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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 26, 1998
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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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1998 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 22, 1999 was 10,276,833; and the aggregate market value of the voting
stock held by non-affiliates of the registrant was $329,815,872 (based on the
$33.188 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.
1998 Annual Report on Form 10-K
Table of Contents
<TABLE>
<CAPTION>
Part I
Page
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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 7a. Quantitative and Qualitative Disclosures about
Market Risk 16
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 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management 17
Item 13. Certain Relationships and Related Transactions 17
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 18
Signatures 19
Index to Exhibits 21
</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., Risk Management Claim Services, Inc.
("RMCS"), Landstar Corporate Services, Inc. and Signature Insurance
Company ("Signature"). Landstar Ranger, Landstar Inway, Landstar Ligon,
Landstar Gemini, 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 shares of Landstar 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. During 1997 and
1996, the Company incurred approximately $3,247,000 and $5,937,000 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.
On August 22, 1998, Landstar Poole, 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 approximately $40,435,000 in cash. Accordingly, the
financial results of this segment have been reported as discontinued
operations.
Description of Business
Landstar, a transportation services company, operates one of the largest
truckload carrier businesses in North America, with revenue of $1.3 billion
in 1998. The Company provides transportation services which
emphasize information coordination and customer service delivered primarily by
a network of over 1,000 independent commission sales agents. The
Company's truckload capacity is provided by independent contractors.
Landstar distinguishes itself from many other large truckload carriers by
utilizing a wide range of specialized equipment designed to meet customers'
varied transportation requirements. The Company transports a variety of
freight, including iron and steel, automotive products, paper, lumber and
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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
services to shippers throughout the continental United States and, to a lesser
extent, between the United States and each of Canada and Mexico.
The Company has determined it has three reportable business segments under the
provisions of Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information." These are the carrier, multimodal and insurance segments.
The following table provides financial information relating to the Company's
reportable business segments as of and for the fiscal years ending 1998, 1997
and 1996 (dollars in thousands):
<TABLE>
<CAPTION> Fiscal Year
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1998 1997 1996
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<S> <C> <C> <C>
Revenue from unaffiliated customers:
Carrier segment $ 981,427 $ 945,330 $ 905,472
Multimodal segment 277,999 255,041 224,384
Insurance segment 24,181 18,940
Inter-segment revenue:
Carrier segment $ 38,517 $ 39,453 $ 37,479
Multimodal segment 535 968 1,160
Insurance segment 24,175 15,452
Operating income:
Carrier segment $ 67,536 $ 62,280 $ 57,031
Multimodal segment 8,272 5,355 4,584
Insurance segment 19,479 7,863 (799)
Other (33,833) (29,177) (22,462)
Identifiable assets:
Carrier segment $ 199,287 $ 192,143 $ 212,034
Multimodal segment 66,120 64,055 56,547
Insurance segment 24,179 22,101 480
Discontinued segment 68,791 85,526
Other 24,079 10,089 16,214
</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 varies
directly with revenue. At December 26, 1998, the carrier segment operated a
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fleet of approximately 7,900 tractors, provided by approximately 6,200
independent contractors, and approximately 12,300 trailers, 6,100 of which are
supplied by independent contractors. Approximately 77% 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
by the trailer. The carrier segment's trailer fleet is comprised of
approximately 7,700 dry vans, 3,400 flatbeds, 900 specialty and 300
refrigerated vans. The carrier segment has a network of approximately 840
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
generated. 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 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.
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, 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. Agent
compensation in the multimodal segment is 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-upon fixed fee. The nature
of the multimodal segment business is such that a significant portion of its
operating costs varies directly with revenue. At December 26, 1998, the
multimodal segment operated a fleet of 630 trucks, provided by approximately
570 independent contractors. Multimodal segment independent contractors provide
primarily power-only truck capacity, whereby the freight is hauled by an
independent contractor in a customer trailer or container. Cargo vans and
straight trucks are utilized for emergency and expedited freight services.
The multimodal segment has a network of approximately 240 independent
commission sales agents.
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The insurance segment is comprised of Signature, a wholly-owned offshore
insurance subsidiary that was formed in March 1997, and RMCS. The insurance
segment provides risk and claims management services for 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.
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 customer service and information coordination among its independent
commission sales agents, customers and capacity providers, rather
than the volume-driven approach of generic dry van carriers. Landstar intends
to continue developing appropriate systems and technologies that offer
integrated transportation and logistics solutions to meet the total
transportation needs of its customers.
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 primarily truckload transportation services through the carrier and
multimodal groups, 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 26, 1998:
<TABLE>
<CAPTION>
<S> <C>
Trailers:
Vans 7,593
Specialty Vans 95
Temperature-Controlled 328
Flatbeds 2,428
Drop Deck/Low Boys 1,027
Light Specialty 64
Other Specialized Flatbeds 826
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Total 12,361
======
</TABLE>
MARKETING NETWORK. Landstar's network of over 1,000
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 1998, more
than 370 agents generated revenue for Landstar of at least $1 million each, or
approximately $1.0 billion 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
parameters. Each operating subsidiary contracts directly with customers and
generally assumes the credit risk and liability for freight losses or damages.
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The carrier segment and multimodal segment generally dispatch their fleets
through their local agents. 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 its information services department.
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. Information regarding the Company's
computer system year 2000 status is included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 25 to 31 of
the Company's 1998 Annual Report to shareholders and is included in this report
on Form 10-K as Exhibit 13.
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
strategic planning human resource management
technology and management information systems finance
legal accounting, budgeting and taxes
quality programs
INDEPENDENT CONTRACTORS. Landstar operates the largest fleet of truckload
independent contractors in North America. This provides marketing, operating,
safety, recruiting, retention and financial advantages to the Company. Most
of the Company's truckload independent contractors are compensated based on
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 1998, Landstar experienced a turnover rate among independent contractors of
approximately 51%. A significant percentage of this turnover was attributable
to independent contractors who had been independent contractors with the
Company for less than one year. Management believes that the lack of
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 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. This allows the
Company to maintain a lower level of capital investment, which results in 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.
Deregulation 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, although competition has created downward
pressure on the truckload industry's pricing structure, the Company has been
able to increase its overall revenue per revenue mile (price) by improving its
freight quality during the most recent years. 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
("ICC") and is now regulated by the United States Department of
Transportation ("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 requirements have not adversely affected the availability of
qualified drivers to the Company.
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 26, 1998, the Company and its subsidiaries employed
approximately 1,278 individuals. Approximately 130 Landstar Ranger drivers
(out of a total of approximately 3,700) 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. In addition, the Company's corporate headquarters are
located in Jacksonville, Florida and RMCS is located in Madisonville, Kentucky.
The Madisonville, Kentucky and Rockford, Illinois facilities of the carrier
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. On March 24, 1998, the court granted
defendant's motion to dismiss the RICO claim. Briefs were submitted on the
question of a private right of action to enforce the federal leasing
regulations at the court's behest and a decision is pending. The court will
likely refer Rivas' remaining claims to arbitration if a private right of
action and Federal court jurisdiction is sustained. Plaintiff may appeal
dismissal of the RICO claim. 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 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 1998.
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 1998 Market Price 1997 Market Price
--------------- ----------------- -----------------
<S> <C> <C> <C> <C>
High Low High Low
First Quarter $ 32 1/2 $ 25 1/4 $ 26 1/2 $ 21 3/4
Second Quarter 35 5/32 30 3/4 29 23 1/2
Third Quarter 37 1/4 27 28 1/2 23 1/2
Fourth Quarter 45 5/8 21 1/16 28 3/4 23 5/8
</TABLE>
The reported last sale price per share of the Common Stock as quoted through
the NASDAQ National Market System on March 22, 1999 was $33.188 per share. As
of such date, Landstar had 10,276,833 shares of Common Stock outstanding. As
of March 22, 1999, the Company had 86 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 brokers or dealers for their customers in street name.
The Company has not paid any cash dividends on the Common Stock within the past
three years 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 46 of the Company's 1998 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 31 of the Company's 1998 Annual Report to Shareholders.
15
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company has 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. As of December 26, 1998, the weighted average
interest rate on borrowings outstanding was 5.69%. During fiscal 1998, the
average outstanding balance under the Second Amended and Restated Credit
Agreement was $38,974,000. Based on the borrowing rates in the Second Amended
and Restated Credit Agreement and the repayment terms, the fair value of the
outstanding borrowings as of December 26, 1998 was estimated to approximate
carrying value.
The Second Amended and Restated Credit Agreement expires on
October 10, 2002. The amount outstanding on the acquisition facility is
payable upon the expiration of the Second Amended and Restated Credit
Agreement.
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 32 through 45 of the
Company's 1998 Annual Report to Shareholders.
Item 9. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
16
<PAGE>
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 16 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.
17
<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 LLP dated February 9, 1999, 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 32 through 44
of the Company's 1998 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 24 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 26, 1998 S-4
II Valuation and Qualifying Accounts
For the Fiscal Year Ended December 27, 1997 S-5
II Valuation and Qualifying Accounts
For the Fiscal Year Ended December 28, 1996 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
1998.
18
<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 24, 1999
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 24, 1999
- - ------------------- Chief Executive Officer, Principal
Jeffrey C. Crowe Executive Officer
Henry H. Gerkens Executive Vice President & March 24, 1999
- - ------------------- Chief Financial Officer; Principal
Henry H. Gerkens Financial Officer
Robert C. LaRose Vice President Finance & Treasurer;
- - ------------------- Principal Accounting Officer March 24, 1999
Robert C. LaRose
* Senior Vice President and Director March 24, 1999
- - -------------------
John B. Bowron
* Director March 24, 1999
- - -------------------
David G. Bannister
* Director March 24, 1999
- - -------------------
Ronald W. Drucker
19
<PAGE>
* Director March 24, 1999
- - -------------------
Merritt J. Mott
* Director March 24, 1999
- - -------------------
William S. Elston
* Director March 24, 1999
- - -------------------
Diana M. Murphy
* Attorney In Fact
- - ----------------------
By: Michael L. Harvey
20
<PAGE>
EXHIBIT INDEX
Form 10-K for fiscal year ended 12/26/98
Exhibit No. Description
- - ----------- -----------
(1) Plan of acquisition, reorganization, arrangement, liquidation
or succession
2.1 Asset Purchase Agreement by and between Landstar Poole, Inc.
as the seller, and Landstar System, Inc., as the guarantor, and Schneider
National, Inc. as the purchaser dated as of July 15, 1998. (Incorporated by
reference to Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 27, 1998 (Commission File No. 0-21238))
(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.
21
<PAGE>
Exhibit Index (continued)
Form 10-K for fiscal year ended 12/26/98
Exhibit No. Description
- - ----------- -----------
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))
4.6* First Amendment, dated October 30, 1998, to the 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
(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 (Incorporated by reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 27, 1997 (Commission
File NO. 0-21238))
22
<PAGE>
Exhibit Index (continued)
Form 10-K for fiscal year ended 12/26/98
Exhibit No. Description
- - ----------- -----------
10.10+ Amendment to the Landstar System, Inc. 1993 Stock Option
Plan (Incorporated by reference to Exhibit 10.10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 27, 1997 (Commission
File No. 0-21238))
10.11+* Form of Promissory Note between the Company and certain
directors, executive officers and management of the Company.
(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 1998 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 LLP as Independent Auditors of the Registrant
(24) Power of Attorney
24.1* Powers of Attorney
(27) Financial Data Schedules
27.1* 1998 Financial Data Schedule
27.2* Restated 1997 Financial Data Schedule
___________________
+management contract or compensatory plan or arrangement
*Filed herewith.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Landstar System, Inc.:
Under date of February 9, 1999, we reported on the consolidated balance sheets
of Landstar System, Inc. and subsidiary as of December 26, 1998 and December
27, 1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the fiscal years ended December 26,
1998, December 27, 1997 and December 28, 1996, as contained in the 1998 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 1998. 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 LLP
Stamford, Connecticut
February 9, 1999
24
<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. 26, Dec. 27,
1998 1997
-------- --------
<S> <C> <C>
Assets
- - ------
Investment in Landstar System Holdings, Inc.,
net of advances $111,848 $151,696
-------- --------
Total assets $111,848 $151,696
======== ========
Liabilities and Shareholders' Equity
- - -----------------------------------
Shareholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares, issued 13,041,574
and 12,900,974 shares $ 130 129
Additional paid-in capital 65,198 62,169
Retained earnings 124,237 112,345
Cost of 2,618,041 and 915,441 shares of common
stock in treasury (76,176) (22,947)
Notes receivable arising from exercise of
stock options (1,541)
-------- --------
Total shareholders' equity 111,848 151,696
-------- --------
Total liabilities and shareholders' equity $111,848 $151,696
======== ========
</TABLE>
S-1
25
<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 YEARS ENDED
-----------------------------------------------
Dec. 26, Dec. 27, Dec. 28,
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Rental income $ 648 $ 682
Amortization expense (626) (626)
Interest expense (22) (56)
Equity in undistributed earnings
of Landstar System Holdings, Inc. $ 11,897 24,736 18,942
Income taxes (5) (46) (17)
---------- ---------- -----------
Net income $ 11,892 $ 24,690 $ 18,925
========== ========== ===========
Earnings per common share $ 1.08 $ 1.97 $ 1.48
========== ========== ===========
Diluted earnings per share $ 1.07 $ 1.96 $ 1.47
========== ========== ===========
Average number of shares
outstanding:
Earnings per common share 11,022,000 12,541,000 12,785,000
========== ========== ===========
Diluted earnings per share 11,123,000 12,580,000 12,831,000
========== ========== ==========
</TABLE>
S-2
26
<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 YEARS ENDED
-----------------------------------------------
Dec. 26, Dec. 27, Dec. 28,
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Operating Activities
- - --------------------
Net income $ 11,892 $ 24,690 $ 18,925
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Amortization of operating property 626 626
Equity in undistributed earnings of
Landstar System Holdings, Inc. (11,897) (24,736) (18,942)
---------- ---------- -----------
Net Cash Provided (Used) By Operating
Activities (5) 580 609
---------- ---------- -----------
Investing Activities
- - --------------------
Additional investments in and advances
from (to) Landstar System Holdings,
Inc., net 51,745 20,384 (223)
---------- ---------- -----------
Net Cash Provided (Used) By Investing
Activities 51,745 20,384 (223)
---------- ---------- -----------
Financing Activities
- - --------------------
Principal payments on borrowings under
capital lease obligations (413) (622)
Proceeds from sales of common stock 1,489 429 236
Purchases of common stock (53,229) (20,980)
---------- ---------- ----------
Net Cash Used By Financing
Activities (51,740) (20,964) (386)
---------- ---------- ----------
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
27
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1998
(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(A) Describe Describe(B) of Period
- - ----------- --------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Deducted from trade
receivables $ 5,957 $ 3,238 $ - $ (2,767) $ 6,428
Deducted from other
receivables 4,009 818 - (820) 4,007
Deducted from other
non-current
receivables 58 245 - - 303
------- --------- --------- -------- -------
$10,024 $ 4,301 $ - $ (3,587) $10,738
======= ========= ========= ======== =======
</TABLE>
(A) Includes $25 charged to costs and expenses of discontinued operations.
(B) Write-offs, net of recoveries.
S-4
28
<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(A) Describe Describe(B) 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) Includes $234 of recoveries related to discontinued operations.
(B) Write-offs, net of recoveries.
S-5
29
<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(A) Describe Describe (B) 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) Includes $715 charged to costs and expenses of discontinued operations.
(B) Write-offs, net of recoveries.
S-6
30
<PAGE>
EXHIBIT 4.6
FIRST AMENDMENT
FIRST AMENDMENT, dated as of October 30, 1998 (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 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):
"7.1(a) Maintenance of Net Worth. Permit Consolidated New Worth on the last
day of any fiscal quarter of the Parent to be less than the sum of
(i) $80,000,000, plus (ii) the gross cash proceeds of any issuance of any
equity securities received by the Parent or any of its Subsidiaries subsequent
to the Closing Date (other than any such cash proceeds received from employees
of the Borrower and its Subsidiaries to whom the amount thereof shall have been
loaned in cash by the Borrower or any of its Subsidiaries) less all legal
expenses, commissions and other fees and expenses incurred or to be incurred
and all federal, state, local and foreign taxes incurred or to be incurred in
connection therewith to the extent such proceeds are included in Consolidated
Net Worth, plus (iii) 50% of Cumulative Consolidated Net Income."
3. Amendment of Subsection 7.10(m). Subsection 7.10(m) of the Credit
Agreement is hereby amended by deleting the Dollar amount "$1,000,000" and
inserting in lieu thereof the Dollar amount "$5,000,000".
4. Amendment of Subsection 7.10. Subsection 7.10 of the Credit
Agreement is hereby amended by adding the following new paragraphs at the end
thereof:
31
<PAGE>
"(n) loans to its employees for the purpose of exercising employee stock
options to purchase common stock of the Parent, which loans may be
non-recourse."
"(o) loans to its employees to purchase common stock of the Parent, which
loans may be non-recourse, provided all such loans may not exceed $5,000,000
at any one time outstanding."
5. 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 the Credit Agreement as amended by this Amendment.
6. Conditions to Effectiveness. This Amendment shall become effective on the
date on which the Agent shall 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.
7. 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.
8. 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.
9. 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.
32
<PAGE>
10. 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: Vice President Finance and Treasurer
LANDSTAR SYSTEM, INC.
By: __________________________
Title: Vice President Finance and Treasurer
THE CHASE MANHATTAN BANK,
As Administrative Agent and as a Lender
By: __________________________
Title
33
<PAGE> Exhibit 10.11
Promissory Note
---------------
FOR VALUE RECEIVED, -----------(the "Borrower") hereby promises to pay to
the order of LANDSTAR SYSTEM, INC. (the "lender") the sum of -----------
Dollars ($xx,xxx.xx) (the "loan") on or before ----------------, plus interest
on the unpaid principal balance hereof from December xx, 1998 at the annual
rate of seven percent (7%) as provided herein on demand. The principal shall
be repaid on the fifth anniversary of this note, ---------------. Interest
shall be repayable annually on the anniversary date of the note, except that
interest shall be forgiven each year on the anniversary date of this note if
the Borrower is still employed by the Lender. In the event Borrower is
terminated as an employee of Landstar System, In., (Landstar System Inc. or
any affiliate of Landstar System, Inc.) for any reason, the entire amount
(principal and interest) then remaining due shall be repaid in full within
thirty (30) days of the termination date.)
The Lender and the Borrower further agree to waive demand, notice of
non-payment and protest; and in the case suit shall be brought for the
collection hereof, or the same has to be collected upon demand of an attorney,
to pay reasonable attorney's fees for making such collection. The Lender and
the Borrower shall remain liable for any deficiency with legal interest. The
Loan (I) may not be assigned by Borrower without the written consent of the
Lender, (II) is binding upon the Borrower's successors and heirs, and (III)
shall be governed by and construed in accordance with the laws of the state
of Florida.
The Lender may, on notice to the Borrower, convey its interest on the Loan
to any entity in which the Lender has equity interest, in which case reference
herein to "Lender" shall be deemed to refer to such entity.
Dated: ---------------------
________________________
Typed Name:
Acknowledged and Agreed:
LANDSTAR SYSTEM, INC.
By: ______________________
Name:
Title:
34
<PAGE>
EXHIBIT 11.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Years Ended
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income from continuing operations $ 34,481 $ 25,428 $ 19,647
Discontinued operations, net
of income taxes (22,589) (738) (722)
------------ ------------ ------------
Net income $ 11,892 $ 24,690 $ 18,925
============ ============ ============
Average number of common shares
outstanding 11,022 12,541 12,785
============ ============ ============
Earnings (loss) per common share:
Income from continuing operations $ 3.13 $ 2.03 $ 1.54
Loss from discontinued operations (2.05) (0.06) (0.06)
------------ ------------ ------------
Earnings per common share $ 1.08 $ 1.97 $ 1.48
============ ============ ============
</TABLE>
35
<PAGE>
EXHIBIT 11.2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF DILUTED EARNINGS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Years Ended
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income from continuing operations $ 34,481 $ 25,428 $ 19,647
Discontinued operations, net
of income taxes (22,589) (738) (722)
------------ ------------ ------------
Net income $ 11,892 $ 24,690 $ 18,925
============ ============ ============
Average number of common shares
outstanding 11,022 12,541 12,785
============ ============ ============
Plus: Incremental shares from
assumed exercise of stock
options 101 39 46
------------ ------------ ------------
Average number of common shares
and incremental shares
outstanding 11,123 12,580 12,831
============ ============ ============
Diluted earnings (loss) per share:
Income from continuing operations $ 3.10 $ 2.02 $ 1.53
Loss from discontinued operations (2.03) (0.06) (0.06)
------------ ------------ ------------
Diluted earnings per share $ 1.07 $ 1.96 $ 1.47
============ ============ ============
</TABLE>
36
<PAGE>
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 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 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 carrier segment's revenue represented 76%, 77% and 80% of Landstar's
consolidated revenue in 1998, 1997 and 1996, respectively.
The multimodal segment is comprised of Landstar Logistics, Inc. ("Landstar
Logistics") and Landstar Express America, Inc. ("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. The nature
of the multimodal segment's business is such that a significant portion of its
operating costs also varies directly with revenue. The multimodal segment's
revenue represented 22%, 21% and 20% of Landstar's consolidated revenue in
1998, 1997 and 1996, respectively.
37
<PAGE>
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. The insurance
segment's revenue represented 2% of Landstar's consolidated revenue in both
1998 and 1997.
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 approximately $40,435,000 in cash. Accordingly, the financial results
of this segment have been reported as discontinued operations in the
accompanying financial statements.
During the fourth quarter of 1996, the Company announced a plan to
restructure the Landstar T.L.C., Inc. ("Landstar T.L.C.") operations,
in addition to the relocation of its Shelton, Connecticut corporate
office headquarters to Jacksonville, Florida in the second quarter of 1997.
In accordance with the restructuring plan, the operations of Landstar T.L.C.
were merged into Landstar Inway and the Company recorded $3,247,000 and
$5,937,000 of restructuring costs during the 1997 and 1996 periods,
respectively. The restructuring was substantially completed by June 28, 1997.
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
38
<PAGE>
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 operations or the air freight operations of the
multimodal segment.
Trailer rent and maintenance costs are the largest components 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.
39
<PAGE>
The following table sets forth the percentage relationships of expense items to
revenue for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Years
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Investment income 0.1
Costs and expenses:
Purchased transportation 74.0 73.7 73.2
Commissions to agents and brokers 7.9 8.1 7.5
Other operating costs 2.1 2.7 4.6
Insurance and claims 3.1 3.5 2.6
Selling, general and administrative 7.4 7.0 7.0
Depreciation and amortization 0.8 0.9 1.2
Restructuring costs 0.3 0.5
------ ------ ------
Total costs and expenses 95.3 96.2 96.6
------ ------ ------
Operating income 4.8 3.8 3.4
Interest and debt expense 0.3 0.2 0.4
------ ------ ------
Income from continuing operations
before income taxes 4.5 3.6 3.0
Income taxes 1.8 1.5 1.2
------ ------ ------
Income from continuing operations 2.7 2.1 1.8
Discontinued operations, net of
income taxes (1.8) (0.1) (0.1)
------ ------ ------
Net income 0.9% 2.0% 1.7%
====== ====== ======
</TABLE>
FISCAL YEAR ENDED DECEMBER 26, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 27,
1997
Revenue for the fiscal year 1998 was $1,283,607,000, an increase of
$64,296,000, or 5.3%, over revenue for the 1997 fiscal year. The increase
was attributable to higher revenue at the carrier, multimodal and insurance
segments of $36,097,000, $22,958,000 and $5,241,000, respectively. Overall,
revenue per revenue mile (price) increased approximately 3%, which reflected
improved freight quality, and revenue miles (volume) increased approximately
1%. The increase in revenue over the prior year at the insurance segment was
primarily attributable to the establishment of Signature in March 1997.
Purchased transportation was 74.0% of revenue in 1998 compared with 73.7% in
1997. Other operating costs were 2.1% of revenue in 1998 compared with 2.7% in
1997. The increase in purchased transportation and decrease in other operating
costs as a percentage of revenue was primarily attributable to the elimination
40
<PAGE>
of company-owned tractors as part of the Landstar T.L.C. restructuring.
Commissions to agents and brokers were 7.9% of revenue in 1998 compared
with 8.1% in 1997 primarily due to a decrease in the percentage of revenue
contributed by the intermodal services operations of the multimodal segment
and increased premium revenue at the insurance segment. Insurance and claims
were 3.1% of revenue in 1998 compared with 3.5% in 1997 primarily due to
the favorable development of prior year claims in 1998 and favorable frequency
and severity of accidents. Excluding the effects of the insurance programs
available to the Company's independent contractors which Signature reinsures,
insurance and claims were 2.2% of revenue in 1998 and 2.7% in 1997.
Selling, general and administrative costs were 7.4% of revenue in 1998 and 7.0%
in 1997. The increase in selling, general and administrative costs as a
percentage of revenue was due to a higher provision for bonuses under the
Company's incentive compensation plan, increased management information
services costs, an increased provision for customer bad debts and one time
costs of $560,000 attributable to the relocation of Landstar Express America
from Charlotte, North Carolina to Jacksonville, Florida.
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C. operations, in addition to the relocation of its Shelton, Connecticut
corporate office headquarters to Jacksonville, Florida in the second quarter of
1997. Accordingly, the Company recorded $3,247,000 of restructuring costs
during the 1997 period. The restructuring was substantially completed by
June 28, 1997.
Interest and debt expense was 0.3% of revenue in 1998 and 0.2% in 1997.
This increase was primarily attributable to the effect of higher average
borrowings on the senior credit facility, which were used to finance a portion
of the Company's stock purchase program, partially offset by reduced capital
lease obligations.
The provisions for income taxes from continuing operations for the 1998 and
1997 fiscal years were based on effective income tax rates of approximately
40.5% and 41.7%, respectively, which are 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 26,
1998, the valuation allowance of $658,000 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 $52,000 for state operating loss carryforwards utilized in 1998.
The valuation allowance and goodwill will be further reduced by $630,000
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.
41
<PAGE>
Income from continuing operations was $34,481,000, or $3.13 per common share,
in 1998 compared with $25,428,000, or $2.03 per common share, in 1997.
Including the dilutive effect of the Company's stock options, diluted earnings
per share from continuing operations was $3.10 in 1998 and $2.02 in 1997.
Excluding restructuring costs, income from continuing operations for 1997
would have been $27,321,000, or $2.18 per common share ($2.17 diluted earnings
per share).
The loss from discontinued operations of $22,589,000, or $2.05 per common share
($2.03 diluted loss per share), in 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 loss
from discontinued operations for 1997 was $738,000, net of income tax benefits
of $310,000, or $0.06 per common share ($0.06 diluted loss per share).
Net income was $11,892,000, or $1.08 per common share, in 1998 compared with
$24,690,000, or $1.97 per common share, in the prior year. Including the
dilutive effect of the Company's stock options, diluted earnings per share was
$1.07 in 1998 and $1.96 in 1997.
FISCAL YEAR ENDED DECEMBER 27, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1996
Revenue for the fiscal year 1997 was $1,219,311,000, an increase of
$89,455,000, or 7.9%, over revenue for the prior year. The increase was
attributable to higher revenue at the carrier and multimodal segments of
$39,858,000 and $30,657,000, respectively, and premium revenue of $18,940,000
generated by the insurance segment. Overall, revenue miles increased
approximately 4% and revenue per revenue mile increased approximately 2%.
During 1997, revenue generated through independent contractors,
including railroads and air cargo carriers, was 98.0% of consolidated
revenue compared with 96.7% in 1996.
Purchased transportation was 73.7% of revenue in 1997 compared with 73.2% in
1996. Other operating costs were 2.7% of revenue in 1997 compared with 4.6% in
1996. The increase in purchased transportation and decrease in other operating
costs as a percentage of revenue was primarily attributable to an increase in
the percentage of revenue generated through independent contractors due to the
elimination of company-owned tractors as a result of the Landstar T.L.C.
restructuring. Commissions to agents and brokers were 8.1% of revenue in
1997 compared with 7.5% in 1996 due to an increase in the percentage of
revenue generated through independent commission sales agents. Insurance and
claims were 3.5% of revenue in 1997 compared with 2.6% in 1996 due 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 2.7% in 1997. Selling,
general and administrative costs were 7.0% of revenue in both 1997 and 1996.
Depreciation and amortization was 0.9% of revenue in 1997 compared with 1.2%
of revenue in 1996 primarily due to the elimination of company-owned tractors
related to the Landstar T.L.C. restructuring.
Interest and debt expense was 0.2% of revenue in 1997 and 0.4% in 1996.
This decrease was primarily attributable to the effect of lower average
borrowings on the senior credit facility and reduced capital lease obligations.
42
<PAGE>
The provisions for income taxes from continuing operations for the 1997 and
1996 fiscal years were based on effective income tax rates of approximately
41.7% and 41.0%, respectively, which are 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 $106,000 for state operating loss
carryforwards utilized in 1997.
Income from continuing operations was $25,428,000, or $2.03 per common share,
in 1997 compared with $19,647,000, or $1.54 per common share, in 1996.
Including the dilutive effect of the Company's stock options, diluted earnings
per share from continuing operations was $2.02 in 1997 and $1.53 in 1996.
Excluding restructuring costs, income from continuing operations for 1997 and
1996 would have been $27,321,000, or $2.18 per common share ($2.17 diluted
earnings per share), and $23,150,000, or $1.81 per common share ($1.80 diluted
earnings per share), respectively.
The loss from discontinued operations was $738,000, or $0.06 per common share
($0.06 diluted loss per share), for 1997. The loss from discontinued
operations for 1996 was $722,000, or $0.06 per common share ($0.06 diluted loss
per share).
43
<PAGE>
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.
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 26, 1998, Landstar had commitments for letters of
credit outstanding in the amount of $24,592,000, $17,592,000 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 26, 1998, 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 26, 1998, the commitment fee for the unused portion of the Second
Amended and Restated Credit Agreement was 0.100%. At December 26, 1998, the
weighted average interest rate on borrowings outstanding under the Acquisition
Facility was 5.69%. 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
44
<PAGE>
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
$4,600,000 at December 26, 1998.
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 Landstar System Holdings,
Inc.'s ("LSHI") subsidiaries guarantee LSHI's obligations under the Second
Amended and Restated Credit Agreement.
Shareholders' equity was $111,848,000, or 76% of total capitalization,
at December 26, 1998, compared with $151,696,000, or 75% of total
capitalization, at December 27, 1997. The reduction in shareholders' equity
was a result of the purchase of 1,702,600 shares of the Company's common
stock at a total cost of $53,229,000 offset by 1998 net income.
Long-term debt including current maturities was $34,440,000 at December 26,
1998, $16,006,000 lower than at December 27, 1997. Working capital and the
ratio of current assets to current liabilities were $75,670,000 and 1.53 to 1,
respectively, at December 26, 1998, compared with $79,051,000 and 1.57 to 1,
respectively, at December 27, 1997. Landstar has historically operated with
current ratios approximating 1.5 to 1. Cash provided by operating activities
from continuing operations was $53,363,000 in 1998 compared with $58,480,000
in 1997. During the 1998 fiscal year, Landstar purchased $7,185,000 of
operating property and acquired $12,902,000 of revenue equipment by entering
into capital leases. Landstar anticipates it will acquire approximately
$30,000,000 of operating property during fiscal year 1999 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,
45
<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 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. The Company plans to replace all non-IT systems
that are not year 2000 compliant with year 2000 compliant systems prior to
year-end 1999. The Company is utilizing 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
already 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,
whose revenue represents 43% of the carrier segment's revenue, have been
reprogrammed to be year 2000 compliant. The Company has successfully tested
each of the major subsystems independently and intends to perform an additional
system-wide comprehensive test during the third quarter of 1999. As part of its
ongoing system development, the Company is in the process of converting the
critical IT systems of Landstar Ligon, whose revenue represents approximately
22% of the carrier segment's revenue, to the same systems as Landstar Ranger.
This conversion is expected to be completed by July 1999. Landstar Inway, the
remaining operating company in the carrier segment, has successfully converted
approximately 55% of its critical IT systems and expects to complete the
project by May 1999. In addition, as part of the overall standardization plan,
the Company intends to convert all of its operating companies to a generic,
year 2000 compliant general ledger and accounts payable software system
during 1999.
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 will approximate $500,000, of which approximately
$300,000 has been incurred. 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.
46
<PAGE>
The Company's contingency plan for Landstar Inway, which is still
in the process of converting its critical IT systems, is to accelerate the
transfer of data processing information to the Landstar Ranger based system.
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.
The Company believes that the year 2000 project will be completed in sufficient
time to ensure that transactions affecting the year 2000 will be properly
recognized by the revised programming code. Failure to complete the
year 2000 project, both internal and the readiness of third party vendors,
could have a material adverse effect on the Company's future operating results
or financial condition.
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 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." This Statement,
effective for fiscal years beginning after June 15, 1999, establishes standards
for reporting and display of derivative investments and for hedging activities.
Management believes that upon adoption of this Statement, Landstar's financial
statements will not be affected, considering the nature of the transactions the
Company routinely enters into.
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 are typically
lower than the quarters ending June, September and December due to reduced
shipments and higher operating costs in the winter months.
47
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION> December 26, December 27,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 26,681 $ 17,994
Short-term investments 3,012
Trade accounts receivable, less allowance
of $6,428 and $5,957 172,471 176,785
Other receivables, including advances to independent
contractors, less allowance of $4,007
and $4,009 13,980 12,599
Prepaid expenses and other current assets 5,428 7,832
-------- --------
Total current assets 218,560 218,222
-------- --------
Operating property, less accumulated depreciation
and amortization of $29,603 and $50,301 46,958 81,258
Goodwill, less accumulated amortization of $6,561
and $8,818 34,949 53,289
Deferred income taxes and other assets 13,198 4,410
-------- --------
Total assets $313,665 $357,179
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 14,746 $ 12,475
Accounts payable 50,624 50,394
Current maturities of long-term debt 4,708 14,228
Insurance claims 29,873 28,247
Accrued compensation 9,881 5,392
Other current liabilities 33,058 28,435
-------- --------
Total current liabilities 142,890 139,171
-------- --------
Long-term debt, excluding current maturities 29,732 36,218
Insurance claims 29,195 27,890
Deferred income taxes 2,204
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 13,041,574 shares and
12,900,974 shares 130 129
Additional paid-in capital 65,198 62,169
Retained earnings 124,237 112,345
Cost of 2,618,041 and 915,441 shares of common
stock in treasury (76,176) (22,947)
Notes receivable arising from exercise of stock options (1,541)
-------- --------
Total shareholders' equity 111,848 151,696
-------- --------
Total liabilities and shareholders' equity $313,665 $357,179
======== ========
See accompanying notes to consolidated financial statements.
</TABLE> 48
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION> Fiscal Years Ended
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 1,283,607 $ 1,219,311 $ 1,129,856
Investment income 1,689
Costs and expenses:
Purchased transportation 950,343 898,746 826,822
Commissions to agents and brokers 101,409 98,425 84,768
Other operating costs 27,516 32,747 51,385
Insurance and claims 39,388 42,885 29,774
Selling, general and administrative 95,028 85,586 79,002
Depreciation and amortization 10,158 11,354 13,814
Restructuring costs 3,247 5,937
------------ ------------ ------------
Total costs and expenses 1,223,842 1,172,990 1,091,502
------------ ------------ ------------
Operating income 61,454 46,321 38,354
Interest and debt expense 3,503 2,705 5,032
------------ ------------ ------------
Income from continuing operations before
income taxes 57,951 43,616 33,322
Income taxes 23,470 18,188 13,675
------------ ------------ ------------
Income from continuing operations 34,481 25,428 19,647
Discontinued operations, net of
income taxes (22,589) (738) (722)
------------ ------------ ------------
Net income $ 11,892 $ 24,690 $ 18,925
============ ============ ============
Earnings (loss) per common share:
Income from continuing operations $ 3.13 $ 2.03 $ 1.54
Loss from discontinued operations (2.05) (0.06) (0.06)
------------ ------------ ------------
Earnings per common share $ 1.08 $ 1.97 $ 1.48
============ ============ ============
Diluted earnings (loss) per share:
Income from continuing operations $ 3.10 $ 2.02 $ 1.53
Loss from discontinued operations (2.03) (0.06) (0.06)
------------ ------------ ------------
Diluted earnings per share $ 1.07 $ 1.96 $ 1.47
============ ============ ============
Average number of shares outstanding:
Earnings per common share 11,022,000 12,541,000 12,785,000
Diluted earnings per share 11,123,000 12,580,000 12,831,000
See accompanying notes to consolidated financial statements.
</TABLE> 49
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION> Fiscal Years Ended
December 26, December 27, December 28,
1998 1997 1996
(Dollars in thousands) ------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Net income $ 11,892 $ 24,690 $ 18,925
Adjustments to reconcile net income to net cash
provided by operating activities of continuing operations:
Discontinued operations 22,589 738 722
Impairment of long-lived assets 2,943
Depreciation and amortization of operating property 8,892 9,737 12,184
Amortization of goodwill and non-competition agreements 1,266 1,617 1,630
Non-cash interest charges 324 264 264
Provisions for losses on trade and other receivables 4,276 4,232 4,053
Gains on sales of operating property (253) (600) (482)
Deferred income taxes, net (423) 5,670 (954)
Non-cash charge in lieu of income taxes 52 106 190
Changes in operating assets and liabilities,
net of discontinued operations:
Increase in trade and other accounts receivable (7,167) (13,672) (31,969)
Decrease (increase) in prepaid expenses and other assets (2,066) (195) 1,685
Increase in accounts payable 2,482 11,978 1,374
Increase in insurance claims 4,531 8,492 6,867
Increase (decrease) in other liabilities 6,968 5,423 (3,362)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 53,363 58,480 14,070
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of investments (4,799)
Maturities of short-term investments 3,012 1,787
Purchases of operating property (7,185) (8,944) (10,034)
Proceeds from sales of operating property 2,716 13,373 5,613
Proceeds from sale of discontinued operations 40,435
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 38,978 1,417 (4,421)
------------ ------------ ------------
FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Increase (decrease) in cash overdraft 2,598 (483) 248
Borrowings on revolving credit facility 15,000 16,000
Principal payments on long-term debt and capital lease obligations (23,040) (29,338) (28,841)
Proceeds from exercise of stock options and related income tax benefit 1,489 429 236
Purchases of common stock (53,229) (20,980)
------------ ------------ ------------
NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (57,182) (50,372) (12,357)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS (26,472) 4,282 3,480
------------ ------------ ------------
Increase in cash 8,687 13,807 772
Cash at beginning of period 17,994 4,187 3,415
------------ ------------ ------------
Cash at end of period $ 26,681 $ 17,994 $ 4,187
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE> 50
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Years Ended December 26, 1998,
December 27, 1997 and December 28, 1996
(Dollars in thousands)
<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 30, 1995 12,871,674 $ 129 $ 61,504 $ 68,730 94,041 $ (1,967) $128,396
Net income 18,925 18,925
Exercises 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)
Exercises 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
Net income 11,892 11,892
Purchases of common stock 1,702,600 (53,229) (53,229)
Exercises of stock options
and related income tax
benefit 140,600 1 3,029 $ (1,541) 1,489
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 26, 1998 13,041,574 $ 130 $65,198 $124,237 2,618,041 $ (76,176) $ (1,541) $111,848
========== ====== ======= ======== ========= ========= ============= ========
See accompanying notes to consolidated financial statements.
</TABLE>
51
<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. ("LSHI"). 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.
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.
52
<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 bases. 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
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) 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 approximately $40,435,000 in cash. Accordingly, the financial results
of this segment have been reported as discontinued operations in the
accompanying financial statements.
The loss from discontinued operations of $22,589,000 in 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 loss from discontinued operations for 1997 was $738,000, net of income tax
benefits of $310,000. The loss from discontinued operations for 1996 was
$722,000, net of income tax benefits of $250,000. Certain liabilities of the
company-owned tractor segment were retained by Landstar, primarily insurance
claims, capital lease obligations and accounts payable.
The company-owned tractor segment had revenues of $58,715,000, $93,393,000 and
$153,945,000 for 1998, 1997 and 1996, respectively.
53
<PAGE>
(3) Restructuring Costs
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C., Inc. ("Landstar T.L.C.") 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.
During the 1996 fourth quarter, the Company recorded $5,937,000 in
restructuring costs, which included $2,943,000 for the impairment of certain
long-lived assets, $939,000 for the early termination of certain operating
leases, $747,000 for employee termination costs and $1,308,000 of other costs.
Long-lived assets, having an aggregate carrying value of $14,000,000, were
reduced to their estimated sales value and primarily represented revenue
equipment to be sold. After deducting related income tax benefits of
$2,434,000, the restructuring charge reduced net income by $3,503,000, or
$0.27 per common share, in 1996.
During the first half of 1997, the Company recorded an additional $3,247,000 of
restructuring costs, which included $1,647,000 for office and employee
relocation and $1,600,000 of other costs. After deducting related income tax
54
<PAGE>
benefits of $1,354,000, the restructuring charge reduced net income by
$1,893,000, or $0.15 per common share, in 1997. The restructuring was
substantially completed by June 28, 1997.
(4) Income Taxes
The provisions for income taxes from continuing operations consisted of
the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Years
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $21,185 $10,375 $12,479
State 2,656 2,037 1,960
------- ------- -------
23,841 12,412 14,439
Deferred:
Federal (1,268) 4,465 (870)
State 845 1,205 (84)
------ ------- -------
(423) 5,670 (954)
Non-cash charge in lieu of income taxes 52 106 190
------- ------- -------
Income taxes $23,470 $18,188 $13,675
======= ======= =======
</TABLE>
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 26, 1998 Dec. 27, 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Receivable valuations $ 3,263 $ 2,380
Deferred state income tax benefits 1,396 1,100
State net operating loss carryforwards 1,536 4,032
Self insured claims 10,383 15,094
Compensated absences 493 529
All other 1,532 376
--------- ---------
18,603 23,511
Valuation allowance (658) (710)
--------- ---------
$ 17,945 $ 22,801
========= =========
Deferred tax liabilities:
Operating property $ 6,296 $ 19,784
All other 5,826 5,221
--------- ---------
$ 12,122 $ 25,005
========= =========
</TABLE>
55
<PAGE>
The loss from discontinued operations included a deferred tax benefit of
$7,604,000 in 1998.
At December 26, 1998, the valuation allowance of $658,000 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 $52,000 for state operating loss carryforwards
utilized in 1998. The valuation allowance and goodwill will be further reduced
by $630,000 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 from continuing operations
before income taxes and the provisions for income taxes (in thousands):
<TABLE>
<CAPTION>
Fiscal Years
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income taxes at federal income tax rate $20,283 $15,266 $11,663
State income taxes, net of federal income
tax benefit 2,309 2,176 1,343
Amortization of goodwill 258 258 258
Meals and entertainment exclusion 470 425 397
Other, net 150 63 14
------- -------- --------
Income taxes $23,470 $18,188 $13,675
======= ======= =======
</TABLE>
Landstar paid income taxes of $26,110,000 in 1998, $10,184,000 in 1997 and
$15,949,000 in 1996.
(5) Operating Property
Operating property is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 26, 1998 Dec. 27, 1997
------------- -------------
<S> <C> <C>
Land $ 2,280 $ 1,776
Leasehold improvements 95 56
Buildings and improvements 9,589 11,279
Revenue equipment 43,522 95,623
Other equipment 21,075 22,825
-------- --------
76,561 131,559
Less accumulated depreciation and amortization 29,603 50,301
-------- --------
$ 46,958 $ 81,258
======== ========
</TABLE>
Included above is $35,438,000 in 1998 and $86,706,000 in 1997 of operating
property under capital leases, $22,513,000 and $46,363,000, respectively, net
of accumulated amortization. Landstar acquired operating property by entering
56
<PAGE>
into capital leases in the amount of $12,902,000 and $20,690,000 (including
$7,045,000 related to the discontinued company-owned tractor segment) in 1998
and 1996, respectively. 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, Inc. ("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 from continuing operations for the Company sponsored defined
contribution plan and for union sponsored plans was $624,000 and $1,265,000
in 1998, respectively, $660,000 and $1,193,000 in 1997, respectively, and
$714,000 and $1,085,000 in 1996, respectively.
(7) Debt
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 26, 1998 Dec. 27, 1997
------------- -------------
<S> <C> <C>
Capital leases $15,940 $31,946
Acquisition Facility 18,500 18,500
------- -------
34,440 50,446
Less current maturities 4,708 14,228
------- -------
Total long-term debt $29,732 $36,218
======= =======
</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.
57
<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 26, 1998, 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 26, 1998, the commitment fee for the unused portion
of the Second Amended and Restated Credit Agreement was 0.100%. At December 26,
1998, the weighted average interest rate on borrowings outstanding under the
Acquisition Facility was 5.69%. 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
$4,600,000 at December 26, 1998.
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 $4,159,000 in 1998, $5,476,000 in 1997 and
$7,180,000 in 1996. Included in interest paid is $695,000, $1,936,000 and
$2,518,000 in 1998, 1997 and 1996, respectively, related to discontinued
operations.
(8) Leases
The future minimum lease payments under all noncancelable leases at
December 26, 1998, principally for revenue equipment, are shown in the
following table (in thousands):
58
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1999 $ 5,589 $ 2,414
2000 4,301 1,193
2001 3,614 656
2002 3,013 454
2003 1,517 46
------- ---------
18,034 $ 4,763
=========
Less amount representing interest
(6.0% to 8.0%) 2,094
Present value of minimum -------
lease payments $15,940
=======
</TABLE>
Total rent expense from continuing operations, net of sublease income, was
$20,548,000 in 1998, $21,022,000 in 1997 and $17,445,000 in 1996.
(9) Stock Option Plans
The Company maintains two stock option plans. Under the 1993 Stock Option Plan,
as amended, (the "Plan"), the Compensation Committee of the Board of Directors
may grant options to Company employees for up to 1,115,000 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, as amended, each outside Director
will be granted 9,000 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 26, 1998, there were
1,065,100 shares of the Company's stock reserved for issuance upon exercise of
options granted under the plans.
59
<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 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
Granted 219,300 $ 35.02
Exercised (140,600) $ 20.66
Forfeited (39,900) $ 27.36
--------
Options at December 26, 1998 520,300 $ 30.25 203,900 $ 26.40
========
</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 1998, 1997 and 1996: risk free interest rate of 5.0% in 1998 and
6.0% in 1997 and 1996, expected lives of 5 years and no dividend yield. The
expected volatility used in calculating the fair market value of stock options
granted was 40% in 1998, 37% in 1997 and 39% in 1996. The weighted average
grant date fair value of stock options granted was $15.02, $11.23 and $12.06
per share in 1998, 1997 and 1996, respectively.
The following table summarizes stock options outstanding at December 26, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Range of Exercise Weighted Average Weighted Average
Prices Number Outstanding Remaining Contractual Exercise Price
Per Share Dec. 26, 1998 Life (years) Per Share
----------------- ------------------ --------------------- ----------------
<S> <C> <C> <C>
$18.500 - $27.500 181,200 6.3 $ 24.83
$27.501 - $36.500 212,000 7.9 $ 29.66
$36.501 - $38.953 127,100 10.0 $ 38.95
----------------
$18.500 - $38.953 520,300 7.9 $ 30.25
================
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Options Exercisable
-------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
Per Share Dec. 26, 1998 Per Share
----------------- ---------------- ----------------
<S> <C> <C>
$18.500 - $27.500 129,400 $ 24.53
$27.501 - $30.500 74,500 $ 29.65
----------------
$18.500 - $30.500 203,900 $ 26.40
================
</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 Statement of Financial Accounting Standards ("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 $484,000, or
$0.04 per common share, in 1998, $378,000, or $0.03 per common share, in
1997 and $270,000, or $0.02 per common share, in 1996.
(10) Shareholders' Equity
During 1998, Landstar purchased 1,702,600 shares of its common stock at a total
cost of $53,229,000 pursuant to previously announced stock purchase programs.
As of December 26, 1998, Landstar may purchase up to an additional 655,000
shares of its common stock in order to complete its authorized
stock purchase programs.
During 1998, the Company established an employee stock option loan program.
Under the terms of the program, the Company will provide employees
financing in order for them to exercise fully vested stock options. The
loans are full recourse with the principal repayable in lump sum on the fifth
anniversary of the loan. During 1998, $1,541,000 of such loans were issued.
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.
61
<PAGE>
(11) Segment Information
Under the provisions of SFAS No. 131, the Company determined it has three
reportable business segments. These are the carrier, multimodal and insurance
segments. 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 varies directly with revenue. 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.
Signature Insurance Company, which comprises the majority of 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 and multimodal
segments is 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 and multimodal 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.
62
<PAGE>
The following tables summarize information about the Company's reportable
business segments as of and for the fiscal years ending December 26, 1998,
December 27, 1997 and December 28, 1996 (in thousands):
<TABLE>
<CAPTION>
1998
Carrier Multimodal Insurance Other Total
<S> <C> <C> <C> <C> <C>
External revenue $ 981,427 $ 277,999 $ 24,181 $1,283,607
Internal revenue 38,517 535 24,175 63,227
Investment income 1,689 1,689
Interest and debt expense $ 3,503 3,503
Depreciation and
amortization 5,922 1,214 3,022 10,158
Operating income 67,536 8,272 19,479 (33,833) 61,454
Expenditures on
long-lived assets 2,222 735 4,228 7,185
Capital lease additions 12,902 12,902
Total assets 199,287 66,120 24,179 24,079 313,665
1997
Carrier Multimodal Insurance Other Total
<S> <C> <C> <C> <C> <C>
External revenue $ 945,330 $ 255,041 $ 18,940 $1,219,311
Internal revenue 39,453 968 15,452 55,873
Interest income 468 468
Interest and debt expense $ 3,173 3,173
Depreciation and
amortization 6,334 1,285 3,735 11,354
Restructuring costs 1,244 154 1,849 3,247
Operating income 62,280 5,355 7,863 (29,177) 46,321
Expenditures on
long-lived assets 6,082 861 2,001 8,944
Total assets 192,143 64,055 22,101 78,880 357,179
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
1996
Carrier Multimodal Insurance Other Total
<S> <C> <C> <C> <C> <C>
External revenue $ 905,472 $ 224,384 $1,129,856
Internal revenue 37,479 1,160 38,639
Interest and debt expense $ 5,032 5,032
Depreciation and
amortization 9,583 1,310 2,921 13,814
Restructuring costs 4,675 1,262 5,937
Operating income 57,031 4,584 (799) (22,462) 38,354
Expenditures on
long-lived assets 7,930 906 1,198 10,034
Capital lease additions 12,828 817 13,645
Total assets 212,034 56,547 480 101,740 370,801
</TABLE>
Included in total assets in the other segment at December 27, 1997 and
December 28, 1996, are assets of $68,791,000 and $85,526,000, respectively,
from the discontinued company-owned tractor segment.
(12) Commitments and Contingencies
At December 26, 1998, the Company had commitments for letters of credit
outstanding in the amount of $24,592,000, primarily as collateral for estimated
insurance claims. The commitments for letters of credit outstanding include
$17,592,000 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.
64
<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 26, 1998 and December 27, 1997, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the fiscal years ended December 26, 1998, December 27, 1997
and December 28, 1996. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Landstar System,
Inc. and subsidiary as of December 26, 1998 and December 27, 1997, and the
results of their operations and their cash flows for the fiscal years ended
December 26, 1998, December 27, 1997 and December 28, 1996 in conformity with
generally accepted accounting principles.
KPMG LLP
Stamford, Connecticut
February 9, 1999
65
<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
1998 1998 1998 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 333,865 $ 324,033 $ 327,525 $ 298,184
========== ========== ========== ==========
Operating income $ 19,954 $ 16,516 $ 16,047 $ 8,937
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes $ 19,035 $ 15,528 $ 15,104 $ 8,284
Income taxes 7,709 6,289 6,117 3,355
---------- ---------- ---------- ----------
Income from continuing operations 11,326 9,239 8,987 4,929
Discontinued operations,
net of income taxes (22,152) (437)
---------- ---------- ---------- ----------
Net income (loss) $ 11,326 $ 9,239 $ (13,165) $ 4,492
========== ========== ========== ==========
Earnings (loss) per common share: (1)
Income from continuing operations $ 1.09 $ 0.86 $ 0.80 $ 0.42
Loss from discontinued operations (1.97) (0.04)
---------- ---------- ---------- ----------
Earnings (loss) per common share $ 1.09 $ 0.86 $ (1.17) $ 0.38
========== ========== ========== ==========
Diluted earnings (loss) per share: (1)
Income from continuing operations $ 1.07 $ 0.85 $ 0.79 $ 0.42
Loss from discontinued operations (1.95) (0.04)
---------- ---------- ---------- ----------
Diluted earnings (loss) per share $ 1.07 $ 0.85 $ (1.16) $ 0.38
========== ========== ========== ==========
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION> Fourth Third Second First
Quarter Quarter Quarter Quarter
1997 1997 1997 (2) 1997 (2)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 325,331 $ 304,157 $ 311,558 $ 278,265
========== ========== ========== ==========
Operating income $ 14,161 $ 14,737 $ 10,129 $ 7,294
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes $ 13,749 $ 14,243 $ 9,214 $ 6,410
Income taxes 5,733 5,940 3,842 2,673
---------- ---------- ---------- ----------
Income from continuing operations 8,016 8,303 5,372 3,737
Discontinued operations,
net of income taxes (336) (738) 1,068 (732)
---------- ---------- ---------- ----------
Net income $ 7,680 $ 7,565 $ 6,440 $ 3,005
========== ========== ========== ==========
Earnings (loss) per common share: (1)
Income from continuing operations $ 0.66 $ 0.66 $ 0.43 $ 0.30
Income (loss) from discontinued
operations (0.03) (0.06) 0.08 (0.06)
---------- ---------- ---------- ----------
Earnings per common share $ 0.63 $ 0.60 $ 0.51 $ 0.24
========== ========== ========== ==========
Diluted earnings (loss) per share: (1)
Income from continuing operations $ 0.65 $ 0.66 $ 0.43 $ 0.30
Income (loss) from discontinued
operations (0.03) (0.06) 0.08 (0.06)
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.62 $ 0.60 $ 0.51 $ 0.24
========== ========== ========== ==========
</TABLE>
(1) 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.
(2) Includes pre-tax restructuring costs of $2,068 and $1,179 in the second
and first quarters, respectively. After deducting related income tax
benefits of $862 and $492 in the second and first quarters, respectively,
the restructuring costs reduced income from continuing operations by $1,206,
or $0.10 per common share ($0.10 per diluted share), in the 1997 second
quarter, and $687, or $0.05 per common share ($0.05 per diluted share), in the
1997 first quarter.
67
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Years
1998 1997 1996 1995 1994
------------------------------------------------------------
Income Statement Data:
Revenue $1,283,607 $1,219,311 $1,129,856 $1,054,648 $ 839,810
Investment income 1,689
Costs and expenses:
Purchased transportation 950,343 898,746 826,822 773,300 623,669
Commissions to agents and brokers 101,409 98,425 84,768 73,095 60,997
Other operating costs 27,516 32,747 51,385 43,369 15,898
Insurance and claims 39,388 42,885 29,774 26,722 25,480
Selling, general and administrative 95,028 85,586 79,002 81,448 70,899
Depreciation and amortization 10,158 11,354 13,814 11,287 5,442
Restructuring costs 3,247 5,937
--------- --------- --------- --------- ---------
Total costs and expenses 1,223,842 1,172,990 1,091,502 1,009,221 802,385
--------- --------- --------- --------- ---------
Operating income 61,454 46,321 38,354 45,427 37,425
Interest and debt expense 3,503 2,705 5,032 5,166 2,031
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes 57,951 43,616 33,322 40,261 35,394
Income taxes 23,470 18,188 13,675 16,489 14,628
--------- --------- --------- --------- ---------
Income from continuing operations 34,481 25,428(1) 19,647(2) 23,772 20,766
Discontinued operations, net of
income taxes (22,589) (738) (722) 1,190 3,641
--------- --------- --------- --------- ---------
Net income $ 11,892 $ 24,690 $ 18,925 $ 24,962 $ 24,407
========= ========= ========= ========= =========
Earnings (loss) per common share:
Income from continuing operations $ 3.13 $ 2.03(1) $ 1.54(2) $ 1.86 $ 1.62
Income (loss) from discontinued
operations (2.05) (0.06) (0.06) 0.09 0.28
--------- --------- --------- --------- ---------
Earnings per common share $ 1.08 $ 1.97 $ 1.48 $ 1.95 $ 1.90
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Income from continuing operations $ 3.10 $ 2.02(1) $ 1.53(2) $ 1.85 $ 1.61
Income (loss) from discontinued
operations (2.03) (0.06) (0.06) 0.09 0.28
--------- --------- --------- --------- ---------
Diluted earnings per share $ 1.07 $ 1.96 $ 1.47 $ 1.94 $ 1.89
========= ========= ========= ========= =========
<CAPTION>
68
<PAGE>
Dec. 26, Dec. 27, Dec. 28, Dec. 30, Dec. 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $ 313,665 $ 357,179 $ 370,801 $ 353,079 $ 267,084
Long-term debt, including
current maturities 34,440 50,446 90,396 93,867 43,680
Shareholders' equity 111,848 151,696 147,557 128,396 105,161
</TABLE>
(1) After deducting related income tax benefits of $1,354, the
restructuring costs reduced income from continuing operations by $1,893, or
$0.15 per common share ($0.15 per diluted share).
(2) After deducting related income tax benefits of $2,434, the
restructuring costs reduced income from continuing operations by $3,503, or
$0.27 per common share ($0.27 per diluted share).
69
<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, BWI 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
70
<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 9, 1999, relating to the consolidated balance sheets of
Landstar System, Inc. and subsidiary as of December 26, 1998 and December 27,
1997, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the fiscal years ended December 26,
1998, December 27, 1997, and December 28, 1996, and all related schedules,
which reports appear in or are incorporated by reference in the December 26,
1998 annual report on Form 10-K of Landstar System, Inc.
KPMG LLP
Stamford, Connecticut
March 24, 1999
71
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/26/98
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 26, 1998, 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 15, 1999
72
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/26/98
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 26, 1998, 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 15, 1999
73
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/26/98
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 26, 1998, 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 15, 1999
74
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/26/98
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 26, 1998, 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.
William S. Elston
--------------------------
William S. Elston
DATED: March 15, 1999
75
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/26/98
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 26, 1998, 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.
Diana M. Murphy
--------------------------
Diana M. Murphy
DATED: March 15, 1999
76
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/26/98
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 26, 1998, 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 15, 1999
77
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets at December 26, 1998 and the Consolidated
Statements of Income for the fiscal year ended December 26, 1998
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-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> DEC-26-1998
<CASH> 26,681
<SECURITIES> 0
<RECEIVABLES> 178,899
<ALLOWANCES> 6,428
<INVENTORY> 0
<CURRENT-ASSETS> 218,560
<PP&E> 76,561
<DEPRECIATION> 29,603
<TOTAL-ASSETS> 313,665
<CURRENT-LIABILITIES> 142,890
<BONDS> 29,732
0
0
<COMMON> 130
<OTHER-SE> 111,718
<TOTAL-LIABILITY-AND-EQUITY> 313,665
<SALES> 0
<TOTAL-REVENUES> 1,283,607
<CGS> 0
<TOTAL-COSTS> 977,859
<OTHER-EXPENSES> 39,388
<LOSS-PROVISION> 4,276
<INTEREST-EXPENSE> 3,503
<INCOME-PRETAX> 57,951
<INCOME-TAX> 23,470
<INCOME-CONTINUING> 34,481
<DISCONTINUED> (22,589)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,892
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.07
</TABLE>
<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> 0
<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> 1,219,311
<CGS> 0
<TOTAL-COSTS> 931,493
<OTHER-EXPENSES> 42,885
<LOSS-PROVISION> 4,232
<INTEREST-EXPENSE> 2,705
<INCOME-PRETAX> 43,616
<INCOME-TAX> 18,188
<INCOME-CONTINUING> 25,428
<DISCONTINUED> (738)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,690
<EPS-PRIMARY> 1.97
<EPS-DILUTED> 1.96
</TABLE>
