0000928658 COVENANT LOGISTICS GROUP, INC. false --12-31 Q3 2020 4,408 1,440 753 692 - - 0.01 0.01 40,000,000 40,000,000 16,211,918 14,784,214 16,165,145 16,165,145 0.01 0.01 5,000,000 5,000,000 2,350,000 2,350,000 2,350,000 2,350,000 1,427,704 0 12 821 226 652 56 185 2 5 1.0 5 7 10 0 0 408 10.0 4 21 2.8 3.7 1.9 3.3 0 0 1.8 2.5 0.0 0.0 1 0.4 0.4 0.4 0 0.1 49 1.2 0 0 42.5 0 0 As of September 30, 2020 we have a $1.0 million current liability related to employee separation costs. We expect to incur additional employee separation costs in the fourth quarter of 2020 related to this restructuring activity, but do not have enough information to quantify at this time. Excludes the nine months ended September 30, 2020. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

or

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to

 

Commission File Number: 0-24960

CVENLOGO2.JPG  

COVENANT LOGISTICS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

88-0320154

(State or other jurisdiction of incorporation

(I.R.S. Employer Identification No.)

or organization)

 
   

400 Birmingham Hwy.

 

Chattanooga, TN

37419

(Address of principal executive offices)

(Zip Code)

 

423-821-1212

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
$0.01 Par Value Class A common stock CVLG The NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒

No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☒

No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐

  

Accelerated filer ☒

Non-accelerated filer   ☐

Smaller reporting company ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐

No ☒


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (October 30, 2020).

 

Class A Common Stock, $.01 par value: 14,784,214 shares

Class B Common Stock, $.01 par value: 2,350,000 shares

 

Page 1

 

 
 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

   

Page

Number

Item 1.

Financial Statements

 
     
 

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (unaudited)

Page 3
     
 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)

Page 4
     
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019 (unaudited)

Page 5
     
 

Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)

Page 6
     
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

Page 7
     
 

Notes to Condensed Consolidated Financial Statements (unaudited)

Page 8
     

Item 2.

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

Page 22
     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Page 38
     

Item 4.

Controls and Procedures

Page 39
 

PART II

OTHER INFORMATION

   

Page

Number

     

Item 1.

Legal Proceedings

Page 40
     

Item 1A.

Risk Factors

Page 41
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Page 41
     

Item 3.

Defaults Upon Senior Securities

Page 41
     

Item 4.

Mine Safety Disclosures

Page 41
     

Item 5.

Other Information

Page 41
     

Item 6.

Exhibits

Page 42

 

Page 2

 

  

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

   

September 30, 2020

   

December 31, 2019

 
   

(unaudited)

       

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 13,734     $ 43,591  

Accounts receivable, net of allowance of $4,408 in 2020 and $1,440 in 2019

    89,161       81,205  

Drivers' advances and other receivables, net of allowance of $753 in 2020 and $692 in 2019

    18,098       8,507  

Inventory and supplies

    3,296       4,210  

Prepaid expenses

    6,777       11,707  

Assets held for sale

    43,141       12,010  

Income taxes receivable

    5,083       5,403  

Other short-term assets

    414       1,132  
Current assets of discontinued operations     21,094       86,620  

Total current assets

    200,798       254,385  
                 

Property and equipment, at cost

    527,715       725,383  

Less: accumulated depreciation and amortization

    (140,487 )     (208,180 )

Net property and equipment

    387,228       517,203  
                 

Goodwill

    42,518       42,518  

Other intangibles, net

    25,670       29,615  

Other assets, net

    67,619       37,919  
                 

Total assets

  $ 723,833     $ 881,640  

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Checks outstanding in excess of bank balances

  $ -     $ 592  

Accounts payable

    21,933       19,500  

Accrued expenses

    42,926       31,840  

Current maturities of long-term debt

    15,067       54,377  

Current portion of finance lease obligations

    5,964       7,258  
Current portion of operating lease obligations     17,478       19,460  

Current portion of insurance and claims accrual

    22,895       21,800  
Other short-term liabilities     824       185  
Current liabilities of discontinued operations     20,226       6,245  

Total current liabilities

    147,313       161,257  
                 

Long-term debt

    89,347       200,177  

Long-term portion of finance lease obligations

    13,190       26,010  
Long-term portion of operating lease obligations     25,635       40,882  

Insurance and claims accrual

    49,629       20,295  

Deferred income taxes

    72,672       80,330  

Other long-term liabilities

    11,251       2,578  

Total liabilities

    409,037       531,529  

Commitments and contingent liabilities

    -       -  

Stockholders' equity:

               

Class A common stock, $.01 par value; 40,000,000 shares authorized; 16,211,918 shares issued and 14,784,214 outstanding as of September 30, 2020; and 16,165,145 shares issued and outstanding as of December 31, 2019

    173       173  

Class B common stock, $.01 par value; 5,000,000 shares authorized; 2,350,000 shares issued and outstanding

    24       24  

Additional paid-in-capital

    142,896       141,885  
Treasury stock at cost; 1,427,704 and no shares as of September 30, 2020 and December 31, 2019, respectively     (17,446 )     -  

Accumulated other comprehensive loss

    (2,839 )     (1,014 )

Retained earnings

    191,988       209,043  

Total stockholders' equity

    314,796       350,111  

Total liabilities and stockholders' equity

  $ 723,833     $ 881,640  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 3

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE three and nine months ended September 30, 2020 and 2019

(In thousands, except per share data)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

(unaudited)

   

(unaudited)

 
   

2020

   

2019

   

2020

   

2019

 

Revenues

                               

Freight revenue

  $ 196,217     $ 197,377     $ 565,362     $ 583,950  

Fuel surcharge revenue

    14,613       23,082       47,971       70,882  

Total revenue

  $ 210,830     $ 220,459     $ 613,333     $ 654,832  
                                 

Operating expenses:

                               

Salaries, wages, and related expenses

    78,812       83,687       235,964       238,281  

Fuel expense

    18,061       28,812       59,264       85,858  

Operations and maintenance

    11,912       14,742       36,956       44,814  

Revenue equipment rentals and purchased transportation

    58,604       50,428       151,677       146,267  

Operating taxes and licenses

    2,979       3,170       9,555       9,719  

Insurance and claims

    13,317       14,050       40,491       35,755  

Communications and utilities

    1,306       1,790       4,657       5,268  

General supplies and expenses

    7,673       7,584       27,568       21,493  

Depreciation and amortization

    13,428       20,817       51,274       61,230  
Gain on disposition of property and equipment, net     (2,073 )     (751 )     (7,048 )     (959 )
Impairment of long lived property, equipment, and right-of-use assets     -       -       26,569       -  

Total operating expenses

    204,019       224,329       636,927       647,726  

Operating income (loss)

    6,811       (3,870 )     (23,594 )     7,106  

Interest expense, net

    1,935       2,198       5,917       6,048  

Income from equity method investment

    (1,176 )     (2,138 )     (971 )     (7,548 )

Income (loss) before income taxes

    6,052       (3,930 )     (28,540 )     8,606  

Income tax expense (benefit)

    1,339       112       (7,000 )     3,645  
Income (loss) from continuing operations     4,713       (4,042 )     (21,540 )     4,961  
Income from discontinued operations, net of tax     2,788       853       4,485       2,354  

Net income (loss)

  $ 7,501     $ (3,189 )   $ (17,055 )   $ 7,315  
                                 
Basic income (loss) per share:                                

Income (loss) from continuing operations

  $ 0.28     $ (0.22 )   $ (1.24 )   $ 0.27  
Income from discontinued operations     0.16       0.05       0.26       0.13  
Net income (loss)(1)   $ 0.44     $ (0.17 )   $ (0.98 )   $ 0.40  
Diluted income (loss) per share:                                
Income (loss) from continuing operations   $ 0.27     $ (0.22 )   $ (1.24 )   $ 0.27  
Income from discontinued operations     0.16       0.05       0.26       0.13  
Net income (loss)(1)   $ 0.43     $ (0.17 )   $ (0.98 )   $ 0.39  

Basic weighted average shares outstanding

    17,134       18,458       17,435       18,426  

Diluted weighted average shares outstanding

    17,267       18,458       17,435       18,620  

 

(1) Sum of the individual amounts may not add due to rounding.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 4

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE three and nine months ended September 30, 2020 and 2019

(Unaudited and in thousands)

 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net income (loss)

  $ 7,501     $ (3,189 )   $ (17,055 )   $ 7,315  
                                 

Other comprehensive income (loss):

                               
                                 

Unrealized loss on effective portion of cash flow hedges, net of tax of $12 and $821 in 2020 and $226 and $652 in 2019, respectively

    (34 )     (596 )     (2,398 )     (1,720 )
                                 

Reclassification of cash flow hedge losses (gains) into statement of operations, net of tax of ($56) and ($185) in 2020 and ($2) and $5 in 2019, respectively

    163       5       541       (14 )
                                 

Unrealized holding (loss) gain on investments classified as available-for-sale

    (4 )     26       33       47  

Total other comprehensive income (loss)

    125       (565 )     (1,824 )     (1,687 )
                                 

Comprehensive income (loss)

  $ 7,626     $ (3,754 )   $ (18,879 )   $ 5,628  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 5

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE three and nine months ended September 30, 2020 and 2019

(Unaudited and in thousands)

 

   

For the Three and Nine Months Ended September 30, 2020

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

Loss

   

Earnings

   

Equity

 

Balances at December 31, 2019

  $ 173     $ 24     $ 141,885     $ -     $ (1,014 )   $ 209,043     $ 350,111  

Net loss

    -       -       -       -       -       (2,213 )     (2,213 )
Other comprehensive loss     -       -       -       -       (2,350 )     -       (2,350 )

Share repurchase

    -       -       -       (17,515 )     -       -       (17,515 )

Stock-based employee compensation expense

    -       -       466       -       -       -       466  

Issuance of restricted shares, net

    -       -       (6 )     -       -       -       (6 )

Balances at March 31, 2020

  $ 173     $ 24     $ 142,345     $ (17,515 )   $ (3,364 )   $ 206,830     $ 328,493  
Net loss     -       -       -       -       -       (22,343 )     (22,343 )

Other comprehensive income

    -       -       -       -       400       -       400  
Share repurchase     -       -       -       29       -       -       29  
Stock-based employee compensation expense     -       -       355       -       -       -       355  
Issuance of restricted shares, net     -       -       (43 )     40       -       -       (3 )
Balances at June 30, 2020   $ 173     $ 24     $ 142,657     $ (17,446 )   $ (2,964 )   $ 184,487     $ 306,931  
Net income     -       -       -             -       7,501       7,501  
Other comprehensive income     -       -       -             125       -       125  
Stock-based employee compensation expense     -       -       298             -       -       298  
Issuance of restricted shares, net     -       -       (59 )           -       -       (59 )
Balances at September 30, 2020   $ 173     $ 24     $ 142,896     $ (17,446 )   $ (2,839 )   $ 191,988     $ 314,796  

 

   

For the Three and Nine Months Ended September 30, 2019

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

Income (Loss)

   

Earnings

   

Equity

 

Balances at December 31, 2018

  $ 171     $ 24     $ 142,177     $ -     $ 204     $ 200,566     $ 343,142  

Net income

    -       -       -       -       -       4,433       4,433  

Other comprehensive loss

    -       -       -       -       (432 )     -       (432 )

Stock-based employee compensation expense

    -       -       1,262       -       -       -       1,262  

Issuance of restricted shares, net

    1       -       (669 )     -       -       -       (668 )

Balances at March 31, 2019

  $ 172     $ 24     $ 142,770     $ -     $ (228 )   $ 204,999     $ 347,737  
Net income     -       -       -       -       -       6,071       6,071  
Other comprehensive loss     -       -       -       -       (690 )     -       (690 )
Stock-based employee compensation expense reversal     -       -       (1,433 )     -       -       -       (1,433 )
Issuance of restricted shares, net     -       -       -       -       -       -       -  
Balances at June 30, 2019   $ 172     $ 24     $ 141,337     $ -     $ (918 )   $ 211,070     $ 351,685  
Net loss     -       -       -       -       -       (3,189 )     (3,189 )
Other comprehensive loss     -       -       -       -       (565 )     -       (565 )
Stock-based employee compensation expense     -       -       597       -       -       -       597  
Issuance of restricted shares, net     -       -       (94 )     -       -       -       (94 )
Balances at September 30, 2019   $ 172     $ 24     $ 141,840     $ -     $ (1,483 )   $ 207,881     $ 348,434  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 6

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE nine months ended September 30, 2020 and 2019

(Unaudited and in thousands)

 

    Nine Months Ended September 30,  
   

2020

   

2019

 
Cash flows from operating activities:                

Net (loss) income

  $ (17,055 )   $ 7,315  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

               

Provision for accounts receivable

    3,211       13  

Reversal of gain on sales to equity method investee

    (77 )     (7 )

Depreciation and amortization

    51,281       61,250  
Impairment of property and equipment     26,569       -  

Amortization of deferred financing fees

    154       110  

Deferred income tax (benefit) expense

    (7,138 )     4,632  

Income tax benefit arising from restricted share vesting and stock options exercised

    81       4  

Stock-based compensation expense

    1,120       426  

Income from equity method investment

    (971 )     (7,548 )
Return on investment in affiliated company     -       1,225  

Gain on disposition of property and equipment

    (7,019 )     (2,137 )
Gain on disposition of reportable segment     (3,720 )     -  

Return on investment in available-for-sale securities

    -       (4 )

Changes in operating assets and liabilities:

               

Receivables and advances

    (72,413 )     (9,099 )

Prepaid expenses and other assets

    5,756       (977 )

Inventory and supplies

    914       (111 )
Insurance and claims accrual     30,428       539  

Accounts payable and accrued expenses

    13,836       (15,828 )

Net cash flows provided by operating activities

    24,957       39,803  
                 
Cash flows from investing activities:                
Purchase of available-for-sale securities     (319 )     (1,380 )

Acquisition of property and equipment

    (63,614 )     (129,403 )

Proceeds from disposition of reportable segment

    108,375       -  

Proceeds from disposition of property and equipment

    86,555       31,235  

Net cash flows provided by (used in) investing activities

    130,997       (99,548 )
                 

Cash flows from financing activities:

               

Change in checks outstanding in excess of bank balances

    (592 )     (664 )

Proceeds from issuance of notes payable

    65,457       102,796  

Repayments of notes payable

    (215,750 )     (30,538 )

Repayments of finance lease obligations

    (17,372 )     (4,232 )

Proceeds under revolving credit facility

    1,091,966       1,257,755  

Repayments under revolving credit facility

    (1,091,966 )     (1,247,942 )

Payment of minimum tax withholdings on stock compensation

    (68 )     (762 )
Common stock repurchased     (17,486 )     -  

Net cash flows (used in) provided by financing activities

    (185,811 )     76,413  
                 

Net change in cash and cash equivalents

    (29,857 )     16,668  
                 
Cash and cash equivalents at beginning of period     43,591       23,127  
Cash and cash equivalents at end of period   $ 13,734     $ 39,795  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 7

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.

Significant Accounting Policies

 

Basis of Presentation

 

On July 1, 2020, the stockholders of Covenant Transportation Group, Inc. approved the amendment to the organization’s Articles of Incorporation to change the Company’s name to Covenant Logistics Group, Inc. All references herein reflect the change of name to Covenant Logistics Group, Inc.

 

The condensed consolidated financial statements include the accounts of Covenant Logistics Group, Inc., a Nevada holding company, and its wholly owned subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to Covenant Logistics Group, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933. In preparing financial statements, it is necessary for management to make assumptions and estimates affecting the amounts reported in the condensed consolidated financial statements and related notes. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts. In the opinion of management, the accompanying financial statements include all adjustments that are necessary for a fair presentation of the results for the interim periods presented, such adjustments being of a normal recurring nature.

 

Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 2019, condensed consolidated balance sheet was derived from our audited balance sheet as of that date. Our operating results are subject to seasonal trends when measured on a quarterly basis; therefore operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2019. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year.

 

Change in Estimates

 

The Company reviews the estimated useful lives and salvage values of its assets on an ongoing basis, based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. During the second quarter of 2020, the Company adjusted the useful lives of certain intangible finite-lived assets, including the Landair trade name and non-compete agreement, and certain revenue equipment held under operating leases as the result of management changes, a change in the branding of the organization, and the forward looking use of these assets. These changes are being treated as a change in accounting estimate, which during the nine months ended September 30, 2020, resulted in an increase in depreciation and amortization expense of approximately $3.2 million, or a $2.2 million, or $0.13, per diluted share decrease to net income.

 

 

Risks and Uncertainties

 

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic, and the President of the United States declared the COVID-19 a national emergency. In view of the rapidly changing business environment, unprecedented market volatility and heightened degree of uncertainty resulting from COVID-19, we are currently unable to fully determine its future impact on our business. However, we are continuing to monitor the progression of the pandemic, further government response and development of treatments and vaccines and their potential effect on our financial position, results of operations, cash flows and liquidity. These events could have an impact in future periods on certain estimates used in the preparation of our third quarter financial results, including, but not limited to impairment of goodwill, other intangible assets and other long-lived assets, income tax provision and recoverability of certain receivables. Should the pandemic continue for an extended period of time, the impact on our operations could have a material adverse effect on our financial condition, results of operations, cash flows and liquidity.

 

Our insurance program includes multi-year policies with specific insurance limits that may be eroded over the course of the policy term. If that occurs, we will be operating with less liability coverage insurance at various levels of our insurance tower. For the current policy period ( April 1, 2018 to March 31, 2021), aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million are estimated to be fully eroded based on current claims expense accruals, which could lead to volatility in our insurance and claims expense. As a result, any increases to existing claims, and/or new claims filed prior to March 31, 2021, may require additional expense accruals. Due to developments, we may experience additional expense accruals, increased insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. We maintain insurance to cover liabilities arising from the transportation of freight for amounts in excess of certain self-insured retentions. In management's opinion, our potential exposure under pending legal proceedings is adequately provided for in the accompanying condensed consolidated financial statements. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations.

 

Page 8

 

On July 8, 2020, we sold a portfolio of accounts receivable, contract rights, and associated assets consisting of approximately $103.3 million in net funds employed (the “Portfolio”) previously held by Transport Financial Services ("TFS"), a division of Covenant Transport Solutions, LLC, an indirect wholly owned subsidiary of the Company, to a subsidiary of Triumph Bancorp, Inc. ("Triumph") for approximately $122.3 million, consisting of $108.4 million in cash and $13.9 million in Triumph stock, plus an earn-out opportunity of up to $9.9 million. After the transaction closed, the Company and Triumph became involved in a dispute over the nature of approximately $66.0 million of the assets included in the Portfolio. The dispute was resolved on September 23, 2020 with an amendment of the purchase agreement and related funding arrangements that reduced the purchase price of the Portfolio to approximately $108.4 million, representing the cash amount received by us at closing. Additionally, the earnout opportunity was terminated and we are required to sell the Triumph stock we received at closing and will deliver the net proceeds to Triumph. In October 2020, the Company sold the Triumph stock acquired as part of the amended purchase agreement for $28.1 million and remitted the proceeds to Triumph upon settlement. The amended purchase agreement resulted in a gain on the sale of the Portfolio of $3.7 million, net of related expenses.

 

The amended purchase agreement specifically identified approximately $62.0 million accounts within the Portfolio, which related to advances on services that had not yet been performed, were placed in a loss sharing pool to be repaid with proceeds other than those generated from ordinary working capital factoring. To the extent losses on covered accounts are incurred, we will indemnify Triumph on a dollar for dollar basis for up to the first $30.0 million of losses, and on a 50% basis for up to the next $30.0 million of losses, for total indemnification exposure of up to $45.0 million.

 

To date no indemnification obligations have been required to be funded and the Company and Triumph are cooperating to manage the covered accounts and assist the clients with, among other things, operational improvements in an attempt to minimize losses on the covered accounts. We have not recorded a liability for our indemnification obligations as of September 30, 2020, as we lack the information necessary to determine a probable amount. We will record liabilities, if any, when they become probable and capable of estimation. The accrual of material liabilities and payment of amounts with respect to the indemnification obligations could create volatility in our reported future financial results and could have an adverse effect on our results of operations, cash flows, available liquidity, and total indebtedness.

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined using the straight-line method over the estimated useful lives of the assets, while depreciation for tax purposes is generally recorded using an accelerated method. Depreciation of revenue equipment is our largest item of depreciation. We have historically depreciated new tractors over five years to salvage values of approximately 15% of their cost. We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 25% of their cost. We review, at least annually, the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Changes in the useful life or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations.

 

Recent Accounting Pronouncements

 

Accounting Standards not yet adopted

 

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Measurement of Credit Losses on Financial Instruments, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. This update will be effective for our annual reporting period beginning January 1, 2023, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impacts the adoption of this standard will have on the consolidated financial statements.

 

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Note 2.

Income (Loss) Per Share

 

Basic income (loss) per share excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income (loss) per share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings. There were 133,000 and 261,000 shares issuable upon conversion of unvested restricted shares for the three months ended  September 30, 2020 and September 30, 2019, respectively, and approximately 216,000 shares and 194,000 shares issuable upon conversion of unvested restricted shares for the nine months ended September 30, 2020 and September 30, 2019, respectively. Of such shares, 261,000 shares and 216,000 shares for the three months ended September 30, 2019 and the nine months ended September 30, 2020, respectively, were not included in the computation of the diluted loss per share for the same periods as the inclusion would have been anti-dilutive due to the net loss. There were no outstanding stock options at September 30, 2020 or September 30, 2019. Income per share is the same for both Class A and Class B shares.

 

The following table sets forth, for the periods indicated, the calculation of net income (loss) per share included in the condensed consolidated statements of operations:

 

(in thousands except per share data)

 

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Numerators:

                               
Income (loss) from continuing operations   $ 4,713     $ (4,042 )   $ (21,540 )   $ 4,961  
Income from discontinued operations     2,788       853       4,485       2,354  

Net income (loss)

  $ 7,501     $ (3,189 )   $ (17,055 )   $ 7,315  

Denominator:

                               

Denominator for basic income (loss) per share – weighted-average shares

    17,134       18,458       17,435       18,426  

Effect of dilutive securities:

                               

Equivalent shares issuable upon conversion of unvested restricted shares

    133       -       -       194  

Denominator for diluted income (loss) per share adjusted weighted-average shares and assumed conversions

    17,267       18,458       17,435       18,620  
                                 

Basic income (loss) per share:

                               

Income (loss) from continuing operations

  $ 0.28     $ (0.22 )   $ (1.24 )   $ 0.27  
Income from discontinued operations     0.16       0.05       0.26       0.13  
Net income (loss)(1)   $ 0.44     $ (0.17 )   $ (0.98 )   $ 0.40  
Diluted income (loss) per share:                                
Income (loss) from continuing operations   $ 0.27     $ (0.22 )   $ (1.24 )   $ 0.27  
Income from discontinued operations     0.16       0.05       0.26       0.13  
Net income (loss)(1)   $ 0.43     $ (0.17 )   $ (0.98 )   $ 0.39  

 

(1Sum of the individual amounts may not add due to rounding.

Page 10

 

 

 

Note 3.

Discontinued Operations

 

As of June 30, 2020, our Factoring reportable segment was classified as discontinued operations as it: (i) was a component of the entity, (ii) met the criteria as held for sale, and (iii) had a material effect on the Company's operations and financial results. On July 8, 2020, we closed on the disposition of substantially all of the operations and assets of TFS, which included substantially all of the assets and operations of our Factoring reportable segment. The sale consisted primarily of $103.3 million of net accounts receivable, which included $108.7 million of gross accounts receivable, less advances and rebates of $5.4 million. 

 

We have reflected the former Factoring reportable segment as discontinued operations in the condensed consolidated statements of operations for all periods presented. Prior periods have been adjusted to conform to the current presentation.

 

The following table summarizes the results of our discontinued operations for the three and nine months ended September 30, 2020 and 2019:

(in thousands)   Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2020     2019     2020     2019  
Total revenue   $ 142     $ 2,455     $ 5,397     $ 6,561  
Operating expenses     (3,601 )     515       (2,571 )     1,327  
Operating income     3,743       1,940       7,968       5,234  
Interest expense     -       794       1,948       2,073  
Income before income taxes     3,743       1,146       6,020       3,161  
Income tax expense     955       293       1,535       807  
Net income from discontinued operations, net of tax    $ 2,788     $ 853     $ 4,485     $ 2,354  

 

Operating expenses for the three and nine months ended September 30, 2020 include the $3.7 million gain on disposition of the Factoring segment Portfolio.

 

Interest expense not directly attributable to or related to other operations has been allocated to discontinued operations in a manner consistent with debt needed to finance the net average funds employed by the Factoring reportable segment, multiplied by the Company’s weighted average interest rate.

The following table summarizes the major classes of assets and liabilities included as discontinued operations as of  September 30, 2020 and December 31, 2019:

(in thousands)

 

September 30, 2020

   

December 31, 2019

 

Current assets:

               

Accounts receivable, net of allowance of $0 in 2020 and $408 in 2019

  $ -     $ 86,620  
Other short-term assets     21,094       -  

Current assets of discontinued operations

    21,094       86,620  
                 

Current liabilities:

               

Accounts payable

    20,226       6,245  

Current liabilities of discontinued operations

  $ 20,226     $ 6,245  

 

In accordance with the amended purchase agreement, $19.6 million was recorded as an asset and liability for the fair market value of the Triumph stock received that is payable to Triumph. In October 2020, the Company sold the Triumph stock acquired as part of the amended purchase agreement for $28.1 million and remitted the proceeds to Triumph upon settlement.

 

The net cash flows for operating activities related to discontinued operations provided $10.0 million and used $25.9 million for the nine months ended September 30, 2020 and 2019, respectively. There were $108.4 million investing and no financing cash flows related to discontinued operations for the nine months September 30, 2020 and no investing or financing cash flows related to discontinued operations for the same period in 2019.

 

The following unaudited summary information is presented on a consolidated pro forma basis as if the Factoring assets were sold as of January 1, 2019.

 

(in thousands)   Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2020     2019     2020     2019  
Total revenue   $ 210,830     $ 220,459     $ 613,333     $ 654,832  
Income (loss) from continuing operations     4,713       (4,042 )     (21,540 )     4,961  
Income (loss) per basic share from continuing operations   $ 0.28     $ (0.22 )   $ (1.24 )   $ 0.27  
Income (loss) per diluted share from continuing operations   $ 0.27     $ (0.22 )   $ (1.24 )   $ 0.27  

 

Refer to Note 1, “Significant Accounting Policies” of the accompanying condensed consolidated financial statements for further information about the amended TFS purchase agreement. 

 

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Note 4.

Segment Information

 

Until the second quarter of 2020, we had four reportable segments, Highway Services, Dedicated, Managed Freight, and Factoring. As discussed in Note 3, our Factoring reportable segment was classified as discontinued operations as of June 30, 2020. As of September 30, 2020, the segment formerly known as Highway Services is now reflected as Expedited, given the change in business mix surrounding the exit of the majority of the solo-refrigerated business in the second quarter of 2020. In addition, given management changes and growth, we have reported Warehousing as a separate reportable segment from Managed Freight. We believe the updated reportable segments reflect our service offerings, strategic direction, and how management, including our chief operating decision makers, monitors our performance.

 

Our four reportable segments are as follows:

 

 

Expedited: The Expedited segment primarily provides truckload services to customers with high service freight and delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery windows. Expedited services generally require two-person driver teams on equipment either owned or leased by the Company.

 

 

Dedicated: The Dedicated segment provides customers with committed truckload capacity over contracted periods using equipment either owned or leased by the Company.

 

 

Managed Freight: The Managed Freight segment includes our brokerage and transport management services (“TMS”). Brokerage services provide logistics capacity by outsourcing the carriage of customers’ freight to third parties. TMS provides comprehensive logistics services on a contractual basis to customers who prefer to outsource their logistics needs. 

 

 

Warehousing: The Warehousing segment provides day-to-day warehouse management services to customers who have chosen to outsource this function.

 

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in our 2019 Form 10-K. Substantially all intersegment sales prices are market based. We evaluate performance based on operating income of the respective business units.

 

The following table summarizes our total revenue by our four reportable segments, as used by our chief operating decision makers in making decisions regarding allocation of resources etc., for the three and nine months ended September 30, 2020 and 2019:

 

(in thousands)

 

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues:

                               

Expedited

  $ 78,410     $ 87,674     $ 244,347     $ 265,664  

Dedicated

    71,104       87,284       218,833       257,362  

Managed Freight

    47,594       33,339       112,695       95,725  

Warehousing

    13,722       12,162       37,458       36,081  

Total revenues

  $ 210,830     $ 220,459     $ 613,333     $ 654,832  

 

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Note 5.

Income Taxes

 

Income tax expense in both 2020 and 2019 varies from the amount computed by applying the federal corporate income tax rates of 21% to income before income taxes, primarily due to state income taxes, net of federal income tax effect, adjusted for permanent differences, the most significant of which is the effect of the per diem pay structure for drivers. Drivers who meet the requirements to receive per diem receive non-taxable per diem pay in lieu of a portion of their taxable wages. This per diem program increases our drivers' net pay per mile, after taxes, while decreasing gross pay, before taxes. As a result, salaries, wages, and related expenses are slightly lower and our effective income tax rate is higher than the statutory rate. Generally, as pre-tax income increases, the impact of the driver per diem program on our effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pre-tax income, while in periods where earnings are at or near breakeven the impact of the per diem program on our effective tax rate is significant. Due to the partially nondeductible effect of per diem pay, our tax rate will fluctuate in future periods based on fluctuations in earnings.

 

Our liability recorded for uncertain tax positions as of  September 30, 2020 has increased by less than $0.2 million since December 31, 2019.

 

The net deferred tax liability of $72.7 million primarily relates to differences in cumulative book versus tax depreciation of property and equipment, partially off-set by net operating loss carryovers and insurance claims that have been reserved but not paid. The carrying value of our deferred tax assets assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to establish a valuation allowance against the carrying value of the deferred tax assets, which would result in additional income tax expense. On a periodic basis, we assess the need for adjustment of the valuation allowance. Based on forecasted taxable income resulting from the reversal of deferred tax liabilities, primarily generated by accelerated depreciation for tax purposes in prior periods, and tax planning strategies available to us, a valuation allowance has been established at September 30, 2020, for $0.4 million related to certain state net operating loss carryforwards. If these estimates and related assumptions change in the future, we may be required to modify our valuation allowance against the carrying value of the deferred tax assets.

 

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions for refundable payroll tax credits, deferral of employer-side social-security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. Although the Company is still assessing the impact of the legislation, we do not expect there to be a material income tax impact to our consolidated financial statements at this time.

 

 

Note 6.

Restructuring and Cost Savings Initiatives

 

In the second quarter of 2020, we made significant changes to our operational business units, overhead structure and branding strategy in an effort to streamline our business in a manner that we believe will allow us to significantly lower our fixed costs, pay down debt and produce consistent acceptable margins. These changes include (i) a reduction in our fleet of tractors and refrigerated trailers, which have historically produced unacceptable or unprofitable operating income, (ii) reallocation of our operating fleet toward our more profitable expedited, dedicated and irregular route operations, (iii) the sale of our Hutchins, Texas terminal and discontinued use of our Texarkana, Arkansas terminal, (iv) changes to key management and reductions to headcount, (v) the closure and early termination of our leased office space in Chattanooga, Tennessee that our brokerage group occupied, (vi) the installation of new operational processes allowing us to abandon or discontinue the use of a number of peripheral information technology infrastructure and applications and (vii) a change in our branding strategy to focus on one company name, phasing out the use of the Landair trade name.

 

Although the significant majority of restructuring and cost savings initiatives were completed in the second quarter of 2020, we incurred additional costs in the third quarter of 2020 and anticipate additional costs in the fourth quarter of 2020, as we continue to optimize our fleet profile and management team.

 

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In the second quarter of 2020 we discontinued the use of a significant amount of property and equipment, including assets owned and held under operating leases. We adjusted the carrying value of the owned property and equipment down to fair market value less estimated costs of disposal and classified them as available held for sale as of June 30, 2020. We expect to sell all the assets within the next twelve months. We terminated the lease agreement on a leased office facility in Chattanooga, TN during the second quarter of 2020 and recognized the related loss on the termination of the right of use asset and the abandonment of leasehold improvements within the impairment of property and equipment line item of the condensed consolidated statement of operations. The following table provides a summary of the asset groups impaired, amount of the impairment and a description of the valuation technique used to determine fair value. We believe that these impairment activities are substantially complete. Accordingly, we incurred no additional charges during the third quarter of 2020 and do not expect to incur additional charges in connection with this activity.  

 

(in thousands)

 

Description

  Three months ended September 30, 2020  

Nine months ended September 30, 2020

  Segment(s) Impacted

Value Determination

Revenue equipment

  $ -   $ 16,779   Expedited and Dedicated

Third Party Market Appraisal

Terminal facility, leasehold improvements, and equipment, Texarkana, AR

    -     7,319   Expedited and Dedicated

Third Party Market Appraisal

Leased office facility, Chattanooga, TN

    -     2,236   Managed Freight

Loss on ROU Asset and Leasehold Improvements

Training and orientation center, Chattanooga, TN

    -     235   Expedited and Dedicated

Quoted Market Price

Impairment of right-of-use asset, long lived properties, and equipment

  $ -   $ 26,569      

 

Other restructuring related gains and charges incurred during the three and nine-months ended September 30, 2020 are summarized in the table below. Unless noted below, we believe that these other restructuring related gains and charges are substantially complete. Accordingly, we do not expect to incur additional charges in connection with this activity.

 

(in thousands)

 

    Three months ended   Nine months ended      

Description

  September 30, 2020  

September 30, 2020

  Segment(s) Impacted

Statement of Operations Line Item

Gain on sale of Hutchins, TX terminal

  $ -   $ (5,712 ) Expedited and Dedicated

Gain on disposition of property and equipment, net

Employee separation costs (1)     1,000     2,791   Expedited, Dedicated and Managed Freight Salaries, wages, and related expenses

Abandonment of information technology infrastructure and applications

    -     1,048   Expedited and Dedicated Gain on disposition of property and equipment, net
Change in useful life/abandonment of intangible assets     -     1,331   Dedicated, Managed Freight, and Warehousing Depreciation and amortization
Abandonment of revenue equipment held under operating leases     -     825   Expedited and Dedicated Revenue equipment rentals and purchased transportation
Contract exit costs and restructuring related costs and professional fees     -     695   Expedited and Dedicated

General supplies and expenses

Total

  $ 1,000   $ (978 )    

 

(1) As of September 30, 2020, we have a $1.6 million current liability related to employee separation costs. We expect to incur less than $1.0 million of additional employee separation costs in the fourth quarter of 2020 related to this restructuring activity.

 

Page 14

 
 

Note 7.

Debt

 

Current and long-term debt and lease obligations consisted of the following at  September 30, 2020 and December 31, 2019:

 

(in thousands)

 

September 30, 2020

   

December 31, 2019

 
   

Current

   

Long-Term

   

Current

   

Long-Term

 

Borrowings under Credit Facility

  $ -     $ -     $ -     $ -  
Borrowings under the Draw Note     -       -       -       -  

Revenue equipment installment notes; weighted average interest rate of 2.8% at September 30, 2020, and 3.7% at December 31, 2019, due in monthly installments with final maturities at various dates ranging from October 2020 to October 2024, secured by related revenue equipment

    13,939       67,528       53,431       177,514  

Real estate notes; interest rate of 1.9% at September 30, 2020 and 3.3% at December 31, 2019 due in monthly installments with a fixed maturity at August 2035, secured by related real estate

    1,128       21,819       1,093       22,670  

Deferred loan costs

    -       -       (147 )     (7 )

Total debt

    15,067       89,347       54,377       200,177  

Principal portion of finance lease obligations, secured by related revenue equipment

    5,964       13,190       7,258       26,010  

Principal portion of operating lease obligations, secured by related revenue equipment

    17,478       25,635       19,460       40,882  

Total debt and lease obligations

  $ 38,509     $ 128,172     $ 81,095     $ 267,069  

 

We and substantially all of our subsidiaries are parties to the Credit Facility with Bank of America, N.A., as agent (the "Agent") and JPMorgan Chase Bank, N.A. (together with the Agent, the "Lenders"). On October 23, 2020, we amended and extended the Credit Facility (the “Eighteenth Amendment”). The Credit Facility is a $110.0 million revolving credit facility (increased from $95.0 million by the Eighteenth Amendment), with an uncommitted accordion feature that, so long as no event of default exists, allows us to request an increase in the revolving credit facility of up to $50.0 million subject to Lender acceptance of the additional funding commitment. The Credit Facility includes a letter of credit sub facility in an aggregate amount of $105.0 million (increased from $95.0 million by the Eighteenth Amendment) and a swing line sub facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments under the Credit Facility from time-to-time. The Credit Facility matures in October 2025 (extended from September 2021 by the Eighteenth Amendment).

 

Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans accrue interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, plus an applicable margin ranging from 0.25% to 0.75% (decreased from a range of 0.5% to 1.0% by the Eighteenth Amendment); while LIBOR loans accrue interest at LIBOR, plus an applicable margin ranging from 1.25% to 1.75% (decreased from a range of 1.5% to 2.0% by the Eighteenth Amendment). The applicable rates are adjusted quarterly based on average pricing availability. The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility. The obligations under the Credit Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of any real estate or revenue equipment pledged under other financing agreements, including revenue equipment installment notes and finance leases.

 

Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $110.0 million (increased from $95.0 million by the Eighteenth Amendment), minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 87.5% (increased from 85% by the Eighteenth Amendment) of eligible accounts receivable, plus (ii) the least of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 100% (increased from 95% by the Eighteenth Amendment) of the net book value of eligible revenue equipment, (c) 40.9% (increased from 35% by the Eighteenth Amendment) of the Lenders' aggregate revolving commitments under the Credit Facility, or (d) following the Eighteenth Amendment, $45.0 million, plus (iii) the lesser of (a) $10.4 million (as of the date of the Eighteenth Amendment) or (b) 80% (increased from 75% by the Eighteenth Amendment) of the appraised fair market value of eligible real estate, as reduced by a periodic amortization amount. We had no outstanding borrowings under the Credit Facility as of September 30, 2020, undrawn letters of credit outstanding of approximately $36.7 million, and available borrowing capacity of $58.3 million. As of September 30, 2020, there were no outstanding base rate or LIBOR loans. Based on availability as of September 30, 2020 and 2019, there was no fixed charge coverage requirement.

 

Page 15

 

The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the Lenders' commitments may be terminated. If an event of default occurs under the Credit Facility and the Lenders cause, or have the ability to cause, all of the outstanding debt obligations under the Credit Facility to become due and payable, this could result in a default under other debt instruments that contain acceleration or cross-default provisions. The Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. Failure to comply with the covenants and restrictions set forth in the Credit Facility could result in an event of default. 

 

In connection with the TFS Settlement, on September 23, 2020, TBK Bank, SSB, as lender and agent for Triumph (“TBK Bank”), provided the Company with a $45 million line of credit (the “Draw Note”), the proceeds of which are to be used solely to satisfy our indemnification obligations under the TFS Settlement. We may borrow pursuant to the Draw Note until September 23, 2025. Any amount outstanding under the Draw Note will accrue interest at a per annum rate equal to one and one-half (1.5) percentage points over LIBOR, provided, however, that LIBOR shall be deemed to be at least 0.25%.  Accrued interest is due monthly and the outstanding principal balance is due on September 23, 2026. To secure our obligations under the TFS Settlement and the Draw Note, we pledged certain unencumbered revenue equipment with an estimated net orderly liquidation value of $60 million. The Draw Note includes usual and customary events of default for a facility of this nature and provides that, upon occurrence and continuation of an event of default, payment of all amounts payable under the Draw Note may be accelerated.

 

Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly installments with final maturities at various dates ranging from  October 2020 to October 2024. The notes contain certain requirements regarding payment, insuring of collateral, and other matters, but do not have any financial or other material covenants or events of default except certain notes totaling $60.3 million are cross-defaulted with the Credit Facility. Additional borrowings from the financial affiliates of our primary revenue equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered in 2020, while any other property and equipment purchases, including trailers, are expected to be funded with a combination of available cash, notes, operating leases, finance leases, and/or from the Credit Facility.

 

In April 2020, in an effort to improve our liquidity during the COVID-19 pandemic, we executed a modification to certain of our revenue equipment installment notes, exercising an option to make interest only payments for a period of 90 days, extending the due date of $177.3 million of debt by three months.

 

In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third party lender. The note contains certain restrictions and covenants that are usual and customary for a note of this nature. Failure to comply with the covenants and restrictions set forth in the note could result in an event of default. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the related interest rate to 4.2%. The note contains certain restrictions and covenants that are usual and customary for a note of this nature. Failure to comply with the covenants and restrictions set forth in the note could result in an event of default. For the second quarter ended June 30, 2020, we obtained a waiver from the third-party lender for a financial covenant that we did not comply with. Absent the waiver we would have been in default under our covenants. For the third quarter ended September 30, 2020, there was an amendment to the calculation of the covenant and we were in compliance with the calculation as stated in the amendment. We expect to be in compliance with our debt covenants for the next 12 months. 

 

Page 16

 
 
 

Note 8.

Lease Obligations

 

The finance leases in effect at  September 30, 2020 terminate from  October 2020 through  January 2024 and contain guarantees of the residual value of the related equipment by us.

 

 A summary of our lease obligations at September 30, 2020 and 2019 are as follows:

 

(dollars in thousands)

 

Three Months Ended

   

Three Months Ended

   

Nine Months Ended

   

Nine Months Ended

 
   

September 30, 2020

   

September 30, 2019

   

September 30, 2020

   

September 30, 2019

 

Finance lease cost:

                               

Amortization of right-of-use assets

  $ 1,018     $ 1,406     $ 3,023     $ 4,225  

Interest on lease liabilities

    284       210       808       644  

Operating lease cost

    5,734       6,167       19,782       17,824  

Variable lease cost

    44       -       358       -  
                                 

Total lease cost

  $ 7,080     $ 7,783     $ 23,971     $ 22,693  
                                 

Other information

                               

Cash paid for amounts included in the measurement of lease liabilities:

                               

Operating cash flows from finance leases

    1,018       1,146       3,023       3,589  

Operating cash flows from operating leases

    5,778       6,167       20,140       17,824  

Financing cash flows from finance leases

    284       210       808       644  

Right-of-use assets obtained in exchange for new finance lease liabilities

    1,131       -       3,258       -  

Right-of-use assets obtained in exchange for new operating lease liabilities

    122       20,096       2,759       26,421  

Weighted-average remaining lease term—finance leases

 

1.8 years

                         

Weighted-average remaining lease term—operating leases

 

2.5 years

                         

Weighted-average discount rate—finance leases

    4.2 %                        

Weighted-average discount rate—operating leases

    5.2 %                        

 

During the three and nine months ended September 30, 2020 we recognized $0.0 million and approximately $2.2 million, respectively, of impairment expense related to a leased office facility in Chattanooga, TN held under an operating lease and $0.0 million and approximately $0.8 million, respectively of additional revenue equipment and purchased transportation expense related to the abandonment of revenue equipment held under an operating lease. As of  September 30, 2020 and December 31, 2019, right-of-use assets of $41.7 million and $58.8 million for operating leases and $50.6 million and $35.6 million for finance leases, respectively, are included in net property and equipment in our condensed consolidated balance sheets. Operating lease right-of-use asset amortization is included in revenue equipment rentals and purchased transportation, communication and utilities, and general supplies and expenses, depending on the underlying asset, in the condensed consolidated statement of operations. Amortization of finance leased assets is included in depreciation and amortization expense in the condensed consolidated statement of operations.

 

Our future minimum lease payments as of September 30, 2020, are summarized as follows by lease category:

 

(in thousands)

 

Operating

   

Finance

 
2020 (1)   $ 5,177     $ 6,654  

2021

    18,543       7,590  

2022

    15,523       5,456  

2023

    6,762       29  

2024

    28       -  

Thereafter

    9       -  

Total minimum lease payments

  $ 46,042     $ 19,729  

Less: amount representing interest

    (2,929 )     (575 )

Present value of minimum lease payments

  $ 43,113     $ 19,154  

Less: current portion

    (17,478 )     (5,964 )

Lease obligations, long-term

  $ 25,635     $ 13,190  

 

(1) Excludes the nine months ended September 30, 2020.

 

Page 17

 
 
 

Note 9.

Stock-Based Compensation

 

Our Third Amended and Restated 2006 Omnibus Incentive Plan, as amended (the "Incentive Plan") governs the issuance of equity awards and other incentive compensation to management and members of the board of directors. On  July 1, 2020, the stockholders, upon recommendation of the board of directors, approved the Second Amendment (the “Second Amendment”) to our Third Amended and Restated 2006 Omnibus Incentive Plan (the "Incentive Plan"). The Second Amendment (i) increased the number of shares of Class A common stock available for issuance under the Incentive Plan by an additional 1,900,000 shares, (ii) added a fungible share reserve feature, under which shares subject to stock options and stock appreciation rights will be counted as one share for every share granted and shares subject to all other awards will be counted as 1.80 shares for every share granted, (iii) added a double-trigger vesting requirement upon a change in control, (iv) eliminated the Compensation Committee’s discretion to accelerate vesting, except in cases involving death or disability, (v) increased the maximum award granted or payable to any one participant under the Incentive Plan for a calendar year from 200,000 shares of Class A common stock or $2,000,000, in the event the award is paid in cash, to 500,000 shares of Class A common stock or $4,000,000, in the event the award is paid cash, (vi) re-set the date through which awards  may be made under the Incentive Plan to  June 1, 2030, and (vii) made other miscellaneous, administrative and conforming changes.

 

The Incentive Plan permits annual awards of shares of our Class A common stock to executives, other key employees, consultants, non-employee directors, and eligible participants under various types of options, restricted stock awards, or other equity instruments. As of  September 30, 2020, there were 2,515,193 shares remaining of the 4,200,000 shares available for award under the Incentive Plan. No participant in the Incentive Plan may receive awards of any type of equity instruments in any calendar year that relates to more than 500,000 shares of our Class A common stock or $4,000,000, in the event the award is paid in cash. No awards may be made under the Incentive Plan after June 1, 2030. To the extent available, we have issued treasury stock to satisfy all share-based incentive plans.

 

Included in salaries, wages, and related expenses within the condensed consolidated statements of operations is the net reversal of approximately $0.2 million and the recognition of $0.7 million of stock-based compensation expense for the three and nine months ended September 30, 2020, respectively, and the recognition of $0.6 million and $1.1 million of stock-based compensation expense for the three and nine months ended September 30, 2019, respectively. All stock compensation expense recorded in 2020 and 2019 relates to restricted shares, as no unvested options were outstanding during these periods. An additional $0.4 million of stock-based compensation was recorded in general supplies and expenses in the condensed consolidated statements of operations for each of the three and nine month periods ended  September 30, 2020 and 2019, respectively, as this amount relates to the issuance of restricted stock to non-employee directors.

 

The Incentive Plan allows participants to pay the federal and state minimum statutory tax withholding requirements related to awards that vest or allows participants to deliver to us shares of Class A common stock having a fair market value equal to the minimum amount of such required withholding taxes. To satisfy withholding requirements for shares that vested through September 30, 2020, certain participants elected to forfeit receipt of an aggregate of 5,119 shares of Class A common stock at a weighted average per share price of $14.15 based on the closing price of our Class A common stock on the dates the shares vested in 2020, in lieu of the federal and state minimum statutory tax withholding requirements. We remitted less than $0.1 million to the proper taxing authorities in satisfaction of the employees' minimum statutory withholding requirements.

 

 

Note 10.

Commitments and Contingencies

 

From time-to-time, we are a party to ordinary, routine litigation arising in the ordinary course of business, most of which involves claims for personal injury and property damage incurred in connection with the transportation of freight.

 

Our subsidiary Covenant Transport, Inc. (“Covenant Transport”) is a defendant in a lawsuit filed on November 9, 2018, in the Superior Court of Los Angeles County, California. The lawsuit was filed on behalf of Richard Tabizon (a California resident and former driver) who is seeking to have the lawsuit certified as a class action. The complaint asserts that the time period covered by the lawsuit is from October 31, 2014 to the present and alleges claims for failure to properly pay drivers for rest breaks, failure to provide accurate itemized wage statements and/or reimbursement of business related expenses, unlawful deduction of wages, failure to pay proper minimum wage and overtime wages, failure to provide all wages due at termination, and other related wage and hour claims under the California Labor Code. Since the original filing date, the case has been removed from the Los Angeles Superior Court to the U.S. District Court in the Central District of California and subsequently the case was transferred to the U.S. District Court in the Eastern District of Tennessee where the case is now pending. Covenant Transport intends to vigorously defend itself in this matter. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of  September 30, 2020

 

On February, 28 2019, Covenant Transport was named in a separate (but related) lawsuit filed in the Superior Court of Los Angeles County, California requesting civil penalties under the California Private Attorneys’ General Act for the same underlying wage and hour claims at issue in the putative class action case noted above. On August 1, 2019, the Los Angeles Superior Court entered an order staying the action pending completion of the earlier-filed action that is pending in the United States District Court for the Eastern District of Tennessee. Covenant Transport intends to vigorously defend itself in this matter. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of September 30, 2020.

 

Page 18

 

On August 2, 2018, Curtis Markson, et al. (collectively, “Markson”), filed a putative class action case in United States District Court, Central District of California generically claiming that five (5) specified trucking companies (including our subsidiary Southern Refrigerated Transport, Inc.) entered into a "no poaching conspiracy" in which they agreed not to solicit or hire employees in California who were "under contract" with a fellow defendant. The allegations center around new drivers in California who received their commercial driver's license through driving schools associated with, or paid for by, one of the named defendants, in exchange for agreeing to drive for that defendant carrier for a specified amount of time (typically 8-10 months). Over the ensuing 1820 months, the Plaintiffs added more trucking companies as co-defendants in the lawsuit, including Covenant Transport on April 23, 2020. The lawsuit claims that the named defendants sent letters to one another, providing notice of "under contract" status, if these new California drivers were hired by another defendant carrier prior to the driver completing their contractual obligations. Plaintiffs contend that these notifications evidence a collusive agreement by the named defendants to restrain competition among trucking companies in California and suppress wages. Southern Refrigerated Transport, Inc. and Covenant Transport, Inc. are vigorously defending themselves against these claims. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of September 30, 2020.

 

Refer to Note 1, “Significant Accounting Policies” of the accompanying condensed consolidated financial statements for information about our insurance program.

 

Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of open claims and pending litigation, discussed above, taking into account existing reserves, is not likely to have a materially adverse effect on our condensed consolidated financial statements, however, any future liability claims would impact this analysis.

 

We had $36.7 million and $35.2 million of outstanding and undrawn letters of credit as of September 30, 2020 and December 31, 2019, respectively. The letters of credit are maintained primarily to support our insurance programs. Additionally, we had $45.0 million of availability on a line of credit from Triumph solely to fund any indemnification owed to Triumph in relation to the sale of TFS.

 

 

Note 11.

Equity Method Investment

 

We own a minority investment in Transport Enterprise Leasing, LLC ("TEL"). TEL is a tractor and trailer equipment leasing company and used equipment reseller. We have not guaranteed any of TEL's debt and have no obligation to provide funding, services, or assets. TEL’s majority owners are generally restricted from transferring their interests in TEL, other than to certain permitted transferees, without our consent. We sold no tractors or trailers to TEL during the nine-months ended September 30, 2020 and 2019, and we received $6.3 million and $7.1 million, respectively, for providing various maintenance services, certain back-office functions, and for miscellaneous equipment. We recognized a net reversal of previously deferred gains totaling less than $0.1 million for the nine-months ended September 30, 2020 and 2019, representing 49% of the gains on units sold to TEL less any gains previously deferred and recognized when the equipment was subsequently sold to a third party. Deferred gains, totaling $0.1 million and $0.2 million at  September 30, 2020 and 2019, respectively, are being carried as a reduction in our investment in TEL. At  September 30, 2020 and  December 31, 2019, we had accounts receivable from TEL of $0.8 million and $1.2 million, respectively, related to cash disbursements made pursuant to our performance of certain back-office and maintenance functions on TEL’s behalf.

 

We have accounted for our investment in TEL using the equity method of accounting, and thus our financial results include our proportionate share of TEL's 2020 net income through September 30, 2020, or $1.0 million. We received no equity distribution from TEL during the nine-months ended September 30, 2020 and $1.2 million during the three and nine months ended September 30, 2019. Our investment in TEL, totaling $33.0 million and $32.4 million, as of  September 30, 2020 and December 31, 2019, respectively, is included in other assets in the accompanying condensed consolidated balance sheets.

 

See TEL's summarized financial information below:

 

(in thousands)

 

As of September 30,

   

As of December 31,

 
   

2020

   

2019

 

Total Assets

  $ 337,699     $ 374,591  

Total Liabilities

    279,543       318,743  

Total Equity

  $ 58,156     $ 55,848  

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenue

  $ 22,984     $ 30,709     $ 72,202     $ 82,683  

Cost of Sales

    2,748       6,302       10,332       17,213  

Operating Expenses

    15,184       16,634       51,708       42,775  

Operating Income

    5,052       7,773       10,162       22,695  

Net Income

  $ 2,729     $ 4,585     $ 2,308     $ 14,452  

 

Page 19

 
 
 

Note 12.

Goodwill and Other Assets

 

On July 3, 2018, we acquired 100% of the outstanding stock of Landair Holdings, Inc., a Tennessee corporation (“Landair”). Landair is a dedicated and for-hire truckload carrier, as well as a supplier of transportation management, warehousing and logistics inventory management services. Landair’s results have been included in the consolidated financial statements since the date of acquisition. Landair’s trucking operations’ results are reported within our Dedicated reportable segment, while Landair’s logistics operations’ results are reported within our Managed Freight and Warehousing reportable segments.

 

As a result of management compensation structure changes and a change in the branding strategy of the organization, the Company revised the estimated remaining useful life of the Landair trade name to 15 months as of June 30, 2020. At the end of its useful life, the Landair trade name will have a residual value of $0.5 million. The non-compete agreement with a former Landair executive was terminated during the second quarter of 2020. These changes resulted in additional amortization of none and $1.3 million during the three and nine months ended  September 30, 2020, or a $1.0 million, or $0.06 per diluted share, decrease in net income. The remaining useful lives as adjusted are included in the summary of other intangible assets below.

 

As of  September 30, 2020 and December 31, 2019, we had goodwill of $42.5 million.

 

A summary of other intangible assets as of  September 30, 2020 and  December 31, 2019 is as follows:

 

(in thousands)

 

September 30, 2020

 
   

Gross intangible assets

   

Accumulated amortization

   

Net intangible assets

   

Remaining life (months)

 

Trade name:

                               

Dedicated

  $ 2,402     $ (896 )   $ 1,506          

Managed Freight

    999       (373 )     626          
Warehousing     999       (373 )     626          

Total trade name

    4,400       (1,642 )     2,758       12  

Non-Compete agreement:

                               

Dedicated

    914       (914 )     -          

Managed Freight

    130       (130 )     -          
Warehousing     356       (356 )     -          

Total non-compete agreement

    1,400       (1,400 )     -       -  

Customer relationships:

                               

Dedicated

    14,072       (2,638 )     11,434          

Managed Freight

    1,692       (318 )     1,374          
Warehousing     12,436       (2,332 )     10,104          

Total customer relationships:

    28,200       (5,288 )     22,912       117  

Total other intangible assets

  $ 34,000     $ (8,330 )   $ 25,670          

 

(in thousands)

 

December 31, 2019

 
   

Gross intangible assets

   

Accumulated amortization

   

Net intangible assets

   

Remaining life (months)

 

Trade name:

                               

Dedicated

  $ 2,402     $ (240 )   $ 2,162          

Managed Freight

    999       (100 )     899          
Warehousing     999       (100 )     899          

Total trade name

    4,400       (440 )     3,960       162  

Non-Compete agreement:

                               

Dedicated

    914       (274 )     640          

Managed Freight

    130       (39 )     91          
Warehousing     356       (107 )     249          

Total non-compete agreement

    1,400       (420 )     980       42  

Customer relationships:

                               

Dedicated

    14,072       (1,759 )     12,313          

Managed Freight

    1,692       (213 )     1,479          
Warehousing     12,436       (1,554 )     10,883          

Total customer relationships:

    28,200       (3,525 )     24,675       126  

Total other intangible assets

  $ 34,000     $ (4,385 )   $ 29,615          

 

The above intangible assets have a weighted average remaining life of 106 months as of September 30, 2020, compared to 128 months as of December 31, 2019, as a result of the change in estimated useful life as discussed above. The expected amortization of these assets for the remainder of 2020 and the next five successive years is as follows:

 

   

(in thousands)

 

2020 (1)

  $ 1,152  

2021

    4,043  

2022

    2,350  

2023

    2,350  

2024

    2,350  
2025     2,350  

Thereafter

    10,575  

 

(1) Excludes the nine months ended September 30, 2020.

 

Page 20

 

 

Note 13.

Equity

 

On February 10, 2020, the Company announced that the Board approved the repurchase of up to $20.0 million worth of the Company's outstanding common stock. The program was suspended on March 26, 2020, with approximately $2.5 million worth of the shares remaining authorized for purchase. There were 1.4 million shares repurchased in the open market for $17.5 million during the three months ended March 31, 2020. There were no changes to the stock repurchase program during the three months ended September 30, 2020. The Company has the ability to reinstate the stock repurchase program as circumstances warrant based on market conditions, cash flow requirements, securities law limitations, and other factors.

 

 

Note 14.

Liquidity

 

Our business requires significant capital investments over the short-term and the long-term. We generally finance our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. We had working capital (total current assets less total current liabilities) of $53.5 million and $93.1 million at September 30, 2020 and December 31, 2019, respectively. Based on our expected financial condition, net capital expenditures, and results of operations and related net cash flows, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs for at least the next year.

 

As of September 30, 2020, we had no borrowings outstanding, undrawn letters of credit outstanding of approximately $36.7 million, and available borrowing capacity of $58.3 million under the Credit Facility. Additionally, we had $45.0 million of availability on a line of credit from Triumph solely to fund any indemnification owed to Triumph in relation to the sale of TFS. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment.

 

During the first half of 2020, in response to the uncertainty of the upcoming economic environment as a result of COVID-19 and as part of our strategic focus to reduce overhead costs, we took measures to preserve our liquidity, including capital reductions, financing, cost reduction, and working capital actions. During 2020, we have paid down approximately $175.6 million of debt and lease obligations. If needed, we have other potential flexible sources of liquidity that we can leverage, such as currently unencumbered owned revenue equipment.

 

 

Note 15.

Subsequent Events

 

On October 23, 2020, we amended the Credit Facility to increase the size of the facility from $95 million to $110 million, extend the term through October 2025, improve the pricing by 25 basis points across the grid and improve various other terms and conditions, while incurring no amendment fees or similar bank fees related to the amendment. 

 

In October 2020, the Company sold the Triumph stock acquired as part of the amended purchase agreement for $28.1 million and remitted the proceeds to Triumph upon settlement.

 

Page 21

 
 
 

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The condensed consolidated financial statements include the accounts of Covenant Logistics Group, Inc., a Nevada holding company, and its wholly owned subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to Covenant Logistics Group, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

This report contains certain statements that may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities 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. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. In this Form 10-Q, statements relating to future reclassification of losses arising from derivative instruments and the performance of counterparties to such instruments, future impact of accounting standards, future third-party transportation provider expenses, future tax rates, expenses, and deductions, expected freight demand and volumes and trucking industry conditions, including the size and impact of “peak” season, potential results of a default and testing of our fixed charge covenant under the Credit Facility or other debt agreements, expected sources of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), expected capital expenditures, allocations, and requirements, future customer relationships, expected debt reduction, including future interest expense, future driver market conditions, expected cash flows, expected operating income, future investments in and growth of our segments and services, expected adjusted operating ratio, future trucking capacity, future rates and prices, future utilization, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation and the impact of our cost saving measures, expected net fuel costs, strategies for managing fuel costs, the effectiveness and impact of, and cash flows relating to, our fuel hedging contracts and fuel surcharge programs, future fluctuations in operations and maintenance expenses, expected effects and mix of our solo and team operations, future fleet size, management, and upgrades, the market value of used equipment, including equipment subject to operating or finance leases relative to our payment obligations under such operating leases (including residual value guarantees and the proceeds from the sale thereof), the anticipated impact of our investment in TEL, the future impact of our restructuring activities, strategic plan, and other strategic initiatives, anticipated levels of and fluctuations relating to insurance, claims, and litigation expenses, , including the erosion of available limits in our aggregate insurance policies and possible additional expense to reinstate certain insurance policies, the impact of the material weakness identified in our internal control over financial reporting, our disposition of the assets of TFS, including any future indemnification obligations related to the TFS Portfolio, and the anticipated impact of the COVID-19 outbreak or other similar outbreaks, among others, are forward-looking statements.  -looking statements may be identified by the use of terms or phrases such as "believe," "may," "could," "would," "will," "expects," "estimates," "projects," "anticipates," "plans," " outlook," "focus," "seek," "potential," "continue," "goal," "target," "objective," "intends," derivations thereof, and similar terms and phrases. Such statements are based on currently available operating, financial, and competitive information. Forward-looking statements 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. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Item 1A. Risk Factors," set forth in this Form 10-Q, in our Form 10-K for the year ended December 31, 2019, our Form 10-Q for the quarter ended March 31, 2020, as amended, and our Form 10-Q for the quarter ended June 30, 2020. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in this Form 10-Q, in our Form 10-K for the year ended December 31, 2019, our Form 10-Q for the quarter ended March 31, 2020, as amended, and our Form 10-Q for the quarter ended June 30, 2020, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

 

All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

 

Executive Overview

 

We were pleased with the progress on executing our strategic plan, which is focused on growing our more consistent and profitable freight commitments, improving margins, improving return on capital, and managing leverage at a reasonable level. Compared with the third quarter of 2019, revenue before fuel surcharges was essentially constant, we reduced our tractor fleet nearly 18%, and profitability improved sharply. Additionally, we have paid down approximately $175.6 million of debt and obligations under operating leases over the past year. On an adjusted earnings per share basis, the third quarter of 2020 was second best of any third quarter in the past decade and third best of any quarter overall in the past five years. Nevertheless, we are in the early stages of implementing our plan, and we expect ups and downs as we work toward implementing lasting changes.

 

The following is a summary of infrequent and non-cash transactions that occurred during the third quarter of 2020:

 

Gain item:

 

  Gain on sale of TFS

$  3.7 million

   

Expense items:

 

  Employee separation costs

$  1.0 million

  Insurance policy erosion and reinstatement costs $  4.4 million
  Intangible asset amortization $  1.2 million

Net third quarter expense adjustment

$  2.9 million

 

Page 22

 

As of June 30, 2020, our Factoring segment was classified as discontinued operations as it: (i) was a component of the entity, (ii) met the criteria as held for sale, and (iii) had a material effect on the Company's operations and financial results. On July 8, 2020, we closed on the disposition of substantially all of the operations and assets of TFS, a division of Covenant Transport Solutions LLC, an indirect wholly owned subsidiary of the Company, which included substantially all of the assets and operations of our Factoring segment. Beginning with the period ended June 30, 2020, we have reflected the former Factoring segment as discontinued operations in the condensed consolidated statements of operations for all periods presented. Prior periods have been adjusted to conform to the current presentation. 

 

Additional items of note for the  third quarter of  2020 include the following:
 
 

Total revenue of $210.8 million, a decrease of 4.4% compared with the third quarter of 2019, and freight revenue (which excludes revenue from fuel surcharges) of $196.2 million, a decrease of 0.6% compared with the third quarter of 2019;

     
 

Operating income of $6.8 million, compared with operating loss of $3.9 million in the third quarter of 2019;

     
 

Net income of $7.5 million, or $0.43 per diluted share, compared with net loss of $3.2 million, or $0.17 per diluted share, in the third quarter of 2019. Net income from continuing operations of $4.7 million, or $0.27 per diluted share, compared to $4.0 million net loss from continuing operations or $0.22 per diluted share, in the third quarter of 2019. Net income from discontinued operations of $2.8 million, or $0.16 per diluted share, compared to net income from discontinued operations of $0.9 million, or $0.05 per diluted share, in the third quarter of 2019.

     
 

With available borrowing capacity of $58.3 million under our Credit Facility at September 30, 2020, we do not expect to be required to test our fixed charge covenant in the foreseeable future;

     
 

Our Managed Freight reportable segment’s total revenue increased to $47.6 million in the 2020 quarter from $33.3 million in the 2019 quarter and the segment had an operating income of $2.1 million in the 2020 quarter compared to operating income of $0.5 million in the 2019 quarter; 

     
 

Our equity investment in TEL provided $1.2 million of pre-tax earnings in the third quarter of 2020 and provided $2.1 million in the third quarter of 2019;

     
 

Since December 31, 2019, total indebtedness, net of cash, decreased by $151.7 million to $152.9 million; and 

     
 

Stockholders' equity and tangible book value at September 30, 2020, were $314.8 million and $246.6 million, respectively.

 

COVID-19

 

In March 2020, the World Health Organization declared COVID-19 a global pandemic. The outbreak of COVID-19 has resulted in governmental authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, increased border and port controls and closures, and shutdowns.

 

During the second quarter, we increased our reserves for uncollectible accounts receivable by approximately $2.6 million as a result of the bankruptcy of one customer and the heightened risk we have on certain of our retail related customers as a result of COVID-19. There were no additional COVID-19 related reserves in the third quarter. Local, state and national governments continue to emphasize the importance of transportation and have designated it as an essential service. The health and safety of our team members and the community is our first priority, as such, we've put certain measures into place, including remote work arrangements, enforced social distancing and increased sanitation protocols, among others.

 

We believe we have sufficient liquidity to satisfy our cash needs, however we continue to evaluate and act, as necessary to maintain sufficient liquidity to ensure our ability to operate during these unprecedented times. However, the extent to which COVID-19 could impact our operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain and will depend on future developments. We will continue to evaluate the nature and extent of these potential impacts to our business.

 

Outlook

As we look to the fourth quarter of 2020, we are focused on delivering superior service to our customers in what is expected to be a robust peak shipping season with limited trucking capacity.  Similar to the third quarter of 2020, our reduced fleet size and more focused and committed model provides limited capacity to “flex up” and take advantage of the peak spot market to the same extent we did in prior years.  However, we expect fourth quarter 2020 volumes and pricing to be favorable and to support sequential margin improvement. For the fourth quarter of 2020, adjusted operating ratio is expected to improve slightly compared with the 93.2% adjusted operating ratio generated in the third quarter of 2020.

 

In 2021 and beyond, our focus will be continued execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by our Dedicated, Managed Freight, and Warehousing segments, reducing unnecessary overhead, and improving our safety, service, and productivity. This will be a gradual process of diversifying our customer base with less seasonal and cyclical exposure, improving legacy contracts, and investing in systems, technology, and people to support the growth of these previously under-invested areas.  As we undertake this multiyear effort, I would like to remind investors that our goal is to improve our earnings and returns in a manner that is sustainable and less susceptible to upward and downward market forces.  The gradual improvements we expect will be offset at times by short term forces.  For example, in 2021, we expect underlying progress on efficiency and cost control, improved contract pricing, and improved safety.  These benefits are expected to be offset to some extent by the return of certain cost pressures. Over time, we expect to exit the plan a stronger, more profitable, more predictable business with the opportunity for significant and sustained value creation. Adjusted operating ratio for the full year of 2021 is expected to improve compared with adjusted operating ratio for the full year of 2020 but deteriorate compared with the 93.2% adjusted operating ratio achieved in the third quarter of 2020.

 

Page 23

 

Non-GAAP Reconciliation

 

In addition to operating ratio, we use "adjusted operating ratio" as a key measure of profitability. Adjusted operating ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Adjusted operating ratio means operating expenses, net of fuel surcharge revenue, excluding amortization of intangibles, and significant unusual items, divided by total revenue, less fuel surcharge revenue. We believe the use of adjusted operating ratio allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices, amortization of intangibles, and significant unusual items. Our Board and management focus on our adjusted operating ratio as an indicator of our performance from period to period. We believe our presentation of adjusted operating ratio is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define adjusted operating ratio differently. Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.

 

Operating Ratio

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

GAAP Operating Ratio:

 

2020

   

OR %

   

2019

   

OR %

   

2020

   

OR %

   

2019

   

OR %

 

Total revenue

  $ 210,830             $ 220,459             $ 613,333             $ 654,832          

Total operating expenses

    204,019       96.8 %     224,329       101.8 %     636,927       103.8 %     647,726       98.9 %

Operating income (loss)

  $ 6,811             $ (3,870 )           $ (23,594 )           $ 7,106          
                                                                 

Adjusted Operating Ratio:

 

2020

   

Adj. OR %

   

2019

   

Adj. OR %

   

2020

   

Adj. OR %

   

2019

   

Adj. OR %

 

Total revenue

  $ 210,830             $ 220,459             $ 613,333             $ 654,832          

Fuel surcharge revenue

    (14,613 )             (23,082 )             (47,971 )             (70,882 )        

Freight revenue (total revenue, excluding fuel surcharge)

    196,217               197,377               565,362               583,950          
                                                                 

Total operating expenses

    204,019               224,329               636,927               647,726          

Adjusted for:

                                                               

Fuel surcharge revenue

    (14,613 )             (23,082 )             (47,971 )             (70,882 )        

Amortization of intangibles

    (1,152 )             (731 )             (2,614 )             (2,193 )        
Insurance policy erosion and premium reinstatement expense     (4,447 )             -               (4,447 )             -          
Bad debt expense associated with customer bankruptcy and high credit risk customers     -               -               (2,617 )             -          
Strategic restructuring adjusting items:                                                                
Gain on sale of terminal     -               -               5,712               -          
Impairment of real estate and related tangible assets     -               -               (9,790 )             -          
Impairment of revenue generating equipment and related charges (1)     -               -               (17,604 )             -          
Employee separation costs     (1,000 )             -               (2,791 )             -          
Change in useful life of intangible assets     -               -               (1,331 )             -          
Abandonment of information technology infrastructure and applications     -               -               (1,048 )             -          
Contract exit costs and other restructuring related professional fees     -               -               (695 )             -          

Adjusted operating expenses

    182,807       93.2 %     200,516       101.6 %     551,731       97.6 %     574,651       98.4 %

Adjusted operating income (loss)

  $ 13,410             $ (3,139 )           $ 13,631             $ 9,299          

 

(1) Of the $17.6 million, $0.8 million is related to operating leases and reflected in revenue equipment rentals and purchased transportation. 

 

Page 24

 

Revenue and Expenses

 

We focus on targeted markets throughout the United States where we believe our service standards can provide a competitive advantage. We are a major carrier for transportation companies such as parcel freight forwarders, less-than-truckload carriers, and third party logistics providers that require a high level of service to support their businesses, as well as for traditional truckload customers such as manufacturers, retailers, and food and beverage shippers. 

 

Until the second quarter of 2020 we had four reportable segments, Highway Services, Dedicated, Managed Freight, and Factoring Services. As discussed above, our Factoring reportable segment was classified as discontinued operations as of June 30, 2020. As of September 30, 2020, the segment formerly known as Highway Services is now reflected as Expedited, given the change in business mix surrounding the exit of the majority of the solo-refrigerated business in the second quarter of 2020. In addition, given management changes and growth, we have reported Warehousing as a separate reportable segment from Managed Freight. We believe the updated reportable segments reflect our service offerings, strategic direction, and how management, including our chief operating decision makers, monitors our performance.

 

Our four reportable segments include:

 

 

Expedited: The Expedited segment primarily provides truckload services to customers with high service freight and delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery windows. Expedited services generally require two-person driver teams on equipment either owned or leased by the Company.

 

 

Dedicated: The Dedicated segment provides customers with committed truckload capacity over contracted periods using equipment either owned or leased by the Company.

 

 

Managed Freight: The Managed Freight segment includes our brokerage and transport management services (“TMS”). Brokerage services provide logistics capacity by outsourcing the carriage of customers’ freight to third parties. TMS provides comprehensive logistics services on a contractual basis to customers who prefer to outsource their logistics needs.

 

 

Warehousing: The Warehousing segment provides day-to-day warehouse management services to customers who have chosen to outsource this function.

 

In our Expedited and Dedicated reportable segments, we primarily generate revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile for our truckload services. We enhance our truckload revenue by charging for tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The main factors that could affect our Expedited revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of shipments and miles we generate. The main factors that could affect our Dedicated revenue are the rates and utilization under the contracts with our Dedicated customers. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability.

 

The main expenses that impact the profitability of our Expedited and Dedicated reportable segments are the variable costs of transporting freight for our customers. These costs include fuel expenses, driver-related expenses, such as wages, benefits, training, and recruitment, and purchased transportation expenses, which primarily include compensating independent contractors. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, self-insured retention versus insurance premiums, fleet age, efficiency, and other factors. Historically, our main fixed costs include rentals and depreciation of long-term assets, such as revenue equipment and terminal facilities, and the compensation of non-driver personnel.

 

Page 25

 

Within our Expedited and Dedicated reportable segments, we operate tractors driven by a single driver and also tractors assigned to two-person driver teams. Our single driver tractors generally operate in shorter lengths of haul, generate fewer miles per tractor, and experience more non-revenue miles, but the lower productive miles are expected to be offset by generally higher revenue per loaded mile and the reduced employee expense of compensating only one driver. In contrast, our two-person driver tractors generally operate in longer lengths of haul, generate greater miles per tractor, and experience fewer non-revenue miles, but we typically receive lower revenue per loaded mile and incur higher employee expenses of compensating both drivers. We expect operating statistics and expenses to shift with the mix of single and team operations.

 

Within our Managed Freight reportable segment, we derive revenue from arranging transportation services, directly and through agents, who are paid a commission for the freight they provide, for customers on both an ad-hoc and a contractual basis. We provide these services directly and through relationships with thousands of third-party carriers and integration with our Expedited reportable segment. We also utilize technology and process management to provide detailed visibility into a customer’s movement of freight – inbound and outbound – throughout the customer’s network and can provide focused customer support through multiyear contracts. The main factors that impact profitability in terms of expenses are the variable costs of outsourcing the transportation freight for our customers and managing fixed costs, including salaries, and selling, general, and administrative expenses. 

 

Within our Warehousing reportable segment, we empower customers to outsource warehousing management, including moving containers and trailers in or around freight yards. The main factors that impact profitability in terms of expenses are fixed costs, including salaries, facility warehousing costs, and selling, general, and administrative expenses. 

 

In May 2011, we acquired a 49.0% interest in TEL. TEL is a tractor and trailer equipment leasing company and used equipment reseller. We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income since May 2011.

 

Our main measures of profitability are operating ratio and adjusted operating ratio, which we define as operating expenses, net of fuel surcharge revenue, excluding amortization of intangibles, and significant unusual items, divided by total revenue, less fuel surcharge revenue. See page 24 for the uses and limitations associated with adjusted operating ratio.

 

Revenue Equipment

 

At September 30, 2020, we operated 2,485 tractors and 6,259 trailers. Of such tractors, 1,477 were owned, 784 were financed under operating leases, and 224 were provided by independent contractors, who provide and drive their own tractors. Of such trailers, 4,704 were owned and 1,555 were financed under finance type leases. We finance a small portion of our tractor fleet and larger portion of our trailer fleet with operating leases, which generally run for a period of three to five years for tractors and five to seven years for trailers. At September 30, 2020, our fleet had an average tractor age of 1.9 years and an average trailer age of 4.6 years.

 

Independent contractors provide a tractor and a driver and are responsible for all operating expenses in exchange for a fixed payment per mile. We do not have the capital outlay of purchasing or leasing the tractor. The payments to independent contractors and the financing of equipment under operating leases are recorded in revenue equipment rentals and purchased transportation. Expenses associated with owned equipment, such as interest and depreciation, and expenses associated with employee drivers, including driver compensation, fuel, and other expenses, are not incurred with respect to independent contractors. Obtaining equipment from independent contractors and under operating leases effectively shifts financing expenses from interest to "above the line" operating expenses, and as such, we evaluate our efficiency using net income margin as well as operating ratio.

 

Page 26

 

 

 

RESULTS OF CONSOLIDATED OPERATIONS

 

COMPARISON OF three and nine months ended September 30, 2020 TO three and nine months ended September 30, 2019

 

The following tables set forth the percentage relationship of certain items to total revenue and freight revenue (total revenue less fuel surcharge revenue) for the periods indicated, where applicable (dollars in thousands):

 

Revenue

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenue:

                               

Freight revenue

  $ 196,217     $ 197,377     $ 565,362     $ 583,950  

Fuel surcharge revenue

    14,613       23,082       47,971       70,882  

Total revenue

  $ 210,830     $ 220,459     $ 613,333     $ 654,832  

 

For the quarter ended September 30, 2020, total revenue decreased approximately $9.6 million, or 4.4%, to $210.8 million from $220.5 million in the 2019 quarter. Freight revenue decreased approximately $1.2 million, or 0.6%, to $196.2 million for the quarter ended September 30, 2020, from $197.4 million in the 2019 quarter, while fuel surcharge revenue decreased $8.5 million quarter-over-quarter. The decrease in revenue resulted from an $11.1 million and a $5.9 million  decrease in Dedicated and Expedited freight revenue, respectively, partially offset by an increase of $14.3 million and $1.6 million in Managed Freight and Warehousing freight revenue, respectively.

 

For the nine months ended September 30, 2020, total revenue decreased approximately $41.5 million, or 6.3%, to $613.3 million from $654.8 million in the same 2019 period. Freight revenue decreased approximately $18.6 million, or 3.2%, to $565.4 million for the period ended September 30, 2020, from $584.0 million in the 2019 period, while fuel surcharge revenue decreased $22.9 million period-over-period. The decrease in revenue resulted from a $24.9 million and $12.2 million decrease in Dedicated and Expedited freight revenue, respectively, partially offset by an increase of $17.0 million and $1.5 million in Managed Freight and Warehousing freight revenue, respectively.

 

See results of segment operations section for discussion of fluctuations.

 

For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue. As it relates to the comparison of expenses to freight revenue, we believe removing fuel surcharge revenue, which is sometimes a volatile source of revenue, affords a more consistent basis for comparing the results of operations from period-to-period. Nonetheless, freight revenue represents a non-GAAP financial measure and is not a substitute for revenue measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Our Board and management focus on our freight revenue as an indicator of our performance from period to period. We believe our presentation of freight revenue is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that freight revenue improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define freight revenue differently. Because of these limitations, freight revenue should not be considered a measure of total revenue generated by or available to our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.

 

For each expense item discussed below, we have provided a table setting forth the relevant expense first as a percentage of total revenue, and then as a percentage of freight revenue.

 

Salaries, wages, and related expenses

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Salaries, wages, and related expenses

  $ 78,812     $ 83,687     $ 235,964     $ 238,281  

% of total revenue

    37.4 %     38.0 %     38.5 %     36.4 %

% of freight revenue

    40.2 %     42.4 %     41.7 %     40.8 %

 

Salaries, wages, and related expenses decreased approximately $4.9 million, or 5.8%, for the three months ended September 30, 2020, compared with the same quarter in 2019. As a percentage of total revenue, salaries, wages, and related expenses decreased to 37.4% of total revenue for the three months ended September 30, 2020, from 38.0% in the same quarter in 2019. As a percentage of freight revenue, salaries, wages, and related expenses decreased to 40.2% of freight revenue for the three months ended September 30, 2020, from 42.4% in the same quarter in 2019. These changes were primarily the result of decreases in group health insurance and workers' compensation insurance, partially offset by employee separation costs related to management changes and less revenue over which to spread these costs.

 

For the nine months ended September 30, 2020, salaries, wages, and related expenses decreased approximately $2.3 million, or 1.0%, compared with the same period in 2019. As a percentage of total revenue, salaries, wages, and related expenses increased to 38.5% of total revenue for the nine months ended September 30, 2020, from 36.4% for the nine months ended September 30, 2019. As a percentage of freight revenue, salaries, wages, and related expenses increased to 41.7% of freight revenue for the nine months ended September 30, 2020, from 40.8% in the same period in 2019. These changes were primarily the result of decreases in group health insurance, workers' compensation, and contract labor support costs, partially offset by employee separation costs related to the restructuring and driver and non-driver pay increases since the second quarter of 2019 and lower revenue over which to spread these costs.

 

For the remainder of 2020 we believe salaries, wages, and related expenses will increase in comparison to the third quarter of 2020 as a result of driver pay changes being put in place as a result of the tight freight market, partially offset by cost saving measures put into place at the beginning of the second quarter 2020 that are expected to remain in place through at least the end of 2020. Looking beyond the fourth quarter of 2020, we believe higher average driver salary costs will be partially offset by fewer drivers as a result of our change in business model and our smaller fleet. Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by independent contractors and our Managed Freight reportable segment, for which payments are reflected in the purchased transportation line item.

 

Page 27

 

 

Fuel expense

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Fuel expense

  $ 18,061     $ 28,812     $ 59,264     $ 85,858  

% of total revenue

    8.6 %     13.1 %     9.7 %     13.1 %

% of freight revenue

    9.2 %     14.6 %     10.5 %     14.7 %

 

Total fuel expense decreased $10.8 million to $18.1 million for the three months ended September 30, 2020, compared with $28.8 million the same quarter in 2019. As a percentage of total revenue, total fuel expense decreased to 8.6% of total revenue for the three months ended September 30, 2020, from 13.1% in the same quarter in 2019. As a percentage of freight revenue, total fuel expense decreased to 9.2% of freight revenue for the three months ended September 30, 2020, as compared to 14.6% for the 2019 quarter. 

 

For the nine months ended September 30, 2020, total fuel expense decreased approximately $26.6 million, or 31.0%, compared with the same period in 2019. As a percentage of total revenue, total fuel expense decreased to 9.7% of total revenue for the nine months ended September 30, 2020, from 13.1% for the nine months ended September 30, 2019. As a percentage of freight revenue, total fuel expense decreased to 10.5% of freight revenue for the nine months ended September 30, 2020, from 14.7% in the same period in 2019.

 

We receive a fuel surcharge on our loaded miles from most shippers; however, this does not cover the entire cost of fuel for several reasons, including the following: surcharges cover only loaded miles we operate; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business relating to shipments obtained from freight brokers does not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.

 

The rate of fuel price changes also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the Department of Energy ("DOE") for the week prior to the shipment, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Fuel prices as measured by the DOE were $0.60 per gallon and $0.49 per gallon lower in the three and nine months ended September 30, 2020 compared with the same periods in 2019.

 

To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors and other third parties which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge revenue, the percentage of miles driven by company tractors, our fuel economy, our percentage of deadhead miles, for which we do not receive material fuel surcharge revenues, and the net impact of fuel hedging gains and losses.

 

Net fuel expense is shown below:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Total fuel surcharge

  $ 14,613     $ 23,082     $ 47,971     $ 70,882  

Less: Fuel surcharge revenue reimbursed to independent contractors and other third parties

    1,723       2,898       5,823       8,878  

Company fuel surcharge revenue

  $ 12,890     $ 20,184     $ 42,148     $ 62,004  

Total fuel expense

  $ 18,061     $ 28,812     $ 59,264     $ 85,858  

Less: Company fuel surcharge revenue

    12,890       20,184       42,148       62,004  

Net fuel expense

  $ 5,171     $ 8,628     $ 17,116     $ 23,854  

% of freight revenue

    2.6 %     4.4 %     3.0 %     4.1 %

 

Net fuel expense decreased $3.5 million, or 40.1%, and $6.7 million, or 28.2%, for the quarter and nine months ended September 30, 2020 as compared to the same 2019 periods. As a percentage of freight revenue, net fuel expense decreased to 2.6% from 4.4% for the quarter ended September 30, 2020 and to 3.0% from 4.1% for the nine months ended September 30, 2020 compared to the same 2019 periods. The change in net fuel expense is primarily due to lower fuel prices, partially offset by reduced fuel surcharge revenue as a result of the lower cost of fuel.  Additionally there were $0.1 million and $0.4 million of diesel fuel hedge losses for the quarter and nine month periods of 2020 compared to none for the same 2019 periods, respectively. Also, as a result of the change in our business mix our fleet was more fuel efficient due to less idling and less temperature controlled freight thus reducing reefer fuel expense. As of September 30, 2020, we had fuel hedging contracts with a fair market value of $0.2 million recorded as other liabilities in our condensed consolidated balance sheet. These contracts will be reclassified into fuel expense as they mature. We did not have any fuel hedges in place during the same 2019 periods.

 

We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors to improve our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated by refrigerated operations (which uses diesel fuel for refrigeration but usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from independent contractors, and the success of fuel efficiency initiatives.

 

Page 28

 

 

Operations and maintenance

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Operations and maintenance

  $ 11,912     $ 14,742     $ 36,956     $ 44,814  

% of total revenue

    5.7 %     6.7 %     6.0 %     6.8 %

% of freight revenue

    6.1 %     7.5 %     6.5 %     7.7 %

 

Operations and maintenance decreased approximately $2.8 million, or 19.2%, for the quarter ended September 30, 2020, compared with the same quarter in 2019. As a percentage of total revenue, operations and maintenance decreased to 5.7% of total revenue for the quarter ended September 30, 2020, from 6.7% in the same quarter of 2019. As a percentage of freight revenue, operations and maintenance decreased to 6.1% of freight revenue for the quarter ended September 30, 2020, from 7.5% the same 2019 quarter.

 

For the nine months ended September 30, 2020, operations and maintenance decreased approximately $7.9 million, or 17.5%, compared with the same period in 2019. As a percentage of total revenue, operations and maintenance decreased to 6.0% of total revenue for the nine months ended September 30, 2020, from 6.8% for the nine months ended September 30, 2019. As a percentage of freight revenue, operations and maintenance decreased to 6.5% of freight revenue for the nine months ended September 30, 2020, from 7.7% in the same period in 2019.

 

The decreases in operations and maintenance for the three and nine months ended September 30, 2020, were primarily related to the timing of the trade cycle for our tractors as compared to the same 2019 periods as well as decreased maintenance and repair expense on our younger fleet of tractors, a reduction in unloading charges due to a change in business mix, and a planned reduction in outside driver recruiting expense related to improved efficiency of advertising dollars.

 

Going forward, we believe this category will fluctuate based on several factors, including the condition of the driver market and our ability to hire and retain drivers, our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, and the reliability of new and untested revenue equipment models.

 

Revenue equipment rentals and purchased transportation

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenue equipment rentals and purchased transportation

  $ 58,604     $ 50,428     $ 151,677     $ 146,267  

% of total revenue

    27.8 %     22.9 %     24.7 %     22.3 %

% of freight revenue

    29.9 %     25.5 %     26.8 %     25.0 %

 

Revenue equipment rentals and purchased transportation increased approximately $8.2 million, or 16.2%, for the three months ended September 30, 2020, compared with the same quarter in 2019. As a percentage of total revenue, revenue equipment rentals and purchased transportation increased to 27.8% of total revenue for the three months ended September 30, 2020, from 22.9% in the same quarter in 2019. As a percentage of freight revenue, revenue equipment rentals and purchased transportation increased to 29.9% of freight revenue for the three months ended September 30, 2020, from 25.5% in the same quarter in 2019.

 

For the nine months ended September 30, 2020, revenue equipment rentals and purchased transportation increased approximately $5.4 million, or 3.7%, compared with the same period in 2019. As a percentage of total revenue, revenue equipment rentals and purchased transportation increased to 24.7% of total revenue for the nine months ended September 30, 2020, from 22.3% for the nine months ended September 30, 2019. As a percentage of freight revenue, revenue equipment rentals and purchased transportation increased to 26.8% of freight revenue for the nine months ended September 30, 2020, from 25.0% in the same period in 2019.

 

These increases were primarily the result of a more competitive market for sourcing third-party capacity and growth in the Managed Freight reportable segment, partially offset by a reduction in the percentage of the total miles run by independent contractors from 12.4% and 12.7% for the three and nine months ended September 30, 2019, to 11.1% and 11.4% for the same 2020 periods.

 

We expect purchased transportation to increase as we seek to grow the Managed Freight reportable segment. In addition, if fuel prices increase, it would result in a further increase in what we pay third party carriers and independent contractors. However, this expense category will fluctuate with the number and percentage of loads hauled by independent contractors, loads handled by Managed Freight, and tractors, trailers, and other assets financed with operating leases. In addition, factors such as the cost to obtain third party transportation services and the amount of fuel surcharge revenue passed through to the third party carriers and independent contractors will affect this expense category. If industry-wide trucking capacity continues to tighten in relation to freight demand, we may need to increase the amounts we pay to third-party transportation providers and independent contractors, which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue. If we were to recruit more independent contractors we would expect this line item to increase as a percentage of revenue.

 

Operating taxes and licenses 

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Operating taxes and licenses

  $ 2,979     $ 3,170     $ 9,555     $ 9,719  

% of total revenue

    1.4 %     1.4 %     1.6 %     1.5 %

% of freight revenue

    1.5 %     1.6 %     1.7 %     1.7 %

 

For the periods presented, the changes in operating taxes and licenses were not significant as either a percentage of total revenue or freight revenue.

 

Page 29

 

 

Insurance and claims

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Insurance and claims

  $ 13,317     $ 14,050     $ 40,491     $ 35,755  

% of total revenue

    6.3 %     6.4 %     6.6 %     5.5 %

% of freight revenue

    6.8 %     7.1 %     7.2 %     6.1 %

 

Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims, decreased approximately $0.7 million, or 5.2% for the three months ended September 30, 2020 compared with the same quarter in 2019. As a percentage of total revenue, insurance and claims decreased to 6.3% of total revenue for the three months ended September 30, 2020, from 6.4% in the same quarter in 2019. As a percentage of freight revenue, insurance and claims decreased to 6.8% of freight revenue for the three months ended September 30, 2020, from 7.1% in the same quarter in 2019. Insurance and claims per mile cost increased to 17.6 cents per mile in the third quarter of 2020 compared to 16.7 cents per mile in the third quarter of 2019. These changes are primarily a result of the occurrence of large claims in the 2019 period and less prior period claims development in the third quarter of 2020, partially offset by $3.3 million of additional premium expense recognized in the third quarter of 2020 as a result of to the erosion of our excess insurance coverage layer $9.0 million in excess of $1.0 million, as discussed below. 

 

For the nine months ended September 30, 2020, insurance and claims increased approximately $4.7 million, or 13.2%, compared with the same period in 2019. As a percentage of total revenue, insurance and claims increased to 6.6% of total revenue for the nine months ended September 30, 2020, from 5.5% for the nine months ended September 30, 2019. As a percentage of freight revenue, insurance and claims increased to 7.2% of freight revenue for the nine months ended September 30, 2020, from 6.1% in the same period in 2019. Insurance and claims cost per mile increased to 17.4 cents per mile in the nine months ended September 30, 2020 from 14.3 cents per mile in the same 2019 period. The increases are primarily related to the erosion of our excess insurance coverage layer $9.0 million in excess of $1.0 million, as discussed below, an increase in overall cost per claim, and an increase in fixed premiums expenses, partially offset by a refund of $7.3 million of previously expensed premiums from our commutation of the April 10, 2015 through March 31, 2018 policy for our primary auto liability insurance. 

 

Our auto liability (personal injury and property damage), cargo, and general liability insurance programs include significant self-insured retention amounts. We are also self-insured for physical damage to our equipment. Because of these significant self-insured exposures, insurance and claims expense may fluctuate significantly from period-to-period. Any increase in frequency or severity of claims, or any increases to then-existing reserves, could adversely affect our financial condition and results of operations. We periodically evaluate strategies to efficiently reduce our insurance and claims expense. The auto liability policy contains a feature whereby we are able to retroactively obtain a partial refund of the premium in exchange for taking on the liability for incidents that occurred during the period and releasing the insurers. This is referred to as "commuting" the policy or "policy commutation." In the second quarter of 2020, as well as in several past periods we have commuted the policy, which has lowered our insurance and claims expense. Effective April 2018, we entered into new auto liability policies with a three-year term. The policy includes a limit for a single loss of $9.0 million, an aggregate of $18.0 million for each policy year, and a $30.0 million aggregate for the 36 month term ended March 31, 2021. The policy includes a policy release premium refund or commutation option of up to $14.0 million, less any future amounts paid on claims by the insurer. A decision with respect to commutation of the policy could be made before April 1, 2021. Management cannot predict whether or not future claims or the development of existing claims will justify a commutation of either policy period, and accordingly, no related amounts were recorded at September 30, 2020. 

 

Our insurance program includes multi-year policies with specific insurance limits that may be eroded over the course of the policy term. If that occurs, we will be operating with less liability coverage insurance at various levels of our insurance tower. For the current policy period (April 1, 2018 to March 31, 2021), aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million are estimated to be fully eroded based on current claims expense accruals, which could lead to volatility in our insurance and claims expense. As a result, any increases to existing claims, and/or new claims filed prior to March 31, 2021, may require additional expense accruals. Effective April 1, 2020, consistent with an extremely difficult insurance market for the industry, our insurance renewal terms include a higher fixed premium expense of approximately $0.5 million per quarter, greater self-insured retention, and lower aggregate limits than prior coverage. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. 

 

In addition, in future periods, insurance and claims costs may be more volatile depending on our future accident experience, which could have a material adverse effect on our business, financial condition, and results of operations.

 

Page 30

 

Communications and utilities

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Communications and utilities

  $ 1,306     $ 1,790     $ 4,657     $ 5,268  

% of total revenue

    0.6 %     0.8 %     0.8 %     0.8 %

% of freight revenue

    0.7 %     0.9 %     0.8 %     0.9 %

 

For the periods presented, the changes in communications and utilities were not significant as either a percentage of total revenue or freight revenue.

 

General supplies and expenses

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

General supplies and expenses

  $ 7,673     $ 7,584     $ 27,568     $ 21,493  

% of total revenue

    3.6 %     3.4 %     4.5 %     3.3 %

% of freight revenue

    3.9 %     3.8 %     4.9 %     3.7 %

 

General supplies and expenses increased approximately $0.1 million, or 1.2%, for the three months ended September 30, 2020, compared with the same quarter in 2019. As a percentage of total revenue, general supplies and expenses increased to 3.6% of total revenue for the three months ended September 30, 2020, compared to 3.4% for the same quarter in 2019. As a percentage of freight revenue, general supplies and expenses increased to 3.9% of freight revenue for the three months ended September 30, 2020, from 3.8% in the same quarter in 2019.

 

Page 31

 

For the nine months ended September 30, 2020, general supplies and expenses increased approximately $6.1 million, or 28.3%, compared with the same period in 2019. As a percentage of total revenue, general supplies and expenses increased to 4.5% of total revenue for the nine months ended September 30, 2020, from 3.3% for the nine months ended September 30, 2019. As a percentage of freight revenue, general supplies and expenses increased to 4.9% of freight revenue for the nine months ended September 30, 2020, from 3.7% in the same period in 2019.

 

The increases for the nine months ended September 30, 2020 primarily relate to additional reserves put in place for potentially uncollectible accounts receivable, increased period over period legal fees incurred to defend class action litigation, and strategic planning and process improvement investments that are part of our organizational restructuring. For the remainder of 2020, we expect the changes in general supplies and expenses versus the prior year period to decrease as a result of cost-saving efforts enacted as part of our strategic focus to reduce overhead costs.

 

Depreciation and amortization

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Depreciation and amortization

  $ 13,428     $ 20,817     $ 51,274     $ 61,230  

% of total revenue

    6.4 %     9.4 %     8.4 %     9.4 %

% of freight revenue

    6.8 %     10.5 %     9.1 %     10.5 %

 

Depreciation and amortization consists primarily of depreciation of tractors, trailers, and other capital assets, as well as amortization of intangible assets. Depreciation and amortization decreased by $7.4 million, or 35.5%, for the three months ended September 30, 2020, compared with the same quarter in 2019. As a percentage of total revenue, depreciation and amortization decreased to 6.4% of total revenue for the three months ended September 30, 2020, from 9.4% in the same quarter in 2019. As a percentage of freight revenue, depreciation and amortization decreased to 6.8% of freight revenue for the three months ended September 30, 2020, from 10.5% in the same quarter in 2019.

 

For the nine months ended September 30, 2020, depreciation and amortization decreased approximately $10.0 million, or 16.3%, compared with the same period in 2019. As a percentage of total revenue, depreciation and amortization decreased to 8.4% of total revenue for the nine months ended September 30, 2020, from 9.4% for the nine months ended September 30, 2019. As a percentage of freight revenue, depreciation and amortization decreased to 9.1% of freight revenue for the nine months ended September 30, 2020, from 10.5% in the same period in 2019.

 

Depreciation decreased $7.8 million and $11.7 million to $12.3 million and $47.3 million for the three and nine months ended September 30, 2020, respectively, compared to $20.1 million and $59.0 million in the same 2019 periods. The decreases in depreciation expense are due to a reduction in the average number of units as we downsized our unprofitable operations. Amortization of intangible assets was $1.2 million and $3.9 million for the three and nine months ended September 30, 2020 and $0.7 million and $2.2 million for the same 2019 periods, respectively. The increase is a result of the revised remaining useful life of the Landair trade name to 15 months as of June 30, 2020 and the termination of the non-compete agreement with a former Landair executive as a result of management changes, a change in the branding of the organization, and the expected use of the Landair trade name.

 

For the fourth quarter of 2020, we expect our average operational fleet size to remain relatively flat with the third quarter of 2020 at approximately 2,550 tractors.

 

Gain on disposition of property and equipment, net

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Gain on disposition of property and equipment, net

  $ (2,073 )   $ (751 )   $ (7,048 )   $ (959 )

% of total revenue

    (1.0 %)     (0.3 %)     (1.1 %)     (0.1 %)

% of freight revenue

    (1.1 %)     (0.4 %)     (1.2 %)     (0.2 %)

 

Gain on disposition of property and equipment, net was $2.1 million and $7.0 million for the three and nine months ended September 30, 2020, respectively, compared with $0.8 million and $1.0 million for the same 2019 periods. As a percentage of total revenue, gain on disposition of property and equipment, net was 1.0% and 1.1% for the three and nine months ended September 30, 2020 As a percentage of freight revenue, gain on disposition of property and equipment, net was 1.1% and 1.2% of freight revenue for the three and nine months ended September 30, 2020. These increases are primarily the result of the $3.7 million gain on of disposition of TFS in the third quarter of 2020 as well as the $5.7 million gain in the second quarter of 2020 on the disposition of our Hutchins, TX terminal facility, which was sold as part of the Company's restructuring plan. 

 

Page 32

 

Impairment of long lived property and equipment

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Impairment of long lived property and equipment

  $ -     $ -     $ 26,569     $ -  

% of total revenue

    0.0 %     0.0 %     4.3 %     0.0 %

% of freight revenue

    0.0 %     0.0 %     4.7 %     0.0 %

 

Impairment of long lived property and equipment, was none and $26.6 million for the three and nine months ended September 30, 2020, compared with none for the same periods of 2019. As a percentage of total revenue, impairment of long lived property and equipment was 0.0% and 4.3% of total revenue for the three and nine months ended September 30, 2020. As a percentage of freight revenue, impairment of long lived property and equipment was 0.0% and 4.7% of freight revenue for the three and nine months ended September 30, 2020. During the second quarter of 2020, we recognized impairment of $16.8 million on revenue equipment, $7.3 million on our Texarkana, AR terminal, related leasehold improvements, and equipment, $2.2 million on an office facility in Chattanooga, TN held under an operating lease, and $0.2 million on a training and orientation facility in Chattanooga, TN.

 

Interest expense, net

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Interest expense, net

  $ 1,935     $ 2,198     $ 5,917     $ 6,048  

% of total revenue

    0.9 %     1.0 %     1.0 %     0.9 %

% of freight revenue

    1.0 %     1.1 %     1.0 %     1.0 %

 

For the periods presented, the changes in interest expense, net were not significant as either a percentage of total revenue or freight revenue.

 

This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases as well as our ability to continue to generate profitable results and reduce our leverage. Going forward, we expect this line item to decrease based upon our indebtedness reduction from the TFS disposition and dispositions of terminals and revenue equipment.

 

Income from equity method investment

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Income from equity method investment

  $ 1,176     $ 2,138     $ 971     $ 7,548  

 

We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income or loss. Our income from equity method investment declined to $1.2 million and $0.9 million for the three and nine months ended September 30, 2020, respectively. The decrease in TEL's contributions to our results for the three and nine months ended September 30, 2020 is the result of the revenue impact associated with a customer bankruptcy during the fourth quarter of 2019. We expect the impact on our earnings resulting from our investment in TEL to be down year-over-year as a result of the terminated business.

 

Income tax expense (benefit)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Income tax expense (benefit)

  $ 1,339     $ 112     $ (7,000 )   $ 3,645  

% of total revenue

    0.6 %     0.1 %     (1.1 %)     0.6 %

% of freight revenue

    0.7 %     0.1 %     (1.2 %)     0.6 %

 

Income tax expense increased approximately $1.2 million, or 1095.5%, for the three months ended September 30, 2020, compared with the same quarter in 2019. As a percentage of total revenue, income tax expense was 0.6% of total revenue for the three months ended September 30, 2020, compared to 0.1% in the same quarter in 2019. As a percentage of freight revenue, income tax expense was 0.7% of freight revenue for the three months ended September 30, 2020, compared to 0.1% in the same quarter in 2019.

 

For the nine months ended September 30, 2020, income tax expense decreased approximately $10.6 million, or 292.0%, to a benefit of $7.0 million compared with the same period in 2019. As a percentage of total revenue, income tax benefit was 1.1% of total revenue for the nine months ended September 30, 2020, compared to income tax expense of 0.6% for the nine months ended September 30, 2019. As a percentage of freight revenue, income tax benefit was 1.2% of freight revenue for the nine months ended September 30, 2020, compared to income tax expense of 0.6% in the same period in 2019.

 

These changes were primarily related to the $10.0 million increase and $37.1 million decrease in pre-tax income in the three and nine months ended September 30, 2020, respectively, compared to the same 2019 periods, resulting from the changes in operating income and the decreased earnings on investment in TEL noted above.

 

The effective tax rate is different from the expected combined tax rate due primarily to permanent differences related to our per diem pay structure for drivers. Due to the partial nondeductible effect of the per diem payments, our tax rate will fluctuate in future periods as income fluctuates. We are currently estimating our 2020 effective income tax rate to be approximately 25.5%.

 

Page 33

 
 

RESULTS OF SEGMENT OPERATIONS

 

We have four reportable segments, Expedited, Dedicated, Managed Freight, and Warehousing. The Expedited segment primarily provides truckload services to customers with high service freight and delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery windows. Expedited services generally require two-person driver teams on equipment either owned or leased by the Company. The Dedicated segment provides customers with committed truckload capacity over contracted periods using equipment either owned or leased by the Company. The Managed Freight segment includes our brokerage and TMS. Brokerage services provide logistics capacity by outsourcing the carriage of customers’ freight to third parties. TMS provides comprehensive logistics services on a contractual basis to customers who prefer to outsource their logistics needs. The Warehousing segment provides day-to-day warehouse management services to customers who have chosen to outsource this function.

 

COMPARISON OF three and nine months ended September 30, 2020 TO three and nine months ended September 30, 2019

 

The following table summarizes financial and operating data by reportable segment:

 

(in thousands)

 

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues:

                               

Expedited

  $ 78,410     $ 87,674     $ 244,347     $ 265,664  

Dedicated

    71,104       87,284       218,833       257,362  

Managed Freight

    47,594       33,339       112,695       95,725  

Warehousing

    13,722       12,162       37,458       36,081  

Total revenues

  $ 210,830     $ 220,459     $ 613,333     $ 654,832  
                                 

Operating Income (Loss):

                               

Expedited

  $ 2,521     $ (2,637 )   $ (11,845 )   $ (1,876 )

Dedicated

    926       (2,979 )     (13,796 )     2,718  

Managed Freight

    2,079       506       (893 )     2,018  

Warehousing

    1,285       1,240       2,940       4,246  

Total operating income (loss)

  $ 6,811     $ (3,870 )   $ (23,594 )   $ 7,106  

 

For the quarter ended September 30, 2020, total revenue decreased approximately $9.6 million, or 4.4%, to $210.8 million from $220.5 million in the 2019 quarter. Freight revenue decreased approximately $1.2 million, or 0.6%, to $196.2 million for the quarter ended September 30, 2020, from $197.4 million in the 2019 quarter, while fuel surcharge revenue decreased $8.5 million quarter-over-quarter. The decrease in revenue resulted from an $11.1 million and a $5.9 million  decrease in Dedicated and Expedited freight revenue, respectively, partially offset by an increase of $14.3 million and $1.6 million in Managed Freight and Warehousing freight revenue, respectively.

 

The decrease in Expedited revenue relates to a 270 (or 21.5%) average tractor decrease related to the exit of the solo-refrigerated business in the second quarter of 2020 partially offset by an increase in average freight revenue per tractor per week of 18.2% compared to the 2019 quarter. The increase in average freight revenue per tractor per week for the quarter ended September 30, 2020 is the result of a 27.5% increase in average miles per unit partially offset by a 14.1 cents per mile (or 7.3%) decrease in average rate per total mile compared to the 2019 quarter. Expedited team-driven trucks averaged 896 tractors in the third quarter of 2020, an increase of approximately 11.1% from the average of 807 tractors in the third quarter of 2019.

 

The decrease in Dedicated revenue relates to a 274 (or 15.1%) average tractor decrease as a result of not renewing underperforming contracts and a $5.1 million reduction in fuel surcharge revenue. Average freight revenue per tractor per week decreased slightly compared to the 2019 quarter as the result of a 4.9% decrease in average miles per unit partially offset by an 8.8 cents per mile (or 4.9% increase) in average rate per total mile compared to the 2019 quarter. 

 

Managed Freight total revenue increased $14.3 million for the 2020 quarter compared to the same 2019 quarter, as a result of a robust spot market in the third quarter of 2020, providing new customer opportunities, partially offset by the negative impact of COVID-19 to one key customer during the quarter. 

 

Warehousing total revenue increased $1.6 million and $1.4 million for the three and nine month periods ended September 30, 2020, respectively, compared to the same 2019 periods as a result of new customer business that began operations during the third quarter of 2020.

 

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For the nine months ended September 30, 2020, total revenue decreased approximately $41.5 million, or 6.3%, to $613.3 million from $654.8 million in the same 2019 period. Freight revenue decreased approximately $18.6 million, or 3.2%, to $565.4 million for the period ended September 30, 2020, from $584.0 million in the 2019 period, while fuel surcharge revenue decreased $22.9 million period-over-period. The decrease in revenue resulted from a $24.9 million and $12.2 million decrease in Dedicated and Expedited freight revenue, respectively, partially offset by an increase of $17.0 million and $1.5 million in Managed Freight and Warehousing freight revenue, respectively.

 

The decrease in Expedited revenue relates to a 156 tractor (or 11.8%) average tractor decrease partially offset by an increase in average freight revenue per tractor per week of 7.2% compared to the same 2019 period. The increase in average freight revenue per tractor per week for the period ended September 30, 2020 is the result of a 14.4% increase in average miles per unit partially offset by a 11.3 cents per mile (or 5.9%) decrease in average rate per total mile compared to the same 2019 period. Expedited team-driven trucks averaged 872 tractors for the nine months ended September 30, 2020 compared to 803 tractors in the same 2019 period.

 

The decrease in Dedicated revenue relates to a 160 tractor (or 9.0%) average tractor decrease and a decrease in average freight revenue per tractor per week of 3.1% compared to the same 2019 period. The decrease in average freight revenue per tractor per week for the period ended September 30, 2020 is the result of a 5.6% decrease in average miles per unit partially offset by a 5.5 cents per mile (or 3.0%) increase in average rate per total mile compared to the same 2019 period. Dedicated team-driven trucks averaged 44 tractors for the nine months ended September 30, 2020 compared to 110 tractors in the same 2019 period.

 

Managed Freight total revenue increased $17.0 million for the nine months ended September 30, 2020 compared to the same 2019 period as a result of additional opportunities in the brokerage market as a result of COVID-19. 

 

For the quarter ended September 30, 2020, total operating income was $6.8 million compared to operating loss of $3.9 million in the 2019 quarter. In addition to the changes in revenue described above, the change in operating income resulted from a $20.1 and $14.4 million decrease in Dedicated and Expedited operating expenses, respectively, partially offset by a $12.7 million and $1.5 million increase in Managed Freight and Warehousing operating expenses, respectively. The decrease in Dedicated and Expedited operating expenses is primarily the result of a 15.1% and 21.5% average operating fleet reduction, respectively, partially offset by higher variable costs associated with a greater concentration of team driven units in the Expedited fleet. The downsizing of our terminal network and short-term cost reductions also contributed to this reduction. The increase in Managed Freight operating expenses is the result of increased revenue driving an increase in variable expenses, primarily purchased transportation. The increase for Warehousing was primarily driven by the new customer business that began operations during the third quarter of 2020.

 

For the nine months ended September 30, 2020, total operating loss was $23.6 million compared to operating income of $7.1 million during the same 2019 period. In addition to the changes in revenue described above, the change in operating income resulted from a $22.0 million and $11.4 million decrease in Dedicated and Expedited operating expenses, respectively, partially offset by a $19.9 million and $2.7 million increase in Managed Freight and Warehousing operating expenses. The decrease in Dedicated and Expedited operating expenses was primarily due to a 9.0% and 11.8% average operating fleet reduction, respectively, partially offset by higher variable costs associated with a greater concentration of team driven units in the Expedited fleet. The downsizing of our terminal network and short-term cost reductions also contributed to this reduction. The increase in Managed Freight operating expenses is the result of increased revenue driving an increase in variable expenses, primarily purchased transportation. The increase for Warehousing was primarily driven by the new customer business that began operations during the third quarter of 2020. 

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. Going forward, we expect revenue equipment acquisitions through purchases and finance leases to increase as a percentage of our fleet as we decrease our use of operating leases. Further, we expect to increase our capital allocation toward Dedicated and Managed Freight reportable segments to become the go-to partner for our customers’ most critical transportation and logistics needs. We had working capital (total current assets less total current liabilities) of $53.5 million and $93.1 million at September 30, 2020 and December 31, 2019, respectively. Our working capital on any particular day can vary significantly due to the timing of collections and cash disbursements. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs and we do not expect to experience material liquidity constraints in the foreseeable future.

 

With an average fleet age of 1.9 years at September 30, 2020, we believe we have flexibility to manage our fleet, and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and purchase options. If we were to grow our independent contractor fleet, our capital requirements would be reduced.

 

As of September 30, 2020 and December 31, 2019 we had $166.7 million and $348.2 million in long-term debt and lease obligations, respectively, consisting of the following:

 

 

No outstanding borrowings under the Credit Facility, respectively;
     
  No outstanding borrowings under the Draw Note, respectively;
     
  $81.5 million and $230.9 million in revenue equipment installment notes, respectively;
     
  $22.9 million and $23.8 million in real estate notes, respectively;
     
  none and $0.2 million in deferred loan costs (which reduce long-term debt), respectively;
     
  $19.2 million and $33.3 million of the principal portion of financing lease obligations, respectively, and;
     
  $43.1 million and $60.3 million of the operating lease obligations, respectively.

 

The decrease in our revenue equipment installment notes and financing lease obligations was primarily due to a strategic decision to reduce our debt and lease obligations during the third quarter of 2020. The decrease in operating lease obligations was primarily due to the termination of a property lease related to our Managed Freight segment and the amortization of the operating lease liability during 2020.

 

As of September 30, 2020, we had no borrowings outstanding, undrawn letters of credit outstanding of approximately $36.7 million, and available borrowing capacity of $58.3 million under the Credit Facility. Additionally, we had availability of a $45.0 million line of credit from Triumph Bank which is available solely to fund any indemnification owed to Triumph in relation to the sale of TFS. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment. Refer to Note 7, “Debt” of the accompanying condensed consolidated financial statements for further information about material debt agreements.

 

Our net capital expenditures for the nine months ended September 30, 2020 totaled $18.8 million of proceeds as compared to $0.1 million of expenditures for the prior year period. In the third quarter of 2020, we took delivery of approximately 86 new tractors and no new trailers, while disposing of approximately 391 used tractors and 397 used trailers. Our current fleet plan for fiscal 2020 includes the delivery of an additional 200 new company replacement tractors and no additional new trailer deliveries. For the fourth quarter of 2020, we expect our average operational fleet size to remain relatively flat with the third quarter of 2020 at approximately 2,550 tractors. Net gains on disposal of equipment and real estate in the third quarter of 2020 were $2.1 million compared to $0.8 million in the prior-year quarter.

 

During the first half of 2020, in response to the uncertainty of the upcoming economic environment as a result of COVID-19 and as part of our strategic focus to reduce overhead costs, we took measures to preserve our liquidity, including capital reductions, financing, cost reduction, and working capital actions. During the third quarter of 2020, we have paid down approximately $175.6 million of debt and lease obligations. If needed, we have other potential flexible sources of liquidity that we can leverage, such as currently unencumbered owned revenue equipment.

 

In April 2020, in an effort to improve our liquidity during the COVID-19 pandemic, we executed a modification to certain of our revenue equipment installment notes, exercising an option to make interest only payments for a period of 90 days, extending the due date of $177.3 million of debt by three months.

 

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Cash Flows

 

Net cash flows provided by operating activities decreased to $25.0 million for the nine-month period ended September 30, 2020, compared to $39.8 million for the same 2019 period primarily due to a $24.4 decrease in net income as well as the timing and amount of payments on our trade accounts and insurance claims. 

 

Net cash flows provided by investing activities were $131.0 million for the nine-month period ended September 30, 2020, compared to $99.5 million used in the same 2019 period. The change in net cash flows used by investing activities was primarily the result of the disposal of substantially all of the operations and assets of TFS, which included substantially all of the assets and operations of our Factoring reportable segment and the disposal of our Orlando and Hutchins properties during the 2020 period as well as timing of our trade cycle whereby we took delivery of approximately 86 new company tractors and disposed of approximately 391 used tractors in the 2020 period compared to delivery and disposal of approximately 1,211 and 486 tractors, respectively, in the same 2019 period. 

 

Net cash flows used by financing activities were approximately $185.8 million for the nine-months ended September 30, 2020, compared to $76.4 million provided in the same 2019 period. The change in net cash flows provided by financing activities was primarily a function of paying down approximately $175.6 million of debt and lease obligations during the third quarter of 2020 and our stock repurchase program during the first quarter of 2020. 

 

On February 10, 2020, our Board of Directors approved a stock repurchase program authorizing the purchase of up to $20.0 million of our Class A common stock from time-to-time based upon market conditions and other factors. The stock could be repurchased on the open market or in privately negotiated transactions. The repurchased shares are held as treasury stock and may be used for general corporate purposes as our Board of Directors may determine. On March 26, 2020, our Board of Directors temporarily suspended the stock repurchase program for added flexibility in response to the uncertain impact of the COVID-19 pandemic. Between February 10, 2020 and March 26, 2020, we repurchased 1.4 million shares of our Class A common stock in the open market for $17.5 million. There were no changes to the stock repurchase program during the second quarter of 2020.

 

Going forward, the disposition of our Factoring reportable segment will improve our cash flows used by financing activities. However, on an ongoing basis, our cash flows may fluctuate depending on capital expenditures, future stock repurchases, strategic investments or divestitures, and the extent of future income tax obligations and refunds.

 

CONTRACTUAL OBLIGATIONS

 

During the three and nine months ended September 30, 2020, we paid down a significant amount of our revenue equipment and property installment notes and finance leases.  Other than those presented in the table below, there have been no material changes in our commitments or our contractual liabilities.

 

The following table sets forth our contractual cash obligations and commitments as of September 30, 2020: 

 

 

 

Payments due by period:

                                                       

(in thousands)

 

Total

      2020 (1 )     2021       2022       2023       2024    

More than 5 years

 
Credit Facility and Draw Note (2)     $ -       $ -       $ -       $ -       $ -       $ -       $ -  

Revenue equipment and property installment notes, including interest (3)

  $ 177,305     $ 18,147     $ 30,168     $ 28,802     $ 2,798     $ 2,077     $ 95,313  
Operating leases (4)     $ 47,042       $ 5,177       $ 18,543       $ 15,523       $ 6,762       $ 28       $ 9  
Finance leases (5)     $ 19,729       $ 6,654       $ 7,590       $ 5,456       $ 29       $ -       $ -  
Purchase obligations (6)     $ 59,870       $ 25,100       $ 34,770       $ -       $ -       $ -       $ -  

Total contractual cash obligations (7)

  $ 303,946     $ 29,978     $ 56,301     $ 49,781     $ 9,589     $ 2,105     $ 95,322  

 

(1) For the remainder of 2020.

(2) There were no outstanding borrowings under the Credit Facility or Draw Note as of September 30, 2020. Refer to Note 7, "Debt" of the accompanying condensed consolidated financial statements for further information.

(3) Represents principal and interest payments owed at September 30, 2020. The borrowings consist of installment notes with finance companies, with fixed borrowing amounts and fixed interest rates, except for a variable rate real estate note, for which the interest rate is effectively fixed through an interest rate swap. The table assumes these installment notes are held to maturity. Refer to Note 7, "Debt" of the accompanying condensed consolidated financial statements for further information.

(4) Represents future monthly rental payment obligations under operating leases for tractors, trailers, terminal properties, and computer and office equipment. Substantially all lease agreements for revenue equipment have fixed payment terms based on the passage of time. The tractor lease agreements generally stipulate maximum miles and provide for mileage penalties for excess miles. These leases generally run for a period of three to five years for tractors and five to seven years for trailers. Refer to Note 8, "Lease Obligations" of the accompanying condensed consolidated financial statements for further information.

(5) Represents principal and interest payments owed at September 30, 2020. The borrowings consist of finance leases with finance companies, with fixed borrowing amounts and fixed interest rates or rates that are floating but effectively fixed through related interest rate swaps. Borrowings in 2020 and thereafter include the residual value guarantees on the related equipment as balloon payments. Refer to Note 7, "Debt" of the accompanying condensed consolidated financial statements for further information.

(6) Represents purchase obligations for revenue equipment totaling approximately $25.1 million in 2020 and $34.8 million in 2021. These commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits. These purchase commitments are expected to be financed by operating leases, finance leases, long-term debt, proceeds from sales of existing equipment, and/or cash flows from operations. Refer to Notes 7 and 8, "Debt" and "Leases Obligations," respectively, of the accompanying condensed consolidated financial statements for further information.

(7) Excludes any amounts accrued for unrecognized tax benefits as we are unable to reasonably predict the ultimate amount or timing of settlement of such unrecognized tax benefits

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. There have been no material changes to our most critical accounting policies and estimates during the three and nine months ended September 30, 2020, compared to those disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our 2019 Form 10-K, other than those discussed above.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We experience various market risks, including changes in interest rates and fuel prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes, or when there are no underlying related exposures. Because our operations are confined to the United States, we are not subject to a material amount of foreign currency risk.

 

We engage in activities that expose us to market risks, including the effects of changes in fuel prices and in interest rates. Financial exposures are evaluated as an integral part of our risk management program, which seeks, from time-to-time, to reduce the potentially adverse effects that the volatility of fuel markets and interest rate risk may have on operating results.

 

COMMODITY PRICE RISK

 

In an effort to seek to reduce the variability of the ultimate cash flows associated with fluctuations in diesel fuel prices, we have periodically entered into various derivative instruments, including forward futures swap contracts. We have historically entered into hedging contracts with respect to ultra-low sulfur diesel ("ULSD"). Under these contracts, we paid a fixed rate per gallon of ULSD and received the monthly average price of Gulf Coast ULSD. The retrospective and prospective regression analyses provided that changes in the prices of diesel fuel and ULSD were deemed to be highly effective based on the relevant authoritative guidance. During the quarter ended September 30, 2020, we had fuel hedge contracts with a fair market value of $0.2 million, which are included in other liabilities in our condensed consolidated balance sheet at September 30, 2020. We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes.
 
A one dollar increase in the price of diesel per gallon would decrease our net income by $0.1 million. This sensitivity analysis considers that we expect to purchase approximately 5.1 million gallons of diesel during the remainder of 2020, with an assumed fuel surcharge recovery rate of 81.4% of the cost (which was our fuel surcharge recovery rate during the nine months ended September 30, 2020, excluding the impact of gains or losses of fuel hedge settlements). Assuming our fuel surcharge recovery is consistent during the remainder of 2020, this leaves 0.9 million gallons that are not covered by the natural hedge created by our fuel surcharges. Because we have hedged a portion of our fuel, we will not realize the impact of changes in fuel prices to the same extent as we would have had we not entered into our hedge contracts.

 

INTEREST RATE RISK

 

In August 2015, we entered into an interest rate swap agreement with a notional amount of $28.0 million, which was designated as a hedge against the variability in future interest payments due on the debt associated with the purchase of our corporate headquarters. The terms of the swap agreement effectively convert the variable rate interest payments on this note to a fixed rate of 4.2% through maturity on August 1, 2035. In 2016, we also entered into several interest rate swaps, which were designated to hedge against the variability in future interest rate payments due on rent associated with the purchase of certain trailers. Because the critical terms of the swap and hedged item coincide, in accordance with the requirements of ASC 815, the change in the fair value of the derivative is expected to exactly offset changes in the expected cash flows due to fluctuations in the LIBOR rate over the term of the debt instrument, and therefore no ongoing assessment of effectiveness is required. For the periods ended September 30, 2020 and 2019, the fair value of the swap agreements, amounts reclassified from accumulated other comprehensive income (loss) into our results of operations, and amounts expected to be reclassified from accumulated other comprehensive income (loss) into our results of operations during the next twelve months due to interest rate changes, are immaterial. The amounts actually realized will depend on the fair values as of the date of settlement

 

Our market risk is also affected by changes in interest rates. Historically, we have used a combination of fixed-rate and variable-rate obligations to manage our interest rate exposure. Fixed-rate obligations expose us to the risk that interest rates might fall. Variable-rate obligations expose us to the risk that interest rates might rise. Of our total $166.7 million of debt and operating and finance leases, we had $29.9 million of variable rate debt outstanding at September 30, 2020, including our Credit Facility, a real-estate note and certain equipment notes, of which the real-estate note of $22.9 million was hedged with the interest rate swap agreement at 4.2% and certain of our equipment notes totaling $6.9 million were hedged to provide a weighted average interest rate of 2.9%. The interest rates applicable to these agreements are based on either the prime rate or LIBOR. Our earnings would be affected by changes in these short-term interest rates. Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates. At our September 30, 2020 level of borrowing, a 1% increase in our applicable rate would reduce annual net income by less than $0.1 million. Our remaining debt is fixed rate debt, and therefore changes in market interest rates do not directly impact our interest expense.

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ITEM 4.     CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020.

 

As disclosed in Part I, Item 4 Controls and Procedures in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, we identified a deficiency in our internal control over financial reporting that we considered to be a material weakness regarding ineffective internal control related to credit approval and monitoring within our TFS subsidiary. The Company completed the sale of substantially all assets of TFS on July 8, 2020.  Management determined that the material weakness was isolated to the TFS subsidiary. As a result, management believes that the material weakness was eliminated upon the sale of TFS.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.

 

We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.

 

Changes in Internal Control Over Financial Reporting 

 

Except for the sale of substantially all assets of TFS on July 8, 2020, there have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

From time-to-time, we are a party to ordinary, routine litigation arising in the ordinary course of business, most of which involves claims for personal injury and/or property damage incurred in connection with the transportation of freight.

 

Our subsidiary Covenant Transport, Inc. (“Covenant Transport”) is a defendant in a lawsuit filed on November 9, 2018, in the Superior Court of Los Angeles County, California. The lawsuit was filed on behalf of Richard Tabizon (a California resident and former driver) who is seeking to have the lawsuit certified as a class action. The complaint asserts that the time period covered by the lawsuit is from October 31, 2014 to the present and alleges claims for failure to properly pay drivers for rest breaks, failure to provide accurate itemized wage statements and/or reimbursement of business related expenses, unlawful deduction of wages, failure to pay proper minimum wage and overtime wages, failure to provide all wages due at termination, and other related wage and hour claims under the California Labor Code. Since the original filing date, the case has been removed from the Los Angeles Superior Court to the U.S. District Court in the Central District of California and subsequently the case was transferred to the U.S. District Court in the Eastern District of Tennessee where the case is now pending. Covenant Transport intends to vigorously defend itself in this matter. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of September 30, 2020. 

 

On February, 28 2019, Covenant Transport was named in a separate (but related) lawsuit filed in the Superior Court of Los Angeles County, California requesting civil penalties under the California Private Attorneys’ General Act for the same underlying wage and hour claims at issue in the putative class action case noted above. On August 1, 2019, the Los Angeles Superior Court entered an order staying the action pending completion of the earlier-filed action that is pending in the United States District Court for the Eastern District of Tennessee. Covenant Transport intends to vigorously defend itself in this matter. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of September 30, 2020.

 

On August 2, 2018, Curtis Markson, et al. (collectively, “Markson”), filed a putative class action case in United States District Court, Central District of California generically claiming that five (5) specified trucking companies (including our subsidiary Southern Refrigerated Transport, Inc.) entered into a "no poaching conspiracy" in which they agreed not to solicit or hire employees in California who were "under contract" with a fellow defendant. The allegations center around new drivers in California who received their commercial driver's license through driving schools associated with, or paid for by, one of the named defendants, in exchange for agreeing to drive for that defendant carrier for a specified amount of time (typically 8-10 months). Over the ensuing 18 – 20 months, the Plaintiffs added more trucking companies as co-defendants in the lawsuit, including Covenant Transport on April 23, 2020. The lawsuit claims that the named defendants sent letters to one another, providing notice of "under contract" status, if these new California drivers were hired by another defendant carrier prior to the driver completing their contractual obligations. Plaintiffs contend that these notifications evidence a collusive agreement by the named defendants to restrain competition among trucking companies in California and suppress wages. Southern Refrigerated Transport, Inc. and Covenant Transport, Inc. are vigorously defending themselves against these claims. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of September 30, 2020. 

 

Our insurance program includes multi-year policies with specific insurance limits that may be eroded over the course of the policy term. If that occurs, we will be operating with less liability coverage insurance at various levels of our insurance tower. For the current policy period (April 1, 2018 to March 31, 2021), aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million are estimated to be fully eroded based on current claims expense accruals, which could lead to volatility in our insurance and claims expense. As a result, any increases to existing claims, and/or new claims filed prior to March 31, 2021, may require additional expense accruals. The expenses associated with additional liability claims may be substantial and such expenses could have a material adverse effect on our business, financial condition, and results of operations. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. We maintain insurance to cover liabilities arising from the transportation of freight for amounts in excess of certain self-insured retentions. In management's opinion, our potential exposure under pending legal proceedings is adequately provided for in the accompanying condensed consolidated financial statements.

 

Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of open claims and pending litigation, discussed above, taking into account existing reserves, is not likely to have a materially adverse effect on our condensed consolidated financial statements, however, any future liability claims would impact this analysis.

 

 

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ITEM 1A.

RISK FACTORS

 

While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. Our Form 10-K for the year ended December 31, 2019, Form 10-Q for the quarter ended March 31, 2020, as amended, and Form 10-Q for the quarter ended June 30, 2020 in the sections entitled "Item 1A. Risk Factors," describe some of the risks and uncertainties associated with our business. We are amending and restating in its entirety the risk factor formerly entitled "We are involved in a dispute arising from our disposition of substantially all of the operations and assets of TFS, which could have a material adverse effect on our business, financial conditions, and results of operation", from our Form 10-Q for the quarter ended June 30, 2020, as set forth below. This risk factor should be read in conjunction with the other risk factors included in our Form 10-K for the year ended December 31, 2019, Form 10-Q for the quarter ended March 31, 2020, as amended, and Form 10-Q for the quarter ended June 30, 2020. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects. 

 

We may incur additional charges in connection with the disposition of substantially all of the operations and assets of TFS, which could have a material adverse effect on our results of operations, cash flows, available liquidity, and total indebtedness.

 

During the third quarter of 2020, we sold substantially all of the operations and assets of TFS. In connection with the sale of TFS’ assets, we agreed to indemnify the purchaser of TFS’ assets for certain advances we made to specified clients prior to the sale. We are responsible for and will indemnify the purchaser for 100% of the first $30 million of any losses incurred by the purchaser related to these advances, and for 50% of the next $30 million of any losses incurred by the purchaser, for total indemnification by us of $45.0 million. Our indemnification obligations are secured by certain revenue equipment.

 

We have not accrued a liability for our indemnification obligations as of the date hereof. We will record liabilities, if any, when they become probable and capable of estimation in accordance with GAAP. The accrual of material liabilities and payment of amounts with respect to the indemnification obligations could create volatility in our reported future financial results and have an adverse effect on our results of operations, cash flows, available liquidity, and total indebtedness.

 

Due to the amended terms for the sale of TFS’ assets, the previously disclosed $26.5 million estimated gain was reduced to a $3.7 million gain in the third quarter of 2020.

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the quarter ended September 30, 2020, we did not engage in unregistered sales of securities or any other transactions required to be reported under this Item 2 of Part II on Form 10-Q.

 

The payment of cash dividends is currently limited by our financing arrangements, including certain covenants under our Credit Facility.
 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION

 

Not applicable.

 

Page 41

 
 

 

ITEM 6.       EXHIBITS

 

Exhibit

Number

 

Reference

 

Description

2.1 # Accounts Receivable Purchase Agreement by and between Covenant Transport Solutions, LLC and Advance Business Capital LLC, dated as of July 8, 2020

3.1

(1)

Third Amended and Restated Articles of Incorporation

3.2

(2)

Fifth Amended and Restated Bylaws

4.1

(1)

Third Amended and Restated Articles of Incorporation

4.2

(2)

Fifth Amended and Restated Bylaws

10.1 *# Separation Agreement between Richard Cribbs and Transport Management Services, LLC
10.2 # Account Management Agreement, Amendment to Purchase Agreement and Mutual Release, by and among Covenant Transport Solutions, LLC, Covenant Logistics Group, Inc., Triumph Bancorp, Inc., and Advance Business Capital LLC, dated as of September 23, 2020
10.3 # Seventeenth Amendment to Third Amended and Restated Credit Agreement, dated as of September 23, 2020, among Covenant Logistics Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, LLC, Star Transportation, Inc., Covenant Logistics, Inc., Transport Management Services, LLC, Landair Holdings, Inc., Landair Transport, Inc., Landair Logistics, Inc., Landair Leasing, Inc., and Bank of America, N.A.
10.4 # Draw Note in the face amount of $45.0 million by Covenant Logistics Group, Inc. and Covenant Transport Solutions, LLC with TBK Bank, SSB as Lender and Agent, dated as of September 23, 2020
10.5 *# Form of Executive Severance Agreement
10.6 (3)* Second Amendment to the Company’s Third Amended and Restated 2006 Omnibus Incentive Plan

31.1

#

Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Principal Executive Officer

31.2

#

Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by M. Paul Bunn, the Company's Principal Financial Officer

32.1

##

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer

32.2

##

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by M. Paul Bunn, the Company's Chief Financial Officer

101.INS

  Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104   Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101)

References:

   

(1)

Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K, filed July 2, 2020.

(2)

Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 8-K, filed July 2, 2020.
(3) Incorporated by reference to Appendix A to the Company's Schedule 14A, filed June 8, 2020.

#

Filed herewith.

##

Furnished herewith.

* Management contract or compensatory plan or arrangement.

 

Page 42

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

COVENANT LOGISTICS GROUP, INC.

   
   

Date: November 3, 2020

By:

/s/ M. Paul Bunn

   

M. Paul Bunn

   

Executive Vice President, Chief Financial Officer, and Secretary in his capacity as such and as a duly authorized officer on behalf of the issuer

 

 

Page 43

 

 

 

 

 

 

 

 

 

 

 

 

ACCOUNTS RECEIVABLE PURCHASE AGREEMENT

 

by and between

 

COVENANT TRANSPORT SOLUTIONS, LLC

as Seller,

 

and

 

ADVANCE BUSINESS CAPITAL LLC

as Buyer

 

 

 

Dated as of July 8, 2020

 

 

 

 

 

 

 

 

 

Table of Contents

 
 

Page

SECTION 1. DEFINITIONS AND INTERPRETATION.

1

 

Section 1.1 Definitions

1

 

Section 1.2 Index of Defined Terms.

5

 

Section 1.3 Interpretation

7

SECTION 2. PURCHASE OF RECEIVABLES PORTFOLIO AND RELATED ASSETS.

8

 

Section 2.1 Purchase and Sale of Receivables

8

 

Section 2.2 Assumption of Obligations.

9

 

Section 2.3 Excluded Obligations.

9

 

Section 2.4 Financing Statements

10

 

Section 2.5 Refunds and Remittances.

10

 

Section 2.6 Payments from Excluded Customers.

10

SECTION 3. PURCHASE PRICE; CLOSING; EARNOUT AMOUNT.

10

 

Section 3.1 Purchase Price

10

 

Section 3.2 Closing

10

 

Section 3.3 Payments Received and Liabilities Incurred..

12

 

Section 3.4 Earnout Consideration.

12

SECTION 4. REPRESENTATIONS AND WARRANTIES.

14

 

Section 4.1 Seller’s General Representations

14

 

Section 4.2 Seller’s Representation Regarding Purchased Receivables

17

 

Section 4.3 Buyer’s Representations.

19

 

Section 4.4 No Other Representations.

19

SECTION 5. COVENANTS.

20

 

Section 5.1 Post-Closing Access to Information.

20

 

Section 5.2 Confidentiality.

20

 

Section 5.3 Further Assurances.

21

 

Section 5.4 Non-Solicitation; Non-Competition

21

 

Section 5.5 Loss Reimbursement.

22

SECTION 6. TAX MATTERS.

22

 

Section 6.1 Withholding

22

 

Section 6.2 Straddle Periods.

22

 

Section 6.3 Transfer Taxes

23

SECTION 7. SURVIVAL; INDEMNIFICATION.

23

 

Section 7.1 Survival.

23

 

Section 7.2 Indemnification by Seller.

23

 

Section 7.3 Indemnification by Buyer.

23

 

Section 7.4 Certain Limitations on Indemnification.

24

 

Section 7.5 No Waiver.

24

 

Section 7.6 Set Off.

24

 

Section 7.7 Direct Claim Indemnification Procedures.

24

 

Section 7.8 Third-Party Claim Indemnification Procedures.

25

 

Section 7.9 Exclusive Remedy.

27

 

Section 7.10 Tax Treatment of Indemnification Payments.

27

SECTION 8. MISCELLANEOUS.

27

 

Section 8.1 Assignment

27

 

Section 8.2 No Third-Party Beneficiaries.

27

 

Section 8.3 Expenses.

27

 

 
i

 

 

Section 8.4 Notices, Addresses

27

 

Section 8.5 Amendment and Waiver

28

 

Section 8.6 Counterparts

29

 

Section 8.7 Entire Agreement

29

 

Section 8.8 Invalidity

29

 

Section 8.9 Governing Law

29

 

Section 8.10 Consent to Jurisdiction

29

 

Section 8.11 WAIVER OF JURY TRIAL

29

 

Section 8.12 Specific Performance

30

 

Section 8.13 Obligation of Buyer Indirect Parent.

30

 

 

ii
 

 

 

 

 

ACCOUNTS RECEIVABLE PURCHASE AGREEMENT

 

THIS ACCOUNTS RECEIVABLE PURCHASE AGREEMENT, dated as of July 8, 2020 (this “Agreement”), is entered into by and between Covenant Transport Solutions, LLC, a Nevada limited liability company doing business as Transport Financial Services (“Seller”), and Advance Business Capital LLC, a Delaware limited liability company (“Buyer”).

 

RECITAL:

 

A.     Seller conducts and provides accounts receivable factoring financing services through a division of Seller known as Transport Financial Solutions (the “Business”).

 

B.     Seller desires to sell and assign to Buyer certain accounts receivable related to the Business, and Buyer desires to purchase such accounts receivable from Seller, in each case, on the terms and conditions set forth in this Agreement.

 

AGREEMENT:

 

NOW THEREFORE, in consideration of the recitals, the mutual representations, covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller hereby agree as follows:

 

SECTION 1.      DEFINITIONS AND INTERPRETATION.

 

Section 1.1      Definitions. In this Agreement, the following terms shall have the meanings ascribed thereto:

 

Affiliate” means any Person controlling, controlled by or under common control with, such Person.

 

Anti-Corruption Laws” means the Foreign Corrupt Practices Act of 1977, and the rules and regulations promulgated thereunder, and each other applicable Law of any jurisdiction applicable to Seller or any of its Subsidiaries concerning or relating to bribery or corruption.

 

Anti-Money Laundering Laws” means the PATRIOT Act, the Money Laundering Control Act of 1986, the Bank Secrecy Act, and the rules and regulations promulgated thereunder, and corresponding Law of the jurisdictions in which Seller or any of its Subsidiaries operates.

 

Asset-Based Lending” means the business of acting as a lender to provide lines of credit that are secured by accounts receivable, inventory, or cash of the borrower(s).

 

Average Net Funds Employed” means $100,789,559, which amount is the average aggregate daily balance for a 30-day period prior to Closing of the difference between (a) the gross face amount of the Purchased Receivables; minus (b) the net amount of accrued reserves and earned reserves with respect to such Purchased Receivables, in each case determined as of 9:00 P.M. Central time on each day and calculated in accordance with GAAP; provided that the “Average Net Funds Employed” amount shall not include any reserve for Allowance for Doubtful Accounts (as defined by GAAP).

 

1

 

Business Day” means any day other than a Saturday, Sunday or a day on which banks in the State of Texas are required to be closed in accordance with applicable Law. Any action, notice or right that is to be taken or given or that is to be exercised or lapses on or by a given date that is not a Business Day may be taken, given or exercised and shall not lapse until the next Business Day following.

 

Buyer Indirect Parent” means Triumph Bancorp, Inc., a Texas corporation and registered financial holding company under the Bank Holding Company Act of 1956.

 

Claim” means and includes all demands, claims, suits, actions, causes of action and proceedings, whether or not ultimately determined to be valid.

 

Closing Data Spreadsheet” means an electronic file containing the information fields required by Buyer regarding the Purchased Receivables as of 9:00 P.M. Central time on the day prior to the date hereof.

 

Closing Date” means the date of this Agreement.

 

Closing Net Funds Employed” means an amount equal to (a) the gross face amount of the Purchased Receivables at the Closing; minus (b) the net amount of accrued reserves and earned reserves with respect to such Purchased Receivables, in each case as of 9:00 P.M. Central time on the day prior to the Closing Date calculated in accordance with GAAP; provided that the “Closing Net Funds Employed” amount shall not include any reserve for Allowance for Doubtful Accounts (as defined by GAAP).

 

Closing Premium” means an amount of cash equal to $5,089,478 and 630,268 shares of Triumph Common Stock.

 

Closing Statement” means a mutually agreed-upon statement reflecting the Closing Net Funds Employed and the Closing Premium and the other information included therein determined based on the Closing Data Spreadsheet.

 

Code” means the Internal Revenue Code of 1986.

 

Contract” means all contracts, purchase orders, sales orders, licenses, leases and other agreements, commitments, arrangements and understandings, whether written or oral.

 

Customer” means, with respect to any Purchased Receivable, the Person that provided goods or services to an Obligor in connection therewith and assigned a Receivable to Seller pursuant to the Factoring Agreement applicable thereto.

 

Dispute” means, with respect to any Purchased Receivable, any Claim, offset, defense, counterclaim, discount, allowance, or warranty issue of any kind between Seller and the applicable Obligor (or any of their respective Affiliates) relating to such Purchased Receivable, including any products liability Claim arising out of or in connection with such Purchased Receivable.

 

GAAP” means United States generally accepted accounting principles applied on a consistent basis throughout the periods involved.

 

2

 

Governmental Entity” means any federal, state, municipal, county, local, foreign, or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to a government.

 

Insolvency Event” means, with respect to any Person, such Person (a) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (b) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (c) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (d) institutes or has instituted against it a proceeding seeking judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency Law or other similar Law affecting creditor’s rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (i) results in a judgment of insolvency or bankruptcy or the entry of an Order for relief or the making of an Order for its winding up or liquidation; or (ii) is not dismissed, discharged, stayed or restrained, in each case within 30 days of the institution or presentation thereof; (e) has a resolution passed for its winding-up, official management or liquidation; (f) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all of its assets; (g) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (h) causes or is subject to any event with respect to it which, under the applicable Law of any jurisdiction, has an analogous effect to any of the events specified in clauses (a) to (g) (inclusive); or (i) takes any corporate or other organizational action to authorize any of the foregoing.

 

Invoice” means, with respect to any Receivable, the invoice issued by a Customer to the applicable Obligor for the payment for the goods supplied or related services provided to such Obligor.

 

Knowledge” means, with respect to Seller, the knowledge, after reasonable inquiry and investigation, of the Persons identified in Schedule 1.1(a).

 

Law” means any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, Order, injunction, writ, decree or award of any Governmental Entity.

 

Liability” means any direct or indirect indebtedness, guaranty, endorsement, Claim, Loss, damage, deficiency, cost, expense (including capital improvements), fine, penalty, obligation or responsibility, fixed or unfixed, known or unknown, asserted or unasserted, liquidated or unliquidated, secured or unsecured.

 

Liens” means any mortgages, liens (statutory or otherwise), security interests, Claims, pledges, licenses, equities, options, conditional sales contracts, assessments, levies, easements, covenants, conditions, reservations, encroachments, hypothecations, restrictions, rights-of-way, exceptions, limitations, charges, possibilities of reversion, rights of refusal or encumbrances of any nature whatsoever, including voting trusts or agreements, proxies and marital or community property interests.

 

3

 

Losses” means and includes (a) all Liabilities; (b) all losses, Taxes, damages, diminutions in value, judgments, awards, penalties, settlements and assessments; and (c) all costs and expenses (including prejudgment interest in any litigated or arbitrated matter and other interest), court costs and fees and expenses of attorneys, consultants and expert witnesses of investigating, defending or asserting any Claim or of enforcing this Agreement.

 

Net Funds Employed” means an amount equal to (a) the gross face amount of a Receivable; minus (b) the net amount of accrued reserves and earned reserves with respect to such Receivable calculated in accordance with GAAP; provided that the “Net Funds Employed” amount shall not include any reserve for Allowance for Doubtful Accounts (as defined by GAAP).

 

Obligor” means, with respect to any receivable purchased by Seller pursuant to a Factoring Agreement, the Person that is obligated to make payments in respect of such Receivable pursuant to the applicable Factoring Agreement.

 

Order” means any order, writ, injunction, judgment, plan or decree of or issued by any Governmental Entity.

 

Party” means a party to this Agreement, including any successors and permitted assigns; provided that notwithstanding anything to the contrary herein, Buyer Indirect Parent is not a “Party” to this Agreement except with respect to Section 8.13.

 

Person” means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Entity or other entity of whatever nature.

 

Post-Closing Tax Period” means all taxable periods beginning and ending after the Closing Date and the portion beginning on the day after the Closing Date of any Straddle Period.

 

Pre-Closing Tax Period” shall mean all taxable periods ending on or before the Closing Date and the portion ending on and including the Closing Date of any Straddle Period.

 

Purchase Price” means an amount equal to (a) the Closing Net Funds Employed; plus (b) the Closing Premium.

 

Receivable” means the monetary obligations of an Obligor arising under a Contract between a Customer and such Obligor and evidenced by an Invoice (including the right to receive payment of any interest or finance charges or other liabilities of such Obligor under such Contract), all Related Assets with respect thereto, and all collections and other proceeds with respect to the foregoing, which obligations have been purchased and acquired by Seller pursuant to a Factoring Agreement entered into between Seller, as purchaser, and the Customer thereunder.

 

Related Assets” means, with respect to any Receivable (a) all related rights and remedies under or in connection with the applicable Contract, including bills of lading, bills of exchange, promissory notes and accessions; (b) all guaranties, suretyships, letters of credit, security, Liens and other arrangements supporting payment thereof; (c) all applicable sales records (and other records related thereto, including electronic records); (d) all related insurance; and (e) all proceeds of the foregoing.

 

4

 

Seller Group” means Covenant Transportation Group, Inc., a Nevada corporation, and its current and future Subsidiaries.

 

Subsidiary” means, with respect to any Person, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 25% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof.

 

Taxes” means all present and future federal, state, local and foreign income, excise, gross receipts, gross income, ad valorem, profits, gains, property, capital, sales, transfer, use, value-added, stamp, documentation, payroll, employment, severance, withholding, duties, license, intangibles, franchise, backup withholding, environmental, occupation, alternative or add-on minimum taxes imposed by any Governmental Entity, and other taxes, charges, levies or like assessments, and including all penalties and additions to tax and interest thereon; and “Taxation” and “Tax” shall be construed accordingly.

 

Transfer Taxes” means all Liabilities for transfer, documentary, sales, use, registration, value-added, stamp, bulk transfer, bulk sale, goods and services and other similar Taxes and related amounts incurred in connection with the transactions contemplated herein.

 

Triumph Common Stock” means the common stock, par value $0.01 per share, of Buyer Indirect Parent.

 

UCC” means the Uniform Commercial Code as from time to time in effect in each applicable jurisdiction for purposes of the provisions hereof relating to such perfection, effect of perfection or non-perfection or priority.

 

Section 1.2      Index of Defined Terms. The following terms have the meanings given to such terms in the Sections set forth below:

 

Defined Term

Section

Affiliate

1.1

Agreement

Preamble

Anti-Corruption Laws

1.1

Anti-Money Laundering Laws

1.1

Asset-Based Lending

1.1

Assumed Liabilities 

2.2

Average Earnout Period Value

3.4(f)(i)

 

5

 

 

Average Net Funds Employed

1.1

Business

Recitals

Business Day

1.1

Buyer 

Preamble

Buyer Indemnified Parties

7.2

Buyer Indirect Parent

1.1

Cap

7.4(a)

Claim

1.1

Claim Notice

7.8(a)

Closing

3.2(a)

Closing Data Spreadsheet

1.1

Closing Date

1.1

Closing Net Funds Employed

1.1

Closing Premium

1.1

Closing Statement

1.1

Code

1.1

Contract

1.1

Controlling Party

7.8(d)

Customer

1.1

Direct Claim 

7.7

Dispute 

1.1

Earnout Amount

3.4(f)(ii)

Earnout Amount Notice of Disagreement

3.4(b)

Earnout Period

3.4(f)(iii)

Earnout Statement

3.4(a)

Excess Earnout Percentage

3.4(f)(v)

Excess Earnout Value

3.4(f)(iv)

Excluded Customers

2.3(a)

Excluded Liability 

2.3

Factoring Agreements 

2.1(b)

Financial Statements

4.1(l)

Fundamental Representations

7.1

GAAP

1.1

Governmental Entity

1.1

Indemnified Party

7.3

Indemnifying Party 

7.8(a)

Independent Accountant

3.4(b)

Information

5.2

Insolvency Event

1.1

Invoice

1.1

Knowledge

1.1

Law

1.1

Liability

1.1

Liens

1.1

 

6

 

 

Loss Reimbursement Amount

5.5

Losses

1.1

Maximum Earnout

3.4(f)(vi)

Monthly Earnout Value

3.4(f)(vii)

Net Funds Employed

1.1

Non-Controlling Party 

7.8(d)

Obligor

1.1

Order

1.1

Party

1.1

Person

1.1

Post-Closing Tax Period

1.1

Pre-Closing Tax Period

1.1

Purchase Price 

1.1

Purchased Assets

2.1

Purchased Receivables

2.1(a)

Receivable

1.1

Receivables Schedule

4.2(a)

Records

2.1(g)

Related Assets

1.1

Seller 

Preamble

Seller Group

1.1

Seller Indemnified Parties

7.3

Straddle Period

6.2

Subsidiary

1.1

Tax Claim

7.8(d)

Taxes

1.1

Texas Courts

8.10

Third-Party Claim

7.8(a)

Threshold Amount

7.4(a)

Transfer Taxes

1.1

Transferred Contracts 

2.1(c)

Triumph Common Stock

1.1

UCC

1.1

 

Section 1.3      Interpretation. In this Agreement, unless otherwise stated or the context otherwise requires, the following usages apply: (a) unless otherwise provided herein, actions permitted but not required under this Agreement may be taken at any time, and from time to time, in the actor’s sole discretion; (b) headings are inserted for convenience of reference only and are not a part of, nor shall they affect any construction or interpretation of, this Agreement; (c) unless otherwise specified, indications of time of day mean the time of day in Dallas, Texas; (d) all references to Articles, Sections, Schedules and Exhibits are to Articles, Sections, Schedules and Exhibits in or to this Agreement; (e) references to a statute shall refer to the statute and any successor statute, as amended, and to all regulations promulgated under or implementing the statute or successor statute, as in effect at the relevant time; (f) references to a governmental or quasi-governmental agency, authority or instrumentality shall also refer to a regulatory body that succeeds to the functions of the agency, authority or instrumentality; (g) “including” shall mean “including, but not limited to”; (h) all words used in this Agreement in the singular number shall extend to and include the plural; all words in the plural number shall extend to and include the singular and all words in any gender shall extend to and include all genders; (i) any reference to a document or set of documents in this Agreement, and the rights and obligations of the Parties under any such documents, shall mean such document or documents as amended from time to time, and any and all modifications, extensions, renewals, substitutions or replacements thereof; (j) all references to dollars ($) shall mean United States currency; (k) the phrase “to the extent” means “the degree by which” and not “if”; and (l) the word “or” in this Agreement is disjunctive but not necessarily exclusive.

 

7

 

SECTION 2.      PURCHASE OF RECEIVABLES PORTFOLIO AND RELATED ASSETS.

 

Section 2.1      Purchase and Sale of Receivables. Upon the terms and conditions set forth in this Agreement, at the Closing, Seller hereby agrees to sell, convey, assign and deliver to Buyer (or cause such actions), and Buyer hereby agrees to purchase and accept from Seller, free and clear of all Liens, all of Seller’s right, title and interest in, to and under the following assets (collectively, the “Purchased Assets”):

 

(a)     the Receivables set forth on Schedule 2.1(a) and reflected on the Closing Data Spreadsheet (collectively, the “Purchased Receivables”);

 

(b)     all Contracts pursuant to which Seller acquired the Purchased Receivables (the “Factoring Agreements”);

 

(c)     all Contracts set forth on Schedule 2.1(c) (such Contracts, together with the Factoring Agreements, the “Transferred Contracts”);

 

(d)     all Customer deposits, Customer escrows and similar funds held or controlled by Seller in connection with the conduct of the Business and related to the Purchased Receivables and all credits, deferred charges, initial direct costs, and prepaid items to the extent arising out of such Purchased Receivables (i) to hold in trust for a third-party and remit to such third-party under a Transferred Contract any cash or cash equivalents; and (ii) to hold as security for any Factoring Agreement that is a Transferred Contract;

 

(e)     all rights, Claims and credits, including all guarantees, warranties, indemnities, Orders and demands of any nature and similar rights, whether or not currently being pursued, in favor of Seller, to the extent related to any Purchased Receivable or to any Assumed Liability except to the extent solely related to an Excluded Liability;

 

(f)     all rights of Seller or its Affiliates as secured party of record under financing statements filed under the UCC or similar statutes with respect to a Purchased Receivable or a Factoring Agreement;

 

(g)     all books and records, Customer lists and Customer correspondence (in all cases, in any form or medium and, in the case of electronically stored records, including the system in which such information is stored) (collectively, the “Records”) to the extent related to the Purchased Receivables; and

 

(h)     the assets listed in Schedule 2.1(h).

 

8

 

Section 2.2      Assumption of Obligations. Upon the terms and subject to the conditions of this Agreement, Buyer shall assume, effective as of the Closing, and from and after the Closing Buyer shall pay, perform, remit and discharge when due, the following (and only the following) specified liabilities, obligations and commitments, other than the Excluded Liabilities (such Liabilities, the “Assumed Liabilities”) (it being understood that notwithstanding anything in this Agreement to the contrary, no Liabilities, except for the Liabilities provided by Section 2.2(c), to the extent accrued or arising prior to the Closing or arising from Seller’s and its Affiliates’ ownership and operation of the Purchased Assets or the Business prior to the Closing shall be Assumed Liabilities):

 

(a)     all Liabilities arising after the Closing under the Transferred Contracts, other than any Liabilities to the extent arising out of or relating to any default, breach or violation under any Transferred Contract by Seller or any of their Affiliates prior to the Closing;

 

(b)     all Liabilities in respect of Taxes related to the Purchased Receivables other than (i) those Taxes specifically allocated to Seller pursuant to this Agreement; and (ii) Taxes for which Seller is required to indemnify Buyer Indemnified Parties pursuant to Section 7; and

 

(c)     Customer deposits, Customer rebates, Customer escrows and similar funds held or controlled in connection with the conduct of the Business and related to the Purchased Receivables and all credits, deferred charges, initial direct costs, and prepaid items to the extent arising out of such Purchased Receivables, in each case, solely to the extent listed in Schedule 2.2(c).

 

Section 2.3      Excluded Obligations. Notwithstanding any other provision of this Agreement, Seller shall retain and remain solely responsible for, and Buyer will not assume or be responsible or be liable in any way for, the Excluded Liabilities. The term “Excluded Liability” means all Liabilities of Seller and its Affiliates, whether relating to the Business or otherwise (but in each case other than the Assumed Liabilities), and without limiting the generality of the foregoing, shall include the following Liabilities (but in each case other than the Assumed Liabilities):

 

(a)     all Liabilities to the extent related to or arising out of any assets or businesses not transferred to Buyer, including those customers of the Business set forth on Schedule 2.3(a) (collectively, the “Excluded Customers”);

 

(b)     all Liabilities attributable to or arising out of Seller’s operation of the Business prior to the Closing, other than with respect to such Customer deposits, Customer rebates, Customer escrows, credits, deferred charges, initial direct costs, prepaid items and similar funds assumed by Buyer set forth in Schedule 2.2(c);

 

(c)     all Liabilities for (i) Taxes payable by Seller or any of its Affiliates for any Tax period (including any Taxes for which Buyer may be liable as a transferee or a successor to Seller as a result of the transactions contemplated by this Agreement), including any Taxes imposed on, relating to or arising out of the Business, Purchased Assets or Assumed Liabilities for any Pre-Closing Tax Period; and (ii) any Transfer Tax for which Seller is responsible for pursuant to Section 6.3 (collectively, the “Excluded Tax Liability”);

 

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(d)     all Liabilities of Seller arising under this Agreement, the documents related hereto or incurred in connection with the sale process for the Business; and

 

(e)     all fees and expenses or other Liabilities of Seller or any of its Affiliates with respect to accounting, investment banking, banking and other professional counsel in connection with the transactions contemplated hereby.

 

Each of Seller’s obligations under this Section 2.3 will not be subject to offset or reduction by reason of any actual or alleged breach of any representation, warranty or covenant contained in this Agreement or any right or alleged right to indemnification hereunder.

 

Section 2.4      Financing Statements. Seller agrees that, following the Closing, Seller and its Affiliates will not exercise any rights as secured party of record with respect to financing statements under the UCC or other similar statutes with respect to the Purchased Receivables without the prior written consent of Buyer and will cooperate with Buyer as reasonably requested by Buyer to amend any such financing statements in the manner requested by Buyer.

 

Section 2.5      Refunds and Remittances. After the Closing, if Seller receives any refund or other amount in respect of a Purchased Receivable or that is otherwise properly due and owing to Buyer in accordance with the terms of this Agreement, Seller promptly shall remit, or shall cause to be remitted, such amount to Buyer.

 

Section 2.6      Payments from Excluded Customers. After the Closing, if Buyer receives any payment with respect to an account receivable owing by an Excluded Customer to Seller that is not attributable to a Purchased Receivable, Buyer promptly shall remit such amount to Seller.

 

SECTION 3.      PURCHASE PRICE; CLOSING; EARNOUT AMOUNT.

 

Section 3.1      Purchase Price. The consideration to be paid by Buyer to Seller for the sale of the Purchased Assets shall consist of (a) the assumption by Buyer of the Assumed Liabilities; plus (b) the Purchase Price, payable as set forth in this Section 3; plus (c) the Earnout Amount to the extent payable pursuant to this Section 3.

 

Section 3.2      Closing.

 

(a)     Time and Location. The closing of the purchase and sale of the Purchase Receivables and the other transactions contemplated herein (the “Closing”) shall take place simultaneously with the execution and delivery of this Agreement by each of the Parties.

 

(b)     Payment. At the Closing, Buyer shall pay to Seller an amount equal to $108,375,386 by wire transfer of immediately available funds in U.S. dollars. In addition, within five days following the Closing Date, Buyer Indirect Parent shall issue and deliver to Seller 630,268 shares of Triumph Common Stock.

 

(c)     Seller Deliverables at Closing. At the Closing, Seller shall deliver or cause to be delivered to Buyer:

 

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(i)     an appropriately executed copy of the Closing Statement;

 

(ii)     appropriately executed instruments of sale, assignment, transfer and conveyance in form and substance satisfactory to Buyer evidencing and effecting the sale, assignment, transfer and conveyance to Buyer of the Purchased Assets;

 

(iii)     appropriately executed instruments of assumption in form and substance satisfactory to Buyer evidencing and effecting Buyer’s assumption of the Assumed Liabilities;

 

(iv)     an appropriately executed registration rights agreement in form and substance satisfactory to Buyer and Seller with respect to the shares to Triumph Common Stock issuable to Seller at Closing;

 

(v)     a duly executed certificate from each entity treated as owning any of the Purchased Assets for U.S. federal income tax purposes, in form and substance reasonably satisfactory to Buyer, certifying that such entity is either not a foreign person within the meaning of Section 7701(a)(30) of the Code, substantially in the form of the sample certification set forth in Treasury Regulations Section 1.1445-2(b)(2)(iv)(B), or is not selling any United States real property interest for purposes of Section 1445 of the Code;

 

(vi)     a duly executed power of attorney by Seller in favor of Buyer, in a form and substance reasonably satisfactory to Buyer and Seller; and

 

(vii)     satisfactory evidence of release of any Liens on the Purchased Assets.

 

(d)     Buyer Deliverables at or following Closing. At the Closing, Buyer shall deliver or cause to be delivered to Seller:

 

(i)     an appropriately executed copy of the Closing Statement;

 

(ii)     appropriately executed counterparts to such instruments of sale, assignment, transfer and conveyance referenced in Section 3.2(c)(ii);

 

(iii)     appropriately executed counterparts to such instruments of sale, assignment, transfer and conveyance referenced in Section 3.2(c)(iii);

 

(iv)     an appropriately executed counterpart to the registration rights agreement referenced in Section 3.2(c)(iv); and

 

(v)     the cash portion of the Purchase Price by wire transfer of immediately available funds in accordance Section 3.2(b).

 

Within five days following the Closing Date, Buyer shall provide satisfactory evidence of book-entry issuance to Seller of the shares of Triumph Common Stock specified in Section 3.2(b).

 

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Section 3.3      Payments Received and Liabilities Incurred. If, following the effective time of the Closing Data Spreadsheet, Seller receives any payment, or any Obligor pays any amount, with respect to a Purchased Receivable, then Seller shall promptly, but in any event within five Business Days, remit and pay to Buyer the amount of such payment received.

 

Section 3.4      Earnout Consideration.

 

(a)     As additional consideration for the Purchased Assets, within 30 days following the end of the Earnout Period, Buyer shall deliver to Seller a statement setting forth the Average Earnout Period Value and the Earnout Amount (the “Earnout Statement”), in each case determined in a manner consistent and in accordance with this Agreement.

 

(b)     Following receipt by Seller of Buyer’s proposed Earnout Statement, Seller will be permitted to review the Business’ books and records and working papers related to Buyer’s draft of the proposed Earnout Statement and determination of the Average Earnout Period Value and Earnout Amount, and Buyer will provide Seller with reasonable access to the Business’ personnel, books and records, and facilities in connection with such review. The proposed Earnout Statement delivered by Buyer will become final and binding on the parties 30 days following Buyer’s delivery thereof to Seller except to the extent (and only to the extent) Seller delivers written notice of its disagreement (the “Earnout Amount Notice of Disagreement”) to Buyer on or prior to such date. All matters not subject to dispute as specifically identified in the Earnout Amount Notice of Disagreement will be final and binding. The Earnout Amount Notice of Disagreement must identify each item in the Earnout Statement that the Seller disagrees with and, for each disputed item, contain a statement describing in reasonable detail the basis of such objection and the amount in dispute. If Seller timely delivers an Earnout Amount Notice of Disagreement, then the Earnout Statement will become final and binding on the parties to this Agreement on the earlier of (i) the date Buyer and Seller resolve in writing any differences they have with respect to the matters specified in the Earnout Amount Notice of Disagreement; and (ii) the date all matters in dispute are finally resolved in writing by CliftonLarsonAllen LLP (the “Independent Accountant”).

 

(c)     During the 30 days following delivery of an Earnout Amount Notice of Disagreement, Buyer and Seller will seek in good faith to resolve in writing any differences that they may have with respect to the matters specified in the Earnout Amount Notice of Disagreement. At the end of the such 30-day period, Buyer and Seller will submit to the Independent Accountant for resolution all matters that remain in dispute, which were included in the Earnout Amount Notice of Disagreement (and will take all actions reasonably requested by the Independent Accountant in connection with such resolution, including submitting written claims to the Independent Accountant if so requested), and the Independent Accountant will make a final determination of the Average Earnout Period Value and Earnout Amount in accordance with the terms of this Agreement (with it being understood that Buyer and Seller will request that the Independent Accountant deliver to Buyer and Seller its resolution in writing not more than 30 days after the date submitted to the Independent Accountant). The Independent Accountant will make a determination only with respect to the matters still in dispute and, with respect to each such matter, its determination will be within the range of the dispute between Buyer and Seller. The Independent Accountant’s determination will be based solely on written materials submitted by Buyer and Seller (i.e., not on independent review) and the provisions of this Agreement.

 

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(d)     The costs and expenses of the Independent Accountant will be allocated between Buyer and Seller based upon the percentage of the portion of the contested amount not awarded to Buyer or Seller bears to the amount actually contested by such party. For example, if Seller claims the Earnout Amount is $1,000 greater than the amount claimed by Buyer, and Buyer contests only $500 of the amount claimed by Seller, and if the Independent Accountant ultimately resolve the dispute by awarding Sellers $300 of the $500 contested, then the costs and expenses of the Independent Accountant will be allocated 60% (i.e., 300 ÷ 500) to Buyer and 40% (i.e., 200 ÷ 500) to Seller.

 

(e)     Within two Business Days after the date on which the Earnout Statement becomes binding on the parties, Buyer shall pay Seller the positive difference, if any, between (i) the Earnout Amount, if any; minus (ii) $200,000, which payment shall be paid in cash by wire transfer in immediately available funds to the account designated by Seller. For the avoidance of doubt, if the Average Earnout Period Value is equal to or less than $665,000, the Earnout Amount shall be $0, and no payment shall be made by Buyer to Seller pursuant to this Section 3.4. If the Earnout Amount is less than $200,000, then Seller shall pay to Buyer the positive difference between (A) $200,000; minus (B) the Earnout Amount, which payment shall be paid in cash by wire transfer in immediately available funds to the account designated by Buyer.

 

(f)     Certain Definitions. As used in this Agreement:

 

(i)     “Average Earnout Period Value” means the arithmetic average of the Monthly Earnout Value during the Earnout Period.

 

(ii)     “Earnout Amount” means: (A) if the Average Earnout Period Value is equal to, or greater than $885,000, an amount equal to the Maximum Earnout; (B) if the Average Earnout Period Value is less than $885,000 but greater than $665,000, an amount equal to the Excess Earnout Percentage multiplied by the Maximum Earnout; and (C) if the Average Earnout Period Value is equal to or less than $665,000 an amount equal to $0.

 

(iii)     “Earnout Period” means the 12-month period commencing with the first day of the first full calendar month following the Closing Date.

 

(iv)     “Excess Earnout Value” means an amount (but not less than zero) equal to the Average Earnout Period Value minus $665,000.

 

(v)     “Excess Earnout Percentage” shall equal to the Excess Earnout Value divided by $220,000.

 

(vi)     “Maximum Earnout” means an amount equal to 10% multiplied by the Average Net Funds Employed.

 

(vii)     “Monthly Earnout Value” means for each full calendar month during the Earnout Period, an aggregate amount equal to all factoring fees (including all discount and interest income) paid to and received by Buyer during such month pursuant to the Factoring Agreements, any factoring agreement or other financing agreement entered into each month with the prospective customer identified on Schedule 3.4(f)(vii), any factoring agreement assigned by a Customer to an Affiliate of the Customer, and any Receivables acquired by a Customer in an acquisition of (i) all or substantially all of the assets of an entity or (ii) an entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger, consolidation, or equity acquisition).

 

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(g)     Tax Treatment of Earnout. The Parties agree that any amounts paid to Seller under this Section 3 shall be treated as an adjustment to the Purchase Price paid by Buyer pursuant to this Agreement for all tax purposes. Seller hereby agrees to report for all tax purposes (including in connection with any tax return) any income in respect of any amounts payable under this Section 3 in a manner that is consistent with the foregoing and applicable Law.

 

SECTION 4.      REPRESENTATIONS AND WARRANTIES.

 

Section 4.1      Seller’s General Representations. Seller hereby makes the following representations and warranties for the benefit of Buyer as of the Closing Date:

 

(a)     Seller is duly organized, validly existing and in good standing as a limited liability company under the laws of its jurisdiction of organization.

 

(b)     Seller has all requisite power and authority to own, operate and lease its assets, to carry on its business as and where such is currently conducted, to execute and deliver this Agreement and the other documents and instruments to be executed and delivered by the Seller pursuant hereto and to carry out the transactions contemplated hereby and thereby.

 

(c)     Seller is duly licensed or qualified to do business as a foreign limited liability company and is in good standing in each jurisdiction in which the character of the assets owned or leased by it, or the nature of its business, makes such licensing or qualification necessary except for any such failures which would not be expected to have a material adverse effect on Seller. Schedule 4.1(c) sets forth a correct and complete list of the jurisdictions in which Seller is duly licensed or qualified to do business as a foreign limited liability company.

 

(d)     The execution and delivery of this Agreement and the other documents and instruments to be executed and delivered by Seller and the consummation of the transactions contemplated hereby have been duly authorized by Seller. No other or further act or proceeding on the part of Seller is necessary to authorize this Agreement or the other documents and instruments to be executed and delivered by Seller pursuant hereto or the consummation of the transactions contemplated hereby. Seller has delivered to Buyer correct and complete copies of all consents, resolutions and other documents necessary to duly authorize the execution and delivery of this Agreement and the other documents and instruments to be executed and delivered by Seller pursuant hereto and the consummation of the transactions contemplated hereby and thereby. This Agreement and the other documents and instruments to be executed and delivered by Seller in connection herewith constitute valid and binding agreements of Seller, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity).

 

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(e)     Except as set forth on Schedule 4.1(e), neither the execution nor the delivery of this Agreement or any of the other documents related hereto, nor the performance of or compliance with the terms and provisions hereof or thereof will conflict with or result in a breach of or give rise to a default under (i) any Law; (ii) any indenture, loan agreement, security agreement, instrument or other material contract binding upon Seller or any of its properties; or (iii) any provision of Seller’s organizational documents.

 

(f)     No Insolvency Event with respect to Seller has occurred and is continuing.

 

(g)     There is no pending or, to Seller’s Knowledge, threatened action, proceeding, investigation or injunction, writ or restraining Order affecting Seller, any of its Affiliates, the Purchased Assets, the Assumed Liabilities or the Business before any court, governmental entity or arbitrator, which could reasonably be expected to have an adverse effect on the enforceability of this Agreement (including the enforceability of Buyer’s ownership interest in the Purchased Assets) or the ability of Seller to perform its obligations hereunder. No event has occurred nor has any action been taken that is reasonably likely to result in any material litigation, nor has Seller received written notice of any actual or potential litigation initiated or to be initiated by a Governmental Entity, in each case arising out of or related to the operation of the Business, any Purchased Asset or any Assumed Liability.

 

(h)     Seller is in material compliance with each applicable Law and all Orders with respect to the operation of the Business. Seller has not received notice of any violation or alleged violation of any Law or Orders with respect to the operation of the Business. All reports, filings and returns required to be filed by or on behalf of Seller with any Governmental Entity with respect to the operation of the Business have been filed and, when filed, to the Seller’s Knowledge, were correct and complete in all material respects.

 

(i)     None of Seller or any of its Subsidiaries nor, to Seller’s Knowledge, any Affiliate or any director, officer, agent or other Person acting on behalf of Seller or any of its Subsidiaries has taken any action, directly or indirectly, that would result in a violation by such persons of Anti-Corruption Laws or Anti-Money Laundering Laws.

 

(j)     Seller is not in default in any material respect under any Contract related to or affecting the Business, the Purchased Assets or the Assumed Liabilities and to which it is a party or otherwise bound, nor has any event or omission occurred that, through the passage of time or the giving of notice, or both, would constitute a default in any material respect thereunder or cause the acceleration of any of Seller’s obligations thereunder or result in the creation of any Lien on the Business or Purchased Assets. No third-party is in default in any material respect under any Contract related to or affecting the Business, the Purchased Assets or the Assumed Liabilities and to which Seller is a party or otherwise bound, nor has any event or omission occurred that, through the passage of time or the giving of notice, or both, would constitute a default in any material respect thereunder, or give rise to an automatic termination or the right of discretionary termination thereof. Each Contract related to or affecting the Business, the Purchased Assets or the Assumed Liabilities and to which Seller is a party or otherwise bound is in full force and effect and is a valid and binding agreement enforceable against Seller and the other party or parties thereto in accordance with its terms.

 

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(k)     All Taxes due with respect to the Purchased Assets, the Assumed Liabilities or the Business due prior to the date hereof have been fully and timely paid and all Tax returns required to have been filed with respect to the Purchased Assets, the Assumed Liabilities or the Business have been timely filed. All such Tax returns are true, correct and complete in all material respects. All deficiencies asserted or assessments for Taxes made by a Governmental Entity with respect to the Purchased Assets, the Assumed Liabilities or the Business have been fully paid. No material Tax Liens have been filed and no material claims are being asserted in writing with respect to any Taxes due with respect to the Purchased Assets. There has been no Tax proceeding relating to the Purchased Assets, the Assumed Liabilities or the Business since January 1, 2016 and no such Tax proceeding is pending or threatened in writing, and no written notice has been received from any Governmental Entity relating to Taxes of the Purchased Assets, the Assumed Liabilities or the Business.

 

(l)     Attached as Schedule 4.1(l) are true and complete copies of (i) the unaudited financial statements (including the balance sheet and income statement) of the Business for periods ending December 31, 2019, December 31, 2018 and December 31, 2017; and (ii) the unaudited financial statements (including the balance sheet and income statement) as of May 31, 2020 (the financial statements referred to in clauses (i) and (ii) together, the “Financial Statements”). Except as set forth on Schedule 4.1(l), each of the Financial Statements fairly presents, in all material respects, the financial position of the Business as of the respective date thereof and the operating results of the Business for the period covered thereby, in each case prepared in good faith and in conformity with past practices consistently applied throughout the periods covered by such Financial Statements. Seller has established and maintains a system of internal accounting controls sufficient to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements relating to Seller as a whole for external purposes in accordance with GAAP.

 

(m)     Except as set forth on Schedule 4.1(m), the Business has no Liabilities, other than (i) Liabilities reflected on the Financial Statement as of May 31, 2020; (ii) Liabilities that have arisen since May 31, 2020 in the ordinary course of business consistent with past practice; and (iii) executory portions under contracts by which the Business is bound (except for any breach of any such contract).

 

(n)     Schedule 4.1(n) contains a correct and complete list of the 50 largest Customers for the 12 months ended May 31, 2020 (determined on the basis of the total dollar amount of purchase volume) showing the total dollar amount of net sales to or from each such Customer during each such year. Except as set forth in Schedule 4.1(n), Seller has no Knowledge or information of any facts indicating, nor any other reason to believe, that any of the Customers described in Schedule 4.1(n) will not continue to be Customers of Buyer after the Closing. Schedule 4.1(n) contains a correct and complete debtor aging report as of May 31, 2020.

 

(o)     Seller has all licenses, permits, approvals, registrations, certifications, consents and listings of all Governmental Entities and of all certification organizations required, and all exemptions from requirements to obtain or apply for any of the foregoing, for the conduct of the Business. All such licenses, permits, approvals, registrations, certifications, consents and listings are in full force and effect. Seller (including its business and assets) is and has been in compliance with all of the licenses, permits, approvals, registrations, certifications, consents and listings required for the conduct of the Business.

 

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(p)     Seller has not given a power of attorney or proxy that is currently in effect to any Person relating to the Business, the Purchased Assets or the Assumed Liabilities.

 

(q)     No Seller Group member has any direct or indirect interest in or other business relationship or arrangement with (i) any Person that does business with Seller in connection with the operation of, or is competitive with, the Business; or (ii) any property, asset or right that is used by the Business.

 

(r)     None of Seller, its Affiliates or any of Seller’s or its Affiliates’ respective directors, officers, employees or agents have retained, employed or used any broker or finder in connection with the transactions provided for herein or the negotiation thereof, nor are any of them responsible for the payment of any broker’s, finder’s or similar fees.

 

Section 4.2      Seller’s Representation Regarding Purchased Receivables. Seller hereby makes the following representations and warranties with respect to the Purchased Receivables as of the Closing Date:

 

(a)     Seller has delivered one or more spreadsheets, including the Closing Data Spreadsheet, that form a part of Schedule 4.2(a) and that together list all outstanding Purchased Receivables, and the Net Funds Employed associated with any such Purchased Receivable (the “Receivables Schedule”). The information set forth in the Receivables Schedule is complete, true and correct in all material respects as of the date thereof.

 

(b)     Prior to giving effect to the sale of the Purchased Receivables pursuant hereto, Seller is the sole owner of the Purchased Receivables, having valid ownership interest therein, free and clear of any Liens, except as set forth on Schedule 4.2(b). Each Purchased Receivables is a valid, current and freely assignable account receivable, and the assignment of such Purchased Receivable is not subject to a consent requirement by any third-party to the sale or other transfer of such Purchased Receivable or the grant of a security interest or other Lien in such Purchased Receivable, except as set forth on Schedule 4.2(b).

 

(c)     The sale of the Purchased Receivables by Seller to Buyer constitutes a true sale or other absolute transfer of such Purchased Receivables, and upon such purchase by Buyer of the Purchased Receivables from Seller pursuant hereto, all of Seller’s right, title and interest in and to the Purchased Receivables will have been validly sold and absolutely assigned and transferred to Buyer and Buyer will have the legal and beneficial right to be paid the face amount of each Purchased Receivable free of any Lien, other than the right of a Customer relating to the return of Customer deposits, Customer escrows and similar funds, without any need on the part of Seller or Buyer to (i) notify the applicable Customer or Obligor under a Purchased Receivable; or (ii) file, register or record any document or instrument for the sale of such Purchased Receivable under the Law applicable to Seller, any Customer or any Obligor (other than those filings, registrations or recordings that have been made). Each Purchased Receivable is sold hereunder in good faith and without actual intent to hinder, delay or defraud present or future creditors of Seller.

 

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(d)     Each Purchased Receivable, and the Factoring Agreement applicable thereto, constitutes a bona fide, existing and enforceable legal, valid and binding agreement of the Customer and Seller and reflects the obligation therein of the applicable Obligor, arising out of an arm’s-length sale by Customer of goods or the provision of services to such Obligor, in each case, in the ordinary course of Customer’s business. The applicable Factoring Agreement constitutes an existing and enforceable legal, valid and binding obligation of the applicable Customer and Seller. Such Purchased Receivable and the related Factoring Agreement under which it arises comply with the requirements of all applicable Law of any Governmental Entity and, except as set forth on Schedule 4.2(d), do not contravene any agreement binding upon Seller or, to Seller’s Knowledge, the Customer.

 

(e)     Seller has filed with applicable Governmental Entities an effective UCC financing statement or other similar instrument covering each Factoring Agreement and the transactions set forth therein, giving Seller a perfected first Lien and security interest in and to the Receivables applicable thereto. Except as set forth on Schedule 4.2(e), no effective financing statement or other similar instrument in effect covering any Factoring Agreement or transaction set forth therein is on file in any recording office, except those filed in favor of Seller, each of which will be assigned to Buyer pursuant hereto, and no competing notice or notice inconsistent with the transactions contemplated in this Agreement remains in effect. Except as set forth on Schedule 4.2(e), Seller has not pledged or granted any security interest in any Purchased Receivable to any person except pursuant to this Agreement.

 

(f)     Each Obligor with respect to a Purchased Receivable has not in the past 12 months failed to pay without objection or notice of dispute any material sum due and payable to Seller or the Customer in circumstances where Seller or the Customer did not waive or consent to such failure. No Obligor with respect to a Purchased Receivable has asserted any Dispute with respect to the applicable Purchased Receivable.

 

(g)     No note, account, instrument, document, contract right, general intangible, chattel paper or other form of obligation other than that which has been assigned to Buyer exists which evidences a Purchased Receivable, and each Purchased Receivable is not evidenced by and does not constitute an “instrument” or “chattel paper” as such terms are defined in the UCC.

 

(h)     To Seller’s Knowledge, no Insolvency Event with respect to a Customer or Obligor has occurred and is continuing.

 

(i)     There are no actions, Claims or proceedings now pending between Seller and a Customer or Obligor related to or in any way connected to a Purchased Receivable. There are no pending or threatened actions or proceedings before any court or administrative agency related to or in any way connected to a Purchased Receivable.

 

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Section 4.3      Buyer’s Representations. Buyer hereby makes the following representations and warranties for the benefit of Seller as of the Closing Date:

 

(a)     Buyer is duly organized, validly existing and in good standing under the laws of Delaware.

 

(b)     Buyer has all requisite limited liability company power and authority to execute and deliver this Agreement and the other documents and instruments to be executed and delivered by Buyer pursuant hereto and to carry out the transactions contemplated hereby.

 

(c)     The execution and delivery of this Agreement and the other documents and instruments to be executed and delivered by Buyer pursuant hereto and the consummation of the transactions contemplated hereby have been duly authorized by Buyer. No other or further limited liability company act or proceeding on the part of Buyer or its owner is necessary to authorize this Agreement or the other documents and instruments to be executed and delivered by Buyer pursuant hereto or the consummation of the transactions contemplated hereby.

 

(d)     This Agreement and the other documents and instruments executed and delivered by Buyer in connection herewith constitute, valid and binding agreements of Buyer, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity).

 

(e)     None of Buyer, its Affiliates or any of Buyer’s or its Affiliates’ respective directors, officers, employees or agents have retained, employed or used any broker or finder in connection with the transactions provided for herein or the negotiation thereof, nor are any of them responsible for the payment of any broker’s, finder’s or similar fees.

 

Section 4.4      No Other Representations. Each of the Parties represents, warrants, and agrees that, in executing this Agreement, it has relied solely on the statements expressly set forth within this Agreement and the other documents and instruments to be executed and delivered pursuant hereto. Each of the Parties further represents, warrants, and agrees that, in executing this Agreement, it has placed no reliance whatsoever on any statement, representation, or promise of any other Party, or any other person or entity, that is not expressly set forth within this Agreement, or the other documents and instruments to be executed and delivered pursuant hereto or upon the failure of any other Party, or any other person or entity, to make any statement, representation or disclosure of anything whatsoever.

 

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SECTION 5.      COVENANTS.

 

Section 5.1      Post-Closing Access to Information. For a period of six years after the Closing Date, each Party shall afford any other Party, its respective counsel, accountants and other representatives, during normal business hours, reasonable access to the books, records and other data in such Party’s possession relating directly or indirectly to the Purchased Assets, Assumed Liabilities or operations of the Business with respect to periods prior to the Closing, and the right to make copies and extracts therefrom at its expense, to the extent such access is reasonably required by the requesting Party for any proper business purpose. Notwithstanding the obligations contained in this Section 5.1, no Party shall be required to provide access to or to disclose information where such access or disclosure would jeopardize the attorney-client privilege of it or its Affiliates or contravene any applicable Law or binding agreement; provided that, in the case that the foregoing restricts the rights of any Party under this Section 5.1, Seller and Buyer shall use their reasonable best efforts to make appropriate substitute disclosure arrangements that do not impair any such attorney-client privilege or violate any applicable Law. The Parties hereto will make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the previous sentence apply. Subject to the previous sentence, each Party agrees, for a period of six years after the Closing Date, not to destroy or otherwise dispose of any of the books, records or other data described in this Section 5.1 without first offering in writing to surrender such books, records and other data to the other Parties, which other Parties shall have 10 days after such offer to agree in writing to take possession thereof.

 

Section 5.2      Confidentiality. Each Party shall hold, and shall cause its respective directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, except to the extent necessary to discharge obligations pursuant to this Agreement or unless compelled to disclose by judicial or administrative process or, based on the advice of its counsel, by other requirements of applicable Law or the applicable requirements of any Governmental Entity, all non-public records, books, Contracts, instruments, computer data and other data and information (collectively, “Information”) concerning the Purchased Assets or the Business (including, if required under a Contract with a third party, such third party), other than (a) to its Affiliates and any officers, directors, members, managers or employees of such Party or any of its Affiliates and then only to the extent such Information is required or useful in connection with this Agreement or any of the transactions contemplated hereunder (including the administration, operation, analysis, audit, review or enforcement of any aspect of any of the foregoing); (b) to any outside accountants, auditors or attorneys of such Party or any of its Affiliates; (c) to potential credit support providers or investors if they agree to hold it confidential pursuant to customary commercial terms; and (d) to Governmental Entities with appropriate jurisdiction (including filings required under securities Law). Notwithstanding the above stated obligations, the Parties hereto will not be liable for disclosure or use of such Information that (i) was required by Law, including pursuant to a valid subpoena or other legal process; (ii) is disclosed or used in connection with the exercise of any remedies hereunder or any suit or proceeding relating to this Agreement or the enforcement of rights hereunder; or (iii) is, at the time of the disclosure, generally known to the public (without breach of any of such Person’s obligations hereunder). Notwithstanding the foregoing, each Party may issue a press release or other public disclosure that includes information related to this Agreement or any other transaction contemplated hereby; provided that each Party shall obtain the written consent of the other Party as to the form and substance of such press release or other public disclosure.

 

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Section 5.3      Further Assurances. From time-to-time after the Closing, upon request of a Party (the “Requesting Party”) and without further consideration, the other Party shall, and shall cause its Subsidiaries and Affiliates to, execute and deliver to such Requesting Party documents and instruments and take such actions as may reasonably requested by the Requesting Party to consummate more effectively the intent and purpose of the Parties under this Agreement and the transactions contemplated by this Agreement.

 

Section 5.4      Non-Solicitation; Non-Competition.

 

(a)     As an inducement to Buyer to execute and deliver this Agreement and to consummate the transactions contemplated hereby and to preserve the goodwill associated with the Business, and except as may be specifically authorized in writing by Buyer expressly referencing this Section 5.4, for a period of two years after the Closing Date, Seller shall not, and shall cause each Seller Group member not to, directly or indirectly, alone or in association with another Person:

 

(i)     engage in, continue in, carry on, or control, operate, manage, or have any ownership or financial interest (whether as proprietor, partner, member, stockholder, lender, referral source, consultant or otherwise) in, any business or Person that engages in any aspect of (A)(I) extending credit to or processing payments for clients involved in the transportation industry for the purpose of factoring receivables, providing fuel advances as a part of a factoring or other lending-based program secured by receivables, or Asset-Based Lending; or (B) the business of factoring receivables or engaging in ancillary businesses for the purpose of generating client acquisitions related to the business of factoring receivables (collectively, a “Competitive Business”);

 

(ii)     consult with, advise or assist in any way, whether or not for consideration, any business or Person engaged in a Competitive Business (a “Competitor”) for the purpose of furthering or engaging in such Competitive Business, including advertising or otherwise endorsing the products or services of any such Competitor, soliciting clients or otherwise serving as an intermediary for any such Competitor or loaning money or rendering any other form of financial assistance to any such Competitor;

 

(iii)     solicit, induce or otherwise offer employment or engagement as an independent contractor to, or engage in discussions regarding employment or engagement as an independent contractor with, or hire, any Person who is or, in connection with the transaction contemplated pursuant hereto is hired as, an employee, commissioned salesperson or consultant of, or who performed similar services for, Buyer, or assist any third party with respect to any of the foregoing, unless such Person has been separated from his or her employment or other relationship with Buyer and each of its Affiliates for a period of 12 consecutive months; or

 

(iv)     engage in any practice the purpose of which is to evade the provisions of this covenant not to compete.

 

(b)     Notwithstanding the foregoing, Section 5.4(a) shall not prohibit: (i) the ownership of not more than one percent of the securities of any corporation or other entity that is listed on a national securities exchange. The geographic scope of the covenant not to compete set forth in Section 5.4(a) shall extend throughout the United States. Seller hereby acknowledges and agrees that the duration, geographic scope and activity restrictions of this covenant not to compete are reasonable. The covenants contained in this Section 5.4 and each provision hereof are severable and distinct covenants and provisions. The invalidity or unenforceability of any such covenant or provision as written shall not invalidate or render unenforceable the remaining covenants or provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such covenant or provision in any other jurisdiction.

 

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Section 5.5      Loss Reimbursement. If, on or before the one year anniversary of the Closing Date, Buyer has not received in full all amounts owing with respect to the items set forth on Schedule 5.5, including all accrued but unpaid interest, income, costs and expenses owing with respect thereto through such one-year anniversary date (collectively, the “Loss Reimbursement Amount”), Seller shall pay and remit to Buyer the Loss Reimbursement Amount within three Business Days following receipt of written demand for payment together with Buyer’s calculation of the Loss Reimbursement Amount.

 

SECTION 6.      TAX MATTERS.

 

Section 6.1      Withholding. All payments to be made by Buyer under this Agreement shall be made free and clear of and without deduction for or on account of all Taxes, except to the extent that Buyer is required by Law to make payment subject to any Taxes. All Taxes required to be deducted or withheld from any amounts paid or payable by Buyer under this Agreement shall be paid by Buyer within the time allowed under the relevant Law. In addition, if any Taxes or amounts in respect of Taxes must be deducted from any amounts payable by Buyer under this Agreement, Buyer shall pay such additional amounts as may be necessary to ensure that Seller receives a net amount equal to the full amount which Seller would have received had payment not been made subject to deduction of Tax by Buyer.

 

Section 6.2      Straddle Periods. In the case of a Tax imposed in respect of property or any other Tax that applies ratably to a tax period that includes (but does not end on) the Closing Date (a “Straddle Period”), the amount of Tax allocable to a portion of the Straddle Period shall be the total amount of such Tax for the period in question multiplied by a fraction, the numerator of which is the total number of days in such portion of such Straddle Period and the denominator of which is the total number of days in such Straddle Period. In the case of any Taxes other than Taxes that apply ratably to a Tax period, the amount of Tax allocable to the Pre-Closing Tax Period and the Post-Closing Tax Period shall be computed as if the Pre-Closing Tax Period ended as of the end of the day on the Closing Date.

 

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Section 6.3      Transfer Taxes. All Transfer Taxes shall be borne and paid solely by Seller. Each Party shall use reasonable efforts to avail itself of any available reduction or exemption from any such Transfer Taxes, and to cooperate with the other Party in timely providing any information and documentation that may be necessary to obtain such reductions or exemptions or to make any filings relating to Transfer Taxes. The Party responsible under applicable Law for making any Transfer Tax filings shall make such filings and promptly provide evidence of such payment to the other Party to obtain reimbursement, if applicable.

 

SECTION 7.      SURVIVAL; INDEMNIFICATION.

 

Section 7.1      Survival. Each representation and warranty contained in Sections 4.1(a), (b), (c) and (r) and 4.3(a), (b), (c) and (e) (collectively, the “Fundamental Representations”) shall survive until they terminate upon the applicable statute of limitations, and each other representation and warranty contained herein shall survive until they expire and terminate on the date that is 24 months after the Closing Date, and each covenant or obligation contained herein that is required to be performed after the Closing shall continue in full force and effect in accordance with its terms until performed. No Claim for indemnification can be made after the expiration of the applicable survival period with respect to such Claim; provided, however, if on or prior to the last day of the applicable survival period, an Indemnifying Party shall have been properly notified of a Claim for indemnity hereunder and such Claim shall not have been finally resolved at such date, such Claim shall continue to survive and shall remain a basis for indemnity hereunder until such Claim is finally resolved.

 

Section 7.2      Indemnification by Seller. Subject to the terms of this Section 7, from and after the Closing, Seller shall indemnify and defend Buyer and its Affiliates and each of their respective officers, directors, employees, agents and representatives (collectively, the “Buyer Indemnified Parties”) against and hold them harmless from any and all Losses asserted against, resulting to, imposed upon or incurred by any Buyer Indemnified Party, directly or indirectly, by reason of, arising out of or resulting from:

 

(a)     any breach of any representation or warranty of Seller contained in Section 4.1 or 4.2, determined without regard to any “material” or “materiality” qualifiers contained in or otherwise applicable to such representation or warranty;

 

(b)     any breach of any covenant of Seller contained in this Agreement; and

 

(c)     any Excluded Liability.

 

Section 7.3      Indemnification by Buyer. Subject to the terms of this Section 7, from and after the Closing, Buyer shall indemnify Seller and its Affiliates and each of their respective officers, directors, employees, agents and representatives (collectively, the “Seller Indemnified Parties”, and collectively with Buyer Indemnified Parties, the “Indemnified Parties”) against and hold them harmless from any and all Losses asserted against, resulting to, imposed upon or incurred by any Seller Indemnified Party, directly or indirectly, by reason of, arising out of or resulting from:

 

(a)     any breach of any representation or warranty of Buyer contained in Section 4.3, determined without regard to any “material” or “materiality” qualifiers contained in or otherwise applicable to such representation or warranty;

 

(b)     any breach of any covenant of Buyer contained in this Agreement; and

 

(c)     any Assumed Liability.

 

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Section 7.4      Certain Limitations on Indemnification.

 

(a)     Notwithstanding anything to the contrary herein, Seller shall not be liable to any Buyer Indemnified Parties for any Losses with respect to the matters contained in Section 7.2(a), (i) unless such Losses exceed an aggregate amount equal to $100,000 (the “Threshold Amount”) and then Seller shall be responsible only for Losses in excess of the Threshold Amount; and (ii) in excess of $4,011,582 in the aggregate (the “Cap”); provided that each of the limitations in the foregoing clauses (i) and (ii) shall not apply to Losses with respect to the Fundamental Representations of Seller.

 

(b)     Notwithstanding anything to the contrary herein, Buyer shall not be liable to any Seller Indemnified Parties for any Losses with respect to the matters contained in Section 7.3(a), (i)  unless such Losses exceed an aggregate amount equal to the Threshold Amount and then Buyer shall be responsible only for Losses in excess of the Threshold Amount; and (ii) in excess of the Cap in the aggregate; provided that each of the limitations in the foregoing clauses (i) and (ii) shall not apply to Losses with respect to the Fundamental Representations of Buyer.

 

(c)     No Indemnifying Party shall be liable under this Section 7 for any punitive, special, indirect, incidental or consequential damages, except to the extent awarded by a court of competent jurisdiction to a Person other than an Indemnified Party pursuant to a Third-Party Claim or Governmental Entity.

 

Section 7.5      No Waiver. The consummation of the transactions contemplated hereby shall not constitute a waiver by any Party of its rights to indemnification hereunder, regardless of whether the Indemnified Party had knowledge of the basis of the Claim at or prior to the Closing.

 

Section 7.6      Set Off. If Seller fails to promptly pay any amounts that it is obligated to pay to Buyer (or any other Buyer Indemnified Party) under this Agreement, then Buyer or any of its Affiliates may, in addition to any other rights and remedies that may be available, on 15 days’ prior written notice to the Seller set off against any payments due to Seller pursuant to Section 3.4.

 

Section 7.7      Direct Claim Indemnification Procedures. Each Indemnified Party shall assert any Claim on account of any Losses which do not result from a Third-Party Claim (a “Direct Claim”) by giving the Indemnifying Party written notice thereof. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, include copies of all available material written evidence thereof and indicate the estimated amount, if reasonably practicable, of Losses that have been or may be sustained by the Indemnified Party; provided that the failure to timely give such notice shall only affect the rights of an Indemnified Party hereunder to the extent such failure actually and materially prejudices the defenses or other rights available to the Indemnifying Party with respect to such Direct Claim.

 

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Section 7.8      Third-Party Claim Indemnification Procedures.

 

(a)     In the event that any written Claim for which an indemnifying Party hereunder (an “Indemnifying Party”) may reasonably be expected to have liability to any Indemnified Party hereunder is asserted against or sought to be collected from any Indemnified Party by a third-party (a “Third-Party Claim”), such Indemnified Party shall notify the Indemnifying Party of such Third-Party Claim, the amount or the estimated amount of damages sought thereunder to the extent then ascertainable, any other remedy sought thereunder, a reasonably detailed explanation of the events giving rise to such Third-Party Claim, supporting documentation for such Third-Party Claim, all communication between the Indemnified Party and the third-party regarding the Third-Party Claim and any other material details pertaining thereto, in each case to the extent known by the Indemnified Party (a “Claim Notice”); provided that the failure to timely give a Claim Notice shall only affect the rights of an Indemnified Party hereunder to the extent such failure actually and materially prejudices the defenses or other rights available to the Indemnifying Party with respect to such Third-Party Claim.

 

(b)     The Indemnifying Party shall have the right (but not the obligation) to assume the defense and control of any Third Party Claim within 30 days after the receipt of the applicable Claim Notice if the Indemnifying Party admits that it has an indemnification obligation hereunder with respect to the Third Party Claim, in which case such admission shall constitute the Indemnifying Party’s undertaking to pay directly all costs, expenses, damages, judgments, awards, penalties and assessments incurred in connection therewith, except as otherwise provided below; provided, however, that an Indemnifying Party shall not have the right to assume and control the defense of any criminal or regulatory action or Claim or any Third-Party Claim in the event the Claim seeks equitable or non-monetary remedies or obligations on the Indemnified Party, if a Third-Party Claim involves a Customer of the Business, if in the reasonable opinion of counsel to the Indemnified Party a conflict or potential conflict exists between the Indemnified Party and the Indemnifying Party that would make such separate representation advisable, or if one or more defenses are available to the Indemnified Party that are not available to the Indemnifying Party. With the prior written consent of the Indemnified Party, the Indemnifying Party may undertake and control the defense, compromise and/or settlement of the Third-Party Claim without admitting that it has an indemnification obligation hereunder. In the event that the Indemnifying Party notifies the Indemnified Party that it elects to defend, or is otherwise permitted by the Indemnified Party to defend, the Indemnified Party against a Third-Party Claim, the Indemnifying Party shall have the right to defend such Indemnified Party by appropriate proceedings, with counsel not reasonably objected to by the Indemnified Party. Unless and until the Indemnifying Party shall have so assumed the defense of such action or Claim, the Parties shall cooperate in the defense of such action or Claim, and all of the reasonable costs and expenses incurred by the Indemnified Party in connection with the defense, settlement or compromise of such Claim or action shall be Losses subject to indemnification hereunder to the extent provided herein. Once the Indemnifying Party has made such election, the Indemnified Party shall have the right to participate in any such defense and to employ separate counsel of its choosing at the expense of the Indemnified Party. The Indemnifying Party shall not, without the prior written consent of such Indemnified Party (such consent not to be unreasonably withheld, conditioned or delayed), settle, compromise or offer to settle or compromise any Third-Party Claim if the terms of such settlement would result in (i) the imposition of a consent Order, injunction, decree or other binding action that would restrict the future activity or conduct of such Indemnified Party or involve non-monetary relief; (ii) a finding or admission of a violation of Law by such Indemnified Party; or (iii) any monetary liability of such Indemnified Party that will not be paid or reimbursed by the Indemnifying Party. Whether or not the Indemnifying Party assumes the defense of a Third-Party Claim, such Indemnified Party shall not admit any liability with respect to, or settle, compromise or discharge, such Third-Party Claim without such Indemnifying Party’s prior written consent (such consent not to be unreasonably withheld, conditioned or delayed). So long as the Indemnifying Party is defending the Third-Party Claim actively and in good faith pursuant to this Section 7.8, the Indemnified Party (A) shall not compromise or settle, or consent to the entry of a judgment with respect to, the Third-Party Claim without the prior written consent of the Indemnifying Party; and (B) shall provide the Indemnifying Party with reasonable cooperation in the defense of the Third Party Claim. If the Indemnifying Party, within a reasonable time after notice of the Third-Party Claim, fails to defend the Third-Party Claim actively and in good faith as described in this Section 7.8, then the Indemnified Party shall have the right to undertake the defense, compromise or settlement of the Third-Party Claim on behalf of and for the account and risk of the Indemnifying Party, and the Indemnifying Party shall thereafter have no right to challenge the Indemnified Party’s defense, compromise or settlement. Notwithstanding anything to the contrary in this Section 7.8, if there is a reasonable probability that any Third-Party Claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments, then the Indemnified Party shall have the right to undertake and control the defense, compromise and/or settlement of such Third Party Claim.

 

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(c)     The Indemnified Party and the Indemnifying Party shall reasonably cooperate in order to ensure the proper and adequate defense of a Third-Party Claim, including by providing reasonable access to each other’s relevant books and records, and employees. Such cooperation shall include the retention and (upon the Indemnifying Party’s request) the provision to the Indemnifying Party of books, records and information that are reasonably relevant to such Third-Party Claim, and making employees and representatives available on a mutually convenient basis during normal business hours to provide additional information and explanation of any material provided hereunder. The Indemnified Party and the Indemnifying Party shall use commercially reasonable efforts to avoid production of confidential information (consistent with applicable Law), and to cause all communications among employees, counsel and others representing a Party to a Third-Party Claim to be made so as to preserve any applicable attorney-client or work-product privileges.

 

(d)     Anything to the contrary in this Section notwithstanding, if a Third-Party Claim includes both a Claim for Taxes that are Excluded Liabilities and a Claim for Taxes that are not Excluded Liabilities, the Parties shall exercise commercially reasonable efforts to separate such Third-Party Claim into two separate Tax proceedings, one of which concerns only Taxes that are Excluded Liabilities and the other of which concerns only Taxes that are not Excluded Liabilities. If such Third-Party Claim cannot be so separated, Seller (if the Claim for Taxes that are Excluded Liabilities exceeds or is reasonably expected to exceed in amount the Claim for Taxes that are not Excluded Liabilities) or otherwise Buyer (Seller or Buyer, as the case may be, the “Controlling Party”), shall be entitled to control such Third-Party Claim (such Third-Party Claim, a “Tax Claim”). In such case, the other Party (the “Non-Controlling Party”) shall be entitled to participate fully (at the Non-Controlling Party’s sole expense) in the conduct of such Tax Claim and the Controlling Party shall not settle such Tax Claim without the consent of such Non-Controlling Party (which consent shall not be unreasonably withheld, conditioned or delayed). The costs and expenses of conducting the defense of such Tax Claim shall be reasonably apportioned based on the relative amounts at issue in the Tax Claim that are Excluded Liabilities that are not Excluded Liabilities.

 

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Section 7.9      Exclusive Remedy. Following the Closing, except in respect of fraud, the rights and remedies of the Parties under this Section 7 shall be the exclusive rights and remedies of the Parties for any of the matters set forth in Section 7.2 or Section 7.3. Without limiting the generality of the foregoing, except in the case of fraud, in no event shall any Party, its successors or permitted assigns be entitled to claim or seek rescission of the transactions consummated by this Agreement. Notwithstanding the foregoing, the provisions of this Section 7 will not restrict the right of any Party to seek specific performance or other equitable remedies in connection with any breach of any of the covenants contained in this Agreement.

 

Section 7.10      Tax Treatment of Indemnification Payments. For all Tax purposes, Buyer, Seller and each of their respective Affiliates agree to treat any indemnity payment under this Agreement as an adjustment to the Purchase Price received by Seller for the transactions contemplated by this Agreement unless otherwise required by applicable Law.

 

SECTION 8.      MISCELLANEOUS.

 

Section 8.1      Assignment. This Agreement and the rights and obligations hereunder shall not be assignable or transferable by Buyer or Seller (including by operation of Law in connection with a merger, consolidation or sale of substantially all the assets of Buyer or any Seller) without the prior written consent of the other Party.

 

Section 8.2      No Third-Party Beneficiaries. Except as provided in Section 7, this Agreement is for the sole benefit of the Parties and nothing herein expressed or implied shall give or be construed to give to any Person, other than the Parties, any legal or equitable rights hereunder.

 

Section 8.3      Expenses. Except as otherwise expressly provided in this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Party incurring such costs and expenses.

 

Section 8.4      Notices, Addresses. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be delivered by hand or sent e-mail with receipt confirmed or sent, postage prepaid, by registered, certified or express mail or reputable overnight courier service and shall be deemed given when so delivered by hand or sent by facsimile or email with receipt confirmed, or if mailed, three days after mailing (one Business Day in the case of overnight mail or overnight courier service), as follows:

 

If to Buyer:     Advance Business Capital LLC

12700 Park Central Drive

Suite 1700

Dallas, Texas 75251

Attention: Geoff Brenner, CEO

E-mail: gbrenner@tbcap.com

 

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With a Copy to:

 

Triumph Bancorp, Inc.

12700 Park Central Drive

Suite 1700

Dallas, Texas 75251

Attention: Adam D. Nelson, Executive Vice President and General Counsel

E-mail: anelson@tbkbank.com

 

And to:

 

Shapiro Bieging Barber Otteson LLP

7979 E. Tufts Avenue

Suite 1600

Denver, Colorado 80237

Attention: Christian E. Otteson

E-mail: cotteson@sbbolaw.com

 

 

If to Seller:

Covenant Transport Solutions, LLC

400 Birmingham Highway

Chattanooga, Tennessee 37419

Attention: Richard B. Cribbs, Senior Vice President of Strategy & Investor Relations

E-mail: rcribbs@covenanttransport.com

With a copy to:

 

Scudder Law Firm, P.C., L.L.O.

411 South 13th Street, Suite 200

Lincoln, NE 58508

Attention: Mark A. Scudder

E-mail: mscudder@scudderlaw.com

 

Section 8.5      Amendment and Waiver. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the Parties. By an instrument in writing Buyer, on the one hand, or Seller, on the other hand, may waive compliance by the other with any term or provision of this Agreement that such other Party was or is obligated to comply with or perform. No single waiver of any of the provisions of this Agreement shall be deemed to or shall constitute, absent an express statement otherwise, a continuous waiver of such provision or a waiver of any other provision hereof (whether or not similar). No delay on the part of any Party in exercising any right, power, or privilege hereunder shall operate as a waiver thereof.

 

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Section 8.6      Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the Parties and delivered to the other Party.

 

Section 8.7      Entire Agreement. This Agreement (including the Schedules attached hereto) contain the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersede all prior agreements and understandings relating to such subject matter. There have been and are no representations, warranties or covenants among the Parties other than those set forth or provided for in this Agreement.

 

Section 8.8      Invalidity. If any court of competent jurisdiction determines that the provisions of this Agreement are illegal or excessively broad as to duration, geographical scope or activity, then such provisions shall be construed so that the remaining provisions of this Agreement shall not be affected, but shall remain in full force and effect, and any such illegal or overly broad provisions shall be deemed, without further action on the part of any Person, to be modified, amended and/or limited, but only to the extent necessary to render the same valid and enforceable in the applicable jurisdiction.

 

Section 8.9      Governing Law. This Agreement shall be governed by and construed in accordance with the internal Law of the State of New York applicable to agreements made and to be performed entirely within such state, without regard to the conflicts of Law principles of such state.

 

Section 8.10      Consent to Jurisdiction. Each Party irrevocably submits to the exclusive jurisdiction of any federal or state court sitting in Dallas, Texas (“Texas Courts”) for the purposes of any suit, action or other proceeding arising out of this Agreement or any transaction contemplated hereby. Each Party agrees to commence any such action, suit or proceeding only in the Texas Courts. Each Party further agree that service of any process, summons, notice or document by U.S. registered mail to such Party’s respective address set forth above shall be effective service of process for any action, suit or proceeding in the Texas Courts with respect to any matters to which it has submitted to jurisdiction in this Section 8.10. Each Party irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby in the Texas Courts, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.

 

Section 8.11      WAIVER OF JURY TRIAL. SELLER AND BUYER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY OTHER PURCHASE DOCUMENT OR ANY APPLICATION, INSTRUMENT, DOCUMENT, AMENDMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER PURCHASE DOCUMENTS, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

 

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Section 8.12      Specific Performance. Each Party acknowledges and agrees that the other Party would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached or violated. Accordingly, each Party agrees that, without posting a bond or other undertaking and in addition to any other remedy to which a Party may be entitled at Law or equity, the other Party will be entitled to an injunction or injunctions to prevent breaches or violations of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter in addition to any other remedy to which it may be entitled, at Law or in equity. Each Party further agrees that, in the event of any action for specific performance in respect of such breach or violation, it will not assert as a defense that a remedy at Law would be adequate.

 

Section 8.13      Obligation of Buyer Indirect Parent. Subject to the terms hereof, Buyer Indirect Parent hereby agrees to take such actions as necessary to issue to Seller the number of shares of Triumph Common Stock required by Section 3.2(b).

 

[Remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, the Parties have executed this Agreement by their undersigned, duly authorized officers on the date first written above.

 

SELLER:

 

COVENANT TRANSPORT SOLUTIONS, LLC

 

 

By: /s/ Richard B. Cribbs               

Name: Richard B. Cribbs

Title: Treasurer

 

 

BUYER:

 

ADVANCE BUSINESS CAPITAL LLC

 

 

By: /s/ Geoffrey P. Brenner               

Name: Geoffrey P. Brenner

Title: Chief Executive Officer

 

 

BUYER INDIRECT PARENT (Solely for the purposes of Section 8.13):

 

TRIUMPH BANCORP, INC.

 

 

By: /s/ Adam Nelson                    

Name: Adam Nelson

Title: EVP & GC

 

 

 

 

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SEPARATION AGREEMENT

 

THIS SEPARATION AGREEMENT is made and entered into by and between Richard Cribbs (the “Employee”) and Transport Management Services, LLC (the “Company”) (the employee and the Company being sometimes collectively referred to as the “Parties”).

 

W I T N E S S E T H:

 

WHEREAS, Employee’s employment with the Company and any member of the Company Group will end as of the Separation Date set forth below;

 

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein the Parties agree as follows:

 

1. Separation. The Parties agree that Employee’s employment with the Company and any member of the Company Group will end effective as of the close of business on September 15, 2020 (the “Separation Date”). Until the Separation Date, the Parties agree that Employee shall continue to perform those job duties as directed by the Company or any member of the Company Group on an as-needed, when-requested basis. Accordingly, except for payment of: (a) Employee’s regular pay and benefits during the period leading up to the Separation Date, and (b) the Separation Pay, Additional Separation Pay, COBRA Premium Pay, Severance Benefits described herein, as applicable, Employee shall not be entitled to any other or future compensation (whether cash, equity, or otherwise), pay or benefits from any member of the Company Group after the Separation Date unless future consulting services or Employee’s time is utilized in accordance with Section 5(h) of this Separation Agreement are requested by any member of the Company Group.

 

2. Separation Pay.

 

(a)   Separation Pay. In consideration of this Agreement, the Company agrees to pay Employee a minimum of One Hundred Sixty-seven Thousand Five Hundred dollars ($167,500.00) representing six (6) months’ gross wages (the “Separation Pay”). The Company will pay the Separation Pay to Employee in thirteen (13) bi-weekly installment payments of Twelve Thousand Eight Hundred Eighty-Four & 62/100 ($12,884.62) each (the “Bi-Weekly Payments”), consistent with the Company’s regular payroll intervals; provided the Bi-Weekly Payment shall not become due and payable until the Company’s regular payroll date that occurs at least seven (7) days after the General Release becomes effective and period for revocation has expired (such bi-weekly installment period being collectively referred to as the “Separation Pay Period”). Payment of the Separation Pay (and any Additional Separation Pay) shall be subject to applicable withholdings and other ordinary and customary payroll taxes.   

 

(b)   Acceptance of Permitted Employment Prior to Expiration of Separation Pay Period. Subject to Section 6 below, at all times following the Effective Date of this Agreement and continuing through the expiration of the Separation Pay Period, the Parties agree that Employee shall be expected to actively pursue other employment opportunities consistent with Employee’s professional experience and/or skillset and paying an annualized base compensation of at least $167,500 (a “New Position”). If Employee accepts a New Position at any time prior to expiration of the Separation Pay Period, the Company shall nonetheless be obligated to pay Employee the entirety of the Separation Pay regardless of Employee’s acceptance of New Position. Notwithstanding the foregoing or anything contained herein to the contrary, Employee shall not be permitted to begin employment with a Competitive Business until the expiration of the Non-Compete Term.

 

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(c)   Option for Additional Separation Pay after the Separation Pay Period. If, after good faith efforts to secure employment, Employee has not accepted a New Position prior to expiration of the Separation Pay Period, the Company agrees to pay Employee additional compensation representing up to a cumulative of Two Hundred Fifty-Eight Thousand Dollars ($258,000.00) (the “Additional Separation Pay”). The Company will pay the Additional Separation Pay to Employee in bi-weekly installment payments of Nine Thousand Nine Hundred Twenty-Three & 08/100 Dollars ($9,923.08) each (the “Additional Bi-Weekly Payments”). If activated, the Additional Separation Pay will be limited to a maximum of twenty-six (26) Additional Bi-Weekly Payments which will be paid consistent with the Company’s regular payroll intervals commencing on the first regular pay period following expiration of the Separation Pay Period and continuing thereafter until such time as Employee accepts a New Position (the “Additional Pay Period”) at which time the Company’s obligation to pay Additional Separation Pay will terminate. In addition to the other payment contingencies set forth herein (including, without limitation, those set forth in Sections 4, 5 and 6), any and all Additional Separation Pay is expressly contingent upon Employee making good faith efforts to secure other employment both during the Separation Pay Period and during any Additional Pay Period. If Employee fails to undertake such efforts during the Separation Pay Period or during any Additional Pay Period, the Company will not pay Employee any Additional Separation Pay, and any Additional Separation Pay already paid to Employee will be returned by Employee to the Company. For purposes of this Agreement, it is understood and agreed that a good faith attempt by Employee to secure other employment but failure to do so will not be deemed a failure by Employee to make good faith efforts to secure the same. For the avoidance of doubt, the Company’s Additional Separation Pay obligations under this Agreement shall automatically terminate in the event of Employee’s death or disability as of the date of any such occurrence, however the Company’s Separation Pay and Severance Benefits obligations under this Agreement shall remain in effect if such obligations have not already been provided to Employee prior to the Employee’s death or disability.

 

(d)   Notice of New Employment. Employee shall notify the Company in writing immediately upon Employee’s acceptance of any New Position, providing both the name of the employer and the agreed upon start date, and the Company’s obligation to make any further Additional Separation Pay shall cease concurrent with Employee’s new start date.

 

3. Severance Benefits

 

(a)   Group Health Insurance COBRA Premium Pay. The Company also agrees to pay Employee’s group health insurance COBRA premiums (the “COBRA Pay”) for a period not to exceed eighteen (18) months of premium pay (such 18-month payment period being collectively referred to as the “COBRA Pay Period”). If Employee accepts a New Position at any time prior to expiration of the COBRA Pay Period, the Company’s obligation to continue making Employee’s monthly COBRA premium payments shall cease when Employee becomes eligible for health insurance coverage with Employee’s new employer, regardless of whether Employee enrolls for such coverage.

 

(b)   Severance Benefits. In further consideration of this Agreement, the Company agrees to pay Employee the amount of One Hundred Forty-Four Thousand Dollars ($144,000.00) (the “Severance Benefits”). The Company will pay the Severance Benefits to Employee in thirteen (13) bi-weekly installment payments of Eleven Thousand, Seventy Six & 92/100 ($11,076.92) each (the “Additional Bi-Weekly Payments”), consistent with the Company’s regular payroll intervals during the Separation Pay Period; provided the Additional Bi-Weekly Payments shall not become due and payable until the Company’s regular payroll date that occurs at least seven (7) days after the General Release becomes effective and period for revocation has expired. Payment of the Severance Benefits shall be subject to applicable withholdings and other ordinary and customary payroll taxes.

 

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4. Separation Payment Conditions. As a condition to the receipt of any and all Separation Pay, Additional Separation Pay, COBRA Pay, Severance Benefits, and any other payments or benefits described in this Agreement, in addition to any other conditions set forth herein, Employee shall:

 

(a)     execute and comply with the terms of a general release of all claims (the “General Release”) against the Company Group and their affiliates and representatives, in the form attached hereto as Exhibit B, as updated by the Company for any change in laws. The General Release must be signed, and the period provided therein for revocation must have expired, not later than sixty days from the Separation Date. Notwithstanding anything to the contrary contained herein, no separation payments or other benefits or payments required under this Agreement shall be paid until the General Release is signed and the revocation period has expired, and any amounts that would otherwise have been paid prior to such date shall be paid within a reasonable time after such date, without interest; and

 

(b)     fully perform and comply with all of Employee’s obligations hereunder, including, without limitation, Employee’s obligations under Section 6. In the event Employee breaches any of Employee’s obligations hereunder (including, without limitation, Employee’s obligations under Section 6), then, in addition to any other remedies to which the Company Group may be entitled as a result of such breach, the Company Group shall be immediately and automatically released from any obligation to make any further Separation Pay, Additional Separation Pay, Severance Benefits or COBRA Pay and, upon notice from the Company, Employee shall be required to reimburse the Company Group for any and all after-tax Separation Pay, Additional Separation Pay and Severance Benefits made to Employee by the Company or any member of the Company Group within thirty days from the Company’s notice to Employee of such breach.

 

5.     Employee Representations. As an inducement for the Company to enter into this Agreement, Employee hereby represents, warrants and covenants as follows:

 

 

(a)

Employee has carefully read and fully understands all of the provisions of this Agreement;

 

(b)     Is through this Agreement, releasing each member of the Company Group and each such member’s officers, agents, directors, supervisors, employees, representatives, successors and assigns and all persons acting by, through, under, or in concert with any of them from any and all claims Employee may have against any member of the Company Group or such individuals, including those under the Age Discrimination in Employment Act of 1967 (29 U.S.C. §621, et seq.), except as specified herein;

 

(c)     Employee knowingly and voluntarily agrees to all of the terms set forth in this Agreement;

 

(d)     Employee knowingly and voluntarily intends to be legally bound by the terms set forth in this Agreement;

 

(e)     Employee agrees not to disclose the terms of this Agreement to anyone except Employee’s attorney, financial and other professional advisors, the IRS or other taxing authorities, or Employee’s immediate family (spouse, children, siblings, parents) (collectively; “Representatives”), or as required by law, or in response to any inquiry from any judicial, governmental, regulatory, or self-regulatory agency or organization. To the extent Employee discloses the terms of this Agreement to any permitted Representative, Employee agrees to advise them that they must not disclose the terms of this Agreement. Employee agrees to be responsible for any breach of this Agreement by his Representatives and agrees to take any and all action necessary to enforce compliance with the terms of this Agreement by his Representatives.

 

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(f)     Within three (3) days following execution of this Agreement or on the actual Separation Date, whichever occurs last, Employee shall return to the Company all items of Company Group property which the Employee may still have in Employee’s possession, custody or control, including without any limitation whatsoever: all identification cards, credit cards, customer and vendor files or any other Company Group files, records, materials or information produced by, for or relating to the Company Group, its business, Employee’s job duties or functions, or any customer or vendor; all keys (in any form) to any Company Group office building, employee office, filing cabinet, desk or other key; all cell phones, pagers or other electronic devices or items of tangible personal property; all computer software; the Microsoft Surface laptop or other computer previously issued to Employee by any member of the Company Group, together with any and all passwords and/or passcodes to any of the items described above. The Company will pay Employee Two Thousand Dollars ($2,000) to assist in Employee’s purchase of a replacement laptop computer and will allow Employee to keep the remaining associated computer hardware (i.e. docking station, desk monitors (2), speakers, cabling and input devices).

 

(g)     Further, Employee represents and warrants to the Company Group as follows: (1) the financial information of any member of the Company Group that Employee is responsible for (if any) does not contain any untrue statement of a fact or omit a statement of fact making the information misleading; (2) no events have occurred since the end of the most recent reporting period and up through the date of this Agreement that would require adjustment to the financial information of any member for the Company Group that Employee is responsible for (if any); (3) during Employee’s employment by any member of the Company Group, the Parent’s Ethics Hotline was made available to Employee and to Employee’s department, and during such time, Employee did not have any complaints or concerns (nor were any brought directly to Employee’s attention) regarding ethics or policy violations, or of fraud or the suspicion of fraud, involving management that have not been properly reported to a member of the Company Group; and (4) if an event of fraud or a suspicion of fraud, whether or not material, that involved management or other employees of any member of the Company Group occurred during Employee’s employment within five (5) years prior to the Separation Date, Employee has disclosed said event or suspicion to the Internal Audit Department of Parent or otherwise properly reported the matter in writing to a member of the Company Group unless said event or suspicion was known by Employee to have been previously disclosed to the Internal Audit Department of Parent or otherwise properly reported in writing to a member of the Company Group by another Person.

 

(h)     Employee agrees that he will reasonably cooperate with any member of the Company Group and their counsel in any legal action or other claim against any member of the Company Group and any legal action or other claim made by any member of the Company Group about which he may have particular knowledge or in which he may be a witness. Such cooperation includes meeting with representatives and counsel of any member of the Company Group to disclose facts; preparing with counsel of any member of the Company Group for depositions, trials, hearings or other proceedings; attending depositions, trials, hearings or other proceedings to provide truthful testimony; and providing other assistance to any member of the Company Group and their counsel in any legal action or claim as may, in the judgment of counsel of any member of the Company Group, be necessary. The Company agrees to reimburse Employee for reasonable expenses incurred in the course of complying with this obligation of cooperation, and after the Company’s obligation to pay Separation Pay and Additional Separation Pay has expired, if Employee is requested and/or required to devote more than 10 hours in a given month in the course of complying with this obligation of cooperation, the Company agrees to compensate Employee for reasonable expenses incurred and for time devoted in excess of 10 hours per month at a reasonable hourly rate to be agreed upon by the parties.

 

6. Restrictive Covenants. Employee acknowledges and agrees that during the course of Employee’s employment with the Company or any member of the Company Group, Employee has had access to confidential information which, if disclosed, would assist in competition against the Company Group, and that Employee has generated goodwill for the Company Group during the course of Employee’s employment. Therefore, Employee hereby acknowledges and agrees that the following restrictive covenants (i) are necessary to protect the goodwill, confidential information, and other legitimate interests of the Company Group, (ii) are reasonable and necessary to induce the Company to enter into this Agreement, and (iii) are of a scope that is reasonably tailored, and not broader than necessary, to protect the legitimate business interests of the Company Group, and do not prevent or preclude Employee from earning a suitable livelihood. Employee hereby agrees to abide by the following restrictive covenants:

 

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(a)     Non-Competition. Until the Separation Date, during the remainder of the month in which the Separation Date occurs and for three (3) full calendar months immediately after the month in which the Separation Date occurs (collectively the “Non-Compete Term”), Employee shall not, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion, directly or indirectly engage or invest in, own, manage, operate, finance, control or participate in the ownership, management, operation, financing or control of, be employed by, serve as an agent, officer, director or consultant to, be associated with or in any manner connected with, lend his name or any similar name to, lend his credit or render services or advice to, any Competitive Business anywhere in North America, provided, however, that nothing herein will be deemed to prevent Employee from acquiring through market purchases and owning, solely as an investment, less than one percent (1%) in the aggregate of the equity securities of any entity that derives more than fifty percent (50%) of its gross revenues from the conduct of any Competitive Business, whose shares are registered under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are listed or admitted for trading on any United States national securities exchange or are quoted on any system of automated dissemination of quotations of securities prices in common use, so long as Employee is not directly or indirectly a member of any “control group” (within the meaning of the rules and regulations of the Securities and Exchange Commission) of any such issuer; and provided further, however, that nothing herein will be deemed to prevent Employee from acquiring through market purchases and owning, solely as an investment, any shares, units or other interest in a mutual fund, exchange-traded fund, unit investment trust, or similar investment vehicle whose holdings include investments in any Competitive Business or any entity involved in a Competitive Business.

 

(b)     Customers and Employees: Non-Solicitation and Non-Interference. Until the Separation Date, during the remainder of the month in which the Separation Date occurs and for twelve (12) full calendar months immediately after the month in which the Separation Date occurs (collectively the “Non-Solicitation Term”), Employee shall not, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion:

 

(i) whether on Employee’s own behalf or on behalf of another Person, provide or solicit to provide any Competitive Services to any Person that: (x) was at any time in the twelve (12) months prior to the Separation Date a customer, shipper, carrier or other client of any member of the Company Group; or (y) to Employee’s knowledge, was at any time in the twelve (12) months prior to the Separation Date or the solicitation of Competitive Services, a customer, shipper, carrier or other client of any member of the Company Group;

 

(ii) whether on Employee’s own behalf or on behalf of another Person, solicit to employ, or otherwise engage as an employee, independent contractor, agent or otherwise, any Person who: (x) was at any time in the twelve (12) months prior to the Separation Date an employee, independent contractor, or agent of or otherwise engaged with any member of the Company Group; or (y) to Employee’s knowledge, was at any time in the twelve (12) months prior to the solicitation, employment, or engagement of such Person an employee, independent contractor, or agent of or otherwise engaged with any member of the Company Group; or

 

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(iii) at any time interfere with any member of the Company Group’s relationship with any Person that: (x) was at any time in the twelve (12) months prior to the Separation Date an employee, contractor, supplier, agent, customer, shipper, carrier or other client of any member of the Company Group; or (y) to Employee’s knowledge, was at any time in the twelve (12) months prior to the interference an employee, contractor, supplier, agent, customer, shipper, carrier or other client of any member of the Company Group; including, without limitation, soliciting, encouraging, advising or influencing such Person(s) to discontinue or reduce the extent of such relationship.

 

(c)     Non-Disclosure. Until the Separation Date and at all times after the Separation Date (continuing indefinitely), Employee will not, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion:

 

(i) divulge, communicate, use to the detriment of any member of the Company Group, or for the benefit of any other Person(s), or misuse in any way, any confidential information, documents, materials or trade secrets pertaining to any member of the Company Group, except as required or compelled by law; or

 

(ii) divulge, communicate, use to the detriment of any member of the Company Group, or for the benefit of any other Person(s), or misuse in any way, any information, documentation, files, or other materials (written or verbal) arising out of or related to any Company Group employee, contractor, customer, shipper, vendor or supplier, except as required or compelled by law, regardless of whether such information, documents or materials are treated as confidential by any member of the Company Group.

 

(d)     Mutual Non-Disparagement. Employee agrees not to do or say anything which would portray any member of the Company Group or any of their respective stockholders, directors, officers, employees, agents, products or services in a negative light or poor manner, except as may be required in legal or statutory proceedings. Likewise, Company agrees that its directors and officers will not do or say anything which would portray Employee in a negative light or poor manner, except as may be required in legal or statutory proceedings. This provision shall become null and void five (5) years after the Separation Date, except as to any matters that occurred prior to the Separation Date. Any matters that occurred prior to the Separation Date will always be protected by this provision.

 

(e)     Reformation; Severability; Injunctive Relief. Employee expressly acknowledges and agrees that the restrictions contained herein are reasonable and no greater than necessary to protect the legitimate interests of the Company Group. However, if any covenant set forth in this Agreement (including, without limitation, this Section 6) is determined by any court to be unenforceable by reason of its extending for too great a period of time or over too great a geographic area, or by reason of its being too extensive in any other respect, such covenant shall be reformed and interpreted to extend only for the longest period of time and over the greatest geographic area, and to otherwise have the broadest application as shall be enforceable. The invalidity or unenforceability of any particular provision (or part thereof) of this Agreement (including, without limitation, this Section 6) shall not affect the other provisions hereof (or parts thereof), which shall continue in full force and effect. Without limiting the foregoing, the covenants contained herein shall be construed as separate covenants, covering their respective subject matters, with respect to each of the separate cities, counties and states, and each political subdivision thereof, within North America. Employee further acknowledges that any violation of this Agreement (including, without limitation, this Section 6) will result in irreparable injury to the Company Group, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such violation would not be reasonable or adequate compensation to the Company Group for such a violation. Accordingly, Employee agrees that if Employee violates the provisions of this Agreement (including, without limitation, this Section 6), any member of the Company Group, in addition to all other remedies which may be available to it at law or in equity, shall be entitled to specific performance and injunctive relief, without posting bond or other security, but only with proof of actual damages. Such relief will not be exclusive, but will be in addition to all other relief available to the Company Group, at law and equity.

 

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(f)     Certain Defined Terms. For purposes of this Agreement, the following defined terms shall have the meanings set forth below:

 

(i)     “Competitive Business” means any business conducted by any member of the Company Group as of the date of Employee’s termination (including any business where strategic plans were in place as of the date of Employee’s termination for any member of the Company Group to engage in such business).

 

(ii)     “Competitive Services” means those services provided in the furtherance of a Competitive Business.

 

(iii)     “Company Group” means the Company, Covenant Logistics Group, Inc., formerly Covenant Transportation Group, Inc. (“Parent”), successors thereto, and any subsidiary or affiliate of the Company or Parent and including any equity method investments of any of the foregoing (collectively, the “Company Group”).

 

(iv)     “Person” means any individual, person, business, enterprise or legal entity.

 

7. No Admission. It is understood and agreed that by tendering this Agreement to Employee, by offering to enter into it, or by entering into it, the Company has not admitted and is not admitting that it has violated any law or breached any duty owing to Employee by the Company or any member of the Company Group.

 

8. No Effect on COBRA Rights. The parties further agree that nothing in this Agreement shall be construed to waive or affect in any way any rights which Employee may have under the Consolidated Omnibus Budget Reconciliation Act of 1989 (COBRA) to continue at Employee’s own expense any coverage which Employee may have and which Employee may be entitled to continue under the Company's group health insurance program.

 

9. NDA and Other Matters. This Agreement represents the entire and sole agreement between the Parties with respect to the subject matter hereof and supersedes any and all prior negotiations, understandings, representations or agreements whether written or oral. Notwithstanding the foregoing, the Parties acknowledge that Employee has previously entered that certain Confidentiality, Non-Disclosure and Restrictive Covenants Agreement dated June 26, 2011 (the “NDA”), and the Parties expressly intend for such NDA to remain in full force and effect in accordance with the terms of said NDA . However, in the event of a conflict between the terms set forth herein and those set forth in Employee’s NDA, the terms set forth herein shall control. This Agreement cannot be modified, changed or amended, except for in writing signed by the Parties. If any provision of this Agreement is declared invalid or unenforceable, such provision shall be deemed modified to the extent necessary and possible to render it valid and enforceable. In any event, the unenforceability or invalidity of any provision shall not affect any other provision of this Agreement, and this Agreement shall continue in full force and effect, and be construed and enforced, as if such provision had not been included, or had been modified as above provided, as the case may be. This Agreement shall be interpreted and governed by the laws of the State of Tennessee without regard to any conflict of laws rules or provisions of such state, and the Parties agree that any controversy or dispute in any way relating to or arising out of this Agreement shall: (a) first, be promptly submitted to private resolution between the parties (with or without their respective legal counsel being present as the parties may decide), and if such private meeting is unsuccessful within ten (10) days after an invitation to meet has been delivered by one party to the other, then (b) be promptly submitted to non-binding mediation conducted by a mutually agreeable certified mediator in Hamilton County, Tennessee, and if no satisfactory resolution is obtained at the conclusion of the mediation which must occur within twenty (20) days after the private resolution meeting ends, then (c) thereafter be resolved exclusively in the courts located in Hamilton County, Tennessee, and the prevailing party (as determined by the court) shall be entitled to all reasonable attorneys’ fees incurred on behalf of that party in association with the underlying controversy or dispute. The foregoing multi-step resolution process shall not apply with respect to any claims or disputes arising out of alleged violations of Employee’s obligations under Section 6) or Employee’s NDA and the matter may proceed directly to court under sub-item (c) above.

 

THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THE FOREGOING SEPARATION AGREEMENT, FULLY UNDERSTAND IT, AND ARE FREELY AND VOLUNTARILY ENTERING INTO THIS AGREEMENT, INTENDING TO BE LEGALLY BOUND BY THE SAME.

 

IN WITNESS WHEREOF, the parties have executed and delivered, or have caused to be executed and delivered by their duly authorized representatives, this Separation Agreement on the date set forth next to each party's name.

 

EMPLOYEE:                              TRANSPORT MANAGEMENT SERVICES, INC.

 

         

/s/ Richard B. Cribbs            By: /s/ Joey B. Hogan      President 
(Signature) Title               

Actual Date Execution: August 20, 2020          Actual Date of Execution: August 20, 2020

 

The Effective Date of this Agreement shall be the close of business on August 28, 2020 which is the 8th day after Employee’s actual execution of this Agreement.

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EXHIBIT B – GENERAL RELEASE

 

In exchange for the payments and benefits described in the Separation Agreement to which this General Release is attached (the “Agreement”), Employee, on his or her own behalf and on behalf of his or her heirs, executors, administrators, assigns and successors, does hereby covenant not to sue and acknowledges full and complete satisfaction of and hereby releases, absolves and discharges the Company, Parent, each affiliate or subsidiary of the Company or the Parent, and its and their successors and assigns, parents, subsidiaries and affiliates, including any equity method investments of any of the foregoing, past and present, as well as their trustees, directors, officers, agents, attorneys, insurers, stockholders and employees, past and present, and each of them (hereinafter collectively referred to as “Releasees”), with respect to and from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, debts, wages, vacation pay, expenses, attorneys’ fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected, and whether or not concealed or hidden, which Employee now owns or holds or has at any time heretofore owned or held as against said Releasees, or any of them, arising out of or in any way connected with his or her employment or other relationships with the Company, Parent, or its or their subsidiaries or affiliates, including any equity method investments of any of the foregoing, or his or her separation from any such employment or other relationships (collectively, “Released Claims”), including specifically, but without limiting the generality of the foregoing, any claim under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act of 1967, as amended by the Older Worker’s Benefit Protection Act (“ADEA”), the federal Family and Medical Leave Act, the Fair Labor Standards Act, the Equal Pay Act, the Employee Retirement Income Security Act of 1974, the Worker Adjustment and Retraining Notification Act, or any other employment related federal, state or local law, regulation or ordinance; provided, however, that the foregoing release will not include or affect (and the following are expressly excluded from any Released Claims): (i) Employee’s rights under the Agreement; (ii) Employee’s rights to file claims for workers’ compensation or unemployment insurance benefits, (iii) Employee’s regular and usual salary accrued prior to the Separation Date, accrued but unused vacation through the Separation Date, COBRA continuation coverage and life insurance conversion rights, if any, (iv) Employee’s rights to provide information, assist or participate in any investigation, proceedings, or litigation concerning any administrative claim with any government agency under any applicable law that protects such rights, or to file such a claim, or (v) Employee’s rights under any written contracts between the Employee or his or her affiliated entities and any member of the Company Group. This General Release does not (i) limit Employee's ability to file a charge or complaint with the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”), (ii) limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company, or (iii) limit Employee’s right to receive an award for information provided to any Government Agencies.

 

Employee acknowledges that the non-disparagement and confidentiality provisions contained in the Agreement infringe on Employee’s rights described in this release, and Employee agrees that he or she is aware of and has consented to such infringement.

 

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Employee acknowledges that he or she is waiving and releasing any rights he or she may have under the ADEA and that this waiver and release is knowing and voluntary. Employee and the Company agree that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date (as hereinafter defined) of the Agreement. Employee acknowledges that the consideration given for the Agreement is in addition to anything of value to which he was already entitled. Employee further acknowledges that he or she has been advised by this writing that:

 

(a)     He or she should consult with an attorney of his/her choice prior to executing the Agreement and this General Release;

 

(b)     He or she has at least twenty-one (21) days within which to consider the Agreement and if he/she has not availed himself/herself of that full time period that he/she has failed to do so knowingly and voluntarily;

 

(c)     He or she has seven (7) days following his or her execution of the Agreement to revoke the Agreement and has been and hereby is advised in writing that this Agreement shall not become effective or enforceable until the revocation period has expired;

 

(d)     This Agreement will not be effective until the eighth day after Employee executes and does not revoke the Agreement (the “Effective Date”); and

 

(e)     Nothing in the Agreement prevents or precludes Employee from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties or costs from doing so, unless specifically authorized by federal law. Any revocation must be in writing and electronically delivered to the Company’s then VP of Human Resources with confirmed receipt or hand delivered to the Company by close of business on or before the seventh day from the date that Employee signs the Agreement. In the event that Employee exercises his or her right of revocation, neither Employee nor any member of the Company, Parent, or its or their subsidiaries or affiliates, including any equity method investments of any of the foregoing, will have any further rights or obligations under the Agreement.

 

It is the desire and intent of the parties that the provisions of this release be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any provision of this release is determined to be partially or wholly invalid, illegal or unenforceable in any jurisdiction, then such provision shall, as to such jurisdiction, be modified or restricted to the extent necessary to make such provision valid, binding and enforceable, or if such provision cannot be so modified or restricted, then such provision shall, as to such jurisdiction, be deemed to be excised from this release; provided, however, that the legality, binding effect and enforceability of the remaining provisions of this release, to the extent the benefits conferred upon the parties by virtue of this release remain substantially unimpaired, shall not be affected or impaired in any manner, and any such invalidity, illegality or unenforceability with respect to such provision in such jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

 

Employee represents and warrants that he or she has no present knowledge of any injury, illness or disease to him or her that is or might be compensable as a workers’ compensation claim or similar claim for workplace injuries, illnesses or diseases.

 

Terms used herein and not otherwise defined will have the meanings set forth in the Agreement to which this Release was attached. Intending to be legally bound, I have signed this General Release as of the date written below.

 

Employee Signature: /s/ Richard B. Cribbs

 

Date Signed: August 20, 2020

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ACCOUNT MANAGEMENT AGREEMENT, AMENDMENT TO PURCHASE AGREEMENT AND
MUTUAL RELEASE

     

This Account Management Agreement, Amendment to Purchase Agreement and Mutual Release (“Agreement”), dated as of September 23, 2020 (the “Effective Date”), is made between COVENANT TRANSPORT SOLUTIONS, LLC (“Covenant”), and Covenant’s parent, COVENANT LOGISTICS GROUP, INC. (“CVLG”), on the one hand (Covenant and CVLG, together with Covenant Transport, Inc., a Tennessee corporation, Covenant Asset Management, LLC, a Nevada limited liability company, CTG Leasing Company, a Nevada corporation, Covenant Logistics, Inc., a Nevada corporation, IQS Insurance Risk Retention Group, Inc., a Vermont corporation, Southern Refrigerated Transport, Inc., an Arkansas corporation, Star Transportation, Inc., a Tennessee corporation, Heritage Insurance, Inc., a Tennessee corporation, Transport Management Services, LLC, a Tennessee limited liability company, Landair Holdings, Inc., a Tennessee corporation, Landair Transport, Inc., a Tennessee corporation, Landair Leasing, Inc., a Tennessee corporation, and Landair Logistics, Inc., a Tennessee corporation, are collectively referred to herein as “Covenant Group”), TRIUMPH BANCORP, INC. (“TBI”) and ADVANCE BUSINESS CAPITAL LLC d/b/a TRIUMPH BUSINESS CAPITAL (“ABC”), on the other hand (TBI and ABC, together with TBK Bank, SSB and Triumph Insurance Group, Inc., are collectively referred to herein as “Triumph”) (TBI, ABC, CVLG and Covenant are referred to herein each individually as a “Party”, and collectively as, the “Parties”).

 

 

RECITALS(1)
 

WHEREAS, in March 2020, Triumph and Covenant commenced discussions relating to Covenant’s offer to Triumph to purchase Covenant’s Factoring Portfolio (all defined terms contained in these Recitals are defined in Section 2 of this Agreement); and

 

WHEREAS, on July 8, 2020, ABC, as buyer, and Covenant, as seller, and TBI, as Buyer Indirect Parent, entered into the Purchase Agreement; and

 

WHEREAS, ABC agreed to pay to Covenant approximately $108.4 million dollars in cash, plus transfer 630,268 shares of Triumph’s Shares valued at approximately $13.9 million dollars, plus contingent cash consideration of up to approximately $9.9 million dollars following the twelve-month period ending July 31, 2021; and

 

WHEREAS, the Purchase Agreement identified TBI as a “Buyer Indirect Parent,” and TBI executed the Purchase Agreement “solely for the purpose of Section 8.13.” Section 8.13 required TBI to issue to Covenant the common stock required by Section 3.2(b), consisting of 630,268 shares; and

 

WHEREAS, subsequent to the Closing of the Purchase Agreement, ABC and Covenant became involved in a dispute related to the transactions contemplated by the Purchase Agreement (the “Pending Dispute”); and

 


1 These Recitals use terms in this Agreement that have been defined in Section 2, below, and shall have the meaning so prescribed therein.

 

 

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WHEREAS, on August 28, 2020, Covenant commenced the Lawsuit and ABC removed the Lawsuit to the United States District Court for the Northern District of Texas, Dallas Division; and

 

WHEREAS, the Parties commenced negotiations and have reached this agreement to fully and finally resolve the Pending Dispute and the Lawsuit; and

 

WHEREAS, the Parties, without the admission of liability on the part of any party and in order to avoid the uncertainty, expense, and inconvenience of continued disputes, agree to the following:

 

AGREEMENTS

 

NOW, THEREFORE, for the good and valuable consideration of the payments, promises, mutual agreements, covenants and provisions recited herein, it is hereby agreed between and among the Parties that all claims by and between them with regard to the Lawsuit and the allegations set forth herein shall be settled and compromised pursuant to the following terms and conditions: 

 

1. Recitals. The above Recitals are deemed incorporated into this Agreement by reference as if set forth herein and are further acknowledged by the Parties as being true and correct.

 

2. Definitions

 

2.1. “ABC” means Advance Business Capital LLC d/b/a Triumph Business Capital.

 

2.2. “ABC Original Collateral” means all “Collateral” as that term is defined in Section 1.9 of the Factoring Agreements.

 

2.3. “Account Debtor” has the same meaning as the term Account Debtor is defined in Tex. Bus. & Com. Code § 9.102(a)(3), and, as may be applicable, shall also include “Obligor” as that term is defined in the Purchase Agreement, and “Account Debtor” as that term is defined by each Factoring Agreement.

 

2.4. “Additional Equipment Collateral” means the equipment identified on the Schedule “A” to that certain Rider to the Security Agreement attached hereto, as the same may be amended from time to time, which is being made available to Triumph by the Covenant Group to secure the Covenant Group’s monetary and non-monetary obligations under the Draw Note, this Agreement and the Security Agreement, including any Written Indemnification Calls.

 

2.5. “Buyer Indirect Parent” means Triumph Bancorp, Inc.

 

2.6. “CVLG” means Covenant Logistics Group, Inc.

 

2.7. “Charge-Off Event” means that ABC, in its reasonable discretion, has determined that any Over-Formula Advance, including all or any portion thereof, is likely to be uncollectible from any one or more Over-Formula Advance Factoring Client(s) and in connection therewith issues a Written Indemnification Call. A Charge-Off Event shall be deemed effective during the period of time that a charge off would be recognized by the application of GAAP, as may be applicable, using Triumph’s accounting methodology, consistently applied, to charge off all or any portion of the face amount of the applicable Over-Formula Advance (as set forth in Exhibit 2.26). For avoidance of doubt, a Charge-Off Event shall include, but shall not be limited to, the occurrence of an Insolvency Event with respect to any Over-Formula Advance Client notwithstanding that ABC may agree to provide any Over-Formula Advance Factoring Client with post-petition financing in connection with any chapter 11 bankruptcy case.

 

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2.8. “Client Supplemental Collateral” means any of the following assets that one or more of the Over-Formula Advance Factoring Clients may pay to ABC or offer to and be accepted by ABC as additional collateral (which acceptance will not be unreasonably withheld, delayed, or conditioned) to secure or pay down all or some portion of Over-Formula Advances: (i) Underpaid DRO Claims; (ii). any equipment (i.e. trucks or trailers) offered to ABC after the execution of this Agreement, in which ABC does not currently have a perfected security interest, (iii) the net cash proceeds of any asset sale, debt or equity contribution received by the Over-Formula Advance Factoring Clients or (iv) any other collateral subsequently identified by ABC in its reasonable discretion as available to pay down the Over-Formula Advances. Client Supplemental Collateral shall not include any of the ABC Original Collateral, except as set forth above. In addition, for the avoidance of doubt, the “Client Supplemental Collateral” shall not include any collateral (other than the types enumerated in clauses (i), (ii), and (iii) above unless Covenant shall consent) provided by an Over-Formula Advance Factoring Client or its affiliates pursuant to a separate financing arrangement Triumph may enter into with any Over-Formula Advance Factoring Client or its affiliates, so long as such separate financing is deemed by Triumph to be reasonably likely to decrease the likelihood and/or amount of Charge-Off Events.

 

2.9. “Closing Date” means July 8, 2020, the date of the Purchase Agreement.

 

2.10. “Closing Net Funds Employed” means as that term is defined in Section 1 of the Purchase Agreement, in the amount of $103,285,908.01, which was calculated as the total gross face amount of the Purchased Receivables minus the net amount of accrued reserves and earned reserves with respect to such Purchased Receivables.

 

2.11. “Closing Premium” means as that term is defined in Section 1 of the Purchase Agreement, which includes an amount of cash equal to $5,089,478 and 630,268 shares of Triumph Common Stock.

 

2.12. “Covenant” means Covenant Transport Solutions, LLC.

 

2.13. “Draw Note” means that Draw Note, issued by Covenant to TBK Bank, SSB for the principal amount of FORTY FIVE MILLION DOLLARS ($45,000,000.00), including all amendments, riders, and supplements thereto, entered in connection with this Agreement and dated September 23, 2020, attached hereto as composite Exhibit 2.33.

 

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2.14. “Earnout Amount” means as that term is defined in Section 3 of the Purchase Agreement, which includes contingent cash consideration of up to approximately $9.9 million dollars following the twelve-month period ending July 31, 2021.

 

2.15. “Factoring Agreement(s)” means those Factoring and Security Agreements between Covenant and various Factoring Clients, as identified on Schedule 2.1(c) of the Purchase Agreement.

 

2.16. “Factoring Client(s)” means various independent motor carriers that contracted with Covenant by having entered into one or more Factoring Agreements to obtain factoring facilities from Covenant, as further defined by the term “Customer” as defined in the Purchase Agreement, and the term “Seller” as defined in the Factoring Agreements.

 

2.17. “Factoring Portfolio” means the assets acquired by ABC from Covenant pursuant to the Purchase Agreement, including, but not limited to, Covenant’s contractual factoring relationships with Factoring Clients, and the Purchased Receivables, and more specifically identified in Section 2.1 of the Purchase Agreement, and as set forth in Schedules 2.1(a), 2.1(c), 2.2(c) and 4.2(a) of the Purchase Agreement.

 

2.18. “First Tranche Indemnification” means and applies to Covenant Group’s obligations to irrevocably and unconditionally indemnify Triumph for one hundred percent (100%) of all Losses, up to $30,000,000.00, that arise in connection with any Over-Formula Advances giving rise to any Charge-Off Event.

 

2.19. “Governmental Entity” means as defined in Section 1 of the Purchase Agreement.

 

2.20. “Indemnification Payment(s)” means either: (a) payment in cash payable via wire transfer, or ACH deposit to Triumph’s bank account, remitted to Triumph by Covenant Group in connection with each Written Indemnification Call, or (2) a draw down under the Line of Credit.

 

2.21. “Insolvency Event” means, with respect to any Over-Formula Advance Client, (i) the making by such Over-Formula Advance Client of a general assignment for the benefit of creditors, (ii) the filing by such Over-Formula Advance Client of a voluntary petition in bankruptcy, (iii) such Over-Formula Advance Client being adjudged bankrupt or insolvent, or having had entered against such Over-Formula Advance Client an order for relief in any bankruptcy or insolvency proceeding, (iv) the filing by such Over-Formula Advance Client of a petition or answer seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, (v) the filing by such Over-Formula Advance Client of an answer or other pleading admitting or failing to contest the material allegations of a petition filed against such Over-Formula Advance Client in any proceeding specified in clause (vii) below, (vi) seeking, consenting to or acquiescing in the appointment of a trustee, receiver or liquidator of such Over-Formula Advance Client or of all or any substantial part of the assets of such Over-Formula Advance Client or (vii) the failure to obtain dismissal within 60 days of the commencement of any proceeding against such Over-Formula Advance Client seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, or the entry of any order appointing a trustee, liquidator or receiver of such Over-Formula Advance Client of all or any substantial portion of the assets of such Over-Formula Advance Client.

 

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2.22. “Lawsuit” means the lawsuit Covenant commenced on August 28, 2020 styled, Covenant Transport Solutions, LLC v. Advance Business Capital LLC d/b/a Triumph Business Capital, Cause No. DC-20-12141, in the 95th Judicial District Court, Dallas County, Texas, seeking a declaratory judgment or, alternatively, a reformation of the Purchase Agreement.

 

2.23. “Line of Credit” means the line of credit facility as evidenced by the Draw Note, and as described in Section 3.4.2.

 

2.24. “Losses” means the amount of any Over-Formula Advances giving rise to a Charge-Off Event, including all reasonable costs of collection and expenses incurred in connection therewith.

 

2.25. “NOLV” or Net Orderly Liquidation Value means, insofar as the Additional Equipment Collateral, the estimated net amount, after liquidation expenses are deducted, expressed in terms of money, that could be typically realized from a properly advertised and professionally managed liquidation sale, conducted under orderly sale conditions for a reasonable period of time, under the economic trends existing at the time of appraisal, with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.

 

2.26. “Over-Formula Advances” means the advances made to Over-Formula Advance Factoring Clients totaling the amount of $62,167,152.00, as reflected in Exhibit 2.26 attached hereto.

 

2.27. “Over-Formula Advance Factoring Clients” means those Factoring Clients to whom Covenant made Over-Formula Advances. As of the date of this Agreement, the Over-Formula Advance Factoring Clients consists of each the following: Postal Fleet Services, Inc., The Stageline Company, Thunder Ridge Transport, Inc., Ursa Major Corporation, Courtlandt and Brown Enterprises L.L.C., Sheehy Mail Contractors Inc., W.E. Graham, Inc., W&L Mail Service, Inc. and Williams Mail Service, Inc.

 

2.28. “Prevailing Party” means the party who prevails in a final, non-appealable judgment by a court of competent jurisdiction.

 

2.29. “Proceeds” has the same meaning as the term Proceeds as defined in Tex. Bus. & Com. Code § 9.102(a)(65).

 

2.30. “Purchased Accounts” means as defined in Section 1.34 of each Factoring Agreement.

 

2.31. “Purchase Agreement” means that Accounts Receivable Purchase Agreement (the “Purchase Agreement”) and certain related agreements between ABC, as buyer, and Covenant, as seller, and TBI, as Buyer Indirect Parent effective on July 8, 2020.

 

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2.32. “Purchase Price” means as it relates to the consideration paid by Triumph to Covenant under the Purchase Agreement between ABC and Covenant, that amount as defined in Section 1 of the Purchase Agreement, which was based on (a) the Closing Net Funds Employed in the amount of $103,285,908.01; plus (b) the Closing Premium. In addition to the Purchase Price, Covenant had the opportunity to an Earnout Amount.

 

2.33. “Purchased Receivables” means as defined in Section 1 of the Purchase Agreement. For purposes of this Agreement, all obligations of the Over-Formula Advance Factoring Clients included in the Closing Net Funds Employed are deemed Purchased Receivables.

 

2.34. “Registration Rights Agreement” means that Registration Rights Agreement, by and between Covenant and TBI, entered in connection with the Purchase Agreement and dated July 8, 2020.

 

2.35. “Second Tranche Indemnification” means and applies to Covenant Group’s obligations to irrevocably and unconditionally indemnify Triumph for fifty- percent (50%) of all Losses greater than $30,000,000.00 and up to $60,000,000.00 that arise in connection with any Over-Formula Advances giving rise to any Charge-Off Event.

 

2.36. “Security Agreement” means that Security Agreement, by and between Covenant Group, on the one hand, and TBK Bank, SSB, on the other hand, including all amendments, riders, and supplements thereto, entered in connection with this Agreement and dated September 23, 2020, attached hereto as composite Exhibit 2.33.

 

2.37. “Shares” means 630,268 shares of TBI Common Stock transferred to Covenant by TBI as part of the Closing Premium.

 

2.38. “Sources of Proceeds” has the meaning set forth in the first paragraph of Section 8.

 

2.39. “TBI” means Triumph Bancorp, Inc.

 

2.40. “Total Indemnification Obligations” means Covenant Group’s obligations under the First Tranche Indemnification and the Second Tranche Indemnification.

 

2.41. “UCC” means the Uniform Commercial Code.

 

2.42. “Underpaid DRO Claims” means Proceeds from claims by the Over Formula Advance Factoring Clients on amounts purportedly underpaid by the USPS for work performed under so-called Direct Route Optimization (“DRO”) contracts during the 2019-2020 time period.  For avoidance of doubt, the Underpaid DRO Claims are separate and apart from any payments on the outstanding PFS invoice #DRO-10 advanced on October 11, 2019, which was included in the Factoring Portfolio at time of purchase and remains outstanding with a value of $1,336,841.79

 

2.43. “USPS” means the United States Postal Service who was an Account Debtor to the Over-Formula Advance Factoring Clients.

 

2.44. “Written Indemnification Call” means a written notice given to Covenant by ABC in connection with any Charge-Off Event, in the form attached hereto as Exhibit 2.44.

 

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3. Amendments to Purchase Agreement. Covenant and Triumph hereby agree to amend the Purchase Agreement as follows, and as provided below, certain Sections in the Purchase Agreement are supplanted as follows.

 

3.1 Reduction in Purchase Price and Sale of Shares. Covenant and Triumph hereby amend the Purchase Agreement to provide that Covenant will return the portion of the Purchase Price and the Closing Premium paid in all shares of TBI Common Stock delivered by Triumph to Covenant in connection with the Closing (the “Shares”) by surrendering the proceeds of the sale thereof as provided below (which shall be treated as an adjustment to the purchase price for all purposes under the Purchase Agreement):

 

3.1.1 Buyer Indirect Parent, shall use commercially reasonable efforts to file, as soon as practical and permissible following the date of this Agreement, a prospectus supplement as contemplated by Section 5.1 of that certain Registration Rights Agreement, dated July 8, 2020, by and between Covenant and Buyer Indirect Parent (the “Registration Rights Agreement”) to permit or facilitate Covenant’s sale of the Shares.  As promptly as reasonably practicable following the filing of such prospectus supplement, and to the extent permitted by law, Covenant shall sell the Shares at such times, in such quantities, in such manner (including as to delivery of proceeds) and subject to such minimum prices or other requirements as Buyer Indirect Parent may from time to time direct in writing (“Sales”) and shall continue Sales at Buyer Indirect Parent’s written direction until such time as Covenant no longer owns any Shares.  Covenant shall, immediately upon receipt, pay over all proceeds from any Sales, net of brokerage or underwriting fees and commissions, to Triumph.  Buyer Indirect Parent and Covenant shall each (i) take such actions as may reasonably be required to effect the Sales and (ii) comply with all applicable laws with respect to the Sales.  For the avoidance of doubt, Buyer Indirect Parent shall indemnify Covenant Group for any liability, loss, cost, or expense including attorneys’ fees (whether under the Securities Act or otherwise, and including against any governmental or securities industry regulatory organization investigation or proceeding) arising in connection with the registration and sale of the Shares, except any liability for information provided by Covenant Group in writing for inclusion in the prospectus supplement, which will be limited to the name and other factual information provided by the selling stockholder.

 

3.2 Termination of Earnout Consideration. The Purchase Agreement is hereby amended to terminate and delete in its entirety Triumph’s obligation to pay any Earnout Amount to Covenant, and in connection therewith, Section 3.4 of the Purchase Agreement is hereby deleted in its entirety, effective nunc pro tunc as of the Closing Date.

 

3.3 Termination of Indemnification of Covenant. Section 7.3(a) of the Purchase Agreement is hereby deleted in its entirety, effective nunc pro tunc as of the Closing Date.

 

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3.4 Amendment to Limitation of Liability; and Indemnification of Triumph. For purposes of Section 7.1 of the Purchase Agreement, all representations and warranties of the Seller shall be deemed to have expired at closing, and no claims based on a breach of any representation or warranty may be brought. Sections 7.2(a), 7.4(a) and (b), and 7.6 of the Purchase Agreement is each hereby deleted in its entirety, nunc pro tunc as of the Closing Date, Section 7.9 is hereby amended by deleting, in the first sentence, “, except in respect of fraud,” and, in the second sentence, “, except in the case of fraud,”, and Sections 7.4(a) and (b) are hereby supplanted and replaced with the following language:

 

3.4.1 Subject to the terms hereof, Covenant and CVLG hereby irrevocably and unconditionally agree to indemnify Triumph irrevocably and unconditionally for all Total Indemnification Obligations, in connection with any Losses that arise in connection with any Over-Formula Advances giving rise to any Charge-Off Event. Covenant’s and CVLG’s Total Indemnification Obligations are separated into two tranches: a First Tranche Indemnification and a Second Tranche Indemnification. Upon the occurrence of a Charge-Off Event, Triumph may deliver a Written Indemnification Call to Covenant and CVLG, as provided by Exhibit 2.44. Within five business days of each Covenant’s and CVLG’s receipt of each Written Indemnification Call, Covenant and CVLG shall cause an Indemnification Payment to be remitted to Triumph for any Losses as identified in such Written Indemnification Call. Triumph is entitled to issue a Written Indemnification Call for each Charge-Off Event, and regardless of whether any Charge-Off Event is related to a single Over-Formula Advance Factoring Client, or multiple Over-Formula Advance Factoring Clients. If, at any time after a Charge-Off Event for which Covenant and CVLG have fully satisfied any Written Indemnification Call pursuant to this Section 3.4.1, Triumph subsequently recovers any Sources of Proceeds (as defined in Section 8) available to be applied against the Over-Formula Advances related to such Charge-Off Event, such recovered amount shall be paid to Covenant and CVLG within five business days of Triumph’s receipt of such collected amount in accordance with Section 8.6.

 

3.4.2 Triumph shall provide the Line of Credit to Covenant for a maximum facility of $45,000,000.00, as more fully described in the Draw Note and Security Agreement attached hereto in composite Exhibit 2.33 and established solely to enable the Covenant to satisfy any Written Indemnification Call requiring any Indemnification Payment be made to Triumph. Additionally, Covenant shall provide Triumph with such documents, certificates, and other information as is typical and customary to establish the Line of Credit, including without limitation a written opinion of counsel to Covenant dated as of the date of the closing of the Line of Credit, regarding such matters as Triumph or its counsel may reasonably require, including, without limitation, that the execution, delivery and performance by Covenant of the loan documents evidencing the Line of Credit have been duly authorized by all required action, that such loan documents have been duly executed and delivered by Covenant, and are enforceable against Covenant in accordance with their terms.

 

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4 ABC’s Control over Factoring Relationships; Non-Interference. ABC, in its sole and absolute discretion, shall have an unfettered right to manage and administer the Factoring Portfolio and all Factoring Agreements and all Factoring Client factoring relationships, including, those that involve any Over-Formula Advance Factoring Clients. ABC may, as ABC deems necessary and/or appropriate, take any and all actions, including, but not limited to, elect to enforce any rights and remedies, or refrain from taking any such actions in respect to any Factoring Client, ABC’s Original Collateral, the decision to make advances under any Factoring Agreement, declare a default and/or terminate any Factoring Agreement, all of which may be done without notification to the Covenant Group and without any duty to obtain Covenant Group’s approval. Covenant Group acknowledges that ABC shall have no liability, express or implied, for any action taken or omitted to be taken by ABC or for any failure or delay in exercising an right or power possessed by ABC in connection with the Factoring Portfolio, the Factoring Agreements, the Over-Formula Advances and/or any collateral. Without limiting the foregoing: (a) ABC may consult with legal counsel, public accountants, appraisers and other experts, in each case selected by ABC, and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such persons, (b) ABC shall be entitled to rely on, and shall incur no liability by acting upon, any conversation, notice, consent, certificate, statement, order, or any document or other writing believed by ABC to be genuine and correct and to have been signed, sent or made by the proper person, (c) ABC shall not be liable for any failure by any Factoring Client to perform its obligations, or the preservation of any collateral or the loss or depreciation thereof, and (d) ABC shall not be required to make any inquiry concerning any Factoring Clients observance or performance of any agreement, or to inspect any property, books, or records of any Factoring Clients

 

5 Grant of Security Interest to ABC in Additional Equipment Collateral. In order to secure Covenant Group’s Total Indemnification Obligations to Triumph hereunder, ABC shall receive an exclusive and first priority security interest and liens in the Additional Equipment Collateral as identified in the Security Agreement and schedules thereto from time to time, which equipment that shall have a NOLV as of the date the initial security interest is granted of not less than $40,000,000.00 to secure Covenant Group’s First Tranche Indemnification, and includes additional equipment that shall have a NOLV as of the date the initial security interest is granted of not less than $20,000,000.00 to secure Covenant Group’s Second Tranche Indemnification monetary obligations, and shall maintain an ongoing loan to value ratio as required by the Security Agreement and Rider thereto. Covenant Group shall, as necessary, fully cooperate so as to enable ABC to perfect its liens and security interest in all of the Additional Equipment Collateral, by, and as may be required by applicable laws, noting ABC’s lien on each certificate of title. No other party or creditor of Covenant Group shall at any time be authorized or given any form of security interest or liens in any of the Additional Equipment Collateral described above, unless ABC shall first have given its prior written consent, or until Covenant Group’s Total Indemnification Obligations have been fully paid and indefeasibly satisfied. Covenant Group authorizes the filing of any UCC financing Statements that ABC may choose to file in any jurisdiction in which Covenant Group is located in order to perfect the security interest and liens in the Additional Equipment Collateral, provided, however, if ABC fails to file, record or otherwise perfect its security interest or liens, or its perfection is in any way, deemed ineffective, defective, or same lapses, shall have no impact on ABC’s right to receive payment under this Agreement and/or Covenant Group’s monetary obligations to make timely payment to Triumph.

 

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6 Abatement of Certain Fees Accruing on Over-Formula Advances due from Over-Formula Advances Factoring Clients. Pursuant to the Factoring Agreement, ABC is entitled to the payment of certain Default Pricing Fees and Late Payment Fees due on Over-Formula Advances (“Late Fees”), and likewise, ABC may be permitted to collect from Over-Formula Advances Factoring Clients any now existing and hereafter arising Late Fees in accordance with the terms of the Factoring Agreement. Notwithstanding, in an effort to improve the Over-Formula Advances Factoring Clients free cash flow available to repay the existing Over-Formula Advances due and owing to ABC, ABC agrees that in respect to Late Fees accruing after September 30, 2020, ABC will abate its right to collect and apply payments from such Over-Formula Advances Factoring Clients from collections made on Accounts, or otherwise for the satisfaction of such Late Fees. Notwithstanding ABC’s agreement to abate the collection and application, but not the accrual of, any Late Fees in connection with the Over-Formula Advances, such abatement shall not affect the validity such fees. Moreover, this provision will not result in ABC forgiving, or waiving the right to receive, payment of any Late Fees and/or any other obligations of any Factoring Clients arising under the Factoring Agreements, and ABC, in its sole discretion, may at any time terminate the Late Fees abatement, which shall take effect without any requirement to give notice to Covenant Group, or any other person. Moreover, the abatement of payment of Late Fees shall be automatically terminated, and such accrued Late Fees will automatically be reinstituted from the date of abatement in the event of an occurrence of any event of default under any Factoring Agreements with any Over-Formula Advance Factoring Clients. Nothing contained herein shall constitute a waiver of any of ABC’s rights under the Factoring Agreements, and no third-party, including, but not limited to, any Over-Advance Formula Factoring Client is an intended third-party beneficiary under this Agreement.

 

7 Covenant’s Cooperation to Maximizing Recoveries. Covenant Group has expertise in connection with the freight surface transportation business, and ABC may request Covenant Group to offer such expertise and make recommendation to ABC, and other Over-Advance Formula Factoring Clients, in order to suggest improvements to such Over-Advance Formula Factoring Clients’ cash flow and operating efficiencies.  Covenant Group, in its sole discretion, may provide assistance to ABC, and Over-Advance Formula Factoring Clients; provided, however, that Covenant Group shall not be liable to Triumph for any act done or omitted in providing such assistance except for its own willful misconduct or illegal activity and Covenant Group may require a signed waiver and release from any Over-Advance Formula Factoring Client before providing any such assistance. ABC, in its discretion, may request and attempt to obtain information from Over-Advance Formula Factoring Clients that Covenant Group requests in order to assist Covenant Group to offer such guidance and recommendations as contemplated hereby. Notwithstanding anything herein to the contrary, and as provided in Section 4, above, ABC shall have sole and exclusive discretion over all final Over-Advance Formula Factoring Client decisions and a failure to consult with Covenant, or the implementation of (or failure to implement) any of Covenant Group’s recommendations shall not impair any of Triumph’s rights under this Agreement, or excuse any of Covenant Group’s duties under this Agreement.

 

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8 Client Supplemental Collateral; Over-Advance Balance Paydown. It is understood and agreed that ABC has placed the obligations relating to the Over-Formula Advances into a segregated collection account to be repaid solely as provided in this Section 8 and which, for the avoidance of doubt and as applied to each of the items below and for determining what constitutes “Sources of Proceeds” for purposes of this Agreement, shall not include rights to any amounts for which the right to receive payment constitutes the repayment of any advances made subsequent to the Closing Date, or hereafter arising, by ABC to Over-Formula Advance Factoring Clients. In the event that: (a) ABC receives any Underpaid DRO Claims and/or (b) any Over-Formula Advance Factoring Client offers ABC any other Client Supplemental Collateral, including, but not limited to, equipment (i.e., trucks or trailers), that may be used to reduce or secure all or some portion of Over-Formula Advances, and ABC determines that such additional collateral provides additional monetary value to ABC, and/or (c) as a result of the factoring facilities offered by ABC to such Over-Formula Advance Factoring Clients, ABC collects additional Proceeds of non-Purchased Accounts (i.e. non-factored accounts) from an Account Debtor, and/or the generation of surplus cash reserves, any of which, in ABC’s reasonable discretion, may be used and applied to reduce Over-Formula Advances (the items in clauses (a), (b), and (c) collectively referred to as “Sources of Proceeds”), then the following shall apply, subject to the conditions precedent described in Section 8.4, below:

 

8.1 ABC shall, in the exercise of its reasonable business judgment, exercise its rights to collect, dispose of or foreclose on such Sources of Proceeds as may be permitted by any Factoring Agreement(s), other agreement, or as authorized by applicable law.

 

8.2 In connection with the collection, disposition of, or foreclosure on such Sources of Proceeds, or any portion thereof, ABC may, in its sole discretion, dispose of any Client Supplemental Collateral through public and/or private sale, lease, license, exchange, or other disposition, by one or more contracts, as a unit or in parcels, in the present condition, with or without warranties, and in any method, manner, time, place, and other terms, as ABC so chooses.

 

8.3 If, as a result of the collection and/or disposition of any Sources of Proceeds, or any portion thereof, and/or the collection of any other Proceeds as described in Section 8, above, ABC receives identifiable cash Proceeds from the collection, sale, or disposition of same, and conditioned upon the satisfaction of the provisions contained in Section 8.4, below, then ABC will apply such identifiable cash Proceeds, in accordance with the following subsections:

 

8.3.1 First, all such identifiable cash Proceeds shall be applied to the repayment of all reasonable expenses and costs incurred by ABC in respect to the collection and enforcement of its rights, including reasonable attorney's fees and reasonable legal expenses (the amount remaining after such expenses being referred to as “Net Cash Proceeds”), and

 

8.3.2 Second, after quantification of the Net Cash Proceeds, each dollar of Net Cash Proceeds up to the total amount of $30,000,000.00 shall be applied to the Second Tranche Indemnification (one-half of each such dollar reducing Covenant Group’s indemnification obligations thereunder up to $15,000,000). Each dollar of Net Cash Proceeds received greater than $30,000,000.01 and up to the amount of $60,000,000.00, shall be applied to the First Tranche Indemnification.

 

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8.4 If, ABC is required, or in ABC’s reasonable business judgement ABC deems it necessary to, return or refund any Net Cash Proceeds to any person due to, among other things, any claim asserted or threatened against ABC for preferential transfer liability or avoidable transfer liability under Title 11 of the United States Code, or any applicable state law, or otherwise, then Covenant Group’s Total Indemnification Obligations shall be reinstated by the amount of any Net Cash Proceeds returned or refunded by Triumph to any person; provided that Covenant Group’s Total Indemnification Obligations shall only be reinstated by 50% if the Net Cash Proceeds returned or refunded by Triumph to any person were used to pay down the Second Tranche Indemnification.

 

8.5 Except as set forth above, to the extent any Over-Formula Advance Factoring Client offers to ABC any Client Supplemental Collateral, ABC shall use commercially reasonable efforts to (i) perfect any security interest or liens in any Client Supplemental Collateral and (ii) exercise any rights or remedies in respect to any Client Supplemental Collateral.

 

8.6 If, at any time after a Charge-Off Event for which Covenant and CVLG have fully satisfied any Written Indemnification Call pursuant to Section 3.4.1, Triumph subsequently recovers any Sources of Proceeds available to be applied against the Over-Formula Advances related to such Charge-Off Event, such recovered amount shall be applied, to the extent not otherwise applied pursuant to Section 8.3.2, if in relation to the First Tranche Indemnification, 100% to reduce the Total Indemnification Obligations dollar for dollar and, if in relation to the Second Tranche Indemnification, 50% to reduce the Total Indemnification Obligations.

 

9 Event of Default; Remedies. The following shall constitute an Event of Default under this Agreement: (a) any Party fails to abide by or observe any term, condition, covenant, or other provision contained in this Agreement, the Draw Note and/or the Security Agreement, or (b) any statements, representations, warranties or conditions contained in this Agreement, the Draw Note and/or the Security Agreement prove to be false, or misleading (“Event of Default”). Immediately upon the occurrence of an Event of Default, and the defaulting Party’s failure to fully cure such Event(s) of Default within five (5) days of written notice issued by the non-defaulting Party, the non-defaulting Party shall be entitled to unconditionally exercise its rights and remedies under this Agreement against the defaulting Party, and, in the case of Triumph, the Additional Equipment Collateral.  In the event, due to an Event of Default, the non-defaulting Party deems it necessary to seek equitable relief, including, but not limited to, injunctive or replevin remedies, the defaulting Party waives any requirement that the non-defaulting Party post or otherwise obtain or procure any bond. Alternatively, in the event the non-defaulting Party, in its sole and exclusive discretion, desires to procure and post a bond, such bond may be limited to the sum of $10,000.00 notwithstanding any common or statutory law requirement to the contrary, and the non-defaulting Party shall nonetheless be entitled to all legal benefits as if such bond was posted in an amount as may otherwise be required by law. Moreover, nothing contained in this Agreement shall modify, waive, amend, or otherwise alter Covenant’s obligations set forth in Section 5.5 of the Purchase Agreement relating to Roadco Transportation Services Inc., which obligations shall remain unchanged and in full force and effect.

 

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10 Release of Triumph. Upon the Effective Date, and subject to the existing and/or contemporaneous obligations under the Draw Note, the Security Agreement, the Purchase Agreement (as amended hereby) and this Agreement, Covenant Group, for itself and its respective representatives, officers, directors, members, shareholders, attorneys, agents, successors and assigns hereby each, jointly and severally, release and forever discharge Triumph, and its representatives, officers, directors, members, shareholders, attorneys, employees, agents, private investors, owners, subsidiaries, parent companies, related companies, affiliates, principals, partners, employees, lienholders, indemnitors, attorneys, trustees, receivers, executors, administrators, predecessors, successors and assigns of and from any and all claims, demands, damages, penalties, attorney fees, costs, equitable relief or rights and causes of action of whatsoever kind and nature, known or unknown, arising out of or related to the transactions contemplated by the Purchase Agreement, the Pending Dispute, the Lawsuit, or the Over-Formula Advances, including all claims at law or in equity, with the caveat that Triumph shall not be released from its contractual obligations under the Purchase Agreement (as amended hereby) or under this Agreement (“Covenant Group Released Claims”).

 

Covenant Group acknowledges that it may hereafter discover claims or facts in addition to or different from those that they now know or believe to exist and which, if known or suspected at the time of executing this Agreement, may have materially affected this settlement and release. Nevertheless, except for all obligations as expressly set forth in this Agreement, the Draw Note and/or the Security Agreement, and all obligations remaining under the Purchase Agreement (as amended hereby) and related agreements, Covenant Group hereby waives any right, claim or cause of action that might arise as a result of such different or additional claims or facts. Covenant Group acknowledges that it understands the significance and consequence of such release. In connection with this release, Covenant Group acknowledges and reaffirms the representations and warranties made herein and have independently arrived at the conclusion that the consideration for this Agreement is fair and appropriate. Covenant Group further covenants and agrees that they shall not commence or maintain any suit against Triumph, or any individual Party, whether at law or in equity, relating in any way to the Covenant Group Released Claims.

 

11 Release of the Covenant Group. Upon the Effective Date, and subject to the existing and/or contemporaneous obligations under the Draw Note, the Security Agreement, the Purchase Agreement (as amended hereby) and this Agreement, Triumph, for itself and its respective representatives, officers, directors, attorneys, agents, subsidiaries, related companies, predecessors, successors and assigns hereby each, jointly and severally, release and forever discharge the Covenant Group, and its representatives, officers, directors, members, shareholders, attorneys, employees, agents, private investors, owners, subsidiaries, parent companies, related companies, affiliates, principals, partners, employees, lienholders, indemnitors, attorneys, trustees, receivers, executors, administrators, predecessors, successors and assigns of and from any and all claims, demands, damages, penalties, attorney fees, costs, equitable relief or rights and causes of action of whatsoever kind and nature, known or unknown, arising out of or related to the transactions contemplated by the Purchase Agreement, the Pending Dispute, the Lawsuit, or the Over-Formula Advances, including all claims at law or in equity, with the caveat that Covenant shall not be released from its contractual obligations under the Purchase Agreement (as amended hereby) or under this Agreement (“Triumph Released Claims”).

 

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Triumph acknowledges that it may hereafter discover claims or facts in addition to or different from those that it now knows or believes to exist and which, if known or suspected at the time of executing this Agreement, may have materially affected this settlement and release. Nevertheless, except for all obligations as expressly set forth in this Agreement, the Draw Note and/or the Security Agreement, and all obligations remaining under the Purchase Agreement (as amended hereby) and related agreements, Triumph hereby waives any right, claim or cause of action that might arise as a result of such different or additional claims or facts. Triumph acknowledges that it understands the significance and consequence of such release. In connection with this release, Triumph acknowledges and reaffirms the representations and warranties made herein and has independently arrived at the conclusion that the consideration for this Agreement is fair and appropriate. Triumph further covenants and agrees that they shall not commence or maintain any suit against Covenant Group, or any individual Party, whether at law or in equity, relating in any way to the Triumph Released Claims.

 

12 No Marshalling. Triumph shall not be subject to the equitable doctrine of “marshaling” or any other similar doctrine with respect to any Collateral, including Additional Equipment Collateral, or otherwise.

 

13 Representations and Warranties. By execution hereof, each Party warrants that it owns and holds the claims being released and further represents, covenants, and warrants that no claim released herein has previously been conveyed, assigned, or in any manner transferred, in whole or in part, to any third party. The Parties acknowledge that the covenants contained in this Agreement provide good and sufficient consideration for every promise, duty, release, obligation, and the like contained in this Agreement. The Parties acknowledge that each has carefully read and reviewed this Agreement; each is of legal age and is legally competent to execute this Agreement; each individual signing in a representative capacity is so authorized; each freely executes this Agreement; and each executes this Agreement for the recited purposes and considerations after having had the opportunity to seek the advice of counsel. The Parties acknowledge and agree that each is relying solely on each Party’s own knowledge and investigation of the facts underlying the dispute, and that the Parties are not relying upon any statement or representation (except for the statements and representations made in this Agreement), or duty to disclose, by any other Party to this Agreement.

 

14 Entire Agreement. This Agreement is intended to constitute a fully integrated agreement, however, this Agreement shall also be construed in conjunction with the Purchase Agreement (as amended hereby) as well as the Line of Credit agreements and any Exhibits attached hereto, and there are no oral agreements, representations, or understandings between the parties. Any amendments or modifications of this Agreement, in order to be effective, shall be in writing and signed by the parties hereto or thereto. A waiver or release with reference to any one event shall not be construed as continuing, as a bar to, or as a waiver or release of, any subsequent right, remedy, or recourse as to a subsequent event.

 

15 Reserved.

 

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16 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties hereto, and their respective personal representatives, successors and assigns, and no other person or persons shall have any rights or remedies under or by reason of this Agreement.

 

17 Mutual Confidentiality.

 

17.1 Each Party agrees that all documents, communications, drafts and other materials of any kind relating to the negotiation of this Agreement by the Parties that either Party has provided or shall provide, exchange or disclose to the other Party, shall be “Confidential Information” for purposes of this Agreement.

 

17.2 No Party, and no person within the control of a Party (together with the Parties, “Covered Persons”), shall disclose any Confidential Information, except that disclosure of such information shall be permitted in the following limited circumstances: (a) in an action by any Party to enforce this Agreement to the extent reasonably required for the purposes of enforcement; (b) in response to a court order, subpoena or other demand made in accordance with applicable law; (c) (i) as a Covered Person reasonably determines, after consulting with counsel, to be required by law, including U.S. federal securities laws, including any change in law, (ii) in response to a request to a Party from a regulator, examiner, or rating agency, provided the Covered Person takes reasonable steps to maintain the confidentiality of the Confidential Information, or (iii) in communications with a Governmental Entity having jurisdiction over such Party, whether in response to a request made by such a Governmental Entity or an affirmative disclosure made by a Party to such a Governmental Entity, provided the Covered Person takes reasonable steps to maintain the confidentiality of the Confidential Information; or (d) to such Party’s parents or subsidiaries or affiliates, their respective directors, officers, external or internal agents, representatives, professional advisers, attorneys, accountants, auditors, insurers and reinsurers, successors, assigns and employees, who have a need to know and are under a duty to implement appropriate measures to maintain the confidentiality, security and integrity of such information, and who have a need to know and agree to be bound by this provision.

 

17.3 Should a Party receive a request for disclosure or become required by law to disclose any Confidential Information, pursuant to Section 17.2(b) herein after the Effective Date (and excluding any subpoena, document request, or other discovery served prior to the Effective Date), the Party receiving such a request shall promptly, and in no case more than five (5) business days following receipt of such a request (so long as it is possible and legally permitted to provide such notification), notify the other Parties to afford them the opportunity to object or to seek a protective order prior to the disclosure of any such information.

 

17.4 Subject to the terms of Sections 17.1 and 17.2, each Party agrees that (a) it shall use commercially reasonable efforts to obtain assurance that confidential treatment will be accorded to any Confidential Information that is provided to any Governmental Entity or to any other person, and (b) in the event that any Party determines it is required by law or otherwise to make a disclosure of Confidential Information permitted by the preceding sentence, it shall disclose the minimum amount of Confidential Information that it determines is reasonably required under the circumstances.

 

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17.5 For purposes of this Agreement, Confidential Information shall not include information that: (a) is or becomes generally available to the public other than as a result of disclosure by a Party in violation of this Agreement; (b) becomes available to a Party from a source other than the disclosing Party, provided that the receiving Party has no knowledge that such source is prohibited from disclosing such information to the receiving Party by a contractual, legal or fiduciary obligation or (c) is independently developed by a Party without reference to, or use of, the Confidential Information.

 

18 Time of the Essence. Time is of the essence hereunder.

 

19 Construction. Each Party has cooperated in the drafting and preparation of this Agreement. Hence, in any construction to be made of this Agreement, the same shall not be construed against any party. The terms of this Agreement shall expressly control over the Purchase Agreement as provided herein and over any provisions in the Purchase Agreement to the extent of any conflict or patent ambiguity; otherwise, the terms of this Agreement, together with the Line of Credit evidenced by the Draw Note, the Security Agreement, and the terms of the Purchase Agreement are intended to be harmonious and construed in conjunction with each other.

 

20 Reasonably Necessary and Further Documents. The Parties agree to promptly execute all such further and additional documents as shall be reasonable, convenient, necessary, and desirable to carry out the provisions of this Agreement.

 

21 Severability. If any provision or part of this Agreement is held invalid by a court of competent jurisdiction, or unenforceable for any reason, the remainder of this Agreement shall nonetheless remain in full force and effect.

 

22 Choice of Law; Venue. This Agreement and all transactions contemplated hereby shall be governed by, construed, and enforced in accordance with the substantive laws of the State of Texas, without regard to the laws governing conflicts of law. The exclusive forum and venue for resolution of disputes arising under or relating to this Agreement shall be in the courts located in Dallas County, Texas.

 

23 Attorneys’ Fees. If any Party shall seek to enforce or protect its rights under this Agreement, or under any document or instrument executed and delivered in connection herewith, in any action, suit, arbitration, or other proceeding, including all bankruptcy cases and proceedings, and including any appeals or petitions therefrom, the Prevailing Party shall be entitled to recover reasonable attorneys’ fees, costs, and expenses from the non-Prevailing Party.

 

24 Survival. The representations and warranties contained in this Agreement and the performances and obligations arising under this Agreement shall survive execution and delivery of this Agreement.

 

25 Dismissal. On or before the date five business days after the date hereof Covenant agrees to voluntarily dismiss, with prejudice, the Lawsuit.

 

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26 No Admission. The Parties acknowledge, represent, and agree that this Agreement does not constitute and shall not be construed as an admission either of liability for or a lack of merit in any released claim. Execution of this Agreement shall not be construed as an admission that a Party violated any law or breached any covenant or obligation owed to another.

 

27 Waiver of Trial by Jury. THE PARTIES HERETO WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIMS, DEMAND, ACTION OR CAUSE OF ACTION ARISING HEREUNDER, IN ANY WAY CONNECTED WITH OR RELATED TO THIS AGREEMENT WHETHER NOW EXISTING OR HEREINAFTER ARISING AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

 

28 No Third-Party Beneficiary Rights.  This Agreement is not intended to and shall not be construed to give any third party any interest or rights (including, without limitation, any third party beneficiary rights) with respect to or in connection with this Agreement, or provision contained herein or contemplated hereby, except as otherwise expressly provided for in this Agreement.

 

29 Counterparts; Electronic Signatures. This Agreement may be executed in any number of counterparts, each of which shall constitute an original as against any party whose signature appears on them, all of which together shall constitute a single instrument. This Agreement shall become binding when one or more counterparts, individually or taken together, bear the signatures of all parties. Execution of this Agreement may be done through a traditional, manual signature, or the Parties agree that an electronic signature may be used and that the electronic signature of a Party included in this Agreement is intended to authenticate this writing and to have the same force and effect as manual signatures.  Electronic Signature means any electronic sound, symbol, or process attached to or logically associated with a record and executed and adopted by a party with the intent to sign such record, including facsimile or email electronic signatures pursuant to Texas Uniform Electronic Transactions Act (V.T.C.A., Bus. & C. § 322.001, et seq. and UCC § 1.108) as either may be amended from time to time.  Any electronic communication of data, whether by e-mail, tape, disk, or otherwise, a Party remits or causes to be remitted to the other Party shall be authentic and genuine.

 

 

[SIGNATURE PAGE FOLLOWS]

 

 

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COVENANT TRANSPORT SOLUTIONS, LLC

 

 

 

/s/ M. Paul Bunn

 

Name: M. Paul Bunn_____________________________

 

Title: Vice President, Chief Financial Officer, and Secretary

 

Date: 9/23/20

 

 

 

COVENANT LOGISTICS GROUP, INC.,

for itself and on behalf of the other Covenant Group entities

 

 

 

/s/ M. Paul Bunn______________________________

 

Name: M. Paul Bunn_____________________________

 

Title: Vice President, Chief Financial Officer, and Secretary

 

Date: 9/23/20 

 

 

 

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ADVANCE BUSINESS CAPITAL LLC d/b/a TRIUMPH BUSINESS CAPITAL

 

 

 

/s/ Geoffrey P. Brenner_____________________

 

Name: Geoffrey P. Brenner_________________

 

Title: Chief Executive Officer_______________

 

Date: 9/23/20 ___________________________

 

 

TRIUMPH BANCORP, INC.,

for itself and on behalf of the other Triumph entities

 

 

 

/s/ Adam Nelson_________________________

 

Name: Adam Nelson______________________

 

Title: Executive Vice President & General Counsel

 

Date: 9/23/20 ___________________________

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Approved as to Form:

 

 

 

Counsel to Covenant Logistics Group

 

By: /s/ Mark A. Scudder_________________

 

 

 

Counsel to Triumph

 

By: /s/ Kevin Schutte_______________

 

 

 

 

 

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SEVENTEENTH AMENDMENT TO

THIRD AMENDED AND RESTATED CREDIT AGREEMENT

 

This SEVENTEENTH AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”), dated as of September 23, 2020, is by and among COVENANT TRANSPORT, INC., a Tennessee corporation (“CTI”), CTG LEASING COMPANY, a Nevada corporation (“CTGL”), SOUTHERN REFRIGERATED TRANSPORT, INC., an Arkansas corporation (“SRT”), COVENANT ASSET MANAGEMENT, LLC, a Nevada limited liability company (“CAM”), COVENANT TRANSPORT SOLUTIONS, LLC, a Nevada limited liability company formerly known as Covenant Transport Solutions, Inc. (“CTS”), STAR TRANSPORTATION, INC., a Tennessee corporation (“Star”), and COVENANT LOGISTICS, INC., a Nevada corporation (“CLI”), LANDAIR TRANSPORT, INC., a Tennessee corporation (“LA Transport”), LANDAIR LOGISTICS, INC., a Tennessee corporation (“LA Logistics”), and LANDAIR LEASING, INC. (“LA Leasing”), a Tennessee corporation (“Logistics”, and together with CTI, CTGL, SRT, CAM, CTS, Star, CLI, LA Transport, LA Logistics, and LA Leasing, individually a “Borrower” and collectively, “Borrowers”), COVENANT LOGISTICS GROUP, INC., a Nevada corporation formerly known as Covenant Transportation Group, Inc. (“Parent”), TRANSPORT MANAGEMENT SERVICES, LLC, a Tennessee limited liability company (“TMS”), and LANDAIR HOLDINGS, INC., a Tennessee corporation (“LA Holdings”, and together with Parent, and TMS, individually, a “Guarantor” and collectively, “Guarantors”), the Lenders (defined below) party to this Amendment, and BANK OF AMERICA, N.A., a national banking association, as agent for Lenders (in such capacity, “Agent”). Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Credit Agreement (defined below).

 

R E C I T A L S:

 

A.     Obligors, the lenders from time to time party thereto (the “Lenders”) and the Agent are parties to that certain Third Amended and Restated Credit Agreement, dated as of September 23, 2008 (as previously amended, and as otherwise amended, restated or modified from time to time, the “Credit Agreement”).

 

B.     Obligors, Lenders and Agent previously entered into a Consent Agreement dated as of July 8, 2020 (the “Consent Agreement”), pursuant to which Agent and Lenders consented to the sale by CTS of certain of its assets to Advance Business Capital LLC (the “Purchaser”) pursuant to an Accounts Receivable Purchase Agreement dated as of July 8, 2020 among CTS, Purchaser and Triumph Bancorp, Inc. (“Triumph”; Purchaser and Triumph, collectively, the “Triumph Entities”), and certain other transactions in connection therewith (collectively defined in the Consent Agreement as the “Sale Transactions”).

 

C.     A dispute has arisen between CTS and the Triumph Entities regarding the Sale Transactions, following which CTS commenced litigation against Purchaser which is currently pending before the United States District Court for the Northern District of Texas, Dallas Division (the “District Court”) as Case No. 3:20-cv-2590 (the “Litigation”). CTS and the Triumph Entities desire to settle the Litigation by amending the terms of the Sale Transactions pursuant to an Account Management Agreement, Amendment to Purchase Agreement and Mutual Release dated on or about the date hereof (the “Account Management Agreement”), pursuant to which, among other things:

 

1.     CTS agrees to sell 630,268 shares of common stock of Triumph received as part of the Sales Transaction (the “Triumph Common Stock”), and pay the cash proceeds thereof to the Triumph Entities;

 

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2.     The Indemnification Obligations (as defined in the Consent Agreement) currently owing by CTS under the Purchase Agreement will be replaced by CTS’s agreement to indemnify the Triumph Entities for a portion of up to $60,000,000 in potential losses in connection with certain advances made by CTS to the Over-Formula Advance Factoring Clients (as defined in the Account Management Agreement), the first $30,000,000 of such losses to be borne solely by CTS and Parent (collectively, the “Covenant Entities”), the second $30,000,000 to be borne equally by the Covenant Entities and the Triumph Entities (the “Modified Indemnification Obligations”);

 

3.     The obligation of Purchaser to pay CTS the Earnout Amount under (and as defined) in the Purchase Agreement as presently in effect will be eliminated;

 

4.     The Covenant Entities will issue a certain Draw Note to the order of TBK Bank, SSB (“TBK Bank”), in the maximum original principal amount of $45,000,000 (the “Draw Note”), the proceeds of which are to be used solely to pay the Modified Indemnification Obligations owing to the Triumph Entities; and

 

5.     To secure the Covenant Entities’ obligations under the Draw Note and Account Management Agreement, the Covenant Entities and certain other Subsidiaries of Parent will enter into a certain Security Agreement, pursuant to which the Covenant Entities and such Subsidiaries will grant in favor of TBK Bank (as the holder of the Draw Note and as administrative agent for the Triumph Entities under the Account Management Agreement) a first priority Lien on certain Revenue Equipment over which Agent does not have a perfected Lien and, in connection therewith, Agent will be required to release any Lien on such Revenue Equipment (the transactions described in paragraphs (1)-(5), collectively, the “Contemplated Transactions”).

 

D.     The Contemplated Transactions, if consummated, would not be permitted under the Credit Agreement due to the following: (i) the sale of Triumph Common Stock would not be permitted under Section 10.2.5 of the Credit Agreement, (ii) the additional Debt arising from the Modified Indemnification Obligations would not be permitted under Section 10.2.1 of the Credit Agreement, (iii) the additional Debt arising under the Draw Note would not be permitted under Section 10.2.1 of the Credit Agreement, (iv) the Liens granted in favor of TBK Bank under the Security Agreement would not be permitted under Section 10.2.2 of the Credit Agreement, and (v) the modification of the Purchase Agreement, to the extent disposing of any Property rights, would constitute an Asset Disposition that would not be permitted under Section 10.2.5 of the Credit Agreement.

 

 

 

E.     Obligors have requested that Agent and Lenders consent to the Contemplated Transactions and make certain other amendments to the Credit Agreement, and Agent and Lenders are willing to do so on the terms and subject to the conditions set forth below.

 

NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, and other good and valuable consideration, the parties hereto agree as follows:

 

1.     Recitals. The foregoing Recitals are accurate and are incorporated herein and made a part hereof for all purposes.

 

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2.     Consent.

 

(a)     Consent and Acknowledgment. Subject to the satisfaction of the conditions precedent set forth in Section 4 hereof, Agent and each of the undersigned Lenders hereby consent to the Contemplated Transactions.

 

(b)     Limited Consent. Parent, Borrowers, and the other Guarantors acknowledge that the consents and waivers in this Section 2 are granted by the Agent and the Lenders only for the specific instance and for the limited purpose set forth herein and shall not in any manner create a course of dealing or otherwise impair the future ability of the Agent to declare a Default or Event of Default or otherwise enforce the terms of any Loan Document if any similar or related transactions arise, or otherwise. Except as expressly set forth herein, each term and provision of the Credit Agreement continues in full force and effect.

 

3.     Amendments to Credit Agreement. Subject to the terms and conditions set forth herein, the Credit Agreement is hereby amended as follows:

 

(a)     Section 1.1 of the Credit Agreement is hereby amended by adding the following new definitions in proper alphabetical sequence:

 

Seventeenth Amendment Date: September 23, 2020.

 

TBK Bank: TBK Bank, SSB.

 

Triumph Account Management Agreement: that certain Account Management Agreement, Amendment to Purchase Agreement and Mutual Release entered into among CTS, Parent and the Triumph Entities, and approved by the United States District Court for the Northern District of Texas, Dallas Division, in Case No. Case No. 3:20-cv-2590, as in existence on the date the Agreed Order of Dismissal is entered by such court or as at any time amended, restated, supplemented, or otherwise modified with the prior written consent of Agent and Required Lenders; provided, that no such consent shall be required for amendments that (a) do not (i) increase the maximum principal amount of the Triumph Note, (ii) increase the amount or nature of collateral required to be pledged, or (iii) increase the maximum amount of losses for which CTS and Parent are liable, and (b) are not otherwise materially adverse to the Obligors, the Agent, or the Lenders.

 

Triumph Agreements: collectively, the Triumph Note, the Triumph Purchase Agreement, and the Triumph Security Agreement.

 

Triumph Collateral Account: one or more deposit accounts pledged by an Obligor in favor of TBK Bank pursuant to the Triumph Security Agreement into which no deposits are made other than deposits consisting exclusively of proceeds of Triumph Revenue Equipment.

 

Triumph Entities: collectively, Advance Business Capital LLC, a Delaware limited liability company, and Triumph Bancorp, Inc., a Texas corporation.

 

Triumph Liabilities: collectively, (a) Debt arising under the Triumph Note, less any repayments in respect thereof made on or after the Seventeenth Amendment Date, and (b) the liabilities and obligations (whether or not constituting Debt) owing by CTS and Parent to the Triumph Entities under the Triumph Purchase Agreement in respect of the indemnification of the Triumph Entities of losses arising with amounts owing to one or more of the Triumph Entities by the Over-Formula Advance Factoring Clients (as defined in the Triumph Account Management Agreement), in an aggregate amount under clauses (a) and (b) not to exceed $45,000,000 plus any interest, fees and expenses owing under the Triumph Note.

 

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Triumph Note: that certain Draw Note dated on or about the Seventeenth Amendment Date, made by CTS and Parent to the order of TBK Bank, in the original principal amount of $45,000,000, as in existence on such date or as at any time amended, restated, supplemented or otherwise modified with the prior written consent of Agent and Required Lenders.

 

Triumph Purchase Agreement: that certain Accounts Receivable Purchase Agreement dated as of July 8, 2020, among CTS and the Triumph Entities, as amended by the Triumph Account Management Agreement.

 

Triumph Revenue Equipment: any Revenue Equipment pledged by CTS, Parent or CTGL, LA Leasing, or one or more other Obligors under the Triumph Security Agreement, together with any proceeds thereof, to secure the Triumph Liabilities, (a) on the Seventeenth Amendment Date pursuant to the Triumph Security Agreement as in effect on such date, or (b) after the Seventeenth Amendment Date; provided that, no Revenue Equipment shall constitute Triumph Revenue Equipment if pledged (or sought to be pledged) after the Seventeenth Amendment Date, unless (i) Agent’s Lien has not been noted on the certificate of title for such Revenue Equipment, (ii) such Revenue Equipment has not been included as Eligible Revenue Equipment on any Borrowing Base Certificate or, if at any time included, the removal of such Revenue Equipment from the Borrowing Base would not result in an Overadvance, (iii) the value of such Revenue Equipment, when aggregated with all other collateral pledged to secure the Triumph Liabilities, does not exceed 120% of the amount necessary to comply with the LTV Ratio required under (and as defined in) the Rider to Security Agreement, and (iv) if a Trigger Period exists at the time of such pledge, Required Lenders have authorized in writing the release of Agent’s Lien on such Revenue Equipment.

 

Triumph Security Agreement: collectively, (a) that certain Security Agreement and that certain Rider to Security Agreement, each dated on or about the Seventeenth Amendment Date, among CTS, Parent, CTGL, LA Leasing, and TBK Bank, as in existence on such date, and (b) each supplement to the foregoing agreements for the purpose of adding or releasing Revenue Equipment as collateral thereunder or to add one or more other Obligors as pledgers thereunder, so long as, with respect to any such additional collateral, such Revenue Equipment is Triumph Revenue Equipment.

 

(b)     The definition of “Excluded Assets” in Section 1.1 of the Credit Agreement is hereby amended by deleting clause (d) thereof and replacing it with the following:

 

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(d) (i) any Daimler Revenue Equipment for so long as it secures the Daimler Credit Facility, (ii) any Triumph Revenue Equipment and the Triumph Collateral Account so long as any Triumph Liabilities remain outstanding, and (iii) Revenue Equipment and identifiable proceeds thereof in which a Lien is granted by the applicable grantor to secure Debt in an amount not to exceed $55,000,000 to facilitate Parent’s acquisition of one hundred percent (100%) of the outstanding Equity Interests of Landair Holdings, Inc. on or about July 3, 2018, and refinancing Debt in respect thereof that satisfies the Refinancing Conditions;

 

(c)     The definition of “Permitted Asset Disposition” in Section 1.1 of the Credit Agreement is hereby amended by deleting clause (B) and replacing it with the following:

 

(B) a disposition of Excluded Assets (including, without limitation, Triumph Revenue Equipment, Real Estate that does not constitute Eligible Real Estate, Daimler Revenue Equipment and other personal Property financed with Purchase Money Debt and subject to a Purchase Money Lien) where (i) in the case of any Triumph Revenue Equipment, the Net Proceeds are used to repay outstanding Revolver Loans (unless deposited into the Triumph Collateral Account) and (ii) for all other Excluded Assets, the proceeds are applied first to reduce or satisfy, as applicable, Debt secured by such Excluded Assets with any remaining Net Proceeds used to repay outstanding Revolver Loans, if any, or

 

(d)     Section 10 of the Credit Agreement is hereby amended by adding the following new Section 10.1.13 immediately after Section 10.1.12:

 

10.1.13          Triumph Agreements.

 

(a)     Notify Agent and Lender in writing of (i) any default or event of default under any Triumph Agreement, (ii) the commencement of any proceeding or action by any party to any Triumph Agreement to enforce any rights of such party under any such Triumph Agreement;

 

(b)     Deliver to Agent true, correct and complete copies of any order by any court in which any action or proceeding is pending with respect to any Triumph Agreement, including any order of dismissal;

 

(c)     Deliver to Agent, promptly upon the execution thereof, true, correct and complete copies of each amendment, supplement, schedule, joinder or other modification to the Triumph Security Agreement; and

 

(d)     In the event the Triumph Liabilities are repaid in full, CTS and Parent are otherwise released from all liabilities to TBK Bank or the Triumph Entities, or the Triumph Security Agreement is terminated, Obligors shall take shall take such actions as Agent deems appropriate under Applicable Law to obtain and perfect its Lien on any Revenue Equipment at any time pledged to TBK Bank to secure the Triumph Liabilities.

 

(e)     Section 10.2.1 of the Credit Agreement is hereby amended by (i) deleting the “and” at the end of clause (o) thereof, (ii) renumbering clause (p) as clause (q), and (iii) adding the following new clause (p) immediately after clause (o):

 

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(p)     the Triumph Liabilities; and

 

(f)     Section 10.2.2 of the Credit Agreement is hereby amended by (i) deleting the “and” at the end of clause (t) thereof, (ii) deleting the “.” at the end of clause (u) and substituting “; and” in lieu thereof, and (iii) adding the following new clause (v) at the end thereof:

 

(v)     Liens on Triumph Revenue Equipment and the Triumph Collateral Account in favor of TBK Bank so long as any Triumph Liabilities are outstanding.

 

(g)     Section 11.1 of the Credit Agreement is hereby amended by (i) deleting the “or” at the end of clause (m) thereof, (ii) deleting the “.” at the end of clause (n) and substituting “; or” in lieu thereof, and (iii) adding the following new clause (o) at the end thereof:

 

(o)     a default or event of default occurs under any Triumph Agreement after giving effect to any grace or cure period thereunder.

 

4.     Effectiveness; Conditions Precedent. The consent provided for in Section 2 hereof and the amendments provided in Section 3 hereof shall be effective as of the date set forth above upon satisfaction of each of the following, as determined by Agent:

 

(a)     Agent shall have received one or more counterparts of this Amendment duly executed by each of Borrowers, Guarantors and Lenders;

 

(b)     Agent and Lenders shall have received the final versions of the Draw Note and the Security Agreement, and the proposed Account Management Agreement as presented to the District Court for approval, and found the terms of each such agreement and instrument acceptable; and

 

(c)     no Default or Event of Default exists.

 

5.     Additional Covenant. To induce Agent and Required Lenders to enter into this Amendment, Obligors covenant and agree to deliver to Agent a true, correct and complete copy of each of the Account Management Agreement and Consent Motion for Approval submitted to the District Court promptly upon the filing thereof.

 

6.     Release of Agent’s Lien on Certain Revenue Equipment. Upon the effectiveness of this Amendment, Agent releases its Lien on all Revenue Equipment and other Property listed on Schedule A attached hereto.

 

7.     Acknowledgment of the Obligors. Borrowers and Guarantors, as Obligors, hereby acknowledge and agree that, to the best of their knowledge: (a) none of the Obligors has any defense, offset, or counterclaim with respect to the payment of any sum owed to Lenders or Agent under the Loan Documents, or with respect to the performance or observance of any warranty or covenant contained in the Credit Agreement or any of the other Loan Documents; and (b) Agent and Lenders have performed all obligations and duties owed to the Obligors through the date of this Amendment.

 

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8.     Consent and Reaffirmation of Guaranty Agreements.

 

(a)      Parent hereby consents, acknowledges and agrees to the amendments set forth herein and hereby confirms and ratifies in all respects the Parent Guaranty (including without limitation, the continuation of Parent’s payment and performance obligations thereunder upon and after the effectiveness of this Amendment and the amendments contemplated hereby) and the enforceability of the Parent Guaranty against the Parent in accordance with its terms.

 

(b)     Each of TMS and LA Holdings hereby consents, acknowledges and agrees to the amendments set forth herein and hereby confirms and ratifies in all respects its Guaranty (including without limitation, the continuation of each of TMS’s and LA Holdings’ payment and performance obligations thereunder upon and after the effectiveness of this Amendment and the amendments contemplated hereby) and the enforceability of its Guaranty against TMS and LA Holdings in accordance with its terms.

 

9.     Representations and Warranties of the Obligors. Borrowers and Guarantors, as Obligors, represent and warrant to Agent and Lenders that:

 

(a)     Compliance with Credit Agreement. On the date hereof, no Default or Event of Default has occurred and is continuing;

 

(b)     Representations and Warranties. On the date hereof, the representations and warranties of each Obligor in the Loan Documents are true and correct in all material respects (except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct in all material respects as of such earlier date);

 

(c)     Power and Authority. Each Obligor is duly authorized to execute, deliver and perform this Amendment. The execution, delivery and performance of this Amendment and the Credit Agreement, as amended hereby, have been duly authorized by all necessary action, and do not (i) require any consent or approval of the holders of Equity Interests of the Obligors, other than those already obtained; (ii) contravene the Organic Documents of any Obligor; (iii) violate or cause a default under any Applicable Law, Material Contract or Material License; or (iv) result in or require the imposition of any Lien (other than Permitted Liens) on any Property of any Obligor; and

 

(d)     Enforceability. This Amendment and the Credit Agreement, as amended hereby, are legal, valid and binding obligations of each Obligor, enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.

 

10.     Effect on Credit Agreement. Except as specifically amended hereby, the terms and provisions of the Credit Agreement and the other Loan Documents are, in all other respects, ratified and confirmed and remain in full force and effect. Except as expressly set forth herein, the amendments provided herein shall not by implication or otherwise limit, constitute a waiver of, or otherwise affect the rights and remedies of Lenders or Agent under the Credit Agreement or any other Loan Document, nor shall they constitute a waiver of any Event of Default, nor shall they alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document. Each of the amendments provided herein shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to by such amendments. No reference to this Amendment need be made in any notice, writing, or other communication relating to the Credit Agreement and the other Loan Documents, any such reference to the Credit Agreement and the other Loan Documents to be deemed a reference thereto as respectively amended by this Amendment. All references to the Credit Agreement and the other Loan Documents in any document, instrument, or agreement executed in connection with the Credit Agreement and the other Loan Documents will be deemed to refer to the Credit Agreement and the other Loan Documents as respectively amended hereby.

 

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11.     Instrument Pursuant to Credit Agreement. This Amendment is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement.

 

12.     Further Acts. Each of the parties to this Amendment agrees that at any time and from time to time upon the written request of any other party, it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Amendment.

 

13.     Successors. This Amendment shall be binding upon and inure to the benefit of Obligors, Agent, Lenders, and their respective successors and permitted assigns, except that (a) no Obligor shall have the right to assign its rights or delegate its obligations under this Amendment or any Loan Documents; and (b) any assignment by a Lender must be made in compliance with Section 13.3 of the Credit Agreement.

 

14.     Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAW PRINCIPLES OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW (BUT GIVING EFFECT TO FEDERAL LAWS RELATING TO NATIONAL BANKS).

 

15.     Consent to Forum. EACH OBLIGOR, HEREBY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL OR STATE COURT SITTING IN OR WITH JURISDICTION OVER THE STATE OF NEW YORK, IN ANY PROCEEDING OR DISPUTE RELATING IN ANY WAY TO THIS AMENDMENT, AND AGREES THAT ANY SUCH PROCEEDING SHALL BE BROUGHT BY IT SOLELY IN ANY SUCH COURT. EACH OBLIGOR, IRREVOCABLY WAIVES ALL CLAIMS, OBJECTIONS AND DEFENSES THAT IT MAY HAVE REGARDING SUCH COURT’S PERSONAL OR SUBJECT MATTER JURISDICTION, VENUE OR INCONVENIENT FORUM. EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 14.3.1 OF THE CREDIT AGREEMENT. Nothing herein shall limit the right of Agent or any Lender to bring proceedings against any Obligor in any other court, nor limit the right of any party to serve process in any other manner permitted by Applicable Law. Nothing in this Amendment shall be deemed to preclude enforcement by Agent of any judgment or order obtained in any forum or jurisdiction. Notwithstanding the foregoing, Section 14.14 of the Credit Agreement is incorporated herein by reference and shall apply to this Amendment.

 

16.     Counterparts. This Amendment may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of a signature page of any Loan Document by telecopy or electronic mail shall be as effective as delivery of a manually executed counterpart of such agreement.

 

17.     Severability. Wherever possible, each provision of this Amendment shall be interpreted in such manner as to be valid under Applicable Law. If any provision is found to be invalid under Applicable Law, it shall be ineffective only to the extent of such invalidity and the remaining provisions of this Amendment shall remain in full force and effect.

 

18.     Entire Agreement. This Amendment, together with all the Loan Documents (collectively, the “Relevant Documents”), sets forth the entire understanding and agreement of the parties hereto in relation to the subject matter hereof and supersedes any prior negotiations and agreements among the parties relating to such subject matter. No promise, condition, representation or warranty, express or implied, not set forth in the Relevant Documents shall bind any party hereto, and no such party has relied on any such promise, condition, representation or warranty. Each of the parties hereto acknowledges that, except as otherwise expressly stated in the Relevant Documents, no representations, warranties or commitments, express or implied, have been made by any party to the other in relation to the subject matter hereof or thereof. None of the terms or conditions of this Amendment may be changed, modified, waived or canceled orally or otherwise, except in writing and in accordance with Section 14.1 of the Credit Agreement.

 

[Signature Pages Follow]

 

 

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IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written.

 

 

BORROWERS:

COVENANT TRANSPORT, INC.

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Executive Vice President, Chief Financial Officer, and Secretary

 

 

CTG LEASING COMPANY

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Vice President and Secretary

 

 

COVENANT ASSET MANAGEMENT, LLC

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Vice President and Secretary

 

 

COVENANT TRANSPORT SOLUTIONS, LLC

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Vice President, Chief Financial Officer, and Secretary

 

 

SOUTHERN REFRIGERATED TRANSPORT, INC.

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Vice President and Secretary

 

 

[Signatures continued on next page]

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STAR TRANSPORTATION, INC.

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Vice President and Secretary

 

 

COVENANT LOGISTICS, INC. 

By: /s/ David R. Parker

Name: David R. Parker

Title: Chief Executive Officer, President, Secretary, and Treasurer

 

 

LANDAIR TRANSPORT, INC.

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Vice President, Secretary, and Treasurer

 

 

LANDAIR LOGISTICS, INC.

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Vice President, Secretary, and Treasurer

 

 

LANDAIR LEASING, INC.

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Vice President, Secretary, and Treasurer

 

[Signatures continued on next page]

 

 

 

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GUARANTORS:

COVENANT LOGISTICS GROUP, INC.

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Executive Vice President, Chief Financial Officer, and Secretary

   
 

TRANSPORT MANAGEMENT SERVICES, LLC

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Vice President and Secretary

 

 

LANDAIR HOLDINGS, INC.

By: /s/ M. Paul Bunn

Name: M. Paul Bunn

Title: Vice President, Secretary, and Treasurer

 

 

[Signatures continued on next page]

 

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AGENT AND LENDERS:

BANK OF AMERICA, N.A.,

as Agent and Lender

By: /s/ Douglas Cowan

Name: Douglas Cowan

Title: Senior Vice President

 

[Signatures continued on next page]

 

 

12

 

 

 

JPMORGAN CHASE BANK, N.A.

By: /s/ Angela Leake

Name: Angela Leake

Title: Authorized Officer

 

 

 

 

 

 

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DRAW NOTE

 

$45,000,000.00

Dallas

Texas

September 23, 2020

(Principal Amount)

(City)

(State)

(Date)

 

FOR VALUE RECEIVED, COVENANT LOGISTICS GROUP, INC., a Nevada corporation (“CVLG”), and COVENANT TRANSPORT SOLUTIONS, LLC, a Nevada limited liability company (“Covenant”, and together with CVLG, hereinafter together called “Borrower”) promises and agrees to pay to the order of TBK BANK, SSB, having offices at 12700 Park Central Drive, Suite 1700, Dallas, TX 75251 (hereinafter referred to as “Lender”), or at such other place as Lender may from time to time designate, on that date which is one (1) year after the Draw Expiry Date (as defined below) (“Maturity Date”) the principal amount of FORTY FIVE MILLION DOLLARS ($45,000,000.00), or such lesser sum as Lender may loan and/or advance to or for the benefit of Borrower on or after the date hereof together with interest thereon in accordance with the terms hereof, payable in lawful money of the United States of America. The proceeds of the note shall be used only to finance Borrower’s indemnification obligations to Triumph Bancorp, Inc. and Advance Business Capital, LLC (collectively, “Triumph”) in accordance with the Account Management Agreement, Amendment to Purchase Agreement and Mutual Release dated September 23, 2020 by and between Borrower and Triumph (the “Account Management Agreement”). This note may not be terminated by Borrower without the prior written consent of Lender and Triumph prior to the earliest of (i) payment in full of all obligations owing hereunder on or after the Draw Expiry Date, (ii) the date on which Borrower has made payments under the Account Management Agreement (or Lender has made such payments on Borrower’s behalf in accordance with the terms hereof) in an aggregate amount equal to the Total Indemnification Obligations (as defined in the Account Management Agreement), and (iii) the date on which Borrower and Triumph agree in writing.

 

Borrower may borrow pursuant to this note until the Draw Expiry Date (as defined below) in one or more advances, provided, however, that the maximum aggregate principal amount advanced hereunder (the “Maximum Permitted Amount”) shall at no time exceed the sum of FORTY FIVE MILLION DOLLARS ($45,000,000.00). The “Draw Expiry Date” means September 23, 2025.

 

The amount outstanding hereunder shall accrue interest at the Interest Rate, which shall be adjusted quarterly on the first day of each quarter commencing on January 1, 2021. The “Interest Rate” shall be a per annum rate equal to one and one-half (1.5) percentage points over the one (1) month USD LIBOR as quoted by Lender from the Bloomberg Financial Service or any successor thereto, provided, however, that USD LIBOR for this purpose shall be deemed to be at least 0.25%. In the event USD LIBOR is phased out or otherwise becomes no longer available, the Interest Rate shall be determined using a replacement benchmark that is used under Borrower’s senior revolving credit facility with Bank of America (or any successor facility) or, if no such replacement benchmark is used under such facility, the Interest Rate shall be the interest rate charged under such facility. In the event the Interest Rate is changed pursuant to the preceding sentence, the parties hereto will, to the extent requested by any other party, enter into an amendment to this Note providing for the new Interest Rate. Interest shall calculated on the basis of a 360 day year for the actual number of days elapsed, unless such calculation would result in a usurious rate, in which event such calculation shall be on the basis of a 365 day year (but in no event shall such rate exceed any maximum permitted by applicable law).

 

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Commencing on November 1, 2020 and continuing on the same day of each consecutive month thereafter until maturity, Borrower shall make monthly payments of all accrued interest. The outstanding principal balance under this note, along with all other amounts accrued and owing hereunder, shall be due and payable in full on the Maturity Date. Payments shall be applied first to accrued and unpaid interest, then to late charges, with the remainder applied to reduction of principal if any, at Lender’s sole discretion. Borrower shall pay to Lender on demand, on each payment that remains overdue for more than ten (10) days (or such longer period as required by law) after its due date, interest from the date such amounts are due until paid on the unpaid indebtedness (excluding unpaid late charges) (the “Default Rate”) which is the lesser of: (a) the maximum lawful rate per annum which Lender is permitted to charge or (b) the Interest Rate plus five (5) percentage points, until paid in full; and if this note is placed in the hands of an attorney to collect or enforce, a reasonable sum as attorney’s fees.

 

The unpaid principal balance of this note at any time shall be the aggregate of all amounts lent or advanced hereunder by Lender, less the amount of payments of principal made hereon by or for the account of Borrower. It is contemplated that by reason of payments hereon there may be times when no indebtedness is due and owing hereunder; but notwithstanding such occurrences, this note shall remain valid and shall be in full force and effect as to loans and/or advances made pursuant to and under the terms of this note subsequent to each such occurrence. All loans or advances and all payments made hereunder on account of principal or interest may be endorsed by Lender on a Schedule attached to and made a part hereof; but whether or not Lender shall create and attach such Schedule and endorse advances and payments thereon, the amount of all payments and advances as shown on the books and records of Lender shall be conclusive absent manifest error.

 

In the event that the aggregate principal amount advanced hereunder at any time, for any reason, exceeds the Maximum Permitted Amount (as same, from time to time, is reduced), Borrower shall forthwith pay to Lender a sum sufficient to reduce the aggregate amount advanced to the Maximum Permitted Amount. Any principal amount in excess of the Maximum Permitted Amount shall in all respects be deemed to be included among the loans and/or advances made pursuant to the terms of this note and shall bear interest at the rate herein provided. Upon the occurrence and during the continuance of an Event of Default (as defined in the Security Agreement securing this note (the “Security Agreement”)) Lender may declare a default and accelerate the indebtedness due hereunder.

 

This note may be prepaid in full or in part at any time without premium or penalty.

 

If, under the Account Management Agreement, Borrower receives a Written Indemnification Call (as defined in the Account Management Agreement) and does not pay the amount required by the Account Management Agreement with respect to such Written Indemnification Call within ten (10) days, then Triumph may request from Lender that an advance be made hereunder to fund such amount, and Lender shall without any further direction, and notwithstanding any direction to the contrary from Borrower, advance funds hereunder in satisfaction of the amount owed with respect to the Written Indemnification Call (provided no Event of Default has occurred and is continuing, in which case Lender may at its option make such advance). Lender shall not be required to advance any sum which would result in the aggregate amount advanced exceeding the Maximum Permitted Amount. By its signature below, Borrower irrevocably authorizes Lender to make advances on this note in accordance with the provisions of this paragraph, which authorization shall be deemed to be a power coupled with an interest which cannot be revoked.

 

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Upon the occurrence and during the continuation of an Event of Default, Lender may, at its option, without notice or demand, accelerate the maturity of the indebtedness then outstanding under this note and declare same to be at once due and payable whereupon it shall be and become immediately due and payable. Notwithstanding such acceleration, Lender may continue to advance funds under this note in accordance with the terms hereof. Borrower also agrees to pay Lender’s costs and expenses including but not limited to reasonable attorney’s fees incurred in enforcing and/or collecting this note. Borrower, all indorsers, guarantors and any other party liable on this note waive presentment for payment, demand, protest, notice of protest and notice of non-payment, default and dishonor, notice of intent to accelerate, notice of acceleration, and further, to the extent allowed by law, waive all benefit of valuation, appraisement and exemption laws. Lender may, without notice, extend the time of payment of this note, postpone the enforcement hereof, grant any other indulgence, add or release any party primarily or secondarily liable hereon and/or release or change any collateral securing this note without affecting or diminishing Lender’s right of recourse against Borrower, all indorsers, guarantors and all other parties liable on this note, which right is hereby expressly reserved.

 

In the event this note is prepaid in full at any time, whether voluntarily or involuntarily, Borrower shall: (i) give five (5) days’ prior written notice to Lender specifying the date and amount of any proposed voluntary prepayment and the indebtedness being voluntarily prepaid; (ii) pay the amount specified in such voluntary prepayment notice, in good funds, on the date specified in such notice; and (iii) simultaneously pay, in good funds, all principal, interest, late charges, costs, expenses and other charges accrued and/or due to Lender through the date of any such voluntary prepayment, but in no event shall such amount exceed the maximum amount permitted by applicable law and execute and deliver to Lender a written termination of this note.

 

It is the intention of Borrower and Lender to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary herein or in any agreement entered into in connection with or as security for this note, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this note or under any of the other aforesaid agreements or otherwise in connection with this note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be cancelled automatically and if theretofore paid, shall be credited on this note by the Lender or (to the extent that this note shall have been or would thereby be paid in full) refunded to Borrower; and (ii) in the event that maturity of this note is accelerated by reason of an election by the Lender resulting from any default hereunder or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this note or otherwise shall be cancelled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on this note or (to the extent that this note shall have been or would thereby be paid in full) refunded to Borrower. Notwithstanding anything to the contrary in this note or any related writing, all agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of demand for payment or acceleration of the maturity hereof or otherwise, shall the interest contracted for, charged or received by Lender exceed the maximum amount permissible under applicable law. The right to accelerate maturity of sums due under this note does not include the right to accelerate any interest which has not otherwise been earned on the date of such acceleration, and Lender does not intend to charge or collect any unearned interest in the event of acceleration. If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to Lender shall be reduced to the maximum amount permitted under applicable law; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of the maximum lawful amount, an amount equal to any excess interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excess interest exceeds the unpaid balance of the principal hereof, such excess shall be refunded to Borrower. All interest paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period until payment in full of the principal (including the period of any extension or renewal hereof) so that the interest hereon for such full period shall not exceed the maximum amount permitted by applicable law. This paragraph shall control all agreements between Borrower and Lender.

 

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Borrower acknowledges and agrees that its obligations hereunder shall be secured by any first perfected priority security interest more fully described in any security agreement, mortgage, deed of trust or pledge executed by Borrower in favor of Lender, whether now existing or hereafter executed. There shall be no other claims, security interests/liens and/or encumbrances, other than Permitted Liens (as defined in the Security Agreement) on any of the Collateral (as defined in the Security Agreement).

 

This note has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and of the United States of America, without regard to its conflicts of laws principles or provisions and by any applicable federal laws. The proceeds from all loans and/or advances evidenced by this note are to be used for business purposes only, and no part thereof is to be used for primarily consumer, personal, family or household purposes. No resolution or other documents are required for Borrower to execute this Draw Note or any other documents or agreements.

 

As used in this note, the term “Lender” includes any future holder of this note. If more than one person signs this note, the obligations and agreements of each of them shall be joint and several.

 

BORROWER, AS A MATERIAL INDUCEMENT FOR LENDER TO MAKE LOANS OR OTHER FINANCIAL ACCOMMODATIONS AVAILABLE TO BORROWER, HEREBY IRREVOCABLY AGREES (a) TO SUBMIT TO THE EXCLUSIVE JURISDICTION AND VENUE OF THE U.S. DISTRICT COURT, NORTHERN DISTRICT, DALLAS DIVISION FOR RESOLUTION OF DISPUTES ARISING UNDER OR RELATING HERETO, BEING THE COURT TO WHICH THE LAWSUIT RESULTING IN THE ACCOUNT MANAGEMENT AGREEMENT WAS HEARD, UNLESS THE COURT REFUSES TO RETAIN JURISDICTION OVER THE CASE TO ENFORCE THE TERMS OF THE ACCOUNT MANAGEMENT AGREEMENT, IN WHICH EVENT THE EXCLUSIVE FORUM AND VENUE FOR RESOLUTION OF DISPUTES ARISING UNDER OR RELATING TO THIS NOTE SHALL BE IN ANY FEDERAL OR STATE COURT SITTING IN DALLAS, TEXAS, FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY WITH THE SOLE EXCEPTION THAT AN ACTION TO RECOVER POSSESSION OF ALL OR PART OF THE PROPERTY OR ANY OTHER ASSETS OF BORROWER OR ANY GUARANTOR, HOWEVER DENOMINATED, MAY, IN THE SOLE DISCRETION OF THE LENDER, BE BROUGHT IN A STATE OR FEDERAL COURT HAVING JURISDICTION OVER THE PROPERTY, AND/OR SUCH OTHER ASSETS; AND (B) IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY IN THE TEXAS COURTS, AND HEREBY FURTHER IRREVOCABLY AND UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION, SUIT OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

 

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BORROWER HEREBY WAIVES ALL RIGHTS TO A JURY TRIAL IN ANY DISPUTE ARISING IN CONNECTION WITH THE NOTE OR ANY OF THE DOCUMENTS, INSTRUMENTS OR AGREEMENT RELATED TO OR SECURING THE NOTE OR IN ANY WAY RELATED TO THE NEGOTIATION, ADMINISTRATION, MODIFICATION, EXTENSION OR COLLECTION OF THE LOAN EVIDENCED BY THE NOTE. BORROWER HAS CONFERRED SPECIFICALLY WITH RESPECT TO THIS WAIVER, AND HAS AGREED TO THIS WAIVER AFTER CONSULTATION WITH ITS COUNSEL AND WITH FULL UNDERSTANDING OF THE IMPLICATIONS HEREOF.

 

THIS NOTE AND ALL OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES. THIS NOTE MAY NOT BE CHANGED OR TERMINATED ORALLY.

 

[Signature Page to Follow]

 

5

 

BORROWER:

 

COVENANT LOGISTICS GROUP, INC.,

a Nevada corporation

 

 

 

By: /s/ M. Paul Bunn

   Name: M. Paul Bunn                    

   Title:     Executive Vice President, Chief Financial Officer, and Secretary                     

 

/s/ L.B. McKenzie                              

(Witness to Borrower’s Signature)

 

 

COVENANT TRANSPORT SOLUTIONS, LLC,

a Nevada limited liability company

 

 

By: /s/ M. Paul Bunn

   Name: M. Paul Bunn                    

   Title:     Vice President, Chief Financial Officer, and Secretary                    

 

/s/ L.B. McKenzie                              

(Witness to Borrower’s Signature)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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EXECUTIVE SEVERANCE AGREEMENT

 

THIS EXECUTIVE SEVERANCE AGREEMENT (“Agreement”) is made and entered into by and between Transport Management Services, LLC (“Company”) and __________ (“Executive”). Once signed by both parties, this Agreement will be deemed effective as of ________, 2020 (“Effective Date”).

 

1. Employment.  Executive is currently employed by the Company.   Executive has previously entered into that certain Confidentiality, Non-Disclosure and Restrictive Covenants Agreements (the “NDA”) with the Company (or an affiliate). In the event of a conflict between the terms set forth herein and those set forth in Executive’s NDA, the terms set forth herein shall control.

 

2. Term.  This Agreement shall commence on the Effective Date and end on the date that Executive’s employment is terminated. Executive shall be an at-will employee whose employment may be terminated by either Executive or the Company at any time, for any reason, with or without Cause, subject to the terms of this Agreement.

 

3. Compensation. As compensation for Executive’s services, the Company shall pay to Executive a base annualized salary (“Annual Base Salary”), which salary shall be paid in conformity with the Company’s pay practices generally applicable to Company executives. Executive shall be entitled to participate in all employee benefit plans and programs to the same extent generally available to similarly situated Company executives in accordance with the terms of those plans and programs. Executive acknowledges that, as of the Effective Date, Company’s parent company, Covenant Transportation Group, Inc. (“Parent”), is contemplating a name change and agrees that this Agreement will continue to apply after any such name change and any subsequent name changes occurring thereafter. Executive further agrees that Executive’s employment can be transferred within the Company Group by Parent without effecting the rights and obligations set forth in this Agreement, provided a Change in Control is not effected in connection with such transfer.

 

4. Termination.

 

4.1 Termination Procedures. 

 

(a) During the term of this Agreement, any purported termination of the Executive’s employment (other than by reason of death) shall be communicated by a Notice of Termination from one party hereto to the other party hereto in accordance with this Section 4.1(a). For purposes of this Agreement, a “Notice of Termination” shall mean, (i) in the case of a termination of the Executive’s employment by the Company without Cause, a written notice of termination, (ii) in the case of a termination of the Executive’s employment by the Company for Cause, a written notice of termination, which will indicate the conduct set forth in the definition of Cause set forth herein that the Executive was found to have violated, (iii) in the case of a termination of the Executive’s employment by the Company due to Executive’s Disability, a written notice of termination, and (iv) in the case of the Executive terminating his or her employment with the Company, a written notice of termination; provided, that a Notice of Termination by the Executive in the case of a Constructive Termination shall specify in reasonable detail the event or circumstance constituting the Constructive Termination under the definition of Constructive Termination set forth herein, and such notice of Constructive Termination must be provided by the Executive to the Company within ninety (90) days of the initial existence of the condition giving rise to the Constructive Termination. Notwithstanding anything to the contrary contained herein, if the Executive engages in conduct that the Company or Parent reasonably believes to be imminently harmful to the Company, Parent, or any subsidiary or affiliate of the Company or Parent (collectively, the “Company Group”), the Company may terminate the Executive’s employment by giving the Executive a verbal Notice of Termination, which may be effective immediately, and which shall be effective for purposes of this Agreement.

 

(b) “Date of Termination” with respect to any purported termination of the Executive’s employment during the term of this Agreement shall mean:

 

(i)     if Executive’s employment is terminated by the Company for Disability, the date specified in the Notice of Termination (provided that the Executive shall not have returned to the full-time performance of the Executive’s duties before the date set forth in the Notice of Termination);

 

(ii)     if Executive’s employment is terminated because of Executive’s death, immediately upon the death of Executive;

 

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(iii)     if Executive's employment is terminated by the Company for any reason other than Executive’s death or Disability, the date specified in the Notice of Termination; and

 

(iv)     in the case of termination by the Executive (including a Constructive Termination), thirty (30) days after the date such Notice of Termination is given; provided, in the case of a Constructive Termination, the Notice of Termination contemplated by Paragraph (a) of this Section 4.1 shall be deemed cancelled, void and of no further force and effect, and no payment obligation of the Company shall arise therefrom, if the Company rescinds or otherwise eliminates or reverses the action or event that would otherwise constitute grounds for Constructive Termination, and so notifies the Executive in writing within thirty (30) days of its receipt of the notice of Constructive Termination.

 

For purposes of this Agreement, the term “Disability” means a medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six (6) months, where such impairment causes the Executive to be unable to perform the duties of his or her position of employment or any substantially similar position of employment.

 

4.2 Payments Upon Termination.

 

(a) If, during the term of this Agreement, Executive’s employment is terminated for any reason, Executive shall receive the following (“Standard Pay”): (i) the portion of Executive’s then current Annual Base Salary accrued through Executive’s date of termination (pro-rated if applicable); (ii) any vested (as determined by Parent’s compensation committee with respect to performance-vested awards and at the date of vesting with respect to time-vested awards) bonus payments, stock options or restricted stock to which Executive is entitled as of the date of termination pursuant to this Agreement or any plan in which Executive is then participating, provided the payment thereof is not contingent or conditional on Executive’s continued employment with the Company or the satisfaction of any other condition (including, without limitation, performance criteria) which has not been satisfied; and (iii) any payments for reimbursement of expenses, which are due, accrued or payable as of the date of Executive’s termination in accordance with the Company’s expense reimbursement policy.

 

(b) If Executive has been employed by any member of the Company Group for three (3) or more years prior to Executive’s termination (including time employed by any entity that any member of the Company Group has acquired by virtue of an asset purchase, equity purchase, merger, or other business combination) and Executive’s employment is terminated by the Company without Cause, at any time other than between execution of a definitive agreement in contemplation of a Change in Control (as defined below) and continuing through twenty-four (24) months following a Change in Control, and other than as a result of Executive’s death or Disability, then the Company shall pay to Executive, in addition to the Standard Pay, the following payments (the “Continuation Severance Payments”), subject to Section 5 below: (i) Executive’s then-current Annual Base Salary for a ___________ period, in the form of salary continuation payments, plus (ii) any management incentive cash bonus payment that Parent’s compensation committee determined was attained under the terms of such cash bonus plan (and would have been paid to Executive for the year in which Executive’s employment is terminated) except (A) such cash bonus payment, if any, shall be prorated through Executive’s date of separation, and (B) any performance criteria applicable to such cash bonus will be deemed to have been achieved at the “target” level set forth in such cash bonus plan (regardless of the level actually attained), all of which shall be payable periodically in accordance with the Company’s normal payroll procedures, practices and policies. Additionally, the Company will pay the premiums for coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) for Executive and Executive’s eligible dependents, if any, at the rates and eligibility then in effect, subject to any subsequent changes in rates that are generally applicable to the Company’s active employees (the “COBRA Coverage”), until the earliest of (A) a period of ___________ from the date of Executive’s termination of employment, (B) the date upon which Executive (and Executive’s eligible dependents, as applicable) becomes covered under similar plans, or (C) the date upon which Executive ceases to be eligible for coverage under COBRA. Executive’s receipt of COBRA Coverage is subject to Executive electing COBRA continuation coverage within the time period prescribed pursuant to COBRA for Executive and Executive’s eligible dependents, if any. Alternatively, if Executive has been employed by any member of the Company Group for less than three (3) years but more than one (1) year prior to Executive’s termination (including time employed by any entity that any member of the Company Group has acquired by virtue of an asset purchase, equity purchase, merger, or other business combination) and Executive’s employment is terminated by the Company without Cause, at any time other than between execution of a definitive agreement in contemplation of a Change in Control and continuing through twenty-four (24) months following a Change in Control, and other than as a result of Executive’s death or Disability, then the Company shall (x) pay to Executive, in addition to the Standard Pay, one half (1/2) of the Continuation Severance Payments set forth above, and (y) pay for Executive’s COBRA Coverage until the earliest of (A) a period of ___________ months from the date of Executive’s termination of employment, (B) the date upon which Executive (and Executive’s eligible dependents, as applicable) becomes covered under similar plans, or (C) the date upon which Executive ceases to be eligible for coverage under COBRA, provided, however, that in no event will Company provide less COBRA Coverage than Executive is legally entitled to under applicable law.

 

(c) If Executive has been employed by any member of the Company Group for three (3) or more years prior to Executive’s termination (including time employed by any entity that any member of the Company Group has acquired by virtue of an asset purchase, equity purchase, merger, or other business combination) and either (i) a Constructive Termination of Executive occurs while Executive remains employed by the Company or its successor, or (ii) if Executive’s employment is terminated by the Company without Cause, in each case, between execution of a definitive agreement in contemplation of a Change in Control and continuing through twenty-four (24) months following a Change in Control, then the Company shall pay to Executive, in addition to the Standard Pay, the following amounts (the “CIC Severance Payments”) (the Continuation Severance Payments and the CIC Severance Payments, each individually a “Severance Payment” and together, the “Severance Payments”), subject to Section 5 below: a lump sum amount equal to: (i) ___________times the sum of Executive’s Annual Base Salary, plus (ii) any management incentive cash bonus payment that Executive would have been eligible for in the year in which Executive’s employment is terminated (regardless of whether or not the criteria for such cash bonus payment was actually met), provided that any performance criteria applicable to such cash bonus will be deemed to have been achieved at the “target” level (regardless of the level actually attained or whether or not any level was actually attained). Additionally, the Company will pay for Executive’s COBRA Coverage until the earliest of (A) a period of ___________ months from the date of Executive’s termination of employment, (B) the date upon which Executive (and Executive’s eligible dependents, as applicable) becomes covered under similar plans, or (C) the date upon which Executive ceases to be eligible for coverage under COBRA. Executive’s receipt of COBRA Coverage is subject to Executive electing COBRA continuation coverage within the time period prescribed pursuant to COBRA for Executive and Executive’s eligible dependents, if any. Alternatively, if Executive has been employed by any member of the Company Group for less than three (3) years but more than one (1) year prior to Executive’s termination (including time employed by any entity that any member of the Company Group has acquired by virtue of an asset purchase, equity purchase, merger, or other business combination) and either (i) a Constructive Termination of Executive occurs while Executive remains employed by the Company or its successor, or (ii) if Executive’s employment is terminated by the Company without Cause, in each case, between execution of a definitive agreement in contemplation of a Change in Control and continuing through twenty-four (24) months following a Change in Control, then the Company shall (x) pay to Executive, in addition to the Standard Pay, one half (1/2) of the CIC Severance Payments set forth above, and (y) pay for Executive’s COBRA Coverage until the earliest of (A) a period of ___________ months from the date of Executive’s termination of employment, (B) the date upon which Executive (and Executive’s eligible dependents, as applicable) becomes covered under similar plans, or (C) the date upon which Executive ceases to be eligible for coverage under COBRA, provided, however, that in no event will Company provide less COBRA Coverage than Executive is legally entitled to under applicable law. For the avoidance of doubt, and notwithstanding anything contained herein to the contrary, if Executive receives CIC Severance Payments (or any portion thereof) under this Section 4.2(c), then Executive shall not receive any Continuation Severance Payments (or any portion thereof) under Section 4.2(b) above.

 

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(d)  For the avoidance of doubt, a termination of Executive due to Executive’s death or Disability shall not be deemed a termination of Executive without Cause, and in such event Executive will only be entitled to receive the Standard Pay.

 

(e)  The Company intends that all payments and benefits provided under this Agreement or otherwise are exempt from, or comply with, the requirements of Section 409A of the Internal Revenue Code of 1986 (the “Code”) and any guidance promulgated under Section 409A of the Code (collectively, “Section 409A”) so that none of the payments or benefits will be subject to the additional tax imposed under Section 409A, and any ambiguities in this Agreement will be interpreted in accordance with this intent. No payment or benefits to be paid to Executive (including settlement of Company equity awards that constitute deferred compensation under Section 409A), if any, under this Agreement or otherwise, when considered together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A (together, the “Deferred Payments”) will be paid or otherwise provided until Executive has a “separation from service” within the meaning of Section 409A. If, at the time of Executive’s termination of employment, Executive is a “specified employee” within the meaning of Section 409A, then the payment of the Deferred Payments will be delayed to the extent necessary to avoid the imposition of the additional tax imposed under Section 409A, which generally means that Executive will receive payment on the first payroll date that occurs on or after the date that is 6 months and 1 day following Executive’s termination of employment. The Company reserves the right to amend this Agreement as it considers necessary or advisable, in its sole discretion and without the consent of Executive or any other individual, to comply with any provision required to avoid the imposition of the additional tax imposed under Section 409A or to otherwise avoid income recognition under Section 409A prior to the actual payment of any benefits or imposition of any additional tax. Each payment, installment, and benefit payable under this Agreement is intended to constitute a separate payment for purposes of U.S. Treasury Regulation Section 1.409A-2(b)(2). In no event will the Company or any member of the Company Group reimburse, indemnify, or hold harmless Executive for any taxes, penalties and interest that may be imposed, or other costs that may be incurred, as a result of Section 409A.

 

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5. Severance Payment Conditions. As a condition to the receipt of any and all Severance Payments or any other payment benefits described in this Agreement, in addition to any other conditions set forth herein, Executive shall:

 

(a)     execute and comply with the terms of a general release of all claims (the “General Release”) against the Company Group and their affiliates and representatives, in the form attached hereto as Exhibit B, as updated by the Company for any change in laws. The General Release must be signed, and the period provided therein for revocation must have expired, not later than sixty days from the Date of Termination. Notwithstanding anything to the contrary contained herein, no Severance Payments or other benefits or payments required under this Agreement shall be paid until the General Release is signed and the revocation period has expired, and any amounts that would otherwise have been paid prior to such date shall be paid within a reasonable time after such date, without interest; and

 

(b)     fully perform and comply with all of Executive’s obligations hereunder, including, without limitation, Executive’s obligations under Section 6. In the event Executive breaches any of Executive’s obligations hereunder (including, without limitation, Executive’s obligations under Section 6), then, in addition to any other remedies to which the Company Group may be entitled as a result of such breach, the Company Group shall be immediately and automatically released from any obligation to make any further Severance Payments and, upon notice from the Company, Executive shall be required to immediately reimburse the Company Group for any and all Severance Payments made to Executive by the Company.

 

6. Restrictive Covenants. Executive acknowledges and agrees that during the course of Executive’s employment with the Company Group, Executive will have access to confidential information which, if disclosed, would assist in competition against the Company Group and that Executive will generate goodwill for the Company Group during the course of Executive’s employment. Therefore, Executive hereby acknowledges and agrees that the following restrictive covenants (i) are necessary to protect the goodwill, confidential information, and other legitimate interests of the Company Group (including, without limitation, the preservation of trade secrets, valuable confidential and professional information, and substantial relationships with prospective and existing customers and suppliers), (ii) are reasonable and necessary to induce the Company to enter into this Agreement, and (iii) are of a scope (including, without limitation, the time period and geographic parameters) that is reasonably tailored, and not broader than necessary, to protect the legitimate business interests of the Company Group, and do not prevent or preclude Executive from earning a suitable livelihood. Executive hereby agrees to abide by the following restrictive covenants:

 

(a)     Non-Competition. During the period of Executive’s employment with any member of the Company Group and for one (1) year after such employment is terminated, Executive will not, and will not permit any other Person controlling, controlled by or under common control, directly or indirectly, with Executive to, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion, directly or indirectly engage or invest in, own, manage, operate, finance, control or participate in the ownership, management, operation, financing or control of, be employed by, serve as an agent, officer, director or consultant to, be associated with or in any manner connected with, lend his, her, or its name or any similar name to, lend his, her or its credit or render services or advice to, any Competitive Business anywhere throughout the lower 48 contiguous United States, provided, however, that nothing herein will be deemed to prevent Executive from acquiring through market purchases and owning, solely as an investment, less than one percent (1%) in the aggregate of the equity securities of any entity that derives more than fifty percent (50%) of its gross revenues from the conduct of any Competitive Business, whose shares are registered under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are listed or admitted for trading on any United States national securities exchange or are quoted on any system of automated dissemination of quotations of securities prices in common use, so long as Executive is not directly or indirectly a member of any “control group” (within the meaning of the rules and regulations of the Securities and Exchange Commission) of any such issuer; and provided further, however, that nothing herein will be deemed to prevent Executive from acquiring through market purchases and owning, solely as an investment, any shares, units or other interest in a mutual fund, exchange-traded fund, unit investment trust, or similar investment vehicle whose holdings include investments in any Competitive Business or any entity involved in a Competitive Business.

 

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(b)     Non-Solicitation. During the period of Executive’s employment with any member of the Company Group and for one (1) year after such employment is terminated, Executive will not, and will not permit any other Person controlling, controlled by or under common control, directly or indirectly, with Executive to, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion:

 

(i) whether on Executive’s own behalf or on behalf of another Person, provide or solicit to provide any Competitive Services to any Person that: (x) was at any time in the twelve (12) months prior to the Date of Termination a customer, shipper, carrier or other client of any member of the Company Group; or (y) to Executive’s knowledge, was at any time in the twelve (12) months prior to the Date of Termination or solicitation of Competitive Services, a customer, shipper, carrier or other client of any member of the Company Group;

 

(ii) whether on Executive’s own behalf or on behalf of another Person, solicit to employ or engage or employ or otherwise engage as an employee, independent contractor, agent or otherwise, any Person who: (x) was at any time in the twelve (12) months prior to the Date of Termination an employee, independent contractor, or agent of, or was otherwise engaged with, any member of the Company Group; or (y) to Executive’s knowledge, was at any time in the twelve (12) months prior to the solicitation, employment, or engagement of such Person, an employee, independent contractor, or agent of, or was otherwise engaged with, any member of the Company Group, provided that (A) general advertising (including general internet advertising) not targeted at a particular employee or consultant or independent contractor (or group thereof) shall not be deemed a breach hereof, nor shall hiring or retaining any Person who responds to such a general advertisement not targeted at a particular employee or consultant or independent contractor (or group thereof), and (B) nothing in this Agreement shall prohibit Executive or any other Person from engaging any professional services firm or other third party advisor that provides consulting services to multiple clients.; or

 

(iii) at any time interfere with any member of the Company Group’s relationship with any Person that: (x) was at any time in the twelve (12) months prior to the Date of Termination an employee, contractor, supplier, agent, customer, shipper, carrier or other client of any member of the Company Group; or (y) to Executive’s knowledge, was at any time in the twelve (12) months prior to the interference an employee, contractor, supplier, agent, customer, shipper, carrier or other client of any member of the Company Group; including, without limitation, soliciting, encouraging, advising or influencing such Person(s) to discontinue or reduce the extent of such relationship.

 

(c)     Non-Disclosure. During the period of Executive’s employment with any member of the Company Group and for one (1) year after such employment is terminated, Executive will not, and will not permit any other Person controlling, controlled by or under common control, directly or indirectly, with Executive to, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion:

 

(i) make, publish, communicate or take any action to disparage any member of the Company Group or any of their respective stockholders, directors, officers, employees, agents, products or services; or

 

(ii) divulge, communicate, use to the detriment of any member of the Company Group, or for the benefit of any other Person(s), or misuse in any way, any confidential information or trade secrets pertaining to any member of the Company Group, except as required or compelled by law.

 

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(d)     Reformation; Severability; Injunctive Relief. Executive expressly acknowledges and agrees that the restrictions contained herein are reasonable and no greater than necessary to protect the legitimate interests of the Company Group. However, if any covenant set forth in this Agreement (including, without limitation, this Section 6) is determined by any court to be unenforceable by reason of its extending for too great a period of time or over too great a geographic area, or by reason of its being too extensive in any other respect, such covenant shall be reformed and interpreted to extend only for the longest period of time and over the greatest geographic area, and to otherwise have the broadest application as shall be enforceable. The invalidity or unenforceability of any particular provision (or part thereof) of this Agreement (including, without limitation, this Section 6) shall not affect the other provisions hereof (or parts thereof), which shall continue in full force and effect. Without limiting the foregoing, the covenants contained herein shall be construed as separate covenants, covering their respective subject matters, with respect to each of the separate cities, counties and states, and each political subdivision thereof, within the lower 48 contiguous United States. Executive further acknowledges that any violation of this Agreement (including, without limitation, this Section 6) will result in irreparable injury to the Company Group, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such violation would not be reasonable or adequate compensation to Company Group for such a violation. Accordingly, Executive agrees that if Executive violates the provisions of this Agreement (including, without limitation, this Section 6), any member of the Company Group, in addition to all other remedies which may be available to it at law or in equity, shall be entitled to specific performance and injunctive relief, without posting bond or other security, and without the necessity of proving actual damages. Such relief will not be exclusive, but will be in addition to all other relief available to Company Group, at law and equity.

 

7. Restricted Stock and Stock Options. This Agreement does not incorporate, supersede, or in any way affect Parent’s 2006 Omnibus Incentive Plan, as amended from time to time, or any restricted stock agreements or stock option grants, all of which are governed by separate documents prior to the date hereof.

 

8.  Limitation on Payments.

 

(a)     Reduction of Severance Payments. If any payment or benefit that Executive would receive from the Company or any member of the Company Group or any other party whether in connection with the provisions in this Agreement or otherwise (the “Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Payment will be equal to the Best Results Amount. The “Best Results Amount” will be either (x) the full amount of the Payment or (y) a lesser amount that would result in no portion of the Payment being subject to the Excise Tax, whichever of those amounts, taking into account the applicable federal, state and local employment taxes, income taxes and the Excise Tax, results in the Executive’s receipt, on an after-tax basis, of the greater amount. If a reduction in payments or benefits constituting parachute payments is necessary so that the Payment equals the Best Results Amount, reduction will occur in the following order: (A) reduction of cash payments in reverse chronological order (that is, the cash payment owed on the latest date following the occurrence of the event triggering the excise tax will be the first cash payment to be reduced); (B) cancellation of equity awards that were granted “contingent on a change in ownership or control” within the meaning of Section 280G of the Code in the reverse order of date of grant of the awards (that is, the most recently granted equity awards will be cancelled first); (C) reduction of the accelerated vesting of equity awards in the reverse order of date of grant of the awards (that is, the vesting of the most recently granted equity awards will be cancelled first); and (D) reduction of employee benefits in reverse chronological order (that is, the benefit owed on the latest date following the occurrence of the event triggering the excise tax will be the first benefit to be reduced). In no event will Executive have any discretion with respect to the ordering of Payment reductions. Executive will be solely responsible for the payment of all personal tax liability that is incurred as a result of the payments and benefits received under this Agreement, and Executive will not be reimbursed, indemnified, or held harmless by the Company or any member of the Company Group for any of those payments of personal tax liability.

 

(b)     Determination of Excise Tax Liability. Unless the Company and Executive otherwise agree in writing, all determinations required under this Section 8 shall be made by the Company or its advisors in good faith and in accordance with applicable law and such determinations shall be conclusive and binding on Executive for all purposes. For purposes of making the calculations required by this Section 8, the Company may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. Executive will furnish to the Company such information and documents as the Company reasonably may request in order to make determinations under this Section 8.

 

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9 Other Provisions. Except as otherwise set forth or permitted herein, no provisions of this Agreement may be modified, waived, or discharged except by a written document signed by Executive and a duly authorized Company officer. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, representatives, heirs and estates, as applicable. This Agreement shall not be assignable by Executive without the prior written consent of the Company. This Agreement shall be governed by the laws of the State of Tennessee. Any litigation or other dispute resolution proceeding may only be brought within Tennessee, and all parties to this Agreement consent to jurisdiction in Hamilton County.  It is the desire and intent of the parties that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any provision of this Agreement is determined to be partially or wholly invalid, illegal or unenforceable in any jurisdiction, then such provision shall, as to such jurisdiction, be modified or restricted to the extent necessary to make such provision valid, binding and enforceable, or if such provision cannot be so modified or restricted, then such provision shall, as to such jurisdiction, be deemed to be excised from this Agreement; provided, however, that the legality, binding effect and enforceability of the remaining provisions of this Agreement, to the extent the economic benefits conferred upon the parties by virtue of this Agreement remain substantially unimpaired, shall not be affected or impaired in any manner, and any such invalidity, illegality or unenforceability with respect to such provision in such jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute the same instrument. Except for Executive’s NDA, all oral or written agreements or representations, express or implied, with respect to the subject matter of this Agreement are set forth herein. The parties expressly intend for the NDA to otherwise remain in full force and effect. Except as expressly provided herein, this Agreement supersedes all previous agreements, promises, representations, understandings and negotiations between the parties, whether written or oral, with respect to the subject matter hereof. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between Executive and the Company, Executive shall not have any right to be retained in the employ of the Company. Notwithstanding the immediately preceding sentence or any other provision of this Agreement, any purported termination of Executive’s employment that is not effected in accordance with a Notice of Termination satisfying Section 4.1 shall not be effective for purposes of this Agreement. In the event a Severance Payment is triggered pursuant to the provisions of Section 4.2, the provisions of Section 4.2 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive may otherwise be entitled (including any contrary provisions in any written or oral employment agreement or arrangement Executive may have with any member of the Company Group), whether at law, tort or contract, in equity, or under this Agreement. Subject to Section 8, payments provided for hereunder will be subject to required withholding of federal, state and local income, excise, and employment-related taxes, without any gross-ups or similar payments made to Executive.

 

10. Communications with Government Agencies. Notwithstanding anything contained herein or in the NDA to the contrary, nothing set forth herein or in the NDA shall limit Executive’s ability to communicate with the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (collectively, “Government Agencies”) or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company, or limit Executive’s right to receive an award for information provided to any Government Agencies.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the parties have executed and delivered, or have caused to be executed and delivered by their duly authorized representatives, this Executive Severance Agreement as of the Effective Date.

 

 

EXECUTIVE:                              

 

______________________________________

 

___________, individually

 

 

 

TRANSPORT MANAGEMENT SERVICES, LLC

 

 

 

By: ______________________________________

 

Name:

 

Title:

 

 

 

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EXHIBIT A - DEFINED TERMS

 

Cause” for termination by the Company of Executive's employment shall mean (i) failure by Executive to perform the essential functions of Executive’s position with the Company, other than any failure resulting from Executive's incapacity due to physical or mental Disability, it being understood that a reasonable, good faith attempt to perform but failure to do so will not be deemed a failure to perform essential functions; (ii) failure to comply with any lawful directive by the Board of Directors of the Company or the Parent (the “Board”), it being understood that a reasonable, good faith attempt to comply with such directive but failure to do so will not be deemed a failure to comply for purposes of this definition of “Cause”; (iii) a material violation by Executive of the corporate governance guidelines, code of ethics, insider trading policy, governance policy, or other policy of the Company or Parent; (iv) a breach of any fiduciary duty to any member of the Company Group; (v) misconduct in the course and scope of employment by Executive that is injurious to any member of the Company Group from a monetary or reputational standpoint in any material respect; (vi) any attempt to willfully obtain any personal profit from any transaction which is adverse to the interests of any member of the Company Group or in which any member of the Company Group has an interest or any act of fraud or embezzlement against any member of the Company Group or any of their respective customers or suppliers; (vii) a breach by Executive of any of the covenants contained in Section 6 of this Agreement in any material respect; (viii) the repeated use of alcohol or abuse of prescription drugs by Executive that interferes with Executive's duties, the use of illegal drugs by Executive, or a violation by Executive of the drug and/or alcohol policies of the Company or Parent; (ix) violation of any applicable law, rule or regulation, including without limitation the Sarbanes-Oxley Act of 2002 or other federal or state securities law, rule, or regulation, in each case, that is injurious to any member of the Company Group from a monetary or reputational standpoint in any material respect; or (x) the conviction or plea of guilty or nolo contendere to a felony or a misdemeanor involving moral turpitude. With respect to subsections (i), (ii) and (iii) above, Executive shall be notified in writing (which includes, without limitation, e-mail) of any alleged failure, breach or violation, such notice shall specify in reasonable detail the facts and circumstances claimed to constitute Cause under subsections (i), (ii) or (iii) as applicable and, if such failure, breach, or violation is capable of being remedied or cured, the Executive shall be given at least fifteen (15) calendar days to remedy or cure any failure, breach or violation. For purposes of this definition following a Change in Control, the Board’s determination of “Cause” must be made in good faith and will be binding on Executive.

 

"Change in Control" means a change in control of the Parent of a nature that would be required to be reported in response to Item 5.01 of a Current Report on Form 8-K, pursuant to Section 13 or 15(d) of the Exchange Act; provided that, without limitation, a Change in Control shall be deemed to have occurred at such time as any of the following occurs after the Effective Date:

 

(i)      Any "person" within the meaning of Section 3(a)(9) of the Exchange Act, and as modified and used in Section 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) of the Exchange Act (but excluding the Parent, any employee benefit plan sponsored or maintained by the Parent (including any trustee of such plan (acting as trustee) or other fiduciary holding securities under an employee benefit plan of the Company), and any underwriter temporarily holding securities pursuant to an offering of such securities) (“Person”), other than a Permitted Holder becomes the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of fifty percent (50%) or more of the combined voting power of the outstanding securities of the Parent ordinarily having the right to vote in the election of directors; provided, however, that the following will not constitute a Change in Control: any acquisition by any corporation if, immediately following such acquisition, more than seventy-five percent (75%) of the outstanding securities of the acquiring corporation (or the parent thereof) ordinarily having the right to vote in the election of directors is beneficially owned by all or substantially all of those persons who, immediately prior to such acquisition, were the beneficial owners of the outstanding securities of the Parent ordinarily having the right to vote in the election of directors;

 

(ii)      Individuals who constitute the Board of Directors of the Parent on the Effective Date (the "Incumbent Board") have ceased for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Effective Date, whose election or nomination for election by the Parent's stockholders was approved by a vote of at least three-fourths (3/4) of the directors comprising the Incumbent Board, either by a specific vote or by approval of the proxy statement of the Parent in which such person is named as a nominee for director without objection to such nomination (other than an election or nomination of an individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of the Parent, including, without limitation, in connection with a "tender offer," as such term is used in Section 14(d) of the Exchange Act), shall be, for purposes of the Agreement, considered as though such person were a member of the Incumbent Board;

 

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(iii)      Upon the consummation by the Parent of a reorganization, merger, or consolidation, other than one with respect to which all or substantially all of those persons who were the beneficial owners, immediately prior to such reorganization, merger, or consolidation, of outstanding securities of the Parent ordinarily having the right to vote in the election of directors own, immediately after such transaction, more than seventy-five percent (75%) of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors;

 

(iv)      Upon the approval by the Parent’s stockholders of a complete liquidation and dissolution of the Parent or the sale or other disposition of all or substantially all of the assets of the Parent other than to a subsidiary of the Parent or to an entity controlled by a Permitted Holder; or

 

(v)     Upon the consummation of a transaction subject to Rule 13e-3 of the Exchange Act in which the Permitted Holders identified in romanette (iii) of the definition of Permitted Holder hereunder are the beneficial owners of more than fifty percent (50%) of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors.

 

Competitive Business” means any business conducted by any member of the Company Group as of the date of Executive’s termination (including any business where strategic plans were in place as of the date of Executive’s termination for any member of the Company Group to engage in such business).

 

Competitive Services” means those services provided in the furtherance of a Competitive Business.

 

Constructive Termination” means the occurrence of any of the following, without Executive’s express written consent, at any time within twenty-four (24) months following a Change in Control:

 

(i)     material diminution in the overall scope of Executive’s duties, authorities and/or responsibilities from those held by Executive immediately prior to the time of a Change in Control, it being understood that the fact that the Company is a subsidiary of a different public company or becomes a private company, and any diminution of duties in respect of no longer having public company related duties will not be considered a diminution;

 

(ii)     written requirement for geographic relocation of the Executive’s assigned principal business location to a location greater than fifty (50) miles from the place of the Executive’s principal business location immediately prior to the time of a Change in Control; or

 

(iii)     written notice of diminution by ten percent (10%) or more of Executive’s annual base salary or target bonus in effect immediately prior to the time of a Change in Control.

 

"Permitted Holder" means: (i) the Parent or a subsidiary of the Parent, (ii) any employee benefit plan sponsored by the Parent or a subsidiary of the Parent, or (iii) David or Jacqueline Parker or their siblings, children, or grandchildren ("Family Members") or a trust, corporation, partnership, limited partnership, limited liability company, or other such entity, so long as at least eighty percent (80%) of the beneficial interests of the entity are held by Mr. or Mrs. Parker and/or one or more Family Members, where such person(s) or entity acquired their Parent stock from Mr. or Mrs. Parker.

 

 

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EXHIBIT B – GENERAL RELEASE

 

In exchange for the payments and benefits described in the agreement to which this release is attached (the “Agreement”), Executive, on his or her own behalf and on behalf of his or her heirs, executors, administrators, assigns and successors, does hereby covenant not to sue and acknowledges full and complete satisfaction of and hereby releases, absolves and discharges the Company, Parent, each affiliate or subsidiary of the Company or the Parent, and its and their successors and assigns, parents, subsidiaries and affiliates, past and present, as well as their trustees, directors, officers, agents, attorneys, insurers, stockholders and employees, past and present, and each of them (hereinafter collectively referred to as “Releasees”), with respect to and from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, debts, wages, vacation pay, expenses, attorneys’ fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected, and whether or not concealed or hidden, which Executive now owns or holds or has at any time heretofore owned or held as against said Releasees, or any of them, arising out of or in any way connected with his or her employment or other relationships with the Company, Parent, or its or their affiliates, or his or her separation from any such employment or other relationships (collectively, “Released Claims”), including specifically, but without limiting the generality of the foregoing, any claim under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act of 1967, as amended by the Older Worker’s Benefit Protection Act (“ADEA”), the federal Family and Medical Leave Act, the Fair Labor Standards Act, the Equal Pay Act, the Employee Retirement Income Security Act of 1974, the Worker Adjustment and Retraining Notification Act, or any other employment related federal, state or local law, regulation or ordinance; provided, however, that the foregoing release will not include or affect (and the following are expressly excluded from any Released Claims): (i) Executive’s rights under the Agreement; (ii) Executive’s rights to file claims for workers’ compensation or unemployment insurance benefits, (iii) Executive’s regular and usual salary accrued prior to the Separation Date, accrued but unused vacation through the Separation Date, COBRA continuation coverage and life insurance conversion rights, if any, (iv) Executive’s rights to provide information, assist or participate in any investigation, proceedings, or litigation concerning any administrative claim with any government agency under any applicable law that protects such rights, or to file such a claim, or (v) Executive’s rights under any written contracts between the Executive or his or her affiliated entities and any member of the Company Group. This General Release does not (i) limit Executive's ability to file a charge or complaint with the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”), (ii) limit Executive’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company, or (iii) limit Executive’s right to receive an award for information provided to any Government Agencies.

 

Executive acknowledges that the non-disparagement and confidentiality provisions contained in the Agreement infringe on Executive’s rights described in this release, and Executive agrees that he or she is aware of and has consented to such infringement. Furthermore, notwithstanding the foregoing release, Executive will continue to be entitled to all of his or her respective statutory and other rights to indemnification, including, without limitation, indemnification pursuant to the Company’s organizational documents, indemnification agreements, insurance policies or under applicable law to the same extent Executive would have had the right to be indemnified absent this release.

 

Executive acknowledges that he or she is waiving and releasing any rights he or she may have under the ADEA and that this waiver and release is knowing and voluntary. Executive and the Company agree that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date (as hereinafter defined) of the Agreement. Executive acknowledges that the consideration given for the Agreement is in addition to anything of value to which he was already entitled. Executive further acknowledges that he or she has been advised by this writing that:

 

(a)     He or she should consult with an attorney prior to executing the Agreement;

 

(b)     He or she has at least twenty-one (21) days within which to consider the Agreement;

 

(c)     He or she has seven (7) days following his or her execution of the Agreement to revoke the Agreement;

 

(d)     This Agreement will not be effective until the eighth day after Executive executes and does not revoke the Agreement (the “Effective Date”); and

 

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(e)     Nothing in the Agreement prevents or precludes Executive from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties or costs from doing so, unless specifically authorized by federal law. Any revocation must be in writing and hand delivered to the Company by close of business on or before the seventh day from the date that Executive signs the Agreement. In the event that Executive exercises his or her right of revocation, neither Executive nor any member of the Company, Parent, or its or their affiliates will have any further rights or obligations under the Agreement.

 

It is the desire and intent of the parties that the provisions of this release be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any provision of this release is determined to be partially or wholly invalid, illegal or unenforceable in any jurisdiction, then such provision shall, as to such jurisdiction, be modified or restricted to the extent necessary to make such provision valid, binding and enforceable, or if such provision cannot be so modified or restricted, then such provision shall, as to such jurisdiction, be deemed to be excised from this release; provided, however, that the legality, binding effect and enforceability of the remaining provisions of this release, to the extent the benefits conferred upon the parties by virtue of this release remain substantially unimpaired, shall not be affected or impaired in any manner, and any such invalidity, illegality or unenforceability with respect to such provision in such jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

 

Executive represents and warrants that he or she has no present knowledge of any injury, illness or disease to him or her that is or might be compensable as a workers’ compensation claim or similar claim for workplace injuries, illnesses or diseases.

 

Terms used herein and not otherwise defined will have the meanings set forth in the Agreement to which this Release was attached.

 

[Signature page follows]

 

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Intending to be legally bound, I have signed this General Release as of the date written below.

 

 

Signature: _____________________________________________

 

 

 

Date Signed: ___________________________________________

 

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Exhibit 31.1

 

I, David R. Parker, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Covenant Logistics Group, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: November 3, 2020

/s/ David R. Parker

 

David R. Parker

 

Principal Executive Officer

 

 

Exhibit 31.2

 

I, M. Paul Bunn, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Covenant Logistics Group, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: November 3, 2020

/s/ M. Paul Bunn

 

M. Paul Bunn

Principal Financial Officer

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

 

In connection with the Quarterly Report of Covenant Logistics Group, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David R. Parker, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:

 

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: November 3, 2020

/s/ David R. Parker

 

David R. Parker

 

Chief Executive Officer

 

A signed original of this written statement required by Section 906 has been provided to Covenant Logistics Group, Inc. and will be retained by Covenant Logistics Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

 

In connection with the Quarterly Report of Covenant Logistics Group, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, M. Paul Bunn, Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:

 

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date:   November 3, 2020

/s/ M. Paul Bunn

 

M. Paul Bunn

 

Chief Financial Officer

 

A signed original of this written statement required by Section 906 has been provided to Covenant Logistics Group, Inc. and will be retained by Covenant Logistics Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.