<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 26, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to _____________________
Commission File Number: 0-21238
LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1313069
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4160 Woodcock Drive, Jacksonville, Florida
(Address of principal executive offices)
32207
(Zip Code)
(904) 390-1234
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ( X ) No ( )
The number of shares of the registrant's Common Stock, par value $.01 per
share, outstanding as of the close of business on July 30, 1999 was
9,983,933.
<PAGE>
PART I
FINANCIAL INFORMATION
Index
Item 1
Consolidated Balance Sheets as of June 26, 1999
and December 26, 1998 ............................................... Page 3
Consolidated Statements of Income for the Twenty Six and Thirteen Weeks
Ended June 26, 1999 and June 27, 1998 ............................... Page 4
Consolidated Statements of Cash Flows for the Twenty Six Weeks
Ended June 26, 1999 and June 27, 1998 ............................... Page 5
Consolidated Statement of Changes in Shareholders'
Equity for the Twenty Six Weeks Ended June 26, 1999 ................. Page 6
Notes to Consolidated Financial Statements............................. Page 7
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ Page 10
Item 3
Quantitative and Qualitative Disclosures About Market Risk............. Page 18
Item 1. Financial Statements
The interim consolidated financial statements contained herein reflect
all adjustments (all of a normal, recurring nature) which, in the opinion of
management, are necessary for a fair statement of the financial condition,
results of operations, cash flows and changes in shareholders' equity
for the periods presented. They have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the twenty six weeks ended June 26,
1999 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 25, 1999.
These interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
1998 Annual Report on Form 10-K.
2
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 26, December 26,
1999 1998
---------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 30,613 $ 26,681
Trade accounts receivable, less allowance of $4,118
and $6,428 176,276 172,471
Other receivables, including advances to independent
contractors, less allowance of $4,303 and $4,007 14,832 13,980
Prepaid expenses and other current assets 7,787 5,428
---------- -----------
Total current assets 229,508 218,560
---------- -----------
Operating property, less accumulated depreciation
and amortization of $33,346 and $29,603 51,951 46,958
Goodwill, less accumulated amortization of $7,170 and $6,561 34,340 34,949
Deferred income taxes and other assets 15,896 13,198
---------- -----------
Total assets $ 331,695 $ 313,665
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 16,304 $ 14,746
Accounts payable 57,936 50,624
Current maturities of long-term debt 5,579 4,708
Insurance claims 30,592 29,873
Accrued compensation 6,187 9,881
Other current liabilities 33,138 33,058
---------- -----------
Total current liabilities 149,736 142,890
---------- -----------
Long-term debt, excluding current maturities 34,862 29,732
Insurance claims 31,525 29,195
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 13,061,974 shares and 13,041,574 shares 131 130
Additional paid-in capital 65,592 65,198
Retained earnings 142,467 124,237
Cost of 2,998,041 and 2,618,041 shares of common stock in
treasury (90,975) (76,176)
Notes receivable arising from exercise of stock options (1,643) (1,541)
---------- -----------
Total shareholders' equity 115,572 111,848
---------- -----------
Total liabilities and shareholders' equity $ 331,695 $ 313,665
========== ===========
See accompanying notes to consolidated financial statements.
</TABLE> 3
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twenty Six Weeks Ended Thirteen Weeks Ended
----------------------- -----------------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 656,499 $ 625,709 $ 345,064 $ 327,525
Investment income 1,118 750 574 419
Costs and expenses:
Purchased transportation 483,277 462,029 253,847 242,095
Commissions to agents and brokers 52,148 49,115 27,877 25,849
Other operating costs 13,769 14,244 7,100 6,814
Insurance and claims 21,963 24,586 11,818 12,363
Selling, general and administrative 48,731 46,648 23,213 22,376
Depreciation and amortization 5,431 4,853 2,788 2,400
---------- ---------- ---------- ----------
Total costs and expenses 625,319 601,475 326,643 311,897
---------- ---------- ---------- ----------
Operating income 32,298 24,984 18,995 16,047
Interest and debt expense 1,660 1,596 921 943
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes 30,638 23,388 18,074 15,104
Income taxes 12,408 9,472 7,319 6,117
---------- ---------- ---------- ----------
Income from continuing operations 18,230 13,916 10,755 8,987
Discontinued operations, net of income taxes (22,589) (22,152)
---------- ---------- ---------- ----------
Net income (loss) $ 18,230 $ (8,673) $ 10,755 $ (13,165)
========== ========== ========== ==========
Earnings (loss) per common share:
Income from continuing operations $ 1.78 $ 1.21 $ 1.06 $ 0.80
Loss from discontinued operations (1.97) (1.97)
---------- ---------- ---------- ----------
Earnings (loss) per common share $ 1.78 $ (0.76) $ 1.06 $ (1.17)
========== ========== ========== ===========
Diluted earnings (loss) per share:
Income from continuing operations $ 1.76 $ 1.21 $ 1.05 $ 0.79
Loss from discontinued operations (1.96) (1.95)
---------- ---------- ---------- ----------
Diluted earnings (loss) per share $ 1.76 $ (0.75) $ 1.05 $ (1.16)
========== ========== ========== ==========
Average number of shares outstanding:
Earnings per common share 10,246,000 11,462,000 10,125,000 11,239,000
========== ========== ========== ==========
Diluted earnings per share 10,366,000 11,547,000 10,242,000 11,348,000
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE> 4
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty Six Weeks Ended
---------------------------
June 26, June 27,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Net income (loss) $ 18,230 $ (8,673)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities of continuing operations:
Discontinued operations 22,589
Depreciation and amortization of operating property 4,822 4,195
Amortization of goodwill and non-competition agreement 609 658
Non-cash interest charges 162 162
Provisions for losses on trade and other accounts receivable 22 2,604
Gains on sales of operating property (142) (217)
Deferred income taxes, net 673 48
Changes in operating assets and liabilities, net of discontinued
operations:
Increase in trade and other accounts receivable (4,679) (4,581)
Increase in prepaid expenses and other assets (5,892) (4,019)
Increase in accounts payable 7,312 9,173
Decrease in other liabilities (3,614) (3)
Increase in insurance claims 3,049 8,531
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 20,552 30,467
----------- -----------
INVESTING ACTIVITIES
Maturities of short-term investments 1,552
Purchases of operating property (1,419) (2,293)
Proceeds from sales of operating property 856 1,065
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (563) 324
----------- -----------
FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Increase in cash overdraft 1,558 2,519
Borrowings on revolving credit facility 15,000
Proceeds from exercise of stock options and related income tax benefit 293 1,047
Purchases of common stock (14,799) (34,337)
Principal payments on long-term debt and capital lease obligations (3,109) (2,700)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (16,057) (18,471)
----------- -----------
NET CASH USED BY DISCONTINUED OPERATIONS (8,528)
----------- -----------
Increase in cash 3,932 3,792
Cash at beginning of period 26,681 17,994
----------- -----------
Cash at end of period $ 30,613 $ 21,786
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE> 5
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Twenty Six Weeks Ended June 26, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Notes
Treasury Stock Receivable
Common Stock Additional at Cost Arising from
------------------ Paid-In Retained ------------------- Exercise of
Shares Amount Capital Earnings Shares Amount Stock Options Total
---------- ------- --------- --------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 26, 1998 13,041,574 $ 130 $ 65,198 $ 124,237 2,618,041 $ (76,176) $ (1,541) $ 111,848
Net income 18,230 18,230
Purchases of common stock 380,000 (14,799) (14,799)
Exercise of stock options
and related income tax
benefit 20,400 1 394 (102) 293
---------- ------- --------- --------- --------- --------- ------------- ---------
Balance June 26, 1999 13,061,974 $ 131 $ 65,592 $ 142,467 2,998,041 $ (90,975) $ (1,643) $ 115,572
========== ======= ========= ========= ========= ========= ============= =========
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System,
Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all
adjustments (all of a normal, recurring nature) which are, in the opinion of
management, necessary for a fair statement of the results for the periods
presented. The preparation of the consolidated financial statements requires
the use of management's estimates. Actual results could differ from those
estimates. Landstar System, Inc. and its subsidiary are herein referred to as
"Landstar."
(1) Discontinued Operations
On August 22, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned
subsidiary of Landstar which comprised the entire company-owned tractor
segment, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for $40,435,000 in cash. Certain liabilities of the company-owned
tractor segment were retained by Landstar, primarily insurance claims, capital
lease obligations and accounts payable. 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 the twenty six-week
period ended June 27, 1998 included a loss on sale of $21,489,000, net of
income tax benefits of $2,511,000, and a loss from operations of $1,100,000,
net of income tax benefits of $597,000.
The company-owned tractor segment had revenue of $45,358,000 and $23,374,000
for the twenty six and thirteen weeks ended June 27, 1998.
(2) Income Taxes
The provisions for income taxes from continuing operations for the 1999
and 1998 twenty six-week periods were based on an estimated combined full
year effective income tax rate of 40.5%, which is higher than the
statutory federal income tax rate primarily as a result of state income
taxes, amortization of certain goodwill and the meals and entertainment
exclusion.
7
<PAGE>
(3) Earnings Per Share
Earnings per common share amounts are based on the weighted average
number of common shares outstanding. Diluted earnings per share
amounts are based on the weighted average number of common shares
outstanding plus the incremental shares that would have been outstanding
upon the assumed exercise of all dilutive stock options.
(4) Additional Cash Flow Information
During the 1999 period, Landstar paid income taxes and interest of
$16,014,000 and $1,802,000, respectively, and acquired operating property
by entering into capital leases in the amount of $9,110,000. During the
1998 period, Landstar paid income taxes and interest of $9,052,000 and
$2,057,000 ($695,000 related to Landstar Poole), respectively.
(5) Segment Information
The following tables summarize information about Landstar's reportable
business segments for the twenty six and thirteen weeks ended
June 26, 1999 and June 27, 1998 (in thousands):
<TABLE>
<CAPTION>
Twenty Six Weeks Ended June 26, 1999
-------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $ 508,122 $ 135,651 $ 12,726 $ 656,499
Investment income 1,118 1,118
Internal revenue 16,240 231 15,171 31,642
Operating income 38,231 4,211 8,619 $(18,763) 32,298
Twenty Six Weeks Ended June 27, 1998
-------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $ 482,211 $ 131,700 $ 11,798 $ 625,709
Investment income 750 750
Internal revenue 18,450 263 11,541 30,254
Operating income 30,995 2,750 5,737 $(14,498) 24,984
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended June 26, 1999
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $ 267,378 $ 71,192 $ 6,494 $ 345,064
Investment income 574 574
Internal revenue 9,686 135 6,271 16,092
Operating income 21,832 2,396 4,441 $ (9,674) 18,995
Thirteen Weeks Ended June 27, 1998
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $ 252,515 $ 69,122 $ 5,888 $ 327,525
Investment income 419 419
Internal revenue 9,840 143 6,299 16,282
Operating income 18,606 1,816 3,012 $ (7,387) 16,047
</TABLE>
9
<PAGE>
(6) Commitments and Contingencies
At June 26, 1999, Landstar had commitments for letters of
credit outstanding in the amount of $22,540,000, primarily as
collateral for insurance claims. The commitments for letters of credit
outstanding included $12,480,000 under the Second Amended and Restated
Credit Agreement and $10,060,000 secured by assets deposited with a
financial institution.
Landstar is involved in certain claims and pending litigation
arising from the normal conduct of business. Based on the
knowledge of the facts and, in certain cases, opinions of
outside counsel, management believes that adequate provisions
have been made for probable losses with respect to the resolution
of all claims and pending litigation and that the ultimate outcome,
after provisions thereof, will not have a material adverse effect
on the financial condition of Landstar, but could have a material
effect on the results of operations in a given quarter or year.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
attached interim consolidated financial statements and notes
thereto, and with the Company's audited financial statements and
notes thereto for the fiscal year ended December 26, 1998 and
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the 1998 Annual Report to
Shareholders.
10
<PAGE>
RESULTS OF OPERATIONS
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc.
("Landstar" or the "Company"), provide transportation services to a variety
of market niches throughout the United States and to a lesser extent in Canada
and between the United States and Canada and Mexico through its operating
subsidiaries which employ different operating strategies. Under the provisions
of Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information," the Company determined it has three reportable business segments.
These are the carrier, multimodal and insurance segments.
The carrier segment consists of Landstar Ranger, Inc.("Landstar Ranger"),
Landstar Inway, Inc. ("Landstar Inway") and Landstar Ligon, Inc.("Landstar
Ligon"). The carrier segment provides truckload transportation for a wide
range of general commodities over irregular routes with its fleet of dry and
specialty vans and unsided trailers, including flatbed, drop deck and
specialty. The carrier segment markets its services primarily through
independent commission sales agents and utilizes tractors provided by
independent contractors. The nature of the carrier segment's business is
such that a significant portion of its operating costs varies directly with
revenue.
The multimodal segment is comprised of Landstar Logistics, Inc. and Landstar
Express America, Inc. Transportation services provided by the multimodal
segment include the arrangement of intermodal moves, contract logistics, truck
brokerage, short-to-long haul movement of containers by truck and emergency and
expedited air freight and truck services. The multimodal segment markets its
services through independent commission sales agents and utilizes capacity
provided by independent contractors, including railroads and air cargo
carriers. The nature of the multimodal segment's business is such that a
significant portion of its operating costs also varies directly with revenue.
The insurance segment is comprised of Signature Insurance Company
("Signature"), a wholly-owned offshore insurance subsidiary that was formed in
March 1997, and Risk Management Claim Services, Inc. The insurance segment
provides risk and claims management services to Landstar's operating companies.
In addition, it reinsures certain property, casualty and occupational accident
risks of certain independent contractors who have contracted to haul freight
for Landstar and provides certain property and casualty insurance directly to
Landstar's operating subsidiaries.
On August 22, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned
subsidiary of Landstar which comprised the entire company-owned tractor
segment, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for $40,435,000 in cash. Accordingly, the financial results of this segment
have been reported as discontinued operations in the accompanying financial
statements.
11
<PAGE>
Purchased transportation represents the amount an independent contractor
is paid to haul freight and is primarily based on a contractually agreed-upon
percentage of revenue generated by the haul for truck capacity provided by
independent contractors. Purchased transportation for the intermodal services
operations and the air freight operations of the multimodal segment is based on
a contractually agreed-upon fixed rate. Purchased transportation as a
percentage of revenue for the intermodal services operations is normally higher
than that of Landstar's other transportation operations. Purchased
transportation is the largest component of costs and expenses and, on a
consolidated basis, increases or decreases in proportion to the revenue
generated through independent contractors. Commissions to agents and brokers
are primarily based on contractually agreed-upon percentages of revenue at
the carrier segment and of gross profit at the multimodal segment. Commissions
to agents and brokers as a percentage of consolidated revenue will vary
directly with revenue generated through independent commission sales agents.
Both purchased transportation and commissions to agents and brokers generally
will also increase or decrease as a percentage of the Company's consolidated
revenue if there is a change in the percentage of revenue contributed by
Signature or by the intermodal services or air freight operations of the
multimodal segment.
Trailer rental and maintenance costs paid to third parties are the largest
component of other operating costs.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. A material increase in the
frequency or severity of accidents or workers' compensation claims or the
unfavorable development of existing claims can be expected to adversely affect
Landstar's operating income.
Employee compensation and benefits account for over half of the Company's
selling, general and administrative expense. Other significant components of
selling, general and administrative expense are communications costs and rent
expense.
Depreciation and amortization primarily relates to depreciation of
trailers and management information services equipment.
12
<PAGE>
The following table sets forth the percentage relationships of
income and expense items to revenue for the periods indicated:
<TABLE>
<CAPTION>
Twenty Six Weeks Ended Thirteen Weeks Ended
------------------------ ------------------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Investment income 0.2 0.1 0.2 0.1
Costs and expenses:
Purchased transportation 73.6 73.8 73.6 73.9
Commissions to agents and brokers 8.0 7.8 8.1 7.9
Other operating costs 2.1 2.3 2.1 2.1
Insurance and claims 3.4 3.9 3.4 3.8
Selling, general and administrative 7.4 7.5 6.7 6.8
Depreciation and amortization 0.8 0.8 0.8 0.7
------- ------ ------- ------
Total costs and expenses 95.3 96.1 94.7 95.2
------- ------ ------- ------
Operating income 4.9 4.0 5.5 4.9
Interest and debt expense 0.2 0.3 0.3 0.3
------- ------ ------- ------
Income from continuing operations
before income taxes 4.7 3.7 5.2 4.6
Income taxes 1.9 1.5 2.1 1.9
------- ------ ------- ------
Income from continuing operations 2.8 2.2 3.1 2.7
Discontinued operations, net of income taxes (3.6) (6.7)
------- ------ ------- ------
Net income (loss) 2.8% (1.4%) 3.1% (4.0%)
======= ====== ======= ======
</TABLE>
TWENTY SIX WEEKS ENDED JUNE 26, 1999 COMPARED TO TWENTY SIX WEEKS
ENDED JUNE 27, 1998
Revenue for the 1999 twenty six-week period was $656,499,000, an increase of
$30,790,000, or 4.9%, over the 1998 twenty six-week period. The increase was
attributable to increased revenue of $25,911,000, $3,951,000 and $928,000
at the carrier, multimodal and insurance segments, respectively. Overall,
revenue per revenue mile at the carrier and multimodal segments increased
approximately 2%, which reflected improved freight quality, while revenue miles
were approximately 2% higher than 1998. The insurance segment generated
investment income of $1,118,000 and $750,000 during the 1999 and 1998 periods,
respectively.
13
<PAGE>
Purchased transportation was 73.6% of revenue in 1999 compared with 73.8% in
1998. The decrease in purchased transportation as a percentage of revenue
was due to an increase in the percentage of revenue contributed by the carrier
and insurance segments. Commissions to agents and brokers were 8.0% of revenue
in 1999 and 7.8% in 1998. The increase in commissions to agents and brokers as
a percentage of revenue was primarily attributable to an increase in the
percentage of revenue generated through independent commission sales agents
which reflected the conversion of company-owned sales locations to independent
commission sales agent locations. Other operating costs were 2.1% of revenue in
1999 and 2.3% in 1998. The decrease in other operating costs as a percentage of
revenue was due to a one-time reduction in the cost of fuel taxes and permits
which resulted from a favorable fuel tax audit and a permit refund and lower
net trailer costs. These decreases were partially offset by increased
contractor recruiting costs and an increased provision for contractor bad debt.
Insurance and claims were 3.4% of revenue in 1999 compared with 3.9% in 1998.
The decrease in insurance and claims as a percentage of revenue was primarily
attributable to lower premium expense and favorable development of prior year
claims. Selling, general and administrative costs were 7.4% of revenue in 1999
compared with 7.5% of revenue in 1998. This decrease was primarily due to a
decrease in the provision for customer bad debts, partially offset by a
higher provision for bonuses under the Company's management incentive
compensation plan and increased management information services costs.
In addition, selling, general and administrative costs in the prior year
included $560,000 of one time costs incurred for the relocation of Landstar
Express America, Inc. from Charlotte, North Carolina to Jacksonville, Florida.
Interest and debt expense was 0.2% and 0.3% of revenue in 1999 and 1998,
respectively.
The provisions for income taxes from continuing operations for the 1999 and
1998 twenty six-week periods were based on an estimated full year combined
effective income tax rate of approximately 40.5%, which is higher than the
statutory federal income tax rate primarily as a result of state income taxes,
amortization of certain goodwill and the meals and entertainment exclusion.
Net income was $18,230,000, or $1.78 per common share ($1.76 per diluted
share), in the 1999 period. Income from continuing operations for the 1998
period was $13,916,000, or $1.21 per common share ($1.21 per diluted share).
The loss from discontinued operations for the 1998 period was $22,589,000, or
$1.97 loss per common share ($1.96 loss per diluted share).
THIRTEEN WEEKS ENDED JUNE 26, 1999 COMPARED TO THIRTEEN WEEKS
ENDED JUNE 27, 1998
Revenue for the 1999 thirteen-week period was $345,064,000, an increase of
$17,539,000, or 5.4%, over the 1998 thirteen-week period. The increase was
attributable to increased revenue of $14,863,000, $2,070,000 and $606,000
at the carrier, multimodal and insurance segments, respectively. Overall,
revenue per revenue mile increased approximately 3%, which reflected
improved freight quality, while revenue miles were approximately 3%
higher than 1998. The insurance segment generated investment income of
$574,000 and $419,000 during the 1999 and 1998 periods, respectively.
14
<PAGE>
Purchased transportation was 73.6% of revenue in 1999 compared with 73.9% in
1998. The decrease in purchased transportation as a percentage of revenue was
due to an increase in the percentage of revenue contributed by the carrier
segment. Commissions to agents and brokers were 8.1% of revenue in 1999 and
7.9% in 1998. The increase in commissions to agents and brokers as a percentage
of revenue was primarily attributable to an increase in the percentage of
revenue generated through independent commission sales agents which reflected
the conversion of company-owned sales locations to independent commission sales
agents. Other operating costs were 2.1% of revenue in both 1999 and 1998.
Insurance and claims were 3.4% of revenue in 1999 compared with 3.8% in 1998.
The decrease in insurance and claims as a percentage of revenue was primarily
attributable to lower premium expense and favorable development of prior year
claims. Selling, general and administrative costs were 6.7% of revenue in 1999
compared with 6.8% of revenue in 1998. This decrease was primarily due to a
decrease in the provision for customer bad debts, partially offset by a higher
provision for bonuses under the Company's management incentive compensation
plan and increased management information services costs.
Interest and debt expense was 0.3% of revenue in 1999 and 1998.
The provisions for income taxes from continuing operations for the 1999 and
1998 thirteen-week periods were based on an estimated full year combined
effective income tax rate of approximately 40.5%, which is higher than the
statutory federal income tax rate primarily as a result of state income taxes,
amortization of certain goodwill and the meals and entertainment exclusion.
Net income was $10,755,000, or $1.06 per common share ($1.05 per diluted
share), in the 1999 period. Income from continuing operations for the 1998
period was $8,987,000, or $0.80 per common share ($0.79 per diluted share).
The loss from discontinued operations for the 1998 period was $22,152,000, or
$1.97 loss per common share ($1.95 loss per diluted share).
15
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity increased to $115,572,000 at June 26, 1999 compared
with $111,848,000 at December 26, 1998, as a result of net income, partially
offset by the purchase of 380,000 shares of the Company's common stock at an
aggregate cost of $14,799,000. Shareholders' equity was 74% and 76% of total
capitalization at June 26, 1999 and December 26, 1998, respectively.
Working capital and the ratio of current assets to current liabilities were
$79,772,000 and 1.53 to 1, respectively, at June 26, 1999, compared with
$75,670,000 and 1.53 to 1, respectively, at December 26, 1998. Landstar has
historically operated with current ratios approximating 1.5 to 1. Cash
provided by operating activities of continuing operations was $20,552,000 in
the 1999 period compared with $30,467,000 in the 1998 period. The decrease in
cash flow provided by operating activities of continuing operations was
primarily attributable to timing of payments, partially offset by increased
earnings. During the 1999 period, Landstar purchased $1,419,000 of operating
property and acquired $9,110,000 of revenue equipment by entering into capital
leases. Management anticipates acquiring approximately $19,000,000 of operating
property during the remainder of fiscal year 1999 either by purchase or lease
financing.
Management believes that cash flow from operations combined with the Company's
borrowing capacity under its revolving credit agreement will be adequate to
meet Landstar's debt service requirements, fund continued growth, both internal
and through acquisitions, and meet working capital needs.
The Company is aware of the issues associated with the programming code in its
existing computer systems in order for the systems to recognize date sensitive
information when the year changes to 2000. The Company believes it has
identified all of its information technology ("IT") and non-information
technology ("non-IT") systems which require change to ensure all of its systems
will be year 2000 compliant. 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. 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 will be completed during the 1999 third quarter. Landstar
Inway, the remaining operating company in the carrier segment, has successfully
converted its critical IT systems. The Company has successfully tested
each of the major subsystems of Landstar Ranger and Landstar Inway
and intends to perform an additional system-wide comprehensive test during the
third quarter of 1999. In addition, as part of the overall standardization
plan, the Company is converting all of its operating companies to a generic,
year 2000 compliant general ledger and accounts payable software system.
This conversion is expected to be completed during the 1999 third quarter.
16
<PAGE>
As part of the Company's comprehensive review of its systems, it is continuing
to verify the year 2000 readiness of third parties (customers and vendors) who
provide services that are material to the Company's operations. The Company is
currently communicating with its material vendors and customers to assess their
year 2000 readiness and will continue to monitor their progress throughout
1999.
The vast majority of the changes necessary to make the Company's IT systems
year 2000 compliant were incurred as part of ongoing system development or as
part of a Company-wide strategy to standardize computer systems. As such,
management has not separately quantified the cost of year 2000 compliance.
However, management estimates the total cost of third party assistance for
year 2000 compliance will approximate $600,000, of which approximately
$500,000 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.
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.
INFLATION
Management does not believe inflation has had a material impact on the
results of operations or financial condition of Landstar in the past five
years. However, inflation higher than that experienced in the past five
years might have an adverse effect on the Company's results of operations.
17
<PAGE>
FORWARD-LOOKING STATEMENTS
The Company has included various statements in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which may be
considered as forward-looking statements of expected future results of
operations or events. Such statements, based upon management's interpretation
of currently available information, are subject to risks and uncertainties that
could cause future financial results or events to differ materially from those
which are presented. Such risks and factors which are outside of the Company's
control include general economic conditions, competition in the transportation
industry, governmental regulation, the Company's ability to recruit and retain
qualified independent contractors, fuel prices, adverse weather conditions and
the conversion of the Company's or its vendors' critical IT systems to year
2000 compliance.
SEASONALITY
Landstar's operations are subject to seasonal trends common to the
trucking industry. Results of operations for the quarter ending in
March is typically lower than the quarters ending June, September
and December due to reduced shipments and higher operating costs in
the winter months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company maintains a credit agreement with a syndicate of banks and The
Chase Manhattan Bank, as the administrative agent, (the "Second Amended and
Restated Credit Agreement") that provides $200,000,000 of borrowing
capacity, consisting of $150,000,000 revolving credit and $50,000,000 revolving
credit to finance acquisitions. Borrowings under the Second Amended and
Restated Credit Agreement bear interest at rates equal to, at the option of
Landstar, either (i) the greatest of (a) the prime rate as publicly announced
from time to time by The Chase Manhattan Bank, (b) the three month CD rate
adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the
federal funds effective rate plus 1/2%, or, (ii) the rate at the time offered
to The Chase Manhattan Bank in the Eurodollar market for amounts and periods
comparable to the relevant loan plus a margin that is determined based on the
level of the Company's Leverage Ratio, as defined in the Second Amended and
Restated Credit Agreement. There have been no significant changes that would
affect the information provided in Item 7a of the 1998 Annual Report on
Form 10-K regarding quantitative and qualitative disclosures about market risk.
18
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On August 5, 1998, suit was filed entitled Rene Alberto Rivas vs. Landstar
System, Inc., Landstar Gemini, Inc., Landstar Ranger, Inc., Risk Management
Claim Services, Inc., Insurance Management Corporation, and Does 1 through
500, inclusive, in federal district court in Los Angeles. The suit claims
Rivas represents a class of all drivers who, according to the suit, should
be classified as employees and are therefore allegedly aggrieved by the
practice of Landstar Gemini, Inc., requiring such drivers, as independent
contractors, to provide either a worker's compensation certificate or to
participate in an occupational accident insurance program. Rivas claims
violations of federal leasing regulations for allegedly improperly disclosing
the program. Rivas also claims violations of Racketeer Influence and Corrupt
Organizations ("RICO") Act and the California Business and Professions Act.
He seeks on behalf of himself and the class damages of $15 million trebled by
virtue of trebling provisions in the RICO Act plus punitive damages. A motion
to dismiss these claims was argued to the court on February 9, 1998. On
March 24, 1998, the court granted defendant's motion to dismiss the RICO claim.
The federal court has now held that plaintiff has no independent federal claim
for damages and must first seek relief from the U.S. Dept. of Transportation to
determine whether a violation of the FHWA leasing regulations entitles him to a
monetary recovery. As a consequence of this decision, whether this litigation
will remain in the federal court or be re-filed by the plaintiff in the
California Superior Court in Los Angeles will depend on an expected ruling on
whether the U.S. District Court has continued to retain jurisdiction over the
plaintiff's claim for injunctive relief under the ICC Termination Act. The
Company continues to vigorously contest this action. It believes that the
drivers in question are properly classified as independent contractors and it
also has other meritorious defenses to the various claims.
The Company is routinely a party to litigation incidental to its business,
primarily involving claims for personal injury and property damage incurred
in the transportation of freight. The Company maintains insurance which covers
liability amounts in excess of retained liabilities from personal injury and
property damages claims.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
19
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On May 19, 1999, Landstar System, Inc. (the "Company") held its Annual Meeting
of Shareholders (the "Meeting") at the Ponte Vedra Inn, Ponte Vedra Beach,
Florida, 32082. The matters voted upon at the Meeting included (i) the election
of two Class III directors for the terms to expire at the 2002 Annual Meeting
of Shareholders and (ii) the ratification of appointment of KPMG LLP
as the Company's independent auditors for fiscal year 1999.
Pursuant to the Company's Restated Certificate of Incorporation, the Board of
Directors has fixed the number of directors at seven: two Class III directors
whose members' terms will expire at the 2002 Annual Meeting of Shareholders;
two Class I directors whose members' terms will expire at the 2000 Annual
Meeting of Shareholders; and the three Class II directors whose members' terms
will expire at the 2001 Annual Meeting of Shareholders. With respect to the
election of the two Class III directors at the Meeting, nominee Jeffrey C.
Crowe, and nominee David G. Bannister were elected to the Board of
Directors of the Company. Mr. Crowe received 8,637,295 votes for election to
the Board and 269,850 were withheld. Mr. Bannister received 8,637,295 votes for
election to the Board and 269,850 were withheld. The names of the other
directors whose terms of office as a director continued after the Meeting are
as follows: John B. Bowron (a Class I director), Ronald W. Drucker (a Class I
director), William S. Elston (a Class II director), Merritt J. Mott (a Class II
director), and Diana M. Murphy (a Class II director).
The appointment of KPMG LLP as the Company's independent auditors
for fiscal year 1999 was ratified by the Company's shareholders. Votes for the
ratification were 8,848,214, votes against were 2,016 and votes abstaining
were 56,915.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index are filed as part
of this quarterly report on Form 10-Q.
(b) Form 8-K
None.
20
<PAGE>
EXHIBIT INDEX
Registrant's Commission File No.: 0-21238
Exhibit No. Description
- ------------ -----------
(11) Statement re: Computation of Per Share Earnings:
11.1 * Landstar System, Inc. and Subsidiary Calculation of Earnings
Per Common Share for the Twenty Six and Thirteen Weeks Ended
June 26, 1999 and June 27, 1998
11.2 * Landstar System, Inc. and Subsidiary Calculation of Diluted
Earnings Per Share for the Twenty Six and Thirteen Weeks
Ended June 26, 1999 and June 27, 1998
(27) Financial Data Schedules:
27.1 * 1999 Financial Data Schedule
__________________
* Filed herewith
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LANDSTAR SYSTEM, INC.
Date: August 3, 1999 Henry H. Gerkens
----------------------------
Henry H. Gerkens
Executive Vice President and
Chief Financial Officer;
Principal Financial Officer
Date: August 3, 1999 Robert C. LaRose
----------------------------
Robert C. LaRose
Vice President Finance and Treasurer;
Principal Accounting Officer
22
<PAGE>
EXHIBIT 11.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twenty Six Thirteen
Weeks Ended Weeks Ended
--------------------------- ---------------------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
------------ ------------- ------------- -----------
Earnings available for earnings per share:
<S> <C> <C> <C> <C>
Income from continuing operations $ 18,230 $ 13,916 $ 10,755 $ 8,987
Discontinued operations, net of income taxes (22,589) (22,152)
------------ ------------ ------------ ------------
Net income (loss) $ 18,230 $ (8,673) $ 10,755 $ (13,165)
============ ============ ============ ============
Average number of common shares outstanding 10,246 11,462 10,125 11,239
============ ============ ============ ============
Earnings (loss) per common share:
Income from continuing operations $ 1.78 $ 1.21 $ 1.06 $ 0.80
Loss from discontinued operations (1.97) (1.97)
------------ ------------ ------------ ------------
Earnings (loss) per common share $ 1.78 $ (0.76) $ 1.06 $ (1.17)
============ ============ ============ ============
23
</TABLE>
<PAGE>
EXHIBIT 11.2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF DILUTED EARNINGS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twenty Six Thirteen
Weeks Ended Weeks Ended
--------------------------- ---------------------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
------------ ------------ ------------- -----------
Earnings available for earnings per share:
<S> <C> <C> <C> <C>
Income from continuing operations $ 18,230 $ 13,916 $ 10,755 $ 8,987
Discontinued operations, net of income taxes (22,589) (22,152)
------------ ------------ ------------ ------------
Net income (loss) $ 18,230 $ (8,673) $ 10,755 $ (13,165)
============ ============ ============ ============
Average number of common shares
outstanding 10,246 11,462 10,125 11,239
Plus: Incremental shares from
assumed exercise of stock
options 120 85 117 109
------------ ------------ ------------ ------------
Average number of common shares
and common share equivalents
outstanding 10,366 11,547 10,242 11,348
============ ============ ============ ============
Diluted earnings (loss) per share:
Income from continuing operations $ 1.76 $ 1.21 $ 1.05 $ 0.79
Loss from discontinued operations (1.96) (1.95)
------------ ------------ ------------ ------------
Diluted earnings (loss) per share $ 1.76 $ (0.75) $ 1.05 $ (1.16)
============ ============ ============ ============
24
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets at June 26, 1999 (Unaudited) and the Consolidated
Statements of Income for the twenty six weeks ended June 26, 1999 (Unaudited)
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> JUN-26-1999
<CASH> 30,613
<SECURITIES> 0
<RECEIVABLES> 180,394
<ALLOWANCES> 4,118
<INVENTORY> 0
<CURRENT-ASSETS> 229,508
<PP&E> 85,297
<DEPRECIATION> 33,346
<TOTAL-ASSETS> 331,695
<CURRENT-LIABILITIES> 149,736
<BONDS> 34,862
0
0
<COMMON> 131
<OTHER-SE> 115,441
<TOTAL-LIABILITY-AND-EQUITY> 331,695
<SALES> 0
<TOTAL-REVENUES> 656,499
<CGS> 0
<TOTAL-COSTS> 497,046
<OTHER-EXPENSES> 21,963
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 1,660
<INCOME-PRETAX> 30,638
<INCOME-TAX> 12,408
<INCOME-CONTINUING> 18,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,230
<EPS-BASIC> 1.78
<EPS-DILUTED> 1.76
</TABLE>
