which was included in the “impairment of goodwill
and intangible assets” line item in the consolidated statements of
operations.
A part of
the acquisition, the Company gained the rights to The Clark Group trade name.
The income approach indicates value based on the present worth of future
economic benefits. This approach explicitly recognizes that the current value of
an investment is premised on the expected receipt of future economic benefits
such as cash flows or cost savings. A variant of the income approach, known as
the “relief from royalty” approach, is used in the valuation of assets involving
fair royalty rates (e.g., trademarks, patents, etc.). This valuation methodology
is premised on the following hypothetical construct:
If the
owners/operators of a company wanted to continue to use trade name in the
conduct of their business, but found they did not actually have the legal right
to do so, they would be compelled to pay the rightful owner a fair and
reasonable royalty for that right. Since ownership of a trade name relieves the
company from making such payments, the financial performance of the firm is
enhanced – to the extent of the royalty payments avoided. Capitalization of the
after tax effect of the royalty relief at an appropriate rate yields the value
of the trade name.
61
The
Company utilized the relief from royalty method in determining the
fair value of The Clark Group trade name. The reason for using this method is
that management deemed it impractical to determine the fair value of the trade
name based upon a market approach. The relief from royalty income approach
estimates the portion of a company’s earnings attributable to a trade name based
upon the royalty rate the company would have paid for the use of the trade name
if it did not own it. Therefore, a portion of the earnings, equal to the
after-tax royalty that might have been paid for the use of the trade name, can
be attributed to its ownership and therefore, the relief from royalty method,
was deemed the most appropriate valuation method.
The
impairment charge taken was calculated as the difference between the book value
of the trade name and the calculated fair value by use of the relief from
royalty method as discussed above. Significant assumptions included in
management’s analysis were the determination of a royalty rate, projections of
future revenues and a discount rate. Profitability was deemed to be a
significant determinant for a royalty rate in that a company or an investor
would not be willing to pay a rate in excess of a reasonable percentage of the
operating income generated by the trade name. There was little change in
management’s expectation for the trade name from the date of acquisition through
January 3, 2009, therefore, the royalty rate of 0.66% that was used in the
initial determination of the fair value of the trade name was used in impairment
analysis as of January 3, 2009. In calculating the royalty rate of 0.66%,
management estimated that royalty savings would equate to $500,000 per
year. In estimating this amount, management considered a variety of
factors including but not limited to the magnitude of the projected trade names’
net sales and the asset’s perceived marketing strength and recognition among
customers and competitors. Royalty savings of $500,000 per year
corresponds to a royalty rate of 0.66% of annual revenues based on total 2007
revenues. The future revenues for the tradename valuation were based on
sales growth rate forecasts of the Company as of January 3, 2009. The
sales growth rate forecasts as of January 3, 2009 were substantially lower than
they were as of February 12, 2008 (when The Clark Group, Inc. was acquired and
the initial valuation performed) as a result of the weakening global
economy. The pretax royalty savings due to the trade name was then
calculated by the application of the estimated royalty rate to the projected net
sales. A 40% income tax rate was utilized to convert the estimated pretax
royalty savings to appropriate after-tax amounts. The future annual cash
flows attributable to the trade names were then discounted to present value at a
new, higher risk-adjusted interest rate as of January 3, 2009. The reason
for a higher risk-adjusted interest rate was due to the higher cost of capital
incurred by the Company as of this time. For the January 2, 2010
impairment charge, the same methodology was used with a higher discount rate due
to the continued economic crisis and the Company’s operating losses in the 52
week ended January 2, 2010. Included in any valuation model there are
risks inherent in the assumptions utilized and achievability of these
assumptions is not certain.
Due to
the adverse economic impact on the Company’s market capitalization during 2008,
management evaluated intangibles and fixed assets with definite lives for
impairment as of January 3, 2009, in accordance with FASB Topic ASC
360. Management’s projections of undiscounted future cash flows
exceeded the carrying amount of the Customer Relationships identifiable
intangible asset, the Non-Compete Agreements identifiable intangible asset, and
fixed assets, which resulted in no charge for impairment
Due to
the continuing adverse economic impact on the Company’s market capitalization
along with the operating losses incurred during 2009, management evaluated
intangibles and fixed assets with definite lives for impairment as of January 2,
2010, in accordance with FASB Topic ASC
360. Management’s projections of undiscounted future cash
flows did not exceed the carrying amount of
the non-complete agreements intangible asset. As a result of this
undiscounted future cash flow test (“step 1 test”), the net book value of the
non-compete agreements were lower than the undiscounted cash flow, the Company
calculated the fair value of these non-compete agreements, which
resulted in $671,000 impairment charge. This impairment charge was
included in the “impairment of goodwill and intangible assets” line item in the
consolidated statements of operations.
The fair value of these non-compete
agreements was calculated by determining the expected value of the cash flows
that would be lost due to competition from the executives and/or prior owners if
the non-compete agreement did not exist. The value of the non-compete
agreement is measured as the difference between the projected cash flows of the
Company if the executive/prior owners were free to compete considering the
probability of choosing to compete in a given year versus being prohibited from
competing. The probability considers the desire to compete and the likelihood to
competing effectively and taking business away from the acquired company.
Once the expected value of the future cash flows were projected, the Company
used a higher discount rate than used in the previous year. This higher discount
was used due to the continuing economic crisis and the Company’s operating
losses during the 52 weeks ended January 2, 2010. Included in any valuation
model there are risks inherent in the assumptions utilized and achievability of
these assumptions is not certain.
62
For the
Customer Relationships intangibles and fixed assets evaluation for the 52 weeks
ended January 2, 2010, management’s projections of undiscounted future cash
flows did exceed the carrying amount of the Customer Relationship’s intangible
asset and fixed assets, which resulted in no charge for impairment.
The
impairment in the statement of operations for the year ended January 2, 2010,
and the 47 weeks ended January 3, 2009, was calculated as follows:
Impairment
|
January 2, 2010
|
January 3, 2009
|
||||||
Goodwill
|
$ | — | $ | 63,910,000 | ||||
Trade
names
|
406,000 | 2,658,000 | ||||||
Non-compete
agreements
|
671,000 | — | ||||||
Total
|
$ | 1,077,000 | $ | 66,568,000 |
A
schedule of the amortization expense by year is as follows:
Year
|
||||
2010
|
$ | 1,249,000 | ||
2011
|
$ | 1,249,000 | ||
2012
|
$ | 1,249,000 | ||
2013
|
$ | 1,249,000 | ||
2014
|
$ | 1,152,000 |
Amortization
expense for the 52 weeks ended January 2, 2010, the 47 weeks ended January 3,
2009, and the 6 weeks ended February 11, 2008, was $1,434,000,
$1,246,000, and $0 respectively.
8.
|
FAIR
VALUE MEASUREMENTS:
|
FASB
Topic ASC 820 “Fair Value Measurements and Disclosure” defines fair value
as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date, not adjusted for transaction costs. ASC 820 also establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels giving the highest priority to quoted
prices in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3).
The three
levels are described below:
Level
1: Unadjusted quoted
prices in active markets for identical assets or liabilities that is accessible
by the Company;
Level
2: Quoted prices in
markets that are not active or financial instruments for which all significant
inputs are observable, either directly or indirectly;
Level
3: Unobservable
inputs for the asset or liability including significant assumptions of the
Company and other market participants.
The
following tables present our assets and liabilities that are measured at fair
value on a non-recurring basis and are categorized using the fair value
hierarchy.
63
Year Ended
|
Quoted Prices in
Active Markets for
Identical Assets
|
Significant Other
Observable Inputs
|
Significant
Unobservable
Inputs
|
|||||||||||||||||
Description
|
01/02/2010
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total (Losses)
|
|||||||||||||||
Trade
name
|
$ | 2,314,000 | — | — | $ | 2,314,000 | $ | (406,000 | ) | |||||||||||
Non-compete
Agreements
|
485,000 | — | — | 485,000 | (671,000 | ) | ||||||||||||||
$ | 2,799,000 | — | — | $ | 2,799,000 | $ | (1,077,000 | ) |
In
accordance with the provisions of FASB Topic ASC 360, non-compete agreements at
year end with a carrying amount of $1,156,000 were written down to their fair
value of $485,000, resulting in an impairment charge of $671,000, that was
included in the Statement of Operations for the year.
In
accordance with the provisions of FASB Topic ASC 360, trade names at year end
with a carrying amount of $2,720,000 were written down to their fair value of
$2,314,000, resulting in an impairment charge of $406,000, that was included in
the Statement of Operations for the year.
9.
|
DEBT:
|
Simultaneously
with the Acquisition, the Company entered into a Credit Agreement as borrowers,
with various financial institutions party thereto, as lenders, and LaSalle Bank
National Association (presently Bank of America), as administrative agent
(‘‘Bank of America’’or “BOA”) (‘‘Credit Agreement’’). Pursuant to the
Credit Agreement, the Company received a financing commitment of up to
$30,000,000 for a senior secured credit facility from Bank of America in order
to (a) pay out converted shares, (b) provide working capital for the Company and
the Company’s direct and indirect subsidiaries and (c) provide for future
permitted acquisitions. The facility then consisted of up to $30,000,000,
less any amount drawn under the term loan sublimit, as a revolving credit
facility with a $3,000,000 sublimit for letters of credit.
As of
January 3, 2009 events of default occurred due to breaches of the Company’s
financial covenants in the credit agreement as a result of the impairment of
goodwill. Accordingly, the Company amended the credit facility with Bank
of America on April 17, 2009, and in return, the Bank issued a waiver with
respect to the breached covenants. Interest was payable at 4.00% over
LIBOR or at the Prime Interest Rate. The non-use fee is 0.675% per year
and the Letter of Credit fees were 4.00%.
Due to
continuing losses during the second quarter, the Company was not in compliance
with three of its financial covenants as of the end of the May 2009 reporting
period and a notice of events of default was issued by Bank of America on July
6, 2009. Accordingly, the Company amended the credit agreement again
and entered into an Amendment and Forbearance Agreement on September 15,
2009. The primary change with this amendment was the termination date of
the loan, which was set to expire on February 28, 2010. Consequently, the
Company classified all of its long-term debt as current and payable within one
year. As of January 2, 2010 the Company was in compliance with financial
covenants in accordance with the Amendment and Forbearance
Agreement.
As of
January 2, 2010, and January 3, 2009, the interest rate on the term loan was
7.00% and 3.62%, respectively. As of January 2, 2010 and January 3, 2009
$2,894,748 and $4,259,930 was outstanding on the term loan. No funds
were drawn down under the revolving credit agreement. The $2,894,748 was
due in full on February 28, 2010.
The
Company had issued approximately $718,000 in bank letters of credit, which
represented potential future payments under the Company’s workers’ compensation
insurance program.
Interest
expense was approximately $206,000 and $165,000 and $2,000 for 52 weeks ended
January 2, 2010, the 47 weeks ended January 3, 2009, and the 6 weeks ended
February 12, 2008, respectively. In addition, the Company recorded bank
fees associated with the
revolving credit line, the letters of credit and the term loan. These fees
totaled approximately $72,000, $136,000 and $0 for the 52 weeks ended January 2,
2010, the 47 weeks ended January 3, 2009, and the 6 weeks ended February 12,
2008, respectively.
On
February 26, 2010, the Company entered into an extension of its
credit agreement with Bank of America until March 9, 2010, which allowed
the Company to enter into a new credit agreement with Cole Taylor Bank on
March 5, 2010. The Credit Agreement provides for a revolving credit
facility (the “Facility”) of up to
$6,000,000, with a $1,000,000 sublimit for letters of credit. Under the
terms of the Credit Agreement, the Company may borrow up to the lesser of (i)
$6,000,000 and (ii) an amount derived from the Company’s accounts receivable
less certain specified reserves. If the outstanding loans under the
Facility at any time exceed this amount, the Company must repay the
excess. The loans under the Facility (i) accrue interest at 2% over the prime
rate for borrowings based on the prime rate or at 4.5% over LIBOR for borrowings
based on LIBOR, with a floor of 6% in either case; (ii) mature on March 5, 2013;
and (iii) are secured by substantially all of the Company’s assets. The Company
must comply with certain affirmative and negative covenants customary for a
credit facility of this type, including limitations on liens, debt, mergers,
consolidations, sales of assets, investments and dividends. The Company may not
permit its fixed charge coverage (as defined in the Credit Agreement) to be less
than 1.05:1. Simultaneously with entering into the Credit Agreement, the
Company terminated its credit agreement, dated as of February 12, 2008, with
BOA. The Company made an initial draw under the new Facility and used a portion
of the proceeds to help repay the balance of its then-outstanding loans from
BOA.
64
10.
|
INSURANCE
ACCRUALS:
|
The
Company uses a combination of insurance and self-insurance to provide for the
liabilities for workers’ compensation, healthcare benefits, general liability,
property insurance and vehicle liability. Liabilities associated with the
self-insured risks are not discounted and are estimated, in part, by considering
historical claims experience, demographic factors, severity factors and other
assumptions. The estimated accruals for these liabilities, portions of
which are calculated by independent third party service providers, could be
significantly affected if future occurrences and claims differ from these
assumptions and historical trends. For medical and workers’ compensation
insurance, we are partially self-insured, with medical capped at a $40,000 limit
per claim and workers’ compensation capped at a $225,000 limit per claim.
Effective October 1, 2010 and in conjunction with subcontracting of the
management of the dedicated fleet to a large third party carrier, the Company
changed its workers compensation plan to a fixed premium plan. The
self-insurance reserve for medical, dental and workers’ compensation was
included in ‘‘accrued expenses ’’ on the balance sheets at January 2, 2010, and
January 3, 2009, and was $244,000 and $395,000, respectively.
11.
|
LEASES:
|
The
Company has non-cancelable operating leases, primarily for real property and
equipment rentals. The leases require the Company to pay maintenance,
insurance and other operating expenses. Rental expense for operating
leases for 52 weeks ended January 2, 2010, the 47 weeks ended January 3, 2009,
and the 6 weeks ended February 12, 2008 was $2,575,000, $3,912,000 and $499,000,
respectively.
Future
minimum lease payments for operations under non-cancelable lease at January 2,
2010, are as follows:
Property
|
Equipment
|
Total
|
||||||||||
$ | 1,618,000 | $ | 1,115,000 | $ | 2,733,000 | |||||||
2010
|
1,158,000 | 823,000 | 1,981,000 | |||||||||
2011
|
886,000 | 636,000 | 1,522,000 | |||||||||
2012
|
442,000 | 169,000 | 611,000 | |||||||||
2013
|
121,000 | - | 121,000 | |||||||||
2014
|
- | - | - | |||||||||
Thereafter
|
$ | 4,225,000 | $ | 2,743,000 | $ | 6,968,000 |
The
Company’s leases for real property generally contain renewal options for periods
of two to five years.
12.
|
STOCK
BASED COMPENSATION:
|
The
Company’s 2007 Long-Term Incentive Equity Plan (the ‘‘Plan’’), became effective
with the consummation of the Acquisition. The Plan was established to
grant stock options, stock appreciation rights, restricted stock, deferred stock
and other stock based awards to its directors, officers, employees and
consultants of the Company. Under the Plan, all stock option awards are
granted with an exercise price equal to the market price of the Company’s common
stock at the date of grant and expire
ten years after the date of the grant. In 2008, the Company granted 70,000
stock options (in total) of the Company’s common stock to all non-employee
directors on the Board of Directors and the Special Advisor on the Board of
Directors and 56,250 stock options of the Company’s common stock to the Chief
Executive Officer of one of its reporting units for the successful completion of
the 2007 Company audit. On February 9, 2009, the Company granted 150,000
stock options of the Company’s common stock to the Chief Executive
Officer. On March 15, 2009, the Company granted 83,500 stock options (in
total) of the Company’s common stock to the upper management of the various
reporting units as part of the Plan. These stock options vest over a three-year
period. On June 15, 2009, the Company granted 77,250 stock options (in
total) of the Company’s common stock to the upper management of the various
reporting units as part of the Plan. These stock options vest over a three-year
period. Also during the second quarter of 2009, the Company granted 30,000
stock options of the Company’s common stock to a non-employee member of the
Board of Directors as part of the Plan. These stock options vest over a
three-year period. On August 31, 2009, the Company granted 50,000 stock
options of the Company’s common stock to the upper management of the various
reporting units as part of the Plan. These stock options vest over a three-year
period. On September 15, 2009, the Company granted 77,250 stock options
(in total) of the Company’s common stock to the upper management of the various
reporting units as part of the Plan. These stock options vest over a three-year
period. On October 27, 2009, the Company granted 25,000 stock options of
the Company’s common stock to the upper management of the various reporting
units as part of the Plan. These stock options vest over a three-year period. On
November 4, 2009, the Company granted 40,000 stock options of the Company’s
common stock to the upper management of the various reporting units as part of
the Plan. These stock options vest over a three-year period. On December
15, 2009, the Company granted 69,750 stock options (in total) of the Company’s
common stock to the upper management of the various reporting units as part of
the Plan. These stock options vest over a three-year period. Shares issued
as a result of future stock option exercises, if any, will be newly issued
shares. During the 52 weeks ended January 2, 2010, 37,083 stock options
vested and none were exercised. To date 48,750 stock options vested and
none were exercised.
65
There
were 682,750 in stock options granted as of January 2, 2010, and 126,250 in
stock options granted as of January 3, 2009. During the 52 weeks
ended January 2, 2010, and the 47 weeks ended January 3, 2009, approximately
$108,000 and $62,000, respectively, was charged to compensation expense
related to stock option grants. Upon resignation or termination, all
options not fully vested are forfeited. As of January 2, 2010, 46,250 of
stock options were forfeited. In addition, an additional 102,500 of stock
options were forfeited as of the end of the first quarter of 2010.
The fair
value of each stock option award is estimated on the date of grant using the
Black-Scholes option pricing model that uses various assumptions for inputs as
noted. Generally, the Company uses expected volatilities and risk-free
interest rates that correlate with the expected term of the option when
estimating an option’s fair value. The Company has adopted the “simplified
method” to estimate the expected life of options, which is equal to the average
of the vesting term (3 years) and original contractual term (10 years).
Expected volatility is based on historical volatility of the stock prices of
comparable logistic companies of similar market value, given the lack of trading
history of the Company’s stock, and the expected risk-free interest rate is
based on the U.S. Treasury yield curve at the time of the grant. The
assumptions used for options granted in the 52 weeks ended January 2, 2010, and
the 47 weeks ended January 3, 2009, were as follows:
52 Weeks Ended
|
47 Weeks Ended
|
|||||||
January 2, 2010
|
January 3, 2009
|
|||||||
Expected
volatility
|
61.8 | % | 58.0 | % | ||||
Expected
dividends
|
0.0 | % | 0.0 | % | ||||
Expected
term (in years)
|
6.5 | 6.5 | ||||||
Risk-free
rate
|
2.9 | % | 3.0 | % |
66
A summary
of option activity under the Plan through January 2, 2010, is as
follows:
Weighted-
|
Weighted-
|
Average
|
||||||||||||||
Average
|
Average
|
Remaining
|
||||||||||||||
Exercise
|
Grant Date
|
Contractual
|
||||||||||||||
Options
|
Shares
|
Price
|
Fair Value
|
Term
|
||||||||||||
Balance
(at January 4, 2009)
|
126,250 | $ | 3.48 | 2.03 | 8.47 | |||||||||||
Granted
- 1st Quarter 2009
|
233,500 | $ | 0.69 | 0.35 | 9.25 | |||||||||||
Granted
- 2nd Quarter 2009
|
107,250 | $ | 0.82 | 0.46 | 9.50 | |||||||||||
Granted
- 3rd Quarter 2009
|
87,250 | $ | 0.80 | 0.44 | 9.75 | |||||||||||
Granted
- 4th Quarter 2009
|
174,750 | $ | 0.65 | 0.36 | 10.00 | |||||||||||
Exercised
|
— | $ | — | — | — | |||||||||||
Forfeited
or expired
|
(46,250 | ) | $ | 0.37 | 0.37 | 9.25 | ||||||||||
Outstanding
at January 2, 2010
|
682,750 | $ | 1.02 | 0.58 | 6.31 | |||||||||||
Exercisable
(vested) at January 2, 2010
|
48,750 | $ | 3.48 | 2.03 | 8.47 |
A summary
of option activity under the Plan as of January 3, 2009 is as
follows:
Weighted-
|
||||||||||||||||
Weighted-
|
Weighted-
|
Average
|
||||||||||||||
Average
|
Average
|
Remaining
|
||||||||||||||
Exercise
|
Grant Date
|
Contractual
|
||||||||||||||
Options
|
Shares
|
Price
|
Fair Value
|
Term
|
||||||||||||
Beginning
of year
|
— | $ | — | — | — | |||||||||||
Granted
1st Quarter
|
70,000 | $ | 4.06 | 2.37 | 9.75 | |||||||||||
Granted
2nd Quarter
|
56,250 | $ | 2.75 | 1.61 | 9.50 | |||||||||||
Granted
3rd Quarter
|
— | $ | — | — | — | |||||||||||
Granted
4th Quarter
|
— | $ | — | — | — | |||||||||||
Exercised
|
— | $ | — | — | — | |||||||||||
Forfeited
or expired
|
— | $ | — | — | — | |||||||||||
Outstanding
at January 3, 2009
|
126,250 | $ | 3.48 | 2.03 | 9.23 | |||||||||||
Exercisable
at January 3, 2009
|
11,667 | $ | — | — | — |
The total
fair value of shares vested at January 2, 2010 and January 3, 2009, were
$109,000 and $28,000, respectively.
13.
|
BUSINESS
AND CREDIT CONCENTRATIONS:
|
Domestically
the Company maintains cash and cash equivalents in two banks. The bank
balances at year end were in non- interest
bearing accounts, which are fully insured by the FDIC. Under this program (i.e.,
the Temporary Liquidity Guarantee Program), all non-interest bearing transaction
accounts are fully guaranteed by the FDIC for the entire amount in the account
through June 30, 2010.
67
Sales to
three printers and publishers aggregated $22,210,000 for the 52 weeks ended
January 2, 2010, and $27,981,000 for the 47 weeks ended January 2, 2009,
$3,052,000 for the 6 weeks ended
February 12, 2008. Accounts receivable from these printers and
publishers were $1,157,000 and $1,394,000 as of January 2, 2010, and January 3,
2009, respectively.
14.
|
RELATED-PARTY
TRANSACTIONS:
|
The Company provides logistics and
transportation services for Anderson Merchandisers, LP, related through common
ownership. The revenue related to these services was $1,223,000 for the 52
weeks ended January 3, 2010, and $2,418,000 for the 47 weeks ended January 2,
2009, $388,000 6 weeks ended February 12, 2008, and is included in gross
revenues. Accounts receivable included in the consolidated balance sheet
from Anderson Merchandisers, LP, was $5,000 and $333,000 as of January 2, 2010
and January 3, 2009, respectively.
15.
|
BUSINESS
SEGMENTS:
|
The
Company operates in two geographic segments, Domestic and International.
The Domestic segment consists of operations serving a variety of wholesale
customers in North America. The International segment consists principally
of shipments outside North America.
Financial
information on business segments for the 52 weeks ended January 2, 2010, and the
47 weeks ended January 3, 2009, and the 6 weeks ended February 12, 2008 is as
follows (showing all of the activity of the Successor and the
Predecessor):
68
Business
Segments:
52 Weeks Ended January 2,
2010
|
||||||||||||
Domestic
|
International
|
Consolidated
|
||||||||||
Gross revenues
|
$ | 54,817 | $ | 11,849 | $ | 66,666 | ||||||
Freight
expense
|
(34,868 | ) | (7,321 | ) | (42,189 | ) | ||||||
Selling,
operating, and administrative expenses
|
(20,594 | ) | (4,932 | ) | (25,526 | ) | ||||||
Income
from operations before depreciation, impairment of goodwill and intangible
assets, amortization, interest, and taxes
|
$ | (645 | ) | $ | (404 | ) | $ | (1,049 | ) | |||
Total
assets
|
$ | 24,353 | $ | 2,426 | $ | 26,779 | ||||||
Capital
expenditures
|
$ | 569 | $ | 339 | $ | 908 | ||||||
CHI
|
||||||||||||
47 Weeks Ended January 3,
2009
|
Successor
|
|||||||||||
Domestic
|
International
|
Consolidated
|
||||||||||
Gross
revenues
|
$ | 62,539 | $ | 13,234 | $ | 75,773 | ||||||
Freight
expense
|
(41,293 | ) | (8,260 | ) | (49,553 | ) | ||||||
Selling,
operating, and administrative expenses
|
(17,405 | ) | (4,779 | ) | (22,184 | ) | ||||||
Income
from operations before depreciation, impairment of goodwill and intangible
assets, amortization, interest and taxes
|
$ | 3,841 | $ | 195 | $ | 4,036 | ||||||
Total
assets
|
$ | 20,756 | $ | 10,784 | $ | 30,517 | ||||||
Capital
expenditures
|
$ | 1,838 | $ | 641 | ||||||||
CGI
|
||||||||||||
6 Weeks Ended February 12,
2009
|
Predecessor
|
|||||||||||
Domestic
|
International
|
Consolidated
|
||||||||||
Gross
revenues
|
$ | 7,051 | $ | 1,343 | $ | 8,394 | ||||||
Freight
expense
|
(4,372 | ) | (777 | ) | (5,149 | ) | ||||||
Selling,
operating, and administrative expenses
|
(1,835 | ) | (550 | ) | (2,385 | ) | ||||||
Income
from operations before depreciation, amortization, interest and
taxes
|
||||||||||||
$ | 844 | $ | 16 | $ | 860 |
For purposes of this disclosure, all
inter-company transactions have been eliminated.
69
16.
|
INCOME
TAXES:
|
A summary
of the components of the provision (benefit) for income taxes is as
follows:
52 Weeks Ended
|
47 Weeks Ended
|
|||||||
January 2, 2010
|
January 3, 2009
|
|||||||
Federal:
|
||||||||
Current
income tax (benefit)
|
$ | (183,502 | ) | $ | 1,031,390 | |||
Deferred
income tax (benefit)
|
(782,816 | ) | (1,385,091 | ) | ||||
(966,318 | ) | (353,701 | ) | |||||
State:
|
||||||||
Current
income tax expense
|
437,686 | 433,641 | ||||||
Deferred
income tax (benefit)
|
(292,018 | ) | (406,090 | ) | ||||
145,668 | 27,551 | |||||||
Total
(benefit) for taxes
|
$ | (820,650 | ) | $ | (326,150 | ) | ||
A
reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
|
||||||||
52 Weeks Ended
|
47 Weeks Ended
|
|||||||
January 2, 2010
|
January 3, 2009
|
|||||||
Tax
provision computed at federal statutory rate
|
(34.00 | )% | 34.00 | % | ||||
Effect
of state income taxes, net of federal benefits
|
4.58 | % | 8.95 | % | ||||
Goodwill
impairment charge
|
0.00 | % | (43.46 | )% | ||||
Other
permanent differences, net
|
(0.29 | )% | 0.00 | % | ||||
Effective
tax rate
|
(29.71 | )% | (0.51 | )% |
70
Temporary
differences which created deferred tax assets (liabilities) at January 2, 2010
and January 3, 2009 are as follows:
January 2, 2010
|
January 3, 2009
|
|||||||||||||||
Current
|
Non-current
|
Current
|
Non-current
|
|||||||||||||
Deferred
tax assets:
|
||||||||||||||||
Accruals
|
$ | 315,613 | $ | 0 | $ | 236,886 | $ | 0 | ||||||||
Deferred
Revenue
|
64,757 | 0 | 133,766 | 0 | ||||||||||||
State
tax
|
0 | 0 | 447,118 | 0 | ||||||||||||
Compensation
and benefits
|
67,692 | 0 | 26,566 | 0 | ||||||||||||
Amortization
|
0 | 663,471 | 0 | 747,106 | ||||||||||||
Allowance
for bad debts
|
97,371 | 0 | 149,326 | 0 | ||||||||||||
Other
|
0 | 30,500 | ||||||||||||||
NOL
- State
|
44,632 | 0 | 0 | 0 | ||||||||||||
Total
deferred tax assets
|
590,065 | 693,971 | 993,662 | 747,106 | ||||||||||||
Deferred
tax liabilities:
|
||||||||||||||||
Depreciation
|
0 | (270,167 | ) | 0 | (129,515 | ) | ||||||||||
Amortization
|
0 | (5,690,476 | ) | 0 | (7,193,867 | ) | ||||||||||
Prepaids
|
(107,322 | ) | 0 | (276,148 | ) | 0 | ||||||||||
Other
|
0 | 0 | 0 | 0 | ||||||||||||
Total
deferred tax liabilities
|
(107,322 | ) | (5,960,643 | ) | (276,148 | ) | (7,323,382 | ) | ||||||||
Total
deferred tax liability, net
|
$ | 482,743 | $ | (5,266,672 | ) | $ | 717,514 | $ | (6,576,276 | ) |
In
accordance with FASB ASC 740, we recognize deferred tax assets and liabilities
based on the difference between the financial statement carrying amounts and the
tax basis of assets and liabilities. Deferred tax assets represent items
to be used as a tax deduction or credit in future tax returns for which we have
already recorded the tax benefit on the income statement. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized. We have determined that no such allowance
is required.
17.
|
DEFINED
CONTRIBUTION PLAN:
|
The
Company sponsors a contributory defined contribution 401(k) retirement plan
covering all eligible employees, as defined. Contribution expense was $0 for the
52 weeks ended January 2, 2010, and $275,000 for the 47 weeks ended January 3,
2009, $0 for the 6 weeks ended February 12, 2008.
18.
|
CONTINGENCIES:
|
The
Company is subject to various claims, complaints and litigation arising out of
its normal course of business. The Company has referred all such
litigation and claims to legal counsel and, where appropriate, to insurance
carriers. In the opinion of management, after consulting with legal
counsel, the settlement of litigation and various claims will not have a
material adverse effect on the operations or financial position of the
Company.
On or
about July 10, 2009, Multi-Media International filed a complaint against CGI and
its subsidiaries, CDS, HDS, CWT and EXL (the “Subsidiaries”), seeking class
action status in the United States District Court for the District
of New Jersey by alleging, among other things, (i) common law fraud,
aiding and abetting fraud, negligent misrepresentation, conversion and unjust
enrichment, (ii) violation of N.J. Stat. § 56:8-2 and (iii) breach of good faith
and fair dealing, relating to alleged excessive fuel surcharges by the
Subsidiaries. The complaint alleges a class period from June 25, 2002
through June 25, 2009. On behalf of the punitive class plaintiff seeks to
recover the alleged excessive fuel charges, enjoin the alleged improper
calculation of fuel charges by defendants and impose punitive damages and
attorney’s fees. The complaint did not specify an amount of damages; however a
prior complaint seeking similar relief on behalf of the same class, which was
withdrawn, sought compensatory damages in the amount of $10 million and punitive
damages in the amount of $30 million, as described in the Company’s 2008 Form
10-K. The Company believes that the allegations in the lawsuit are without
merit and it intends to vigorously defend itself. However, the ultimate outcome
of this action and the amount of liability that may result, if any, is not
presently determinable.
71
19.
|
RESTRICTED
STOCK IN ESCROW:
|
Upon the
closing of the Acquisition, the founders of the Company placed an aggregate of
1,173,438 of their shares (‘‘restricted stock’’) into escrow pursuant to a
Stockholder Escrow Agreement (‘‘Escrow Agreement’’). These shares will be
released from escrow if, and only if, prior to the fifth anniversary of the
Acquisition, the last sales price of the Company’s common stock equals or
exceeds $11.50 per share for any 20 trading days within a 30 day, trading day,
period. Upon satisfaction of this condition, shares shall be released to
the founders. If such condition is not met, the shares placed in escrow
will be cancelled. The release condition may not be waived under any
circumstances. The terms of the escrow agreement restrict the founders
from selling or otherwise transferring the escrowed shares during the period the
escrow arrangement is in effect, subject to certain limited exceptions such as
transfers to family members and trusts for estate planning purposes, the death
of the founder and transfers to an estate or beneficiaries, provided that the
recipients agree to remain subject to the arrangement.
This
restricted stock in escrow is accounted for in accordance with FASB Topic ASC
718, “Compensation – Stock Compensation”, the Company used a Black-Scholes model
in conjunction with a lattice or decision path model to simulate the future
prices of the Company’s stock over a five year period (100,000 decision paths
were simulated in calculating the probability that the stock would exceed $11.50
for 20 out of 30 days in a 5 year period).
Key
assumptions used in the original model were as follows:
|
·
|
The
stock price of CHI was $5.08 per share as of the close on February 12,
2008.
|
|
·
|
The
risk-free rate for the Black-Scholes model is 2.31% (3 month Treasury rate
as of February 12, 2008).
|
|
·
|
Time
to expiration is five years, consisting of 1,260 business
days.
|
|
·
|
The
shares release on the first day that follows a 30 business day period in
which the stock price equals or exceeds $11.50 in 20 of the
days.
|
|
·
|
The
volatility used in the model was increased from 31.53% (used in the proxy
statement dated January 28, 2008, and used to value the estimated value of
the options awarded to two executives) to 52.7% and 58.3%. The higher
volatility values, which would increase the probability of the stock
achieving the $11.50 goal, were chosen since they better represented the
volatility of logistic firms that had market capitalizations more similar
in the market value to the Company.
|
The
results of the 100,000 lattice or decision path simulations of the original
study were as follows:
|
·
|
The
probability of the stock achieving an $11.50 per share value at the end of
5 years is between 26.445% and 28.028%.
|
|
·
|
This
implies that associated with 100,000 price paths (i.e., ‘‘decision
paths’’), only up to 28,028 of these paths achieved an $11.50 per share
price after 5 years.
|
|
·
|
The
remaining (approximately) 72,000 price paths never achieved the
$11.50 per share price.
|
|
·
|
The
fair value of the restricted stock as of February 12, 2008, is between
$3.33 and $3.59 per share (versus $5.08 per the
market).
|
72
The
‘‘middle result’’ or expected value-median-mean in the 50% range would require
approximately 50,000 price paths achieving an $11.50 per share price. The
results generated by this study are substantially less than the 50,000 required.
As a result of the probability analysis, the Company did not recognize any
amortization expense related to restricted shares during the 47 weeks ended
January 3, 2009.
In
addition, the Company accounts for restricted stock in escrow in accordance with
FASB Topic ASC 260, “Earnings Per Share”. Contingently Issuable
Shares are included in the diluted earning per share calculation “if all
necessary conditions have been satisfied by the end of the
period.” The contingency was not met during the period and therefore
these shares are excluded from both the basic and diluted earnings per
share.
In
Management’s reassessment of the original study with updated assumptions, it was
determined that the expected value of the decision path simulations would be
less than the original study. Consequently, the Company did not
recognize any amortization expense related to restricted shares during the 52
weeks ended January 2, 2010.
73
SIGNATURES
Pursuant
to the requirements of the Section 13 or 15 or 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 on the 19th day of
April 2010.
CLARK
HOLDINGS INC.
|
|
By:
|
/s/ Gregory E. Burns
|
Gregory
E. Burns
|
|
President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Name
|
Title
|
Date
|
||
/s/ Donald G. McInnes
|
Chairman
of the Board
|
April
19, 2010
|
||
Donald
G. McInnes
|
||||
/s/ Gregory E. Burns
|
President,
Chief Executive Officer and Director
|
April
19, 2010
|
||
Gregory
E. Burns
|
(Principal
Executive Officer)
|
|||
/s/ Stephen M. Spritzer
|
Chief
Financial Officer, Treasurer and Secretary
|
April
19, 2010
|
||
Stephen
M. Spritzer
|
(Principal
Financial Officer and Principal
|
|||
Accounting
Officer)
|
||||
/s/ Edward W. Cook
|
Director
|
April
19, 2010
|
||
Edward
W. Cook
|
||||
/s/ Maurice Levy
|
Director
|
April
19, 2010
|
||
Maurice
Levy
|
||||
/s/ Robert C.
LaRose
|
Director
|
April
19, 2010
|
||
Robert
C. LaRose
|
||||
/s/ Brian Bowers
|
Director
|
April
19, 2010
|
||
Brian
Bowers
|
|
|
74