Form 10-Q (First Quarter Fiscal 2007)
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 quarterly period ended September 30, 2006
or
o
|
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, including area
code)
|
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.
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 o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b2 of the Exchange Act).
As
of
October 30, 2006 (the latest practicable date), 23,418,648 shares of the
registrant's common stock, par value $0.033 per share, were
outstanding.
Index
to
September
30, 2006 Form 10-Q
Part
I. Financial
Information
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Item
1.
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Financial
Statements
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Condensed
Consolidated Balance Sheets at September 30, 2006 (Unaudited)
and
June 30, 2006
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|
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Condensed
Consolidated Statements of Operations for the three months
ended
September 30, 2006 and 2005 (Unaudited)
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|
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|
Condensed
Consolidated Statements of Cash Flows for the three months
ended
September 30, 2006 and 2005 (Unaudited)
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|
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Notes
to Condensed Consolidated Financial Statements (Unaudited)
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|
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Item
2.
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Management's
Discussion and Analysis of Financial Condition
and
Results of Operations
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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Item
4.
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Controls
and Procedures
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Part
II. Other
Information
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Item
1.
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Legal
Proceedings
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|
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Item
1A.
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Risk
Factors
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Items
2., 3., 4., and 5.
|
Not
Applicable
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Item
6.
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Exhibits
|
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Item
1. Financial
Statements
CELADON
GROUP, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
September
30, 2006 and June 30, 2006
(Dollars
in thousands, except share amounts)
|
|
September
30,
2006
|
|
June
30,
2006
|
|
A
S S E T S
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,081
|
|
$
|
1,674
|
|
Trade
receivables, net of allowance for doubtful accounts of
$1,332
and $1,269 at September 30, 2006 and June 30, 2006
|
|
|
57,542
|
|
|
55,462
|
|
Prepaid
expenses and other current assets
|
|
|
13,284
|
|
|
10,132
|
|
Tires
in service
|
|
|
2,828
|
|
|
2,737
|
|
Income
tax receivable
|
|
|
2,630
|
|
|
5,216
|
|
Deferred
income taxes
|
|
|
1,240
|
|
|
1,867
|
|
Total
current assets
|
|
|
78,605
|
|
|
77,088
|
|
Property
and equipment
|
|
|
130,688
|
|
|
121,733
|
|
Less
accumulated depreciation and amortization
|
|
|
31,189
|
|
|
30,466
|
|
Net
property and equipment
|
|
|
99,499
|
|
|
91,267
|
|
Tires
in service
|
|
|
1,654
|
|
|
1,569
|
|
Goodwill
|
|
|
19,137
|
|
|
19,137
|
|
Other
assets
|
|
|
934
|
|
|
1,005
|
|
Total
assets
|
|
$
|
199,829
|
|
$
|
190,066
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
7,756
|
|
$
|
4,369
|
|
Accrued
salaries and benefits
|
|
|
12,821
|
|
|
16,808
|
|
Accrued
insurance and claims
|
|
|
7,362
|
|
|
7,048
|
|
Accrued
fuel expense
|
|
|
5,615
|
|
|
6,481
|
|
Other
accrued expenses
|
|
|
13,728
|
|
|
12,018
|
|
Current
maturities of long-term debt
|
|
|
1,493
|
|
|
975
|
|
Current
maturities of capital lease obligations
|
|
|
478
|
|
|
507
|
|
Total
current liabilities
|
|
|
49,253
|
|
|
48,206
|
|
Long-term
debt, net of current maturities
|
|
|
8,845
|
|
|
9,608
|
|
Capital
lease obligations, net of current maturities
|
|
|
886
|
|
|
933
|
|
Deferred
income taxes
|
|
|
10,954
|
|
|
9,867
|
|
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 40,000,000 shares;
Issued
23,418,648 and 23,111,367 shares at September 30, 2006
and
June
30, 2006
|
|
|
773
|
|
|
763
|
|
Additional
paid-in capital
|
|
|
91,997
|
|
|
90,828
|
|
Retained
earnings
|
|
|
39,205
|
|
|
32,092
|
|
Accumulated
other comprehensive loss
|
|
|
(2,109
|
)
|
|
(2,256
|
)
|
Total
stockholders' equity
|
|
|
129,866
|
|
|
121,427
|
|
Total
liabilities and stockholders' equity
|
|
$
|
199,829
|
|
$
|
190,066
|
|
See
accompanying notes to the condensed consolidated financial
statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the three months ended September 30, 2006 and 2005
(Dollars
in thousands, except per share amounts)
(Unaudited)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
Freight
revenue
|
|
$
|
107,665
|
|
$
|
103,340
|
|
Fuel
surcharges
|
|
|
20,063
|
|
|
14,595
|
|
|
|
|
127,728
|
|
|
117,935
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries,
wages and employee benefits
|
|
|
35,289
|
|
|
34,863
|
|
Fuel
|
|
|
30,674
|
|
|
26,220
|
|
Operations
and maintenance
|
|
|
7,634
|
|
|
7,282
|
|
Insurance
and claims
|
|
|
4,231
|
|
|
3,386
|
|
Depreciation
and amortization
|
|
|
3,466
|
|
|
3,163
|
|
Revenue
equipment rentals
|
|
|
9,333
|
|
|
10,372
|
|
Purchased
transportation
|
|
|
18,340
|
|
|
17,823
|
|
Cost
of products and services sold
|
|
|
1,867
|
|
|
1,294
|
|
Professional
and consulting fees
|
|
|
522
|
|
|
852
|
|
Communications
and utilities
|
|
|
1,094
|
|
|
1,019
|
|
Operating
taxes and licenses
|
|
|
2,089
|
|
|
2,061
|
|
General
and other operating
|
|
|
1,548
|
|
|
1,504
|
|
Total
operating expenses
|
|
|
116,087
|
|
|
109,839
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
11,641
|
|
|
8,096
|
|
|
|
|
|
|
|
|
|
Other
(income) expense:
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(7
|
)
|
|
(1
|
)
|
Interest
expense
|
|
|
301
|
|
|
302
|
|
Other
(income) expense, net
|
|
|
(15
|
)
|
|
25
|
|
Income
before income taxes
|
|
|
11,362
|
|
|
7,770
|
|
Provision
for income taxes
|
|
|
4,249
|
|
|
3,086
|
|
Net
income
|
|
$
|
7,113
|
|
$
|
4,684
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
Diluted
earnings per share (1)
|
|
$
|
0.30
|
|
$
|
0.20
|
|
Basic
earnings per share (1)
|
|
$
|
0.31
|
|
$
|
0.21
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
Diluted
(1)
|
|
|
23,542
|
|
|
23,207
|
|
Basic
(1)
|
|
|
23,272
|
|
|
22,631
|
|
(1)
|
Earnings
per share amounts and average number of shares outstanding have been
adjusted to give retroactive effect to the three-for-two stock splits
effected in the form of two 50% stock dividends paid on February
15, 2006
and June 15, 2006
|
See
accompanying notes to the condensed consolidated financial
statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the three months ended September 30, 2006 and 2005
(Dollars
in thousands)
(Unaudited)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
7,113
|
|
$
|
4,684
|
|
Adjustments
to reconcile net income to net cash (used in) provided
by
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,914
|
|
|
3,155
|
|
(Gain)
loss on sale of equipment
|
|
|
(448
|
)
|
|
8
|
|
Provision
(benefit) for deferred income taxes
|
|
|
1,714
|
|
|
(506
|
)
|
Provision
for doubtful accounts
|
|
|
204
|
|
|
138
|
|
Stock
based compensation expense
|
|
|
(1,160
|
)
|
|
873
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
(2,284
|
)
|
|
(2,365
|
)
|
Income
tax recoverable
|
|
|
2,586
|
|
|
1,096
|
|
Tires
in service
|
|
|
(175
|
)
|
|
70
|
|
Prepaid
expenses and other current assets
|
|
|
(3,153
|
)
|
|
(5,264
|
)
|
Other
assets
|
|
|
147
|
|
|
(2,091
|
)
|
Accounts
payable and accrued expenses
|
|
|
2,115
|
|
|
(1,092
|
)
|
Net
cash (used in) provided by operating activities
|
|
|
10,573
|
|
|
(1,294
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(18,872
|
)
|
|
(10,788
|
)
|
Proceeds
on sale of property and equipment
|
|
|
9,034
|
|
|
8,073
|
|
Net
cash used in investing activities
|
|
|
(9,838
|
)
|
|
(2,715
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuances of common stock
|
|
|
782
|
|
|
205
|
|
Payments
on long-term debt
|
|
|
(2,034
|
)
|
|
(371
|
)
|
Principal
payments on capital lease obligations
|
|
|
(76
|
)
|
|
(618
|
)
|
Net
cash used in financing activities
|
|
|
(1,328
|
)
|
|
(784
|
)
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(593
|
)
|
|
(4,793
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
1,674
|
|
|
11,115
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,081
|
|
$
|
6,322
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
239
|
|
$
|
281
|
|
Income
taxes paid
|
|
$
|
121
|
|
$
|
2,359
|
|
Supplemental
disclosure of non-cash flow investing activities:
|
|
|
|
|
|
|
|
Lease
obligation/debt incurred in the purchase of equipment
|
|
$
|
1,789
|
|
$
|
1,025
|
|
See
accompanying notes to the condensed consolidated financial
statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(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, 2006.
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. Stock
Splits
On
January 18, 2006, the Board of Directors approved a three-for-two stock split,
effected in the form of a fifty percent (50%) stock dividend. The stock split
distribution date was February 15, 2006, to stockholders of record as of the
close of business on February 1, 2006. On
May 4,
2006, the Board of Directors approved a second three-for-two stock split,
effected in the form of a fifty percent (50%) stock dividend. The stock split
distribution date was June 15, 2006, to stockholders of record as of the close
of business of June 1, 2006.
Unless
otherwise indicated, all share and per share amounts have been adjusted to
give
retroactive effect to these stock splits.
3. 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
the three months ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
7,113
|
|
$
|
4,684
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
23,272
|
|
|
22,631
|
|
Equivalent
shares issuable upon exercise of stock options
|
|
|
270
|
|
|
576
|
|
|
|
|
|
|
|
|
|
Diluted
shares
|
|
|
23,542
|
|
|
23,207
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
$
|
0.21
|
|
Diluted
|
|
$
|
0.30
|
|
$
|
0.20
|
|
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
4. 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, Celadon Trucking Services,
Inc., ("CTSI"), Celadon Logistics Services, Inc., ("CLSI"), Servicios
de
Transportacion Jaguar, S.A. de C.V. ("Jaguar"), and Celadon Canada, Inc.
("CelCan"). The Company provides certain services over the Internet through
its
e-commerce subsidiary, TruckersB2B, Inc. ("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 September 30, 2006
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
125,052
|
|
$
|
2,676
|
|
$
|
127,728
|
|
Operating
income
|
|
|
11,228
|
|
|
413
|
|
|
11,641
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
115,960
|
|
$
|
1,975
|
|
$
|
117,935
|
|
Operating
income
|
|
|
7,741
|
|
|
355
|
|
|
8,096
|
|
Information
as to the Company's operating revenues by geographic area is summarized below
(in thousands). The Company allocates operating revenues based on country of
origin of the tractor hauling the freight:
|
|
United
States
|
|
Canada
|
|
Mexico
|
|
Consolidated
|
|
Three
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
104,829
|
|
$
|
15,964
|
|
$
|
6,935
|
|
$
|
127,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
96,638
|
|
$
|
14,755
|
|
$
|
6,542
|
|
$
|
117,935
|
|
No
customer accounted for more than 10% of the Company's total revenue during
any
of its two most recent fiscal years.
5. Stock
Based Compensation
On
July
1, 2005, the Company adopted Statement Financial Accounting Standard ("SFAS")
123(R) which requires all share-based payments to employees, including grants
of
employee stock options, be recognized in the financial statements based upon
a
grant-date fair value of an award. In January 2006, shareholders approved the
2006 Omnibus Plan ("2006 Plan"), that provides various vehicles to compensate
the Company's key employees. The 2006 Plan utilizes such vehicles as stock
options, restricted stock grants, and stock appreciation rights ("SARs"). The
2006 Plan authorized the Company to grant 1,687,500 shares. In fiscal 2007,
the
Company granted 20,000 stock options. The Company is authorized to grant an
additional 869,031 shares.
The
following table summarizes the components of our stock based compensation
program expense:
|
|
For
the three months ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Stock
options expense
|
|
$
|
243
|
|
$
|
—
|
|
Restricted
stock expense
|
|
|
154
|
|
|
234
|
|
Stock
appreciation rights expense
|
|
|
(1,557
|
)
|
|
586
|
|
Total
stock related compensation expense
|
|
$
|
(1,160
|
)
|
$
|
820
|
|
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
The
Company has granted a number of stock options under various plans. Options
granted to employees have been granted with an exercise price equal to the
market price on the grant date and expire on the tenth anniversary of the grant
date. The majority of options granted to employees vest 25 percent per year,
commencing with the first anniversary of the grant date. Options granted to
non-employee directors have been granted with an exercise price equal to the
market price on the grant date, vest over three or four years, commencing with
the first anniversary of the grant date, and expire on the tenth anniversary
of
the grant date.
A
summary
of the activity of the Company's stock option plans as of September 30, 2006
and
changes during the period then ended is presented below:
Options
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 1, 2006
|
|
|
1,446,710
|
|
$
|
7.44
|
|
|
—
|
|
|
—
|
|
Granted
|
|
|
20,000
|
|
$
|
18.84
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
(307,282
|
)
|
$
|
2.55
|
|
|
—
|
|
|
—
|
|
Forfeited
or expired
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding
at September 30, 2006
|
|
|
1,159,428
|
|
$
|
8.94
|
|
|
7.48
|
|
$
|
8,931,987
|
|
Exercisable
at September 30, 2006
|
|
|
475,296
|
|
$
|
3.11
|
|
|
4.87
|
|
$
|
6,431,662
|
|
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following
weighted-average:
|
Fiscal
2007
|
|
Fiscal
2006
|
Weighted
average grant date fair value
|
$9.97
|
|
$12.58
|
Dividend
yield
|
0
|
|
0
|
Expected
volatility
|
64.2%
|
|
50.1%
|
Risk-free
interest rate
|
4.92%
|
|
4.35%
|
Expected
lives
|
4
years
|
|
4
years
|
Restricted
Shares
|
|
Number
of Shares
|
|
Weighted
Average Grant
Date Fair Value
|
|
Unvested
at July 1, 2006
|
|
|
274,230
|
|
|
$8.96
|
|
Granted
|
|
|
—
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
Unvested
at September 30, 2006
|
|
|
274,230
|
|
|
$8.96
|
|
Restricted
shares granted to employees have been granted with a share price equal to the
market price on the grant date and vesting at 25 percent per year, commencing
with the first anniversary of the grant date. In addition, there are certain
financial targets which must be met for these shares to vest. The weighted
average grant date share price was $12.81 in fiscal 2006.
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
As
of
September 30, 2006, we had $3.2 million and $1.6 million of total unrecognized
compensation expense related to stock options and restricted stock,
respectively, that is expected to be recognized over the remaining period of
approximately 3.9 years for stock options and 3.4 years for restricted
stock.
Stock
Appreciation Rights
|
|
Number
of Shares
|
|
Weighted
Average
Grant
Date Fair Value
|
|
Unvested
at July 1, 2006
|
|
|
571,437
|
|
|
$7.73
|
|
Granted
|
|
|
—
|
|
|
—
|
|
Paid
|
|
|
(7,871)
|
|
|
$4.48
|
|
Forfeited
|
|
|
(309,176)
|
|
|
$7.10
|
|
Unvested
at September 30, 2006
|
|
|
254,390
|
|
|
$8.59
|
|
SARs
granted to employees vest on a 3 or 4 year vesting schedule; in addition,
certain financial targets must be met for these shares to vest. During the
first
quarter of fiscal 2007, the Company gave SARs grantees the opportunity to enter
into an alternative fixed compensation arrangement whereby the grantee would
forfeit all rights to SARs compensation in exchange for a guaranteed quarterly
payment for the remainder of the underlying SARs term. This alternative
arrangement is subject to continued service to the Company or one of its
subsidiaries. The number of forfeited SARs reported above reflects entry into
this alternative arrangement. These fixed payments will be accrued quarterly
from July 1, 2006 to March 31, 2009. The Company offered this alternative
arrangement to mitigate the volatility to earnings from stock price variance
on
the SARs.
6. Comprehensive
Income
Comprehensive
income consisted of the following components for the three months ended
September 30, 2006 and 2005, respectively (in thousands):
|
|
For
the three months ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
income
|
|
|
$7,113
|
|
|
$4,684
|
|
Foreign
currency translation adjustments
|
|
|
147
|
|
|
47
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
$7,260
|
|
|
$4,731
|
|
7. 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.
8. Reclassification
Certain
reclassifications have been made to the September 30, 2005 financial statements
to conform to the September 30, 2006 presentation.
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 include, but are not limited to, those discussed in the
section entitled Item 1A. Risk Factors, set forth below.
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 twenty largest truckload carriers as measured by revenue.
We generated $480.2 million in operating revenue during our fiscal year
ended June 30, 2006. 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 2006 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
and
the need to establish cross-border business partners and to develop a strong
organization and an adequate infrastructure in Mexico afford 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.
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 CX Roberson
in January 2005, Highway Express in August 2003, and Erin Truckways LTD., d/b/a
Digby Truck Line Inc. ("Digby") in October 2006, we expanded our operations
and
service offerings within the United States and significantly improved our lane
density, freight mix, and customer diversity.
We
also
operate TruckersB2B a profitable marketing business that affords volume
purchasing power for items such as fuel, tires, and equipment to approximately
19,700 member trucking fleets representing approximately 410,000 tractors.
TruckersB2B represents a separate operating segment under generally accepted
accounting principles.
Recent
Results and Financial Condition
For
the
first quarter of fiscal 2007, operating revenue increased 8.3% to $127.7
million, compared with $117.9 million for the first quarter of fiscal 2006.
Net
income increased to $7.1 million from $4.7 million, and diluted earnings per
share improved to $0.30 from $0.20. 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 higher freight rates and, along with continued
focus on cost controls, resulted in increased earnings for the first quarter
of
fiscal 2007 compared to the first quarter of fiscal 2006.
At
September 30, 2006, our total balance sheet debt was $11.7 million and our
total
stockholders' equity was $129.9 million, for a total debt to capitalization
ratio of 8.3%. At September 30, 2006, we had $47.2 million of available
borrowing capacity under our revolving credit facility and $1.1 million of
cash
on hand.
Revenue
We
generate substantially all of our revenue by transporting freight for our
customers. Generally, we are paid by the mile or by the load 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 percentage of miles for which we are compensated, the number
of tractors operating, and the number of miles we generate with our equipment.
These factors relate to, among other things, the U.S. economy, inventory levels,
the level of truck capacity in our markets, specific customer demand, the
percentage of team-driven tractors in our fleet, driver availability, and our
average length of haul.
We
also
derive revenue from fuel surcharges, loading and unloading activities, equipment
detention, and other accessorial services. We believe that eliminating the
impact of this sometimes volatile source of revenue affords a more consistent
basis for comparing our results of operations from period to
period.
Expenses
and Profitability
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. We have other mostly fixed costs, such as our non-driver personnel
and facilities expenses. In discussing our expenses as a percentage of revenue,
we sometimes discuss changes as a percentage of revenue before fuel surcharges,
in addition to absolute dollar changes, because we believe the high variable
cost nature of our business makes a comparison of changes in expenses as a
percentage of revenue more meaningful at times than absolute dollar
changes.
The
trucking industry has experienced significant increases in expenses over the
past three years, in particular those relating to equipment costs, driver
compensation, insurance, and fuel. As the United States economy has expanded,
many trucking companies have been able to raise freight rates to cover the
increased costs. This is primarily due to industry-wide tight capacity of
drivers. Competition for drivers has become increasingly intense, as the
expanding economy has provided alternative jobs at the same time as increasing
freight demand. To obtain capacity, shippers have been willing to accept
significant rate increases. As long as freight demand continues to exceed truck
capacity, we expect increases in driver pay by many carriers, including us,
and
higher freight rates.
Revenue
Equipment and Related Financing
Excluding
purchases associated with the Digby acquisition, we expect our tractor and
trailer purchases will be primarily for replacement and expect to 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 2007 fiscal year.
At
September 30, 2006, we had future operating lease obligations totaling $183.5
million, including residual value guarantees of approximately $76.4
million.
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
Tractors
|
|
Trailers
|
|
Tractors
|
|
Trailers
|
|
Owned
equipment
|
|
|
981
|
|
|
687
|
|
|
367
|
|
|
1,544
|
|
Capital
leased equipment
|
|
|
—
|
|
|
110
|
|
|
—
|
|
|
161
|
|
Operating
leased equipment
|
|
|
1,424
|
|
|
6,433
|
|
|
1,868
|
|
|
5,471
|
|
Independent
contractors
|
|
|
363
|
|
|
—
|
|
|
344
|
|
|
—
|
|
Total
|
|
|
2,768
|
|
|
7,230
|
|
|
2,579
|
|
|
7,176
|
|
Independent
contractors are utilized through a contract with us to supply one or more
tractors and drivers for our use. Independent contractors must pay their own
tractor expenses, fuel, maintenance, and driver costs and must meet our
specified guidelines with respect to safety. A lease-purchase program that
we
offer provides independent contractors the opportunity to lease-to-own a
tractor. As of September 30, 2006, there were 363 independent contractors
providing a combined 13.1% of our tractor capacity.
Outlook
Looking
forward, our profitability goal is to achieve an operating ratio of
approximately 88%. We expect this to require additional improvements in rate
per
mile and decreased non-revenue miles, to overcome expected additional cost
increases. Because a large percentage of our costs are variable, changes in
revenue per mile affect our profitability to a greater extent than changes
in
miles per tractor. For fiscal 2007, the key factors that we expect to have
the
greatest effect on our profitability are our freight revenue per tractor per
week, our compensation of drivers, our cost of revenue equipment (particularly
in light of the 2007 EPA engine requirements), our fuel costs, and our insurance
and claims. To overcome cost increases and improve our margins, we will need
to
achieve increases in freight revenue per tractor, particularly in revenue per
mile, which we intend to achieve by increasing rates and continuing to shift
to
more profitable freight. Operationally, we will seek improvements in safety,
driver recruiting and retention. Our success in these areas primarily will
affect revenue, driver-related expenses, and insurance and claims
expense.
Subsequent
Event
On
October 6, 2006, we acquired certain assets of Digby. Pursuant to the asset
purchase agreement, our wholly-owned subsidiary, CTSI, acquired Digby's
truckload business, including approximately 270 tractors and 590 trailers for
approximately $21.0 million. In connection with the acquisition, we also have
offered employment to approximately 150 qualified former Digby drivers.
According to Digby's unaudited financial statements, the Nashville,
Tennessee-based transportation company generated approximately $48 million
in
gross revenue in 2005. The Company plans to retain approximately 90 of the
newest tractors and approximately 180 of the newest trailers from the
acquisition and dispose of the balance.
We
expect
to integrate the acquired operations promptly. As part of the integration
process, we expect to optimize the combined customer, driver, and equipment
base
to improve asset productivity. We believe we can enhance the service to Digby's
former customers through an upgraded equipment fleet, excellent technology,
more
available assets for dispatch, and an outstanding safety record.
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
September 30,
|
|
|
|
2006
|
|
2005
|
|
Freight
revenue(1)
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries,
wages, and employee benefits
|
|
|
32.8%
|
|
|
33.7%
|
|
Fuel(1)
|
|
|
9.9%
|
|
|
11.2%
|
|
Operations
and maintenance
|
|
|
7.1%
|
|
|
7.0%
|
|
Insurance
and claims
|
|
|
3.9%
|
|
|
3.3%
|
|
Depreciation
and amortization
|
|
|
3.2%
|
|
|
3.1%
|
|
Revenue
equipment rentals
|
|
|
8.7%
|
|
|
10.0%
|
|
Purchased
transportation
|
|
|
17.0%
|
|
|
17.2%
|
|
Costs
of products and services sold
|
|
|
1.7%
|
|
|
1.3%
|
|
Professional
and consulting fees
|
|
|
0.5%
|
|
|
0.8%
|
|
Communications
and utilities
|
|
|
1.0%
|
|
|
1.0%
|
|
Operating
taxes and licenses
|
|
|
1.9%
|
|
|
2.0%
|
|
General
and other operating
|
|
|
1.5%
|
|
|
1.6%
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
89.2%
|
|
|
92.2%
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
10.8%
|
|
|
7.8%
|
|
|
|
|
|
|
|
|
|
Other
expense:
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
0.3%
|
|
|
0.3%
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
10.5%
|
|
|
7.5%
|
|
Provision
for income taxes
|
|
|
3.9%
|
|
|
3.0%
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
6.6%
|
|
|
4.5%
|
|
(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 $20.1 million and $14.6 million for the first
quarter
of fiscal 2007 and 2006,
respectively.
|
Comparison
of Three Months Ended September 30, 2006 to Three Months Ended September 30,
2005
Operating
revenue increased by $9.8 million, or 8.3%, to $127.7 million for the
first quarter of fiscal 2007, from $117.9 million for the first quarter of
fiscal 2006.
Freight
revenue increased by $4.4 million, or 4.3%, to $107.7 million for the first
quarter of fiscal 2007, from $103.3 million for the first quarter of fiscal
2006. This increase was primarily attributable to a 2.2% improvement in average
freight revenue per total mile to $1.39 from $1.36, offset by a decrease in
the
average miles per tractor per week from 2,181 miles to 2,064 miles. The
improvement in average freight revenue per total mile resulted primarily from
better overall freight rates driven by a favorable relationship between freight
demand and truckload capacity, 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.
As a
result of the foregoing factors, average freight revenue per tractor per week,
which is our primary measure of asset productivity, decreased 3.6% to $2,870
in
the first quarter of fiscal 2007, from $2,976 for the first quarter of fiscal
2006. With total miles remaining flat compared to fiscal 2006, the average
number of seated tractors increased to 2,266 for the first quarter in fiscal
2007 from 2,105 for the first quarter in fiscal 2006.
Revenue
for TruckersB2B was $2.7 million in the first quarter of fiscal 2007, compared
to $2.0 million for the first quarter of fiscal 2006.
Salaries,
wages, and employee benefits were $35.3 million,
or 32.8%
of
freight revenue, for fiscal 2007, compared to $34.9 million, or 33.7% of
freight revenue, for the first fiscal quarter of fiscal 2006. The increase
in
the overall dollar amount was primarily related to an increase in paid driver
miles offset by a decrease of $1.2 million in stock related compensation
expenses in the first quarter of fiscal 2007 compared to the first quarter
of
fiscal 2006.
Fuel
expenses, net of fuel surcharge revenue of $20.1 million and $14.6 million
for
the first fiscal quarters of 2007 and 2006, respectively, decreased to
$10.6 million, or 9.9% of freight revenue, for the first fiscal quarter of
2007, compared to $11.6 million, or 11.2% of freight revenue, for the first
fiscal quarter of 2006. Fuel prices increased approximately $.34 per gallon
from
the September 2006 quarter offset by increased fuel surcharge. Higher
fuel prices and lower fuel economy will increase our operating expenses to
the
extent we cannot offset them with surcharges.
Operations
and maintenance increased to $7.6 million for the first quarter of fiscal
2007, from $7.3 million for the first quarter of fiscal 2006. Operations
and maintenance increased slightly at 7.1% of freight revenue for the first
quarter of fiscal 2007, from 7.0% for the first quarter of fiscal 2006.
Operations and maintenance consist of direct operating expense, maintenance,
and
tire expense. This increase is attributed to an increase in various direct
operating expenses such as tolls and an increase on damage repairs to tractors.
We expect maintenance expense to remain constant as a percentage of freight
revenue in future periods as a result of the effects of our fleet upgrade
keeping the average age of tractors at approximately 2.0 years.
Insurance
and claims expense increased to $4.2 million, or 3.9% of freight revenue,
for the first quarter of fiscal 2007, compared to $3.4 million, or 3.3% of
freight revenue, for the first quarter of fiscal 2006. Insurance consists of
premiums for liability, physical damage, and cargo damage insurance. In the
fiscal 2007 quarter we experienced increases in our cargo claims expense and
workers' compensation 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,
increased to $3.5 million for the first quarter of fiscal 2007 from
$3.2 million in first quarter of fiscal 2006. Depreciation and amortization
increased slightly to 3.2% of freight revenue in the first quarter of fiscal
2007, compared to 3.1% of freight revenue for the first quarter of fiscal 2006.
Our increased use of cash and borrowings to acquire tractors was offset by
gains
on the disposition of revenue equipment. As a result, depreciation and
amortization was essentially flat. For
the
remainder of fiscal 2007, we expect depreciation to increase and revenue
equipment rentals to decrease as a percentage of revenue. Because of higher
equipment prices and higher interest rates (which affect lease payments) we
expect our total costs of depreciation and amortization to increase in fiscal
2007. 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, excluding tractors acquired in acquisitions,
with cash generated from operations.
Revenue
equipment rentals were $9.3 million, or 8.7% of freight revenue, for the
first quarter of fiscal 2007, compared to $10.4 million, or 10.0% of freight
revenue, for the first quarter of fiscal 2006. This decrease is attributable
to
a decrease in our tractor fleet financed under operating leases. At September
30, 2006, 1,424 tractors, or 59.2% of our Company tractors, were held under
operating leases compared to 1,868 tractors, or 83.6% of our Company tractors,
at September 30, 2005. As we expect to purchase most of our new tractors,
excluding tractors acquired in acquisitions, with cash generated from
operations, we expect revenue equipment rentals will continue to decrease going
forward, offset somewhat by our purchases of new trailers with operating
leases.
Purchased
transportation increased to $18.3 million, or 17.0% of freight revenue, for
the first quarter of fiscal 2007, from $17.8 million, or 17.2% of freight
revenue, for the first quarter of fiscal 2006. The increase in the overall
dollar amount is primarily related to increased owner-operator fuel surcharge
reimbursement and an increase in the number of independent contractors to 363
at
September 30, 2006, from 344 at September 30, 2005. Independent
contractors are drivers who cover all their operating expenses (fuel, driver
salaries, maintenance, and equipment costs) for a fixed payment per mile. We
expect the majority of our equipment additions to come in our Company-operated
fleet. As a result, the percentage of our fleet comprised of independent
contractors may continue to decline, with a corresponding decrease in this
expense category. It has become difficult to recruit and retain independent
contractors.
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.
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 300 basis points to 10.5% of freight revenue
for
the first quarter of fiscal 2007, from 7.5% of freight revenue for the first
quarter of fiscal 2006.
Income
taxes increased to $4.2 million, with an effective tax rate of 37.4%, for
the first quarter of fiscal 2007, from $3.1 million, with an effective tax
rate of 39.7%, for the first quarter of fiscal 2006. The effective tax rate
decreased as a result of increased earnings, which reduced 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.
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. Other than ordinary operating expenses, we
anticipate that capital expenditures for the acquisition of revenue equipment
and repayment of debt incurred in connection with the Digby acquisition will
constitute our primary cash requirements over the next twelve months. Our
principal sources of liquidity are cash generated from operations, bank
borrowings, 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.
As
of
September 30, 2006, we had on order 725 tractors and 800 trailers for delivery
through 2007. These revenue equipment orders represent a capital commitment
of
approximately $86.0 million, before considering the proceeds of equipment
dispositions. In fiscal 2006, we purchased most of our new tractors and we
acquired most of the new trailers under off-balance sheet operating leases.
At
September 30, 2006, our total balance sheet debt, including capital lease
obligations and current maturities, was $11.7 million, compared to
$7.4 million at September 30, 2005. Our debt-to-capitalization ratio
(total balance sheet debt as a percentage of total balance sheet debt plus
total
stockholders' equity) was 8.3% at September 30, 2006.
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.
Cash
Flows
Cash
provided by operations was $10.6 million for the first quarter of fiscal 2007,
compared to $1.3 million used for the first quarter of fiscal 2006. The increase
in cash provided by operations in the first quarter of fiscal 2007 from the
first quarter of fiscal 2006 is due primarily to the increase in net income
offset by changes in operating assets and liabilities related to increased
prepaid expenses and trade receivables offset by decreased income taxes, and
an
increase in accounts payable.
Investing
activities consumed $9.8 million for the first quarter of fiscal 2007, compared
to $2.7 million for the first quarter of fiscal 2006. Cash used in (provided
by)
investing includes the net effect of acquisitions and dispositions of revenue
equipment during each period. Capital expenditures primarily for tractors and
trailers (including lease buyouts and new equipment purchases) totaled $18.9
million for the first quarter of fiscal 2007 and $10.8 million for the first
quarter of fiscal 2006. We generated proceeds from the sale of property and
equipment of $9.0 million during the first quarter of fiscal 2007, compared
to
$8.1 million in proceeds for the first quarter of fiscal 2006.
Financing
activities consumed $1.3 million for the first quarter of fiscal 2007, compared
to cash used $0.8 million for the first quarter of fiscal 2006. Financing
activity represents borrowings (new borrowings, net of repayment) and payments
of the principal component of capital lease obligations. Although capital
expenditures increased for the first quarter of fiscal 2007, we used cash on
hand for a greater percentage of our financing activities, rather than
borrowing.
Off-Balance
Sheet Arrangements
Operating
leases have been an important source of financing for our revenue equipment.
We
lease a significant portion of our tractor and trailer fleet using operating
leases. In connection with substantially all of our operating leases, we have
issued residual value guarantees, which provide that if we do not purchase
the
leased equipment from the lessor at the end of the lease term, then we are
liable to the lessor for an amount equal to the shortage (if any) between the
proceeds from the sale of the equipment and an agreed value. With respect to
a
small portion of our equipment held under operating leases, we have obtained
from the manufacturers residual value guarantees that meet or exceed the amount
of our guarantee to the lessor. To the extent the expected value at the lease
termination date is lower than the residual value guarantee, we would accrue
for
the difference over the remaining lease term. We currently believe that proceeds
from the sale of equipment held under operating leases would exceed the amount
of our residual obligation on all operating leases.
Prior
to
our fiscal 2007 and 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 ("residual
value"). Therefore, we are subject to the risk that equipment value 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. At September 30, 2006,
we had future operating lease obligations totaling $183.5 million,
including residual value guarantees of approximately $76.4 million. We were
obligated for payments related to operating leases of $107.1 million and $70.5
million at September 30, 2006 and 2005, 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 we will use cash generated from operations to purchase
tractors.
Primary Credit
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 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., 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 September 30, 2006,
and expect to remain in compliance for the foreseeable future. At September
30,
2006, $3.0 million of our credit facility was utilized as outstanding borrowings
and $4.8 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.
Contractual
Obligations and Commercial Commitments
As
of
September 30, 2006, our bank loans, capitalized leases, operating leases, other
debts, and future commitments have stated maturities or minimum annual payments
as follows:
|
|
Payments
Due by Period
|
|
|
|
|
|
|
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
3-5
years
|
|
More
than
5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
$
|
107,077
|
|
$
|
33,048
|
|
$
|
35,708
|
|
$
|
22,075
|
|
$
|
16,246
|
|
Lease
residual value guarantees
|
|
|
76,440
|
|
|
8,402
|
|
|
32,906
|
|
|
10,338
|
|
|
24,794
|
|
Capital
Lease Obligations(1)
|
|
|
1,523
|
|
|
538
|
|
|
402
|
|
|
584
|
|
|
—
|
|
Long-Term
debt(1)
|
|
|
11,550
|
|
|
2,205
|
|
|
5,009
|
|
|
4,336
|
|
|
—
|
|
Subtotal
|
|
$
|
196,590
|
|
$
|
44,193
|
|
$
|
74,025
|
|
$
|
37,333
|
|
$
|
41,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
purchase of revenue equipment
|
|
$
|
85,991
|
|
$
|
57,577
|
|
$
|
14,593
|
|
$
|
3,343
|
|
$
|
10,478
|
|
Employment
and consulting agreements(2)
|
|
|
898
|
|
|
717
|
|
|
138
|
|
|
42
|
|
|
—
|
|
Standby
letters of credit
|
|
|
4,775
|
|
|
4,775
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
288,254
|
|
$
|
107,262
|
|
$
|
88,756
|
|
$
|
40,718
|
|
$
|
51,518
|
|
(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 U.S. generally
accepted accounting principles 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, 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 2
to 7 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.
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 substantial percentage of our tractors and trailers with operating
leases. 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 16% of our tractors
and 22% 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.
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 and frequency of claims incurred in a given period.
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
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.
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.
Recent
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board ("FASB") issued Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109
("FIN
48"). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Our effective date of this interpretation
is
July 1, 2007, the first fiscal year beginning after December 15, 2006. We are
continuing to evaluate the impact of the adoption of FIN 48 on our consolidated
financial statements.
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 September 30, 2006, the interest rate for
revolving borrowings under our credit facility was LIBOR plus 0.875%. At
September 30, 2006, we had $3.0 million variable rate term loan borrowings
outstanding under the credit facility. A hypothetical 10% increase in the bank's
base rate and LIBOR would be immaterial to our net income.
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 first quarter
of fiscal 2007 (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 $259,000. In June 2000, the FASB issued SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activity,
an
Amendment of SFAS 133", which requires 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 September
30, 2006, we had no currency derivatives in place. Derivative contracts had
no
material impact on our results of operations for the first quarter of fiscal
2007.
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 first quarter
of
fiscal 2007 (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 $90,000.
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 instruments to reduce our exposure to fuel price fluctuations. In
accordance with SFAS 138, we adjust any derivative instruments to fair value
through earnings on a monthly basis. As of September 30, 2006, we had no
derivative financial instruments to reduce our exposure to fuel price
fluctuations.
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
first quarter of fiscal 2007 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.
PART
II. OTHER
INFORMATION
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.
While
we
attempt to identify, manage, and mitigate risks and uncertainties associated
with our business, some level of risk and uncertainty will always be present.
Our Form 10-K for the year ended June 30, 2006, in the section entitled Item
1A.
Risk Factors, describes some of the risks and uncertainties associated with
our
business. These risks and uncertainties have the potential to materially affect
our business, financial condition, results of operations, cash flows, projected
results, and future prospects.
In
addition to the risk factors set forth on our Form 10-K, we believe that the
recent acquisition of certain assets of Digby increases the level of risk and
uncertainty present in our business. The risks and uncertainties, include,
without limitation, the risk that integration of the acquired operation will
not
proceed as planned; the risk that the Company will lose key components of the
acquired operation, including customers, key management, and drivers, none
of
whom is bound to remain with the acquired operation; the risk that we will
not
be able to improve the profitability of the acquired operation and operate
it
near the level of the Company's profitability; the risk of receiving less than
expected for tractors and trailers expected to be disposed of and recording
a
loss on disposal of such equipment; the risk of unknown liabilities related
to
the acquired operation; the risk that acquired operations will not be accretive
to earnings per share on the expected schedule or at all; and the risk that
integrating and managing the acquired operation will distract management from
other operations.
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3.1
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Amended
and Restated Certificate of Incorporation of the Company. (Incorporated
by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly
period ending December 31, 2005, filed with the SEC on January 30,
2006.)
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3.2
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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.)
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3.3
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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.)
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4.1
|
Amended
and Restated Certificate of Incorporation of the Company. (Incorporated
by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly
period ending December 31, 2005, filed with the SEC on January 30,
2006.)
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4.2
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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.)
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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.)
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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.)
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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.*
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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.*
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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.*
|
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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.*
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_________________________
*
Filed
herewith
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.
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Celadon
Group, Inc.
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(Registrant)
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/s/
Stephen Russell
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Stephen
Russell
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Chairman
of the Board and
Chief
Executive Officer
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/s/
Paul Will
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Paul
Will
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Chief
Financial Officer, Executive Vice President, Treasurer, and Assistant
Secretary
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Date: October
31, 2006
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