UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
   
(Mark One)  
þ
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the Fiscal Year Ended December 29, 200726, 2009
or
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from          to          
Commission FileNumber: 0-21238
 
Landstar System, Inc.
(Exact name of registrant as specified in its charter)
 
   
Delaware
 06-1313069
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
   
13410 Sutton Park Drive South
Jacksonville, Florida
(Address of principal executive offices)
 32224
(Zip Code)
(904) 398-9400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
   
Title of Each Class
 
Name of Exchange on Which Registered
 
Common Stock, $0.01 Par Value The NASDAQ Stock Market, Inc.
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):  Yes o     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation 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 thisForm 10-K or any amendment to thisForm 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
       
Large accelerated filer þ
 Accelerated filer o Non-accelerated filer oSmaller reporting company o

(Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the voting stock held by non-affiliates of the registrant was $2,627,137,000$1,833,883,000 (based on the per share closing price on June 29, 2007,27, 2009, the last business day of the Company’s second fiscal quarter, as reported on the NASDAQ Global Select Market). 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 persons, are affiliates.
 
The number of shares of the registrant’s common stock, par value $.01$0.01 per share (the “Common Stock”), outstanding as of the close of business on February 1, 2008January 29, 2010 was 52,510,874.50,248,214.
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the following document are incorporated by reference in thisForm 10-K as indicated herein:
 
   
  Part of 10-K
into Which
Document
 
Into Which Incorporated
 
Proxy Statement relating to Landstar System, Inc.’s Annual Meeting of Stockholders scheduled to be held on May 1, 2008April 29, 2010 Part III
 


 

 

LANDSTAR SYSTEM, INC.
 
20072009 ANNUAL REPORT ONFORM 10-K
 
TABLE OF CONTENTS
 
         
    Page
 
   Business  3 
   Risk Factors  11 
   Unresolved Staff Comments  1315 
   Properties  1415 
   Legal Proceedings  1415 
   Submission of Matters to a Vote of Security Holders  1416 
 
PART II
   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  1517 
   Selected Financial Data  1820 
   Management’s Discussion and Analysis of Financial Condition and Results of Operations  1920 
   Quantitative and Qualitative Disclosures About Market Risk  3032 
   Financial Statements and Supplementary Data  3134 
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  5763 
   Controls and Procedures  5763 
   Other Information  6065 
 
PART III
   Directors, Executive Officers and Corporate Governance  6065 
   Executive Compensation  6065 
   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  6066 
   Certain Relationships and Related Transactions, and Director Independence  6166 
   Principal Accounting Fees and Services  6166 
 
PART IV
   Exhibits and Financial Statement Schedules  6166 
  6469 
 EX-10.2 Supplemental Executive Retirement PlanEX-10.3
EX-10.6.4
EX-10.7
EX-10.13
 EX-21.1 List of Subsidiary Corporations of the Registrant
 EX-23.1 Consent of KPMG LLP
 EX-24.1 Powers of Attorney
 EX-31.1 Section 302 Certification of CEO
 EX-31.2 Section 302 Certification of CFO
 EX-32.1 Section 906 Certification of CEO
 EX-32.2 Section 906 Certification of CFO


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PART I
 
Item 1.  Business
 
General
 
Landstar System, Inc. was incorporated in January 1991 under the laws of the State of Delaware. It acquired all of the capital stock of its predecessor, Landstar System Holdings, Inc. (“LSHI”) on March 28, 1991. Landstar System, Inc. has been a publicly held company since its initial public offering in March 1993. 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 Gemini, Inc. (“Landstar Gemini”), Landstar Carrier Services,Transportation Logistics, Inc. (“Landstar Carrier Services”Transportation Logistics”), Landstar Global Logistics, Inc. (“Landstar Global Logistics”), Landstar Express America, Inc. (“Landstar Express America”), Landstar Canada Holdings, Inc. (“LCHI”), Landstar Canada, Inc. (“Landstar Canada”), Landstar Contractor Financing, Inc. (“LCFI”), Risk Management Claim Services, Inc. (“RMCS”), Landstar Supply Chain Solutions, Inc. (“LSCS”), National Logistics Management Co. (“NLM”) and Signature Insurance Company (“Signature”). LSCS owns 100% of the non-voting, preferred interests and 75% of the voting, common equity interests in A3i Acquisition, LLC (“A3i Acquisition”). A3 Integration, LLC (“A3i”) is a wholly-owned subsidiary of A3i Acquisition. Landstar Ranger, Landstar Inway, Landstar Ligon, Landstar Gemini, Landstar Carrier Services,Transportation Logistics, Landstar Global Logistics, Landstar Express America, NLM, A3i and Landstar Canada are collectively herein referred to as Landstar’s “Operating Subsidiaries.” Landstar System, Inc., LSHI, LCFI, RMCS, LCHI, LSCS, A3i Acquisition, Signature and the Operating Subsidiaries are collectively referred to herein as “Landstar” or the “Company,” unless the context otherwise requires. The Company’s principal executive offices are located at 13410 Sutton Park Drive South, Jacksonville, Florida 32224 and its telephone number is(904) 398-9400. The Company makes available free of charge through its website its annual report onForm 10-K, quarterly reports onForm 10-Q, proxy and current reports onForm 8-K as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). The Company’s website is www.landstar.com. The SEC maintains a website athttp://www.sec.gov that contains the Company’s current and periodic reports, proxy and information statements and other information filed electronically with the SEC.
 
Historical BackgroundIn the Company’s 2009 fiscal third quarter, the Company completed the acquisitions of (i) NLM (together with a limited liability company and certain corporate subsidiaries and affiliates) and (ii) A3i through A3i Acquisition, an entity in which the Company owns 100% of the non-voting, preferred interests and 75% of the voting, common equity interests. A3i is a wholly-owned subsidiary of A3i Acquisition. These two acquisitions are referred to herein collectively as the “Recent Acquisitions.” NLM is a non-asset based third-party logistics provider which utilizes proprietary technology to manage transportation services for shippers and provides software-as-a-service technology to customers to perform their own transportation execution management. A3i operates as a software-as-a-service business which utilizes proprietary technology from a third party as well as its own internally developed technology to offer supply chain systems integration and solutions to large and small shippers, including transportation order management, shipment planning and optimization, rate management, transportation sourcing, global in-transit visibility and shipment execution.
 
In March 1993, Landstar completed its initial public offering of Common Stock at a price of $13.00 per share, $1.625 per share adjusted for subsequent stock splits.
Description of Business
 
Landstar is a non-asset based provider of freight transportation services and supply chain solutions. The Company offers shippers services across multiple transportation modes, with the ability to arrange for individual shipments of freight to enterprise-wide solutions to manage all of a shipper’s transportation and logistics services company, providing transportation capacity and related transportationneeds. The Company provides services to shippers principally throughout the United States and Canada, between the United States, Canada and Mexico, and, to a lesser extent, in Canada, and betweenother countries around the United States and Canada, Mexico and other countries.world. These business services emphasize safety, information coordination and customer service and are delivered through a network of independent commission sales agents and third party capacity providers linked together by a series of technological applications which are provided and coordinated by the Company. The Company’s


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Landstar markets its freight transportation services and supply chain solutions primarily through independent commission sales agents. Landstar’s independent commission sales agents enter into contractual arrangements with Landstarthe Company and are primarily responsible for locating freight, making that freight available to Landstar’s third party capacity providers and coordinating the transportation of the freight with customers and third party capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “Business Capacity Owner Independent Contractors” or “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under non-exclusive contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers, railroads and independent warehouse capacity providers (“Warehouse Capacity Owners (as defined below)Owners”). The Company has contracts with all of the Class 1 domestic and Canadian railroads and certain short-line railroads and contracts with domestic and international airlines and ocean lines. Through thisits network of employees, agents and capacity providers linked together by Landstar’s technological applications, Landstar operates a transportation services and logistics servicessupply chain solutions business primarily throughout North America with revenue of approximately $2.5$2.0 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.
 
LandstarTransportation Logistics Segment
The transportation logistics segment provides a wide range of transportation services toand supply chain solutions. Transportation services offered by the Company include truckload andless-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized,U.S.-Canada andU.S.-Mexico cross-border, project cargo and customs brokerage. Supply chain solutions are based on advanced technology solutions offered by the Company and include integrated multi-modal solutions, outsourced logistics, supply chain engineering and warehousing. Also, supply chain solutions can be delivered through a variety of industries, includingsoftware-as-a-service model. Industries serviced by the transportation logistics segment include automotive products, paper, lumber and building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military hardware. In addition, Landstarthe transportation logistics segment provides transportation services to other transportation companies, including logistics andless-than-truckload service providers. Landstar’sEach of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight. Supply chain solution customers are generally charged fees for the services provided. Revenue recognized by the transportation logistics segment when providing capacity to customers to haul their freight is referred to herein as “transportation services revenue” and revenue for freight management services recognized on afee-for-service basis is referred to herein as “transportation management fees.”


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Truck Services.  The transportation logistics segment’s truckload services include a full array of truckload transportation utilizingfor a wide range of general commodities, much of which are transported over irregular or non-repetitive routes. The Company utilizes a broad assortment of specialized equipment, including dry and specialty vans of various sizes, unsided trailers (including flatbeds, (including drop decks and light specialty trailers), temperature-controlled vans and containers. In addition, Landstar provides dedicated contract and logistics solutions, including freight optimization andAvailable truckload services also includeless-than-truckloadshort-to-long freight consolidations. Landstar also provides expedited land and air delivery of time-critical freight and thehaul movement of containers via ocean.by truck and expedited ground and dedicated power-only truck capacity. During fiscal year 2009, revenue hauled by BCO Independent Contractors and Truck Brokerage Carriers was 58% and 35%, respectively, of total transportation logistics segment revenue. The Company’s truck services contributed 91% of total revenue in fiscal year 2009.
 
Landstar focusesRail Intermodal Services.  The transportation logistics segment has contracts with all of the Class 1 domestic and Canadian railroads and certain short-line railroads and all major asset-based intermodal equipment providers, including agreements with stacktrain operators and container and trailing equipment companies. In addition, the transportation logistics segment has contracts with a vast network of local trucking companies that handlepick-up and delivery of rail freight. These contracts provide the transportation logistics segment the ability to transport freight via rail throughout the United States, Canada and Mexico. The transportation logistics segment’s rail intermodal services include trailer on providingflat car, container on flat car, box


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car and railcar service capabilities. The transportation logistics segment’s rail intermodal services contributed 4% of total revenue in fiscal year 2009.
Air and Ocean Services.  The transportation logistics segment provides international ocean and air services to its customers utilizing international airlines and ocean lines. The transportation logistics segment executes international freight transportation as an IATA certified Indirect Air Carrier (IAC) and Federal Maritime Commission (FMC) licensed non-vessel operating common carrier (NVOCC). The transportation logistics segment also provides international freight transportation solutions as a licensed freight forwarder. Through its network of independent commission sales agents and relationships within a global network of foreign freight forwarders, the transportation logistics segment provides efficient and cost effectivedoor-to-door transportation to most points in the world for a vast array of cargo types such as over sized break bulk, consolidations, full container loads and refrigerated cargo. The transportation logistics segment’s air and ocean services contributed 3% of total revenue in fiscal year 2009.
Advanced Technology Solutions.  In the Company’s 2009 fiscal third quarter, the Company completed the Recent Acquisitions. NLM and A3i are supply chain transportation integration companies offering customers technology-based supply chain solutions and other value added services on afee-for-service basis. The services provided by NLM and A3i, along with the Company’s existing capabilities, offer shippers supply chain solutions, including logistics order management, shipment planning and optimization, rate management, transportation sourcing, global in-transit visibility and shipment execution. Supply chain solutions offered by the Company can be managed by the Company through its transportation services offerings or be utilized by shippers as a software-as-a service offering, in which the shipper manages its carriers and executes its own shipments utilizing the Company’s technology. The Company’s supply chain solution services are capable of handling world-wide transportation and logistics services which emphasize customer service and information coordination among its independent commission sales agents, customers and capacity providers. Landstar intends to continue developing appropriate systems and technologies that offer integrated transportation and logistics solutions to meet the total needs of its customers.in multiple currencies.
 
During the second half of 2006, the Company began the roll-out of its warehouse initiative.Warehousing Services.  The Company’s strategy is to offer its customers, through its independent commission sales agent network, national warehousing services without owning or leasing facilities or hiring employees to work at warehouses. The initial phase of developing the product offering included the identification of qualified independent regional warehouse facilities. As of December 29, 2007, the Company has entered into non-exclusive arrangements with 128 independent warehouse capacity providers (“Warehouse Capacity Owners” or “WCOs”) in the United States. The Company’stransportation logistics segment’s warehouse offering is designedprovides customers with nationwide access to provide the availability ofavailable warehouse capacity nationally to its customers utilizing a network of independently owned and operated regional warehouse facilities linked by a single warehouse information technology application. The Company believes the addition of warehousing servicesapplication without Landstar owning or leasing facilities or hiring employees to its transportation and logistics product offerings will contribute additional freight transportation opportunities to and from the network of warehouse facilities. Revenue derived directly from warehouse storage and services will be reported net of the amount earned by the WCO. In general, WCOs are paid a fixed percentage of the gross revenue for storage and services provided through their warehouse. The roll-out of warehousing services will continue throughout 2008. Warehousing services were not a significant contributor to revenue or earnings in 2006 or 2007.work at warehouses.
 
The Company has three reportable business segments. These are the carrier, global logistics and insurance segments. The financial information relating to the Company’s reportable business segments as of and for the fiscal years ending 2007, 2006 and 2005 is included in Footnote 10 of Item 8, “Financial Statements and Supplementary Data” of thisForm 10-K.
The carrier segment consists of Landstar Ranger, Landstar Inway, Landstar Ligon, Landstar Gemini and Landstar CarrierOther Services. The carrier segment primarily provides transportation services to the truckload market for a wide range of general commodities over irregular or non-repetitive routes utilizing dry and specialty vans and unsided trailers, including flatbed, drop deck and specialty. It also providesshort-to-long haul movement of containers by truck and dedicated power-only truck capacity. The carrier segment markets its services primarily through independent commission sales agents and utilizes Business Capacity Owner Independent Contractors and Truck Brokerage Carriers.
The nature of the carrier segment business is such that a significant portion of its operating costs varies directly with revenue. At December 29, 2007, the carrier segment operated a fleet of 8,603 tractors, provided by 8,050 BCO Independent Contractors, and had over 25,000 qualified Truck Brokerage Carriers who provide additional tractor and trailer capacity. At December 29, 2007, the carrier segment also operated a fleet of 14,331 trailers, of which 4,790 of the trailers were provided by BCO Independent Contractors, 518 were leased by the Company at rental rates that vary with the revenue generated through the trailer, 7,206 were owned by the Company, 1,584 were under a long-term rental arrangement at a fixed rate, and 233 were rented on a short-term basis from trailer rental companies. Over 16,000 of the qualified Truck Brokerage Carriers moved at least one load of freight for the Company during the 180 day period immediately preceding December 29, 2007. The use of BCO Independent Contractors, Truck Brokerage Carriers and other third party capacity providers enables the carrier segment to utilize a large fleet of revenue equipment while minimizing capital investment and fixed costs, thereby enhancing return on investment. BCO Independent Contractors who provide a tractor receive a percentage of the revenue generated for the freight hauled and a larger percentage of such revenue for providing both a tractor and a trailer. Truck Brokerage Carriers are paid a negotiated rate for each load they haul. The carrier segment’s network of 1,010 independent commission sales agents provides


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1,225 sales locations. This network provides an in-market presence throughout the continental United States and Canada.
The global logistics segment is comprised of Landstar Global Logistics and its subsidiary, Landstar Express America. Transportation and logistics services provided by the global logistics segment include the arrangement of multimodal (ground, air, ocean and rail) moves, contract logistics, truck brokerage, emergency and expedited ground, air and ocean freight and warehousing. The global logistics segment markets its services primarily through independent commission sales agents and utilizes capacity provided by BCO Independent Contractors and other third party capacity providers, including Truck Brokerage Carriers, railroads, air and ocean cargo carriers and WCOs. Global logistics independent commission sales agents generally receive a percentage of the gross profit from each load they generate or a percentage of the gross revenue from warehousing services. BCO Independent Contractors who provide truck capacity to the global logistics segment are compensated based on a percentage of the revenue generated by the haul depending on the type and timing of the shipment. Truck Brokerage Carriers are paid either a negotiated rate for each load they haul or a contractuallyagreed-upon fixed amount per load. Railroads and air and ocean cargo carriers generally receive a contractually fixed amount per load. Warehouse Capacity Owners generally are paid a fixed percentage of the gross revenue for storage and services provided through their warehouse.
The nature of the global logistics segment business is such that a significant portion of its operating costs also varies directly with revenue. At December 29, 2007, the global logistics segment operated a fleet of 390 trucks, provided by approximately 353 BCO Independent Contractors. Global logistics segment BCO Independent Contractors primarily provide cargo vans and straight trucks that are utilized for emergency and expedited freight services. The global logistics segment’s network of 162 independent commission sales agents provides 172 sales locations. Approximately 31% of the global logistics segment’s revenue and 8% of consolidated revenue is contributed by one independent commission sales agent who derives the majority of his revenue from one customer.  During the fiscal years 2007, 2006 and 2005,year ended December 27, 2008, revenue for passenger bus capacity provided for evacuation assistance related to the storms that impacted the Gulf Coast in September 2008 (“Bus Revenue”) represented 1%, 15% and 35%, respectively, of the globalCompany’s transportation logistics segment’ssegment revenue was derived from transportation services provided in support of disaster relief efforts provided primarily under a contract between Landstar Express America and the United States Department of Transportation/Federal Aviation Administration (the “FAA Contract”).2008.
Insurance Segment
 
The insurance segment is comprised of Signature, a wholly-ownedwholly owned offshore insurance subsidiary, and RMCS. The insuranceThis segment provides risk and claims management services to certain of Landstar’s Operating Subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to certain of Landstar’s Operating Subsidiaries. Revenue, representing premiums on reinsurance programs provided to the Company’s BCO Independent Contractors, at the insurance segment represented approximately 2% of the Company’s total 2009 revenue.
 
Factors Significant to the Company’s Operations
 
Management believes the following factors are particularly significant to the Company’s operations:
 
Agent Network
The Company’s primaryday-to-day contact with its customers is through its network of independent commission sales agents and not typically through employees of the Company. The typical Landstar independent commission sales agent maintains a relationship with a number of shippers and services these shippers utilizing the Company’s network of technological applications and the various modes of transportation made available through the Company’s network of third party capacity providers. The Company provides assistance to the agents in developing additional relationships with shippers and enhancing agent and Company relationships with larger shippers through the Company’s field employees, located throughout the United States


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and, to a lesser degree, in Canada. The Operating Subsidiaries emphasize programs to support the agents’ operations and to provide guidance on establishing pricing parameters for freight hauled by the various modes of transportation available to the agents. Nevertheless, it is important to note that Operating Subsidiaries contract directly with customers and generally assume the credit risk and liability for freight losses or damages.
 
Management believes the Company has more independent commission sales agents than any othernon-asset based transportation and logistics services company. Landstar’s network of 1,397over 1,350 independent commission sales agent locations provides the Company with regular contact with shippers at the local level and the capability to be highly responsive to shippers’ changing needs. The Company’s large fleet of available capacity, as further described below, provides the agent network also enables Landstarthe resources needed to be responsive both in providing specialized equipment toservice both large and small shippers and in providing capacity on short notice from the Company’s large fleet.shippers. Through its agent network, the Company believes it offers smaller shippers a level of service comparable to that typically enjoyed only by larger customers. Examples of services that Landstar is able to make available through the agent network to smaller shippers include the ability to provide transportation services on short notice (often within hours from notification to time ofpick-up), multiplepick-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). Each independent commission sales agent has the opportunity to market all of the services provided by the transportation logistics segment.
 
The typical Landstar agent maintains a relationship with a number of shippers and services these shippers by providing a base of operations for the Company’s BCO Independent Contractors and other third party


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capacity providers. Independent commission salesCommissions to agents in the carrier segment receive a commissionare generally between 5% and 8%10% of the revenue they generate if the load is hauled by a BCO Independent Contractorgenerated and aare based on contractuallyagreed-upon percentagepercentages of thetransportation services revenue or the gross profit, defined as revenue less the cost of purchased transportation from each load they generate if hauled byor gross profit less a Truck Brokerage Carrier. In most cases, the carrier segment independent commission sales agents are paid volume-based incentives for freight hauled by BCO Independent Contractors. Global logistics independent commission sales agents are typically paid a contractuallyagreed-upon agreed upon percentage of the gross profit from each load they generate orrevenue retained by Landstar. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the various modes of transportation, transportation management fees and the insurance segment and with changes in gross revenue from sourcing warehousing services.profit on services provided by Truck Brokerage Carriers, rail intermodal carriers, air cargo carriers and ocean cargo carriers. Commissions to agents are recognized upon the completion of freight delivery.
 
The Company’s primaryday-to-day contact with its customers is through its agents and not through employees of the Company. The Company provides assistance to the agents in developing additional relationships with shippers and enhancing agent and company relationships with larger shippers through the Company’s employee field organizations and National Accounts group. Nevertheless, it is important to note that Operating Subsidiaries contract directly with customers and generally assume the credit risk and liability for freight losses or damages.
The carrier segment’s independent commission sales agents use a variety of proprietary and third party technological applications, depending on the mode of transportation, provided by the Company to service the requirements of shippers. For truck services, the Company’s independent commission sales agents use Landstar Electronic Administrative Dispatch System (LEADS)proprietary software program which enables these agents to enter available freight, dispatch capacity and process most administrative procedures and then communicate that information to Landstar and its capacity providers via the internet. The global logistics segment’s independent commission sales agents use other Landstar proprietary software to process customer shipments and communicate the necessary information to third party capacity providers and Landstar. The Company’s web-based available freight and truck information system provides a listing of available truckstruck capacity to the Company’s independent commission sales agents.
The Operating Subsidiaries emphasize programs to support For other modes, the agents’ operations and to establish pricing parameters. The carrier segment and global logistics segment maintain regular contact with their independent commission sales agents and Landstar holds an annual company-wide agent convention.utilize mostly third party technological applications provided by the Company.
 
During 2007, 495The Company reported 405 and 484 agents who generated revenue for Landstar of at least $1 million each in revenue during 2009 and 2008, respectively. The significant decrease in the number of million dollar agents experienced during 2009 was primarily attributable to the significant downturn in the domestic economy that began in the later part of 2008 and continued throughout 2009. The decrease in million dollar agents was primarily due to 93 agents who achieved $1 million each in revenue in 2008, but, due to the soft freight environment, produced less than $1 million each in revenue in 2009. Turnover, representing the percentage of the 484 million dollar agents who terminated during 2009, was approximately 3 percent. Historically, Landstar has experienced very low turnover among its agents who annually generate revenue of $1 million or approximately $2.3 billion of Landstar’s total revenue, and one agent generated approximately $197,000,000 of Landstar’s total revenue.
more. Management believes that the majority of the agents who annually generate revenue of $1 million or more choose to represent Landstar exclusively. Historically, Landstar has experienced very limited agent turnover among its larger-volume agents.
 
Transportation Capacity
 
The Company relies exclusively on independent third parties for its hauling capacity other than for a portion of the Company’s available trailing equipment owned or leased by the Company and warehousing capacity.utilized primarily by the BCO Independent Contractors. These third party transportation capacity providers consist of BCO Independent Contractors, Truck Brokerage Carriers, air and ocean cargo carriers railroads and WCOs.railroads. Landstar’s use of capacity provided exclusively by its BCO Independent Contractors and other third party capacity providersparties allows it to maintain a lower level of capital investment,


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resulting in lower fixed costs. During the most recently completed fiscal year, revenue hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal, air and ocean carriers represented 58%, 35%, 4%, 1% and 2%, respectively, of the Company’s transportation logistics segment revenue. Historically, with the exception of air revenue, the net margin (defined as revenue less the cost of purchased transportation and commissions to agents)agents divided by revenue) generated from freight hauled by BCO Independent Contractors has been greater than from freight hauled by other third party capacity providers. However, the Company’s insurance and claims costs and other operating costs are incurred primarily in support of the BCO Independent Contractor capacity. In addition, as further described in the “Corporate Services” section that follows, the Company incurs significantly higher selling, general and administrative costs in support of the BCO Independent Contractor capacity as compared to the other modes of transportation. Purchased transportation costs are recognized upon the completion of freight delivery.
 
BCO Independent Contractors.  Management believes the Company has the largest fleet of truckload BCO Independent Contractors in the United States. OurBCO Independent Contractors provide truck capacity to the Company under exclusive lease arrangements. Each BCO Independent Contractor operates under the motor carrier operating authority issued by the U.S. Department of Transportation (“DOT”) to Landstar’s Operating Subsidiary to which such BCO Independent Contractor has leased his or her services and equipment. The Company’s network of BCO Independent Contractors provides marketing, operating, safety, recruiting, retention and financial advantages to the Company.
The Company’s BCO Independent Contractors are compensated based on a fixed percentage of the revenue generated from the freight they haul. This percentage generally ranges from 60%62% to 70%73% where the BCO Independent Contractor provides only a tractor and from 73% to 79%75% where the BCO Independent Contractor provides both a tractor and a trailer. The BCO Independent Contractor must pay substantially all of the expenses of operatinghis/her


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equipment, including driver wages and benefits, fuel, physical damage insurance, maintenance, highway use taxes and debt service, if applicable. The Company passes 100% of fuel surcharges billed to customers to its BCO Independent Contractors for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. During 2007,2009, the Company’s carrier segment passed $173.6Company billed customers $128.4 million in fuel charges billedsurcharges and passed 100% of such fuel surcharges to customers tothe BCO Independent Contractors. These fuel surcharges are excluded from revenue.
 
The Company maintains an internet site through which BCO Independent Contractors can view a completecomprehensive listing of the Company’s available freight, allowing them to consider rate, size, origin and destination when planning trips.
The Landstar Contractors’ Advantage Purchasing Program (LCAPP) leverages Landstar’s purchasing power to provide discounts to eligible BCO 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 BCO Independent Contractors to purchase primarily trailing equipment and mobile communication equipment.
 
TrucksThe number of trucks provided to the Company by the BCO Independent Contractors were 8,993was 8,519 at December 29, 2007,26, 2009, compared to 9,2059,039 at December 30, 2006.27, 2008. At December 26, 2009, 96% of the trucks provided by BCO Independent Contractors were provided by BCO Independent Contractors who provided 5 or fewer trucks to the Company. The number of trucks provided by BCO Independent Contractors fluctuates daily as a result of truck recruiting and truck terminations. Trucks recruited were higher in 20072009 than in 2006, but truck terminations2008, and trucks terminated were also higher in 20072009 compared to 20062008, resulting in a net loss of 212 trucks.520 trucks during 2009. Landstar’s truck turnover was approximately 37%41% in 20072009 compared to 28%32% in 2006.2008. Approximately half of this turnover was attributable to BCO Independent Contractors who had been BCO Independent Contractors with the Company for less than one year. Management believes that factors that have historically favorably impacted turnover include the Company’s extensive agent network, the Company’s programs to reduce the operating costs of its BCO Independent Contractors and Landstar’s reputation for quality, service and reliability. Management believes that a reduction in the amount of freight made available freightfrom the Company to the BCO Independent Contractors may cause an increase in the BCO Independent Contractor truck turnover ratio.ratio, as experienced in 2009.
 
Truck Brokerage Carriers.  TheAt December 26, 2009, the Company maintainsmaintained a database of over 25,00024,000 qualified Truck Brokerage Carriers who provide truck hauling capacity to the Company. Truck Brokerage


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Carriers provide truck capacity to the Company under non-exclusive contractual arrangements and each operates under their own DOT-issued motor carrier operating authority. Truck Brokerage Carriers are paid either a negotiated rate for each load they haul or a contractuallyagreed-upon amount per load. The Company recruits, qualifies, establishes contracts with, tracks safety ratings and service records of and generally maintains the relationships with these third party trucking companies. In addition to providing additional capacity to the Company, the use of Truck Brokerage Carriers enables the Company to pursue different types and quality of freight such as temperature-controlled, short-haul traffic andless-than-truckload and, in certain instances, lower-priced freight that generally would generally not be handled by the Company’s BCO Independent Contractors.
 
The Company maintains an internet site through which Truck Brokerage Carriers can view a listing of the Company’s freight that is available to be hauled by Truck Brokerage Carriers.
The Landstar Savings Plus Program leverages Landstar’s purchasing power to provide discounts to eligible Truck Brokerage Carriers when they purchase fuel and equipment and provides the Truck Brokerage Carriers with an electronic payment option.
 
Third Party Rail, Air, Ocean and Other Transportation Capacity.  The Company maintains contractual relationshipshas contracts with variousall of the Class 1 domestic and Canadian railroads and certain short-line railroads and contracts with domestic and international airlines and ocean and air cargo capacity providers.lines. These relationships allow the Company to pursue the freight best serviced by these forms of transportation capacity. Railroads and air and ocean cargo carriers are generally paid a contractually fixed amount per load. The Company also contracts with other third party capacity providers, such as air charter or passenger bus companies, when required by specific customer needs.
 
Warehouse Capacity
The Company has contracts with Warehouse Capacity Owners.Owners throughout the United States. The Company maintains non-exclusive contractual relationships with 128 WCOs. The Company expects that warehousing services introduced in August 2006, will provide itsavailable to the Company’s customers with additional resources to manage their warehousing servicesprovided from the warehouse capacity network include storage, order fulfillment, repackaging, labeling, inventory consolidations,sub-assembly and storage needs. WCOs generallytemperature and climate options. In general, Warehouse Capacity Owners are paid a fixed percentage of the gross revenue for storage and services provided through their warehouse. Warehouse storage and services are reported net of the amount earned by the Warehouse Capacity Owner. Warehousing services were not a significant contributor to revenue or earnings in 2009, 2008 and 2007.


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Diversity of Services OfferedTrailing Equipment
 
The Company offers its customers a wide range of transportationlarge and logistics services through the Operating Subsidiaries, including adiverse fleet of diverse trailing equipment, extensive geographic coverage and, more recently, warehousing services.equipment. Specialized services offered by the Company include those provided by a large fleet of flatbed trailers and multi-axle trailers capable of hauling extremely heavy or oversized loads, drivers certified to handle ammunition and explosives shipments forloads. Management believes the U.S. DepartmentCompany offers the largest motor carrier fleet of Defense, emergency and expedited surface and air cargo services and intermodal capability with railroads and, to a lesser extent, steamship lines.heavy/specialized trailing equipment in the United States.
 
The following table illustrates the diversity of the trailing equipment, available to the Company as of December 29, 2007:26, 2009, either provided by the BCO Independent Contractors or owned or leased by the Company and made available primarily to BCO Independent Contractors. In general, Truck Brokerage Carriers utilize their own trailing equipment when providing transportation services on behalf of Landstar. Truck Brokerage Carrier trailing equipment is not included in the following table:
 
     
Trailers by Type
   
 
Vans  10,488
Temperature-controlled1079,551 
Flatbeds, including step decks, drop decks and low boys  3,7383,661
Temperature-controlled90 
     
Total  14,33313,302 
     
 
At December 26, 2009, 8,505 of the trailers available to the BCO Independent Contractors were owned by the Company, 32 were leased by the Company with monthly rental payments equal to a fixed percentage of revenue hauled by the trailer, and 254 trailers were rented by the Company under short-term rental


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arrangements. In addition, at December 26, 2009, 4,511 trailers were provided by the BCO Independent Contractors.
Customers
 
The Company has aCompany’s customer base is highly diversified group of customers.and dispersed across many industries, commodities and geographic regions. The Company’s top 100 customers accounted for approximately 50%51% and 52%, respectively, of the Company’s revenue during both fiscal 20072009 and 2006.2008. Management believes that the Company’s overall size, technological applications, geographic coverage, access to equipment and diverse 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. Increasingly, largerLarger shippers are substantiallyoften consider reducing the number of authorized carriers they use in favor of a small number of “core carriers”,carriers,” such as the Company, whose size and diverse service capabilities enable these core carriers to satisfy most of the shippers’ transportation needs. The Company’s national account customers include the United States Department of Defense the United States Department of Transportation/Federal Aviation Administration (the “FAA”) and many of the companies included in the Fortune 500. Large shippers are also using third party logistics providers (“3PLs”) to outsource the management and coordination of their transportation needs. In turn, 3PLs requireThe Company’s supply chain solutions services provide shippers the opportunity to outsource the management and coordination of their transportation needs and provide these shippers the opportunity to utilize the significant amountsamount of capacity available from carriers, such as the Company, to service the needs of shippers. In addition,Company. 3PL’s and other transportation companies also utilize the Company’s transportation capacity to satisfy their obligations to their shippers. There were 9nine transportation service providers, including 3PLs, included in the Company’s top 25 customers for the fiscal year ended December 29, 2007. In addition, management26, 2009. Management believes the Company’s network of agents and third party capacity providers allows it to efficiently attract and service smaller shippers which may not be as desirable to other large transportation providers (see above under “Agent Network”).
Prior to fiscal year 2005, no No customer accounted for more than 10% of the Company’s 2009 revenue. Historically, the United States Government has been the Company’s largest customer. During 2007, 2006 and 2005, revenue derived from the United States Government was approximately 6%, 9% and 17% of revenue, respectively. Included in the revenue derived from the United States Government in all three fiscal years was revenue related to disaster relief services provided by the Company primarily under a contract with the FAA. Revenue included $8.5 million, $100.7 million and $275.9 million in 2007, 2006 and 2005, respectively, generated primarily under the FAA contract. The FAA contract expired on December 31, 2007.
 
Technology
 
Management believes leadership in the development and application of technology is an ongoing part of providing high quality service at competitive prices. The Company’sCompany continues to focus is on identifying, purchasing or developing and implementing software applications which are designed to improve its operational and administrative efficiency, assistingassist its independent commission sales agents in sourcing capacity assistingand pricing transportation services, assist customers in meeting their transportation


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supply chain needs and assistingassist its third party capacity providers in identifying desirable freight. Landstar managesfocuses on providing transportation services and supply chain solutions which emphasize customer service and information coordination among its technology programs centrally throughindependent commission sales agents, customers and capacity providers. Landstar intends to continue to purchase or develop appropriate systems and technologies that offer integrated transportation and logistics solutions to meet the total needs of its informationcustomers. In 2009, the Company completed the Recent Acquisitions that offer customers technology-based supply chain solutions and other value added services department.on afee-for-service basis. The services provided by NLM and A3i along with the Company’s existing capabilities provide the Company with the ability to offer customers complete enterprise solutions and compete in the ‘freight management’ segment of the transportation industry.
 
The Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and, to a lesser extent, in Rockford, Illinois.Illinois and Detroit, Michigan. In addition, the Company utilizes several third-party data centers throughout the U.S. Landstar relies, in the regular course of its business, on the proper operation of its information technology systems.
 
Corporate Services
 
The Company provides many administrative support services to its network of independent commission sales agents, third party capacity providers and customers. Management believes that the technological applications purchased or developed and maintained by the Company and its administrative support services provide operational and financial advantages to the independent commission sales agents, third party capacity


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providers and customers, and in turn, enhance the operational and financial efficiency of all aspects of the network.
Administrative support services that provide operational and financial advantages to the network include customer contract administration, customer credit review and approvals, sales administration and pricing, customer billing, accounts receivable collections, third party capacity payment, safety and operator and equipment compliance management, insurance claims handling, coordination of vendor discount programs and third party capacity quality programs. The Company also provides marketing and advertising strategies.
Management also believes that significant advantages result from the collective expertise and corporate services provided by Landstar’s corporate management. The primary functions provided by management include finance and treasury services, include:
accounting, budgeting and taxesquality programs
finance and treasury servicesrisk management insurance services
human resource managementsafety
legalstrategic planning
purchasingtechnology and management information systems
corporate communicationssales administration and pricing
advertisingcontract administration
accounting, strategic initiatives, budgeting, taxes, legal and human resource management.
 
Competition
 
Landstar competes primarily in the transportation and logistics services industry with truckload carriers, third party logistics companies, intermodal transportation and logistics service providers, railroads,less-than-truckload carriers and othernon-asset based transportation and logistics service providers. The transportation and logistics services industry is extremely competitive and fragmented.
 
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.which are influenced significantly by the economic environment, particularly the amount of available transportation capacity and freight demand. Management believes that Landstar’s overall size and availability of a wide range of equipment, together with its geographically-dispersedgeographically dispersed local independent agent network and wide range of service offerings, present the Company with significant competitive advantages over many transportation and logistics service providers.
 
Self-Insured Claims
 
Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. Landstar’s retained liability for individual commercial trucking claims varies depending on when such claims are incurred. For commercial trucking claims, incurred prior to June 19, 2003 and subsequent to March 30, 2004, Landstar retains liability up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. The Company’s exposure to liability associated with accidents incurred by other third party capacity providersTruck Brokerage Carriers, rail intermodal carriers, air cargo carriers and ocean cargo carriers who transport freight on behalf of the Company is reduced by various factors including the extent to which they maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo or workers’ compensation claims or the unfavorable development of existing claims could be expected to materially adversely affecthave a material adverse effect on Landstar’s results of operations.
 
Insurance Coverage Above Self-Insured Retention
 
The Company has historically maintained insurance coverage above its self-insured retention amounts. For the fiscal year ended and as of December 29, 2007,26, 2009, the Company maintains insurance for liabilities attributable to commercial trucking accidents with third party insurance companies for each and every occurrence in an amount in excess of $200,000,000 per occurrence above the Company’s $5,000,000 self insured retention. Historically, the Company has relied on a limited number of third party insurance companies


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to provide insurance coverage for commercial trucking claims in excess of specific per occurrence limits, up to various maximum amounts. Over the past few years, theThe premiums proposed by the third party insurance companies providing coverage for commercial trucking liability insurance over the Company’s self insured retention amounts have varied dramatically. In an attempt to manage the significant fluctuations in the cost of these premiums required by the third party insurance companies, the Company has historically increased or decreased the level of its financial exposure to commercial trucking claims on a per occurrence basis. To the extent that the third party insurance companies increase their proposed premiums for coveragebasis by increasing or decreasing its level of commercial trucking claims, the Company may increase its exposure in aggregate or on a per occurrence basis. However, to the extent the third party insurance companies reduce their premiums proposed for coverage of commercial trucking claims, the Company may reduce its exposure in aggregate or on a per occurrence basis.self-insured retention.


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Regulation
 
Certain of the Operating Subsidiaries are considered motor carriersand/or brokers authorized to arrange for transportation services by motor carriers which are regulated by the Federal Motor Carrier Safety Administration (the “FMCSA”) and by various state agencies. The FMCSA has broad regulatory powers with respect to activities such as motor carrier operations, practices, periodic financial reporting and insurance. Subject to federal and state regulatory authorities or regulation, the CompanyCompany’s capacity providers may transport most types of freight to and from any point in the United States over any route selected by the Company.selected.
 
Interstate motor carrier operations are subject to safety requirements prescribed by the FMCSA. Each driver, whether a BCO Independent Contractor or Truck Brokerage Carrier, is required to have a commercial driver’s license and is subject to mandatory drug and alcohol testing. The FMCSA’s commercial driver’s license and drug and alcohol testing requirements have not adversely affected the Company’s ability to source the capacity necessary to meet its customers’ transportation needs.
 
In addition, certain of the Operating Subsidiaries are licensed as ocean transportation intermediaries by the U.S. Federal Maritime Commission as non-vessel-operating common carriersand/or as ocean freight forwarders. The Company’s air transportation activities in the United States are subject to regulation by the U.S. Department of Transportation as an indirect air carrier. The Company is also subject to regulations and requirements relating to safety and security promulgated by, among others, the U.S. Department of Homeland Security through the Bureau of U.S. Customs and Border Protection and the Transportation Security Administration, the Canada Border Services Agency and various state and local agencies and port authorities.
 
The transportation industry is subject to possible other regulatory and legislative changes (such as the possibility of more stringent environmental, climate changeand/or safety/security 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 or other transportation or logistics services.
 
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.
 
Employees
 
As of December 29, 2007,26, 2009, the Company and its subsidiaries employed 1,2811,374 individuals. Approximately 1814 Landstar Ranger drivers (out of a Company total of 8,9938,519 drivers for BCO Independent Contractors) are members of the International Brotherhood of Teamsters. The Company considers relations with its employees to be good.


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Item 1A.  Risk Factors
 
Increased severity or frequency of accidents and other claims.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Self Insured-Claims,Self-Insured Claims,” potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. Landstar’s retained liability for individual commercial trucking claims varies depending on when such claims are incurred. For commercial trucking claims, incurred prior to June 19, 2003 and subsequent to March 30, 2004, Landstar retains liability up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. The Company’s exposure to liability associated with accidents incurred by other third party capacity providersTruck Brokerage Carriers, rail intermodal carriers, air cargo carriers and ocean cargo carriers who haultransport freight on behalf of the Company is reduced by various factors including the extent to which they maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo or workers’ compensation claims


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or the unfavorable development of existing claims could be expected to materially adversely affecthave a material adverse effect on Landstar’s results of operations.
 
Dependence on third party insurance companies.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Insurance Coverage Above Self-Insured Retention,” the Company is dependent on a limited number of third party insurance companies to provide insurance coverage in excess of its self-insured retention amounts. Historically, the Company has maintained insurance coverage for commercial trucking claims in excess of specific per occurrence limits, up to various maximum amounts, with a limited number of third party insurance companies. Over the past years, theThe premiums proposed by the third party insurance companies providing coverage for commercial trucking liability insurance above the Company’s self-insured retention amounts have varied dramatically. In an attempt to manage the significant fluctuations in the cost of these premiums required by the third party insurance companies, the Company has historically increased or decreased the level of its financial exposure to commercial trucking claims on a per occurrence basis. To the extent the third party insurance companies increase their proposed premiums for coveragebasis by increasing or decreasing its level of commercial trucking liability claims, the Company may increase its exposure or reduce the maximum amount of coverage in aggregate or on a per occurrence basis. However, to the extent the third party insurance companies reduce their premiums proposed for coverage of commercial trucking claims, the Company may reduce its exposure or increase the maximum amount of coverage in aggregate or on a per occurrence basis.self-insured retention.
 
Dependence on independent commission sales agents.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Agent Network,” the Company markets its services primarily through independent commission sales agents, and currently has a network of 1,397over 1,350 agent locations. During 2007, 4952009, 405 agents generated revenue for Landstar of at least $1 million each, or approximately 91%87% of Landstar’s consolidated revenue and one agent generated approximately $197,000,000, or 8%, of Landstar’s total revenue. Although the Company competes with motor carriers and other third parties for the services of these independent commission sales agents, Landstar has historically experienced very limited agent turnover among its larger-volume agents. However, Landstar’s contracts with its agents are typically terminable upon 10 to 30 days notice by either party and generally restrict the ability of a former agent to compete with Landstar for a specific period of time following any such termination. The loss of some of the Company’s key agents or a significant decrease in volume generated by Landstar’s larger agents could have a material adverse effect on Landstar, including its results of operations and revenue.
 
Dependence on third party capacity providers.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Transportation Capacity,” Landstar does not own trucks or other transportation equipment (other than trailing equipment) and relies on third party capacity providers, including BCO Independent Contractors, Truck Brokerage Carriers, railroads and air and ocean cargo carriers, to transport freight for its customers. The Company competes with motor carriers and other third parties for the services of BCO Independent Contractors and other third party capacity providers. A significant decrease in available capacity provided by either the Company’s BCO Independent Contractors or other third party capacity providers could have a material adverse effect on Landstar, including its results of operations and revenue.


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Decreased demand for transportation services.  The transportation industry historically has experienced cyclical financial results as a result of slowdowns in economic activity, the business cycles of customers, price increases by capacity providers interest rate fluctuations, and other economic factors beyond Landstar’s control. Certain of theThe Company’s third party capacity providers other than BCO Independent Contractors can be expected to charge higher prices to cover increased operating expenses and the Company’s operating income may decline if it is unable to pass through to its customers the full amount of such higher transportation costs. If a slowdown in economic activity or a downturn in the Company’s customers’ business cycles cause a reduction in the volume of freight shipped by those customers, the Company’s operating results could be materially adversely affected.
 
Substantial industry competition.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Competition,” Landstar competes primarily in the transportation and logistics services industry. The transportation and logistics services industry is extremely competitive and fragmented. Landstar competes primarily with truckload carriers, intermodal transportation service providers, railroads,less-than-truckload carriers, third party broker carrierslogistics companies and other non-asset based transportation and logistics service providers. 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.which are influenced significantly by the economic environment, particularly the amount of available transportation capacity and freight demand. Historically, competition has created downward pressure on freight rates. In addition, many large shippers are using third


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party logistics providers (“3PLs”) other than the Company to outsource the management and coordination of their transportation needs rather than directly arranging for transportation services with carriers, such as the Company.carriers. Usage by large shippers of 3PLs often provide carriers, such as the Company, with a less direct relationship with the shipper and, as a result, may increase pressure on freight rates while making it more difficult for the Company to compete primarily based on service and efficiency. A decrease in freight rates could have a material adverse effect on Landstar, including its revenue and operating income.
 
Dependence on key personnel.  The Company is dependent on the services of certain of its executive officers. The Company believes it has an experienced and highly qualified management group and the loss of the services of certain of the Company’s executive officers could have a material adverse effect on the Company.
Disruptions or failures in the Company’s computer systems.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Technology,” the Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and to a lesser extent in Rockford, Illinois.Illinois and Detroit, Michigan. In addition, the Company utilizes several third-party data centers throughout the U.S. Landstar relies in the regular course of its business on the proper operation of its information technology systems to link its extensive network of customers, agents and third party capacity providers, including its BCO Independent Contractors. AnyAlthough the Company has redundant systems for its critical operations, any significant disruption or failure of its technology systems could significantly disrupt the Company’s operations and impose significant costs on the 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 transportation services provided by the Company will be enacted and, if enacted, whether or not the Company’s Truck Brokerage Carriers would attempt to pass the increase on to the Company or if the Company will be able to reflect this potential increased cost of capacity, if any, in prices to customers. Any such increase in fuel taxes, without a corresponding increase in price to the customer, could have a material adverse effect on Landstar, including its results of operations and financial condition. Moreover, competition from other transportation service companies including those that provide non-trucking modes of transportation and intermodal transportation would likely increase if state or federal taxes on fuel were to increase without a corresponding increase in taxes imposed upon other modes of transportation.
 
Status of independent contractors.  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


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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.
 
The Company classifies all of its BCO Independent Contractors and independent commission sales agents as independent contractors for all purposes, including employment tax and employee benefit purposes. There can be no assurance that legislative, judicial, or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the employee/independent contractor classification of BCO Independent Contractors or independent commission sales agents currently doing business with the Company. Although management believes that there are no proposals currently pending that would significantly change the employee/independent contractor classification of BCO Independent Contractors or independent commission sales agents currently doing business with the Company, the costs associated with potential changes, if any, with respect to these BCO Independent Contractor and independent commission sales agent classifications could have a material adverse effect on Landstar, including its results of operations and financial condition if Landstar were unable to reflect them in its fee arrangements with the BCO Independent Contractors or independent commission sales agents or in the prices chargedpass through to its customers.customers the full amount of such higher transportation costs.
 
Regulatory and legislative changes.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Regulation,” certain of the Operating Subsidiaries are motor carriersand/or property


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brokers authorized to arrange for transportation services by motor carriers which are regulated by the Federal Motor Carrier Safety Administration (FMCSA), an agency of the U.S. Department of Transportation, and by various state agencies. The FMCSA has stated its intent to implement Comprehensive Safety Analysis 2010 beginning in July of 2010. We believe the intent is to improve regulatory oversight of motor carriers and commercial drivers using a Safety Measurement System methodology that may be fundamentally different from the methodology that the FMCSA currently relies upon. Certain of the Operating Subsidiaries are licensed as ocean transportation intermediaries by the U.S. Federal Maritime Commission as non-vessel-operating common carriersand/or as ocean freight forwarders. The Company’s air transportation activities in the United States are subject to regulation by the U.S. Department of Transportation as an indirect air carrier. The Company is also subject to regulations and requirements relating to safety and security promulgated by, among others, the U.S. Department of Homeland Security through the Bureau of U.S. Customs and Border Protection and the Transportation Security Administration, the Canada Border Services Agency and various state and local agencies and port authorities. The transportation industry is subject to possible regulatory and legislative changes (such as increasingly stringent environmental, climate changeand/or safety/security 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 or other transportation or logistics services.
Any such regulatory or legislative changes could have a material adverse effect on Landstar, including its results of operations and financial condition.
Recent focus on climate change and related environmental matters has led to efforts by federal and local governmental agencies to support legislation to limit the amount of carbon emissions, including emissions created by diesel engines utilized in tractors operated by the Company’s BCO Independent Contractors and Truck Brokerage Carriers. Increased regulation on emissions created by diesel engines could create substantial costs on the Company’s third-party capacity providers and, in turn, increase the cost of purchased transportation to the Company.
 
Catastrophic loss of a Company facility.  The Company faces the risk of a catastrophic loss of the use of all or a portion of its facilities located in Jacksonville, Florida, and Rockford, Illinois and Detroit, Michigan due to hurricanes, flooding, tornados or other weather conditions or natural disasters, terrorist attack or otherwise. The Company’s corporate headquarters and approximately two-thirds of the Company’s employees are located in its Jacksonville, Florida facility and a significant portion of the Company’s operations with respect to the carrier segment and Truck Brokerage Carriers is located in its Rockford, Illinois facility. In particular, a Category 3, 4 or 5significant hurricane that impacts the Jacksonville, Florida metropolitan area or a tornado that strikes the Rockford, Illinois area could significantly disrupt the Company’s operations and impose significant costs on the Company.
 
Although the Company maintains insurance covering its facilities, including business interruption insurance, the Company’s insurance may not be adequate to cover all losses that may be incurred in the event of a catastrophic loss of eitherone of the Jacksonville, Florida or Rockford, Illinois facility.Company’s facilities. In addition, such insurance, including business interruption insurance, could in the future become more expensive and difficult to maintain and may not be available on commercially reasonable terms or at all.
 
Acquired businesses.  On July 2, 2009, the Company completed the Recent Acquisitions. See “Business — General.” NLM’s business is heavily dependent on the automotive industry which has been very volatile in the past few years. As of the time of its acquisition by the Company, A3i was a startup company with no customers under contract. It licenses its principal software technology from an unaffiliated third party. The Company’s strategic initiatives of the Recent Acquisitions were to increase freight transportation opportunities by diversifying NLM into industries other than the domestic automotive industry and to identify and engage customers to utilize A3i’s supply chain solutions technology. The Company makes no assurance that the Company will be able to successfully achieve its strategic initiatives as it relates to the Recent Acquisitions. If the Company fails to do so, or if the Company does so but at a greater cost than anticipated, or if NLM and A3i experience earnings growth significantly below those anticipated, the Company’s financial results may be adversely affected.
The Company periodically considers acquisitions that it believes are strategically important based on the potential that any such acquisition candidates would further strengthen the Company’s service offerings,


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information technology platform and customer base and would generate additional revenue and earnings growth.
Intellectual property.  The Company uses both internally developed and purchased technology in conducting its business. Whether internally developed or purchased, it is possible that the use of these technologies could be claimed to infringe upon or violate the intellectual property rights of third parties. In the event that a claim is made against the Company by a third party for the infringement of intellectual property rights, any settlement or adverse judgment against the Company either in the form of increased costs of licensing or a cease and desist order in using the technology could have an adverse effect on the Company’s business and its results of operations.
Item 1B.  Unresolved Staff Comments
 
None.


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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 its independent commission sales agents, BCO Independent Contractors and other third party capacity providers. The carriertransportation logistics segment’s primary facilities are located in Jacksonville, Florida, Rockford, Illinois and Rockford, Illinois. The global logistics segment’s primary facility is located in Jacksonville, Florida.Detroit, Michigan. In addition, the Company’s corporate headquarters are located in Jacksonville, Florida. The Rockford, Illinois facility is owned by the Company and all other primary facilities are leased. The Company’s primary facility in Jacksonville, Florida (the “Jacksonville Facility”) is leased under a lease agreement that provides the Company with an option to purchase the Jacksonville Facility, including the land and fixtures located thereon, at a fixed price of $21,135,000 in the first quarter of 2010. The Company has entered into a contract of sale with its landlord to purchase the Jacksonville Facility in the first quarter of 2010, as is, subject to the satisfaction of certain customary conditions under the terms of the contract of sale. It is expected the purchase will be funded from the Company’s existing cash and cash equivalents or from available funds under the Company’s senior credit facility.
 
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 an acceptable cost.
 
Item 3.  Legal Proceedings
 
On November 1, 2002,As further described in periodic and current reports previously filed by Landstar System, Inc. (the “Company”) with the Securities and Exchange Commission, the Company and certain of its subsidiaries (the “Defendants”) are defendants in a suit (the “Litigation”) brought in the United States District Court for the Middle District of Florida (the “District Court”) by the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and certainfour former BCO Independent Contractors (as defined below) (collectively(the “Named Plaintiffs” and, with OOIDA, the “Plaintiffs”) filed a putative class action complaint on behalf of all independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (“BCO(the “BCO Independent Contractors”) in the United States District Court for the Middle District of Florida (the “District Court”) in Jacksonville, Florida, against the Company and certain of its subsidiaries. The complaint was amended on April 7, 2005 (as amended, the “Amended Complaint”). The Amended Complaint allegedPlaintiffs allege that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violate certain federal leasing regulations and soughtseek injunctive relief, an unspecified amount of damages and attorney’sattorneys’ fees. On August 30, 2005, the District Court granted a motion by the Plaintiffs to certify the case as a class action.
 
On January 16, 2007, the District Court ordered the decertification of the class of BCO Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial commenced for purposes of determining what remedies, if any, would be awarded to the remaining named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company: Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the “Defendants”). On March 29, 2007, the District Court denied Plaintiffs’the request by Plaintiffs for injunctive relief, entered a Judgmentjudgment in favor of the Defendants and issued written orders setting forth its rulings related to the decertification of the plaintiff class and other important elements of the denial of Plaintiffs requests for damagesLitigation relating to liability, injunctive relief and injunctivemonetary relief. The Plaintiffs and the Defendants have each filed motions with the District Court concerning an award of attorney fees from the other party.
The Plaintiffs have filed an appeal with the United States Court of Appeals for the Eleventh Circuit (the “Appellate Court”) with respect toof certain of the District Court’s rulings including the judgments entered by the District Court in favor of the Defendants on the issues of damages and injunctive relief.Defendants. The Defendants have asked the Appellate Court to affirm thesuch rulings of the District Court that have been appealed by the Plaintiffs. The Defendants have alsoand filed a cross-appeal with the Appellate Court with respect to certain other rulings of the District Court.


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On September 3, 2008, the Appellate Court issued its ruling, which, among other things, affirmed the District Court’s rulings that (i) the Defendants are not prohibited by the applicable federal leasing regulations from charging administrative or other fees to BCO Independent Contractors in connection with voluntary programs offered by the Defendants through which a BCO Independent Contractor may purchase discounted products and services for a charge that is deducted against the compensation payable to the BCO Independent Contractor (a “Charge-back Deduction”), (ii) the Plaintiffs are not entitled to restitution or disgorgement with respect to violations by Defendants of the applicable federal leasing regulations but instead may recover only actual damages, if any, which they sustained as a result of any such violations and (iii) the claims of BCO Independent Contractors may not be handled on a class action basis for purposes of determining the amount of actual damages, if any, they sustained as a result of any violations. Further, the analysis of the Appellate Court confirmed the absence of any violations alleged by the Plaintiffs of the federal leasing regulations with respect to the written terms of all leases currently in use between the Defendants and BCO Independent Contractors.
However, the ruling of the Appellate Court reversed the District Court’s rulings (i) that an old version of the lease formerly used by Defendants but not in use with any current BCO Independent Contractor complied with applicable disclosure requirements under the federal leasing regulations with respect to adjustments to compensation payable to BCO Independent Contractors on certain loads sourced from the U.S. Dept. of Defense, and (ii) that the Defendants had provided sufficient documentation to BCO Independent Contractors under the applicable federal leasing regulations relating to how the component elements of Charge-back Deductions were computed. The Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek injunctive relief with respect to these violations of the federal leasing regulations and to hold an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking rehearing of the Appellate Court’s ruling; however, there can be no assurance that any petition for rehearing will be granted.
Although no assurances can be given with respect to the outcome of the appeal orLitigation, including any proceedingspossible award of attorneys’ fees to the Plaintiffs, the Company believes that (i) no Plaintiff has sustained any actual damages as a result of any violations by the Defendants of the federal leasing regulations and (ii) injunctive relief, if any, that may be conducted thereafter,granted by the Company believes it has meritorious defenses and it intendsDistrict Court on remand is unlikely to continue asserting these defenses vigorously.have a material adverse financial effect on the Company.
 
The Company is involved in certain other 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 such other claims and pending litigation and that the ultimate outcome, after provisions thereof,therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
 
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 2007.2009.


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PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
The Common Stock of the Company is listed and traded on the NASDAQ Global Select Market under the symbol “LSTR.” The following table sets forth the high and low reported sale prices for the Common Stock on the NASDAQ Global Select Market and the per share value of dividends declared for the periods indicated.
 
                                                
 2007 Market Price 2006 Market Price Dividends Declared  2009 Market Price 2008 Market Price Dividends Declared
Fiscal Period
 High Low High Low 2007 2006  High Low High Low 2009 2008
First Quarter $48.45  $38.51  $48.10  $38.72  $0.0300  $0.025  $40.16  $27.21  $54.24  $37.39  $0.0400  $0.0375 
Second Quarter  52.19   45.21   47.68   40.55   0.0300   0.025   41.65   32.35   59.21   48.71   0.0400   0.0375 
Third Quarter  51.43   39.71   49.01   39.27   0.0375   0.030   38.91   33.22   56.30   43.24   0.0450   0.0400 
Fourth Quarter  44.98   36.50   47.76   37.75   0.0375   0.030   40.00   34.44   45.74   27.37   0.0450   0.0400 
 
The reported last sale price per share of the Common Stock as reported on the NASDAQ Global Select Market on February 1, 2008January 29, 2010 was $46.87$36.29 per share. As of such date, Landstar had 52,510,87450,248,214 shares of Common Stock outstanding. As of February 1, 2008,January 29, 2010, the Company had 71 stockholders of record of its Common Stock. However, the Company estimates that it has a significantly greater number of stockholders because a substantial number of the Company’s shares are held by brokers or dealers for their customers in street name.
 
It is the intention of the Board of Directors to pay a quarterly dividend going forward.
 
Purchases of Equity Securities by the Company
 
The following table provides information regarding the Company’s purchases of its Common Stock during the period from September 30, 200726, 2009 to December 29, 2007,26, 2009, the Company’s fourth fiscal quarter:
 
                 
           Maximum
 
        Total
  Number of
 
        Number of
  Shares That
 
  Total
     Shares Purchased
  May Yet be
 
  Number of
  Average
  as Part of Publicly
  Purchased
 
  Shares
  Price Paid
  Announced
  Under the
 
Fiscal Period
 Purchased  per Share  Programs  Programs 
 
September 30, 2007              2,000,000 
Sept. 30, 2007 — Oct. 27, 2007  359,956  $41.67   359,956   1,640,044 
Oct. 28, 2007 — Nov. 24, 2007  905,643  $39.13   905,643   734,401 
Nov. 25, 2007 — Dec. 29, 2007            734,401 
                 
Total  1,265,599  $39.86   1,265,599     
                 
                 
      Total Number of Shares
 Maximum Number of
      Purchased as Part of
 Shares that May Yet be
  Total Number of
 Average Price
 Publicly Announced
 Purchased Under the
Fiscal Period
 Shares Purchased Paid per Share Programs Programs
 
September 26, 2009              2,040,296 
Sept. 27, 2009 — Oct. 24, 2009  349,852  $36.86   349,852   1,690,444 
Oct. 25, 2009 — Nov. 21, 2009  314,991   35.56   314,991   1,375,453 
Nov. 22, 2009 — Dec. 26, 2009           1,375,453 
                 
Total  664,843  $36.24   664,843     
                 
 
On August 27, 2007,July 16, 2008, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to 2,000,000 shares of its Common Stock from time to time in the open market and in privately negotiated transactions. During its 2009 fourth fiscal quarter, the Company completed the purchase of shares authorized for purchase under this program. On January 28, 2009, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to an additional 1,569,377 shares of its common stock from time to time in the open market and in privately negotiated transactions. As of December 26, 2009, the Company may purchase 1,375,453 shares of its common stock under this authorization. No specific expiration date has been assigned to the August 27, 2007January 28, 2009 authorization.


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During 2009, Landstar paid dividends as follows:
Declaration
Record
Payment
Dividend Amount per Share
DateDateDate
$0.0400January 27, 2009February 6, 2009February 27, 2009
$0.0400April 14, 2009May 7, 2009May 29, 2009
$0.0450July 15, 2009August 10, 2009August 28, 2009
$0.0450October 13, 2009November 2, 2009November 27, 2009
On June 27, 2008 Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement, under certain circumstances, limits the amount of such cash dividends and other distributions to stockholders in the event that after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter.
The Company maintains threetwo stock option plans, and one stock compensation plan.plan and one employee stock option and stock incentive plan (the “ESOSIP”). The following table presents information related to securities authorized for issuance under these plans at December 29, 2007:26, 2009:
 
                        
     Number of Securities
      Number of Securities
 Number of Securities
   Remaining Available for
  Number of Securities
   Remaining Available for
 to be Issued Upon
 Weighted-Average
 Future Issuance Under
  to be Issued Upon
 Weighted-average
 Future Issuance Under
 Exercise of
 Exercise Price of
 Equity Compensation
  Exercise of
 Exercise Price of
 Equity Compensation
Plan Category
 Outstanding Options Outstanding Options Plans  Outstanding Options Outstanding Options Plans
Equity Compensation Plans Approved by Security Holders  2,198,308  $31.10   3,791,823   2,557,802  $36.86   2,722,823 
Equity Compensation Plans Not Approved by Security Holders  0   0   0   0   0   0 
 
Under the ESOSIP, the issuance of a non-vested share of Landstar common stock counts as the issuance of two securities against the number of securities available for future issuance. Included in the number of securities remaining available for future issuance under equity compensation plans was 150,423138,423 shares of Common Stock reserved for issuance under the 2003 Directors’ Stock Compensation Plan.


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Financial Model Shareholder Returns
 
The following graph illustrates the return that would have been realized assuming reinvestment of dividends by an investor who invested $100 in each of the Company’s Common Stock, the Standard and Poor’s 500 Stock Index and the Dow Jones Transportation Stock Index for the period commencing December 31, 200225, 2004 through December 31, 2007.26, 2009.
 
Financial Model
Shareholder Returns
 


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Item 6.  Selected Financial Data
 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
 
                                        
 Fiscal Years  Fiscal Years 
Income Statement Data:
 2007 2006 2005 2004 2003  2009 2008 2007 2006 2005 
Revenue $2,487,277  $2,513,756  $2,517,828  $2,019,936  $1,596,571  $2,008,796  $2,643,069  $2,487,277  $2,513,756  $2,517,828 
Investment income  5,347   4,250   2,695   1,346   1,220   1,268   3,339   5,347   4,250   2,695 
Costs and expenses:                                        
Purchased transportation  1,884,207   1,890,755   1,880,431   1,510,963   1,185,043   1,503,520   2,033,384   1,884,207   1,890,755   1,880,431 
Commissions to agents  200,630   199,775   203,730   161,011   125,997   160,571   203,058   200,630   199,775   203,730 
Other operating costs  28,997   45,700   36,709   37,130   37,681   29,173   28,033   28,997   45,700   36,709 
Insurance and claims  49,832   39,522   50,166   60,339   45,690   45,918   36,374   49,832   39,522   50,166 
Selling, general and administrative  125,177   134,239   140,345   124,357   111,227   133,612   137,758   125,177   134,239   140,345 
Depreciation and amortization  19,088   16,796   15,920   13,959   12,736   23,528   20,960   19,088   16,796   15,920 
                      
Total costs and expenses  2,307,931   2,326,787   2,327,301   1,907,759   1,518,374   1,896,322   2,459,567   2,307,931   2,326,787   2,327,301 
                      
Operating income  184,693   191,219   193,222   113,523 �� 79,417   113,742   186,841   184,693   191,219   193,222 
Interest and debt expense  6,685   6,821   4,744   3,025   3,240   4,030   7,351   6,685   6,821   4,744 
                      
Income before income taxes  178,008   184,398   188,478   110,498   76,177   109,712   179,490   178,008   184,398   188,478 
Income taxes  68,355   71,313   72,880   42,661   29,146   39,762   68,560   68,355   71,313   72,880 
                      
Net income $109,653  $113,085  $115,598  $67,837  $47,031   69,950   110,930   109,653   113,085   115,598 
Less: Net loss attributable to noncontrolling interest  (445)            
                      
Earnings per common share $2.01  $1.95  $1.95  $1.13  $0.77 
Diluted earnings per share $1.99  $1.93  $1.91  $1.10  $0.75 
Net income attributable to Landstar System, Inc. and subsidiary $70,395  $110,930  $109,653  $113,085  $115,598 
           
Earnings per common share attributable to Landstar System, Inc. and subsidiary $1.38  $2.11  $2.01  $1.95  $1.95 
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary $1.37  $2.10  $1.99  $1.93  $1.91 
Dividends paid per common share $0.135  $0.110  $0.050          $0.170  $0.155  $0.135  $0.110  $0.050 
 
                                        
 Dec. 29,
 Dec. 30,
 Dec. 31,
 Dec. 25,
 Dec. 27,
  Dec. 26,
 Dec. 27,
 Dec. 29,
 Dec. 30,
 Dec. 31,
 
Balance Sheet Data:
 2007 2006 2005 2004 2003  2009 2008 2007 2006 2005 
Total assets $629,001  $646,651  $765,814  $586,802  $441,072  $648,792  $663,530  $629,001  $646,651  $765,814 
Long-term debt, including current maturities  164,753   129,321   166,973   92,090   91,456   92,898   136,445   164,753   129,321   166,973 
Shareholders’ equity  180,786   230,274   255,689   215,129   145,130 
Equity  268,151   253,136   180,786   230,274   255,689 


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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
 
The following is a “safe harbor” statement under the Private Securities Litigation Reform Act of 1995. Statements contained in this document that are not based on historical facts are “forward-looking statements.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of thisForm 10-K contain forward-looking statements, such as statements which relate to Landstar’s business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “predicts,” “may,” “should,” “could,” “will,” the negative thereof and similar expressions are intended to identify forward-looking statements. Such statements are by nature subject to uncertainties and


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risks, including but not limited to: an increase in the frequency or severity of accidents or other claims; unfavorable development of existing accident claims; dependence on third party insurance companies; dependence on independent commission sales agents; dependence on third party capacity providers; substantial industry competition; dependence on key personnel; disruptions or failures in our computer systems; changes in fuel taxes; status of independent contractors; a downturn in economic growth or growth in the transportation sector; acquired businesses; intellectual property; and other operational, financial or legal risks or uncertainties detailed in this and Landstar’s other SEC filings from time to time and described in Item 1A of thisForm 10-K under the heading “Risk Factors.” These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements and the Company undertakes no obligation to publicly update or revise any forward-looking statements.
 
Introduction
 
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred to herein as “Landstar” or the “Company”), provideis a non-asset based provider of freight transportation services and supply chain solutions. The Company offers customers services across multiple transportation modes, with the ability to arrange for individual shipments of freight to enterprise-wide solutions to manage all of a variety of market nichescustomer’s transportation and logistics needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada, and between the United States and Canada, Mexico and other countries through its operating subsidiaries. Landstar’s business strategy is to be a non-asset based provider of transportation capacityaround the world. The Company’s services emphasize safety, information coordination and logistics services delivering safe, specialized transportation services globally, utilizingcustomer service and are delivered through a network of independent commission sales agents and third party capacity providers linked together by a series of technological applications which are provided and employees.coordinated by the Company. Landstar focuses on providingmarkets its freight transportation services which emphasize safety, customer service and information coordination among its independent commission sales agents, customers and capacity providers. The Company markets its servicessupply chain solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’and store customer’s freight. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue. The Company has three reportable business segments. These are the carrier, global logistics and insurance segments.
 
The carrier segment consistsIn the Company’s 2009 fiscal third quarter, the Company completed the acquisitions of (i) National Logistics Management Co. (together with a limited liability company and certain corporate subsidiaries and affiliates, “NLM”) and (ii) A3 Integration LLC (“A3i”) through A3i Acquisition LLC, an entity which the Company owns 100% of the non-voting, preferred interests and 75% of the voting, common equity interests. A3i is a wholly-owned subsidiary of A3i Acquisition. These two acquisitions are referred to herein collectively as the “Recent Acquisitions.” NLM and A3i offer customers technology-based supply chain solutions and other value-added services on afee-for-service basis. NLM and A3i are herein referred to as the “Acquired Entities.”
Landstar Ranger, Inc., Landstar Inway, Inc., Landstar Ligon, Inc., Landstar Gemini, Inc. and Landstar Carrier Services, Inc. The carrier segment primarily providesmarkets its freight transportation services to the truckload market for a wide range of general commodities over irregular or non-repetitive routes utilizing dry and specialty vans and unsided trailers, including flatbed, drop deck and specialty. It also providesshort-to-long haul movement of containers by truck and dedicated power-only truck capacity. The carrier segment markets its servicessupply chain solutions primarily through independent commission sales agents who enter into contractual arrangements with the Company and utilizesare responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “Business Capacity Owner Independent Contractors” or “BCO Independent Contractors”) and other third party truck capacity providers under non-exclusive contractual arrangements (“Truck Brokerage Carriers”).
The global logistics segment is comprised of Landstar Global Logistics, Inc. and its subsidiary, Landstar Express America, Inc. Transportation and logistics services provided by the global logistics segment include the arrangement of multimodal (ground, air, ocean and rail) moves, contract logistics, truck brokerage, emergency and expedited ground, air and ocean freight and warehousing. The global logistics segment markets its services primarily through independent commission sales agents and utilizes capacity provided by BCO Independent Contractors and other third party capacity providers, including Truck Brokerage Carriers, railroads, air and ocean cargo carriers and warehouse owners. Beginning in August 2006, the global logistics segment began the rollout of warehousing services with independent contractors, unrelated trucking companies who provide warehouse


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truck capacity to the Company under non-exclusive contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers, railroads and independent warehouse capacity providers (“Warehouse Capacity Owners” or “WCO Independent Contractors”). As of December 29, 2007, Landstar Global Logistics, Inc.The Company has executed contracts with 128 Warehouse Capacity Owners.all of the Class 1 domestic and Canadian railroads and certain short-line railroads and contracts with domestic and international airlines and ocean lines. Through this network of agents and capacity providers linked together by Landstar’s technological applications, Landstar operates a transportation services and supply chain solutions business primarily throughout North America with revenue of approximately $2.0 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.
The transportation logistics segment provides a wide range of transportation services and supply chain solutions. Transportation services offered by the Company include truckload andless-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-


21


haul/specialized,U.S.-Canada andU.S.-Mexico cross-border, project cargo and customs brokerage. Supply chain solutions are based on advanced technology solutions offered by the Company and include integrated multi-modal solutions, outsourced logistics, supply chain engineering and warehousing. Also, supply chain solutions can be delivered through a software-as-a-service model. Industries serviced by the transportation logistics segment include automotive products, paper, lumber and building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military hardware. In addition, the transportation logistics segment provides transportation services to other transportation companies, including logistics andless-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight. Supply chain solution customers are generally charged fees for the services provided. Revenue recognized by the transportation logistics segment when providing capacity to customers to haul their freight is referred to herein as “transportation services revenue” and revenue for freight management services recognized on afee-for-service basis is referred to herein as “transportation management fees.”
 
The insurance segment is comprised of Signature Insurance Company, (“Signature”), a wholly-ownedwholly owned offshore insurance subsidiary, and Risk Management Claim Services, Inc. The insuranceThis segment provides risk and claims management services to certain of Landstar’s operating subsidiaries.Operating Subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to Landstar’s operating subsidiaries.
During the fiscal year ended December 29, 2007, the carrier segment contributed 73%certain of Landstar’s consolidated revenue,Operating Subsidiaries. Revenue, representing premiums on reinsurance programs provided to the global logistics segment contributed 26% of Landstar’s consolidated revenue andCompany’s BCO Independent Contractors, at the insurance segment contributed 1%represented approximately 2% of Landstar’s consolidated revenue.the Company’s total revenue for 2009.
 
Changes in Financial Condition and Results of Operations
 
Management believes the Company’s success principally depends on its ability to generate freight through its network of independent commission sales agents and to efficiently deliver that freight utilizing third party capacity providers. Management believes the most significant factors to the Company’s success include increasing revenue, sourcing capacity and controlling costs.
 
While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s primary focus with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents��Agents”). Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents and increasing the revenue opportunities generated by existing independent commission sales agents. Management believes the decrease in the number of Million Dollar Agents in 2009 resulted from the significant downturn in the domestic economy that began in the later part of 2008 and continued throughout 2009, and not necessarily from agent turnover. There were 93 Million Dollar Agents from 2008 whose revenue fell below $1 million in 2009, primarily due to the economic downturn. The following table shows the number of Million Dollar Agents, the average revenue generated by these agents, the percent of consolidated revenue generated by these agents during the past three fiscal years and the number of agent locations at each fiscal year end:
 
                        
 Fiscal Year  Fiscal Year 
 2007 2006 2005  2009 2008 2007 
Number of Million Dollar Agents  495   490   466   405   484   495 
              
Average revenue generated per Million Dollar Agent $4,571,000  $4,700,000  $5,063,000  $4,292,000  $4,907,000  $4,571,000 
              
Percent of consolidated revenue generated by Million Dollar Agents  91%  92%  94%  87%  90%  91%
              
Number of independent commission sales agent locations at year end  1,397   1,345   1,150   1,366   1,428   1,397 
              


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Management monitors business activity by tracking the number of loads (volume) and revenue per load generated by the carrier and global logistics segments. In addition, management tracks revenue per revenue mile, average lengthmode of haul and total revenue miles at the carrier segment.transportation. Revenue per revenue mile and revenue per load (collectively, price) as well as the number of loads, can be influenced by many factors which do not necessarily indicateother than a change in price or volume.price. Those factors include the average length of haul,


20


freight type, special handling and equipment requirements and delivery time requirements. For shipments involving two or more modes of transportation, revenue is classified by the mode of transportation having the highest cost for the load. The following table summarizes this data by reportable segmentmode of transportation for the past three fiscal years:
 
             
  Fiscal Year 
  2007  2006  2005 
 
Carrier Segment:            
External revenue generated through (in thousands):            
BCO Independent Contractors $1,288,070  $1,270,649  $1,249,159 
Truck Brokerage Carriers  520,321   525,967   442,509 
             
  $1,808,391  $1,796,616  $1,691,668 
             
Revenue per revenue mile $2.04  $2.02  $1.92 
Revenue per load $1,612  $1,621  $1,542 
Average length of haul (miles)  791   803   804 
Number of loads  1,121,900   1,108,300   1,097,000 
Global Logistics Segment:            
External revenue generated through (in thousands):            
BCO Independent Contractors(1) $103,155  $103,588  $159,273 
Truck Brokerage Carriers  361,257   396,141   439,604 
Rail, Air, Ocean and Bus Carriers and WCOs(2)  177,608   182,813   196,259 
             
  $642,020  $682,542  $795,136 
             
Revenue per load(3)(4) $1,572  $1,528  $1,555 
Number of loads(3)(4)  402,900   380,700   334,000 
             
  Fiscal Year 
  2009  2008  2007 
 
Revenue generated through (in thousands):            
BCO Independent Contractors $1,140,004  $1,388,353  $1,377,083 
Truck Brokerage Carriers  694,467   996,269   884,577 
Rail intermodal  76,346   136,367   133,878 
Ocean cargo carriers  33,835   42,153   26,498 
Air cargo carriers  17,621   14,891   19,692 
Other(1)  46,523   65,036   45,549 
             
  $2,008,796  $2,643,069  $2,487,277 
             
Number of loads :            
BCO Independent Contractors  761,940   820,680   857,200 
Truck Brokerage Carriers  501,980   571,600   588,660 
Rail intermodal  37,890   58,510   62,720 
Ocean cargo carriers  5,370   5,380   4,620 
Air cargo carriers  7,780   8,260   11,600 
             
   1,314,960   1,464,430   1,524,800 
             
Revenue per load :            
BCO Independent Contractors $1,496  $1,692  $1,606 
Truck Brokerage Carriers  1,383   1,743   1,503 
Rail intermodal  2,015   2,331   2,135 
Ocean cargo carriers  6,301   7,835   5,735 
Air cargo carriers  2,265   1,803   1,698 
 
 
(1)Includes premium revenue from freight hauledgenerated by carrierthe insurance segment BCO Independent Contractors for globaland warehousing and transportation management fee revenue generated by the transportation logistics customers.
(2)Includedsegment. 2009 includes $8,111 of transportation management fee revenue. Also, included in the 2007, 20062008 and 20052007 fiscal years was $481,000, $25,067,000$27,638 and $44,007,000, respectively, of revenue attributable to buses provided under a contract between Landstar Express America, Inc. and the United States Department of Transportation/Federal Aviation Administration (the “FAA”).
(3)Revenue per load and number of loads for the 2007, 2006 and 2005 fiscal years exclude the effect of $8,511,000, $100,655,000 and $275,929,000,$8,511, respectively, of revenue derived from transportation services provided in support of disaster relief efforts provided under the FAA contract. (See the section “Use of Non-GAAP Financial Measures” on page 25.)
(4)The number of loads in the fiscal period ended 2006 were restated. This change had no impact on reported revenue.contracts that have expired.


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Also critical to the Company’s success is its ability to secure capacity, particularly truck capacity, at rates that allow the Company to profitably transport customers’ freight. The following table summarizes available truck capacity providers as of the end of the three most recent fiscal years:
 
                        
 Dec. 29,
 Dec. 30,
 Dec. 31,
  Dec. 26,
 Dec. 27,
 Dec. 29,
 
 2007 2006 2005  2009 2008 2007 
BCO Independent Contractors  8,403   8,516   8,011   7,926   8,455   8,403 
Truck Brokerage Carriers:                        
Approved and active(1)  16,053   15,247   14,014   14,887   16,135   16,053 
Other approved  9,362   8,574   8,497   9,886   10,036   9,362 
              
  25,415   23,821   22,511   24,773   26,171   25,415 
              
Total available truck capacity providers  33,818   32,337   30,522   32,699   34,626   33,818 
              
Number of trucks provided by BCO Independent Contractors  8,993   9,205   8,728   8,519   9,039   8,993 
              


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(1)Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal year end.
 
The Company incurs costs that are directly related to the transportation of freight that include purchased transportation and commissions to agents. The Company incurs indirect costs associated with the transportation of freight that include other operating costs and insurance and claims. In addition, the Company incurs selling, general and administrative costs essential to administering its business operations. Management continually monitors all components of the costs incurred by the Company and establishes annual cost budgets which, in general, are used to benchmark costs incurred on a monthly basis.
 
Purchased transportation represents the amount a BCO Independent Contractor or other third party capacity provider is paid to haul freight. The amount of purchased transportation paid to a BCO Independent Contractor is primarily based on a contractuallyagreed-upon percentage of revenue generated by the haul. Purchased transportation for the brokerage services operations of the carrier segment is based onpaid to a negotiated rate for each load hauled. Purchased transportation for the brokerage services operations of the global logistics segmentTruck Brokerage Carrier is based on either a negotiated rate for each load hauled or a contractuallyagreed-upon rate. Purchased transportation for thepaid to rail intermodal, air andcargo or ocean freight operations of the global logistics segmentcargo carriers is based on a contractuallyagreed-upon fixed rate. Included in revenue in 2007, 2006 and 2005 was revenue related to bus services provided for disaster relief under the FAA contract. Purchased transportation for bus services provided under the FAA contract was based upon a negotiated rate per mile or per day.rates. Purchased transportation as a percentage of revenue for truck brokerage, services, rail intermodal operations and busocean cargo services is normally higher than that of Landstar’s other transportation operations.BCO Independent Contractor and air cargo services. 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 BCO Independent Contractors and other third party capacity providers, transportation management fees and revenue from the insurance segment. Purchased transportation as a percent of revenue also increases or decreases in relation to the availability of truck brokerage capacity, the price of fuel on revenue hauled by Truck Brokerage Carriers and, to a lesser extent, on revenue hauled by railroads and air and ocean cargo carriers. Purchased transportation costs are recognized upon the completion of freight delivery.
 
Commissions to agents are based on contractuallyagreed-upon percentages of revenue or gross profit, defined as revenue less the cost of purchased transportation, at the carrier segment and ofor gross profit at the global logistics segment.less a contractually agreed upon percentage of revenue retained by Landstar. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the carrier segment, the global logistics segmentvarious modes of transportation, transportation management fees and the insurance segment and with changes in gross profit aton services provided by Truck Brokerage Carriers, rail intermodal, air cargo and ocean cargo carriers. Commissions to agents are recognized upon the global logistics segmentcompletion of freight delivery.
Revenue less the cost of purchased transportation and commissions to agents is referred to as net revenue. Net revenue over revenue is referred to as net margin. In general, net margin on revenue hauled by BCO Independent Contractors represents a fixed percentage of revenue due to the nature of the contracts that pay a fixed percentage of revenue to both the BCO Independent Contractors and independent commission sales agents. For revenue hauled by Truck Brokerage Carriers, net margin is either fixed or variable as a percent of revenue, depending on the contract with each individual independent commission sales agent. Under certain


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contracts with independent commission sales agents, the Company retains a fixed percentage of revenue and the truck brokerage operationsagent retains the amount remaining less the cost of purchased transportation (the “retention contracts”). Net margin on revenue hauled by rail, air cargo carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention contracts, are variable in nature as the Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of gross profit, representing revenue less the cost of purchased transportation. In general, approximately 75% of the carrier segment.Company’s revenue in 2009 had a fixed net margin.
 
Rent and maintenanceMaintenance costs for Company-provided trailing equipment, BCO Independent Contractor recruiting costs and bad debts from BCO Independent Contractors and independent commission sales agents are the largest components of other operating costs.
 
Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. Landstar’s retained liability for individual commercial trucking claims varies depending on when such claims are incurred. For commercial trucking claims, incurred prior to June 19, 2003 and subsequent to March 30, 2004, Landstar retains liability up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. The Company’s exposure to liability associated with accidents incurred by other third partyTruck Brokerage Carriers, rail intermodal capacity providers and air cargo and ocean cargo carriers who haultransport freight on behalf of the Company is reduced by various factors including the extent to which they maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the unfavorable development of existing claims could be expected to materially adversely affect Landstar’s results of operations.
 
Employee compensation and benefits account for over half of the Company’s selling, general and administrative costs.
 
Depreciation and amortization primarily relate to depreciation of trailing equipment, amortization of intangible assets attributed to the acquisitions in 2009 and management information services equipment.


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The following table sets forth the percentage relationships of income and expense items to revenue for the periods indicated:
 
                        
 Fiscal Year  Fiscal Year 
 2007 2006 2005  2009 2008 2007 
Revenue  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
Investment income  0.2   0.2   0.1   0.1   0.1   0.2 
Costs and expenses:                        
Purchased transportation  75.8   75.2   74.7   74.8   76.9   75.8 
Commissions to agents  8.1   8.0   8.1   8.0   7.7   8.1 
Other operating costs  1.1   1.8   1.5   1.5   1.0   1.1 
Insurance and claims  2.0   1.6   2.0   2.3   1.4   2.0 
Selling, general and administrative  5.0   5.3   5.5   6.6   5.2   5.0 
Depreciation and amortization  0.8   0.7   0.6   1.2   0.8   0.8 
              
Total costs and expenses  92.8   92.6   92.4   94.4   93.0   92.8 
              
Operating income  7.4   7.6   7.7   5.7   7.1   7.4 
Interest and debt expense  0.3   0.3   0.2   0.2   0.3   0.3 
              
Income before income taxes  7.1   7.3   7.5   5.5   6.8   7.1 
Income taxes  2.7   2.8   2.9   2.0   2.6   2.7 
              
Net income  4.4%  4.5%  4.6%  3.5%  4.2%  4.4%
              
 
Fiscal Year Ended December 29, 200726, 2009 Compared to Fiscal Year Ended December 30, 200627, 2008
 
Revenue for the fiscal year 20072009 was $2,487,277,000,$2,008,796,000, a decrease of $26,479,000,$634,273,000, or 1.1%24.0%, compared to revenue for the 2006 fiscal year. The decrease in revenue was primarily attributable to lower disaster relief revenue provided under the FAA contract in fiscal year 2007 compared to fiscal year 2006.2008. Revenue for disaster relief services provided under the FAA contract in 2007 and 2006 was $8,511,000 and $100,655,000, respectively, including trailer rental revenue of $2,235,000 and $18,778,000, respectively. Revenue increased $11,775,000 and $2,268,000decreased $633,353,000, or 24.3%, at the carrier and insurance segments, respectively, while revenue at the globaltransportation logistics segment decreased $40,522,000. With respect to the carrier segment, revenue per load, the number of loads delivered, the average length of haul and revenue per revenue mile were all approximately the same in 2007 as compared to 2006.segment. The overall decrease in


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revenue at the global logistics segment was primarily due to the significant downturn in the economy. Revenue hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and ocean cargo carriers in 2009 decreased 18%, 30%, 44% and 20%, respectively, compared to 2008 while revenue hauled by air cargo carriers increased 18%. The number of loads in 2009 hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and air cargo carriers decreased 7%, 12%, 35% and 6%, respectively, compared to 2008, while the number of loads hauled by ocean cargo carriers was flat. Revenue per load in 2009 for disaster relief services provided under the FAA contract. Excludingloads hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and ocean cargo carriers decreased approximately 12%, 21%, 14% and 20%, respectively, compared to 2008, while revenue per load for loads hauled by air cargo carriers increased 26%. The decrease in the number of loads and revenue relatedper load hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal and ocean cargo carriers was primarily attributable to disaster relief services provided bylower demand due to the global logistics segmentoverall weak economic conditions which caused increased pressure on price. In addition, the decrease in 2007 and 2006, the number of loads delivered by the global logistics segment in fiscal year 2007 increased approximately 6% over 2006 and average revenue per load increased approximately 3% over 2006.on Truck Brokerage Carrier revenue was partly attributable to decreased fuel surcharges identified separately in billings to customers in 2009 compared to 2008. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $48,095,000 and $134,230,000 in 2009 and 2008, respectively. Fuel surcharges billed to customers on revenue hauled by BCO Independent Contractors are excluded from revenue and paid in entirety to the BCO Independent Contractors.
 
Investment income at the insurance segment was $5,347,000$1,268,000 and $4,250,000 for fiscal years 2007$3,339,000 in 2009 and 2006,2008, respectively. The increasedecrease in investment income was primarily due to an increaseda decreased rate of return, attributable to a general increasedecrease in interest rates, on investments held by the insurance segment and an increase in average investments held at the insurance segment.2009.
 
Purchased transportation was 75.8%74.8% and 76.9% of revenue in 2007 compared with 75.2% in 2006.2009 and 2008, respectively. The increasedecrease in purchased transportation as a percentage of revenue was primarily attributable to decreased rates of purchased transportation paid to Truck Brokerage Carriers, due to lower cost of fuel and excess truck capacity industry wide, and an increase in the effectpercentage of decreased revenue under the FAA contract,hauled by BCO Independent Contractors, which tends to have a lower cost of purchased transportation, and increased rates for purchased transportation paid to rail intermodal carriers, partially offset by decreased rates for purchased transportation paid to Truck Brokerage Carriers.transportation. Commissions to agents were 8.1% of revenue in 2007 and 8.0% of revenue in 2006.2009 and 7.7% of revenue in 2008. The increase in commissions to agents as a percentage of revenue was primarily attributable to decreased revenue for disaster relief services provided under the FAA contract, which tends to have a lower agent commission rate, and increased commissions to agents primarily attributable to increased gross profit on revenue less the cost of purchased transportation, on truck brokerage revenue.hauled by Truck Brokerage Carriers. Other


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operating costs were 1.1%1.5% and 1.0% of revenue in 20072009 and 1.8% of revenue in 2006.2008, respectively. The decreaseincrease in other operating costs as a percentage of revenue was primarily attributable to reduced trailerthe effect of decreased revenue, $1,702,000 of other operating costs from the Acquired Entities, increased trailing equipment maintenance costs and an increased provision for contractor bad debt, partially offset by decreased trailing equipment rental costs incurred in support of disaster relief services under the FAA contract.costs. Insurance and claims were 2.0%2.3% of revenue in 20072009 and 1.6%1.4% of revenue in 2006.2008. The increase in insurance and claims as a percentage of revenue was primarily attributabledue to a $5,000,000 charge foran increase in the estimated costseverity of one severe accident that occurred during the first quartercommercial trucking claims incurred in 2009 and decreased favorable development of 2007 and increased cargoprior year claims expensereported in 2007.2009. Selling, general and administrative costs were 5.0%6.6% of revenue in 20072009 and 5.3%5.2% of revenue in 2006.2008. The decreaseincrease in selling, general and administrative costs as a percentage of revenue was primarily attributable to the effect of decreased revenue, $2,005,000 of one-time acquisition related costs and $7,138,000 of selling, general and administrative costs from the Acquired Entities in 2009, partially offset by a decreased provision for bonuses under the Company’s incentive compensation programs.programs in 2009. Depreciation and amortization was 0.8%1.2% of revenue in 2007 and 0.7% of revenue2009 compared with 0.8% in 2006.2008. The increase in depreciation and amortization as a percentage of revenue was primarily due to an increase inthe effect of decreased revenue, depreciation on Company-owned trailing equipment.equipment and amortization of identifiable intangible assets attributed to the Acquired Entities.
 
Interest and debt expense was 0.3%0.2% of revenue in both 20072009, compared to 0.3% in 2008. The decrease in interest and 2006.debt expense as a percentage of revenue was primarily attributable to lower average borrowings on the Company’s senior credit facility, a lower average rate on borrowings under the Company’s senior credit facility and lower average capital lease obligations during 2009, partially offset by the effect of decreased revenue in 2009.
 
The provisions for income taxes for the 20072009 and 2006 fiscal years2008 were based on estimated full year combined effective income tax rates of approximately 38.4%36.2% and 38.7%38.2%, respectively, which arewere higher than the statutory federal income tax rate primarily as a result of state income taxes, the meals and entertainment exclusion and non-deductible stock compensation expense. The decrease in the effective income tax rate was primarily attributable to changes in the mix


26


recognition of income apportionedbenefits relating to the states in which the Company generates revenue and previously unrecognized tax benefits forseveral uncertain tax positions that were recognized in 2007 that had reachedfor which the applicable statute of limitations. limitations passed in 2009.
The Company believes that deferred income tax benefits are more likely than notnet loss attributable to be realized becausenoncontrolling interest of $445,000 represents the noncontrolling investor’s 25 percent share of the Company’s ability to generate future taxable earnings.net loss incurred by A3i during the 2009 period.
 
Net income forattributable to the 2007 fiscal yearCompany was $109,653,000,$70,395,000, or $2.01$1.38 per common share ($1.991.37 per diluted share), which included approximately $2,153,000 of operatingin 2009. Net income relatedattributable to the $8,511,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $2,153,000 of operating income, net of related income taxes, increased net income approximately $1,325,000,Company was $110,930,000, or $0.02$2.11 per common share ($0.02 per diluted share). Net income for the 2006 fiscal year was $113,085,000, or $1.95 per common share ($1.932.10 per diluted share), which included approximately $14,590,000 of operating income related to the $100,655,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $14,590,000 of operating income, net of related income taxes, increased net income approximately $8,944,000, or $0.15 per common share ($0.15 per diluted share).in 2008.
 
Fiscal Year Ended December 30, 200627, 2008 Compared to Fiscal Year Ended December 31, 200529, 2007
 
Revenue for the fiscal year 20062008 was $2,513,756,000,$2,643,069,000, an increase of $155,792,000, or 6.3%, compared to revenue of $2,517,828,000 for the 2005 fiscal year.2007. Revenue increased $104,948,000 and $3,574,000$155,805,000, or 6.4%, at the carrier and insurance segments, respectively, and decreased $112,594,000 at the globaltransportation logistics segment primarily attributabledue to lower disaster reliefa 13% increase in revenue hauled by Truck Brokerage Carriers, increased revenue hauled by ocean cargo carriers and increased revenue for bus capacity provided under the FAA contract in fiscal year 2006 compared to fiscal year 2005. With respectfor evacuation assistance related to the carrier segment,storms that impacted the Gulf Coast in September 2008 (“Bus Revenue”), partially offset by lower revenue per load increased approximately 5% whilehauled by air cargo carriers. The number of loads in 2008 hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal and air cargo carriers, decreased 4%, 3%, 7% and 29% , respectively, compared to the number of loads deliveredhauled in 20062007. Loads hauled by ocean cargo carriers increased approximately 1%16% over the number of loads delivered in 2005. The average length of haul2007. Revenue per load at the carrier segment remained approximately the same as prior year, however, revenue per revenue milefor loads hauled by Truck Brokerage Carriers, BCO Independent Contractors and rail intermodal, air cargo and ocean cargo carriers increased approximately16%, 5%. Included, 9%, 6% and 37%, respectively, over 2007. The increase in disaster relief revenue at the global logistics segment for the 2006 and 2005 fiscal years was $100,655,000 and $275,929,000, respectively, of disaster relief revenue provided primarily under the FAA contract. Excluding the number of loads and revenue related to the disaster relief efforts provided by the global logistics segment in 2006 and 2005, the number of loads delivered by the global logistics segment in fiscal year 2006 increased approximately 16% over 2005, however, average revenue per load decreased approximately 3%.hauled by Truck Brokerage Carriers and rail intermodal, air cargo and ocean cargo carriers was partly attributable to increased fuel surcharges identified separately in billings to customers in 2008 compared to 2007. Fuel surcharges on truck brokerage revenue identified separately in billings to customers and included as a component of truck brokerage revenue were $134,230,000 and $85,256,000 in 2008 and 2007, respectively. Fuel surcharges billed to customers on revenue hauled by BCO Independent Contractors are excluded from revenue.
 
Investment income at the insurance segment was $4,250,000$3,339,000 and $2,695,000 for fiscal years 2006$5,347,000 in 2008 and 2005,2007, respectively. The increasedecrease in investment income was primarily due to an increaseda decreased rate of return, attributable to a general increasedecrease in interest rates, on investments held by the insurance segment.segment in 2008.
 
Purchased transportation was 75.2%76.9% and 75.8% of revenue in 2006 compared with 74.7% in 2005.2008 and 2007, respectively. The increase in purchased transportation as a percentage of revenue was primarily attributable to an increase in the portion of revenue generated under the FAA contract attributable to bus, air and fuel delivery services, which have a


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higher costincreased rates of purchased transportation paid to Truck Brokerage Carriers and ocean cargo carriers, partially attributable to the increased truck brokeragecost of fuel in 2008, increased revenue hauled by Truck Brokerage Carriers and rail intermodal revenue,ocean cargo carriers, both of which tend to have a higher cost of purchased transportation, compared toand the effect of disaster relief services revenue, generated through BCO Independent Contractors, partially offset by lower rates forwhich also had a higher rate of purchased transportation paid to Truck Brokerage Carriers.transportation. Commissions to agents were 8.0%7.7% of revenue in 20062008 and 8.1% of revenue in 2005.2007. The decrease in commissions to agents as a percentage of revenue was primarily attributable to the change in the mix ofdecreased gross profit on revenue generated under the FAA contract in 2006 towards transportation services which have a lower commission rate.hauled by Truck Brokerage Carriers. Other operating costs were 1.8%1.0% and 1.1% of revenue in 20062008 and 1.5%2007, respectively. The decrease in other operating costs as a percentage of revenue in 2005. The increase was primarily attributable to trailer rentalthe effect of increased revenue hauled by Truck Brokerage Carriers and ocean cargo carriers in 2008, neither of which incur significant other operating costs, incurred in support of disaster relief services provided under the FAA contract, partially offset by reduced other trailer rent expense and maintenance costs, as a resultlower gains on the sales of the Company’s on-going efforttrailing equipment in 2008 compared to reduce the cost of Company provided trailing equipment.2007. Insurance and claims were 1.6%1.4% of revenue in 2006 and2008, compared with 2.0% of revenue in 2005.2007. The decrease in insurance and claims as a percentage of revenue was primarily attributabledue to a $5,000,000 charge for the estimated cost of one severe accident that occurred during the first quarter of 2007, favorable development of prior year claims in 2006, lower frequency2008 and severity of commercial trucking accidents in 2006, and increased truck brokerage revenue, which has a lower cost of cargo claims risk profile than revenue hauled by BCO Independent Contractors.in 2008. Selling, general and administrative costs were 5.3%5.2% of revenue in 2006 and 5.5%2008, compared with 5.0% of revenue in 2005.2007. The decreaseincrease in selling, general and administrative costs as a percentage of revenue was primarily attributable to a decreasedan increased provision for bonuses under the Company’s incentive compensation programs.programs and an increased provision for customer bad debt, partially offset by the effect of increased revenue. Depreciation and amortization was 0.7%0.8% of revenue in 2006both 2008 and 0.6% of revenue in 2005. The increase in depreciation and amortization as a percentage of revenue was primarily due to an increase in Company owned trailing equipment as opposed to trailing equipment obtained through operating leases.2007.
 
Interest and debt expense was 0.3% of revenue in 2006both 2008 and 0.2% of revenue in 2005. This increase in interest and debt expense was primarily attributable to increased interest rates on the Company’s revolving credit facility, increased capital lease obligations and increased borrowings under the Company’s credit facility during the first half of 2006, which were used to fund a portion of the December 31, 2005 receivable from the FAA and to fund purchases of the Company’s common stock under its authorized share repurchase program.2007.


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The provisions for income taxes for the 20062008 and 2005 fiscal years2007 were based on an estimated full year combined effective income tax raterates of approximately 38.7% for each annual period,38.2% and 38.4%, respectively, which iswere higher than the statutory federal income tax rate primarily as a result of state income taxes, the meals and entertainment exclusion and non-deductible stock compensation expense.
 
Net income forattributable to the 2006 fiscal yearCompany was $113,085,000,$110,930,000, or $1.95$2.11 per common share ($1.932.10 per diluted share), which included approximately $14,590,000 of operating income relatedin 2008, compared to the $100,655,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $14,590,000 of operating income, net of related income taxes, increased net income approximately $8,944,000,$109,653,000, or $0.15$2.01 per common share ($0.15 per diluted share). Net income for the 2005 fiscal year was $115,598,000, or $1.95 per common share ($1.911.99 per diluted share), which included approximately $51,945,000 of operating income related to the $275,929,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $51,945,000 of operating income, net of related income taxes, increased net income approximately $31,626,000, or $0.53 per common share ($0.52 per diluted share).in 2007.
 
Use of Non-GAAP Financial Measures
In this annual report onForm 10-K, Landstar provides the following information that may be deemed non-GAAP financial measures for the 2007, 2006 and 2005 fiscal years: (1) revenue per load for the global logistics segment excluding revenue and loads related to disaster relief transportation services provided under the FAA contract and (2) the percentage change in revenue per load for the global logistics segment excluding revenue and loads related to disaster relief transportation services provided under the FAA contract as compared to revenue per load for the global logistics segment for the corresponding prior year periods. Each of the foregoing financial measures should be considered as additional information and not as a substitute for the GAAP financial information presented in thisForm 10-K.
Management believes that it is appropriate to present this financial information for the following reasons: (1) a significant portion of the disaster relief transportation services were provided under the FAA contract on


25


the basis of a daily rate for the use of transportation equipment in question, and therefore load and per load information is not necessarily available or appropriate for a significant portion of the related revenue, (2) disclosure of the effect of the transportation services provided by Landstar relating to disaster relief efforts will allow investors to better understand the underlying trends in Landstar’s financial condition and results of operations, (3) this information will facilitate comparisons by investors of Landstar’s results as compared to the results of peer companies and (4) management considers this financial information in its decision making.
Capital Resources and Liquidity
 
Shareholders’ equityEquity was $180,786,000,$268,151,000, or 52%74% of total capitalization (defined as total debt plus equity), at December 29, 2007,26, 2009, compared with $230,274,000,$253,136,000, or 64%65% of total capitalization, at December 30, 2006.27, 2008. The decreaseincrease in shareholders’ equity was primarily a result of the purchase of 4,093,100 shares of the Company’s common stock at a total cost of $176,590,000 and dividends paid of $7,389,000, partially offset by net income and the effect of the exercises of stock options during the period.period, partially offset by the purchase of 1,624,547 shares of the Company’s common stock at a total cost of $55,757,000.
The Company paid $0.17 per share, or $8,686,000, in cash dividends during 2009. It is the intention of the Board of Directors to continue to pay a quarterly dividend. As of December 29, 2007,26, 2009, the Company may purchase an additional 734,4011,375,453 shares of its common stock under its authorized stock purchase program. Long-term debt, including current maturities, was $164,753,000$92,898,000 at December 29, 2007,26, 2009, compared to $129,321,000$136,445,000 at December 30, 2006. 27, 2008.
Working capital and the ratio of current assets to current liabilities were $184,078,000$167,977,000 and 1.71.6 to 1, respectively, at December 29, 2007,26, 2009, compared with $221,168,000$238,817,000 and 1.92.0 to 1, respectively, at December 30, 2006.27, 2008. Landstar has historically operated with current ratios within the range of 1.5 to 1 to 2.0 to 1. Cash provided by operating activities was $140,608,000$144,964,000 and $119,689,000 in 2007 compared with cash provided by operating activities of $292,168,000 in 2006.2009 and 2008, respectively. The decreaseincrease in cash flow provided by operating activities was primarily attributable to the collectiontiming of the 2005 fiscal year end receivable from the FAA for disaster relief transportation services during 2006.collections of trade receivables.
 
On July 8, 2004,June 27, 2008, Landstar renegotiated its existingentered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Fourth Amended and Restated Credit“Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009,June 27, 2013, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees.
 
At December 29, 2007, the Company had $80,000,000 in borrowings outstanding and $26,868,000 of letters of credit outstanding under the Fourth Amended and Restated Credit Agreement. At December 29, 2007, there was $118,132,000 available for future borrowings under the Company’s Fourth Amended and Restated Credit Agreement. In addition, the Company has $43,254,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments and cash equivalents totaling $45,630,000.
Borrowings under the Fourth 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 JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the federal funds effective rate plus1/2%, or, (ii) the rate at the time offered to JPMorgan Chase 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 Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 29, 2007, the margin was equal to 62.5/100 of 1%.
The unused portion of the Fourth Amended and Restated Credit Agreement carries a commitment fee determined based on the level of the Leverage Ratio, as therein defined. As of December 29, 2007, the commitment fee for the unused portion of the Fourth Amended and Restated Credit Agreement was 0.20%. At December 29, 2007, the weighted average interest rate on borrowings outstanding under the Fourth Amended and Restated Credit Agreement was 5.92%.
The Fourth 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.indebtedness. The Fourth Amended and Restated Credit Agreement also requires Landstar to meet certain financial tests. LandstarCompany is required to, among other things, maintain a minimum levels


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of Consolidated Net Worth and Fixed Charge Coverage and limit its borrowings to a specified ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (the “Leverage Ratio”),Ratio, as each is defined in the Fourth AmendedCredit Agreement, and Restatedmaintain a Leverage Ratio, as defined in the Credit Agreement, below a specified maximum. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the amount of such cash dividends and other distributions to stockholders in the event that after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event, among other things, that a person or group acquires 25% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors. None of these covenants are presently considered by management to be materially restrictive to the Company’s operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Fourth Amended and Restated Credit Agreement. The Fourth Amended and Restated Credit Agreement provides that the Company maintain a minimum Consolidated Net Worth of $80,000,000. Under the most restrictive covenant, the Fixed Charge Coverage, fixed charges were $74,580,000 lower than the maximum amount allowed at December 29, 2007.
The Fourth Amended and Restated Credit Agreement provides for an event 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 Fourth Amended and Restated Credit Agreement are unsecured, however, Landstar System, Inc., LSHI and all but two subsidiaries guarantee the obligations under the Fourth Amended and Restated Credit Agreement.
 
The Fourth AmendedAt December 26, 2009, the Company had $40,000,000 in borrowings outstanding and Restated Credit Agreement provides for a restriction on cash dividends on the Company’s capital stock only to the extent there is an event$33,857,000 of defaultletters of credit outstanding under the Fourth AmendedCredit Agreement. At December 26, 2009, there was $151,143,000 available for future borrowings under the Credit Agreement. In addition, the Company has $45,008,000 in letters of credit outstanding, as collateral for insurance claims, that are secured by investments and Restated Credit Agreement.cash equivalents totaling $49,817,000. Investments, all of which are carried at fair value, consist of investment-grade bonds having maturities of up to five years. Fair value of investments is based primarily on quoted market prices.


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Historically, the Company has generated sufficient operating cash flow to meet its debt service requirements, fund continued growth, both internal and through acquisitions, complete or execute share purchases of its common stock under authorized share purchase programs, pay dividends and meet working capital needs. As a non-asset based provider of transportation capacityservices and logistics services,supply chain solutions, the Company’s annual capital requirements for operating property are generally for trailing equipment and management information services equipment. In addition, a significant portion of the trailing equipment used by the Company is provided by third party capacity providers, thereby reducing the Company’s capital requirements. During 2007, 20062009, 2008 and 2005,2007, the Company purchased $6,514,000, $4,173,000$2,715,000, $8,289,000 and $3,857,000,$6,514,000, respectively, of operating property and acquired $36,046,000, $36,594,000$12,284,000, $4,802,000 and $28,512,000,$36,046,000, respectively, of trailing equipment by entering into capital leases. The Company’s primary facility in Jacksonville, Florida (the “Jacksonville Facility”) is leased under a lease agreement that provides the Company with an option to purchase the Jacksonville Facility, including the land and fixtures located thereon, at a fixed price of $21,135,000 in the first quarter of 2010. In January 2010, the Company has entered into a contract of sale with its landlord to purchase the Jacksonville Facility in the first quarter of 2010, as is, subject to the satisfaction of certain customary conditions under the terms of the contract of sale. It is expected the purchase will be funded from the Company’s existing cash and cash equivalents or from available funds under the Company’s senior credit facility. In addition, Landstar anticipates acquiring approximately $20,000,000 of$27,000,000 in operating property, primarily new trailing equipment to replace older trailing equipment, and information technology equipment during fiscal year 20082010 either by purchase or by lease financing. Prior to 2003, the Company historically funded its acquisition of Company provided fixed cost trailing equipment using capital leases. During 2004 and 2003, the Company acquired van trailing equipment under a long-term operating lease at a fixed monthly rental price per trailer. The Company does not currently anticipate any other significant capital requirements in 2008.2010.
In the Company’s 2009 fiscal third quarter, the Company completed the Recent Acquisitions. Consideration paid plus net liabilities assumed for the Recent Acquisitions was approximately $35,300,000 in the aggregate. As it relates to the noncontrolling interest of A3i Acquisition, the Company has the option, during the period commencing on the fourth anniversary of June 29, 2009, (the “Closing Date”), and ending on the sixth anniversary of the Closing Date, to purchase at fair value all but not less than all of the noncontrolling interest (the “A3i Call Right”). The noncontrolling interest is also subject to customary restrictions on transfer, including a right of first refusal in favor of the Company, and drag-along rights. If the Company does not exercise the A3i Call Right, the owner of the noncontrolling interest has the right, but not the obligation, for a specified period following each of the sixth, seventh and eighth anniversaries of the Closing Date, to sell at fair value to the Company up to one third annually of the investment then held by such owner. The owner of the noncontrolling interest also has certain preemptive rights and tag-along rights. In addition, as it relates to NLM, the Company may be required to pay additional consideration to the prior owner of NLM contingent on NLM achieving certain levels of earnings through December 2014.
 
Since January 1997, the Company has purchased $764,810,000over $872,000,000 of its common stock under programs authorized by the Board of Directors of the Company in open market and private block transactions. The Company has used cash provided by operating activities and borrowings on the Company’s revolving credit facilities to fund the purchases.
 
Management believes that cash flow from operations combined with the Company’s borrowing capacity under the Credit Agreement will be adequate to meet Landstar’s debt service requirement, fund continued growth, both internal and through acquisitions, pay dividends, complete the authorized share purchase program and meet working capital needs.


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Contractual Obligations and Commitments
 
At December 29, 2007,26, 2009, the Company’s obligations and commitments to make future payments under contracts, such as debt and lease agreements, were as follows (in thousands):
 
                                        
 Payments Due By Period  Payments Due by Period 
   Less Than
 1-3
 4-5
 More Than
    Less Than
 1-3
 4-5
 More Than
 
Contractual Obligation
 Total 1 Year Years Years 5 Years  Total 1 Year Years Years 5 Years 
Long-term debt $80,000      $80,000         
Long-term debt obligations $40,000          $40,000     
Capital lease obligations  93,732  $27,079   46,876  $19,777       56,226  $26,661  $28,244   1,321     
Operating leases  23,411   7,633   7,564   4,313  $3,901 
Operating lease obligations  14,232   4,134   5,688   4,410     
Purchase obligations  19,094   16,756   2,304   34     
                      
 $197,143  $34,712  $134,440  $24,090  $3,901  $129,552  $47,551  $36,236  $45,765  $ 
                      


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Long-term debt represents borrowings under the Fourth Amended and Restated Credit Agreement and does not include interest. Capital lease obligations above include $8,979,000$3,328,000 of imputed interest. Operating leases primarily include $13,710,000 related to the Company’s main office facility located in Jacksonville, Florida and $5,198,000 related to a long-term operating lease for trailing equipment. At December 29, 2007,26, 2009, the Company has gross unrecognized tax benefits of $16,401,000.$11,966,000. This amount is excluded from the table above as the Company cannot reasonably estimate the period of cash settlement with the respective taxing authorities. At December 26, 2009, the Company has insurance claims liabilities of $72,307,000. This amount is excluded from the table above as the Company cannot reasonably estimate the period of cash settlement on these liabilities. The short term portion of the insurance claims liability is reported on an actuarially determined basis. Included in purchase obligations in the table above is $14,134,000 of obligations related to trailing equipment to replace older trailing equipment.
In January 2010, the Company entered into a contract of sale with the landlord of its Jacksonville, FL facility to purchase its headquarters in the first quarter of 2010. The purchase price of the facility, including the land and fixtures located thereon, is $21,135,000. Included above under operating lease obligations is $10,006,000 of rental payments for the Jacksonville Facility. If the purchase is completed, the remaining operating lease obligations on this facility will no longer be payable.
 
Off-Balance Sheet Arrangements
 
As of December 29, 2007,26, 2009, the Company had no off-balance sheet arrangements, other than operating leases as disclosed in the table of Contractual Obligations and Commitments above, that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Legal Matters
 
On November 1, 2002,As further described in periodic and current reports previously filed by Landstar System, Inc. (the “Company”) with the Securities and Exchange Commission, the Company and certain of its subsidiaries (the “Defendants”) are defendants in a suit (the “Litigation”) brought in the United States District Court for the Middle District of Florida (the “District Court”) by the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and certainfour former BCO Independent Contractors (as defined below) (collectively(the “Named Plaintiffs” and, with OOIDA, the “Plaintiffs”) filed a putative class action complaint on behalf of all independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (“BCO(the “BCO Independent Contractors”) in the United States District Court for the Middle District of Florida (the “District Court”) in Jacksonville, Florida, against the Company and certain of its subsidiaries. The complaint was amended on April 7, 2005 (as amended, the “Amended Complaint”). The Amended Complaint allegedPlaintiffs allege that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violate certain federal leasing regulations and soughtseek injunctive relief, an unspecified amount of damages and attorney’sattorneys’ fees. On August 30, 2005, the District Court granted a motion by the Plaintiffs to certify the case as a class action.
 
On January 16, 2007, the District Court ordered the decertification of the class of BCO Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial commenced for purposes of determining what remedies, if any, would be awarded to the remaining named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company: Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the “Defendants”). On March 29, 2007, the District Court denied Plaintiffs’the request by Plaintiffs for injunctive relief, entered a Judgmentjudgment in favor of the Defendants and issued written orders setting forth its rulings related to the decertification of the plaintiff class and other important elements of the denial of Plaintiffs requests for damagesLitigation relating to liability, injunctive relief and injunctivemonetary relief. The Plaintiffs and the Defendants have each filed motions with the District Court concerning an award of attorney fees from the other party.
The Plaintiffs have filed an appeal with the United States Court of Appeals for


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the Eleventh Circuit (the “Appellate Court”) with respect toof certain of the District Court’s rulings including the judgments entered by the District Court in favor of the Defendants on the issues of damages and injunctive relief.Defendants. The Defendants have asked the Appellate Court to affirm thesuch rulings of the District Court that have been appealed by the Plaintiffs. The Defendants have alsoand filed a cross-appeal with the Appellate Court with respect to certain other rulings of the District Court.
On September 3, 2008, the Appellate Court issued its ruling, which, among other things, affirmed the District Court’s rulings that (i) the Defendants are not prohibited by the applicable federal leasing regulations from charging administrative or other fees to BCO Independent Contractors in connection with voluntary programs offered by the Defendants through which a BCO Independent Contractor may purchase discounted products and services for a charge that is deducted against the compensation payable to the BCO Independent Contractor (a “Charge-back Deduction”), (ii) the Plaintiffs are not entitled to restitution or disgorgement with respect to violations by Defendants of the applicable federal leasing regulations but instead may recover only actual damages, if any, which they sustained as a result of any such violations and (iii) the claims of BCO Independent Contractors may not be handled on a class action basis for purposes of determining the amount of actual damages, if any, they sustained as a result of any violations. Further, the analysis of the Appellate Court confirmed the absence of any violations alleged by the Plaintiffs of the federal leasing regulations with respect to the written terms of all leases currently in use between the Defendants and BCO Independent Contractors.
However, the ruling of the Appellate Court reversed the District Court’s rulings (i) that an old version of the lease formerly used by Defendants but not in use with any current BCO Independent Contractor complied with applicable disclosure requirements under the federal leasing regulations with respect to adjustments to compensation payable to BCO Independent Contractors on certain loads sourced from the U.S. Dept. of Defense, and (ii) that the Defendants had provided sufficient documentation to BCO Independent Contractors under the applicable federal leasing regulations relating to how the component elements of Charge-back Deductions were computed. The Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek injunctive relief with respect to these violations of the federal leasing regulations and to hold an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking rehearing of the Appellate Court’s ruling; however, there can be no assurance that any petition for rehearing will be granted.
Although no assurances can be given with respect to the outcome of the appeal orLitigation, including any proceedingspossible award of attorneys’ fees to the Plaintiffs, the Company believes that (i) no Plaintiff has sustained any actual damages as a result of any violations by the Defendants of the federal leasing regulations and (ii) injunctive relief, if any, that may be conducted thereafter,granted by the Company believes it has meritorious defenses and it intendsDistrict Court on remand is unlikely to continue asserting these defenses vigorously.have a material adverse financial effect on the Company.
 
The Company is involved in certain other 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 such other claims and pending litigation and that the ultimate outcome, after provisions thereof,therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.


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Critical Accounting Policies and Estimates
 
The allowance for doubtful accounts for both trade and other receivables represents management’s estimate of the amount of outstanding receivables that will not be collected. Recently, the Company has experienced a higher level of customer bad debt expense than typically experienced in the past. Management believes this resulted from the difficult economic environment experienced by the Company’s customers. Historically, management’s estimates for uncollectible receivables have been materially correct. Although management believes the amount of the allowance for both trade and other receivables at December 29, 200726, 2009 is appropriate, a prolonged period of low or no economic growth may adversely affect the collection of these receivables. Conversely, a more robust economic environment may result in the realization of some portion of the estimated uncollectible receivables.


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Landstar provides for the estimated costs of self-insured claims primarily on an actuarial basis. The amount recorded for the estimated liability for claims incurred is based upon the facts and circumstances known on the applicable balance sheet date. The ultimate resolution of these claims may be for an amount greater or less than the amount estimated by management. The Company continually revises its existing claim estimates as new or revised information becomes available on the status of each claim. Historically, the Company has experienced both favorable and unfavorable development of prior year claims estimates. During fiscal years 2007, 20062009, 2008 and 2005,2007, insurance and claims costs included $8,296,000, $7,739,000$4,113,000, $9,968,000 and $1,525,000,$8,296,000, respectively, of favorable adjustments to prior yearsyears’ claims estimates. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims reserve at December 29, 2007.26, 2009.
 
The Company utilizes certain income tax planning strategies to reduce its overall cost of income taxes. Upon audit, it is possible that certain strategies might be disallowed resulting in an increased liability for income taxes. Certain of these tax planning strategies result in a level of uncertainty as to whether the related tax positions taken by the Company will result in a recognizable benefit. The Company has provided for its estimated exposure attributable to such tax positions due to the corresponding level of uncertainty with respect to the amount of income tax benefit that may ultimately be realized. Management believes that the provision for liabilities resulting from the uncertainty in such income tax positions is appropriate. To date, the Company has not experienced an examination by governmental revenue authorities that would lead management to believe that the Company’s past provisions for exposures related to the uncertainty of such income tax positions are not appropriate.
 
Significant variances from management’s estimates for the amount of uncollectible receivables, the ultimate resolution of self-insured claims or the provision for uncertainty in income tax positions can all be expected to positively or negatively affect Landstar’s earnings in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations.
 
Effects of 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 yearsexcess of historical trends might have an adverse effect on the Company’s results of operations.
 
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.
 
Recently Issued Accounting Standards Not Currently Effective
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2007, the FASB issued


29


Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 or SFAS 159 to have a significant effect on the Company’s financial condition or results of operations.
Item 7A.7a.  Quantitative and Qualitative Disclosures about Market Risk
 
The Company is exposed to changes in interest rates as a result of its financialfinancing activities, primarily its borrowings on the revolving credit facility, and investing activities with respect to investments held by the insurance segment.
 
On July 8, 2004,June 27, 2008, Landstar entered into a new senior credit facilityagreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Fourth Amended and Restated Credit“Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009,June 27, 2013, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees.
 
Borrowings under the Fourth Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar,the Company, either (i) the greatestgreater of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reservesN.A. and FDIC assessment costs plus 1% and (c)(b) the federal funds effective rate plus1/2% .5%, or, (ii) the rate at the time offered to JPMorgan Chase Bank, N.A. in the Eurodollar market for amounts and periods comparable to the relevant loan plus, in either


32


case, a margin that is determined based on the level of the Company’s Leverage Ratio, as defined in the Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the borrowing capacity. As of December 29, 2007,26, 2009 and December 27, 2008, the weighted average interest rate on borrowings outstanding was 5.92%.1.12% and 2.63%, respectively. During fiscal 2007,the fourth quarter of 2009 and 2008, the average outstanding balance under the Fourth Amended and Restated Credit Agreement was approximately $55,420,000.$33,120,000 and $84,500,000, respectively. Based on the borrowing rates in the Fourth Amended and Restated Credit Agreement and the repayment terms, the fair value of the outstanding borrowings as of December 29, 200726, 2009 was estimated to approximate carrying value. The balance outstanding under the Credit Agreement was $40,000,000 and $70,000,000 at December 26, 2009 and December 27, 2008, respectively. Assuming that debt levels on the Fourth Amended and Restated Credit Agreement remain at $80,000,000,$40,000,000, the balance at December 29, 2007,26, 2009, a hypothetical increase of 100 basis points in current rates provided for under the Fourth Amended and Restated Credit Agreement is estimated to result in an increase in interest expense of $800,000$400,000 on an annualized basis.
All amounts outstanding on the Fourth Amended and Restated Credit Agreement are payable on July 8, 2009, the expiration of the Fourth Amended and Restated Credit Agreement.
 
Long-term investments, all of which areavailable-for-sale, consist of investment gradeinvestment-grade bonds having maturities of up to five years. The balance of the long-term portion of investments in bonds was $28,603,000 and $14,431,000 at December 26, 2009 and December 27, 2008, respectively. Assuming that the long-term portion of investments in bonds remains at $14,939,000,$28,603,000, the balance at December 29, 2007,26, 2009, a hypothetical increase or decrease in interest rates of 100 basis points would not have a material impact on future earnings on an annualized basis. Short-term investments consist of short-term investment gradeinvestment-grade instruments and the current maturities of investment gradeinvestment-grade bonds. Accordingly, any future interest rate risk on these short-term investments would not be material.
Assets and liabilities of the Company’s Canadian operation are translated from their functional currency to U.S. dollars using exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average monthly exchange rates during the period. Adjustments resulting from the translation process are included in accumulated other comprehensive income. Transactional gains and losses arising from receivable and payable balances, including intercompany balances, in the normal course of business that are denominated in a currency other than the functional currency of the operation are recorded in the statements of income when they occur. The net assets held at Landstar’s Canadian subsidiary at December 26, 2009 was, as translated to U.S. dollars, less than 1% of total consolidated net assets. Accordingly, any translation gain or loss related to the Canadian operation would not be material.


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Item 8.  Financial Statements and Supplementary Data
 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
(Dollars in thousands, except per share amounts)
 
         
  Dec. 29, 2007  Dec. 30, 2006 
 
ASSETS
Current Assets        
Cash and cash equivalents $60,750  $91,491 
Short-term investments  22,921   21,548 
Trade accounts receivable, less allowance of $4,469 and $4,834  310,258   318,983 
Other receivables, including advances to independent contractors, less allowance of $4,792 and $4,512  11,170   14,198 
Deferred income taxes and other current assets  28,554   25,142 
         
Total current assets  433,653   471,362 
         
Operating property, less accumulated depreciation and amortization of $88,284 and $77,938  132,369   110,957 
Goodwill  31,134   31,134 
Other assets  31,845   33,198 
         
Total assets $629,001  $646,651 
         
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities        
Cash overdraft $25,769  $25,435 
Accounts payable  117,122   122,313 
Current maturities of long-term debt  23,155   18,730 
Insurance claims  28,163   25,238 
Accrued income taxes  14,865   10,023 
Other current liabilities  40,501   48,455 
         
Total current liabilities  249,575   250,194 
         
Long-term debt, excluding current maturities  141,598   110,591 
Insurance claims  37,631   36,232 
Deferred income taxes  19,411   19,360 
Shareholders’ Equity        
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 65,630,383 and 64,993,143 shares  656   650 
Additional paid-in capital  132,788   108,020 
Retained earnings  601,537   499,273 
Cost of 13,121,109 and 9,028,009 shares of common stock in treasury  (554,252)  (377,662)
Accumulated other comprehensive gain (loss)  57   (7)
         
Total shareholders’ equity  180,786   230,274 
         
Total liabilities and shareholders’ equity $629,001  $646,651 
         
See accompanying notes to consolidated financial statements.


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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
             
  Fiscal Years Ended 
  Dec. 29,
  Dec. 30,
  Dec. 31,
 
  2007  2006  2005 
 
Revenue $2,487,277  $2,513,756  $2,517,828 
Investment income  5,347   4,250   2,695 
Costs and expenses:            
Purchased transportation  1,884,207   1,890,755   1,880,431 
Commissions to agents  200,630   199,775   203,730 
Other operating costs  28,997   45,700   36,709 
Insurance and claims  49,832   39,522   50,166 
Selling, general and administrative  125,177   134,239   140,345 
Depreciation and amortization  19,088   16,796   15,920 
             
Total costs and expenses  2,307,931   2,326,787   2,327,301 
             
Operating income  184,693   191,219   193,222 
Interest and debt expense  6,685   6,821   4,744 
             
Income before income taxes  178,008   184,398   188,478 
Income taxes  68,355   71,313   72,880 
             
Net income $109,653  $113,085  $115,598 
             
Earnings per common share $2.01  $1.95  $1.95 
             
Diluted earnings per share $1.99  $1.93  $1.91 
             
Average number of shares outstanding:            
Earnings per common share  54,681,000   57,854,000   59,199,000 
             
Diluted earnings per share  55,156,000   58,654,000   60,413,000 
             
Dividends paid per common share $0.135  $0.110  $0.050 
             
See accompanying notes to consolidated financial statements.


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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
             
  Fiscal Years Ended 
  Dec. 29,
  Dec. 30,
  Dec. 31,
 
  2007  2006  2005 
 
OPERATING ACTIVITIES            
Net income $109,653  $113,085  $115,598 
Adjustments to reconcile net income to net cash provided (used) by operating activities:            
Depreciation and amortization of operating property  19,088   16,796   15,920 
Non-cash interest charges  174   174   174 
Provisions for losses on trade and other accounts receivable  4,100   5,349   5,939 
Gains on sales and disposals of operating property, net  (1,648)  (475)  (340)
Deferred income taxes, net  521   3,297   (2,019)
Stock-based compensation  8,288   7,173   6,453 
Changes in operating assets and liabilities:            
Decrease (increase) in trade and other accounts receivable  7,653   207,128   (198,894)
Decrease (increase) in other assets  (3,207)  (7,761)  686 
Increase (decrease) in accounts payable  (5,191)  (42,196)  44,312 
Increase (decrease) in other liabilities  (3,147)  (6,145)  10,979 
Increase (decrease) in insurance claims  4,324   (4,257)  685 
             
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES  140,608   292,168   (507)
             
INVESTING ACTIVITIES            
Net change in other short-term investments  3,272   (4,462)  (1,747)
Sales and maturities of investments  44,224   42,334   4,977 
Purchases of investments  (48,266)  (41,239)  (6,450)
Purchases of operating property  (6,514)  (4,173)  (3,857)
Proceeds from sales of operating property  3,708   2,620   4,492 
             
NET CASH USED BY INVESTING ACTIVITIES  (3,576)  (4,920)  (2,585)
             
FINANCING ACTIVITIES            
Increase (decrease) in cash overdraft  334   (4,394)  6,282 
Proceeds from repayment of notes receivable arising from exercises of stock options     47   423 
Dividends paid  (7,389)  (6,361)  (2,922)
Proceeds from exercises of stock options  12,862   10,533   9,216 
Excess tax benefit on stock option exercises  3,624   5,758   7,036 
Borrowings on revolving credit facility  58,000   5,000   57,000 
Purchases of common stock  (176,590)  (156,492)  (95,600)
Principal payments on long-term debt and capital lease obligations  (58,614)  (79,246)  (10,629)
             
NET CASH USED BY FINANCING ACTIVITIES  (167,773)  (225,155)  (29,194)
             
Increase (decrease) in cash and cash equivalents  (30,741)  62,093   (32,286)
Cash and cash equivalents at beginning of period  91,491   29,398   61,684 
             
Cash and cash equivalents at end of period $60,750  $91,491  $29,398 
             
See accompanying notes to consolidated financial statements.


33


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Fiscal Years Ended December 29, 2007,
December 30, 2006 and December 31, 2005
(Dollars in thousands)
                                     
                       Notes
    
                       Receivable
    
                       Arising
    
                    Accumulated
  from
    
        Add’l
     Treasury Stock
  Other
  Exercises
    
  Common Stock  Paid-In
  Retained
  at Cost  Comprehensive
  of Stock
    
  Shares  Amount  Capital  Earnings  Shares  Amount  Income (Loss)  Options  Total 
 
Balance December 25, 2004  63,154,190  $632  $62,198  $279,873   2,490,930  $(127,151) $47  $(470) $215,129 
Net income              115,598                   115,598 
Dividends paid ($0.050 per share)              (2,922)                  (2,922)
Purchases of common stock                  2,873,053   (95,600)          (95,600)
Exercises of stock options, including excess tax benefit  991,712   10   16,242                       16,252 
Director compensation paid in common stock  6,000       193                       193 
Stock-based compensation expense          6,260                       6,260 
Repayment of notes receivable arising from exercises of stock options                              423   423 
Incentive compensation paid in common stock          (361)      (19,100)  975           614 
Unrealized loss onavailable-for-sale investments, net of income taxes
                          (258)      (258)
                                     
Balance December 31, 2005  64,151,902   642   84,532   392,549   5,344,883   (221,776)  (211)  (47)  255,689 
Net income              113,085                   113,085 
Dividends paid ($0.110 per share)              (6,361)                  (6,361)
Purchases of common stock                  3,697,726   (156,492)          (156,492)
Exercises of stock options, including excess tax benefit  835,241   8   16,283                       16,291 
Director compensation paid in common stock  6,000       265                       265 
Stock-based compensation expense          6,908                       6,908 
Repayment of note receivable arising from exercise of stock options                              47   47 
Incentive compensation paid in common stock          32       (14,600)  606           638 
Unrealized gain onavailable-for-sale investments, net of income taxes
                          204       204 
                                     
Balance December 30, 2006  64,993,143   650   108,020   499,273   9,028,009   (377,662)  (7)  0   230,274 
Net income              109,653                   109,653 
Dividends paid ($0.135 per share)              (7,389)                  (7,389)
Purchases of common stock                  4,093,100   (176,590)          (176,590)
Exercises of stock options, including excess tax benefit  623,663   6   16,480                       16,486 
Director compensation paid in common stock  13,577       678                       678 
Stock-based compensation expense          7,610                       7,610 
Unrealized gain onavailable-for-sale investments, net of income taxes
                          64       64 
                                     
Balance December 29, 2007  65,630,383  $656  $132,788  $601,537   13,121,109  $(554,252) $57  $0  $180,786 
                                     
         
  Dec. 26,
  Dec. 27,
 
  2009  2008 
 
ASSETS
Current Assets        
Cash and cash equivalents $85,719  $98,904 
Short-term investments  24,325   23,479 
Trade accounts receivable, less allowance of $5,547 and $6,230  278,854   315,065 
Other receivables, including advances to independent contractors, less allowance of $5,797 and $4,298  18,149   10,083 
Deferred income taxes and other current assets  19,565   27,871 
         
Total current assets  426,612   475,402 
         
Operating property, less accumulated depreciation and amortization of $124,810 and $106,635  116,656   124,178 
Goodwill  57,470   31,134 
Other assets  48,054   32,816 
         
Total assets $648,792  $663,530 
         
 
LIABILITIES AND EQUITY
Current Liabilities        
Cash overdraft $28,919  $32,065 
Accounts payable  121,030   105,882 
Current maturities of long-term debt  24,585   24,693 
Insurance claims  41,627   23,545 
Accrued income taxes  9,957   12,239 
Other current liabilities  32,517   38,161 
         
Total current liabilities  258,635   236,585 
         
Long-term debt, excluding current maturities  68,313   111,752 
Insurance claims  30,680   38,278 
Deferred income taxes  23,013   23,779 
Equity        
Landstar System, Inc. and subsidiary shareholders’ equity:        
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 66,255,358 and 66,109,547 shares  663   661 
Additional paid-in capital  161,261   154,533 
Retained earnings  766,040   704,331 
Cost of 16,022,111 and 14,424,887 shares of common stock in treasury  (660,446)  (605,828)
Accumulated other comprehensive income (loss)  498   (561)
         
Total Landstar System, Inc. and subsidiary shareholders’ equity  268,016   253,136 
         
Noncontrolling interest  135    
         
Total equity  268,151   253,136 
         
Total liabilities and equity $648,792  $663,530 
         
 
See accompanying notes to consolidated financial statements.


34


LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
             
  Fiscal Years Ended 
  Dec. 26,
  Dec. 27,
  Dec. 29,
 
  2009  2008  2007 
 
Revenue $2,008,796  $2,643,069  $2,487,277 
Investment income  1,268   3,339   5,347 
Costs and expenses:            
Purchased transportation  1,503,520   2,033,384   1,884,207 
Commissions to agents  160,571   203,058   200,630 
Other operating costs  29,173   28,033   28,997 
Insurance and claims  45,918   36,374   49,832 
Selling, general and administrative  133,612   137,758   125,177 
Depreciation and amortization  23,528   20,960   19,088 
             
Total costs and expenses  1,896,322   2,459,567   2,307,931 
             
Operating income  113,742   186,841   184,693 
Interest and debt expense  4,030   7,351   6,685 
             
Income before income taxes  109,712   179,490   178,008 
Income taxes  39,762   68,560   68,355 
             
Net income $69,950  $110,930  $109,653 
             
Less: Net loss attributable to noncontrolling interest  (445)      
             
Net income attributable to Landstar System, Inc. and subsidiary $70,395  $110,930  $109,653 
             
Earnings per common share attributable to Landstar System, Inc. and subsidiary $1.38  $2.11  $2.01 
             
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary $1.37  $2.10  $1.99 
             
Average number of shares outstanding:            
Earnings per common share  51,095,000   52,503,000   54,681,000 
             
Diluted earnings per share  51,280,000   52,854,000   55,156,000 
             
Dividends paid per common share $0.170  $0.155  $0.135 
             
See accompanying notes to consolidated financial statements.


35


LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
             
  Fiscal Years Ended 
  Dec. 26,
  Dec. 27,
  Dec. 29,
 
  2009  2008  2007 
 
OPERATING ACTIVITIES            
Net income $69,950  $110,930  $109,653 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation and amortization of operating property and intangible assets  23,528   20,960   19,088 
Non-cash interest charges  218   196   174 
Provisions for losses on trade and other accounts receivable  7,986   6,937   4,100 
Losses (gains) on sales and disposals of operating property, net  (55)  176   (1,648)
Deferred income taxes, net  2,419   3,873   521 
Stock-based compensation  4,968   6,636   7,610 
Director compensation paid in common stock     634   678 
Changes in operating assets and liabilities:            
Decrease (increase) in trade and other accounts receivable  32,780   (10,657)  7,653 
Decrease (increase) in other assets  8,068   28   (3,207)
Decrease in accounts payable  (1,634)  (11,240)  (5,191)
Decrease in other liabilities  (13,748)  (4,813)  (3,147)
Increase (decrease) in insurance claims  10,484   (3,971)  4,324 
             
NET CASH PROVIDED BY OPERATING ACTIVITIES  144,964   119,689   140,608 
             
INVESTING ACTIVITIES            
Net change in other short-term investments  28,024   (7,887)  3,272 
Sales and maturities of investments  15,932   13,801   44,224 
Purchases of investments  (49,965)  (6,921)  (48,266)
Purchases of operating property  (2,715)  (8,289)  (6,514)
Proceeds from sales of operating property  841   146   3,708 
Consideration paid for acquisitions  (14,888)      
             
NET CASH USED BY INVESTING ACTIVITIES  (22,771)  (9,150)  (3,576)
             
FINANCING ACTIVITIES            
Increase (decrease) in cash overdraft  (3,146)  6,296   334 
Dividends paid  (8,686)  (8,136)  (7,389)
Proceeds from exercises of stock options  1,128   12,249   12,862 
Excess tax benefit on stock option exercises  773   2,231   3,624 
Borrowings on revolving credit facility  40,000   87,000   58,000 
Purchases of common stock  (55,757)  (51,576)  (176,590)
Capital contribution from noncontrolling interest  580       
Principal payments on long-term debt and capital lease obligations  (110,817)  (120,110)  (58,614)
             
NET CASH USED BY FINANCING ACTIVITIES  (135,925)  (72,046)  (167,773)
             
Effect of exchange rate changes on cash and cash equivalents  547   (339)   
             
Increase (decrease) in cash and cash equivalents  (13,185)  38,154   (30,741)
Cash and cash equivalents at beginning of period  98,904   60,750   91,491 
             
Cash and cash equivalents at end of period $85,719  $98,904  $60,750 
             
See accompanying notes to consolidated financial statements.


36


LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Fiscal Years Ended December 26, 2009,
December 27, 2008 and December 29, 2007
(Dollars in thousands)
                                     
  Landstar System, Inc. and Subsidiary Shareholders       
                    Accumulated
       
        Additional
     Treasury
  Other
  Non-
    
  Common Stock  Paid-In
  Retained
  Stock at Cost  Comprehensive
  Controlling
    
  Shares  Amount  Capital  Earnings  Shares  Amount  Income (Loss)  Interest  Total 
 
Balance December 30, 2006  64,993,143  $650  $108,020  $499,273   9,028,009  $(377,662) $(7) $0  $230,274 
Net income              109,653                   109,653 
Dividends paid ($0.135 per share)              (7,389)                  (7,389)
Purchases of common stock                  4,093,100   (176,590)          (176,590)
Exercises of stock options, including excess tax benefit  623,663   6   16,480                       16,486 
Director compensation paid in common stock  13,577       678                       678 
Stock-based compensation          7,610                       7,610 
Unrealized gain onavailable-for-sale investments, net of income taxes
                          64       64 
                                     
Balance December 29, 2007  65,630,383  $656  $132,788  $601,537   13,121,109  $(554,252) $57  $0  $180,786 
Net income              110,930                   110,930 
Dividends paid ($0.155 per share)              (8,136)                  (8,136)
Purchases of common stock                  1,303,778   (51,576)          (51,576)
Exercises of stock options, including excess tax benefit  467,164   5   14,475                       14,480 
Director compensation paid in common stock  12,000       634                       634 
Stock-based compensation          6,636                       6,636 
Foreign currency translation                          (339)      (339)
Unrealized loss onavailable-for-sale investments, net of income taxes
                          (279)      (279)
                                     
Balance December 27, 2008  66,109,547  $661  $154,533  $704,331   14,424,887  $(605,828) $(561) $0  $253,136 
Net income (loss)              70,395               (445)  69,950 
Dividends paid ($0.170 per share)              (8,686)                  (8,686)
Purchases of common stock                  1,624,547   (55,757)          (55,757)
Exercises of stock options and issuance of non-vested stock, including excess tax benefit  145,811   2   1,899                       1,901 
Capital contribution from noncontrolling interest                              580   580 
Consideration for acquisition paid in common stock          (139)      (27,323)  1,139           1,000 
Stock-based compensation          4,968                       4,968 
Foreign currency translation                          547       547 
Unrealized gain onavailable-for-sale investments, net of income taxes
                          512       512 
                                     
Balance December 26, 2009  66,255,358  $663  $161,261  $766,040   16,022,111  $(660,446) $498  $135  $268,151 
                                     
See accompanying notes to consolidated financial statements.


37


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
 
(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.” Landstar owns, through various subsidiaries, a controlling interest in A3i Acquisition LLC, which in turn owns 100% of A3 Integration, LLC (A3i Acquisition LLC, A3 Integration, LLC and its subsidiaries are collectively referred to herein as “A3i”), a supply chain transportation integration company acquired in the Company’s 2009 fiscal third quarter. Given Landstar’s controlling interest in A3i Acquisition, the accounts of A3i have been consolidated herein and a noncontrolling interest has been recorded for the noncontrolling investor’s interests in the net assets and operations of A3i. Significant inter-company accounts have been eliminated in consolidation.
Estimates
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
 
TheWhen providing the physical transportation of freight, the Company is the primary obligor with respect to freight delivery and assumes the related credit risk. Accordingly, transportation services revenue billed to customers for the physical transportation of freight and the related direct freight expenses of the carrier and global logistics segments are recognized on a gross basis upon completion of freight delivery. In general, when providing transportation management services under afee-for-service basis, the Company does not assume credit risk for billings related to the physical transportation of freight. Accordingly, transportation management fee revenue is recognized net of freight expenses upon completion of freight delivery. Insurance premiums of the insurance segment are recognized over the period earned, which is usually on a monthly basis. Fuel surcharges billed to customers for freight hauled by independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “Business Capacity Owner Independent Contractors” or “BCO Independent Contractors”) are excluded from revenue and paid in entirety to the BCO Independent Contractors.
 
Insurance Claim Costs
 
Landstar provides, primarily 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 for individual commercial trucking claims incurred prior to June 19, 2003 or subsequent to March 30, 2004, up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim.
 
Tires
 
Tires purchased as part of trailing equipment are capitalized as part of the cost of the equipment. Replacement tires are charged to expense when placed in service.


38


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Cash and Cash Equivalents
 
Included in cash and cash equivalents are all investments, except those provided for collateral, with an original maturity of 3 months or less.
 
InvestmentsTrade and Other Receivables
 
Investments, all of which areavailable-for-sale, consist of investment-grade bonds having maturities of up to five years. Investments are carried at fair value, with unrealized gainsThe allowance for doubtful accounts for both trade and losses, net of related income taxes, reported as accumulated other comprehensive income. Short-term investments include $8,823,000 in current maturities of investment grade bonds and $14,098,000 of cash equivalents held by the Company’s insurance segment at December 29, 2007. These short-term investments together with $14,939,000receivables represents management’s estimate of the non-current portionamount of investment grade bondsoutstanding receivables that will not be collected. Estimates are used to determine the allowance for doubtful accounts for both trade and $7,770,000 of cash equivalents includedother receivables and are generally based on historical collection results, current economic trends and changes in other assets at


35


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 29, 2007, provide collateral for the $43,254,000 of letters of credit issued to guarantee payment of insurance claims. Based upon quoted market prices, the unrealized gain on these bonds was $88,000 at December 29, 2007 and the unrealized loss on these bonds was $11,000 at December 30, 2006.
Investment income represents the earnings on the insurance segment’s assets. Investment income earned from the assets of the insurance segment are included as a component of operating income as the investing activities and earnings thereon generally comprise a significant portion of the insurance segment’s profitability.terms.
 
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. Trailing equipment is being depreciated over 7 years. Hardware and software included in management information services equipment is generally being depreciated over 3 to 7 years.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price paid over the fair value of the net assets of acquired businesses. The Company has two reporting units within the transportation logistics segment that report goodwill. Goodwill is subject to impairment testing which the Company performs annually. Other intangible assets, which consist primarily of non-contractual customer relationships, developed technology, trademarks and non-compete agreements, are included in other assets on the consolidated balance sheets and are amortized over their estimated useful lives, which range from five to ten years.
 
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.
 
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted FIN 48 on January 1, 2007.
Earnings Per Share
 
Earnings per common share amountsattributable to Landstar System, Inc. and subsidiary are based on the weighted average number of common shares outstanding, including outstanding restricted stock, and diluted earnings per share amountsattributable to Landstar System, Inc. and subsidiary are based on the weighted average number of common shares outstanding, including outstanding restricted stock, plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options.
The following table provides a reconciliation of the average number of common shares outstanding used to calculate earnings per share to the average number of common shares and common share equivalents outstanding used to calculate diluted earnings per share (in thousands):
             
  Fiscal Year 
  2007  2006  2005 
 
Average number of common shares outstanding  54,681   57,854   59,199 
Incremental shares from assumed exercises of stock options  475   800   1,214 
             
Average number of common shares and common share equivalents outstanding  55,156   58,654   60,413 
             
For the fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005, there were 9,000, 5,000 and 470,000, respectively, options outstanding to purchase shares of common stock excluded from the calculation of diluted earnings per share because they were antidilutive.


3639


 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table provides a reconciliation of the average number of common shares outstanding used to calculate earnings per share attributable to Landstar System, Inc. and subsidiary to the average number of common shares and common share equivalents outstanding used to calculate diluted earnings per share attributable to Landstar System, Inc. and subsidiary (in thousands):
             
  Fiscal Year 
  2009  2008  2007 
 
Average number of common shares outstanding  51,095   52,503   54,681 
Incremental shares from assumed exercises of stock options  185   351   475 
             
Average number of common shares and common share equivalents outstanding  51,280   52,854   55,156 
             
For the fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007, there were 1,895,742, 90,000 and 9,000 options outstanding, respectively, to purchase shares of common stock excluded from the calculation of diluted earnings per share attributable to Landstar System, Inc. and subsidiary because they were antidilutive.
Share-Based Payments
 
On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (“FAS 123R”), Share-Based Payment. The Company adopted FAS 123Restimates the fair value of stock option awards on the date of grant using the modified retrospective method. Under the modified retrospective method, compensation cost is recognized in the financial statements for all share-based payments granted after January 1, 2006 based on the requirements of FAS 123RBlack-Scholes pricing model and based on the requirements of FAS 123 for all unvested awards granted prior to January 1, 2006. The Company recognizes compensation cost for stock option awards expected to vest on a straight linestraight-line basis over the requisite service period for the entire award. Forfeitures are estimated at grant date based on historical experience and anticipated employee turnover. The fair value of each share of non-vested restricted stock is based on the fair value of such share on the date of grant and compensation costs for non-vested restricted stock is recognized on a straight-line basis over the requisite service period for the award.
 
(2)  Comprehensive Income
Foreign Currency Translation
 
The following table includesAssets and liabilities of the componentsCompany’s Canadian operation are translated from their functional currency to U.S. dollars using exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average monthly exchange rates during the period. Adjustments resulting from the translation process are included in accumulated other comprehensive income. Transactional gains and losses arising from receivable and payable balances, including intercompany balances, in the normal course of comprehensivebusiness that are denominated in a currency other than the functional currency of the operation are recorded in the statements of income for the fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005 (in thousands):when they occur.
 
             
  Fiscal Year 
  2007  2006  2005 
 
Net income $109,653  $113,085  $115,598 
Unrealized holding gains/(losses) onavailable-for-sale investments, net of income taxes
  64   204   (258)
             
Comprehensive income $109,717  $113,289  $115,340 
             
Subsequent Events
 
The unrealized holding gainCompany has evaluated the impact of subsequent events through February 23, 2010, the date onavailable-for-sale investments during 2007 represents which themark-to-market adjustment of $99,000 net of related income taxes of $35,000. The unrealized holding gain onavailable-for-sale investments during 2006 represents financial statements were available to be issued, and has determined that all subsequent events have been appropriately reflected in themark-to-market adjustment of $316,000 net of related income taxes of $112,000. The unrealized holding loss onavailable-for-sale investments during 2005 represents themark-to-market adjustment of $400,000 net of related income tax benefits of $142,000. accompanying financial statements.
(3)  Income Taxes
 
The provisions for income taxes consistedCompany’s primary facility in Jacksonville, Florida (the “Jacksonville Facility”) is leased under a lease agreement that provides the Company with an option to purchase the Jacksonville Facility, including the land and fixtures located thereon, at a fixed price of $21,135,000 in the first quarter of 2010. In January 2010, the Company entered into a contract of sale with its landlord to purchase the Jacksonville Facility in the first quarter of 2010, as is, subject to the satisfaction of certain customary conditions under the terms of the following (in thousands):
             
  Fiscal Year 
  2007  2006  2005 
 
Current:            
Federal $61,266  $60,599  $65,804 
State  6,568   7,417   9,095 
             
   67,834   68,016   74,899 
Deferred:            
Federal  296   2,650   (2,104)
State  225   647   85 
             
   521   3,297   (2,019)
             
Income taxes $68,355  $71,313  $72,880 
             
contract of sale. It is expected the purchase will be funded from the Company’s existing cash and cash equivalents or from available funds under the Company’s senior credit facility.


3740


 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
(2)  Acquisitions
In the Company’s 2009 fiscal third quarter, the Company completed the acquisitions of (i) National Logistics Management Co. (together with a limited liability company and certain corporate subsidiaries and affiliates, “NLM”) and (ii) A3i. Consideration paid with respect to the acquisitions, net of cash acquired of $2.4 million, was approximately $15.9 million, which included 27,323 shares, or $1.0 million, of common stock of Landstar, subject to certain vesting and other restrictions including restrictions on transfer. Net liabilities acquired were approximately $17.0 million. Identified in the allocation of purchase price was approximately $9.0 million of identifiable intangible assets which are included in other assets on the consolidated balance sheets. The resulting goodwill arising from the acquisitions was approximately $26.3 million, all of which is expected to be deductible for income tax purposes. The results of operations from NLM and A3i are presented as part of the Company’s transportation logistics segment. During 2009, the Company incurred $2,005,000, or $0.02 per common share ($0.02 per diluted share), in one-time costs related to the completion of these acquisitions.
(3)  Comprehensive Income
The following table includes the components of comprehensive income for the fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007 (in thousands):
             
  Fiscal Year 
  2009  2008  2007 
 
Net income attributable to Landstar System, Inc. and subsidiary $70,395  $110,930  $109,653 
Unrealized holding gains (losses) onavailable-for-sale investments, net of income taxes
  512   (279)  64 
Foreign currency translation gains (losses)  547   (339)   
             
Comprehensive income attributable to Landstar System, Inc. and subsidiary $71,454  $110,312  $109,717 
             
The unrealized holding gain onavailable-for-sale investments during 2009 represents themark-to-market adjustment of $791,000 net of related income taxes of $279,000. The unrealized holding loss onavailable-for-sale investments during 2008 represents themark-to-market adjustment of $431,000 net of related income taxes of $152,000. The unrealized holding gain onavailable-for-sale investments during 2007 represents themark-to-market adjustment of $99,000 net of related income taxes of $35,000. The foreign currency translation gain during 2009 represents the unrealized net gain on the translation of the financial statements of the Company’s Canadian operations. The foreign currency translation loss during 2008 represents the unrealized net loss on the translation of the financial statements of the Company’s Canadian operations. Accumulated other comprehensive income as reported as a component of equity at December 26, 2009 of $498,000 represents the unrealized net gain on the translation of the financial statements of the Company’s Canadian operations of $208,000 and the cumulative unrealized holding gains onavailable-for-sale investments, net of income taxes, of $290,000.
(4)  Investments
Investments consist of investment-grade bonds having maturities of up to five years (the “bond portfolio”). Bonds in the bond portfolio are reported asavailable-for-sale and are carried at fair value. Bonds maturing less than one year from the balance sheet date are included in short-term investments and bonds maturing more than one year from the balance sheet date are included in other assets in the consolidated balance sheets. Management has performed an analysis of the nature of the unrealized losses onavailable-for-sale investments to determine whether such losses areother-than-temporary. Unrealized losses, representing the excess of the


41


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
purchase price of an investment over its market value as of the end of a period, considered to beother-than-temporary, are to be included as a charge in the statement of income while unrealized losses considered to be temporary are to be included as a component of equity. Investments whose values are based on quoted market prices in active markets are classified within Level 1. Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, are classified within Level 2. As Level 2 investments include positions that are not traded in active markets, valuations may be adjusted to reflect illiquidityand/or non-transferability, which are generally based on available market information. Fair value of the bond portfolio was determined using Level 1 inputs related to U.S. Treasury obligations and Level 2 inputs related to investment-grade corporate bonds and direct obligations of U.S. government agencies. Unrealized gains on the bonds in the bond portfolio were $448,000 at December 26, 2009, while unrealized losses on the bonds in the bond portfolio were $343,000 at December 27, 2008. The accumulated unrealized loss onavailable-for-sale investments as of December 27, 2008 was considered by management to be temporary and therefore was reported as a component of equity.
The amortized cost and fair market values of investments are as follows at December 26, 2009 and December 27, 2008 (in thousands):
                 
     Gross
  Gross
  Fair
 
  Amortized
  Unrealized
  Unrealized
  Market
 
  Cost  Gains  Losses  Value 
 
December 26, 2009
                
Corporate bonds and direct obligations of U.S. government agencies $39,261  $668  $226  $39,703 
U.S. Treasury obligations  11,489   6      11,495 
                 
Total $50,750  $674  $226  $51,198 
                 
December 27, 2008
                
Corporate bonds and direct obligations of U.S. government agencies $15,135  $166  $599  $14,702 
U.S. Treasury obligations  1,642   90      1,732 
                 
Total $16,777  $256  $599  $16,434 
                 
For thoseavailable-for-sale investments with unrealized losses at December 26, 2009 and December 27, 2008, the following table summarizes the duration of the unrealized loss (in thousands):
                             
  Less Than 12 Months 12 Months or Longer Total
  Fair Market
 Unrealized
 Fair Market
 Unrealized
 Fair Market
   Unrealized
  Value Loss Value Loss Value   Loss
 
December 26, 2009
                            
Corporate bonds and direct obligations of U.S. government agencies $1,989  $10  $1,192  $216  $3,181      $226 
December 27, 2008
                            
Corporate bonds and direct obligations of U.S. government agencies $5,473  $139  $2,491  $460  $7,964      $599 
Short-term investments include $22,595,000 in current maturities of investment-grade bonds and $1,730,000 of cash equivalents held by the Company’s insurance segment at December 26, 2009. These short-term investments together with $25,492,000 of the non-current portion of investment-grade bonds at


42


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 26, 2009, provide collateral for the $45,008,000 of letters of credit issued to guarantee payment of insurance claims.
Investment income represents the earnings on the insurance segment’s assets. Investment income earned from the assets of the insurance segment are included as a component of operating income as the investing activities and earnings thereon generally comprise a significant portion of the insurance segment’s profitability.
(5)  Income Taxes
The provisions for income taxes consisted of the following (in thousands):
             
  Fiscal Year 
  2009  2008  2007 
 
Current:            
Federal $35,878  $57,249  $61,266 
State  656   6,267   6,568 
Canadian  809   1,171    
             
  $37,343  $64,687  $67,834 
             
Deferred:            
Federal $2,035  $3,438  $296 
State  384   435   225 
             
   2,419   3,873   521 
             
Income taxes $39,762  $68,560  $68,355 
             
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities consisted of the following (in thousands):
 
        
         Dec. 26,
 Dec. 27,
 
 Dec. 29, 2007 Dec. 30, 2006  2009 2008 
Deferred tax assets:                
Receivable valuations $3,927  $3,847  $4,787  $5,401 
Share-based payments  4,554   3,989   5,426   5,050 
Self-insured claims  7,358   4,081   5,288   6,782 
Other  3,201   4,562   5,938   2,807 
          
 $19,040  $16,479  $21,439  $20,040 
          
Deferred tax liabilities:                
Operating property $21,273  $18,718  $27,433  $25,758 
Goodwill  5,509   4,982 
Other  8,040   5,897 
          
 $26,782  $23,700  $35,473  $31,655 
          
Net deferred tax liability $7,742  $7,221  $14,034  $11,615 
          


43


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes the differences between income taxes calculated at the federal income tax rate of 35% on income before income taxes and the provisions for income taxes (in thousands):
 
                        
 Fiscal Year  Fiscal Year 
 2007 2006 2005  2009 2008 2007 
Income taxes at federal income tax rate $62,303  $64,539  $65,967  $38,399  $62,822  $62,303 
State income taxes, net of federal income tax benefit  4,415   5,234   5,967   676   4,356   4,415 
Meals and entertainment exclusion  802   720   229   870   493   802 
Share-based payments  598   443   457   636   515   598 
Other, net  237   377   260   (819)  374   237 
              
Income taxes $68,355  $71,313  $72,880  $39,762  $68,560  $68,355 
              
 
As of December 29, 2007,26, 2009, the Company had $12,326,000$8,761,000 of net unrecognized tax benefits representing the provision for the uncertainty of certain tax positions plus a component of interest and penalties. The implementation of FIN 48 did not have a significant impact on the provision for unrecognized tax benefits as of December 31, 2006. Estimated interest and penalties on the provision for the uncertainty of certain tax positions is included in income tax expense. At December 29, 200726, 2009 and December 27, 2008 there was $6,331,000$3,852,000 and $6,186,000, respectively, accrued for estimated interest and penalties related to the uncertainty of certain tax positions. During fiscal year 2007, the Company recognized $1,190,000 of expense for estimated interest and penalties related to the uncertainty of certain tax positions. The Company does not currently anticipate any significant increase or decrease to the unrecognized tax benefit during 2008.2010.
 
The Company files a consolidated U.S. federal income tax return. The Company or its subsidiaries file state tax returns in the majority of the U.S. state tax jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to U.S. federal or state income tax examinations by tax authorities for 2005 and prior years. At the end of 2007, the Company formed a wholly owned Canadian subsidiary, Landstar Canada, Inc. which is subject to Canadian income and other taxes.
The following table summarizes the rollforward of the total amounts of gross unrecognized tax benefits for fiscal years prior to 2003.2009 and 2008 (in thousands):
         
  Fiscal Year 
  2009  2008 
 
Gross unrecognized tax benefits — beginning of the year $16,110  $16,401 
Gross increases related to current year tax positions  635   2,161 
Gross increases related to prior year tax positions  2,570   1,759 
Gross decreases related to prior year tax positions  (3,420)  (1,163)
Settlements  (381)  (352)
Lapse of statute of limitations  (3,548)  (2,696)
         
Gross unrecognized tax benefits — end of the year $11,966  $16,110 
         
Landstar paid income taxes of $32,913,000 in 2009, $63,712,000 in 2008 and $64,366,000 in 2007.


3844


 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes the rollforward of the total amounts of gross unrecognized tax benefits (in thousands):
         
Gross unrecognized tax benefits January 1, 2007     $15,175 
Gross increases related to current year tax positions      2,036 
Gross increases related to prior year tax positions      1,957 
Gross decreases related to prior year tax positions      (1,511)
Lapse of statute of limitations      (1,256)
         
Gross unrecognized tax benefits December 29, 2007     $16,401 
         
Landstar paid income taxes of $64,366,000 in 2007, $67,062,000 in 2006 and $65,367,000 in 2005.
 
(4)(6)  Operating Property
 
Operating property is summarized as follows (in thousands):
 
                
 Dec. 29,
 Dec. 30,
  Dec. 26,
 Dec. 27,
 
 2007 2006  2009 2008 
Land $1,921  $1,921  $1,921  $1,921 
Leasehold improvements  9,384   8,955   9,749   9,654 
Buildings and improvements  8,181   7,741   8,218   8,206 
Trailing equipment  167,207   140,426   183,247   173,254 
Other equipment  33,960   29,852   38,331   37,778 
          
  220,653   188,895   241,466   230,813 
Less accumulated depreciation and amortization  88,284   77,938   124,810   106,635 
          
 $132,369  $110,957  $116,656  $124,178 
          
 
Included above is $132,456,000$127,684,000 in 20072009 and $99,107,000$123,733,000 in 20062008 of operating property under capital leases, $102,680,000$81,722,000 and $80,707,000,$88,054,000, respectively, net of accumulated amortization. Landstar acquired operating property by entering into capital leases in the amount of $12,284,000 in 2009, $4,802,000 in 2008 and $36,046,000 in 2007, $36,594,000 in 2006 and $28,512,000 in 2005.2007.
 
(5)(7)  Retirement Plan
 
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 75% of their base salary, subject to certain limitations. Landstar contributes an amount equal to 100% of the first 3% and 50% of the next 2% of such contributions, subject to certain limitations.
 
The expense for the Company-sponsored defined contribution plan included in selling, general and administrative expense was $1,598,000 in 2009, $1,571,000 in 2008 and $1,461,000 in 2007, $1,367,0002007.
(8)  Debt
Long-term debt is summarized as follows (in thousands):
         
  Dec. 26,
  Dec. 27,
 
  2009  2008 
 
Capital leases $52,898  $66,445 
Revolving credit facility  40,000   70,000 
         
   92,898   136,445 
Less current maturities  24,585   24,693 
         
Total long-term debt $68,313  $111,752 
         
On June 27, 2008, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which expires on June 27, 2013, provides $225,000,000 of borrowing capacity in 2006 and $1,312,000the form of a revolving credit facility, $75,000,000 of which may be utilized in 2005.the form of letter of credit guarantees. Borrowings under the Credit Agreement are unsecured, however, all but two of the Company’s subsidiaries guarantee the obligations under the Credit Agreement. All amounts outstanding under the Credit Agreement are payable on June 27, 2013, the expiration of the Credit Agreement.


3945


 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
(6)  Debt
Long-term debt is summarized as follows (in thousands):
         
  Dec. 29,
  Dec. 30,
 
  2007  2006 
 
Capital leases $84,753  $69,321 
Revolving credit facility  80,000   60,000 
         
   164,753   129,321 
Less current maturities  23,155   18,730 
         
Total long-term debt $141,598  $110,591 
         
On July 8, 2004, Landstar renegotiated its existing credit agreement with a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the “Fourth Amended and Restated Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees.
Borrowings under the Fourth Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar,the Company, either (i) the greatestgreater of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reservesN.A. and FDIC assessment costs plus 1% and (c)(b) the federal funds effective rate plus1/2% 0.5%, or, (ii) the rate at the time offered to JPMorgan Chase Bank, N.A. in the Eurodollar market for amounts and periods comparable to the relevant loan plus, in either case, a margin that is determined based on the level of the Company’s Leverage Ratio, as defined in the Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 29, 2007, the margin was equal to 62.5/100 of 1%.
The unused portion of the Fourth Amended and Restatedrevolving credit facility under the Credit Agreement carries a commitment fee determined based on the level of the Company’s Leverage Ratio, as therein defined. As of December 29, 2007, theThe commitment fee for the unused portion of the Fourth Amended and Restatedrevolving credit facility under the Credit Agreement was 0.20%. Atranges from .175% to .350%, based on achieving certain levels of the Leverage Ratio. As of December 29, 2007,26, 2009, the weighted average interest rate on borrowings outstanding under the Fourth Amended and Restated Credit Agreement was 5.92%1.12%. Based on the borrowing rates in the Fourth Amended and Restated Credit Agreement and the repayment terms, the fair value of the outstanding borrowings under the Fourth Amended and Restated Credit Agreement was estimated to approximate carrying value.
 
The Fourth 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.indebtedness. The Fourth Amended and Restated Credit Agreement also requires Landstar to meet certain financial tests. LandstarCompany is required to, among other things, maintain a minimum levels of Consolidated Net Worth and Fixed Charge Coverage and limit its borrowings to a specified ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (the “Leverage Ratio”),Ratio, as each is defined in the Fourth AmendedCredit Agreement, and Restatedmaintain a Leverage Ratio below a specified maximum. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the amount of such cash dividends and other distributions to stockholders in the event that after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event, among other things, that a person or group acquires 25% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors. None of these covenants are presently considered by management to be materially restrictive to the Company’s operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Fourth Amended and Restated Credit Agreement. The Fourth Amended and Restated
Interest on borrowings under the Credit Agreement providesis based on interest rates that vary with changes in the Company maintain a minimum Consolidated Net Worthrate offered to JPMorgan Chase Bank, N.A. in the Eurodollar market for amounts and periods comparable to the relevant loan and, therefore, borrowings under the Company’s senior credit facility approximate fair value. Interest on the Company’s capital lease obligations is based on interest rates that approximate currently available interest rates and, therefore, indebtedness under the Company’s capital lease obligations approximates fair value.
Landstar paid interest of $80,000,000. Under the most restrictive covenant, the Fixed Charge Coverage, fixed charges were $74,580,000 lower than the maximum amount allowed at December 29,$4,398,000 in 2009, $7,904,000 in 2008 and $7,518,000 in 2007.


4046


 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company’s Fourth Amended and Restated Credit Agreement provides for a restriction on cash dividends on the Company’s capital stock only to the extent there is an event of default under the Fourth Amended and Restated Credit Agreement.
The Fourth Amended and Restated Credit Agreement provides for an event 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 Fourth Amended and Restated Credit Agreement are unsecured, however, Landstar System, Inc., LSHI and all but two subsidiaries guarantee the obligations under the Fourth Amended and Restated Credit Agreement.
Landstar paid interest of $7,518,000 in 2007, $8,135,000 in 2006 and $5,040,000 in 2005.
 
(7)(9)  Leases
 
The future minimum lease payments under all noncancelable leases at December 29, 2007,26, 2009, principally for trailing equipment and the Company’s headquarters facility in Jacksonville, Florida, are shown in the following table (in thousands):
 
                
 Capital
 Operating
  Capital
 Operating
 
 Leases Leases  Leases Leases 
2008 $27,079  $7,633 
2009  26,150   4,377 
2010  20,726   3,187  $26,661  $4,134 
2011  14,393   2,278   20,274   3,060 
2012  5,384   2,035   7,970   2,628 
2013  1,022   2,392 
2014  299   2,018 
Thereafter      3,901       
          
  93,732  $23,411   56,226  $14,232 
      
 
Less amount representing interest (4.3% to 5.9%)  8,979     
Less amount representing interest (3.1% to 5.9%)  3,328     
      
Present value of minimum lease payments $84,753      $52,898     
      
 
Total rent expense, net of sublease income, was $2,664,000 in 2009, $5,744,000 in 2008 and $9,893,000 in 2007, $27,624,0002007.
In January 2010, the Company entered into a contract of sale with the landlord of its Jacksonville, FL facility to purchase its headquarters in 2006the first quarter of 2010. The purchase price of the facility, including the land and $17,969,000 in 2005.fixtures located thereon, is $21,135,000. Included above under operating leases is $10,006,000 of rental payments for the Jacksonville Facility. If the purchase is completed, the remaining operating lease obligations on this facility will no longer be payable.
 
(8)(10)  Stock Compensation PlansShare-Based Payment Arrangements
 
Share-Based Payment ArrangementsEmployee and Director Equity Plans
 
As of December 29, 2007, the Company had two employee stock option plans and one stock option plan for members of itsThe Company’s Board of Directors amended and restated the Company’s 2002 Employee Stock Option Plan. As amended and restated, the 2002 Employee Stock Option Plan is now called the Amended and Restated 2002 Employee Stock Option and Stock Incentive Plan (the “Plans”“ESOSIP”). Amounts recognizedThe ESOSIP was approved by vote of the Company’s shareholders at the Annual Meeting of Stockholders on April 30, 2009. The amendment and restatement of the ESOSIP, among other things, provides the Compensation Committee of the Company’s Board of Directors the power to grant equity and equity-based awards in addition to stock options, including restricted stock, stock appreciation rights, performance shares and other stock-based awards. It also extended the financial statementsterm of the ESOSIP to 10 years after the date it was amended and restated by the Company’s Board of Directors for all awards, except for incentive stock options which may not be granted after the tenth anniversary of the date the 2002 Employee Stock Option Plan was originally adopted by the Board.
In revising the ESOSIP, the Company did not increase the number of shares available for grant under the 2002 Employee Stock Option Plan. As originally adopted, 800,000 shares were authorized for issuance. Through the adjustment provisions of the 2002 Employee Stock Option Plan, to reflect stock splits with respect to these Plans are as follows (in thousands):
             
  Fiscal Years 
  Dec. 29, 2007  Dec. 30, 2006  Dec. 31, 2005 
 
Total cost of the Plans during the period $7,610  $6,908  $6,260 
Amount of related income tax benefit recognized during the period  2,187   2,169   1,902 
             
Net cost of the Plans during the period $5,423  $4,739  $4,358 
             
the Company’s common stock, the number of shares authorized for issuance had been adjusted to be 6,400,000 shares. Awards of restricted stock, performance shares or other stock-based awards now authorized under the ESOSIP will be made from the existing pool of shares available under the 2002 Employee Stock Option Plan. Moreover, to the extent that the awards of restricted stock, performance shares or other stock-based awards provide the recipient with the “full value” of the shares, and the settlement of an existing


4147


 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Employee and Director Stock Option Plansobligation is not otherwise payable in cash, each share granted will count as two shares against the share limit in the ESOSIP. Certain provisions in the agreements for awards of stock options allow for the automatic vesting of outstanding stock options if there is a change in control for the Company.
 
UnderAs of December 26, 2009, the 1993 Stock Option Plan, as amended,Company had an employee stock option plan, the Compensation CommitteeESOSIP and one stock option plan for members of theits Board of Directors was authorized to grant(the “Plans”). No further grants can be made under the employee stock option plan as its term for granting stock options to Company employees to purchase up to 4,460,000 shares of common stock. Under the 2002 Employee Stock Option Plan, the Compensation Committee of the Board of Directors is authorized to grant options to Company employees to purchase up to 6,400,000 shares of common stock. Under the 1994 Directors’ Stock Option Plan, as amended (the “DSOP”), options to purchase up to 420,000 shares of common stock were authorizedhas expired. In addition, no further grants are to be granted to outsidemade under the stock option plan for members of the Board of Directors upon election or re-electionDirectors. Amounts recognized in the financial statements with respect to the Board of Directors. Effective May 15, 2003, no further grants will be made under the DSOP. Also, no further grants will be made under the 1993 Stock Option Planthese Plans are as it has expired.follows (in thousands):
             
  Fiscal Years 
  Dec. 26,
  Dec. 27,
  Dec. 29,
 
  2009  2008  2007 
 
Total cost of the Plans during the period $4,968  $6,636  $7,610 
Amount of related income tax benefit recognized during the period  1,163   1,973   2,187 
             
Net cost of the Plans during the period $3,805  $4,663  $5,423 
             
 
Options granted under the Plans generally become exercisable in either three or five equal annual installments commencing on the first anniversary of the date of grant or vest 100% four and one-half years from the date of grant or 100% on the third or fifth anniversary from the date of grant, subject to acceleration in certain circumstances. All options granted under the Plans expire on the tenth anniversary of the date of grant. Under the Plans, the exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. As of December 29, 2007,26, 2009, there were 5,839,7085,142,202 shares of the Company’s common stock reserved for issuance upon exercise of options granted and to be granted under the Plans.
 
The fair value of each option grant on its grant date was calculated using the Black-Scholes option pricing model with the following weighted average assumptions for grants made in 2007, 20062009, 2008 and 2005:2007:
 
                        
 2007 2006 2005  2009 2008 2007 
Expected volatility  33.0%  34.0%  31.0%  38.0%  33.0%  33.0%
Expected dividend yield  0.3%  0.3%  0.0%  0.400%  0.375%  0.300%
Risk-free interest rate  4.75%  4.75%  4.50%  1.50%  3.00%  4.75%
Expected lives (in years)  4.2   4.5   5.0   4.4   4.1   4.2 
 
The Company utilizes historical data, including exercise patterns and employee departure behavior, in estimating the term options will be outstanding. Expected volatility was based on historical volatility and other factors, such as expected changes in volatility arising from planned changes to the Company’s business, if any. The risk-free interest rate was based on the yield of zero coupon U.S. Treasury bonds for terms that approximated the terms of the options granted. The weighted average grant date fair value of stock options granted during 2009, 2008 and 2007 2006was $12.30, $12.60 and 2005 was $14.26, $15.33 and $12.76, respectively.
 
The total intrinsic value of stock options exercised during 2009, 2008 and 2007 2006was $3,816,000, $11,587,000 and 2005 was $16,616,000, $26,411,000 and $27,162,000, respectively. At December 29, 2007,26, 2009, the total intrinsic value of stock options outstanding was $25,853,000.$7,331,000. At December 29, 2007,26, 2009, the total intrinsic value of options outstanding and exercisable was $13,554,000.$8,954,000.
 
As of December 29, 2007,26, 2009, there was $8,795,000$11,321,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The unrecognized compensation cost related to these non-vested options is expected to be recognized over a weighted average period of 2.43.1 years.


4248


 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
InformationThe following table summarizes information regarding the Company’s stock option plans is as follows:options under the Plans:
 
                                
 Options Outstanding Options Exercisable  Options Outstanding Options Exercisable 
   Weighted Average
   Weighted Average
    Weighted Average
   Weighted Average
 
   Exercise Price
   Exercise price
    Exercise Price
   Exercise Price
 
 Shares per Share Shares Per Share  Shares per Share Shares per Share 
Options at December 25, 2004  3,115,764  $12.31   664,324  $8.56 
Granted  683,000  $35.77         
Exercised  (991,712) $9.29         
Forfeited  (12,400) $22.31         
   
Options at December 31, 2005  2,794,652  $19.07   855,816  $10.37 
Granted  650,000  $43.61         
Exercised  (835,241) $12.61         
Forfeited  (42,840) $21.14         
   
Options at December 30, 2006  2,566,571  $27.35   779,739  $16.29   2,566,571  $27.35   779,739  $16.29 
Granted  275,500  $43.00           275,500  $43.00         
Exercised  (623,663) $20.62           (623,663) $20.62         
Forfeited  (20,100) $39.96           (19,100) $39.73         
      
Options at December 29, 2007  2,198,308  $31.10   747,626  $24.73   2,199,308  $31.11   747,626  $24.73 
Granted  777,500  $42.30         
Exercised  (467,164) $26.22         
Forfeited  (4,000) $44.63         
      
Options at December 27, 2008  2,505,644  $35.47   822,211  $30.75 
Granted  367,000  $38.20         
Exercised  (207,342) $19.31         
Forfeited  (107,500) $42.77         
   
Options at December 26, 2009  2,557,802  $36.86   1,225,802  $32.43 
   
 
The following tables summarize stock options outstanding and exercisable at December 29, 2007:26, 2009:
 
             
  Options Outstanding 
  Number
  Weighted Average
  Weighted Average
 
  Outstanding
  Remaining Contractual
  Exercise Price
 
Range of Exercise Prices per Share
 Dec. 29, 2007  Life (Years)  per Share 
 
$ 7.11 — $10.00  223,000   3.1  $7.82 
$10.01 — $15.00  252,960   4.9  $13.55 
$15.01 — $25.00  236,000   6.0  $19.25 
$25.01 — $35.00  292,001   6.9  $29.79 
$35.01 — $40.00  370,001   7.3  $37.47 
$40.01 — $44.00  617,846   8.1  $43.57 
$44.01 — $46.83  206,500   9.1  $44.40 
             
   2,198,308   6.8  $31.10 
             
             
  Options Outstanding 
  Number
  Weighted Average
  Weighted Average
 
  Outstanding
  Remaining Contractual
  Exercise Price
 
Range of Exercise Prices Per Share
 Dec. 26, 2009  Life (Years)  per Share 
 
$ 8.08 - $10.00  73,800   1.4  $8.25 
$10.01 - $15.00  122,776   2.9  $13.67 
$15.01 - $25.00  191,000   4.0  $19.37 
$25.01 - $35.00  166,979   5.0  $31.29 
$35.01 - $40.00  600,167   7.7  $37.96 
$40.01 - $44.00  1,134,580   7.3  $42.36 
$44.01 - $48.15  268,500   7.4  $45.56 
             
   2,557,802   6.6  $36.86 
             
 
         
  Options Exercisable 
  Number
  Weighted Average
 
  Exercisable
  Exercise Price
 
Range of Exercise Prices per Share
 Dec. 29, 2007  per Share 
 
$ 7.11 — $10.00  223,000  $7.82 
$10.01 — $15.00  150,240  $13.47 
$15.01 — $25.00  2,000  $20.21 
$25.01 — $35.00  55,268  $32.74 
$35.01 — $40.00  153,334  $37.31 
$40.01 — $43.66  163,784  $43.65 
         
   747,626  $24.73 
         
             
  Options Exercisable 
  Number
  Weighted Average
  Weighted Average
 
  Exercisable
  Remaining Contractual
  Exercise Price
 
Range of Exercise Prices Per Share
 Dec. 26, 2009  Life (Years)  per Share 
 
$ 8.08 - $10.00  73,800   1.4  $8.25 
$10.01 - $15.00  122,776   2.9  $13.67 
$15.01 - $25.00  191,000   4.0  $19.37 
$25.01 - $35.00  139,779   5.0  $31.13 
$35.01 - $40.00  178,667   5.0  $37.33 
$40.01 - $44.00  415,780   6.3  $43.44 
$44.01 - $48.15  104,000   7.3  $44.97 
             
   1,225,802   5.1  $32.43 
             


4349


 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
As of December 26, 2009, there were 11,500 shares of common stock of the Company, subject to certain vesting and other restrictions including restrictions on transfer, issued under the ESOSIP and outstanding. The fair value of each share of non-vested restricted stock issued under the ESOSIP is based on the fair value of a share of the Company’s common stock on the date of grant. During 2009, 11,500 shares of restricted stock were issued under the ESOSIP with a grant date fair value of $400,000, or $34.82 per share. None of these shares vested or forfeited during 2009. As of December 26, 2009, there was $366,000 of total unrecognized compensation cost related to non-vested shares granted under the ESOSIP. The unrecognized compensation cost related to these non-vested shares of restricted stock is expected to be recognized over a weighted average period of 4.6 years.
Directors’ Stock Compensation Plan
Under the Directors’ Stock Compensation Plan, outside members of the Board of Directors who are elected or re-elected to the Board will receive 6,000 shares of common stock of the Company, subject to certain restrictions including restrictions on transfer. The Company issued 12,000 6,000 and 6,000,13,577, respectively, shares of the Company’s common stock to members of the Board of Directors upon such members’ re-election at the 2007, 20062008 and 20052007 annual stockholders’ meetings. On July 19,During 2008 and 2007, 1,577 shares of the Company’s common stock were issued to a member of the Board of Directors upon such member’s election to the Board of Directors. During 2007, 2006 and 2005, the Company reported $678,000, $265,000$634,000 and $193,000,$678,000, respectively, in compensation expense representing the fair market value of these share awards. There were no such shares issued in 2009. As of December 29, 2007,26, 2009, there were 150,423138,423 shares of the Company’s common stock reserved for issuance upon the grant of common stock under the Directors’ Stock Compensation Plan.
 
(9)(11)  Shareholders’ Equity
 
On August 3, 2006,July 16, 2008, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to 2,000,000 shares of its common stock from time to time in the open market and in privately negotiated transactions. During its 2007 second2009 fourth quarter, the Company completed the purchase of shares authorized for purchase under this program. On April 19, 2007, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase an additional 2,000,000 shares of its common stock from time to time in the open market and in privately negotiated transactions. During its third fiscal quarter, the Company completed the purchase of shares authorized for purchase under this program. On August 27, 2007,January 28, 2009, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to 2,000,000an additional 1,569,377 shares of its common stock from time to time in the open market and in privately negotiated transactions. As of December 29, 2007,26, 2009, Landstar may purchase an additional 734,4011,375,453 shares of its common stock under its most recently authorized stock purchase program. During 2007,2009, Landstar purchased a total of 4,093,1001,624,547 shares of its common stock at a total cost of $176,590,000$55,757,000 pursuant to its previously announced stock purchase programs.
 
The Company has 2,000,000 shares of preferred stock authorized and unissued.
 
(10)(12)  Segment InformationCommitments and Contingencies
 
TheAt December 26, 2009, in addition to the $45,008,000 letters of credit secured by investments, Landstar had $33,857,000 of letters of credit outstanding under the Company’s Credit Agreement.
In the Company’s 2009 fiscal third quarter, the Company completed the acquisitions of NLM and A3i. As it relates to NLM, the Company may be required to pay additional consideration to the prior owner of NLM contingent on NLM achieving certain levels of earnings through December 2014. As it relates to the noncontrolling interest of A3i Acquisition, the Company has three reportable business segments. These are the carrier, global logisticsoption, during the period commencing on the fourth anniversary of June 29, 2009, the closing date of the acquisition (the “Closing Date”), and insurance segments.ending on the sixth anniversary of the Closing Date, to purchase at fair value all but not less than all of the noncontrolling interest. The carrier segment primarily provides transportation servicesnoncontrolling interest is also subject to customary restrictions on transfer, including a right of first refusal in favor of the truckload market forCompany, and drag-along rights. For a wide rangespecified period following each of general commodities over irregular or non-repetitive routes utilizing drythe sixth, seventh and specialty vans and unsided trailers, including flatbed, drop deck and specialty. It also providesshort-to-long haul movementeighth anniversaries of containers by truck and dedicated power-only truck capacity. The carrier segment markets its services primarily through independent commission sales agents and utilizes independent contractors who provide truck capacitythe Closing Date, the owner of the noncontrolling interest shall have the right, but not the obligation, to sell at fair value to the Company under exclusive lease arrangements (the “Business Capacity Owner Independent Contractors” or “BCO Independent Contractors”) and other third party truck capacity providers under non-exclusive contractual arrangements (“Truck Brokerage Carriers”). Transportation and logistics services provided by the global logistics segment include the arrangement of multimodal (ground, air, ocean and rail) moves, contract logistics, truck brokerage, emergency and expedited ground, air and ocean freight and warehousing. The global logistics segment markets its services primarily through independent commission sales agents and utilizes capacity provided by BCO Independent Contractors and other third party capacity providers, including Truck Brokerage Carriers, railroads, air and ocean cargo carriers and warehouse capacity owners. The nature of the carrier and global logistics segments’ businesses is such that a significant portion of their operating costs varies directly with revenue. The insurance segment provides risk and claims management servicesup to Landstar’s operating subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to Landstar’s operating subsidiaries.


4450


 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The accounting policiesone third annually of the segments areinvestment then held by such owner. The owner of the same as thosenon-controlling interest also has certain preemptive rights and tag-along rights.
As further described in periodic and current reports previously filed by Landstar System, Inc. (the “Company”) with the summarySecurities and Exchange Commission, the Company and certain of significant accounting policies. The Company evaluatesits subsidiaries (the “Defendants”) are defendants in a segment’s performance based on operating income.
Internal revenue for transactions between the carrier and global logistics 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. Internal revenue for premiums billed by the insurance segment to the carrier and global logistics segments is calculated each fiscal period based primarily on an actuarial calculation of historical loss experience and is believed to approximate the cost that would have been incurred by the carrier and global logistics segments had similar insurance been obtained from an unrelated third party.
During 2007, 2006 and 2005, revenue derived from various departments ofsuit (the “Litigation”) brought in the United States Government represented 6%, 9%District Court for the Middle District of Florida (the “District Court”) by the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and 17%, respectively,four former BCO Independent Contractors (the “Named Plaintiffs” and, with OOIDA, the “Plaintiffs”) on behalf of consolidated revenue. Includedall independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (the “BCO Independent Contractors”). The Plaintiffs allege that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violate certain federal leasing regulations and seek injunctive relief, an unspecified amount of damages and attorneys’ fees.
On March 29, 2007, the District Court denied the request by Plaintiffs for injunctive relief, entered a judgment in consolidated revenue derived fromfavor of the various departmentsDefendants and issued written orders setting forth its rulings related to the decertification of the plaintiff class and other important elements of the Litigation relating to liability, injunctive relief and monetary relief. The Plaintiffs filed an appeal with the United States Government in 2007, 2006 and 2005 was $8,511,000, $100,655,000 and $275,929,000, respectively,Court of revenue related to disaster relief services. These disaster relief services were provided primarily under a contract between Landstar Express America, Inc. andAppeals for the United States DepartmentEleventh Circuit (the “Appellate Court”) of Transportation/Federal Aviation Administration and were reflected in revenuecertain of the global logistics segment. No other single customer accounted for more than 10% of consolidated revenueDistrict Court’s rulings in 2007, 2006 or 2005. In addition, during 2007 approximately 10%favor of the Company’s revenue was attributableDefendants. The Defendants asked the Appellate Court to affirm such rulings and filed a cross-appeal with the Appellate Court with respect to certain other rulings of the District Court.
On September 3, 2008, the Appellate Court issued its ruling, which, among other things, affirmed the District Court’s rulings that (i) the Defendants are not prohibited by the applicable federal leasing regulations from charging administrative or other fees to BCO Independent Contractors in connection with voluntary programs offered by the Defendants through which a BCO Independent Contractor may purchase discounted products and services for a charge that is deducted against the compensation payable to the automotive industry. One agent inBCO Independent Contractor (a “Charge-back Deduction”), (ii) the global logistics segment contributed approximately $197,000,000Plaintiffs are not entitled to restitution or disgorgement with respect to violations by Defendants of the Company’s revenue in 2007. Substantially allapplicable federal leasing regulations but instead may recover only actual damages, if any, which they sustained as a result of any such violations and (iii) the claims of BCO Independent Contractors may not be handled on a class action basis for purposes of determining the amount of actual damages, if any, they sustained as a result of any violations. Further, the analysis of the Company’s revenue is generatedAppellate Court confirmed the absence of any violations alleged by the Plaintiffs of the federal leasing regulations with respect to the written terms of all leases currently in use between the United States.Defendants and BCO Independent Contractors.
However, the ruling of the Appellate Court reversed the District Court’s rulings (i) that an old version of the lease formerly used by Defendants but not in use with any current BCO Independent Contractor complied with applicable disclosure requirements under the federal leasing regulations with respect to adjustments to compensation payable to BCO Independent Contractors on certain loads sourced from the U.S. Dept. of Defense, and (ii) that the Defendants had provided sufficient documentation to BCO Independent Contractors under the applicable federal leasing regulations relating to how the component elements of Charge-back Deductions were computed. The Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek injunctive relief with respect to these violations of the federal leasing regulations and to hold an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking rehearing of the Appellate Court’s ruling; however, there can be no assurance that any petition for rehearing will be granted.
Although no assurances can be given with respect to the outcome of the Litigation, including any possible award of attorneys’ fees to the Plaintiffs, the Company believes that (i) no Plaintiff has sustained any actual damages as a result of any violations by the Defendants of the federal leasing regulations and (ii) injunctive


4551


 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following tables summarize information about the Company’s reportable business segments as of and for the fiscal years ending December 29, 2007, December 30, 2006 and December 31, 2005 (in thousands):
                     
     Global
          
  Carrier  Logistics  Insurance  Other  Total 
 
2007
                    
External revenue $1,808,391  $642,020  $36,866      $2,487,277 
Internal revenue  46,132   3,602   29,217       78,951 
Investment income          5,347       5,347 
Interest and debt expense             $6,685   6,685 
Depreciation and amortization  14,848   78       4,162   19,088 
Operating income  180,247   21,397   34,055   (51,006)  184,693 
Expenditures on long-lived assets  829           5,685   6,514 
Goodwill  20,496   10,638           31,134 
Capital lease additions  36,046               36,046 
Total assets  382,344   102,782   89,383   54,492   629,001 
2006
                    
External revenue $1,796,616  $682,542  $34,598      $2,513,756 
Internal revenue  54,837   2,478   28,293       85,608 
Investment income          4,250       4,250 
Interest and debt expense             $6,821   6,821 
Depreciation and amortization  12,814   152       3,830   16,796 
Operating income  181,550   31,433   35,673   (57,437)  191,219 
Expenditures on long-lived assets  637   174       3,362   4,173 
Goodwill  20,496   10,638           31,134 
Capital lease additions  36,594               36,594 
Total assets  357,575   115,729   106,322   67,025   646,651 
2005
                    
External revenue $1,691,668  $795,136  $31,024      $2,517,828 
Internal revenue  95,872   2,222   31,036       129,130 
Investment income          2,695       2,695 
Interest and debt expense             $4,744   4,744 
Depreciation and amortization  11,262   309       4,349   15,920 
Operating income  169,882   60,115   19,374   (56,149)  193,222 
Expenditures on long-lived assets  798   20       3,039   3,857 
Goodwill  20,496   10,638           31,134 
Capital lease additions  28,512               28,512 
Total assets  360,083   304,727   58,379   42,625   765,814 
(11)  Commitments and Contingencies
At December 29, 2007, in addition to the $43,254,000 letters of credit secured by investments, Landstar had $26,868,000 of letters of credit outstanding under the Company’s revolving credit facility.
On November 1, 2002, the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and certain BCO Independent Contractors (as defined below) (collectively with OOIDA, the “Plaintiffs”) filed a putative


46


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
class action complaint on behalf of independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (“BCO Independent Contractors”) in the United States District Court for the Middle District of Florida (the “District Court”) in Jacksonville, Florida, against the Company and certain of its subsidiaries. The complaint was amended on April 7, 2005 (as amended, the “Amended Complaint”). The Amended Complaint alleged that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violate certain federal leasing regulations and sought injunctive relief, an unspecified amount of damages and attorney’s fees. On August 30, 2005, the District Court granted a motion by the Plaintiffs to certify the case as a class action.
On January 16, 2007, the District Court ordered the decertification of the class of BCO Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial commenced for purposes of determining what remedies, if any, wouldthat may be awarded to the remaining named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company: Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the “Defendants”). On March 29, 2007, the District Court denied Plaintiffs’ request for injunctive relief, entered a Judgment in favor of the Defendants and issued written orders setting forth its rulings related to the decertification of the class and the denial of Plaintiffs requests for damages and injunctive relief. The Plaintiffs and the Defendants have each filed motions with the District Court concerning an award of attorney fees from the other party.
The Plaintiffs have filed an appeal with the United States Court of Appeals for the Eleventh Circuit (the “Appellate Court”) with respect to certain of the District Court’s rulings, including the judgments enteredgranted by the District Court in favor of the Defendantson remand is unlikely to have a material adverse financial effect on the issues of damages and injunctive relief. The Defendants have asked the Appellate Court to affirm the rulings of the District Court that have been appealed by the Plaintiffs. The Defendants have also filed a cross-appeal with the Appellate Court with respect to certain other rulings of the District Court. Although no assurances can be given with respect to the outcome of the appeal or any proceedings that may be conducted thereafter, the Company believes it has meritorious defenses and it intends to continue asserting these defenses vigorously.Company.
 
The Company is involved in certain other 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 such other claims and pending litigation and that the ultimate outcome, after provisions thereof,therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
(13)  Segment Information
Landstar markets its freight transportation services and supply chain solutions primarily through independent commission sales agents who enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under non-exclusive contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers, railroads and independent warehouse capacity providers (“Warehouse Capacity Owners”). The Company has contracts with all of the Class 1 domestic and Canadian railroads and certain short-line railroads and contracts with domestic and international airlines and ocean lines. Through this network of agents and capacity providers linked together by Landstar’s technological applications, Landstar operates a transportation services and supply chain solutions business primarily throughout North America with revenue of approximately $2.0 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.
The transportation logistics segment provides a wide range of transportation services and supply chain solutions. Transportation services offered by the Company include truckload andless-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized,U.S.-Canada andU.S.-Mexico cross-border, project cargo and customs brokerage. Supply chain solutions are based on advanced technology solutions offered by the Company and include integrated multi-modal solutions, outsourced logistics, supply chain engineering and warehousing. Also, supply chain solutions can be delivered through a software-as-a-service model. Industries serviced by the transportation logistics segment include automotive products, paper, lumber and building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military hardware. In addition, the transportation logistics segment provides transportation services to other transportation companies, including logistics andless-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight. Supply chain solution customers are generally charged fees for the services provided. Revenue recognized by the transportation logistics segment when providing capacity to customers to haul their freight is referred to herein as “transportation services revenue” and revenue for freight management services recognized on afee-for-service basis is referred to herein as “transportation management fees.”
The insurance segment provides risk and claims management services to certain of Landstar’s Operating Subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to certain of Landstar’s Operating Subsidiaries. Internal revenue for premiums billed by the insurance segment to the transportation logistics segment is calculated each fiscal period based primarily on an actuarial calculation of historical loss experience and is


4752


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
believed to approximate the cost that would have been incurred by the transportation logistics segment had similar insurance been obtained from an unrelated third party.
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.
No single customer accounted for more than 10% of consolidated revenue in 2009, 2008 or 2007. Substantially all of the Company’s revenue is generated in North America, primarily through customers located in the United States.
The following tables summarize information about the Company’s reportable business segments as of and for the fiscal years ending December 26, 2009, December 27, 2008 and December 29, 2007 (in thousands):
             
  Transportation
    
  Logistics Insurance Total
 
2009
            
External revenue $1,972,863  $35,933  $2,008,796 
Internal revenue      27,179   27,179 
Investment income      1,268   1,268 
Interest and debt expense  4,030       4,030 
Depreciation and amortization  23,528       23,528 
Operating income  88,176   25,566   113,742 
Expenditures on long-lived assets  2,715       2,715 
Goodwill  57,470       57,470 
Capital lease additions  12,284       12,284 
Total assets  524,584   124,208   648,792 
2008
            
External revenue $2,606,216  $36,853  $2,643,069 
Internal revenue      27,565   27,565 
Investment income      3,339   3,339 
Interest and debt expense  7,351       7,351 
Depreciation and amortization  20,960       20,960 
Operating income  148,385   38,456   186,841 
Expenditures on long-lived assets  8,289       8,289 
Goodwill  31,134       31,134 
Capital lease additions  4,802       4,802 
Total assets  530,163   133,367   663,530 
2007
            
External revenue $2,450,411  $36,866  $2,487,277 
Internal revenue      29,217   29,217 
Investment income      5,347   5,347 
Interest and debt expense  6,685       6,685 
Depreciation and amortization  19,088       19,088 
Operating income  150,638   34,055   184,693 
Expenditures on long-lived assets  6,514       6,514 
Goodwill  31,134       31,134 
Capital lease additions  36,046       36,046 
Total assets  539,618   89,383   629,001 


53


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders
Landstar System, Inc.:
 
We have audited the accompanying consolidated balance sheets of Landstar System, Inc. and subsidiary (the Company) as of December 29, 200726, 2009 and December 30, 2006,27, 2008, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the fiscal years ended December 29, 2007,26, 2009, December 30, 200627, 2008 and December 31, 2005.29, 2007. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 29, 200726, 2009 and December 30, 2006,27, 2008, and the results of their operations and their cash flows for the fiscal years ended December 29, 2007,26, 2009, December 30, 200627, 2008 and December 31, 2005,29, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective December 31, 2006.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Landstar System, Inc.’s internal control over financial reporting as of December 29, 2007,26, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 200823, 2010, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/  KPMG LLP
 
February 25, 200823, 2010
Jacksonville, Florida
Certified Public Accountants


4854


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA

(Dollars in thousands, except per share amounts)

(Unaudited)
 
                                
 Fourth
 Third
 Second
 First
  Fourth
 Third
 Second
 First
 
 Quarter
 Quarter
 Quarter
 Quarter
  Quarter
 Quarter
 Quarter
 Quarter
 
 2007 2007 2007 2007  2009 2009 2009 2009 
Revenue $642,865  $634,811  $632,952  $576,649  $547,715  $500,670  $491,164  $469,247 
                  
Operating income $48,666  $49,648  $49,508  $36,871  $27,570  $32,678  $29,776  $23,718 
                  
Income before income taxes $46,445  $47,884  $48,400  $35,279  $26,633  $31,721  $28,803  $22,555 
Income taxes  17,414   18,536   18,730   13,675   8,296   11,859   10,946   8,661 
                  
Net income $29,031  $29,348  $29,670  $21,604  $18,337  $19,862  $17,857  $13,894 
                  
Earnings per common share(1) $0.55  $0.54  $0.53  $0.39 
Less: Net loss attributable to noncontrolling interest  (231)  (214)      
                  
Diluted earnings per share(1) $0.54  $0.54  $0.53  $0.38 
Net income attributable to Landstar System, Inc and subsidiary $18,568  $20,076  $17,857  $13,894 
         
Earnings per common share attributable to Landstar System, Inc. and subsidiary(1) $0.37  $0.39  $0.35  $0.27 
         
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary(1) $0.37  $0.39  $0.35  $0.27 
                  
Dividends paid per common share $0.0375  $0.0375  $0.0300  $0.0300  $0.0450  $0.0450  $0.0400  $0.0400 
                  
 
                                
 Fourth
 Third
 Second
 First
  Fourth
 Third
 Second
 First
 
 Quarter
 Quarter
 Quarter
 Quarter
  Quarter
 Quarter
 Quarter
 Quarter
 
 2006 2006 2006 2006  2008 2008 2008 2008 
Revenue $611,279  $649,197  $643,238  $610,042  $603,837  $732,753  $697,651  $608,828 
                  
Operating income $48,652  $51,701  $49,255  $41,611  $40,977  $54,690  $50,185  $40,989 
                  
Income before income taxes $46,781  $49,893  $47,963  $39,761  $39,261  $52,933  $48,449  $38,847 
Income taxes  18,091   19,313   18,498   15,411   14,656   20,116   18,684   15,104 
                  
Net income $28,690  $30,580  $29,465  $24,350  $24,605  $32,817  $29,765  $23,743 
                  
Earnings per common share(1) $0.51  $0.53  $0.50  $0.41 
Less: Net income attributable to noncontrolling interest            
                  
Diluted earnings per share(1) $0.50  $0.53  $0.50  $0.41 
Net income attributable to Landstar System, Inc and subsidiary $24,605  $32,817  $29,765  $23,743 
         
Earnings per common share attributable to Landstar System, Inc. and subsidiary(1) $0.47  $0.62  $0.56  $0.45 
         
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary(1) $0.47  $0.62  $0.56  $0.45 
                  
Dividends paid per common share $0.0300  $0.0300  $0.0250  $0.0250  $0.0400  $0.0400  $0.0375  $0.0375 
                  
 
 
(1)Due to the changes in the number of average common shares and common stock equivalents outstanding during the year, the sum of earnings per share amounts for each quarter do not necessarily sum in the aggregate to the earnings per share amounts for the full year.


4955


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders
Landstar System, Inc.:
 
Under date of February 25, 2008,23, 2010, we reported on the consolidated balance sheets of Landstar System, Inc. and subsidiary (the Company) as of December 29, 200726, 2009 and December 30, 2006,27, 2008, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the fiscal years ended December 29, 2007,26, 2009, December 30, 200627, 2008 and December 31, 2005,29, 2007, which are included in the 20072009 annual report to shareholders. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in Item 15(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.
 
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective December 31, 2006.
/s/  KPMG LLP
/s/  KPMG LLP
 
February 25, 200823, 2010
Jacksonville, Florida
Certified Public Accountants


5056


LANDSTAR SYSTEM, INC.

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEET INFORMATION
(Dollars in thousands, except per share amounts)
 
         
  Dec. 29,
  Dec. 30,
 
  2007  2006 
 
ASSETS
Investment in Landstar System Holdings, Inc., net of advances $180,786  $230,274 
         
Total assets $180,786  $230,274 
         
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Shareholders’ equity:        
Common stock, $.01 par value, authorized 160,000,000 shares, issued 65,630,383 and 64,993,143 $656  $650 
Additional paid-in capital  132,788   108,020 
Retained earnings  601,537   499,273 
Cost of 13,121,109 and 9,028,009 shares of common stock in treasury  (554,252)  (377,662)
Accumulated other comprehensive gain/(loss)  57   (7)
         
Total shareholders’ equity  180,786   230,274 
         
Total liabilities and shareholders’ equity $180,786  $230,274 
         
         
  Dec. 26,
  Dec. 27,
 
  2009  2008 
 
ASSETS
Investment in Landstar System Holdings, Inc., net of advances $268,151  $253,136 
         
Total assets $268,151  $253,136 
         
 
LIABILITIES AND EQUITY
Equity:        
Landstar System, Inc. and subsidiary shareholders’ equity        
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 66,255,358 and 66,109,547 $663  $661 
Additional paid-in capital  161,261   154,533 
Retained earnings  766,040   704,331 
Cost of 16,022,111 and 14,424,887 shares of common stock in treasury  (660,446)  (605,828)
Accumulated other comprehensive income/(loss)  498   (561)
         
Total Landstar System, Inc. and subsidiary shareholders’ equity  268,016   253,136 
Noncontrolling interest  135    
         
Total liabilities and equity $268,151  $253,136 
         
 
See Report of Independent Registered Public Accounting Firm.


5157


LANDSTAR SYSTEM, INC.

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF INCOME INFORMATION
(Dollars in thousands, except per share amounts)
 
                        
 Fiscal Years Ended  Fiscal Years Ended 
 Dec. 29,
 Dec. 30,
 Dec. 31,
  Dec. 26,
 Dec. 27,
 Dec. 29,
 
 2007 2006 2005  2009 2008 2007 
Equity in undistributed earnings of Landstar System Holdings, Inc.  $109,200  $113,079  $115,020  $70,341  $110,331  $109,200 
Income taxes  (453)  (6)  (578)  (54)  (599)  (453)
              
Net income $109,653  $113,085  $115,598 
Net income attributable to Landstar System, Inc. and subsidiary $70,395  $110,930  $109,653 
              
Earnings per common share $2.01  $1.95  $1.95 
Earnings per common share attributable to Landstar System, Inc. and subsidiary $1.38  $2.11  $2.01 
              
Diluted earnings per share $1.99  $1.93  $1.91 
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary $1.37  $2.10  $1.99 
              
Dividends paid per common share $0.135  $0.110  $0.050  $0.170  $0.155  $0.135 
              
Average number of shares outstanding:                        
Earnings per common share  54,681,000   57,854,000   59,199,000   51,095,000   52,503,000   54,681,000 
              
Diluted earnings per share  55,156,000   58,654,000   60,413,000   51,280,000   52,854,000   55,156,000 
              
 
See Report of Independent Registered Public Accounting Firm.


5258


LANDSTAR SYSTEM, INC.

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF CASH FLOWS INFORMATION
(Dollars in thousands)
 
                        
 Fiscal Years Ended  Fiscal Years Ended 
 Dec. 29,
 Dec. 30,
 Dec. 31,
  Dec. 26,
 Dec. 27,
 Dec. 29,
 
 2007 2006 2005  2009 2008 2007 
Operating Activities                        
Net income $109,653  $113,085  $115,598  $70,395  $110,930  $109,653 
Adjustments to reconcile net income to net cash provided by operating activities:                        
Equity in undistributed earnings of Landstar System Holdings, Inc.   (109,200)  (113,079)  (115,020)  (70,341)  (110,331)  (109,200)
              
Net Cash Provided By Operating Activities  453   6   578   54   599   453 
              
Investing Activities                        
Additional investments in and advances from Landstar System Holdings, Inc., net  167,040   146,509   81,269   61,941   44,972   167,040 
              
Net Cash Provided By Investing Activities  167,040   146,509   81,269   61,941   44,972   167,040 
              
Financing Activities                        
Excess tax benefit on stock option exercises  3,624   5,758   7,036   773   2,231   3,624 
Proceeds from repayment of notes receivable arising from exercises of stock options  0   47   423 
Proceeds from exercises of stock options  12,862   10,533   9,216   1,128   12,249   12,862 
Dividends paid  (7,389)  (6,361)  (2,922)  (8,686)  (8,136)  (7,389)
Purchases of common stock  (176,590)  (156,492)  (95,600)  (55,757)  (51,576)  (176,590)
              
Net Cash Used By Financing Activities  (167,493)  (146,515)  (81,847)  (62,542)  (45,232)  (167,493)
              
Change in cash  0   0   0 
Cash at beginning of period  0   0   0 
Effect of exchange rate changes on cash and cash equivalents  547   (339)  0 
Change in cash and cash equivalents  0   0   0 
Cash and cash equivalents at beginning of period  0   0   0 
              
Cash at end of period $0  $0  $0 
Cash and cash equivalents at end of period $0  $0  $0 
              
 
See Report of Independent Registered Public Accounting Firm.


5359


LANDSTAR SYSTEM, INC. AND SUBSIDIARY

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 26, 2009
(Dollars in thousands)
                     
COL A
 COL B  COL C  COL D  COL E 
     Additions       
        Charged to
       
  Balance at
  Charged to
  Other
  Deductions
  Balance at
 
  Beginning of
  Costs and
  Accounts
  Describe
  End of
 
  Period  Expenses  Describe  (A)  Period 
 
Description                    
Allowance for doubtful accounts:                    
Deducted from trade receivables $6,230  $3,801      $(4,484) $5,547 
Deducted from other receivables  4,866   4,182       (2,321)  6,727 
Deducted from other non-current receivables  316   3           319 
                     
  $11,412  $7,986               $(6,805) $12,593 
                     
(A)Write-offs, net of recoveries.
See Report of Independent Registered Public Accounting Firm.


60


LANDSTAR SYSTEM, INC. AND SUBSIDIARY

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 27, 2008
(Dollars in thousands)
                     
COL A
 COL B  COL C  COL D  COL E 
     Additions       
        Charged to
       
  Balance at
  Charged to
  Other
  Deductions
  Balance at
 
  Beginning of
  Costs and
  Accounts
  Describe
  End of
 
  Period  Expenses  Describe  (A)  Period 
 
Description                    
Allowance for doubtful accounts:                    
Deducted from trade receivables $4,469  $4,641      $(2,880) $6,230 
Deducted from other receivables  4,792   2,290       (2,216)  4,866 
Deducted from other non-current receivables  310   6           316 
                     
  $9,571  $6,937               $(5,096) $11,412 
                     
(A)Write-offs, net of recoveries.
See Report of Independent Registered Public Accounting Firm.


61


LANDSTAR SYSTEM, INC. AND SUBSIDIARY

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 29, 2007
(Dollars in thousands)
 
                     
COL A
 COL B  COL C  COL D  COL E 
     Additions       
        Charged to
       
  Balance at
  Charged to
  Other
  Deductions
  Balance at
 
  Beginning of
  Costs and
  Accounts
  Describe
  End of
 
  Period  Expenses  Describe  (A)  Period 
 
Description                    
Allowance for doubtful accounts:                    
Deducted from trade receivables $4,834  $2,501      $(2,866) $4,469 
Deducted from other receivables  4,512   1,586       (1,306)  4,792 
Deducted from other non-current receivables  297   13           310 
                     
  $9,643  $4,100               $(4,172) $9,571 
                     
 
 
(A)Write-offs, net of recoveries.recoveries
 
See Report of Independent Registered Public Accounting Firm.


5462


SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 30, 2006
(Dollars in thousands)
                     
COL A
 COL B  COL C  COL D  COL E 
     Additions       
        Charged to
       
  Balance at
  Charged to
  Other
  Deductions
  Balance at
 
  Beginning of
  Costs and
  Accounts
  Describe
  End of
 
  Period  Expenses  Describe  (A)  Period 
 
Description                    
Allowance for doubtful accounts:                    
Deducted from trade receivables $4,655  $3,235               $(3,056) $4,834 
Deducted from other receivables  4,342   2,099       (1,929)  4,512 
Deducted from other non-current receivables  282   15           297 
                     
  $9,279  $5,349      $(4,985) $9,643 
                     
(A)Write-offs, net of recoveries.
See Report of Independent Registered Public Accounting Firm.


55


LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 31, 2005
(Dollars in thousands)
                     
COL A
 COL B  COL C  COL D  COL E 
     Additions       
        Charged to
       
  Balance at
  Charged to
  Other
  Deductions
  Balance at
 
  Beginning of
  Costs and
  Accounts
  Describe
  End of
 
  Period  Expenses  Describe  (A)  Period 
 
Description                    
Allowance for doubtful accounts:                    
Deducted from trade receivables $4,021  $3,399               $(2,765) $4,655 
Deducted from other receivables  4,245   2,521       (2,424)  4,342 
Deducted from other non-current receivables  263   19           282 
                     
  $8,529  $5,939      $(5,189) $9,279 
                     
(A)Write-offs, net of recoveries.
See Report of Independent Registered Public Accounting Firm.


56


Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.  Controls and Procedures
 
Disclosure Controls and Procedures
 
As of the end of the period covered by this Annual Report onForm 10-K, an evaluation was carried out, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined inRule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of December 29, 200726, 2009 to provide reasonable assurance that information required to be disclosed by the Company in reports that it filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
In designing and evaluating disclosure controls and procedures, Company management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitation in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.
 
Internal Control Over Financial Reporting
 
(a)  Management’s Report on Internal Control over Financial Reporting
 
Management of Landstar System, Inc. (the “Company”) is responsible for establishing and maintaining effective internal controls over financial reporting, as such term is defined inRules 13a-15(f) and15d-15(f) under the Securities Exchange Act, as amended.
 
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
 
Management, with the participation of the Company’s principal executive and principal financial officers, assessed the effectiveness of the Company’s internal control over financial reporting as of December 29, 2007.26, 2009. This assessment was performed using the criteria established under the Internal Control-Integrated Framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error or circumvention or


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overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and reporting and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


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Based on the assessment performed using the criteria established by COSO, management has concluded that the Company maintained effective internal control over financial reporting as of December 29, 2007.26, 2009.
 
KPMG LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report onForm 10-K for the fiscal year ended December 29, 2007,26, 2009, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Such report appears immediately below.


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(b)  Attestation Report of the Registered Public Accounting Firm
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders
Landstar System, Inc:
 
We have audited Landstar System, Inc.’s internal control over financial reporting as of December 29, 2007,26, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Landstar System, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Landstar System, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 29, 2007,26, 2009, based on criteria established in Internal Control — Integrated Framework issued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 29, 200726, 2009 and December 30, 2006,27, 2008, and the related consolidated statements of income, changes in shareholders’


64


equity, and cash flows for the fiscal years ended December 29, 2007,26, 2009, December 30, 200627, 2008 and December 31, 2005,29, 2007, and our report dated February 25, 2008,23, 2010, expressed an unqualified opinion on those consolidated financial statements.
 
/s/ S/KPMG LLP
 
February 25, 200823, 2010
Jacksonville, Florida
Certified Public Accountants


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(c)  Changes in Internal Control Over Financial Reporting
 
There were no significant changes in the Company’s internal controls over financial reporting during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Item 9B.  Other Information
 
None
 
PART III
 
Item 10.  Directors, Executive Officers and Corporate Governance
 
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” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. The information required by this Item concerning Director Independence, the Company’s Audit Committee and the Audit Committee’s Financial Expert is set forth under the caption “Information Regarding Board of Directors and Committees” and “Report of the Audit Committee” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
 
The Company has adopted a Code of Ethics and Business Conduct that applies to each of its directors and employees, including its principal executive officer, principal financial officer, controller and all other employees performing similar functions. The Code of Ethics and Business Conduct is available on the Company’s website atwww.landstar.comunder “Investor Relations — Corporate Governance.” The Company intends to satisfy the disclosure requirement under Item 5.05 ofForm 8-K regarding amendments to, or waivers from, a provision or provisions of the Code of Ethics and Business Conduct by posting such information on its website at the web address indicated above.
 
Item 11.  Executive Compensation
 
The information required by this Item is set forth under the captions “Compensation of Directors,” “Compensation of Executive Officers,” “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Option Exercises and Stock Vested,” “Outstanding Equity Awards at Fiscal Year End,” “Nonqualified Deferred Compensation,” “Report of the Compensation Committee on Executive Compensation,”Compensation” and “Key Executive Employment Protection Agreements” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.


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Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by this Item pursuant to Item 201(d) ofRegulation S-K is set forth under the caption “Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of this report, and is incorporated by reference herein.
 
The information required by this Item pursuant to Item 403 ofRegulation S-K is set forth under the caption “Security Ownership by Management and Others” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.


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Item 13.  Certain Relationships and Related Transactions, and Director Independence
 
None.None, other than information required to be disclosed under this item in regard to Director Independence, which is set forth under the caption “Independent Directors” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A and incorporated herein by reference.
 
Item 14.  Principal Accounting Fees and Services
 
The information required by this item is set forth under the caption “Report of the Audit Committee” and “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
 
PART IV
 
Item 15.  Exhibits and Financial Statement Schedules
 
(a)(1)Financial Statements and Supplementary Data
 
     
  Page
 
31
Consolidated Statements of Income32
Consolidated Statements of Cash Flows33
Consolidated Statement of Changes in Shareholders’ Equity  34 
Notes to   35 
36
37
38
  4854 


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(2) Financial Statement Schedules
 
The report of the Company’s independent registered public accounting firm with respect to the financial statement schedules listed below appears on page 5056 of this Annual Report onForm 10-K.
 
         
Schedule
    
Number
 
Description
 Page
 
   Condensed Financial Information of Registrant Parent Company Only Balance Sheet Information  5157 
   Condensed Financial Information of Registrant Parent Company Only Statement of Income Information  5258 
   Condensed Financial Information of Registrant Parent Company Only Statement of Cash Flows Information  5359 
   Valuation and Qualifying Accounts For the Fiscal Year Ended December 26, 200960
Valuation and Qualifying Accounts For the Fiscal Year Ended December 27, 200861
Valuation and Qualifying Accounts For the Fiscal Year Ended December 29, 2007  54
IIValuation and Qualifying Accounts For the Fiscal Year Ended December 30, 200655
IIValuation and Qualifying Accounts For the Fiscal Year Ended December 31, 20055662 
 
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.


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(3) Exhibits
 
        
Exhibit
Exhibit
  Exhibit
  
No.
No.
 
Description
No.
 
Description
(3)  Articles of Incorporation and By-Laws:(3)  Articles of Incorporation and By-Laws:
3.1 Restated Certificate of Incorporation of the Company dated March 6, 2006, including Certificate of Designation of Junior Participating Preferred Stock dated February 10, 1993. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 31, 2005 (Commission FileNo. 0-21238))3.1 Restated Certificate of Incorporation of the Company dated March 6, 2006, including Certificate of Designation of Junior Participating Preferred Stock dated February 10, 1993. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 31, 2005 (Commission FileNo. 0-21238))
3.2 The Company’s Bylaws, as amended and restated on November 1, 2007. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report onForm 10-Q for the fiscal quarter ended September 29, 2007 (Commission FileNo. 0-21238))3.2 The Company’s Bylaws, as amended and restated on November 1, 2007. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report onForm 10-Q for the fiscal quarter ended September 29, 2007 (Commission FileNo. 0-21238))
(4)  Instruments defining the rights of security holders, including indentures:(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 onForm S-1 (RegistrationNo. 33-57174))4.1 Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement onForm S-1 (RegistrationNo. 33-57174))
4.2 Fourth Amended and Restated Credit Agreement, dated July 8, 2004, among LSHI, Landstar, the lenders named therein and JPMorgan Chase Bank as administrative agent (including exhibits and schedules thereto). (Incorporated by reference to Exhibit 99.1 to the Registrant’sForm 8-K filed on July 12, 2004 (Commission FileNo. 0-21238))4.2 Credit Agreement, dated as of June 27, 2008, among LSHI, Landstar, the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent (including exhibits and schedules thereto). (Incorporated by reference to Exhibit 99.1 to the Registrant’sForm 8-K filed on July 3, 2008 (Commission FileNo. 0-21238))
(10)  Material contracts:(10)  Material contracts:
10.1+ Landstar System, Inc. Executive Incentive Compensation Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on April 2, 2007 (Commission FileNo. 0-21238))10.1+ Landstar System, Inc. Executive Incentive Compensation Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on April 2, 2007 (CommissionFile No. 0-21238))
10.2*+ Landstar System Holdings, Inc. Supplemental Executive Retirement Plan, as amended and restated on February 25, 200810.2+ Amendment to the Landstar System, Inc. Executive Incentive Compensation Plan, effective as of December 3, 2008 (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 27, 2008 (Commission FileNo. 0-21238))
10.3+ Landstar System, Inc. 1993 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement onForm S-1. (RegistrationNo. 33-67666))10.3+* Landstar System, Inc. Supplemental Executive Retirement Plan, as amended and restated as of January 1, 2010
10.4+ Amendment to the Landstar System, Inc. 1993 Stock Option Plan (Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 27, 1997 (Commission FileNo. 0-21238))10.4+ Landstar System, Inc. 1993 Stock Option Plan, as amended as of December 31, 2008 (Incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report onForm 8-K filed on January 7, 2009 (Commission FileNo. 0-21238))
10.5+ Landstar System, Inc. 2002 Employee Stock Option Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on March 22, 2002 (Commission FileNo. 0-21238))10.5+ Amended and Restated Landstar System, Inc. 2002 Employee Stock Option and Stock Incentive Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on March 23, 2009 (Commission FileNo. 0-21238))
10.6+ Landstar System, Inc. 1994 Director’s Stock Option Plan. (Incorporated by reference to Exhibit 99 to the Registrant’s Registration Statement onForm S-8 filed July 5, 1995. (RegistrationNo. 33-94304))10.6.1+ Landstar System, Inc. 1994 Directors Stock Option Plan. (Incorporated by reference to Exhibit 99 to the Registrant’s Registration Statement onForm S-8 filed July 5, 1995 (RegistrationNo. 33-94304))
10.7+ First Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 30, 2000 (Commission FileNo. 0-21238))
10.8+ Second Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 30, 2000 (Commission FileNo. 0-21238))
10.9+ Directors Stock Compensation Plan, dated May 15, 2003 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 28, 2003 (Commission FileNo. 0-21238))
10.10+ Form of Indemnification Agreement between the Company and each of the directors and executive officers of the Company. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 27, 2003 (CommissionNo. 0-21238))
10.11+ Form of Key Executive Employment Protection Agreement dated January 30, 1998 between Landstar System, Inc. and Robert C. LaRose (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 27, 1997 (Commission FileNo. 0-21238))


6267


     
Exhibit
  
No.
 
Description
 
 10.12+.6.2+ First Amendment to Key Executive Employment Protection Agreement, dated August 7, 2002, betweenthe Landstar System, Inc. and Robert C. LaRose1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 28, 200230, 2000 (Commission FileNo. 0-21238))
 10.13+.6.3+Second Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 30, 2000 (Commission FileNo. 0-21238))
10.6.4+*Third Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan
10.7+*Directors Stock Compensation Plan, as amended and restated as of February 22, 2010
10.8+Form of Indemnification Agreement between the Company and each of the directors and executive officers of the Company. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 27, 2003 (CommissionNo. 0-21238))
10.9+ Form of Key Executive Employment Protection Agreement between Landstar System, Inc. and each of Joseph J. Beacom, James B. Gattoni, Henry H. Gerkens, Jim M. Handoush, Michael K. Kneller, Patrick J. O’Malley, Jeffrey L. Pundt, Ronald G. Stanley and Larry S. Thomasthe Executive Officers of the Company (Incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 30, 2006 (Commission FileNo. 0-21238))
 10.14+.10+Form of Amendment to Key Executive Employment Protection Agreement between Landstar System, Inc. and each of the Executive Officers of the Company
10.11+ Letter Agreement, dated July 2, 2002 from Jeffrey C. Crowe to Henry H. Gerkens. (Incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 28, 2002 (Commission FileNo. 0-21238))
 10.15+.12+ Letter Agreement, dated April 27, 2004, between Landstar System, Inc. and Jeffrey C. Crowe (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed on April 28, 2004 (CommissionNo. 0-21238))
10.16+Letter Agreement, dated January 2, 2007, between Landstar System, Inc. and Robert C. LaRose (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report onForm 8-K filed January 3, 2007 (CommissionNo. 0-21238))
10.17+Letter agreement, dated January 2,December 31, 2008, between Landstar System, Inc. and Henry H. Gerkens (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report onForm 8-K filed on January 4,December 31, 2008 (Commission FileNo. 0-21238))
10.13+*Consulting Services Agreement, dated as of December 18, 2009, between Landstar System, Inc. and Jeffrey C. Crowe
 (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 Registered Public Accounting Firm of the Registrant
 (24)  Power of attorney:
 24.1* Powers of Attorney
 (31)  Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
 31.1* Chief Executive Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 31.2* Chief Financial Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 (32)  Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:
 32.1** Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 32.2** Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
+management contract or compensatory plan or arrangement
 
*Filed herewith.
 
**Furnished herewith.
 
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, 13410 SUTTON PARK DRIVE SOUTH, JACKSONVILLE, FLORIDA 32224.

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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: 
/s/  Henry H. Gerkens
Henry H. Gerkens
Chairman of the Board, President and
Chief Executive Officer
 
 By: 
/s/  James B. Gattoni
James B. Gattoni
Vice President and
Chief Financial Officer
 
Date: February 25, 200823, 2010
 
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 BoardFebruary 25, 2008
/s/  Henry H. Gerkens

Henry H. Gerkens
 Director,Chairman, President and
Chief Executive Officer;
Principal Executive Officer
 February 25, 200823, 2010
     
/s/  James B. Gattoni

James B. Gattoni
 Vice President and
Chief Financial Officer;
Principal Accounting Officer
 February 25, 200823, 2010
     
*

David G. Bannister
 Director February 25, 200823, 2010
     
*

Ronald W. DruckerJeffrey C. Crowe
 Director February 25, 200823, 2010
     
*

William S. Elston
 Director February 25, 200823, 2010
     
*

Michael A. Henning
 Director February 25, 200823, 2010
     
*

Diana M. Murphy
 Director February 25, 200823, 2010
By: 
/s/  Michael K. Kneller

Michael K. Kneller
Attorney In Fact*
 
Michael K. Kneller
Attorney In Fact*


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