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| GLA > SEC Filings for GLA > Form 10-Q on 20-Aug-2009 | All Recent SEC Filings |
20-Aug-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 initially 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 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"), as described more fully in the Company's registration statement on Form S-1 (File No. 333-128591). 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.
The Company conducts its domestic operations through its subsidiaries, Clark Distribution Systems, Inc. ("CDS"), Highway Distribution Systems, Inc. ("HDS") and Evergreen Express Lines, Inc. ("EXL"), and its international operations through its subsidiary, Clark Worldwide Transportation, Inc. ("CWT"). Each of CDS, HDS, EXL and CWT is a wholly-owned subsidiary of CGI.
Recent Events
Overview of Results of Operations
The Company experienced net losses of $751,000 and $1,283,000 for the 13 weeks ended July 4, 2009 and 26 weeks ended July 4, 2009, respectively, compared to net income of $354,000 and $519,000 for comparable periods in 2008. The decrease in net income was due to a decrease in revenue and an increase in selling, operating and administrative expense, each as discussed in more detail below under the heading "Results of Operations." In response to these continuing losses, management implemented a series of cost restructurings including a reduction in force, wage freezes and wage reductions that resulted in reducing the annual payroll by $2.4 million per year. Management also significantly reduced capital expenditure budgets and has several ongoing initiatives to further reduce the cost base in the third quarter going forward and improve free cash flow generation.
Current Non-Compliance with Financial Covenants
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, as amended, the lenders made a financing commitment of up $7,700,000, consisting of a term loan commitment of $4,700,000 and a revolving loan commitment of up to $3,000,000, which the Company and its subsidiaries may use for working capital, with a $2,000,000 sublimit for letters of credit. The Company's borrowings under the revolving loan may at no time exceed the sum of the Company's borrowing base (as defined in the Credit Agreement, as amended) plus its cash collateralized letters of credit less the amount of the outstanding term loan. The interest rate charged under the facility is 4.00% over LIBOR or 2.50% over the prime interest rate, as applicable. The non-use fee is 0.675% per year and the fee for letters of credit is 1.75%.
The Company is not in compliance with certain of the financial covenants contained in the Credit Agreement. As of May 31, 2009 and June 30, 2009, the Company's ratio of permitted senior debt to EBITDA (each as calculated pursuant to the Credit Agreement) exceeded the maximum of 2.00 to 1.00. As of April 30, 2009, May 31, 2009 and June 30, 2009, the Company's fixed charge coverage ratio (as calculated pursuant to the Credit Agreement) was less than 1.25 to 1.00. As of May 31, 2009 and June 30, 2009, the Company's ratio of permitted total debt to EBITDA (each as calculated pursuant to the Credit Agreement) exceeded the maximum of 2.50 to 1.00. These occurrences constitute events of default under the Credit Agreement. As a consequence of these events of default, the interest due and payable under the credit facility is 6% higher than would otherwise be payable with respect to the loans.
The Company and the Bank are in discussions with respect to a forbearance agreement, waiver agreement, amendment to the Credit Agreement and/or similar agreement to address the events of default; however, there can be no assurance that the Company will be able to negotiate such an agreement on favorable terms or at all. While we do not expect the Bank to immediately terminate the credit facility and/or demand immediate repayment of outstanding debt, it would have the right to do so as a result of the events of default. In such event, the Bank could seek to foreclose on its security interests in our assets and those of our subsidiaries. Alternatively, the Bank could exercise the other rights and remedies available to it under the Credit Agreement. Such actions would materially and negatively impact our liquidity, results of operations and financial condition. Consequently, the Company is reclassifying all of its long-term debt under the facility as current. As of July 4, 2009, the outstanding term loan balance was $3,549,942 and the outstanding revolving loan balance was $0.
Going Concern
As shown in the accompanying financial statements, the Company incurred a net loss from operations of $1,283,000 for the 26 weeks ended July 4, 2009. The cumulative deficit at July 4, 2009 was $62,929,000, with the majority of this loss associated with the impairment of goodwill and intangible assets in an amount of $66,568,000 that was incurred in 2008. As of July 4, 2009 the Company had negative working capital of $1,729,000. The Company was not in compliance with its financial covenants associated with its credit facility at July 4, 2009 as described above. Because there can be no assurance that the Company will be able to negotiate an agreement to address these events of default, the Company is classifying all of the bank debt outstanding balance of $3,549,942 as a current liability. These conditions, as well as the uncertainty that the Company faces regarding its market conditions and continued bank financing, creates an uncertainty about the Company's ability to continue as a going concern.
Management of the Company has implemented a plan to increase its profits through increases in product sales, the reductions in costs through personnel reduction in forces, wage reductions and wage freezes, the elimination of all non-essential other expenses, and the slowdown and/or the suspension of capital expenditures for the remainder of the year. The Company also intends to secure a new credit facility from another financial institution. The cost reductions mentioned above decreased the annual payroll by $2.4 million.
The ability of the Company to continue as a going concern is dependent upon its ability to improve profitability, reduce operating cost and secure a new credit facility from another financial institution. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
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' 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. 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 significantly affected the Company's operating results, as discussed more fully in this Item under the heading "Results of Operations."
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 negatively offset revenue.
Claim for Indemnification
At the closing of the Acquisition, we entered into an escrow agreement ("Escrow Agreement"), dated February 12, 2008, 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 by Sellers of the covenants and representations and warranties contained in the SPA. Unless a claim against the escrow funds was made by the Company, one-third of the escrow funds were to be released to Sellers on August 13, 2008, one-half of the remainder were to be released on February 13, 2009 and the remainder were to be released on August 12, 2009. 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 ("Escrow Claim"). The bulk of this claim (approximately 97%) pertained to damages incurred because the Sellers failed to deliver the intellectual property required by the SPA in the condition represented in the SPA. Damages to the Company 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. On March 18, 2009, the Sellers made a demand for arbitration for release of the escrow funds; on April 15, 2009, the Company served a counterclaim seeking recovery from the funds held in escrow of no less than $3,600,000. The arbitration is being administered by the American Arbitration Association.
On August 11, 2009, the Company issued a second 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 $5,000,000, constituting the full amount remaining in the escrow. The Company made this demand for indemnification against the Sellers pursuant to the SPA, based upon the Multi-Media International class action described below in Part II, Item 1, "Legal Proceedings," and the pending claims against the escrow described above.
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 the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 2009 ("2008 Form 10-K"). In addition, there have been no changes in critical accounting policies in the current year from those set forth the Company's 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 intangible assets, 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
Adjustment
Associated
Adjustments to with Final
Preliminary Preliminary Purchase Final Purchase
Allocation at Purchase Price Price Price
2/12/08 Allocation Adjustments Allocation
Current assets $ 6,956,000 $ 6,956,000
Current assets of discontinued
operations 388,000 388,000
Property and equipment 1,394,000 1,394,000
Intangibles 26,575,000 $ (5,924,000 ) 20,651,000
Goodwill 59,471,020 5,924,000 $ (2,366,000 ) 63,029,020
Current liabilities (7,441,000 ) (7,441,000 )
Current liabilities of discontinued
operations (132,000 ) (132,000 )
Deferred tax liability (10,104,020 ) 2,366,000 (7,738,020 )
Total fair value of assets and
liabilities $ 77,107,000 $ - $ - $ 77,107,000
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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
On February 12, 2008, the Company acquired the Clark Group Inc., that resulted
in acquisition-related identifiable intangible assets. Acquisition-related
identifiable intangible assets at February 12, 2008 and at January 3, 2009, as
amended, consisted of the following:
Net Fair Value
Fair Value of After Impairment
Amortization Assets as of Accumulated as of
Period February 12, 2008 Amortization Impairment January 3, 2009
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
Second Quarter 2009 Compared to Second Quarter 2008
We sometimes refer to the 13 weeks ended July 4, 2009 and the 13 weeks ended
June 28, 2008 as the second quarter of 2009 and the second quarter of 2008,
respectively.
Revenues.?The following table summarizes the Company's revenue by business
segment (i.e., domestic versus international) for the second quarter of 2009
versus the second quarter of 2008 (in thousands of dollars):
For 13 Weeks Ending
7/4/09 6/28/08 % Change
Domestic $ 13,815 $ 17,507 -21.1 %
International 2,676 3,706 -27.8 %
Gross Revenue $ 16,491 $ 21,213 -22.3 %
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The table below includes certain items in the consolidated statements of operations as a percentage of revenue for the quarters ended July 4, 2009 versus June 28, 2008.
For 13 Weeks Ending
07/04/09 06/28/08
Gross Revenue 100.0 % 100.0 %
Freight Expense 62.5 % 65.4 %
Gross Profit (Net Revenue) 37.5 % 34.6 %
Depreciation and Amortization 2.6 % 3.0 %
. . .
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