Attached files
file | filename |
---|---|
EX-99.1 - Clark Holdings Inc. | v202857_ex99-1.htm |
EX-10.2 - Clark Holdings Inc. | v202857_ex10-2.htm |
EX-31.2 - Clark Holdings Inc. | v202857_ex31-2.htm |
EX-31.1 - Clark Holdings Inc. | v202857_ex31-1.htm |
EX-10.1 - Clark Holdings Inc. | v202857_ex10-1.htm |
EX-32.1 - Clark Holdings Inc. | v202857_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended October 2, 2010
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For the
transition period from ________ to ___________.
Commission
file number: 001-32735
CLARK
HOLDINGS INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
43-2089172
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
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)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes o 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 such shorted period that the registrant was required to submit and
post such files). o Yes o No
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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
|
Non-accelerated
filer o (Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes x No
As of
November 5, 2010, we had 12,032,193 shares of common stock issued and
outstanding.
CLARK
HOLDINGS INC.
AND
SUBSIDIARIES
FORM
10-Q
FOR
THE QUARTER ENDED OCTOBER 2, 2010
TABLE
OF CONTENTS
PART I. FINANCIAL INFORMATION | ||
ITEM
1.
|
FINANCIAL
STATEMENTS
|
3
|
Condensed
Consolidated Balance Sheets as of October 2, 2010 (Unaudited) and January
2, 2010
|
3
|
|
Condensed
Consolidated Statements of Operations for the 13 Weeks and 39 Weeks Ended
October 2, 2010 and October 3, 2009 (Unaudited)
|
4
|
|
Condensed
Consolidated Statements of Cash Flows for the 39 Weeks Ended October 2,
2010 and October 3, 2009 (Unaudited)
|
5
|
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
20
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
28
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
28
|
PART
II. OTHER INFORMATION
|
||
ITEM
1.
|
LEGAL
PROCEEDINGS
|
30
|
ITEM
1A.
|
RISK
FACTORS
|
30
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
30
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
30
|
ITEM
4.
|
RESERVED
|
30
|
ITEM
5.
|
OTHER
INFORMATION
|
30
|
ITEM
6.
|
EXHIBITS
|
31
|
SIGNATURES
|
32
|
2
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CLARK
HOLDINGS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
Thousands)
(Unaudited)
|
||||||||
|
October 2, 2010
|
January 2, 2010
|
||||||
ASSETS | ||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 207 | $ | 2,879 | ||||
Restricted
cash
|
– | 718 | ||||||
Accounts
receivable, net
|
6,244 | 5,073 | ||||||
Income
tax receivable
|
600 | – | ||||||
Other
receivables
|
287 | 414 | ||||||
Prepaid
expenses
|
730 | 397 | ||||||
Deferred
tax assets-current
|
1,322 | 483 | ||||||
Total
Current Assets
|
9,390 | 9,964 | ||||||
PROPERTY
AND EQUIPMENT, net of accumulated depreciation
|
1,781 | 2,529 | ||||||
INTANGIBLE
ASSETS, net of accumulated amortization
|
13,325 | 14,257 | ||||||
TOTAL
ASSETS
|
$ | 24,496 | $ | 26,750 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Current
portion of long term debt
|
$ | 2,665 | $ | 2,895 | ||||
Accounts
payable
|
5,768 | 3,502 | ||||||
Accrued
expenses and other payables
|
5,343 | 5,165 | ||||||
Total
Current Liabilities
|
13,776 | 11,562 | ||||||
DEFERRED
TAX LIABILITIES-NON-CURRENT
|
3,823 | 5,267 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Preferred
stock-$.0001 par value; 1,000,000 shares authorized;none
issued
|
– | – | ||||||
Common
stock-$.0001 par value; 40,000,000 and 400,000,000 shares authorized at
October 2, 2010 and January 2, 2010, respectively, and 10,858,755 issued
and outstanding at each date.
|
1 | 1 | ||||||
Additional
paid-in capital
|
73,607 | 73,535 | ||||||
Accumulated
deficit
|
(66,711 | ) | (63,615 | ) | ||||
Total
Shareholders' Equity
|
6,897 | 9,921 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 24,496 | $ | 26,750 |
See
accompanying notes to condensed consolidated financial
statements.
3
CLARK
HOLDINGS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In
Thousands)
13 Weeks Ended
|
39 Weeks Ended
|
|||||||||||||||
October 2, 2010
|
October 3, 2009
|
October 2, 2010
|
October 3, 2009
|
|||||||||||||
Gross
Revenues
|
$ | 17,052 | $ | 17,183 | $ | 48,917 | $ | 51,117 | ||||||||
Freight
expense
|
(12,134 | ) | (10,453 | ) | (34,303 | ) | (32,011 | ) | ||||||||
Depreciation
and amortization
|
(406 | ) | (432 | ) | (1,226 | ) | (1,272 | ) | ||||||||
Operating,
selling and administrative expense
|
(5,261 | ) | (5,992 | ) | (15,858 | ) | (19,410 | ) | ||||||||
Restructuring
charges
|
(324 | ) | – | (543 | ) | – | ||||||||||
Impairment
charge
|
– | – | (594 | ) | – | |||||||||||
Operating
income (loss)
|
(1,073 | ) | 305 | (3,607 | ) | (1,576 | ) | |||||||||
Interest
income
|
– | – | 2 | 1 | ||||||||||||
Interest
expense
|
(41 | ) | (82 | ) | (121 | ) | (145 | ) | ||||||||
(Loss)
income before income taxes
|
(1,114 | ) | 223 | (3,726 | ) | (1,720 | ) | |||||||||
Benefit
(provision) for income taxes
|
418 | (89 | ) | 1,842 | 572 | |||||||||||
Income
(loss) from continuing operations
|
$ | (696 | ) | $ | 134 | $ | (1,884 | ) | $ | (1,148 | ) | |||||
Loss
from discontinued operations, net of tax
|
(498 | ) | – | (1,213 | ) | – | ||||||||||
Net
income (loss)
|
$ | (1,194 | ) | $ | 134 | $ | (3,097 | ) | $ | (1,148 | ) | |||||
Basic
& diluted income (loss) per share
|
||||||||||||||||
Income
(loss) from continuing operations
|
$ | (0.06 | ) | $ | 0.01 | $ | (0.18 | ) | $ | (0.11 | ) | |||||
Loss
from discontinued operations
|
(0.05 | ) | – | (0.11 | ) | – | ||||||||||
Net
income (loss)
|
$ | (0.11 | ) | $ | 0.01 | $ | (0.29 | ) | $ | (0.11 | ) | |||||
Weighted
average shares used to compute income (loss) per share
|
||||||||||||||||
Basic
and diluted
|
10,859 | 10,859 | 10,859 | 10,859 |
See
accompanying notes to condensed consolidated financial
statements
4
CLARK
HOLDINGS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In
Thousands)
39 Weeks Ended
|
||||||||
October 2, 2010
|
October 3, 2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$ | (3,097 | ) | $ | (1,148 | ) | ||
Loss
from discontinued operations
|
(1,213 | ) | – | |||||
Loss
from continuing operations
|
$ | (1,884 | ) | $ | (1,148 | ) | ||
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
||||||||
Depreciation
|
294 | 213 | ||||||
Amortization
|
932 | 1,059 | ||||||
Stock-based
compensation expense
|
72 | 88 | ||||||
Deferred
income tax benefit
|
(1,475 | ) | (364 | ) | ||||
Impairment
charges
|
594 | – | ||||||
Provision
for doubtful accounts and allowances
|
48 | 40 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,145 | ) | (122 | ) | ||||
Income
tax receivable
|
(600 | ) | – | |||||
Other
receivables
|
127 | (601 | ) | |||||
Prepaid
expenses
|
(339 | ) | 363 | |||||
Accounts
payable
|
1,933 | 831 | ||||||
Accrued
expenses and other payables
|
(471 | ) | (500 | ) | ||||
Net
cash used by operating activities from continuing
operations
|
(1,914 | ) | (141 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchases
of property and equipment
|
(220 | ) | (994 | ) | ||||
Proceeds
from disposal of assets
|
80 | – | ||||||
Net
cash used in investing activities from continuing
operations
|
(140 | ) | (994 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Repayment
of term loan
|
(2,895 | ) | (947 | ) | ||||
Net
bank credit line proceeds
|
2,665 | – | ||||||
Decrease
in restricted cash
|
718 | – | ||||||
Net
cash provided (used) by financing activities from continuing
operations
|
488 | (947 | ) | |||||
CASH
FLOWS FROM DISCONTINUED OPERATIONS
|
||||||||
Net
cash used by operating activities
|
(1,106 | ) | – | |||||
Net
cash used for investing activities
|
– | – | ||||||
Net
cash provided by financing activities
|
– | – | ||||||
Net
cash used by discontinued operations
|
(1,106 | ) | – | |||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(2,672 | ) | (2,082 | ) | ||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
2,879 | 3,915 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 207 | $ | 1,833 | ||||
SUPPLEMENTAL
CASH FLOW INFORMATION
|
||||||||
Interest
paid
|
$ | 121 | $ | 145 | ||||
Income
taxes paid
|
$ | – | $ | 339 |
See
accompanying notes to condensed consolidated financial
statements.
5
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of
Business. Clark
Holdings Inc. (the “Company”) is a holding company which conducts its business
through its operating subsidiaries. The Company provides transportation
management and logistics services to the print media and other industries,
providing ground, air, and ocean freight forwarding, as well as contract
logistics, customs clearances, distribution, inbound logistics, truckload
brokerage, and other supply chain management solutions.
Basis of
Presentation. The condensed consolidated financial statements are
presented in accordance with generally accepted accounting principles in the
United States of America (“U.S. GAAP”) for interim financial information and
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted pursuant to Article 8 of
Regulation S-X. In the opinion of management, the unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair presentation of the
financial position, results of operations and cash flows for the periods
indicated. You should read these condensed consolidated financial statements in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended January
2, 2010, filed with the SEC on April 19, 2010. The January 2, 2010 consolidated
financial statements were derived from audited consolidated financial statements
but does not include all disclosures required by U.S. GAAP.
The
condensed consolidated financial statements include the accounts of Clark
Holdings Inc., a Delaware corporation, and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation. As
of October 2, 2010, there have been no significant changes to any of the
Company’s accounting policies as set forth in the Annual Report on Form 10-K for
the year ended January 2, 2010.
The
results of operations for the 13 and 39 weeks ended October 2, 2010 are not
necessarily indicative of the results that may be expected for any other interim
period or for the full year ending January 1, 2011.
Reclassifications.
Certain prior period balances have been reclassified to conform to the
current financial statement presentation, including those associated with
presentation of the Company’s discontinued operations in accordance with
authoritative guidance. These reclassifications had no impact on previously
reported results of operations or shareholders’ equity.
Estimates and
Uncertainties.
The preparation of condensed consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The Company’s most significant estimates and assumptions
made in the preparation of the condensed consolidated financial statements
relate to revenue recognition, accounts receivable allowance for doubtful
accounts, intangible assets, income taxes, and accrued expenses. Actual results
could differ from those estimates.
As
reflected in the accompanying condensed consolidated financial statements, the
Company incurred a net loss of approximately $3.1 million for the 39 weeks ended
October 2, 2010. By September of 2010, management had completed a series of cost
reduction initiatives, including closure of its brokerage division, a management
reorganization of its international division, several reductions in workforce,
and a wage freeze and a wage reduction. Collectively, these initiatives have
reduced the Company’s annual operating costs by more than $7.2 million. In
addition, the Company reduced capital expenditure budgets and amended its credit
facility agreement on November 11, 2010 (Note 4). The Company continues to
pursue a number of initiatives to further reduce its costs and increase its
revenues. While management believes that these actions taken to improve the
Company’s operating and financial requirements will allow the Company to sustain
its future operations and meet its financial covenants, further steps may need
to be taken if the above actions prove to be insufficient.
6
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
Liquidity.
Over the
next twelve months, the Company’s operations may require additional funds and it
may seek to raise such additional funds through public or private sales of debt
or equity securities, or securities convertible or exchangeable into such
securities, strategic relationships, bank debt, lease financing arrangements, or
other available means. No assurance can be provided that additional funding, if
sought, will be available or, if available, will be on acceptable terms to meet
the Company’s business needs. If additional funds are raised through the
issuance of equity securities, stockholders may experience dilution, or such
equity securities may have rights, preferences, or privileges senior to those of
the holders of the Company’s common stock. If additional funds are raised
through debt financing, the debt financing may involve significant cash payment
obligations and financial or operational covenants that may restrict the
Company’s ability to operate its business. An inability to fund its operations
or fulfill outstanding obligations could have a material adverse effect on the
Company’s business, financial condition, results of operations and ability to
meet its financial covenants.
Fair Value of
Financial Instruments. The carrying value of cash equivalents, accounts
receivable, accounts payable and short-term debt reasonably approximate their
fair value due to the relatively short maturities of these instruments. The fair
value estimates presented herein were based on market or other information
available to management. The use of different assumptions and/or estimation
methodologies could have a significant effect on the estimated fair value
amounts.
Restricted
Cash. At
January 2, 2010, $718,000 of bank deposits were classified as restricted as
collateral for outstanding letters of credit issued by the Company’s former
bank. On March 18, 2010, the restricted cash was released as part of the
Company’s refinancing of its bank credit facility (see Note 4) and the proceeds
were used to pay down the bank line.
Income
Taxes. The Company recognizes deferred tax assets, net of
applicable valuation allowances, related to net operating loss carry-forwards
and certain temporary differences and deferred tax liabilities related to
certain temporary differences. The Company recognizes a future tax benefit to
the extent that realization of such benefit is considered to be more likely than
not. This determination is based upon the projected reversal of taxable
temporary differences, projected future taxable income and use of tax planning
strategies. Otherwise, a valuation allowance is applied. To the extent that the
Company’s deferred tax assets require valuation allowances in the future, the
recording of such valuation allowances would result in an increase to its tax
provision in the period in which the Company determines that such a valuation
allowance is required.
The
Company evaluates the need for a deferred tax valuation allowance quarterly. No
valuation allowance was required as of October 2, 2010 and January 2, 2010 as it
was deemed more likely than not that the Company’s deferred tax assets will be
realized. Although the Company incurred substantial losses before income taxes
for the 39 weeks ended October 2, 2010 and the year ended January 2, 2010,
management believes that it is more likely than not that the Company will
recognize the deferred tax assets. However, if future events change management’s
assumptions and estimates regarding the Company’s future earnings, a significant
deferred tax asset valuation allowance may have to be
established.
7
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – RECENT ACCOUNTING
PRONOUNCEMENTS
In
February 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2010-09 (ASU 2010-09) to Codification Topic 855,
Subsequent Events. This
update requires that all SEC filers must evaluate subsequent events through the
date the financial statements are issued. However, it no longer requires filers
to disclose either the issuance date or the revised issuance date. The amended
Codification Topic 855 established general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued. The Company has evaluated subsequent events for
appropriate accounting and disclosure in accordance with ASU
2010-09.
In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue
Arrangements (ASU 2009-13), which amends Codification Topic 605, Revenue Recognition. This
update provides amendments to the criteria for separating deliverables,
measuring and allocating arrangement consideration to one or more units of
accounting. This update also establishes a selling price hierarchy for
determining the selling price of a deliverable. ASU 2009-13 is effective for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. While the Company is still assessing the
impact of the adoption of ASU 2009–13, it is not expecting this update will have
a material effect on the Company’s results of operations or financial
position.
NOTE
3 – CONDENSED CONSOLIDATED BALANCE SHEET COMPONENTS
($000s)
|
(Unaudited)
|
|||||||||||
Accounts receivable, net
|
October 2, 2010
|
January 2, 2010
|
||||||||||
Continuing
Operations:
|
||||||||||||
Accounts
receivable, gross
|
$ | 6,210 | $ | 5,124 | ||||||||
Allowance
for doubtful accounts
|
(177 | ) | (184 | ) | ||||||||
Allowance
for cargo claims
|
(24 | ) | (29 | ) | ||||||||
$ | 6,009 | $ | 4,911 | |||||||||
Discontinued
Operations:
|
||||||||||||
Accounts
receivable, gross
|
$ | 413 | $ | 212 | ||||||||
Allowance
for doubtful accounts
|
(178 | ) | (50 | ) | ||||||||
235 | 162 | |||||||||||
Accounts
receivable, net
|
$ | 6,244 | $ | 5,073 | ||||||||
Property
and Equipment, net
|
Useful
Lives
|
|||||||||||
Land
|
$ | 71 | $ | 71 | ||||||||
Building
|
40
|
465 | 465 | |||||||||
Equipment
|
3 –
7 years
|
642 | 611 | |||||||||
Furniture
and fixtures
|
7
years
|
321 | 222 | |||||||||
IT
systems
|
3
years
|
895 | 882 | |||||||||
Leasehold
improvements
|
5 –
10 years
|
163 | 163 | |||||||||
Construction-in-progress
|
– | 594 | ||||||||||
2, 557 | 3,008 | |||||||||||
Less:
Accumulated depreciation and amortization
|
(776 | ) | (479 | ) | ||||||||
$ | 1,781 | $ | 2,529 | |||||||||
Intangible
Assets, net
|
||||||||||||
Customer
list
|
12
years
|
$ | 13,588 | $ | 13,588 | |||||||
Trade
names
|
–
|
2,314 | 2,314 | |||||||||
Non-compete
agreements
|
5
years
|
1,013 | 1,013 | |||||||||
16,915 | 16,915 | |||||||||||
Less:
Accumulated amortization
|
(3,590 | ) | (2,658 | ) | ||||||||
$ | 13,325 | $ | 14,257 |
8
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 – DEBT
On
February 12, 2008, the Company entered into a credit agreement with Bank of
America, N.A. (“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. Beginning in May 2009, the Company was not in compliance with
certain of the financial covenants contained in the credit agreement. Pursuant
to the September 15, 2009 amendment, BOA agreed to forbear from exercising its
rights arising from such non-compliance.
The
credit agreement with BOA, as amended through September 15, 2009, provided for a
term loan of $4,700,000, revolving loans and letters of credit of up to
$2,218,000 and a termination date of February 28, 2010. The term loan and
revolving loans bore interest at LIBOR plus 4% or at the prime rate, the
outstanding letters of credit bore interest at 4% and the facility had an annual
unused line fee of 0.675%. The facility was collateralized by a senior security
interest in substantially all of the Company’s assets. Pursuant to the February
26, 2010 amendment, the termination date was extended to March 9,
2010.
On March
5, 2010, the Company entered into a new credit agreement with Cole Taylor Bank
for a three year revolving line of credit. Simultaneously with entering into the
new credit agreement, the Company terminated its prior credit agreement with BOA
and made an initial draw under the new facility to repay then-outstanding loans.
The new credit agreement provides for a revolving credit 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 eligible accounts receivable less
certain specified reserves and the value of outstanding letters of credit. The
credit facility is collateralized by a first priority security interest in
substantially all of the Company’s assets and requires payment of interest only
during the facility’s three year term. The interest rate on the line of credit
varies based on the bank’s prime rate or LIBOR and is equal to the greater of 6%
or the bank’s prime rate plus 2%, for borrowings based on the prime rate, or
LIBOR plus 4.5%, for borrowings based on LIBOR. At October 2, 2010 the
applicable interest rate on amounts drawn under the term note and the line of
credit was 6%.
The
Company must comply with certain affirmative and negative covenants customary
for a credit facility of this type, including limitations on liens, debt,
mergers, and consolidations, sales of assets, investments and dividends. The
Company’s credit facility is also subject to financial covenants. As amended
effective November 11, 2010, current financial covenants include a minimum
cumulative EBITDA covenant, set at a loss of not more than $4,505,000, measured
on a monthly basis through the Company’s fiscal month ended February 5, 2011.
Thereafter, the Fixed Charge Coverage ratio, as defined in the credit agreement
shall not be less than 1.05:1 calculated on a Cumulative 52 week basis,
beginning with the Company’s 2011 fiscal year. At October 2, 2010, the Company
was not in compliance with its financial covenants, which were waived via the
November 2010 amendment. At January 2, 2010 the Company was in compliance with
its financial covenants in accordance with the September 15, 2009 amendment to
the credit agreement with BOA.
As of
October 2, 2010, the Company had an outstanding balance of $2,665,000 under the
revolving line and approximately $557,000 of undrawn availability under the
credit line. At January 2, 2010, the Company had an outstanding balance of
$2,895,000 drawn under its revolving credit line, with about $1,683,000 of
undrawn availability.
9
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 – INCOME (LOSS) PER SHARE
Basic
income (loss) per share is computed using the weighted average number of common
shares outstanding. Diluted income (loss) per share is computed using the
weighted average number of common shares outstanding as adjusted for the
incremental shares attributable to outstanding options and warrants to purchase
common stock.
The
following table sets forth the computation of the basic and diluted income
(loss) per share:
13 Weeks Ended
|
39 Weeks Ended
|
|||||||||||||||
($000s)
|
October 2, 2010
|
October 3, 2009
|
October 2, 2010
|
October 3, 2009
|
||||||||||||
Numerator
for basic and diluted:
|
||||||||||||||||
Income
(loss) from continuing operations
|
$ | (696 | ) | $ | 134 | $ | (1,884 | ) | $ | (1,148 | ) | |||||
Loss
from discontinued operations
|
(498 | ) | – | (1,213 | ) | – | ||||||||||
Net
income (loss)
|
$ | (1,194 | ) | $ | 134 | $ | (3, 097 | ) | $ | (1,148 | ) | |||||
Denominator
:
|
||||||||||||||||
For
basic loss per common share – weighted average shares
outstanding
|
10,858,755 | 10,858,755 | 10,858,755 | 10,858,755 | ||||||||||||
Effect
of dilutive securities - stock options, restricted stock units
and warrants
|
– | – | – | – | ||||||||||||
For
diluted loss per common share – weighted average shares outstanding
adjusted for
assumed exercises
|
10,858,755 | 10,858,755 | 10,858,755 | 10,858,755 | ||||||||||||
Basic
and diluted income (loss) per share
|
||||||||||||||||
Continuing
operations
|
$ | (0.06 | ) | $ | 0.01 | $ | (0.18 | ) | $ | (0.11 | ) | |||||
Discontinued
operations
|
(0.05 | ) | – | (0.11 | ) | – | ||||||||||
Net
income (loss)
|
$ | (0.11 | ) | $ | 0.01 | $ | (0.29 | ) | $ | (0.11 | ) |
The
following options and warrants to purchase common stock were excluded from the
computation of diluted loss per share for the 13 and 39 weeks ended October 2,
2010 and October 3, 2009 because they would be antidilutive as their exercise
price was greater than the average market price of the common stock or as a
result of the Company’s net loss for a reporting period:
13 Weeks Ended
|
39 Weeks Ended
|
|||||||||||||||
October 2, 2010
|
October 3, 2009
|
October 2, 2010
|
October 3, 2009
|
|||||||||||||
Anti-dilutive
options and warrants
|
14,012,010 | 13,719,606 | 13,973,827 | 13,623,974 |
10
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 – STOCK-BASED COMPENSATION
The
effect of recording stock-based compensation for the 13 and 39 weeks ended
October 2, 2010 and October 3, 2009 was as follows:
13 Weeks Ended
|
39 Weeks Ended
|
|||||||||||||||
October 2, 2010
|
October 3, 2009
|
October 2, 2010
|
October 3, 2009
|
|||||||||||||
Stock-based
compensation expense by type of award:
|
||||||||||||||||
Employee
stock options
|
$ | 13,760 | $ | 22,764 | $ | 47,222 | $ | 56,777 | ||||||||
Non-employee
director stock options
|
8,984 | 11,438 | 24,834 | 31,223 | ||||||||||||
Total
stock-based compensation expense
|
$ | 22,744 | $ | 34,202 | $ | 72,056 | $ | 88,000 | ||||||||
Tax
effect of stock-based compensation recognized
|
(8,547 | ) | (13,681 | ) | (27,384 | ) | (35,200 | ) | ||||||||
Net
effect on net loss
|
$ | 14,197 | $ | 20,521 | $ | 44,672 | $ | 52,800 | ||||||||
Excess
tax benefit effect on:
|
||||||||||||||||
Cash
flows from operations
|
$ | – | $ | – | $ | – | $ | – | ||||||||
Cash
flows from financing activities
|
$ | – | $ | – | $ | – | $ | – | ||||||||
Effect
on loss per share:
|
||||||||||||||||
Basic
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Diluted
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 |
As of
October 2, 2010, the unrecorded deferred stock-based compensation balance was
$122,337 after estimated forfeitures and will be recognized over an estimated
weighted average amortization period of about 1.2 years. During the 13 weeks
ended October 2, 2010, the Company granted 20,000 stock options with an
estimated total grant-date fair value of $565 after estimated forfeitures.
During the 39 weeks ended October 2, 2010, the Company granted 160,000 stock
options with an estimated total grant-date fair value of $27,175 after estimated
forfeitures. During the 13 weeks ended October 3, 2009, the Company granted
77,250 stock options with an estimated total grant-date fair value of $20,399
after estimated forfeitures. During the 39 weeks ended October 3, 2009, the
Company granted 418,000 stock options with an estimated total grant-date fair
value of $128,218 after estimated forfeitures.
Valuation
Assumptions
The
Company estimates the fair value of stock options using a Black-Scholes
option-pricing model. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model and the straight-line
attribution approach with the following weighted-average
assumptions:
13 Weeks Ended
|
39 Weeks Ended
|
|||||||||||||||
October 2,
2010
|
October 3,
2009
|
October 2,
2010
|
October 3,
2009
|
|||||||||||||
Risk-free
interest rate
|
0.7 | % | 3.0 | % | 2.7 | % | 3.0 | % | ||||||||
Dividend
yield
|
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
Expected
stock price volatility
|
62 | % | 58 | % | 62 | % | 58 | % | ||||||||
Average
expected life of options
|
2.6
years
|
6.5
years
|
5.8
years
|
6.5
years
|
11
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 – STOCK-BASED COMPENSATION (CONTINUED)
Authoritative
guidance issued by the FASB requires the use of option pricing models that were
not developed for use in valuing employee stock options. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including the option’s expected life and the
price volatility of the underlying stock. Given the limited trading history of
the Company’s stock, the expected stock price volatility assumption was
determined using the historic volatility of a peer group of comparable logistic
companies with similar attributes, including market capitalization, annual
revenues, and debt leverage.
The
Company uses the simplified method suggested by the SEC in authoritative
guidance for determining the expected life of the options. Under this method,
the Company calculates the expected term of an option grant by averaging its
vesting and contractual term. The Company estimates its applicable risk-free
rate based upon the yield of U.S. Treasury securities having maturities similar
to the estimated term of an option grant.
Equity
Incentive Program
The
Company’s equity incentive program is a broad-based, long-term retention program
that is intended to attract and retain qualified and experienced management, and
align stockholder and employee interests. The equity incentive program presently
consists of the Company’s 2007 Long-Term Incentive Equity Plan (the “Plan”).
Under this Plan, non-employee directors, officers, key employees, consultants
and all other employees may be granted options to purchase shares of the
Company’s stock, restricted stock units and other types of equity awards. Under
the equity incentive program, stock options generally have a vesting period of
three years, are exercisable for a period of ten years from the date of issuance
and are not granted at prices less than the fair market value of the Company’s
common stock at the grant date. Options and restricted stock units may be
granted with varying service-based vesting requirements. The Company settles
Plan stock option exercises and restricted stock grants with newly issued common
shares.
Under the
Company’s 2007 Plan, 930,000 common shares are authorized for issuance through
awards of options or other equity instruments. As of October 2, 2010, 180,500
common shares were available for future issuance under the 2007
Plan.
The
following table summarizes the stock option plan activity for the indicated
periods:
Number of
Shares
|
Weighted
Average
Exercise Price
|
|||||||
Balance
outstanding at January 2, 2010
|
727,750 | $ | 1.08 | |||||
39
weeks ended October 2, 2010:
|
||||||||
Options
granted
|
160,000 | 0.51 | ||||||
Options
exercised
|
– | – | ||||||
Options
cancelled/expired/forfeited
|
(138,250 | ) | 1.55 | |||||
Balance
outstanding at October 2, 2010
|
749,500 | $ | 0.87 |
12
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 – STOCK-BASED COMPENSATION (CONTINUED)
The
options outstanding and exercisable at October 2, 2010 were in the following
exercise price ranges:
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||||
Range of
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life-Years
|
Weighted
Average
Exercise
Price
|
Number
Vested and
Exercisable
|
Weighted
Average
Exercise
Price
|
||||||||||||||||
$0.32 to $0.50 | 206,750 | 9.4 | $ | 0.42 | 3,332 | $ | 0.48 | ||||||||||||||
$0.56 to $0.87 | 492,750 | 8.8 | 0.74 | 96,167 | 0.72 | ||||||||||||||||
$4.06 | 50,000 | 7.4 | 4.06 | 41,667 | 4.06 | ||||||||||||||||
749,500 | 8.9 | $ | 0.88 | 141,166 | $ | 1.70 |
At
October 2, 2010, none of the Company’s exercisable options were in-the-money. At
October 2, 2010, the aggregate intrinsic value of options outstanding and
exercisable was $0. No options were exercised during the 13 or 39 weeks ended
October 2, 2010.
The
weighted average grant date fair value of options granted during the 13 and 39
months ended October 2, 2010 was $0.04 and $0.22, respectively. The weighted
average grant date fair value of options granted during the 13 and 39 months
ended October 3, 2009 was $0.44 and $0.39, respectively.
NOTE
7 – ACQUISITION OF CLARK GROUP, INC. AND IMPAIRMENT CHARGES
On
February 12, 2008, the Company consummated its acquisition of all of the issued
and outstanding capital stock of Clark Group, Inc. (“CGI”) for 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,). In connection with the closing of the Acquisition,
the Company changed its name from Global Logistics Acquisition Corporation to
Clark Holdings Inc.
Acquisition
Accounting
The
Company accounted for the acquisition under the purchase method of accounting.
Accordingly, the cost of the acquisition was allocated to the assets and
liabilities based upon their respective fair values, including identifiable
intangibles and the remaining cost was allocated to goodwill. During the first
three quarters of 2008, additional adjustments to the preliminary purchase price
allocation were recorded to goodwill.
The final
allocation of the fair value of the assets acquired and liabilities assumed in
the acquisition of CGI was as follows:
Current
assets
|
6,956,000 | |||
Current
assets of discontinued operations
|
388,000 | |||
Property
and equipment
|
1,394,000 | |||
Intangibles
|
20,651,000 | |||
Goodwill
|
63,910,000 | |||
Current
liabilities
|
(7,441,000 | ) | ||
Current
liabilities of discontinued operations
|
(132,000 | ) | ||
Deferred
tax liability
|
(7,738,000 | ) | ||
Total
fair value of assets and liabilities
|
77,988,000 |
13
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 – ACQUISITION OF CLARK GROUP, INC. AND IMPAIRMENT CHARGES
(CONTINUED)
Goodwill
& Intangible Asset Impairments
In
accordance with authoritative guidance, during the fourth quarter of 2008, the
Company performed its annual impairment test for goodwill and intangible assets
with an indefinite life. The evaluation resulted in a $63,910,000 impairment
charge which was included in the “impairment of goodwill and intangible assets”
line item in the consolidated statements of operations.
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 authoritative guidance using the “relief from royalty” method. This
evaluation resulted in a $2,658,000 impairment charge for the period ended
January 3, 2009 and 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.
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 authoritative guidance. Management’s projections of
undiscounted future cash flows did not exceed the carrying amount of the
non-compete agreement intangible assets. As a result of this testing, 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.
Impairment
charges reflected in the statement of operations for the year ended January 2,
2010, and the period ended January 3, 2009, were 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 |
During
the 13 weeks ended July 3, 2010, the Company recognized $594,000 of impairment
charges related to abandoned IT investments not yet placed into service that had
previously been capitalized as “Construction-in-progress” plant and equipment
assets. The non-cash charges associated with these impairments are
recognized as “Impairment charges” in the Company’s Condensed Consolidated
Statements of Operations and Cash Flows.
14
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 – ACQUISITION OF CLARK GROUP, INC. AND IMPAIRMENT CHARGES
(CONTINUED)
Escrow
At
closing of the acquisition, an escrow agreement was entered into and funded in
the amount of $8,300,000 to provide for potential indemnification claims that
might arise as a result of any breaches of the sellers’ covenants,
representations and warranties under the acquisition agreement and other
post-closing provisions of the agreement. In accordance with the escrow
agreement, $2,800,000 was released from escrow in 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.
NOTE
8 – WARRANTS & CONTINGENTLY ISSUABLE SHARES
Warrants
On
February 21, 2006, in an initial public offering, 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 of Clark Group Inc. on
February 12, 2008 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. Holders of these 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.
Contingently
Issuable Shares
Founders
of the Company placed 1,173,438 shares of common stock into escrow pending the
Company’s closing stock price for any 20 day trading period, within a 30 day
trading period, exceeding $11.50 per share before February 12, 2013. If the
escrow release condition is not satisfied by February 12, 2013, the shares in
escrow will be returned to the Company’s transfer agent for cancellation. As a
result of the condition to which the escrowed shares are subject, these shares
are considered contingently issuable, and as such, are excluded from outstanding
shares and earnings per share calculations. Accordingly, the Company may in the
future recognize a charge based on the fair value of these restricted shares
over the expected period of time it may 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.
15
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – BUSINESS SEGMENTS
The
Company operates two business segments, Domestic and International. The Domestic
segment consists of operations serving primarily print wholesale customers in
North America. The International segment consists principally of shipments
outside North America. Results for the now discontinued Brokerage segment are
reflected as discontinued operations.
Financial
information on business segments for the 13 weeks ended October 2, 2010, and
October 3, 2009, is as follows:
For
13 Weeks Ending October 2, 2010
($000s)
|
Domestic
|
International
|
Continuing
Operations
|
Discontinued
Operations
|
||||||||||||
Gross
revenues
|
$ | 12,476 | $ | 4,576 | $ | 17,052 | $ | 600 | ||||||||
Freight
expense
|
(8,819 | ) | (3,315 | ) | (12,134 | ) | (671 | ) | ||||||||
Operating,
selling and administrative expense (a)
|
(4,037 | ) | (1,224 | ) | (5,261 | ) | (614 | ) | ||||||||
Restructuring
charges
|
– | (324 | ) | (324 | ) | (144 | ) | |||||||||
Loss
from operations before depreciation, amortization, interest and
taxes
|
$ | (380 | ) | $ | (287 | ) | $ | (667 | ) | $ | (829 | ) | ||||
Total
assets
|
$ | 22,744 | $ | 1,506 | $ | 24,250 | $ | 246 | ||||||||
Capital
expenditures
|
$ | 0 | $ | 14 | $ | 14 | $ | 0 |
For
13 Weeks Ending October 3, 2009
($000s)
|
Domestic
|
International
|
Continuing
Operations
|
Discontinued
Operations
|
||||||||||||
Gross
revenues
|
$ | 13,846 | $ | 3,337 | $ | 17,183 | $ | – | ||||||||
Freight
expense
|
(8,391 | ) | (2,062 | ) | (10,453 | ) | – | |||||||||
Operating,
selling and administrative expense (a)
|
(4,776 | ) | (1,217 | ) | (5,993 | ) | – | |||||||||
Income
from operations before depreciation, amortization, interest and
taxes
|
$ | 679 | $ | 58 | $ | 737 | $ | – | ||||||||
Total
assets
|
$ | 26,777 | $ | 1,728 | $ | 28,505 | $ | – | ||||||||
Capital
expenditures
|
$ | (16 | ) | $ | 300 | $ | 284 | $ | – |
(a)
|
All
corporate overhead services (accounting, finance, billing and customer
service, information technologies) and all public company costs are
included in domestic operating, selling and administrative
expense.
|
16
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – BUSINESS SEGMENTS (CONTINUED)
Financial
information on business segments for the 39 weeks ended October 2, 2010, and
October 3, 2009, is as follows:
For
39 Weeks Ending October 2, 2010
($000s)
|
Domestic
|
International
|
Continuing
Operations
|
Discontinued
Operations
|
||||||||||||
Gross
revenues
|
$ | 36,150 | $ | 12,767 | $ | 48,917 | $ | 3,112 | ||||||||
Freight
expense
|
(24,821 | ) | (9,482 | ) | (34,303 | ) | (2,913 | ) | ||||||||
Restructuring
charges
|
(177 | ) | (366 | ) | (543 | ) | (144 | ) | ||||||||
Impairment
charge
|
(594 | ) | – | (594 | ) | – | ||||||||||
Operating,
selling and administrative expense (a)
|
(12,042 | ) | (3,816 | ) | (15,858 | ) | (2, 076 | ) | ||||||||
Loss
from operations before depreciation, amortization, interest and
taxes
|
$ | (1,484 | ) | $ | (897 | ) | $ | (2,381 | ) | $ | (2,021 | ) | ||||
Total
assets
|
$ | 22,744 | $ | 1,506 | $ | 24,250 | $ | 246 | ||||||||
Capital
expenditures
|
$ | 166 | $ | 54 | $ | 220 | $ | – |
For
39 Weeks Ending October 3, 2009
($000s)
|
Domestic
|
International
|
Continuing
Operations
|
Discontinued
Operations
|
||||||||||||
Gross
revenues
|
$ | 42,310 | $ | 8,807 | $ | 51,117 | $ | – | ||||||||
Freight
expense
|
(26,663 | ) | (5,348 | ) | (32,011 | ) | – | |||||||||
Operating,
selling and administrative expense (a)
|
(15,647 | ) | (3,763 | ) | (19,410 | ) | – | |||||||||
Income
(loss) from operations before depreciation, amortization, interest and
taxes
|
$ | – | $ | (304 | ) | $ | (304 | ) | $ | – | ||||||
Total
assets
|
$ | 26,777 | $ | 1,728 | $ | 28,505 | $ | – | ||||||||
Capital
expenditures
|
$ | 655 | $ | 339 | $ | 994 | $ | – |
(a)
|
All
corporate overhead services (accounting, finance, billing and customer
service, information technologies) and all public company costs are
included in domestic operating, selling and administrative
expense.
|
For
purposes of this disclosure, all inter-company transactions have been
eliminated.
17
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 – LITIGATION AND 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 Clark
Group Inc. (“CGI”) and its subsidiaries, Clark Distribution Systems, Inc.
(“CDS”), Highway Distribution Systems, Inc. (“HDS”), Clark Worldwide
Transportation, Inc. (“CWT”) and Evergreen Express Lines (“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 2009 Form
10-K.
On June
18, 2010 the U.S. Court for the District of New Jersey issued a ruling in the
Multi-Media International case that substantially narrowed the case. The Court
granted CGI’s motion to dismiss the New Jersey Consumer Fraud Act claim. With
regard to the class action allegations, CGI’s motion to disqualify MMI and its
lawyer from representing the class was rendered moot when MMI withdrew its class
allegations and filed a motion to convert the case into an individual claim by
MMI against CGI. The Court then granted MMI’s motion to file the amended
complaint and proceed without the class action or the NJ Consumer Fraud
allegations. As a result of these actions, CGI’s potential liability is
substantially reduced. The Company continues to believe that the remaining
allegations in the lawsuit are without merit and 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.
Other
than the above, as at October 2, 2010, the Company was not a party to any
material pending legal proceeding, other than ordinary routine litigation
incidental to its business.
18
CLARK
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – DISCONTINUED OPERATIONS
On August
9, 2010, management began implementing a Board approved plan (“Plan”) to
discontinue the Company’s start-up brokerage operations. The decision to take
this action resulted from an extensive evaluation of the division, which
resulted in the conclusion that it was not achieving performance levels that
warranted further investment. Employment of the brokerage division’s remaining
personnel was terminated, with transitional agreements reached with several of
the divisions key management personnel. Operations of the division ceased in the
quarter ended October 2, 2010,
Refer to
Note 9 to the Condensed Consolidated Financial Statements for additional
information regarding the significant components of discontinued brokerage
operations results of operations for the 13 and 39 weeks ended October 2, 2010.
Since the brokerage operations commenced during the 13 weeks ended January 2,
2010, the Company’s fiscal fourth quarter of 2009, there were no comparative
results for the 13 and 39 weeks ended October 3, 2009. Other than trade
receivables, trade payables and accrued obligations, including those resulting
from $54,000 of severance and $83,000 of lease exit costs, the division had no
other material assets or obligations. Other costs associated with exit or
disposal activities are recorded when incurred.
The major
classes of assets and liabilities included in Condensed Consolidated Balance
Sheets for the discontinued brokerage division as of October 2, 2010 and January
2, 2010 were as follows:
($000s)
|
October 2, 2010
|
January 2, 2010
|
||||||
Current
assets
|
$ | 246 | $ | 209 | ||||
Non-current
assets
|
– | – | ||||||
Total
Assets
|
$ | 246 | $ | 209 | ||||
Current
liabilities
|
$ | 1,206 | $ | 215 | ||||
Non-current
liabilities
|
– | – | ||||||
Total
Liabilities
|
$ | 1,206 | $ | 215 |
NOTE
12 – RESTRUCTURING CHARGES
During
the 13 weeks ended October 2, 2010, the Company recognized restructuring charges
totaling $468,000, consisting of $330,000 of severance and related costs and
$138,000 of lease exit costs associated with the discontinuance of the Company’s
brokerage division and consolidation of its domestic and international divisions
leadership under common management. This management reorganization was
undertaken under a plan to improve the Company’s profitability through reduced
operating costs and improved organizational efficiencies resulting from use of
shared resources and greater coordination of the Company’s domestic and
international operations.
The table
below reconciles the beginning and ending liability balances in connection with
restructuring charges recorded during the 13 weeks ended October 2, 2010 in
continuing and discontinued operations:
($000s)
Severance and lease exit obligations
|
Balances at
Beginning of
Period
|
Restructuring
Charges, Net
|
Cash
Payments
|
Balances at
End of Period
|
||||||||||||
Continuing operations
|
$ | 369 | $ | 324 | $ | 333 | $ | 360 | ||||||||
Discontinued
operations
|
– | 144 | 30 | 114 | ||||||||||||
$ | 369 | $ | 468 | $ | 363 | $ | 474 |
The above
liability balances at October 2, 2010 are included in accrued expenses and other
payables in the accompanying Condensed Consolidated Balance
Sheets. Cash payments to be applied against these accruals
at
October
2, 2010 are expected to be approximately $225,000 in 2010 and $249,000 in
2011.
19
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD
LOOKING STATEMENTS
This
report, including the discussion contained under this Item 2 of Part I, 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, assumptions and projections about the
Company’s industry, its business, and its financial performance. 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 the Company’s control and difficult to predict and
could cause actual results to differ materially from those discussed in the
forward-looking statements. Such risks, uncertainties and other factors include,
without limitation, the risks, uncertainties and other factors the Company
identifies from time to time in its filings with the Securities and Exchange
Commission, including under Item 1A of Part II of this report and in its other
quarterly reports on Form 10-Q, its annual reports on Form 10-K and its current
reports on Form 8-K. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this report. The
Company undertakes no obligation to update such statements to reflect subsequent
events.
You
should read the following discussion and analysis in conjunction with the
information set forth in the unaudited condensed consolidated financial
statements and the notes thereto included in this report (the “Condensed
Consolidated Financial Statements”) and the audited condensed consolidated
financial statements and the notes thereto included in the Company’s annual
report on Form 10-K for the year ended January 2, 2010 (the “2009 Form 10-K”),
which was filed on April 19, 2010.
OVERVIEW
OF THE COMPANY’S BUSINESS
Clark
Holdings Inc. is a holding company which conducts its business through its
operating subsidiaries, which provide 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 currently has two divisions, a domestic division and an international
division. The domestic division 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 international division has an operating model similar to that of a
traditional freight forwarder. It utilizes three distribution centers to
consolidate shipments and arrange for international transportation utilizing
third-party carriers (air, ocean or ground). From October 2009 until August
2010, the Company also had a third division, a brokerage division. On August 9,
2010, management began implementing a plan to discontinue the brokerage
division. The brokerage division had offered a range of non-asset based logistic
solutions through a network of third party carriers. See Note 11 to the
Condensed Consolidated Financial Statements, regarding this discontinued
operation.
See Note
9 to the Condensed Consolidated Financial Statements for a summary of
comparative operating results for the Company’s reportable segments and
discontinued operations.
EXECUTIVE
SUMMARY
As
reflected in the accompanying Condensed Consolidated Financial Statements, the
Company experienced net losses of $1,194,000 and $3,097,000 for the 13 and 39
weeks ended October 2, 2010, respectively, including those from discontinued
operations. This compares with net income of $134,000 and a net loss of
$1,148,000, respectively, for the 13 and 39 weeks ended October 3, 2009.
20
Items
Affecting Comparability
The
following non-recurring items are included in and significantly impacted the
Company’s comparative reported results of operations for the 13 and 39 weeks
ended October 2, 2010:
Discontinued Operations. For
the 13 and 39 weeks ended October 2, 2010, the Company incurred $829,000 and
$2,021,000 (about $498,000 and $1,213,000 after tax, respectively) in formation
and start-up costs associated with its now discontinued brokerage division. As
this division was launched in October 2009, the Company incurred no similar
costs in the comparative year ago periods. As discussed in Note 11 to the
Condensed Consolidated Financial Statements, management decided in August to
cease the Company’s brokerage operations. Based on the division’s losses from
the beginning of the current fiscal year through the date of its discontinuance,
and assuming the division would have continued to operate at a loss at the same
rate, discontinuance of the brokerage operations is expected to improve the
Company’s pretax operating income and cash flow from operations by about
$2,400,000 annually.
During
the prior fiscal year, the 13 and 39 weeks ended October 3, 2009, the Company
recognized $0 and $240,000 (about $144,000 after tax) of costs associated with
the closure of the Company’s Amarillo, Texas distribution center. No similar
costs were incurred in the comparative current year periods.
Impairment Charge. During the
39 weeks ended October 2, 2010, the Company recognized $594,000 (about $356,000
after tax) of impairment charges related to abandoned IT investments not yet
placed into service that had previously been capitalized as
“Construction-in-progress” plant and equipment assets. The non-cash charges
associated with these impairments are recognized as “Impairment charges” in the
Company’s Condensed Consolidated Statements of Operations and Cash Flows. No
similar charges were recognized in the comparative year ago
periods.
Severance & Restructuring
Charges. During the 13 and 39 weeks ended October 2, 2010, the Company
recognized $467,000 and $687,000 (about $280,000 and $412,000 after tax,
respectively) of severance and lease exit costs associated with reductions in
force implemented during the year. $143,000 (about $86,000 after tax) of these
severance and lease exit costs recognized during the 13 weeks ended October 2,
2010 were associated with discontinuance of the Company’s brokerage operations.
Collectively, these reductions in force were implemented as part of a plan to
reduce costs and improve the Company’s profitability. These completed cost
reduction efforts are expected to result in an annualized pretax run-rate
savings of approximately $7,200,000.
During
the 13 and 39 weeks ended October 3, 2009, the Company recognized $0 and
$323,000 (about $194,000 after tax) of severance costs associated with
reductions in force in the comparative year ago periods.
Impact
of Economic Recession
The
transportation industry historically has experienced cyclical fluctuations in
financial results due to economic recession, downturns in the 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 have business models that are dependent on expenditures by
advertisers. These expenditures tend to be cyclical, reflecting general economic
conditions, as well as budgeting and buying patterns. The current economic
recession, the resulting downturn in the business cycles of the Company’s
customers (which has caused a reduction in the volume of freight shipped by
those customers, particularly to the single copy distribution channel), and the
reduction in fuel costs have significantly adversely affected the Company’s
financial performance, including its revenues, as discussed more fully in this
Item under the heading “Results of Operations.” Although there have been some
notable improvements in freight volumes over the preceding quarters, these
metrics remain unfavorable when compared with those for the comparative year ago
periods.
Instability
in the Newsstand Distribution Channel
In the
first quarter of 2009, there was a disruption of the wholesale distribution
supply channel, which 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
would adversely affect our financial performance. In early August 2010, the
court ruled against the plaintiffs and dismissed the lawsuit. The plaintiff may
seek an appeal of this decision.
21
Initiatives
to Reduce Costs & Improve Profitability
In May
2010, management completed a series of cost restructurings including a reduction
in workforce, wage freezes and wage reductions that resulted in reducing the
Company’s annual payroll by $2,450,000 on an annualized basis. In
addition, the Company reduced capital expenditure budgets and amended its credit
facility agreement (see Note 4 to the Condensed Consolidated Financial
Statements). Previous cost restructurings of the domestic and international
divisions resulted in over $1,000,000 in annualized savings in operating,
selling, general and administrative costs for the Company’s first fiscal quarter
of 2010, the 13 weeks ended April 3, 2010.
In August
2010, the Company discontinued its start-up brokerage operations and
consolidated the leadership of its domestic and international divisions under
the President of its domestic operations. The reorganization, expected to
improve the organizational efficiency and coordination of the Company’s domestic
and international operations, is expected to substantially reduce the Company’s
operating costs and improve its profitability. Discontinuance of the brokerage
division is expected to improve the Company’s annual operating results by about
$2,400,000 annually, as it was expected that the division would have continued
to operate at a loss in the future. By discontinuing the Company’s brokerage
division, the Company will avoid such losses, which, on a pretax basis, had
accumulated to $2,021,000 for the 39 weeks ended October 2, 2010. By
consolidating leadership of the Company’s international and domestic divisions,
the Company has reduced payroll, compensation related expenses, and other
operating costs by about $1,100,000 on an annualized basis. Costs associated
with the reorganization and discontinued operations were recognized in the
Company’s current fiscal quarter under authoritative guidance, which are
discussed fully in Notes 11 and 12 to the Condensed Consolidated Financial
Statements.
Management
believes that these actions taken to improve the Company’s operating and
financial performance will allow the Company to sustain its future operations
and achieve profitability. Throughout the Company, management remains focused on
efforts to improve the Company’s profitability and financial
position.
Line
of Credit
The
Company has a line of credit with Cole Taylor Bank. The Company’s credit
agreement with Cole Taylor Bank, as amended, requires the Company to comply with
certain affirmative and negative covenants customary for a credit facility of
this type, including limitations on liens, debt, mergers, and consolidations,
sales of assets, investments and dividends. The Company’s credit facility is
also subject to financial covenants. At October 2, 2010, the Company was not in
compliance with its financial covenants, which were waived via the November 2010
amendment. The credit agreement and the financial covenant are described more
fully in the Part I, Item 2, in the section entitled “Liquidity and Capital
Resources.”
SUMMARY
FINANCIAL DATA
Gross revenues, freight
expense, net revenues (a non-GAAP measure), income (loss) from operations, net
income (loss), and diluted earnings (loss) per share are the key indicators we
use to monitor our operating performance. The following table shows
summary financial data from continuing operations, including these key
indicators, for the year-to-date 13 week fiscal periods and the comparative year
ago periods, and also serves to reconcile net revenue to gross revenue, the
nearest GAAP financial measure. Management believes that net revenues (gross
revenues less freight expenses) are a better measure than gross revenues of the
Company’s financial performance since net revenues earned by the Company, as a
freight forwarder and consolidator, include the direct incremental costs of
transportation services provided by the Company.
22
The table
and the accompanying discussion and analysis should be read in conjunction with
the Condensed Consolidated Financial Statements.
Results from Continuing Operations
|
Fiscal Year 2010
|
Fiscal Year 2009
|
||||||||||||||||||||||
($000, except per share data)
|
1st
|
2nd
|
3rd
|
1st
|
2nd
|
3rd
|
||||||||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||||||||
Gross
revenues
|
$ | 14,554 | $ | 17,311 | $ | 17,052 | $ | 17,443 | $ | 16,491 | $ | 17,183 | ||||||||||||
Freight
expense
|
$ | 10,067 | $ | 12,101 | $ | 12,134 | $ | 11,256 | $ | 10,310 | $ | 10,453 | ||||||||||||
Net
revenue
|
$ | 4,487 | $ | 5,210 | $ | 4,918 | $ | 6,187 | $ | 6,181 | $ | 6,730 | ||||||||||||
Gross
Margin %
|
30.8 | % | 30.1 | % | 28.8 | % | 35.5 | % | 37.5 | % | 39.2 | % | ||||||||||||
Income
(loss) from operations (a)(b)
|
$ | (1,377 | ) | $ | (1,157 | ) | $ | (1,073 | ) | $ | (731 | ) | $ | (1,150 | ) | $ | 305 | |||||||
Operating
margin
|
(9.5 | )% | (6.7 | )% | (6.3 | )% | (4.2 | )% | (7.0 | )% | 1.8 | % | ||||||||||||
Net
income (loss) (a)(b)
|
$ | (902 | ) | $ | (285 | ) | $ | (696 | ) | $ | (532 | ) | $ | (751 | ) | $ | 134 | |||||||
Net
margin
|
(6.2 | )% | (1.7 | )% | (4.1 | )% | (3.1 | )% | (4.6 | )% | 0.8 | % | ||||||||||||
Diluted
income (loss) per share
|
$ | (0.08 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.07 | ) | $ | 0.01 |
|
(a)
|
First,,
second , and third quarter 2010 includes pretax severance & lease exit
charges of $75, $144, $324 (about $45, $86, and $194 after tax),
respectively. First and second quarter 2009 includes pretax
severance charges of $97 and $226 (about $58 and $136 after tax),
respectively.
|
|
(b)
|
Second
quarter 2010 includes non-cash impairment charge of $594 (about $356 after
tax) associated with an abandoned IT
investment.
|
See Note
9 to the condensed consolidated financial statements for a summary of
comparative operating results for the Company’s reportable
segments.
RESULTS
OF OPERATIONS FOR THE 13 AND 39 WEEKS ENDED OCTOBER 2, 2010 AND OCTOBER 3,
2009
Gross Revenues. For the 13
weeks ended October 2, 2010, as compared to the same period last year, gross
revenues decreased by $131,000 or 0.8% from $17,183,000 to $17,052,000. For the
39 weeks ended October 2, 2010, as compared to the same period last year, gross
revenues decreased by $2,200,000 or 4% from $51,117,000 to $48,917,000. These
decreases were primarily driven by year-over-year loss of business due to
competition and the effect of pricing concessions, partially offset by new
domestic print media business and reverse logistics business and year-over-year
growth of our international general commodity import revenues. As described
above in the “Executive Summary,” our core print media business is sensitive to
the economy and in particular to the level of print media advertising, fuel
prices, and other factors that can impact the price of transportation services.
In addition, the economic climate has resulted in some year-over-year loss of
customers and repricing of our services that have adversely affected our
revenues.
Discontinuance
of the Company’s brokerage operations, discussed fully in Note 11 to the
Condensed Consolidated Financial Statements, will reduce the Company’s future
reported gross revenues and net revenues. For the 13 and 39 weeks ended October
2, 2010, the brokerage division generated gross revenues of $600,000 and
$3,112,000, respectively, and net revenues of ($72,000) and $199,000,
respectively.
Net Revenues. For the 13 weeks
ended October 2, 2010, as compared to the same period last year, net revenues
decreased by $1,812,000 or 27% from $6,730,000 to $4,918,000. For the 39 weeks
ended October 2, 2010, as compared to the same period last year, net revenues
decreased by $4,492,000 or 24% from $19,106,000 to $14,614,000. These decreases
were primarily driven by declining volumes in our core domestic print media
business, which were only partially offset by the net revenue contribution
provided by the top-line growth of our international and domestic operations.
The decline in our net revenues is attributed to the repricing of our
traditional newsstand logistics services due to market conditions and our
increased sales mix of lower margin general commodities import
business.
23
Gross Margin. Consolidated
gross margin for the 13 weeks ended October 2, 2010, compared to the same period
last year, decreased by 1040 basis points to 28.8% from 39.2%. Consolidated
gross margin for the 39 weeks ended October 2, 2010, compared to the same period
last year, decreased by 750 basis points to 29.9% from 37.4%. Both of these
declines were driven by our sales mix, as described above.
Our
margins reflect a portfolio mix of the services we provide as well as the direct
variable costs of providing those transportation services to our customers.
Generally, the Company’s domestic and international core print media operations
generate greater margins than those provided by its more competitive
international general commodity import services. Margins within the Company’s
various divisions and lines of business can vary quite significantly. As a
result, the Company’s margins can vary materially, not only as a function of
divisional sales mix, but of the sales mix within each division based on the
growth or contraction of its sales volume associated with each transportation
service offering. Accordingly, it is reasonable to expect continued variability
in the Company’s margins, both favorable and unfavorable, as a result of changes
in sales mix.
Depreciation and Amortization.
Depreciation and amortization expense for the 13 weeks ended October 2, 2010
compared to the same period last year, decreased by $26,000 or 6% to $406,000
from $432,000. For the 39 weeks ended October 2, 2010, compared to the same year
ago period, depreciation and amortization expense decreased by $46,000 or 4% to
$1,226,000 from $1,272,000. The decrease in depreciation and amortization
expense reflects the decline in our fixed asset additions over the comparative
periods.
Operating, Selling, General and
Administrative Expense. Operating, selling, general and administrative
expense, exclusive of depreciation and amortization, for the 13 weeks ended
October 2, 2010, compared to the same period last year, decreased by $732,000 or
12% to $5,261,000 from $5,993,000. For the 39 weeks ended October 2, 2010,
operating, selling, general and administrative expense, exclusive of
depreciation and amortization, as compared to the same period last year,
decreased by $3,552,000 or 18% to $15,858,000 from $19,410,000.
The
decrease in selling, general and administrative expense was primarily driven by
our cost reduction efforts, partially offset by increases in these costs
resulting from expansion of our international operations. The operating,
selling, general and administrative expense associated with each segment of our
business is disclosed in Note 9 to the Condensed Consolidated Financial
Statements.
Interest Expense. For the 13
and 39 weeks ended October 2, 2010, we incurred interest expense of $41,000 and
$121,000, respectively. This compares with interest expense of $82,000 and
$145,000, respectively, for the prior year’s 13 and 39 weeks ended October 3,
2009. These changes were primarily the result of year-over-year changes in the
Company’s effective interest rate.
Income Taxes. For the 13 and
39 weeks ended October 2, 2010, we recorded an income tax benefit related to
continuing operations of $418,000 and $1,842,000, respectively. This compares
with an income tax expense of $89,000 and a benefit of $572,000, respectively,
for the 13 and 39 weeks ended October 3, 2009. Our effective blended state and
federal tax rate varies due to the magnitude of various permanent differences
between pretax income as set forth in the Condensed Consolidated Financial
Statements and what is recognized as taxable income by various taxing
authorities.
Net Loss. For the 13 and 39
weeks ended October 2, 2010, we lost $1,194,000 ($0.11 per share basic and
diluted) and $3,097,000 ($0.29 per share basic and diluted), inclusive of losses
associated with discontinued operations. This compares with net income of
$134,000 ($0.01 per share basic and diluted) and a net loss of $1,148,000 ($0.11
per share basic and diluted), respectively, for the 13 and 39 weeks ended
October 3, 2009.
RECENT
ACCOUNTING PRONOUNCEMENTS
See Note
2 to the Condensed Consolidated Financial Statements for a full description of
recent accounting pronouncements, including the expected dates of adoption and
estimated effects on our consolidated financial statements, which is
incorporated herein by reference.
24
CRITICAL
ACCOUNTING POLICIES
For a
description of critical accounting policies see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and Note 2 to the
audited financial statements included in the Company’s 2009 Form 10-K. There
were no significant changes in the Company’s critical accounting policies during
the 39 weeks ended October 2, 2010.
LIQUIDITY
AND CAPITAL RESOURCES
During
the 39 weeks ended October 2, 2010, our cash and equivalents decreased by
$2,672,000 to $207,000. $3,020,000 was used in operating activities ($1,914,000
from continuing operations and $1,106,000 from discontinued operations),
$140,000 was used in investing activities, and $488,000 was provided by
financing activities. Net cash used in investing activities of $140,000 included
the purchase of plant equipment, furniture and fixtures and IT hardware and
software, net of disposal proceeds, representing a decrease of $854,000 or 86%
over the $994,000 invested during the comparative 39 weeks ended October 3,
2009. These nominal capital investments were primarily funded by draws on our
bank credit line.
We used
$1,914,000 of cash in our continuing operating activities for the 39 weeks ended
October 2, 2010 as compared with $141,000 used during the comparative 39 weeks
ended October 3, 2009. The $1,914,000 of cash used by operating activities
during the 39 weeks ended October 2, 2010 resulted from a $1,884,000 loss from
continuing operations, net non-cash charges totaling $465,000 (including a
$594,000 non-cash impairment charge), and about $495,000 of cash used primarily
to increase our non-cash working capital (current assets less cash and cash
equivalents net of current liabilities). The most significant drivers behind the
$495,000 increase in our non-cash working capital include: (1) a $1,145,000
increase in our accounts receivable, (2) a $600,000 increase in our income tax
receivable, and (3) a $339,000 increase in our prepaid expenses. These increases
were partially offset by a $1,462,000 net increase in our trade obligations and
other accrued expenses and a $127,000 decrease in our other
receivables.
On
February 12, 2008, the Company entered into a credit agreement with Bank of
America, N.A. (“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. Beginning in May 2009, the Company was not in compliance with
certain of the financial covenants contained in the credit agreement. Pursuant
to the September 15, 2009 amendment, BOA agreed to forbear from exercising its
rights arising from such non-compliance.
The
credit agreement with BOA, as amended through September 15, 2009, provided for a
term loan of $4,700,000, revolving loans and letters of credit of up to
$2,218,000 and a termination date of February 28, 2010. The term loan and
revolving loans bore interest at LIBOR plus 4% or at the prime rate, the
outstanding letters of credit bore interest at 4% and the facility had an annual
unused line fee of 0.675%. The facility was collateralized by a senior security
interest in substantially all of the Company’s assets. Pursuant to the February
26, 2010 amendment, the termination date was extended to March 9,
2010.
On March
5, 2010, the Company entered into a new credit agreement with Cole Taylor Bank
for a three year revolving line of credit. Simultaneously with entering into the
new credit agreement, the Company terminated its prior credit agreement with BOA
and made an initial draw under the new facility to repay the then-outstanding
loans from BOA. The new credit agreement provides for a revolving line of credit
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 eligible accounts
receivable less certain specified reserves and the value of outstanding letters
of credit. The line of credit is collateralized by a first priority security
interest in substantially all of the Company’s assets and requires payment of
interest only during the line of credit’s three year term. The interest rate on
the line of credit varies based on the bank’s prime rate or LIBOR and is equal
to the greater of 6% or the bank’s prime rate plus 2%, for borrowings based on
the prime rate, or LIBOR plus 4.5%, for borrowings based on LIBOR. At October 2,
2010 the applicable interest rate on amounts drawn under the line of credit was
6%.
25
As of
October 2, 2010, the Company had an outstanding balance of $2,665,000 under the
line of credit, with approximately $557,000 of undrawn availability. At January
2, 2010, the Company had an outstanding balance of $2,895,000 under the line of
credit with BOA, with approximately $1,683,000 of undrawn
availability.
The
Company must comply with certain affirmative and negative covenants customary
for a credit facility of this type, including limitations on liens, debt,
mergers, and consolidations, sales of assets, investments and dividends. The
Company’s credit facility is also subject to financial covenants. As amended on
November 11, 2010, current financial covenants include a minimum cumulative
EBITDA covenant set at a loss of not more than $4,505,000 measured on a monthly
basis through the Company’s fiscal month ended February 5, 2011. Thereafter, the
Fixed Charge Coverage ratio, as defined in the credit agreement shall not be
less than 1.05:1 calculated on a Cumulative 52 week basis, beginning with the
Company’s 2011 fiscal year. At October 2, 2010, the Company was not in
compliance with its financial covenants, which were waived via the November 2010
amendment. At January 2, 2010 the Company was in compliance with its financial
covenants in accordance with the September 15, 2009 amendment to the credit
agreement with BOA.
The
Company’s monthly minimum cumulative EBITDA levels, as adjusted by the second
amendment, are as follows:
Time Period
|
Minimum Cumulative EBITDA
|
|||
forty-four
(44) week period ending November 6, 2010
|
$ | (4,505,000 | ) | |
forty-eight
(48) week period ending December 4, 2010
|
$ | (4,505,000 | ) | |
fifty-two
(52) week period ending January 1, 2011
|
$ | (4,505,000 | ) | |
Fifty-seven
(57) week period ending February 5, 2011
|
$ | (4,505,000 | ) |
Until
March 5, 2011, Minimum Cumulative EBITDA is the only financial covenant the
Company is subject to. At October 2, 2010, the Company’s Cumulative EBITDA was $
(4,402,000). Beginning March 5, 2011, the Company will be subject to a financial
covenant requiring that its Fixed Charge Coverage ratio, as defined in the
credit agreement, be at least 1.05:1 as calculated on a cumulative 52 week
basis, commencing with the Company’s 2011 fiscal year. At October 2, 2010, the
Company was not in compliance with its financial covenants, which were waived
via the November 2010 amendment. At January 2, 2010 the Company was in
compliance with its financial covenants in accordance with the September 15,
2009 amendment to the credit agreement with BOA.
Covenants
in our debt instruments could trigger a default adversely affecting our ability
to execute our business plan, our ability to obtain further financing, and
potentially adversely affect the ownership of our assets. Upon the occurrence of
an event of default under any of our loan agreements, the lenders could elect to
declare all amounts outstanding thereunder to be immediately due and payable,
and terminate all commitments to extend further debt. If the lenders accelerate
the repayment of borrowings, we cannot provide assurance that we will have
sufficient assets to repay our debt facilities and our other indebtedness or be
able to implement our business plan. If we are unable to repay our outstanding
indebtedness, the bank could foreclose on all of our assets, which collateralize
our borrowings. Accordingly, the occurrence of an event of default could have a
material adverse affect on our financial position, results of operations, and
our viability as a going concern. Because of the losses incurred to date, the
Company can provide no assurances that it will meet its financial covenants in
the future.
Over the
next twelve months, our operations may require additional funds and we may seek
to raise such additional funds through public or private sales of debt or equity
securities, or securities convertible or exchangeable into such securities,
strategic relationships, bank debt, lease financing arrangements, or other
available means. We cannot provide assurance that additional funding, if sought,
will be available or, if available, will be on acceptable terms to meet our
business needs. If additional funds are raised through the issuance of equity
securities, stockholders may experience dilution, or such equity securities may
have rights, preferences, or privileges senior to those of the holders of our
common stock. If additional funds are raised through debt financing, the debt
financing may involve significant cash payment obligations and financial or
operational covenants that may restrict our ability to operate our business. An
inability to fund our operations or fulfill outstanding obligations could have a
material adverse effect on our business, financial condition and results of
operations.
26
SEASONALITY
While the
Company’s revenues are generally not seasonal (as each quarter’s revenue
approximates 25% of annual revenues), there may be on occasion special events
(e.g., an historical event or death of a celebrity or other public figure) or a
publisher’s release of a new publication that favorably impact tonnage and
resulting revenues in a particular quarter.
MARKET
RISK
We are
exposed to various market risks, including changes in fuel prices,
transportation costs, general levels of inflation, and interest rates. Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as transportation costs, fuel price inflation and interest rates.
There has been no material change in the Company’s market risk exposure during
the 13 weeks ended October 2, 2010.
Fuel
Price Inflation Risk
Increases
in fuel costs directly impact our costs of providing transportation services. We
do not hedge our fuel price exposures as the net impact of these exposures can,
to some degree, be passed along to our customers. We continuously pursue efforts
to improve our purchasing of transportation and our contractual ability to pass
along inflation in these costs to our customers. While we have historically been
able to pass along a significant portion of this inflation in operating costs
through higher prices to our customers, we can provide no assurance that we will
be able to do so in the future.
Interest
Rate Risk
At
October 2, 2010, we had about $2,665,000 of debt outstanding under our line of
credit. Interest expense under this line of credit is variable, based on its
lender’s prime rate. Accordingly, we are subject to interest rate risk in the
form of greater interest expense in the event of rising interest rates. We
estimate that a 10% increase in interest rates, based on our present level of
borrowings, would result in the Company incurring about $16,000 pretax ($10,000
after tax) of greater annual interest expense.
27
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Reference
is made to the information set forth under the caption “Market Risk” included in
Item 2 of Part I of this report. Also refer to the last paragraph of “Liquidity
and Capital Resources” contained in Item 2 of Part I this report for additional
discussion of issues regarding liquidity.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures. As required by Rule 13a-15(b) under the Exchange Act, our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of our
disclosure controls and procedures (as such term is defined in Rule 13a-15(e)
under the Exchange Act) as of the end of the period covered by this report.
Based
upon their evaluation, they concluded
that our disclosure controls and procedures were ineffective, because those
controls and procedures were affected
by the material weaknesses identified in our internal control over financial
reporting, as set forth in our 2009 Form
10-K.
Changes in Internal Control Over
Financial Reporting. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of our financial statements for external
purposes in accordance with United States generally accepted accounting
principles (“U.S. GAAP”). Internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; provide reasonable assurance that transactions are
recorded as necessary to permit preparation of our financial statements in
accordance with U.S. GAAP, and that our receipts and expenditures are being made
only in accordance with the authorization of our board of directors and
management; and 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 financial statements.
In our
2009 Form 10-K, we identified material weaknesses in our internal control over
financial reporting. In order to remedy such material weaknesses, we made
changes to our internal control over financial reporting. In connection with the
evaluation required by Rule 13a-15(d) under the Exchange Act, our management
identified the following changes that occurred during the fiscal quarter ended
October 2, 2010, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting:
|
·
|
Management
has hired, and continues 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.
|
|
·
|
Where
necessary, we will continue to 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.
|
28
|
·
|
We
have identified and are implementing a new financial accounting system. We
expect to have key elements of the system implemented by the end of our
fiscal 2010 year. This accounting software is widely used by many public
and private companies and provides off the shelf capabilities and
preventative and detective controls that will benefit the integrity,
reliability and timeliness of our internal and external financial
reporting. This system is also expected to improve our ability to perform
detailed analysis, segregate important job functions, and significantly
automate current processes that are now manually
performed.
|
|
·
|
Through
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 five Certified Public Accountants
within the Company. In addition, the Company works very closely with its
outside consultants in their 404(a) assessment to improve control
effectiveness to obtain reasonable assurance that managements review
procedures were properly performed over the accounts and disclosures
affecting the Company’s financial
reporting.
|
|
·
|
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.
|
29
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
The
information set forth above in Note 10 to the Condensed Consolidated Financial
Statements is incorporated herein by reference.
ITEM
1A. RISK FACTORS
A
description of factors that could materially affect our business, financial
condition or operating results is included in Item 1A of Part I of the Company’s
2009 Form 10-K and is incorporated herein by reference. There have been no
material changes in the Company’s risk factors during the fiscal quarter ended
October 2, 2010 from those previously reporting in the 2009 Form
10-K.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
The
Company’s credit agreement with Cole Taylor Bank, as amended through May 24,
2010, included a financial covenant requiring the Company to maintain a minimum
cumulative EBITDA measured on a monthly basis until January 1, 2011. At October
2, 2010, the Company was not in compliance with its financial covenants, which
were waived via the November 11, 2010 amendment. The credit agreement and the
financial covenant are described more fully in the Part I, Item 2, in the
section entitled “Liquidity and Capital Resources,” and such description is
incorporated herein by reference.
ITEM
4. RESERVED
ITEM
5. OTHER INFORMATION
The
following disclosure is provided in response to the requirements of Form
8-K:
Item 1.01. On November
15, 2010, the Company entered into a second amendment to its credit agreement
with Cole Taylor Bank, effective as of November 11, 2010. The second amendment
is more fully described in Part I, Item 2 in the section entitled “Liquidity and
Capital Resources,” and such description is incorporated herein by reference.
The second amendment is attached hereto as Exhibit 10.1.
Item 2.02. On November 16,
2010, the Company issued a press release announcing its unaudited financial
results for its fiscal quarter ended October 2, 2010. The press release is
included as Exhibit 99.1 hereto. The information furnished pursuant to this Item
2.02, including the exhibit related thereto, shall not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be
deemed incorporated by reference in any disclosure document of the Company,
except as shall be expressly set forth by specific reference in such
document.
30
ITEM
6. EXHIBITS
The
following exhibits are filed with this report:
Exhibit No.
|
Description
|
|
10.1*
|
Second
Amendment to Credit and Security, dated as of November 11, 2010, by and
among Cole Taylor Bank and Clark Holdings Inc., The Clark Group, Inc.,
Clark Distribution Systems, Inc., Highway Distributions Systems, Inc.,
Clark Worldwide Transportation, Inc., and Evergreen Express Lines,
Inc.
|
|
10.2*
|
Agreement
for Advisory Services, dated as of September 14, 2010, by and between the
Company and Everest Group International LLC.
|
|
31.1*
|
Certification
of Chief Executive Officer Pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a)
|
|
31.2*
|
Certification
of Chief Financial Officer Pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a)
|
|
32.1*
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
|
|
99.1* | Third Quarter Fiscal Year 2010 Financial Results Press Release |
* Filed herewith
31
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
CLARK
HOLDINGS INC.
|
||
Dated: November
16, 2010
|
By:
|
/s/ Gregory E. Burns
|
Gregory
E. Burns
|
||
Chief
Executive Officer
|
||
Dated: November
16, 2010
|
By:
|
/s/ Kevan D. Bloomgren
|
Kevan
D. Bloomgren
|
||
Chief
Financial Officer
|
32