CELADON GROUP INC - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
[ ] 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: 0-23192

CELADON GROUP, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 13-3361050
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)

9503 East 33rd Street
Indianapolis, IN 46235
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (317) 972-7000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK ($0.033 PAR VALUE)
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS

Indicate by check mark whether the registrant (1) has filed all reports required
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[X] No[ ]

Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of September 25, 2002,the aggregate market value of the Common Stock ($0.033
par value) held by non-affiliates of the registrant (6,207,007 shares) was
approximately $70,075,000 (based upon the closing price of such stock on
September 25, 2002). The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant. The number of shares
outstanding of the Common Stock of the registrant as of the close of business on
September 25, 2002 was 7,682,775.

Documents Incorporated by Reference
Part III of Form 10-K - Portions of Definitive Proxy Statement for
the 2002 Annual Meeting of Stockholders

CELADON GROUP, INC.
FORM 10-K

TABLE OF CONTENTS

PAGE
----
PART I

ITEM 1. Business................................................. 3
ITEM 2. Properties............................................... 9
ITEM 3. Legal Proceedings........................................ 9
ITEM 4. Submission of Matters to a Vote of Security Holders...... 9

PART II

ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................10
ITEM 6. Selected Financial Data..................................11
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................12
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk..........................................18
ITEM 8. Financial Statements and Supplementary Data..............19
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................48

PART III

ITEM 10. Directors and Executive Officers of the Registrant.......48
ITEM 11. Executive Compensation...................................48
ITEM 12. Security Ownership of Certain Beneficial Owners
And Management.......................................48
ITEM 13. Certain Relationships and Related Transactions...........48
ITEM 14. Controls and Procedures..................................48

SIGNATURES...................................................................49

CERTIFICATIONS...............................................................50

PART IV

ITEM 15. Exhibits, Financial Statement Schedules and Reports
On Form 8-K..........................................51

INDEX TO EXHIBITS............................................................55

2

PART I

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information in Items 1, 3, 7, 7A
and 8 of this Form 10-K constitutes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and, as such,
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. You can identify such statements by
the fact that they do not relate strictly to historical or current facts. These
statements use words such as "believe", "expect", "should", "expects",
"estimates", "planned", "outlook", "goal" and "anticipate." Because
forward-looking statements involve risks and uncertainties, the Company's actual
results may differ materially from the results expressed or implied by the
forward-looking statements. While it is impossible to identify all factors that
may cause actual results to differ, the risks and uncertainties that may affect
the Company's business, performance and results of operations include the
factors listed on Exhibit 99.3 to this report, which is incorporated herein by
reference. Subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere in this
Form 10-K.

All such forward-looking statements speak only as of the date of this
Form 10-K. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.

References to the "Company", "we", "us", "our" and words of similar
import refer to Celadon Group, Inc. and its subsidiaries.

ITEM 1. BUSINESS

Incorporated in 1986, we are one of the largest truckload carriers in
North America, with dedicated operations in the United States, Mexico and
Canada. Our focus is to excel in service, safety and technology as we move
time-sensitive freight in and between the North American Free Trade Agreement
("NAFTA") countries. In fiscal year 2002, we transported approximately 110,000
trailers across the United States-Mexico border and approximately 50,000 across
the United States-Canada border. We believe the Company is a leader in our
industry in cross-border movements within the NAFTA countries. Our strategically
located terminals and experience with different languages, cultures and border
crossing requirements, we believe, provide us with a competitive advantage in
the international trucking marketplace. These cross-border shipments represented
over 50% of our trucking revenue in fiscal 2002 and the balance is domestic
throughout the United States with first class customers.

In recent years, we have focused on returning to and sustaining
profitability. We have added several experienced managers during 2000 and 2001,
and cost reductions have been implemented to integrate the acquisitions made in
the late 1990's. A lower cost base from corporate integration and restructuring,
coupled with improvements in service, safety and technology, allowed us to
absorb approximately 15 percent of additional revenue in March 2002 on an
immediately accretive to earnings basis. Our strategy is to maintain a
leadership position in cross-border shipments, broaden our domestic position
through selective opportunistic acquisitions, and continue our emphasis on
service, safety and technology.

3

In December 2001, the United States Congress enacted legislation
providing for the opening of the Mexican border consistent with NAFTA, which was
approved in December 1994. The opening of the border, expected in the near
future, will for the first time permit Mexican drivers to move loads without
restrictions between Mexico and points in the United States. We have extensive
experience with the management of drivers in Mexico, through our ownership of
Jaguar, our Mexico City-based subsidiary. We expect to take advantage of the
border opening by utilizing lower cost drivers on shipments to and from Mexico.

SERVICE

With our focus on time-sensitive, van truckload operations in and
between the United States, Canada, and Mexico, the NAFTA countries, we play an
integral role in our customers' supply chain management. We offer
point-to-point, on-time, just-in-time, team service to meet the expectations of
our service-oriented customers. With the addition of Zipp Express in 1999 and
certain assets of Burlington Motor Carriers in 2002, we have significantly
improved our lane density, customer base and service offerings.

SAFETY

We have made safety a priority since 1999. Hours-of-service issues, log
violations, and reportable accidents and incidents have all been significantly
reduced. In August 2001, The Trucker magazine ranked us as the public truckload
carrier with the best Department of Transportation rating. We were also
recognized in March 2002 as the third best large fleet in America at the
Truckload Carrier Conference, the trucking industry's most recognized trade
group. As a result of our improved safety record, we were approved in July 2002
by the Department of Transportation for self-insured status.

TECHNOLOGY

We use state-of-the-art technology for customer service, dispatch,
equipment control, driver communications, electronic data interchange and
administrative purposes. All of our tractors are equipped with Qualcomm mobile
communication terminals, which allow information to be passed to and from the
driver via satellite instantaneously. Customer order information, load tracking,
and service performance are all monitored using the latest in mobile
communication technology. Our ability to capture data also allows customers to
track their own shipments utilizing CelaTrac, a proprietary Internet based
tracking system. We believe that these network optimization tools and our
ability to monitor engine performance on a real time basis by satellite
technology allow us to reduce operating expenses. In December 2000, we also
implemented document imaging. All key documents are scanned so that customers
can retrieve information via the Internet, e-mail or facsimile 24 hours a day, 7
days a week.

TRUCKERSB2B

In early 2000, we created TruckersB2B, Inc., a "business-to-business"
membership group that allows the smaller carriers in the trucking industry to
achieve cost savings on various purchases. There are approximately 11,500
fleets, representing 360,000 tractors, participating as members as of June 2002
(12,750 fleets as of September 30, 2002). Fuel, tires, satellite systems,
financing and other items are vendor products that are offered. Over $6.5
million in rebates have been paid out to members since inception. After
expensing a loss of $6.2 million, before taxes, to start the business,
TruckersB2B has been profitable since April of 2001.

4

INDUSTRY OVERVIEW

The full truckload market is defined by the quantity of goods,
generally over 10,000 pounds, shipped by a single customer point-to-point and is
divided into several segments by the type of trailer used to transport the
goods. These segments include van, temperature-controlled, flatbed, and tank
carriers. We participate in the North American van truckload market. We
previously competed in the flatbed market through our ownership of Cheetah,
which was sold in June 2001. The markets within the United States, Canada, and
Mexico are fragmented, with many competitors.

Transportation of goods by truck between the United States, Canada, and
Mexico is subject to the provisions of NAFTA. United States and Canadian based
carriers may operate within both countries. United States and Canadian carriers
are not allowed to operate within Mexico, and Mexican carriers are not allowed
to operate within the United States and Canada, in each case except for a
26-kilometer band along either side of the Mexican border. Trailers may cross
all borders.

Transportation of goods between the United States or Canada and Mexico
consists of three components: (i) transport from the point of origin to the
Mexican border, (ii) drayage, which is transportation across the border, and
(iii) transportation from the border to the final destination. We are one of a
limited number of trucking companies that participates in all three segments of
this cross border market, providing true door-to-door carriage.

TruckersB2B is a business-to-business savings program, for small and
mid-sized fleets. Competitors include other large trucking companies and other
business-to-business buying programs.

OPERATIONS AND MARKETING

We approach our trucking operations as an integrated effort of
marketing, customer service, and fleet management. Our customer service and
marketing personnel emphasize both new account development and expanded service
for current customers. Customer service representatives provide day-to-day
contact with customers, while the sales force targets freight that will increase
lane density.

We provide and arrange for long-haul, point-to-point, time sensitive,
full truckload transport of goods between the United States, Canada and Mexico.
Most international shipments are carried on through-trailer service on U.S. or
Canadian trailers. Mexican carriers also use our trailers. As a result, we
maintain an above average trailer-to-tractor ratio. We utilized 2,568 tractors
(of which 512 were owner operators and 200 were lease-purchase owner operators)
and 6,758 trailers as of June 30, 2002.

Our success is largely dependent upon the success of our operations in
Mexico and Canada, and we are subject to risks of doing business
internationally, including fluctuations in foreign currencies, changes in the
economic strength of the countries in which we do business, difficulties in
enforcing contractual obligations and intellectual property rights, burdens of
complying with a wide variety of international and United States export and
import laws and social, political and economic instability. Additional risks
associated with our foreign operations, including restrictive trade policies and
imposition of duties, taxes or government royalties by foreign governments, are
present but largely mitigated by the terms of NAFTA. Information regarding the
Company's revenue derived from foreign external customers and long-lived assets
located in foreign countries is set forth in Note 12 to the consolidated
financial statements filed as part of this report.

5

We target large service-sensitive customers with time-definite delivery
requirements throughout the United States, Canada and Mexico. Our customers
frequently ship in the north-south lanes (i.e., to and from locations in Mexico
and locations in the United States and Eastern Canada). The sales and marketing
personnel in our offices work together to source northbound and southbound
transport, in addition to other transportation solutions. We currently service
in excess of 3,700 trucking customers. Our premium service to these customers is
enhanced by a high trailer-to-tractor ratio, state-of-the-art technology,
well-maintained, late-model tractors and trailers, and 24/7 dispatch and
reporting services. The principal types of freight transported include
automotive parts, paper products, manufacturing parts, semi-finished products,
textiles, appliances, retail and toys.

Our largest customer is DaimlerChrysler, which accounted for
approximately 19%, 20% and 24% of our total revenue for fiscal 2002, 2001 and
2000, respectively. In the fourth quarter in fiscal 2002, DaimlerChrysler
accounted for approximately 16% of our revenue. We transport DaimlerChrysler
original equipment automotive parts primarily between the United States and
Mexico, and DaimlerChrysler after-market replacement parts and accessories
within the United States. We have an agreement with DaimlerChrysler for
international freight for the Chrysler division, which expires in October 2003.
No other customer accounted for more than 10% of our total revenue during any of
our three most recent fiscal years.

Our TruckersB2B subsidiary provides discounted fuel, tires, and other
products and services to small and medium-sized trucking companies through its
website, www.truckersb2b.com. TruckersB2B provides small and medium-sized
trucking company members with the ability to cut costs, and thereby compete more
effectively and profitably with the larger fleets.

DRIVERS AND PERSONNEL

At June 30, 2002, we employed 2,975 persons, of whom 2,044 were
drivers, 175 were truck maintenance personnel and 756 were administrative
personnel. None of our U.S. or Canadian employees are represented by a union or
a collective bargaining unit.

Driver recruitment, retention, and satisfaction are essential
components of our success. Drivers are selected in accordance with specific
guidelines, relating primarily to safety records, driving experience, and
personal evaluations, including a physical examination and mandatory drug
testing. Our drivers attend an orientation program and ongoing driver efficiency
and safety programs.

Owner-operators are independent contractors who are utilized through a
contract with us to supply one or more tractors and drivers for our use.
Owner-operators must pay their own tractor expenses, fuel, maintenance and
driver costs and must meet our specified guidelines with respect to safety. The
lease-purchase program provides owner operators the opportunity to lease-to-own
a tractor from the Company. As of June 30, 2002, there were 512 owner-operator
tractors and 200 lease-purchase owner-operator tractors providing a combined 28%
of our tractor capacity.

REVENUE EQUIPMENT

Our equipment strategy is to utilize premium late-model tractors,
maintain a high trailer-to-tractor ratio, actively manage equipment throughout
its life cycle and employ a comprehensive service and maintenance program.

Our fleet is comprised of tractors manufactured by Freightliner, Volvo
and Peterbilt to our specifications, which we believe helps to attract and
retain drivers and to minimize maintenance and repair costs.

6

As of June 30, 2002, the average age of our owned and leased tractors
and trailers was approximately 2.3 and 4.8 years, respectively. We utilize a
comprehensive maintenance program to minimize downtime and control maintenance
costs. Centralized purchasing of spare parts and tires, and centralized control
of over-the-road repairs are also used to control costs. We generally replace
our tractors every four to five years, although we retain some older tractors
for use on shorter haul routes (including drayage) where they can be utilized
more economically. We further reduce exposure to declines in the resale value of
our equipment by entering into agreements with certain manufacturers providing
for pre-established resale values upon trade-in of existing equipment.

The following table shows our revenue equipment by type and model year
at June 30, 2002:

MODEL YEAR TRACTORS TRAILERS
---------- -------- --------
2003 85 ---
2002 104 ---
2001 430 312
2000 733 1,059
1999 319 1,121
1998 244 743
1997 42 305
1996 52 1,799
1995 14 957
Pre-1995 33 462
----- -----
Total 2,056 6,758
===== =====

We maintain a 2.6 to 1 trailer-to-tractor ratio (including
owner-operator equipment) in order to provide availability in Mexico and to
allow us to leave trailers with our high volume shippers to load and unload at
their convenience. As of June 30, 2002, we had 139 tractors on order for
delivery in fiscal 2003. Additional growth in the tractor and trailer fleet
beyond our existing orders will require additional sources of financing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."

FUEL

We purchase the majority of our fuel through a network of over 100 fuel
stops throughout the United States and Canada. We have negotiated discounted
pricing based on certain volume commitments with these fuel stops. We maintain
bulk fueling facilities in Indianapolis, Indiana, Laredo, Texas, and Kitchener,
Ontario, Canada to further reduce fuel costs.

Shortages of fuel, increases in prices or rationing of petroleum
products can have a materially adverse effect on our operations and
profitability. Fuel is subject to economic, political and market factors that
are outside of our control. We have historically been able to recover a portion
of high fuel prices from customers in the form of fuel surcharges. However, a
portion of the fuel expense increase was not recovered during fiscal years 2001
and 2000. This was due to several factors: the base fuel price levels which
determine when surcharges are collected, truck idling, empty miles between
freight shipments, and out-of-route miles. We cannot predict whether high fuel
price levels will occur in the future or the extent to which fuel surcharges
will be collected to offset such increases.

7

We from time-to-time will enter into derivative financial instruments
to reduce our exposure to fuel price fluctuations. As of June 30, 2002, we had
17% and 13% of estimated fuel purchases hedged through August 2002 and January
2003, respectively. We recognized approximately $100,000 of expense associated
with these derivative contracts for the year ended June 30, 2002.

COMPETITION

While the truckload industry is highly competitive and fragmented, we
are one of a limited number of companies that is able to provide or arrange for
door-to-door transport service between points in the United States, Canada and
Mexico. Although both service and price drive competition in the premium
long-haul, time sensitive portion of the market, we rely primarily on our high
level of service to attract customers. This strategy requires us to focus on
market segments that employ just-in-time inventory systems and other premium
services. Competitors include other long-haul truckload carriers and, to a
lesser extent, medium-haul truckload carriers and railroads.

REGULATION

Our operations are regulated and licensed by various United States
federal and state, Canadian provincial and Mexican federal agencies. Interstate
motor carrier operations are subject to safety requirements prescribed by the
United States Department of Transportation. Such matters as weight and equipment
dimensions are also subject to United States federal and state regulation and
Canadian provincial regulations. We operate in the United States throughout the
48 contiguous states pursuant to operating authority granted by the Federal
Highway Administration, in various Canadian provinces pursuant to operation
authority granted by the Ministries of Transportation and Communications in such
provinces, and within Mexico pursuant to operating authority granted by
Secretaria de Communiciones y Transportes. To the extent that we conduct
operations outside the United States, we are subject to the Foreign Corrupt
Practices Act, which generally prohibits United States companies and their
intermediaries from bribing foreign officials for the purpose of obtaining or
retaining favorable treatment.

CARGO LIABILITY, INSURANCE, AND LEGAL PROCEEDINGS

We are a party to routine litigation incidental to our business,
primarily involving claims for bodily injury or property damage incurred in the
transportation of freight. We are responsible for the safe delivery of cargo. As
of July 2002, we are self-insured on auto liability claims for the first one
million dollars of an accident claim and for this year Celadon is also
responsible for a one million dollar aggregate corridor deductible on the second
one million dollar layer of auto liability insurance coverage, plus
administrative expenses, for each occurrence involving personal injury or
property damage. We are also self-insured for our physical damage losses, and
workers compensation losses and responsible for the first $100,000 on cargo
claims. We maintain separate insurance in Mexico consisting of bodily injury and
property damage coverage with acceptable deductibles. Management believes our
uninsured exposure is reasonable for the transportation industry. Consequently,
we do not believe that the litigation and claims experienced will have a
material impact on our financial position or results of operations.

8

SEASONALITY

To date, our revenues have not shown any significant seasonal pattern.
However, because our primary traffic lane is between the Midwest United States
and Mexico, winter generally may have an unfavorable impact upon our results of
operations. Also, many manufacturers close or curtail their operations during
holiday periods and observe vacation shutdowns, which may impact our operations
in any particular period.

ITEM 2. PROPERTIES

The Company operates an international network of eighteen terminal
locations, including facilities in Laredo and El Paso, Texas, which are the two
largest inland freight gateway cities between the United States and Mexico.
Operating terminals are currently located in the following cities:

Owned Property (O) Lease Property (L)

Both the Laredo and Indianapolis facilities include administrative
functions, lounge and sleeping facilities for drivers, parking, fuel and truck
washing facilities. The Company's executive and administrative offices occupy
four buildings located on 30 acres of property in Indianapolis, Indiana.

ITEM 3. LEGAL PROCEEDINGS

See discussion under "Cargo Liability, Insurance, and Legal
Proceedings" in Item 1, and Note 10 to the consolidated financial statements,
"Commitments and Contingencies."

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted for a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 2002.

9

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Since January 24, 1994, the date of the initial public offering of the
Company's Common Stock, the Common Stock has been quoted through the Nasdaq
National Market under the symbol "CLDN." The following table sets forth the high
and low reported sales price for the Common Stock as quoted through the Nasdaq
National Market for the periods indicated.

FISCAL 2001 HIGH LOW
----------- ---- ---

Quarter ended September 30, 2000 $15.25 $6.88

Quarter ended December 31, 2000 $8.00 $2.88

Quarter ended March 31, 2001 $8.68 $2.75

Quarter ended June 30, 2001 $5.27 $2.88

FISCAL 2002
-----------

Quarter ended September 30, 2001 $4.26 $2.98

Quarter ended December 31, 2001 $6.05 $3.30

Quarter ended March 31, 2002 $7.00 $4.62

Quarter ended June 30, 2002 $13.99 $5.85

On September 25, 2002, there were approximately 2,100 holders of the
Company's Common Stock, and the closing price of the Company's Common Stock was
$11.29.

The following table summarizes the Company's equity compensation plans as of
June 30, 2002:

10

DIVIDEND POLICY

The Company has not paid cash dividends on its Common Stock as a public
company and has no present intention of paying cash dividends on its Common
Stock in the foreseeable future. Moreover, pursuant to its existing credit
agreements, the Company and certain of its subsidiaries may pay cash dividends
only up to certain specified levels and only if certain financial ratios are
met.

ITEM 6. SELECTED FINANCIAL DATA

The statement of operations data and balance sheet data presented below
have been derived from the Company's consolidated financial statements and
related notes thereto. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and related notes thereto.

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(1) Calculation of diluted net income (loss) per common share for the 2001 and
2000 periods are anti-dilutive.
(2) Includes expenses of $800,000 related to write-off of deferred initial
public offering costs for TruckersB2B.
(3) Includes operating loss of $4.7 million related to TruckersB2B.
(4) Operating ratio is defined as total operating expenses as a percentage of
total operating revenues.
(5) EBITDA is defined as operating income plus depreciation and amortization.
The Company has included data with respect to EBITDA because it is commonly
used as a measurement of financial performance by investors to analyze and
compare companies on the basis of operating performance. EBITDA is not a
measure of financial performance under generally accepted accounting
principles ("GAAP") and should not be considered an alternative to
operating income, as determined in accordance with GAAP, as an indicator of
our operating performance, or to cash flows from operating activities, as
determined in accordance with GAAP, as a measurement of the Company's
liquidity.

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

Celadon Group, Inc., through its operating subsidiaries, provides
truckload transportation services in and between the NAFTA countries of the
United States, Mexico and Canada. We deliver our services through a network of
owned and leased tractors and, to a lesser extent, independent owner-operators.
We excel in service, safety and technology as we move time-sensitive freight in
and between the United States, Canada and Mexico.

Consistent with our focus on technology to improve our core businesses,
we also operate TruckersB2B, Inc., a profitable e-procurement business that
passes on volume purchasing power to more than 11,500 member fleets to provide
discounts on fuel, tire and other related services.

We continually evaluate our acquisition opportunities in order to
expand our core business and improve the quality of our customer service. We
believe that current economic conditions will lead to additional consolidation
in the industry, and we feel that we are well positioned to take advantage of
that consolidation. Consistent with our strategy, we have made several
strategic acquisitions in recent years, including the acquisition of Zipp
Express in 1999 and the acquisition of certain assets of Burlington Motor
Carriers in 2002, each as described in more detail below. We believe these
acquisitions have significantly improved our lane density, customer base,
service offerings and operating results.

RECENT ACQUISITIONS AND DIVESTITURES

We purchased, in March 2002, certain fixed assets of Burlington Motor
Carriers, consisting primarily of approximately 300 tractors and 900 trailers,
and we incurred $7.5 million in notes payable related to the transaction.

In June 2001, we sold certain assets and the owner-operator and agent
contracts of Cheetah Transportation, Inc. to American Trans Freight. Cheetah, a
flatbed truckload carrier operating out of Mooresville, North Carolina, was
divested due to its lack of strategic fit with our focus on van truckload
operations. We recognized a $3.7 million loss on disposition, which included a
non-cash charge of $3.2 million, related to the net book value of goodwill and
other intangibles. Cheetah had approximately 300 owner-operators and revenues of
$27 million in fiscal 2001.

Effective July 1, 1999, we acquired the assets and assumed certain
liabilities of Zipp Express, Inc. for approximately $26 million. Zipp operated a
relatively new fleet of approximately 270 tractors and 800 trailers. The
addition of this newer equipment allowed us to dispose of older, less
fuel-efficient tractors and other assets. The effect of upgrading our fleet
through this equipment disposition resulted in a non-cash charge of
approximately $3.3 million in fiscal 2000.

12

RESULTS OF OPERATIONS

The following table sets forth the percentage relationship of revenue
and expense items to operating revenues for the periods indicated.

FISCAL YEAR ENDED JUNE 30, 2002 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2001

REVENUE. Consolidated revenue decreased by $14.8 million, to $337.0
million for fiscal 2002 from $351.8 million for fiscal 2001. Revenue for fiscal
2001 included revenue from Cheetah, our flatbed carrier operation, and higher
pass-through revenues related to the Mexican portion of transportation. In April
of 2001, Daimler Chrysler began to coordinate and contract with Mexican
transportation companies for the Mexico portion of loads. This decreased our
pass-through revenues in fiscal 2002 by approximately $11 million. Adjusted for
these items, last year's consolidated revenue would have been $314.7 million. On
a comparable basis, excluding Cheetah and the pass-through revenues in the prior
year, revenue for fiscal 2002 represented an increase of $22.3 million, or
approximately 7%. We experienced an increase of approximately 11 million
dispatch miles for fiscal 2002 related to a strengthening economy and a focused
effort to add customers of bankrupt Burlington Motor Carriers. Revenue for
TruckersB2B was approximately $6.7 million in fiscal 2002 compared to $4.4
million in fiscal 2001. The TruckersB2B revenue increase is primarily related to
an increase in member usage of the tire discount program.

13

OPERATING INCOME. Consolidated operating income increased by $6.2
million, to $10.5 million in fiscal 2002 from $4.3 million in fiscal 2001. The
increase in operating income was primarily a result of decreased fuel, rent and
purchased transportation and depreciation and amortization expense offset by
increased salaries, wages and employee benefits and insurance expense.
TruckersB2B operating income increased by $3.2 million, to $0.9 million in
fiscal 2002 from a loss of $2.3 million in fiscal 2001. Our operating ratio,
which expresses operating expenses as a percentage of operating revenue,
improved from 98.8% in fiscal 2001 to 96.9% in fiscal 2002. The decrease in
operating ratio for fiscal 2002 will also adversely affect the operating expense
percentages of revenues discussed further below when compared to fiscal 2001.

Salaries, wages and benefits were $100.4 million, or 29.8% of operating
revenues, for fiscal 2002 compared to 27.3% for the same period in 2001. This
increase is primarily related to driver pay for small, focused regional
operations which have accretive revenues.

Fuel expenses decreased to 10.7% of revenue for fiscal 2002 compared to
11.3% in fiscal 2001. Fuel prices have declined approximately $0.20 per gallon
for fiscal 2002 compared to fiscal 2001.

Insurance and claims expense was 3.6% in fiscal 2002 compared to 2.9%
for fiscal 2001. Insurance consists of premiums for liability, physical damage
and cargo damage insurance. Our insurance program involves self-insurance at
various risk retention levels. Claims in excess of these risk levels are covered
by insurance in amounts we consider to be adequate. We accrue for the uninsured
portion of claims based on known claims and historical experience. Liability
insurance premiums, which were renewed effective May 11, 2001, increased
significantly year-over-year due to continued difficulty in the insurance and
reinsurance markets.

Rent and purchased transportation decreased $22 million to 33.3% of
revenue for fiscal 2002 from 38.1% for the same period in 2001. The decrease in
fiscal 2002 is primarily related to reduced owner-operator expense caused by the
sale of Cheetah, partially offset by increased usage of owner-operators in other
areas. Also, as pass-through revenue related to the Mexican portion of loads
decreased, the pass-through purchased transportation expense has also decreased.
To offset these decreases, trailer costs have risen as we continue to replace
48-foot trailers with 53-foot trailers. In addition, tractor costs have
increased as most new tractors have operating leases on a four-year trade cycle.

NET INTEREST EXPENSE. Net interest expense decreased by $1.8 million,
or 19.4%, to $7.5 million in fiscal 2002 from $9.3 million in fiscal 2001. The
decrease was the result primarily of lower interest rates as bank borrowings and
capital lease obligations were slightly higher at June 30, 2002, compared to
June 30, 2001. The bank line borrowings have decreased $4.6 million to $38.9
million on June 30, 2002.

INCOME TAXES. Income taxes resulted in expense of $1.2 million in
fiscal 2002, with an effective tax rate of 41.6%, compared to a benefit of $2.6
million, with an effective tax rate of 33.0%, in fiscal 2001. The effective tax
rate increased by approximately 6% for non-deductible expenses as a result of
the increased pre-tax income in fiscal 2002 compared to the pre-tax loss in
fiscal 2001.

FISCAL YEAR ENDED JUNE 30, 2001 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2000

REVENUE. Consolidated revenue increased by $0.2 million to $351.8
million for fiscal 2001 from $351.6 million for fiscal 2000. Beginning in the
fourth quarter, DaimlerChrysler began to coordinate the Mexican portion of
transportation causing a decline of $3.6 million compared to prior year fourth
quarter. In addition, we experienced a reduction in dispatch miles directly
related to the softening economy. The billings related to the Mexican portion of
transportation decreased for the year approximately $1.6 million. TruckersB2B
revenue increased to $4.4 million in fiscal 2001 compared with $200 thousand in
fiscal 2000.

14

OPERATING INCOME. Consolidated operating income decreased by $4.5
million, or 51%, to $4.3 million in fiscal 2001 from $8.8 million in fiscal
2000. Our operating ratio increased from 97.5% in fiscal 2000 to 98.8% in fiscal
2001.

The decrease in operating income and the increased operating ratio were
attributable to a significant increase in fuel costs, net of fuel surcharges, of
approximately $1.2 million, or $0.16 (tax effected) per diluted common share. We
recovered a portion of the increased cost from customers via the use of fuel
surcharges. However, a portion of the fuel expense increase was not recovered
during fiscal year 2001. In fiscal 2001, we met with our customers to explain
the impact of high fuel prices and to improve the amount and percentage of fuel
surcharge reimbursement.

Rent and purchased transportation expense increased as a result of
owner-operator capacity growth in the van truckload division, and higher
equipment costs, partially offset by a decreased use of independent Mexican
carriers. In addition, depreciation expense and insurance costs increased
slightly as a percentage of revenue.

TruckersB2B had a $2.3 million operating loss for fiscal year 2001
compared to an operating loss of $4.7 million in fiscal 2000. In fiscal 2001,
the operating loss included approximately $800 thousand of deferred initial
public offering expenses and approximately $350 thousand of non-cash member and
vendor development expense related to issuing shares of TruckersB2B common stock
at fair value to a strategic partner. The remaining loss in fiscal 2001 was
related to expenses incurred in salaries, advertising and other administrative
costs. The loss in fiscal 2000 included a non-cash charge of $2.8 million
related to the fair value of shares of TruckersB2B common stock earned by its
strategic partners. TruckersB2B also incurred $2.0 million of pre-tax operating
losses for salaries, advertising, and other costs associated with the start-up
of this business.

LOSS OF DISPOSITION OF FLATBED DIVISION. In June 2001, we sold Cheetah
for cash. We recognized a loss of $3.7 million, which included a non-cash charge
of $3.2 million related to the net book value of goodwill and other intangibles.

NET INTEREST EXPENSE. Net interest expense increased by $0.1 million,
or 1.1%, to $9.3 million in fiscal 2001 from $9.2 million in fiscal 2000. The
increase was the result of higher rates for our existing variable rate credit
facility, partially offset by reduced borrowings under capital leases.

INCOME TAXES. Income taxes resulted in a benefit of $2.6 million in
fiscal 2001, with an effective tax rate of 33.0%, compared to a benefit of $1.3
million, with an effective tax rate of 39.4%, in fiscal 2000. This change in
income taxes is a result of our pre-tax loss in fiscal 2001 compared to the
pre-tax loss in fiscal 2000.

LIQUIDITY AND CAPITAL RESOURCES

We generated cash flow of $14.5 million, $13.9 million and $10.3
million from operating activities in fiscal 2002, 2001 and 2000, respectively.
In fiscal 2002, the slight increase in cash flow relative to fiscal 2001 was due
to net income in fiscal 2002, decreases in prepaid expenses and increases in
accrued expenses partially offset by increases in other assets and trade
receivables.

Investing activities provided cash of $5.3 million and $9.7 million in
fiscal 2002 and 2001, respectively. This cash was provided by proceeds from the
sale of property and equipment offset in part by the purchase of new property
and equipment. In fiscal 2000, we used $22.5 million for investing activities,
primarily related to the purchase of Zipp Express.

15

We used $20.2 million and $23.2 million for financing activities in
fiscal 2002 and 2001, respectively. These uses were primarily for net bank
borrowings, capital lease obligations and stock repurchases. In fiscal 2000,
financing activities generated cash of $11.8 million. The proceeds from bank
borrowings during fiscal 2000 were $38.6 million, which included funds to
purchase Zipp Express offset by net payments for bank borrowings, other debt and
capital lease payments.

Our primary capital requirements over the last three years have been
funding the acquisition of equipment, the start-up of TruckersB2B and the Zipp
Express acquisition. Capital expenditures (including the value of equipment
procured under capital leases) totaled $19.0 million, $23.3 million, and $24.5
million in fiscal 2002, 2001 and 2000, respectively. We purchased $12.6 million,
$17.3 million, and $13.2 million of revenue equipment under capitalized leases
and other financing in fiscal 2002, 2001 and 2000, respectively. We have
historically met our capital investment requirements with a combination of
internally generated funds, bank financing, equipment lease financing (both
capitalized and operating) and, to a lesser extent, the issuance of common
stock.

As of June 30, 2002, the Company had a $65 million banking facility
("credit agreement") with ING (U.S.) Capital, LLC ("ING"). The arrangement
includes a $30 million revolving loan and a $35 million term loan. In June 2002,
our credit agreement with ING was amended to adjust our minimum EBITDA and
limitation on leasing covenants and to waive or override certain provisions of
the credit agreement to permit us to complete the purchase of the Burlington
Motor Carrier's assets and to the sale of certain assets to other parties. We
were in compliance with all financial covenants at June 30, 2002.

On September 26, 2002, we entered into a Loan and Security Agreement
("Loan Agreement") with Fleet Capital Corporation, Fleet Capital Canada
Corporation and several other lenders named in the Loan Agreement. The Loan
Agreement provides to us, our Canadian subsidiary and certain of our United
States subsidiaries a credit facility in the aggregate amount of $55 million.
The facility consists of two revolving loan facilities, two term loan
subfacilities and a commitment to issue and guaranty letters of credit. The term
loan subfacilities consist of a domestic term loan in the aggregate principal
amount of approximately $10 million and a Canadian term loan in the aggregate
principal amount of approximately $800 thousand. Repayment of the amounts
outstanding under the Loan Agreement is secured by a lien on our assets and the
assets of certain of our subsidiaries, including the stock or other equity
interests of various subsidiaries. In addition, certain of our subsidiaries that
are not party to the Loan Agreement have guaranteed the repayment of the amount
outstanding under the Loan Agreement, and have granted a lien on their
respective assets to secure such repayment. The Loan Agreement replaces in full
the credit facility the Company entered into with ING (U.S.) Capital, LLC, in
August 1999. As of September 27, 2002, of the amount available for borrowing
under the Loan Agreement, approximately $39.5 million was utilized as
outstanding borrowings under the line of credit and the term loans, and
approximately $5.3 million was utilized for standby letters of credit. The Loan
Agreement, which is for a term of three years, terminates on September 26, 2005.
Immediately upon completion of the new loan agreement, all interest rate charges
and other loan fees will be reduced from the previous credit agreement charges.

At June 30, 2002, $38.9 million of our previous credit facility was
utilized as outstanding borrowings and $2.8 million was utilized for standby
letters of credit. The average balance outstanding during fiscal 2002 was $38.7
million and the highest balance outstanding was $49.9 million. At June 30, 2002,
we also had cash payments of $49.3 million for $45.3 million in capital lease
financing at interest rates ranging from 5.8% to 8.0%, maturing at various dates
through 2007. Of this amount, $23.7 of cash payments relating to $21.1 million
of capital lease obligation is due prior to June 30, 2003.

16

As of June 30, 2002, our bank loans, capitalized leases and operating
leases for our operating assets have stated maturities or minimum annual
payments as follows:

(1) Assuming we exercise the conversion feature within our credit agreement.

As of June 30, 2002, we had 139 tractors on order for delivery in
fiscal 2003. A commitment for lease financing on these units has been obtained.
Management believes that there are presently adequate sources of secured
equipment financing together with our existing credit facilities and cash flow
from operations to provide sufficient funds to meet our anticipated working
capital requirements. Additional growth in the tractor and trailer fleet beyond
our existing orders will require additional sources of financing.

INFLATION

Many of our operating expenses, including fuel costs and related fuel
taxes, are sensitive to the effects of inflation, which result in higher
operating costs. The effects of inflation on our business during the past three
years were most significant in fuel. We have limited the effects of inflation
through increases in freight rates and fuel surcharges.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make
assumptions and estimates that can have a material impact on the reported
results of operations. While management applies its judgment based on
assumptions believed to be reasonable under the circumstances, actual results
could vary from those assumptions, and it is possible that materially different
amounts would be reported using differing assumptions.

We are self-insured for most medical insurance claims, workers
compensation claims, and general liability and automotive liability losses.
Reported claims and related loss reserves are estimated by third party
administrators. Claims incurred but not reported are recorded based on
historical experience and industry trends, which are continually monitored, and
accruals are adjusted when warranted by changes in facts and circumstances

Long-lived assets are depreciated over estimated useful lives based on
our historical experience and prevailing industry practice. Estimated useful
lives are periodically reviewed to ensure they remain appropriate. Long-lived
assets are tested for impairment whenever an event occurs that indicates an
impairment may exist.

17

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We experience various market risks, including changes in foreign
currency exchange rates, interest rates, and fuel prices. We do not enter into
derivatives or other financial instruments for trading or speculative purposes.

We are exposed to interest rate risk primarily from our Credit
Agreement ("Credit Agreement") as of June 30, 2002. A hypothetical 10% movement
in interest rates would have an impact on net income of approximately $170,000.
In the event of a change of such magnitude, management would likely consider
actions to further mitigate our exposure to the change

Our foreign currency revenues are generally proportionate to our
foreign currency expenses, and we do not generally engage in currency hedging
transactions. For purposes of consolidation, however, the operating results
earned by our subsidiaries in foreign currencies are converted into United
States dollars. As a result, a decrease in the value of the Mexican peso or
Canadian dollar could adversely affect our consolidated results of operations
and equity.

Shortages of fuel, increases in prices or rationing of petroleum
products can have a materially adverse effect on our operations and
profitability. Fuel is subject to economic, political and market factors that
are outside of our control. From time-to-time we will enter into derivative
financial instruments to reduce our exposure to fuel price fluctuations. As of
June 30, 2002, we had 17% and 13% of estimated fuel purchases hedged through
August 2002 and January 2003, respectively. We have recognized approximately
$100,000 of expense associated with these derivative contracts for the year
ended June 30, 2002. A hypothetical 10% movement in the price of fuel future
quantities would have an impact on net income of approximately $150,000.

18

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following statements are filed with this report:

Report of Independent Auditors;
Consolidated Balance Sheets;
Consolidated Statements of Operations;
Consolidated Statements of Cash Flows;
Consolidated Statements of Stockholders' Equity; and
Notes to Consolidated Financial Statements.

19

CELADON GROUP, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Three years ended June 30, 2002 with
Report of Independent Auditors

Contents

Report of Independent Auditors................................................21

Audited Consolidated Financial Statements:

Consolidated Balance Sheets..............................................22
Consolidated Statements of Operations....................................23
Consolidated Statements of Cash Flows....................................24
Consolidated Statements of Stockholders' Equity..........................25
Notes to Consolidated Financial Statements...............................26

20

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Celadon Group, Inc.

We have audited the accompanying consolidated balance sheets of Celadon
Group, Inc. as of June 30, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 14. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Celadon Group, Inc. at June 30, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2002, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statements
schedule, when considered in relation to the basic financial statement taken as
a whole, presents fairly in all material respects the information set forth
therein.

/s/ERNST & YOUNG LLP

Indianapolis, Indiana
August 9, 2002
except for Note 13, as to which that date is
September 27, 2002

21

CELADON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See accompanying notes to consolidated financial statements.

22

CELADON GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See accompanying notes to consolidated financial statements.

23

CELADON GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS)

See accompanying notes to consolidated financial statements.

24

CELADON GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See accompanying notes to financial statements.

25

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Celadon Group, Inc. (the "Company"), through its subsidiaries, provides
long haul, full truckload services between the United States, Canada and Mexico.
The Company's primary trucking subsidiaries are: Celadon Trucking Services, Inc.
("CTSI"), a U.S. based company; Servicio de Transportation Jaguar, S.A. de C.V.
("Jaguar"), a Mexican based company and Celadon Canada ("CelCan"), a Canadian
based company.

TruckersB2B, Inc. ("TruckersB2B") is an interest based
"business-to-business" membership program, majority owned by Celadon E-Commerce,
Inc., a wholly owned subsidiary of Celadon Group, Inc.

SUMMARY OF SIGNIFICANT ACCOUNT POLICIES

Principles of Consolidation and Presentation

The consolidated financial statements include the accounts of Celadon
Group, Inc. and its wholly and majority owned subsidiaries, all of which are
wholly owned except for Jaguar and TruckersB2B in which the Company has a 75%
and 81% interest, respectively. All significant intercompany accounts and
transactions have been eliminated in consolidation. Unless otherwise noted, all
references to annual periods refer to the respective fiscal years ended June 30.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the date of the financial statements and
during the reporting period. Such estimates include provisions for liability
claims and uncollectible accounts receivable. Actual results could differ from
those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents.

Revenue Recognition

Trucking revenue and related direct cost are recognized when the freight is
delivered by the Company.

26

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2002

TruckersB2B revenue is recognized at different times depending on the
product or service purchased by the TruckersB2B member ("member"). Revenue for
fuel rebates is recognized in the month the fuel was purchased by a member. The
tire rebate revenue is recognized when proof-of-purchase documents are received
from members. In most other programs, TruckersB2B receives commissions,
royalties or transaction fees based upon percentages of member purchases.
TruckersB2b records revenue under these programs when earned and it receives the
necessary information to calculate the revenue.

Costs of Products and Services

Cost of products and services represents the cost of the product or service
purchased or used by the TruckersB2B member. Cost of products and services is
recognized in the period that TruckersB2B recognizes revenue for the respective
product or service.

Tires in Service

Original and replacement tires on tractors and trailers are included in
tires in service and are amortized over 18 to 36 months.

Property and Equipment

Property and equipment are stated at cost. Property and equipment under
capital leases are stated at fair value at the inception of the lease.

Depreciation of property and equipment and amortization of assets under
capital leases is generally computed using the straight-line method and is based
on the estimated useful lives (net of salvage value) of the related assets as
follows:

Revenue and service equipment.......... 4-12 years
Furniture and office equipment......... 4-7 years
Buildings.............................. 20 years
Leasehold improvements................. Lesser of life of lease or useful life
of improvement

Initial delivery costs relating to placing tractors and trailers in
service, which are included in revenue and service equipment, are being
amortized on a straight-line basis over the lives of the assets or in the case
of leased equipment, over the respective lease term. The cost of maintenance and
repairs, including tractor overhauls, is charged to expense as incurred.

27

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

Goodwill

Goodwill reflects the excess of cost over net assets of businesses
acquired. Goodwill is reviewed annually for impairment See Note 2 to the
Consolidated Financial Statements.

Insurance Reserves

Reserves for known claims and incurred but not reported claims up to
specific policy limits are accrued based upon information provided by third
party administrators. Such amounts are included in accrued expenses.

Advertising

Advertising costs are expensed as incurred by the Company. Advertising
expenses for fiscal 2002, 2001, and 2000 were approximately $0.6 million, $1.6
million, and $3.5 million, respectively, and are included in salaries, wages and
employee benefits and general, administrative and selling expenses in the
statement of operations.

Non-Cash Member and Vendor Development Costs

Non-cash member and vendor development costs represents the fair value, at
the measurement date, of TruckersB2B common stock issued to strategic partners
in connection with the development of its member base and product and service
offerings.

Income Taxes

Deferred taxes are recognized for the future tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
and income tax reporting, based on enacted tax laws and rates. Federal income
taxes are provided on the portion of the income of foreign subsidiaries that is
expected to be remitted to the United States.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables.
Concentrations of credit risk with respect to trade receivables are generally
limited due to the Company's large number of customers and the diverse range of
industries, which they represent. Accounts receivable balances due from
DaimlerChrysler totaled $6.6 million, or 12%, of the gross trade receivables at
June 30, 2002. The Company had no other significant concentrations of credit
risk.

Foreign Currency Translation

Foreign financial statements are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52, Foreign Currency
Translation. Assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at year-end exchange rates. Income statement
accounts are translated at the average exchange rate prevailing during the year.
Resulting translation adjustments are included in other comprehensive income.

28

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

Financial Instruments

The fair value of the Company's financial instruments, including cash and
cash equivalents; accounts and notes receivable; accounts payable; and accrued
liabilities approximate their carrying value due to their short term nature. The
fair value of the Company's current and long-term bank borrowings also
approximate as their interest rates fluctuate based upon current market
conditions.

Recent Accounting Pronouncements

In 2001, the Financial Accounting Standards Board issued Statement No. 143
(SFAS 143), Accounting for Asset Retirement Obligations. SFAS 143 requires
companies to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred, which is adjusted to its
present value each period. In addition, companies must capitalize a
corresponding amount by increasing the carrying amount of the related long-lived
asset, which is depreciated over the useful life of the related asset. The
Company will adopt SFAS 143 on July 1, 2002, and does not expect that this
statement will have a material impact on its consolidated financial position or
results of operations.

In 2001, the Financial Accounting Standards Board issued Statement No. 144
(SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 provides additional restrictive criteria that would have to be met to
classify an asset as held-for-sale. This statement also requires expected future
operating losses from discontinued operations to be recorded in the period in
which the losses are incurred (rather than as of the date management commits to
a formal plan to dispose of a segment, as previously required). In addition,
more dispositions will qualify for discontinued operations treatment in the
income statement. The Company will adopt SFAS 144 on July 1, 2002, and does not
expect that this statement will have a material impact on its consolidated
financial position or results of operations.

(2) GOODWILL

As of July 1, 2001, we adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, which addressees the financial
accounting and reporting standards for the acquisition of intangible assets
outside of a business combination and for goodwill and other intangible assets
subsequent to their acquisition. This accounting standard requires that goodwill
be separately disclosed from other intangible assets in the statement of
financial position, and no longer be amortized but tested for impairment on a
periodic basis. The provisions of this accounting standard also require the
completion of a transitional impairment test within six months of adoption. The
transitional impairment test has been completed and there is no impairment as of
July 1, 2001, the date the Company adopted the provisions of this statement. At
April 1, 2002, the Company has reviewed the impairment test principles applied
previously and concluded that there is no impairment.

29

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

In accordance with SAFAS No. 142, we discontinued the amortization of
goodwill effective July 1, 2001. A reconciliation of previously reported net
income, loss and earnings (loss) per share to the amounts adjusted for the
exclusion of goodwill amortization net of the related income tax effect follows:

FISCAL YEAR ENDED
JUNE 30,
2002 2001 2000
--------- --------- ---------
Reported net income (loss) $ 1,709 (5,336) $ (2,041)
Add: Goodwill amortization, net of tax -- 951 61
--------- ------ ---------
Adjusted net income (loss) $ 1,709 (4,385) $ (1,180)
========= ====== =========

Diluted and basic earnings (loss) per share:
Reported net income (loss) $ 0.22 (0.70) $ (0.26)
Add: Goodwill amortization, net of tax 0.13 0.11
--------- ------ ---------
Adjusted net income (loss) $ 0.22 (0.57) $ (0.15)
========= ====== =========

(3) ACQUISITIONS AND DIVESTITURES

Effective July 1, 1999, the Company acquired the assets and assumed certain
liabilities of Zipp for approximately $26 million. Zipp was a major carrier to
and from Mexico and also maintains a strong base of business in the Midwest. At
the acquisition date, Zipp operated a relatively new fleet of about 270 tractors
and 800 trailers. The Company accounted for the transaction as a purchase and
funded the acquisition using its line of credit. The allocation of the Zipp
purchase price resulted in $10.1 million of goodwill. As a result of this
acquisition, the Company disposed of a group of its own older equipment and
related items that will no longer be required due to the acquired fleet having
newer and more fuel-efficient equipment. The combined fleets resulted in
operating efficiencies that allowed the Company to dispose of this excess
equipment. The effect of upgrading the Company's fleet through this disposition
resulted in a non-cash charge of approximately $3.3 million in fiscal year 2000.
Effective December 31, 2001, Zipp was merged into CTSI.

In June 2001, the Company sold certain assets and the owner operator and
agent contracts of Cheetah Transportation, Inc. ("Cheetah"), a wholly owned
subsidiary of the Company. Cheetah was a flatbed truckload carrier operating out
of Mooresville, North Carolina. The Company incurred a $3.7 million loss on the
disposition of Cheetah, which included a non-cash charge of $3.2 million related
to the net book value of goodwill and other intangible assets.

30

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

(4) PROPERTY, EQUIPMENT AND LEASES

Property, Equipment and Revenue Equipment Under Capital Leases

Property and equipment consists of the following (in thousands):

2002 2001
-------- --------
Revenue equipment owned ..................... $ 41,749 $ 39,450
Revenue equipment under capital leases ...... 82,223 88,202
Furniture and office equipment .............. 4,498 5,616
Land and buildings .......................... 10,185 9,487
Service equipment ........................... 832 849
Leasehold improvements ...................... 655 779
-------- --------
$140,142 $144,383
======== ========

Included in accumulated depreciation was $23.1 million and $21.5 million in
2002 and 2001, respectively, related to revenue equipment under capital leases.

Depreciation and amortization expense relating to property and equipment
owned and revenue equipment under capital leases was $13.6 in 2002, $13.5
million in 2001 and $14.2 million in 2000.

Lease Obligations

The Company leases certain revenue and service equipment under long-term
lease agreements, payable in monthly installments with interest at rates ranging
from 5.8% to 8.0% per annum, maturing at various dates through 2007.

The Company leases warehouse and office space under noncancellable
operating leases expiring at various dates through September 2021. Certain
leases contain renewal options.

31

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

Future minimum lease payments relating to capital leases and to operating
leases with initial or remaining terms in excess of one year are as follows (in
thousands):

YEAR ENDED JUNE 30 CAPITAL LEASES OPERATING LEASES
------------------ -------------- ----------------

2003 ................................................. $23,694 $26,117
2004 ................................................. 15,646 35,668
2005 ................................................. 9,385 19,772
2006 ................................................. 201 8,688
2007 ................................................. 414 7,133
Thereafter............................................. -- 11,921
------- ---------
Total minimum lease payments....................... $49,340 $109,299
=========
Less amounts representing interest..................... 4,027
-------
Present value of net minimum lease payments............ $45,313
Less Current maturities................................ 21,120
-------
Non-current portion................................ $24,193
=======

Total rental expense for operating leases is as follows (in thousands):

2002 2001 2000
------- ------- -------
Revenue and service equipment ............... $22,079 $19,107 $16,447
Office facilities and terminals.............. 2,285 2,329 2,339
------- ------- -------
$24,364 $21,436 $18,786
======= ======= =======

(5) BANK BORROWINGS AND LONG-TERM DEBT

The Company's outstanding borrowings consist of the following at June 30:

2002 2001
------- -------
(in thousands)
Outstanding amounts under lines of credit (collateralized
by certain trade receivables and revenue equipment) $38,910 $43,500
------- -------
Other borrowings............................................. 12,799 6,462
51,709 49,962
Less current maturities...................................... 7,531 12,394
------- -------
Non-current portion..................................... $44,178 $37,568
======= =======

32

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

Lines of Credit

The Company has completed a $65 million banking facility ("credit
agreement") with ING (U.S.) Capital LLC. The arrangement includes $35 million
revolving loan and a $30 million term loan. The Company's credit agreement
expires in September 2003 (fiscal 2004). Interest is based, at the Company's
option, upon either the bank's base rate as defined in the credit agreement plus
a margin ranging from 1.0% to 2.5% or the London Interbank Offered Rate plus a
margin ranging from 2.0% to 3.5% depending upon performance by the Company. At
June 30, 2002, the interest rate charged on outstanding borrowings was 5.5%. In
addition, the Company pays a commitment fee of .5% on the unused portion of the
credit agreement.

Amounts available under the credit agreement are determined based upon the
Company's borrowing base, as defined. In addition, there are certain covenants
which restrict, among other things, the payment of cash dividends, and require
the Company to maintain certain financial ratios and certain other financial
conditions. Such borrowings are secured by a significant portion of the
Company's assets.

Other borrowings consist primarily of mortgage debt financing and notes
payable for equipment purchase, which are collateralized by the equipment.

Maturities of long-term debt, assuming the Company exercises the conversion
feature within its credit agreement, for the years ending June 30 are as follows
(in thousands):

2003........................ $ 7,531
2004........................ 38,469
2005........................ 2,064
2006........................ 803
2007........................ 174
Thereafter.................. 2,668
-------
$51,709
=======

The Company's new loan facility, which replaced the credit agreement in
full as of September 27, 2002 is described in Note 13 to the Consolidated
Financial Statements.

(6) EMPLOYEE BENEFIT PLANS

401(k) Profit Sharing Plan

The Company has a 401(k) profit sharing plan which permits U.S. employees
of the Company to contribute up to 15% of their annual compensation, up to
certain Internal Revenue Service limits, on a pre-tax basis. The contributions
made by each employee are fully vested immediately and are not subject to
forfeiture. The Company makes a matching contribution of 25% of the employee's
contribution up to 5% of their annual compensation and may make additional
discretionary contributions. The aggregate Company contribution may not exceed
5% of the employee's compensation. Employees vest in the Company's contribution
to the plan at the rate of 20% per year from the date of contribution.
Contributions made by the Company during 2002, 2001 and 2000 amounted to $232
thousand, $220 thousand, and $173 thousand, respectively. No discretionary
contributions were made during 2002, 2001 or 2000.

33

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

(7) STOCK PLANS

Stock Options - Celadon Group, Inc.

The Company has a Stock Option Plan ("Plan") which provides for the
granting of stock options, stock appreciation rights and restricted stock awards
to purchase not more than 1,050,000 shares of Common Stock, subject to
adjustment under certain circumstances, to select management and key employees
of the Company and its subsidiaries. The options have a three-year vesting
period.

The Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its stock options. Under APB No. 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized for
the Celadon options.

Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, requires presentation of pro forma net income and
earnings per share if the Company had accounted for its employee stock options
granted subsequent to June 30, 1995 under the fair value method of that
statement. Under SFAS No. 123, total compensation expense for stock-based awards
of $1.5 million, $1.6 million, and $0.7 million in 2002, 2001, and 2000,
respectively, on a pro forma basis, would have been reflected in income on a
pretax basis. For purposes of pro forma disclosure, the estimated fair value of
the options is amortized to expense over the vesting period. Under the fair
value method, the Company's net income (in thousands) and earnings per share
would have been:

2002 2001 2000
----- ------- -------

Net income................................ $ 799 $(6,308) $(2,506)
Earnings per share........................ $0.10 $ (0.83) $ (0.32)

The weighted-average per share fair value of the individual options granted
during fiscal year 2002, 2001 and 2000 for Celadon is estimated as $4.32 and
$3.35 and $8.91, respectively, on the date of grant.

34

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

The fair values of Celadon option grants for the last three years were
determined using a Black-Scholes option-pricing model with the following
weighted average assumptions:

2002 2001 2000
------ ------ ------

Dividend yield...................... 0 0 0
Volatility.......................... 85.7% 111.2% 100.2%
Risk-free interest rate............. 3.9% 4.7% 6.1%
Forfeiture rate..................... 0.4% 14.0% 5.4%
Expected life....................... 7 years 7 years 7 years

Stock option activity for Celadon is summarized below:

SHARES OF WEIGHTED
COMMON STOCK AVERAGE
ATTRIBUTABLE EXERCISE
TO OPTIONS PRICE OF OPTIONS
------------- ----------------

Unexercised at June 30, 1999 405,216 $12.21
Granted 250,500 9.48
Exercised (6,350) 12.67
Forfeited (110,466) 13.31
-------- ------

Unexercised at June 30, 2000 538,900 10.26
Granted 366,333 3.80
Exercised (5,335) 8.00
Forfeited (87,549) 10.21
-------- ------

Unexercised at June 30, 2001 812,349 $ 7.37
Granted 282,664 $ 5.57
Exercised (33,366) $ 4.49
Forfeited (211,296) $ 9.03
-------- ------

Unexercised at June 30, 2002 850,351 $ 6.47
======== ======

35

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

The following table summarizes information concerning outstanding and
exercisable Celadon options at June 30, 2002:

Options Outstanding Options Exercisable
Weighted-
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------- ----------- -------------------- -------- ----------- ---------

$0-$5 311,018 8.50 $3.56 165,117 $3.26
$5-$10 411,833 8.11 $6.81 150,352 $7.63
$10-$15 127,000 8.10 $12.46 126,334 $12.67
$15-$20 500 7.92 $16.38 334 $16.38

Celadon stock options exercisable at June 30, 2002, 2001 and 2000 were
442,137 and 279,386, and 227,414, respectively.

Stock Options- TruckersB2B, Inc.

On March 15, 2000, TruckersB2B, Celadon - E-Commerce's majority owned
subsidiary, adopted the 2000 Stock Option Plan ("2000 Plan"). Under the 2000
Plan, TruckersB2B is authorized to grant options for up to 1,000,000 shares of
common stock to employees of TruckersB2B, Celadon, directors of TruckersB2B, and
vendors. Options granted under the 2000 Plan are for periods not to exceed ten
years and must be issued at prices not less than 100% of the fair market value
of the stock on the date of grant. Incentive stock options granted to
stockholders with greater than 10% ownership of the outstanding stock are for
periods not to exceed five years. Options generally vest at a rate of 2% to 5%
per month. In certain cases, a portion of the options vests immediately on the
date of grant.

TruckersB2B has elected to follow Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its stock options. Under APB No. 25, because the exercise
price of TruckersB2B employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized for
the options.

The weighted-average per share fair value of the individual options granted
is estimated as $0.09, and $0.67, on the date of the grant, during fiscal year
2001 and 2000, respectively, for TruckersB2B. No options were granted during
fiscal year 2002.

36

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

The fair value of TruckersB2B option grants for 2001 was determined using a
Black-Scholes option-pricing model with the following weighted average
assumptions;

2001 2000
---- ----

Dividend yield........................... 0 0
Volatility............................... 1% 1%
Risk-free interest rate.................. 5.8% 6.5%
Forfeiture rate.......................... 17% 0%
Expected life............................ 3 years 3 years

Stock option activity for TruckersB2B is summarized below:

SHARES OF WEIGHTED
COMMON STOCK AVERAGE
ATTRIBUTABLE EXERCISE
TO OPTIONS PRICE OF OPTIONS
---------- ----------------

Granted March 15, 2000 -
June 30, 2000 693,250 $1.57
-------

Unexercised at July 1, 2000 693,250 $1.57
Granted 152,000 $0.57
Forfeited (96,500) $1.01
-------

Unexercised at June 30, 2001 748,750 $1.44
Forfeited (336,000) $1.19
--------

Unexercised at June 30, 2002 412,750 $1.64
=======

37

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

The following table summarizes information concerning outstanding and
exercisable TruckersB2B options at June 30, 2002:

Stockholder Rights Plan

On June 28, 2000, the Company's Board of Directors approved a
Stockholder Rights Plan whereby, on July 31, 2000, common stock purchase rights
("Rights") were distributed as a dividend at the rate of one Right for each
share of the Company's common stock held as of the close of business on July 20,
2000. The Rights will expire on July 18, 2010. Under the plan, the Rights will
be exercisable only if triggered by a person or group's acquisition of 15% or
more of the Company's common stock. Each right, other than Rights held by the
acquiring person or group, would entitle its holder to purchase a specified
number of the Company's common shares for 50% of their market value at that
time.

Following the acquisition of 15% or more of the Company's common stock
by a person or group, the Board of Directors may authorize the exchange of the
Rights, in whole or in part, for shares of the Company's common stock at an
exchange ratio of one share for each Right, provided that at the time of such
proposed exchange no person or group is then the beneficial owner of 50% or more
of the Company's common stock.

Unless a 15% acquisition has occurred, the Rights may be redeemed by
the Company at any time prior to the termination date of the plan.

38

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

(8) EARNINGS PER SHARE

The following is a reconciliation of the numerators and denominators
used in computing earnings per share (in thousands):

Diluted loss per share for fiscal year 2001 and 2000 does not include
the anti-dilutive effect of 50 thousand and 113 thousand stock options and other
incremental shares, respectively.

(9) RELATED PARTY TRANSACTIONS

In fiscal 2000, TruckersB2B sold 107,500 shares of its Class A common
stock for $1 per share to Michael Miller, a Company board member.

In October 2001, the Company sold 103,850 shares of treasury stock to
non-executive members of management. The Company granted loans totaling $449,000
to the non-executive management with a 5-year term. As of June 30, 2002,
approximately $385,000 of the aforementioned loans remained outstanding.

39

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

In fiscal 2002, Millennium Contractor's, LLC, a company which is
majority owned by Jerry Closser, Officer and Executive Vice President of Celadon
Group, Inc., sub-contracted from MacDougall Pierce to perform various services
for Celadon Trucking Services, Inc. The sub-contract was awarded by MacDougall
Pierce based on competitive bidding. These services included but were not
limited to excavation, utility installation, and ground preparation for parking
and building additions constructed in fiscal 2002. Millennium Contractor's LLC
was paid by MacDougall Pierce approximately $177,000 for these services.

(10) COMMITMENTS AND CONTINGENCIES

The Company has outstanding commitments to purchase approximately $12.8
million of revenue equipment at June 30, 2002, which will be financed utilizing
long-term lease agreements.

Standby letters of credit, not reflected in the accompanying
consolidated financial statements, aggregated approximately $2.8 million at June
30, 2002.

The Company has employment and consulting agreements with various key
employees providing for minimum combined annual compensation over the next two
fiscal years ranging from $840 thousand in 2003 to $320 thousand in 2004.

There are various claims, lawsuits and pending actions against the
Company and its subsidiaries in the normal course of the operations of its
businesses. The Company believes many of these proceedings are covered in whole
or in part by insurance and that none of these matters will have a material
adverse effect on its consolidated financial position or results of operations
in any given period.

The Company has a lawsuit filed by Reliance National Indemnity Company
("Reliance") relating to one trucker's liability insurance policy. The Company
disagrees with Reliance and has vigorously defended this lawsuit. The Company
has been advised that Reliance has decided to dismiss its cause of action
against the company and it is in the process of closing this litigation.

We are a party to routine litigation incidental to its business,
primarily involving claims for bodily injury or property damage incurred in the
transportation of freight. We are responsible for the safe delivery of cargo. As
of July 2002, we are self-insured on auto liability claims for the first one
million dollars of an accident claim and for this year Celadon is also
responsible for a one million dollar aggregate corridor deductible on the second
one million dollar layer of auto liability insurance coverage, plus
administrative expenses, for each occurrence involving personal injury or
property damage. We are also self-insured for its physical damage losses, and
workers compensation losses and responsible for the first $100,000 on cargo
claims. We maintain separate insurance in Mexico consisting of bodily injury and
property damage coverage with acceptable deductibles. Management believes its
uninsured exposure is reasonable for the transportation industry. Consequently,
we do not believe that the litigation and claims experienced will have a
material impact on our financial position or results of operations.

40

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

Shortages of fuel, increases in fuel prices or rationing of petroleum
products can have a materially adverse effect on the operations and
profitability of the Company. The Company cannot predict whether high fuel price
levels will continue in the future or the extent to which fuel surcharges will
be collected to offset such increases. During the years ended June 30, 2002 and
2001, the Company recognized approximately $100 thousand of expense and $405
thousand of income, respectively on futures contracts and commodity collar
transactions which is included in fuel expense.

(11) INCOME TAXES

The income tax provision (benefit) for operations in 2002, 2001 and
2000 consisted of the following (in thousands):

No provision is made for U.S. federal income taxes on undistributed
earnings of foreign subsidiaries of approximately $5.0 million at June 30, 2002,
as management intends to permanently reinvest such earnings in the Company's
operations in the respective foreign countries where earned. Included in the
consolidated income before income taxes is income of approximately $1.2 million
generated from foreign operations in fiscal 2002.

41

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

The Company's effective rate differs from the statutory federal tax
rate as follows:

The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at June 30, 2002 and 2001
consisted of the following (in thousands):

As of June 30, 2002, the Company had approximately $10.2 million of net
operating loss carryforwards with expiration dates beginning in 2015.

42

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

(12) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS

The Company operates in two segments, transportation and e-commerce.
The Company generates revenue, in the transportation segment, providing
truckload hauling services through its subsidiaries, CTSI, Jaguar, Gerth, Zipp
and formerly Cheetah. The Company began providing certain services over the
Internet through its e-commerce subsidiary, TruckersB2B, in the last half of
fiscal year 2000. The e-commerce segment generates revenue by providing
discounted fuel, tires, and other products and services to small and
medium-sized trucking companies. The Company evaluates the performance of its
operating segments based on operating income (loss).

43

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

See accompanying notes to consolidated financial statements.

44

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

Information as to the Company's operations by geographic area is
summarized below (in thousands):

The Company's largest customer is DaimlerChrysler, which accounted for
approximately 19%, 20%, and 24% of the Company's total revenue for fiscal 2002,
2001 and 2000, respectively. In the fourth quarter in fiscal 2002,
DaimlerChrysler accounted for approximately 16% of our revenue. The Company
transports DaimlerChrysler original equipment automotive parts primarily between
the United States and Mexico and Daimler Chrysler after-market replacement parts
and accessories within the United States. The Company's agreement with
DaimlerChrysler is an agreement for international freight with the Chrysler
division, which expires in October 2003. No other customer accounted for more
than 10% of the Company's total revenue during any of its three most recent
fiscal years.

45

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

(13) SUBSEQUENT EVENT

On September 26, 2002, the Company entered into a Loan and Security
Agreement ("Loan Agreement") with Fleet Capital Corporation, Fleet Capital
Canada Corporation and several other lenders named in the Loan Agreement. The
Loan Agreement provides to the Company, its Canadian subsidiary and certain of
its United States subsidiaries a credit facility in the aggregate amount of $55
million. The facility consists of two revolving loan facilities, two term loan
subfacilities and a commitment to issue and guaranty letters of credit. The term
loan subfacilities consist of a domestic term loan in the aggregate principal
amount of approximately $10 million and a Canadian term loan in the aggregate
principal amount of approximately $800 thousand. Repayment of the amounts
outstanding under the Loan Agreement is secured by a lien on the Company's
assets and the assets of certain of its subsidiaries, including the stock or
other equity interests of various subsidiaries. In addition, certain of the
Company's subsidiaries that are not party to the Loan Agreement have guaranteed
the repayment of the amount outstanding under the Loan Agreement, and have
granted a lien on their respective assets to secure such repayment. The Loan
Agreement replaces in full the credit facility the Company entered into with ING
(U.S.) Capital, LLC, in August 1999. The Loan Agreement, which is for a term of
three years, terminates on September 26, 2005.

46

CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2002

(14) SELECTED QUARTERLY DATA (UNAUDITED)

Summarized quarterly data for fiscal 2002 and 2001 follows (in thousands
except per share amounts):

FISCAL YEAR 2002
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------

Operating revenues ........... $ 82,870 $ 79,349 $ 78,737 $ 96,043
Operating expenses ........... 80,383 77,125 76,550 92,396
-------- -------- -------- --------

Operating income ............. 2,487 2,224 2,187 3,647
Other expense ................ 2,086 1,896 1,714 1,925
-------- -------- -------- --------

Income before taxes .......... 401 326 473 1,722
Income tax expense ........... 260 129 195 631
-------- -------- -------- --------

Net income ................... $ 141 $ 199 $ 278 $ 1,091
======== ======== ======== ========

Basic income per share ....... $ 0.02 $ 0.03 $ 0.04 $ 0.14
-------- -------- -------- --------
Diluted income per share ..... $ 0.02 $ 0.03 $ 0.04 $ 0.14
======== ======== ======== ========

FISCAL YEAR 2001
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------

Operating revenues ........... $ 88,427 $ 87,048 $ 88,234 $ 88,109
Operating expenses ........... 86,678 85,754 88,390 86,648
-------- -------- -------- --------

Operating income (loss) ...... 1,749 1,294 (156) 1,461
Other expense ................ 2,344 2,132 2,258 5,576
-------- -------- -------- --------

Loss before taxes ............ (595) (838) (2,414) (4,115)
Income taxes benefit ......... (125) (283) (832) (1,386)
-------- -------- -------- --------

Net (loss) ................... $ (470) $ (555) $ (1,582) $ (2,729)
======== ======== ======== ========

Basic loss per share ......... $ (0.06) $ (0.07) $ (0.21) $ (0.36)
-------- -------- -------- --------
Diluted loss per share ....... $ (0.06) $ (0.07) $ (0.21) $ (0.36)
======== ======== ======== ========

The effect of stock options for the quarters with net losses is anti-dilutive
because of the net loss. In these cases, the diluted per share amounts equal the
basic per share amounts.

47

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There were no changes in or disagreements with accountants on
accounting or financial disclosure within the last three fiscal years.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated herein by reference to the Company's definitive Proxy Statement to
be filed in connection with the 2002 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated herein by reference to the Company's definitive Proxy Statement to
be filed in connection with the 2002 Annual Meeting of Stockholders. Information
regarding the Company's equity compensation plans is set forth in Item 5 of this
report and incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Incorporated herein by reference to the Company's definitive Proxy Statement to
be filed in connection with the 2002 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference to the Company's definitive Proxy Statement to
be filed in connection with the 2002 Annual Meeting of Stockholders.

ITEM 14. CONTROLS AND PROCEDURES

Not applicable.

48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this September 30,
2002.

Celadon Group, Inc.

By: /s/ Stephen Russell
------------------------------
Stephen Russell
Chairman of the Board and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

49

CERTIFICATIONS

I, Stephen Russell, certify that:

1. I have reviewed this annual report on Form 10-K of Celadon Group, Inc;

2. Based on my knowledge, this annual 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 annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.

Date: September 30, 2002 /s/ Stephen Russell
-------------------- -------------------------------------
Stephen Russell
Chairman of the Board
and Chief Executive Officer

I, Paul A. Will, certify that:

1. I have reviewed this annual report on Form 10-K of Celadon Group, Inc;

2. Based on my knowledge, this annual 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 annual report and;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.

Date: September 30, 2002 /s/ Paul A. Will
------------------------ ------------------------------------
Paul A. Will
Chief Financial Officer;
Secretary and Assistant Treasurer

50

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

Page Number of
Annual Report
on Form 10-K

List of Documents filed as part of this Report

(1) FINANCIAL STATEMENTS

Report of Independent Auditors 21

Consolidated Balance Sheets as of June 30, 2002 and 2001 22

Consolidated Statements of Operations for each of the years
Ended June 30, 2002, 2001 and 2000 23

Consolidated Statements of Cash Flows for each of the years
Ended June 30, 2002, 2001 and 2000 24

Consolidated Statements of Stockholders' Equity for each of the years
Ended June 30, 2002, 2001 and 2000 25

Notes to Consolidated Financial Statements 26

(2) FINANCIAL STATEMENT SCHEDULES

Consolidated Financial Statements Schedules as of and for each of the years
ended June 30, 2002, 2001 and 2000

Schedule II Valuation and Qualifying Accounts 54

All other Financial Statements Schedules have been omitted because they are
not required or are not applicable.

51

(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K).

3.1-- Certificate of Incorporation of the Company. Incorporated by reference
to Exhibit 3.1 of Form S-1 filed January 20, 1994 (No. 33-72128).
3.2-- Certificate of Amendment of Certificate of Incorporation dated February
2, 1995 decreasing aggregate number of authorized shares to 12,179,985.
Incorporated by reference to Exhibit 3.2 of Form 10-K filed November
30, 1995.
3.3-- Certificate of Designation
3.4-- By-laws of the Company. Incorporated by reference to Exhibit 3.2 of
Form S-1 filed January 20, 1994 (No. 33-72128).
10.1-- Celadon Group, Inc. 1994 Stock Option Plan. Incorporated by reference
to Exhibit B to the Company's Proxy Statement filed October 17, 1997.
10.2-- 401(k) Profit Sharing Plan of the Company. Incorporated by reference to
Exhibit 10.4 of Form S-1 filed January 20, 1994 (No. 33-72128).
10.3-- 401(K) Profit Sharing Plan and Adoption Agreement of the Company.
Incorporated by reference to Exhibit 10.45 of Form 10-Q filed February
12, 1997.
10.4-- Employment Agreement between the Company and Stephen Russell.
Incorporated by reference to Exhibit 10.43 of Form S-1 Filed January
20, 1994 (No. 33-72128).10.7
10.5-- Amendment dated February 12, 1997 to Employment Agreement dated January
21, 1994 between the Company and Stephen Russell. Incorporated by
reference to Exhibit 10.50 of Form 10-K filed September 12, 1997.
10.6-- Celadon Group, Inc. Non-Employee Director Stock Option Plan.
Incorporated by reference to Exhibit A to the Company's Proxy Statement
filed October 17, 1997.
10.7-- Amendment No. 2 dated August 1, 1997 to Employment Agreement dated
January 21, 1994 between the Company and Stephen Russell. Incorporated
by reference to Exhibit 10.55 of Form 10-Q filed February 11, 1998.
10.8-- $60,000,000 Credit Agreement dated August 11, 1999 among the Company,
and Celadon Trucking Services, Inc., and ING (U.S.) Capital LLC.
Incorporated by reference to Exhibit 10.61 of Form 10-Q filed November
15, 1999.
10.9-- $5,000,000 First Amendment Credit Agreement dated November 5, 1999
among the Company, and Celadon Trucking Services, Inc. and ING ((U.S.)
Capital LLC. Incorporated by reference to Exhibit 10.62 of Form 10-Q
filed February 14, 2000.
10.10-- Second Amendment Credit Agreement dated February 17, 2000 between the
Company and ING (U.S.) Capital LLC. Incorporated by reference to
Exhibit 10.22 of Form 10-K filed September 28, 2000.
10.11-- Third Amendment Credit Agreement dated May 11, 2000 between the Company
and ING (U.S.) Capital LLC. Incorporated by reference to Exhibit 10.23
of Form 10-K filed September 28, 2000.
10.12-- $2,000,000 Fourth Amendment Credit Agreement dated September 6, 2000
between the Company and ING (U.S.) Capital LLC. Incorporated by
reference to Exhibit 10.24 of Form 10-K filed September 28, 2000.
10.13-- Stockholder Rights Plan for the Company Incorporated by reference to
Exhibit 4.1 of Form 8-A filed July 20, 2000.
10.14-- Fifth Amendment Credit Agreement dated February 14, 2001 between the
Company and ING (U.S.) Capital LLC. Incorporated by reference to
Exhibit 10.26 of Form 10-Q filed May 14, 2001.
10.15-- Sixth Amendment Credit Agreement dated May 14, 2001 between the Company
and ING (U.S.) Capital LLC. Incorporated by reference to Exhibit 10.27
of Form 10-K filed September 28, 2001.
10.16-- Seventh Amendment Credit Agreement dated September 14, 2001 between the
Company and ING (U.S.) Capital LLC. Incorporated by reference to
Exhibit 10.28 of Form 10-Q filed November 14, 2001.
10.17-- Eighth Amendment Credit Agreement dated December 31, 2001 between the
Company and ING (U.S.) Capital LLC. Incorporated by reference to
Exhibit 10.29 of Form 10-Q filed February 14, 2002.
10.18-- Ninth Amendment, Waiver and Override Agreement dated June 6, 2002
between the Company and ING (U.S.) Capital LLC.
10.19-- Amendment No. 3 dated July 26, 2000 to Employment Agreement dated
January 21, 1994 between the Company and Stephen Russell.
10.20-- Amendment No. 4 dated April 4, 2002 to Employment Agreement dated
January 21, 1994 between the Company and Stephen Russell.
10.21-- Separation Agreement dated March 3, 2000 between the Company and Paul
A. Will.
10.22-- Amendment to Separation Agreement between the Company and Paul A. Will
dated March 3, 2000.

52

10.23-- Separation Agreement dated March 2, 2000 between the Company and David
Shatto.
10.24-- Amendment to Separation Agreement between the Company and David Shatto
dated March 2, 2000.
10.25-- Loan and Security Agreement dated September 26, 2002, among the
Company, certain of its subsidiaries, Fleet Capital Corporation, Fleet
Capital Canada Corporation and certain other lenders.
21-- Subsidiaries.
23-- Consent of Independent Auditors.
99.1-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3-- Risk Factors.

- ----------

(4) REPORTS ON FORM 8-K.
No current Reports on Form 8-K were filed during the three months ended
June 30, 2002.

(5) EXHIBITS.
The exhibits required to be filed with this Annual Report on Form 10-K
pursuant to Item 601 of Regulation S-K are listed under "Exhibits" in Part
IV, Item 15(3) of this Annual Report on Form 10-K, and are filed herewith
or incorporated herein by reference.

53

SCHEDULE II

CELADON GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED JUNE 30, 2002, 2001 AND 2000

BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- --------- -------- ---------- ------

YEAR ENDED JUNE 30, 2000:

Allowance for doubtful accounts $ 788,188 $ 493,621 $ 495,389(a) $ 786,420

Reserves for claims payable $1,024,320 $3,856,668 $2,689,773(b) $2,191,215
as self insurer

YEAR ENDED JUNE 30, 2001:

Allowance for doubtful accounts $ 786,420 $ 753,860 $ 530,249(a) $1,010,031

Reserves for claims payable $2,191,215 $5,260,129 $4,239,005(b) $3,212,339
as self insurer

YEAR ENDED JUNE 30, 2002:

Allowance for doubtful accounts $1,010,031 $ 932,657 $1,002,566(a) $ 940,122

Reserves for claims payable $3,212,339 $6,203,768 $5,024,203(b) $4,391,904
as self insurer

- ----------

(a) Represents accounts receivable write-offs.

(b) Represents claims paid.

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INDEX TO EXHIBITS

3.1-- Certificate of Incorporation of the Company. Incorporated by reference
to Exhibit 3.1 of Form S-1 filed January 20, 1994 (No. 33-72128).
3.2-- Certificate of Amendment of Certificate of Incorporation dated February
2, 1995 decreasing aggregate number of authorized shares to 12,179,985.
Incorporated by reference to Exhibit 3.2 of Form 10-K filed November
30, 1995.
3.3-- Certificate of Designation
3.4-- By-laws of the Company. Incorporated by reference to Exhibit 3.2 of
Form S-1 filed January 20, 1994 (No. 33-72128).
10.1-- Celadon Group, Inc. 1994 Stock Option Plan. Incorporated by reference
to Exhibit B to the Company's Proxy Statement filed October 17, 1997.
10.2-- 401(k) Profit Sharing Plan of the Company. Incorporated by reference to
Exhibit 10.4 of Form S-1 filed January 20, 1994 (No. 33-72128).
10.3-- 401(K) Profit Sharing Plan and Adoption Agreement of the Company.
Incorporated by reference to Exhibit 10.45 of Form 10-Q filed February
12, 1997.
10.4-- Employment Agreement between the Company and Stephen Russell.
Incorporated by reference to Exhibit 10.43 of Form S-1 Filed January
20, 1994 (No. 33-72128).10.7
10.5-- Amendment dated February 12, 1997 to Employment Agreement dated January
21, 1994 between the Company and Stephen Russell. Incorporated by
reference to Exhibit 10.50 of Form 10-K filed September 12, 1997.
10.6-- Celadon Group, Inc. Non-Employee Director Stock Option Plan.
Incorporated by reference to Exhibit A to the Company's Proxy Statement
filed October 17, 1997.
10.7-- Amendment No. 2 dated August 1, 1997 to Employment Agreement dated
January 21, 1994 between the Company and Stephen Russell. Incorporated
by reference to Exhibit 10.55 of Form 10-Q filed February 11, 1998.
10.8-- $60,000,000 Credit Agreement dated August 11, 1999 among the Company,
and Celadon Trucking Services, Inc., and ING (U.S.) Capital LLC.
Incorporated by reference to Exhibit 10.61 of Form 10-Q filed November
15, 1999.
10.9-- $5,000,000 First Amendment Credit Agreement dated November 5, 1999
among the Company, and Celadon Trucking Services, Inc. and ING ((U.S.)
Capital LLC. Incorporated by reference to Exhibit 10.62 of Form 10-Q
filed February 14, 2000.
10.10-- Second Amendment Credit Agreement dated February 17, 2000 between the
Company and ING (U.S.) Capital LLC. Incorporated by reference to
Exhibit 10.22 of Form 10-K filed September 28, 2000.
10.11-- Third Amendment Credit Agreement dated May 11, 2000 between the Company
and ING (U.S.) Capital LLC. Incorporated by reference to Exhibit 10.23
of Form 10-K filed September 28, 2000.
10.12-- $2,000,000 Fourth Amendment Credit Agreement dated September 6, 2000
between the Company and ING (U.S.) Capital LLC. Incorporated by
reference to Exhibit 10.24 of Form 10-K filed September 28, 2000.
10.13-- Stockholder Rights Plan for the Company Incorporated by reference to
Exhibit 4.1 of Form 8-A filed July 20, 2000.
10.14-- Fifth Amendment Credit Agreement dated February 14, 2001 between the
Company and ING (U.S.) Capital LLC. Incorporated by reference to
Exhibit 10.26 of Form 10-Q filed May 14, 2001.
10.15-- Sixth Amendment Credit Agreement dated May 14, 2001 between the Company
and ING (U.S.) Capital LLC. Incorporated by reference to Exhibit 10.27
of Form 10-K filed September 28, 2001.
10.16-- Seventh Amendment Credit Agreement dated September 14, 2001 between the
Company and ING (U.S.) Capital LLC. Incorporated by reference to
Exhibit 10.28 of Form 10-Q filed November 14, 2001.
10.17-- Eighth Amendment Credit Agreement dated December 31, 2001 between the
Company and ING (U.S.) Capital LLC. Incorporated by reference to
Exhibit 10.29 of Form 10-Q filed February 14, 2002.
10.18-- Ninth Amendment, Waiver and Override Agreement dated June 6, 2002
between the Company and ING (U.S.) Capital LLC.
10.19-- Amendment No. 3 dated July 26, 2000 to Employment Agreement dated
January 21, 1994 between the Company and Stephen Russell.
10.20-- Amendment No. 4 dated April 4, 2002 to Employment Agreement dated
January 21, 1994 between the Company and Stephen Russell.
10.21-- Separation Agreement dated March 3, 2000 between the Company and Paul
A. Will.
10.22-- Amendment to Separation Agreement between the Company and Paul A. Will
dated March 3, 2000.
10.23-- Separation Agreement dated March 2, 2000 between the Company and David
Shatto.

10.24-- Amendment to Separation Agreement between the Company and David Shatto
dated March 2, 2000.
10.25-- Loan and Security Agreement dated September 26, 2002, among the
Company, certain of its subsidiaries, Fleet Capital Corporation, Fleet
Capital Canada Corporation and certain other lenders.
21-- Subsidiaries.
23-- Consent of Independent Auditors.
99.1-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3-- Risk Factors.

56