SAIA

Business Context and Reporting Period

This Form 10-Q covers SCS Transportation, Inc. (SCST) for the quarter and nine months ended September 30, 2002. SCST is a regional and interregional less-than-truckload (LTL) and truckload (TL) carrier operating through two subsidiaries: Saia Motor Freight Line, Inc. (approx. 63% of revenue) and Jevic Transportation, Inc. (approx. 37% of revenue). A material event during this period was the consummation of a tax-free spin-off from Yellow Corporation on September 30, 2002, resulting in SCST becoming an independent public company listed on NASDAQ under the symbol "SCST."

Key Financial Metrics

Material Changes vs. Prior Period

• Goodwill Impairment: The nine-month 2002 net loss of $66.1 million was driven by a non-cash charge of $75.2 million for the impairment of goodwill associated with the Jevic subsidiary, recorded due to the adoption of SFAS No. 142. Excluding this charge, the company reported net income of $9.0 million for the nine months.
• Operating Performance: Operating income improved significantly in both the quarter ($8.1M vs $5.6M) and nine-month period ($19.7M vs $10.4M) compared to 2001. The 2001 nine-month results included $6.7 million in one-time integration charges.
• Debt Structure: In connection with the spin-off, SCST issued $100 million in Senior Notes and entered a $50 million revolving credit facility. This replaced intercompany debt owed to Yellow Corporation, which was largely repaid ($110.6 million) at the time of the spin-off.
• Segment Results: Saia reported operating income of $6.5 million for Q3 2002 (up from $5.1M in 2001) with an improved operating ratio of 94.9%. Jevic reported operating income of $1.9 million (up from $1.1M in 2001) with an operating ratio of 97.5%.

Guidance, Outlook, and Risks

Outlook: Management anticipates no significant economic recovery or deterioration in the fourth quarter of 2002. The focus remains on cost management, productivity improvements, and positioning for long-term growth. Projected net capital expenditures for the full year 2002 are $27.5 million.

Risks and Contingencies:

• Fuel Price Volatility: Operating income is sensitive to diesel fuel prices. While fuel surcharge programs are in place, adjustments lag actual price changes.
• Insurance Claims: SCST is self-insured for significant portions of its risk (medical, workers' comp, auto liability). Actual costs could differ materially from actuarial estimates.
• Collateral Support: Following the spin-off, Yellow Corporation continues to provide collateral support (surety bonds and letters of credit) for SCST's insurance programs through at least February 28, 2003, with costs expected to increase significantly after the fourth year.
• Market Conditions: Results depend on general economic conditions, competitive pricing pressures, and the ability to match capacity with shifting volume levels.

Investor Verification Checklist

• Goodwill Impairment Impact: Verify the sustainability of earnings by analyzing results excluding the $75.2 million non-cash goodwill charge.
• Debt Covenants: Confirm ongoing compliance with financial covenants (EBITDAR ratio, interest coverage, tangible net worth) required by the new $100M Senior Notes and $50M Credit Agreement.
• Spin-off Transition: Monitor the transition of collateral support from Yellow Corporation and the associated cost increases after the initial support period.
• Operating Ratios: Track the operating ratios of Saia (94.9%) and Jevic (97.5%) to ensure cost management efforts offset competitive pricing pressures and wage increases.
• Capital Expenditures: Review actual capital spending against the $27.5 million full-year projection, particularly regarding revenue equipment replacement.