INDIANAPOLIS, April 2, 2018 /PRNewswire/ -- Celadon Group,
Inc. ("Celadon," the "Company," "we," or "us") (NYSE: CGI) today
announced the following.
Audit Committee Investigation and Related Matters
On May 1, 2017, Celadon announced
that the Company's financial statements for fiscal year 2016
(ended June 30, 2016) and the quarters ended September
30, 2016 and December 31, 2016 and related reports of the
Company's independent registered public accounting firm, BKD, LLP
("BKD") should no longer be relied upon. The Audit Committee of
Celadon's Board of Directors immediately commenced an investigation
with the assistance of an independent law firm and a leading
international auditing, tax, and advisory firm (the "internal
investigation"). The internal investigation is nearing
completion but remains ongoing.
Celadon's new senior management team, led by the Company's new
Chief Financial Officer and new Chief Accounting Officer, also
subsequently commenced a review of the Company's current and
historical accounting policies and procedures. The internal
investigation and management review have identified errors that
will require adjustments to the previously issued 2014, 2015, 2016,
and 2017 financial statements (and potentially periods prior
thereto). The amounts, periods, and adjustments described
below are preliminary, have not been subjected to any audit
procedures, and are subject to change. The estimated range of
amounts and periods described below are being provided to indicate
a general sense of the magnitude of the expected changes and should
not be considered definitive. Based upon its analysis and
assessment of presently available information, the Company
presently expects the adjustments to include the following:
- Equipment Held for Sale Transactions. The internal
investigation has revealed transactions involving revenue equipment
held for sale by the Quality Companies subsidiary that included
undisclosed arrangements that overstated the values of equipment
traded in those transactions. Pursuant to these transactions,
the Company sold to counterparties equipment at above market prices
and in return the Company paid amounts substantially in excess of
the fair value of equipment purchased from those
counterparties. Additionally, the written agreement governing
certain of these transactions with a particular counterparty
omitted material, agreed upon terms in order to enable the Company
to account for those transactions as separate, independent
purchases and sales, notwithstanding that they had not been
negotiated as such and the stated values of a significant portion
of the traded equipment was not at arm's-length values. Based
on this information, the Company performed additional procedures to
determine the fair value of equipment both purchased and sold and
concluded that a write down of carrying values of revenue equipment
held for sale of approximately $20
million is appropriate at June 30,
2016. The carrying values of this equipment will be restated
to reflect management's determination of fair values at the
relevant periods, which may include dates prior to June 30, 2016. The adjustment will be
non-cash, and no future impact to the carrying value of this
equipment is expected because all of the affected equipment was
disposed of or contributed to the 19th Capital Group,
LLC ("19th Capital") joint venture prior to December 31, 2016.
- Element Transactions. The Company determined that
equipment transactions with Element Financial Corp. and its
affiliates ("Element") and 19th Capital (prior to its
recapitalization on December 30,
2016), did not sufficiently transfer the risks of ownership
to qualify for sales accounting. Instead, the Company should
have recorded such transactions as borrowings due to the terms of
the relevant agreements, including amendments, and the manner in
which the Company administered the Element transactions.
Under borrowing accounting, the Company would continue to recognize
equipment assets on its books and would reflect the proceeds
received from Element and 19th Capital as financing
obligations. The assets would continue to be depreciated, the
payments would be recorded as a reduction of obligations and an
increase to interest expense, amounts collected from lessees would
be recorded as revenue and payments for maintenance would be
expensed. The Company expects to record non-cash adjustments for
the affected periods: fiscal 2014, fiscal 2015, fiscal 2016, and
the first two quarters of fiscal 2017. At the end of the
second quarter of fiscal 2017, borrowing treatment would cease due
to the contribution of the relevant assets and liabilities to
19th Capital on December 30,
2016.
-
- The balance sheet adjustments relating to these transactions
are expected to result in an increase in reported asset values in
our statements of financial position totaling approximately
$500 million for the three-year
period ended June 30, 2016.
Adjustments related to liabilities are expected to result in an
increase in reported values in our statements of financial position
totaling approximately $700 million
for the three-year period ended June
30, 2016. Adjustments for both assets and liabilities
for the first two quarters of fiscal 2017 are still under
review.
- The income statement impacts relating to these adjustments are
expected to reduce net income before income taxes by a range of
$200-$250
million cumulatively over the three-year period ended
June 30, 2016. In addition to
considering the impact on these periods, the Company is reviewing
the impact for the first two quarters of 2017.
- The reversal of borrowing accounting at December 30, 2016, is expected to remove all of
the assets and liabilities described above from the balance sheet
and result in a significant non-cash gain due to the elimination of
liabilities in excess of assets. The amount of the gain is
still under review and will be offset in part by the amount by
which the opening recorded value of the Company's equity investment
in 19th Capital is adjusted below $100 million, as discussed below.
- 19th Capital Investment. On December 30, 2016, the Company and Element
Transportation, LLC ("Element Transportation") each contributed
certain assets to 19th Capital and, in exchange, each
received approximately 49.9% of the equity interests in
19th Capital. Element Transportation contributed
its beneficial interests in certain fleet assets, the associated
lease agreements, and cash, which was immediately applied to pay
down the outstanding principal balance of loans made by Element
Transportation to 19th Capital. Element
Transportation also made a daylight loan to 19th Capital
in the amount of $31.8 million, which
was used to satisfy an outstanding payable obligation to the
Company. The Company contributed certain assets held for
sale, leasing assets, and cash. Based upon adjustments
related to equipment held for sale, including those noted above,
the original $100 million recorded
value of the Company's initial contribution to 19th
Capital at its December 30, 2016
inception will be reduced. The Company is evaluating whether any
further adjustment for items other than equipment values is
appropriate. The expected total adjustment will relate to the fair
values of the assets, liabilities and equity of 19th
Capital contributed by both the Company and Element Transportation,
the assets and liabilities retained by 19th Capital, as
well as aspects of the accounting for the recapitalization of
19th Capital. The restated carrying value of the
equity investment as of December 31,
2016, coupled with net losses of 19th Capital
subsequent to December 31, 2016, may
result in a reduction of the Company's equity method investment to
as low as zero.
- Lease Classification. The Company determined that a
portion of the Company's equipment leases currently accounted for
as operating leases should be restated as capitalized leases
primarily due to the default and cross default provisions in such
agreements. The affected periods include fiscal 2014, fiscal 2015,
fiscal 2016, and the first two quarters of fiscal 2017, and some of
such leases remain in effect. The impact on net income in any given
period is not expected to be significant. The impact on
stockholders' equity is not expected to be significant because the
recorded assets and liabilities are expected to be approximately
equal. The adjustment to assets and liabilities in our
statements of financial position are expected to total
approximately $150 million for the
three-year period ended June 30,
2016.
- Other. The Company is reviewing other accounting areas in
each affected period as part of the financial restatement issuance
process. Additional items identified to date and presently
under review include: (1) carrying values of, and depreciation
policies applicable to, tractors and trailers used in operations,
(2) reserves applicable to claims and accounts receivable, (3)
foreign currency gains and losses, (4) potential impairments of
property, plant and equipment related to the Element transactions,
and (5) the Company's deferred income tax liability in light of the
various adjustments. Any adjustments associated with these
issues could be material and some of them may impact current and
future periods.
The anticipated adjustments identified above are subject to
ongoing review and analysis and cannot be precisely quantified with
respect to any period at this time. However, the cumulative
effect of the adjustments, along with operating losses and other
expenses since the Company's last filed financial reports, are
expected to reduce its reported stockholders' equity
materially. The adjustments are also anticipated to have a
material impact on assets, liabilities, revenue, income (loss), and
individual expense items in certain periods.
Due to the restatement issues identified above, on April 2, 2018, the Audit Committee and the
Company's management concluded that the annual financial statements
for the Company's 2014 and 2015 fiscal years, the unaudited
quarterly reports issued during such periods, and the unaudited
quarterly reports issued during fiscal 2016, should no longer be
relied upon. In addition, the Company has concluded that
there were deficiencies in its internal control over financial
reporting that constituted material weaknesses for each of the
affected periods and, as a result, management's reports on its
internal control over financial reporting as of June 30, 2014, June 30,
2015, and June 30, 2016,
should no longer be relied upon. The Company has engaged outside
advisors to assist in remediating deficiencies in its internal
control over financial reporting.
Chief Executive Officer Comments
Chief Executive Officer, Paul
Svindland, commented: "Celadon's past several quarters
have been consumed with four main activities: supporting the
internal investigation, evaluating more broadly the appropriateness
of historical accounting under prior management, executing our
strategic turnaround plan while replacing substantially all of the
prior senior leadership team, and pursuing a refinancing of our
existing credit facility. We have made significant progress
on all four priorities and, although much remains to be done, I am
encouraged by the progress."
Mr. Svindland continued: "Today's updates concerning the
internal investigation and additional accounting restatements come
after approximately eleven months of in-depth research and analysis
by our audit committee, multiple outside advisors, and the new
management team. As described above, the accounting adjustments
will be significant to prior period earnings and to our total
stockholders' equity. Nevertheless, we remain confident in
our current management team and strategic plan, and we emphasize
the following points concerning the accounting issues:
- The greatest magnitude of the adjustments relate to the former
Quality Equipment Leasing business, which we disposed of in
calendar 2017, and our equity investment in 19th
Capital, which does not impact our cash flows.
- The accounting adjustments relating to assets held for sale and
borrowing treatment for the Element transactions, which constitute
the greatest portion of the expected adjustments, will be reversed
at December 30, 2016, with the assets
and liabilities coming back off of our balance sheet.
- The officers who (1) directly negotiated or oversaw the Quality
Companies' revenue equipment transactions that are the subject of
the restatement, (2) had principal responsibility for the
management of the Company's relationship with Element, or (3)
signed certifications included in the Company's public filings that
incorporated the affected financial statements are no longer with
the Company."
Mr. Svindland added: "The restatement process, along with
accompanying remediation of internal controls, are in the capable
hands of our new Chief Financial and Strategy Officer, Thom Albrecht, and new Chief Accounting Officer,
Vince Donargo, who are working
diligently with outside advisors to issue the restated financial
reports as soon as possible. Accurate and transparent
financial reporting is of the utmost importance to the new
management team and critical to re-establishing a strong foundation
of trust and accountability with all of our stakeholders."
Mr. Svindland further commented on new management's execution of
the strategic plan: "Since starting the turnaround process in
April of 2017, we have replaced most of our executive and
accounting leadership, sold our flatbed division, outsourced our
driver school, and reduced our domestic truckload division's fleet
by approximately 20% to approximately 1,900 seated tractors
(excludes A&S, Taylor, FTL, and Buckler U.S. subsidiaries) to
concentrate on the most attractive lanes and freight. In the
currently strong freight environment, we are allocating our fleet
capacity to targeted customers and geographies at improved
productivity. Improvements in our revenue per loaded mile, miles
per seated tractor, and load ratio in our U.S. over-the-road fleet
have contributed to revenue per seated tractor per week (excluding
fuel surcharges) increasing approximately 20% between April 2017 and February
2018. In addition, we have exited our Quality Equipment
Leasing business altogether, which we view as highly beneficial to
our overall truckload operations because the previous strategy of
elevating management attention and other resources to Quality over
the core trucking business had highly negative effects on our
operations and sales efforts as well as draining our capital
resources.
"While the improvement in operating metrics is encouraging, we
have been incurring significant operational costs associated with
shrinking our fleet, repositioning equipment, recruiting drivers,
temporarily unseated trucks, repositioning driver pay and fuel, new
customer start-up, equipment turn-in, and fixed overhead. We
expect negative consolidated operating margins (excluding
refinancing related costs) to extend into the middle of calendar
2018. Nevertheless, our operations and sales teams are highly
engaged and motivated, our customer service has improved, we have
maintained strong continued relationships with core customers, and
we are committed to taking cost out of the system. I am encouraged
by the progress our new team and strategy are delivering."
Mr. Svindland addressed the ongoing refinancing effort:
"Strengthening our balance sheet with new, long-term capital has
been another key goal. On the revolving credit side, Bank of
America Business Credit and Wells Fargo Capital Finance continue to
work with us toward a new $100
million asset-based revolving credit facility. Our
revolving lenders and we are currently reviewing a refinancing
proposal, received on March 31, that
anticipates retiring all principal and interest under our existing
facility and would provide a stable capital structure going
forward. The proposal includes approximately $200 million of term debt plus an issuance of
common equity without additional consideration. If accepted, the
new revolving credit facility and term loan proposal would be
expected to close during our fourth fiscal quarter. Each
facility is subject to negotiating extensions of certain equipment
lease maturities with the affected lessors, operating in the
ordinary course of business, adequate closing liquidity, credit
committee and board approvals, and other customary conditions to
closing. Neither proposal is conditioned upon the completion of
restated financial reports. Additional updates will be provided as
we make additional progress on our refinancing path."
Credit Agreement Amendment
On March 30, 2018, the Company
entered into an Eighth Amendment to its Amended and Restated Credit
Agreement (the "Amendment"). The Amendment extended the
existing financial covenant relief through April 30, 2018, with the principal purpose of
permitting the Company and the revolving lenders to evaluate the
recently received refinancing proposal. The Amendment
also:
- Provided additional exceptions to representations and
warranties regarding the Company's financial statements to reflect
the restatements addressed in this press release;
- Changed the frequency of interest payments from quarterly to
monthly;
- Added a requirement that the lenders consent to most asset
dispositions in excess of $50,000,
and provided that the proceeds of any such asset dispositions will
permanently pay down revolving borrowings;
- Increased the value of real estate that can be included in the
asset coverage ratio covenant to $85
million; and
- Required the payment of approximately $2.6 million in previously accrued fees, extended
the payment date for approximately $5.95
million in accrued fees to April 30,
2018, and imposed an amendment fee of $2.76 million, payable on April 30, 2018.
The full text of the amendment and required disclosures will be
reported on a Form 8-K to be filed with the United States
Securities and Exchange Commission ("SEC").
Status of NYSE Listing
The Company's continued listing on the New York Stock Exchange
("NYSE") requires that the Company cure its financial reporting
filing delinquencies by May 2, 2018.
Due to the number of restatement issues and the additional periods
being impacted, the Company has determined that it will not be able
to cure the delinquencies by the NYSE deadline. As a result,
the Company expects the NYSE to halt trading of its common stock
and commence the delisting process promptly. The Company
currently anticipates that its common stock would be quoted on the
OTC Pink market electronic quotation service operated by OTC
Markets Group Inc. However, there can be no assurance that a
market maker will apply to quote the Company's common stock or that
the Company's common stock will become eligible for such
quotation. The Company will remain subject to SEC public
reporting requirements.
About Celadon
Celadon Group, Inc. (www.celadongroup.com), through its
subsidiaries, provides long haul, regional, local, dedicated,
intermodal, temperature-protect, and expedited freight service
across the United States,
Canada, and Mexico. The Company also owns Celadon
Logistics Services, which provides freight brokerage services,
freight management, as well as supply chain management solutions,
including logistics, warehousing, and distribution.
This press release contains certain statements that may be
considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of
the Securities Exchange Act of 1934, as amended 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 may be identified by their use of terms or phrases,
including "expects," "expected," "will," "would," "could,"
"intends," "believes," "anticipates," "future," and similar terms
and phrases. Forward-looking statements are based upon the current
beliefs and expectations of the Company's management and are
inherently subject to risks and uncertainties, some of which cannot
be predicted or quantified, which could cause future events and
actual results to differ materially from those set forth in,
contemplated by, or underlying the forward-looking
statements. In this press release, statements relating to the
restatement of the Company's financial statements, including,
without limitation, the affected periods, the items requiring
adjustment, the magnitude, quantification, materiality, and
significance of the adjustments and related impacts, the cash flow
impacts of the adjustments, the manner in which the adjustments
will be implemented, impacts on stockholders' equity, our ability
to issue restated financial statements, the period of time
necessary to issue restated financial statements, the carrying
value of revenue equipment held for sale and property, plant and
equipment, accounting for equipment sale transactions as
borrowings, the valuation of our equity interest in 19th
Capital and the factors impacting such valuation, the restatement
of operating leases as capitalized leases, the review of other
financial statement items as part of the restatement process, and
the impact of the adjustments on assets, liabilities, revenue,
income (loss), and individual expense items, our consolidated
operating margins, our reduction of costs, our future progress and
operational performance, our refinancing effort, the occurrence and
expected timing of a refinancing, the existence and terms of future
debt and equity investments in us, the extension of equipment lease
maturities, our future liquidity, our expected delisting from the
NYSE, and our expectation that our common stock will be quoted on
the OTC Pink market electronic quotation system, among others, are
forward-looking statements. Actual results may differ
from those set forth in the forward-looking statements.
Factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not
limited to, the risk that the internal investigation or
management's review may identify additional issues or matters
requiring adjustment to our financial statements, the risk that the
actual restated financial statements differ materially from any
estimates included in this press release, the risk that we are
delayed in filing or are unable to file restated financial
statements, the risk of negative tax or other implications
resulting from the restatement of our financial statements,
the risk that our operating performance does not improve or
deteriorates, the risk that we are unable to refinance our existing
credit agreement or do so on terms that are more detrimental to us
or dilutive to our stockholders than the terms described in this
press release, the risk of potential claims and proceedings
relating to the matters described in this press release, the risk
that our liquidity will be constrained as a result of restrictions
placed on us by our debt and lease arrangements or from payments we
are required to make under such arrangements, and the risk that our
common stock will not qualify for quotation on the OTC Pink
electronic quotation system or that brokers will choose not to
quote or otherwise make a market for trading our common stock.
Readers should review and consider these and other factors that
could impact results as provided in various disclosures by the
Company in its press releases, stockholder reports, and filings
with the SEC.
For more information:
Thom Albrecht
Chief Financial and Strategy Officer
(317) 972-7030
talbrecht@celadongroup.com
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SOURCE Celadon Group, Inc.