CELADON GROUP INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

	For the period ended December 31, 2004

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

Commission file number: 0-23192

CELADON GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	13-3361050 (IRS Employer Identification Number)

One Celadon Drive Indianapolis, IN 46235-4207 (Address of principal executive offices)	(317) 972-7000 (Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]

As of February 7, 2005 (the latest practicable date), 9,959,041 shares of the registrant’s common stock, par value $0.033 per share, were outstanding.

CELADON GROUP, INC.

Index to

December 31, 2004 Form 10-Q

Part I.	Financial Information

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets at December 31, 2004 (Unaudited) and June 30, 2004	3

		Condensed Consolidated Statements of Income for the three and six months ended December 31, 2004 and 2003 (Unaudited	4

		Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2004 and 2003 (Unaudited)	5

		Notes to Condensed Consolidated Financial Statements (Unaudited)	6

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	11

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24

	Item 4.	Controls and Procedures	25

Part II.	Other Information

	Item 1.	Legal Proceedings	26

	Items 2. and 3.		Not Applicable

	Item 4.	Submission of Matters to a Vote of Security Holders	26

	Item 5.		Not Applicable

	Item 6.	Exhibits	26


	2

CELADON GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except par value amounts)

	December 31,			June 30,
	2004			2004
A S S E T S	(unaudited)

Current assets:
Cash and cash equivalents	$	416		$	356
Trade receivables, net of allowance for doubtful accounts of
$1,935 and $1,946 at December 31, 2004 and June 30, 2004		47,245			52,248
Accounts receivable - other		3,505			4,476
Prepaid expenses and other current assets		5,391			5,427
Tires in service		4,280			4,368
Deferred income taxes		1,974			1,974
Total current assets		62,811			68,849
Property and equipment		97,393			102,084
Less accumulated depreciation and amortization		39,542			40,283
Net property and equipment		57,851			61,801
Tires in service		2,247			1,875
Goodwill		19,137			16,702
Other assets		2,221			2,083
Total assets	$	144,267		$	151,310

L I A B I L I T I E S A N D S T O C K H O L D E R S’ E Q U I T Y

Current liabilities:
Accounts payable	$	4,755		$	6,018
Accrued salaries and benefits		5,025			9,229
Accrued insurance and claims		8,550			7,563
Accrued independent contractor expense		2,057			2,269
Accrued fuel expense		274			2,466
Other accrued expenses		11,235			12,945
Current maturities of long-term debt		5,434			2,270
Current maturities of capital lease obligations		1,985			3,040
Income tax payable		626			2,941
Total current liabilities		39,941			48,741
Long-term debt, net of current maturities		3,155			6,907
Capital lease obligations, net of current maturities		1,508			2,277
Deferred income taxes		9,951			10,530
Minority interest		25			25
Stockholders’ equity:
Preferred stock, $1.00 par value, authorized 179,985 shares; no
shares issued and outstanding		---			---
Common stock, $0.033 par value, authorized 12,000,000 shares; issued
9,908,041 and 9,748,970 shares at December 31, 2004 and June 30, 2004		327			322
Additional paid-in capital		87,647			86,588
Retained earnings (deficit)		4,489			(1,036	)
Unearned compensation of restricted stock		(586	)		(689	)
Accumulated other comprehensive loss		(2,190	)		(2,355	)
Total stockholders’ equity		89,687			82,830
Total liabilities and stockholders’ equity	$	144,267		$	151,310

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


	3

CELADON GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands except per share amounts)

(Unaudited)

	For the three months ended						For the six months ended
	December 31,						December 31,
	2004			2003			2004			2003

Operating revenue	$	106,871		$	97,137		$	211,264		$	192,788

Operating expenses:
Salaries, wages and employee benefits		32,395			30,834			65,569			60,665
Fuel		18,890			13,517			36,750			25,931
Operations and maintenance		8,899			8,038			17,807			16,221
Insurance and claims		3,326			3,686			6,330			7,608
Depreciation, amortization and impairment charge⁽¹⁾		3,634			3,641			7,002			17,252
Revenue equipment rentals		8,634			6,964			16,512			13,775
Purchased transportation		19,504			19,655			38,044			39,349
Costs of products and services sold		1,113			1,469			2,316			3,124
Professional and consulting fees		524			542			1,025			1,070
Communications and utilities		1,022			1,054			2,054			2,089
Operating taxes and licenses		2,095			1,919			4,180			4,020
General and other operating		1,565			1,765			3,086			3,541
Total operating expenses		101,601			93,084			200,675			194,645

Operating income (loss)		5,270			4,053			10,589			(1,857	)

Other (income) expense:
Interest income		(3	)		(9	)		(6	)		(25	)
Interest expense		338			1,026			688			2,161
Other (income) expense, net		31			3			7			40
Income (loss) before income taxes		4,904			3,033			9,900			(4,033	)
Provision for income taxes		2,130			1,507			4,375			(19	)
Net income (loss)	$	2,774		$	1,526		$	5,525		$	(4,014	)

Earnings (loss) per common share:
Diluted earnings (loss) per share	$	0.27		$	0.19		$	0.54		$	(0.52	)
Basic earnings (loss) per share	$	0.28		$	0.20		$	0.57		$	(0.52	)
Average shares outstanding:
Diluted		10,154			8,175			10,157			7,716
Basic		9,801			7,727			9,781			7,716

(1)	Includes a $9.8 million pretax impairment charge on trailers in the three months ended September 30, 2003.

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


	4

CELADON GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the six months ended
	December 31,
	2004			2003

Cash flows from operating activities:
Net income (loss)	$	5,525		$	(4,014	)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization		7,002			7,418
Impairment charge		---			9,834
Provision for deferred income taxes		(579	)		418
Restricted stock and SARS		491			243
Provision for doubtful accounts		542			821
Changes in assets and liabilities:
Trade receivables		4,461			2,585
Accounts receivable - other		971			286
Tires in service		(284	)		(181	)
Prepaid expenses and other current assets		36			(717	)
Other assets		(124	)		371
Accounts payable and accrued expenses		(8,982	)		3,585
Income tax receivable		(2,315	)		(541	)
Net cash provided by operating activities		6,744			20,108
Cash flows from investing activities:
Purchase of property and equipment		(15,845	)		(6,493	)
Proceeds on sale of property and equipment		12,944			4,406
Purchase of treasury stock in subsidiary		(2,435	)		---
Purchase of a business, net of cash acquired		---			(3,594	)
Net cash used in investing activities		(5,336	)		(5,681	)
Cash flows from financing activities:
Proceeds from issuances of stock		1,064			329
Proceeds from bank borrowings and debt		5,868			6,270
Payments on bank borrowings and debt		(6,456	)		(12,476	)
Principal payments under capital lease obligations		(1,824	)		(8,865	)
Net cash used in financing activities		(1,348	)		(14,742	)

Increase (decrease) in cash and cash equivalents		60			(314	)

Cash and cash equivalents at beginning of period		356			1,088

Cash and cash equivalents at end of period	$	416		$	774
Supplemental disclosure of cash flow information:
Interest paid	$	691		$	2,184
Income taxes paid	$	6,964		$	142

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


	5

CELADON GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Celadon Group, Inc. and its majority owned subsidiaries (the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial statements. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (all of a normal recurring nature), which are necessary for a fair presentation of the financial condition and results of operations for these periods. The results of operations for the interim period are not necessarily indicative of the resul ts for a full year. These consolidated financial statements and notes thereto should be read in conjunction with the Company’s consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

2.	Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock Based Compensation. The adoption of this statement is not expected to have a material impact on the financial position or results of operations of the Company.

3. Earnings Per Share

The difference in basic and diluted weighted average shares is due to the assumed conversion of outstanding stock options. A reconciliation of the basic and diluted earnings per share calculation was as follows:

(In thousands except share and per share data)	For the three months ended				For the six months ended
	December 31,				December 31,
	2004		2003		2004		2003

Net income (loss)	$	2,774	$	1,526	$	5,525	$	(4,014	)

Denominator
Weighted average number of common shares outstanding		9,801,289		7,727,039		9,781,057		7,716,085
Equivalent shares issuable upon exercise of stock options		352,426		447,625		376,027		---

Diluted shares		10,153,715		8,174,664		10,157,084		7,716,085

Earnings (loss) per share

Basic	$	0.28	$	0.20	$	0.57	$	(0.52	)

Diluted	$	0.27	$	0.19	$	0.54	$	(0.52	)

Diluted loss per share for the six months ended December 31, 2003 does not include the anti-dilutive effect of 426 thousand stock options and other incremental shares.


	6

CELADON GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(Unaudited)

4. Stock Based Compensation

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 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.

Statements of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,” and SFAS 148 “Accounting for Stock-Based Compensation - Transition and Disclosure” requires presentation of pro forma net income and earnings per share as if the Company had accounted for its employee stock options granted subsequent to June 30, 1995 under the fair value method of that statement. 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 and earnings per share would have been (Dollars in thousands, except per share amounts):

(In thousands except per share data)	For three months ended				For six months ended
	December 31,				December 31,
	2004		2003		2004		2003

Net income (loss)	$	2,774	$	1,526	$	5,525	$	(4,014	)
Stock-based compensation expense (net of tax)		64		102		159		206
Pro forma net income (loss)	$	2,710	$	1,424	$	5,366	$	(4,220	)

Earnings (loss) per share:
Diluted earnings (loss) per share
As reported	$	0.27	$	0.19	$	0.54	$	(0.52	)
Pro forma	$	0.27	$	0.17	$	0.53	$	(0.55	)
Basic earnings (loss) per share
As reported	$	0.28	$	0.20	$	0.57	$	(0.52	)
Pro forma	$	0.28	$	0.18	$	0.55	$	(0.55	)


	7

CELADON GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(Unaudited)

5. Segment Information and Significant Customers

The Company operates in two segments, transportation and e-commerce. The Company generates revenue in the transportation segment primarily by providing truckload transportation services through its subsidiaries, Celadon Trucking Services, Inc. (“CTSI”), Servicios de Transportacion Jaguar, S.A de C.V. (“Jaguar”) and Celadon Canada, Inc. (“CelCan”). The Company began providing certain services over the Internet through its e-commerce subsidiary, TruckersB2B, Inc. (“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 evalu ates the performance of its operating segments based on operating income (loss).

(In thousands)	Transportation			E-commerce		Consolidated

Three months ended December 31, 2004
Operating revenue	$	104,950		$	1,921	$	106,871
Operating income	$	4,839		$	431	$	5,270

Three months ended December 31, 2003
Operating revenue	$	94,786		$	2,351	$	97,137
Operating income	$	3,558		$	495	$	4,053

Six months ended December 31, 2004
Operating revenue	$	207,336		$	3,928	$	211,264
Operating income	$	9,738		$	851	$	10,589

Six months ended December 31, 2003
Operating revenue	$	187,895		$	4,893	$	192,788
Operating income (loss)	$	(2,782	^) (1)	$	925	$	(1,857	)

(1) Includes a $9.8 million pretax impairment charge on trailers in the three months ended September 30, 2003.

Information as to the Company’s operating revenue by geographic area is allocated based primarily on the country of the customer and summarized below:

(In thousands)	For the three months ended				For the six months ended
	December 31,				December 31,
	2004		2003		2004		2003
Operating revenue:
United States	$	86,532	$	78,931	$	171,390	$	156,495
Canada		14,902		13,580		29,223		26,927
Mexico		5,437		4,626		10,651		9,366
Total	$	106,871	$	97,137	$	211,264	$	192,788


	8

CELADON GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(Unaudited)

The Company’s largest customer is DaimlerChrysler. The Company transports DaimlerChrysler original equipment automotive parts primarily between the United States and Mexico and DaimlerChrysler 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 2006.

For the three months ended

For the six months ended

December 31,

2004

2003

2004

2003

Percent of revenue from DaimlerChrysler

10%

6. Income Taxes

Income tax expense varies from the federal corporate income tax rate of 34% due to state income taxes, net of the federal income tax effect, and adjustment for permanent non-deductible differences. The permanent non-deductible differences include primarily per diem pay for drivers, meals and entertainment, and fines. For the three months ended December 31, 2004, the Company recorded an income tax benefit as a result of the impairment charge recognized on the planned disposal of trailers (Note 8). The income tax benefit recorded was partially offset by amounts accrued for certain income tax exposures.

7. Comprehensive Income (Loss)

Comprehensive income (loss) consisted of the following components for the three and six months ended December 31, 2004 and 2003, respectively:

(In thousands)	Three months ended					Six months ended
	December 31,					December 31,
	2004		2003			2004		2003
Net income (loss)	$	2,774	$	1,526		$	5,525	$	(4,014	)

Foreign currency translations adjustments		49		(131	)		165		(323	)

Total comprehensive income (loss)	$	2,823	$	1,395		$	5,690	$	(4,337	)

8. Commitments and Contingencies

There are various claims, lawsuits and pending actions against the Company and its subsidiaries in the normal course of the operations of its businesses with respect to cargo and auto liability. The Company believes many of these proceedings are covered in whole or in part by insurance and accrued amounts on the Company’s balance sheet for the self-insured retention amount of outstanding claims. The Company also believes that none of these matters will have a materially adverse effect on its consolidated financial position or results of operations in any given period.


	9

CELADON GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(Unaudited)

9. Impairment of Equipment Values

In September 2003, the Company initiated a plan to dispose of approximately 1,600 trailers and recognized a pre-tax impairment charge of $9.8 million. The Company disposed of these trailers, including all 48-foot trailers in addition to 53-foot trailers over 9 years old, due to shipper compatibility issues. The majority of the Company’s customers require 53-foot trailers. The disposal of 48-foot trailers from the Company fleet has reduced logistical issues with customers requiring a 53-foot trailer. The Company replaced the approximately 1,600 trailers with 1,300 new 53-foot trailers. This change in the fleet increased operating efficiencies and reduced out-of-route miles. The pre-tax impairment charge consisted of a write-down of revenue equipment by $8.4 million (net of accumulated depreciation), a write-off of tires in-service of $0.9 million and an accrual for costs of disposal of $0.5 million.

10. Purchase of TruckersB2B Stock

During the six months ended December 31, 2004, TruckersB2B, Inc. has purchased 2,013,276 shares of its Common Stock into treasury for $2,435,000. An eighteen-month note payable for $910,000 was issued with the difference settled in cash. As of December 31, 2004, Celadon Group, Inc. and subsidiaries own 100% of the outstanding shares of TruckersB2B, Inc. The $2,435,000 of TruckersB2B treasury stock is accounted for using the purchase method in accordance with SFAS 141 “Business Combinations.”

11. Acquisition

On January 14, 2005, the Company purchased certain assets consisting of approximately 370 tractors and 670 van trailers of CX Roberson, Inc. for approximately $22.7 million. In addition, Celadon offered employment to approximately 320 qualified drivers. The Company used borrowings under its existing credit facility to fund the transaction. According to the seller’s unaudited financial statements, the Champaign, Illinois-based van division of CX Roberson generated approximately $45 million in gross revenue in 2004. The transaction did not include Roberson’s flatbed business and related assets.

12. Reclassification

Certain reclassifications have been made to the December 31, 2003 financial statements to conform to the December 31, 2004 presentation.


	10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Disclosure Regarding Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information in this Form 10-Q constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and, as such, involves known and unknown risks, uncertainties, and other factors which may cause the actual results, events, performance, or achievements of the Company to be materially different from any future results, events, performance, or achievements expressed in 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 generally use words such as “believe,” “expect,& #148; “anticipate,” “project,” “forecast,” “should,” “estimate,” “plan,” “outlook,” “goal,” and similar expressions. Because forward-looking statements involve risks and uncertainties, the Company’s actual results may differ materially from the results expressed in or implied by the forward-looking statements. While it is impossible to identify all factors that may cause actual results to differ from those expressed in or implied by forward-looking statements, the risks and uncertainties that may affect the Company’s business, performance, and results of operations include the factors listed on Exhibit 99.1 to this report.

All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. 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 the 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 consolidated subsidiaries.

Business Overview

We are one of North America's fifteen largest truckload carriers as measured by revenue. We generated $398 million in operating revenue during our fiscal year ended June 30, 2004. We have grown significantly throughout our history through internal growth and a series of acquisitions since 1995. As a dry van truckload carrier, we generally transport full trailer loads of freight from origin to destination without intermediate stops or handling. Our customer base includes Fortune 500 shippers such as DaimlerChrysler, General Electric, Phillip Morris, Wal-Mart, Procter & Gamble, and Target. At December 31, 2004, we operated 2,479 tractors and 6,842 trailers. None of our employees is subject to a union contract.

We operate in two main market sectors. In our international operations, we offer time-sensitive transportation in and between the United States, Mexico, and Canada. We generated approximately one-half of our revenue in fiscal 2004 from international movements, and we believe our approximately 150,000 annual border crossings make us the largest provider of international truckload movements in North America. We believe that our strategically located terminals and experience with the language, culture, and border crossing requirements of each North American country provide a competitive advantage in the international trucking marketplace.

In addition to our international business, we offer a broad range of truckload transportation services within the United States, including regional, long-haul, dedicated, and logistics. We also operate TruckersB2B, Inc., a profitable marketing business that affords volume purchasing power for items such as fuel, tires, and equipment to approximately 17,000 member trucking fleets representing approximately 441,000 tractors.


	11

We generate substantially all of our revenue by transporting freight for our customers. Generally, we are paid by the mile for our services. We also derive revenue from fuel surcharges, loading and unloading activities, equipment detention, other trucking-related services, and from TruckersB2B. The main factors that affect our revenue are the revenue per mile we receive from our customers, the number of miles we generate with our equipment, and the percentage of miles for which we are compensated. These factors are affected by, among other things, the United States, Mexican, and Canadian economies, customers’ inventory levels, the level of capacity in our industry, and customer demand.

The main factors that impact our profitability on the expense side are the variable costs of transporting freight for our customers. These costs include fuel expense, driver-related expenses, such as wages, benefits, training and recruitment, and independent contractor costs, which we record as purchased transportation. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. Our main fixed cost is the acquisition and financing of long-term assets, primarily revenue equipment and operating terminals. We have other mostly fixed costs, such as our non-driver personnel. Competitive rate pre ssures, coupled with significant increases in the costs of fuel, insurance, and equipment over the last few years, have created a difficult operating environment for most of the industry.

For the second quarter of fiscal 2005, operating revenue increased 10% to $106.9 million, compared with $97.1 million for the same quarter last year. Net income increased to $2.8 million, compared with $1.5 million, and diluted earnings per share improved to $0.27, compared with $0.19. We believe that a favorable relationship between freight demand and the industry-wide supply of tractor and trailer capacity, as well as our dedication to pricing discipline, yield management, and customer service, contributed to our increase in earnings for the second fiscal quarter versus the prior year.

Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At December 31, 2004, we had approximately $12.1 million of long-term debt and capital lease obligations, including current maturities, and $89.7 million in stockholders' equity. We have used our increased liquidity following our May 2004 stock offering to upgrade our tractor and trailer fleets. We lowered the average age of our tractor fleet to 2.0 years from 2.6 years as of December 31, 2004 compared to prior year, and lowered the average age or our trailer fleet to 4.3 years from 6.2 years as of December 31, 2004 compared to prior year. We anticipate that the size of our tractor fleet will remain relatively constant or grow modestly, excluding growth resulting from any acquisitions. We expect our tractor a nd trailer purchases will be primarily for replacement and will maintain the average age of our tractor fleet at approximately 2.0 years and the average age of our trailer fleet less than 5.0 during the 2005 fiscal year. We expect that most of our equipment purchases will be acquired with off-balance sheet operating leases. At December 31, 2004, we had future operating lease obligations totaling $168.5 million, including residual value guarantees of approximately $46.9 million, a significant portion of which we believe will be covered by manufacturer commitments. Of our tractors, approximately 450 were owned, 1,579 were financed under operating leases, and 443 were provided by independent contractors, who own (or lease) and drive their own tractors, at December 31, 2004. Of our trailers, approximately 1,450 were owned and the remain ing were financed under capital and operating leases at December 31, 2004.

Recent Development

On January 14, 2005 we signed and closed an asset purchase agreement with PFT Roberson, Inc. and its subsidiary CX Roberson, Inc. (together, "Roberson"). Pursuant to the asset purchase agreement, our wholly-owned subsidiary Celadon Trucking Services, Inc. acquired the truckload van business, including approximately 370 tractors and 670 trailers, of Roberson, a Champaign, Illinois-based carrier, for $22.7 million in cash, subject to certain post-closing adjustments. The acquisition was financed with borrowing under our existing credit facility. The transaction did not include Roberson's flatbed division or related assets.


	12

Our plan is to retain approximately 200 of the newest acquired tractors and 200 of the newest acquired trailers, and to dispose of the balance of the acquired revenue equipment. Net of proceeds of dispositions, we expect our investment in the former Roberson equipment to be approximately $12.0 million to $15.0 million. Following the acquisition, we offered employment to approximately 320 of Roberson's drivers, and to date over 220 of those drivers have accepted employment.

We believe that this acquisition, like our acquisitions of certain Burlington Motor Carrier assets in 2002 and Highway Express in 2003, is consistent with our goals of diversifying our customer base and freight mix, adding density in our primary lanes, and balancing lane flows. Pursuant to our operating model, we have begun the process of evaluating Roberson's customers, lanes, and loads for profitability based on rates, length of time for completion of the movement, attractiveness of positioning for the next load, driver friendliness, total cost, and other factors. In connection with this evaluation, we will seek to retain the freight that we identify as favorable, and discontinue freight that we conclude does not fit our business model.

In calendar 2004, Roberson's truckload van operations generated approximately $45.0 million in revenue, according to their unaudited financial statements. Following the equipment dispositions and freight evaluation process outlined above, we anticipate that this acquisition will initially produce approximately $30.0 million in incremental annual revenue and will be accretive to earnings by our fourth fiscal quarter ending June 30, 2005. These projections assume that we retain 200 of the acquired tractors and at least that many drivers, continuing strong demand from Roberson's former customers, that we are able to dispose of unwanted acquired equipment at expected prices, and smooth integration of the acquired operations.


	13

Results of Operations

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

	For the three months ended						For the six months ended
	December 31,						December 31,
	2004			2003			2004			2003
Operating revenue		100.0	%		100.0	%		100.0	%		100.0	%

Operating expenses:
Salaries, wages, and employee benefits		30.3	%		31.7	%		31.0	%		31.5	%
Fuel		17.7	%		13.9	%		17.4	%		13.5	%
Operations and maintenance		8.3	%		8.3	%		8.4	%		8.4	%
Insurance and claims		3.1	%		3.8	%		3.0	%		4.0	%
Depreciation, amortization and impairment charges		3.4	%		3.7	%		3.3	%		8.9	^%(1)
Revenue equipment rentals		8.1	%		7.2	%		7.8	%		7.1	%
Purchased transportation		18.3	%		20.2	%		18.0	%		20.4	%
Costs of products and services sold		1.0	%		1.5	%		1.1	%		1.6	%
Professional and consulting fees		0.5	%		0.6	%		0.5	%		0.6	%
Communications and utilities		1.0	%		1.1	%		1.0	%		1.1	%
Operating taxes and licenses		2.0	%		2.0	%		2.0	%		2.1	%
General and other operating		1.5	%		1.8	%		1.5	%		1.8	%

Total operating expenses		95.1	%		95.8	%		95.0	%		101.0	^%(1)

Operating income (loss)		4.9	%		4.2	%		5.0	%		(1.0	^%)(1)

Other (income) expense:
Interest expense		0.3	%		1.1	%		0.3	%		1.1	%

Income (loss) before income taxes		4.6	%		3.1	%		4.7	%		(2.1	%)⁽¹⁾
Provision for income taxes		2.0	%		1.6	%		2.1	%		0.0	%

Net income (loss)		2.6	%		1.6	%		2.6	%		(2.1	%)⁽¹⁾

(1)	Includes a $9.8 million pretax impairment charge for the three months ended September 30, 2003.

Comparison of Three Months Ended December 31, 2004 to Three Months Ended December 31, 2003

Operating revenue increased by $9.8 million, or 10.1%, to $106.9 million for the second quarter of fiscal 2005, from $97.1 million for the same period in fiscal 2004. This increase was primarily attributable to a 8.3% improvement in average revenue per total mile, excluding fuel surcharge, to $1.31 from $1.21, and an increase in average tractors to 2,257 from 2,246, partially offset by a decrease in average miles per tractor per week, to 2,152 from 2,221. The improvement in average revenue per total mile resulted primarily from better overall freight rates in the fiscal 2005 period, a decrease in the percentage of our freight comprised of automotive parts and a corresponding increase in the percentage of our freight comprised of consumer non-durables, and to a lesser extent a reduction in our percentage of non-revenue miles, which declined to 7.1% from 7.3%. The 3.1% decline in average miles per tractor per week was primarily attributable to more of our drivers taking holiday vacation time during the last two weeks of December as a result of a new driver compensation program implemented in January 2004 that allows drivers to accumulate time off. As a result of the foregoing factors, revenue per seated tractor per week, excluding fuel surcharge, which is our primary measure of asset productivity, increased 5.1% to $2,826 in the second quarter of fiscal 2005, from $2,689 for the same period in fiscal 2004, as a result of an increase in revenue per mile. Revenue for TruckersB2B was $1.9 million in the second quarter of fiscal 2005, compared to $2.4 million for the same period in fiscal 2004.


	14

The decrease in TruckersB2B revenue was attributable to a decline in revenue from tire discount programs, partially offset by an increase in member usage of the fuel program.

Salaries, wages and benefits were $32.4 million, or 30.3% of operating revenue, for the second quarter of fiscal 2005, compared to $30.8 million, or 31.7% of operating revenue, for the same period in fiscal 2004. The increase in the overall dollar amount was primarily related to an increase in Company miles, an increase in drivers wage rates, the number of work days, and marking the Company’s stock appreciation rights to market. The decrease as a percentage of operating revenue was primarily attributable to a decrease of approximately 44.2% in expenses related to employer-paid health insurance experience and the improvement in average revenue per total mile, which increased by a greater amount per mile than increases in driver compensation.

Fuel expenses increased to $18.9 million, or 17.7% of operating revenue, for the second quarter of fiscal 2005, compared to $13.5 million, or 13.9% of operating revenue, for the corresponding period in fiscal 2004. This increase was primarily attributable to average fuel prices that were approximately $0.55 per gallon, or 40.4%, higher during the fiscal 2005 period, and an increase in Company miles, which in turn increased fuel usage. The increase in fuel prices, however, was more than offset by improved fuel surcharge, which improved to $9.6 million in the fiscal 2005 period from $3.0 million in the fiscal 2004 period, and a decrease in fuel prices towards the end of the quarter. The improvement in fuel surcharge collection was attributable to higher fue l prices and a lower percentage of shipments being hauled under contracts with less favorable terms with regard to our ability to pass increases in fuel prices through to the customer. Increased fuel prices will decrease our operating income to the extent they are not offset by surcharges.

Operations and maintenance increased to $8.9 million for the second quarter of fiscal 2005, from $8.0 million for the second quarter of fiscal 2004. As a percentage of revenue, operations and maintenance remained constant at 8.3% of operating revenue. Operations and maintenance consist of direct operating expense, maintenance and tire expense. Expenses to prepare tractors and trailers for trade-in or sale have been higher than anticipated causing the increase in the overall dollar amount from the prior year period. We expect maintenance expense to decrease as a percentage of revenue in future periods as a result of the effects of our fleet upgrade.

Insurance and claims expense was $3.3 million, or 3.1% of operating revenue, for the second quarter of fiscal 2005, compared to $3.7 million, or 3.8% of operating revenue, for the same period in fiscal 2004. Insurance consists of premiums for liability, physical damage and cargo damage insurance. The primary reasons for the decrease in insurance and claims were lower premiums, as our self-insurance retention increased from fiscal 2004 levels, and positive safety experience and reduced adverse loss development on claims compared to the fiscal 2004 period. 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. We continually revise and change our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume.

Depreciation and amortization, consisting primarily of depreciation of revenue equipment, remained constant at $3.6 million for the second quarter of fiscal 2005 and 2004. As a percentage of revenue, depreciation and amortization decreased to 3.4% of operating revenue in the second quarter of fiscal 2005, compared to 3.7% of operating revenue for the same period of fiscal 2004. This expense consisted of depreciation of owned equipment and losses on disposition of tractors and trailers. Revenue equipment held under operating leases is not reflected on our balance sheet and the expenses related to such equipment are reflected on our statements of operations in revenue equipment rentals, rather than in depreciation and amortization and intere st expense, as is the case for revenue equipment that is financed with borrowings or capital leases. To date, most of the new tractors and trailers acquired in connection with our fleet upgrade have been financed under off-balance sheet operating leases, and we expect that trend to continue in the near term. In such event, we anticipate some further reduction in depreciation and amortization as a percentage of revenue going forward, excluding the impact of the revenue equipment acquired from Roberson.


	15

Revenue equipment rentals were $8.6 million, or 8.1% of operating revenue, for the second quarter of fiscal 2005, compared to $7.0 million, or 7.2% of operating revenue for the same period in fiscal 2004. This increase is attributable to an increase in our trailer fleet financed under operating leases during the 2005 period. As of December 31, 2004, approximately 4,700 trailers, or 68.7% of our Company trailers, were held under operating leases compared to approximately 3,400 trailers, or 44.7% of our trailers, at December 31, 2003. As we expect to finance most of our new tractors an d trailers under off-balance sheet operating leases, we expect revenue equipment rentals will continue to increase going forward.

Purchased transportation decreased to $19.5 million, or 18.3% of operating revenue for the second quarter of fiscal 2005, from $19.7 million, or 20.2% of operating revenue, for the same period in fiscal 2004. The decrease is primarily related to reduced owner-operator expense, as the percentage of our fleet comprised of owner-operators decreased. It has become difficult to recruit and retain owner-operators due to the challenging operating environment. Owner-operators are independent contractors who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. To the extent these operating expenses continue to rise and there is not a corresponding increase in the fixed payment per mile, we expect the percentage of our fleet comprised of owner-operators will continue to decrease.

All of our other operating expenses are relatively minor in amount, and there were no significant changes in such expenses. Accordingly, we have not provided a detailed discussion of such expenses.

Net interest expense decreased 70.0% to $0.3 million in the second quarter of fiscal 2005, from $1.0 million for the same period in fiscal 2004. This decrease was a result of reduced bank borrowings, which decreased to $4.2 million at December 31, 2004, from $21.7 million at December 31, 2003, and capital lease obligations, which decreased to $3.5 million at December 31, 2004, from $19.4 million at December 31, 2003. The reduction in our borrowings and capital lease obligations resulted largely from the application of the proceeds of our completed secondary stock offering in May 2004, and increased use of operating leases to finance acquisitions of revenue equipment. Our trend toward financing revenue equipment with operating leases instead of borrowing moves the interest component of the leases into revenue equipment rentals, an "above the line" operating expense, with a corresponding decrease in this expense category.

Our pretax margin, which we believe is a useful measure of our operating performance because it is neutral with regard to the method of revenue equipment financing that a company uses, improved 150 basis points to 4.6% for the second quarter of fiscal 2005, from 3.1% for the same period in the prior year.

Income taxes increased to $2.1 million, with an effective tax rate of 43%, for the second quarter of fiscal 2005, from $1.5 million, with an effective tax rate of 50%, for the corresponding period in fiscal 2004. The effective tax rate decreased as a result of increased earnings reducing the effect of non-deductible expenses related to our per diem pay structure. As per diem is a non-deductible expense, our effective tax rate will fluctuate as net income fluctuates in the future.

As a result of the factors described above, net income increased to $2.8 million for the second quarter of fiscal 2005, from $1.5 million for the same period in fiscal 2004.

Comparison of Six Months Ended December 31, 2004 to Six Months Ended December 31, 2003

Operating revenue increased by $18.5 million, or 9.6%, to $211.3 million for the six months ended December 31, 2004, from $192.8 million for the corresponding period in fiscal 2004. This increase was primarily attributable to a 7.5% improvement in average revenue per total mile, excluding fuel surcharge, from $1.29 to $1.20 and an increase in average tractors to 2,254 from 2,237, partially offset by a decrease in average miles per tractor per week, to 2,195 from 2,214. The improvement in average revenue per total mile resulted primarily from better overall freight rates in the fiscal 2005 period, a decrease in the percentage of our freight comprised of automotive parts and a corresponding increase in the percentage of our freight


	16

comprised of consumer non-durables, and to a lesser extent a reduction in our percentage of non-revenue miles which declined to 7.1% from 7.5%. The 0.9% decline in average miles per tractor per week was primarily attributable to more of our drivers taking holiday vacation time during the last two weeks of December as a result of a new driver compensation program implemented in January 2004 that allows drivers to accumulate time off. As a result of the foregoing factors, revenue per seated tractor per week, excluding fuel surcharge, which is our primary measure of asset productivity, increased 6.6% to $2,837 in the six months ended December 31, 2004, from $2,661 for the same period in fiscal 2004, as a result of an increase in revenue per mile. The increase in average tractors was primarily related to our a cquisition of certain assets of Highway Express in August 2003. Revenue for TruckersB2B was $3.9 million for the six months ended December 31, 2004, compared to $4.9 million for the corresponding period in fiscal 2004. The TruckersB2B revenue decrease was related to a decrease in the usage of the tire program, which was partially offset by an increase in member usage of other various programs, including the fuel program.

Salaries, wages and benefits were $65.6 million, or 31.0% of operating revenue, for the six months ended December 31, 2004, compared to $60.7 million, or 31.5% of operating revenue, for the same period in fiscal 2004. The increase in the overall dollar amount was primarily related to an increase in Company miles, an increase in drivers wage rates, which in turn increased driver wages, and to a lesser extent increases in administrative wages due to a higher number of work days and marking the Company stock appreciation rights plan to market. The decrease as a percentage of operating revenue was primarily attributable to a decrease in expenses related to employer-paid health insurance and the improvement in average revenue per total mile, which increas ed by a greater amount per mile than increases in driver compensation.

Fuel expenses increased to $36.8 million, or 17.4% of operating revenue, for the six months ended December 31, 2004, compared to $25.9 million, or 13.5% of operating revenue, for the same period in fiscal 2004. This increase was primarily attributable to average fuel prices that were approximately $0.53 per gallon, or 39.6%, higher during the fiscal 2005 period, and an increase in Company miles. The increase in fuel prices was substantially offset by the collection of $16.3 million in fuel surcharge revenue in the fiscal 2005 period, compared to $6.3 million in the fiscal 2004 period. The improvement in fuel surcharge collection was attributable to higher fuel prices and a lower percentage of shipments being hauled under contracts with less favo rable terms with regard to our ability to pass increases in fuel prices through to the customer. Increased fuel prices will decrease our operating income to the extent they are not offset by surcharges.

Operations and maintenance increased to $17.8 million for first six months of fiscal 2005, from $16.2 million for the six months ended December 31, 2003. As a percentage of revenue, operations and maintenance remained constant at 8.4% of revenue. Operations and maintenance consist of direct operating expense, maintenance and tire expense. Expenses to prepare tractors and trailers for trade-in or sale have been higher than anticipated causing the increase in the overall dollar amount from the prior year period. We expect maintenance expense to decrease as a percentage of revenue in future periods as a result of the effects of our fleet upgrade.

Insurance and claims expense was $6.3 million, or 3.0% of operating revenue, for the first six months of fiscal 2005, compared to $7.6 million, or 4.0% of operating revenue, for the corresponding period in fiscal 2004. The primary reasons for the decrease in insurance and claims expense were lower premiums, as our self-insurance retention increased from fiscal 2004 levels, and positive safety experience and a reduction in adverse loss development on claims compared to the fiscal 2004 period. 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. W e accrue for the uninsured portion of claims based on known claims and historical experience. We continually revise and change our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume.

Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased to $7.0 million, or 3.3% of operating revenue, in the six months ended December 31, 2004, from $17.3 million, or 8.9% of operating revenue, for the same period of fiscal 2004. This decrease is primarily attributable to the pretax impairment charge of $9.8 million, or 5.1% of operating revenue, that we


	17

recognized in the first quarter of fiscal 2004 as a result of our decision to dispose of all of our remaining 48' trailers, as well as our 53' trailers that are over nine years old. Revenue equipment held under operating leases is not reflected on our balance sheet and the expenses related to such equipment are reflected on our statements of operations in revenue equipment rentals, rather than in depreciation and amortization and interest expense, as is the case for revenue equipment that is financed with borrowings or capital leases. To date, most of the new tractors and trailers acquired in connection with our fleet upgrade have been financed under off-balance sheet operating leases, and we expect that trend to continue in the near term. In such event, we anticipate some further reduction in depreciation and amort ization as a percentage of revenue going forward, excluding the impact of the revenue equipment acquired from Roberson.

Revenue equipment rentals were $16.5 million, or 7.8% of operating revenue, for the second quarter of fiscal 2005, compared to $13.8 million, or 7.1% of operating revenue for the same period in fiscal 2004. This increase is attributable to a higher proportion of our trailer fleet held under operating leases during the 2005 period. As of December 31, 2004, approximately 4,700 trailers, or 68.7% of our Company trailers, were held under operating leases compared to approximately 3,400 trailers, or 44.7% of our trailers, at December 31, 2003. As we expect to finance most of our new tractors and trailers under off-balance sheet operating leases, we expect revenue equipment rentals will continue to increase going forward.

Purchased transportation decreased to $38.0 million, or 18.0% of operating revenue for the six months ended December 31, 2004, from $39.3 million, or 20.4% of operating revenue, for the same period in fiscal 2004. The decrease is primarily related to reduced owner-operator expense, as the percentage of our fleet comprised of owner-operators decreased. It has become difficult to recruit and retain owner-operators due to the challenging operating environment. Owner-operators are independent contractors who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. To the extent these operating expenses continue to rise and there is not a corresponding increase in the fixed payment per mile , we expect the percentage of our fleet comprised of owner-operators will continue to decrease.

All of our other operating expenses are relatively minor in amount, and there were no significant changes in such expenses. Accordingly, we have not provided a detailed discussion of such expenses.

Net interest expense decreased 68.2% to $0.7 million in the six months ended December 31, 2004, from $2.2 million for the corresponding period in fiscal 2004. This decrease was a result of reduced bank borrowings, which decreased to $4.2 million at December 31, 2004, from $21.7 million at December 31, 2003, and capital lease obligations, which decreased to $3.5 million at December 31, 2004, from $19.4 million at December 31, 2003. The reduction in our borrowings and capital lease obligations resulted largely from the application of the proceeds of our completed secondary stock offering in May 2004, and increased use of operating leases to finance acquisitions of revenue equipment. Our trend toward financing revenue equipment with operating leases instead of borrowing moves the interest component of the leases into revenue equipment rentals, an "above the line" operating expense, with a corresponding decrease in this expense category.

Our pretax margin, which we believe is a useful measure of our operating performance because it is neutral with regard to the method of revenue equipment financing that a company uses, improved 170 basis points to 4.7% for the first six months of fiscal 2005, from 3.0% for the same period of the prior year. Such amounts exclude the impact of the $9.8 million pretax impairment charge in the fiscal 2004 period.

Income taxes resulted in expense of $4.4 million with an effective tax rate of 44%, in the first six months of fiscal 2005, compared to a small benefit, with an effective tax rate of 0%, for the same period in fiscal 2004. As per diem is a non-deductible expense our effective tax rate will fluctuate as net income fluctuates in the future.

As a result of the factors described above, net income increased by $9.5 million to $5.5 million for the first six months of fiscal 2005, from a net loss of ($4.0 million) in the corresponding period in fiscal 2004.


	18

Liquidity and Capital Resources

Trucking is a capital-intensive business. We require cash to fund our operating expenses (other than depreciation and amortization), to make capital expenditures and acquisitions, and to repay debt, including principal and interest payments. Outside of ordinary operating expenses, we anticipate that capital expenditures for the acquisition of revenue equipment will constitute our primary cash requirement over the next twelve months. Our principal sources of liquidity are cash generated from operations, bank borrowings, capital and operating lease financing of revenue equipment, proceeds from the sale of used revenue equipment, and to a lesser extent, the issuance of securities.

For the first six months of fiscal 2005, net cash provided by operations was $6.7 million, compared to $20.1 million for the same period in fiscal 2004.

Net cash used in investing activities was $5.3 million for the first six months of fiscal 2005, compared to net cash used in investing activities of $5.7 million for the corresponding period in fiscal 2004. A significant portion of the cash used in investing activities for the fiscal 2004 period was related to our purchase of Highway Express in August of 2003. In addition, cash used in (provided by) investing activities includes the net cash effect of acquisitions and dispositions of revenue equipment during the period. Capital expenditures (excluding the assets purchased from Highway Express, Inc.) totaled $15.8 million in the first six months of fiscal 2005 and $6.5 million for the same period in fiscal 2004. We generated proceeds from the sale of property and equipment of $12.9 million d uring the first six months of fiscal 2005, compared to $4.4 million in proceeds for the corresponding period in fiscal 2004.

Net cash used in financing activities was $1.3 million for the first six months of fiscal 2005, compared to $14.7 million for the same period in fiscal 2004. Financing activity generally represents bank borrowings (payment and proceeds) and payment of capital lease obligations.

As of December 31, 2004, we had on order approximately 1,270 tractors and 700 trailers for delivery through December 2007. These revenue equipment orders represent a capital commitment of approximately $105.3 million, before considering the proceeds of equipment dispositions. In connection with our fleet upgrade, we have financed most of the new tractors and new trailers we have acquired to date under off-balance sheet operating leases. A substantial amount of the used equipment that has been or will be replaced by these new units was or is owned or held under capitalized leases and, therefore, carried on our balance sheet. As a result of our increased use of operating leases to finance acquisitions of revenue equipment, we have reduced our balance sheet debt. At December 31, 2004, our tota l balance sheet debt, including capitalized lease obligations, was $12.1 million, compared to $53.2 million at December 31, 2003. Our debt-to-capitalization ratio (total balance sheet debt as a percentage of total balance sheet debt plus total stockholders’ equity) decreased from 50.0% at December 31, 2003, to 11.9% at December 31, 2004.

Over the past several years, we have financed most of our new tractors and trailers under operating leases, which are not reflected on our balance sheet. The use of operating leases also affects our statement of cash flows. For assets subject to these operating leases, we do not record depreciation as an increase to net cash provided by operations, nor do we record any entry with respect to investing activities or financing activities.

Our operating leases include some under which we do not guarantee the value of the asset at the end of the lease term ("walk-away leases") and some under which we do guarantee the value of the asset at the end of the lease term. We were obligated for residual value payments related to operating leases of $46.9 million and $44.8 million at December 31, 2004 and 2003, respectively. A significant portion of these amounts are covered by repurchase and/or trade agreements we have with the equipment manufacturer. We believe that residual payment obligations that are not covered by the manufacturer will be satisfied, in the aggregate, by the value of the related equipment at the end of the lease. We anticipate that our continued reliance on operating leases, rather than bank borrowings or capital leases, t o finance the acquisition of revenue equipment in connection with our fleet upgrade will allow us to use our cash flows to further reduce our balance sheet debt.


	19

The tractors on order are not protected by manufacturers' repurchase arrangements and are not subject to "walk-away" leases under which we can return the equipment without liability regardless of its market value at the time of return. Therefore, we are subject to the risk that equipment values may decline, in which case we would suffer a loss upon disposition and be required to make cash payments because of the residual value guarantees we provide to our equipment lessors.

On September 26, 2002, we entered into our current primary credit facility with Fleet Capital Corporation, Fleet Capital Canada Corporation and several other lenders. This $55.0 million facility consists of revolving loan facilities, approximately $4.2 million in term loan subfacilities, and a commitment to issue and guaranty letters of credit. Repayment of the amounts outstanding under the credit facility is secured by a lien on our assets, including the stock or other equity interests of our subsidiaries, and the assets of certain of our subsidiaries. In addition, certain of our subsidiaries that are not party to the credit facility have guaranteed the repayment of the amount outstanding under the credit facility, and have granted a lien on their respective assets to secure such repayment. The credit facility expires on September 26, 2005.

Amounts available under the credit facility are determined based on our accounts receivable borrowing base. The facility contains restrictive covenants, which, among other things, limit our ability to pay cash dividends and the amount of our annual capital expenditures and lease payments, and require us to maintain compliance with certain financial ratios, including a minimum fixed charge coverage ratio. We were in compliance with these covenants at December 31, 2004, and expect to remain in compliance for the foreseeable future. At December 31, 2004, $4.2 million of our credit facility was utilized as outstanding borrowings and $6.8 million was utilized for standby letters of credit, and we had approximately $24.3 million in remaining avai lability under the facility. We utilized borrowings under the facility to finance the Roberson acquisition described above.

We believe we will be able to fund our operating expenses, as well as our current commitments for the acquisition of revenue equipment, over the next twelve months with a combination of cash generated from operations, borrowings available under the primary credit facility, and lease financing arrangements. Additional growth in our tractor and trailer fleet beyond our existing orders, as well as any additional acquisitions involving a significant cash component, may require additional sources of financing. We will continue to have significant capital requirements over the long term, and the availability of such capital will depend upon our financial condition and operating results and numerous other factors over which we have limited or no control, including prevailing market conditions and the market price of our c ommon stock. However, based on our improving operating results, anticipated future cash flows, current availability under our credit facility, and sources of equipment lease financing that we expect will be available to us, we do not expect that we will experience significant liquidity constraints in the foreseeable future.


	20

Contractual Obligations and Commercial Commitments

As of December 31, 2004, our bank loans, capitalized leases, operating leases, other debts and future commitments have stated maturities or minimum annual payments as follows:

	Annual Cash Requirements
	as of December 31, 2004
	(in thousands) Amounts Due by Period
	Total		Less than One Year		One to Three Years		Three to Five Years		Over Five Years


Operating Leases⁽¹⁾	$	168,522	$	35,665	$	74,320	$	38,812	$	19,725
Capital Leases Obligations⁽¹⁾	$	3,493	$	1,985	$	754	$	233	$	521
Long-Term Debt	$	8,589	$	5,434	$	670	$	687	$	1,798

Sub-Total	$	180,604	$	43,084	$	75,744	$	39,732	$	22,044

Future Purchase of Revenue Equipment	$	105,298	$	2,688	$	25,800	$	43,346	$	33,464
Employment and Consulting Agreements⁽²⁾	$	1,012	$	898	$	114		---		---
Standby Letters of Credit	$	6,766	$	6,766		---		---		---

Total	$	293,680	$	53,436	$	101,658	$	83,078	$	55,508

(1)	Included in these balances are residual guarantees of $46.9 million in total and $0.2 million coming due in less than one year. We believe that a significant portion of these amounts will be satisfied by manufacturer commitments and amounts not satisfied by manufacturer commitments will be satisfied, in the aggregate, by the value of the related equipment at the end of the lease.

(2)	The amounts reflected in the table do not include sums that could become payable to our Chief Executive Officer, Chief Financial Officer, and our Executive Vice President under certain circumstances in the event their employment by the Company is terminated.

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that impact the amounts reported in our consolidated financial statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenues and expenses, and associated disclosures of contingent assets and liabilities, are affected by these estimates and assumptions. We evaluate these estimates and assumptions on an ongoing basis, utilizing historical experience, consultation with experts, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates and assumptions, and it is possible that materially different amounts would be reported using differing estimates or assumptions. We consider our critical accounting policies to be those that require us to make more significant judgments and estimates when we prepare our financial statements. Our critical accounting policies include the following:

Revenue Recognition. Upon delivery of a load, we recognize all revenue related to that load, including revenue from detention charges and our fuel surcharge program. In this connection, we make estimates concerning the collectibility of our accounts receivable and the required amounts of reserves for uncollectible accounts. We also recognize direct operating expenses, such as drivers’ wages and fuel, on the date of delivery of the relevant load.


	21

Depreciation of Property and Equipment. We depreciate our property and equipment using the straight line method over the estimated useful life of the asset. We generally use estimated useful lives of 4 to 12 years for tractors and trailers, and estimated salvage values for tractors and trailers generally range from 25% to 40% of the capitalized cost. Gains and losses on the disposal of revenue equipment are included in depreciation expense in our statements of operations.

We periodically review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used equipment market, and prevailing industry practice. Changes in our useful life or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations.

Revenue equipment and other long-lived assets are tested for impairment whenever an event occurs that indicates an impairment may exist. Expected future cash flows are used to analyze whether an impairment has occurred. If the sum of expected undiscounted cash flows is less than the carrying value of the long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or the appraised value of the asset, as appropriate.

Operating leases. We recently have financed a substantial majority of our revenue equipment acquisitions with operating leases, rather than with bank borrowings or capital lease arrangements. These leases generally contain residual value guarantees, which provide that the value of equipment returned to the lessor at the end of the lease term will be no lower than a negotiated amount. To the extent that the value of the equipment is below the negotiated amount, we are liable to the lessor for the shortage at the expiration of the lease. For approximately 75% of our current tractors and 30% of our current trailers, we have residual value guarantees from manufacturers at amounts equal to our residual obligation to the lesso rs. For all other equipment (or to the extent we believe any manufacturer will refuse or be unable to meet its obligation), we are required to recognize additional rental expense to the extent we believe the fair market value at the lease termination will be less than our obligation to the lessor.

In accordance with SFAS 13, “Accounting for Leases,” property and equipment held under operating leases, and liabilities related thereto, are not reflected on our balance sheet. All expenses related to revenue equipment operating leases are reflected on our statements of operations in the line item entitled “Revenue equipment rentals.” As such, financing revenue equipment with operating leases instead of bank borrowings or capital leases effectively moves the interest component of the financing arrangement into operating expenses on our statements of operations. Consequently, we believe that pretax margin (income before income taxes as a percentage of operating revenue) may provide a more useful measure of our operating performance than operating ratio (operating expenses as a percentage of oper ating revenue) because it eliminates the impact of revenue equipment financing decisions.

Claims Reserves and Estimates. The primary claims arising for us consist of cargo liability, personal injury, property damage, collision and comprehensive, workers’ compensation, and employee medical expenses. We maintain self-insurance levels for these various areas of risk and have established reserves to cover these self-insured liabilities. We also maintain insurance to cover liabilities in excess of these self-insurance amounts. Claims reserves represent accruals for the estimated uninsured portion of reported claims, including adverse development of reported claims, as well as estimates of incurred but not reported claims. Reported claims and related loss reserves are estimated by third party administrators, a nd we refer to these estimates in establishing our reserves. Claims incurred but not reported are estimated based on our historical experience and industry trends, which are continually monitored, and accruals are adjusted when warranted by changes in facts and circumstances. In establishing our reserves we must take into account and estimate various factors, including, but not limited to, assumptions concerning the nature and severity of the claim, the effect of the jurisdiction on any award or settlement, the length of time until ultimate resolution, inflation rates in health care and in general, interest rates, legal expenses, and other factors. Our actual experience may be different than our estimates, sometimes significantly. Changes in assumptions as well as changes in actual experience could cause these estimates to change in the near term. Insurance and claims expense will vary from period to period based on the severity, frequency, and adverse development of claims incurred in a given period.


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Goodwill. Our consolidated balance sheets at June 30, 2004 and December 31, 2004, included goodwill of acquired businesses of approximately $16.7 and $19.1 million, respectively. This amount has been recorded as a result of prior business acquisitions accounted for under the purchase method of accounting. Prior to July 1, 2001, goodwill from each acquisition was generally amortized on a straight-line basis. Under SFAS No. 142, Goodwill and Other Intangible Assets, which we adopted as of July 1, 2001, goodwill is tested for impairment annuall y (or more often, if an event or circumstance indicates that an impairment loss has been incurred) in lieu of amortization. During the fourth quarter of fiscal 2004, we completed our most recent annual impairment test for that fiscal year and concluded that there was no indication of impairment.

A significant amount of judgment is required in performing goodwill impairment tests. Such tests include estimating the fair value of our reporting units. As required by SFAS No. 142, we compare the estimated fair value of our reporting units with their respective carrying amounts including goodwill. We define a reporting unit as an operating segment. Under SFAS No. 142, fair value refers to the amount for which the entire reporting unit could be bought or sold. Our methods for estimating reporting unit values include market quotations, asset and liability fair values, and other valuation techniques, such as discounted cash flows and multiples of earnings, revenue, or other financial measures. With the exception of market quotations, all of these methods involve significant estimates and assumptions, including esti mates of future financial performance and the selection of appropriate discount rates and valuation multiples.

TruckersB2B, Inc. has purchased 2,073,276 shares of its Common Stock into treasury for $2,435,000, which is accounted for using the purchase method in accordance with SFAS 141 “Business Combinations.”

Accounting for Income Taxes. Deferred income taxes represent a substantial liability on our consolidated balance sheet. Deferred income taxes are determined in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry-forwards. We evaluate our tax assets and liabilities on a periodic basis and adjust these balances as appropriate. We believe that we have adequately provided for our future tax consequences based upon current facts and cir cumstances and current tax law. However, should our tax positions be challenged and not prevail, different outcomes could result and have a significant impact on the amounts reported in our consolidated financial statements.

The carrying value of our deferred tax assets (tax benefits expected to be realized in the future) assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to reduce the value of the deferred tax assets resulting in additional income tax expense. We believe that it is more likely than not that the deferred tax assets, net of valuation allowance, will be realized, based on forecasted income. However, there can be no assurance that we will meet our forecasts of future income. We evaluate the deferred tax assets on a periodic basis and assess the need for additional valuation allowances.

Federal income taxes are provided on that portion of the income of foreign subsidiaries that is expected to be remitted to the United States.

Seasonality

We have substantial operations in the Midwestern and Eastern United States and Canada. In those geographic regions, our tractor productivity may be adversely affected during the winter season because inclement weather may impede our operations. Moreover, some shippers reduce their shipments during holiday periods as a result of curtailed operations or vacation shutdowns. At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and harsh weather creating higher accident frequency, increased claims, and more equipment repairs.


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Inflation

Many of our operating expenses, including fuel costs, revenue equipment, and driver compensation are sensitive to the effects of inflation, which result in higher operating costs and reduced operating income. The effects of inflation on our business during the past three years were most significant in fuel. The effects of inflation on revenue were not material in the past three years. We have limited the effects of inflation through increases in freight rates and fuel surcharges.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We experience various market risks, including changes in interest rates, foreign currency exchange rates, and fuel prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes, nor when there are no underlying related exposures.

Interest Rate Risk. We are exposed to interest rate risk primarily from our primary credit facility. The credit facility carries a maximum variable interest rate of the bank’s base rate plus 3.0% or LIBOR plus 3.5%. At December 31, 2004, we had variable rate borrowings of $4.2 million outstanding under the credit facility. Assuming variable rate borrowings under the credit facility at December 31, 2004 levels, a hypothetical 10% increase in the bank's base rate and LIBOR would not be material to our annual net income. In the event of a change of such magnitude, management would likely consider actions to further mitigate our exposure.

Foreign Currency Exchange Rate Risk. We are subject to foreign currency exchange rate risk, specifically in connection with our Canadian operations. While virtually all of the expenses associated with our Canadian operations, such as owner-operator costs, Company driver compensation, and administrative costs, are paid in Canadian dollars, a significant portion of our revenue generated from those operations is billed in U.S. dollars because many of our customers are U.S. shippers transporting goods to or from Canada. As a result, increases in the Canadian dollar exchange rate adversely affect the profitability of our Canadian operations. Assuming revenue and expenses for our C anadian operations identical to that in the quarter ended December 31, 2004 (both in terms of amount and currency mix), we estimate that a $0.01 increase in the Canadian dollar exchange rate would reduce our annual net income by approximately $235,000. We generally do not face the same magnitude of foreign currency exchange rate risk in connection with our intra-Mexico operations conducted through our Mexican subsidiary, Jaguar, because our foreign currency revenues are generally proportionate to our foreign currency expenses for those operations. For purposes of consolidation, however, the operating results earned by our subsidiaries, including Jaguar, in foreign currencies are converted into United States dollars. As a result, a decrease in the value of the Mexican peso could adversely affect our consolidated results of operations. We estimate that a $0.01 decrease in the Mexican peso exchange rate would reduce our annual net income by approximately $42,000. Although we have from time-to-time ent ered foreign currency hedging transactions in the past, we currently are not a party to any such transactions.

Commodity Price Risk. 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. Historically, we have sought to recover a portion of short-term increases in fuel prices from customers through the collection of fuel surcharges. However, fuel surcharges do not always fully offset increases in fuel prices. In addition, from time-to-time we may enter into derivative financial inst ruments to reduce our exposure to fuel price fluctuations. In accordance with SFAS 133, we adjust any such derivative instruments to fair value through earnings on a monthly basis. As of December 31, 2004, we had no fuel derivatives in place.


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Item 4. Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company has carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter e nded December 31, 2004 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the "Commission"). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding disclosures.

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


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Part II - Other Information

Item 1. Legal Proceedings

There are various claims, lawsuits and pending actions against the Company and its subsidiaries which arose in the normal course of the operations of its business. 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.

Item 4. Submission of Matters to a Vote of Security Holders

Celadon Group, Inc. held its regular Annual Meeting of shareholders on November 19, 2004. At the Annual Meeting, Stephen Russell, Paul A. Biddelman, Michael Miller, Anthony Heyworth, and John Kines were elected to serve as directors for one-year terms. Stockholders representing 8,499,851 shares or 87.5% of the total outstanding shares of Common Stock were present in person or by proxy at the Annual Meeting. A tabulation of the vote with respect to each nominee follows:

Proposal 1 -Election of Directors
	Voted For	Vote Withheld

Stephen Russell	8,003,154	496,697
Paul A. Biddelman	8,031,405	468,446
Michael Miller	8,031,455	468,396
Anthony Heyworth	8,031,713	468,138
John Kines	8,032,540	467,311

Item 6. Exhibits

3.1	Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 filed with the Commission on 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 to Annual Report on Form 10-K for the fiscal year ended June 30, 1995 filed with the Commission on November 30, 1995.
3.3	Certificate of Designation for Series A Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.3 to Annual Report on Form 10-K for the fiscal year ended June 30, 2000 filed with the Commission on September 28, 2000.
3.4	By-laws of the Company. Incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 filed with the Commission on January 20, 1994 (No. 33-72128).
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements


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SIGNATURES

Pursuant to the requirements 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.

	Celadon Group, Inc.
	(Registrant)

	/s/Stephen Russell
	Stephen Russell
	Chief Executive Officer

	/s/Paul A. Will
	Paul A. Will
	Chief Financial Officer

Date: February 8, 2005