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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-21238
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LANDSTAR SYSTEM, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1313069
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4160 Woodcock Drive, Jacksonville, Florida 32207
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(Address of principal executive offices) (Zip Code)
(904) 390-1234
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value Common Stock Rights
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(Title of class) (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
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Documents Incorporated by Reference
Portions of the following documents are incorporated by reference in this
Form 10-K as indicated herein:
Part of 10-K into
Document which incorporated
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1997 Annual Report to Shareholders Part II
Proxy Statement relating to Part III
Landstar System, Inc.'s Annual
Meeting of Shareholders
The number of shares of the registrant's common stock, par value $.01 per
share, (the "Common Stock") outstanding as of the close of business on
March 20, 1998 was 11,433,533; and the aggregate market value of the voting
stock held by non-affiliates of the registrant was $349,260,947 (based on the
$31.375 per share closing price on that date, as reported by NASDAQ National
Market System). In making this calculation, the registrant has assumed,
without admitting for any purpose, that all directors and executive officers
of the registrant, and no other person, are affiliates.
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LANDSTAR SYSTEM, INC.
1997 Annual Report on Form 10-K
Table of Contents
<TABLE>
<CAPTION>
Part I
Page
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<S> <C>
Item 1. Business 4
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 16
Part III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 17
Signatures 18
Index to Exhibits 20
</TABLE>
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Part I
Item 1. - Business
General
Landstar System, Inc. (herein referred to as "Landstar" or the "Company")
was incorporated in January 1991 under the laws of the State of
Delaware and acquired all of the capital stock of its predecessor, Landstar
System Holdings, Inc. ("LSHI") on March 28, 1991. LSHI owns directly or
indirectly all of the common stock of Landstar Ranger, Inc. ("Landstar
Ranger"), Landstar Inway, Inc. ("Landstar Inway"), Landstar Ligon, Inc.
("Landstar Ligon"), Landstar T.L.C., Inc. (Landstar T.L.C.), Landstar Gemini,
Inc. ("Landstar Gemini"), Landstar Poole, Inc. ("Landstar Poole"), Landstar
Logistics, Inc. ("Landstar Logistics"), Landstar Express America, Inc.
("Landstar Express America"), Landstar Contractor Financing, Inc. ("LCFI"),
Landstar Capacity Services, Inc. ("LCS"), Risk Management Claim Services, Inc.
("RMCS"), Landstar Corporate Services, Inc. ("LCSI") and Signature Insurance
Company ("Signature"). Landstar Ranger, Landstar Inway, Landstar Ligon,
Landstar Gemini, Landstar Poole, Landstar Logistics and Landstar Express
America are collectively herein referred to as Landstar's "Operating
Subsidiaries" or "Operating Companies". The Company's principal executive
offices are located at 4160 Woodcock Drive, Jacksonville, Florida 32207 and
its telephone number is (904) 390-1234.
Historical Background
In March 1991, Landstar acquired LSHI in a buy-out organized by Kelso &
Company, Inc. ("Kelso"). Investors in the acquisition included Kelso
Investment Associates IV L.P. ("KIA IV"), an affiliate of Kelso, ABS MB
Limited Partnership ("ABSMB"), an affiliate of BT Alex. Brown, Inc. ("BT Alex.
Brown") (formerly known as Alex. Brown & Sons Incorporated), and certain
management employees of Landstar and its subsidiaries (the "Management
Stockholders"). Landstar was capitalized by the sale of an aggregate of
8,024,000 shares of Common Stock for $20.1 million, as follows: KIA IV
($15.5 million), ABSMB ($3.0 million), Management Stockholders($1.3 million)
and certain institutional stockholders ($.3 million). In March 1993, Landstar
completed a recapitalization (the "Recapitalization") that increased
shareholders' equity, reduced indebtedness and improved the Company's
operating and financial flexibility. The Recapitalization involved three
principal components: (i) the initial public offering (the "IPO") of 5,387,000
shares of Common Stock, at an initial price to the public of $13 per share,
2,500,000 of which were sold by Landstar and 2,887,000 of which were sold by
certain of the Company's stockholders (including KIA IV), (ii) the retirement
of all $38 million outstanding principal amount of LSHI's 14% Senior
Subordinated Notes due 1998 (the "14% Notes"), and (iii) the refinancing of
the Company's then existing senior debt facility with a senior bank credit
agreement. The net proceeds to the Company from the IPO (net of underwriting
discounts and commissions and expenses) of $28,450,000 and proceeds from the
new term loan, were used to repay outstanding borrowings under the old credit
agreement and redeem or purchase the 14% Notes. In October 1993, a secondary
public offering by existing stockholders of 5,547,930 shares of Common Stock
at an initial price to the public of $15 per share was completed. KIA IV sold
4,492,640 shares and ABSMB sold 1,055,290 shares. Immediately subsequent to
the offering, KIA IV no longer owned any Landstar shares of Common Stock, and
affiliates of BT Alex. Brown retained approximately 1% of the Common Stock
outstanding.
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In connection with the secondary offering, Landstar granted the underwriters
an over-allotment option of up to 554,793 shares of Common Stock. The option
was exercised and Landstar sold the 554,793 shares of Common Stock at an
initial price to the public of $15 per share. Landstar received proceeds, net
of underwriting discounts and commissions and expenses of the secondary
offering, in the amount of $7,386,000.
During the first quarter of 1995, Landstar, through different subsidiaries of
LSHI acquired the businesses and net assets of Intermodal Transport Company
("ITCO"), a California-based intermodal marketing company, LDS Truck Lines,
Inc., a California-based drayage company, and T.L.C. Lines, Inc., a Missouri-
based temperature-controlled and long-haul, time sensitive dry van carrier.
Also in the 1995 first quarter, Landstar, through another subsidiary of LSHI,
acquired all of the outstanding common stock of Express America Freight
Systems, Inc., ("Express"), a North Carolina-based air freight and truck
expedited service provider. The businesses acquired from ITCO and Express
comprise the majority of the multimodal segment's operations.
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C. and Landstar Poole operations, in addition to the relocation of its
Shelton, Connecticut corporate office headquarters to Jacksonville, Florida in
the second quarter of 1997. The plan to restructure Landstar T.L.C. included
the merger of the operations of Landstar T.L.C. into Landstar Inway, the
closing of the Landstar T.L.C. headquarters in St. Clair, Missouri and the
disposal of all of Landstar T.L.C.'s company-owned tractors. The plan to
restructure Landstar Poole included the transfer of the variable cost business
component of Landstar Poole to Landstar Ranger and the disposal of 175 Landstar
Poole company-owned tractors. During 1997 and 1996, the Company incurred
approximately $3,164,000 and $7,263,000 of such restructuring costs,
respectively. In addition, in January 1997, the operations of Landstar Gemini
were merged into the operations of Landstar Logistics. The Company's
restructuring plan was substantially completed by June 28, 1997.
In March 1997, Landstar formed Signature, a wholly-owned offshore insurance
subsidiary. Signature reinsures certain property, casualty and occupational
accident risks of certain independent contractors who have contracted to haul
freight for Landstar. In addition, Signature provides certain property and
casualty insurance directly to Landstar's Operating Subsidiaries.
Description of Business
Landstar, a transportation services company, operates one of the largest
truckload carrier businesses in North America, with revenue of $1,312.7
million in 1997. The Company seeks to provide transportation services which
emphasize information coordination and customer service delivered primarily by
a network of approximately 1,150 independent commission sales agents. The vast
majority of the Company's truckload capacity is provided by independent
contractors.
Landstar utilizes a wide range of specialized equipment designed to meet
customers' varied transportation requirements, which distinguishes the Company
from many other large truckload carriers. The Company transports a variety of
freight, including iron and steel, automotive products, paper, lumber and
building products, aluminum, chemicals, foodstuffs, heavy machinery, ammunition
and explosives, and military hardware. The Company provides truckload carrier
services, intermodal transportation services and expedited air and truck
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services to shippers throughout the continental United States and, to a lesser
extent, between the United States and each of Canada and Mexico.
Under the provisions of Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information", the Company has determined it has four
reportable business segments. These are the carrier segment, multimodal
segment, company-owned tractor segment and insurance segment. The following
table provides financial information relating to the Company's reportable
business segments as of and for the fiscal years ending 1997, 1996 and 1995
(dollars in thousands):
<TABLE>
<CAPTION> Fiscal Year Ended
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1997 1996 1995
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<S> <C> <C> <C>
Revenue from unaffiliated customers:
Carrier segment $ 945,330 $ 905,472 $ 852,235
Multimodal segment 255,041 224,384 202,413
Company-owned tractor segment 93,393 153,945 150,019
Insurance segment 18,940
Inter-segment revenue:
Carrier segment $ 39,453 $ 37,479 $ 30,874
Multimodal segment 968 1,160 563
Company-owned tractor segment 6,785 6,956 9,238
Insurance segment 15,452
Operating income:
Carrier segment $ 62,280 $ 57,031 $ 70,307
Multimodal segment 5,355 4,584 1,497
Company-owned tractor segment 849 1,543 4,581
Insurance segment 8,933
Other (30,247) (23,261) (26,377)
Identifiable assets:
Carrier segment $ 192,143 $ 212,034 $ 189,414
Multimodal segment 64,055 56,547 49,987
Company-owned tractor segment 68,791 85,526 97,098
Insurance segment 21,538
Other 10,652 16,694 16,580
</TABLE>
The carrier segment is comprised of three of Landstar's operating subsidiaries,
Landstar Ranger, Landstar Inway and Landstar Ligon. The carrier segment
provides truckload transportation for a wide range of general commodities over
irregular routes with its fleet of dry and specialty vans and unsided trailers,
including flatbed, drop deck and specialty. The carrier segment markets its
services primarily through independent commission sales agents and utilizes
tractors provided by independent contractors. The nature of the carrier segment
business is such that a significant portion of its operating costs vary
directly with revenue. At December 27, 1997, the carrier segment operated a
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fleet of approximately 7,500 tractors, provided by approximately 5,800
independent contractors, and approximately 12,000 trailers, 5,800 of which are
supplied by independent contractors. Approximately 70% of the trailers
available to the carrier segment are provided by independent contractors or are
leased by the Company at rental rates that vary with the revenue generated
through the trailer. The carrier segment's trailer fleet is comprised of
approximately 7,200 dry vans, 3,000 flatbeds, 1,300 specialty and 400
refrigerated vans. The carrier segment has a network of approximately 860
independent commission sales agents. An agent in the carrier segment is
typically paid 7% of the revenue generated through that agent, with volume-
based incentive commissions that can increase the percentage to 10% of revenue.
The use of independent contractors enables the carrier segment to utilize a
large fleet of revenue equipment while minimizing capital investment and fixed
costs, thereby enhancing the carrier segment's return on investment.
Independent contractors who provide truckload capacity to the carrier segment
are compensated on the basis of a fixed percentage of the revenue generated
from the shipments they haul. In 1997, revenue generated through independent
contractors was 99% of carrier segment revenue.
The multimodal segment is comprised of Landstar Logistics and Landstar Express
America. Transportation services provided by the multimodal segment include the
arrangement of intermodal moves, contract logistics, truck brokerage, short-to-
long haul movement of containers by truck and emergency and expedited air
freight and truck services. The multimodal segment markets its services through
independent commission sales agents and utilizes capacity provided by
independent contractors, including railroads and air cargo carriers. An agent
in the multimodal segment is compensated based on a percentage of the gross
profit on revenue generated through that agent. Independent contractors who
provide truck capacity to the multimodal segment are compensated based on a
percentage of the revenue generated from the shipments they haul. Railroads and
air cargo carriers are paid a contractually agreed fixed fee. The nature
of the multimodal segment business is such that a significant portion of its
operating costs vary directly with revenue. At December 27, 1997, the
multimodal segment operated a fleet of 600 trucks, provided by approximately
530 independent contractors. The truck capacity provided by the independent
contractors to the multimodal segment is primarily power only, in which the
freight is hauled by an independent contractor in a customer trailer or
container, or cargo van and straight truck for emergency and expedited freight
services. The multimodal segment has a network of approximately 230 independent
commission sales agents. In 1997, revenue generated through independent
contractors, including railroads and air cargo carriers, was 100% of multimodal
segment revenue.
The company-owned tractor segment is comprised of Landstar Poole. The company-
owned tractor segment provides truckload transportation services over short and
medium length regional traffic lanes. The company-owned tractor segment
primarily markets its services through an employee sales force and primarily
utilizes company-owned and employee-driven tractors and to a lesser extent
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independent contractors who are compensated on a cents-per-mile driven basis.
At December 27, 1997, the company-owned tractor segment operated a fleet of
approximately 870 tractors, including 190 tractors provided by 171 independent
contractors, and approximately 1,400 trailers. The trailer fleet of the
company-owned tractor segment is comprised of approximately 1,200 dry vans and
220 flatbeds. In 1997, revenue generated through independent contractors was
18% of company-owned tractor segment revenue.
The insurance segment is Signature, a wholly-owned offshore insurance
subsidiary that was formed in March 1997. The insurance segment reinsures
certain property, casualty and occupational accident risks of certain
independent contractors who have contracted to haul freight for Landstar. In
addition, the insurance segment provides certain property and casualty
insurance directly to the Company's transportation group.
Landstar's business strategy is to offer high quality, specialized
transportation services through its transportation group to service-sensitive
customers. Landstar focuses on providing transportation services which
emphasize information coordination among its independent commission sales
agents, customers and capacity providers, as well as customer service, rather
than the volume driven approach of generic dry van carriers. Landstar intends
to continue developing appropriate systems and technologies to offer
integrated transportation and logistic solutions in order to meet its
customers' total transportation needs.
The Company's overall size, geographic coverage, equipment and service
capability offer the Company significant competitive marketing and operating
advantages. These advantages allow the Company to meet the needs of even the
largest shippers and thereby qualify it as a "core carrier." Increasingly, the
larger shippers are substantially reducing the number of authorized carriers
in favor of a small number of core carriers whose size and diverse service
capability enable these core carriers to satisfy most of the shippers'
transportation needs. Examples of national account customers include the U.S.
Department of Defense and shippers in particular industries, such as the three
major U.S. automobile manufacturers.
Management believes the Company has a number of significant competitive
advantages, including:
DIVERSITY OF SERVICES OFFERED. The Company offers its customers a wide range
of transportation services, primarily truckload, through its transportation
group, including a fleet of diverse trailing equipment and extensive geographic
coverage. Examples of the specialized services offered include a large fleet
of flatbed trailers, multi-axle trailers capable of hauling extremely heavy or
oversized loads, drivers certified to handle ammunition and explosive shipments
for the U.S. Department of Defense, emergency and expedited surface and air
cargo services and intermodal capability with railroads and steamship lines,
including short-to-medium haul movement of ocean-going containers between U.S.
ports and inland cities.
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The following table illustrates the diversity of this equipment as of
December 27, 1997:
<TABLE>
<CAPTION>
<S> <C>
Trailers:
Vans 8,360
Specialty Vans 116
Temperature-Controlled 420
Flatbeds 2,721
Drop Deck/Low Boys 499
Light Specialty 79
Other Specialized Flatbeds 1,236
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Total 13,431
======
</TABLE>
MARKETING NETWORK. Landstar's network of approximately 1,150
independent commission sales agents results in regular contact with shippers at
the local level and the capability to be highly responsive to shippers'
changing needs. The agent network enables Landstar to be responsive both in
providing specialized equipment to both large and small shippers and in
providing capacity on short notice from the Company's large fleet to high
volume shippers. Through its agent network, the Company believes it offers
smaller shippers a level of service comparable to that typically reserved by
other truckload carriers only for their largest customers. Examples of services
that Landstar is able to make available through the agent network to smaller
shippers include the ability to haul shipments on short notice (often within
hours from notification to time of pick-up), multiple pick-up and delivery
points, electronic data interchange capability and access to specialized
equipment. In addition, a number of the Company's agents specialize in certain
types of freight and transportation services (such as oversized or heavy
loads). An agent in the carrier segment is typically paid a percentage of the
revenue generated through that agent, with volume-based incentives. An agent in
the multimodal segment is typically paid a contractually agreed upon percentage
of the gross profit on revenue generated through that agent. During 1997, more
than 360 agents generated revenue for Landstar of at least $1 million each, or
approximately $981.7 million of Landstar's total revenue. The majority of the
agents who generate revenue of $1 million or more have chosen to represent
Landstar exclusively. The typical Landstar agent maintains a relationship with
a number of shippers and services these shippers by providing a base of
operations for independent contractors, both single-unit owner-operator and
multi-unit contractors. Contracts with agents are typically terminable upon 30
days' notice. Historically, Landstar has experienced very limited agent
turnover among its larger volume agents. Each operating subsidiary emphasizes
programs to support the agents' operations and to establish pricing
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parameters. Each operating subsidiary contracts directly with customers and
generally assumes the credit risk and liability for freight losses or damages.
The carrier segment and multimodal segment generally dispatch their fleets
through their local agents, while the company-owned tractor segment generally
operates through a central dispatch system. The carrier segment and multimodal
segment hold regular regional agent meetings for their independent commission
sales agents and Landstar holds an annual company-wide agent convention.
TECHNOLOGY. Management believes leadership in the development and application
of technology is an ongoing part of providing high quality service at
competitive prices. Landstar manages its carrier and multimodal segments'
technology programs centrally through a Chief Information Officer. The
technology programs of the company-owned equipment segment are controlled by
management of that segment.
CORPORATE SERVICES. Significant advantages result from the collective
expertise and corporate services afforded by Landstar's corporate
management. The primary services provided are:
safety purchasing
risk and claims management strategic planning
technology and management information systems human resource management
legal finance
quality programs accounting, budgeting and taxes
INDEPENDENT CONTRACTORS. Landstar operates the largest fleet of truckload
independent contractors in North America. This provides marketing, operating,
safety, recruiting and retention and financial advantages to the Company. Most
of the Company's truckload independent contractors are compensated on the basis
of a fixed percentage of the revenue generated from the freight they haul. This
percentage generally ranges from 60% to 70% where the independent contractor
provides a tractor and from 75% to 79% where the independent contractor
provides both a tractor and trailer. The independent contractor must pay all
the expenses of operating his/her equipment, including driver wages and
benefits, fuel, physical damage insurance, maintenance, highway use taxes
and debt service. In 1997, Landstar experienced a turnover rate among
independent contractors of approximately 79%. A significant percentage of
this turnover was attributable to independent contractors who had been
independent contractors with the Company for less than one year and the effect
of the restructuring. Management believes that the availability of loads is
a significant factor in turnover. Management believes other factors that tend
to limit turnover include the Company's extensive agent network, the Company's
programs to reduce the operating costs of its independent contractors, and
Landstar's reputation for quality, service and reliability. The Landstar
Contractors' Advantage Purchasing Program ("LCAPP") leverages Landstar's
purchasing power as one of the largest truckload carriers in North America to
provide discounts to the independent contractors when they purchase equipment,
fuel, tires and other items. In addition, LCFI provides a source of funds at
competitive interest rates to the independent contractors to purchase tractors,
trailers or mobile communication equipment. Landstar also benefits from its use
of independent contractors as it allows the Company to maintain a lower level
of capital investment. As a result, the carrier and multimodal segments tend to
have higher variable costs and lower fixed costs.
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Competition
Landstar competes primarily in the domestic transportation industry, focusing
on the common and contract truckload segment. This segment has been
characterized by significant change since the substantial economic
deregulation of the trucking industry in 1980, and again in 1994 and 1995,
which have led to a rapid influx of small, often poorly capitalized truckload
carriers and downward pressure on freight rates. Primarily because deregulation
eliminated most route, commodity and rate restrictions, the market for common
and contract truckload services has grown as truckload carriers have attracted
business from railroads, less-than-truckload carriers and private fleets.
Management believes the truckload segment will continue to undergo significant
consolidation and that the barriers to entry may become harder to overcome.
These barriers include the capital-intensive nature of the business, purchasing
economies available only to larger carriers, increasing customer demand for
sophisticated information systems, rising insurance costs, greater customer
demand for specialized services and the reluctance of certain shippers to do
business with smaller carriers.
The transportation services business is extremely competitive and fragmented.
Landstar competes primarily with other truckload carriers and independent
contractors and, with respect to certain aspects of its business, intermodal
transportation, railroads and less-than-truckload carriers.
Management believes that competition for the freight transported by the Company
is based primarily on service and efficiency and, to a lesser degree, on
freight rates alone. Historically, competition has created downward pressure
on the truckload industry's pricing structure, however, during the most recent
years the Company has been able to increase its overall revenue per revenue
mile (price) by improving its freight quality. Management believes that
Landstar's overall size and availability of a wide range of equipment, together
with its geographically dispersed local independent agent network, present the
Company with significant competitive advantages over many other truckload
carriers. The Company also competes with other motor carriers for the services
of independent contractors and independent commission sales agents, contracts
with whom are terminable upon short notice. The Company's overall size,
coupled with its reputation for good relations with agents and independent
contractors, have enabled the Company to attract a sufficient number of
qualified agents, independent contractors and drivers.
Insurance and Claims
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. Landstar retains liability up to
$1,000,000 for each individual property, casualty and general liability
claim, $500,000 for each workers' compensation claim and $250,000 for each
cargo claim. The Company provides, on an actuarially determined basis, for the
estimated cost of property, casualty and general liability claims reported and
for claims incurred but not reported. Although Landstar has an active training
and safety program, there can be no assurance that the frequency or severity of
accidents or workers' compensation claims will not increase in the future, that
there will not be unfavorable development of existing claims or that insurance
premiums will not increase. A material increase in the frequency or severity
of accidents or workers' compensation claims or the unfavorable development of
existing claims can be expected to adversely affect Landstar's operating
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results. Management believes that Landstar realizes significant savings in
insurance premiums by retaining a larger amount of risk than might be prudent
for a smaller company.
Potential Changes in Fuel Taxes
From time to time, various legislative proposals are introduced to increase
federal, state, or local taxes, including taxes on motor fuels. The Company
cannot predict whether, or in what form, any increase in such taxes applicable
to the Company will be enacted and, if enacted, whether or not the Company
will be able to reflect the increases in prices to customers. Competition
from non-trucking modes of transportation and from intermodal transportation
would be likely to increase if state or federal taxes on fuel were to increase
without a corresponding increase in taxes imposed upon other modes of
transportation.
Independent Contractor Status
From time to time, various legislative or regulatory proposals are introduced
at the federal or state levels to change the status of independent contractors'
classification to employees for either employment tax purposes (withholding,
social security, Medicare and unemployment taxes) or other benefits
available to employees. Currently, most individuals are classified as
employees or independent contractors for employment tax purposes based on 20
"common-law" factors rather than any definition found in the Internal Revenue
Code or Internal Revenue Service regulations. In addition, under Section 530
of the Revenue Act of 1978, taxpayers that meet certain criteria may treat an
individual as an independent contractor for employment tax purposes if they
have been audited without being told to treat similarly situated workers as
employees, if they have received a ruling from the Internal Revenue Service
or a court decision affirming their treatment, or if they are following a
long-standing recognized practice.
Although management is unaware of any proposals currently pending to change
the employee/independent contractor classification, the costs associated with
potential changes, if any, in the employee/independent contractor
classification could adversely affect Landstar's results of operations if
Landstar were unable to reflect them in its fee arrangements with the
independent contractors and agents or in the prices charged to its customers.
Regulation
Each of the Operating Subsidiaries is a motor carrier which, prior to
January 1, 1995, was regulated by the Interstate Commerce Commission
(the "ICC") and is now regulated by the United States Department of
Transportation (the "DOT") and by various state agencies. The DOT has broad
powers, generally governing activities such as the regulation of, to a limited
degree, motor carrier operations, rates, accounting systems, periodic
financial reporting and insurance. Subject to federal and state regulatory
authorities or regulation, the Company may transport most types of freight to
and from any point in the United States over any route selected by the Company.
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The trucking industry is subject to possible regulatory and legislative changes
(such as increasingly stringent environmental regulations or limits on vehicle
weight and size) that may affect the economics of the industry by requiring
changes in operating practices or by changing the demand for common or contract
carrier services or the cost of providing truckload services.
Congress deregulated transportation in 1994 by passage of the Trucking
Industry Regulatory Reform Act of 1994 ("TIRRA") and the Federal Aviation
Administration Authorization Act of 1994 ("FAAAA"). TIRRA substantially
eliminated entry procedures for interstate transportation and eliminated the
ICC tariff filing requirements for virtually all common carriers. FAAAA
required all states to substantially deregulate intrastate transportation as
of January 1, 1995. In 1995, Congress enacted The Interstate Commerce
Commission Termination Act and substantially eliminated certain of the
functions of the ICC and transferred most functions to the DOT.
Landstar Ranger is subject to the Multi Employer Pension Plan Amendments Act
of 1980 ("MEPPA"), which could require Landstar Ranger, in the event of
withdrawal, to fund its proportionate share of the union sponsored plans'
unfunded benefit obligation. Management believes that the liability, if any,
for withdrawal from any or all of these plans would not have a material adverse
effect on the financial condition of Landstar, but could have a material effect
on the results of operations in a given quarter or year.
Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT. All of the Company's drivers are required to have
national commercial driver's licenses and are subject to mandatory drug and
alcohol testing. The DOT's national commercial driver's license and drug and
alcohol testing requirement have not adversely affected the availability to
the Company of qualified drivers.
Seasonality
Landstar's operations are subject to seasonal trends common to the trucking
industry. Results of operations for the quarter ending in March are typically
lower than the quarters ending in June, September and December due to reduced
shipments and higher operating costs in the winter months.
Employees
As of December 27, 1997, the Company and its subsidiaries employed
approximately 2,050 individuals. Approximately 150 Landstar Ranger drivers
(out of a total of approximately 3,600) are members of the International
Brotherhood of Teamsters. The Company considers relations with its employees
to be good.
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Item 2. - Properties
The Company owns or leases various properties in the U.S. for the Company's
operations and administrative staff that support the independent commission
sales agents and independent contractors. The carrier segment's primary
facilities are located in Jacksonville, Florida, Rockford, Illinois and
Madisonville, Kentucky. The multimodal segment's primary facilities are located
in Jacksonville, Florida, and Charlotte, North Carolina. The company-owned
tractor segment's primary facility is located in Evergreen, Alabama. In
addition, the Company's corporate headquarters are located in Jacksonville,
Florida and RMCS is located in Madisonville, Kentucky. The Evergreen, Alabama
facility of the company-owned tractor segment, the Madisonville, Kentucky and
Rockford, Illinois facilities of the carrier segment and the Charlotte, North
Carolina facility of the multimodal segment are owned by the Company. All other
facilities are leased.
Management believes that Landstar's owned and leased properties are adequate
for its current needs and that leased properties can be retained or replaced
at acceptable cost.
Item 3. - Legal Proceedings
On August 5, 1997, suit was filed entitled Rene Alberto Rivas Vs. Landstar
System, Inc., Landstar Gemini, Inc., Landstar Ranger, Inc., Risk Management
Claims Services, Inc., Insurance Management Corporation, and Does 1 through
500, inclusive, in federal district court in Los Angeles. The suit claims Rivas
represents a class of all drivers who, according to the suit, should be
classified as employees and are therefore allegedly aggrieved by the practice
of Landstar Gemini, Inc. requiring such drivers, as independent contractors, to
provide either a worker's compensation certificate or to participate in an
occupational accident insurance program. Rivas claims violations of federal
leasing regulations for allegedly improperly disclosing the program. Rivas also
claims violations of Racketeer Influence and Corrupt Organizations ("RICO") Act
and the California Business and Professions Act. He seeks on behalf of himself
and the class damages of $15 million trebled by virtue of trebling provisions
in the RICO Act plus punitive damages. A motion to dismiss these claims was
argued to the court on February 9, 1998, and the court's decision is pending.
The Company is vigorously defending this action. It believes that the drivers
in question are properly classified as independent contractors and that it also
has other meritorious defenses to the various claims.
The Company is routinely a party to litigation incidental to its business,
primarily involving claims for personal injury and property damage incurred
in the transportation of freight. The Company maintains insurance which covers
liability amounts in excess of retained liabilities from personal injury and
property damages claims.
Item 4. - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.
14
<PAGE>
Part II
Item 5. - Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company is quoted through the National Association of
Securities Dealers, Inc. National Market System (the "NASDAQ National Market
System") under the symbol "LSTR". The following table sets forth the high and
low reported sale prices for the Common Stock as quoted through the NASDAQ
National Market System for the periods indicated.
<TABLE>
<CAPTION>
Calendar Period 1997 Market Price 1996 Market Price
--------------- ----------------- -----------------
<S> <C> <C> <C> <C>
High Low High Low
First Quarter $26 1/2 $21 3/4 $ 27 1/4 $ 21 3/4
Second Quarter 29 23 1/2 30 5/8 23 1/4
Third Quarter 28 1/2 23 1/2 29 3/8 23 1/4
Fourth Quarter 28 3/4 23 5/8 27 1/4 21 1/2
</TABLE>
The reported last sale price per share of the Common Stock as quoted through
the NASDAQ National Market System on March 20, 1998 was $31.375 per share. As
of such date, Landstar had 11,433,533 shares of Common Stock outstanding. As
of March 20, 1998, the Company had 105 stockholders of record of its Common
Stock. However, the Company estimates that it has a significantly greater
number of stockholders of record because a substantial number of the Company's
shares are held by broker or dealers for their customers in street name.
The Company has not within the past three years paid any cash dividends on the
Common Stock, and does not intend to pay dividends on the Common Stock for the
foreseeable future. The declaration and payment of any future dividends will
be determined by the Company's Board of Directors, based on Landstar's results
of operations, financial condition, cash requirements, certain corporate law
requirements and other factors deemed relevant.
Item 6. - Selected Financial Data
The information required by this Item is set forth under the caption "Selected
Consolidated Financial Data" in Exhibit 13 attached hereto, and is
incorporated by reference in this Annual Report on Form 10-K. This
information is also included on page 45 of the Company's 1997 Annual Report to
Shareholders.
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this Item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Exhibit 13 attached hereto, and is incorporated by reference in
this Annual Report on Form 10-K. This information is also included on pages
25 to 30 of the Company's 1997 Annual Report to Shareholders.
15
<PAGE>
Item 8. - Financial Statements and Supplementary Data
The information required by this Item is set forth under the captions
"Consolidated Balance Sheets", "Consolidated Statements of Income",
"Consolidated Statements of Cash Flows", "Consolidated Statements of Changes
in Shareholders' Equity", "Notes to Consolidated Financial Statements",
"Independent Auditors' Report" and "Quarterly Financial Data" in Exhibit 13
attached hereto, and are incorporated by reference in this Annual Report on
Form 10-K. This information is also included on pages 31 through 44 of the
Company's 1997 Annual Report to Shareholders.
Item 9. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. - Directors and Executive Officers of the Registrant
The information required by this Item concerning the Directors (and nominees
for Directors) and Executive Officers of the Company is set forth under the
captions "Election of Directors", "Directors of the Company", "Information
Regarding Board of Directors and Committees", and "Executive Officers of the
Company" on pages 2 through 8, and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" on page 17 of the Company's definitive Proxy
Statement for its annual meeting of shareholders filed with the Securities and
Exchange Commission pursuant to Regulation 14A, and is incorporated herein by
reference.
Item 11. - Executive Compensation
The information required by this Item is set forth under the captions
"Compensation of Directors and Executive Officers", "Summary Compensation
Table", "Fiscal Year-End Option Values", "Report of the Compensation
Committee on Executive Compensation", "Performance Comparison" and
"Key Executive Employment Protection Agreements" on pages 9 through 14 of
the Company's definitive Proxy Statement for its annual meeting of shareholders
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
and is incorporated herein by reference.
Item 12. - Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth under the caption "Security
Ownership by Management and Others" on pages 15 through 17 of the Company's
definitive Proxy Statement for its annual meeting of shareholders filed with
the Securities and Exchange Commission pursuant to Regulation 14A, and is
incorporated herein by reference.
Item 13. - Certain Relationships and Related Transactions
The information required by this Item is set forth under the caption
"Indebtedness of Management" on page 11 of the Company's definitive Proxy
Statement for its annual meeting of shareholders filed with the Securities and
Exchange Commission pursuant to Regulation 14A, and is incorporated herein by
reference.
16
<PAGE>
Part IV
Item 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements
Financial statements of the Company and related notes thereto, together with
the report thereon of KPMG Peat Marwick LLP dated February 10, 1998, are
in Exhibit 13 attached hereto, and are incorporated by reference in this Annual
Report on Form 10-K. This information is also included on pages 31 through 43
of the Company's 1997 Annual Report to Shareholders.
(2) Financial Statement Schedules
The report of the Company's independent public accountants with respect to the
financial statement schedules listed below appears on page 23 of this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
Schedule Number Description Page
- --------------- ----------- ----
<S> <C> <C>
I Condensed Financial Information of Registrant
Parent Company Only Balance Sheet Information S-1
I Condensed Financial Information of Registrant
Parent Company Only Statement of Income Information S-2
I Condensed Financial Information of Registrant
Parent Company Only Statement of Cash
Flows Information S-3
II Valuation and Qualifying Accounts
For the Fiscal Year Ended December 27, 1997 S-4
II Valuation and Qualifying Accounts
For the Fiscal Year Ended December 28, 1996 S-5
II Valuation and Qualifying Accounts
For the Fiscal Year Ended December 30, 1995 S-6
</TABLE>
All other financial statement schedules not listed above have been omitted
because the required information is included in the consolidated financial
statements or the notes thereto, or is not applicable or required.
(3) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report (see "Exhibit Index").
THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO ANY SHAREHOLDER OF THE COMPANY WHO
SO REQUESTS IN WRITING, A COPY OF ANY EXHIBITS, AS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. ANY SUCH REQUEST SHOULD BE DIRECTED TO LANDSTAR
SYSTEM, INC., ATTENTION: INVESTOR RELATIONS, 4160 WOODCOCK DRIVE, JACKSONVILLE,
FLORIDA 32207.
(b) No reports on Form 8-K were filed during the last quarter of fiscal year
1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
LANDSTAR SYSTEM, INC.
By: Henry H. Gerkens
----------------------------------------
Henry H. Gerkens
Executive Vice President & Chief Financial
Officer
By: Robert C. LaRose
----------------------------------------
Robert C. LaRose
Vice President Finance & Treasurer
Date: March 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Jeffrey C. Crowe Chairman of the Board, President & March 25, 1998
- ------------------- Chief Executive Officer, Principal
Jeffrey C. Crowe Executive Officer
Henry H. Gerkens Executive Vice President & March 25, 1998
- ------------------- Chief Financial Officer; Principal
Henry H. Gerkens Financial Officer
Robert C. LaRose Vice President Finance & Treasurer;
- ------------------- Principal Accounting Officer March 25, 1998
Robert C. LaRose
* Senior Vice President and Director March 25, 1998
- -------------------
John B. Bowron
* Director March 25, 1998
- -------------------
David G. Bannister
* Director March 25, 1998
- -------------------
Ronald W. Drucker
* Director March 25, 1998
- -------------------
Arthur J. Fritz, Jr.
* Director March 25, 1998
- -------------------
Merritt J. Mott
18
<PAGE>
* Michael L. Harvey Attorney In Fact
- ----------------------
By: Michael L. Harvey
19
<PAGE>
EXHIBIT INDEX
Form 10-K for fiscal year ended 12/27/97
Exhibit No. Description
- ----------- -----------
(3) Articles of Incorporation and Bylaws:
3.1 Amended and Restated Certificate of Incorporation of the
Company dated February 9, 1993 and Certificate of Designation of Junior
Participating Preferred Stock. (Incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement on Form S-1 (Registration No. 33-
57174))
3.2 The Company's Bylaws, as amended and restated on February 9,
1993. (Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-57174))
(4) Instruments defining the rights of security holders,
including indentures:
4.1 Specimen of Common Stock Certificate. (Incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1
(Registration No. 33-57174))
4.2 Stockholders Agreement, dated as of March 12, 1993, among KIA
IV, ABSMB and the Company. (Incorporated by reference to Exhibit 4.9 of
Amendment No. 3 to the Registrant's Registration Statement on Form S-1
(Registration No. 33-57174))
4.3 Rights Agreement, dated as of February 10, 1993, between the
Company and Chemical Bank, as Rights Agent. (Incorporated by reference to
Exhibit 4.14 of Amendment No. 1 to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-57174))
4.4 The Company agrees to furnish copies of any instrument defining
the rights of holders of long-term debt of the Company and its respective
consolidated subsidiaries that does not exceed 10% of the total assets of the
Company and its respective consolidated subsidiaries to the Securities and
Exchange Commission upon request.
4.5 Second Amended and Restated Credit Agreement, dated
October 10, 1997, among LSHI, Landstar, the lenders named
therein and The Chase Manhattan Bank as administrative agent
(including exhibits and schedules thereto).(Incorporated by reference to
Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 27, 1997 (Registration No. 0-21238))
20
<PAGE>
Exhibit Index (continued)
Form 10-K for fiscal year ended 12/27/97
Exhibit No. Description
- ----------- -----------
(10) Material Contracts:
10.1+ Landstar System, Inc. 1993 Stock Option Plan. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-67666))
10.2+ LSHI Investors' Plan. (Incorporated by reference to Exhibit
10.2 to the Registrant's Registration Statement on Form S-1 (Registration No.
33-57174))
10.3 Directors' and Consulting Service Agreement, dated March 27,
1991, between Alex. Brown & Sons Incorporated and the Company. (Incorporated
by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-57174))
10.4 Management Services Agreement, dated March 27, 1991, between
Kelso and the Company. (Incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1 (Registration No. 33-57174))
10.5 Irrevocable Guaranty, dated as of March 30, 1992, among the
Company, Kelso Insurance Services, Inc., and the American Telephone and
Telegraph Company. (Incorporated by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1 (Registration No. 33-57174))
10.6 Form of Indemnification Agreement between the Company and each
of the directors and executive officers of the Company. (Incorporated by
reference to Exhibit 10.7 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-57174))
10.7+ LSHI Management Incentive Compensation Plan. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 25, 1993 (Commission File No. 0-21238))
10.8+ Landstar System, Inc. 1994 Director's Stock Option Plan.
(Incorporated by reference to Exhibit 99 to the Registrant's Registration
Statement on Form S-8 filed July 5, 1995 (Registration No. 33-94304))
10.9*+ Key Executive Employment Protection Agreement dated
January 30, 1998 between Landstar System, Inc. and certain officers of the
Company
21
<PAGE>
Exhibit Index (continued)
Form 10-K for fiscal year ended 12/27/97
Exhibit No. Description
- ----------- -----------
10.10*+ Amendment to the Landstar System, Inc. 1993 Stock Option Plan
(11) Statement re: Computation of Per Share Earnings:
11.1* Landstar System, Inc. and Subsidiary Calculation of Earnings
Per Common Share
11.2* Landstar System, Inc. and Subsidiary Calculation of Diluted
Earnings Per Share
(13) Annual Report to Shareholders, Form 10-Q or Quarterly Report to
Shareholders:
13.1* Excerpts from the 1997 Annual Report to Shareholders
(21) Subsidiaries of the Registrant:
21.1* List of Subsidiary Corporations of the Registrant
(23) Consents of Experts and Counsel:
23.1* Consent of KPMG Peat Marwick LLP as Independent Auditors of the
Registrant
(24) Power of Attorney
24.1* Powers of Attorney
(27) Financial Data Schedules
27.1* 1997 Financial Data Schedule
27.2* Restated 1996 Financial Data Schedule
___________________
+management contract or compensatory plan or arrangement
*Filed herewith.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Landstar System, Inc.:
Under date of February 10, 1998, we reported on the consolidated balance sheets
of Landstar System, Inc. and subsidiary as of December 27, 1997 and December
28, 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the fiscal years ended December 27,
1997, December 28, 1996 and December 30, 1995, as contained in the 1997 annual
report to shareholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 1997. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedules
as listed in Item 14 (a)(2). These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Stamford, Connecticut
February 10, 1998
23
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEET INFORMATION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Dec. 27, Dec. 28,
1997 1996
-------- --------
<S> <C> <C>
Assets
- ------
Investment in Landstar System Holdings, Inc.,
net of advances $151,696 $147,344
Operating property, less accumulated
amortization of $1,504 and $878 626
-------- --------
Total assets $151,696 $147,970
======== ========
Liabilities and Shareholders' Equity
- -----------------------------------
Current maturities of long-term debt $ 413
Shareholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares, issued 12,900,974
and 12,882,874 shares $ 129 129
Additional paid-in capital 62,169 61,740
Retained earnings 112,345 87,655
Cost of 915,441 and 94,041 shares of common
stock in treasury (22,947) (1,967)
-------- --------
Total shareholders' equity 151,696 147,557
-------- --------
Total liabilities and shareholders' equity $151,696 $147,970
======== ========
</TABLE>
S-1
24
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF INCOME INFORMATION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
Dec. 27, Dec. 28, Dec. 30,
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Rental income $ 648 $ 682 $ 323
Amortization expense (626) (626) (252)
Interest expense (22) (56) (71)
Equity in undistributed earnings
of Landstar System Holdings, Inc. 24,736 18,942 $ 25,019
Income taxes (46) (17) (57)
---------- ---------- -----------
Net income $ 24,690 $ 18,925 $ 24,962
========== ========== ===========
Earnings per common share $ 1.97 $ 1.48 $ 1.95
========== ========== ===========
Diluted earnings per share $ 1.96 $ 1.47 $ 1.94
========== ========== ===========
Average number of shares
outstanding:
Earnings per common share 12,541,000 12,785,000 12,807,000
========== ========== ===========
Diluted earnings per share 12,580,000 12,831,000 12,898,000
========== ========== ==========
</TABLE>
S-2
25
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF CASH FLOWS INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
Dec. 27, Dec. 28, Dec. 30,
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Operating Activities
- --------------------
Net income $ 24,690 $ 18,925 $ 24,962
Adjustments to reconcile net income
to net cash provided by
operating activities:
Amortization of operating property 626 626 252
Equity in undistributed earnings of
Landstar System Holdings, Inc. (24,736) (18,942) (25,019)
---------- ---------- -----------
Net Cash Provided By Operating
Activities 580 609 195
---------- ---------- -----------
Investing Activities
- --------------------
Additional investments in and advances
from (to) Landstar System Holdings,
Inc., net 20,384 (223) 2,001
---------- ---------- -----------
Net Cash Provided (Used) By Investing
Activities 20,384 (223) 2,001
---------- ---------- -----------
Financing Activities
- --------------------
Principal payments on borrowings under
capital lease obligations (413) (622) (469)
Proceeds from sales of common stock 429 236
Purchases of common stock (20,980) (1,727)
---------- ---------- ----------
Net Cash Used By Financing
Activities (20,964) (386) (2,196)
---------- ---------- ----------
Change in cash 0 0 0
Cash at beginning of period 0 0 0
---------- --------- -----------
Cash at end of period $ 0 $ 0 $ 0
========== ========= ===========
</TABLE>
S-3
26
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------ ------ ------ ------ ------
Balance Additions
at --------------------------
Beginning Charged to Charged to Balance
of Costs and Other Accounts Deductions at End
Description Period Expenses Describe Describe(A) of Period
- ----------- --------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Deducted from trade
receivables $ 6,526 $ 2,284 $ - $ (2,853) $ 5,957
Deducted from other
receivables 4,390 1,673 - (2,054) 4,009
Deducted from other non-
current receivables 17 41 - - 58
------- --------- ----------- -------- -------
$10,933 $ 3,998 $ - $ (4,907) $10,024
======= ========= =========== ======== =======
</TABLE>
(A) Write-offs, net of recoveries.
S-4
27
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------ ------ ------ ------ ------
Balance Additions
at --------------------------
Beginning Charged to Charged to Balance
of Costs and Other Accounts Deductions at End
Description Period Expenses Describe Describe (A) of Period
- ----------- --------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Deducted from trade
receivables $ 6,923 $ 1,667 $ - $ (2,064) $ 6,526
Deducted from other
receivables 4,205 3,084 - (2,899) 4,390
Deducted from other non-
current receivables 0 17 - - 17
------- --------- ----------- -------- -------
$11,128 $ 4,768 $ - $ (4,963) $10,933
======= ========= =========== ======== =======
</TABLE>
(A) Write-offs, net of recoveries.
S-5
28
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------ ------ ------ ------ ------
Balance Additions
at --------------------------
Beginning Charged to Charged to Balance
of Costs and Other Accounts Deductions at End
Description Period Expenses Describe (A) Describe of Period
- ----------- --------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Deducted from trade
receivables $ 4,136 $ 3,755 $ 1,105 $ (2,073) $ 6,923
Deducted from other
receivables 3,662 2,477 95 (2,029) 4,205
------- --------- --------- -------- -------
$ 7,798 $ 6,232 $ 1,200 $ (4,102)(B) $11,128
======= ========= ========= ======== =======
</TABLE>
(A) Amounts in this column represent opening balances from new business
acquired during 1995.
(B) Write-offs, net of recoveries.
S-6
29
<PAGE>
EXHIBIT 10.9
KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
THIS AGREEMENT between Landstar System, Inc., a Delaware corporation
(the "Company"), and ------------------ (the "Executive"), dated as of
this --- day of January 30, 1998.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company has employed the Executive in an executive
officer position and has determined that the Executive holds a position of
significant importance with the Company;
WHEREAS, the Company believes that, in the event it is confronted
with a situation that could result in a change in ownership or control of the
Company, continuity of management will be essential to its ability to evaluate
and respond to such situation in the best interests of shareholders;
WHEREAS, the Company understands that any such situation will present
significant concerns for the Executive with respect to his financial and job
security;
WHEREAS, the Company desires to assure itself of the Executive's
services during the period in which it is confronting such a situation, and to
provide the Executive certain financial assurances to enable the Executive to
perform the responsibilities of his position without undue distraction and to
exercise his judgment without bias due to his personal circumstances;
WHEREAS, to achieve these objectives, the Company and the Executive
desire to enter into an agreement providing the Company and the Executive with
certain rights and obligations upon the occurrence of a Change of Control (as
defined in Section 2);
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Company and the
Executive as follows:
1. Operation of Agreement. (a) Effective Date. The effective
date of this Agreement shall be the date on which a Change of Control occurs
(the "Change of Control Date"), provided that, except as provided in Section 1
(b), if the Executive is not employed by the Company on the Change of Control
Date, this Agreement shall be void and without effect. Notwithstanding the
foregoing, if, prior to the occurrence of a Change of Control or a Potential
Change of Control (as defined in Section 2), the Executive is demoted, the
Board of Directors shall have the right to declare this Agreement void and
without effect.
(b) Termination of Employment Following a Potential Change of
Control. Notwithstanding Section 1(a), if (i) the Executive's employment is
terminated by the Company without Cause (as defined in Section 2) after the
occurrence of a Potential Change
30
<PAGE>
of Control and prior to the occurrence of a Change of Control and (ii) a Change
of Control occurs within one year of such termination, the Executive shall be
deemed, solely for purposes of determining his rights under this Agreement, to
have remained employed until the date such Change of Control occurs and to have
been terminated by the Company without Cause immediately after this Agreement
becomes effective.
(c) Termination of Employment Following Death or Disability.
This Agreement shall terminate automatically upon the Executive's death or
termination due to Disability (as defined in Section 2).
2. Definitions. (a) Change of Control. For the purposes of this
Agreement, a "Change of Control" shall mean (i) any "person," including a
"group" (as such terms are used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended ("the Act")), but excluding the
Company, any of its subsidiaries, or any employee benefit plan of the Company
or any of its subsidiaries, or any employee benefit plan of the Company or any
of its subsidiaries, is or becomes the "beneficial owner" (as defined in Rule
13(d)(3) under the Act), directly or indirectly, of common stock of the Company
representing the greater of 35% or more of the combined voting power of the
Company's then outstanding common stock; (ii) the shareholders of the Company
approve a definitive agreement (a) for the merger or other business combination
of the Company with or into another corporation, a majority of the directors of
which were not directors of the Company immediately prior to the merger and in
which the shareholders of the Company immediately prior to the effective date
of such merger directly or indirectly own less than 50% of the voting power in
such corporation or (b) for the sale or other disposition of all or
substantially all of the assets of the Company; or (iii) the purchase of common
stock of the Company pursuant to any tender or exchange offer made by any
"person," including a "group" (as such terms are used in Sections 13(d) and 14
(d)(2) of the Act), other than the Company, any of its subsidiaries, or an
employee benefit plan of the Company or any of its subsidiaries for 35% or more
of the common stock of the Company.
(b) Potential Change of Control. For the purposes of this
Agreement, a "Potential Change of Control" shall be deemed to have occurred if
(i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the
Act) commences a tender offer for common stock, which if consummated, would
result in such person owning 35% or more of the combined voting power of the
Company's then outstanding common stock; (ii) the Company enters into an
agreement the consummation of which would constitute a Change of Control;
(iii) proxies for the election of directors of the Company are solicited by
anyone other than the Company; or (iv) any other event occurs which is
deemed to be a Potential Change of Control by the Board of Directors of
the Company.
(c) Cause. For the purposes of this Agreement, "Cause" means
(i) the Executive's conviction or plea of nolo contendere to a felony; (ii)
an act or acts of extreme dishonesty or gross misconduct on the Executive's
part which result or are intended to result in material damage to the Company's
business or reputation; or (iii) repeated material violations by the Executive
of his position, authority or responsibilities as in effect at the Change of
Control Date, which violations are demonstrably willful and deliberate on the
Executive's part and which result in material damage to the Company's business
or reputation.
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(d) Good Reason. "Good Reason" means the occurrence of any of
the following, without the express written consent of the Executive, after the
occurrence of a Potential Change of Control or a Change of Control:
(i) (A) the assignment to the Executive of any duties
inconsistent in any material adverse respect with the Executive's position,
authority or responsibilities as in effect at the Change of Control
Date, or (B) any other material adverse change in such position, including
titles, authority or responsibilities;
(ii) any failure by the Company, other than an insubstantial
or inadvertent failure remedied by the Company promptly after receipt of notice
thereof given by the Executive, to provide the Executive with (A) an annual
base salary, as it may be increased from time to time (the "Base Salary"),
which is at least equal to the Base Salary paid to the Executive immediately
prior to the Change of Control Date, or (B) incentive compensation
opportunities at a level which is at least equal to the level of incentive
compensation opportunities made available, to the Executive immediately prior
to the Change of Control Date;
(iii) the failure by the Company to permit the Executive (and,
to the extent applicable, his dependents) to participate in or be covered under
all pension, retirement, deferred compensation, savings, medical, dental,
health, disability, group life, accidental death and travel accident insurance
plans and programs of the Company and its affiliated companies at a level that
is commensurate with the Executive's participation in such plans immediately
prior to the Change of Control Date (or, if more favorable to the Executive,
at the level made available to the Executive or other similarly situated
officers at any time thereafter);
(iv) the Company's requiring the Executive to be based at any
office or location more than 50 miles from that location at which he performed
his services for the Company immediately prior to the Change of Control, except
for travel reasonably required in the performance of the Executive's
responsibilities; or
(v) any failure by the Company to obtain the assumption and
agreement to perform this Agreement by a successor as contemplated by
Section 5.
In no event shall the mere occurrence of a Change of Control, absent any
further impact on the Executive, be deemed to constitute Good Reason.
(e) Disability. For purposes of this Agreement, "Disability"
shall mean the Executive's inability to perform the duties of his position,
as determined in accordance with the policies and procedures applicable with
respect to the Company's long-term disability plan, as in effect immediately
prior to the Change of Control Date.
(f) Notice of Termination. Any termination by the Company for
Cause or by the Executive for Good Reason shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 6(d).
For purposes of this Agreement, a "Notice of Termination" means a written
notice given, in the case of a termination for Cause, within 10 business days
of the Company's having actual knowledge of the events giving rise to such
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termination, and in the case of a termination for Good Reason, within 90 days
of the later to occur of (x) the Change of Control Date or (y) the Executive's
having actual knowledge of the events giving rise to such termination, and
which (i) indicates the specific termination provision in this Agreement
relied upon, (ii) sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated, and (iii) if the termination date is other than
the date of receipt of such notice, specifies the termination date of this
Agreement (which date shall be not more than 30 days after the giving of such
notice). The failure by the Executive to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason shall not waive any right of the Executive hereunder or preclude the
Executive from asserting such fact or circumstance in enforcing his rights
hereunder.
(g) Date of Termination. For the purpose of this Agreement, the
term "Date of Termination" means (i) in the case of a termination for which a
Notice of Termination is required, the date of receipt of such notice of
Termination or, if later, the date specified therein, as the case may be, and
(ii) in all other cases, the actual date on which the Executive's employment
terminates.
3. Employment Protection Benefits. (a) Basic Benefits. If (x)
on or before the second anniversary of the Change of Control Date (i) the
Company terminates the Executive's employment for any reason other than for
Cause or Disability or (ii) the Executive voluntarily terminates his employment
for Good Reason at any time on or before the second anniversary of the Change
of Control Date or (y) if the Executive voluntarily terminates his employment,
with or without Good Reason, at any time within the 60 day period beginning on
the 181st day following the Change of Control Date, then the Company shall pay
the Executive the following amounts:
(i) the Executive's Base Salary earned through the Date of
Termination (the "Earned Salary");
(ii) a cash amount (the "Severance Amount") equal to one (two)
or (three) times the sum of
(A) the Executive's annual Base Salary; and
(B)the amount that would have been payable to the Executive as
a target bonus for the year in which the Change of Control occurs; and
(iii) any vested amounts or benefits owing to the Executive under
the Company's otherwise applicable employee benefit plans and programs,
including any compensation previously deferred by the Executive (together with
any accrued earnings thereon) and not yet paid by the Company and any accrued
vacation pay not yet paid by the Company (the "Accrued Obligations").
The Earned Salary and Severance Amount shall be paid in a single lump sum as
soon as practicable, but in no event more than ten business days (or at such
earlier date required by law) following the Executive's Date of Termination.
Accrued Obligations shall be paid in accordance with the terms of the
applicable plan, program or arrangement.
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(b) Continuation of Benefits. If the Executive receives the
Severance Amount described in this Section 3, the Executive (and, to the extent
applicable, his dependents) shall be entitled, after the Date of Termination
until the earlier of (x) the first anniversary of his Date of Termination (the
"End Date") or (y) the date the Executive becomes eligible for comparable
benefits under a similar plan, policy or program of a subsequent employer, to
continue participation in all of the Company's employee and executive welfare
and fringe benefit plans (the "Benefit Plans") as were generally provided to
the Executive in accordance with the Company's policies and practices
immediately prior to the Change of Control Date. To the extent any such
benefits cannot be provided under the terms of the applicable plan, policy or
program, the Company shall provide a comparable benefit under another plan or
from the Company's general assets. The Executive's participation in the
Benefit Plans will be on the same terms and conditions that would have applied
had the Executive continued to be employed by the Company through the End Date.
(c) Indemnification. The Company shall indemnify the Executive
and hold the Executive harmless from and against any claim, loss or cause of
action arising from or out of the Executive's performance as an officer,
director or employee of the Company or any of its subsidiaries or in any other
capacity, including any fiduciary capacity, in which the Executive serves at
the request of the Company to the maximum extent permitted by applicable law
and the Company's Certificate of Incorporation and By-Laws (the "Governing
Documents"), provided that in no event shall the protection afforded to the
Executive hereunder be less than that afforded under the Governing Documents as
in effect immediately prior to the Change of Control Date.
(d) Certain Further Payments by the Company. In the event that
any amounts or benefits paid or distributed to the Executive pursuant to this
Agreement, taken together with any amounts or benefits otherwise paid or
distributed to the Executive by the Company or any affiliated company
(collectively, the "Covered Payments"), are or become subject to the tax
(the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code"), or any similar tax that may hereafter be imposed,
the Company shall pay to the Executive at the time specified below an
additional amount (the "Tax Reimbursement Payment") such that the net amount
retained by the Executive with respect to such Covered Payments, after
deduction of any Excise Tax on the Covered Payments and any Federal, state and
local income or employment tax and Excise Tax on the Tax Reimbursement
Payment provided for by this Section 3(d), but before deduction for any
Federal, state or local income or employment tax withholding on such Covered
Payments, shall be equal to the amount of the Covered Payments.
The Tax Reimbursement Payment shall be paid to the Executive not later than
10 business days following the payment of the Covered Payments; provided,
however, that if the amount of such Tax Reimbursement Payment cannot be finally
determined on or before the date on which payment is due, the Company shall
pay to the Executive by such date an amount estimated in good faith by the
Company's independent certified public accountants appointed prior to the
Change of Control Date or tax counsel selected by such accountants (the
"Accountants") to be the minimum amount of such Tax Reimbursement Payment
and shall pay the remainder of such Tax Reimbursement Payment (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon
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as the amount thereof can be determined, but in no event later than 45 calendar
days after payment of the related Covered Payments. In the event that the
amount of the estimated Tax Reimbursement Payment exceeds the amount
subsequently determined to have been due, such excess shall constitute a loan
by the Company to the Executive, payable on the fifth business day after
written demand by the Company for payment (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code).
For purposes of determining whether any of the Covered Payments will be subject
to the Excise Tax and the amount of such Excise Tax,
(i)such Covered Payments will be treated as "parachute payments"
within the meaning of Section 280G of the Code, and all "parachute payments"
in excess of the "base amount" (as defined under Section 280G(b)(3) of the
Code) shall be treated as subject to the Excise Tax, unless, and except to the
extent that, in the good faith judgment of the Accountants, the Company has a
reasonable basis to conclude that such Covered Payments (in whole or in part)
either do not constitute "parachute payments" or represent reasonable
compensation for personal services actually rendered (within the meaning of
Section 280G(b)(4)(B) of the Code) in excess of the base amount, or such
parachute payments are otherwise not subject to such Excise Tax, and
(ii) the value of any non-cash benefits or any deferred payment
or benefit shall be determined by the Accountants in accordance with the
principles of Section 280G of the Code.
For purposes of determining the amount of the Tax Reimbursement Payment, the
Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable marginal
rate of Federal income taxation for the calendar year in which the Tax
Reimbursement Payment is to be made, and
(B) any applicable state and local income taxes at the highest
applicable marginal rate of taxation for the calendar year in which the Tax
Reimbursement Payment is to be made, net of the maximum reduction in Federal
income taxes which could be obtained from the deduction of such state or local
taxes if paid in such year.
(e) Adjustments to the Tax Reimbursement Payment. In the event
that the Excise Tax is subsequently determined by the Accountants or pursuant
to any proceeding or negotiations with the Internal Revenue Service to be less
than the amount taken into account hereunder in calculating the Tax
Reimbursement Payment made, the Executive shall repay to the Company, at the
time that the amount of such reduction in the Excise Tax is finally determined,
the portion of such prior Tax Reimbursement Payment that would not have been
paid if such Excise Tax had been applied in initially calculating such Tax
Reimbursement Payment, plus interest on the amount of such repayment at the
rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the
foregoing, in the event any portion of the Tax Reimbursement Payment to be
refunded to the Company has been paid to any Federal, state or local tax
authority, repayment thereof shall not be required until actual refund or
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credit of such portion has been made to the Executive, and interest payable
to the Company shall not exceed interest received or credited to the Executive
by such tax authority for the period it held such portion. The Executive and
the Company shall mutually agree upon the course of action to be pursued (and
the method of allocating the expenses thereof) if the Executive's good faith
claim for refund or credit is denied.
In the event that the Excise Tax is later determined by the Accountants or
pursuant to any proceeding or negotiations with the Internal Revenue Service
to exceed the amount taken into account hereunder at the time the Tax
Reimbursement Payment is made (including, but not limited to, by reason of
any payment the existence or amount of which cannot be determined at the time
of the Tax Reimbursement Payment), the Company shall make an additional Tax
Reimbursement Payment in respect of such excess (plus any interest or penalty
payable with respect to such excess) at the time that the amount of such excess
is finally determined.
(f) Discharge of the Company's Obligations. Except as
expressly provided in Section 4, the Severance Amount and the other amounts
payable and benefits provided in respect of the Executive pursuant to this
Section 3 following termination of his employment shall be in full and complete
satisfaction of the Executive's rights under this Agreement and any other
claims he may have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages with respect to
any and all such rights and claims and, upon the Executive's receipt of such
amounts, the Company shall be released and discharged from any and all
liability to the Executive in connection with this Agreement or otherwise in
connection with the Executive's employment with the Company and its
subsidiaries. Without limiting the generality of the foregoing, the Company's
obligation to make the payments provided for in this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any circumstances,
including, without limitation, any set-off, counterclaim, recoupment, defense
or other right which the Company may have against the Executive or others
whether by reason of the subsequent employment of the Executive or otherwise.
Nothing in this Section 3(f), however, shall in any way limit the Company's
obligations to the Executive pursuant to Section 3(c) hereof.
4. Legal Fees and Expenses. If the Executive asserts any claim in
any contest (whether initiated by the Executive or by the Company) as to the
validity, enforceability or interpretation of any provision of this Agreement,
the Company shall pay the Executive's legal expenses (or cause such expenses to
be paid) including, without limitation, his reasonable attorney's fees, on a
quarterly basis, upon presentation of proof of such expenses, provided that the
Executive shall reimburse the Company for such amounts, plus simple interest
thereon at the 90-day United States Treasury Bill rate as in effect from time
to time, compounded annually, if the Executive shall not prevail, in whole or
in part, as to any material issue as to the validity, enforceability or
interpretation of any provision of this Agreement.
5. Successors. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors. The Company shall require any
successor to all or substantially all of the business and/or assets of the
Company, whether direct or indirect, by purchase, merger, consolidation,
acquisition of stock, or otherwise, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as the Company would be
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required to perform if no such succession had taken place. This Agreement is
personal to the Executive and is not assignable by the Executive otherwise
than by will or the laws of descent and distribution. This Agreement shall
inure to the benefit of and be enforceable by the Executive's legal
representatives.
6. Miscellaneous. (a) Applicable Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware,
applied without reference to principles of conflict of laws.
(b) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be resolved by binding arbitration. The
arbitration shall be held in Jacksonville, Florida, and except to the extent
inconsistent with this Agreement, shall be conducted in accordance with the
Expedited Employment Arbitration Rules of the American Arbitration Association
then in effect at the time of the arbitration, and otherwise in accordance with
principles which would be applied by a court of law or equity. The arbitrator
shall be acceptable to both the Company and the Executive. If the parties
cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel
of three arbitrators, one appointed by each of the parties and the third
appointed by the other two arbitrators.
(c) Entire Agreement. Upon the Change of Control Date, this
Agreement shall constitute the entire agreement between the parties
hereto with respect to the matters referred to herein. There are no promises,
representations, inducements or statements between the parties other than those
that are expressly contained herein. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto
or their respective successors and legal representatives. In the event any
provision of this Agreement is invalid or unenforceable, the validity and
enforceability of the remaining provisions hereof shall not be affected. The
Executive acknowledges that he is entering into this Agreement of his own free
will and accord, and with no duress, that he has read this Agreement and that
he understands it and its legal consequences.
(d) Notices. All notices and other communications hereunder
shall be in writing and shall be given by hand-delivery to the other party or
by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: at the home address of the Executive noted on the records
of the Company
If to the Company: Landstar Systems, Inc.
4160 Woodcock Drive
Jacksonville, Florida 32207
Attn.: General Counsel
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or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and the
Company has caused this Agreement to be executed in its name on its behalf,
and its corporate seal to be hereunto affixed and attested by its Secretary,
all as of the day and year first above written.
LANDSTAR SYSTEM, INC.
By:______________________
Title:
WITNESSED:
____________________
______________________
WITNESSED:
____________________
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EXHIBIT 10.10
LANDSTAR SYSTEM, INC.
1993 STOCK OPTION PLAN
AS AMENDED, EFFECTIVE August 7, 1997
SECTION 1.
PURPOSE
The purpose of the Plan is to foster and promote the long-term financial
success of the Company and materially increase shareholder value by (a)
motivating superior performance by means of performance-related incentives,
(b) encouraging and providing for the acquisition of an ownership interest
in the Company by Employees, and (c) enabling the Company to attract and retain
the services of an outstanding management team upon whose judgment, interest,
and special effort the successful conduct of its operations is largely
dependent.
SECTION 2.
DEFINITIONS
2.1. Definitions. Whenever used herein, the following terms shall have the
respective meanings set forth below:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means (i) the willful failure by the Participant to perform
substantially his duties as an Employee of the Company (other than due to
physical or mental illness) after reasonable notice to the Participant of such
failure, (ii) the Participant's engaging in serious misconduct that is
injurious to the Company or any Subsidiary, (iii) the Participant's having been
convicted of, or entered a plea of nolo contendere to, a crime that constitutes
a felony or (iv) the breach by the Participant of any written covenant or
agreement with the Company or any Subsidiary not to disclose any information
pertaining to the Company or any Subsidiary or not to compete or interfere with
the Company or any Subsidiary.
(d) "Change in Control" means the occurrence, of any of the following
events:
(i) any "person," including a "group" (as such terms are used in Sections
13(d) and 14(d)(2) of the Act, but excluding the Company, any of its
Subsidiaries, any employee benefit plan of the Company or any of its
Subsidiaries, Kelso Investment Associates IV, L.P., and its affiliates and
Alex. Brown & Sons Incorporated, and its affiliates) is or becomes the
"beneficial owner" (as defined in Rule 13(d)(3) under the Act), directly or
indirectly, of securities of the Company representing the greater of 35% or
more of the combined voting power of the Company's then outstanding
securities; or
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(ii) the stockholders of the Company shall approve a definitive agreement
(a) for the merger or other business combination of the Company with or into
another corporation, a majority of the directors of which were not directors
of the Company immediately prior to the merger and in which the stockholders of
the Company immediately prior to the effective date of such merger directly or
indirectly own less than 50% of the voting power in such corporation or (b) for
the sale or other disposition of all or substantially all of the assets of the
Company; or
(iii) the purchase of Stock pursuant to any tender or exchange offer made
by any "person," including a "group" (as such terms are used in Sections 13(d)
and 14(d)(2) of the Act), other than the Company, any of its Subsidiaries, an
employee benefit plan of the Company or any of its Subsidiaries, Kelso
Investment Associates IV, L.P., and its affiliates, or Alex. Brown & Sons
Incorporated, and its affiliates, for 35% or more of the Stock of the Company.
(e) "Change in Control Price" means the highest price per share of Stock
offered in conjunction with any transaction resulting in a Change in Control
(as determined in good faith by the Committee if any part of the offered price
is payable other than in cash).
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means the Compensation Committee of the Board, which shall
consist of two or more "outside directors" within the meaning of Section
1-162-27(e) of the Treasury Regulations issued pursuant to Section 162(m) of
the Code.
(h) "Company" means Landstar System, Inc., a Delaware corporation, and any
successor thereto.
(i) "Disability" means total disability as determined in accordance with
the terms of the long-term disability plan of the Company or any of its
Subsidiaries in which the Participant is eligible to participate.
(j) "Employee" means any officer or other key executive and management
employee of the Company or any of its Subsidiaries.
(k) "Fair Market Value" means, on any date, the average of the bid and asked
for price of a share of Stock as reported on the National Association of
Securities Dealers Automated Quotation/National Market System (or on such other
recognized market or quotation system on which the trading prices of the Stock
are traded or quoted at the relevant time) on such date. In the event that
there are no Stock transactions reported on NASDAQ/NMS(or such other system)
on such date, Fair Market Value shall mean the closing price on the immediately
preceding date on which Stock transactions were so reported.
(l) "Option" means the right to purchase Stock at a stated price for a
specified period of time. For purposes of the Plan, an Option may be either
(i)an "Incentive Stock Option" within the meaning of Section 422 of the Code
or (ii)a "Nonstatutory Stock Option."
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(m) "Participant" means any Employee designated by the Committee to
participate in the Plan.
(n) "Plan" means the Landstar System, Inc. 1993 Stock Option Plan, as in
effect from time to time.
(o) "Retirement" means termination of a Participant's employment on or after
the date the participant attains age 62.
(p) "Stock" means the common stock of the Company, par value $0.01 per share.
(q) "Subsidiary" means any corporation or partnership in which the Company
owns, directly or indirectly, 50% or more of the total combined voting power of
all classes of stock of such corporation or of the capital interest or profits
interest of such partnership.
2.2. Gender and Number. Except when otherwise indicated by the context, words
in the masculine gender used in the Plan shall include the feminine gender,
the singular shall include the plural, and the plural shall include the
singular.
SECTION 3.
ELIGIBILITY AND PARTICIPATION
Participants in the Plan shall be those Employees selected by the Committee
to participate in the Plan.
SECTION 4.
POWERS OF THE COMMITTEE
4.1. Power to Grant. The Committee shall determine the Participants to whom
Options shall be granted and the terms and conditions of any and all such
Options. The Chairman of the Board may suggest to the Committee the
Participants who should receive Options under the Plan. The terms and
conditions of each Option shall be determined by the Committee at the time of
grant, and such terms and conditions shall not be subsequently changed in a
manner which would be adverse to participants without the consent of the
Participant to whom such Option has been granted. The Committee may establish
different terms and conditions for different Participants receiving Options
and for the same Participant for each Option such Participant may receive,
whether or not granted at different times.
4.2. Substitute Options. The Committee shall have the right to grant Options
in substitution for or upon the cancellation of Options previously granted and
such new Options may contain terms more favorable to the recipient than the
Options they replace, including, without limitation, a lower exercise price
(subject to Section 6.2).
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4.3. Administration. The Committee shall be responsible for the
administration of the Plan. The Committee, by majority action thereof, is
authorized to prescribe, amend, and rescind rules and regulations relating to
the Plan, to provide for conditions deemed necessary or advisable to protect
the interests of the Company, and to make all other determinations necessary
or advisable for the administration and interpretation of the Plan in order
to carry out its provisions and purposes. Determinations, interpretations,
or other actions made or taken by the Committee pursuant to the provisions of
the Plan shall be final, binding, and conclusive for all purposes and upon
all persons.
SECTION 5.
STOCK SUBJECT TO PLAN
5.1. Number. Subject to the provisions of Section 5.3, the number of shares
of Stock subject to Options under the Plan may not exceed 1,115,000 shares of
Stock. The shares to be delivered under the Plan may consist, in whole or in
part, of treasury Stock or authorized but unissued Stock, not reserved for any
other purpose.
5.2. Cancelled, Terminated, or Forfeited Options. Any shares of Stock subject
to an Option which for any reason is cancelled, terminated or otherwise
settled without the issuance of any Stock shall again be available under the
Plan.
5.3. Adjustment in Capitalization. In the event of any Stock dividend or
Stock split, recapitalization (including, without limitation, the payment of an
extraordinary dividend), merger, consolidation, combination, spin-off,
distribution of assets to stockholders, exchange of shares, or other similar
corporate change, the aggregate number of shares of Stock available for
Options under Section 5.1 or subject to outstanding Options and the respective
prices and/or performance criteria applicable to outstanding Options may be
appropriately adjusted by the Committee, whose determination shall be
conclusive.
SECTION 6.
STOCK OPTIONS
6.1. Grant of Options. Options may be granted to Participants at such time or
times as shall be determined by the Committee. Options granted under the Plan
may be of two types: (i) Incentive Stock Options and (ii) Nonstatutory Stock
Options. The Committee shall have complete discretion in determining the number
of Options, if any, to be granted to a Participant. Each Option shall be
evidenced by an Option agreement that shall specify the type of Option granted,
the exercise price, the duration of the Option, the number of shares of Stock
to which the Option pertains, and such other terms and conditions not
inconsistent with the Plan as the Committee shall determine.
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6.2. Option Price. Nonstatutory Stock Options and Incentive Stock Options
granted pursuant to the Plan shall have an exercise price which is not less
than the Fair Market Value on the date the Option is granted.
6.3. Exercise of Options. Options awarded to a Participant under the Plan
shall be exercisable at such times and shall be subject to such restrictions
and conditions including the performance of a minimum period of service or the
satisfaction of performance goals, as the Committee may impose either at or
after the time of grant of such Options, subject to the Committee's right to
accelerate the exercisability of such Option in its discretion. Notwithstanding
the foregoing, no Option shall be exercisable for more than 10 years after the
date on which it is granted.
6.4. Payment. The Committee shall establish procedures governing the exercise
of Options, which shall require that written notice of exercise be given and
that the Option price be paid in full in cash or cash equivalents, including
by personal check, at the time of exercise. The Committee may, in its
discretion, permit a Participant to make payment in Stock already owned by him
or her, valued at its Fair Market Value on the date of exercise, as partial
or full payment of the exercise price. As soon as practicable after receipt
of a written exercise notice and full payment of the exercise price, the
Company shall deliver to the Participant a certificate or certificates
representing the acquired shares of Stock.
6.5. Incentive Stock Options. Notwithstanding anything in the Plan to the
contrary, no term of the Plan relating to Incentive Stock Options shall be
interpreted, amended or altered, nor shall any discretion or authority granted
under the Plan be so exercised, so as to disqualify the Plan under Section 422
of the Code, or, without the consent of any Participant affected thereby, to
cause any Incentive Stock Option previously granted to fail to qualify for
the Federal income tax treatment afforded under Section 421 of the Code.
6.6. Buyout. The Committee may at any time offer to buy out for a payment
in cash any Option previously granted, based on such terms and conditions as
the Committee shall establish and communicate to the optionee at the time
such offer is made.
SECTION 7.
TERMINATION OF EMPLOYMENT
7.1. Termination of Employment Due to Retirement. Unless otherwise
determined by the Committee at the time of grant, in the event a Participant's
employment terminates by reason of Retirement, any Options granted to such
Participant which are then outstanding (whether or not exercisable prior to the
date of such termination) may be exercised at any time prior to the expiration
of the term of the Options or within one (1) year (or such other period as the
Committee shall determine at the time of grant) following the Participant's
termination of employment, whichever period is shorter.
7.2. Termination of Employment Due to Death or Disability. Unless otherwise
determined by the Committee at the time of grant, in the event a Participant's
employment terminates by reason of death or Disability, any Options granted to
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<PAGE>
such Participant which are then outstanding (whether or not exercisable prior
to the date of such termination) may be exercised by the Participant or the
Participant's designated beneficiary, and if none is named, in accordance with
Section 10.2, at any time prior to the expiration date of the term of the
Options or within one year (or such other period as the Committee shall
determine at the time of grant) following the Participant's termination of
employment, whichever period is shorter.
7.3. Termination of Employment For Cause. Unless otherwise determined by
the Committee at the time of grant, in the event a Participant's employment
is terminated for Cause, any Options granted to such Participant which are
then outstanding (whether or not exercisable prior to the date of such
termination) shall be forfeited.
7.4. Termination of Employment for Any Other Reason. Unless otherwise
determined by the Committee at or after the time of grant, in the event the
employment of the Participant shall terminate for any reason other than one
described in Section 7.1, 7.2 or 7.3, any Options granted to such Participant
which are exercisable at the date of the Participant's termination of employment
shall be exercisable at any time prior to the expiration of the term of such
Options or the thirtieth day following the Participant's termination of
employment, whichever period is shorter.
SECTION 8.
CHANGE IN CONTROL
8.1. Accelerated Vesting and Payment. Subject to the provisions of Section
8.2 below, in the event of a Change in Control, each Option shall be cancelled
in exchange for a payment in cash of an amount equal to the excess of the
Change in Control Price over the exercise price for such Option.
8.2. Alternative Awards. Notwithstanding Section 8.1, no cancellation,
acceleration of exercisability or vesting or cash settlement or other payment
shall occur with respect to any Option if the Committee reasonably determines
in good faith prior to the occurrence of a Change in Control that such Option
shall be honored or assumed, or new rights substituted therefor (such honored,
assumed or substituted award hereinafter called an "Alternative Award"), by a
Participant's employer (or the parent or a subsidiary of such employer)
immediately following the Change in Control, provided that any such Alternative
Award must:
(i) be based on stock which is traded on an established securities market,
or which will be so traded within 60 days of the Change in Control;
(ii) provide such Participant (or each Participant in a class of
Participants) with rights and entitlements substantially equivalent to or
better than the rights, terms and conditions applicable under such Award,
including, but not limited to, an identical or better exercise or vesting
schedule and identical or better timing and methods of payment;
(iii) have substantially equivalent economic value to such Award
(determined at the time of the Change in Control);
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(iv) have terms and conditions which provide that in the event that the
Participant's employment is involuntarily terminated or constructively
terminated, any conditions on a Participant's rights under, or any restrictions
on transfer or exercisability applicable to, each such Alternative Award shall
be waived or shall lapse, as the case may be.
For this purpose, a constructive termination shall mean a termination by a
Participant following a material reduction in the Participant's compensation or
a material reduction in the Participant's responsibilities, in each case
without the Participant's written consent.
SECTION 9.
AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN
The Board may at any time terminate or suspend the Plan, and from time to time
may amend or modify the Plan. No amendment, modification, or termination of
the Plan shall in any manner adversely affect any Option theretofore granted
under the Plan, without the consent of the Participant.
SECTION 10.
MISCELLANEOUS PROVISIONS
10.1. Nontransferability of Options. No Options granted under the Plan may
be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
All rights with respect to Options granted to a Participant under the Plan
shall be exercisable during his lifetime only by such Participant.
10.2. Beneficiary Designation. Each Participant under the Plan may from time
to time name any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid or by whom any
right under the Plan is to be exercised in case of his death. Each designation
will revoke all prior designations by the same Participant, shall be in a form
prescribed by the Committee, and will be effective only when filed by the
Participant in writing with the Committee during his lifetime. In the absence
of any such designation, benefits remaining unpaid at the Participant's death
shall be paid to or exercised by the Participant's surviving spouse, if any,
or otherwise to or by his estate.
10.3. No Guarantee of Employment or Participation. Nothing in the Plan
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company or any
Subsidiary or affiliate. No Employee shall have a right to be selected as a
Participant, or, having been so selected, to receive any future Options.
10.4. Tax Withholding. The Company shall have the power to withhold, or
require a Participant to remit to the Company, an amount sufficient to satisfy
Federal, state, and local withholding tax requirements on any Option under the
Plan, and the Company may defer payment of cash or issuance of Stock until
such requirements are satisfied.
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10.5. Indemnification. Each person who is or shall have been a member of the
Committee or of the Board shall be indemnified and held harmless by the Company
against and from any loss, cost, liability, or expense that may be imposed upon
or reasonably incurred by him in connection with or resulting from any claim,
action, suit, or proceeding to which he may be made a party or in which he may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him in settlement thereof, with
the Company's approval, or paid by him in satisfaction of any judgment in any
such action, suit, or proceeding against him, provided he shall give the
Company an opportunity, at its own expense, to handle and defend the same
before he undertakes to handle and defend it on his own behalf. The foregoing
right of indemnification shall not be exclusive and shall be independent of
any other rights of indemnification to which such persons may be entitled under
the Company's Articles of Incorporation or By-laws, by contract, as a matter of
law, or otherwise.
10.6. No Limitation on Compensation. Nothing in the Plan shall be construed
to limit the right of the Company to establish other plans or to pay
compensation to its employees in cash or property, in a manner which is not
expressly authorized under the Plan.
10.7. Requirements of Law. The granting of Options and the issuance of shares
of Stock shall be subject to all applicable laws, rules, and regulations, and
to such approvals by any governmental agencies or national securities
exchanges as may be required.
10.8. Term of Plan. The Plan shall be effective upon its adoption by the
Board and approval by a majority of the shareholders of the Company. The Plan
shall continue in effect, unless sooner terminated pursuant to Section 9,
until the tenth anniversary of the date on which it is adopted by the Board.
10.9. Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Delaware.
10.10. No Impact On Benefits. Options granted under the Plan are not
compensation for purposes of calculating an Employee's rights under any
employee benefit plan.
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EXHIBIT 11.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Year Ended
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 24,690 $ 18,925 $ 24,962
============ ============ ============
Average number of common shares
outstanding 12,541 12,785 12,807
============ ============ ============
Earnings per common share $ 1.97 $ 1.48 $ 1.95
============ ============ ============
</TABLE>
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EXHIBIT 11.2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF DILUTED EARNINGS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Year Ended
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 24,690 $ 18,925 $ 24,962
============ ============ ============
Average number of common shares
outstanding 12,541 12,785 12,807
Plus: Incremental shares from
assumed exercise of stock
options 39 46 91
------------ ------------ ------------
Average number of common shares
and common share equivalents
outstanding 12,580 12,831 12,898
============ ============ ============
Diluted earnings per share $ 1.96 $ 1.47 $ 1.94
============ ============ ============
</TABLE>
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EXHIBIT 13.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc.
("Landstar" or the "Company"), provide transportation services to a variety
of market niches throughout the United States and to a lesser extent in Canada
and between the United States and Canada and Mexico through its operating
subsidiaries which employ different operating strategies. Under the provisions
of Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and
Related Information," the Company determined it has four reportable business
segments. These are the carrier segment, multimodal segment, company-owned
tractor segment and insurance segment.
The carrier segment consists of Landstar Ranger, Inc. ("Landstar Ranger"),
Landstar Inway, Inc. ("Landstar Inway") and Landstar Ligon, Inc. The carrier
segment provides truckload transportation for a wide range of general
commodities over irregular routes with its fleet of dry and specialty vans and
unsided trailers, including flatbed, drop deck and specialty. The carrier
segment markets its services primarily through independent commission sales
agents and utilizes tractors provided by independent contractors. The nature
of the carrier segment's business is such that a significant portion of its
operating costs vary directly with revenue. The carrier segment's revenue
represented 72%, 71% and 71% of Landstar's consolidated revenue in 1997, 1996
and 1995, respectively.
The multimodal segment is comprised of Landstar Logistics, Inc. ("Landstar
Logistics") and Landstar Express America, Inc. ("Landstar Express").
Transportation services provided by the multimodal segment include
the arrangement of intermodal moves, contract logistics, truck brokerage,
short-to-long haul movement of containers by truck and emergency and expedited
air freight and truck services. The multimodal segment markets its services
through independent commission sales agents and utilizes capacity provided by
independent contractors, including railroads and air cargo carriers. The nature
of the multimodal segment's business is such that a significant portion of its
operating costs also vary directly with revenue. The multimodal segment's
revenue represented 19%, 17% and 17% of Landstar's consolidated revenue in
1997, 1996 and 1995, respectively.
The company-owned tractor segment consists of Landstar Poole, Inc. ("Landstar
Poole"). The company-owned tractor segment provides truckload transportation
services over short and medium length regional traffic lanes. The company-owned
tractor segment primarily markets its services through an employee sales force
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and primarily utilizes company-owned and employee-driven tractors. The company-
owned tractor segment's revenue represented 7%, 12% and 12% of Landstar's
consolidated revenue in 1997, 1996 and 1995, respectively.
The insurance segment is Signature Insurance Company ("Signature"), a wholly-
owned offshore insurance subsidiary, formed in March 1997. The insurance
segment reinsures certain property, casualty and occupational accident risks of
certain independent contractors who have contracted to haul freight for
Landstar. In addition, the insurance segment provides certain property and
casualty insurance directly to Landstar's operating subsidiaries. The insurance
segment's revenue represented 2% of Landstar's consolidated revenue in 1997.
During the fourth quarter of 1996, the Company announced a plan to
restructure the operations of both Landstar Poole and Landstar T.L.C., Inc.
("Landstar T.L.C."). The Landstar Poole restructuring plan included the
transfer of the variable cost business component of Landstar Poole to Landstar
Ranger and the disposal of 175 company-owned tractors. The Landstar T.L.C.
restructuring plan included the merger of the operations of Landstar T.L.C.
into Landstar Inway and the disposal of all the company-owned tractors. The
restructuring was substantially completed by June 28, 1997.
During the first quarter of 1995, Landstar, through different subsidiaries of
Landstar System Holdings, Inc. ("LSHI"), acquired the businesses and net
assets of Intermodal Transport Company ("ITCO"), a California-based intermodal
marketing company, LDS Truck Lines, Inc., a California-based drayage company,
and T.L.C. Lines, Inc.("TLC"), a Missouri-based temperature-controlled and
long-haul, time sensitive dry van carrier. Also, in the 1995 first quarter,
Landstar, through another subsidiary of LSHI, acquired all of the outstanding
common stock of Express America Freight Systems, Inc. ("Express"), a North
Carolina-based air freight and truck expedited service provider. The businesses
acquired from ITCO and Express comprise the majority of the multimodal
segment's operations.
Purchased transportation represents the amount an independent contractor
is paid to haul freight and is primarily based on a contractually agreed
upon percentage of revenue generated by the haul for truck capacity provided by
independent contractors. Purchased transportation for the intermodal services
operations and the air freight operations of the multimodal segment is based on
a contractually agreed upon fixed rate. Purchased transportation as a
percentage of revenue for the intermodal services operations is normally higher
than that of Landstar's other transportation operations. Purchased
transportation is the largest component of costs and expenses and, on a
consolidated basis, increases or decreases in proportion to the revenue
generated through independent contractors. Commissions to agents and brokers
are primarily based on contractually agreed upon percentages of revenue or
contractually agreed upon percentages of gross profit. Commissions to agents
and brokers as a percentage of consolidated revenue will vary directly with
revenue generated through independent commission sales agents. Both purchased
transportation and commissions to agents and brokers generally will also
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increase or decrease as a percentage of the Company's consolidated revenue
if there is a change in the percentage of revenue contributed by the intermodal
services operations or the air freight operations of the multimodal segment or
through the company-employed drivers of the company-owned tractor segment.
Drivers' wages and benefits represent the amount the Company's employee
drivers are compensated. Employee drivers are compensated primarily on a cents-
per-mile driven basis. Drivers' wages and benefits as a percentage of
consolidated revenue generally will vary only if there is a change in the
revenue contribution generated through independent contractors or a change in
the rate of employee driver pay or benefit structure.
The Company's intention is to continue its expansion of truckload capacity
provided by independent contractors and to maintain or reduce its truckload
capacity provided by company-owned equipment and company-employed drivers. It
is also the Company's intention to favor independent commission sales agent
locations over company-owned and operated locations. Historically, Landstar
T.L.C. and the intermodal services operations of Landstar Logistics have
principally utilized a company employee sales structure and to a lesser degree,
independent commission sales agents. During 1996, management completed the
process of converting the majority of company-owned sales locations at Landstar
Logistics and Landstar T.L.C. to independent commission sales agent locations.
Accordingly, purchased transportation and commissions to agents and brokers
are anticipated to increase as a percentage of total consolidated revenue and
drivers' wages and benefits are anticipated to decline as a percentage of total
consolidated revenue over time.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. The industry is also subject to
substantial workers' compensation expense. A material increase in the
frequency or severity of accidents or workers' compensation claims or the
unfavorable development of existing claims can be expected to adversely affect
Landstar's operating income.
The cost of fuel is the largest component of fuel and other operating costs.
Changes in prevailing prices of fuel or increases in fuel taxes can
significantly affect the company-owned tractor segment's operating results.
Also included in fuel and other operating costs are costs of equipment
maintenance paid to third parties and the operating costs of Landstar Poole and
Landstar T.L.C. terminals. Effective August 1, 1996, Landstar closed all but
one of the Landstar Poole terminals, including those that had functioned as
Landstar Centers. The closings were part of Landstar's strategy to reduce the
fixed cost elements of the company-owned tractor segment.
Employee compensation and benefits account for over half of the Company's
selling, general and administrative expense. Other significant components of
selling, general and administrative expense are data processing expense,
communications costs and rent expense.
Depreciation and amortization primarily relate to depreciation of tractors
and trailers.
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The following table sets forth the percentage relationships of expense items to
revenue for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Costs and expenses:
Purchased transportation 70.4 69.0 67.5
Drivers' wages and benefits 2.1 3.2 4.0
Fuel and other operating costs 3.7 5.5 5.6
Insurance and claims 3.7 2.8 3.1
Commissions to agents and brokers 7.6 6.8 6.2
Selling, general and administrative 7.1 7.1 7.7
Depreciation and amortization 1.6 1.9 1.7
Restructuring costs 0.2 0.6
------ ------ ------
Total costs and expenses 96.4 96.9 95.8
------ ------ ------
Operating income 3.6 3.1 4.2
Interest and debt expense, net 0.4 0.6 0.7
------ ------ ------
Income before income taxes 3.2 2.5 3.5
Income taxes 1.3 1.0 1.4
------ ------ ------
Net income 1.9% 1.5% 2.1%
====== ====== ======
</TABLE>
FISCAL YEAR ENDED DECEMBER 27, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1996
Revenue for the fiscal year 1997 was $1,312,704,000, an increase of $28,903,000,
or 2.3%, over revenue for the 1996 fiscal year. The increase was attributable
to higher revenue of $39,858,000 and $30,657,000 at the carrier and multimodal
segments, respectively, and premium revenue of $18,940,000 generated by the
insurance segment. These increases were partially offset by a $60,552,000
revenue decline at the company-owned tractor segment, which resulted from the
restructuring of the operations of Landstar Poole. Overall, revenue per revenue
mile (price) increased approximately 4%, which reflected improved freight
quality, while revenue miles (volume) were approximately 8% lower than 1996,
which reflected the effects of the restructuring. During 1997, revenue
generated through all independent contractors, including railroads and air
cargo carriers, was 92.9% of consolidated revenue compared with 90.4% in 1996.
Purchased transportation was 70.4% of revenue in 1997 compared with 69.0% in
1996. Drivers' wages and benefits were 2.1% of revenue in 1997 compared with
3.2% in 1996. Fuel and other operating costs were 3.7% of revenue in 1997
compared with 5.5% in 1996. The increase in purchased transportation and
decrease in drivers' wages and benefits and fuel and other operating costs as
a percentage of revenue was primarily attributable to an increased percentage
of revenue generated through independent contractors due to the reduction of
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company-owned tractors as a result of the Landstar Poole and Landstar T.L.C.
restructuring. The decrease in fuel and other operating costs was also
attributable to reduced terminal and maintenance costs. Insurance and claims
were 3.7% of revenue in 1997 compared with 2.8% in 1996. The increase in
insurance and claims as a percentage of revenue was primarily attributable to
the effects of insurance programs available to the Company's independent
contractors which Signature reinsures. Excluding the premium revenue and
insurance and claims expense related to the above reinsurance programs,
insurance and claims as a percentage of revenue was 2.9% in 1997. This increase
was attributable to the favorable development of prior year claims in 1996,
partially offset by lower third party premiums in 1997. Commissions to agents
and brokers were 7.6% of revenue in 1997 compared with 6.8% in 1996 primarily
due to an increased percentage of revenue generated through independent
commission sales agents. Selling, general and administrative costs were 7.1%
of revenue in both 1997 and 1996. Depreciation and amortization was 1.6% of
revenue in 1997 compared with 1.9% in 1996 primarily due to the reduction of
company-owned equipment as a result of the Landstar Poole and Landstar T.L.C.
restructuring.
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C. and Landstar Poole operations, in addition to the relocation of its
Shelton, Connecticut corporate office headquarters to Jacksonville, Florida in
the second quarter of 1997. During the 1996 fourth quarter, the Company
recorded $7,263,000 in restructuring costs, which included $4,166,000 for
impairment of certain long-lived assets, $939,000 for the early termination
of certain operating leases, $850,000 for employee termination costs and
$1,308,000 of other costs. Long-lived assets, having an aggregate carrying
value of $16,500,000, were reduced to their estimated sales value and primarily
represented revenue equipment to be sold. During the first half of 1997, the
Company recorded an additional $3,164,000 of restructuring costs, which
included $1,647,000 for office and employee relocation and $1,517,000 of other
costs. The restructuring was substantially completed by June 28, 1997.
Interest and debt expense, net was 0.4% of revenue in 1997 and 0.6% in 1996.
This decrease was primarily attributable to the effect of lower average
borrowings on the senior credit facility, reduced capital lease obligations
and interest income from investments at Signature.
The provisions for income taxes for the 1997 and 1996 fiscal years were based
on an effective income tax rate of approximately 42% and 41.5%, respectively,
which is higher than the statutory federal income tax rate primarily as a
result of state income taxes, amortization of certain goodwill and the meals
and entertainment exclusion. At December 27, 1997, the valuation allowance of
$710,000 was attributable to deferred state income tax benefits, which
primarily represented state operating loss carryforwards at one subsidiary.
The valuation allowance and goodwill were reduced by $106,000 for state
operating loss carryforwards utilized in 1997. The valuation allowance and
goodwill will be further reduced by $682,000 when realization of deferred state
income tax benefits becomes likely. The Company believes that deferred income
tax benefits, net of the valuation allowance, are more likely than not to be
realized because of the Company's ability to generate future taxable earnings.
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Net income was $24,690,000, or $1.97 per common share, in 1997 compared with
$18,925,000, or $1.48 per common share, in the prior year. Including the
dilutive effect of the Company's stock options, diluted earnings per share was
$1.96 in 1997 and $1.47 in 1996. Excluding restructuring costs, net income
would have been $26,525,000, or $2.12 per common share ($2.11 diluted earnings
per share), in 1997 and $23,174,000, or $1.81 per common share ($1.80 diluted
earnings per share), in 1996.
FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
1995
Revenue for the fiscal year 1996 was $1,283,801,000, an increase of
$79,134,000, or 6.6%, over revenue for the 1995 fiscal year. The increase was
primarily attributable to an increase in revenue miles of 6.5%, which included
the revenue of the businesses acquired during the first quarter of 1995 for the
full fifty-two weeks of 1996, and an increase of less than 1% in revenue per
revenue mile. During 1996, revenue generated through independent contractors,
including railroads and air cargo carriers, was 90.4% of consolidated revenue
compared with 88.5% in 1995.
Purchased transportation was 69.0% of revenue in 1996 compared with 67.5% in
1995. Drivers' wages and benefits were 3.2% of revenue in 1996 compared with
4.0% in 1995. Fuel and other operating costs were 5.5% of revenue in 1996
compared with 5.6% in 1995. The increase in purchased transportation and
decrease in drivers' wages and benefits and fuel and other operating costs as a
percentage of revenue was primarily attributable to an increase in the
percentage of revenue generated through independent contractors. The decrease
in fuel and other operating costs was partially offset by an increase in fuel
prices. Insurance and claims were 2.8% of revenue in 1996 compared with 3.1%
in 1995 due to a decrease in third party premiums and favorable development of
prior year claims. Commissions to agents and brokers were 6.8% of revenue in
1996 compared with 6.2% in 1995 due to an increase in the percentage of revenue
generated through independent commission sales agents which reflected the
conversion of company-owned sales locations to independent commission sales
agent locations. Selling, general and administrative costs were 7.1% of
revenue in 1996 compared with 7.7% of revenue in 1995, primarily due to a lower
provision for customer bad debts, reduced employee sales costs which reflected
the conversion of company-owned sales locations to independent commission sales
agent locations and the effect of increased revenue.
Interest and debt expense, net was 0.6% of revenue in 1996 and 0.7% in 1995.
This decrease was primarily attributable to the effect of increased revenue.
The provisions for income taxes for both the 1996 and 1995 fiscal years were
based on an effective income tax rate of approximately 41%, which is higher
than the statutory federal income tax rate primarily as a result of state
income taxes, amortization of certain goodwill and the meals and entertainment
exclusion. The valuation allowance and goodwill were reduced by $190,000
for state operating loss carryforwards utilized in 1996. The valuation
allowance was reduced by an additional $265,000 for state operating loss
carryforwards that had expired.
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Net income was $18,925,000, or $1.48 per common share, in 1996 compared with
$24,962,000, or $1.95 per common share, in the prior year. Including the
dilutive effect of the Company's stock options, diluted earnings per share was
$1.47 in 1996 and $1.94 in 1995. Excluding restructuring costs, 1996 net income
would have been $23,174,000, or $1.81 per common share ($1.80 diluted earnings
per share). If the acquisitions had taken place at the beginning of 1995, pro
forma net income for 1995 would have been $24,352,000, or $1.90 per common
share ($1.89 diluted earnings per share).
CAPITAL RESOURCES AND LIQUIDITY
On October 10, 1997, Landstar renegotiated its existing Credit Agreement with a
syndicate of banks and The Chase Manhattan Bank, as administrative agent (the
"Second Amended and Restated Credit Agreement"). The Second Amended and
Restated Credit Agreement provides $200,000,000 of borrowing capacity,
consisting of $150,000,000 of revolving credit (the "Working Capital Facility")
and $50,000,000 of revolving credit available to finance acquisitions (the
"Acquisition Facility"). $50,000,000 of the total borrowing capacity under the
Working Capital Facility may be utilized in the form of letter of credit
guarantees. At December 27, 1997, Landstar had commitments for letters of
credit outstanding in the amount of $24,659,000, $17,659,000 of which were
supported by the Second Amended and Restated Credit Agreement, primarily as
collateral for estimated insurance claims. The Second Amended and Restated
Credit Agreement expires on October 10, 2002.
Borrowings under the Second Amended and Restated Credit Agreement bear interest
at rates equal to, at the option of Landstar, either (i) the greatest of (a)
the prime rate as publicly announced from time to time by The Chase Manhattan
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to The Chase Manhattan Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus
a margin that is determined based on the level of the Company's Leverage Ratio,
as defined in the Second Amended and Restated Credit Agreement. As of
December 27, 1997, the margin was equal to 32/100 of 1%. The unused portion of
the Second Amended and Restated Credit Agreement carries a commitment fee
determined based on the level of the Leverage Ratio, as therein defined. As of
December 27, 1997, the commitment fee for the unused portion of the Second
Amended and Restated Credit Agreement was 0.100%. At December 27, 1997, the
weighted average interest rate on borrowings outstanding under the Acquisition
Facility was 6.32%. Based on the borrowing rates in the Second Amended and
Restated Credit Agreement and the repayment terms, the fair value of the
outstanding borrowings under the Acquisition Facility was estimated to
approximate carrying value.
The Second Amended and Restated Credit Agreement contains a number of covenants
that limit, among other things, the incurrence of additional indebtedness, the
incurrence of operating or capital lease obligations and the purchase of
operating property. The Second Amended and Restated Credit Agreement also
requires Landstar to meet certain financial tests. Landstar is required to,
among other things, maintain minimum levels of Net Worth, as defined in the
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Second Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined. Under the most restrictive covenant, Landstar
exceeded the required Interest Charge Coverage level by approximately
$6,500,000 at December 27, 1997.
The Second Amended and Restated Credit Agreement provides a number of events of
default related to a person or group acquiring 25% or more of the outstanding
capital stock of the Company or obtaining the power to elect a majority of the
Company's directors.
Borrowings under the Second Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of LSHI's subsidiaries
guarantee LSHI's obligations under the Second Amended and Restated Credit
Agreement.
Shareholders' equity increased to $151,696,000, or 75% of total capitalization,
at December 27, 1997, compared with $147,557,000, or 62% of total
capitalization, at December 28, 1996, primarily as a result of 1997 net income
and the repayment of $39,950,000 of long-term debt, partially offset by the
purchase of 821,400 shares of the Company's common stock at a total cost of
$20,980,000. Working capital and the ratio of current assets to current
liabilities were $79,051,000 and 1.57 to 1, respectively, at December 27, 1997,
compared with $70,653,000 and 1.54 to 1, respectively, at December 28, 1996.
Landstar has historically operated with current ratios ranging between 1.0 to 1
and 1.5 to 1. Cash provided by operating activities was $70,431,000 in 1997
compared with $24,994,000 in 1996. The increase in cash provided by operating
activities was primarily attributable to the timing of payments and cash
receipts and increased earnings. During the 1997 fiscal year, Landstar
purchased $9,794,000 of operating property. The Company did not acquire any
operating property by entering into capital leases during 1997. Landstar
anticipates it will acquire approximately $25,000,000 of operating property
during fiscal year 1998 either by purchase or by lease financing.
Landstar is involved in certain claims and pending litigation arising from the
normal conduct of business. Based on the knowledge of the facts and, in
certain cases, opinions of outside counsel, management believes that adequate
provisions have been made for probable losses with respect to the resolution of
all claims and pending litigation and that the ultimate outcome, after
provisions thereof, will not have a material adverse effect on the financial
condition of Landstar, but could have a material effect on the results of
operations in a given quarter or year.
Landstar Ranger is subject to the Multi Employer Pension Plan Amendments Act of
1980 ("MEPPA"), which could require Landstar Ranger, in the event of
withdrawal, to fund its proportionate share of the union sponsored plans'
unfunded benefit obligation. However, management believes that the liability,
56
<PAGE>
if any, for withdrawal from any or all of these plans would not have a material
adverse effect on the financial condition of Landstar, but could have a
material effect on the results of operations in a given quarter or year.
The Company is aware of the issues associated with the programming code in its
existing computer systems in order for the systems to recognize date-sensitive
information when the year changes to 2000. The Company believes it has
identified and is in the process of modifying all computer software which
requires change to ensure its computer systems will be year 2000 compliant as
part of its scheduled maintenance and normal system upgrades. As such,
management has not separately quantified the cost of year 2000 compliance,
however, management does not believe that the future costs of maintaining and
upgrading Landstar's computer systems will have a material adverse effect on
results of operations. It is anticipated that all reprogramming and testing
efforts will be completed by May 1999. To date, confirmations have been
received from the Company's primary outside processing vendors that plans have
been developed to address the year 2000 issue.
Management believes that cash flow from operations combined with its borrowing
capacity under the Second Amended and Restated Credit Agreement will be
adequate to meet Landstar's debt service requirements, fund continued growth,
both internal and through acquisitions, and meet working capital needs.
Management does not believe inflation has had a material impact on the results
of operations or financial condition of Landstar in the past five years.
However, inflation higher than that experienced in the past five years might
have an adverse effect on the Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". This Statement, effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components. Management believes that
upon adoption of this Statement, Landstar's comprehensive income will not be
materially different from its reported net income, considering the nature of
the transactions the Company routinely enters into.
SEASONALITY
Landstar's operations are subject to seasonal trends common to the trucking
industry. Results of operations for the quarter ending in March are typically
lower than the quarters ending June, September and December due to reduced
shipments and higher operating costs in the winter months.
57
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 17,994 $ 4,187
Short-term investments 3,012
Trade accounts receivable, less allowance
of $5,957 and $6,526 176,785 176,892
Other receivables, including advances to independent
contractors, less allowance of $4,009
and $4,390 12,599 10,740
Inventories 922 1,785
Prepaid expenses and other current assets 6,910 7,319
-------- --------
Total current assets 218,222 200,923
-------- --------
Operating property, less accumulated depreciation
and amortization of $50,301 and $50,223 81,258 105,564
Goodwill, less accumulated amortization of $8,818
and $7,087 53,289 55,126
Deferred income taxes and other assets 4,410 9,188
-------- --------
Total assets $357,179 $370,801
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 12,475 $ 13,488
Accounts payable 50,394 39,901
Current maturities of long-term debt 14,228 23,241
Insurance claims 28,247 25,328
Other current liabilities 33,827 28,312
-------- --------
Total current liabilities 139,171 130,270
-------- --------
Long-term debt, excluding current maturities 36,218 67,155
Insurance claims 27,890 25,819
Deferred income taxes 2,204
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 12,900,974 shares and
12,882,874 shares 129 129
Additional paid-in capital 62,169 61,740
Retained earnings 112,345 87,655
Cost of 915,441 and 94,041 shares of common
stock in treasury (22,947) (1,967)
-------- --------
Total shareholders' equity 151,696 147,557
-------- --------
Total liabilities and shareholders' equity $357,179 $370,801
======== ========
See accompanying notes to consolidated financial statements.
</TABLE> 58
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 1,312,704 $ 1,283,801 $ 1,204,667
Costs and expenses:
Purchased transportation 923,654 885,500 813,003
Drivers' wages and benefits 28,010 41,210 47,970
Fuel and other operating costs 48,733 70,207 67,861
Insurance and claims 47,993 36,495 37,816
Commissions to agents and brokers 99,848 87,935 73,974
Selling, general and administrative 93,214 91,267 93,194
Depreciation and amortization 20,918 24,027 20,841
Restructuring costs 3,164 7,263
------------ ----------- ------------
Total costs and expenses 1,265,534 1,243,904 1,154,659
------------ ----------- ------------
Operating income 47,170 39,897 50,008
Interest and debt expense, net 4,602 7,547 7,552
------------ ----------- ------------
Income before income taxes 42,568 32,350 42,456
Income taxes 17,878 13,425 17,494
------------ ----------- ------------
Net income $ 24,690 $ 18,925 $ 24,962
============ =========== ============
Earnings per common share $ 1.97 $ 1.48 $ 1.95
============ =========== ============
Diluted earnings per share $ 1.96 $ 1.47 $ 1.94
============ =========== ============
Average number of shares outstanding:
Earnings per common share 12,541,000 12,785,000 12,807,000
============ =========== ============
Diluted earnings per share 12,580,000 12,831,000 12,898,000
============ =========== ============
See accompanying notes to consolidated financial statements.
</TABLE>
59
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
December 27, December 28, December 30,
1997 1996 1995
(Dollars in thousands) ------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 24,690 $ 18,925 $ 24,962
Adjustments to reconcile net income to net cash
provided by operating activities:
Impairment of long-lived assets 4,166
Depreciation and amortization of operating property 18,783 21,878 18,824
Amortization of goodwill and non-competition agreements 2,135 2,149 2,017
Non-cash interest charges 264 264 253
Provisions for losses on trade and other receivables 3,998 4,768 6,232
Gains on sales of operating property (2,379) (2,530) (2,080)
Deferred income taxes, net 6,620 355 (419)
Non-cash charge in lieu of income taxes 106 190
Changes in operating assets and liabilities,
net of businesses acquired:
Increase in trade and other accounts receivable (5,750) (28,032) (14,417)
Decrease (increase) in other assets 966 868 (2,635)
Increase (decrease) in accounts payable 10,493 2,474 (2,928)
Increase in estimated insurance claims 4,990 3,462 7,179
Increase (decrease) in other liabilities 5,515 (3,943) (17,025)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 70,431 24,994 19,963
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of businesses, net of cash acquired (33,932)
Purchases of investments (4,799)
Maturities of short-term investments 1,787
Purchases of operating property (9,794) (12,853) (7,286)
Proceeds from sales of operating property 17,696 12,517 7,154
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 4,890 (336) (34,064)
------------ ------------ ------------
FINANCING ACTIVITIES
Borrowings to finance businesses acquired 45,900
Borrowings under revolving credit facility 16,000 10,000
Increase (decrease) in cash overdraft (1,013) 39 4,029
Proceeds from exercise of stock options and
related income tax benefit 429 236
Purchases of common stock (20,980) (1,727)
Principal payments on borrowings under revolving
credit facility, long-term debt and capital lease obligations (39,950) (40,161) (58,441)
------------ ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (61,514) (23,886) (239)
------------ ----------- -----------
Increase (decrease) in cash 13,807 772 (14,340)
Cash at beginning of period 4,187 3,415 17,755
------------ ----------- -----------
Cash at end of period $ 17,994 $ 4,187 $ 3,415
============ =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE> 60
<PAGE>
LANDSTAR SYSTEM INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Year Ended December 27, 1997,
December 28, 1996 and December 30, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Treasury Stock
Common Stock Paid-In Retained at Cost
Shares Amount Capital Earnings Shares Amount Total
---------- ------ --------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 12,871,674 $ 129 $61,504 $ 43,768 24,041 $ (240) $105,161
Net income 24,962 24,962
Purchases of common stock 70,000 (1,727) (1,727)
---------- ------ ------- ------- ------ --------- --------
Balance December 30, 1995 12,871,674 129 61,504 68,730 94,041 (1,967) 128,396
Net income 18,925 18,925
Exercise of stock options
and related income tax
benefit 11,200 236 236
---------- ------ ------- ------- ------- --------- --------
Balance December 28, 1996 12,882,874 129 61,740 87,655 94,041 (1,967) 147,557
---------- ------ ------- ------- ------- --------- --------
Net income 24,690 24,690
Purchases of common stock 821,400 (20,980) (20,980)
Exercise of stock options
and related income tax
benefit 18,100 429 429
---------- ------ ------- -------- ------- --------- --------
Balance December 27, 1997 12,900,974 $ 129 $62,169 $112,345 915,441 $(22,947) $151,696
========== ====== ======= ======== ======= ========= ========
See accompanying notes to consolidated financial statements.
</TABLE>
61
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Landstar System,
Inc. and its subsidiary Landstar System Holdings, Inc. Landstar System, Inc.
and its subsidiary are herein referred to as "Landstar" or the "Company".
Significant inter-company accounts have been eliminated in consolidation. The
preparation of the consolidated financial statements requires the use of
management's estimates. Actual results could differ from those estimates.
Fiscal Year
Landstar's fiscal year is the 52 or 53 week period ending the last Saturday in
December.
Revenue Recognition
Revenue and the related direct freight expenses are recognized upon completion
of freight delivery.
Insurance Claim Costs
Landstar provides, on an actuarially determined basis, for the estimated costs
of cargo, property, casualty, general liability and workers' compensation
claims both reported and for claims incurred but not reported. Landstar
retains liability up to $1,000,000 for each individual property, casualty and
general liability claim, $500,000 for each workers' compensation claim and
$250,000 for each cargo claim.
Inventories
Inventories, consisting of fuel, tires and vehicle repair parts, are valued at
the lower of average cost or market.
Tires
Tires and tubes purchased as part of revenue equipment are capitalized as part
of the cost of the equipment. Replacement tires and tubes are charged to
expense when placed in service.
Short-Term Investments
The Company's short-term investments are carried at amortized cost, which
approximates fair value.
Operating Property
Operating property is recorded at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets.
Revenue equipment is being depreciated over a maximum of 7 years.
Goodwill
Goodwill represents the excess of purchase cost over the estimated fair value
of net assets acquired. It is being amortized on a straight-line basis over
periods of twenty and forty years. The Company assesses the recoverability of
goodwill by determining whether the amortization of the goodwill balance over
its remaining useful life can be recovered through projected undiscounted
future operating cash flows. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's current average cost of funds.
62
<PAGE>
Income Taxes
Income tax expense is equal to the current year's liability for income taxes
and a provision for deferred income taxes. Deferred tax assets and
liabilities are recorded for the future tax effects attributable to temporary
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using the enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences
are expected to be recovered or settled.
Stock-Based Compensation
Compensation cost for the Company's stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of grant
over the exercise price of the stock option.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
requires companies to present basic earnings per share ("earnings per common
share") and diluted earnings per share.
Earnings per common share amounts are based on the weighted average number of
common shares outstanding and diluted earnings per share amounts are based on
the weighted average number of common shares outstanding plus the incremental
shares that would have been outstanding upon the assumed exercise of all
dilutive stock options.
(2) Restructuring Costs
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C., Inc. ("Landstar T.L.C.") and Landstar Poole, Inc. ("Landstar Poole")
operations, in addition to the relocation of its Shelton, Connecticut
corporate office headquarters to Jacksonville, Florida in the second quarter
of 1997.
The plan to restructure Landstar T.L.C. included the merger of the operations
of Landstar T.L.C. into Landstar Inway, Inc., the closing of the Landstar
T.L.C. headquarters in St. Clair, Missouri and the disposal of all of Landstar
T.L.C.'s company-owned tractors. The plan to restructure Landstar Poole
included the transfer of the variable cost business component of Landstar
Poole to Landstar Ranger, Inc. ("Landstar Ranger") and the disposal of 175
Landstar Poole company-owned tractors.
During the 1996 fourth quarter, the Company recorded $7,263,000 in
restructuring costs, which included $4,166,000 for the impairment of certain
long-lived assets, $939,000 for the early termination of certain operating
leases, $850,000 for employee termination costs and $1,308,000 of other costs.
Long-lived assets, having an aggregate carrying value of $16,500,000, were
reduced to their estimated sales value and primarily represented revenue
equipment to be sold. After deducting related income tax benefits of
$3,014,000, the restructuring charge reduced net income by $4,249,000, or
$0.33 per common share, in 1996.
During the first half of 1997, the Company recorded an additional $3,164,000 of
restructuring costs, which included $1,647,000 for office and employee
relocation and $1,517,000 of other costs. After deducting related income tax
63
<PAGE>
benefits of $1,329,000, the restructuring charge reduced net income by
$1,835,000, or $0.15 per common share, in 1997. The restructuring was
substantially completed by June 28, 1997.
(3) Acquisitions
During the first quarter of 1995, Landstar, through different subsidiaries of
Landstar System Holdings, Inc. ("LSHI"), acquired the businesses and net
assets of Intermodal Transport Company, a California-based intermodal marketing
company, LDS Truck Lines, Inc., a California-based drayage company, and T.L.C.
Lines, Inc., a Missouri-based temperature-controlled and long-haul, time
sensitive dry van carrier. Also in the 1995 first quarter, Landstar, through
another subsidiary of LSHI, acquired all of the outstanding common stock of
Express America Freight Systems, Inc., a North Carolina-based air freight and
truck expedited service provider. The aggregate purchase price of the four
acquisitions, including expenses, was $34,076,000, plus the assumption of
$24,162,000 of long-term debt, including current maturities.
The aggregate purchase price and a portion of the debt
assumed was paid or refinanced with proceeds received from $34,500,000 of
borrowings under the acquisition line of Landstar's revolving credit facility,
$11,400,000 of borrowings from Fleet Bank, N.A. and Mark Twain Bank, and
available cash.
The acquisitions were accounted for under the purchase method and the net
assets acquired and the results of operations of the four acquisitions were
included in Landstar's consolidated financial statements from their respective
dates of acquisition. The aggregate purchase price was allocated to the
assets acquired, including $22,036,000 of operating property, and the
liabilities assumed based on their respective estimated fair values. The
aggregate purchase price exceeded the fair value of the net assets acquired by
$27,415,000 of which $1,200,000 was assigned to non-competition agreements and
$26,215,000 was assigned to goodwill. The non-competition agreements are
being amortized on the straight-line method over the two and three year lives
of the agreements, and goodwill is being amortized on the straight-line method
over periods of twenty and forty years.
The following unaudited pro forma information represents the consolidated
results of operations of Landstar and the four acquired businesses as if the
acquisitions had occurred at the beginning of fiscal year 1995, and gives
effect to increased depreciation of operating property, amortization of
goodwill and non-competition agreements and increased interest expense, at
rates available to Landstar under the acquisition line of its revolving credit
facility (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year
1995
----
<S> <C>
Revenue $1,214,267
Net income $ 24,352
Earnings per common share $ 1.90
Diluted earnings per share $ 1.89
</TABLE>
The above pro forma information is not necessarily indicative of the results of
operations which actually would have been obtained during 1995.
64
<PAGE>
(4) Income Taxes
The provisions for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 9,027 $10,830 $14,838
State 2,125 2,050 3,075
------- ------- -------
11,152 12,880 17,913
Deferred:
Federal 5,798 869 413
State 822 (514) (832)
------ ------- -------
6,620 355 (419)
Non-cash charge in lieu of income taxes 106 190
------- ------- -------
Income taxes $17,878 $13,425 $17,494
======= ======= =======
</TABLE>
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 27, 1997 Dec. 28, 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Receivable valuations $ 2,380 $ 3,750
Deferred state income tax benefits 1,100 812
State net operating loss carryforwards 4,032 3,235
Self insured claims 15,094 20,294
Compensated absences 529 620
All other 376 1,245
--------- ---------
23,511 29,956
Valuation allowance (710) (816)
--------- ---------
$ 22,801 $ 29,140
========= =========
Deferred tax liabilities:
Operating property $ 19,784 $ 20,254
All other 5,221 4,470
--------- ---------
$ 25,005 $ 24,724
========= =========
</TABLE>
65
<PAGE>
At December 27, 1997, the valuation allowance of $710,000 was attributable to
deferred state income tax benefits, which primarily represented state
operating loss carryforwards at one subsidiary. The valuation allowance and
goodwill were reduced by $106,000 for state operating loss carryforwards
utilized in 1997. The valuation allowance and goodwill will be further reduced
by $682,000 when realization of deferred state income tax benefits becomes
likely.
The following table summarizes the differences between income taxes calculated
at the federal income tax rate of 35% on income before income taxes and the
provisions for income taxes (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income taxes at federal income tax rate $14,899 $11,323 $14,860
State income taxes, net of federal income
tax benefit 1,984 1,122 1,458
Amortization of goodwill 439 439 420
Meals and entertainment exclusion 457 448 647
Other, net 99 93 109
------- -------- --------
Income taxes $17,878 $13,425 $17,494
======= ======= =======
</TABLE>
Landstar paid income taxes of $10,184,000 in 1997, $15,949,000 in 1996 and
$19,679,000 in 1995.
(5) Operating Property
Operating property is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 27, 1997 Dec. 28, 1996
------------- -------------
<S> <C> <C>
Land $ 1,776 $ 2,309
Leasehold improvements 56 366
Buildings and improvements 11,279 10,937
Revenue equipment 95,623 125,124
Other equipment 22,825 17,051
-------- --------
131,559 155,787
Less accumulated depreciation and amortization 50,301 50,223
-------- --------
$ 81,258 $105,564
======== ========
</TABLE>
Included above is $86,706,000 in 1997 and $110,936,000 in 1996 of operating
property under capital lease, $46,363,000 and $74,792,000, respectively, net
of accumulated amortization. Landstar acquired operating property by entering
66
<PAGE>
into capital leases in the amount of $20,690,000 in 1996 and $28,566,000 in
1995. Landstar did not acquire any property by entering into capital leases in
1997.
(6) Pension Plans
Landstar sponsors an Internal Revenue Code section 401(k) defined contribution
plan for the benefit of full-time employees who have completed one year of
service. Eligible employees make voluntary contributions up to 6% of their
base salary, subject to certain limitations. Landstar contributes an amount
equal to 50% of such contributions, subject to certain limitations. In
addition, one subsidiary, Landstar Ranger, makes contributions in accordance
with a negotiated labor contract (generally based on the number of weeks
worked) to union sponsored multi-employer defined benefit pension plans for
the benefit of approximately 200 union drivers.
Landstar Ranger is subject to the Multi Employer Pension Plan Amendments Act
of 1980 ("MEPPA"), which could require Landstar Ranger, in the event of
withdrawal, to fund its proportionate share of these union sponsored plans'
unfunded benefit obligation. Management believes that the liability, if any,
for withdrawal from any or all of these plans would not have a material
adverse effect on the financial condition of Landstar, but could have a
material effect on the results of operations in a given quarter or year.
The expense for the Company sponsored defined contribution plan and for union
sponsored plans was $1,037,000 and $1,193,000 in 1997, respectively, $1,144,000
and $1,085,000 in 1996, respectively, and $1,185,000 and $937,000 in 1995,
respectively.
(7) Debt
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 27, 1997 Dec. 28, 1996
------------- -------------
<S> <C> <C>
Capital leases $31,946 $61,896
Acquisition Facility 18,500 28,500
------- -------
50,446 90,396
Less current maturities 14,228 23,241
------- -------
Total long-term debt $36,218 $67,155
======= =======
</TABLE>
On October 10, 1997, Landstar renegotiated its existing Credit Agreement with a
syndicate of banks and The Chase Manhattan Bank, as administrative agent (the
"Second Amended and Restated Credit Agreement"). The Second Amended and
Restated Credit Agreement provides $200,000,000 of borrowing capacity,
consisting of $150,000,000 of revolving credit (the "Working Capital Facility")
and $50,000,000 of revolving credit available to finance acquisitions (the
"Acquisition Facility"). $50,000,000 of the total borrowing capacity under the
Working Capital Facility may be utilized in the form of letter of credit
guarantees. The Second Amended and Restated Credit Agreement
expires on October 10, 2002.
67
<PAGE>
Borrowings under the Second Amended and Restated Credit Agreement bear interest
at rates equal to, at the option of Landstar, either (i) the greatest of (a)
the prime rate as publicly announced from time to time by The Chase Manhattan
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to The Chase Manhattan Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus
a margin that is determined based on the level of the Company's Leverage Ratio,
as defined in the Second Amended and Restated Credit Agreement. As of
December 27, 1997, the margin was equal to 32/100 of 1%. The unused portion of
the Second Amended and Restated Credit Agreement carries a commitment fee
determined based on the level of the Company's Leverage Ratio, as therein
defined. As of December 27, 1997, the commitment fee for the unused portion
of the Second Amended and Restated Credit Agreement was 0.100%. At December 27,
1997, the weighted average interest rate on borrowings outstanding under the
Acquisition Facility was 6.32%. Based on the borrowing rates in the Second
Amended and Restated Credit Agreement and the repayment terms, the fair value
of the outstanding borrowings under the Acquisition Facility was estimated to
approximate carrying value.
The Second Amended and Restated Credit Agreement contains a number of covenants
that limit, among other things, the incurrence of additional indebtedness, the
incurrence of operating or capital lease obligations and the purchase of
operating property. The Second Amended and Restated Credit Agreement also
requires Landstar to meet certain financial tests. Landstar is required to,
among other things, maintain minimum levels of Net Worth, as defined in the
Second Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined. Under the most restrictive covenant, Landstar
exceeded the required Interest Charge Coverage level by approximately
$6,500,000 at December 27, 1997.
The Second Amended and Restated Credit Agreement provides a number of events of
default related to a person or group acquiring 25% or more of the outstanding
capital stock of the Company or obtaining the power to elect a majority of the
Company's directors.
Borrowings under the Second Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of LSHI's subsidiaries
guarantee LSHI's obligations under the Second Amended and Restated Credit
Agreement.
The amount outstanding on the Acquisition Facility is payable upon the
expiration of the Second Amended and Restated Credit Agreement. There are no
other installments of long term debt, excluding capital lease obligations,
maturing in the next five years.
Landstar paid interest of $5,476,000 in 1997, $7,180,000 in
1996 and $7,359,000 in 1995.
(8) Leases
The future minimum lease payments under all noncancelable leases at
December 27, 1997, principally for revenue equipment, are shown in the
following table (in thousands):
68
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1998 $15,991 $ 1,983
1999 10,759 1,663
2000 6,583 798
2001 1,596 474
2002 345
Thereafter 60
------- ---------
34,929 $ 5,323
=========
Less amount representing interest
(6.0% to 10.1%) 2,983
Present value of minimum -------
lease payments $31,946
=======
</TABLE>
Total rent expense, net of sublease income, was $22,270,000 in 1997,
$19,928,000 in 1996 and $17,667,000 in 1995.
(9) Stock Option Plans
The Company maintains two stock option plans. Under the 1993 Stock Option
Plan (the "Plan"), the Compensation Committee of the Board of Directors may
grant options to Company employees for up to 615,000 shares of common stock.
Under the 1994 Directors Stock Option Plan (the "DSOP"), outside members of
the Board of Directors will be granted up to an aggregate of 120,000 options
to purchase common stock. Under the DSOP, each outside Director will be
granted 12,000 options to purchase common stock upon election or re-election
to the Board of Directors.
Options granted become exercisable in five equal annual installments under the
Plan and three equal annual installments under the DSOP, commencing on the
first anniversary of the date of grant, subject to acceleration in certain
circumstances, and expire on the tenth anniversary of the date of grant.
Under the plans, the exercise price of each option equals the market price of
the Company's stock on the date of grant. At December 27, 1997, there were
705,700 shares of the Company's stock reserved for issuance upon exercise of
options granted under the plans.
69
<PAGE>
Information regarding the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------- --------------------------
Weighted Average Weighted Average
Exercise Price Exercise Price
Shares Per Share Shares Per Share
-------- ----------------- -------- ----------------
<S> <C> <C> <C> <C>
Options at December 31, 1994 389,000 $ 22.07 37,200 $ 18.33
Granted 212,000 $ 30.06
Forfeited (1,500) $ 25.50
-------
Options at December 30, 1995 599,500 $ 24.89 121,100 $ 21.10
Granted 35,000 $ 27.53
Exercised (11,200) $ 18.50
Forfeited (110,400) $ 26.94
--------
Options at December 28, 1996 512,900 $ 24.77 201,000 $ 23.10
Granted 23,500 $ 26.38
Exercised (18,100) $ 19.89
Forfeited (36,800) $ 24.95
--------
Options at December 27, 1997 481,500 $ 25.01 276,800 $ 23.90
========
</TABLE>
The fair value of each option grant on its grant date was calculated using
the Black-Scholes option pricing model with the following assumptions for
grants made in 1997, 1996 and 1995: risk free interest rate of 6.0%, expected
lives of 5 years and no dividend yield. The expected volatility used in
calculating the fair market value of stock options granted was 37% in 1997 and
39% in 1996 and 1995. The weighted average grant date fair value of stock
options granted was $11.23, $12.06 and $13.20 per share in 1997, 1996 and
1995, respectively.
The following table summarizes stock options outstanding at December 27, 1997:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Range of Exercise Weighted Average Weighted Average
Prices Number Outstanding Remaining Contractual Exercise Price
Per Share Dec. 27, 1997 Life (years) Per Share
----------------- ------------------ --------------------- ----------------
<S> <C> <C> <C>
$14.625 - $22.531 120,500 6.0 $ 18.53
$22.532 - $32.250 361,000 7.6 $ 27.17
----------------
$14.625 - $32.250 481,500 7.2 $ 25.01
================
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Options Exercisable
-------------------
Range of Exercise Number Weighted Average
Prices Outstanding Exercise Price
Per Share Dec. 27, 1997 Per Share
----------------- ---------------- ----------------
<S> <C> <C>
$14.625 - $22.531 94,800 $ 18.47
$22.532 - $32.250 182,000 $ 26.73
----------------
$14.625 - $32.250 276,800 $ 23.90
================
</TABLE>
The Company accounts for its stock option plans using the intrinsic value
method as prescribed in Accounting Principal Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Had compensation cost for the Company's stock
option plans been determined using the fair value at grant date method as
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation", the
effect on net income and earnings per common share for the fiscal year
would have been $378,000, or $0.03 per common share, in 1997, $270,000,
or $0.02 per common share, in 1996 and $91,000, or $0.01 per common
share, in 1995.
Options to purchase 166,500 shares of common stock at a weighted average
exercise price of $29.34 per share were outstanding during 1997 but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common
shares.
(10) Shareholders' Equity
During 1997, Landstar purchased 821,400 shares of its common stock at a total
cost of $20,980,000 pursuant to previously announced stock purchase programs.
As of December 27, 1997, Landstar may purchase up to an additional 857,600
shares of its common stock in order to complete its most recently authorized
stock purchase program.
The Company has 2,000,000 shares of preferred stock authorized and unissued.
Under the terms of a Shareholder Rights Agreement (the "Agreement"), a
preferred stock purchase right (the "Right") accompanies each outstanding
share of common stock. Each Right entitles the holder to purchase from the
Company one one-hundredth of a share of preferred stock at an exercise price
of $60. Within the time limits and under the circumstances specified in the
Agreement, the Rights entitle the holder to acquire shares of common stock in
the Company, or the surviving Company in a business combination, having a
value of two times the exercise price. The Rights may be redeemed prior to
becoming exercisable by action of the Board of Directors at a redemption price
of $.01 per Right. The Rights expire February 10, 2003. Until a Right is
exercised, it has no rights including, without limitation, the right to vote
or to receive dividends.
71
<PAGE>
(11) Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information", which
requires a company to report certain financial information about its
operating segments. The Company implemented SFAS No. 131 for fiscal year 1997.
Under the provisions of SFAS No. 131, the Company determined it has four
reportable business segments. These are the carrier segment, multimodal
segment, company-owned tractor segment and insurance segment. The carrier
segment provides truckload transportation for a wide range of general
commodities over irregular routes with its fleet of dry and specialty
vans and unsided trailers, including flatbed, drop deck and specialty.
The carrier segment markets its services primarily through independent
commission sales agents and utilizes tractors provided by independent
contractors. Transportation services provided by the multimodal segment
include the arrangement of intermodal moves, contract logistics, truck
brokerage, short-to-long haul movement of containers by truck and
emergency and expedited air freight and truck services. The multimodal
segment markets its services through independent commission sales agents
and utilizes capacity provided by independent contractors. The nature of
the carrier and multimodal segments' business is such that a significant
portion of their operating costs vary directly with revenue. The
company-owned tractor segment transports truckload freight over short and
medium length regional traffic lanes and primarily markets its services
through an employee sales force and primarily utilizes company-owned and
employee-driven tractors. The insurance segment reinsures certain property,
casualty, and occupational accident risks of certain independent contractors
who have contracted to haul freight for Landstar. In addition, the
insurance segment provides certain property and casualty insurance directly
to Landstar's other segments. The insurance segment began operations in
March 1997.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates a segment's
performance based on operating income.
Inter-segment revenue for transactions between the carrier, multimodal
and company-owned tractor segments are based on quoted rates which are believed
to approximate the cost that would have been incurred had similar services
been obtained from an unrelated third party. Inter-segment revenue between the
insurance segment and the carrier, multimodal and company-owned tractor
segments is calculated at the beginning of each fiscal period based on an
actuarial calculation of historical loss experience and is believed to
approximate the cost that would have been incurred had similar insurance been
obtained from an unrelated third party.
No single customer accounts for more than 10% of consolidated revenue.
Substantially all of the Company's revenue is generated in the United States.
72
<PAGE>
The following tables summarize information about the Company's reportable
business segments as of and for the fiscal years ending December 27, 1997,
December 28, 1996 and December 30, 1995 (in thousands):
<TABLE>
<CAPTION>
1997 Company-
owned
Carrier Multimodal Tractor Insurance Other Total
<S> <C> <C> <C> <C> <C> <C>
External revenue $ 945,330 $ 255,041 $ 93,393 $ 18,940 $1,312,704
Internal revenue 39,453 968 6,785 15,452 62,658
Interest income (468) (468)
Interest expense, net $ 5,070 5,070
Depreciation and
amortization 6,334 1,285 9,564 3,735 20,918
Restructuring costs 1,244 154 (83) 1,849 3,164
Operating income 62,280 5,355 849 8,933 (30,247) 47,170
Expenditures on
long-lived assets 6,082 861 850 2,001 9,794
Total assets 192,143 64,055 68,791 21,538 10,652 357,179
1996 Company-
owned
Carrier Multimodal Tractor Insurance Other Total
<S> <C> <C> <C> <C> <C> <C>
External revenue $ 905,472 $ 224,384 $ 153,945 $1,283,801
Internal revenue 37,479 1,160 6,956 45,595
Interest expense, net $ 7,547 7,547
Depreciation and
amortization 9,583 1,310 10,213 2,921 24,027
Restructuring costs 4,675 1,326 1,262 7,263
Operating income 57,031 4,584 1,543 (23,261) 39,897
Expenditures on
long-lived assets 7,930 906 2,819 1,198 12,853
Capital lease additions 12,828 7,045 817 20,690
Total assets 212,034 56,547 85,526 16,694 370,801
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
1995 Company-
owned
Carrier Multimodal Tractor Insurance Other Total
<S> <C> <C> <C> <C> <C> <C>
External revenue $ 852,235 $ 202,413 $ 150,019 $1,204,667
Internal revenue 30,874 563 9,238 40,675
Interest expense, net $ 7,552 7,552
Depreciation and
amortization 8,471 1,086 9,554 1,730 20,841
Operating income 70,307 1,497 4,581 (26,377) 50,008
Expenditures on
long-lived assets 1,889 785 3,197 1,415 7,286
Capital lease additions 9,796 18,770 28,566
Total assets 189,414 49,987 97,098 16,580 353,079
</TABLE>
(12) Commitments and Contingencies
At December 27, 1997, the Company had commitments for letters of credit
outstanding in the amount of $24,659,000, primarily as collateral for estimated
insurance claims. The commitments for letters of credit outstanding include
$17,659,000 under the Second Amended and Restated Credit Agreement and
$7,000,000 secured by assets deposited with a financial institution.
Landstar is involved in certain claims and pending litigation arising from the
normal conduct of business. Based on knowledge of the facts and, in certain
cases, opinions of outside counsel, management believes that adequate
provisions have been made for probable losses with respect to the resolution
of all claims and pending litigation and that the ultimate outcome, after
provisions thereof, will not have a material adverse effect on the financial
condition of Landstar, but could have a material effect on the results of
operations in a given quarter or year.
74
<PAGE>
Independent Auditors' Report
- ----------------------------
Landstar System, Inc. and Subsidiary
The Board of Directors and Shareholders
Landstar System, Inc.:
We have audited the accompanying consolidated balance sheets of Landstar
System, Inc. and subsidiary as of December 27, 1997 and December 28, 1996, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the fiscal years ended December 27, 1997, December 28, 1996
and December 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Landstar System,
Inc. and subsidiary as of December 27, 1997 and December 28, 1996, and the
results of their operations and their cash flows for the fiscal years ended
December 27, 1997, December 28, 1996 and December 30, 1995 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Stamford, Connecticut
February 10, 1998
75
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
1997 1997 1997 (1) 1997 (1)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 347,153 $ 326,311 $ 333,682 $ 305,558
========== ========== ========== ==========
Operating income $ 14,063 $ 13,965 $ 12,523 $ 6,619
---------- ---------- ---------- ----------
Income before income taxes $ 13,241 $ 13,046 $ 11,101 $ 5,180
Income taxes 5,561 5,481 4,661 2,175
---------- ---------- ---------- ----------
Net income $ 7,680 $ 7,565 $ 6,440 $ 3,005
========== ========== ========== ==========
Earnings per common share (2) $ 0.63 $ 0.60 $ 0.51 $ 0.24
========== ========== ========== ==========
Diluted earnings per share (2) $ 0.62 $ 0.60 $ 0.51 $ 0.24
========== ========== ========== ==========
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
1996 (3) 1996 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 329,017 $ 330,195 $ 329,112 $ 295,477
========== ========== ========== ==========
Operating income $ 3,185 $ 15,261 $ 14,118 $ 7,333
---------- ---------- ---------- ----------
Income before income taxes $ 1,547 $ 13,325 $ 12,067 $ 5,411
Income taxes 484 5,631 5,053 2,257
---------- ---------- ---------- ----------
Net income $ 1,063 $ 7,694 $ 7,014 $ 3,154
========== ========== ========== ==========
Earnings per common share (2) $ 0.08 $ 0.60 $ 0.55 $ 0.25
========== ========== ========== ==========
Diluted earnings per share (2) $ 0.08 $ 0.60 $ 0.54 $ 0.25
========== ========== ========== ==========
</TABLE>
(1) Includes pre-tax restructuring costs of $1,985 and $1,179 in the second
and first quarters, respectively. After deducting related income tax
benefits of $834 and $495 in the second and first quarters, respectively,
the restructuring costs reduced net income by $1,151, or $0.09 per common
share, in the 1997 second quarter, and $684, or $0.05 per common share,
in the 1997 first quarter.
(2) Due to the changes in the number of average common shares and common
stock equivalents outstanding during the year, earnings per share amounts for
each quarter do not necessarily add to the earnings per share amounts for the
full year.
(3) Includes pre-tax restructuring costs of $7,263. After deducting related
income tax benefits of $3,014, the restructuring costs reduced net income by
$4,249, or $0.33 per common share.
76
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue $1,312,704 $1,283,801 $1,204,667 $ 984,359 $ 780,520
Costs and expenses:
Purchased transportation 923,654 885,500 813,003 653,076 500,368
Drivers' wages and benefits 28,010 41,210 47,970 38,287 37,124
Fuel and other operating costs 48,733 70,207 67,861 53,627 55,376
Insurance and claims 47,993 36,495 37,816 35,413 30,314
Commissions to agents and brokers 99,848 87,935 73,974 61,542 45,965
Selling, general and administrative 93,214 91,267 93,194 83,143 68,390 (3)
Depreciation and amortization 20,918 24,027 20,841 13,509 12,759
Restructuring costs 3,164 7,263
---------- ---------- ---------- --------- ----------
Total costs and expenses 1,265,534 1,243,904 1,154,659 938,597 750,296
---------- ---------- ---------- --------- ----------
Operating income 47,170 39,897 50,008 45,762 30,224
Interest and debt expense, net 4,602 7,547 7,552 4,134 5,711
---------- ---------- ---------- --------- ----------
Income before income taxes and
extraordinary loss 42,568 32,350 42,456 41,628 24,513
Income taxes 17,878 13,425 17,494 17,221 10,955
---------- ---------- ---------- ---------- ----------
Income before extraordinary loss 24,690 18,925 24,962 24,407 13,558
Extraordinary loss (1,830)(4)
---------- ---------- ---------- ---------- ----------
Net income $ 24,690(1) $ 18,925 (2) $ 24,962 $ 24,407 $ 11,728
========== ========== ========== ========== ==========
Earnings per common share:
Income before extraordinary loss $ 1.97(1) $ 1.48 (2) $ 1.95 $ 1.90 $ 1.14 (3)
Extraordinary loss (0.15)(4)
========== ========== ========== ========== ==========
Earnings per common share $ 1.97(1) $ 1.48 (2) $ 1.95 $ 1.90 $ 0.99 (3)(5)
========== ========== ========== ========== ==========
Diluted earnings per share:
Income before extraordinary loss $ 1.96 $ 1.47 $ 1.94 $ 1.89 $ 1.12
Extraordinary loss (0.15)
---------- ---------- ---------- ---------- ----------
Diluted earnings per share $ 1.96 $ 1.47 $ 1.94 $ 1.89 $ 0.97
========== ========== ========== ========== ==========
<CAPTION>
Dec. 27, Dec. 28, Dec. 30, Dec. 31, Dec. 25,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $ 357,179 $ 370,801 $ 353,079 $ 267,084 $ 219,412
Long-term debt, including
current maturities 50,446 90,396 93,867 43,680 48,074
Shareholders' equity 151,696 147,557 128,396 105,161 80,754
</TABLE>
77
<PAGE>
(1) After deducting related income tax benefits of $1,329, the
restructuring costs reduced net income by $1,835, or $0.15
per common share.
(2) After deducting related income tax benefits of $3,014, the
restructuring costs reduced net income by $4,249, or $0.33
per common share.
(3) Included in selling, general and administrative costs in
1993 are one-time charges in the amount of $1,200 for the
termination of consulting and management services agreements
with two parties-in-interest. After deducting related income
tax benefits of $504, these charges reduced earnings per common share
by $0.06.
(4) Represents the after-tax loss on the early extinguishment
of the Company's 14% senior subordinated notes.
(5) If the initial public offering and the redemption of the
Company's 14% senior subordinated notes had taken place at the
beginning of 1993, earnings per common share for 1993 would have
been $1.16.
78
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARY CORPORATIONS OF LANDSTAR SYSTEM, INC.
Jurisdiction % of Voting
Name of Incorporation Securities Owned
- ---- ---------------- ----------------
Subsidiary of Landstar System, Inc.:
Landstar System Holdings, Inc. Delaware 100
Subsidiaries of Landstar System Holdings, Inc.:
Landstar Express America, Inc. Delaware 100
Landstar Inway, Inc. Delaware 100
Also d/b/a Inway Nationwide Transportation Services
Also d/b/a Independent Freightways, Inc.
Landstar Logistics, Inc. Delaware 100
Landstar Ligon, Inc. Delaware 100
Also d/b/a Ligon Contract Services in Kentucky
Landstar Poole, Inc. Alabama 100
Landstar Ranger, Inc. Delaware 100
Also d/b/a Ranger/Landstar, Inc. in South Carolina
Risk Management Claim Services, Inc. Kentucky 100
Also d/b/a RMCS, Inc. in Alabama and California
Landstar Contractor Financing, Inc. Delaware 100
Landstar Capacity Services, Inc. Delaware 100
Signature Insurance Company Cayman Islands, BWT... 100
Subsidiary of Landstar Gemini, Landstar Inway,
Landstar Ligon, Landstar Poole and Landstar Ranger:
Landstar Corporate Services, Inc. Delaware 100
Subsidiary of Landstar Logistics, Inc.
Landstar Gemini, Inc. Delaware 100
Also d/b/a Gemini Transportation Services of
Greensburg, PA in Ontario and New Jersey
Also d/b/a GTSI Transportation Services in Ontario
Subsidiary of Landstar Inway, Inc.
Landstar T.L.C., Inc. Delaware 100
79
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Landstar System, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-76340 and No 33-94304) on Form S-8 of Landstar System, Inc. of our reports
dated February 10, 1998, relating to the consolidated balance sheets of
Landstar System, Inc. and subsidiary as December 27, 1997 and December 28,
1996, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the fiscal years ended December 27,
1997, December 28, 1996, and December 30, 1995, and all related schedules,
which reports appear in or are incorporated by reference in the December 27,
1997 annual report on Form 10-K of Landstar System, Inc.
KPMG Peat Marwick LLP
Stamford, Connecticut
March 25, 1998
80
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/27/97
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Henry H. Gerkens, and Michael L. Harvey, and each of
them, with full power in each to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Landstar System, Inc.
(the "Company"), the Annual Report on Form 10-K of the Company for the fiscal
year ended December 27, 1997, and file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), and any and all other instruments
which either of said attorneys-in-fact and agents deems necessary or advisable
to enable the Company to comply with the Act, the rules, regulations and
requirements of the SEC in respect thereof, giving and granting to each of said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or could do if
personally present at the doing thereof, with full power of substitution and
resubstitution, hereby ratifying and confirming all that his said attorneys-in-
fact and agents or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
David G. Bannister
--------------------------
David G. Bannister
DATED: March 16, 1998
81
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/27/97
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Henry H. Gerkens, and Michael L. Harvey, and each of
them, with full power in each to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Landstar System, Inc.
(the "Company"), the Annual Report on Form 10-K of the Company for the fiscal
year ended December 27, 1997, and file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), and any and all other instruments
which either of said attorneys-in-fact and agents deems necessary or advisable
to enable the Company to comply with the Act, the rules, regulations and
requirements of the SEC in respect thereof, giving and granting to each of said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or could do if
personally present at the doing thereof, with full power of substitution and
resubstitution, hereby ratifying and confirming all that his said attorneys-in-
fact and agents or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
John B. Bowron
--------------------------
John B. Bowron
DATED: March 16, 1998
82
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/27/97
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Henry H. Gerkens, and Michael L. Harvey, and each of
them, with full power in each to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Landstar System, Inc.
(the "Company"), the Annual Report on Form 10-K of the Company for the fiscal
year ended December 27, 1997, and file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), and any and all other instruments
which either of said attorneys-in-fact and agents deems necessary or advisable
to enable the Company to comply with the Act, the rules, regulations and
requirements of the SEC in respect thereof, giving and granting to each of said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or could do if
personally present at the doing thereof, with full power of substitution and
resubstitution, hereby ratifying and confirming all that his said attorneys-in-
fact and agents or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
Ronald W. Drucker
--------------------------
Ronald W. Drucker
DATED: March 16, 1998
83
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/27/97
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Henry H. Gerkens, and Michael L. Harvey, and each of
them, with full power in each to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Landstar System, Inc.
(the "Company"), the Annual Report on Form 10-K of the Company for the fiscal
year ended December 27, 1997, and file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), and any and all other instruments
which either of said attorneys-in-fact and agents deems necessary or advisable
to enable the Company to comply with the Act, the rules, regulations and
requirements of the SEC in respect thereof, giving and granting to each of said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or could do if
personally present at the doing thereof, with full power of substitution and
resubstitution, hereby ratifying and confirming all that his said attorneys-in-
fact and agents or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
Arthur J. Fritz, Jr.
--------------------------
Arthur J. Fritz, Jr.
DATED: March 16, 1998
84
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/27/97
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Henry H. Gerkens, and Michael L. Harvey, and each of
them, with full power in each to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Landstar System, Inc.
(the "Company"), the Annual Report on Form 10-K of the Company for the fiscal
year ended December 27, 1997, and file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), and any and all other instruments
which either of said attorneys-in-fact and agents deems necessary or advisable
to enable the Company to comply with the Act, the rules, regulations and
requirements of the SEC in respect thereof, giving and granting to each of said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or could do if
personally present at the doing thereof, with full power of substitution and
resubstitution, hereby ratifying and confirming all that his said attorneys-in-
fact and agents or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
Merritt J. Mott
--------------------------
Merritt J. Mott
DATED: March 16, 1998
85
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets at December 27, 1997 and the Consolidated
Statements of Income for the fiscal year ended December 27, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> DEC-27-1997
<CASH> 17,994
<SECURITIES> 3,012
<RECEIVABLES> 182,742
<ALLOWANCES> 5,957
<INVENTORY> 922
<CURRENT-ASSETS> 218,222
<PP&E> 131,559
<DEPRECIATION> 50,301
<TOTAL-ASSETS> 357,179
<CURRENT-LIABILITIES> 139,171
<BONDS> 36,218
0
0
<COMMON> 129
<OTHER-SE> 151,567
<TOTAL-LIABILITY-AND-EQUITY> 357,179
<SALES> 0
<TOTAL-REVENUES> 1,312,704
<CGS> 0
<TOTAL-COSTS> 1,000,397
<OTHER-EXPENSES> 47,993
<LOSS-PROVISION> 3,998
<INTEREST-EXPENSE> 4,602
<INCOME-PRETAX> 42,568
<INCOME-TAX> 17,878
<INCOME-CONTINUING> 24,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,690
<EPS-PRIMARY> 1.97
<EPS-DILUTED> 1.96
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets at December 28, 1996 and the Consolidated
Statements of Income for the fiscal year ended December 28, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 4,187
<SECURITIES> 0
<RECEIVABLES> 183,418
<ALLOWANCES> 6,526
<INVENTORY> 1,785
<CURRENT-ASSETS> 200,923
<PP&E> 155,787
<DEPRECIATION> 50,223
<TOTAL-ASSETS> 370,801
<CURRENT-LIABILITIES> 130,270
<BONDS> 67,155
0
0
<COMMON> 129
<OTHER-SE> 147,428
<TOTAL-LIABILITY-AND-EQUITY> 370,801
<SALES> 0
<TOTAL-REVENUES> 1,283,801
<CGS> 0
<TOTAL-COSTS> 996,917
<OTHER-EXPENSES> 36,495
<LOSS-PROVISION> 4,768
<INTEREST-EXPENSE> 7,547
<INCOME-PRETAX> 32,350
<INCOME-TAX> 13,425
<INCOME-CONTINUING> 18,925
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,925
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.47
</TABLE>
