Charles G. "Chuck" Raymond is stepping down as Chairman, President and Chief Executive Officer of U.S.-flag containership operator Horizon Lines, Inc. (NYSE:HRZ), while Executive Vice President and Chief Operating Officer John V. Keenan has "been granted a leave of absence."
The company reported today that it has entered a guilty plea on a charge of violating antitrust laws with respect to the Puerto Rico trade. It said that under the plea deal the Department of Justice "has agreed that it will not bring criminal charges against any current director or officer, although this agreement does not extend to the company's current Chief Executive Officer or to the company's current Chief Operating Officer."
The current Chief Executive Officer is, of course, Mr. Raymond, while the current Chief Operating Officer is Mr. Keenan.
The company today filed an 8K with the SEC (and issued two press releases) in which it reported the plea deal and a slew of management changes and disclosed that it is "in discussions with certain of its lenders to waive a judgment default that will arise from the plea agreement and to provide financial covenant relief as the company seeks new long-term financing."
It said the quarterly dividend had been suspended immediately "in light of the company's ongoing refinancing initiative and its outlook for 2011."
According to 8K filing:
"On February 23, 2011, the Company and Mr. Raymond entered into a Separation Agreement, dated as of such date, in connection with Mr. Raymond's retirement from the Company ... Mr. Raymond has until March 3, 2011 to revoke certain terms of the Agreement. In the event that Mr. Raymond does not exercise his right to revoke certain terms of the Agreement, he will become entitled to payment under the Separation Agreement on March 3, 2011. Under the terms of the Separation Agreement, Mr. Raymond will receive severance payments totaling $2,281,994. The first seven equal monthly installments of $140,000 per month will be followed by eighteen equal monthly installments of $72,333. In addition, the Company will reimburse Mr. Raymond for premiums related to continued health coverage under COBRA for the period he and his eligible dependents are covered under COBRA. Mr. Raymond will also be entitled to indemnification and the advancement of legal expenses as provided by the Company's charter and bylaws and any other applicable documents, and Mr. Raymond has agreed not to sell any shares of the Company's common stock that he owns for a period of one year."
The 8K discloses that Executive Vice President and Chief Operating Officer John V. Keenan has "been granted a leave of absence."
The 8K says that "Mr. Keenan currently has an employment agreement with the Company, and in connection with Mr. Keenan's leave of absence, the Company agreed that the term of the employment agreement would continue during the time he is on leave, subject to earlier termination by the Company or Mr. Keenan as otherwise provided in the employment agreement. The Company also agreed that if Mr. Keenan's employment is terminated prior to February 23, 2012 without Cause, as that term is defined in his employment agreement, the Company will pay Mr. Keenan an additional 50% of the severance payment required by the employment agreement."
Alex J. Mandl has been named independent Chairman of the Board, effective March 11, 2011, and Stephen H. Fraser has been appointed as the interim President and Chief Executive Officer, effective March 11, 2011.
Brian W. Taylor has been appointed Executive Vice President and Chief Operating Officer, to succeed Mr..Keenan,.
Michael T. Avara has been promoted from Senior Vice President and Chief Financial Officer to Executive Vice President and Chief Financial Officer.
The company said today it had entered a plea agreement with the Antitrust Division of the U.S. Department of Justice under which it will plead guilty to a charge of violating federal antitrust laws solely with respect to the Puerto Rico tradelane and pay a fine of $45 million over five years without interest. It said that
"We are very pleased to have reached a resolution with the Department of Justice," said Michael T. Avara, Senior Vice President and Chief Financial Officer. "We now look forward to moving ahead in our discussions with lenders. We remain very focused on serving our customers well, further improving our operational excellence, and financially strengthening our company for the benefit of all of our stakeholders."
Under terms of the plea agreement, which is subject to court approval, Horizon Lines will plead guilty to a charge of violating section 1 of the Sherman Act with respect to the Puerto Rico tradelane between May 2002 and April 2008 and pay a fine of $45 million. The fine is payable over a five-year period as follows: $1 million within 30 days after imposition of the sentence by the court, $1 million on the first anniversary thereafter, $3 million on the second anniversary, $5 million on the third anniversary, $15 million on the fourth anniversary, and $20 million on the fifth anniversary.
The plea agreement provides that Horizon Lines will not face additional charges relating to the Puerto Rico tradelane. The DOJ also agreed that the company will not face any charges in connection with the DOJ's investigation into the Alaska trade, and indicated that the company is not a subject or target of any investigation by the DOJ into the Hawaii and Guam trades.
Additionally, the DOJ has agreed that it will not bring criminal charges against any current director or officer, although this agreement does not extend to the company's current Chief Executive Officer or to the company's current Chief Operating Officer.
As previously announced, Horizon Lines has been cooperating with the DOJ since the company became aware of the investigation in April 2008, and has strengthened its corporate compliance and training programs to prevent recurrence of the conduct giving rise to the investigation.
"We have taken major steps to put the issues in the Puerto Rico tradelane behind us and are working diligently to resolve the civil litigation arising out of the DOJ investigation as it relates to Puerto Rico," Mr. Avara said. "These steps include reaching a settlement with the plaintiffs in the direct purchaser Puerto Rico class-action antitrust cases. As part of this process, Walmart recently released us from antitrust claims related to the Puerto Rico tradelane."
Horizon Lines also entered into a Memorandum of Understanding (MOU) on February 22, 2011, with the Commonwealth of Puerto Rico and attorneys representing indirect purchasers. The indirect purchasers allege they paid inflated prices for goods imported to Puerto Rico as a result of the alleged price fixing conspiracy. Under the MOU, the company has agreed to pay $1.8 million in exchange for a full release. The settlement agreement, when negotiated and entered into by the parties, will be subject to court approval.
In conjunction with the DOJ resolution, Horizon Lines says it is working with financial advisor Moelis & Company and the legal firm Kirkland & Ellis LLP to help the company fully evaluate refinancing options and pursue an amendment to its current credit agreement. Regarding its credit agreement, Horizon Lines is seeking to waive or otherwise satisfy the default conditions that would be triggered by the amount of the $45 million judgment issued by the court. The company also is requesting, by early March, relief from anticipated future financial covenant noncompliance, as it seeks new long-term financing.
2010 PRELIMINARY RESULTS
Horizon Lines is scheduled to report fourth-quarter and full-year financial results on March 3, 2011. For the fiscal year ended December 26, 2010, the company expects to report adjusted EBITDA of approximately $96.0 million (see reconciliation table). Despite achieving results lower than expectations, Horizon Lines maintained compliance with all debt covenants during fiscal 2010. The company's fourth-quarter results were adversely impacted by lower-than-projected volumes in its Hawaii trade lane, rising fuel prices, continued rate pressures, particularly in Puerto Rico, and the anticipated start-up costs related to the company's new China service.
In conjunction with the DOJ agreement, fiscal 2010 financial results will include a charge of $30.0 million, which represents the present value of the $45 million in installment payments.
The company also has decided to divest its Logistics business and is in discussions to sell the unit, but can give no assurances that a transaction will take place.
The company currently anticipates modest EBITDA growth in 2011 compared to 2010. It says that the typically slow first quarter is expected to be exacerbated by the seasonality of the company's new China service, which replaces a more consistent month-to-month earnings stream produced by its previous space charter agreement with Maersk. As a result, Horizon Lines does not expect to be in compliance with its existing financial covenants, but is seeking the credit agreement amendment to address this. The company expects 2011 financial results to improve in line with the economic recovery in its domestic tradelanes, the ramp-up of the new China business and the continued implementation of aggressive cost-reduction initiatives.
Read the 8K filing HERE
Read the Department of Justice press release on the plea agreement HERE
February 24, 2011