48
EXHIBIT 13.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc.
("Landstar" or the "Company"), provide transportation services to a variety
of market niches throughout the United States and to a lesser extent in Canada
and between the United States and Canada and Mexico through its operating
subsidiaries which employ different operating strategies. Under the provisions
of Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and
Related Information," the Company determined it has four reportable business
segments. These are the carrier segment, multimodal segment, company-owned
tractor segment and insurance segment.
The carrier segment consists of Landstar Ranger, Inc. ("Landstar Ranger"),
Landstar Inway, Inc. ("Landstar Inway") and Landstar Ligon, Inc. The carrier
segment provides truckload transportation for a wide range of general
commodities over irregular routes with its fleet of dry and specialty vans and
unsided trailers, including flatbed, drop deck and specialty. The carrier
segment markets its services primarily through independent commission sales
agents and utilizes tractors provided by independent contractors. The nature
of the carrier segment's business is such that a significant portion of its
operating costs vary directly with revenue. The carrier segment's revenue
represented 72%, 71% and 71% of Landstar's consolidated revenue in 1997, 1996
and 1995, respectively.
The multimodal segment is comprised of Landstar Logistics, Inc. ("Landstar
Logistics") and Landstar Express America, Inc. ("Landstar Express").
Transportation services provided by the multimodal segment include
the arrangement of intermodal moves, contract logistics, truck brokerage,
short-to-long haul movement of containers by truck and emergency and expedited
air freight and truck services. The multimodal segment markets its services
through independent commission sales agents and utilizes capacity provided by
independent contractors, including railroads and air cargo carriers. The nature
of the multimodal segment's business is such that a significant portion of its
operating costs also vary directly with revenue. The multimodal segment's
revenue represented 19%, 17% and 17% of Landstar's consolidated revenue in
1997, 1996 and 1995, respectively.
The company-owned tractor segment consists of Landstar Poole, Inc. ("Landstar
Poole"). The company-owned tractor segment provides truckload transportation
services over short and medium length regional traffic lanes. The company-owned
tractor segment primarily markets its services through an employee sales force
49
and primarily utilizes company-owned and employee-driven tractors. The company-
owned tractor segment's revenue represented 7%, 12% and 12% of Landstar's
consolidated revenue in 1997, 1996 and 1995, respectively.
The insurance segment is Signature Insurance Company ("Signature"), a wholly-
owned offshore insurance subsidiary, formed in March 1997. The insurance
segment reinsures certain property, casualty and occupational accident risks of
certain independent contractors who have contracted to haul freight for
Landstar. In addition, the insurance segment provides certain property and
casualty insurance directly to Landstar's operating subsidiaries. The insurance
segment's revenue represented 2% of Landstar's consolidated revenue in 1997.
During the fourth quarter of 1996, the Company announced a plan to
restructure the operations of both Landstar Poole and Landstar T.L.C., Inc.
("Landstar T.L.C."). The Landstar Poole restructuring plan included the
transfer of the variable cost business component of Landstar Poole to Landstar
Ranger and the disposal of 175 company-owned tractors. The Landstar T.L.C.
restructuring plan included the merger of the operations of Landstar T.L.C.
into Landstar Inway and the disposal of all the company-owned tractors. The
restructuring was substantially completed by June 28, 1997.
During the first quarter of 1995, Landstar, through different subsidiaries of
Landstar System Holdings, Inc. ("LSHI"), acquired the businesses and net
assets of Intermodal Transport Company ("ITCO"), a California-based intermodal
marketing company, LDS Truck Lines, Inc., a California-based drayage company,
and T.L.C. Lines, Inc.("TLC"), a Missouri-based temperature-controlled and
long-haul, time sensitive dry van carrier. Also, in the 1995 first quarter,
Landstar, through another subsidiary of LSHI, acquired all of the outstanding
common stock of Express America Freight Systems, Inc. ("Express"), a North
Carolina-based air freight and truck expedited service provider. The businesses
acquired from ITCO and Express comprise the majority of the multimodal
segment's operations.
Purchased transportation represents the amount an independent contractor
is paid to haul freight and is primarily based on a contractually agreed
upon percentage of revenue generated by the haul for truck capacity provided by
independent contractors. Purchased transportation for the intermodal services
operations and the air freight operations of the multimodal segment is based on
a contractually agreed upon fixed rate. Purchased transportation as a
percentage of revenue for the intermodal services operations is normally higher
than that of Landstar's other transportation operations. Purchased
transportation is the largest component of costs and expenses and, on a
consolidated basis, increases or decreases in proportion to the revenue
generated through independent contractors. Commissions to agents and brokers
are primarily based on contractually agreed upon percentages of revenue or
contractually agreed upon percentages of gross profit. Commissions to agents
and brokers as a percentage of consolidated revenue will vary directly with
revenue generated through independent commission sales agents. Both purchased
transportation and commissions to agents and brokers generally will also
50
increase or decrease as a percentage of the Company's consolidated revenue
if there is a change in the percentage of revenue contributed by the intermodal
services operations or the air freight operations of the multimodal segment or
through the company-employed drivers of the company-owned tractor segment.
Drivers' wages and benefits represent the amount the Company's employee
drivers are compensated. Employee drivers are compensated primarily on a cents-
per-mile driven basis. Drivers' wages and benefits as a percentage of
consolidated revenue generally will vary only if there is a change in the
revenue contribution generated through independent contractors or a change in
the rate of employee driver pay or benefit structure.
The Company's intention is to continue its expansion of truckload capacity
provided by independent contractors and to maintain or reduce its truckload
capacity provided by company-owned equipment and company-employed drivers. It
is also the Company's intention to favor independent commission sales agent
locations over company-owned and operated locations. Historically, Landstar
T.L.C. and the intermodal services operations of Landstar Logistics have
principally utilized a company employee sales structure and to a lesser degree,
independent commission sales agents. During 1996, management completed the
process of converting the majority of company-owned sales locations at Landstar
Logistics and Landstar T.L.C. to independent commission sales agent locations.
Accordingly, purchased transportation and commissions to agents and brokers
are anticipated to increase as a percentage of total consolidated revenue and
drivers' wages and benefits are anticipated to decline as a percentage of total
consolidated revenue over time.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. The industry is also subject to
substantial workers' compensation expense. A material increase in the
frequency or severity of accidents or workers' compensation claims or the
unfavorable development of existing claims can be expected to adversely affect
Landstar's operating income.
The cost of fuel is the largest component of fuel and other operating costs.
Changes in prevailing prices of fuel or increases in fuel taxes can
significantly affect the company-owned tractor segment's operating results.
Also included in fuel and other operating costs are costs of equipment
maintenance paid to third parties and the operating costs of Landstar Poole and
Landstar T.L.C. terminals. Effective August 1, 1996, Landstar closed all but
one of the Landstar Poole terminals, including those that had functioned as
Landstar Centers. The closings were part of Landstar's strategy to reduce the
fixed cost elements of the company-owned tractor segment.
Employee compensation and benefits account for over half of the Company's
selling, general and administrative expense. Other significant components of
selling, general and administrative expense are data processing expense,
communications costs and rent expense.
Depreciation and amortization primarily relate to depreciation of tractors
and trailers.
51
The following table sets forth the percentage relationships of expense items to
revenue for the periods indicated:
Fiscal Year
------------------------
1997 1996 1995
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Costs and expenses:
Purchased transportation 70.4 69.0 67.5
Drivers' wages and benefits 2.1 3.2 4.0
Fuel and other operating costs 3.7 5.5 5.6
Insurance and claims 3.7 2.8 3.1
Commissions to agents and brokers 7.6 6.8 6.2
Selling, general and administrative 7.1 7.1 7.7
Depreciation and amortization 1.6 1.9 1.7
Restructuring costs 0.2 0.6
------ ------ ------
Total costs and expenses 96.4 96.9 95.8
------ ------ ------
Operating income 3.6 3.1 4.2
Interest and debt expense, net 0.4 0.6 0.7
------ ------ ------
Income before income taxes 3.2 2.5 3.5
Income taxes 1.3 1.0 1.4
------ ------ ------
Net income 1.9% 1.5% 2.1%
====== ====== ======
FISCAL YEAR ENDED DECEMBER 27, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1996
Revenue for the fiscal year 1997 was $1,312,704,000, an increase of $28,903,000,
or 2.3%, over revenue for the 1996 fiscal year. The increase was attributable
to higher revenue of $39,858,000 and $30,657,000 at the carrier and multimodal
segments, respectively, and premium revenue of $18,940,000 generated by the
insurance segment. These increases were partially offset by a $60,552,000
revenue decline at the company-owned tractor segment, which resulted from the
restructuring of the operations of Landstar Poole. Overall, revenue per revenue
mile (price) increased approximately 4%, which reflected improved freight
quality, while revenue miles (volume) were approximately 8% lower than 1996,
which reflected the effects of the restructuring. During 1997, revenue
generated through all independent contractors, including railroads and air
cargo carriers, was 92.9% of consolidated revenue compared with 90.4% in 1996.
Purchased transportation was 70.4% of revenue in 1997 compared with 69.0% in
1996. Drivers' wages and benefits were 2.1% of revenue in 1997 compared with
3.2% in 1996. Fuel and other operating costs were 3.7% of revenue in 1997
compared with 5.5% in 1996. The increase in purchased transportation and
decrease in drivers' wages and benefits and fuel and other operating costs as
a percentage of revenue was primarily attributable to an increased percentage
of revenue generated through independent contractors due to the reduction of
52
company-owned tractors as a result of the Landstar Poole and Landstar T.L.C.
restructuring. The decrease in fuel and other operating costs was also
attributable to reduced terminal and maintenance costs. Insurance and claims
were 3.7% of revenue in 1997 compared with 2.8% in 1996. The increase in
insurance and claims as a percentage of revenue was primarily attributable to
the effects of insurance programs available to the Company's independent
contractors which Signature reinsures. Excluding the premium revenue and
insurance and claims expense related to the above reinsurance programs,
insurance and claims as a percentage of revenue was 2.9% in 1997. This increase
was attributable to the favorable development of prior year claims in 1996,
partially offset by lower third party premiums in 1997. Commissions to agents
and brokers were 7.6% of revenue in 1997 compared with 6.8% in 1996 primarily
due to an increased percentage of revenue generated through independent
commission sales agents. Selling, general and administrative costs were 7.1%
of revenue in both 1997 and 1996. Depreciation and amortization was 1.6% of
revenue in 1997 compared with 1.9% in 1996 primarily due to the reduction of
company-owned equipment as a result of the Landstar Poole and Landstar T.L.C.
restructuring.
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C. and Landstar Poole operations, in addition to the relocation of its
Shelton, Connecticut corporate office headquarters to Jacksonville, Florida in
the second quarter of 1997. During the 1996 fourth quarter, the Company
recorded $7,263,000 in restructuring costs, which included $4,166,000 for
impairment of certain long-lived assets, $939,000 for the early termination
of certain operating leases, $850,000 for employee termination costs and
$1,308,000 of other costs. Long-lived assets, having an aggregate carrying
value of $16,500,000, were reduced to their estimated sales value and primarily
represented revenue equipment to be sold. During the first half of 1997, the
Company recorded an additional $3,164,000 of restructuring costs, which
included $1,647,000 for office and employee relocation and $1,517,000 of other
costs. The restructuring was substantially completed by June 28, 1997.
Interest and debt expense, net was 0.4% of revenue in 1997 and 0.6% in 1996.
This decrease was primarily attributable to the effect of lower average
borrowings on the senior credit facility, reduced capital lease obligations
and interest income from investments at Signature.
The provisions for income taxes for the 1997 and 1996 fiscal years were based
on an effective income tax rate of approximately 42% and 41.5%, respectively,
which is higher than the statutory federal income tax rate primarily as a
result of state income taxes, amortization of certain goodwill and the meals
and entertainment exclusion. At December 27, 1997, the valuation allowance of
$710,000 was attributable to deferred state income tax benefits, which
primarily represented state operating loss carryforwards at one subsidiary.
The valuation allowance and goodwill were reduced by $106,000 for state
operating loss carryforwards utilized in 1997. The valuation allowance and
goodwill will be further reduced by $682,000 when realization of deferred state
income tax benefits becomes likely. The Company believes that deferred income
tax benefits, net of the valuation allowance, are more likely than not to be
realized because of the Company's ability to generate future taxable earnings.
53
Net income was $24,690,000, or $1.97 per common share, in 1997 compared with
$18,925,000, or $1.48 per common share, in the prior year. Including the
dilutive effect of the Company's stock options, diluted earnings per share was
$1.96 in 1997 and $1.47 in 1996. Excluding restructuring costs, net income
would have been $26,525,000, or $2.12 per common share ($2.11 diluted earnings
per share), in 1997 and $23,174,000, or $1.81 per common share ($1.80 diluted
earnings per share), in 1996.
FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
1995
Revenue for the fiscal year 1996 was $1,283,801,000, an increase of
$79,134,000, or 6.6%, over revenue for the 1995 fiscal year. The increase was
primarily attributable to an increase in revenue miles of 6.5%, which included
the revenue of the businesses acquired during the first quarter of 1995 for the
full fifty-two weeks of 1996, and an increase of less than 1% in revenue per
revenue mile. During 1996, revenue generated through independent contractors,
including railroads and air cargo carriers, was 90.4% of consolidated revenue
compared with 88.5% in 1995.
Purchased transportation was 69.0% of revenue in 1996 compared with 67.5% in
1995. Drivers' wages and benefits were 3.2% of revenue in 1996 compared with
4.0% in 1995. Fuel and other operating costs were 5.5% of revenue in 1996
compared with 5.6% in 1995. The increase in purchased transportation and
decrease in drivers' wages and benefits and fuel and other operating costs as a
percentage of revenue was primarily attributable to an increase in the
percentage of revenue generated through independent contractors. The decrease
in fuel and other operating costs was partially offset by an increase in fuel
prices. Insurance and claims were 2.8% of revenue in 1996 compared with 3.1%
in 1995 due to a decrease in third party premiums and favorable development of
prior year claims. Commissions to agents and brokers were 6.8% of revenue in
1996 compared with 6.2% in 1995 due to an increase in the percentage of revenue
generated through independent commission sales agents which reflected the
conversion of company-owned sales locations to independent commission sales
agent locations. Selling, general and administrative costs were 7.1% of
revenue in 1996 compared with 7.7% of revenue in 1995, primarily due to a lower
provision for customer bad debts, reduced employee sales costs which reflected
the conversion of company-owned sales locations to independent commission sales
agent locations and the effect of increased revenue.
Interest and debt expense, net was 0.6% of revenue in 1996 and 0.7% in 1995.
This decrease was primarily attributable to the effect of increased revenue.
The provisions for income taxes for both the 1996 and 1995 fiscal years were
based on an effective income tax rate of approximately 41%, which is higher
than the statutory federal income tax rate primarily as a result of state
income taxes, amortization of certain goodwill and the meals and entertainment
exclusion. The valuation allowance and goodwill were reduced by $190,000
for state operating loss carryforwards utilized in 1996. The valuation
allowance was reduced by an additional $265,000 for state operating loss
carryforwards that had expired.
54
Net income was $18,925,000, or $1.48 per common share, in 1996 compared with
$24,962,000, or $1.95 per common share, in the prior year. Including the
dilutive effect of the Company's stock options, diluted earnings per share was
$1.47 in 1996 and $1.94 in 1995. Excluding restructuring costs, 1996 net income
would have been $23,174,000, or $1.81 per common share ($1.80 diluted earnings
per share). If the acquisitions had taken place at the beginning of 1995, pro
forma net income for 1995 would have been $24,352,000, or $1.90 per common
share ($1.89 diluted earnings per share).
CAPITAL RESOURCES AND LIQUIDITY
On October 10, 1997, Landstar renegotiated its existing Credit Agreement with a
syndicate of banks and The Chase Manhattan Bank, as administrative agent (the
"Second Amended and Restated Credit Agreement"). The Second Amended and
Restated Credit Agreement provides $200,000,000 of borrowing capacity,
consisting of $150,000,000 of revolving credit (the "Working Capital Facility")
and $50,000,000 of revolving credit available to finance acquisitions (the
"Acquisition Facility"). $50,000,000 of the total borrowing capacity under the
Working Capital Facility may be utilized in the form of letter of credit
guarantees. At December 27, 1997, Landstar had commitments for letters of
credit outstanding in the amount of $24,659,000, $17,659,000 of which were
supported by the Second Amended and Restated Credit Agreement, primarily as
collateral for estimated insurance claims. The Second Amended and Restated
Credit Agreement expires on October 10, 2002.
Borrowings under the Second Amended and Restated Credit Agreement bear interest
at rates equal to, at the option of Landstar, either (i) the greatest of (a)
the prime rate as publicly announced from time to time by The Chase Manhattan
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to The Chase Manhattan Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus
a margin that is determined based on the level of the Company's Leverage Ratio,
as defined in the Second Amended and Restated Credit Agreement. As of
December 27, 1997, the margin was equal to 32/100 of 1%. The unused portion of
the Second Amended and Restated Credit Agreement carries a commitment fee
determined based on the level of the Leverage Ratio, as therein defined. As of
December 27, 1997, the commitment fee for the unused portion of the Second
Amended and Restated Credit Agreement was 0.100%. At December 27, 1997, the
weighted average interest rate on borrowings outstanding under the Acquisition
Facility was 6.32%. Based on the borrowing rates in the Second Amended and
Restated Credit Agreement and the repayment terms, the fair value of the
outstanding borrowings under the Acquisition Facility was estimated to
approximate carrying value.
The Second Amended and Restated Credit Agreement contains a number of covenants
that limit, among other things, the incurrence of additional indebtedness, the
incurrence of operating or capital lease obligations and the purchase of
operating property. The Second Amended and Restated Credit Agreement also
requires Landstar to meet certain financial tests. Landstar is required to,
among other things, maintain minimum levels of Net Worth, as defined in the
55
Second Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined. Under the most restrictive covenant, Landstar
exceeded the required Interest Charge Coverage level by approximately
$6,500,000 at December 27, 1997.
The Second Amended and Restated Credit Agreement provides a number of events of
default related to a person or group acquiring 25% or more of the outstanding
capital stock of the Company or obtaining the power to elect a majority of the
Company's directors.
Borrowings under the Second Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of LSHI's subsidiaries
guarantee LSHI's obligations under the Second Amended and Restated Credit
Agreement.
Shareholders' equity increased to $151,696,000, or 75% of total capitalization,
at December 27, 1997, compared with $147,557,000, or 62% of total
capitalization, at December 28, 1996, primarily as a result of 1997 net income
and the repayment of $39,950,000 of long-term debt, partially offset by the
purchase of 821,400 shares of the Company's common stock at a total cost of
$20,980,000. Working capital and the ratio of current assets to current
liabilities were $79,051,000 and 1.57 to 1, respectively, at December 27, 1997,
compared with $70,653,000 and 1.54 to 1, respectively, at December 28, 1996.
Landstar has historically operated with current ratios ranging between 1.0 to 1
and 1.5 to 1. Cash provided by operating activities was $70,431,000 in 1997
compared with $24,994,000 in 1996. The increase in cash provided by operating
activities was primarily attributable to the timing of payments and cash
receipts and increased earnings. During the 1997 fiscal year, Landstar
purchased $9,794,000 of operating property. The Company did not acquire any
operating property by entering into capital leases during 1997. Landstar
anticipates it will acquire approximately $25,000,000 of operating property
during fiscal year 1998 either by purchase or by lease financing.
Landstar is involved in certain claims and pending litigation arising from the
normal conduct of business. Based on the knowledge of the facts and, in
certain cases, opinions of outside counsel, management believes that adequate
provisions have been made for probable losses with respect to the resolution of
all claims and pending litigation and that the ultimate outcome, after
provisions thereof, will not have a material adverse effect on the financial
condition of Landstar, but could have a material effect on the results of
operations in a given quarter or year.
Landstar Ranger is subject to the Multi Employer Pension Plan Amendments Act of
1980 ("MEPPA"), which could require Landstar Ranger, in the event of
withdrawal, to fund its proportionate share of the union sponsored plans'
unfunded benefit obligation. However, management believes that the liability,
56
if any, for withdrawal from any or all of these plans would not have a material
adverse effect on the financial condition of Landstar, but could have a
material effect on the results of operations in a given quarter or year.
The Company is aware of the issues associated with the programming code in its
existing computer systems in order for the systems to recognize date-sensitive
information when the year changes to 2000. The Company believes it has
identified and is in the process of modifying all computer software which
requires change to ensure its computer systems will be year 2000 compliant as
part of its scheduled maintenance and normal system upgrades. As such,
management has not separately quantified the cost of year 2000 compliance,
however, management does not believe that the future costs of maintaining and
upgrading Landstar's computer systems will have a material adverse effect on
results of operations. It is anticipated that all reprogramming and testing
efforts will be completed by May 1999. To date, confirmations have been
received from the Company's primary outside processing vendors that plans have
been developed to address the year 2000 issue.
Management believes that cash flow from operations combined with its borrowing
capacity under the Second Amended and Restated Credit Agreement will be
adequate to meet Landstar's debt service requirements, fund continued growth,
both internal and through acquisitions, and meet working capital needs.
Management does not believe inflation has had a material impact on the results
of operations or financial condition of Landstar in the past five years.
However, inflation higher than that experienced in the past five years might
have an adverse effect on the Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". This Statement, effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components. Management believes that
upon adoption of this Statement, Landstar's comprehensive income will not be
materially different from its reported net income, considering the nature of
the transactions the Company routinely enters into.
SEASONALITY
Landstar's operations are subject to seasonal trends common to the trucking
industry. Results of operations for the quarter ending in March are typically
lower than the quarters ending June, September and December due to reduced
shipments and higher operating costs in the winter months.
57
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 27, December 28,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash $ 17,994 $ 4,187
Short-term investments 3,012
Trade accounts receivable, less allowance
of $5,957 and $6,526 176,785 176,892
Other receivables, including advances to independent
contractors, less allowance of $4,009
and $4,390 12,599 10,740
Inventories 922 1,785
Prepaid expenses and other current assets 6,910 7,319
-------- --------
Total current assets 218,222 200,923
-------- --------
Operating property, less accumulated depreciation
and amortization of $50,301 and $50,223 81,258 105,564
Goodwill, less accumulated amortization of $8,818
and $7,087 53,289 55,126
Deferred income taxes and other assets 4,410 9,188
-------- --------
Total assets $357,179 $370,801
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 12,475 $ 13,488
Accounts payable 50,394 39,901
Current maturities of long-term debt 14,228 23,241
Insurance claims 28,247 25,328
Other current liabilities 33,827 28,312
-------- --------
Total current liabilities 139,171 130,270
-------- --------
Long-term debt, excluding current maturities 36,218 67,155
Insurance claims 27,890 25,819
Deferred income taxes 2,204
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 12,900,974 shares and
12,882,874 shares 129 129
Additional paid-in capital 62,169 61,740
Retained earnings 112,345 87,655
Cost of 915,441 and 94,041 shares of common
stock in treasury (22,947) (1,967)
-------- --------
Total shareholders' equity 151,696 147,557
-------- --------
Total liabilities and shareholders' equity $357,179 $370,801
======== ========
See accompanying notes to consolidated financial statements.
58
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Fiscal Year Ended
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
Revenue $ 1,312,704 $ 1,283,801 $ 1,204,667
Costs and expenses:
Purchased transportation 923,654 885,500 813,003
Drivers' wages and benefits 28,010 41,210 47,970
Fuel and other operating costs 48,733 70,207 67,861
Insurance and claims 47,993 36,495 37,816
Commissions to agents and brokers 99,848 87,935 73,974
Selling, general and administrative 93,214 91,267 93,194
Depreciation and amortization 20,918 24,027 20,841
Restructuring costs 3,164 7,263
------------ ----------- ------------
Total costs and expenses 1,265,534 1,243,904 1,154,659
------------ ----------- ------------
Operating income 47,170 39,897 50,008
Interest and debt expense, net 4,602 7,547 7,552
------------ ----------- ------------
Income before income taxes 42,568 32,350 42,456
Income taxes 17,878 13,425 17,494
------------ ----------- ------------
Net income $ 24,690 $ 18,925 $ 24,962
============ =========== ============
Earnings per common share $ 1.97 $ 1.48 $ 1.95
============ =========== ============
Diluted earnings per share $ 1.96 $ 1.47 $ 1.94
============ =========== ============
Average number of shares outstanding:
Earnings per common share 12,541,000 12,785,000 12,807,000
============ =========== ============
Diluted earnings per share 12,580,000 12,831,000 12,898,000
============ =========== ============
See accompanying notes to consolidated financial statements.
59
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
December 27, December 28, December 30,
1997 1996 1995
(Dollars in thousands) ------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 24,690 $ 18,925 $ 24,962
Adjustments to reconcile net income to net cash
provided by operating activities:
Impairment of long-lived assets 4,166
Depreciation and amortization of operating property 18,783 21,878 18,824
Amortization of goodwill and non-competition agreements 2,135 2,149 2,017
Non-cash interest charges 264 264 253
Provisions for losses on trade and other receivables 3,998 4,768 6,232
Gains on sales of operating property (2,379) (2,530) (2,080)
Deferred income taxes, net 6,620 355 (419)
Non-cash charge in lieu of income taxes 106 190
Changes in operating assets and liabilities,
net of businesses acquired:
Increase in trade and other accounts receivable (5,750) (28,032) (14,417)
Decrease (increase) in other assets 966 868 (2,635)
Increase (decrease) in accounts payable 10,493 2,474 (2,928)
Increase in estimated insurance claims 4,990 3,462 7,179
Increase (decrease) in other liabilities 5,515 (3,943) (17,025)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 70,431 24,994 19,963
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of businesses, net of cash acquired (33,932)
Purchases of investments (4,799)
Maturities of short-term investments 1,787
Purchases of operating property (9,794) (12,853) (7,286)
Proceeds from sales of operating property 17,696 12,517 7,154
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 4,890 (336) (34,064)
------------ ------------ ------------
FINANCING ACTIVITIES
Borrowings to finance businesses acquired 45,900
Borrowings under revolving credit facility 16,000 10,000
Increase (decrease) in cash overdraft (1,013) 39 4,029
Proceeds from exercise of stock options and
related income tax benefit 429 236
Purchases of common stock (20,980) (1,727)
Principal payments on borrowings under revolving
credit facility, long-term debt and capital lease obligations (39,950) (40,161) (58,441)
------------ ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (61,514) (23,886) (239)
------------ ----------- -----------
Increase (decrease) in cash 13,807 772 (14,340)
Cash at beginning of period 4,187 3,415 17,755
------------ ----------- -----------
Cash at end of period $ 17,994 $ 4,187 $ 3,415
============ =========== ===========
See accompanying notes to consolidated financial statements.
60
LANDSTAR SYSTEM INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Year Ended December 27, 1997,
December 28, 1996 and December 30, 1995
(Dollars in thousands)
Additional Treasury Stock
Common Stock Paid-In Retained at Cost
Shares Amount Capital Earnings Shares Amount Total
---------- ------ --------- -------- ------- -------- -------
Balance December 31, 1994 12,871,674 $ 129 $61,504 $ 43,768 24,041 $ (240) $105,161
Net income 24,962 24,962
Purchases of common stock 70,000 (1,727) (1,727)
---------- ------ ------- ------- ------ --------- --------
Balance December 30, 1995 12,871,674 129 61,504 68,730 94,041 (1,967) 128,396
Net income 18,925 18,925
Exercise of stock options
and related income tax
benefit 11,200 236 236
---------- ------ ------- ------- ------- --------- --------
Balance December 28, 1996 12,882,874 129 61,740 87,655 94,041 (1,967) 147,557
---------- ------ ------- ------- ------- --------- --------
Net income 24,690 24,690
Purchases of common stock 821,400 (20,980) (20,980)
Exercise of stock options
and related income tax
benefit 18,100 429 429
---------- ------ ------- -------- ------- --------- --------
Balance December 27, 1997 12,900,974 $ 129 $62,169 $112,345 915,441 $(22,947) $151,696
========== ====== ======= ======== ======= ========= ========
See accompanying notes to consolidated financial statements.
61
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Landstar System,
Inc. and its subsidiary Landstar System Holdings, Inc. Landstar System, Inc.
and its subsidiary are herein referred to as "Landstar" or the "Company".
Significant inter-company accounts have been eliminated in consolidation. The
preparation of the consolidated financial statements requires the use of
management's estimates. Actual results could differ from those estimates.
Fiscal Year
Landstar's fiscal year is the 52 or 53 week period ending the last Saturday in
December.
Revenue Recognition
Revenue and the related direct freight expenses are recognized upon completion
of freight delivery.
Insurance Claim Costs
Landstar provides, on an actuarially determined basis, for the estimated costs
of cargo, property, casualty, general liability and workers' compensation
claims both reported and for claims incurred but not reported. Landstar
retains liability up to $1,000,000 for each individual property, casualty and
general liability claim, $500,000 for each workers' compensation claim and
$250,000 for each cargo claim.
Inventories
Inventories, consisting of fuel, tires and vehicle repair parts, are valued at
the lower of average cost or market.
Tires
Tires and tubes purchased as part of revenue equipment are capitalized as part
of the cost of the equipment. Replacement tires and tubes are charged to
expense when placed in service.
Short-Term Investments
The Company's short-term investments are carried at amortized cost, which
approximates fair value.
Operating Property
Operating property is recorded at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets.
Revenue equipment is being depreciated over a maximum of 7 years.
Goodwill
Goodwill represents the excess of purchase cost over the estimated fair value
of net assets acquired. It is being amortized on a straight-line basis over
periods of twenty and forty years. The Company assesses the recoverability of
goodwill by determining whether the amortization of the goodwill balance over
its remaining useful life can be recovered through projected undiscounted
future operating cash flows. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's current average cost of funds.
62
Income Taxes
Income tax expense is equal to the current year's liability for income taxes
and a provision for deferred income taxes. Deferred tax assets and
liabilities are recorded for the future tax effects attributable to temporary
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using the enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences
are expected to be recovered or settled.
Stock-Based Compensation
Compensation cost for the Company's stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of grant
over the exercise price of the stock option.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
requires companies to present basic earnings per share ("earnings per common
share") and diluted earnings per share.
Earnings per common share amounts are based on the weighted average number of
common shares outstanding and diluted earnings per share amounts are based on
the weighted average number of common shares outstanding plus the incremental
shares that would have been outstanding upon the assumed exercise of all
dilutive stock options.
(2) Restructuring Costs
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C., Inc. ("Landstar T.L.C.") and Landstar Poole, Inc. ("Landstar Poole")
operations, in addition to the relocation of its Shelton, Connecticut
corporate office headquarters to Jacksonville, Florida in the second quarter
of 1997.
The plan to restructure Landstar T.L.C. included the merger of the operations
of Landstar T.L.C. into Landstar Inway, Inc., the closing of the Landstar
T.L.C. headquarters in St. Clair, Missouri and the disposal of all of Landstar
T.L.C.'s company-owned tractors. The plan to restructure Landstar Poole
included the transfer of the variable cost business component of Landstar
Poole to Landstar Ranger, Inc. ("Landstar Ranger") and the disposal of 175
Landstar Poole company-owned tractors.
During the 1996 fourth quarter, the Company recorded $7,263,000 in
restructuring costs, which included $4,166,000 for the impairment of certain
long-lived assets, $939,000 for the early termination of certain operating
leases, $850,000 for employee termination costs and $1,308,000 of other costs.
Long-lived assets, having an aggregate carrying value of $16,500,000, were
reduced to their estimated sales value and primarily represented revenue
equipment to be sold. After deducting related income tax benefits of
$3,014,000, the restructuring charge reduced net income by $4,249,000, or
$0.33 per common share, in 1996.
During the first half of 1997, the Company recorded an additional $3,164,000 of
restructuring costs, which included $1,647,000 for office and employee
relocation and $1,517,000 of other costs. After deducting related income tax
63
benefits of $1,329,000, the restructuring charge reduced net income by
$1,835,000, or $0.15 per common share, in 1997. The restructuring was
substantially completed by June 28, 1997.
(3) Acquisitions
During the first quarter of 1995, Landstar, through different subsidiaries of
Landstar System Holdings, Inc. ("LSHI"), acquired the businesses and net
assets of Intermodal Transport Company, a California-based intermodal marketing
company, LDS Truck Lines, Inc., a California-based drayage company, and T.L.C.
Lines, Inc., a Missouri-based temperature-controlled and long-haul, time
sensitive dry van carrier. Also in the 1995 first quarter, Landstar, through
another subsidiary of LSHI, acquired all of the outstanding common stock of
Express America Freight Systems, Inc., a North Carolina-based air freight and
truck expedited service provider. The aggregate purchase price of the four
acquisitions, including expenses, was $34,076,000, plus the assumption of
$24,162,000 of long-term debt, including current maturities.
The aggregate purchase price and a portion of the debt
assumed was paid or refinanced with proceeds received from $34,500,000 of
borrowings under the acquisition line of Landstar's revolving credit facility,
$11,400,000 of borrowings from Fleet Bank, N.A. and Mark Twain Bank, and
available cash.
The acquisitions were accounted for under the purchase method and the net
assets acquired and the results of operations of the four acquisitions were
included in Landstar's consolidated financial statements from their respective
dates of acquisition. The aggregate purchase price was allocated to the
assets acquired, including $22,036,000 of operating property, and the
liabilities assumed based on their respective estimated fair values. The
aggregate purchase price exceeded the fair value of the net assets acquired by
$27,415,000 of which $1,200,000 was assigned to non-competition agreements and
$26,215,000 was assigned to goodwill. The non-competition agreements are
being amortized on the straight-line method over the two and three year lives
of the agreements, and goodwill is being amortized on the straight-line method
over periods of twenty and forty years.
The following unaudited pro forma information represents the consolidated
results of operations of Landstar and the four acquired businesses as if the
acquisitions had occurred at the beginning of fiscal year 1995, and gives
effect to increased depreciation of operating property, amortization of
goodwill and non-competition agreements and increased interest expense, at
rates available to Landstar under the acquisition line of its revolving credit
facility (in thousands, except per share amounts):
Fiscal Year
1995
----
Revenue $1,214,267
Net income $ 24,352
Earnings per common share $ 1.90
Diluted earnings per share $ 1.89
The above pro forma information is not necessarily indicative of the results of
operations which actually would have been obtained during 1995.
64
(4) Income Taxes
The provisions for income taxes consisted of the following (in thousands):
Fiscal Year
------------------------------
1997 1996 1995
---- ---- ----
Current:
Federal $ 9,027 $10,830 $14,838
State 2,125 2,050 3,075
------- ------- -------
11,152 12,880 17,913
Deferred:
Federal 5,798 869 413
State 822 (514) (832)
------ ------- -------
6,620 355 (419)
Non-cash charge in lieu of income taxes 106 190
------- ------- -------
Income taxes $17,878 $13,425 $17,494
======= ======= =======
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities consisted of the following (in thousands):
Dec. 27, 1997 Dec. 28, 1996
------------- -------------
Deferred tax assets:
Receivable valuations $ 2,380 $ 3,750
Deferred state income tax benefits 1,100 812
State net operating loss carryforwards 4,032 3,235
Self insured claims 15,094 20,294
Compensated absences 529 620
All other 376 1,245
--------- ---------
23,511 29,956
Valuation allowance (710) (816)
--------- ---------
$ 22,801 $ 29,140
========= =========
Deferred tax liabilities:
Operating property $ 19,784 $ 20,254
All other 5,221 4,470
--------- ---------
$ 25,005 $ 24,724
========= =========
65
At December 27, 1997, the valuation allowance of $710,000 was attributable to
deferred state income tax benefits, which primarily represented state
operating loss carryforwards at one subsidiary. The valuation allowance and
goodwill were reduced by $106,000 for state operating loss carryforwards
utilized in 1997. The valuation allowance and goodwill will be further reduced
by $682,000 when realization of deferred state income tax benefits becomes
likely.
The following table summarizes the differences between income taxes calculated
at the federal income tax rate of 35% on income before income taxes and the
provisions for income taxes (in thousands):
Fiscal Year
----------------------------
1997 1996 1995
---- ---- ----
Income taxes at federal income tax rate $14,899 $11,323 $14,860
State income taxes, net of federal income
tax benefit 1,984 1,122 1,458
Amortization of goodwill 439 439 420
Meals and entertainment exclusion 457 448 647
Other, net 99 93 109
------- -------- --------
Income taxes $17,878 $13,425 $17,494
======= ======= =======
Landstar paid income taxes of $10,184,000 in 1997, $15,949,000 in 1996 and
$19,679,000 in 1995.
(5) Operating Property
Operating property is summarized as follows (in thousands):
Dec. 27, 1997 Dec. 28, 1996
------------- -------------
Land $ 1,776 $ 2,309
Leasehold improvements 56 366
Buildings and improvements 11,279 10,937
Revenue equipment 95,623 125,124
Other equipment 22,825 17,051
-------- --------
131,559 155,787
Less accumulated depreciation and amortization 50,301 50,223
-------- --------
$ 81,258 $105,564
======== ========
Included above is $86,706,000 in 1997 and $110,936,000 in 1996 of operating
property under capital lease, $46,363,000 and $74,792,000, respectively, net
of accumulated amortization. Landstar acquired operating property by entering
66
into capital leases in the amount of $20,690,000 in 1996 and $28,566,000 in
1995. Landstar did not acquire any property by entering into capital leases in
1997.
(6) Pension Plans
Landstar sponsors an Internal Revenue Code section 401(k) defined contribution
plan for the benefit of full-time employees who have completed one year of
service. Eligible employees make voluntary contributions up to 6% of their
base salary, subject to certain limitations. Landstar contributes an amount
equal to 50% of such contributions, subject to certain limitations. In
addition, one subsidiary, Landstar Ranger, makes contributions in accordance
with a negotiated labor contract (generally based on the number of weeks
worked) to union sponsored multi-employer defined benefit pension plans for
the benefit of approximately 200 union drivers.
Landstar Ranger is subject to the Multi Employer Pension Plan Amendments Act
of 1980 ("MEPPA"), which could require Landstar Ranger, in the event of
withdrawal, to fund its proportionate share of these union sponsored plans'
unfunded benefit obligation. Management believes that the liability, if any,
for withdrawal from any or all of these plans would not have a material
adverse effect on the financial condition of Landstar, but could have a
material effect on the results of operations in a given quarter or year.
The expense for the Company sponsored defined contribution plan and for union
sponsored plans was $1,037,000 and $1,193,000 in 1997, respectively, $1,144,000
and $1,085,000 in 1996, respectively, and $1,185,000 and $937,000 in 1995,
respectively.
(7) Debt
Long-term debt is summarized as follows (in thousands):
Dec. 27, 1997 Dec. 28, 1996
------------- -------------
Capital leases $31,946 $61,896
Acquisition Facility 18,500 28,500
------- -------
50,446 90,396
Less current maturities 14,228 23,241
------- -------
Total long-term debt $36,218 $67,155
======= =======
On October 10, 1997, Landstar renegotiated its existing Credit Agreement with a
syndicate of banks and The Chase Manhattan Bank, as administrative agent (the
"Second Amended and Restated Credit Agreement"). The Second Amended and
Restated Credit Agreement provides $200,000,000 of borrowing capacity,
consisting of $150,000,000 of revolving credit (the "Working Capital Facility")
and $50,000,000 of revolving credit available to finance acquisitions (the
"Acquisition Facility"). $50,000,000 of the total borrowing capacity under the
Working Capital Facility may be utilized in the form of letter of credit
guarantees. The Second Amended and Restated Credit Agreement
expires on October 10, 2002.
67
Borrowings under the Second Amended and Restated Credit Agreement bear interest
at rates equal to, at the option of Landstar, either (i) the greatest of (a)
the prime rate as publicly announced from time to time by The Chase Manhattan
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to The Chase Manhattan Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus
a margin that is determined based on the level of the Company's Leverage Ratio,
as defined in the Second Amended and Restated Credit Agreement. As of
December 27, 1997, the margin was equal to 32/100 of 1%. The unused portion of
the Second Amended and Restated Credit Agreement carries a commitment fee
determined based on the level of the Company's Leverage Ratio, as therein
defined. As of December 27, 1997, the commitment fee for the unused portion
of the Second Amended and Restated Credit Agreement was 0.100%. At December 27,
1997, the weighted average interest rate on borrowings outstanding under the
Acquisition Facility was 6.32%. Based on the borrowing rates in the Second
Amended and Restated Credit Agreement and the repayment terms, the fair value
of the outstanding borrowings under the Acquisition Facility was estimated to
approximate carrying value.
The Second Amended and Restated Credit Agreement contains a number of covenants
that limit, among other things, the incurrence of additional indebtedness, the
incurrence of operating or capital lease obligations and the purchase of
operating property. The Second Amended and Restated Credit Agreement also
requires Landstar to meet certain financial tests. Landstar is required to,
among other things, maintain minimum levels of Net Worth, as defined in the
Second Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined. Under the most restrictive covenant, Landstar
exceeded the required Interest Charge Coverage level by approximately
$6,500,000 at December 27, 1997.
The Second Amended and Restated Credit Agreement provides a number of events of
default related to a person or group acquiring 25% or more of the outstanding
capital stock of the Company or obtaining the power to elect a majority of the
Company's directors.
Borrowings under the Second Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of LSHI's subsidiaries
guarantee LSHI's obligations under the Second Amended and Restated Credit
Agreement.
The amount outstanding on the Acquisition Facility is payable upon the
expiration of the Second Amended and Restated Credit Agreement. There are no
other installments of long term debt, excluding capital lease obligations,
maturing in the next five years.
Landstar paid interest of $5,476,000 in 1997, $7,180,000 in
1996 and $7,359,000 in 1995.
(8) Leases
The future minimum lease payments under all noncancelable leases at
December 27, 1997, principally for revenue equipment, are shown in the
following table (in thousands):
68
Capital Operating
Leases Leases
------- ---------
1998 $15,991 $ 1,983
1999 10,759 1,663
2000 6,583 798
2001 1,596 474
2002 345
Thereafter 60
------- ---------
34,929 $ 5,323
=========
Less amount representing interest
(6.0% to 10.1%) 2,983
Present value of minimum -------
lease payments $31,946
=======
Total rent expense, net of sublease income, was $22,270,000 in 1997,
$19,928,000 in 1996 and $17,667,000 in 1995.
(9) Stock Option Plans
The Company maintains two stock option plans. Under the 1993 Stock Option
Plan (the "Plan"), the Compensation Committee of the Board of Directors may
grant options to Company employees for up to 615,000 shares of common stock.
Under the 1994 Directors Stock Option Plan (the "DSOP"), outside members of
the Board of Directors will be granted up to an aggregate of 120,000 options
to purchase common stock. Under the DSOP, each outside Director will be
granted 12,000 options to purchase common stock upon election or re-election
to the Board of Directors.
Options granted become exercisable in five equal annual installments under the
Plan and three equal annual installments under the DSOP, commencing on the
first anniversary of the date of grant, subject to acceleration in certain
circumstances, and expire on the tenth anniversary of the date of grant.
Under the plans, the exercise price of each option equals the market price of
the Company's stock on the date of grant. At December 27, 1997, there were
705,700 shares of the Company's stock reserved for issuance upon exercise of
options granted under the plans.
69
Information regarding the Company's stock option plans is as follows:
Options Outstanding Options Exercisable
--------------------------- --------------------------
Weighted Average Weighted Average
Exercise Price Exercise Price
Shares Per Share Shares Per Share
-------- ----------------- -------- ----------------
Options at December 31, 1994 389,000 $ 22.07 37,200 $ 18.33
Granted 212,000 $ 30.06
Forfeited (1,500) $ 25.50
-------
Options at December 30, 1995 599,500 $ 24.89 121,100 $ 21.10
Granted 35,000 $ 27.53
Exercised (11,200) $ 18.50
Forfeited (110,400) $ 26.94
--------
Options at December 28, 1996 512,900 $ 24.77 201,000 $ 23.10
Granted 23,500 $ 26.38
Exercised (18,100) $ 19.89
Forfeited (36,800) $ 24.95
--------
Options at December 27, 1997 481,500 $ 25.01 276,800 $ 23.90
========
The fair value of each option grant on its grant date was calculated using
the Black-Scholes option pricing model with the following assumptions for
grants made in 1997, 1996 and 1995: risk free interest rate of 6.0%, expected
lives of 5 years and no dividend yield. The expected volatility used in
calculating the fair market value of stock options granted was 37% in 1997 and
39% in 1996 and 1995. The weighted average grant date fair value of stock
options granted was $11.23, $12.06 and $13.20 per share in 1997, 1996 and
1995, respectively.
The following table summarizes stock options outstanding at December 27, 1997:
Options Outstanding
-------------------
Range of Exercise Weighted Average Weighted Average
Prices Number Outstanding Remaining Contractual Exercise Price
Per Share Dec. 27, 1997 Life (years) Per Share
----------------- ------------------ --------------------- ----------------
$14.625 - $22.531 120,500 6.0 $ 18.53
$22.532 - $32.250 361,000 7.6 $ 27.17
----------------
$14.625 - $32.250 481,500 7.2 $ 25.01
================
70
Options Exercisable
-------------------
Range of Exercise Number Weighted Average
Prices Outstanding Exercise Price
Per Share Dec. 27, 1997 Per Share
----------------- ---------------- ----------------
$14.625 - $22.531 94,800 $ 18.47
$22.532 - $32.250 182,000 $ 26.73
----------------
$14.625 - $32.250 276,800 $ 23.90
================
The Company accounts for its stock option plans using the intrinsic value
method as prescribed in Accounting Principal Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Had compensation cost for the Company's stock
option plans been determined using the fair value at grant date method as
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation", the
effect on net income and earnings per common share for the fiscal year
would have been $378,000, or $0.03 per common share, in 1997, $270,000,
or $0.02 per common share, in 1996 and $91,000, or $0.01 per common
share, in 1995.
Options to purchase 166,500 shares of common stock at a weighted average
exercise price of $29.34 per share were outstanding during 1997 but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common
shares.
(10) Shareholders' Equity
During 1997, Landstar purchased 821,400 shares of its common stock at a total
cost of $20,980,000 pursuant to previously announced stock purchase programs.
As of December 27, 1997, Landstar may purchase up to an additional 857,600
shares of its common stock in order to complete its most recently authorized
stock purchase program.
The Company has 2,000,000 shares of preferred stock authorized and unissued.
Under the terms of a Shareholder Rights Agreement (the "Agreement"), a
preferred stock purchase right (the "Right") accompanies each outstanding
share of common stock. Each Right entitles the holder to purchase from the
Company one one-hundredth of a share of preferred stock at an exercise price
of $60. Within the time limits and under the circumstances specified in the
Agreement, the Rights entitle the holder to acquire shares of common stock in
the Company, or the surviving Company in a business combination, having a
value of two times the exercise price. The Rights may be redeemed prior to
becoming exercisable by action of the Board of Directors at a redemption price
of $.01 per Right. The Rights expire February 10, 2003. Until a Right is
exercised, it has no rights including, without limitation, the right to vote
or to receive dividends.
71
(11) Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information", which
requires a company to report certain financial information about its
operating segments. The Company implemented SFAS No. 131 for fiscal year 1997.
Under the provisions of SFAS No. 131, the Company determined it has four
reportable business segments. These are the carrier segment, multimodal
segment, company-owned tractor segment and insurance segment. The carrier
segment provides truckload transportation for a wide range of general
commodities over irregular routes with its fleet of dry and specialty
vans and unsided trailers, including flatbed, drop deck and specialty.
The carrier segment markets its services primarily through independent
commission sales agents and utilizes tractors provided by independent
contractors. Transportation services provided by the multimodal segment
include the arrangement of intermodal moves, contract logistics, truck
brokerage, short-to-long haul movement of containers by truck and
emergency and expedited air freight and truck services. The multimodal
segment markets its services through independent commission sales agents
and utilizes capacity provided by independent contractors. The nature of
the carrier and multimodal segments' business is such that a significant
portion of their operating costs vary directly with revenue. The
company-owned tractor segment transports truckload freight over short and
medium length regional traffic lanes and primarily markets its services
through an employee sales force and primarily utilizes company-owned and
employee-driven tractors. The insurance segment reinsures certain property,
casualty, and occupational accident risks of certain independent contractors
who have contracted to haul freight for Landstar. In addition, the
insurance segment provides certain property and casualty insurance directly
to Landstar's other segments. The insurance segment began operations in
March 1997.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates a segment's
performance based on operating income.
Inter-segment revenue for transactions between the carrier, multimodal
and company-owned tractor segments are based on quoted rates which are believed
to approximate the cost that would have been incurred had similar services
been obtained from an unrelated third party. Inter-segment revenue between the
insurance segment and the carrier, multimodal and company-owned tractor
segments is calculated at the beginning of each fiscal period based on an
actuarial calculation of historical loss experience and is believed to
approximate the cost that would have been incurred had similar insurance been
obtained from an unrelated third party.
No single customer accounts for more than 10% of consolidated revenue.
Substantially all of the Company's revenue is generated in the United States.
72
The following tables summarize information about the Company's reportable
business segments as of and for the fiscal years ending December 27, 1997,
December 28, 1996 and December 30, 1995 (in thousands):
1997 Company-
owned
Carrier Multimodal Tractor Insurance Other Total
External revenue $ 945,330 $ 255,041 $ 93,393 $ 18,940 $1,312,704
Internal revenue 39,453 968 6,785 15,452 62,658
Interest income (468) (468)
Interest expense, net $ 5,070 5,070
Depreciation and
amortization 6,334 1,285 9,564 3,735 20,918
Restructuring costs 1,244 154 (83) 1,849 3,164
Operating income 62,280 5,355 849 8,933 (30,247) 47,170
Expenditures on
long-lived assets 6,082 861 850 2,001 9,794
Total assets 192,143 64,055 68,791 21,538 10,652 357,179
1996 Company-
owned
Carrier Multimodal Tractor Insurance Other Total
External revenue $ 905,472 $ 224,384 $ 153,945 $1,283,801
Internal revenue 37,479 1,160 6,956 45,595
Interest expense, net $ 7,547 7,547
Depreciation and
amortization 9,583 1,310 10,213 2,921 24,027
Restructuring costs 4,675 1,326 1,262 7,263
Operating income 57,031 4,584 1,543 (23,261) 39,897
Expenditures on
long-lived assets 7,930 906 2,819 1,198 12,853
Capital lease additions 12,828 7,045 817 20,690
Total assets 212,034 56,547 85,526 16,694 370,801
73
1995 Company-
owned
Carrier Multimodal Tractor Insurance Other Total
External revenue $ 852,235 $ 202,413 $ 150,019 $1,204,667
Internal revenue 30,874 563 9,238 40,675
Interest expense, net $ 7,552 7,552
Depreciation and
amortization 8,471 1,086 9,554 1,730 20,841
Operating income 70,307 1,497 4,581 (26,377) 50,008
Expenditures on
long-lived assets 1,889 785 3,197 1,415 7,286
Capital lease additions 9,796 18,770 28,566
Total assets 189,414 49,987 97,098 16,580 353,079
(12) Commitments and Contingencies
At December 27, 1997, the Company had commitments for letters of credit
outstanding in the amount of $24,659,000, primarily as collateral for estimated
insurance claims. The commitments for letters of credit outstanding include
$17,659,000 under the Second Amended and Restated Credit Agreement and
$7,000,000 secured by assets deposited with a financial institution.
Landstar is involved in certain claims and pending litigation arising from the
normal conduct of business. Based on knowledge of the facts and, in certain
cases, opinions of outside counsel, management believes that adequate
provisions have been made for probable losses with respect to the resolution
of all claims and pending litigation and that the ultimate outcome, after
provisions thereof, will not have a material adverse effect on the financial
condition of Landstar, but could have a material effect on the results of
operations in a given quarter or year.
74
Independent Auditors' Report
- ----------------------------
Landstar System, Inc. and Subsidiary
The Board of Directors and Shareholders
Landstar System, Inc.:
We have audited the accompanying consolidated balance sheets of Landstar
System, Inc. and subsidiary as of December 27, 1997 and December 28, 1996, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the fiscal years ended December 27, 1997, December 28, 1996
and December 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Landstar System,
Inc. and subsidiary as of December 27, 1997 and December 28, 1996, and the
results of their operations and their cash flows for the fiscal years ended
December 27, 1997, December 28, 1996 and December 30, 1995 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Stamford, Connecticut
February 10, 1998
75
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
1997 1997 1997 (1) 1997 (1)
---------- ---------- ---------- ----------
Revenue $ 347,153 $ 326,311 $ 333,682 $ 305,558
========== ========== ========== ==========
Operating income $ 14,063 $ 13,965 $ 12,523 $ 6,619
---------- ---------- ---------- ----------
Income before income taxes $ 13,241 $ 13,046 $ 11,101 $ 5,180
Income taxes 5,561 5,481 4,661 2,175
---------- ---------- ---------- ----------
Net income $ 7,680 $ 7,565 $ 6,440 $ 3,005
========== ========== ========== ==========
Earnings per common share (2) $ 0.63 $ 0.60 $ 0.51 $ 0.24
========== ========== ========== ==========
Diluted earnings per share (2) $ 0.62 $ 0.60 $ 0.51 $ 0.24
========== ========== ========== ==========
Fourth Third Second First
Quarter Quarter Quarter Quarter
1996 (3) 1996 1996 1996
---------- ---------- ---------- ----------
Revenue $ 329,017 $ 330,195 $ 329,112 $ 295,477
========== ========== ========== ==========
Operating income $ 3,185 $ 15,261 $ 14,118 $ 7,333
---------- ---------- ---------- ----------
Income before income taxes $ 1,547 $ 13,325 $ 12,067 $ 5,411
Income taxes 484 5,631 5,053 2,257
---------- ---------- ---------- ----------
Net income $ 1,063 $ 7,694 $ 7,014 $ 3,154
========== ========== ========== ==========
Earnings per common share (2) $ 0.08 $ 0.60 $ 0.55 $ 0.25
========== ========== ========== ==========
Diluted earnings per share (2) $ 0.08 $ 0.60 $ 0.54 $ 0.25
========== ========== ========== ==========
(1) Includes pre-tax restructuring costs of $1,985 and $1,179 in the second
and first quarters, respectively. After deducting related income tax
benefits of $834 and $495 in the second and first quarters, respectively,
the restructuring costs reduced net income by $1,151, or $0.09 per common
share, in the 1997 second quarter, and $684, or $0.05 per common share,
in the 1997 first quarter.
(2) Due to the changes in the number of average common shares and common
stock equivalents outstanding during the year, earnings per share amounts for
each quarter do not necessarily add to the earnings per share amounts for the
full year.
(3) Includes pre-tax restructuring costs of $7,263. After deducting related
income tax benefits of $3,014, the restructuring costs reduced net income by
$4,249, or $0.33 per common share.
76
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fiscal Year
--------------------------------------------------------------
1997 1996 1995 1994 1993
Income Statement Data:
Revenue $1,312,704 $1,283,801 $1,204,667 $ 984,359 $ 780,520
Costs and expenses:
Purchased transportation 923,654 885,500 813,003 653,076 500,368
Drivers' wages and benefits 28,010 41,210 47,970 38,287 37,124
Fuel and other operating costs 48,733 70,207 67,861 53,627 55,376
Insurance and claims 47,993 36,495 37,816 35,413 30,314
Commissions to agents and brokers 99,848 87,935 73,974 61,542 45,965
Selling, general and administrative 93,214 91,267 93,194 83,143 68,390 (3)
Depreciation and amortization 20,918 24,027 20,841 13,509 12,759
Restructuring costs 3,164 7,263
---------- ---------- ---------- --------- ----------
Total costs and expenses 1,265,534 1,243,904 1,154,659 938,597 750,296
---------- ---------- ---------- --------- ----------
Operating income 47,170 39,897 50,008 45,762 30,224
Interest and debt expense, net 4,602 7,547 7,552 4,134 5,711
---------- ---------- ---------- --------- ----------
Income before income taxes and
extraordinary loss 42,568 32,350 42,456 41,628 24,513
Income taxes 17,878 13,425 17,494 17,221 10,955
---------- ---------- ---------- ---------- ----------
Income before extraordinary loss 24,690 18,925 24,962 24,407 13,558
Extraordinary loss (1,830)(4)
---------- ---------- ---------- ---------- ----------
Net income $ 24,690(1) $ 18,925 (2) $ 24,962 $ 24,407 $ 11,728
========== ========== ========== ========== ==========
Earnings per common share:
Income before extraordinary loss $ 1.97(1) $ 1.48 (2) $ 1.95 $ 1.90 $ 1.14 (3)
Extraordinary loss (0.15)(4)
========== ========== ========== ========== ==========
Earnings per common share $ 1.97(1) $ 1.48 (2) $ 1.95 $ 1.90 $ 0.99 (3)(5)
========== ========== ========== ========== ==========
Diluted earnings per share:
Income before extraordinary loss $ 1.96 $ 1.47 $ 1.94 $ 1.89 $ 1.12
Extraordinary loss (0.15)
---------- ---------- ---------- ---------- ----------
Diluted earnings per share $ 1.96 $ 1.47 $ 1.94 $ 1.89 $ 0.97
========== ========== ========== ========== ==========
Dec. 27, Dec. 28, Dec. 30, Dec. 31, Dec. 25,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Balance Sheet Data:
Total assets $ 357,179 $ 370,801 $ 353,079 $ 267,084 $ 219,412
Long-term debt, including
current maturities 50,446 90,396 93,867 43,680 48,074
Shareholders' equity 151,696 147,557 128,396 105,161 80,754
77
(1) After deducting related income tax benefits of $1,329, the
restructuring costs reduced net income by $1,835, or $0.15
per common share.
(2) After deducting related income tax benefits of $3,014, the
restructuring costs reduced net income by $4,249, or $0.33
per common share.
(3) Included in selling, general and administrative costs in
1993 are one-time charges in the amount of $1,200 for the
termination of consulting and management services agreements
with two parties-in-interest. After deducting related income
tax benefits of $504, these charges reduced earnings per common share
by $0.06.
(4) Represents the after-tax loss on the early extinguishment
of the Company's 14% senior subordinated notes.
(5) If the initial public offering and the redemption of the
Company's 14% senior subordinated notes had taken place at the
beginning of 1993, earnings per common share for 1993 would have
been $1.16.