CELADON GROUP, INC. (NYSE:CGI) Files An 8-K Entry into a Material Definitive Agreement
Item 1.01 Entry into a Material Definitive Agreement.
On December 30, 2016 (the Closing Date), Celadon Group, Inc. (the
Company), Quality Companies LLC, a wholly-owned subsidiary of the
Company (Quality), Quality Equipment Leasing, LLC, a wholly-owned
subsidiary of the Company (Leasing), 19th
Capital Group, LLC, a non-controlling investment of the Company
before and after the agreements (19th
Capital), Element Transportation LLC (Element), and certain other
parties entered into a series of simultaneous agreements and
related transactions (collectively, the Transactions), to which
substantially all tractors under management by Quality and owned
by Element, 19th Capital, Quality, and Leasing have been
combined into 19th Capital as a joint venture primarily
between the Company and Element. In connection with the
Transactions, all previously outstanding membership interests of
19th Capital were redeemed, and all previously existing
agreements among the Company, Quality, Element, and 19th
Capital were terminated or assumed by 19th
Capital. After the Transactions, the Company and Element each own
a non-controlling 49.999975% interest in 19th
Capital, which holds the rights to over 10,000 tractors for use
in leasing operations.
The material definitive agreements entered into by the Company
and its subsidiaries with respect to the Transactions were as
follows: (i) the Membership Interest Redemption Agreement by and
between the Company, as seller, and 19th
Capital (the Redemption Agreement), (ii) the Subscription
Agreement by and among the Company, 19th
Capital, and Element, (iii) the Amended and Restated Limited
Liability Company Agreement of 19th
Capital by and among the Company, Element, and the Management
Members (as defined below) (the LLC Agreement), (iv) the Service
Agreement by and between 19th Capital and Quality, and
(v) the Third Amendment to Amended and Restated Credit Agreement
(the Amendment) by and among the Company, Bank of America, N.A.,
as Administrative Agent, Swing Line Lender, and L/C Issuer (the
Agent), Wells Fargo Bank, N.A., and Citizens Bank, N.A., both as
lenders. In addition, the Company terminated previously existing
agreements that were material to the Termination Agreement and
Mutual Waiver and Release by and among the Company, Leasing,
19th Capital, and Element (the Termination Agreement).
Redemption Agreement
On the Closing Date, 19th Capital redeemed all of
its issued and outstanding membership interests owned by the
Company to the Redemption Agreement. Under the Redemption
Agreement, the Company received the following consideration: (i)
approximately $4.6 million in cash, and (ii) the right to receive
approximately an additional $2.5 million in restricted cash when
the restrictions lapse. The redemption receipts relate to the
original $2.0 million that had been invested by the Company in
2015 and has been since been booked using the equity method of
accounting.
Subscription Agreement
Simultaneously with the redemption of 19th
Capitals issued and outstanding membership interests, the
Company, 19th Capital, and Element entered into the
Subscription Agreement to which:
|
Element (i) transferred, conveyed, and assigned to 19th Capital certain of Elements beneficial interests in certain fleet assets described in the Subscription Agreement, together with the associated lease agreements (the JV SUBI Interests), held in the Element Transportation Asset Trust, a Delaware statutory trust (the ETAT), (ii) contributed an amount equivalent to $100.0 million in cash of equity to 19th Capital, which was applied against the outstanding principal balance of the Term Loans (as defined below) as part of a prepayment made on the Closing Date and settled on a net basis, and (iii) transferred, conveyed, and assigned to 19th Capital certain of Elements beneficial interests in the certain other fleet assets described in the Subscription Agreement, together with the associated lease agreements (the Equipment SUBI Interests), held in the ETAT. In consideration of the foregoing, 19th Capital (i) issued to Element membership units of 19th Capital, which, after the consummation of the Transactions, constituted approximately 49.99% of the issued and outstanding units of 19th Capital, and (ii) received certain term loan financing from Element. |
|
The Company (i) contributed $35.3 million in cash to 19th Capital, (ii) conveyed to 19th Capital equipment (primarily tractors) categorized as equipment held for sale, leasing assets held for sale, or leasing assets used with a net book value of $63.6 million, and (iii) received credit for $1.1 million of unencumbered cash in the bank accounts of 19th Capital immediately at the consummation of the Transaction. In consideration of the foregoing, 19th Capital (i) issued to the Company membership units of 19th Capital, which, after the consummation of the Transactions, constituted approximately 49.99% of the issued and outstanding units of 19th Capital, (ii) paid to the Company $31.8 million in cash for reimbursement of previous payments made by the Company related to the Element assets, and (iii) issued the Company an obligation to distribute restricted cash of 19th Capital and its subsidiaries at the closing of the Transactions of approximately $2.5 million at such time as such cash becomes unrestricted. Going forward, the Company has agreed not to enter into additional leases as lessor in the equipment leasing business, subject to a modest exception for short-term leasing pending ordinary course dispositions from the Companys trucking fleet. |
The remaining membership units of 19th
Capital, which are non-voting, were purchased by certain members
of 19th Capitals management (the Management
Members). The Management Members are not employees of the Company
or its subsidiaries.
Limited Liability Company Agreement
On the Closing Date, the Company, Element, and the Management
Members entered into the LLC Agreement. The LLC Agreement
provides, among other things:
|
Board. 19th Capital will be governed by a board of managers (the Board). The Board will initially consist of four managers, of which two managers will be nominated by the Company and two managers will be nominated by Element. |
|
Significant Actions. Certain Board actions, including, among other things, matters relating to 19th Capitals capital structure and governance, distributions, budget and business plan, and borrowing requires the unanimous approval of the Board. |
|
Transfer Restrictions. Until 18 months from the Closing Date, no member of 19th Capital may transfer any membership interest in 19th Capital other than certain permitted transfers. |
|
Tag-Along; Right of First Offer. Customary tag-along and right of first offer provisions. |
Service Agreement
On the Closing Date, 19th Capital and Quality
entered into a Service Agreement under which Quality will provide
administrative and servicing support for all assets owned by
19th Capital and will receive monthly servicing revenue.
The new Service Agreement does not contain any payment remitting,
Perfect Pay or similar obligation on the part of the Company or
its subsidiaries.
Credit Agreement Amendment
On December 30, 2016, the Company entered into the Amendment with
the Agent, Wells Fargo Bank, N.A., and Citizens Bank, N.A., both
as lenders, which amends that certain Amended and Restated Credit
Agreement, dated December 12, 2014, by and among the Company, the
Agent, and the other lenders party thereto (the Credit
Agreement). The Amendment consented to the Transactions and
reduced the Aggregate Commitments under the Credit Agreement by
$50.0 million on a pro rata basis among the lenders from $300.0
million to $250.0 million.
Filing of Agreements
The above description of the Transactions and related agreements
discussed herein and the Amendment does not purport to be
complete and is qualified in its entirety by the Redemption
Agreement, the Subscription Agreement, the LLC Agreement, the
Service Agreement, and the Amendment, which the Company intends
to file with its Quarterly Report on Form 10-Q for the quarter
ended December 31, 2016, to the extent required by the rules and
regulations promulgated by the Securities and Exchange
Commission.
Item 1.02 Termination of a Material Definitive Agreement.
On the Closing Date, the Companys and Leasings obligations under
all existing agreements with Element and its affiliates were
terminated to the Termination Agreement, subject to the exception
described below. Prior to the termination, these agreements
provided for the Company and Leasing to service leased equipment,
and the related leases, financed and owned by an affiliate of
Element. The terminated agreements included the following
contract previously filed by the Company as material contracts:
|
Amended and Restated Program Agreement, dated November 14, 2014, by and among the Company, Leasing, and Element. |
|
Third Amended and Restated Reserve Account Agreement dated March 23, 2016, by and among the Company, Leasing, and Element. |
|
Third Amended and Restated Service Agreement dated March 23, 2016, by and among the Company, Leasing, and Element, including obligations thereunder to make advances to Element in respect of any lease payment shortfalls, or Perfect Pay. |
The Companys and its affiliates obligations under the foregoing
agreements were not terminated to the extent they had been
assigned by Element to one particular third party, which held
rights to approximately 2.9% of the equipment under the prior
Element portfolio. Rather than being terminated, the obligations
under such agreements were assigned to, and assumed by,
19th Capital under the Termination Agreement.
Item 7.01 Regulation FD Disclosure.
On December 30, 2016, the Company issued a press release
announcing the closing of the joint venture. A copy of the press
release is attached to this report as Exhibit 99.1.
In addition, the Company hereby furnishes the following
information, all of which is based on preliminary expectations
prior to any quarterly closing procedures, and is subject to
normal financial closing procedures and other significant risks,
uncertainties, and other factors:
The Company believes the Transactions furthered its goals of
exiting the leasing business, reducing total fixed assets and
balance sheet debt, and converting Quality primarily to an asset
light business.
Summary of Cash Sources and Uses
The following table summarizes the Companys primary sources and
uses of cash associated with the Transactions (excluding taxes,
fees, and expenses):
|
Source / (Use) (in millions) |
Description |
||
|
$ |
4,600 |
Cash received redemption |
|
|
6,700 |
Cash received receipt of deferred purchase price cash |
||
|
50,000 |
Cash received sale of Quality equipment |
||
|
31,800 |
Cash received reimbursement of Other Assets |
||
|
(35,300) |
Cash invested in 19th Capital at closing |
||
|
$ |
57,800 |
Net cash received at closing |
The foregoing excludes other sources and uses of cash during the
quarter and should not be considered a substitute for the
Companys net changes in cash during the quarter.
Summary of Equipment Transactions
The following table summarizes the Companys total contribution to
19th Capital at closing, including equipment dispositions
associated with the Transactions:
|
Source / (Use) (in millions) |
Description |
||
|
$ |
56,000 |
Equipment contributed to 19th Capital at closing |
|
|
21,900 |
Contribution of deferred sale assets from 9/30/2016 |
||
|
50,000 |
Equipment sold to Element at closing |
||
|
34,600 |
Settlement of deferred sale assets from 6/30/2016 |
||
|
$ |
162,500 |
Total equipment reduction at closing |
|
|
$ |
14,300 |
Contribution of deferred sale liability from 9/30/2016 |
|
|
26,000 |
Settlement of deferred sale liability from 6/30/2016 |
||
|
$ |
40,300 |
Total reduction in liabilities at closing |
|
|
$ |
77,900 |
Equipment contributed to 19th Capital at closing |
|
|
(14,300) |
Other liabilities related to contributed deferred sales assets |
||
|
35,300 |
Cash contributed to 19th Capital |
||
|
1,100 |
Undistributed cash remaining with 19th Capital |
||
|
$ |
100,000 |
Total contribution to 19th Capital at closing |
The deferred sale assets and deferred sale liabilities referred
to above relate to sales of equipment to 19th
Capital prior to the closing of the Transactions. These prior
sales involved $60.5 million in net book value of assets sold for
recorded value. As previously disclosed, these sales were
recorded as financing transactions under GAAP, subject to
treatment as a sale upon the occurrence of certain events. With
the closing of the Transactions, $6.7 million of the remaining
consideration was received relating to the 6/30/2016 transaction
and $7.6 million of the remaining consideration from the
9/30/2016 transaction was contributed to 19th
Capital. The entries included receipt of $6.7 million in deferred
purchase price cash (mentioned in the sources and uses table
above), elimination of $40.3 million in deferred sale
liabilities, and elimination of $56.5 million in assets.
Certain Effects on the Companys Consolidated Financial
Statements
The Transactions are expected to result in significant changes to
several line items in the Companys consolidated balance sheet, as
compared with balances at September 30, 2016. Such changes are
summarized below. The following summary is not a complete listing
of all expected entries.
|
Long term assets. The collection of an amount previously recorded under Other assets will reduce this balance by approximately $31.8 million. Also, as part of the transaction the Company received proceeds of $6.7 million in payment of deferred purchase price from a sale to 19th Capital in the June 30, 2016 quarter. The remaining $1.9 deferred purchase price will be classified as a long term asset that will be collected at a later date. |
|
Current liabilities. The receipt of proceeds from 19th Capital for the current portion of the deferred purchase price, as well as the contributed interest in the deferred purchase price related to two transactions in which tractors were sold to a 19th Capital SPE in the fourth quarter of FY 2016 and the first quarter of FY 2017, will reduce deferred leasing revenue” liability by approximately $11.9 million. |
|
Equipment held for sale, leased assets held for sale, and leased assets. Equipment with net book value of approximately $162.5 million was disposed of in connection with the Transactions. These assets were primarily recorded under equipment held for sale, leased assets held for sale, and leased assets. The Company does not expect to record a significant gain or loss on disposition of this equipment. |
|
Long term liabilities. The receipt of proceeds from 19th Capital for the current portion of the deferred purchase price, as well as the contributed interest in the deferred purchase price related to tractors sold to a 19th Capital SPE in in the fourth quarter of FY 2016 and the first quarter of FY 2017, will reduce other long term liability by approximately $30.7 million. |
|
Minority investment. Celadon expects to record approximately $100.0 million as a minority investment and record results of the joint venture using the equity method of accounting. The prior equity investment of $2.0 million in 19th Capital was redeemed and will not be outstanding. |
Capitalization and Liquidity
At December 31, 2016 the Company estimates its available
borrowing under the newly amended Credit Agreement was
approximately $130.0 million. The Company expects to be in
compliance with its leverage ratio and other covenants under its
Credit Agreement as of December 31, 2016.
Item 9.01 Financial Statements and Exhibits.
|
(d) |
Exhibits. |
||
|
EXHIBIT |
|||
|
NUMBER |
EXHIBIT DESCRIPTION |
||
|
99.1 |
Celadon Group, Inc. press release announcing the closing of the joint venture |
The information contained in Items 7.01 and 9.01 of this report
and Exhibit 99.1 hereto shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended
(the Exchange Act), or incorporated by reference in any filing
under the Securities Act of 1933, as amended (the Securities
Act), or the Exchange Act, except as shall be expressly set forth
by specific reference in such a filing.
The information contained in Items 7.01 and 9.01 of this report
and Exhibit 99.1 hereto contain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E
of the Exchange Act and such statements are subject to the safe
harbor created by those sections and the Private Securities
Litigation Reform Act of 1995, as amended. Such statements are
made based on the current beliefs and expectations of the
Companys management and are subject to significant risks and
uncertainties, including the fact that the expectations
concerning impacts on the Company’s consolidated financial
statements are preliminary, have not been subjected to all of the
procedures associated with the closing of financial statements,
and are subject to change. Actual results or events may differ
from those anticipated by forward-looking statements. Please
refer to various disclosures by the Company in its press
releases, stockholder reports, and filings with the Securities
and Exchange Commission for information concerning risks,
uncertainties, and other factors that may affect future results.
and Exhibit 99.1 hereto contain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E
of the Exchange Act and such statements are subject to the safe
harbor created by those sections and the Private Securities
Litigation Reform Act of 1995, as amended. Such statements are
made based on the current beliefs and expectations of the
Companys management and are subject to significant risks and
uncertainties, including the fact that the expectations
concerning impacts on the Company’s consolidated financial
statements are preliminary, have not been subjected to all of the
procedures associated with the closing of financial statements,
and are subject to change. Actual results or events may differ
from those anticipated by forward-looking statements. Please
refer to various disclosures by the Company in its press
releases, stockholder reports, and filings with the Securities
and Exchange Commission for information concerning risks,
uncertainties, and other factors that may affect future results.
About CELADON GROUP, INC. (NYSE:CGI)
Celadon Group, Inc. (Celadon) is a truckload freight transportation provider. The Company’s segments are asset-based, asset-light, and equipment leasing and services. Its services involve point-to-point shipping for its customers within the United States, between the United States and Mexico, and between the United States and Canada. The Company’s primary asset-based services include the United States domestic dry van, refrigerated and flatbed service; cross-border service between the United States and each of Mexico and Canada; intra-Mexico and intra-Canada service; contract service; regional and specialized short haul service, and rail intermodal service. The Company’s primary asset-light services include freight brokerage, warehousing, less-than truckload consolidation and supply chain logistics services. Celadon’s equipment leasing and services segment consists primarily of leasing activities with independent contractors and other trucking fleets. CELADON GROUP, INC. (NYSE:CGI) Recent Trading Information
CELADON GROUP, INC. (NYSE:CGI) closed its last trading session up +0.35 at 8.65 with 280,431 shares trading hands.