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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

FOR THE QUARTER ENDED SEPTEMBER 30, 2003

OR

FOR THE TRANSITION PERIOD FROM                   to                   

Commission file number: 0-49983

SCS TRANSPORTATION, INC.

(816) 960-3664
(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. Yes x No o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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SCS TRANSPORTATION, INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

SCS Transportation, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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SCS Transportation, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the quarter and nine months ended September 30, 2003 and 2002
(in thousands, except per share data)
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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SCS Transportation, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2003 and 2002
(in thousands)
(unaudited)

See accompanying notes to condensed consolidated financial statements

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SCS Transportation, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

(1)

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SCS Transportation, Inc. and its two wholly owned regional transportation subsidiaries (the Company or SCST), Saia Motor Freight Line, Inc. and Jevic Transportation, Inc.

The condensed consolidated financial statements have been prepared by the Company, without audit by independent public accountants. In the opinion of management, all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods included herein have been made. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these statements. These interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Operating results for the quarter ended September 30, 2003, are not necessarily indicative of the results of operations that may be expected for the year ended December 31, 2003.

Organization

The Company provides regional overnight and second-day less-than-truckload (LTL) and selected inter-regional LTL and truckload (TL) transportation services through two subsidiaries, Saia Motor Freight Line, Inc. (Saia) and Jevic Transportation, Inc. (Jevic). For the quarter ended September 30, 2003 Saia generated 64 percent and Jevic 36 percent of total revenue.

Certain of SCST’s long-term debt is guaranteed by its subsidiaries. The guarantees are full and unconditional, joint and several, and any subsidiaries that are not guarantors are minor as defined by Securities and Exchange Commission (SEC) regulations. SCST, as the parent company issuer of this debt, has no independent assets or operations. There are no significant restrictions on the Company’s ability or the ability of any guarantor to obtain funds from its subsidiaries by such means as a dividend or loan.

Stock-Based Compensation

For all stock option grants prior to January 1, 2003, stock-based compensation to employees is accounted for based on the intrinsic value method under Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” and related interpretations, including Financial Accounting Standards Board (FASB) Interpretation No. 44 “Accounting for Certain Transactions involving Stock Compensation”. Accordingly, no stock-based compensation expense related to stock option awards was recorded in the quarter or nine months ended September 30, 2002.

Effective January 1, 2003, the Company adopted the fair value method of recording stock option expense under SFAS No. 123, “Accounting for Stock-Based Compensation.” Under SFAS No. 123 the Company will recognize stock option expense prospectively for all stock awards granted after January 1, 2003, resulting in an estimated negative impact on earnings per share of less than $.01 for the year ended December 31, 2003 as the Company’s current long-term incentive plans are predominantly cash based plans, with the only expected stock option grants to be for outside directors. Stock option grants will be expensed over the stock option vesting period based on the fair value at the date the options are granted.

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In connection with the spin-off effective October 1, 2002, all former parent company stock options issued and outstanding to employees of SCST were replaced with SCST stock options with equivalent vesting, contract terms and an intrinsic value identical to the value of the former parent company options being replaced.

There were no SCST stock options outstanding during the quarter and nine months ended September 30, 2002, and therefore, no comparative information is presented.

The following table illustrates the effect on net income and earnings per share during the quarter and nine months ended September 30, 2003 if the Company had applied the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” for all stock option grants prior to January 1, 2003, the date the Company adopted SFAS No. 123 (in thousands, except per share data).

New Accounting Pronouncements

There are no new accounting pronouncements pending adoption as of September 30, 2003, which the Company believes would have a significant impact on its consolidated financial position or results of operations.

(2)

Computation of Earnings Per Share

The calculation of basic and diluted earnings per share for the quarter and nine months ended September 30, 2002 was based upon the shares outstanding as of the date of the spin-off from our former parent company, which was September 30, 2002. Effective October 1, 2002, diluted earnings per share includes the dilutive impact of outstanding stock options as shown below.

The calculation of basic earnings per common share and diluted earnings per common share was as follows (in thousands except per share amounts):

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(3)

Shareholders’ Equity

On March 6, 2003, the SCST Executive Capital Accumulation Plan (the Capital Accumulation Plan) was amended to allow for the plan participants to invest in the Company’s common stock. The Company’s Rabbi Trust, which holds the investments for the Capital Accumulation Plan, purchased 3,020 and 62,407 shares of the Company’s common stock at an aggregate purchase price of $46,000 and $738,000 during the quarter and nine months ended September 30, 2003, respectively. The Rabbi Trust shares are recorded by the Company in a manner similar to treasury stock at cost until either a change in investment election by a plan participant or a participant’s withdrawal from the Capital Accumulation Plan.

(4)

Business Segment Information

The Company has two operating subsidiaries (Saia and Jevic) that are reportable segments. Each of these segments is a strategic business unit offering different products and services.

The segments are managed separately because each requires different operating, technology and marketing strategies. The Company evaluates financial performance primarily on operating income and return on capital.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Management fees and other corporate services are charged to segments based on direct benefit received or allocated indirect benefit based on revenue. The following table summarizes the Company’s operations by business segment (in thousands):

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(5)

Commitments and Contingencies

The Company is subject to legal proceedings that arise in the ordinary course of its business. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not materially adversely affect our financial position, results of operations or cash flows.

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

GENERAL

The following management’s discussion and analysis describes the principal factors affecting the results of operations, liquidity and capital resources, as well as the critical accounting policies, of SCS Transportation, Inc. (SCST or the Company). This discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and our 2002 audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. These financial statements include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.

SCST is a leading transportation company providing regional overnight and second-day less-than-truckload (LTL) and selected inter-regional LTL and truckload (TL) service solutions to more than 71,000 customers across the United States. SCST’s operating subsidiaries are Saia Motor Freight Line, Inc. (Saia), based in Duluth, Georgia, and Jevic Transportation, Inc. (Jevic), based in Delanco, New Jersey.

The key factors that affect our operating results are the volumes of shipments transported through our networks, as measured by our average daily shipments and tonnage; the prices we obtain for our services, as measured by revenue per hundred weight (yield) and revenue per shipment, both excluding the impact of fuel surcharge; our ability to manage our cost structure for capital expenditures and operating expenses such as salaries, wages and benefits, purchased transportation, insurance claims and expense and fuel and maintenance; and our ability to match operating costs to shifting volume levels.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

SCST makes estimates and assumptions in preparing the consolidated financial statements that affect reported amounts and disclosures therein. In the opinion of management, the accounting policies that generally have the most significant impact on the financial position and results of operations of SCST include:

•

Claims and Insurance Accruals. SCST has self-insured retention limits generally ranging from $250,000 to $1,000,000 per claim for medical, workers’ compensation, auto liability, casualty and cargo claims with an additional $2,000,000 annual aggregate exposure for auto liability. Policy years prior to March 1, 2000 have per claim retention limits up to $2,000,000. The liabilities associated with the risk retained by SCST are estimated in part based on historical experience, third-party actuarial analysis, demographics, nature and severity, past experience and other assumptions. However, these estimated accruals could be significantly affected if the actual costs of SCST differ from these assumptions.

•

Depreciation and Capitalization of Assets. Under the SCST accounting policy for property and equipment, management establishes appropriate depreciable lives and salvage values for SCST’s revenue equipment (tractors and trailers) based on their estimated useful lives and estimated fair values to be received when the equipment is sold or traded in. These estimates are continuously evaluated and updated when circumstances warrant. However, actual depreciation and salvage values could differ from these assumptions based on market conditions and other factors.

•

Recovery of Goodwill. On January 1, 2002, SCST adopted Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets”. The statement requires that, upon adoption and at least annually thereafter, SCST assess goodwill impairment by applying a fair value based test. This fair value based test involves assumptions regarding the long-term future performance of the operating subsidiaries of SCST, fair value of the assets and liabilities of SCST, cost of capital rates and other assumptions. However, actual recovery of remaining goodwill could differ from these assumptions based on market conditions and other factors. In the event remaining goodwill is determined to be impaired, a charge to earnings may be required.

•

Revenue Recognition and Related Allowances. Revenue is recognized on a percentage-of-completion basis for shipments in transit while expenses are recognized as incurred. In addition, estimates included in the recognition of revenue and accounts receivable include estimates of shipments in transit and estimates of future adjustments to revenue and accounts receivable for billing adjustments and collectibility.

Revenue is recognized in a systematic process whereby estimates of shipments in transit are based upon actual shipments picked up, scheduled day of delivery and current trend in average rates charged to customers. Since the cycle for pick up and delivery of shipments is generally 1-3 days, typically less than 5 percent of a total month’s revenue is in transit at the end of any month. Estimates for credit losses and billing adjustments are based upon historical experience of credit losses, adjustments processed and trends of collections as well as specific customer situations. Billing adjustments are primarily made for discounts and billing corrections. These estimates are periodically evaluated and updated; however changes in economic conditions, pricing arrangements and other factors can significantly impact these estimates.

These accounting policies, and others, are described in further detail in the notes to our audited consolidated financial statements included in the Company’s Annual Report on Form 10-K.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

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RESULTS OF OPERATIONS

Quarter and nine months ended September 30, 2003 vs. quarter and nine months ended September 30, 2002

Revenue and volume

Operating revenue of SCST for the quarter ended September 30, 2003 was $211.5 million, up 5.2 percent on a per day basis from $201.2 million for the quarter ended September 30, 2002. Fuel surcharge revenue, which is intended to reduce the Company’s exposure to rising diesel prices, significantly affected the Company’s revenue trend for the quarter. Operating revenue excluding fuel surcharge was up 3.7 percent on a per day basis compared to the prior-year quarter. Saia experienced tonnage and shipment increases over the prior-year quarter. While Jevic’s shipments were up, tonnage was down versus the prior-year quarter due to a shift to more LTL shipments, which have lower weights. For the nine months ended September 30, 2003, operating revenues were $619.9 million versus $581.2 million for the nine months ended September 30, 2002, primarily due to increases in market share and a $13.1 million increase in fuel surcharge revenue.

Saia had operating revenue of $134.3 million for the quarter ended September 30, 2003, up 5.3 percent on a per day basis from $127.6 million for the quarter ended September 30, 2002. Saia’s operating revenue excluding fuel surcharge was $129.9 million for the quarter ended September 30, 2003, up 3.9 percent on a per day basis from $125.0 million for the quarter ended September 30, 2002. Including the effects of mix changes, Saia’s LTL revenue per hundredweight excluding fuel surcharge (a measure of yield) decreased 0.3 percent from the prior year quarter to $9.53 per hundredweight for the quarter ended September 30, 2003. The pricing environment, especially in regional markets, remains stable, but very competitive. LTL tonnage increased 4.0 percent to 626,000 tons and LTL shipments were up 2.0 percent to 1.2 million shipments. Management believes that Saia continues to grow volumes by providing high quality service for its customers.

For the nine months ended September 30, 2003, Saia had operating revenue of $391.1 million versus $366.6 million for the nine months ended September 30, 2002 for a 6.7 percent increase. Operating revenue, excluding fuel surcharge, was $377.1 million for the nine months ended September 30, 2003, up 4.6 percent on a per day basis from $360.5 million for the nine months ended September 30, 2002. The increase, exclusive of fuel surcharge, over the nine-month period was primarily due to increased volumes. Additionally, Saia implemented a 6.2 percent general rate increase effective June 9, 2003 on non-contractual accounts, which represent approximately 30 percent of its revenue base.

Jevic had operating revenue of $77.2 million for the quarter ended September 30, 2003, up 4.9 percent on a per day basis from operating revenue of $73.6 million for the quarter ended September 30, 2002. Jevic’s operating revenue excluding fuel surcharge was $74.6 million for the quarter ended September 30, 2003, up 3.5 percent on a per day basis from $72.1 million for the quarter ended September 30, 2002. Jevic’s revenue increase is due to increased LTL volume, improved yields and increased brokerage revenue, partially offset by lower TL volumes. Jevic’s yield increased 2.5 percent to $6.36 per hundredweight, excluding fuel surcharge revenue. On a per day basis, tonnage was down 1.6 percent versus the prior-year quarter to 558,000 tons and shipments were up 3.3 percent to 252,000 shipments. The increase in yield is a result of a mix shift toward higher yielding LTL business.

For the nine months ended September 30, 2003, Jevic had operating revenue of $228.8 million versus $214.5 million for the nine months ended September 30, 2002 for a 6.7 percent increase. Operating revenue, excluding fuel surcharge, was $220.3 million for the nine months ended September 30, 2003, up 4.3 percent on a per day basis from $211.2 million for the nine months ended September 30, 2002. The increase in revenue excluding fuel surcharge for the nine-month period is primarily a result of the mix shift toward higher yielding LTL business. Additionally, Jevic implemented a 5.9 percent general rate increase on LTL business and a 3.0 percent increase on truckload business on June 1, 2003, which affected approximately 40 percent of Jevic’s revenue base.

Operating income

Operating income of SCST for the quarter ended September 30, 2003 was $11.2 million versus $8.1 million for the quarter ended September 30, 2002 with both business segments reporting improved operating results. Volume gains, cost controls and productivity improvements contributed to the improved operating results. Higher fuel prices, in conjunction with volume changes, caused $1.8 million of the increase in operating expenses and supplies. These fuel cost increases were more than offset by increased revenues from the fuel surcharge programs. Structural cost increases, primarily in wages and health care, were offset by cost controls in other areas and improved productivity. The third quarter of 2003 includes unallocated holding company costs of $0.7 million versus $0.3 million of unallocated costs in the third quarter of 2002. Holding company costs in 2002 are not indicative of post

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spin-off operations. The third quarter 2003 operating ratio (operating expenses divided by operating revenue) for SCST was 94.7 compared to the third quarter 2002 operating ratio of 96.0. For the nine months ended September 30, 2003, operating income was $24.6 million with an operating ratio of 96.0 compared to operating income of $19.7 million with an operating ratio of 96.6 for the nine months ended September 30, 2002.

Saia’s third quarter 2003 operating income was $8.1 million compared to operating income of $6.5 million for the third quarter of 2002. Saia’s continued focus on cost controls and operating efficiencies contributed to its operating income improvement. Saia benefited from labor productivity gains, safety initiatives, which have reduced workers compensation claim frequency and other expense reductions that have offset structural cost increases in wages, benefits and healthcare costs. Wages increased an average of 4.2 percent versus the prior-year quarter due to scheduled wage rate increases and other pay adjustments. In addition, Saia’s healthcare costs increased $1.6 million over the third quarter of 2002. During the third quarter of 2003, Saia had an unfavorable adjustment in auto liability reserves for prior period claims of approximately $0.5 million that was more than offset by a $0.8 million favorable adjustment to allowance for doubtful accounts for prior period estimates, based on recent experience related to bad debts. Saia’s operating ratio was 94.0 for the third quarter of 2003 compared to 94.9 in the third quarter of 2002.

For the nine months ended September 30, 2003, Saia had operating income of $20.3 million and an operating ratio of 94.8 compared to operating income of $16.2 million and an operating ratio of 95.6 for the nine months ended September 30, 2002. Management believes the operating income improvement is a result of volume gains combined with effective cost and yield management.

Jevic’s third quarter 2003 operating income was $3.8 million compared to $1.9 million for the third quarter in 2002. Jevic’s operating ratio was 95.1 for the third quarter of 2003, an improvement over the 97.5 for the third quarter of 2002. The third quarter of 2002 included a $0.9 million charge to adjust workers compensation reserves to an actuarial estimate, while the third quarter of 2003 included a $0.4 million favorable adjustment to workers compensation reserves reflecting Jevic’s improved year-to-date injury frequency trends. Additionally, Jevic had net favorable adjustments to revenue and other claims reserves of $0.5 million during the quarter offset by $0.4 million in claims expense for one severe accident. Jevic’s results were also negatively impacted during the quarter by the Northeast Blackout. Jevic’s quarter-over-quarter yield improvement was offset by the impact of operational challenges related to a continuing driver shortage requiring the use of higher cost purchased transportation. The third quarter of 2003 was also impacted by an approximately 2 percent average increase over wages from the third quarter of 2002 and increased healthcare costs.

For the nine months ended September 30, 2003, Jevic had operating income of $6.4 million and an operating ratio of 97.2 compared to operating income of $3.7 million and an operating ratio of 98.3 for the nine months ended September 30, 2002. The increase in operating income for the nine months ended September 30, 2003 over the nine months ended September 30, 2002 was primarily a result of the third quarter activities discussed in the previous paragraph and a $1.5 million charge for workers compensation reserves in the second quarter of 2002, which was $1.2 million above Jevic’s experience for second quarter of 2003.

Holding company operating expenses for the quarter ended September 30, 2003 were $0.7 million in excess of costs allocated to the operating companies, which includes a $0.2 million charge related to the appreciation of SCST stock accounted for in the Capital Accumulation Plan. For the nine months ended September 30, 2003 holding company costs were $2.2 million, which includes $0.4 million of costs for a consulting project and insurance reserve adjustments plus $0.2 million related to the appreciation of SCST stock discussed above. The holding company had $0.3 million and $0.1 million in operating expenses in excess of costs allocated to the operating companies in the three months and nine months ended September 30, 2002, respectively, which are not indicative of post spin-off operations.

SCST had nonoperating expenses of $2.3 million in the third quarter of 2003 compared to nonoperating expenses of $1.3 million in the third quarter of 2002. SCST had nonoperating expenses of $6.7 million in the first nine months of 2003 compared to nonoperating expenses of $4.1 million in the first nine months of 2002. Substantially all SCST post spin-off nonoperating expenses represent interest expense. The increase in interest cost is a result of the Company’s new capital structure consisting of predominantly longer term higher fixed rate instruments versus the principally shorter term floating rate structure with the former parent company. The increase in interest rates was partially offset by lower debt in 2003 versus 2002. The effective tax rate for the first nine months of 2003 was 41.8 percent compared to an effective tax rate of 42.4 percent in the first nine months of 2002. Net income was $5.1 million in the third quarter of 2003 compared to net income of $4.0 million in the third quarter of 2002. Net income was $10.4 million in the nine months ended September 30, 2003 compared to a net loss of $66.1 million in the nine months ended September 30, 2002. The first quarter of 2002 included a non-cash charge for the cumulative effect of change in accounting for goodwill of $75.2 million. Net income before cumulative effect of change in accounting was $9.0 million for nine months ended September 30, 2002.

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Working capital/capital expenditures

SCST’s working capital increased from $54.9 million at December 31, 2002 to $63.2 million at September 30, 2003. The change in working capital is predominantly a result of a higher invested cash balance and seasonal increases in accounts receivable offset by increases in wage and employee benefits accruals. These accruals are both seasonal and affected by the day of the week on which the accounting period ends. Cash flows from operating activities increased to $41.0 million for the nine months ended September 30, 2003 from $17.2 million for the nine months ended September 30, 2002, due to improved profitability and collections of accounts receivable. Net capital expenditures were $32.1 million for the nine months ended September 30, 2003 compared to $24.4 million for the nine months ended September 30, 2002. Capital investments during the first nine months of 2003 primarily represent replacement of revenue equipment. The Company anticipates that it will spend an additional $18 million in capital, net of dispositions, over the remainder of the year, resulting in total annual net capital expenditures of $50 million for 2003.

Outlook

Our business is highly correlated to the general economy. Our outlook assumes a relatively low year-over-year growth in the industrial economy during the fourth quarter. We plan to continue to apply technology, training and accountability to improve productivity, while maintaining top-quality service. We believe we are positioned to improve earnings even in a slow-growth economy.

In the short-term, we plan to continue to focus on cost and yield management efforts, while further seeking to improve productivity and positioning the Company for longer-term growth. Actual results for 2003 will depend upon a number of factors, including the timing, speed and magnitude of the economic recovery or downturn, our ability to match capacity with shifting volume levels, competitive pricing pressures and self-insurance claims. We also look to increase market share in our existing geography and to explore geographic expansion pending the right opportunities.

See “Forward-Looking Statements” for a more complete discussion of potential risks and uncertainties that could materially affect our future performance.

New Accounting Pronouncements

See Note 1 to the accompanying financial statements for further discussion of recent accounting pronouncements.

CHANGE IN ACCOUNTING METHOD

Effective January 1, 2003, the Company adopted the fair value method of recording stock option expense under SFAS No. 123, “Accounting for Stock-Based Compensation.” Under SFAS No. 123 the Company will recognize stock option expense prospectively for all stock awards granted after January 1, 2003, resulting in an estimated negative impact on earnings per share of less than $.01 for the year ended December 31, 2003 as the Company’s current long-term incentive plans are predominantly cash based plans, with the only expected stock option grants for outside directors. Stock option grants will be expensed over the stock option vesting period based on the fair value at the date the options are granted. Previously, the Company applied the intrinsic value method permitted under SFAS No. 123, as defined in APB No. 25, “Accounting for Stock Issued to Employees”, in accounting for stock options issued prior to January 1, 2003, and accordingly, no compensation expense has been or will be recognized for such stock awards granted.

FINANCIAL CONDITION

SCST liquidity needs arise primarily from capital investment in new equipment, land and structures and information technology, as well as funding working capital requirements. In addition, the Company may pursue selective growth initiatives, such as geographic expansion, that would require capital funding.

In connection with the spin-off effective October 1, 2002, SCST issued $100 million in Senior Notes under a $125 million Master Shelf Agreement with Prudential Investment Management, Inc. and certain of its affiliates. SCST

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also entered into a $50 million Agented Revolving Credit Agreement (the Credit Agreement) with Bank of Oklahoma, N.A., as agent. Proceeds from the Senior Notes and a portion of the Credit Agreement were used for payments due the former parent company. In addition, SCST has third party borrowings of approximately $16.5 million in subordinated notes. SCST had approximately $120.5 million outstanding under the line-of-credit agreements with the former parent company immediately prior to the spin-off, of which $113.6 million was repaid to the former parent company under the terms of the spin-off. The remaining $6.9 million reduction in the line-of-credit with the former parent company was a capital contribution to SCST from the former parent company.

The $100 million Senior Notes are unsecured with a fixed interest rate of 7.38% and an average maturity of eight years. Payments due under the Senior Notes are interest only until June 30, 2006 and at that time semi-annual principal payments begin, with the final payment due December 2013. Under the terms of the Senior Notes, SCST must maintain several financial covenants including a maximum ratio of total indebtedness to earnings before interest, taxes, depreciation, amortization and rent (EBITDAR), a minimum interest coverage ratio and a minimum tangible net worth, among others. At September 30, 2003, SCST was in compliance with these covenants.

The $50 million Credit Agreement is unsecured with an interest rate based on LIBOR or prime at the Company’s option, plus an applicable spread, in certain instances, and matures in September 2005. The availability under the Credit Agreement is limited to SCST’s qualified receivables (as defined in the Credit Agreement). At September 30, 2003, SCST had no borrowings under the Credit Agreement, $22.5 million in letters of credit outstanding under the Credit Agreement and availability of $27.5 million. The remaining portion of the Credit Agreement is available for future capital expenditures, working capital and letter of credit requirements as needed. Under the terms of the Credit Agreement, SCST must maintain several financial covenants including a maximum ratio of total indebtedness to EBITDAR, a minimum interest coverage ratio and a minimum tangible net worth, among others. At September 30, 2003, SCST was in compliance with these covenants.

At September 30, 2003, the former parent company provided on behalf of SCST approximately $4.3 million in outstanding surety bonds. These bonds, issued by insurance companies, serve as collateral support primarily for workers compensation programs in states where SCST is self-insured. The price and availability of surety bonds fluctuates over time with general conditions in the insurance market. A lack of availability of surety bonds could result in the need for the former parent company to issue additional letters of credit. At September 30, 2003, the former parent company provided on behalf of SCST $13.6 million in outstanding letters of credit. Under the terms of the Master Separation and Distribution Agreement, the former parent company will continue to provide SCST with this amount of collateral to support SCST’s various insurance programs for which SCST reimburses the former parent for their cost which is subject to market variability and the former parent’s credit position. The collateral support by the former parent company is not limited to any length of time. However, the agreement does provide for significant increases in the cost to SCST for the collateral support by the former parent company after September 30, 2006.

Projected net capital expenditures for 2003 are approximately $50 million, an increase from 2002 net capital expenditures of $24.8 million. Net capital expenditures pertain primarily to replacement of revenue equipment at both subsidiaries and additional investments in information technology, land and structures.

The Company believes it has adequate sources of capital to meet short-term and longer-term liquidity and capital expenditure requirements through cash balances, future operating cash flows and availability under its long-term debt facilities. Future operating cash flows are primarily dependent upon the Company’s profitability and working capital requirements. The Company has the ability to adjust its capital expenditures in the event of a shortfall in anticipated operating cash flows.

In accordance with accounting principles generally accepted in the United States of America, our operating leases are not recorded on our balance sheet; however, the minimum lease payments related to these leases are disclosed in the notes to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002, and in “Contractual Cash Obligations” below.

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CONTRACTUAL CASH OBLIGATIONS

The following tables set forth a summary of our contractual cash obligations and other commercial commitments as of September 30, 2003 (in millions):

FORWARD-LOOKING STATEMENTS

Certain statements in this Report, including those contained in “Outlook” and “Financial Condition”, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of SCST. Forward-looking statements include those preceded by, followed by, or that include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “predict,” “believe” and similar words or expressions. All forward-looking statements reflect the present expectation of future events of our management and are subject to a number of important factors, risks, uncertainties and assumptions that could cause actual results to differ materially from those described in the forward-looking statements. These factors include, but are not limited to, general economic conditions; labor relations; cost and availability of qualified drivers; governmental regulations, including but not limited to Hours of Service, engine emissions and Homeland Security; cost and availability of fuel; inclement weather; competitive initiatives and pricing pressures; self insurance claims and other expense volatility; and other financial, operational and legal risks and uncertainties detailed from time to time in other filings with the Securities and Exchange Commission.

As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Report. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

SCST is exposed to a variety of market risks, including the effects of interest rates and fuel prices. The detail of SCST’s debt structure, which presently has limited exposure to floating interest rate risks, is more fully described in the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Saia and Jevic each maintain fuel surcharge programs that are designed to mitigate our risk to rising fuel prices. These programs are well established within the industry and customer acceptance of fuel surcharges remains high. Since the amount of fuel surcharge is based on average national diesel fuel prices and is reset weekly, exposure of SCST to fuel price volatility is significantly reduced.

The following table provides information about SCST third-party financial instruments as of September 30, 2003. The table presents principal cash flows (in millions) and related weighted average interest rates by contractual maturity dates. Weighted average variable rates are based on the prime rate as of September 30, 2003.