<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 25, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to _____________________
Commission File Number: 0-21238
LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1313069
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4160 Woodcock Drive, Jacksonville, Florida
(Address of principal executive offices)
32207
(Zip Code)
(904) 390-1234
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
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 ( )
The number of shares of the registrant's Common Stock, par value $.01 per
share, outstanding as of the close of business on October 29, 1999 was
9,529,820.
<PAGE>
PART I
FINANCIAL INFORMATION
Index
Item 1
Consolidated Balance Sheets as of September 25, 1999
and December 26, 1998 ............................................... Page 3
Consolidated Statements of Income for the Thirty Nine and Thirteen Weeks
Ended September 25, 1999 and September 26, 1998 ..................... Page 4
Consolidated Statements of Cash Flows for the Thirty Nine Weeks
Ended September 25, 1999 and September 26, 1998 ..................... Page 5
Consolidated Statement of Changes in Shareholders'
Equity for the Thirty Nine Weeks Ended September 25, 1999 ........... Page 6
Notes to Consolidated Financial Statements............................. Page 7
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................... Page 10
Item 3
Quantitative and Qualitative Disclosures About Market Risk ............ Page 18
Item 1. Financial Statements
The interim consolidated financial statements contained herein reflect
all adjustments (all of a normal, recurring nature) which, in the opinion of
management, are necessary for a fair presentation of the financial condition,
results of operations, cash flows and changes in shareholders' equity
for the periods presented. They have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the thirty nine weeks ended September 25,
1999 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 25, 1999.
These interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
1998 Annual Report on Form 10-K.
2
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 25, Dec. 26,
1999 1998
---------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 30,068 $ 26,681
Trade accounts receivable, less allowance of $4,045
and $6,428 186,041 172,471
Other receivables, including advances to independent
contractors, less allowance of $5,413 and $4,007 13,637 13,980
Prepaid expenses and other current assets 7,318 5,428
---------- -----------
Total current assets 237,064 218,560
---------- -----------
Operating property, less accumulated depreciation
and amortization of $35,757 and $29,603 51,687 46,958
Goodwill, less accumulated amortization of $7,474 and $6,561 34,036 34,949
Deferred income taxes and other assets 20,114 13,198
---------- -----------
Total assets $ 342,901 $ 313,665
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 15,965 $ 14,746
Accounts payable 67,094 50,624
Current maturities of long-term debt 5,909 4,708
Insurance claims 30,071 29,873
Accrued compensation 9,514 9,881
Other current liabilities 33,521 33,058
---------- -----------
Total current liabilities 162,074 142,890
---------- -----------
Long-term debt, excluding current maturities 35,567 29,732
Insurance claims 28,668 29,195
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 13,061,974 and 13,041,574 shares 131 130
Additional paid-in capital 65,592 65,198
Retained earnings 154,541 124,237
Cost of 3,273,041 and 2,618,041 shares of common stock in
treasury (102,029) (76,176)
Notes receivable arising from exercise of stock options (1,643) (1,541)
---------- -----------
Total shareholders' equity 116,592 111,848
---------- -----------
Total liabilities and shareholders' equity $ 342,901 $ 313,665
========== ===========
See accompanying notes to consolidated financial statements.
</TABLE> 3
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirty Nine Weeks Ended Thirteen Weeks Ended
----------------------- -----------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $1,007,959 $ 949,742 $ 351,460 $ 324,033
Investment income 1,751 1,191 633 441
Costs and expenses:
Purchased transportation 742,442 701,981 259,165 239,952
Commissions to agents and brokers 80,587 74,803 28,439 25,688
Other operating costs 21,627 20,818 7,858 6,574
Insurance and claims 29,030 32,886 7,067 8,300
Selling, general and administrative 73,304 71,414 24,573 24,766
Depreciation and amortization 8,806 7,531 3,375 2,678
---------- ---------- ---------- ----------
Total costs and expenses 955,796 909,433 330,477 307,958
---------- ---------- ---------- ----------
Operating income 53,914 41,500 21,616 16,516
Interest and debt expense 2,981 2,584 1,321 988
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes 50,933 38,916 20,295 15,528
Income taxes 20,629 15,761 8,221 6,289
---------- ---------- ---------- ----------
Income from continuing operations 30,304 23,155 12,074 9,239
Discontinued operations, net of income taxes (22,589)
---------- ---------- ---------- ----------
Net income $ 30,304 $ 566 $ 12,074 $ 9,239
========== ========== ========== ==========
Earnings per common share:
Income from continuing operations $ 2.99 $ 2.06 $ 1.21 $ 0.86
Loss from discontinued operations (2.01)
---------- ---------- ---------- ----------
Earnings per common share $ 2.99 $ 0.05 $ 1.21 $ 0.86
========== ========== ========== ===========
Diluted earnings per share:
Income from continuing operations $ 2.95 $ 2.05 $ 1.20 $ 0.85
Loss from discontinued operations (2.00)
---------- ---------- ---------- ----------
Diluted earnings per share $ 2.95 $ 0.05 $ 1.20 $ 0.85
========== ========== ========== ==========
Average number of shares outstanding:
Earnings per common share 10,149,000 11,223,000 9,954,000 10,743,000
========== ========== ========== ==========
Diluted earnings per share 10,270,000 11,316,000 10,076,000 10,852,000
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE> 4
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty Nine Weeks Ended
---------------------------
Sept. 25, Sept. 26,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Net income $ 30,304 $ 566
Adjustments to reconcile net income to net cash provided
by operating activities of continuing operations:
Discontinued operations 22,589
Depreciation and amortization of operating property 7,893 6,570
Amortization of goodwill and non-competition agreement 913 961
Non-cash interest charges 243 243
Provisions for losses on trade and other accounts receivable 1,122 3,850
Losses (gains) on sales of operating property 179 (306)
Deferred income taxes, net 2,003 (2,118)
Changes in operating assets and liabilities, net of discontinued operations:
Increase in trade and other accounts receivable (14,349) (6,817)
Increase in prepaid expenses and other assets (11,052) (4,146)
Increase in accounts payable 16,470 7,427
Increase in other liabilities 96 5,019
Increase (decrease) in insurance claims (329) 6,848
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 33,493 40,686
----------- -----------
INVESTING ACTIVITIES
Maturities of short-term investments 1,552
Purchases of operating property (2,369) (4,347)
Proceeds from sales of operating property 1,303 1,383
Proceeds from sale of discontinued operations 40,435
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (1,066) 39,023
----------- -----------
FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Increase in cash overdraft 1,219 1,870
Borrowings on revolving credit facility 15,000
Proceeds from exercise of stock options and related income tax benefit 293 1,118
Purchases of common stock (25,853) (47,392)
Principal payments on long-term debt and capital lease obligations (4,699) (21,646)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (29,040) (51,050)
----------- -----------
NET CASH USED BY DISCONTINUED OPERATIONS (26,472)
----------- -----------
Increase in cash 3,387 2,187
Cash at beginning of period 26,681 17,994
----------- -----------
Cash at end of period $ 30,068 $ 20,181
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE> 5
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Thirty Nine Weeks Ended September 25, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Notes
Treasury Stock Receivable
Common Stock Additional at Cost Arising from
------------------ Paid-In Retained ------------------- Exercise of
Shares Amount Capital Earnings Shares Amount Stock Options Total
---------- ------- --------- --------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 26, 1998 13,041,574 $ 130 $ 65,198 $ 124,237 2,618,041 $ (76,176) $ (1,541) $ 111,848
Net income 30,304 30,304
Purchases of common stock 655,000 (25,853) (25,853)
Exercise of stock options
and related income tax
benefit 20,400 1 394 (102) 293
---------- ------- --------- --------- --------- --------- ------------- ---------
Balance September 25, 1999 13,061,974 $ 131 $ 65,592 $ 154,541 3,273,041 $(102,029) $ (1,643) $ 116,592
========== ======= ========= ========= ========= ========= ============= =========
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System,
Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all
adjustments (all of a normal, recurring nature) which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
presented. The preparation of the consolidated financial statements requires
the use of management's estimates. Actual results could differ from those
estimates. Landstar System, Inc. and its subsidiary are herein referred to as
"Landstar."
(1) Discontinued Operations
On August 22, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned
subsidiary of Landstar which comprised the entire company-owned tractor
segment, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for $40,435,000 in cash. Accordingly, the financial results
of this segment have been reported as discontinued operations in the
accompanying financial statements. Certain liabilities of the company-owned
tractor segment were retained by Landstar, primarily insurance claims, capital
lease obligations and accounts payable.
The loss from discontinued operations of $22,589,000 in the thirty nine-week
period ended September 26, 1998 included a loss on sale of $21,489,000, net of
income tax benefits of $2,511,000, and a loss from operations of $1,100,000,
net of income tax benefits of $597,000.
The company-owned tractor segment had revenue of $58,715,000 and $13,357,000
for the thirty nine weeks and thirteen weeks ended September 26, 1998.
(2) Income Taxes
The provisions for income taxes from continuing operations for the 1999
and 1998 thirty nine-week periods were based on an estimated combined full
year effective income tax rate of 40.5%, 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.
7
<PAGE>
(3) Earnings Per Share
Earnings per common share amounts are based on the weighted average
number of common shares outstanding. 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.
(4) Additional Cash Flow Information
During the 1999 period, Landstar paid income taxes and interest of
$24,126,000 and $3,095,000, respectively, and acquired operating property
by entering into capital leases in the amount of $11,735,000. During the
1998 period, Landstar paid income taxes and interest of $18,718,000 and
$3,207,000 ($836,000 related to Landstar Poole), respectively, and
acquired operating property by entering into capital leases in the
amount of $12,902,000.
(5) Segment Information
The following tables summarize information about Landstar's reportable
business segments for the thirty nine and thirteen weeks ended
September 25, 1999 and September 26, 1998 (in thousands):
<TABLE>
<CAPTION>
Thirty Nine Weeks Ended September 25, 1999
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $ 777,434 $ 211,360 $ 19,165 $1,007,959
Investment income 1,751 1,751
Internal revenue 25,234 474 20,327 46,035
Operating income 59,336 7,078 15,982 $(28,482) 53,914
Thirty Nine Weeks Ended September 26, 1998
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $ 730,119 $ 201,558 $ 18,065 $ 949,742
Investment income 1,191 1,191
Internal revenue 28,089 378 16,385 44,852
Operating income 48,774 4,839 12,018 $(24,131) 41,500
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended September 25, 1999
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $ 269,312 $ 75,709 $ 6,439 $ 351,460
Investment income 633 633
Internal revenue 8,994 243 5,156 14,393
Operating income 21,105 2,867 7,363 $ (9,719) 21,616
Thirteen Weeks Ended September 26, 1998
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $ 247,908 $ 69,858 $ 6,267 $ 324,033
Investment income 441 441
Internal revenue 9,639 115 4,844 14,598
Operating income 17,779 2,089 6,281 $ (9,633) 16,516
</TABLE>
9
<PAGE>
(6) Commitments and Contingencies
At September 25, 1999, Landstar had commitments for letters of
credit outstanding in the amount of $22,229,000, primarily as
collateral for insurance claims. The commitments for letters of credit
outstanding included $12,480,000 under the Second Amended and Restated
Credit Agreement and $9,749,000 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 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
attached interim consolidated financial statements and notes
thereto, and with the Company's audited financial statements and
notes thereto for the fiscal year ended December 26, 1998 and
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the 1998 Annual Report to
Shareholders.
10
<PAGE>
RESULTS OF OPERATIONS
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 No. 131, "Disclosure about Segments of an Enterprise and Related
Information," the Company determined it has three reportable business segments.
These are the carrier, multimodal and insurance segments.
The carrier segment consists of Landstar Ranger, Inc.("Landstar Ranger"),
Landstar Inway, Inc. ("Landstar Inway") and Landstar Ligon, Inc.("Landstar
Ligon"). The carrier segment provides truckload transportation for a wide
range of general commodities over both regular and 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 varies directly with
revenue.
The multimodal segment is comprised of Landstar Logistics, Inc. and Landstar
Express America, Inc. 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 varies directly with revenue.
The insurance segment is comprised of Signature Insurance Company
("Signature"), a wholly-owned offshore insurance subsidiary that was formed in
March 1997, and Risk Management Claim Services, Inc. The insurance segment
provides risk and claims management services to Landstar's operating companies.
In addition, it reinsures certain property, casualty and occupational accident
risks of certain independent contractors who have contracted to haul freight
for Landstar and provides certain property and casualty insurance directly to
Landstar's operating subsidiaries.
On August 22, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned
subsidiary of Landstar which comprised the entire company-owned tractor
segment, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for $40,435,000 in cash. Accordingly, the financial results of this segment
have been reported as discontinued operations in the accompanying financial
statements.
11
<PAGE>
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 at
the carrier segment and of gross profit at the multimodal segment. 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 increase or decrease as a percentage of the Company's consolidated
revenue if there is a change in the percentage of revenue contributed by
Signature or by the intermodal services or air freight operations of the
multimodal segment.
Trailer rental and maintenance costs paid to third parties are the largest
component of other operating costs.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. 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.
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 communications costs and rent
expense.
Depreciation and amortization primarily relates to depreciation of
trailers and management information services equipment.
12
<PAGE>
The following table sets forth the percentage relationships of
income and expense items to revenue for the periods indicated:
<TABLE>
<CAPTION>
Thirty Nine Weeks Ended Thirteen Weeks Ended
------------------------ ------------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Investment income 0.2 0.1 0.2 0.1
Costs and expenses:
Purchased transportation 73.6 73.9 73.7 74.1
Commissions to agents and brokers 8.0 7.9 8.1 7.9
Other operating costs 2.1 2.2 2.2 2.0
Insurance and claims 2.9 3.4 2.0 2.6
Selling, general and administrative 7.3 7.5 7.0 7.6
Depreciation and amortization 0.9 0.8 1.0 0.8
------- ------ ------- ------
Total costs and expenses 94.8 95.7 94.0 95.0
------- ------ ------- ------
Operating income 5.4 4.4 6.2 5.1
Interest and debt expense 0.3 0.3 0.4 0.3
------- ------ ------- ------
Income from continuing operations
before income taxes 5.1 4.1 5.8 4.8
Income taxes 2.1 1.7 2.4 1.9
------- ------ ------- ------
Income from continuing operations 3.0 2.4 3.4 2.9
Discontinued operations, net of income taxes (2.3)
------- ------ ------- ------
Net income 3.0% 0.1% 3.4% 2.9%
======= ====== ======= ======
</TABLE>
THIRTY NINE WEEKS ENDED SEPTEMBER 25, 1999 COMPARED TO THIRTY NINE WEEKS
ENDED SEPTEMBER 26, 1998
Revenue for the 1999 thirty nine week period was $1,007,959,000, an increase of
$58,217,000, or 6.1%, over the 1998 thirty nine week period. The increase was
attributable to increased revenue of $47,315,000, $9,802,000 and $1,100,000
at the carrier, multimodal and insurance segments, respectively. Overall,
revenue per revenue mile at the carrier and multimodal segments increased
approximately 2%, which reflected improved freight quality, while revenue miles
were approximately 4% higher than 1998. The insurance segment generated
investment income of $1,751,000 and $1,191,000 during the 1999 and 1998
periods, respectively.
13
<PAGE>
Purchased transportation was 73.6% of revenue in 1999 compared with 73.9% in
1998. The decrease in purchased transportation as a percentage of revenue
was due to an increase in the percentage of revenue contributed by the carrier
segment. Commissions to agents and brokers were 8.0% of revenue
in 1999 and 7.9% in 1998. The increase in commissions to agents and brokers as
a percentage of revenue was primarily attributable 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. Other operating costs were 2.1% of revenue in
1999 and 2.2% in 1998. The decrease in other operating costs as a percentage of
revenue was due to a one-time reduction in the cost of fuel taxes and permits
which resulted from a favorable fuel tax audit and a permit refund.
This decrease was partially offset by increased
contractor recruiting costs and an increased provision for contractor bad debt.
Insurance and claims were 2.9% of revenue in 1999 compared with 3.4% in 1998.
The decrease in insurance and claims as a percentage of revenue was primarily
attributable to lower premium expense and favorable development of prior year
claims. Selling, general and administrative costs were 7.3% of revenue in 1999
compared with 7.5% of revenue in 1998. This decrease was primarily due to a
decrease in the provision for customer bad debts, partially offset by a
higher provision for bonuses under the Company's management incentive
compensation plan and increased management information services costs.
In addition, selling, general and administrative costs in the prior year
included $560,000 of one time costs incurred for the relocation of Landstar
Express America, Inc. from Charlotte, North Carolina to Jacksonville, Florida.
Interest and debt expense was 0.3% of revenue in 1999 and 1998.
The provisions for income taxes from continuing operations for the 1999 and
1998 thirty nine-week periods were based on an estimated full year combined
effective income tax rate of approximately 40.5%, 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.
Net income was $30,304,000, or $2.99 per common share ($2.95 per diluted
share), in the 1999 period. Income from continuing operations for the 1998
period was $23,155,000, or $2.06 per common share ($2.05 per diluted share).
The loss from discontinued operations for the 1998 period was $22,589,000, or
$2.01 loss per common share ($2.00 loss per diluted share).
THIRTEEN WEEKS ENDED SEPTEMBER 25, 1999 COMPARED TO THIRTEEN WEEKS
ENDED SEPTEMBER 25, 1998
Revenue for the 1999 thirteen-week period was $351,460,000, an increase of
$27,427,000, or 8.5%, over the 1998 thirteen-week period. The increase was
attributable to increased revenue of $21,404,000, $5,851,000 and $172,000
at the carrier, multimodal and insurance segments, respectively. Overall,
revenue per revenue mile increased approximately 2%, which reflected
improved freight quality, while revenue miles were approximately 7%
higher than 1998. The insurance segment generated investment income of
$633,000 and $441,000 during the 1999 and 1998 periods, respectively.
14
<PAGE>
Purchased transportation was 73.7% of revenue in 1999 compared with 74.1% in
1998. The decrease in purchased transportation as a percentage of revenue was
due to an increase in the percentage of revenue contributed by the carrier
segment and a decrease in revenue at the intermodal services operations of the
multimodal segment. Commissions to agents and brokers were 8.1% of revenue in
1999 and 7.9% in 1998. The increase in commissions to agents and brokers as a
percentage of revenue was primarily attributable 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 agents. Other operating costs were 2.2% of revenue in 1999 and
2.0% of revenue in 1998. The increase in other operating costs as a percentage
of revenue was due to higher net trailer costs, increased contractor recruiting
costs and a higher provision for contractor bad debt. Insurance and claims were
2.0% of revenue in 1999 compared with 2.6% in 1998. The decrease in insurance
and claims as a percentage of revenue was primarily attributable to favorable
development of prior year claims. Selling, general and administrative costs
were 7.0% of revenue in 1999 compared with 7.6% of revenue in 1998. The
decrease in selling, general and administrative costs as a percentage of
revenue was primarily due to a decrease in the provision for customer bad
debts, partially offset by increased management information services costs.
Interest and debt expense was 0.4% and 0.3% of revenue in 1999 and 1998,
respectively. The increase in interest and debt expense as a percentage of
revenue was due to increased capital lease obligations and fees incurred as a
result of amending the Company's senior credit facility.
The provisions for income taxes for the 1999 and
1998 thirteen-week periods were based on an estimated full year combined
effective income tax rate of approximately 40.5%, 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.
Net income was $12,074,000, or $1.21 per common share ($1.20 per diluted
share), in the 1999 period. Net income for the 1998
period was $9,239,000, or $0.86 per common share ($0.85 per diluted share).
15
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity increased to $116,592,000 at September 25, 1999 compared
with $111,848,000 at December 26, 1998, as a result of net income, partially
offset by the purchase of 655,000 shares of the Company's common stock at an
aggregate cost of $25,853,000. During the third quarter of 1999, the Company's
Board of Directors approved the purchase of up to an additional 500,000
shares of the Company's common stock from time to time in the open market and
privately negotiated transactions. Shareholders' equity was 74% and 76% of
total capitalization at September 25, 1999 and December 26, 1998, respectively.
Working capital and the ratio of current assets to current liabilities were
$74,990,000 and 1.46 to 1, respectively, at September 25, 1999, compared with
$75,670,000 and 1.53 to 1, respectively, at December 26, 1998. Landstar has
historically operated with current ratios approximating 1.5 to 1. Cash
provided by operating activities of continuing operations was $33,493,000 in
the 1999 period compared with $40,686,000 in the 1998 period. The decrease in
cash flow provided by operating activities of continuing operations was
primarily attributable to timing of collections, partially offset by increased
earnings and timing of payments. During the 1999 period, Landstar purchased
$2,369,000 of operating property and acquired $11,735,000 of revenue equipment
by entering into capital leases. Management anticipates acquiring approximately
$14,000,000 of operating property during the remainder of fiscal year 1999
either by purchase or lease financing.
Management believes that cash flow from operations combined with the Company's
borrowing capacity under its revolving 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.
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 all of its information technology ("IT") and non-information
technology ("non-IT") systems which require change to ensure all of its systems
will be year 2000 compliant. With the 1999 fourth quarter relocation of all the
Company's Jacksonville, FL based operations to its new facility, all non-IT
systems that were not year 2000 compliant have been replaced with new year 2000
compliant systems. The Company has utilized in-house staff, with third
party assistance, to convert its IT systems to year 2000 compliance. The
Company believes that its pricing, billing and settlement systems are
critical to the Company's operations. These systems enable the Company to
invoice customers and pay independent contractors and commission sales agents
properly. The operating subsidiaries comprising the multimodal segment are
year 2000 compliant. Several years ago the Company began to implement a
strategy to standardize the carrier group's critical IT systems using the
Landstar Ranger system as the base. The critical IT systems of Landstar Ranger
have been reprogrammed to be year 2000 compliant. During the 1999 third
quarter, the Company completed the conversion of the critical IT systems of
Landstar Ligon to the same systems as Landstar Ranger. During the 1999 second
quarter, Landstar Inway, the remaining operating company in the carrier segment,
successfully completed reprogramming its critical IT systems. The Company has
successfully completed a comprehensive system-wide test of all
critical IT systems. In addition, as part of the overall standardization plan,
the Company has converted all of its operating companies to a generic, year
2000 compliant general ledger and accounts payable software system.
16
<PAGE>
As part of the Company's comprehensive review of its systems, it is continuing
to verify the year 2000 readiness of third parties (customers and vendors) who
provide services that are material to the Company's operations. The Company is
currently communicating with its material vendors and customers to assess their
year 2000 readiness and will continue to monitor their progress throughout
1999.
The vast majority of the changes necessary to make the Company's IT systems
year 2000 compliant were incurred as part of ongoing system development or as
part of a Company-wide strategy to standardize computer systems. As such,
management has not separately quantified the cost of year 2000 compliance.
However, management estimates the total cost of third party assistance for
year 2000 compliance approximated $700,000. Although management expects the
cost of maintaining and upgrading the Company's computer systems to increase
over the next few years compared to prior years, management does not believe
that the future costs of maintaining and upgrading Landstar's computer systems
will have a material adverse effect on the results of operations.
In the event the Company determines that one or more of its material vendors
will not become year 2000 compliant, the Company's contingency plan is to
select alternative vendors or implement alternate procedures for an interim
period.
Although management believes all of the Company's critical IT systems have been
reprogrammed to properly recognize year 2000 transactions, an unforeseen
failure, or the non compliance of third party vendors, could have a material
adverse effect on the Company's future operating results or financial condition.
INFLATION
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.
17
<PAGE>
FORWARD-LOOKING STATEMENTS
The Company has included various statements in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which may be
considered as forward-looking statements of expected future results of
operations or events. Such statements, based upon management's interpretation
of currently available information, are subject to risks and uncertainties that
could cause future financial results or events to differ materially from those
which are presented. Such risks and factors which are outside of the Company's
control include general economic conditions, competition in the transportation
industry, governmental regulation, the Company's ability to recruit and retain
qualified independent contractors, fuel prices, adverse weather conditions and
the conversion of the Company's or its vendors' critical IT systems to year
2000 compliance.
SEASONALITY
Landstar's operations are subject to seasonal trends common to the
trucking industry. Results of operations for the quarter ending in
March is typically lower than the quarters ending June, September
and December due to reduced shipments and higher operating costs in
the winter months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company maintains a credit agreement with a syndicate of banks and The
Chase Manhattan Bank, as the administrative agent, (the "Second Amended and
Restated Credit Agreement") that provides $200,000,000 of borrowing
capacity, consisting of $150,000,000 revolving credit and $50,000,000 revolving
credit to finance acquisitions. 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. There have been no significant changes that would
affect the information provided in Item 7a of the 1998 Annual Report on
Form 10-K regarding quantitative and qualitative disclosures about market risk.
18
<PAGE>
PART II
OTHER INFORMATION
Item 1. 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
Claim 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. On March 24, 1998,
the court granted defendant's motion to dismiss the RICO claim.
The federal court has now held that Rivas may not recover damages for
alleged violations of the federal leasing regulations without first
proceeding at the Federal Highway Administration. Further, Rivas has now
agreed to dismiss his federal lawsuit and submit his claim to arbitration
as provided under the motor vehicle lease agreement. It is anticipated that
arbitration will commence in early to mid 2000. The Company continues to
vigorously contest this action. It believes that the drivers in question are
properly classified as independent contractors and 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 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
19
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index are filed as part
of this quarterly report on Form 10-Q.
(b) Form 8-K
None.
20
<PAGE>
EXHIBIT INDEX
Registrant's Commission File No.: 0-21238
Exhibit No. Description
- ------------ -----------
(4) Instruments defining the rights of security holders,
including indentures:
4.1 * Second Amendment, dated September 8, 1999, to the Second
Amended and Restated Credit Agreement, dated as of
October 10, 1997
(11) Statement re: Computation of Per Share Earnings:
11.1 * Landstar System, Inc. and Subsidiary Calculation of Earnings
Per Common Share for the Thirty Nine and Thirteen Weeks Ended
September 25, 1999 and September 26, 1998
11.2 * Landstar System, Inc. and Subsidiary Calculation of Diluted
Earnings Per Share for the Thirty Nine and Thirteen Weeks
Ended September 25, 1999 and September 26, 1998
(27) Financial Data Schedules:
27.1 * 1999 Financial Data Schedule
__________________
* Filed herewith
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LANDSTAR SYSTEM, INC.
Date: November 4, 1999 Henry H. Gerkens
----------------------------
Henry H. Gerkens
Executive Vice President and
Chief Financial Officer;
Principal Financial Officer
Date: November 4, 1999 Robert C. LaRose
----------------------------
Robert C. LaRose
Vice President Finance and Treasurer;
Principal Accounting Officer
22
<PAGE> EXHIBIT 4.1
SECOND AMENDMENT
SECOND AMENDMENT, dated as of September 8, 1999 (this "Amendment"),
to the Second Amended and Restated Credit Agreement, dated as of October
10, 1997 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among LANDSTAR SYSTEM HOLDINGS, INC., a Delaware
Corporation (the "Borrower"), LANDSTAR SYSTEM, INC., a Delaware corporation
(the "Parent"), the Subsidiaries of the Borrower which are signatories hereto,
the several banks and other financial institutions from time to time parties
to this agreement (such banks and other financial institutions other than the
Existing Lenders, the "Lenders") and The Chase Manhattan Bank ("Chase"), as
administrative agent for the Lenders hereunder (in such capacity, the
"Administrative Agent").
W I T N E S S E T H:
WHEREAS, the Borrower, the Parent, the Subsidiaries of the Borrower
which are signatories hereto, the Lenders and the Agent are parties to the
Credit Agreement; and
WHEREAS, the Borrower has requested that the Lenders agree to amend
certain provisions of the Credit Agreement, and the Lenders are agreeable to
such request upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, and for other valuable consideration the receipt of which is
hereby acknowledged, the Borrower, the Parent, the Subsidiaries of the Borrower
which are signatories hereto and the Agent hereby agree as follows:
1 Definitions. All terms defined in the Credit Agreement
shall have such defined meanings when used herein unless otherwise defined
herein.
2 Amendment to Section 1.1. Section 1.1 is hereby amended
by inserting the phrase "and/or any other Persons principally engaged in
trucking or a similar business" immediately before the period in the
definition of the term "Insurance Subsidiary."
3 Amendment to Section 4.16. Section 4.16 is hereby amended
by inserting the phrase "and to repurchase the Capital Stock of the Borrower"
immediately after the term "Permitted Acquisitions" in the first sentence of
such subsection.
4 Amendment to Section 6.4. Section 6.4 is hereby amended
by inserting the phrase "and/or any other Persons principally engaged in
trucking or a similar business" immediately before the second parenthesis
therein.
23
<PAGE>
5 Amendment of Subsection 7.1(a). Subsection 7.1(a) of the
Credit Agreement is hereby amended by deleting it in its entirety and inserting
in lieu thereof the following new subsection 7.1(a):
"(a) Maintenance of Net Worth. Permit Consolidated Net Worth
on the last day of any fiscal quarter of the Parent to be less
than $80,000,000."
6 Amendment of Subsection 7.10(e). Subsection 7.10(e) of the
Credit Agreement is hereby amended by deleting the Dollar amount "$10,000,000"
and inserting in lieu thereof the Dollar amount "$20,000,000" and by deleting
the word "three" and inserting in lieu thereof the word "five".
7 Amendment of Subsection 7.16. Subsection 7.16 of the
Credit Agreement is hereby amended by adding the phrase "and/or any other
Persons principally engaged in trucking or a similar business" in the fourth
line from the bottom of that subsection, immediately after the word
"Subsidiaries" and before the word "provided" and adding the following new
language after the last parenthesis therein:
"and provided, further, that no more than one third (1/3)
of the total insurance premiums received by the Insurance Subsidiary during
any period of four consecutive fiscal quarters may derive from policies held by
Persons principally engaged in trucking or a similar business not doing
business with the Borrower and/or any of its Subsidiaries."
8 Representations; No Default. On and as of the date hereof,
and after giving effect to this Amendment, the Borrower confirms, reaffirms
and restates that the representations and warranties set forth in Section IV of
the Credit Agreement are true and correct in all material respects, provided
that the references to the Credit Agreement therein shall be deemed to be
references to this Amendment and to the Credit Agreement as amended by this
Amendment.
9 Conditions to Effectiveness. This Amendment shall become
effective on the date on which the Agent shall have received counterparts of
this Amendment, duly executed and delivered by a duly authorized officer of
each of the Borrower, the Parent, each Guarantor which is a party to the
Subsidiaries Guarantee and each of the Required Lenders.
10 Limited Effect. Except as expressly amended herein, the
Credit Agreement shall continue to be, and shall remain, in full force and
effect. This Amendment shall not be deemed to be a waiver of, or consent to,
or a modification or amendment of, any other term or condition of the Credit
Agreement or to prejudice any other right or rights which the Lenders may now
have or may have in the future under or in connection with the Credit Agreement
or any of the instruments or agreements referred to therein, as the same may be
amended from time to time.
24
<PAGE>
11 Costs and Expenses. The Borrower agrees to pay or
reimburse the Agent for all its reasonable and customary out-of-pocket costs
and expenses incurred in connection with this Amendment, including, without
limitation, the reasonable fees and disbursements of its counsel.
12 Counterparts. This Amendment may be executed by one or
more of the parties hereto in any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
13 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their respective duly authorized
officers as of the date first above written.
LANDSTAR SYSTEM HOLDINGS, INC.
By:
Title:
LANDSTAR SYSTEM, INC.
By:
Title:
THE CHASE MANHATTAN BANK,
as Administrative Agent and as a Lender
By:
Title:
25
<PAGE>
EXHIBIT 11.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirty Nine Thirteen
Weeks Ended Weeks Ended
--------------------------- ---------------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
------------ ------------- ------------- -----------
Earnings available for earnings per share:
<S> <C> <C> <C> <C>
Income from continuing operations $ 30,304 $ 23,155 $ 12,074 $ 9,239
Discontinued operations, net of income taxes (22,589)
------------ ------------ ------------ ------------
Net income $ 30,304 $ 566 $ 12,074 $ 9,239
============ ============ ============ ============
Average number of common shares outstanding 10,149 11,223 9,954 10,743
============ ============ ============ ============
Earnings per common share:
Income from continuing operations $ 2.99 $ 2.06 $ 1.21 $ 0.86
Loss from discontinued operations (2.01)
------------ ------------ ------------- ------------
Earnings per common share $ 2.99 $ 0.05 $ 1.21 $ 0.86
============ ============ ============= ============
26
</TABLE>
<PAGE>
EXHIBIT 11.2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF DILUTED EARNINGS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirty Nine Thirteen
Weeks Ended Weeks Ended
--------------------------- ---------------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
------------ ------------- ------------- -----------
Earnings available for earnings per share:
<S> <C> <C> <C> <C>
Income from continuing operations $ 30,304 $ 23,155 12,074 $ 9,239
Discontinued operations, net of income taxes (22,589)
------------ ------------ ------------ ------------
Net income $ 30,304 $ 566 $ 12,074 $ 9,239
============ ============ ============ ============
Average number of common shares
outstanding 10,149 11,223 9,954 10,743
Plus: Incremental shares from
assumed exercise of stock
options 121 93 122 109
------------ ------------ ------------ ------------
Average number of common shares
and common share equivalents
outstanding 10,270 11,316 10,076 10,852
============ ============ ============ ============
Diluted earnings per share:
Income from continuing operations $ 2.95 $ 2.05 $ 1.20 $ 0.85
Loss from discontinued operations (2.00)
------------ ------------ ------------ ------------
Diluted earnings per share $ 2.95 $ 0.05 $ 1.20 $ 0.85
============ ============ ============ ============
27
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets at September 25, 1999 (Unaudited) and the
Consolidated Statements of Income for the thirty nine weeks ended September 25,
1999 (Unaudited) 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-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> SEP-25-1999
<CASH> 30,068
<SECURITIES> 0
<RECEIVABLES> 190,086
<ALLOWANCES> 4,045
<INVENTORY> 0
<CURRENT-ASSETS> 237,064
<PP&E> 87,444
<DEPRECIATION> 35,757
<TOTAL-ASSETS> 342,901
<CURRENT-LIABILITIES> 162,074
<BONDS> 35,567
0
0
<COMMON> 131
<OTHER-SE> 116,461
<TOTAL-LIABILITY-AND-EQUITY> 116,592
<SALES> 0
<TOTAL-REVENUES> 1,007,959
<CGS> 0
<TOTAL-COSTS> 764,069
<OTHER-EXPENSES> 29,030
<LOSS-PROVISION> 1,122
<INTEREST-EXPENSE> 2,981
<INCOME-PRETAX> 50,933
<INCOME-TAX> 20,629
<INCOME-CONTINUING> 30,304
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,304
<EPS-BASIC> 2.99
<EPS-DILUTED> 2.95
</TABLE>
