Celadon (CGIP) 10-Q 2006 Q2 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, 2005

or

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

Commission file number: 000-23192

CELADON GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware	13-3361050
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification Number)
9503 East 33rd Street
One Celadon Drive
Indianapolis, IN	46235-4207
(Address of principal executive offices)	(Zip Code)
(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [   ] Accelerated filer [X] Non-accelerated filer [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act).

Yes [   ]  No [X]

As of January 24, 2006 (the latest practicable date), 10,121,465 shares of the registrant’s common stock, par value $0.033 per share, were outstanding.

CELADON GROUP, INC.

Index to

December 31, 2005 Form 10-Q

Part I.	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets at December 31, 2005 (Unaudited) and June 30, 2005	3
		Condensed Consolidated Statements of Income for the three and six months ended December 31, 2005 and 2004 (Unaudited)	4
		Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2005 and 2004 (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	21
	Item 4.	Controls and Procedures	22
Part II.	Other Information
	Item 1.	Legal Proceedings.	23
	Items 2., 3., 4., and 5.		Not Applicable
	Item 6.	Exhibits	23

2

Part I.   Financial Information

CELADON GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2005 and June 30, 2005

(Dollars in thousands except par share and value amounts)

	December 31, 2005			June 30, 2005
	(unaudited)
A S S E T S
Current assets:
Cash and cash equivalents	$	8,478		$	11,115
Trade receivables, net of allowance for doubtful accounts of $1,564 and $1,496 at December 31, 2005 and June 30, 2005		53,061			55,760
Accounts receivable - other		1,165			2,727
Prepaid expenses and other current assets		8,226			3,599
Tires in service		3,109			3,308
Income tax receivable		533			---
Deferred income taxes		2,424			2,424
Total current assets		76,996			78,933
Property and equipment		92,875			88,230
Less accumulated depreciation and amortization		31,323			30,685
Net property and equipment		61,552			57,545
Tires in service		1,658			1,739
Goodwill		19,137			19,137
Other assets		2,585			2,089
Total assets	$	161,928		$	159,443
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	$	5,116		$	4,465
Accrued salaries and benefits		8,647			11,523
Accrued insurance and claims		10,055			10,021
Accrued independent contractor expense		234			1,265
Accrued fuel expense		1,248			6,104
Other accrued expenses		11,730			9,840
Current maturities of long-term debt		1,008			1,057
Current maturities of capital lease obligations		225			788
Income tax payable		---			265
Total current liabilities		38,263			45,328
Long-term debt, net of current maturities		5,194			4,239
Capital lease obligations, net of current maturities		1,118			1,260
Deferred income taxes		8,637			10,100
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 10,091,882 and 10,050,449 shares at December 31, 2005 and June 30, 2005		333			332
Additional paid-in capital		89,046			89,359
Retained earnings		21,027			11,544
Unearned compensation of restricted stock		---			(711	)
Accumulated other comprehensive loss		(1,715	)		(2,033	)
Total stockholders’ equity		108,691			98,491
Total liabilities and stockholders’ equity	$	161,928		$	159,443

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

3

CELADON GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share amounts)

(Unaudited)

	For the three months ended December 31,						For the six months ended December 31,
	2005			2004			2005			2004
Revenue:
Freight revenue	$	102,888		$	97,249		$	206,228		$	195,478
Fuel surcharges		17,386			9,622			31,981			15,786
		120,274			106,871			238,209			211,264
Operating expenses:
Salaries, wages, and employee benefits		35,468			32,395			70,331			65,569
Fuel		27,928			18,890			54,148			36,750
Operations and maintenance		7,442			8,899			14,724			17,807
Insurance and claims		3,961			3,326			7,347			6,330
Depreciation and amortization		2,921			3,634			6,084			7,002
Revenue equipment rentals		10,255			8,634			20,626			16,512
Purchased transportation		17,840			19,504			35,663			38,044
Costs of products and services sold		1,347			1,113			2,641			2,316
Professional and consulting fees		702			524			1,553			1,025
Communications and utilities		1,024			1,022			2,043			2,054
Operating taxes and licenses		2,153			2,095			4,213			4,180
General and other operating		1,458			1,565			2,965			3,086
Total operating expenses		112,499			101,601			222,338			200,675
Operating income		7,775			5,270			15,871			10,589
Other (income) expense:
Interest income		(77	)		(3	)		(78	)		(6	)
Interest expense		197			338			499			688
Other (income) expense, net		1			31			26			7
Income before income taxes		7,654			4,904			15,424			9,900
Provision for income taxes		2,855			2,130			5,941			4,375
Net income	$	4,799		$	2,774		$	9,483		$	5,525
Earnings per common share:
Diluted earnings per share	$	0.46		$	0.27		$	0.92		$	0.54
Basic earnings per share	$	0.48		$	0.28		$	0.94		$	0.57
Average shares outstanding:
Diluted		10,354			10,154			10,334			10,157
Basic		10,085			9,801			10,071			9,781

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

4

CELADON GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended December 31, 2005 and 2004

(Dollars in thousands)

(Unaudited)

	2005			2004
Cash flows from operating activities:
Net income	$	9,483		$	5,525
Adjustments to reconcile net income to net cash provided  by operating activities:
Depreciation and amortization		6,084			7,002
Stock based compensation		1,749			491
Benefit for deferred income taxes		(1,462	)		(579	)
Provision for doubtful accounts		459			542
Changes in assets and liabilities:
Trade receivables		2,240			4,461
Accounts receivable - other		1,562			971
Income tax recoverable		(533	)		---
Tires in service		280			(284	)
Prepaid expenses and other current assets		(4,628	)		36
Other assets		(220	)		(124	)
Accounts payable and accrued expenses		(7,823	)		(8,982	)
Income tax payable		(265	)		(2,315	)
Net cash provided by operating activities		6,926			6,744
Cash flows from investing activities:
Purchase of property and equipment		(24,932	)		(15,845	)
Proceeds on sale of property and equipment		16,519			12,944
Purchase of minority shares of subsidiary		---			(1,525	)
Net cash used in investing activities		(8,413	)		(4,426	)
Cash flows from financing activities:
Proceeds from issuances of common stock		286			1,064
Proceeds from bank borrowings and debt		---			4,958
Payments on long-term debt		(730	)		(6,456	)
Principal payments under capital lease obligations		(706	)		(1,824	)
Net cash used in financing activities		(1,150	)		(2,258	)
Increase (decrease) in cash and cash equivalents		(2,637	)		60
Cash and cash equivalents at beginning of period		11,115			356
Cash and cash equivalents at end of period	$	8,478		$	416
Supplemental disclosure of cash flow information:
Interest paid	$	489		$	691
Income taxes paid	$	8,539		$	6,964
Supplemental disclosure of non-cash flow investing activities:
Lease obligation/debt incurred in the purchase of equipment	$	1,636		$	735
Note payable obligation incurred in purchase of minority shares	$	---		$	910

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, 2005

(Unaudited)

1.  Basis of Presentation

The accompanying unaudited condensed 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 condensed 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 results for a full year. These condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s condensed consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

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 FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123-R, "Share-Based Payments, an Amendment of SFAS 123 on Accounting for Stock Based Compensation." SFAS 123-R requires companies to recognize in the income statement the grant date fair value of stock options and other equity-based compensation issued to employees. SFAS 123-R is effective for most public companies with interim or annual periods beginning after June 15, 2005. We adopted this statement effective July 1, 2005. Our adoption of SFAS 123-R impacted our results of operations by increasing salaries, wages, and related expenses. The amount of the impact was immaterial to the Company for the second quarter of fiscal 2006 and the six months ended December 31, 2005.

At December 31, 2005, the Company had 469,020 stock options vested and outstanding with an average exercise price of $6.13. These options have an intrinsic value of $10.6 million based on the December 30, 2005 closing share price of $28.80. The weighted average remaining contractual term on these options is approximately 5.0 years.

The Company had 360,000 stock appreciation rights ("SARs") outstanding with an average exercise price of $16.36. These SARs vest annually over a 3 or 4 year term based on grant dates, with grant dates ranging from June 9, 2003 to August 21, 2005. These SARs have an intrinsic value of $4.5 million based on the December 30, 2005 closing share price of $28.80. The weighted average remaining contractual term on these SARs is approximately 2.4 years.

6

CELADON GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005

(Unaudited)

For purposes of pro forma disclosure, for the six months ended December 31, 2004, the estimated fair value of the options are expensed over the vesting period. Under the fair value method, the Company’s net income (in thousands) and earnings per share would have been:

	For the three months ended		For the six months ended
	December 31, 2004		December 31, 2004
Net income	$	2,774	$	5,525
Stock-based compensation expense (net of tax)		64		159
Pro forma net income	$	2,710	$	5,366
Income per share:
Diluted earnings per share
As reported	$	0.27	$	0.54
Pro forma	$	0.27	$	0.53
Basic earnings per share:
As reported	$	0.28	$	0.57
Pro forma	$	0.28	$	0.55

3. Credit Facility

    On September 26, 2005, Celadon Group, Inc., a Delaware corporation (the "Company"), Celadon Trucking Services, Inc., a New Jersey corporation and wholly-owned subsidiary of the Company ("CTSI"), and TruckersB2B, Inc., a Delaware corporation and wholly-owned subsidiary of the Company ("TruckersB2B"), entered into an unsecured Credit Agreement with LaSalle Bank National Association, as administrative agent, and LaSalle Bank National Association, Fifth Third Bank (Central Indiana), and JPMorgan Chase Bank, N.A., as lenders, which matures on September 24, 2010 (the "Credit Agreement"). The Credit Agreement was used to refinance the Company’s existing credit facility and is intended to provide for ongoing working capital needs and general corporate purposes. Borrowings under the Credit Agreement are based, at the option of the Company, on a base rate equal to the greater of the federal funds rate plus 0.5% and the administrative agent’s prime rate or LIBOR plus an applicable margin between 0.75% and 1.125% that is adjusted quarterly based on cash flow coverage. The Credit Agreement is guaranteed by Celadon E-Commerce, Inc., ("CelEComm"), Celadon Canada, Inc., ("CelCan"), and Servicios de Transportacion Jaguar, S.A. de C.V., ("Jaguar") each of which is a subsidiary of the Company.

    The Credit Agreement has a maximum revolving borrowing limit of $50.0 million, and the Company may increase the revolving borrowing limit by an additional $20.0 million, to a total of $70.0 million. Letters of credit are limited to an aggregate commitment of $15.0 million and a swing line facility has a limit of $5.0 million. A commitment fee that is adjusted quarterly between 0.15% and 0.225% per annum based on cash flow coverage is due on the daily unused portion of the Credit Agreement. The Credit Agreement contains certain restrictions and covenants relating to, among other things, dividends, tangible net worth, cash flow, mergers, consolidations, acquisitions and dispositions, and total indebtedness. The Credit Agreement includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Agreement may be accelerated and the Lenders’ commitments may be terminated.

7

CELADON GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005

(Unaudited)

4.  Earnings Per Share

The difference in basic and diluted weighted average shares is due to the assumed exercise of outstanding stock options. A reconciliation of the basic and diluted earnings per share calculation was as follows (amounts in thousands, except per share amounts):

	For three months ended December 31,				For six months ended December 31,
	2005		2004		2005		2004
Net income	$	4,799	$	2,774	$	9,483	$	5,525
Denominator
Weighted average number of common shares outstanding		10,085		9,801		10,071		9,781
Equivalent shares issuable upon exercise of stock options		269		353		263		376
Diluted shares		10,354		10,154		10,334		10,157
Earnings per share
Basic	$	0.48	$	0.28	$	0.94	$	0.57
Diluted	$	0.46	$	0.27	$	0.92	$	0.54

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-hauling services through its subsidiaries CTSI, Jaguar, and CelCan. The Company provides certain services over the Internet through its e-commerce subsidiary TruckersB2B.  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 (amounts below in thousands).

	Transportation		E-commerce		Consolidated
Three months ended December 31, 2005
Operating revenue	$	118,192	$	2,082	$	120,274
Operating income		7,416		359		7,775
Three months ended December 31, 2004
Operating revenue	$	104,950	$	1,921	$	106,871
Operating income		4,839		431		5,270
Six months ended December 31, 2005
Operating revenue	$	234,152	$	4,057	$	238,209
Operating income		15,157		714		15,871
Six months ended December 31, 2004
Operating revenue	$	207,336	$	3,928	$	211,264
Operating income		9,738		851		10,589

8

CELADON GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005

(Unaudited)

Information as to the Company’s operating revenue by geographic area is summarized below (in thousands). The Company allocates operating revenue based on country of origin of the tractor hauling the freight:

	For the three months ended December 31,				For the six months ended December 31,
	2005		2004		2005		2004
Operating revenue:
United States	$	97,576	$	86,532	$	194,214	$	171,390
Canada		14,980		14,902		29,735		29,223
Mexico		7,718		5,437		14,260		10,651
Total	$	120,274	$	106,871	$	238,209	$	211,264

The Company’s largest customer is DaimlerChrysler, which accounted for approximately 2% and 5% of the Company’s total revenue for the second quarter of fiscal 2006 and 2005, respectively, and which accounted for approximately 3% and 5% of the Company’s total revenue for the six months ended December 31, 2005 and 2004, respectively. 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. No other customer accounted for more than 5% of the Company’s total revenue during any of its two most recent fiscal years.

6.             Income Taxes

Income tax expense varies from the federal corporate income tax rate of 35% 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, entertainment, and fines.

7.            Comprehensive Income

Comprehensive income consisted of the following components for the second quarter of fiscal 2006 and 2005, respectively, and the six months ended December 31, 2005 and 2004, respectively (in thousands):

	Three months ended December 31,				Six months ended December 31,
	2005		2004		2005		2004
Net income	$	4,799	$	2,774	$	9,483	$	5,525
Foreign currency translation adjustments		271		49		318		165
Total comprehensive income	$	5,070	$	2,823	$	9,801	$	5,690

9

CELADON GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005

(Unaudited)

8.             Stock Split

On January 18, 2006, the Board of Directors approved a three-for-two stock split, affected in the form of a fifty percent (50%) stock dividend. The stock split distribution date is February 15, 2006, to stockholders of record as of the close of business on February 1, 2006. This stock split will increase the number of outstanding shares to approximately 15,150,000 from approximately 10,092,000. Diluted earnings per share for the second quarter of fiscal 2006 and the six months ended December 31, 2005, would have been approximately $0.31 and $0.73 based on the post stock split share count.

9.            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, auto liability, or income taxes. 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.

10.          Reclassification

Certain reclassifications have been made to the December 31, 2004 financial statements to conform to the December 31, 2005 presentation.

10

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

Disclosure Regarding Forward Looking Statements

This Quarterly Report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve 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. Such statements may be identified by the fact that they do not relate strictly to historical or current facts. These statements generally use words such as "believe," "expect," "anticipate," "project," "forecast," "should," "estimate," "plan," "outlook," "goal," and similar expressions. 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 Quarterly Report on Form 10-Q.

All such forward-looking statements speak only as of the date of this Quarterly Report on 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 $436.8 million in operating revenue during our fiscal year ended June 30, 2005. We have grown significantly since our incorporation in 1986 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 many Fortune 500 shippers.

In our international operations, we offer time-sensitive transportation in and between the United States and its two largest trading partners, Mexico and Canada. We generated approximately one-half of our revenue in fiscal 2005 from international movements, and we believe our 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.

We believe our international operations, particularly those involving Mexico, offer an attractive business niche for several reasons. The additional complexity of and need to establish cross-border business partners and to develop strong organization and adequate infrastructure in Mexico affords some barriers to competition that are not present in traditional U.S. truckload service. In addition, the expected continued growth of Mexico’s economy, particularly exports to the U.S., positions us to capitalize on our cross-border expertise.

Our success is 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.

11

In addition to our international business, we offer a broad range of truckload transportation services within the United States, including long-haul, regional, dedicated, and logistics. With the acquisitions of certain assets of Highway Express in August 2003 and CX Roberson in January 2005, we expanded our operations and service offerings within the United States and significantly improved our lane density, freight mix, and customer diversity. The Highway Express and CX Roberson acquisitions were particularly important to us, and we believe they have contributed to our recent operating improvements.

We also operate TruckersB2B, a profitable marketing business that affords volume purchasing power for items such as fuel, tires, and equipment to approximately 20,000 trucking fleets representing approximately 425,000 tractors. TruckersB2B represents a separate operating segment under generally accepted accounting principles.

For the second quarter of fiscal 2006, operating revenue increased 12.5% to $120.3 million, compared with $106.9 million for the second quarter of fiscal 2005. Net income increased to $4.8 million from $2.8 million, and diluted earnings per share improved to $0.46 from $0.27. 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 quarter of fiscal 2006 compared to the second quarter of fiscal 2005.

Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At December 31, 2005, we had approximately $7.5 million of long-term debt and capital lease obligations, including current maturities, and $108.7 million in stockholders’ equity. The average age of our tractor fleet remained constant at 2.1 years and 2.0 years as of December 31, 2005 and December 31, 2004, and we lowered the average age of our trailer fleet to 3.6 years from 4.3 years as of December 31, 2005 compared to December 31, 2004. We expect our tractor and 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 at 4.0 years or less during the 2006 fiscal year. We expect that our equipment purchases will be financed using cash generated from operations or with off-balance sheet operating leases. At December 31, 2005, we had future operating lease obligations totaling $201.5 million, including residual value guarantees of approximately $75.6 million. Of our tractors, 383 were owned, 1,847 were financed under operating leases, and 351 were provided by independent contractors, who own (or lease) and drive their own tractors, at December 31, 2005. Of our 7,727 trailers, 1,673 were owned or financed with capital leases and the remaining were financed under operating leases at December 31, 2005.

12

Results of Operations

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

	For the three months ended December 31,						For the six months ended December 31,
	2005			2004			2005			2004
Freight revenue(1)		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
Salaries, wages, and employee benefits		34.5	%		33.3	%		34.1	%		33.5	%
Fuel(1)		10.2	%		9.6	%		10.7	%		10.7	%
Operations and maintenance		7.2	%		9.2	%		7.1	%		9.1	%
Insurance and claims		3.9	%		3.4	%		3.6	%		3.2	%
Depreciation and amortization		2.8	%		3.7	%		3.0	%		3.6	%
Revenue equipment rentals		10.0	%		8.9	%		10.0	%		8.4	%
Purchased transportation		17.3	%		20.1	%		17.3	%		19.5	%
Costs of products and services sold		1.3	%		1.1	%		1.3	%		1.2	%
Professional and consulting fees		0.7	%		0.5	%		0.8	%		0.5	%
Communications and utilities		1.0	%		1.1	%		1.0	%		1.1	%
Operating taxes and licenses		2.1	%		2.2	%		2.0	%		2.1	%
General and other operating		1.4	%		1.6	%		1.4	%		1.6	%
Total operating expenses		92.4	%		94.7	%		92.3	%		94.5	%
Operating income		7.6	%		5.3	%		7.7	%		5.5	%
Other expense:
Interest expense		0.1	%		0.4	%		0.2	%		0.5	%
Income before income taxes		7.5	%		4.9	%		7.5	%		5.0	%
Provision for income taxes		2.8	%		2.2	%		2.9	%		2.2	%
Net income		4.7	%		2.7	%		4.6	%		2.8	%

(1) Freight revenue is total revenue less fuel surcharges. In this table, fuel surcharges are eliminated from revenue and subtracted from fuel expense. Fuel surcharges were $17.4 million and $9.6 million for the second quarter of fiscal 2006 and 2005, respectively, and $32.0 million and $15.8 million for the six months ended December 31, 2005 and 2004, respectively.

Comparison of Three Months Ended December 31, 2005 to Three Months Ended December 31, 2004

Operating revenue increased by $13.4 million, or 12.5%, to $120.3 million for the second quarter of fiscal 2006, from $106.9 million for the second quarter of fiscal 2005. Freight revenue increased by $5.6 million, or 5.8%, to $102.9 million for the second quarter of fiscal 2006, from $97.2 million for the second quarter of fiscal 2005. This increase was primarily attributable to a 4.6% improvement in average freight revenue per total mile to $1.37 from $1.31, with the average miles per tractor per week remaining constant at approximately 2,150 miles. The improvement in average revenue per total mile resulted primarily from better overall freight rates driven by a favorable relationship between freight demand and truckload capacity. As a result of the foregoing factors, average freight revenue per seated tractor per week, which is our primary measure of asset productivity, increased 3.6% to $3,142 in the second quarter of fiscal 2006, from $3,032 for the second quarter of fiscal 2005. Revenue for TruckersB2B was $2.1 million in the second quarter of fiscal 2006, compared to $1.9 million for the second quarter of fiscal 2005.

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Salaries, wages, and benefits were $35.5 million, or 34.5% of freight revenue, for the second quarter of fiscal 2006, compared to $32.4 million, or 33.3% of freight revenue, for the second quarter of fiscal 2005. The increase in the overall dollar amount was primarily related to an increase in driver payroll resulting from an increase in Company miles and adjusting the Company’s accrual for outstanding SARs by $940,000, due to the increase in the Company’s stock price during the quarter. The Company is required to make quarterly adjustments to reflect changes in the stock price. Accordingly, our salaries, wages, and benefits will fluctuate as our stock price changes.

Fuel expenses, net of fuel surcharge revenue of $17.4 million and $9.6 million for the second quarter of fiscal 2006 and 2005, respectively, increased to $10.5 million, or 10.2% of freight revenue, for the second quarter of fiscal 2006, compared to $9.3 million, or 9.6% of freight revenue, for the second quarter of fiscal 2005. This increase was primarily attributable to average fuel prices that were approximately $2.56 per gallon, or 33.9% higher during the second quarter of fiscal 2006, and an increase in Company miles, which in turn increased fuel usage. The increase in fuel prices, however, was offset by fuel surcharge revenue.Increased fuel prices will increase our operating expenses to the extent they are not offset by surcharges.

Operations and maintenance decreased to $7.4 million for the second quarter of fiscal 2006, from $8.9 million for the second quarter of fiscal 2005. As a percentage of freight revenue, operations and maintenance decreased to 7.2% of freight revenue, for the second quarter of fiscal 2006, from 9.2% for the second quarter of fiscal 2005. Operations and maintenance consist of direct operating expense, maintenance, and tire expense. Expenses to prepare tractors for trade-in or sale have decreased as we have changed our trade cycle from 4 years to 3 years and the reduction in the average age of tractors and trailers has decreased our repairs. 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 $4.0 million, or 3.9% of freight revenue, for the second quarter of fiscal 2006, compared to $3.3 million, or 3.4% of freight revenue, for the second quarter of fiscal 2005. Insurance consists of premiums for liability, physical damage, and cargo damage insurance. The increase in insurance and claims was primarily attributable to additional cargo claims. 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, decreased to $2.9 million from $3.6 million for the second quarter of fiscal 2006, compared to the second quarter of fiscal 2005. As a percentage of freight revenue, depreciation and amortization decreased to 2.8% of freight revenue in the second quarter of fiscal 2006, compared to 3.7% of freight revenue for the second quarter of fiscal 2005. Net gains on the disposition of revenue equipment and financing of our trailers with operating leases offset increased depreciation on new tractors acquired in connection with our fleet upgrade with cash generated from operations. 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. In the near term we expect to purchase new tractors with cash generated from operations.

Revenue equipment rentals were $10.3 million, or 10.0% of freight revenue, for the second quarter of fiscal 2006, compared to $8.6 million, or 8.9% of freight revenue for the second quarter of fiscal 2005. This increase is attributable to an increase in our trailer fleet financed under operating leases. At December 31, 2005, 6,054 trailers, or 78.3% of our Company trailers, were held under operating leases compared to 4,758 trailers, or 69.5% of our trailers, at December 31, 2004. As we expect to finance most of our new trailers under off-balance sheet operating leases, we expect revenue equipment rentals will continue to slightly increase going forward, but at a slower rate as we have moved away from financing tractor acquisitions with operating leases.

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Purchased transportation decreased to $17.8 million, or 17.3% of freight revenue, for the second quarter of fiscal 2006, from $19.5 million, or 20.1% of freight revenue, for the second quarter of fiscal 2005. 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 66.7% to $0.1 million for the second quarter of fiscal 2006, from $0.3 million for the second quarter of fiscal 2005. The decrease in our borrowings and reduction in capital lease obligations resulted largely from the use of cash generated by operations to purchase new tractors.

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 250 basis points to 7.5% of freight revenue for the second quarter of fiscal 2006, from 5.0% of freight revenue for the second quarter of fiscal 2005.

Income taxes increased to $2.9 million, with an effective tax rate of 37.3%, for the second quarter of fiscal 2006, from $2.1 million, with an effective tax rate of 43.4%, for the second quarter of fiscal 2005. 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 $4.8 million for the second quarter of fiscal 2006, from $2.7 million for the second quarter of fiscal 2005.

Comparison of Six Months Ended December 31, 2005 to Six Months Ended December 31, 2004

Operating revenue increased by $26.9 million, or 12.7%, to $238.2 million for the six months ended December 31, 2005, from $211.3 million for the six months ended December 31, 2004. This increase was primarily attributable to a 5.4% improvement in average freight revenue per total mile, from $1.30 to $1.37, with the average miles per tractor per week decreasing to 2,167 from 2,195. The improvement in average revenue per total mile resulted primarily from better overall freight rates driven by a favorable relationship between freight demand and truckload capacity. As a result of the foregoing factors, average freight revenue per seated tractor per week, which is our primary measure of asset productivity, increased 3.6% to $3,188 for the six months ended December 31, 2005, from $3,076 for the six months ended December 31, 2004. Revenue for TruckersB2B was $4.1 million for the six months ended December 31, 2005, compared to $3.9 million for the six months ended December 31, 2004.

Salaries, wages, and benefits were $70.3 million, or 34.1% of freight revenue, for the six months ended December 31, 2005, compared to $65.6 million, or 33.5% of freight revenue, for the six months ended December 31, 2004. The increase in the overall dollar amount was primarily related to an increase in driver payroll resulting from an increase in Company miles and adjusting the Company’s accrual for outstanding SARs due to an increase in the Company’s stock price. The Company is required to make quarterly adjustments to reflect changes in the stock price. Accordingly, our salaries, wages, and benefits will fluctuate as our stock price changes.

Fuel expenses, net of fuel surcharge revenue of $32.0 million and $15.8 million for the six months ended December 31, 2005 and 2004, respectively, increased to $22.2 million, or 10.7% of freight revenue, for the six months ended December 31, 2005, compared to $21.0 million, or 10.7% of freight revenue, for the six months ended December 31, 2004. The increase in our costs was primarily attributable to average fuel prices that were approximately $2.52 per gallon, or 34.7% higher during the six months ended December 31, 2005, and an increase in Company miles. The increase in fuel prices was offset by the collection of fuel surcharge revenue. Increased fuel prices will increase our operating expenses to the extent they are not offset by surcharges.

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               Operations and maintenance decreased to $14.7 million for the six months ended December 31, 2005, from $17.8 million for the six months ended December 31, 2004. As a percentage of freight revenue, operations and maintenance decreased to 7.1% for the six months ended December 31, 2005, from 9.1% for the six months ended December 31, 2004. Operations and maintenance consist of direct operating expense, maintenance, and tire expense. Expenses to prepare tractors for trade-in or sale have decreased as we have changed our trade cycle from 4 years to 3 years and the reduction in the average age of tractors and trailers has decreased our repairs. 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 $7.3 million, or 3.6% of freight revenue, for the six months ended December 31, 2005, compared to $6.3 million, or 3.2% of freight revenue, for the six months ended December 31, 2004. The primary reasons for the increase in insurance and claims were additional cargo claims and increased legal expenses incurred in defense and settlement of various cases. 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. 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 $6.1 million, or 3.0% of freight revenue, for the six months ended December 31, 2005, from $7.0 million, or 3.6% of freight revenue, for the six months ended December 31, 2004. Net gains on the disposition of revenue equipment and financing our trailers with operating leases offset increased depreciation on new tractors acquired in connection with our fleet upgrade with cash generated from operations. 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. In the near term we expect to purchase new tractors with cash generated from operations.

Revenue equipment rentals were $20.6 million, or 10.0% of freight revenue, for the six months ended December 31, 2005, compared to $16.5 million, or 8.4% of freight revenue for the six months ended December 31, 2004. This increase is attributable to an increased percentage of our trailer fleet held under operating leases for the six months ended December 31, 2005. At December 31, 2005, 6,054 trailers, or 78.3% of our Company trailers, were held under operating leases compared to approximately 4,758 trailers, or 69.5% of our trailers, at December 31, 2004. As we expect to finance most of our new trailers under off-balance sheet operating leases, we expect revenue equipment rentals will continue to increase going forward, but at a slower rate as we have moved away from financing tractor acquisitions with operating leases.

Purchased transportation decreased to $35.7 million, or 17.3% of freight revenue, for the six months ended December 31, 2005, from $38.0 million, or 19.5% of freight revenue, for the six months ended December 31, 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.

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Net interest expense decreased 42.9% to $0.4 million for the six months ended December 31, 2005, from $0.7 million for the six months ended December 31, 2004. The decrease in our borrowings and reduction of capital lease obligations resulted from the increased use of operating leases and cash acquisitions to finance revenue equipment.

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 240 basis points to 7.5% of freight revenue for the six months ended December 31, 2005, from 5.1% of freight revenue for the six months ended December 31, 2004.

Income taxes resulted in expense of $5.9 million with an effective tax rate of 38.5%, for the six months ended December 31, 2005, compared to $4.4 million, with an effective tax rate of 44.2%, for the six months ended December 31, 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 $4.0 million to $9.5 million for the six months ended December 31, 2005, from a net income of $5.5 million for the six months ended December 31, 2004.

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. Other than 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 sale of shares of our common stock.

Cash Flows

For the six months ended December 31, 2005, net cash provided by operations was $6.9 million, compared to cash provided by operations of $6.7 million for the six months ended December 31, 2004. Prepaid expenses increased due to payment of fiscal 2006 insurance premiums at beginning of year whereas installment payments were made historically, prepayment of heavy vehicle use tax (historically paid quarterly), and payment on license renewals.

Net cash used in investing activities was $8.4 million for the six months ended December 31, 2005, compared to $4.4 million for the six months ended December 31, 2004. Cash used in investing activities includes the net cash effect of acquisitions and dispositions of revenue equipment during each period. Capital expenditures totaled $24.9 million for the six months ended December 31, 2005, and $15.9 million for the six months ended December 31, 2004, reflecting our recent practice of purchasing new tractors with cash on hand in the 2006 period instead of leasing tractors as in prior periods. We generated proceeds from the sale of property and equipment of $16.5 million for the six months ended December 31, 2005, compared to $12.9 million in proceeds for the six months ended December 31, 2004.

Net cash used in financing activities was $1.2 million for the six months ended December 31, 2005, compared to $2.3 million for the six months ended December 31, 2004. Financing activity represents borrowings (new borrowings, net of repayment) and payments of the principal component of capital lease obligations. Although capital expenditures increased in the 2006 period, we used cash on hand to fund a greater percentage, rather than borrowing.

As of December 31, 2005, we had on order 585 tractors and 600 trailers for delivery through fiscal 2007. These revenue equipment orders represent a capital commitment of approximately $63.9 million, before considering the proceeds of equipment dispositions and assuming all are purchased instead of financed under operating leases. We have purchased all tractors in fiscal 2006 using cash generated from operations.

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Off-Balance Sheet Arrangements

Prior to our fiscal 2006 purchase of new tractors with cash generated from operations, we historically have financed many 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 statements 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 $75.6 million and $46.9 million at December 31, 2005 and 2004, respectively. A portion of these amounts is covered by repurchase and/or trade agreements we have with the equipment manufacturer. We believe that any 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 in the short term we will continue to use operating leases to finance the acquisition of trailers and cash generated from operations to purchase tractors.

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.

PrimaryCredit Agreement

               On September 26, 2005, the Company, CTSI, and TruckersB2B entered into an unsecured Credit Agreement with LaSalle Bank National Association, as administrative agent, and LaSalle Bank National Association, Fifth Third Bank (Central Indiana), and JPMorgan Chase Bank, N.A., as lenders, which matures on September 24, 2010 (the "Credit Agreement"). The Credit Agreement will be used to refinance the Company’s existing credit facility and provide for ongoing working capital needs and general corporate purposes. Borrowings under the Credit Agreement are based, at the option of the Company, on a base rate equal to the greater of the federal funds rate plus 0.5% and the administrative agent’s prime rate or LIBOR plus an applicable margin between 0.75% and 1.125% that is adjusted quarterly based on cash flow coverage. The Credit Agreement is guaranteed by CelEComm, CelCan, and Jaguar, each of which is a subsidiary of the Company.

The Credit Agreement has a maximum revolving borrowing limit of $50.0 million, and the Company may increase the revolving borrowing limit by an additional $20.0 million, to a total of $70.0 million. Letters of credit are limited to an aggregate commitment of $15.0 million and a swing line facility has a limit of $5.0 million. A commitment fee that is adjusted quarterly between 0.15% and 0.225% per annum based on cash flow coverage is due on the daily unused portion of the Credit Agreement. The Credit Agreement contains certain restrictions and covenants relating to, among other things, dividends, tangible net worth, cash flow, mergers, consolidations, acquisitions and dispositions, and total indebtedness. We were in compliance with these covenants at December 31, 2005, and expect to remain in compliance for the foreseeable future. At December 31, 2005, none of our credit facility was utilized as outstanding borrowings and $6.4 million was utilized for standby letters of credit.

We believe we will be able to fund our operating expenses, as well as our current commitments for the acquisition of revenue equipment in connection with our fleet upgrade over the next twelve months with a combination of cash generated from operations, borrowings available under our primary credit facility, and lease financing arrangements. We will continue to have significant capital requirements over the long term, and the availability of the needed 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 common 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 to experience significant liquidity constraints in the foreseeable future.

18

Contractual Obligations and Commercial Commitments

As of December 31, 2005, our operating leases, capitalized leases, other debts, and future commitments have stated maturities or minimum annual payments as follows:

	Annual Cash Requirements as of December 31, 2005 (in thousands) Amounts Due by Period
	Total		Less than One Year		One to Three Years		Three to Five Years		Over Five Years
Operating leases	$	125,888	$	39,746	$	45,645	$	20,924	$	19,573
Lease residual value guarantees		75,577		13,575		27,243		6,327		28,432
Capital leases(1)		1,542		293		550		281		418
Long-term debt(1)		7,203		1,423		4,298		1,482		---
Sub-total	$	210,210	$	55,037	$	77,736	$	29,014	$	48,423
Future purchase of revenue equipment	$	63,878	$	35,009	$	18,963	$	2,396	$	7,510
Employment and consulting agreements(2)		1,224		938		278		8		---
Standby Letters of Credit		6,350		6,350		---		---		---
Total	$	281,662	$	97,334	$	96,977	$	31,418	$	55,933

(1)	Includes interest.
(2)	The amounts reflected in the table do not include amounts that could become payable to our Chief Executive Officer and Chief Financial Officer under certain circumstances if 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:

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 3 to 10 years for tractors and trailers, and estimated salvage values for tractors and trailers generally range from 35% to 50% of the capitalized cost. Gains and losses on the disposal of revenue equipment are included in depreciation expense in our statements of operations.

We 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.

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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 or estimated market value of the asset, as appropriate.

Operating leases. We have financed a 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 36% of our tractors and 23% of our trailers under operating lease, we have residual value guarantees from the manufacturer at amounts equal to our residual obligation to the lessors. 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 Statement of Financial Accounting Standards ("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 operating 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, and 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.

Accounting for Income Taxes. Deferred income taxes represent a 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 circumstances 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.

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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.

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 principally from our primary credit facility. The credit facility carries a maximum variable interest rate of either the bank’s base rate or LIBOR plus 1.125%. At December 31, 2005, the interest rate for revolving borrowings under our credit facility was LIBOR plus .875%. At December 31, 2005, we had no loan borrowings outstanding under the credit facility.

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 independent contractor 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 Canadian operations identical to that in the six months ended December 31, 2005 (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.

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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. Assuming revenue and expenses for our Mexican operations identical to that in the six months ended December 31, 2005 (both in terms of amount and currency mix), we estimate that a $0.01 decrease in the Mexican peso exchange rate would reduce our annual net income by approximately $60,000.

In response to increases in Canadian dollar exchange rates, we have from time-to-time entered into derivative financial instruments to reduce our exposure to currency fluctuations. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Certain Hedging Activities." In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133." SFAS 133 and SFAS 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. Derivatives that are not hedges must be adjusted to fair value through earnings. As of December 31, 2005, we had no currency derivatives in place.

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, market, and climatic 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 instruments 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, 2005, we had no fuel derivatives in place.

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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. There were no changes in the Company’s internal control over financial reporting that occurred during the second quarter of fiscal 2006 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. 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 6.    Exhibits

3.1	Amended and Restated Certificate of Incorporation of the Company, effective January 12, 2006.*
3.2	Certificate of Designation for Series A Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, filed with the SEC on September 28, 2000.)
3.3	By-laws. (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, Registration No. 33-72128, filed with the SEC on November 24, 1993.)
4.1	Amended and Restated Certificate of Incorporation of the Company, effective January 12, 2006.*
4.2	Certificate of Designation for Series A Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, filed with the SEC on September 28, 2000.)
4.3	Rights Agreement, dated as of July 20, 2000, between Celadon Group, Inc. and Fleet National Bank, as Rights Agent. (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A, filed with the SEC on July 20, 2000.)
4.4	By-laws. (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, Registration No. 33-72128, filed with the SEC on November 24, 1993.)
10.21	First Amendment to Credit Agreement, dated December 23, 2005, among the Company, certain of its subsidiaries, LaSalle Bank National Association, and certain other lenders.*
31.1	Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Stephen Russell, the Company’s Chief Executive Officer.*
31.2	Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Paul Will, the Company’s Chief Financial Officer.*
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Stephen Russell, the Company’s Chief Executive Officer.*
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Paul Will, the Company’s Chief Financial Officer.*
99.1	Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements.*
_______________________
* Filed herewith

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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
	Chairman of the Board and Chief Executive Officer
	/s/ Paul Will
	Paul Will
	Chief Financial Officer, Executive Vice President, Treasurer, and Assistant Secretary
Date:January 30, 2006

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