36
EXHIBIT 13.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc.
("Landstar" or the "Company"), provide transportation services to a variety
of market niches throughout the United States and to a lesser extent in Canada
and between the United States and Canada and Mexico through its operating
subsidiaries which employ different operating strategies. Under the provisions
of Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and
Related Information," the Company determined it has three reportable business
segments. These are the carrier, multimodal and insurance segments.
The carrier segment consists of Landstar Ranger, Inc. ("Landstar Ranger"),
Landstar Inway, Inc. ("Landstar Inway") and Landstar Ligon, Inc. ("Landstar
Ligon"). The carrier segment provides truckload transportation for a wide range
of general commodities over irregular routes with its fleet of dry and
specialty vans and unsided trailers, including flatbed, drop deck and
specialty. The carrier segment markets its services primarily through
independent commission sales agents and utilizes tractors provided by
independent contractors. The nature of the carrier segment's business is such
that a significant portion of its operating costs varies directly with revenue.
The carrier segment's revenue represented 76%, 77% and 80% of Landstar's
consolidated revenue in 1998, 1997 and 1996, respectively.
The multimodal segment is comprised of Landstar Logistics, Inc. ("Landstar
Logistics") and Landstar Express America, Inc. ("Landstar Express America").
Transportation services provided by the multimodal segment include
the arrangement of intermodal moves, contract logistics, truck brokerage,
short-to-long haul movement of containers by truck and emergency and expedited
air freight and truck services. The multimodal segment markets its services
through independent commission sales agents and utilizes capacity provided by
independent contractors, including railroads and air cargo carriers. The nature
of the multimodal segment's business is such that a significant portion of its
operating costs also varies directly with revenue. The multimodal segment's
revenue represented 22%, 21% and 20% of Landstar's consolidated revenue in
1998, 1997 and 1996, respectively.
37
The insurance segment is comprised of Signature Insurance Company
("Signature"), a wholly-owned offshore insurance subsidiary that was formed
in March 1997, and Risk Management Claim Services, Inc. The insurance segment
provides risk and claims management services to Landstar's operating
companies. In addition, it reinsures certain property, casualty and
occupational accident risks of certain independent contractors who have
contracted to haul freight for Landstar and provides certain property and
casualty insurance directly to Landstar's operating subsidiaries. The insurance
segment's revenue represented 2% of Landstar's consolidated revenue in both
1998 and 1997.
On August 22, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned
subsidiary of Landstar which comprised the entire company-owned tractor
segment, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for approximately $40,435,000 in cash. Accordingly, the financial results
of this segment have been reported as discontinued operations in the
accompanying financial statements.
During the fourth quarter of 1996, the Company announced a plan to
restructure the Landstar T.L.C., Inc. ("Landstar T.L.C.") operations,
in addition to the relocation of its Shelton, Connecticut corporate
office headquarters to Jacksonville, Florida in the second quarter of 1997.
In accordance with the restructuring plan, the operations of Landstar T.L.C.
were merged into Landstar Inway and the Company recorded $3,247,000 and
$5,937,000 of restructuring costs during the 1997 and 1996 periods,
respectively. The restructuring was substantially completed by June 28, 1997.
Purchased transportation represents the amount an independent contractor
is paid to haul freight and is primarily based on a contractually agreed-
upon percentage of revenue generated by the haul for truck capacity provided by
independent contractors. Purchased transportation for the intermodal services
operations and the air freight operations of the multimodal segment is based on
a contractually agreed-upon fixed rate. Purchased transportation as a
percentage of revenue for the intermodal services operations is normally higher
than that of Landstar's other transportation operations. Purchased
transportation is the largest component of costs and expenses and, on a
consolidated basis, increases or decreases in proportion to the revenue
generated through independent contractors. Commissions to agents and brokers
are primarily based on contractually agreed-upon percentages of revenue at the
carrier segment and of gross profit at the multimodal segment. Commissions to
agents and brokers as a percentage of consolidated revenue will vary directly
with revenue generated through independent commission sales agents. Both
purchased transportation and commissions to agents and brokers generally will
38
also increase or decrease as a percentage of the Company's consolidated revenue
if there is a change in the percentage of revenue contributed by Signature or
by the intermodal services operations or the air freight operations of the
multimodal segment.
Trailer rent and maintenance costs are the largest components of other
operating costs.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. A material increase in the
frequency or severity of accidents or workers' compensation claims or the
unfavorable development of existing claims can be expected to adversely affect
Landstar's operating income.
Employee compensation and benefits account for over half of the Company's
selling, general and administrative expense. Other significant components of
selling, general and administrative expense are communications costs and rent
expense.
Depreciation and amortization primarily relates to depreciation of trailers
and management information services equipment.
39
The following table sets forth the percentage relationships of expense items to
revenue for the periods indicated:
Fiscal Years
------------------------
1998 1997 1996
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Investment income 0.1
Costs and expenses:
Purchased transportation 74.0 73.7 73.2
Commissions to agents and brokers 7.9 8.1 7.5
Other operating costs 2.1 2.7 4.6
Insurance and claims 3.1 3.5 2.6
Selling, general and administrative 7.4 7.0 7.0
Depreciation and amortization 0.8 0.9 1.2
Restructuring costs 0.3 0.5
------ ------ ------
Total costs and expenses 95.3 96.2 96.6
------ ------ ------
Operating income 4.8 3.8 3.4
Interest and debt expense 0.3 0.2 0.4
------ ------ ------
Income from continuing operations
before income taxes 4.5 3.6 3.0
Income taxes 1.8 1.5 1.2
------ ------ ------
Income from continuing operations 2.7 2.1 1.8
Discontinued operations, net of
income taxes (1.8) (0.1) (0.1)
------ ------ ------
Net income 0.9% 2.0% 1.7%
====== ====== ======
FISCAL YEAR ENDED DECEMBER 26, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 27,
1997
Revenue for the fiscal year 1998 was $1,283,607,000, an increase of
$64,296,000, or 5.3%, over revenue for the 1997 fiscal year. The increase
was attributable to higher revenue at the carrier, multimodal and insurance
segments of $36,097,000, $22,958,000 and $5,241,000, respectively. Overall,
revenue per revenue mile (price) increased approximately 3%, which reflected
improved freight quality, and revenue miles (volume) increased approximately
1%. The increase in revenue over the prior year at the insurance segment was
primarily attributable to the establishment of Signature in March 1997.
Purchased transportation was 74.0% of revenue in 1998 compared with 73.7% in
1997. Other operating costs were 2.1% of revenue in 1998 compared with 2.7% in
1997. The increase in purchased transportation and decrease in other operating
costs as a percentage of revenue was primarily attributable to the elimination
40
of company-owned tractors as part of the Landstar T.L.C. restructuring.
Commissions to agents and brokers were 7.9% of revenue in 1998 compared
with 8.1% in 1997 primarily due to a decrease in the percentage of revenue
contributed by the intermodal services operations of the multimodal segment
and increased premium revenue at the insurance segment. Insurance and claims
were 3.1% of revenue in 1998 compared with 3.5% in 1997 primarily due to
the favorable development of prior year claims in 1998 and favorable frequency
and severity of accidents. Excluding the effects of the insurance programs
available to the Company's independent contractors which Signature reinsures,
insurance and claims were 2.2% of revenue in 1998 and 2.7% in 1997.
Selling, general and administrative costs were 7.4% of revenue in 1998 and 7.0%
in 1997. The increase in selling, general and administrative costs as a
percentage of revenue was due to a higher provision for bonuses under the
Company's incentive compensation plan, increased management information
services costs, an increased provision for customer bad debts and one time
costs of $560,000 attributable to the relocation of Landstar Express America
from Charlotte, North Carolina to Jacksonville, Florida.
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C. operations, in addition to the relocation of its Shelton, Connecticut
corporate office headquarters to Jacksonville, Florida in the second quarter of
1997. Accordingly, the Company recorded $3,247,000 of restructuring costs
during the 1997 period. The restructuring was substantially completed by
June 28, 1997.
Interest and debt expense was 0.3% of revenue in 1998 and 0.2% in 1997.
This increase was primarily attributable to the effect of higher average
borrowings on the senior credit facility, which were used to finance a portion
of the Company's stock purchase program, partially offset by reduced capital
lease obligations.
The provisions for income taxes from continuing operations for the 1998 and
1997 fiscal years were based on effective income tax rates of approximately
40.5% and 41.7%, respectively, which are higher than the statutory federal
income tax rate primarily as a result of state income taxes, amortization of
certain goodwill and the meals and entertainment exclusion. At December 26,
1998, the valuation allowance of $658,000 was attributable to deferred state
income tax benefits, which primarily represented state operating loss
carryforwards at one subsidiary. The valuation allowance and goodwill were
reduced by $52,000 for state operating loss carryforwards utilized in 1998.
The valuation allowance and goodwill will be further reduced by $630,000
when realization of deferred state income tax benefits becomes likely.
The Company believes that deferred income tax benefits, net of the valuation
allowance, are more likely than not to be realized because of the Company's
ability to generate future taxable earnings.
41
Income from continuing operations was $34,481,000, or $3.13 per common share,
in 1998 compared with $25,428,000, or $2.03 per common share, in 1997.
Including the dilutive effect of the Company's stock options, diluted earnings
per share from continuing operations was $3.10 in 1998 and $2.02 in 1997.
Excluding restructuring costs, income from continuing operations for 1997
would have been $27,321,000, or $2.18 per common share ($2.17 diluted earnings
per share).
The loss from discontinued operations of $22,589,000, or $2.05 per common share
($2.03 diluted loss per share), in 1998, included a loss on sale of
$21,489,000, net of income tax benefits of $2,511,000, and a loss from
operations of $1,100,000, net of income tax benefits of $597,000. The loss
from discontinued operations for 1997 was $738,000, net of income tax benefits
of $310,000, or $0.06 per common share ($0.06 diluted loss per share).
Net income was $11,892,000, or $1.08 per common share, in 1998 compared with
$24,690,000, or $1.97 per common share, in the prior year. Including the
dilutive effect of the Company's stock options, diluted earnings per share was
$1.07 in 1998 and $1.96 in 1997.
FISCAL YEAR ENDED DECEMBER 27, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1996
Revenue for the fiscal year 1997 was $1,219,311,000, an increase of
$89,455,000, or 7.9%, over revenue for the prior year. The increase was
attributable to higher revenue at the carrier and multimodal segments of
$39,858,000 and $30,657,000, respectively, and premium revenue of $18,940,000
generated by the insurance segment. Overall, revenue miles increased
approximately 4% and revenue per revenue mile increased approximately 2%.
During 1997, revenue generated through independent contractors,
including railroads and air cargo carriers, was 98.0% of consolidated
revenue compared with 96.7% in 1996.
Purchased transportation was 73.7% of revenue in 1997 compared with 73.2% in
1996. Other operating costs were 2.7% of revenue in 1997 compared with 4.6% in
1996. The increase in purchased transportation and decrease in other operating
costs as a percentage of revenue was primarily attributable to an increase in
the percentage of revenue generated through independent contractors due to the
elimination of company-owned tractors as a result of the Landstar T.L.C.
restructuring. Commissions to agents and brokers were 8.1% of revenue in
1997 compared with 7.5% in 1996 due to an increase in the percentage of
revenue generated through independent commission sales agents. Insurance and
claims were 3.5% of revenue in 1997 compared with 2.6% in 1996 due to the
effects of insurance programs available to the Company's independent
contractors which Signature reinsures. Excluding the premium revenue and
insurance and claims expense related to the above reinsurance programs,
insurance and claims as a percentage of revenue was 2.7% in 1997. Selling,
general and administrative costs were 7.0% of revenue in both 1997 and 1996.
Depreciation and amortization was 0.9% of revenue in 1997 compared with 1.2%
of revenue in 1996 primarily due to the elimination of company-owned tractors
related to the Landstar T.L.C. restructuring.
Interest and debt expense was 0.2% of revenue in 1997 and 0.4% in 1996.
This decrease was primarily attributable to the effect of lower average
borrowings on the senior credit facility and reduced capital lease obligations.
42
The provisions for income taxes from continuing operations for the 1997 and
1996 fiscal years were based on effective income tax rates of approximately
41.7% and 41.0%, respectively, which are higher than the statutory federal
income tax rate primarily as a result of state income taxes, amortization of
certain goodwill and the meals and entertainment exclusion. The valuation
allowance and goodwill were reduced by $106,000 for state operating loss
carryforwards utilized in 1997.
Income from continuing operations was $25,428,000, or $2.03 per common share,
in 1997 compared with $19,647,000, or $1.54 per common share, in 1996.
Including the dilutive effect of the Company's stock options, diluted earnings
per share from continuing operations was $2.02 in 1997 and $1.53 in 1996.
Excluding restructuring costs, income from continuing operations for 1997 and
1996 would have been $27,321,000, or $2.18 per common share ($2.17 diluted
earnings per share), and $23,150,000, or $1.81 per common share ($1.80 diluted
earnings per share), respectively.
The loss from discontinued operations was $738,000, or $0.06 per common share
($0.06 diluted loss per share), for 1997. The loss from discontinued
operations for 1996 was $722,000, or $0.06 per common share ($0.06 diluted loss
per share).
43
Net income was $24,690,000, or $1.97 per common share, in 1997 compared with
$18,925,000, or $1.48 per common share, in the prior year. Including the
dilutive effect of the Company's stock options, diluted earnings per share was
$1.96 in 1997 and $1.47 in 1996.
CAPITAL RESOURCES AND LIQUIDITY
On October 10, 1997, Landstar renegotiated its existing Credit Agreement with a
syndicate of banks and The Chase Manhattan Bank, as administrative agent (the
"Second Amended and Restated Credit Agreement"). The Second Amended and
Restated Credit Agreement provides $200,000,000 of borrowing capacity,
consisting of $150,000,000 of revolving credit (the "Working Capital Facility")
and $50,000,000 of revolving credit available to finance acquisitions (the
"Acquisition Facility"). $50,000,000 of the total borrowing capacity under the
Working Capital Facility may be utilized in the form of letter of credit
guarantees. At December 26, 1998, Landstar had commitments for letters of
credit outstanding in the amount of $24,592,000, $17,592,000 of which were
supported by the Second Amended and Restated Credit Agreement, primarily as
collateral for estimated insurance claims. The Second Amended and Restated
Credit Agreement expires on October 10, 2002.
Borrowings under the Second Amended and Restated Credit Agreement bear interest
at rates equal to, at the option of Landstar, either (i) the greatest of (a)
the prime rate as publicly announced from time to time by The Chase Manhattan
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to The Chase Manhattan Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus
a margin that is determined based on the level of the Company's Leverage Ratio,
as defined in the Second Amended and Restated Credit Agreement. As of
December 26, 1998, the margin was equal to 32/100 of 1%. The unused portion of
the Second Amended and Restated Credit Agreement carries a commitment fee
determined based on the level of the Leverage Ratio, as therein defined. As of
December 26, 1998, the commitment fee for the unused portion of the Second
Amended and Restated Credit Agreement was 0.100%. At December 26, 1998, the
weighted average interest rate on borrowings outstanding under the Acquisition
Facility was 5.69%. Based on the borrowing rates in the Second Amended and
Restated Credit Agreement and the repayment terms, the fair value of the
outstanding borrowings under the Acquisition Facility was estimated to
approximate carrying value.
The Second Amended and Restated Credit Agreement contains a number of covenants
that limit, among other things, the incurrence of additional indebtedness, the
incurrence of operating or capital lease obligations and the purchase of
operating property. The Second Amended and Restated Credit Agreement also
requires Landstar to meet certain financial tests. Landstar is required to,
among other things, maintain minimum levels of Net Worth, as defined in the
44
Second Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined. Under the most restrictive covenant, Landstar
exceeded the required Interest Charge Coverage level by
$4,600,000 at December 26, 1998.
The Second Amended and Restated Credit Agreement provides a number of events of
default related to a person or group acquiring 25% or more of the outstanding
capital stock of the Company or obtaining the power to elect a majority of the
Company's directors.
Borrowings under the Second Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of Landstar System Holdings,
Inc.'s ("LSHI") subsidiaries guarantee LSHI's obligations under the Second
Amended and Restated Credit Agreement.
Shareholders' equity was $111,848,000, or 76% of total capitalization,
at December 26, 1998, compared with $151,696,000, or 75% of total
capitalization, at December 27, 1997. The reduction in shareholders' equity
was a result of the purchase of 1,702,600 shares of the Company's common
stock at a total cost of $53,229,000 offset by 1998 net income.
Long-term debt including current maturities was $34,440,000 at December 26,
1998, $16,006,000 lower than at December 27, 1997. Working capital and the
ratio of current assets to current liabilities were $75,670,000 and 1.53 to 1,
respectively, at December 26, 1998, compared with $79,051,000 and 1.57 to 1,
respectively, at December 27, 1997. Landstar has historically operated with
current ratios approximating 1.5 to 1. Cash provided by operating activities
from continuing operations was $53,363,000 in 1998 compared with $58,480,000
in 1997. During the 1998 fiscal year, Landstar purchased $7,185,000 of
operating property and acquired $12,902,000 of revenue equipment by entering
into capital leases. Landstar anticipates it will acquire approximately
$30,000,000 of operating property during fiscal year 1999 either by purchase
or by lease financing.
Landstar is involved in certain claims and pending litigation arising from the
normal conduct of business. Based on the knowledge of the facts and, in
certain cases, opinions of outside counsel, management believes that adequate
provisions have been made for probable losses with respect to the resolution of
all claims and pending litigation and that the ultimate outcome, after
provisions thereof, will not have a material adverse effect on the financial
condition of Landstar, but could have a material effect on the results of
operations in a given quarter or year.
Landstar Ranger is subject to the Multi Employer Pension Plan Amendments Act of
1980 ("MEPPA"), which could require Landstar Ranger, in the event of
withdrawal, to fund its proportionate share of the union sponsored plans'
unfunded benefit obligation. However, management believes that the liability,
45
if any, for withdrawal from any or all of these plans would not have a material
adverse effect on the financial condition of Landstar, but could have a
material effect on the results of operations in a given quarter or year.
The Company is aware of the issues associated with the programming code in its
existing computer systems in order for the systems to recognize date sensitive
information when the year changes to 2000. The Company believes it has
identified all of its information technology ("IT") and non-information
technology ("non-IT") systems which require change to ensure all of its systems
will be year 2000 compliant. The Company plans to replace all non-IT systems
that are not year 2000 compliant with year 2000 compliant systems prior to
year-end 1999. The Company is utilizing in-house staff, with third
party assistance, to convert its IT systems to year 2000 compliance. The
Company believes that its pricing, billing and settlement systems are
critical to the Company's operations. These systems enable the Company to
invoice customers and pay independent contractors and commission sales agents
properly. The operating subsidiaries comprising the multimodal segment are
already year 2000 compliant. Several years ago the Company began to implement a
strategy to standardize the carrier group's critical IT systems using the
Landstar Ranger system as the base. The critical IT systems of Landstar Ranger,
whose revenue represents 43% of the carrier segment's revenue, have been
reprogrammed to be year 2000 compliant. The Company has successfully tested
each of the major subsystems independently and intends to perform an additional
system-wide comprehensive test during the third quarter of 1999. As part of its
ongoing system development, the Company is in the process of converting the
critical IT systems of Landstar Ligon, whose revenue represents approximately
22% of the carrier segment's revenue, to the same systems as Landstar Ranger.
This conversion is expected to be completed by July 1999. Landstar Inway, the
remaining operating company in the carrier segment, has successfully converted
approximately 55% of its critical IT systems and expects to complete the
project by May 1999. In addition, as part of the overall standardization plan,
the Company intends to convert all of its operating companies to a generic,
year 2000 compliant general ledger and accounts payable software system
during 1999.
As part of the Company's comprehensive review of its systems, it is continuing
to verify the year 2000 readiness of third parties (customers and vendors) who
provide services that are material to the Company's operations. The Company is
currently communicating with its material vendors and customers to assess their
year 2000 readiness and will continue to monitor their progress throughout
1999.
The vast majority of the changes necessary to make the Company's IT systems
year 2000 compliant were incurred as part of ongoing system development or as
part of a Company-wide strategy to standardize computer systems. As such,
management has not separately quantified the cost of year 2000 compliance.
However, management estimates the total cost of third party assistance for
year 2000 compliance will approximate $500,000, of which approximately
$300,000 has been incurred. Although management expects the cost of
maintaining and upgrading the Company's computer systems to increase
over the next few years compared to prior years, management does not believe
that the future costs of maintaining and upgrading Landstar's computer systems
will have a material adverse effect on the results of operations.
46
The Company's contingency plan for Landstar Inway, which is still
in the process of converting its critical IT systems, is to accelerate the
transfer of data processing information to the Landstar Ranger based system.
In the event the Company determines that one or more of its material vendors
will not become year 2000 compliant, the Company's contingency plan is to
select alternative vendors or implement alternate procedures for an interim
period.
The Company believes that the year 2000 project will be completed in sufficient
time to ensure that transactions affecting the year 2000 will be properly
recognized by the revised programming code. Failure to complete the
year 2000 project, both internal and the readiness of third party vendors,
could have a material adverse effect on the Company's future operating results
or financial condition.
Management believes that cash flow from operations combined with its borrowing
capacity under the Second Amended and Restated Credit Agreement will be
adequate to meet Landstar's debt service requirements, fund continued growth,
both internal and through acquisitions, and meet working capital needs.
Management does not believe inflation has had a material impact on the results
of operations or financial condition of Landstar in the past five years.
However, inflation higher than that experienced in the past five years might
have an adverse effect on the Company's results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." This Statement,
effective for fiscal years beginning after June 15, 1999, establishes standards
for reporting and display of derivative investments and for hedging activities.
Management believes that upon adoption of this Statement, Landstar's financial
statements will not be affected, considering the nature of the transactions the
Company routinely enters into.
FORWARD-LOOKING STATEMENTS
The Company has included various statements in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which may be
considered as forward-looking statements of expected future results of
operations or events. Such statements, based upon management's interpretation
of currently available information, are subject to risks and uncertainties that
could cause future financial results or events to differ materially from those
which are presented. Such risks and factors which are outside of the Company's
control include general economic conditions, competition in the transportation
industry, governmental regulation, the Company's ability to recruit and retain
qualified independent contractors, fuel prices, adverse weather conditions and
the conversion of the Company's or its vendors' critical IT systems to year
2000 compliance.
SEASONALITY
Landstar's operations are subject to seasonal trends common to the trucking
industry. Results of operations for the quarter ending in March are typically
lower than the quarters ending June, September and December due to reduced
shipments and higher operating costs in the winter months.
47
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 26, December 27,
1998 1997
----------- -----------
ASSETS
Current assets:
Cash $ 26,681 $ 17,994
Short-term investments 3,012
Trade accounts receivable, less allowance
of $6,428 and $5,957 172,471 176,785
Other receivables, including advances to independent
contractors, less allowance of $4,007
and $4,009 13,980 12,599
Prepaid expenses and other current assets 5,428 7,832
-------- --------
Total current assets 218,560 218,222
-------- --------
Operating property, less accumulated depreciation
and amortization of $29,603 and $50,301 46,958 81,258
Goodwill, less accumulated amortization of $6,561
and $8,818 34,949 53,289
Deferred income taxes and other assets 13,198 4,410
-------- --------
Total assets $313,665 $357,179
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 14,746 $ 12,475
Accounts payable 50,624 50,394
Current maturities of long-term debt 4,708 14,228
Insurance claims 29,873 28,247
Accrued compensation 9,881 5,392
Other current liabilities 33,058 28,435
-------- --------
Total current liabilities 142,890 139,171
-------- --------
Long-term debt, excluding current maturities 29,732 36,218
Insurance claims 29,195 27,890
Deferred income taxes 2,204
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 13,041,574 shares and
12,900,974 shares 130 129
Additional paid-in capital 65,198 62,169
Retained earnings 124,237 112,345
Cost of 2,618,041 and 915,441 shares of common
stock in treasury (76,176) (22,947)
Notes receivable arising from exercise of stock options (1,541)
-------- --------
Total shareholders' equity 111,848 151,696
-------- --------
Total liabilities and shareholders' equity $313,665 $357,179
======== ========
See accompanying notes to consolidated financial statements.
48
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Fiscal Years Ended
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
Revenue $ 1,283,607 $ 1,219,311 $ 1,129,856
Investment income 1,689
Costs and expenses:
Purchased transportation 950,343 898,746 826,822
Commissions to agents and brokers 101,409 98,425 84,768
Other operating costs 27,516 32,747 51,385
Insurance and claims 39,388 42,885 29,774
Selling, general and administrative 95,028 85,586 79,002
Depreciation and amortization 10,158 11,354 13,814
Restructuring costs 3,247 5,937
------------ ------------ ------------
Total costs and expenses 1,223,842 1,172,990 1,091,502
------------ ------------ ------------
Operating income 61,454 46,321 38,354
Interest and debt expense 3,503 2,705 5,032
------------ ------------ ------------
Income from continuing operations before
income taxes 57,951 43,616 33,322
Income taxes 23,470 18,188 13,675
------------ ------------ ------------
Income from continuing operations 34,481 25,428 19,647
Discontinued operations, net of
income taxes (22,589) (738) (722)
------------ ------------ ------------
Net income $ 11,892 $ 24,690 $ 18,925
============ ============ ============
Earnings (loss) per common share:
Income from continuing operations $ 3.13 $ 2.03 $ 1.54
Loss from discontinued operations (2.05) (0.06) (0.06)
------------ ------------ ------------
Earnings per common share $ 1.08 $ 1.97 $ 1.48
============ ============ ============
Diluted earnings (loss) per share:
Income from continuing operations $ 3.10 $ 2.02 $ 1.53
Loss from discontinued operations (2.03) (0.06) (0.06)
------------ ------------ ------------
Diluted earnings per share $ 1.07 $ 1.96 $ 1.47
============ ============ ============
Average number of shares outstanding:
Earnings per common share 11,022,000 12,541,000 12,785,000
Diluted earnings per share 11,123,000 12,580,000 12,831,000
See accompanying notes to consolidated financial statements.
49
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
December 26, December 27, December 28,
1998 1997 1996
(Dollars in thousands) ------------ ------------ ------------
OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Net income $ 11,892 $ 24,690 $ 18,925
Adjustments to reconcile net income to net cash
provided by operating activities of continuing operations:
Discontinued operations 22,589 738 722
Impairment of long-lived assets 2,943
Depreciation and amortization of operating property 8,892 9,737 12,184
Amortization of goodwill and non-competition agreements 1,266 1,617 1,630
Non-cash interest charges 324 264 264
Provisions for losses on trade and other receivables 4,276 4,232 4,053
Gains on sales of operating property (253) (600) (482)
Deferred income taxes, net (423) 5,670 (954)
Non-cash charge in lieu of income taxes 52 106 190
Changes in operating assets and liabilities,
net of discontinued operations:
Increase in trade and other accounts receivable (7,167) (13,672) (31,969)
Decrease (increase) in prepaid expenses and other assets (2,066) (195) 1,685
Increase in accounts payable 2,482 11,978 1,374
Increase in insurance claims 4,531 8,492 6,867
Increase (decrease) in other liabilities 6,968 5,423 (3,362)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 53,363 58,480 14,070
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of investments (4,799)
Maturities of short-term investments 3,012 1,787
Purchases of operating property (7,185) (8,944) (10,034)
Proceeds from sales of operating property 2,716 13,373 5,613
Proceeds from sale of discontinued operations 40,435
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 38,978 1,417 (4,421)
------------ ------------ ------------
FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Increase (decrease) in cash overdraft 2,598 (483) 248
Borrowings on revolving credit facility 15,000 16,000
Principal payments on long-term debt and capital lease obligations (23,040) (29,338) (28,841)
Proceeds from exercise of stock options and related income tax benefit 1,489 429 236
Purchases of common stock (53,229) (20,980)
------------ ------------ ------------
NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (57,182) (50,372) (12,357)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS (26,472) 4,282 3,480
------------ ------------ ------------
Increase in cash 8,687 13,807 772
Cash at beginning of period 17,994 4,187 3,415
------------ ------------ ------------
Cash at end of period $ 26,681 $ 17,994 $ 4,187
============ ============ ============
See accompanying notes to consolidated financial statements.
50
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Years Ended December 26, 1998,
December 27, 1997 and December 28, 1996
(Dollars in thousands)
Notes
Treasury Stock Receivable
Common Stock Additional at Cost Arising from
----------------- Paid-In Retained ------------------- Exercise of
Shares Amount Capital Earnings Shares Amount Stock Options Total
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 30, 1995 12,871,674 $ 129 $ 61,504 $ 68,730 94,041 $ (1,967) $128,396
Net income 18,925 18,925
Exercises of stock options
and related income tax
benefit 11,200 236 236
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 28, 1996 12,882,874 129 61,740 87,655 94,041 (1,967) 147,557
Net income 24,690 24,690
Purchases of common stock 821,400 (20,980) (20,980)
Exercises of stock options
and related income tax
benefit 18,100 429 429
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 27, 1997 12,900,974 129 62,169 112,345 915,441 (22,947) 151,696
Net income 11,892 11,892
Purchases of common stock 1,702,600 (53,229) (53,229)
Exercises of stock options
and related income tax
benefit 140,600 1 3,029 $ (1,541) 1,489
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 26, 1998 13,041,574 $ 130 $65,198 $124,237 2,618,041 $ (76,176) $ (1,541) $111,848
========== ====== ======= ======== ========= ========= ============= ========
See accompanying notes to consolidated financial statements.
51
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Landstar System,
Inc. and its subsidiary Landstar System Holdings, Inc. ("LSHI"). Landstar
System, Inc. and its subsidiary are herein referred to as "Landstar" or the
"Company." Significant inter-company accounts have been eliminated in
consolidation. The preparation of the consolidated financial statements
requires the use of management's estimates. Actual results could differ from
those estimates.
Fiscal Year
Landstar's fiscal year is the 52 or 53 week period ending the last Saturday in
December.
Revenue Recognition
Revenue and the related direct freight expenses are recognized upon completion
of freight delivery.
Insurance Claim Costs
Landstar provides, on an actuarially determined basis, for the estimated costs
of cargo, property, casualty, general liability and workers' compensation
claims both reported and for claims incurred but not reported. Landstar
retains liability up to $1,000,000 for each individual property, casualty and
general liability claim, $500,000 for each workers' compensation claim and
$250,000 for each cargo claim.
Tires
Tires and tubes purchased as part of revenue equipment are capitalized as part
of the cost of the equipment. Replacement tires and tubes are charged to
expense when placed in service.
Short-Term Investments
The Company's short-term investments are carried at amortized cost, which
approximates fair value.
Operating Property
Operating property is recorded at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets.
Revenue equipment is being depreciated over a maximum of 7 years.
Goodwill
Goodwill represents the excess of purchase cost over the estimated fair value
of net assets acquired. It is being amortized on a straight-line basis over
periods of twenty and forty years. The Company assesses the recoverability of
goodwill by determining whether the amortization of the goodwill balance over
its remaining useful life can be recovered through projected undiscounted
future operating cash flows. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's current average cost of funds.
52
Income Taxes
Income tax expense is equal to the current year's liability for income taxes
and a provision for deferred income taxes. Deferred tax assets and
liabilities are recorded for the future tax effects attributable to temporary
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using the enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences
are expected to be recovered or settled.
Stock-Based Compensation
Compensation cost for the Company's stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of grant
over the exercise price of the stock option.
Earnings Per Share
Earnings per common share amounts are based on the weighted average number of
common shares outstanding and diluted earnings per share amounts are based on
the weighted average number of common shares outstanding plus the incremental
shares that would have been outstanding upon the assumed exercise of all
dilutive stock options.
(2) Discontinued Operations
On August 22, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned
subsidiary of Landstar which comprised the entire company-owned tractor
segment, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for approximately $40,435,000 in cash. Accordingly, the financial results
of this segment have been reported as discontinued operations in the
accompanying financial statements.
The loss from discontinued operations of $22,589,000 in 1998, included a
loss on sale of $21,489,000, net of income tax benefits of $2,511,000, and a
loss from operations of $1,100,000, net of income tax benefits of $597,000.
The loss from discontinued operations for 1997 was $738,000, net of income tax
benefits of $310,000. The loss from discontinued operations for 1996 was
$722,000, net of income tax benefits of $250,000. Certain liabilities of the
company-owned tractor segment were retained by Landstar, primarily insurance
claims, capital lease obligations and accounts payable.
The company-owned tractor segment had revenues of $58,715,000, $93,393,000 and
$153,945,000 for 1998, 1997 and 1996, respectively.
53
(3) Restructuring Costs
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C., Inc. ("Landstar T.L.C.") operations, in addition to the relocation of
its Shelton, Connecticut corporate office headquarters to Jacksonville,
Florida in the second quarter of 1997.
The plan to restructure Landstar T.L.C. included the merger of the operations
of Landstar T.L.C. into Landstar Inway, Inc., the closing of the Landstar
T.L.C. headquarters in St. Clair, Missouri and the disposal of all of Landstar
T.L.C.'s company-owned tractors.
During the 1996 fourth quarter, the Company recorded $5,937,000 in
restructuring costs, which included $2,943,000 for the impairment of certain
long-lived assets, $939,000 for the early termination of certain operating
leases, $747,000 for employee termination costs and $1,308,000 of other costs.
Long-lived assets, having an aggregate carrying value of $14,000,000, were
reduced to their estimated sales value and primarily represented revenue
equipment to be sold. After deducting related income tax benefits of
$2,434,000, the restructuring charge reduced net income by $3,503,000, or
$0.27 per common share, in 1996.
During the first half of 1997, the Company recorded an additional $3,247,000 of
restructuring costs, which included $1,647,000 for office and employee
relocation and $1,600,000 of other costs. After deducting related income tax
54
benefits of $1,354,000, the restructuring charge reduced net income by
$1,893,000, or $0.15 per common share, in 1997. The restructuring was
substantially completed by June 28, 1997.
(4) Income Taxes
The provisions for income taxes from continuing operations consisted of
the following (in thousands):
Fiscal Years
------------------------------
1998 1997 1996
---- ---- ----
Current:
Federal $21,185 $10,375 $12,479
State 2,656 2,037 1,960
------- ------- -------
23,841 12,412 14,439
Deferred:
Federal (1,268) 4,465 (870)
State 845 1,205 (84)
------ ------- -------
(423) 5,670 (954)
Non-cash charge in lieu of income taxes 52 106 190
------- ------- -------
Income taxes $23,470 $18,188 $13,675
======= ======= =======
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities consisted of the following (in thousands):
Dec. 26, 1998 Dec. 27, 1997
------------- -------------
Deferred tax assets:
Receivable valuations $ 3,263 $ 2,380
Deferred state income tax benefits 1,396 1,100
State net operating loss carryforwards 1,536 4,032
Self insured claims 10,383 15,094
Compensated absences 493 529
All other 1,532 376
--------- ---------
18,603 23,511
Valuation allowance (658) (710)
--------- ---------
$ 17,945 $ 22,801
========= =========
Deferred tax liabilities:
Operating property $ 6,296 $ 19,784
All other 5,826 5,221
--------- ---------
$ 12,122 $ 25,005
========= =========
55
The loss from discontinued operations included a deferred tax benefit of
$7,604,000 in 1998.
At December 26, 1998, the valuation allowance of $658,000 was attributable to
deferred state income tax benefits, which primarily represented state
operating loss carryforwards at one subsidiary. The valuation allowance and
goodwill were reduced by $52,000 for state operating loss carryforwards
utilized in 1998. The valuation allowance and goodwill will be further reduced
by $630,000 when realization of deferred state income tax benefits becomes
likely.
The following table summarizes the differences between income taxes calculated
at the federal income tax rate of 35% on income from continuing operations
before income taxes and the provisions for income taxes (in thousands):
Fiscal Years
----------------------------
1998 1997 1996
---- ---- ----
Income taxes at federal income tax rate $20,283 $15,266 $11,663
State income taxes, net of federal income
tax benefit 2,309 2,176 1,343
Amortization of goodwill 258 258 258
Meals and entertainment exclusion 470 425 397
Other, net 150 63 14
------- -------- --------
Income taxes $23,470 $18,188 $13,675
======= ======= =======
Landstar paid income taxes of $26,110,000 in 1998, $10,184,000 in 1997 and
$15,949,000 in 1996.
(5) Operating Property
Operating property is summarized as follows (in thousands):
Dec. 26, 1998 Dec. 27, 1997
------------- -------------
Land $ 2,280 $ 1,776
Leasehold improvements 95 56
Buildings and improvements 9,589 11,279
Revenue equipment 43,522 95,623
Other equipment 21,075 22,825
-------- --------
76,561 131,559
Less accumulated depreciation and amortization 29,603 50,301
-------- --------
$ 46,958 $ 81,258
======== ========
Included above is $35,438,000 in 1998 and $86,706,000 in 1997 of operating
property under capital leases, $22,513,000 and $46,363,000, respectively, net
of accumulated amortization. Landstar acquired operating property by entering
56
into capital leases in the amount of $12,902,000 and $20,690,000 (including
$7,045,000 related to the discontinued company-owned tractor segment) in 1998
and 1996, respectively. Landstar did not acquire any property by entering into
capital leases in 1997.
(6) Pension Plans
Landstar sponsors an Internal Revenue Code section 401(k) defined contribution
plan for the benefit of full-time employees who have completed one year of
service. Eligible employees make voluntary contributions up to 6% of their
base salary, subject to certain limitations. Landstar contributes an amount
equal to 50% of such contributions, subject to certain limitations. In
addition, one subsidiary, Landstar Ranger, Inc. ("Landstar Ranger"), makes
contributions in accordance with a negotiated labor contract (generally based
on the number of weeks worked) to union sponsored multi-employer defined
benefit pension plans for the benefit of approximately 200 union drivers.
Landstar Ranger is subject to the Multi Employer Pension Plan Amendments Act
of 1980 ("MEPPA"), which could require Landstar Ranger, in the event of
withdrawal, to fund its proportionate share of these union sponsored plans'
unfunded benefit obligation. Management believes that the liability, if any,
for withdrawal from any or all of these plans would not have a material
adverse effect on the financial condition of Landstar, but could have a
material effect on the results of operations in a given quarter or year.
The expense from continuing operations for the Company sponsored defined
contribution plan and for union sponsored plans was $624,000 and $1,265,000
in 1998, respectively, $660,000 and $1,193,000 in 1997, respectively, and
$714,000 and $1,085,000 in 1996, respectively.
(7) Debt
Long-term debt is summarized as follows (in thousands):
Dec. 26, 1998 Dec. 27, 1997
------------- -------------
Capital leases $15,940 $31,946
Acquisition Facility 18,500 18,500
------- -------
34,440 50,446
Less current maturities 4,708 14,228
------- -------
Total long-term debt $29,732 $36,218
======= =======
On October 10, 1997, Landstar renegotiated its existing Credit Agreement with a
syndicate of banks and The Chase Manhattan Bank, as administrative agent (the
"Second Amended and Restated Credit Agreement"). The Second Amended and
Restated Credit Agreement provides $200,000,000 of borrowing capacity,
consisting of $150,000,000 of revolving credit (the "Working Capital Facility")
and $50,000,000 of revolving credit available to finance acquisitions (the
"Acquisition Facility"). $50,000,000 of the total borrowing capacity under the
Working Capital Facility may be utilized in the form of letter of credit
guarantees. The Second Amended and Restated Credit Agreement expires on
October 10, 2002.
57
Borrowings under the Second Amended and Restated Credit Agreement bear interest
at rates equal to, at the option of Landstar, either (i) the greatest of (a)
the prime rate as publicly announced from time to time by The Chase Manhattan
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to The Chase Manhattan Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus
a margin that is determined based on the level of the Company's Leverage Ratio,
as defined in the Second Amended and Restated Credit Agreement. As of
December 26, 1998, the margin was equal to 32/100 of 1%. The unused portion of
the Second Amended and Restated Credit Agreement carries a commitment fee
determined based on the level of the Company's Leverage Ratio, as therein
defined. As of December 26, 1998, the commitment fee for the unused portion
of the Second Amended and Restated Credit Agreement was 0.100%. At December 26,
1998, the weighted average interest rate on borrowings outstanding under the
Acquisition Facility was 5.69%. Based on the borrowing rates in the Second
Amended and Restated Credit Agreement and the repayment terms, the fair value
of the outstanding borrowings under the Acquisition Facility was estimated to
approximate carrying value.
The Second Amended and Restated Credit Agreement contains a number of covenants
that limit, among other things, the incurrence of additional indebtedness, the
incurrence of operating or capital lease obligations and the purchase of
operating property. The Second Amended and Restated Credit Agreement also
requires Landstar to meet certain financial tests. Landstar is required to,
among other things, maintain minimum levels of Net Worth, as defined in the
Second Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined. Under the most restrictive covenant, Landstar
exceeded the required Interest Charge Coverage level by approximately
$4,600,000 at December 26, 1998.
The Second Amended and Restated Credit Agreement provides a number of events of
default related to a person or group acquiring 25% or more of the outstanding
capital stock of the Company or obtaining the power to elect a majority of the
Company's directors.
Borrowings under the Second Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of LSHI's subsidiaries
guarantee LSHI's obligations under the Second Amended and Restated Credit
Agreement.
The amount outstanding on the Acquisition Facility is payable upon the
expiration of the Second Amended and Restated Credit Agreement. There are no
other installments of long-term debt, excluding capital lease obligations,
maturing in the next five years.
Landstar paid interest of $4,159,000 in 1998, $5,476,000 in 1997 and
$7,180,000 in 1996. Included in interest paid is $695,000, $1,936,000 and
$2,518,000 in 1998, 1997 and 1996, respectively, related to discontinued
operations.
(8) Leases
The future minimum lease payments under all noncancelable leases at
December 26, 1998, principally for revenue equipment, are shown in the
following table (in thousands):
58
Capital Operating
Leases Leases
------- ---------
1999 $ 5,589 $ 2,414
2000 4,301 1,193
2001 3,614 656
2002 3,013 454
2003 1,517 46
------- ---------
18,034 $ 4,763
=========
Less amount representing interest
(6.0% to 8.0%) 2,094
Present value of minimum -------
lease payments $15,940
=======
Total rent expense from continuing operations, net of sublease income, was
$20,548,000 in 1998, $21,022,000 in 1997 and $17,445,000 in 1996.
(9) Stock Option Plans
The Company maintains two stock option plans. Under the 1993 Stock Option Plan,
as amended, (the "Plan"), the Compensation Committee of the Board of Directors
may grant options to Company employees for up to 1,115,000 shares of common
stock. Under the 1994 Directors Stock Option Plan (the "DSOP"), outside members
of the Board of Directors will be granted up to an aggregate of 120,000 options
to purchase common stock. Under the DSOP, as amended, each outside Director
will be granted 9,000 options to purchase common stock upon election or
re-election to the Board of Directors.
Options granted become exercisable in five equal annual installments under the
Plan and three equal annual installments under the DSOP, commencing on the
first anniversary of the date of grant, subject to acceleration in certain
circumstances, and expire on the tenth anniversary of the date of grant.
Under the plans, the exercise price of each option equals the market price of
the Company's stock on the date of grant. At December 26, 1998, there were
1,065,100 shares of the Company's stock reserved for issuance upon exercise of
options granted under the plans.
59
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 30, 1995 599,500 $ 24.89 121,100 $ 21.10
Granted 35,000 $ 27.53
Exercised (11,200) $ 18.50
Forfeited (110,400) $ 26.94
--------
Options at December 28, 1996 512,900 $ 24.77 201,000 $ 23.10
Granted 23,500 $ 26.38
Exercised (18,100) $ 19.89
Forfeited (36,800) $ 24.95
--------
Options at December 27, 1997 481,500 $ 25.01 276,800 $ 23.90
Granted 219,300 $ 35.02
Exercised (140,600) $ 20.66
Forfeited (39,900) $ 27.36
--------
Options at December 26, 1998 520,300 $ 30.25 203,900 $ 26.40
========
The fair value of each option grant on its grant date was calculated using
the Black-Scholes option pricing model with the following assumptions for
grants made in 1998, 1997 and 1996: risk free interest rate of 5.0% in 1998 and
6.0% in 1997 and 1996, expected lives of 5 years and no dividend yield. The
expected volatility used in calculating the fair market value of stock options
granted was 40% in 1998, 37% in 1997 and 39% in 1996. The weighted average
grant date fair value of stock options granted was $15.02, $11.23 and $12.06
per share in 1998, 1997 and 1996, respectively.
The following table summarizes stock options outstanding at December 26, 1998:
Options Outstanding
-------------------
Range of Exercise Weighted Average Weighted Average
Prices Number Outstanding Remaining Contractual Exercise Price
Per Share Dec. 26, 1998 Life (years) Per Share
----------------- ------------------ --------------------- ----------------
$18.500 - $27.500 181,200 6.3 $ 24.83
$27.501 - $36.500 212,000 7.9 $ 29.66
$36.501 - $38.953 127,100 10.0 $ 38.95
----------------
$18.500 - $38.953 520,300 7.9 $ 30.25
================
60
Options Exercisable
-------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
Per Share Dec. 26, 1998 Per Share
----------------- ---------------- ----------------
$18.500 - $27.500 129,400 $ 24.53
$27.501 - $30.500 74,500 $ 29.65
----------------
$18.500 - $30.500 203,900 $ 26.40
================
The Company accounts for its stock option plans using the intrinsic value
method as prescribed in Accounting Principal Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Had compensation cost for the Company's stock
option plans been determined using the fair value at grant date method as
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the effect on net income and
earnings per common share for the fiscal year would have been $484,000, or
$0.04 per common share, in 1998, $378,000, or $0.03 per common share, in
1997 and $270,000, or $0.02 per common share, in 1996.
(10) Shareholders' Equity
During 1998, Landstar purchased 1,702,600 shares of its common stock at a total
cost of $53,229,000 pursuant to previously announced stock purchase programs.
As of December 26, 1998, Landstar may purchase up to an additional 655,000
shares of its common stock in order to complete its authorized
stock purchase programs.
During 1998, the Company established an employee stock option loan program.
Under the terms of the program, the Company will provide employees
financing in order for them to exercise fully vested stock options. The
loans are full recourse with the principal repayable in lump sum on the fifth
anniversary of the loan. During 1998, $1,541,000 of such loans were issued.
The Company has 2,000,000 shares of preferred stock authorized and unissued.
Under the terms of a Shareholder Rights Agreement (the "Agreement"), a
preferred stock purchase right (the "Right") accompanies each outstanding
share of common stock. Each Right entitles the holder to purchase from the
Company one one-hundredth of a share of preferred stock at an exercise price
of $60. Within the time limits and under the circumstances specified in the
Agreement, the Rights entitle the holder to acquire shares of common stock in
the Company, or the surviving Company in a business combination, having a
value of two times the exercise price. The Rights may be redeemed prior to
becoming exercisable by action of the Board of Directors at a redemption price
of $.01 per Right. The Rights expire February 10, 2003. Until a Right is
exercised, it has no rights including, without limitation, the right to vote
or to receive dividends.
61
(11) Segment Information
Under the provisions of SFAS No. 131, the Company determined it has three
reportable business segments. These are the carrier, multimodal and insurance
segments. The carrier segment provides truckload transportation for a wide
range of general commodities over irregular routes with its fleet of dry and
specialty vans and unsided trailers, including flatbed, drop deck and
specialty. The carrier segment markets its services primarily through
independent commission sales agents and utilizes tractors provided by
independent contractors. Transportation services provided by the multimodal
segment include the arrangement of intermodal moves, contract logistics, truck
brokerage, short-to-long haul movement of containers by truck and
emergency and expedited air freight and truck services. The multimodal
segment markets its services through independent commission sales agents
and utilizes capacity provided by independent contractors. The nature of
the carrier and multimodal segments' business is such that a significant
portion of their operating costs varies directly with revenue. The insurance
segment provides risk and claims management services to Landstar's
operating companies. In addition, it reinsures certain property, casualty,
and occupational accident risks of certain independent contractors who have
contracted to haul freight for Landstar and provides certain property and
casualty insurance directly to Landstar's operating subsidiaries.
Signature Insurance Company, which comprises the majority of the insurance
segment, began operations in March 1997.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates a segment's
performance based on operating income.
Inter-segment revenue for transactions between the carrier and multimodal
segments is based on quoted rates which are believed to approximate the cost
that would have been incurred had similar services been obtained from an
unrelated third party. Inter-segment revenue between the insurance segment
and the carrier and multimodal segments is calculated at the beginning of
each fiscal period based on an actuarial calculation of historical loss
experience and is believed to approximate the cost that would have been
incurred had similar insurance been obtained from an unrelated third party.
No single customer accounts for more than 10% of consolidated revenue.
Substantially all of the Company's revenue is generated in the United States.
62
The following tables summarize information about the Company's reportable
business segments as of and for the fiscal years ending December 26, 1998,
December 27, 1997 and December 28, 1996 (in thousands):
1998
Carrier Multimodal Insurance Other Total
External revenue $ 981,427 $ 277,999 $ 24,181 $1,283,607
Internal revenue 38,517 535 24,175 63,227
Investment income 1,689 1,689
Interest and debt expense $ 3,503 3,503
Depreciation and
amortization 5,922 1,214 3,022 10,158
Operating income 67,536 8,272 19,479 (33,833) 61,454
Expenditures on
long-lived assets 2,222 735 4,228 7,185
Capital lease additions 12,902 12,902
Total assets 199,287 66,120 24,179 24,079 313,665
1997
Carrier Multimodal Insurance Other Total
External revenue $ 945,330 $ 255,041 $ 18,940 $1,219,311
Internal revenue 39,453 968 15,452 55,873
Interest income 468 468
Interest and debt expense $ 3,173 3,173
Depreciation and
amortization 6,334 1,285 3,735 11,354
Restructuring costs 1,244 154 1,849 3,247
Operating income 62,280 5,355 7,863 (29,177) 46,321
Expenditures on
long-lived assets 6,082 861 2,001 8,944
Total assets 192,143 64,055 22,101 78,880 357,179
63
1996
Carrier Multimodal Insurance Other Total
External revenue $ 905,472 $ 224,384 $1,129,856
Internal revenue 37,479 1,160 38,639
Interest and debt expense $ 5,032 5,032
Depreciation and
amortization 9,583 1,310 2,921 13,814
Restructuring costs 4,675 1,262 5,937
Operating income 57,031 4,584 (799) (22,462) 38,354
Expenditures on
long-lived assets 7,930 906 1,198 10,034
Capital lease additions 12,828 817 13,645
Total assets 212,034 56,547 480 101,740 370,801
Included in total assets in the other segment at December 27, 1997 and
December 28, 1996, are assets of $68,791,000 and $85,526,000, respectively,
from the discontinued company-owned tractor segment.
(12) Commitments and Contingencies
At December 26, 1998, the Company had commitments for letters of credit
outstanding in the amount of $24,592,000, primarily as collateral for estimated
insurance claims. The commitments for letters of credit outstanding include
$17,592,000 under the Second Amended and Restated Credit Agreement and
$7,000,000 secured by assets deposited with a financial institution.
Landstar is involved in certain claims and pending litigation arising from the
normal conduct of business. Based on knowledge of the facts and, in certain
cases, opinions of outside counsel, management believes that adequate
provisions have been made for probable losses with respect to the resolution
of all claims and pending litigation and that the ultimate outcome, after
provisions thereof, will not have a material adverse effect on the financial
condition of Landstar, but could have a material effect on the results of
operations in a given quarter or year.
64
Independent Auditors' Report
- - ----------------------------
Landstar System, Inc. and Subsidiary
The Board of Directors and Shareholders
Landstar System, Inc.:
We have audited the accompanying consolidated balance sheets of Landstar
System, Inc. and subsidiary as of December 26, 1998 and December 27, 1997, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the fiscal years ended December 26, 1998, December 27, 1997
and December 28, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Landstar System,
Inc. and subsidiary as of December 26, 1998 and December 27, 1997, and the
results of their operations and their cash flows for the fiscal years ended
December 26, 1998, December 27, 1997 and December 28, 1996 in conformity with
generally accepted accounting principles.
KPMG LLP
Stamford, Connecticut
February 9, 1999
65
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
1998 1998 1998 1998
---------- ---------- ---------- ----------
Revenue $ 333,865 $ 324,033 $ 327,525 $ 298,184
========== ========== ========== ==========
Operating income $ 19,954 $ 16,516 $ 16,047 $ 8,937
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes $ 19,035 $ 15,528 $ 15,104 $ 8,284
Income taxes 7,709 6,289 6,117 3,355
---------- ---------- ---------- ----------
Income from continuing operations 11,326 9,239 8,987 4,929
Discontinued operations,
net of income taxes (22,152) (437)
---------- ---------- ---------- ----------
Net income (loss) $ 11,326 $ 9,239 $ (13,165) $ 4,492
========== ========== ========== ==========
Earnings (loss) per common share: (1)
Income from continuing operations $ 1.09 $ 0.86 $ 0.80 $ 0.42
Loss from discontinued operations (1.97) (0.04)
---------- ---------- ---------- ----------
Earnings (loss) per common share $ 1.09 $ 0.86 $ (1.17) $ 0.38
========== ========== ========== ==========
Diluted earnings (loss) per share: (1)
Income from continuing operations $ 1.07 $ 0.85 $ 0.79 $ 0.42
Loss from discontinued operations (1.95) (0.04)
---------- ---------- ---------- ----------
Diluted earnings (loss) per share $ 1.07 $ 0.85 $ (1.16) $ 0.38
========== ========== ========== ==========
66
Fourth Third Second First
Quarter Quarter Quarter Quarter
1997 1997 1997 (2) 1997 (2)
---------- ---------- ---------- ----------
Revenue $ 325,331 $ 304,157 $ 311,558 $ 278,265
========== ========== ========== ==========
Operating income $ 14,161 $ 14,737 $ 10,129 $ 7,294
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes $ 13,749 $ 14,243 $ 9,214 $ 6,410
Income taxes 5,733 5,940 3,842 2,673
---------- ---------- ---------- ----------
Income from continuing operations 8,016 8,303 5,372 3,737
Discontinued operations,
net of income taxes (336) (738) 1,068 (732)
---------- ---------- ---------- ----------
Net income $ 7,680 $ 7,565 $ 6,440 $ 3,005
========== ========== ========== ==========
Earnings (loss) per common share: (1)
Income from continuing operations $ 0.66 $ 0.66 $ 0.43 $ 0.30
Income (loss) from discontinued
operations (0.03) (0.06) 0.08 (0.06)
---------- ---------- ---------- ----------
Earnings per common share $ 0.63 $ 0.60 $ 0.51 $ 0.24
========== ========== ========== ==========
Diluted earnings (loss) per share: (1)
Income from continuing operations $ 0.65 $ 0.66 $ 0.43 $ 0.30
Income (loss) from discontinued
operations (0.03) (0.06) 0.08 (0.06)
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.62 $ 0.60 $ 0.51 $ 0.24
========== ========== ========== ==========
(1) Due to the changes in the number of average common shares and common
stock equivalents outstanding during the year, earnings per share amounts for
each quarter do not necessarily add to the earnings per share amounts for the
full year.
(2) Includes pre-tax restructuring costs of $2,068 and $1,179 in the second
and first quarters, respectively. After deducting related income tax
benefits of $862 and $492 in the second and first quarters, respectively,
the restructuring costs reduced income from continuing operations by $1,206,
or $0.10 per common share ($0.10 per diluted share), in the 1997 second
quarter, and $687, or $0.05 per common share ($0.05 per diluted share), in the
1997 first quarter.
67
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fiscal Years
1998 1997 1996 1995 1994
------------------------------------------------------------
Income Statement Data:
Revenue $1,283,607 $1,219,311 $1,129,856 $1,054,648 $ 839,810
Investment income 1,689
Costs and expenses:
Purchased transportation 950,343 898,746 826,822 773,300 623,669
Commissions to agents and brokers 101,409 98,425 84,768 73,095 60,997
Other operating costs 27,516 32,747 51,385 43,369 15,898
Insurance and claims 39,388 42,885 29,774 26,722 25,480
Selling, general and administrative 95,028 85,586 79,002 81,448 70,899
Depreciation and amortization 10,158 11,354 13,814 11,287 5,442
Restructuring costs 3,247 5,937
--------- --------- --------- --------- ---------
Total costs and expenses 1,223,842 1,172,990 1,091,502 1,009,221 802,385
--------- --------- --------- --------- ---------
Operating income 61,454 46,321 38,354 45,427 37,425
Interest and debt expense 3,503 2,705 5,032 5,166 2,031
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes 57,951 43,616 33,322 40,261 35,394
Income taxes 23,470 18,188 13,675 16,489 14,628
--------- --------- --------- --------- ---------
Income from continuing operations 34,481 25,428(1) 19,647(2) 23,772 20,766
Discontinued operations, net of
income taxes (22,589) (738) (722) 1,190 3,641
--------- --------- --------- --------- ---------
Net income $ 11,892 $ 24,690 $ 18,925 $ 24,962 $ 24,407
========= ========= ========= ========= =========
Earnings (loss) per common share:
Income from continuing operations $ 3.13 $ 2.03(1) $ 1.54(2) $ 1.86 $ 1.62
Income (loss) from discontinued
operations (2.05) (0.06) (0.06) 0.09 0.28
--------- --------- --------- --------- ---------
Earnings per common share $ 1.08 $ 1.97 $ 1.48 $ 1.95 $ 1.90
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Income from continuing operations $ 3.10 $ 2.02(1) $ 1.53(2) $ 1.85 $ 1.61
Income (loss) from discontinued
operations (2.03) (0.06) (0.06) 0.09 0.28
--------- --------- --------- --------- ---------
Diluted earnings per share $ 1.07 $ 1.96 $ 1.47 $ 1.94 $ 1.89
========= ========= ========= ========= =========
68
Dec. 26, Dec. 27, Dec. 28, Dec. 30, Dec. 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Balance Sheet Data:
Total assets $ 313,665 $ 357,179 $ 370,801 $ 353,079 $ 267,084
Long-term debt, including
current maturities 34,440 50,446 90,396 93,867 43,680
Shareholders' equity 111,848 151,696 147,557 128,396 105,161
(1) After deducting related income tax benefits of $1,354, the
restructuring costs reduced income from continuing operations by $1,893, or
$0.15 per common share ($0.15 per diluted share).
(2) After deducting related income tax benefits of $2,434, the
restructuring costs reduced income from continuing operations by $3,503, or
$0.27 per common share ($0.27 per diluted share).