ITEM 1. BUSINESS

 

Our Business Prior to the Acquisition

 

Clark Holdings Inc.(formerly known as Global Logistics Acquisition Corporation) was formed as a blank check company on September 1, 2005 to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the transportation and logistics sector and related industries. References herein to “Holdings,” “CHI” and the “Company” and to “we,” “us” or “our” refer to the Clark Holdings Inc. and, where the context requires, its subsidiaries.

 

On February 21, 2006, we closed our initial public offering (“IPO”) of 10,000,000 units, with each unit consisting of one share of our common stock and one warrant, each to purchase one share of our common stock at an exercise price of $6.00 per share.  Concurrently with the closing of the IPO, our initial stockholders collectively purchased 2,272,727 warrants (“Private Warrants”). The Private Warrants were sold at an offering price of $1.10 per warrant, generating gross proceeds of $2,500,000.  On March 1, 2006, we closed on the sale of an additional 1,000,000 units which were subject to an over-allotment option.  The units from the IPO (including the over-allotment option) were sold at an offering price of $8.00 per unit, generating total gross proceeds of $88,000,000.  After deducting underwriting discounts and commissions and offering expenses, the total net proceeds to us from the offering (including the over-allotment option) were $80,997,000, of which $79,340,000 (plus the $2,500,000 from the sale of the Private Warrants) was deposited into a trust account (“Trust Account”).  The remaining proceeds of $1,657,000 became available to be used to provide for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative expenses.  The funds held in the Trust Account were not to be released until the consummation of an initial business combination or our liquidation, if earlier.  The holders of the units issued in our IPO (including the over-allotment option) are referred to herein as “Public Stockholders” and the shares of common stock included in the units are referred to herein as “Public Shares.”  Our initial stockholders, including our officers and directors prior to the business combination, are referred to herein as our “Founders.”

 

We did not engage in any substantive commercial business until we consummated our business combination with The Clark Group, Inc. (“CGI”), as described under this Item in the section entitled “The Acquisition,” at which point our business became the business of CGI.

 

The Acquisition

On May 18, 2007, we entered into a stock purchase agreement (“SPA”), as amended on November 1, 2007, with CGI and the stockholders of CGI (“Sellers”), providing for the purchase by us of all of CGI’s outstanding capital stock (the “Acquisition”).  In accordance with our certificate of incorporation as it existed at the time, we called a special meeting in lieu of annual meeting of stockholders (the “Special Meeting”) in order to obtain stockholder approval of the Acquisition and other related proposals.

On February 1 and February 8, 2008, we entered into agreements with Cherokee Investments LLC (“Cherokee,” formerly Clark-GLAC Investment, LLC), pursuant to which Cherokee purchased 3,200,000 Public Shares from holders of such shares who had indicated their intention to vote against the Acquisition.  On February 1, 2008, we also entered into an agreement with certain of our Founders, pursuant to which they purchased 299,800 Public Shares from holders of such shares who had indicated their intention to vote against the Acquisition.

After adjournments of the Special Meeting on February 7, 2008, and February 8, 2008, the Public Stockholders approved the Acquisition and the other related proposals on February 11, 2008.  In accordance with our certificate of incorporation as it existed at the time, holders of 1,802,983 of the Public Shares voted against the Acquisition and elected to convert their shares into a pro rata portion of the Trust Account (approximately $8.06 per share).  In order to receive payment, holders of such shares had to surrender them to us.  1,787,453 of such shares were surrendered within the required time period after the consummation of the Acquisition.  $14,536,911 was paid to the holders of such shares and such shares were cancelled.

 

 

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On February 12, 2008, the Company consummated the Acquisition.  At the closing, the funds held in the Trust Account were released to us and were used in part to purchase all of the issued and outstanding capital stock of CGI for a total consideration of $75,000,000 (of which $72,527,472.53 was paid in cash and $2,472,527.47 by the issuance of 320,276 shares of the Company’s common stock valued at $7.72 per share, the average share price at the announcement of the SPA) plus an adjustment of $495,067 based on CGI’s estimated working capital at the closing.  Subsequently, an additional adjustment of $257,000 was paid to the stockholders of CGI based on CGI’s working capital at the closing as finally determined.  Of the consideration paid at closing, $8,300,000 was placed in escrow, as described more fully below.  In addition, certain of our Founders placed 1,173,438 shares of common stock into escrow, to be released from escrow if, and only if, prior to the fifth anniversary of the closing, the last sales price of our common stock equaled or exceeded $11.50 per share for any 20 trading days within a 30 day trading day period.  As of April 19, 2010, such shares remained in escrow. In connection with the closing of the Acquisition, we changed our name from Global Logistics Acquisition Corporation to Clark Holdings Inc.

At the closing of the Acquisition, we entered into an escrow agreement (“Escrow Agreement”) with the stockholders of CGI, as sellers, providing for (i) $7,500,000 as a fund for the payment of indemnification claims that may be made by us as a result of any breaches of CGI’s covenants, representations and warranties in the SPA (“Indemnification Escrow”), (ii) $500,000 as a fund to pay us the amount, if any, by which the average of the working capital on the last day of the month for the twelve months ended March 31, 2008, was higher (less negative) than negative $1,588,462 (“Working Capital Escrow”), and (iii) $300,000 as a fund to reimburse CGI and us for costs incurred in connection with discontinuing certain of CGI’s operations in the United Kingdom (“Discontinued Operations Escrow”).  On August 14, 2008, one third of the Indemnification Escrow, or $2.5 million, was released to former stockholders of CGI in accordance with the terms of the SPA and the Escrow Agreement.  On September 15, 2008, the entire Discontinued Operations Escrow was released to the former stockholders of CGI.  By the end of the third quarter of 2008, the entire Working Capital Escrow had been released, all of which was due to the Company in accordance with the SPA and the Escrow Agreement, but $257,000 of which was paid to the Sellers in satisfaction of the aforementioned adjustment to the Acquisition consideration based on CGI’s working capital at closing as finally determined. On December 31, 2009, the remainder of the Indemnification Escrow was released, approximately $1,286,000 of which was paid to the Company in settlement of all of its claim for indemnification under the SPA, as more fully described under Item 3, and the remainder of which was paid to the former stockholders of CGI.

 

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Our Business Model

The Company is a niche provider of non-asset based transportation and logistics services primarily to the print media industry throughout the United States and between the United States and other countries.  The Company operates through a network of operating centers where it consolidates mass market consumer publications so that the publications can be transported in larger, more efficient quantities to common destination points.  The Company refers to each common destination point’s aggregated publications as a “pool.”  By building these pools, the Company offers cost effective transportation and logistics services for time sensitive publications.

The Company generates revenues by arranging for the movement of its customers’ freight in trailers and containers. Generally, the Company bills its customers based on pricing that is variable based upon the amount of tonnage tendered, frequency of recurring shipments, origination, destination, product density and carrier rates.  The Company’s specified rates are subject to weight variation, fuel surcharge, and timely availability of the customer’s product.  The Company provides ancillary services such as warehousing and other services (e.g., product labeling).  As part of its bundled service offering, the Company tracks shipments in transit and handles claims for freight loss or damage on behalf of its customers.  Because the Company owns relatively little transportation equipment, it relies on independent transportation carriers.

 

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The Company is a principal and also provides limited brokerage of transportation services.  By accepting the customer’s order, it accepts certain responsibilities for transportation of the shipment from origin to destination.  The Company selects carriers based upon myriad factors that include service reliability and pricing.  Carrier pricing is typically from a pre-negotiated tariff rate table.  The carrier’s contract is with the Company, not its customer, and the Company is responsible for payment of carrier charges. In the cases where the Company has agreed to pay for claims for damage to domestic freight while in transit, when appropriate the Company will pursue reimbursement from the carrier for the claims.

The Company operates as a niche service provider.  Its publisher and printer customer relationships are long standing.  Many domestic customers have the Company handle a substantial portion of their freight transportation to single copy magazine wholesalers.  The Company’s principal competitors are the in-house transportation and logistics capabilities of the larger printers.

 

The Company’s core business involves the shipment of mass market consumer magazines. Its business is impacted by the specifics of its underlying publications (including the number of copies shipped and the pages per copy which vary with advertising), the mix of publication frequency (e.g. weekly, monthly, annual), the number of destination points, and the service levels requested by its customer publishers and printers. Except for special editions publications, copies distributed of mass market consumer magazines is fairly consistent and predictable. Mass market magazines generally do not experience material swings in copy volume in the aggregate. However, while copies distributed in 2009 did remain consistent with 2008 levels, a decrease in advertising pages in magazines over the last twelve months did have a negative impact on business as the average weight per copy shipped declined. Generally, demand for the Company’s services increases with fragmentation and it is able to charge higher fees per hundred weight for smaller quantity publications or tonnage going to a destination point. Management expects its future freight pools, demand for services and pricing to remain fairly consistent with its past experience.

The Company closely monitors the ratio of freight expense to gross revenue, or net revenue margin, which can be positively or negatively impacted by numerous factors including customer billing rates, the aggregate weight of a weekly pool shipment, the fluctuation of per mile transportation costs, and the rise and fall of crude oil prices. Fuel charge increases will artificially contribute to a margin percentage decline because as surcharges are passed along in the form of higher billing rates, revenues increase without a corresponding change to gross profit.  Conversely, fuel decreases will artificially contribute to a margin percentage increase because as surcharges are passed along in the form of lower billing rates, revenues decrease without a corresponding change to gross profit. The Company’s top 10 domestic customers’ revenue represented approximately 71% of its 2009 domestic revenue.  The Company uses various performance indicators to manage its business.  The Company closely monitors margin and gains and losses for its top 20 customers and loads with negative margins.  The Company also evaluates on-time performance, costs per load by location and weekly revenue by location.  Vendor cost changes and vendor service issues are also monitored closely.

  

We conduct our domestic operations through our subsidiaries, Clark Distribution Systems, Inc. (“CDS”) and Highway Distribution Systems, Inc. (“HDS”), and our international operations through our subsidiary, Clark Worldwide Transportation, Inc. (“CWT”). Each of CDS, HDS and CWT is a wholly-owned subsidiary of CGI.

History of Our Business Prior to Its Acquisition

Our predecessors founded the business in 1957 with the establishment of Clark Transfer, Inc., a regional transportation company for film, magazines and newspapers. Through a series of acquisitions and organic growth, Clark Transfer expanded its service platform and geographic presence throughout the 1960s, 1970s and 1980s to include theatrical transportation and wholesale news agencies. CDS was formed in 1984 to provide national freight consolidation for books and magazines. J.E. Tompkins & Son, an international freight-forwarding firm, was acquired by Clark Transfer in 1987, and subsequently merged with Caribbean Worldwide, Inc. to become CWT.

During the 1990s our predecessors acquired the operations of Magazine Shippers Association, a consolidator of printed matter in Connecticut and Illinois, and divested our theatrical transportation and wholesale news agency subsidiaries along with the “Clark Transfer” name. Since the acquisition of Magazine Shippers Association in 1991, all of the business’ growth has been organic. During this time, a new umbrella corporation, CGI, was formed. CDS, HDS and CWT became subsidiaries of CGI, out of which the business’ key divisions were operated.

 

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On February 12, 2008, the predecessor (the Clark Group Inc.) was acquired by the successor (Clark Holdings Inc.) as described above.

Industry

As a transportation management and logistics services company whose core business is the shipment of mass market consumer magazines, our business is a part of the general transportation and logistics industry and is heavily affected by the print media industry in general and the magazine segment of that industry specifically. We believe our ability to provide a wide range of cost-effective transportation and logistics solutions is a competitive advantage within the print media industry as publishers and printers focus on their core competencies, which often do not include freight transportation.

We operate in a highly fragmented specialty market. We believe that this market continues to grow based on a series of factors, including the growth of world trade and the resulting complexity and length of supply chains; increased outsourcing of manufacturers’ and retailers’ non-core operations, as they increasingly focus on core competencies; and demand for specialized, value added services which require logistics providers to tailor solutions to fit specific client needs. Companies within this industry compete on the basis of pricing, quality of service and customer relationships.

Key Strengths

Management believes that our most significant strengths include:

Niche Provider of Mission-Critical Supply Chain Solutions to the Print Media Industry.  Our broad portfolio of transportation management and logistics solutions, extensive expertise with print media supply chains, nationwide presence and longstanding customer relationships have contributed to our position as a niche provider of third-party transportation and logistics services to the print media industry.

Broad Portfolio of Third-Party Transportation and Logistics Services.  We provide an extensive range of transportation management and logistics services and technology solutions including shipment optimization, load consolidation, mode selection, carrier management, load planning and execution and web-based shipment visibility. Management believes its ability to provide a wide range of transportation and logistics solutions is a competitive advantage within the print media industry.

Enduring Customer Relationships.  Management believes that we have developed into a trusted service provider to the print media industry. Our customer base is highlighted by long-term relationships where we play an integral role in customers’ distribution chains. This role comprises much more than transportation, and often includes specialized services such as time-definite deliveries, unlocking and securing customers’ warehouses and “on the dock” freight movements. These value-added services have entrenched us in our customers’ distribution chains and created a high level of customer loyalty. Our top ten customers for 2009 have an average tenure with us of 15 years and nine of the top ten have been a customer for at least five years.  Our top fifteen customers for 2009 have an average tenure with us of 14 years of which twelve have been a customer for at least five years.

Non-Asset Based Business Model.    As a non-asset based company, we maintain no print media inventory and rely extensively on third-party or leased assets for transportation (ground, air and ocean). Without substantial ownership of assets, we enjoy a highly variable cost structure where a majority of our expenses fluctuate with business volumes. While this model subjects us to unit and other cost increases by suppliers in connection with such items as increased fuel costs and driver wages, we have historically been successful in passing such increased costs to our customers through increases in our service rates. Additionally, our management believes that this highly variable cost structure permits us to better align our costs with our revenues. We have also been able to address the risks associated with the availability of third party services providers and access to required quantities and quality of leased equipment by establishing long-standing relationships with respected third party vendors and being a provider of a significant source of business to those vendors, and with respect to leased assets, entering into leases with favorable and flexible terms. Management believes its successful mitigation of the risks associated with a non-asset model has allowed us to achieve the benefit of minimal capital expenditures, consistent cash flow and high returns on capital. Management further believes this structure also provides us with the necessary level of financial and operational flexibility to quickly adapt to changing market conditions and capitalize on growth opportunities.

 

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Visible and Consistent Revenue.    The print media industry has proven to be a relatively stable component of the United States economy, resulting in historically consistent demand for our services. The newsstand distribution channel, in which we play a critical role, is vital to the publishing industry in driving subscriptions and launching new titles. Our loyal customer base and the predictability of our customers’ freight patterns aid us in evaluating future operational and financial performance. The visibility also plays an important role in management’s planning efforts, including employee/asset deployment, capital expenditures and growth initiatives.

Experienced Management Team.    With approximately 200 years of combined experience at the company, our senior managers make up one of the channel’s most established and experienced management teams. This experience has played a critical role in our ability to maintain long-term customer relationships and become entrenched in customers’ distribution chains.

Operations

We conduct our domestic operations through our wholly-owned subsidiaries, CDS and HDS, and our international operations through our wholly-owned subsidiary, CWT. On a day-to-day basis, customers communicate their freight needs, typically on a shipment-by-shipment basis, to one of our transportation offices/distribution centers for dissemination to our operating companies for upload into the respective systems each company utilizes to meet the specific requirements of its customer base. Our employees ensure that all appropriate information about each shipment is entered into our proprietary operating system. With the help of information provided by the operating system, our employees then determine the appropriate mode of transportation for the shipment and select a carrier or carriers, based upon their knowledge of the carrier’s service capability, equipment availability, freight rates, and other relevant factors. Many of these activities are routine and recurring reflecting the scheduled frequency (e.g., weekly, monthly, quarterly) of magazine publications.

Domestic Nationwide Distribution Services

Through CDS, we provide domestic newsstand magazine distribution services throughout North America. Essentially, CDS operates a “hub-and-spoke” network of operating centers and professional traffic management services, which provide publishers and printers with the benefits of scheduled delivery and reduced cost by shipping in a consolidated weekly pool managed by CDS. Services provided include pick-up at printing plants; break-bulk and sorting of individual wholesaler orders by title; consolidation of multiple titles to common wholesaler delivery points; and preparation of manifests, advance shipping notices and completion of shipment notifications to national distributors. On average, CDS delivers over 35 million magazines and books per week from over 90 print locations to wholesalers across North America.

CDS serves as a link between magazine printers/publishers and wholesalers, whose responsibilities include distributing magazines to retailers for public consumption. In this role, CDS is responsible for all aspects of distribution, including shipment pickup, consolidation and final delivery to wholesalers. CDS’ freight flow is similar to the “hub-and-spoke” networks utilized in the airline or less-than-truckload industries. Low volume shipments will be directed to one of the six operating centers (Laflin, PA; LaVergne, TN; York, PA; Woodridge, IL; Carrollton, TX; and Kansas City, MO) where they are consolidated and pooled with other shipments destined for the same wholesaler. High volume shipments will bypass the distribution center and be delivered directly to the wholesaler.  CDS’ disbribution centers are operated by HDS.

CDS contracts with third-party transportation providers for approximately 75% of its transportation moves. With a third-party carrier base of approximately 600, CDS can ensure that its customers receive the appropriate balance between service levels and transportation costs that each circumstance requires. In the other 25% of transportation moves, CDS utilizes the services of HDS. Although CDS’ business model is heavily focused on the use of third-party assets and theoretically could operate with 100% non-affiliated carriers, HDS plays an important role in CDS’ network. CDS utilizes HDS dedicated fleet managed by a third party carrier. As described below, in predictable, high density lanes, where service standards are very demanding.

 

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Domestic Regional Disbrtbution Services

Through HDS, we provide time-critical ground-based transportation services to the print media industry. Our services include the transportation of specialized media products such as magazines, mass market books, newspaper inserts, drop ship mail, and motion picture film.  HDS’ network includes the management of six distribution centers and relationships with approximately 600 third-party transportation providers through CDS. In addition, HDS has an agreement with a large third party carrier to provide dedicated motor carrier services to HDS for the transportation of goods. Under the Agreement, the third party carrier manages the fleet of 40 company-leased tractors and 76 company-leased and 18 company-owned trailers that was previously operated by the Company through its subsidiary, Evergreen Express Lines, Inc. (“EXL”), and uses this fleet in providing the dedicated motor carrier services.  As the tractors and trailers in this fleet are removed from service, the third party carrier will provide its own equipment.  Approximately 40% of HDS’ transportation is hauled by the dedicated fleet managed by the third party carrier and the remaining 60% is hauled by other third parties.

HDS’ core business is providing traditional “break-up” services for printers and publishers in regions surrounding the six distribution centers. The break-up service is similar to a regional LTL (less-than-truckload) service, where freight is picked up from a customer, transported to one of the HDS distribution centers, pooled with other shipments headed in similar proximities and sent to final destinations. Through the six distribution centers that it manages, HDS provides break-up services in selected lanes throughout New England, Mid-Atlantic, Midwest, Rocky Mountain, Southwest and Southeast regions of the United States.

International Freight Forwarding

Through CWT, we offer consolidation and import/export transportation management and logistics services to print media publishers, distributors and to their respective import partners worldwide.  With an operating model similar to that of a traditional freight forwarder, CWT utilizes four distribution centers to consolidate shipments and arrange for international transportation utilizing third-party carriers (air, ocean or ground).  CWT’s geographic footprint encompasses the majority of the economically developed and English-speaking overseas markets.

CWT’s primary functions are break-bulk and sortation of hundreds of individual titles and then consolidation into single consignee specific shipments, with us providing commercial invoices and detailed packing list as an agent for the export distributors. Once the sortation and assembly process is completed, CWT then takes on the role of an international freight forwarder – scheduling and booking freight with air and ocean carriers to ship to the import wholesalers who then effect retail distribution in the local marketplace they serve. Consolidation activities take place at one of its three distribution centers strategically located near international freight gateways (Wayne, NJ; Wilmington, CA; Atlanta, Georgia and Laredo, Texas).  CWT relies on a group of 60 air, ocean and ground freight carriers for transportation, with approximately 75% of its shipments traveling via ocean carriers, 15% via air carriers and 10% via trucks to Mexico.

In a typical transaction, CWT is hired by an export distributor or directly by the publisher to facilitate the transportation of its product to a foreign distributor or wholesaler. The customer is responsible for transporting the shipment to a CWT distribution center. The U.S. inland transport to CWT is handled by the printers – or CDS for those publishers CDS ships in North America – in bulk. CWT is responsible for providing break-bulk of the several hundred magazine titles per data supplied electronically in advance and uploaded into CWT’s information technology system and then CWT consolidates the multiple individual titles into one bulk order packed by consignee for shipment (usually weekly) via air and or ocean. At the distribution center, CWT employees pool the customer’s shipments with other shipments headed to similar locations. Once load space has been maximized, CWT arranges for the international movement of the consolidated load.

Customers

We are organized along three divisions that address the individual needs of our customers. The customers of CDS consist primarily of publishers and printers that have smaller quantities and require national distribution. HDS focuses primarily on publishers and printers with regional distribution needs. CWT focuses entirely on publishers and printers that require international distribution (and international import distributors of this product that need a U.S. consolidation and forwarding company).

 

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Our customers share several key common attributes. Customers’ product shares common beginning and end points within the single copy distribution channel. Product is printed by common printers and is distributed into the retail marketplace through common single copy distributors. An individual customer’s product destined for a distributor will be less-than-truckload quantities.  As such, we add value through aggregation and consolidation. Pools of less-than-truckload quantities are consolidated so that full truck load economies of scale are realized. Also, customer product is published with targeted time periods in which it will be displayed at retail. Our established routines ensure that these timelines are met in a cost effective manner.

Customer Relationships

We have written service contracts with a select group of our major customers. In most cases, and in particular with customers with whom we have a longstanding relationship and dependable track record, we provide services based on an email quotation or oral agreement.

In general, CDS offers single blended rates based on exclusive distribution throughout the entire United States and Canada; HDS offers point to point rates within a defined geographic region; and CWT offers point to point rates dependent upon mode of transport (air or ocean). Pricing is determined based upon costing analysis for titles with similar distribution characteristics in our existing distribution costing model or based upon building a separate costing model for larger distributions or those with unique requirements.  Often pricing is variable based upon the amount of tonnage tendered, frequency of recurring shipments, location of pick-up, destination, product density and carrier rates. Pricing also includes fuel surcharges, and for air freight, security surcharges. In the cases where we have agreed to pay for claims for damage to domestic freight while in transit, when appropriate we pursue reimbursement from the carrier for the claims. In the international business, we only insure specific consignee shipments against loss or damage while in transit. These overseas c.i.f. (cost, insurance and freight) shipments are insured by us, with such insurance coverage included as part of our service rate to customers.

As a result of our logistics capabilities, many of our domestic customers have us handle all, or a substantial portion, of their freight transportation requirements to or from a particular manufacturing facility or distribution center, including final delivery of shipments to single copy wholesalers. Our commitment to handle the shipments is usually at specific rates, subject to weight variation, fuel surcharge, and on time availability of the customer’s product. As is typical in the transportation industry, most of our customer agreements do not include specific volume commitments or “must haul” requirements.

In the course of providing day-to-day transportation services, we often identify opportunities for additional logistics services as we become more familiar with our customer’s daily operations and the nuances of its supply chain. These include analyzing the customer’s current transportation rate structures, modes of shipping, and carrier selection. These services are bundled with underlying transportation services and are not typically priced separately.

Relationships with Transportation Providers

Because we own relatively little transportation equipment and do not employ the people directly involved with the delivery of customers’ freight, our relationships with reliable transportation providers are critical to our success.

As of January 2, 2010, we had qualified approximately 600 domestic and 60 international segment transportation providers worldwide, of which the vast majority are motor carriers. Our transportation providers are of all sizes, including owner-operators of single trucks, small and mid-size fleets, private fleets and large national trucking companies. Consequently, we are not dependent on any one carrier. Our motor carrier contracts require that the carrier issue invoices only to and accept payment solely from us, and we reserve the right to withhold payment to satisfy previous claims or shortages.

While we generally contract with transportation providers on a short-term basis or in connection with specific shipments, and most of our transportation services are provided on a per mile basis, the majority of our purchased transportation is priced by our carriers at prenegotiated rates, and at times can be affected by the spot market, or on a transactional basis.  It is our policy to maintain relationships with numerous motor, air and ocean carriers with respect to specific traffic lanes to reduce risk of availability and keep pricing at a competitive level. We also have intermodal marketing contacts with railroads, including all of the major North American railroads, giving us access to additional trailers and containers. Intermodal transportation rates are typically negotiated between us and railroad consolidators and brokers.

 

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In our international business, we have contracts with most of the major ocean and air carriers which support a variety of service and rate needs for our customers. We negotiate annual contracts that establish the predetermined rates we agree to pay our ocean carriers. Air carrier rates are generally reviewed biannually. The rates are negotiated based on expected volumes from our customers, specific trade lane requirements, and anticipated growth in the international shipping marketplace. These contracts are sometimes amended during the year to reflect changes in market conditions for our business, such as additional trade lanes. While most of our air freight ships under negotiated tariffs with the airlines, we also move freight under lower spot market rates when possible.

Competition

CDS is the only independent transportation and logistics provider of newsstand magazine distribution in the United States. Given the specialized nature of these services within the overall transportation and logistics industry, CDS’ primary competition is the “in-house” distribution arms of the large major printers, such as R.R. Donnelley, Quad Graphics  including Quad’s recently announced acquisition of World Color (previously Quebecor World), who all provide services that are similar to ours in servicing newsstand copies of monthly, bi-monthly and annual magazine publications of large print runs. All of these printers have substantially greater financial and other resources than us. Large major printer transportation services, however, generally do not address weekly publications and are generally based on a specific company’s manufacturing schedules, are focused primarily on postal requirements, and are responsive almost exclusively to publication manufacturing needs, thereby limiting their ability to effectively compete with our specialized single copy services. As a result, certain of these printing companies actually contract with us for our services.  HDS faces competition from a handful of independent, regional ground-based transportation specialty service providers, none of which have achieved a material market share. We typically see these competitors in “backhaul” lanes where we are transporting general freight.

CWT is the largest participant in the domestic magazine export market. CWT is also a major participant in the export of domestic books. Its major competitors include a small number of other specialized book and magazine importers/exporters and, on a smaller scale, large freight forwarders of general goods.

Both domestically and internationally, we face potential competition from participants in the overall freight forwarding, logistics and supply chain management industries, and specifically from national truckload carriers, intermodal transportation service providers, less-than-truckload carriers, railroads and third-party broker carriers that have the worldwide capabilities to provide a breadth of services. Competition in this industry is intense and many carriers and service providers have substantially greater financial and other resources than us. We also could encounter competition from regional and local third-party logistics providers, integrated transportation companies that operate their own aircraft, cargo sales agents and brokers, surface freight forwarders and carriers, airlines, associations of shippers organized to consolidate their members’ shipments to obtain lower freight rates, and internet-based freight exchanges.

Generally, we believe that companies in this overall industry must be able to provide their clients with integrated supply chain solutions. Among the factors we believe are impacting the logistics industry are the outsourcing of supply chain activities, increased global trade and sourcing, increased demand for time definite delivery of goods, and the need for advanced information technology systems that facilitate real-time access to shipment data, client reporting and transaction analysis. Furthermore, as supply chain management becomes more complicated, we believe companies are increasingly seeking full service solutions from a single or limited number of partners that are familiar with their requirements, processes and procedures and that can provide services globally. Our ability to compete within the industry is primarily based on service, efficiency and freight rates, with advantages resulting from, among other things, our niche focus, a global network of transportation providers and our expertise in outsourced transportation and logistics services.

 

 

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Although the non-asset based nature of our business makes capital barriers to entry minimal, we believe other barriers to entry are high, primarily due to (i) the relatively small size of the specialized print media transportation management and logistics services industry and the inability of the major printers, logistics and supply chain management providers to provide the cost efficiencies and service levels necessary to operate in this specialized space; (ii) the importance of customer relationships; and (iii) with respect to smaller printers and transportation and logistics firms, the large level of critical mass necessary to operate profitably. Prospective competitors not only have to possess the required warehouse facilities staffed with experienced personnel, operated with highly tailored information systems and located strategically accessible to printing facilities, but would also need to overcome our unique position and entrenchment in the single copy distribution channel, our long standing customer relations, and knowledge of single copy newsstand circulation and distribution and our ability to be a sole-source provider of transportation and logistics services. To compete effectively, a potential competitor must also form freight pools of publications that profitably deliver product to single copy distributors, satisfying the time requirements of the underlying publications.

Technology and Information Systems

Our technology allows us to provide our customers with the tracking and tracing of shipments throughout the transportation process, and, depending on customer requirements, may include complete shipment history, estimated charges and electronic bill presentment. We maintain different informational websites that can only be accessed by approved customers and, depending on the specific design and customer requirements, can provide them with tracking and tracing information of shipments, ship dates, arrival dates, manifests, packing lists, and proof of deliveries. In addition, certain customers are able to electronically transmit their transportation requirements to us from their own networks and systems. We continue to evaluate potential enhancements to our systems to permit our customers to obtain this information timely, as well as increase the use of electronic interchange between us and our customers, which in many instances will require both the cooperation and enhancement of our customer’s system capabilities. We plan to continue investing management and financial resources to maintain and upgrade our information systems in an effort to increase the volume of freight we can handle in our network, improve the visibility of shipment information and reduce our operating costs. The ability to provide accurate and timely information on the status of shipments is increasingly important.

We also use technology to improve terminal operations. Recently, we increased the use of hand-held RF scanners in the distribution centers to improve the efficiency of handling incoming and outgoing freight and freight moving within the distribution centers, as well as the accuracy of the associated information regarding the freight.

Equipment

We do not own or lease significant equipment assets.  Our transportation service capacity is pimarily handled through our network of third-party carriers, which permit less direct investment and greater operational flexibility.

Employees

As of January 2, 2010, we had  230 employees, with 8 executives, 7 employees in IT Systems, 7 employees in accounting/finance/customer service, 13 employees in sales, 1 employee in human resources, 28 employees in operations management, 33 employees in operations, 51 employees in clerical, and 82 warehouse hourly employees.  We believe that our future success will depend, in part, on our continued ability to attract, hire and retain qualified personnel. None of our employees are represented by a labor union, and we believe that employee relations are good.

On September 2, 2009, the Company entered into an agreement with a large third party carrier to provide dedicated motor carrier services to the Company for transportation of the goods that were being delivered by EXL, a wholly owned subsidiary of the Company.  As a result of this agreement, the Company does not employ any drivers.

Insurance

We maintain insurance coverage for general and fleet liability, property (including property of others), ocean and surface cargo liability, employment practices, employee health and workers compensation. In addition, our vendors are required to provide evidence of fleet liability, cargo liability, workers compensation, and in some cases, flood insurance coverage in an amount we deem sufficient. All claims are administered by third party administrators, with the exception of overage, shortage and damage claims that are made that are below our deductible limits.

 

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For all insurance policies, except for medical and workers’ compensation, we are insured with policies that have standard deductible limits.  For medical and workers’ compensation insurance, we are partially self-insured, with medical capped at a $40,000 limit per claim and workers’ compensation capped at a $225,000 limit per claim.  Effective October 1, 2010, in conjunction with the out sourcing of its fleet to a third party carrier, the Company changed its workers compensation plan to a fixed premium plan.   We believe that the types of coverage, deductibles, reserves and limits on liability that are currently in place are adequate.

Other than with respect to health and workers’ compensation insurance, we have reserved no material claim amounts in our financial statements and we have experienced no material uninsured claims during the periods covered by our financial statements. Our exposure to liability associated with accidents incurred by other third party capacity providers who transport freight on behalf of us is reduced by various factors including the extent to which they maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo or workers’ compensation claims or the unfavorable development of existing claims could be expected to materially adversely affect our results of operations.

Government Regulation

We, along with the third-party carriers that handle the physical transportation of its customers’ shipments, are subject to a variety of federal and state safety and environmental regulations. Historically, compliance with the regulations governing licensees in the areas in which we operate has not had a materially adverse effect on our operations or financial condition.

Our operations, as well as those of many of the third party transportation and other service providers used by us, are subject to federal, state and local laws and regulations in the Unites States pertaining to their business, including those primarily related to safety and promulgated or administered by the Department of Transportation (“DOT”), the Transportation Safety Administration (“TSA”) and the Occupational Safety and Health Administration (“OSHA”).

We are subject to licensing and regulation as a transportation broker and freight forwarder and are re-licensed by the DOT to arrange for the transportation of property by motor vehicle. The DOT prescribes qualifications for acting in this capacity. We are subject to DOT regulations related to vehicular operating safety which regulate, among other things, driver’s hours of service and require us to maintain driver’s logs, driver’s information files and vehicle inspections reports, conduct scheduled preventative vehicle maintenance, perform random driver drug and alcohol tests, record and report motor vehicle accidents, and maintain current vehicle registrations. Under certain circumstances, we provide motor carrier transportation services that require registration with the DOT and compliance with certain economic regulations administered by the DOT, including a requirement to maintain insurance coverage in minimum prescribed amounts.

We are also subject to regulation by the Federal Maritime Commission as an ocean freight forwarder for which we maintain a separate bond and license. Clark Worldwide Transportation is registered with the TSA as an Indirect Air Carrier (“IAC”) and is subject to regulation by the DOT, Federal Aviation Administration and by the TSA. We operate within and according to such regulations which are intended to ensure that the cargo presented to airlines for carriage is safe. Among other things, we are required to comply with security requirements, maintain the confidentiality of certain security information and procedures and designate and use a security coordinator.

We are also subject to a variety of federal and state safety and environmental regulations, including certain OSHA regulations. We are subject to various OSHA regulations that primarily deal with maintaining a safe workplace environment. OSHA regulations require us, among other things, to maintain documentation of work related injuries, illnesses and fatalities and files for recordable events, complete workers’ compensation loss reports and review the status of outstanding worker compensation claims, and complete certain annual filings and postings.

Although Congress enacted legislation in 1994 that substantially preempts the authority of states to exercise economic regulation of motor carriers and brokers of freight, some shipments for which we arrange transportation may be subject to licensing, registration or permit requirements in certain states. We generally rely on the carrier transporting the shipment to ensure compliance with these types of requirements.

 

Recent Events

Impairment to Other Intangibles

Intangibles assets with an indefinite life (i.e., trade names) were evaluated for impairment at January 2, 2010, by management in accordance with FASB Topic ASC 350, using the “relief from royalty” method.  This evaluation resulted in a $0.406 million impairment charge for the 52 weeks ended January 2, 2010, which was included in the “impairment of goodwill and intangible assets” line item in the consolidated statements of operations.

Due to the continuing adverse economic impact on the Company’s market capitalization along with the operating losses incurred during 2009, management evaluated intangibles and fixed assets with definite lives for impairment as of January 2, 2010, in accordance with FASB Topic ASC 360.   Management’s projections of undiscounted future cash flows did not exceed the carrying amount of the non-complete agreements, which resulted in $0.671 million impairment charge which was included in the “impairment of goodwill and intangible assets” line item in the consolidated statements of operations.  However, Management’s projections of undiscounted future cash flows exceeded the carrying amount of the customer relationships identifiable intangible asset, which resulted in no charge for impairment. It was determines that there was no impairment to fixed assets.

The impairment charge is included in the statement of operations for the year ended January 2, 2010 and is summarized as follows:

 

Impairment		January 2, 2010
Trade names			406,000
Non-compete agreements			671,000
Total		$	1,077,000

Credit Facility with Cole Taylor Bank

On March 5, 2010, we entered into a credit and security agreement (“Credit Agreement”) with Cole Taylor Bank (“Cole Taylor”).  The Credit Agreement provides for a revolving credit facility (“Facility”) of up to $6,000,000, with a $1,000,000 sublimit for letters of credit.  Under the terms of the Credit Agreement:

·

The Company may borrow up to the lesser of (i) $6,000,000 and (ii) an amount derived from the Company’s accounts receivable less certain specified reserves.  If the outstanding loans under the Facility at any time exceed this amount, the Company must repay the excess.

·

The loans under the Facility (i) accrue interest at 2% over the prime rate for borrowings based on the prime rate or at 4.5% over LIBOR for borrowings based on LIBOR, with a floor of 6% in either case; (ii) mature on March 5, 2013; and (iii) are secured by substantially all of the Company’s assets.

·

The Company must comply with certain affirmative and negative covenants customary for a credit facility of this type, including limitations on liens, debt, mergers, consolidations, sales of assets, investments and dividends.

·

The Company may not permit its fixed charge coverage (as defined in the Credit Agreement) to be less than 1.05:1.

Simultaneously with entering into the Credit Agreement, the Company terminated its credit agreement, dated as of February 12, 2008, with Bank of America, N.A. (“BOA”).  The Company made an initial draw under the new Facility, using a portion of the proceeds , in combination with available cash, to repay the balance of its then-outstanding loans from BOA.

Settlement of Escrow Claim

On December 31, 2009, the Company settled all of its claims for indemnification under the SPA, as more fully described under Item 3.  Pursuant to the settlement agreement, among other things, approximately $1,286,000 of the funds held in the Indemnification Escrow were released to the Company and the remainder was released to the Sellers.  The settlement agreement is more fully described under Item 3.

 

 

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ITEM 1A. RISK FACTORS

In addition to other information included in this report, the following factors should be considered in evaluating our business and future prospects.

Risks Associated With Our Business

We are subject to DOT, TSA, OSHA and other pertinent regulations and laws in the United States that could cause us to incur significant compliance expenditures and liability for noncompliance.

Our operations are subject to federal, state and local laws and regulations in the Unites States pertaining to our business, including those primarily related to safety and promulgated or administered by the DOT, the TSA and OSHA. Specifically, we are subject to the DOT regulations related to vehicular operating safety which regulate, among other things, driver’s hours of service and require us to maintain driver’s logs, driver’s information files and vehicle inspections reports, conduct scheduled preventative vehicle maintenance, perform random driver drug and alcohol tests, record and report motor vehicle accidents, and maintain current vehicle registrations. In addition, our subsidiary, Clark Worldwide Transportation, Inc. (“CWT”), is registered with the TSA as an IAC and operates within and according to its regulations which are intended to ensure that the cargo presented to airlines for carriage is safe. Among other things, we are required to comply with security requirements, maintain the confidentiality of certain security information and procedures and designate and use a security coordinator. We are also subject to various OSHA regulations that primarily deal with maintaining a safe workplace environment. OSHA regulations require us, among other things, to maintain documentation of work related injuries, illnesses and fatalities and files for recordable events, complete workers’ compensation loss reports and review the status of outstanding worker compensation claims, and complete certain annual filings and postings. We may be involved from time to time in administrative and judicial proceedings and investigation with these United States governmental agencies, including inspections and audits by the applicable agencies related to our compliance with these rules and regulations.

To date, our compliance with these and other applicable regulations has not had a material effect on its results of operations or financial condition. Our failure, however, to comply with these and other applicable requirements in the future could result in fines and penalties to us and require us to undertake certain remedial actions or be subject to a suspension of our business, which, if significant, could materially adversely effect our business or results of operations. Moreover, our mere involvement in any audits and investigations or other proceedings could result in substantial financial cost to us and divert our management’s attention. Likewise, the failure by our third party service providers to comply with applicable regulations which results in increased costs of the services they provide to us or results in a disruption to their business and ability to provide services to us could have a materially adverse effect on us. Additionally, future events, such as changes in existing laws and regulations, new laws or regulations or the discovery of conditions not currently known to us, may give rise to additional compliance or remedial costs that could be material.

We depend on key personnel and we may not be able to operate and grow our business effectively if we lose the services of any of our key personnel or are unable to attract qualified personnel in the future.

We are dependent upon the efforts of our key personnel and our ability to retain them and hire other qualified employees. The loss of key personnel could affect our ability to run our business effectively. Competition for senior management personnel is intense and we may not be able to retain our personnel even though we have entered into employment agreements with certain of them. The loss of any key personnel requires the remaining key personnel to divert immediate and substantial attention to seeking a replacement. An inability to find a suitable replacement for any departing executive officer on a timely basis could adversely affect our ability to operate and grow our business. Management and execution of key operations related to supply chain solutions also requires skilled and experienced employees. A shortage of such employees, or our inability to retain such employees, could have an adverse impact on our productivity and costs, our ability to expand, develop and distribute new products and our entry into new markets.

Demand for our services may decrease during economic recession.

 

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The transportation industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns in business cycles of our customers, fuel shortages, price increases by carriers, interest rate fluctuations, and other economic factors beyond our control. Carriers can be expected to charge higher prices to cover higher operating expenses, and our gross profits and income from operations may decrease if we are unable to pass through to our customers the full amount of higher transportation costs. Furthermore, many of our customers’ business models are dependent on expenditures by advertisers. These expenditures tend to be cyclical, reflecting general economic conditions, as well as budgeting and buying patterns. If economic recession or a downturn in our customers’ business cycles causes a reduction in the volume of freight shipped by those customers, particularly to the single copy distribution channel, our operating results could also be adversely affected.

We depend upon others to provide equipment and services.

We do not own or control the vast majority of transportation assets that deliver our customers’ freight. We control a limited number of trucks for dedicated customer and company service through a dedicated fleet that is managed by a large third party carrier. For the majority of our transportation needs we do not employ the people directly involved in delivering freight. We are dependent on independent third parties to provide most truck and all rail, ocean and air services and to report certain events to us including delivery information and freight claims. This reliance could cause delays in reporting certain events, including recognizing revenue, expenses and claims. If we are unable to secure sufficient equipment or other transportation services to meet our commitments to our customers, our operating results could be materially and adversely affected, and our customers could switch to our competitors temporarily or permanently. Many of these risks are beyond our control including:

  

·

equipment shortages in the transportation industry, particularly among truckload carriers,

·

interruptions in service or stoppages in transportation as a result of labor disputes,

·

changes in regulations impacting transportation, and

·

unanticipated changes in transportation rates.

Our business and results of operations could also be adversely affected by work stoppages and other disruptive organized labor activities by those third party truck, rail, ocean and air equipment and service providers that are unionized. While we do not have definitive information as to the extent the carriers servicing our domestic operations are unionized, we believe that a small minority of such carriers we use are unionized. While we also do not have definitive information as to the extent the carriers servicing our international operations are unionized, and while we are unaware of any specific business relationships involving unionized carriers, we expect that certain of these international carriers are also unionized. These unionized international carriers would be predominately carriers that transport our freight in international markets between their facilities, airports and piers. It is also generally known that stevedores, who may handle some of our ocean cargo shipments, are often unionized. Furthermore, there are significant numbers of unionized personnel working at air carriers which handle a portion of our international business. These include, but are not limited to, airline pilots, ground handlers and flight attendants.

To date, we have not been materially adversely affected by the activities of organized labor domestically or internationally with respect to any third party service providers. The risk exists, however, that we could lose business in the event of any significant work stoppage or slowdown with one or more of our domestic or international carriers and that such a loss could materially adversely affect our results of operation and financial condition. Rates for both domestic and international transportation services are negotiated with individual carriers only and not with union representatives.

Our non-asset based transportation management, North American and international freight forwarding and trucking businesses are subject to a number of factors that are largely beyond our control, any of which could have a material adverse effect on our results of operations.

These businesses could be materially adversely affected by numerous risks beyond our control including:

·

potential liability to third parties and clients as a result of accidents involving our employees, independent contractors or third party carriers,

·

increased insurance premiums, the unavailability of adequate insurance coverage, or the solvency of our current insurance providers,

 

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·

recruitment and retention of agents and affiliates,

·

adverse weather and natural disasters,

·

changes in fuel taxes,

·

the ability to effectively pass through fuel cost increases to our clients through commonly accepted fuel surcharges,

·

potentially adverse effects from federal standards for new engine emissions, and

·

a carrier’s failure to deliver freight pursuant to client requirements.

If any of these risks or others occur, then our business and results of operations would be adversely impacted.

We face intense competition in the freight forwarding, logistics, domestic ground transportation and supply chain management industry.

In addition to competition from “in-house” distribution arms of large major printers, we face competition from participants in the freight forwarding, logistics, domestic ground transportation and supply chain management industry. We believe this industry is intensely competitive and expect it to remain so for the foreseeable future. We face competition from a number of companies, including many that have significantly greater financial, technical and marketing resources. There are a large number of companies competing in one or more segments of the industry. We could also encounter competition from regional and local third-party logistics providers, freight forwarders and integrated transportation companies. Depending on the location of the client and the scope of services requested, we might compete against truck brokerage niche players, smaller printers, trucking companies, and larger competitors. In addition, in some instances clients increasingly are turning to competitive bidding situations involving bids from a number of competitors, including competitors that are larger than us. We also face competition from air and ocean carriers, consulting firms and contract manufacturers, many of which are beginning to expand the scope of their operations to include supply chain related services. Increased competition could result in reduced revenues, reduced margins or loss of market share, any of which could damage our results of operations and the long-term or short-term prospects of our business.

Our industry is consolidating and if we cannot gain sufficient market presence in our industry, we may not be able to compete successfully against larger, global companies in our industry.

There currently is a marked trend within our industry toward consolidation of niche players into larger companies which are attempting to increase their global operations through the acquisition of freight forwarders and contract logistics providers. If we cannot maintain sufficient market presence in our industry through internal expansion and additional acquisitions, we may not be able to compete successfully against larger, global companies in its industry.

If we fail to develop and integrate information technology systems or we fail to upgrade or replace our information technology systems to handle increased volumes and levels of complexity, meet the demands of our clients and protect against disruptions of our operations, we may lose inventory items, orders or clients, which could seriously harm our business.

Our continued success is dependent on our systems continuing to operate and to meet the changing needs of our customers. Increasingly, we compete for clients based upon the flexibility, sophistication and security of the information technology systems supporting our services. The failure of the hardware or software that supports our information technology systems, the loss of data contained in the systems, or the inability to access or interact with our web site or connect electronically, could significantly disrupt our operations, prevent clients from placing orders, or cause us to lose inventory items, orders or clients. If our information technology systems are unable to handle additional volume for our operations as our business and scope of services grow, our service levels, operating efficiency and future transaction volumes will decline. In addition, we expect clients to continue to demand more sophisticated, fully integrated information technology systems from their supply chain services providers.

We have internally developed the majority of our operating systems. We are reliant on our technology staff to successfully implement changes to our operating systems in an efficient manner. If we fail to hire or retain qualified persons to implement, maintain and protect our information technology systems or we fail to upgrade or replace our information technology systems to handle increased volumes and levels of complexity, meet the demands of our clients and protect against disruptions of our operations, we may lose inventory items, orders or clients, which could seriously harm our business.

 

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Our information technology systems are subject to risks which we cannot control.

Our information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure which have experienced significant system failures and electrical outages in the past. Our systems are susceptible to outages due to fire, floods, power loss, telecommunications failures and similar events. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, unauthorized access with malicious intent and similar intrusions. The occurrence of any of these events could disrupt or damage our information technology systems and inhibit our internal operations, our ability to provide services to our clients or the ability of our clients to access our information technology systems, or result in the loss or theft of mission-critical information.

Our business could be adversely affected by heightened security measures, actual or threatened terrorist attacks, efforts to combat terrorism, military action against a foreign state or other similar event.

We cannot predict the effects on our business of heightened security measures, actual or threatened terrorist attacks, efforts to combat terrorism, military action against a foreign state or other similar events. It is possible that one or more of these events could be directed at U.S. or foreign ports, borders, railroads or highways. Heightened security measures or other events are likely to slow the movement of freight through U.S. or foreign ports, across borders or on U.S. or foreign railroads or highways and could adversely affect our business and results of operations.

Any of these events could also negatively affect the economy and consumer confidence, which could cause a downturn in the transportation industry. In addition, advertising expenditures by companies in certain sectors of the economy, including the automotive, financial and pharmaceutical industries, represent a significant portion of our customers’ advertising revenues. If any of these events cause a significant reduction in the advertising spending in these sectors, it could adversely affect our customers’ advertising revenues and, by extension, our revenues.

Our customers face significant competition for advertising and circulation.

Our customers face significant competition from several direct competitors and other media, including the Internet. Our customers’ magazine operations compete for circulation and audience with numerous other magazine publishers and other media.

Our customers could face increased costs and business disruption resulting from instability in the newsstand distribution channel.

Our customers operate within a national distribution business that relies on wholesalers to distribute magazines published by customer publishers and other publishers to newsstands and other retail outlets. Due to industry consolidation, three wholesalers represent approximately 90% of the wholesale magazine distribution business. There is a possibility of further consolidation among these wholesalers and/or insolvency of one or more of these wholesalers. Should such further consolidation occur, the number of locations to which we transport product could be reduced. Fewer destination points could reduce the need for our services or adversely affect our pricing to our customers. While insolvency of a wholesaler would not be expected to adversely affect our cash flow since we generally do not invoice wholesalers, such insolvency would, however, adversely affect our customer publishers’ cash flows and could impede the flow of product through the wholesale distribution channel. A disruption in the wholesale channel due to wholesaler insolvency or any other reason could adversely affect our customers’ ability to distribute magazines to the retail market place and adversely affect our business and results of operation.

Risks Associated With Our Organization and Capital Structure

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our internal controls over financial reporting and, starting in our current fiscal year, an independent registered public accounting firm must report on our assessment as to the effectiveness of internal controls over financial reporting. Our assessment, and that of our accounting firm, is that our internal controls over financial reporting need improvement.

 

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Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test the effectiveness of our internal controls over financial reporting in accordance with an established internal control framework and to report on our conclusion as to the effectiveness of our internal controls. Starting in our current fiscal year, it will also require an independent registered public accounting firm to test our internal controls over financial reporting and report on the effectiveness of such controls. For the fiscal year ended January 2, 2010, management performed its assessment of our internal controls over financial reporting and reported on the effectiveness of such controls, which report is set forth in Item 9A.  Management’s assessment of material weaknesses in our internal controls over financial reporting relates primarily to inadequate or ineffective information technology system control processes. The Company has devoted resources to assess, and has and will continue to take steps to remediate, these material weaknesses.

Voting control by our executive officers and directors may limit your ability to influence the outcome of director elections and other matters requiring stockholder approval.

Our officers and directors collectively own approximately 24.2% of our voting stock. Accordingly, they will be able to control the election of directors and, therefore, our policies and direction. This concentration of ownership and voting agreement could have the effect of delaying or preventing a change in our control or discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the market price for their shares of common stock.

If the NYSE Amex  delists our securities from quotation on its exchange investors’ ability to make transactions in our securities could be limited and subject us to additional trading restrictions.

Our securities are listed on the NYSE Amex. We cannot assure you that our securities will continue to be listed on the NYSE Amex in the future.  If the NYSE Amex delists our securities from trading on its exchange, we could face significant material adverse consequences including:

·

a limited availability of market quotations for our securities;

·

a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;

·

a limited amount of news and analyst coverage for our company; and

·

a decreased ability to issue additional securities or obtain additional financing in the future.

An effective registration statement may not be in place when an investor desires to exercise warrants for our common stock, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless.

None of our outstanding warrants will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of our warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so, and if we do not maintain a current prospectus related to the common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to settle any such warrant exercise. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless.

The warrant agreement governing our warrants permits us to redeem the warrants and it is possible that we could redeem the warrants at a time that is disadvantageous to our warrant holders or at a time when a prospectus has not been current, resulting in the warrant holder receiving less than fair value of the warrant or the underlying common stock.

 

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Under the warrant agreement governing our outstanding warrants, we have the right to redeem outstanding warrants, at any time prior to their expiration, at the price of $0.01 per warrant, provided that the last sales price of our common stock has been at least $11.50 per share on each of the 20 trading days within any 30 trading day period ending on the third business day prior to the date on which notice of redemption is given. The warrant agreement does not require, as a condition to giving notice of redemption, that we have in effect – during either the redemption measurement period or at the date of notice of redemption – a current prospectus relating to the common stock issuable upon exercise of our warrants. Thus, it is possible that we could issue a notice of redemption of the warrants following a time when holders of our warrants have been unable to exercise their warrants and thereafter immediately resell the underlying common stock under a current prospectus. Under such circumstances, rather than face redemption at a nominal price per warrant, warrant holders could be forced to sell the warrants or the underlying common stock for less than fair value.

Furthermore, redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants, or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants. We expect most warrant holders hold their securities through one or more intermediaries and consequently warrant holders are unlikely to receive notice directly from us that the warrants are being redeemed. If you fail to receive notice of redemption from a third party and your warrants are redeemed for nominal value, you will not have recourse to the Company.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Property

Since the Acquisition, our corporate headquarters have been located at 121 New York Avenue, Trenton, New Jersey.  This facility is the only facility that we own. The following is a list of the facilities in which we operate:

 

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Location		Operation		Approximate  Square Footage		Lease Expiration
Owned Facilities
Trenton, NJ		Headquarters		11,200		Owned
Leased Facilities
CDS:
Mechanicsburg, PA		CDS Administration		6,517		March 31, 2013
HDS:
Carrollton, TX		HDS Distribution Center		28,770		December 31, 2010
Kansas City, MO		HDS Distribution Center		60,100		December 31, 2010
LaVergne, TN		HDS Distribution Center		94,760		March 31, 2012
Laflin, PA		HDS Distribution Center		63,360		June 30, 2010
Woodridge, IL		HDS Distribution Center		57,525		April 30, 2011
York, PA		HDS Distribution Center		37,000		June 30, 2010
CWT:
Laredo, TX		CWT Distribution Center		12,425		November 30, 2011
Wayne, NJ		CWT Distribution Center		54,000		March 15, 2013
Wilmington, CA		CWT Distribution Center		9,610		June 30, 2014
Atlanta, GA		CWT Distribution Center		16,266		June 30, 2012

Prior to the Acquisition, we maintained our executive offices at 330 Madison Avenue, 6th Floor, New York, New York pursuant to an agreement with Blue Line Advisors, Inc. (“Blue Line”), an affiliate of Gregory E. Burns, our president, chief executive officer and a member of our board of directors. We paid Blue Line a monthly fee of $7,500 for general and administrative services including office space, utilities and secretarial support. We believe, based on rents and fees for similar services in the New York City metropolitan area, that the fee charged by Blue Line was at least as favorable as we could have obtained from an unaffiliated person.

Item 3. Legal Proceedings

On or about July 10, 2009, Multi-Media International filed a complaint against CGI and its subsidiaries, CDS, HDS, CWT and EXL, seeking class action status in the United States District Court for the District of  New Jersey by alleging, among other things, (i) common law fraud, aiding and abetting fraud, negligent misrepresentation, conversion and unjust enrichment, (ii) violation of N.J. Stat. § 56:8-2 and (iii) breach of good faith and fair dealing, relating to alleged excessive fuel surcharges by the Subsidiaries.  The complaint alleges a class period from June 25, 2002 through June 25, 2009. On behalf of the putative class, plaintiff seeks to recover the alleged excessive fuel charges, enjoin the alleged improper calculation of fuel charges by defendants and impose punitive damages and attorney’s fees. The complaint did not specify an amount of damages; however a prior complaint seeking similar relief on behalf of the same class, which was withdrawn, sought compensatory damages in the amount of $10 million and punitive damages in the amount of $30 million, as described in the Company’s 2008 Form 10-K. On October 23, 2009, the Company filed a motion to dismiss the Consumer Fraud Act claim, dismiss Plaintiff’s counsel and its law firm from serving as counsel to Plaintiff, and dismiss Plaintiff from acting as the representative in any class action.  The motion has been fully briefed and we are awaiting decision from the Court. The Company believes that the allegations in the lawsuit are without merit and it intends to vigorously defend itself. However, the ultimate outcome of this action and the amount of liability that may result, if any, is not presently determinable.

On February 9, 2009, the Company issued a notice of claim for indemnification under the SPA, stating that the Company, as buyer, was entitled to receive funds from the Indemnification Escrow in the amount of $3,540,717.  The bulk of this claim (approximately 97%) pertained to damages incurred because the Sellers failed to deliver the intellectual property required by the SPA in the condition represented in the SPA.  Damages to the Company included damages to goodwill, the incremental costs of operating the Company’s computer system as delivered versus as represented, and the costs of repairing and/or replacing the computer system.  On March 18, 2009, the Sellers made a demand for arbitration for release to them of the Indemnification Escrow funds and, on April 15, 2009, the Company made a counterclaim seeking recovery from the Indemnification Escrow of no less than $3,600,000.  On August 11, 2009, the Company issued a second notice of claim for indemnification under the SPA, stating that the Company was entitled to receive funds from the Indemnification Escrow in the amount of $5,000,000, constituting the full amount remaining in the escrow.

 

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On December 31, 2009, the Company settled all of the claims giving rise to the arbitration.  Pursuant to the settlement agreement, (i) approximately $3,764,000 of the Indemnification Escrow funds were released to the Sellers and approximately $1,286,000 of the Indemnification Escrow funds were released to the Company (which together constituted all the funds remaining in escrow); (ii) the parties through their respective counsel executed and filed an order dismissing the arbitration; and (iii) the parties mutually released and discharged each other from any and all claims from prior to the date of the settlement agreement.  Notwithstanding the foregoing, the settlement agreement did not limit or otherwise alter the rights or obligations of any party (i) under certain specified agreements with former executive officers of CGI and (ii) under certain specified sections of the SPA.  The settlement agreement is more fully described in the Company’s Current Report on Form 8-K dated December 31, 2009, filed on January 7, 2010.

Item 4. Reserved

 

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Item 5. Market for Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our units, common stock and warrants are listed on the NYSE Amex under the symbols GLA.U, GLA and GLA.WS, respectively. The following table sets forth the range of high and low sales prices for the units, common stock and warrants for the periods indicated.

		NYSE Amex
		Common Stock								Warrants								Units
		High				Low				High				Low				High				Low
2010
First Quarter*		$	0.70			$	0.38			$	0.02			$	0.01			$	0.55			$	0.44
2009
Fourth Quarter		$	0.65			$	0.37			$	0.01			$	0.00			$	0.92			$	0.45
Third Quarter		$	0.82			$	0.44			$	0.01			$	0.00			$	0.96			$	0.72
Second Quarter		$	0.92			$	0.56			$	0.01			$	0.00			$	0.88			$	0.77
First Quarter		$	0.75			$	0.56			$	0.01			$	0.00			$	1.00			$	0.59
2008
Fourth Quarter		$	1.46			$	0.50			$	0.05			$	0.00			$	1.50			$	0.50
Third Quarter		$	2.50			$	0.97			$	0.12			$	0.01			$	2.97			$	1.00
Second Quarter		$	4.17			$	2.58			$	0.24			$	0.11			$	4.40			$	2.95
First Quarter		$	7.98			$	3.75			$	0.60			$	0.15			$	8.25			$	3.92

 

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* Through April 3, 2010

Holders

As of April 14, 2010 there was one holder of record of our units, 36 holders of record of our common stock and nine holders of record of our warrants.

Dividends

We have not paid any cash dividends on our common stock to date.  The payment of cash dividends in the future will be contingent upon our revenues and earnings, if any, our capital requirements, our credit facility with the Bank and our general financial condition. The payment of any dividends will be within the discretion of our board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.

 

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Equity Compensation Plan Information

As at January 2, 2010, we have the following equity compensation plans that provide for the issuance of options, warrants or rights to purchase our securities.

		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by security holders*			682,750			$	1.02				247,250
Equity compensation plans not approved by security holders			N/A				N/A				N/A
Total			682,750			$	1.02				247,250

 

*

Our stockholders approved the 2007 Long-Term Incentive Equity Plan on February 11, 2008.

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Item 6. Selected Financial Data

 

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									January 3, 2009
		Amortization Period			Balance 02/12/2008				Amortization Expense				Impairment				Balance: 01/03/2009
Non-compete agreements		5			$	1,684,000			$	(247,000	)		$	-			$	1,437,000
Trade names		-				5,378,000				-				(2,658,000	)			2,720,000
Customer relationships		12				13,588,000				(998,000	)			-				12,590,000
					$	20,650,000			$	(1,245,000	)		$	(2,658,000	)		$	16,747,000

  

As part of the acquisition, the Company gained the rights to The Clark Group tradename. The income approach indicates value based on the present worth of future economic benefits. This approach explicitly recognizes that the current value of an investment is premised on the expected receipt of future economic benefits such as cash flows or cost savings. A variant of the income approach, known as the “relief from royalty” approach, is used in the valuation of assets involving fair royalty rates (e.g., trademarks, patents, etc.). This valuation methodology is premised on the following hypothetical construct:

·

If the owners/operators of a company wanted to continue to use tradename in the conduct of their business, but found they did not actually have the legal right to do so, they would be compelled to pay the rightful owner a fair and reasonable royalty for that right,

·

Since ownership of a tradename relieves the company from making such payments, the financial performance of the firm is enhanced – to the extent of the royalty payments avoided, and

·

Capitalization of the after tax effect of the royalty relief at an appropriate rate yields the value of the tradename.

The Company utilized the relief from royalty method in determining the fair value of The Clark Group tradename. The reason for using this method is that management deemed it impractical to determine the fair value of the tradename based upon a market approach. The relief from royalty income approach estimates the portion of a company’s earnings attributable to a tradename based upon the royalty rate the company would have paid for the use of the tradename if it did not own it. Therefore, a portion of the earnings, equal to the after-tax royalty that might have been paid for the use of the tradename, can be attributed to its ownership and therefore, the relief from royalty method, was deemed the most appropriate valuation method.

Intangibles assets with an indefinite life (i.e., trade names), were evaluated for impairment at January 3, 2009 by management using the “relief from royalty” method. This evaluation, based on this acceptable method of valuation, resulted in a $2.658 million impairment charge which was included in the “impairment of goodwill and intangible assets” line item in the consolidated statements of operations.

During the fourth quarter of 2008, we concluded that our market capitalization was below our net book value for an extended period of time, and as a result, our long lived assets were tested for recoverability. Due to the impact of the weakening global economy, our revenue projections related to the intangible assets acquired have declined. The trade name intangible, due to its indefinite life, was evaluated using FASB Topic ASC 350 along with the goodwill. This evaluation resulted in a $2.658 million impairment charge which was included in the “Impairment of goodwill and intangible assets” line item in the condensed consolidated statements of operations.

The impairment charge taken was calculated as the difference between the book value of the tradename and the calculated fair value by use of the relief from royalty method as discussed above. Significant assumptions included in management’s analysis were the determination of a royalty rate, projections of future revenues and a discount rate. Profitability was deemed to be a significant determinant for a royalty rate in that a company or an investor would not be willing to pay a rate in excess of a reasonable percentage of the operating income generated by the tradename. There was little change in management’s expectation for the tradename from the date of acquisition through January 3, 2009, therefore, the royalty rate of 0.66% that was used in the initial determination of the fair value of the tradename was used in impairment analysis as of January 3, 2009. In calculating the royalty rate of 0.66%, management estimated that royalty savings would equate to $500,000 per year. In estimating this amount, management considered a variety of factors including but not limited to the magnitude of the projected tradenames’ net sales and the asset’s perceived marketing strength and recognition among customers and competitors. Royalty savings of $500,000 per year corresponds to a royalty rate of 0.66% of annual revenues based on total 2007 revenues. The future revenues for the tradename valuation were based on sales growth rate forecasts of the Company as of January 3, 2009. The sales growth rate forecasts as of January 3, 2009 were substantially lower than they were as of February 12, 2008 (when The Clark Group, Inc. was acquired and the initial valuation performed) as a result of the weakening global economy. The pretax royalty savings due to the tradename was then calculated by the application of the estimated royalty rate to the projected net sales. A 40% income tax rate was utilized to convert the estimated pretax royalty savings to appropriate after-tax amounts. The future annual cash flows attributable to the tradenames were then discounted to present value at a new, higher risk-adjusted interest rate as of January 3, 2009. The reason for a higher risk-adjusted interest rate was due to the higher cost of capital incurred by the Company as of this time.

 

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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 FASB Topic ASC 350, using the “relief from royalty” method. This evaluation resulted in a $2.658 million impairment charge which was included in the “impairment of goodwill and intangible assets” line item in the consolidated statements of operations.

 

Total Impairment for 2008

 

The impairment in the statement of operations for the year ending January 3, 2009, was calculated as follows:

Impairment		Amount
Goodwill		$	63,910,000
Trade names			2,658,000
TOTAL		$	66,568,000

Intangible Asset Impairment for 2009

  

Acquisition-related identifiable intangible assets at January 3, 2009 and January 2, 2010, as adjusted, consisted of the following:

									January 2, 2010
		Amortization Period			Balance 01/03/2009				Amortization Expense				Impairment				Balance: 01/02/2010
Trade names		-				2,720,000				-				(406,000	)			2,314,000
Non-compete agreements		5			$	1,437,000			$	(281,000	)		$	(671,000	)		$	485,000
Customer relationships		12				12,590,000				(1,132,000	)			-				11,458,000
					$	16,747,000			$	(1,413,000	)		$	(1,077,000	)		$	14,257,000

Intangibles assets with an indefinite life (i.e., trade names), were evaluated for impairment at January 2, 2010, by management in accordance with FASB Topic ASC 350, using the “relief from royalty” method.  This evaluation resulted in a $406,000 impairment charge for the 52 weeks ended January 2, 2010, which was included in the “impairment of goodwill and intangible assets” line item in the consolidated statements of operations.

 

For the calculation of the January 2, 2010 impairment charge of $0.406 million associated with the trade names intangibles, management used the same valuation method, i.e., the “relief from royalty”.  This methodology is described in more detail above and on the previous page.  The projections prepared by management reflected the continued economic recession and the valuation method also included a higher discount rate to reflect the both the economic recession and the Company’s operating losses for the 52 weeks ended January 2, 2010.  As in any valuation model, there are risks inherent in the assumptions utilized and the achievability of these assumptions is not certain.

 

Due to the continuing adverse economic impact on the Company’s market capitalization along with the operating losses incurred during 2009, management evaluated intangibles and fixed assets with definite lives for impairment as of January 2, 2010, in accordance with FASB Topic ASC 360. Management’s projections of undiscounted future cash flows did not exceed the carrying amount of the Non-complete Agreements intangible asset. As a result of this undiscounted future cash flow test (“step 1 test”), the net book value of the Non-compete Agreements were lower than the undiscounted cash flow, the Company calculated the fair value of these Non-Compete Agreements, which resulted in $671,000 impairment charge.  This impairment charge was included in the “impairment of goodwill and intangible assets” line item in the consolidated statements of operations.  

The fair value of these Non-compete Agreements was calculated by determining the expected value of the cash flows that would be lost due to competition from the executives and/or prior owners if the Non-compete Agreement did not exist.  The value of the non-compete agreement is measured as the difference between the projected cash flows of the Company if the executive/prior owners were free to compete considering the probability of choosing to compete in a given year versus being prohibited from competing. The probability considers the desire to compete and the likelihood to competing effectively and taking business away from the acquired company.  Once the expected value of the future cash flows were projected, the Company used a higher discount rate than used in the previous year. This higher discount was used due to the continuing economic crisis and the Company’s operating losses during the 52 weeks ended January 2, 2010.  Included in any valuation model there are risks inherent in the assumptions utilized and achievability of these assumptions is not certain.

For the Customer Relationships intangibles and fixed assets evaluation for the 52 weeks ended January 2, 2010, Management’s projections of undiscounted future cash flows did exceed the carrying amount of the Customer Relationship’s intangible asset and fixed assets, which resulted in no charge for impairment.
   

The impairment in the statement of operations for the year ended January 2, 2010 is as follows:

Impairment		January 2, 2010
Trade names			406,000
Non-compete Agreements			671,000
Total		$	1,077,000

 

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Related-Party Transactions

The Company provided logistics and transportation services for Anderson Merchandisers, LP, related through common ownership. The revenue related to these services was $1,025,000 for the 52 weeks ended January 2, 2010, $2,418,000 for the 47 weeks ended January 3, 2009, and $388,000 for the 6 weeks ended February 12, 2008, and is included in gross revenues. Accounts receivable included in the consolidated balance sheet from Anderson Merchandisers, LP, were $0 and $333,000 as of January 2, 2010 and January 3, 2009, respectively.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes and schedules thereto. In the following discussion:

·

“CHI” refers to Holdings, the entity formerly known as Global Logistics Acquisition Corporation;

·

“predecessor” refers to CGI prior to the Acquisition;

·

“successor” refers to Clark Holdings after the Acquisition;

·

“2009 reporting period” refers to the 52 weeks ended January 2, 2010;

·

“2008 reporting period” refers to the 47 weeks ended January 3, 2009 (after the Acquisition); and

·

“predecessor period” refers to the 6 weeks ended February 11, 2008 (prior to the Acquisition).

Reconciliation of Non-GAAP Financial Measures.

 

Gross profit is a non-GAAP financial measure that is equal to gross revenue less freight expense. The Company uses this financial measure to evaluate its historical performance, as well as its performance relative to its competitors. Specifically, management uses this financial measure to further its own understanding of the Company’s core operating performance, i.e., the transportation of goods. The most directly comparable financial measure as calculated and presented in accordance with GAAP is loss (income) from operations. The following table reconciles gross profit to loss (income) from operations for the 2009 reporting period, the 2008 reporting period and the 2008 predecessor period is as follows:

		(In Thousands)
		Clark Holdings Inc.									CGI
		Successor									Predecessor
		For 52 Weeks Ended				For 47 Weeks Ended					For 6 Weeks Ended
		January 2, 2010				January 3, 2009					January 3, 2009
Loss (income) from operations			(3,842	)			(63,956	)				833
Adjusted for
Depreciation and amortization			(1,715	)			(1,424	)				(27	)
Impairment of goodwill and intangible assets			(1,077	)			(66,568	)				-
Selling, operating and administrative expenses			(25,527	)			(22,184	)				(2,385	)
Gross profit			24,477				26,220					3,245

 

Results of Operations – 52 Weeks Ended January 2, 2010, 47 Weeks Ended January 3, 2009 and 6 Weeks Ended February 11, 2008.

Revenues. The following table summarizes the Company’s revenue by business segment (i.e., domestic versus international, in thousands of dollars) for the 52 weeks ended January 2, 2010, 47 weeks ended January 3, 2009 and 6 weeks ended February 11, 2008.

 

		Sucessor				Succesor					Predecessor
		52 weeks Ended				47 Weeks Ended					6 Weeks Ended
		January 2, 2010				January 3, 2009					February 11, 2008
Domestic		$	54,817			$	62,539				$	7,051
International			11,849				13,234					1,343
Gross Revenue		$	66,666			$	75,773				$	8,394

 

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The following table shows selected items in the consolidated statements of operations as a percentage of revenue for the period.

		Successor				Successor					Predecessor
		52 Weeks Ended				47 Weeks Ended					6 Weeks Ended
		January 2, 2010				January 3, 2009					February 11, 2008
Gross Revenue			100.0	%			100.0	%				100.0	%
Freight Expense			63.3	%			65.4	%				61.3	%
Gross Profit			36.7	%			34.6	%				38.7	%
Depreciation and Amortization			2.6	%			1.9	%				0.4	%
Selling, Operating & Administrative Expenses			38.3	%			29.3	%				28.4	%
Income from Operations			-4.1	%			3.4	%				9.9	%

Domestic revenue declined 12.3% to $54.8 million during the 2009 reporting period as compared to the 2008 reporting period. The revenue decline was mitigated by the 5 week differential that exists between the 2009 and 2008 reporting periods, with the 2008 predecessor period generating $7.1 million in gross revenue. The decrease in gross revenue was the result of a decline in pool distribution tonnage driven by weak economic conditions and a 25.6% reduction in advertising pages in 2009 as compared to 2008. The sharp drop in oil prices during 2009 reporting period compared to 2008 reporting period also resulted in a decrease in energy surcharge invoicing.

The decrease in international gross revenues of 10.5% during the 2009 reporting period as compared to the 2008 reporting period was attributable to tonnage decreasing by approximately 28% in same store sales during the 2009 reporting period as compared to the 2008 reporting period, with the revenue decline being mitigated by the 5 week differential that exists between the reporting periods. Gross revenue was $1.3 million for the 6 week predecessor period. An increase in airfreight offset a portion of the decline in ocean tonnage during the 2009 reporting period. New non-print media customers were added representing 19.4% of total gross revenue with new customer relationships in Europe, including the UK and Asia, including China, Singapore, and the Philippines. The tonnage reductions were the result of a decline in advertising pages for certain customers’ publications mostly moving via ocean service to the U.K. and Europe.

Gross Profit. The Company’s overall gross profit declined in both the domestic and the international business segments. The following table summarizes gross profit (dollars in thousands) and gross margin for the period:

		Successor								Successor									Predecessor
		52 Weeks Ended								47 Weeks Ended									6 Weeks Ended
		January 2, 2010								January 3, 2009									February 11, 2008
Gross revenue domestic		$	54,817				100.0	%		$	62,539				100.0	%			$	7,051				100.0	%
Purchased transportation			27,331				49.9	%			31,183				49.9	%				3,131				44.4	%
Other transportation expense
Personnel and related			3,212				5.9	%			3,898				6.2	%				481				6.8	%
Insurance			447				0.8	%			478				0.8	%				44				0.6	%
Tractor rentals and maintenance			2,001				3.7	%			2,074				3.3	%				249				3.5	%
Fuel			1,594				2.9	%			3,241				5.2	%				385				5.5	%
Travel expense			234				0.4	%			245				0.4	%				31				0.4	%
Other			49				0.1	%			174				0.3	%				51				0.7	%
Total freight expense domestic			34,868				63.6	%			41,293				66.0	%				4,372				62.0	%
Gross profit domestic			19,949				36.4	%			21,246				34.0	%				2,679				38.0	%
Gross revenue international			11,849				100.0	%			13,234				100.0	%				1,343				100.0	%
Freight expense			7,321				61.8	%			8,260				62.4	%				777				57.9	%
Gross profit international			4,528				38.2	%			4,974				37.6	%				566				42.1	%
Total revenue		$	66,666				100.0	%		$	75,773				100.0	%			$	8,394				100.0	%
TOTAL GROSS PROFIT		$	24,477				36.7	%		$	26,220				34.6	%			$	3,245				38.7	%

 

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Domestic gross profit decreased by 6.1% during the 2009 reporting period in comparison to the 2008 reporting period as declines in fuel driven purchased transportation expenditures were outpaced by the decrease in gross revenue. As with gross revenue, the decline in gross profit dollars generated was mitigated by the 5 week differential that exists between the 2009 and 2008 reporting periods. Gross profit for the 6 week predecessor period was $2.7 million. The improved gross margin profit percentage from 34.0% in the 2008 reporting period to 36.4% in the 2009 reporting period was the combined result of numerous initiatives to reduce transportation cost. These initiatives include the use of intermodal transportation and increasing our pool of carriers as we looked to achieve lower rates per lane. The Company’s use of intermodal transportation in 2009 increased 33% over prior year, with rail transportation representing approximately 15% of all the miles traveled in distributing the domestic pool tonnage in 2009. Intermodal transportation is generally less expensive than road transportation by as much as 30% in the transportation lanes where it is used.

International gross profit decreased by 9.0% during the 2009 reporting period in comparison to the 2008 reporting period, with the gross profit decline being mitigated by the 5 week differential that exists between the 2009 and 2008 reporting periods. This decrease is the result of the decline in tonnage and the change in the mix of international’s services, which also resulted in an improvement in gross margin percentage to 38.2% of gross revenue in the 2009 reporting period. Gross profit for the 6 week predecessor period was $566,000.

 

Selling, Operating and Administrative Expenses. The three tables below summarize selling, operating and administrative expenses (one each for company-wide, domestic and international expenses) for the 52 weeks ended January 2, 2010, 47 weeks ended January 3, 2009, and 6 weeks ended February 11, 2008.

 

		Successor				Successor					Predecessor
		52 Weeks Ended				47 Weeks Ended					6 Weeks Ended
TOTAL		January 2, 2010				January 3, 2009					February 11, 2008
Salaries and wages		$	13,562			$	11,721				$	1,348
Group insurance			1,059				1,098					136
Profit sharing			(29	)			226					20
Workers' compensation			278				122					14
			14,870				13,167					1,518
Packaging, office, comp. supplies			907				1,048					114
Occupancy expenses			3,002				2,749					315
Insurance			249				216					13
Cargo loss & damage			229				89					16
Other OSG&A(1)			6,269				4,915					409
			10,656				9,017					867
			25,526				22,184					2,385
Personnel expense to gross revenue			22.3	%			17.4	%				18.1	%
All other OSG&A to gross revenue			16.0	%			11.9	%				10.3	%
Total OSG&A to gross revenue			38.3	%			29.3	%				28.4	%

 

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(1)

Other OSG&A consists of repairs and maintenance, travel expenses, dues and subscriptions, warehouse equipment rentals, licenses, non-cash compensation, legal and professional fees.

Total Selling, Operating and Administrative Expenses — Total selling, operating and administrative expenses increased 15.2% to $25.6 million during the 2009 reporting period in comparison to the 2008 reporting period. The increase in selling, operating and administrative expense was primarily due to $1.0 million of severance expense, $0.6 million of additional expenses associated with new sales, information technology and administrative personnel, $0.7 million of expenses relating to costs associated with arbitrating the escrow claim, $0.1 million charge relating to additional bank fees and cost associated with amending the credit facility, $0.5 million increase associated with information technology consultants and recruiting costs, offset by a $0.2 million reduction of profit sharing associated with the elimination of the 401K match by the Company and offset by $1.6 million of cost reductions that were implemented during the third quarter of 2009. Approximately $2.0 million of the increase in total selling, operating and administrative expense was the result of the 5 week differential between the reporting periods being compared. Total selling, operating and administrative expenses for the 6 week predecessor period were $2.4 million.

 

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		Successor				Successor					Predecessor
		52 Weeks Ended				47 Weeks Ended					6 Weeks Ended
Domestic Division		January 2, 2010				January 3, 2009					February 11, 2008
Salaries and wages		$	10,864			$	9,234				$	1,052
Group insurance			838				812					101
Profit sharing			(29	)			167					17
Workers' compensation			216				103					12
			11,889				10,316					1,182
Packaging, office, comp. supplies			686				682					69
Occupancy expenses			2,218				2,006					221
Insurance			182				151					9
Cargo loss & damage			202				71					13
Other OSG&A			5,417				4,179					341
			8,705				7,089					653
		$	20,594			$	17,405				$	1,835
Personnel expense to gross revenue			21.7	%			16.5	%				16.8	%
All other OSG&A to gross revenue			15.9	%			11.3	%				9.3	%
Total OSG&A to gross revenue			37.6	%			27.8	%				26.1	%

Domestic Selling, Operating and Administrative — Domestic selling, operating and administrative expenses increased $3.2 million to $20.6 million in 2009 reporting period from $17.4 million in the 2008 reporting period. Approximately $1.5 million of the increase is explained by the 5 week report period differential that exists between the reporting periods. Domestic personnel expenses increased $1.6 million as the Company strengthened its accounting, information technology and sales and marketing departments at a cost of $0.7 million, and incurred severance expense of $1.0 million offset by a $0.2 million reduction of profit sharing associated with the elimination of the 401(K) match by the Company. Personnel expenses were further reduced by more than $1.0 million as a result of a reduction in work force initiative in the third quarter of 2009. Approximately $1.1 million of the $1.6 million increase in domestic personnel expenses is explained by the 5 week difference between the reporting periods being compared. Other OS&A costs increased by $1.2 million to $5.4 million in the 2009 reporting period versus $4.2 million in the 2008 reporting period. Costs associated with arbitrating the escrow claim amount to approximately $0.7 million of the increase, with the remainder of the increase being the result of a $0.1 million charge relating to additional bank fees and costs associated with amending the credit facility, and a $0.4 million increase in information technology consultants and recruiting costs. Domestic selling, operating and administrative expenses for the 6 week predecessor period was $1.8 million.

 

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		Successor				Successor					Predecessor
		52 Weeks Ended				47 Weeks Ended					6 Weeks Ended
International Division		January 2, 2010				January 3, 2009					February 11, 2008
Salaries and wages		$	2,698			$	2,487				$	296
Group insurance			221				286					35
Profit sharing			-				59					3
Workers' compensation			62				19					2
			2,981				2,851					336
Packaging, office, comp. supplies			221				366					45
Occupancy expenses			784				743					94
Insurance			67				65					4
Cargo loss & damage			27				18					3
Other OSG&A			852				736					68
			1,951				1,928					214
		$	4,932			$	4,779				$	550
Personnel expense to gross revenue			25.2	%			21.5	%				25.0	%
All other OSG&A to gross revenue			16.4	%			14.6	%				15.9	%
Total OSG&A to gross revenue			41.6	%			36.1	%				40.9	%

 

International Selling, Operating and Administrative — International selling, operating and administrative expenses increased $0.1 million to $4.9 million in the 2009 reporting period as compared to the 2008 reporting period, with the entire increase being the result of the 5 week differential between the reporting periods being compared. The Company continues to implement its strategy of growing the international division and deploying more efficient processes.

 

Liquidity, Capital Resources and the Impact of the Impairment of Goodwill and Other Intangibles

Our primary cash requirements are for working capital, borrowing obligations and capital expenditures. We believe that our existing cash and cash equivalents, cash flow from operations and our amended bank credit facility are adequate to meet our liquidity needs for the foreseeable future, including working capital, capital expenditure requirements, taxes and the term loan amortization obligations.

  

Simultaneously with the Acquisition, we entered into a credit agreement with BOA (at the time known as LaSalle Bank National Association), which was subsequently amended on April 17, 2009, September 15, 2009 and February 26, 2010.  The credit agreement with BOA, as amended, provided for a term loan of $ 4.7 million and revolving loans and letters of credit of up to $2.128 million.  As of January 2, 2010, the outstanding balance of the term loan was $2.895 million, the outstanding balance of the revolving loans was $ 0 and the outstanding balance of the letters of credit was $0.718 million.  On March 5, 2010, the Company entered into the Credit Agreement with Cole Taylor Bank, using a portion of the proceeds from its initial loan under the new Facility, in combination with available cash, to repay its then-existing loans from BOA.  Under the new Facility, the Company received a financing commitment of up to $6 million.  Interest on the new Facility is payable at 200 basis points over the prime rate or 450 basis points over LIBOR.  The new Facility is secured by substantially all of the Company’s assets.   The Credit Agreement and the new Facility are more fully described under Item 1 in the section entitled “Recent Events – Credit Facility with Cole Taylor Bank.”

The amortization of the identifiable intangibles is a $1.249 million charge per year for financial statement purposes.  This amortization is not deductible for tax purposes.  Consequently, our future outlays for income taxes are expected to exceed our income tax expense by approximately $0.500 million per year assuming a 40% effective tax rate.  However, the Company has sufficient ability to carry back $2.493 million of income against prior year taxes, which will reduce the current year’s taxes paid.

   

In October 2008, the Company signed a software and equipment agreement with an IBM services partner to implement a new accounting and operational software (ERP) package. Simultaneously, the Company is also updating and making selective improvements to its infrastructure to support compliance with regulatory requirements and to accommodate the new application suite. These projects will be funded through a combination of internally generated cash flow, operating and /or capital leases.

 

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Cash Flows

 

The following table summarizes our historical cash flows:

 

		(Thousands)
		CHI				CHI				CGI
		Successor				Successor				Predecessor
		Year Ended				47 Weeks Ended				6 Weeks Ended
		January 2, 2010				January 3, 2009				February 11, 2008
Cash provided by operating activities		$	1,237			$	3,304			$	842
Cash (used in) investing activities		$	(908	)		$	(396	)		$	(7	)
Cash (used in) financing activities		$	(1,365	)		$	(10,169	)		$	-

 

The discussion of our cash flows that follows is based on our historical cash flows for the 52 weeks ended January 2, 2010, the 47 week period ended January 3, 2009 and the 6 week period ended February 12, 2008.

 

Cash Flow from Operating Activities. Net cash provided by operating activities for the 52 weeks ended January 2, 2010, the 47 week period ended January 3, 2009, and the 6 week period ended February 12, 2008, were approximately $1.2 million, $3.3 million and $0.8 million, respectively. The decrease in cash flow in 2009 was associated with the economic recession and the significant drop in advertising revenues of the products for which we arrange the shipment.

 

Cash Flow from Investing Activities. Net cash used in investing activities for the 52 weeks ended January 2, 2010, the 47 week period ended January 3, 2009, and the 6 week period ended February 12, 2008 was $0.9 million, $0.4 million and $0.0 million, respectively. Capital expenditures were $0.9 million for 2009 versus $0.6 million for 2008.

 

Cash Flow from Financing Activities. Net cash used in financing activities for the 52 weeks ended January 2, 2010, the 47 week period ended January 3, 2009, and the 6 week period ended February 12, 2008, were approximately $1.4 million, $10.2 million and $0.0 million, respectively. The net cash used by financing activities for the 52 weeks ended January 2, 2010 was the repayment of the term loan of $1.4 million. The net cash used by the financing activities for the 47 weeks ended January 3, 2009 resulted in borrowing of $4.7 million under the Bank of America facility, offset by the $14.4 million in payments to shareholders who chose to convert their shares as part of the Acquisition and by the repayment of the term loan of $0.5 million.

 

Business and Credit Concentration Risks

 

 

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Domestically, the Company maintains cash and cash equivalents in two banks. The bank balances at year end were in non-interest bearing accounts, which are fully insured by the FDIC. Under the Temporary Liquidity Guarantee Program, all non-interest bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account through June 30, 2010.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventories, assets held for sale, income taxes and loss contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

     

Basis of Presentation — In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” This statement modifies the U.S. GAAP hierarchy by establishing only two levels of U.S. GAAP, authoritative and non-authoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (“FASB ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards except for additional authoritative rules and interpretive releases issued by the SEC. Non-authoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize U.S. GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section and paragraph, each of which is identified by a numerical designation. This statement applies beginning in third quarter 2009. All accounting references have been updated, and therefore SFAS references have been replaced with FASB ASC references.

 

Fiscal Year End —  The accompanying consolidated statements of operations, cash flows and stockholder’s equity are presented for two periods: Predecessor and Successor, which relate to the period preceding the Acquisition and the period succeeding the Acquisition, respectively. The Predecessor period pertains to CGI and includes activity for the 6 weeks ended February 11, 2008. The Successor period pertains to CHI and includes activity for the 47 weeks ended January 3, 2009. Starting with fiscal year 2008, the Company, due to the Acquisition of CGI, has adopted CGI’s fiscal year methodology of a 52 – 53 week fiscal year ending on the Saturday closest to December 31. Until fiscal year 2008, the Company used a calendar year ending on December 31, as its fiscal year.

 

Business Activity — The Company is a logistics services company that provides ground, air and ocean freight forwarding, contract logistics, customs clearances, distribution, inbound logistics, truckload brokerage and other supply chain management services. The Company serves its clients through a network of contract logistics providers and distribution centers.

 

Consolidation — The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company transactions have been eliminated in consolidation. The Company is a holding company with investments in operating entities; Clark Group, Inc., Clark Distribution Systems, Inc., Clark Worldwide Transportation, Inc, Highway Distribution Systems, Inc. and Evergreen Express Lines, Inc.

 

Business Combinations —  The Company has accounted for the Acquisition under the purchase method of accounting in accordance with FASB Topic ASC 805, “Business Combinations”. Accordingly, the cost of the Acquisition has been allocated to the assets and liabilities based upon their respective fair values, including identifiable intangible assets (such as, non-compete agreements, trade names, and customer relationships) and the remaining cost allocated to goodwill.

   

Recognition of Revenue  —  Gross revenues consist of the total dollar value of goods and services purchased from the Company by our customers.  FASB Topic ASC 605, “Revenue Recognition”, establishes the criteria for recognizing revenues on a gross or net basis.  All transactions are recorded at the gross amount charged to customers for service.  In these transactions, the Company is the primary obligor, a principal to the transaction, assumes all credit risk, maintains substantially all risks and rewards, has discretion to select the supplier, and has latitude in pricing decisions. The Company has no material revenues relating to activities where these factors are not present.

 

Gross revenue for domestic ground freight is recognized based upon the relative transit time in each reporting period with the freight costs recognized as incurred.  Domestic ground freight estimates are highly predictable and are based on historical delivery data.

 

Gross revenue and freight costs for international air and ocean freight forwarding services are recognized based upon the estimated arrival date of the shipments. International air and ocean freight transit estimates are based on published third party carrier arrival schedules.

  

Cash and Cash Equivalents — For purposes of the consolidated statements of cash flows, the Company considers all short term, highly liquid investments with an original maturity of less than 90 days to be cash equivalents.

 

 

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Accounts Receivable — Accounts receivable are recorded at management's estimate of net realizable value. Management evaluates the adequacy of the allowance for uncollectible accounts on a customer specific basis. These factors include historical trends, general and specific economic conditions and local market conditions. Accounts are written off when management determines collection is doubtful. The balances for the allowance for uncollectible accounts were $244,000 and $348,000 as of January 2, 2010, and January 3, 2009, respectively.

 

Property and Equipment — Property and equipment are stated at fair value as of the date of the Acquisition of the Clark Group, Inc. Buildings and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the related lease term or useful lives of the assets. Gains and losses on disposal of property and equipment are recognized when the asset is sold. Expenditures for maintenance and repairs are expensed as incurred, whereas expenditures for improvements and replacements are capitalized.

 

Freight Expense — Freight expense includes purchased transportation expenses and operating fleet expenses, including equipment rents and leases, maintenance, fuel and driver personnel expenses.

 

Selling Operating and Administrative Expenses — Selling, operating and administrative expenses include all operating expenses except freight. These expenses include personnel, occupancy, packaging, supplies, insurance, cargo losses and depreciation.

 

Fair Value of Financial Instruments — The Company's financial instruments consist of accounts receivable, accounts payable and debt. The fair value of these financial instruments approximates their carrying value.

 

Operating Leases — The Company leases most of its distribution facilities and transportation equipment. At inception, each lease is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal can be reasonably assured and failure to exercise such option would result in an economic penalty. The Company currently has no leases that meet the capital lease requirements, therefore all leases are currently accounted for as operating.

 

The Company records rental expense on a straight-line basis.

  

Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates are based on several factors including the facts and circumstances available at the time the estimates are made, historical experience, risk of loss, general economic conditions and trends, and the assessment of the probable future outcome. Some of the more significant estimates include accounting for doubtful accounts, useful lives of property and equipment and intangible assets, purchase price allocations of acquired businesses, valuation of assets including goodwill and other intangible assets, estimates of the realizability of deferred tax assets, assumptions used in the valuation of stock based compensation, incurred but not report claims and estimates of delivery time. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the statement of operations in the period that they are determined.

  

The Company accrues freight expense for any transportation costs that have been incurred, but have not been included in accounts payable. These estimates are used to substantiate vendor invoices for purchased transportation for shipments that have been completed at the end of the period. At any time we have about 3 weeks of freight expense accrued domestically and about 5 weeks accrued for international operations. Clark maintains a relational database of all freight purchases by vendor and by lane to assist in the purchase of freight and the estimation of the accruals at period end.

 

The Company uses a combination of insurance and self-insurance to provide for the liabilities for workers’ compensation, healthcare benefits, general liability, property insurance, and vehicle liability. Liabilities associated with the self-insured risks are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other assumptions. The estimated accruals for these liabilities, portions of which are calculated by independent third party service providers, could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. The self-insurance reserve for medical, dental and workers’ compensation was included in “accrued expense” on the balance sheets at January 2, 2010, and January 3, 2009, and was $244,000 and $395,000, respectively.

 

Accounting for Goodwill, Intangibles and Other Long-Lived Assets —  The Company accounts for goodwill, intangibles and other long-lived assets in accordance with FASB Topic ASC 350, “Intangibles—Goodwill and Other”, and FASB Topic ASC 360, “Property, Plant, and Equipment”.

 

 Under FASB Topic ASC 805, “Business Combinations”, goodwill represents the excess of cost (purchase price) over the fair value of net assets acquired. Acquired intangibles are recorded at fair value as of the date acquired using the purchase method. Under FASB Topic ASC 350, “Intangibles—Goodwill and Other”, goodwill and other intangible assets determined to have an indefinite life are not amortized, but are tested for impairment at least annually or when events or changes in circumstances indicate that the assets might be impaired. The impairment test for intangible assets consists of a comparison of its fair value with its carrying value, if the carrying amount exceeds its fair value, an impairment loss is recognized.

 

 

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The goodwill impairment test is a two-step process. The first step involves a comparison of the fair market value of a reporting unit with its carrying value. If the fair market value is equal to or greater than the unit’s carrying value, then goodwill of the reporting unit is not considered to be impaired. Alternatively, if the carrying value of the reporting unit exceeds its fair market value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The annual impairment test was performed in the fourth quarter.

 

Other intangible assets, which include non-compete agreements and customer relationships are amortized on a straight-line basis over the estimated useful lives of 5 to 12 years.

 

Comprehensive Income —  FASB Topic ASC 220, “Comprehensive Income”, established standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income for the 52 weeks ended January 2, 2010, 47 weeks ended January 3, 2009, and the 6 weeks ended February 12, 2008 were the same as net income for the Company.

 

Stock Based Compensation —  FASB Topic ASC 718, “Compensation – Stock Compensation” requires the Company to recognize expense for its share-based compensation based on the fair value of the awards that are granted. The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. Option valuation methods require the input of highly subjective assumptions, including the expected stock price volatility. Measured compensation expense related to such option grants, is recognized ratably over the vesting period of the related grants. (Note 11) Prior to the acquisition there was no stock based compensation.

 

Foreign Currency — For consolidation purposes, assets and liabilities expressed in currencies other than U.S. dollars are translated at the rates of exchange effective at the balance sheet date. These gains and losses arising on re-measurement are accounted for in the income statement. Gains and losses on translation were not material.

 

Income Taxes —  The Company early adopted the provisions of FASB Topic ASC 740, “Income Taxes”. This interpretation clarifies the accounting for uncertainty in income taxes recognized in the financial statements and requires companies to use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. For the 52 weeks ended January 2, 2010 and the 47 weeks ended January 3, 2009, the Company had no material unrecognized income tax benefits, expected changes to unrecognized income tax benefits or interest and penalties.

 

The Company’s accounting policy for recognition of interest and penalties related to income taxes is to include such items as a component of income tax expense.

 

CGI was a subchapter S corporation through February 12, 2008, the date of acquisition. Prior to February 12, 2008, CGI was not subject to federal or state income tax, with the exception of certain states that do not recognize federal S corporation status. CGI had evaluated the potential tax, interest and penalties relating to this exposure as of December 29, 2007; it was determined to be immaterial. Upon acquisition, CGI’s S corporation status was terminated, and after that date, the Company will be taxed as a C corporation for federal and state income tax purposes. The Company will file a consolidated income tax return for federal tax purposes and in states where consolidated filings are allowed or required. The Company will file income tax returns in the United Kingdom for its discontinued foreign subsidiary for 2008. The Company will begin filing in all jurisdictions determined by the Company to have potential exposure in 2008. In addition, the Company, as a result of a nexus study, had determined that an increase in the number of states the Company currently files in will be implemented. The impact of these increased filings has been accounted for in the tax provision for the 53 weeks ended January 3, 2009. All tax years since 2006 have been filed or yet to be filed are open to examination by the appropriate tax authorities.

 

FASB Topic ASC 740,“Income Taxes” —  Management has developed control processes and procedures that will achieve the following control objectives with respect to FASB Topic ASC 740 and uncertain tax positions:

·

All material tax positions taken or expected to be taken in tax returns are identified.

·

The appropriate unit of account is determined for each material tax position.

·

Only tax positions that meet the more-likely-than-not recognition threshold are recognized.

·

All tax positions that meet the more-likely-than-not recognition threshold are recognized.

·

All previously unrecognized tax positions that subsequently meet the more-likely-than-not recognition threshold are recognized in the first interim period in which the recognition threshold is met.

 

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·

All previously recognized tax positions that subsequently fail to meet the more-likely-than-not recognition threshold are derecognized in the first interim period in which the recognition threshold is no longer met.

·

The amount of benefit recognized for each tax position is the largest amount that is greater than 50 percent likely to be realized.

·

New information – such as new tax laws, regulations, and court cases – that affects the recognition and measurement of the benefits of a tax position is identified in a timely manner and properly evaluated.

·

The recognition and measurement of the benefits of a tax position reflect all information available to management at the reporting date and do not take into account facts and circumstances and developments occurring after the reporting date but before the issuance of the financial statements.

·

Interest and penalties are properly measured and recorded for all uncertain tax positions.

·

Amounts recorded for unrecognized tax benefits, including interest and penalties, are properly presented, classified, and disclosed in the consolidated financial statements.

Earnings Per Common Share (“EPS”) —  Prior to the Acquisition, the Company was privately held and did not calculate earnings per share.

    

The Company measures the effects of options and warrants on diluted EPS through application of the treasury stock method, whereby the proceeds received by the Company based on assumed exercise are hypothetically used to repurchase the Company’s common stock at the average market price for the period. Dilution will occur according to the treasury stock method only if the average market price of the Company’s common stock is higher than the exercise price of either the stock options and/or warrants. When the opposite is present (i.e., the average market price is lower), the results are antidilutive, and the impact of either the stock options and/or warrants is ignored.

 

The average market price of the Company’s common stock from January 4, 2009, to January 2, 2010, was $.65 and since it was lower than the exercise price of the warrants, the impact of the warrants is excluded from the diluted EPS calculation for the 52 week period ended January 2, 2010.

 

The average market price of the Company’s common stock from January 12, 2008, to January 3, 2009, was $2.20 and since it was lower than the exercise price of the warrants, the impact of the warrants is excluded from the diluted EPS calculation for the 47 week period ended January 3, 2009.

 

During the 52 weeks ended January 2, 2010, the average market price of the Company’s stock was not higher than the exercise price of certain options granted, therefore, the impact of certain stock options is excluded in the diluted EPS calculations for the 52 weeks ended January 2, 2010.

 

During the 47 weeks ended January 3, 2009, the average market price of the Company’s stock was not higher than the exercise price of certain options granted, therefore, the impact of certain stock options is excluded in the diluted EPS calculations for the 47 weeks ended January 3, 2009.

 

New Accounting Standards 

  

Fair Value Measurements

In September 2006, the FASB issued guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance is contained in ASC Topic 820 “Fair Value Measurements and Disclosures.” This guidance does not require any new fair value measurements, but applies under other accounting pronouncements that require or permit fair value measurements. The effective date of this guidance for financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis was January 1, 2008, and the Company did adopt the provisions of this guidance at that time as it related to financial assets and liabilities recognized or disclosed at fair value on a recurring basis. Effective January 1, 2009, pursuant to this guidance, the Company adopted the provisions of this guidance as it relates to non financial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis. The adoption of this guidance had no impact on the Company’s financial statements.

 

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In April 2009, the FASB issued guidance that extends the disclosure requirements regarding the fair value of financial instruments to interim financial statements of publicly traded companies. This guidance is primarily contained in ASC Topic 825 “Financial Instruments” and ASC Topic 270 “Interim Reporting.” This guidance is effective for interim periods ending after June 15, 2009. The adoption of this guidance had no impact on the Company’s financial statements.

 

Collaborative Arrangements

In December 2007, the FASB issued guidance to participants in a collaborative arrangement which is contained in ASC Topic 808. A collaborative arrangement is a contractual arrangement that involves a joint operating activity. These arrangements involve two (or more) parties who are both (a) active participants in the activity and (b) exposed to significant risks and rewards dependent on the commercial success of the activity. Many collaborative arrangements involve licenses of intellectual property, and the participants may exchange consideration related to the license at the inception of the arrangement. Participants in a collaborative arrangement shall report costs incurred and revenue generated from transactions with third parties (that is, parties that do not participate in the arrangement) in each entity's respective income statement pursuant to such guidance. An entity should not apply the equity method of accounting to activities of collaborative arrangements. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of this guidance had no material impact on the Company’s financial statements.

 

Business Combinations

On January 4, 2009, we adopted the accounting pronouncements relating to business combinations (primarily contained in ASC Topic 805 “Business Combinations”), including assets acquired and liabilities assumed arising from contingencies. These pronouncements established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree as well as provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In addition, these pronouncements eliminate the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria and require an acquirer to develop a systematic and rational basis for subsequently measuring and accounting for acquired contingencies depending on their nature. Our adoption of these pronouncements will have an impact on the manner in which we account for any future acquisitions.

 

Non-Controlling Interests in Consolidated Financial Statements

On January 4, 2009, we adopted the accounting pronouncement on non-controlling interests in consolidated financial statements, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance is primarily contained in ASC Topic 810 “Consolidation”. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The adoption of this standard has not had a material impact on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data

 

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Item 9A(T). Control and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that control deficiencies which constitute a material weakness, as discussed below, existed in our internal control over financial reporting as of January 2, 2010. We view our internal control over financial reporting as integral to our disclosure controls and procedures. Because of these material weaknesses, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of January 2, 2010.

Management’s Report on Internal Control Over Financial Reporting

  

Our management is responsible for establishing and maintaining effective internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). Our internal control over financial reporting includes policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.

Our management, with the participation of our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting as of January 2, 2010. In making the assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (‘‘COSO’’) in Internal Control — Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of our internal control over financial reporting as of January 2, 2010, our management identified the following material weaknesses in the Company’s internal control over financial reporting:

·

We determined that our information technology system control processes were inadequate or ineffective.

·

We determined that controls necessary to identify all adjustments required to generate a consolidated financial report were inadequate or ineffective.

Based on our assessment and because of the material weaknesses described above, as well as our inability to file timely the Form 10-K with the SEC, management concluded that our internal control over financial reporting was not effective as of January 2, 2010. The Company is in the process of remediating these material weaknesses, as described below.

 

In light of the material weaknesses described above, we performed additional analyses and other post-closing procedures to determine that our financial statements included in this report were prepared in accordance with U.S. GAAP. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

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Remediation Activities

Our management has discussed the material weaknesses described above with our Audit Committee. In an effort to remediate the identified material weaknesses, we have initiated and/or undertaken the following actions:

(1)

Management has hired, and will continue to hire, additional personnel with technical knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting and U.S. GAAP requirements. The particular areas where training and experience are key aspects of the controls being strengthened and improved are being used to form part of the criteria for future hires for IT; additionally, in some cases, technology is being selectively deployed to transition several areas with weak administrative controls and potential exposures to enable an automated support framework. The use of experienced external resources and training, a focus on improving these areas, and revisions to roles and responsibilities will have a very positive effect on remediation of these material weaknesses. In addition, internal training and awareness programs, with improved documentation, will be launched in the year to provide an understanding of the shared roles and responsibilities of all employees to meet and maintain compliance criteria.

 

(2)

Where necessary, we will supplement personnel with qualified external advisors. We have retained senior level and highly qualified personnel from well known firms with strong training and experience to advise and consult in specific areas of focus and remediation. Additionally, we have and will continue to retain qualified vendors who are long term providers for key technologies as well as accompanying procedures and guidelines that support our short term and long range strategic objectives. We have accelerated activities using additional external resources where appropriate. As we initiate and progress in the projects and activities focusing on both strengthening and improving our controls and the associated procedures, processes and guidelines, we have and will continue to leverage strong relationships with knowledgeable sources to bring in and continue to improve our capabilities for compliance using both administrative and technological means.

 

(3)

Our new financial system and software has been acquired, is in the implementation process, and will be operational by the end of the 2nd quarter of 2010. This software and system has been and is currently used in many public companies, has a global presence and provides off the shelf capabilities and features that reduce the complexity and intricacy of designing and developing accounting and reporting controls and capabilities, thus accelerating the implementation. The activities of Business Requirements and Analysis have been completed, and we are following a proven methodology of design and integration of the software to meet the specific needs of Clark’s business. The new financial system will integrate controls, administrative and management reporting capabilities with improved security over the data and improved audit capabilities. The use of this modern database-oriented financial and accounting system will improve the Company’s ability to perform detailed analysis and reporting, reduce the monthly, quarterly and annual information cycles, as related to accounting and compliance reporting, provide a higher level of automated control on system access and enable user process workflow capabilities.

 

(4)

Through the acquisition of The Clark Group, Inc. on February 12, 2008, and aggressive recruiting, the Company has hired additional resources with expertise in the selection and application of generally accepted accounting principles commensurate with their financial reporting requirements. Currently, there are 5 Certified Public Accountants (“CPAs”) within the Company. In addition, the Company worked very closely with outside consultants in their 404(a) assessment to improve the effective controls to ensure a reasonable assurance that management review procedures were properly performed over the accounts and disclosures of the financial statements.

 

(5)

The IT department, in conjunction with Company management and external consultants, has developed a specific framework that is guiding the scoping and initiation of a series of projects and initiatives targeting specific remediation activities and change management issues relating to the material weaknesses and improving the Company’s capabilities to manage data, systems and software. A communications program is planned to reach out to operations and support personnel across all of the Company in support of these efforts. Areas where documentation, methodologies, processes, procedures and guidelines are required to help meet compliance targets are being reviewed and improvements are being made as we go forward. In several cases, where technology can be used to improve and augment administrative controls and compliance, investment options are being investigated, selectively reviewed and appropriate recommendations are being made.

 

 

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Changes in Internal Control Over Financial Reporting

Other than as described above, there have not been any changes in our internal control over financial reporting in the quarter ended January 2, 2010, which have materially affected, or are likely to materially affect, our internal control over financial reporting.

Limitation on Effectiveness of Controls

All internal control systems have inherent limitations, including the possibility of circumvention and overriding the control. Accordingly, even effective disclosure controls and procedures and internal control over financial reporting can provide only reasonable assurance as to the reliability of financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

See Item 14.

Item 11. Executive Compensation

See Item 14.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

See Item 14.

Item 13. Certain Relationships and Related Transactions, and Director Independence

See Item 14.

Item 14. Principal Accountant Fees and Services

The information required by Items 10, 11, 12, 13 and 14 will be contained in, and is incorporated by reference from, our Definitive Proxy Statement on Schedule 14A for our 2010 annual meeting of stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this annual report.