Item 1.01. Entry Into a Material Definitive Agreement.
As Celadon Group, Inc. (the “Company”) previously disclosed, the U.S.
Department of Justice and U.S. Securities and Exchange Commission (the “SEC”) have been conducting investigations concerning the Company’s prior financial statements and related events. These
investigations have focused on a subsidiary that the Company has since divested, involve transactions, conduct, and events that occurred during the tenure of prior senior management, and compliance with federal securities laws. The Company has cooperated with the investigations.
The Company has reached resolutions with the Department of Justice,
Criminal Division, Fraud Section,
and the
U.S. Attorney’s Office for the Southern District of Indiana (collectively, the “DOJ”),
and the SEC concerning these criminal and civil investigations. In connection with the investigations, the Company (i) on April 24, 2019, entered into a Deferred Prosecution Agreement (the “DPA”) with the DOJ
filed with the United States District Court, Southern District of Indiana (the “Court”) on April 25, 2019,
and (ii) on April 24, 2019
agreed to settle with the SEC, by consenting to the entry of a final judgment (the “Consent”) that upon entry by the Court, among other things, permanently restrains and enjoins the Company from violating Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and applicable rules.
The DPA, which shall remain in effect through June 30, 2024 unless terminated earlier or extended (the “Term”), and the Consent are collectively referred to herein as the “Agreements.”
Pursuant to the DPA, the DOJ filed a criminal information alleging a single-count of conspiracy to commit securities fraud and the falsification of books, records, and accounts. Subject to the Company’s compliance with the DPA, the DOJ has agreed to dismiss with prejudice the criminal information after the expiration of the DPA’s Term.
The DPA requires the Company over the course of the DPA Term to pay restitution in the amount of
$42,245,302 (the "Restitution Amount"). The Company may offset the Restitution Amount by payments made directly to shareholders pursuant to the Company’s prior settlement of civil shareholder class action litigation (“Securities Class Action”). The Company expects such amount to range between $3.5 million and $3.75 million depending on administrative costs, leaving an approximately $38.5 million expected balance of the Restitution Amount. With respect to such balance, the DPA requires the Company to make an initial payment of $5.0 million within 90 days. Thereafter, on an annual basis (on or before October 28), beginning with the fiscal year ended June 30, 2020 and continuing through the fiscal year ended June 30, 2023, after first making all required payments to the Company’s term loan and revolving lenders, the Company has agreed to pay 50 percent of any remaining excess cash flow (“ECF”) as defined or may be defined in the Company’s term loan and revolving credit agreements. The DPA requires the Company to pay the remaining balance of the Restitution Amount, if any, by June 30, 2024. The DPA does not require payment of any criminal fine.
The Company is not permitted to seek or accept, directly or indirectly, reimbursement or indemnification from any source with regard to the Restitution Amount.
The DPA requires the Company to continue to implement a compliance and ethics program designed to prevent and deter violations of anti-fraud reporting, or books and records provisions of federal securities laws, and where necessary adopt a new compliance program, or modify its existing one, including internal controls, compliance policies, and procedures in order to ensure
that the Company maintains an effective system of internal accounting controls designed to ensure the making and keeping of fair and accurate books, records and accounts, and a rigorous compliance program designed to detect and deter violations of anti-fraud reporting, or books and records provisions of the federal securities laws throughout the Company’s operations. The Company also is required to report to the DOJ annually during the Term of the DPA regarding remediation and implementation of the compliance measures described in the DPA. There is no independent monitor requirement.
The SEC Consent and a related final judgment provide that upon entry by the Court, in addition to the above-referenced injunctive relief, the Company is liable for disgorgement of $7,541,633.70, inclusive of prejudgment interest, which shall be deemed satisfied in full by the DPA’s restitution order. Thus, subject to compliance with the DPA, Consent, and related documents, the Company will not have any additional financial obligation beyond the Restitution Amount.
The SEC Consent requires the Company
to remediate by September 30, 2019 the deficiencies in its internal control over financial reporting that constituted material weaknesses as identified in the Company’s Form 8-K dated March 30, 2018. If the Company fails to timely complete such remediation, the Company must within 60 days retain an independent consultant, not unacceptable to the SEC, to conduct a comprehensive review of the material weaknesses and of the Company’s policies, procedures, controls, and training relating to financial reporting and to recommend, as appropriate, policies, procedures, controls and training reasonably designed to ensure that the Company’s internal control over financial reporting is effective, and that the Company has processes and internal controls in place (i) to reasonably ensure that its equipment is tested for impairment when circumstances indicate that the carrying amount may not be recoverable, and (ii) as part of the contract review and approval process to reasonably ensure proper accounting and legal review of any contracts that impact the Company’s financial reporting. The Company shall adopt the Consultant’s recommendations or determinations concerning the specified matters.
The Agreements also provide that the Company will continue to cooperate with the DOJ, and the SEC in all related matters. In the event that the Company breaches the Agreements, there is a risk that DOJ or the SEC would seek to impose remedies provided for therein, including with respect to the DPA, instituting criminal prosecution against the Company.
The above description of the Agreements is not complete and is qualified in its entirety by the terms thereof. A copy of each Agreement is filed hereto as Exhibit 10.1 and Exhibit 10.2 and incorporated herein by reference. Exhibit 10.2 includes the Consent, the SEC's Complaint, and the related final judgment.
