Celadon Group, Inc. NYSE: CGI - Prescience Point Capital Management
THIS RESEARCH REPORT EXPRESSES SOLELY OUR OPINIONS. Use Prescience Point LLC’s research opinions at your own risk. This is not investment advice nor shouldit be construed as such. You should do your own research and due diligence before making any investment decisions with respect to the securities covered herein.Forward-looking statement and projections are inherently susceptible to uncertainty and involve many risks (known and unknown) that could cause actual resultsto differ materially from expected results. You should assume we have a short interest in Celadon Group stock and therefore stand to realize significant gains in theevent that the price of such instrument declines. Please refer to our full disclaimer located on the last page of this report.Celadon Group, Inc. NYSE: CGIPrice Target: 0.00/shareShare Price: 6.25Avg Daily Volume:440kMarket Cap: 176.9mDebt: 471.9mEnterprice Value: 642.6mPrescience Point Research Opinions: CGI shares are worth 0.00 per share. Over 95% of CGI's reported tangible book value does not exist. CGI's actual TBV is no morethan .42/share. CGI will restate its historical results because of the issues exposed in this report. CGI will be bankrupt or insolvent within 1-2 quarters; existing shareholders will be wiped out. CGI stock should be de-listed from the NYSE. Regulatory and law enforcement agencies with subpoena power should launch a fullinvestigation of the company, its accounting, and its practices.Research Highlights: LTM Revenue: 1055m LTM Adj CFFO:- 28.9m LTM Adj FCF:- 48.3m Revolver Availability: 54.3m (est) Auditor:BKD, LLP Disclosure of a sham ‘daylight loan’ transaction in the JV subscription agreement directlycontradicts CGI’s representations of having collected on a 31.8m receivable; in our view, itamounts to incontrovertible proof that CGI has inflated its financial position and falsified itsfinancial reports.CGI’s use of off-balance sheet transactions involving its JV with Element Fleet Managementand related party 19th Capital inflated Q2’17 TBV and LTM profits by an estimated 104.2m,comprising 34% of reported TBV.CGI failed to record a 36m estimated loss from Quality equipment sales on its incomestatement despite its cash flow statement suggesting that such a loss was incurredCGI's Balance Sheets and corresponding Statements of Cash Flows do not reconcile.Discrepancies indicate CGI systematically overstated property and equipment by 78.8m,comprising 26% of CGI’s reported TBV.Divergence between net income and adjusted CFFO has exploded. Net income now exceedsAdj CFFO for the first time in 8 years.CGI management appears to have bilked shareholders out of 4.6m when 19 th Capital, arelated party, was redeemed at an inflated equity value of 4.5x invested capital, just 1.25years after its formation. The redemption may have been paid for with cash misappropriatedfrom CGI’s balance sheet.CGI’s sudden jump (67.4% growth) in Other Revenue from Q2’17 to Q4’16 cannot bereconciled with a reported contraction in trucking assets needed to drive that growth.After CGI fired KPMG as its auditor and hired a smaller regional (BKD), its audit fees rose180%, which would make sense if it was a fraudulent company.Deeply negative and rapidly deteriorating FCF indicates business is fundamentally broken.Our analysis indicates CGI will be insolvent in 1-2 quarters, based on projected cash burn of 80.1m in 2H FY’17 against revolver availability of only 54.3m.CGI would have defaulted on its leverage ratio covenant had it not concealed operatinglosses; concealing losses by falsifying financial results is an Event of Default, in its own right.Incestuous hiring practices and nepotism may have created an environment lacking inaccountability and ripe for fraud.Prescience Point reached out to CGI management numerous times and never heard back.
ContentsIntroduction.3Is 95% of CGI’s Reported TBV Attributable to Accounting Fabrications? .4Celadon Group Makes Leveraged Bet on Tractor Resale Market; Results in Massive Losses .4Accounting Lever 1: Off-Balance Sheet JV Value Fabricated (TBV and Profits Inflated .6by 100m)? .6CGI Lied RE Collecting on its 31.8m Shortfall Receivable. Is this the Smoking Gun that it’s Falsifying its Financials?.8We Believe CGI Overstated the Value of Its JV Stake by 100m .9Accounting Lever #2: Equipment Loss Concealed (TBV and Profits Inflated by 36m)? . 14Accounting Lever #3: 19th Capital Redemption Value Fabricated (TBV and Profits Inflated by 4.2m)? . 15CGI Forms an Off-Balance Sheet, Related Party Entity to Purchase Trucks from CGI .16Was 19th Capital’s Redemption Value Grossly Overstated, Unjustly Diverting Millions to CGI Management? .17More Glaring Accounting Red Flags. 21After Forcing Restatement, Big4 Auditor Replaced w/ Regional Firm – Fees Explode(!) . 23Will CGI be Insolvent in 1-2 Quarters? . 26Did CGI Misappropriate Shareholder Capital? . 28Is CGI in Default of its Credit Agreement?. 29Can a Dysfunctional Culture Result in an Environment Primed for Fraud? . 31Extremely Sloppy and Dubious Sell-Side Research is Back . 33Analysts Aren’t Carefully Reading CGI’s SEC Filings.33Analysts Reports Contain Egregious Mathematical Mistakes .34Endnotes . 352
IntroductionWe believe that Celadon Group (“CGI” or “the company”) is a house of cards on the brink of collapse. In this report, we present evidence, which in ouropinion, indicates that CGI used a series of off-balance sheet transactions, manipulative accounting practices, and material misrepresentations to skirtcovenant violations and hide catastrophic losses from shareholders and creditors. Absent these interventions, we believe that CGI’s creditors would alreadyhave forced a restructuring, and its share price would be trading at pennies.CGI initially caught our attention last year when we learned it was engaging in questionable non-arm’s length transactions with 19th Capital, an offbalance sheet entity owned in-part by CGI and CGI management. Per renowned accounting expert Howard Schilit,1“ transactions that lack a reasonable arm’s-length process are sometimes
reconciled with a reported contraction in trucking assets needed to drive that growth. After CGI fired KPMG as its auditor and hired a smaller regional (BKD), its audit fees rose . Celadon Group, Inc. NYSE: CGI Price Target: 0.00/share Share Price: 6.25 Avg Daily Volume: 440k Market Cap: 176.9m Debt: 471.9m Enterprice Value: 642.6m
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Setting up an Enterprise Architecture Practice A CGI experience Presented to: Open Group EA Conference Brussels Date: 21st of April, 2004 Prepared by: Robert (Bob) Weisman, Partner and Executive Consultant, EA Leader, CGI Contact: robert.weisman@cgi.com or (613)566-4689
Accounting The Accounting programme is written by Niall Lothian, formerly Professor at Edinburgh Business School, Heriot-Watt University, and John Small, Professor Emeritus at Heriot-Watt University. Both have previously occupied chairs in the University’s Department of Accountancy and Finance.
