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”), 19
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Capital Group, LLC, a non-controlling investment of the Company before and after the agreements (“19
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Capital”), Element Transportation LLC (“Element”), and certain other parties entered into a series of simultaneous agreements and related transactions (collectively, the “Transactions”), pursuant to which substantially all tractors under management by Quality and owned by Element, 19
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Capital, Quality, and Leasing have been combined into 19
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Capital as a joint venture primarily between the Company and Element. In connection with the Transactions, all previously outstanding membership interests of 19
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Capital were redeemed, and all previously existing agreements among the Company, Quality, Element, and 19
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Capital were terminated or assumed by 19
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Capital. After the Transactions, the Company and Element each own a non-controlling 49.999975% interest in 19
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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 19
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Capital (the “Redemption Agreement”), (ii) the Subscription Agreement by and among the Company, 19
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Capital, and Element, (iii) the Amended and Restated Limited Liability Company Agreement of 19
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Capital by and among the Company, Element, and the Management Members (as defined below) (the “LLC Agreement”), (iv) the Service Agreement by and between 19
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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 pursuant to the Termination Agreement and Mutual Waiver and Release by and among the Company, Leasing, 19
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Capital, and Element (the “Termination Agreement”).
Redemption Agreement
On the Closing Date, 19
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Capital redeemed all of its issued and outstanding membership interests owned by the Company pursuant 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 19
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Capital’s issued and outstanding membership interests, the Company, 19
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Capital, and Element entered into the Subscription Agreement pursuant to which:
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Element (i) transferred, conveyed, and assigned to 19
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Capital certain of Element’s 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 19
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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 19
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Capital certain of Element’s 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, 19
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Capital (i) issued to Element membership units of 19
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Capital, which, after the consummation of the Transactions, constituted approximately 49.99% of the issued and outstanding units of 19
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Capital, and (ii) received certain term loan financing from Element.
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The Company (i) contributed $35.3 million in cash to 19
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Capital, (ii) conveyed to 19
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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 19
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Capital immediately at the consummation of the Transaction. In consideration of the foregoing, 19
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Capital (i) issued to the Company membership units of 19
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Capital, which, after the consummation of the Transactions, constituted approximately 49.99% of the issued and outstanding units of 19
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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 19
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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, t
he 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 Company’s trucking fleet.
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The remaining membership units of 19
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Capital, which are non-voting, were purchased by certain members of 19
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Capital’s 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:
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Board
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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.
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Significant Actions
. Certain Board actions, including, among other things, matters relating to 19
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Capital’s capital structure and governance, distributions, budget and business plan, and borrowing requires the unanimous approval of the Board.
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Transfer Restrictions
. Until 18 months from the Closing Date, no member of 19
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Capital may transfer any membership interest in 19
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Capital other than certain permitted transfers.
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Tag-Along; Right of First Offer
. Customary tag-along and right of first offer provisions.
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Service Agreement
On the Closing Date, 19
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Capital and Quality entered into a Service Agreement under which Quality will provide administrative and servicing support for all assets owned by 19
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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.