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| GLA > SEC Filings for GLA > Form 10-Q on 18-May-2009 | All Recent SEC Filings |
18-May-2009
Quarterly Report
Forward Looking Statements
The information contained in this section has been derived from the consolidated financial statements of Clark Holdings Inc. (referred to herein as ''we,'' ''us'' or ''our,'' or as the ''Company'' or ''CHI'') and should be read together with our consolidated financial statements and related notes included elsewhere in this Quarterly Report. This Quarterly Report, including the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward looking statements that involve substantial risks and uncertainties. These forward looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs, and our assumptions. Words such as ''anticipates'', ''expects'', ''intends'', ''plans'', ''believes'', ''seeks'', and ''estimates'' and variations of these words and similar expressions are intended to identify forward looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward looking statements, including without limitation, the risks, uncertainties and other factors we identify from time to time in our filings with the Securities and Exchange Commission, including our Form 10-Ks, Form 10-Qs and Form 8-Ks.
Although we believe that the assumptions on which these forward looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward looking statements based on those assumptions could also be incorrect. In light of these and other uncertainties, the inclusion of a projection or forward looking statement in this Quarterly Report should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward looking statements, which apply only as of the date of this Quarterly Report. We undertake no obligation to update such statements to reflect subsequent events.
Overview of Our Business
Clark Holdings Inc. ("Holdings," "CHI" or the "Company," formerly known as Global Logistics Acquisition Corporation) is a niche provider of non-asset based transportation and logistics services to the print media industry throughout the United States and between the United States and other countries. References herein to "we," "us" or "our" refer to the Company.
The Company was formed as a blank check company on September 1, 2005 to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the transportation and logistics sector and related industries. On February 21, 2006, the Company closed its initial public offering ("IPO") of 10,000,000 units, each consisting of one share of common stock and one warrant, and, concurrently therewith, its initial stockholders collectively purchased 2,272,727 warrants ("Private Warrants"). On March 1, 2006, the Company closed on the sale of an additional 1,000,000 units which were subject to an over-allotment option. After deducting underwriting discounts and commissions and offering expenses, the total net proceeds to the Company from the offering (including the over-allotment option) were $80,997,000, of which $79,340,000 (plus the $2,500,000 from the sale of the Private Warrants) was deposited into a trust account ("Trust Account"). On May 18, 2007, the Company entered into a stock purchase agreement ("SPA"), as amended on November 1, 2007, with The Clark Group, Inc. ("CGI") and the stockholders of CGI ("Sellers"), providing for the purchase by the Company of all of CGI's outstanding capital stock (the "Acquisition"). On February 12, 2008, the Company consummated the Acquisition, at which time the funds held in the Trust Account were released to the Company and used in part to pay the purchase price of the Acquisition. Upon the closing of the Acquisition, the Company's business became the business of CGI and the Company changed its name from Global Logistics Acquisition Corporation to Clark Holdings Inc.
The Company operates through a network of operating centers where it consolidates mass market consumer publications so that the publications can be transported in larger, more efficient quantities to common destination points. The Company refers to each common destination point's aggregated publications as a "pool." By building these pools, the Company offers cost effective transportation and logistics services for time sensitive publications.
The Company generates revenues by arranging for the movement of its customers' freight in trailers and containers. Generally, the Company bills its customers based on pricing that is variable based upon the amount of tonnage tendered, frequency of recurring shipments, origination, destination, product density and carrier rates. The Company's specified rates are subject to weight variation, fuel surcharge, and timely availability of the customer's product. The Company provides ancillary services such as warehousing and other services (e.g., product labeling). As part of its bundled service offering, the Company tracks shipments in transit and handles claims for freight loss or damage on behalf of its customers. Because the Company owns relatively little transportation equipment, it relies on independent transportation carriers.
The Company is a principal and not a broker of transportation services. By accepting the customer's order, it accepts certain responsibilities for transportation of the shipment from origin to destination. The Company selects carriers based upon myriad factors that include service reliability and pricing. Carrier pricing is typically from a pre-negotiated tariff rate table. The carrier's contract is with the Company, not its customer, and the Company is responsible for payment of carrier charges. In the cases where the Company has agreed to pay for claims for damage to domestic freight while in transit, when appropriate the Company will pursue reimbursement from the carrier for the claims.
The Company operates as a niche service provider. Its publisher and printer customer relationships are long standing. Many domestic customers have the Company handle a substantial portion of their freight transportation to single copy magazine wholesalers. The Company's principal competitors are the in-house transportation and logistics capabilities of the larger printers.
The Company's core business involves the shipment of mass market consumer magazines. Its business is impacted by the specifics of its underlying publications (including the number of copies shipped and the pages per copy which vary with advertising), the mix of publication frequency (e.g. weekly, monthly, annual), the number of destination points, and the service levels requested by its customer publishers and printers. Over the last two years, the Company's domestic business has been favorably impacted by the publications that have relatively lower cover prices. Except for special editions publications, distribution of mass market consumer magazines is fairly consistent and predictable. Mass market magazines generally do not experience material swings in volume in the aggregate. The Company's business has also been favorably impacted by the large number of publications offered for sale by mass market retailers. Generally, demand for the Company's services increases with fragmentation and it is able to charge higher fees per hundredweight for smaller quantity publications or tonnage going to a destination point. Management expects its future freight pools, demand for services and pricing to remain fairly consistent with its past experience.
Gross revenues increased over the several years prior to 2009. The ratio of freight expenses to gross revenues increased, reducing the Company's margin. Fuel increases contributed to the margin percentage decline because as surcharges are passed along in the form of higher billing rates, revenues increased without a corresponding change to gross profit. The decline in margin also reflects a shift in the customer mix towards the Company's largest customers where it has lower margins. The Company's top 10 domestic customers' revenue represents approximately 69% of its 2008 domestic revenue. The Company uses various performance indicators to manage its business. The Company closely monitors margin and gains and losses for its top 20 customers and loads with negative margins. The Company also evaluates on-time performance, costs per load by location and weekly revenue by location. Vendor cost changes and vendor service issues are also monitored closely.
The Company conducts its domestic operations through its subsidiaries, Clark Distribution Systems, Inc. ("CDS") and Highway Distribution Systems, Inc. ("HDS"), and its international operations through its subsidiary, Clark Worldwide Transportation, Inc. ("CWT"). Each of CDS, HDS and CWT is a wholly-owned subsidiary of CGI.
Recent Events
Amendment to the Credit Facility
Simultaneously with the Acquisition, the Company, as borrower, entered into a credit agreement with various financial institutions, as lenders, and LaSalle Bank National Association, as administrative agent (now part of Bank of America, the "Bank") ("Credit Agreement"). Pursuant to the Credit Agreement, the Company received a financing commitment of up to $30,000,000 for a senior secured credit facility. The facility consisted of up to $20,000,000 that could be drawn within 60 days of the Closing Date (which was subsequently extended to 120 days on April 18, 2008) as a term loan sublimit, and up to $30,000,000, less any amount drawn under the term loan sublimit, as a revolving credit facility with a $3,000,000 sublimit for letters of credit. The balance of the term loan was $4,259,930 and $3,786,605 as of January 3, 2009, and April 4, 2009, respectively.
As at January 3, 2009, the Company recorded an impairment charge of approximately $66,568,000, as more fully described in Part I, Item 2, "Impairment to Goodwill and Other Intangibles." The recording of the impairment charge resulted in breaches of the three financial covenants contained in the Credit Agreement causing events of default thereunder. On April 17, 2009, the Company entered into an amendment to the Credit Agreement, whereby the Bank waived the events of default and agreed to modify the financial covenants to account for the impairment charge. The Company also agreed to certain other changes to the Credit Agreement. Pursuant to the amendment, the lenders' revolving loan commitment was changed to $3,000,000, which the Company and its subsidiaries could use for working capital, with a $2,000,000 sublimit for letters of credit. The term loan balance, which was $3,786,605 as of April 4, 2009 remained outstanding. The Company could borrow up to the amount of the revolving loan commitment, except that its borrowings under the revolving loan could at no time exceed the sum of the Company's borrowing base (as defined in the Amendment) plus its cash collateralized letters of credit less the amount of the outstanding term loan. The interest rate charged under the facility was changed to 4.00% over LIBOR or 2.50% over the prime interest rate, as applicable. The non-use fee was changed to 0.675% per year and the fee for letters of credit was changed to 1.75%. The amortization of the term loan did not change.
The Company believes that its existing cash and cash equivalents, cash flow from operations and its credit facility, as amended, are adequate to meet our liquidity needs for the foreseeable future, including working capital, capital expenditure requirements, taxes and the term loan amortization obligations.
Instability in the Newsstand Distribution Channel
In the first quarter of 2009, there was a disruption of the wholesaler distribution supply channel, that caused a significant disruption of services for approximately a four week period. Initially, two of the four wholesalers demanded distribution surcharges from the publishers and national distributors to cover their operating losses and threatened a suspension of service if these price demands were not met. This resulted in two of the four wholesalers ceasing distribution operations temporarily on February 1, 2009. One of the wholesalers that had ceased delivery of product reached a settlement with the national distributors and publishers concerning pricing and distribution. The other wholesaler ceased operations in early February, liquidated its holdings and filed a lawsuit in U.S District Court (Southern District of New York) against publishers, national distributors and other wholesalers, alleging the defendants conspired to purge, and through coordinated action have purged, plaintiff from the magazine distribution industry and have destroyed plaintiff's business. All of the defendants are existing customers of ours and a settlement against them could affect our business.
Claim for Indemnification
At the closing of the Acquisition, we entered into an escrow agreement ("Escrow Agreement") with the Sellers, providing, in part, for $7,500,000 of the purchase price to be deposited in escrow as a fund for the payment of indemnification claims that may be made by us as a result of any breaches of CGI's covenants, representations and warranties in the SPA. On February 9, 2009, the Company issued a notice certificate pursuant to the Escrow Agreement, stating that the Company, as buyer, was entitled to receive funds from the escrow in the amount of $3,540,717. The bulk of this claim (approximately 97%) pertained to damages incurred as a result of the Sellers' breach of their representations and warranties as contained in the SPA. Among other things, Seller failed to deliver the intellectual property required by the SPA in the condition represented in the SPA. Damages incurred include damages to goodwill, the incremental costs of operating the Company's computer system as delivered versus as represented, and the costs of repairing and/or replacing the computer system.
Impact of Economic Recession
The transportation industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns in business cycles of our customers, fuel shortages, price increases by carriers, interest rate fluctuations, and other economic factors beyond our control. Many of the Company's customers' business models are dependent on expenditures by advertisers. These expenditures tend to be cyclical, reflecting general economic conditions, as well as budgeting and buying patterns. As the economic recession, and the downturn in its customers' business cycles are causing a reduction in the volume of freight shipped by those customers, particularly to the single copy distribution channel, these factors along with the reduction in fuel costs have adversely affected the Company's operating results as discussed below in the "Results of Operations" section of this Item.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based on estimates, assumptions and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated.
A summary of our significant accounting policies are described in Note 2 of our consolidated financial statements for the 13 weeks ended April 4, 2009, as included in this Quarterly Report on Form 10-Q.
There have been no changes in critical accounting policies in the current year from those set forth in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009 ("2008 Form 10-K").
Impairment to Goodwill and Other Intangibles Assets
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.
The final allocation of the fair value of the assets acquired and liabilities assumed in the Acquisition, as described more fully in the Company's 2008 Form 10-K, was as follows:
Deferred tax
liability
Adjustments to adjustment
Preliminary Preliminary associated with
Allocation at Purchase Price Final Purchase Final Purchase
2/12/08 Allocation Price Adjustments Price Allocation
Current assets $ 6,956,000 $ 6,956,000
Current assets of discontinued operations 388,000 388,000
Property and equipment 1,394,000 1,394,000
Intangibles 26,575,000 (5,924,000 ) 20,651,000
Goodwill 59,471,020 5,924,000 (2,366,000 ) 63,029,020
Current liabilities (7,441,000 ) (7,441,000 )
Current liabilities of discontinued operations (132,000 ) (132,000 )
Deferred tax Liability (10,104,020 ) 2,366,000 (7,738,020 )
Total fair value of assets and liabilities $ 77,107,000 $ 0 $ 0 $ 77,107,000
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At the end of 2008, the Company recognized an impairment to the goodwill and identifiable intangible assets in the amount of $66.568 million, as shown below:
Impairment Amount
Goodwill $ 63,910,000
Trade names 2,658,000
TOTAL $ 66,568,000
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Goodwill
During the fourth quarter of 2008, in accordance with SFAS No. 142, the Company performed its annual impairment test for goodwill and intangible assets with an indefinite life. The Company concluded that its market capitalization had been below its net book value for an extended period of time. Management therefore assessed the fair value of its reporting units using both an income approach with a discounted cash flow model and a market approach using the observed market capitalization based on the quoted price of our common stock. Management compared these values to each reporting units'carrying amount, including goodwill and identified an impairment. The evaluation resulted in a $63.910 million impairment charge which was included in the "impairment of goodwill and intangible assets" line item in the consolidated statements of operations.
The changes in the carrying amount of goodwill for the year ending January 3, 2009, were as follows (in thousands):
Balance at February 12, 2008 $ 63,029
Adjustment to Goodwill 881
Impairment Charge (63,910 )
Balance at January 3, 2009 $ -
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Intangible Assets
During 2008, the Company acquired CGI, resulting in acquisition-related
intangible assets. Acquisition-related intangible assets at January 3, 2009, and
February 12, 2008, as amended, consisted of the following:
Net Value
Amortization Accumulated After
Period Fair Value Amortization Impairment Impairment
5 $ 1,684,010 $ (247,573 ) $ - $ 1,436,437
- 5,378,000 - (2,658,000 ) 2,720,000
12 13,588,000 (998,000 ) - 12,590,000
$ 20,650,010 $ (1,245,573 ) $ (2,658,000 ) $ 16,746,437
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Intangibles assets with an indefinite life (i.e., trade names), were evaluated for impairment at January 3, 2009, by management in accordance with SFAS No. 142, using the "relief from royalty" method. This evaluation resulted in a $2.658 million impairment charge which was included in the "impairment of goodwill and intangible assets" line item in the consolidated statements of operations.
Due to the adverse economic impact on the Company's market capitalization in the
fourth quarter, management evaluated intangibles and fixed assets with definite
lives for impairment as of January 3, 2009, in accordance with SFAS No.
144. Management's projections of undiscounted future cash flows exceeded the
carrying amount of these intangible and fixed assets, which resulted in no
charge for impairment. These projections assumed an aggressive growth plan for
the international division with 7 new distribution centers and the expansion
into the shipment of general commodities. International's percentage of the
operating income of the distribution centers before corporate expenses is
projected to grow from 6% to 17% during the projection period. Domestic growth
projections assume moderate growth during this period with gross profit (net
revenue) increasing at 3% per year. During the first 2 years of these
projections, we are investing in upgrading our infrastructure.
Results of Operations
First 13 Weeks 2009 Compared to First 13 Weeks 2008
The results of operations for the 13 weeks ended April 4, 2009 and March 29, 2008, where appropriate and for comparison purposes, include the results of the acquired company, CGI, showing the acquired company as if it was owned and operated during both quarters. Prior to the acquisition of CGI on February 12, 2008, the Company was a ''blank check'' company and did not have any results from operations.
Revenues
The table below summarizes the Company's revenue by business segment (i.e.,
domestic versus international in thousands of dollars) for the first 13 weeks of
2009 versus the first 13 weeks of 2008.
For 13 Weeks Ending
April 4, 2009 March 29, 2008
% Change
Domestic 14,606 16,159 -9.6 %
International 2,837 3,140 -9.6 %
Gross Revenue 17,443 19,299 -9.6 %
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The table below includes certain items in the consolidated statements of income as a percentage of revenue for the 13 weeks ended April 4, 2009 versus March 29, 2008. The last two columns of this table shows certain items as a percentage of revenue for the 13 weeks ended April 4, 2009 and March 29, 2008, respectively, with CGI financial results included in both periods for the purpose of comparing the performance of the underlying business is performing.
For 13 Weeks Ending
April 4, 2009 March 29, 2008
Gross Revenue 100.0 % 100.0 %
Freight Expense 64.5 % 62.6 %
Gross Profit (Net Revenue) 35.5 % 37.4 %
Depreciation and Amortization 2.4 % 2.1 %
Selling, Operating & Administrative Exp 38.0 % 30.7 %
(Loss) Income from Operations -4.9 % 4.6 %
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In reviewing CHI operations for the first 13 weeks of 2009 versus the first 13 weeks of 2008, revenue decreased by 9.6% for the first 13 weeks of 2009 as compared to the first 13 weeks of 2008. Domestically, the decline is attributed to a sharp fall in oil prices resulting in a decrease in fuel surcharge invoicing. During the month of February, 2009, there was an approximate four-week disruption in the supply chain as two of the four major magazine wholesalers were in a pricing dispute with some of our publisher customers, significantly reducing the number of copies shipped to retail during this period of time. This situation resulted in one of the disputing wholesalers suspending operations and the remaining wholesalers deciding to service their retail territories. At this time, the magazine supply chain has returned to normal and is being supported by the remaining wholesalers. Further, weight decreased as a result of a 25.9% drop in advertising pages for the 13 weeks of of 2009 as compared to the first 13 weeks of 2008. Domestic pool distribution weight increased slightly or 0.6% over first quarter of 2008, as Clark was able to add new business to offset the decline in existing magazine customer weight from comparable periods.
The decrease in international gross revenues was attributable to a 10.6% decrease in tonnage offset by a slightly higher percentage of general commodity freight and a combination of higher airfreight and lower ocean freight revenues. The significant reductions that took place in the first 13 weeks of 2009 as compared to the first 13 weeks of 2008 were: UK and continental Europe - 5.2 %, and Mexico, Central and South America - 6.8%. The UK, continental Europe, Mexico, Central and South America destinations represent 45.2% of international tonnage. The reductions reflect fewer orders for U.S. magazines and books by CWT's international customers, along with a 25.6% reduction in advertising pages in the comparable periods. Additional decreases that took place in the first quarter of 2009 as compared to the first quarter of 2008 were: Philippines - 47.3% all other destinations in Asia - 15.0%, and Australia/New Zealand - 17.1%. The revenue offset resulted from a slightly higher percentage of general commodity freight handled in the first 13 weeks of 2009 as compared to the first 13 weeks of 2008.
Seasonality of Revenues.?While CHI'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 or celebrity event or death of a celebrity or other public figure) or a publisher's release of a new publication . . .
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