UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 29, 2001 ----------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- ------------------- Commission File Number: 0-21238 ------- LANDSTAR SYSTEM, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 06-1313069 ------------------------------- ------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 13410 Sutton Park Drive South, Jacksonville, Florida 32224 - -------------------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (904) 398-9400 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value Common Stock Rights ---------------------------- ------------------- (Title of class) (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] 1
Documents Incorporated by Reference Portions of the following documents are incorporated by reference in this Form 10-K as indicated herein: Part of 10-K into Document which incorporated -------- ------------------ 2001 Annual Report to Shareholders Part II Proxy Statement relating to Part III Landstar System, Inc.'s Annual Meeting of Shareholders The number of shares of the registrant's common stock, par value $.01 per share, (the "Common Stock") outstanding as of the close of business on March 15, 2002 was 8,105,753; and the aggregate market value of the voting stock held by non-affiliates of the registrant was $757,861,419 (based on the $94.400 per share closing price on that date, as reported by NASDAQ National Market System). In making this calculation, the registrant has assumed, without admitting for any purpose, that all directors and executive officers of the registrant, and no other person, are affiliates. 2
LANDSTAR SYSTEM, INC. 2001 Annual Report on Form 10-K Table of Contents Part I Page ---- Item 1. Business 4 Item 2. Properties 13 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 14 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 15 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15 Part III Item 10. Directors and Executive Officers of the Registrant 16 Item 11. Executive Compensation 16 Item 12. Security Ownership of Certain Beneficial Owners and Management 16 Item 13. Certain Relationships and Related Transactions 16 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16 Signatures 18 Index to Exhibits 20 3
Part I Item 1. - Business General Landstar System, Inc. (herein referred to as "Landstar" or the "Company") was incorporated in January 1991 under the laws of the State of Delaware and acquired all of the capital stock of its predecessor, Landstar System Holdings, Inc. ("LSHI") on March 28, 1991. LSHI owns directly or indirectly all of the common stock of Landstar Ranger, Inc. ("Landstar Ranger"), Landstar Inway, Inc. ("Landstar Inway"), Landstar Ligon, Inc. ("Landstar Ligon"), Landstar Gemini, Inc. ("Landstar Gemini"), Landstar Carrier Services, Inc., Landstar Logistics, Inc. ("Landstar Logistics"), Landstar Express America, Inc. ("Landstar Express America"), Landstar Contractor Financing, Inc. ("LCFI"), Landstar Capacity Services, Inc., Risk Management Claim Services, Inc. ("RMCS"), Signature Technology Services, Inc. ("STSI") and Signature Insurance Company ("Signature"). Landstar Ranger, Landstar Inway, Landstar Ligon, Landstar Gemini, Landstar Logistics and Landstar Express America are collectively herein referred to as Landstar's "Operating Subsidiaries." The Company's principal executive offices are located at 13410 Sutton Park Drive South, Jacksonville, Florida 32224 and its telephone number is (904) 398-9400. The Company's website is www.landstar.com. Historical Background In March 1991, Landstar acquired LSHI in a buy-out organized by Kelso & Company, Inc. ("Kelso"). Investors in the acquisition included Kelso Investment Associates IV L.P. ("KIA IV"), an affiliate of Kelso, ABS MB Limited Partnership ("ABSMB"), an affiliate of DB Alex. Brown LLC (formerly known as Alex. Brown & Sons Incorporated), and certain management employees of Landstar and its subsidiaries (the "Management Stockholders"). In March 1993, Landstar completed a recapitalization (the "Recapitalization") that increased shareholders' equity, reduced indebtedness and improved the Company's operating and financial flexibility. The Recapitalization involved three principal components: (i) the initial public offering (the "IPO") of 5,387,000 shares of Common Stock, at an initial price to the public of $13 per share, (ii) the retirement of all $38 million outstanding principal amount of LSHI's 14% Senior Subordinated Notes due 1998 (the "14% Notes"), and (iii) the refinancing of the Company's then existing senior debt facility with a senior bank credit agreement. In October 1993, the Company completed a secondary public offering. Immediately subsequent to the offering, KIA IV no longer owned any shares of Landstar Common Stock, and affiliates of DB Alex. Brown LLC retained approximately 1% of the Common Stock outstanding. 4
During the first quarter of 1995, Landstar, through different subsidiaries of LSHI, acquired the businesses and net assets of Intermodal Transport Company ("ITCO"), a California-based intermodal marketing company, LDS Truck Lines, Inc., a California-based drayage company, and T.L.C. Lines, Inc., a Missouri- based temperature-controlled and long-haul, time sensitive dry van carrier. Also in the 1995 first quarter, Landstar, through another subsidiary of LSHI, acquired all of the outstanding common stock of Express America Freight Systems, Inc., ("Express"), a North Carolina-based air freight and truck expedited service provider. The businesses acquired from ITCO and Express comprise the majority of the multimodal segment's operations, and are now operated through Landstar Logistics and Landstar Express America, respectively. On December 18, 1996, the Company announced a plan to restructure its Landstar T.L.C. and Landstar Poole operations, in addition to the relocation of its Shelton, Connecticut corporate office headquarters to Jacksonville, Florida in the second quarter of 1997. The plan to restructure Landstar T.L.C. included the merger of the operations of Landstar T.L.C. into Landstar Inway, the closing of the Landstar T.L.C. headquarters in St. Clair, Missouri and the disposal of all of Landstar T.L.C.'s company-owned tractors. The restructuring was completed during 1997. In March 1997, Landstar formed Signature, a wholly-owned offshore insurance subsidiary. Signature reinsures certain property, casualty and occupational accident risks of certain independent contractors who have contracted to haul freight for Landstar. In addition, Signature provides certain property and casualty insurance directly to Landstar's operating subsidiaries. On August 22, 1998, Landstar Poole, which comprised the entire company-owned tractor segment, completed the sale of all of its tractors and trailers, certain operating assets and the Landstar Poole business to Schneider National, Inc. for $40,435,000 in cash. Accordingly, the financial results of this segment have been reported as discontinued operations. Description of Business Landstar, a non asset based provider of transportation capacity, provides transportation services to shippers throughout the United States and, to a lesser extent, between the United States, Canada and Mexico. These business services, which emphasize safe transportation, information coordination and customer service, are delivered through a network of independent sales agents and independent contractors linked together by a series of technological applications. Through this network, Landstar operates a $1.4 billion transportation services business throughout North America, providing truckload services, truck brokerage services, intermodal transportation services and expedited time definite air and ground transportation services. Landstar provides transportation services to a variety of industries, including iron and steel, automotive products, paper, lumber and building products, 5
aluminum, chemicals, foodstuffs, heavy machinery, ammunition and explosives, and military hardware. Landstar's transportation services include a full array of truckload transportation utilizing a wide range of specialized equipment including dry vans of various sizes, flatbeds, including drop decks and light specialty trailers, and temperature-controlled vans and containers, dedicated contract and logistics solutions, including freight optimization and less than truckload freight consolidations, truck brokerage and expedited land and air delivery of time-critical freight. The Company has three reportable business segments. These are the carrier, multimodal and insurance segments. The following table provides financial information relating to the Company's reportable business segments as of and for the fiscal years ending 2001, 2000 and 1999 (dollars in thousands): Fiscal Year ------------------------------------ 2001 2000 1999 ----- ----- ----- Revenue from unaffiliated customers: Carrier segment $1,098,268 $1,117,042 $1,111,912 Multimodal segment 270,849 277,087 250,395 Insurance segment 23,654 24,363 25,776 Inter-segment revenue: Carrier segment $ 28,587 $ 34,669 $ 35,194 Multimodal segment 2,367 1,241 196 Insurance segment 27,313 21,919 21,790 Operating income: Carrier segment $ 76,105 $ 88,507 $ 86,282 Multimodal segment 5,343 9,346 7,949 Insurance segment 30,644 24,464 27,141 Other (35,706) (39,704) (39,658) Identifiable assets: Carrier segment $ 234,164 $ 256,690 $ 251,922 Multimodal segment 47,795 54,294 57,337 Insurance segment 46,440 33,267 28,180 Other 36,252 26,111 28,002 The carrier segment consists of Landstar Ranger, Landstar Inway, Landstar Ligon and Landstar Gemini. 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. It also provides short-to-long haul movement of containers by truck, dedicated power-only truck capacity and truck brokerage. The carrier segment markets its services primarily through independent commission 6
sales agents and exclusively utilizes tractors provided by independent contractors. The nature of the carrier segment business is such that a significant portion of its operating costs varies directly with revenue. At December 29, 2001, the carrier segment operated a fleet of approximately 8,450 tractors, provided by over 7,220 independent contractors, and 14,519 trailers, 6,067 of which are supplied by independent contractors. Approximately 70% of the trailers available to the carrier segment are provided by independent contractors or are leased by the Company at rental rates that vary with the revenue generated by the trailer. The carrier segment's trailer fleet is comprised of 10,320 dry vans, 3,285 flatbeds, 687 specialty and 227 refrigerated vans. The carrier segment has a network of more than 880 independent commission sales agents. Independent commission sales agents in the carrier segment receive a commission generally between 5% and 8% of the revenue they generate. The use of independent contractors enables the carrier segment to utilize a large fleet of revenue equipment while minimizing capital investment and fixed costs, thereby enhancing return on investment. Independent contractors who provide tractor power receive a percentage of the revenue generated for the freight hauled and a larger percentage for providing both a tractor and trailer. The carrier segment also utilizes capacity provided by third party truck brokerage services. Truck brokerage services are paid a negotiated rate for each load they haul. The multimodal segment is comprised of Landstar Logistics and Landstar Express America. Transportation services provided by the multimodal segment include the arrangement of intermodal moves, contract logistics, truck brokerage and emergency and expedited ground and air freight. The multimodal segment markets its services through independent commission sales agents and utilizes capacity provided by independent contractors, including railroads and air cargo carriers. Multimodal independent sales agents generally receive a percentage of the gross profit, revenue less the cost of the transportation, from each load they generate. Independent contractors who provide truck capacity to the multimodal segment are compensated based on a percentage of the revenue generated by the haul depending on the type and timing of the shipment. Railroads and air cargo carriers receive a fixed amount per load. The nature of the multimodal segment business is such that a significant portion of its operating costs also varies directly with revenue. At December 29, 2001, the multimodal segment operated a fleet of 332 trucks, provided by approximately 267 independent contractors. Multimodal segment independent contractors provide cargo vans and straight trucks that are utilized for emergency and expedited freight services. The multimodal segment has a network of approximately 170 independent commission sales agents. The insurance segment is comprised of Signature, a wholly-owned offshore insurance subsidiary and RMCS. The insurance segment provides risk and claims management services for Landstar's operating companies. In addition, it reinsures certain property, casualty and occupational accident risks of certain independent contractors who have contracted to haul freight for Landstar and provides certain property and casualty insurance directly to Landstar's operating subsidiaries. Landstar's business strategy is to offer high quality, specialized transportation services through its transportation group to service-sensitive customers. Landstar focuses on providing transportation services which emphasize customer service and information coordination among its independent commission sales agents, customers and capacity providers, rather than the volume-driven approach of generic dry van carriers. Landstar intends to continue developing appropriate systems and technologies that offer 7
integrated transportation solutions to meet the total transportation needs of its customers. The Company's overall size, geographic coverage, equipment and service capability offer the Company significant competitive marketing and operating advantages. These advantages allow the Company to meet the needs of even the largest shippers and thereby qualify it as a "core carrier." Increasingly, the larger shippers are substantially reducing the number of authorized carriers in favor of a small number of core carriers whose size and diverse service capability enable these core carriers to satisfy most of the shippers' transportation needs. Examples of national account customers include the U.S. Department of Defense and shippers in particular industries such as the three major U.S. automobile manufacturers. Management believes the Company has a number of significant competitive advantages, including: TECHNOLOGY. Management believes leadership in the development and application of technology is an ongoing part of providing high quality service at competitive prices. Landstar manages its carrier and multimodal segments' technology programs centrally through its information services department. DIVERSITY OF SERVICES OFFERED. The Company offers its customers a wide range of transportation services through the carrier and multimodal groups, including a fleet of diverse trailing equipment and extensive geographic coverage. Examples of the specialized services offered include a large fleet of flatbed trailers, multi-axle trailers capable of hauling extremely heavy or oversized loads, drivers certified to handle ammunition and explosive shipments for the U.S. Department of Defense, emergency and expedited surface and air cargo services and intermodal capability with railroads and steamship lines, including short-to-medium haul movement of ocean-going containers between U.S. ports and inland cities. The following table illustrates the diversity of this equipment as of December 29, 2001: Trailers: Vans 10,194 Specialty Vans 143 Temperature-Controlled 227 Flatbeds, Including Drop Decks and Low Boys 3,286 Other Specialized Flatbeds 687 ------ Total 14,537 ====== 8
MARKETING NETWORK. Landstar's network of more than 1,000 independent commission sales agents results in regular contact with shippers at the local level and the capability to be highly responsive to shippers' changing needs. The agent network enables Landstar to be responsive both in providing specialized equipment to both large and small shippers and in providing capacity on short notice from the Company's large fleet to high volume shippers. Through its agent network, the Company believes it offers smaller shippers a level of service comparable to that typically reserved for larger customers. Examples of services that Landstar is able to make available through the agent network to smaller shippers include the ability to provide transportation services on short notice (often within hours from notification to time of pick-up), multiple pick-up and delivery points, electronic data interchange capability and access to specialized equipment. In addition, a number of the Company's agents specialize in certain types of freight and transportation services (such as oversized or heavy loads). An agent in the carrier segment is typically paid a percentage of the revenue generated through that agent, with volume-based incentives. An agent in the multimodal segment is typically paid a contractually agreed-upon percentage of the gross profit on revenue generated through that agent. During 2001, 357 agents generated revenue for Landstar of at least $1 million each, or approximately $1.2 billion of Landstar's total revenue. The majority of the agents who generate revenue of $1 million or more have chosen to represent Landstar exclusively. The typical Landstar agent maintains a relationship with a number of shippers and services these shippers by providing a base of operations for independent contractors, both single-unit and multi-unit contractors. Contracts with agents are typically terminable upon 30 days' notice. Historically, Landstar has experienced very limited agent turnover among its larger-volume agents. The carrier segment and multimodal segment emphasize programs to support the agents' operations and to establish pricing parameters. Each operating subsidiary contracts directly with customers and generally assumes the credit risk and liability for freight losses or damages. The independent commission sales agents are responsible for locating freight and making that freight available to the Company's independent contractors and coordinating the transportation of the freight with independent contractors. The carrier segment's independent commission sales agents use the Company's Landstar Electronic Administrative Dispatch System (LEADS) software program which enables its independent commission sales agents to dispatch freight and process most administrative procedures and then communicate that information to Landstar and its independent contractors via the worldwide web. The multimodal segment's independent commission sales agents use other Landstar proprietary software to process customer shipments and communicate the necessary information to independent contractors and Landstar. The Company's web-based available freight and truck information system provides a listing of available trucks to the Company's independent commission sales agents. The carrier segment and multimodal segment hold regular regional agent meetings for their independent commission sales agents and Landstar holds an annual company-wide agent convention. INDEPENDENT CONTRACTORS. Landstar operates the largest fleet of truckload independent contractors in North America. This provides marketing, operating, safety, recruiting, retention and financial advantages to the Company. Most of the Company's truckload independent contractors are compensated based on a fixed percentage of the revenue generated from the freight they haul. This percentage generally ranges from 60% to 70% where the independent contractor provides a tractor and from 75% to 79% where the independent contractor 9
provides both a tractor and trailer. The independent contractor must pay all the expenses of operating his/her equipment, including driver wages and benefits, fuel, physical damage insurance, maintenance, highway use taxes and debt service. The Company maintains an internet site through which independent contractors can view a complete listing of all the Company's available freight, allowing them to consider size, origin and destination when planning trips. In 2001, Landstar's truck turnover ratio was approximately 60%. A significant portion of this turnover was attributable to independent contractors who had been independent contractors with the Company for less than one year. Management believes that factors that tend to limit turnover include the Company's extensive agent network, the Company's programs to reduce the operating costs of its independent contractors and Landstar's reputation for quality, service and reliability. Management believes, however, that a reduction in the amount of available freight may cause an increase in truck turnover. The Landstar Contractors' Advantage Purchasing Program leverages Landstar's purchasing power to provide discounts to the independent contractors when they purchase equipment, fuel, tires and other items. In addition, LCFI provides a source of funds at competitive interest rates to the independent contractors to purchase tractors, trailers or mobile communication equipment. Landstar also benefits from its use of independent contractors. This allows the Company to maintain a lower level of capital investment, which results in lower fixed costs. CORPORATE SERVICES. Significant advantages result from the collective expertise and corporate services afforded by Landstar's corporate management. The primary services provided are: safety purchasing strategic planning human resource management technology and management information systems finance legal accounting, budgeting and taxes operator and equipment compliance quality programs risk management insurance services Competition Landstar competes primarily in the transportation services industry. The transportation services industry is extremely competitive and fragmented. Landstar competes primarily with truckload carriers, intermodal transportation service providers, railroads, less-than-truckload carriers, third party broker carriers and other non-asset based transportation service providers. Management believes that competition for the freight transported by the Company is based primarily on service and efficiency and, to a lesser degree, on freight rates alone. Management believes that Landstar's overall size and availability of a wide range of equipment, together with its geographically dispersed local independent agent network, present the Company with significant competitive advantages over many transportation service providers. The Company also competes with motor carriers for the services of independent contractors and with motor carriers and other transportation services companies for the services of independent commission sales agents, 10
contracts with whom are terminable upon short notice. The Company's overall size, coupled with its reputation for good relations with agents and independent contractors, have enabled the Company to attract a sufficient number of qualified agents and independent contractors. Insurance and Claims Potential liability associated with accidents in the trucking portion of the transportation services industry is severe and occurrences are unpredictable. Landstar retains liability for each individual commercial trucking claim up to $1,000,000 through April 30, 2001 and $5,000,000 thereafter. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers' compensation claim and $250,000 for each cargo claim. The Company provides, primarily on an actuarially determined basis, for the estimated cost of property, casualty and general liability claims reported and for claims incurred but not reported. Although Landstar has an active training and safety program, there can be no assurance that the frequency or severity of accidents will not increase in the future, that there will not be unfavorable development of existing claims or that insurance premiums will not increase. A material increase in the frequency or severity of accidents or the unfavorable development of existing claims can be expected to adversely affect Landstar's operating results. Management believes that Landstar realizes significant savings in insurance premiums by retaining a larger amount of risk than might be prudent for a smaller company. Potential Changes in Fuel Taxes From time to time, various legislative proposals are introduced to increase federal, state, or local taxes, including taxes on motor fuels. The Company cannot predict whether, or in what form, any increase in such taxes applicable to the transportation services provided by the Company will be enacted and, if enacted, whether or not the Company will be able to reflect the increases in prices to customers. Competition from other transportation service companies including those that provide non-trucking modes of transportation and intermodal transportation would be likely to increase if state or federal taxes on fuel were to increase without a corresponding increase in taxes imposed upon other modes of transportation. Independent Contractor Status From time to time, various legislative or regulatory proposals are introduced at the federal or state levels to change the status of independent contractors' classification to employees for either employment tax purposes (withholding, social security, Medicare and unemployment taxes) or other benefits available to employees. Currently, most individuals are classified as employees or independent contractors for employment tax purposes based on 20 "common-law" factors rather than any definition found in the Internal Revenue Code or Internal Revenue Service regulations. In addition, under Section 530 of the Revenue Act of 1978, taxpayers that meet certain criteria may treat an individual as an independent contractor for employment tax purposes if they have been audited without being told to treat similarly situated workers as employees, if they have received a ruling from the Internal Revenue Service or a court decision affirming their treatment, or if they are following a long-standing recognized practice. 11
Although management is unaware of any proposals currently pending that would change the employee/independent contractor classification of independent contractors currently doing business with the Company, the costs associated with potential changes, if any, in the employee/independent contractor classification could adversely affect Landstar's results of operations if Landstar were unable to reflect them in its fee arrangements with the independent contractors and agents or in the prices charged to its customers. Regulation Each of the Operating Subsidiaries is a motor carrier which is regulated by the United States Department of Transportation ("DOT") and by various state agencies. The DOT has broad powers, generally governing activities such as the regulation of, to a limited degree, motor carrier operations, rates, accounting systems, periodic financial reporting and insurance. Subject to federal and state regulatory authorities or regulation, the Company may transport most types of freight to and from any point in the United States over any route selected by the Company. The trucking industry is subject to possible regulatory and legislative changes (such as increasingly stringent environmental and/or safety/security regulations or limits on vehicle weight and size) that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. All of the Company's drivers are required to have national commercial driver's licenses and are subject to mandatory drug and alcohol testing. The DOT's national commercial driver's license and drug and alcohol testing requirements have not adversely affected the availability of qualified drivers to the Company. At December 25, 1999, approximately 100 Landstar Ranger drivers were represented by the International Brotherhood of Teamsters (the "Teamsters"). The vast majority of these unionized drivers participated in the Teamsters' Central States Southeast and Southwest Areas Pension Fund (the "Fund"). Under a prior collective bargaining agreement, Landstar Ranger was required to make contributions to various Teamster pension funds for 205 drivers regardless of the actual number of unionized drivers. Effective April 1, 2000, a new collective bargaining agreement required Landstar Ranger to make pension contributions for only the actual number of unionized drivers. As a result of the elimination of the requirement to make contributions for more than the actual number of unionized drivers, the Trustees of the Fund terminated participation in the Fund by Landstar Ranger effective October 1, 2000. The Trustees of the Fund regard this action as a withdrawal by Landstar Ranger. In the third quarter of 2000, the Company recorded a charge in the amount of $2,230,000 for the cost of withdrawal from the Fund. 12
Seasonality Landstar's operations are subject to seasonal trends common to the trucking industry. Results of operations for the quarter ending in March are typically lower than the quarters ending in June, September and December due to reduced shipments and higher operating costs in the winter months. Employees As of December 29, 2001, the Company and its subsidiaries employed 1,231 individuals. Approximately 50 Landstar Ranger drivers (out of a total of approximately 4,600) are members of the International Brotherhood of Teamsters. The Company considers relations with its employees to be good. Item 2. - Properties The Company owns or leases various properties in the U.S. for the Company's operations and administrative staff that support the independent commission sales agents and independent contractors. The carrier segment's primary facilities are located in Jacksonville, Florida and Rockford, Illinois. The multimodal segment's primary facilities are located in Jacksonville, Florida. In addition, the Company's corporate headquarters are located in Jacksonville, Florida. The Rockford, Illinois facility of the carrier segment is owned by the Company. All other primary facilities are leased. Management believes that Landstar's owned and leased properties are adequate for its current needs and that leased properties can be retained or replaced at acceptable cost. Item 3. - Legal Proceedings The Company is routinely a party to litigation incidental to its business, primarily involving claims for personal injury and property damage incurred in the transportation of freight. The Company maintains insurance which covers liability amounts in excess of retained liabilities from personal injury and property damages claims. 13
Item 4. - Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2001. Part II Item 5. - Market for Registrant's Common Equity and Related Stockholder Matters The Common Stock of the Company is quoted through the National Association of Securities Dealers, Inc. National Market System (the "NASDAQ National Market System") under the symbol "LSTR." The following table sets forth the high and low reported sale prices for the Common Stock as quoted through the NASDAQ National Market System for the periods indicated. Calendar Period 2001 Market Price 2000 Market Price --------------- ----------------- ----------------- High Low High Low First Quarter $ 72.875 $ 55.250 $ 64.625 $ 38.063 Second Quarter 72.000 62.500 69.750 48.531 Third Quarter 81.140 60.000 60.625 42.500 Fourth Quarter 75.840 60.500 59.000 37.625 The reported last sale price per share of the Common Stock as quoted through the NASDAQ National Market System on March 15, 2002 was $94.400 per share. As of such date, Landstar had 8,105,753 shares of Common Stock outstanding. As of March 15, 2001, the Company had 64 stockholders of record of its Common Stock. However, the Company estimates that it has a significantly greater number of stockholders because a substantial number of the Company's shares are held by brokers or dealers for their customers in street name. The Company has not paid any cash dividends on the Common Stock within the past three years and does not intend to pay dividends on the Common Stock for the foreseeable future. The declaration and payment of any future dividends will be determined by the Company's Board of Directors, based on Landstar's results of operations, financial condition, cash requirements, certain corporate law requirements and other factors deemed relevant. Item 6. - Selected Financial Data The information required by this Item is set forth under the caption "Selected Consolidated Financial Data" in Exhibit 13 attached hereto, and is incorporated by reference in this Annual Report on Form 10-K. This information is also included on page 44 of the Company's 2001 Annual Report to Shareholders. 14
Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this Item is set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Exhibit 13 attached hereto, and is incorporated by reference in this Annual Report on Form 10-K. This information is also included on pages 21 to 27 of the Company's 2001 Annual Report to Shareholders. Item 7a. Quantitative and Qualitative Disclosures about Market Risk The Company has a credit agreement with a syndicate of banks and JPMorgan Chase Bank, as the administrative agent, (the "Third Amended and Restated Credit Agreement") that provides $175,000,000 of borrowing capacity. Borrowings under the Third Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar, either (i) the greatest of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%, or, (ii) the rate at the time offered to JPMorgan Chase Bank in the Eurodollar market for amounts and periods comparable to the relevant loan plus a margin that is determined based on the level of the Company's Leverage Ratio, as defined in the Third Amended and Restated Credit Agreement. The margin is subject to an increase of .125% if the aggregate amount outstanding under the Third Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 29, 2001, the weighted average interest rate on borrowings outstanding was 2.81%. During fiscal 2001, the average outstanding balance under the Third Amended and Restated Credit Agreement (combined with borrowings that were outstanding on the Second Amended and Restated Credit Agreement from December 30, 2000 to December 20, 2001 which was refinanced on December 20, 2001 with funds received on the Third Amended and Restated Credit Agreement) was $89,929,000. Based on the borrowing rates in the Third Amended and Restated Credit Agreement and the repayment terms, the fair value of the outstanding borrowings as of December 29, 2001 was estimated to approximate carrying value. The Third Amended and Restated Credit Agreement expires on January 5, 2005. The amount outstanding on the Third Amended and Restated Credit Agreement is payable upon the expiration of the Third Amended and Restated Credit Agreement. Item 8. - Financial Statements and Supplementary Data The information required by this Item is set forth under the captions "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Changes in Shareholders' Equity," "Notes to Consolidated Financial Statements," "Independent Auditors' Report" and "Quarterly Financial Data" in Exhibit 13 attached hereto, and are incorporated by reference in this Annual Report on Form 10-K. This information is also included on pages 28 through 43 of the Company's 2001 Annual Report to Shareholders. Item 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 15
Part III Item 10. - Directors and Executive Officers of the Registrant The information required by this Item concerning the Directors (and nominees for Directors) and Executive Officers of the Company is set forth under the captions "Election of Directors," "Directors of the Company," "Information Regarding Board of Directors and Committees," and "Executive Officers of the Company" on pages 2 through 8, and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on page 17 of the Company's definitive Proxy Statement for its annual meeting of shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 11. - Executive Compensation The information required by this Item is set forth under the captions "Compensation of Directors and Executive Officers," "Summary Compensation Table," "Fiscal Year-End Option Values," "Report of the Compensation Committee on Executive Compensation," "Performance Comparison" and "Key Executive Employment Protection Agreements" on pages 9 through 15 of the Company's definitive Proxy Statement for its annual meeting of shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 12. - Security Ownership of Certain Beneficial Owners and Management The information required by this Item is set forth under the caption "Security Ownership by Management and Others" on pages 16 through 18 of the Company's definitive Proxy Statement for its annual meeting of shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 13. - Certain Relationships and Related Transactions The information required by this Item is set forth under the caption "Indebtedness of Management" on pages 12 and 13 of the Company's definitive Proxy Statement for its annual meeting of shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. Part IV Item 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements Financial statements of the Company and related notes thereto, together with the report thereon of KPMG LLP dated February 5, 2002, are in Exhibit 13 attached hereto, and are incorporated by reference in this Annual Report on Form 10-K. This information is also included on pages 28 through 42 of the Company's 2001 Annual Report to Shareholders. 16
(2) Financial Statement Schedules The report of the Company's independent public accountants with respect to the financial statement schedules listed below appears on page 23 of this Annual Report on Form 10-K. Schedule Number Description Page - --------------- ----------- ---- I Condensed Financial Information of Registrant Parent Company Only Balance Sheet Information S-1 I Condensed Financial Information of Registrant Parent Company Only Statement of Income Information S-2 I Condensed Financial Information of Registrant Parent Company Only Statement of Cash Flows Information S-3 II Valuation and Qualifying Accounts For the Fiscal Year Ended December 29, 2001 S-4 II Valuation and Qualifying Accounts For the Fiscal Year Ended December 30, 2000 S-5 II Valuation and Qualifying Accounts For the Fiscal Year Ended December 25, 1999 S-6 All other financial statement schedules not listed above have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required. (3) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report (see "Exhibit Index"). THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO ANY SHAREHOLDER OF THE COMPANY WHO SO REQUESTS IN WRITING, A COPY OF ANY EXHIBITS, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ANY SUCH REQUEST SHOULD BE DIRECTED TO LANDSTAR SYSTEM, INC., ATTENTION: INVESTOR RELATIONS, 13410 SUTTON PARK DRIVE SOUTH, JACKSONVILLE, FLORIDA 32224. (b)The Company's Form 8-K filed with the Securities and Exchange Commission on December 21, 2001 reported the execution of the "Third Amended and Restated Credit Agreement" as of December 20, 2001. 17
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LANDSTAR SYSTEM, INC. By: Henry H. Gerkens ---------------------------------------- Henry H. Gerkens President & Chief Operating Officer By: Robert C. LaRose ---------------------------------------- Robert C. LaRose Vice President, Chief Financial Officer and Secretary Date: March 21, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- Jeffrey C. Crowe Chairman of the Board and Chief March 21, 2002 - ------------------- Executive Officer; Principal Jeffrey C. Crowe Executive Officer Henry H. Gerkens Director, President and Chief March 21, 2002 - ------------------- Operating Officer Henry H. Gerkens Robert C. LaRose Vice President, Chief Financial March 21, 2002 - ------------------- Officer and Secretary; Principal Robert C. LaRose Accounting Officer * Director March 21, 2002 - ------------------- David G. Bannister * Director March 21, 2002 - ------------------- Ronald W. Drucker 18
* Director March 21, 2002 - ------------------- Merritt J. Mott * Director March 21, 2002 - ------------------- William S. Elston * Director March 21, 2002 - ------------------- Diana M. Murphy Robert C. LaRose Attorney In Fact * - ------------------- By: Robert C. LaRose 19
EXHIBIT INDEX Form 10-K for fiscal year ended 12/29/01 Exhibit No. Description - ----------- ----------- (1) Plan of acquisition, reorganization, arrangement, liquidation or succession 2.1 Asset Purchase Agreement by and between Landstar Poole, Inc. as the seller, and Landstar System, Inc., as the guarantor, and Schneider National, Inc., as the purchaser, dated as of July 15, 1998. (Incorporated by reference to Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 27, 1998 (Commission File No. 0-21238)) (3) Articles of Incorporation and Bylaws: 3.1 Amended and Restated Certificate of Incorporation of the Company dated February 9, 1993 and Certificate of Designation of Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33- 57174)) 3.2 The Company's Bylaws, as amended and restated on February 9, 1993. (Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1. (Registration No. 33-57174)) (4) Instruments defining the rights of security holders, including indentures: 4.1 Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-57174)) 4.2 Rights Agreement, dated as of February 10, 1993, between the Company and Chemical Bank, as Rights Agent. (Incorporated by reference to Exhibit 4.14 of Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-57174)) 4.3 The Company agrees to furnish copies of any instrument defining the rights of holders of long-term debt of the Company and its respective consolidated subsidiaries that does not exceed 10% of the total assets of the Company and its respective consolidated subsidiaries to the Securities and Exchange Commission upon request. 4.4 Second Amended and Restated Credit Agreement, dated October 10, 1997, among LSHI, Landstar, the lenders named therein and The Chase Manhattan Bank as administrative agent (including exhibits and schedules thereto).(Incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 27, 1997 (Registration No. 0-21238)) 20
Exhibit Index (continued) Form 10-K for fiscal year ended 12/29/01 Exhibit No. Description - ----------- ----------- 4.6 First Amendment, dated October 30, 1998, to the Second Amended and Restated Credit Agreement, dated October 10, 1997, among LSHI, Landstar, the lenders named therein and The Chase Manhattan Bank as administrative agent. (Incorporated by reference to Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 26, 1998) 4.7 Second Amendment, dated September 8, 1999, to the Second Amended and Restated Credit Agreement, dated as of October 10, 1997. (Incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 25, 1999) 4.8 First Amendment of the Rights Agreement, dated December 22, 2000, between the Company and Mellon Investor Services, LLC, as successor by merger to Chemical Bank. 4.9 Third Amended and Restated Credit Agreement, dated December 20, 2001, among LSHI, Landstar, the lenders named therein and JPMorgan Chase Bank as administrative agent (including exhibits and schedules thereto). (Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K filed on December 21, 2001 (Registration No. 0-21238)) (10) Material Contracts: 10.1+ Landstar System, Inc. 1993 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1. (Registration No. 33-67666)) 10.2 Form of Indemnification Agreement between the Company and each of the directors and executive officers of the Company. (Incorporated by reference to Exhibit 10.7 of Amendment No. 1 to the Registrant's Registration Statement on Form S-1. (Registration No. 33-57174)) 10.3+ LSHI Management Incentive Compensation Plan. (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993. (Commission File No. 0-21238)) 10.4+ Landstar System, Inc. 1994 Director's Stock Option Plan. (Incorporated by reference to Exhibit 99 to the Registrant's Registration Statement on Form S-8 filed July 5, 1995. (Registration No. 33-94304)) 10.5+ Key Executive Employment Protection Agreement dated January 30, 1998 between Landstar System, Inc. and certain officers of the Company. (Incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 27, 1997 (Commission File NO. 0-21238)) 21
Exhibit Index (continued) Form 10-K for fiscal year ended 12/29/01 Exhibit No. Description - ----------- ----------- 10.6+ Amendment to the Landstar System, Inc. 1993 Stock Option Plan (Incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 27, 1997 (Commission File No. 0-21238)) 10.7+ Form of Promissory Notes between the Company and certain directors, executive officers and management of the Company. 10.8+ First Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan 10.9+ Second Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (11) Statement re: Computation of Per Share Earnings: 11.1* Landstar System, Inc. and Subsidiary Calculation of Earnings Per Common Share 11.2* Landstar System, Inc. and Subsidiary Calculation of Diluted Earnings Per Share (13) Annual Report to Shareholders, Form 10-Q or Quarterly Report to Shareholders: 13.1* Excerpts from the 2001 Annual Report to Shareholders (21) Subsidiaries of the Registrant: 21.1* List of Subsidiary Corporations of the Registrant (23) Consents of Experts and Counsel: 23.1* Consent of KPMG LLP as Independent Auditors of the Registrant (24) Power of Attorney: 24.1* Powers of Attorney ___________________ +management contract or compensatory plan or arrangement *Filed herewith. 22
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Landstar System, Inc.: Under date of February 5, 2002, we reported on the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 29, 2001 and December 30, 2000, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999, as contained in the 2001 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in Item 14 (a)(2). These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Stamford, Connecticut February 5, 2002 23
LANDSTAR SYSTEM, INC. AND SUBSIDIARY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY BALANCE SHEET INFORMATION (Dollars in thousands, except per share amounts) Dec. 29, Dec. 30, 2001 2000 -------- -------- Assets - ------ Investment in Landstar System Holdings, Inc., net of advances $117,440 $107,859 -------- -------- Total assets $117,440 $107,859 ======== ======== Liabilities and Shareholders' Equity - ----------------------------------- Shareholders' equity: Common stock, $.01 par value, authorized 20,000,000 shares, issued 13,328,834 and 13,233,874 shares $ 133 $ 132 Additional paid-in capital 75,036 71,325 Retained earnings 258,162 215,368 Cost of 5,241,841 and 4,741,841 shares of common stock in treasury (209,926) (172,727) Notes receivable arising from exercise of stock options (5,965) (6,239) -------- -------- Total shareholders' equity 117,440 107,859 -------- -------- Total liabilities and shareholders' equity $117,440 $107,859 ======== ======== S-1 24
LANDSTAR SYSTEM, INC. AND SUBSIDIARY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY STATEMENT OF INCOME INFORMATION (Dollars in thousands, except per share amounts) FISCAL YEARS ENDED ---------------------------------------------- Dec. 29, Dec. 30, Dec. 25, 2001 2000 1999 ---------- ---------- ---------- Equity in undistributed earnings of Landstar System Holdings, Inc. $ 42,838 $ 45,296 $ 46,018 Income taxes 44 102 81 ---------- ---------- ----------- Net income $ 42,794 $ 45,194 $ 45,937 ========== ========== =========== Earnings per common share $ 5.13 $ 5.15 $ 4.60 ========== ========== =========== Diluted earnings per share $ 5.01 $ 5.03 $ 4.55 ========== ========== =========== Average number of shares outstanding: Earnings per common share 8,336,000 8,781,000 9,982,000 ========== ========== =========== Diluted earnings per share 8,546,000 8,981,000 10,102,000 ========== ========== =========== S-2 25
LANDSTAR SYSTEM, INC. AND SUBSIDIARY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY STATEMENT OF CASH FLOWS INFORMATION (Dollars in thousands) FISCAL YEARS ENDED ----------------------------------------------- Dec. 29, Dec. 30, Dec. 25, 2001 2000 1999 ---------- ---------- ----------- Operating Activities - -------------------- Net income $ 42,794 $ 45,194 $ 45,937 Adjustments to reconcile net income to net cash used by operating activities: Equity in undistributed earnings of Landstar System Holdings, Inc. (42,838) (45,296) (46,018) ---------- ---------- ----------- Net Cash Used By Operating Activities (44) (102) (81) ---------- ---------- ----------- Investing Activities - -------------------- Additional investments in and advances from Landstar System Holdings, Inc., net 34,082 46,144 51,172 ---------- ---------- ----------- Net Cash Provided By Investing Activities 34,082 46,144 51,172 ---------- ---------- ----------- Financing Activities - -------------------- Proceeds from sales of common stock 3,161 143 293 Purchases of common stock (37,199) (46,185) (51,384) ---------- ---------- ---------- Net Cash Used By Financing Activities (34,038) (46,042) (51,091) ---------- ---------- ---------- Change in cash 0 0 0 Cash at beginning of period 0 0 0 ---------- ---------- ---------- Cash at end of period $ 0 $ 0 $ 0 ========== ========== ========== S-3 26
LANDSTAR SYSTEM, INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001 (Dollars in thousands) COL. A COL. B COL. C COL. D COL. E - ------ ------ ------ ------ ------ Balance Additions at -------------------------- Beginning Charged to Charged to Balance of Costs and Other Accounts Deductions at End Description Period Expenses Describe Describe (A) of Period - ----------- --------- ---------- -------------- ---------- --------- Allowance for doubtful accounts: Deducted from trade receivables $ 4,450 $ 4,384 $ - $ (4,418) $ 4,416 Deducted from other receivables 5,089 3,958 - (4,307) 4,740 Deducted from other non- current receivables 1,816 (189) - (1,399) 228 ------- --------- ----------- -------- ------- $11,355 $ 8,153 $ - $ (10,124) $ 9,384 ======= ========= =========== ======== ======= (A) Write-offs, net of recoveries. S-4 27
LANDSTAR SYSTEM, INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000 (Dollars in thousands) COL. A COL. B COL. C COL. D COL. E - ------ ------ ------ ------ ------ Balance Additions at -------------------------- Beginning Charged to Charged to Balance of Costs and Other Accounts Deductions at End Description Period Expenses Describe Describe(A) of Period - ----------- --------- ---------- -------------- ---------- --------- Allowance for doubtful accounts: Deducted from trade receivables $ 4,002 $ 1,915 $ - $ (1,467) $ 4,450 Deducted from other receivables 5,033 2,479 - (2,423) 5,089 Deducted from other non-current receivables 1,626 198 - (8) 1,816 ------- --------- --------- -------- ------- $10,661 $ 4,592 $ - $ (3,898) $11,355 ======= ========= ========= ======== ======= (A) Write-offs, net of recoveries. S-5 28
LANDSTAR SYSTEM, INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEAR ENDED DECEMBER 25, 1999 (Dollars in thousands) COL. A COL. B COL. C COL. D COL. E - ------ ------ ------ ------ ------ Balance Additions at -------------------------- Beginning Charged to Charged to Balance of Costs and Other Accounts Deductions at End Description Period Expenses Describe Describe(A) of Period - ----------- --------- ---------- -------------- ---------- --------- Allowance for doubtful accounts: Deducted from trade receivables $ 6,428 $ 94 $ - $ (2,520) $ 4,002 Deducted from other receivables 4,007 1,226 - (200) 5,033 Deducted from other non- current receivables 303 1,323 - - 1,626 ------- --------- --------- -------- ------- $10,738 $ 2,643 $ - $ (2,720) $10,661 ======= ========= ========= ======== ======= (A) Write-offs, net of recoveries. S-6 29
EXHIBIT 11.1 LANDSTAR SYSTEM, INC. AND SUBSIDIARY CALCULATION OF EARNINGS PER COMMON SHARE (In thousands, except per share amounts) (Unaudited) Fiscal Years Ended December 29, December 30, December 25, 2001 2000 1999 ------------ ------------ ------------ Net income $ 42,794 $ 45,194 $ 45,937 ============ ============ ============ Average number of common shares outstanding 8,336 8,781 9,982 ============ ============ ============ Earnings per common share $ 5.13 $ 5.15 $ 4.60 ============ ============ ============ 30
EXHIBIT 11.2 LANDSTAR SYSTEM, INC. AND SUBSIDIARY CALCULATION OF DILUTED EARNINGS PER SHARE (In thousands, except per share amounts) (Unaudited) Fiscal Years Ended December 29, December 30, December 25, 2001 2000 1999 ------------ ------------ ------------ Net income $ 42,794 $ 45,194 $ 45,937 ============ ============ ============ Average number of common shares outstanding 8,336 8,781 9,982 Plus: Incremental shares from assumed exercise of stock options 210 200 120 ------------ ------------ ------------ Average number of common shares and incremental shares outstanding 8,546 8,981 10,102 ============ ============ ============ Diluted earnings per share $ 5.01 $ 5.03 $ 4.55 ============ ============ ============ 31
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. The Company 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 Ligon, Inc. ("Landstar Ligon") and Landstar Gemini, 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. It also provides short-to-long haul movement of containers by truck, dedicated power-only truck capacity and truck brokerage. 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 typically contributes approximately 79% of Landstar's consolidated revenue. The multimodal segment is comprised of Landstar Logistics, Inc. and Landstar Express America, Inc. Transportation services provided by the multimodal segment include the arrangement of intermodal moves, contract logistics, truck brokerage and emergency and expedited ground and air freight. 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 typically contributes approximately 19% of Landstar's consolidated revenue. The insurance segment is comprised of Signature Insurance Company ("Signature"), a wholly-owned offshore insurance subsidiary, 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 typically contributes approximately 2% of Landstar's consolidated revenue. 32
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 brokerage services operations of the carrier segment and multimodal segment are based on a negotiated rate for each load hauled. 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 and brokerage services 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 are primarily based on contractually agreed-upon percentages of revenue at the carrier segment and of gross profit, revenue less the cost of purchased transportation, at the multimodal segment. Commissions to agents as a percentage of consolidated revenue will vary directly with the percentage of consolidated revenue contributed by the carrier segment, multimodal segment and Signature and increases or decreases in gross profit at the multimodal segment. Trailing equipment 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. Landstar retains liability for each individual commercial trucking claim up to $1,000,000 per occurrence through April 30, 2001 and $5,000,000 per occurrence thereafter. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers' compensation claim and $250,000 for each cargo claim. 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 trailing equipment and management information services equipment. 33
The following table sets forth the percentage relationships of expense items to revenue for the periods indicated: Fiscal Years ------------------------ 2001 2000 1999 ------ ------ ------ Revenue 100.0% 100.0% 100.0% Investment income 0.3 0.3 0.2 Costs and expenses: Purchased transportation 74.0 73.8 73.6 Commissions to agents 7.9 8.0 8.0 Other operating costs 2.3 2.1 2.2 Insurance and claims 2.4 2.2 2.5 Selling, general and administrative 7.2 7.1 7.2 Depreciation and amortization 1.0 0.9 0.8 Non-recurring costs 0.4 ------ ------ ------ Total costs and expenses 94.8 94.5 94.3 ------ ------ ------ Operating income 5.5 5.8 5.9 Interest and debt expense 0.5 0.6 0.3 ------ ------ ------ Income before income taxes 5.0 5.2 5.6 Income taxes 1.9 2.0 2.3 ------ ------ ------ Net income 3.1% 3.2% 3.3% ====== ====== ====== FISCAL YEAR ENDED DECEMBER 29, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 30, 2000 Revenue for the fiscal year 2001 was $1,392,771,000, a decrease of $25,721,000, or 1.8%, compared to revenue for the 2000 fiscal year. Revenue decreased $18,774,000, $6,238,000 and $709,000 at the carrier, multimodal and insurance segments, respectively. The decrease was primarily attributable to the extra week in the 53-week fiscal year 2000 compared to the 52-week fiscal year 2001. As a result, revenue miles (volume) decreased approximately 3% compared to fiscal year 2000, which was partially offset by an increase in revenue per revenue mile (price) of approximately 1%, which reflected improved freight quality primarily at the multimodal segment. Investment income at the insurance segment was $3,567,000 and $4,317,000 for fiscal year 2001 and 2000, respectively. The decrease in investment income was primarily due to a reduced rate of return, attributable to the decline in interest rates, on investments held by the insurance segment. Purchased transportation was 74.0% of revenue in 2001 compared with 73.8% in 2000. The increase in purchased transportation as a percentage of revenue was primarily attributable to 34
increased rates charged by third party capacity providers at the multimodal segment as a result of higher fuel costs, increased brokerage revenue at the carrier segment and decreased premium revenue at the insurance segment. Commissions to agents were 7.9% of revenue in 2001 and 8.0% of revenue in 2000. The decrease in commissions to agents as a percentage of revenue was primarily due to the increased purchased transportation costs incurred at the multimodal segment which negatively impacted gross profit, and resulted in lower agent commissions. Other operating costs were 2.3% of revenue in 2001 compared with 2.1% in 2000. The increase in other operating costs as a percentage of revenue was primarily due to higher net trailer costs, an increased provision for contractor bad debts and increased independent contractor recruiting and qualification costs. Insurance and claims were 2.4% of revenue in 2001 compared with 2.2% in 2000 primarily due to greater favorable development of prior year claims in 2000 than realized in 2001, partially offset by reduced premiums for commercial trucking liability insurance and increased brokerage revenue as a percentage of total revenue, which has a lower claims risk profile. The reduction in premiums for commercial trucking liability insurance was attributable to the increase in the level of self-insured retention from $1,000,000 to $5,000,000 per occurrence effective May 1, 2001. Selling, general and administrative costs were 7.2% of revenue in 2001 and 7.1% in 2000. The increase in selling, general and administrative costs as a percentage of revenue was primarily due to an increased provision for customer bad debts and increased wages and benefits, partially offset by a decrease in the provision for bonuses under the Company's management incentive compensation plan. Depreciation and amortization was 1.0% of revenue in 2001 and 0.9% of revenue in 2000. The increase in depreciation and amortization as a percentage of revenue was due to an increase in Company-owned trailing equipment. Interest and debt expense was 0.5% of revenue in 2001 and 0.6% of revenue in 2000. This decrease was primarily attributable to lower interest rates. At December 25, 1999, approximately 100 Landstar Ranger drivers were represented by the International Brotherhood of Teamsters (the "Teamsters"). The vast majority of these unionized drivers participated in the Teamsters' Central States Southeast and Southwest Areas Pension Fund (the "Fund"). Under a prior collective bargaining agreement, Landstar Ranger was required to make contributions to various Teamster pension funds for 205 drivers regardless of the actual number of unionized drivers. Effective April 1, 2000, a new collective bargaining agreement required Landstar Ranger to make pension contributions for only the actual number of unionized drivers. As a result of the elimination of the requirement to make contributions for more than the actual number of unionized drivers, the Trustees of the Fund terminated participation in the Fund by Landstar Ranger effective October 1, 2000. The Trustees of the Fund regard this action as a withdrawal by Landstar Ranger. Landstar Ranger recorded a charge in the third quarter of 2000 in the amount of $2,230,000 for the cost of withdrawal from the Fund. 35
On March 28, 2000, the Company announced a plan to restructure the operations of Landstar Ligon and to relocate its headquarters from Madisonville, Kentucky to Jacksonville, Florida in June of 2000. As a result of the restructuring and relocation, a one-time charge in the amount of $3,040,000 was recorded during the second quarter of 2000 representing approximately $1,370,000 of employee and office relocation costs, $1,000,000 of severance costs and $670,000 of other costs. The restructuring and relocation were substantially completed by September 23, 2000. The provisions for income taxes for the 2001 and 2000 fiscal years were based on an effective income tax rate of 38.5%, which is higher than the statutory federal income tax rate primarily as a result of state income taxes, amortization of certain goodwill and the meals and entertainment exclusion. At December 29, 2001, the valuation allowance of $491,000 was attributable to deferred state income tax benefits, which primarily represented state operating loss carryforwards at one subsidiary. The valuation allowance and goodwill will be reduced by $463,000 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. Net income was $42,794,000, or $5.13 per common share ($5.01 per diluted share), in 2001 compared with $45,194,000, or $5.15 per common share ($5.03 per diluted share), in 2000. After deducting related income tax benefits of $2,105,000, the non-recurring costs reduced net income by $3,165,000 in 2000. Excluding non-recurring costs, net income would have been $48,359,000, or $5.51 per common share ($5.38 per diluted share) in 2000. FISCAL YEAR ENDED DECEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 25, 1999 Revenue for the fiscal year 2000 was $1,418,492,000, an increase of $30,409,000, or 2.2%, over revenue for the 1999 fiscal year. The increase was attributable to higher revenue at the carrier and multimodal segments of $5,130,000 and $26,692,000, respectively, partially offset by a decrease in revenue of $1,413,000 at the insurance segment. The increase was 36
primarily attributable to the extra week in the 53-week fiscal year 2000 compared to the 52-week fiscal year 1999. Overall, revenue per revenue mile increased approximately 3%, partially offset by a decrease in revenue miles of approximately 1%. The decrease in revenue from the prior year at the insurance segment was primarily attributable to reduced independent contractor participation in the insurance programs reinsured by Signature. Investment income at the insurance segment was $4,317,000 and $2,502,000 for fiscal year 2000 and 1999, respectively. Purchased transportation was 73.8% of revenue in 2000 compared with 73.6% in 1999. The increase in purchased transportation as a percentage of revenue was primarily attributable to increased revenue contributed by the multimodal segment which tends to have a higher cost of purchased transportation and decreased premium revenue at the insurance segment. In addition, purchased transportation costs at the multimodal segment were generally higher due to increased rates charged by its third party capacity providers as a result of higher fuel costs. Commissions to agents were 8.0% of revenue in 2000 and 1999. Other operating costs were 2.1% of revenue in 2000 compared with 2.2% in 1999. The decrease in other operating costs as a percentage of revenue was primarily attributable to the increase in the percentage of revenue contributed by the multimodal segment which does not incur trailer rent or trailer maintenance costs. Insurance and claims were 2.2% of revenue in 2000 compared with 2.5% in 1999 primarily due to increased revenue at the multimodal segment which has a lower claims risk profile and lower accident frequency and severity in 2000. Selling, general and administrative costs were 7.1% of revenue in 2000 and 7.2% in 1999. The decrease in selling, general and administrative costs as a percentage of revenue was primarily due to a decrease in the provision for bonuses under the Company's incentive compensation plan. Depreciation and amortization was 0.9% of revenue in 2000 and 0.8% of revenue in 1999. The increase in depreciation and amortization as a percent of revenue was due to an increase in company-owned trailing equipment. Interest and debt expense was 0.6% of revenue in 2000 and 0.3% of revenue in 1999. This increase was primarily attributable to increased average borrowings on the senior credit facility, which were used to finance a portion of the Company's stock repurchase program, increased capital lease obligations for trailing equipment and higher interest rates. The provisions for income taxes for the 2000 and 1999 fiscal years were based on an effective income tax rate of 38.5% and 40.5%, 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. The decrease in the effective income tax rate was attributable to the implementation of certain state income tax planning strategies. Net income was $45,194,000, or $5.15 per common share ($5.03 per diluted share), in 2000 compared with $45,937,000, or $4.60 per common share ($4.55 per diluted share), in 1999. After deducting related income tax benefits of $2,105,000, the non-recurring costs reduced net income by $3,165,000 in 2000. Excluding non-recurring costs, net income would have been $48,359,000, or $5.51 per common share ($5.38 per diluted share) in 2000. 37
CAPITAL RESOURCES AND LIQUIDITY On December 20, 2001, Landstar renegotiated its existing credit agreement with a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the "Third Amended and Restated Credit Agreement"). The Third Amended and Restated Credit Agreement provides $175,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. At December 29, 2001, Landstar had commitments for letters of credit outstanding in the amount of $19,929,000, primarily as collateral for estimated insurance claims, $9,080,000 of which were supported by the Third Amended and Restated Credit Agreement and $10,849,000 secured by assets deposited with a financial institution. The Third Amended and Restated Credit Agreement expires on January 5, 2005. Borrowings under the Third Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar, either (i) the greatest of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%, or, (ii) the rate at the time offered to JPMorgan Chase Bank in the Eurodollar market for amounts and periods comparable to the relevant loan plus a margin that is determined based on the level of the Company's Leverage Ratio, as defined in the Third Amended and Restated Credit Agreement. The margin is subject to an increase of .125% if the aggregate amount outstanding under the Third Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 29, 2001, the margin was equal to 87.5/100 of 1%. The unused portion 38
of the Third Amended and Restated Credit Agreement carries a commitment fee determined based on the level of the Leverage Ratio, as therein defined. As of December 29, 2001, the commitment fee for the unused portion of the Third Amended and Restated Credit Agreement was 0.250%. At December 29, 2001, the weighted average interest rate on borrowings outstanding under the Third Amended and Restated Credit Agreement was 2.81%. The Third 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 Third 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 Third Amended and Restated Credit Agreement, and Interest and Fixed Charge Coverages, as therein defined. Under the most restrictive covenant, Landstar exceeded the required Interest Coverage level by $11,719,000 at December 29, 2001. The Third Amended and Restated Credit Agreement provides for an event of default related to a person or group acquiring 25% or more of the outstanding capital stock of the Company or obtaining the power to elect a majority of the Company's directors. Borrowings under the Third 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 Third Amended and Restated Credit Agreement. Shareholders' equity was $117,440,000, or 54% of total capitalization, at December 29, 2001, compared with $107,859,000, or 53% of total capitalization, at December 30, 2000. The increase in shareholders' equity as a percentage of total capitalization was primarily a result of current year net income, partially offset by the purchase of 500,000 shares of the Company's common stock at a total cost of $37,199,000. As of December 29, 2001, the Company may purchase an additional 500,000 shares of its common stock under its authorized stock purchase program. Long-term debt including current maturities was $101,874,000 at December 29, 2001, $7,231,000 higher than at December 30, 2000, primarily as a result of financing a portion of the stock purchase program with borrowings under the Company's credit agreement. Working capital and the ratio of current assets to current liabilities were $121,808,000 and 1.92 to 1, respectively, at December 29, 2001, compared with $94,718,000 and 1.61 to 1, respectively, at December 30, 2000. Landstar has historically operated with current ratios approximating 1.5 to 1. Cash provided by operating activities was $49,794,000 in 2001 compared with $54,047,000 in 2000. The decrease in cash provided by operating activities was primarily attributable to the timing of collection of accounts receivable and reduced earnings. During the 2001 fiscal year, Landstar purchased $5,443,000 of operating property. Landstar anticipates it will acquire approximately $28,000,000 of operating property during fiscal year 2002 either by purchase or by lease financing. 39
Management believes that cash flow from operations combined with its borrowing capacity under the Third Amended and Restated Credit Agreement will be adequate to meet Landstar's debt service requirements, fund continued growth, both internal and through acquisitions, complete any purchases under its announced stock purchase program 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. 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. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES The allowance for doubtful accounts for both trade and other receivables represents management's estimate of the amount of outstanding receivables that will not be collected. During 2001, the Company experienced an abnormally high level of bad debt expense. Management believes this resulted from the difficult economic environment experienced by the Company's customers and independent contractors. Although management believes the amount of the allowance for both trade and other receivables at December 29, 2001 is appropriate, a prolonged period of low or no economic growth may adversely affect the collection of these receivables. Correspondingly, a more robust economic environment may result in the realization of some portion of the estimated uncollectible receivables. As described in the accounting policy footnote to the financial statements, Landstar provides for the estimated costs of self-insured claims primarily on an actuarial basis. The amount recorded for the estimated liability for claims incurred is based upon the facts and circumstances known on the balance sheet date. The ultimate resolution of these claims may be for an amount greater or less than the amount estimated by management. Significant variances from management's estimates for the amount of uncollectible receivables or for the ultimate resolution of claims can be expected to positively or negatively affect Landstar's operating income in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations. In June 2001, the Financial Accounting Standards Board issued statement of financial accounting standard (SFAS) No. 142, "Goodwill and Other Intangible Assets." This Statement, effective for fiscal years beginning after December 15, 2001, establishes standards for recognizing and measuring goodwill and other intangible assets. Management believes other than the elimination of amortization expense for goodwill currently reflected on the Company's balance sheet, the adoption of this Statement will not materially affect the financial position or results of operations of the Company. 40
In August 2001, the Financial Accounting Standards Board issued SFAS No.143, "Accounting for Asset Retirement Obligations." This Statement, effective for fiscal years beginning after June 15, 2002, requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. The enterprise is also to record a corresponding increase to the carrying amount of the long-lived asset. Management believes that this Statement will not have a material effect on the financial position or results of operations of the Company. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement, effective for fiscal years beginning after December 15, 2001, supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of," and addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. Management believes that the adoption of this Statement will not have a material effect on the financial position or results of operations of the Company. FORWARD-LOOKING STATEMENTS The following is a "safe harbor" statement under the Private Securities Litigation Reform Act of 1995. Statements contained in this document that are not based on historical facts are "forward-looking statements." This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-K statement contain forward- looking statements, such as statements which relate to Landstar's business objectives, plans, strategies and expectations. Terms such as "anticipates," "believes," "estimates," "plans," "predicts," "may," "should," "will," the negative thereof and similar expressions are intended to identify forward- looking statements. Such statements are by nature subject to uncertainties and risks, including but not limited to; an increase in the frequency or severity of accidents or workers' compensation claims; unfavorable development of existing accident claims; a downturn in domestic economic growth or growth in the transportation sector; and other operational, financial or legal risks or uncertainties detailed in Landstar's SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements, and the Company undertakes no obligation to publicly update or revise any forward-looking statements. 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. 41
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) December 29, December 30, 2001 2000 ----------- ----------- ASSETS Current assets: Cash $ 47,886 $ 32,926 Short-term investments 2,982 1,500 Trade accounts receivable, less allowance of $4,416 and $4,450 185,206 195,398 Other receivables, including advances to independent contractors, less allowance of $4,740 and $5,089 13,779 13,122 Prepaid expenses and other current assets 4,020 6,062 -------- -------- Total current assets 253,873 249,008 -------- -------- Operating property, less accumulated depreciation and amortization of $44,455 and $37,497 68,532 76,049 Goodwill, less accumulated amortization of $10,209 and $8,993 31,134 32,474 Deferred income taxes and other assets 11,112 12,831 -------- -------- Total assets $364,651 $370,362 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Cash overdraft $ 13,018 $ 17,496 Accounts payable 55,813 63,002 Current maturities of long-term debt 9,965 9,766 Insurance claims 21,602 23,364 Accrued compensation 2,091 8,277 Other current liabilities 29,576 32,385 -------- -------- Total current liabilities 132,065 154,290 -------- -------- Long-term debt, excluding current maturities 91,909 84,877 Insurance claims 21,585 23,336 Deferred income taxes 1,652 Shareholders' equity: Common stock, $.01 par value, authorized 20,000,000 shares, issued 13,328,834 and 13,233,874 shares 133 132 Additional paid-in capital 75,036 71,325 Retained earnings 258,162 215,368 Cost of 5,241,841 and 4,741,841 shares of common stock in treasury (209,926) (172,727) Notes receivable arising from exercise of stock options (5,965) (6,239) -------- -------- Total shareholders' equity 117,440 107,859 -------- -------- Total liabilities and shareholders' equity $364,651 $370,362 ======== ======== See accompanying notes to consolidated financial statements. 42
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) Fiscal Years Ended December 29, December 30, December 25, 2001 2000 1999 ------------ ------------ ------------ Revenue $ 1,392,771 $ 1,418,492 $ 1,388,083 Investment income 3,567 4,317 2,502 Costs and expenses: Purchased transportation 1,030,454 1,046,183 1,022,203 Commissions to agents 110,513 113,721 111,666 Other operating costs 32,750 29,568 30,000 Insurance and claims 32,930 31,935 34,064 Selling, general and administrative 99,762 100,516 99,240 Depreciation and amortization 13,543 13,003 11,698 Non-recurring costs 5,270 ------------ ------------ ------------ Total costs and expenses 1,319,952 1,340,196 1,308,871 ------------ ------------ ------------ Operating income 76,386 82,613 81,714 Interest and debt expense 6,802 9,127 4,509 ------------ ------------ ------------ Income before income taxes 69,584 73,486 77,205 Income taxes 26,790 28,292 31,268 ------------ ------------ ------------ Net income $ 42,794 $ 45,194 $ 45,937 ============ ============ ============ Earnings per common share $ 5.13 $ 5.15 $ 4.60 ============ ============ ============ Diluted earnings per share $ 5.01 $ 5.03 $ 4.55 ============ ============ ============ Average number of shares outstanding: Earnings per common share 8,336,000 8,781,000 9,982,000 Diluted earnings per share 8,546,000 8,981,000 10,102,000 See accompanying notes to consolidated financial statements. 43
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended December 29, December 30, December 25, 2001 2000 1999 (Dollars in thousands) ------------ ------------ ------------ OPERATING ACTIVITIES Net income $ 42,794 $ 45,194 $ 45,937 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of operating property 12,327 11,787 10,482 Amortization of goodwill 1,216 1,216 1,216 Non-cash interest charges 97 324 324 Provisions for losses on trade and other accounts receivable 8,153 4,592 2,643 Losses (gains) on sales of operating property (273) (244) 708 Deferred income taxes, net 1,776 3,911 1,788 Non-cash charge in lieu of income taxes 124 43 Changes in operating assets and liabilities: Decrease (increase) in trade and other accounts receivable 1,382 8,230 (37,534) Decrease (increase) in prepaid expenses and other assets 1,194 (1,405) (1,329) Increase (decrease) in accounts payable (7,189) (4,320) 16,698 Increase (decrease) in other liabilities (8,294) (7,410) 7,146 Decrease in insurance claims (3,513) (7,871) (4,497) ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 49,794 54,047 43,582 ------------ ------------ ------------ INVESTING ACTIVITIES Purchases of investments (496) (1,435) (5,005) Maturities of investments 1,484 1,060 Purchases of operating property (5,443) (7,305) (12,716) Proceeds from sales of operating property 906 1,958 2,132 ------------ ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (3,549) (5,722) (15,589) ------------ ------------ ------------ FINANCING ACTIVITIES Increase (decrease) in cash overdraft (4,478) (1,975) 4,725 Borrowings on revolving credit facility 135,500 27,500 21,500 Principal payments on long-term debt and capital lease obligations (128,269) (18,603) (6,087) Proceeds from exercise of stock options 3,161 143 293 Purchases of common stock (37,199) (46,185) (51,384) ------------ ------------ ------------ NET CASH USED BY FINANCING ACTIVITIES (31,285) (39,120) (30,953) ------------ ------------ ------------ Increase (decrease) in cash 14,960 9,205 (2,960) Cash at beginning of period 32,926 23,721 26,681 ------------ ------------ ------------ Cash at end of period $ 47,886 $ 32,926 $ 23,721 ============ ============ ============ See accompanying notes to consolidated financial statements. 44
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Fiscal Years Ended December 29, 2001, December 30, 2000 and December 25, 1999 (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 26, 1998 13,041,574 $ 130 $65,198 $124,237 2,618,041 $(76,176) $ (1,541) $111,848 Net income 45,937 45,937 Purchases of common stock 1,291,000 (51,384) (51,384) Exercises of stock options and related income tax benefit 22,400 1 635 (153) 483 ---------- ------ ------- -------- --------- --------- ------------- -------- Balance December 25, 1999 13,063,974 131 65,833 170,174 3,909,041 (127,560) (1,694) 106,884 Net income 45,194 45,194 Purchases of common stock 864,000 (46,185) (46,185) Exercises of stock options and related income tax benefit 169,900 1 5,048 (4,545) 504 Incentive compensation paid in common stock 444 (31,200) 1,018 1,462 ---------- ------ ------- -------- --------- --------- ------------- -------- Balance December 30, 2000 13,233,874 132 71,325 215,368 4,741,841 (172,727) (6,239) 107,859 Net income 42,794 42,794 Purchases of common stock 500,000 (37,199) (37,199) Exercises of stock options and related income tax benefit 94,960 1 3,711 274 3,986 ---------- ------ ------- -------- --------- --------- ------------- -------- Balance December 29, 2001 13,328,834 $ 133 $75,036 $258,162 5,241,841 $(209,926) $ (5,965) $117,440 ========== ====== ======= ======== ========= ========= ============= ======== See accompanying notes to consolidated financial statements. 45
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, primarily on an actuarially determined basis, for the estimated costs of cargo, property, casualty, general liability and workers' compensation claims both reported and for claims incurred but not reported. Landstar retains liability for each individual commercial trucking claim up to $1,000,000 per occurrence through April 30, 2001 and $5,000,000 per occurrence thereafter. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers' compensation claim and $250,000 for each cargo claim. Tires Tires purchased as part of trailing equipment are capitalized as part of the cost of the equipment. Replacement tires are charged to expense when placed in service. Investments Investments, all of which are intended to be held to maturity, consist of investment grade bonds having maturities of up to five years and are carried at amortized cost, which approximates fair value. Short-term investments represent the current portion of these bonds. There are $1,407,000 and $3,877,000 of these bonds included in other assets at December 29, 2001 and December 30, 2000, respectively. Operating Property Operating property is recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Trailing equipment is being depreciated over 7 years. 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. 46
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) Non-recurring Costs At December 25, 1999, approximately 100 Landstar Ranger, Inc. ("Landstar Ranger") drivers were represented by the International Brotherhood of Teamsters (the "Teamsters"). The vast majority of these unionized drivers participated in the Teamsters' Central States Southeast and Southwest Areas Pension Fund (the "Fund"). Under a prior collective bargaining agreement, Landstar Ranger was required to make contributions to various Teamster pension funds for 205 drivers regardless of the actual number of unionized drivers. Effective April 1, 2000, a new collective bargaining agreement required Landstar Ranger to make pension contributions for only the actual number of unionized drivers. As a result of the elimination of the requirement to make contributions for more than the actual number of unionized drivers, the Trustees of the Fund terminated participation in the Fund by Landstar Ranger effective October 1, 2000. The Trustees of the Fund regard this action as a withdrawal by Landstar Ranger. In the third quarter of 2000, the Company recorded a charge in the amount of $2,230,000 for the cost of withdrawal from the Fund. After deducting related income tax benefits of $880,000, this charge reduced fiscal year 2000 net income by $1,350,000, or $0.15 per common share ($0.15 per diluted share). On March 28, 2000, the Company announced a plan to restructure the operations of Landstar Ligon, Inc. and to relocate its headquarters from Madisonville, Kentucky to Jacksonville, Florida in June of 2000. As a result of this restructuring and relocation, a one-time charge in the amount of $3,040,000 was recorded during the second quarter of 2000 representing approximately $1,370,000 of employee and office relocation costs, $1,000,000 of severance costs and $670,000 of other costs. The restructuring and relocation were substantially completed by September 23, 2000. After deducting related income tax benefits of $1,225,000, this one-time restructuring charge reduced fiscal year 2000 net income by $1,815,000, or $0.21 per common share ($0.20 per diluted share). 47
(3) Income Taxes The provisions for income taxes consisted of the following (in thousands): Fiscal Years ------------------------------ 2001 2000 1999 ---- ---- ---- Current: Federal $23,636 $21,525 $24,931 State 1,254 2,813 4,549 ------- ------- ------- 24,890 24,338 29,480 Deferred: Federal 1,454 4,208 1,019 State 322 (297) 769 ------ ------- ------- 1,776 3,911 1,788 Non-cash charge in lieu of income taxes 124 43 ------- ------- ------- Income taxes $26,790 $28,292 $31,268 ======= ======= ======= Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities consisted of the following (in thousands): Dec. 29, 2001 Dec. 30, 2000 ------------- ------------- Deferred tax assets: Receivable valuations $ 4,128 $ 4,221 Deferred state income tax benefits 1,700 1,587 State net operating loss carryforwards 1,933 1,885 Self-insured claims 3,252 4,881 Other 5,052 3,530 --------- --------- 16,065 16,104 Valuation allowance (491) (615) --------- --------- $ 15,574 $ 15,489 ========= ========= Deferred tax liabilities: Operating property $ 11,378 $ 9,731 Other 5,848 5,634 --------- --------- $ 17,226 $ 15,365 ========= ========= 48
At December 29, 2001, the valuation allowance of $491,000 was attributable to deferred state income tax benefits, which primarily represented state operating loss carryforwards at one subsidiary. The valuation allowance and goodwill will be reduced by $463,000 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 Years ---------------------------- 2001 2000 1999 ---- ---- ---- Income taxes at federal income tax rate $24,354 $25,720 $27,022 State income taxes, net of federal income tax benefit 1,024 1,635 3,457 Amortization of goodwill 258 258 258 Meals and entertainment exclusion 892 597 472 Other, net 262 82 59 ------- -------- -------- Income taxes $26,790 $28,292 $31,268 ======= ======= ======= Landstar paid income taxes of $24,778,000 in 2001, $25,089,000 in 2000 and $28,659,000 in 1999. (4) Operating Property Operating property is summarized as follows (in thousands): Dec. 29, 2001 Dec. 30, 2000 ------------- ------------- Land $ 2,045 $ 2,097 Leasehold improvements 8,307 8,341 Buildings and improvements 7,963 7,963 Trailing equipment 71,957 72,257 Other equipment 22,715 22,888 -------- -------- 112,987 113,546 Less accumulated depreciation and amortization 44,455 37,497 -------- -------- $ 68,532 $ 76,049 ======== ======== Included above is $57,393,000 in 2001 and $60,811,000 in 2000 of operating property under capital leases, $37,224,000 and $44,458,000, respectively, net of accumulated amortization. Landstar did not acquire any property by entering into capital leases in 2001. Landstar acquired operating property by entering 49
into capital leases in the amount of $18,448,000 in 2000 and $17,445,000 in 1999. (5) 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 16% of their base salary, subject to certain limitations. Landstar contributes an amount equal to 100% of the first 3% and 50% of the next 2% of such contributions, subject to certain limitations. Prior to the October 1, 2000 withdrawal (see note 2), Landstar Ranger made contributions in accordance with a negotiated labor contract (generally based on the number of weeks worked) to union sponsored multi-employer pension plans. The expense for the Company-sponsored defined contribution plan was $1,090,000 in 2001, $1,105,000 in 2000 and $1,082,000 in 1999. The expense for union-sponsored plans, excluding the estimated cost of withdrawal (see note 2), was $935,000 in 2000 and $1,351,000 in 1999. (6) Debt Long-term debt is summarized as follows (in thousands): Dec. 29, 2001 Dec. 30, 2000 ------------- ------------- Capital leases $27,374 $37,143 Revolving credit facility 74,500 57,500 ------- ------- 101,874 94,643 Less current maturities 9,965 9,766 ------- ------- Total long-term debt $91,909 $84,877 ======= ======= On December 20, 2001, Landstar renegotiated its existing Credit Agreement with a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the "Third Amended and Restated Credit Agreement"). The Third Amended and Restated Credit Agreement provides $175,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Third Amended and Restated Credit Agreement expires on January 5, 2005. 50
Borrowings under the Third Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar, either (i) the greatest of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%, or, (ii) the rate at the time offered to JPMorgan Chase Bank in the Eurodollar market for amounts and periods comparable to the relevant loan plus a margin that is determined based on the level of the Company's Leverage Ratio, as defined in the Third Amended and Restated Credit Agreement. The margin is subject to an increase of .125% if the aggregate amount outstanding under the Third Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 29, 2001, the margin was equal to 87.5/100 of 1%. The unused portion of the Third 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 29, 2001, the commitment fee for the unused portion of the Third Amended and Restated Credit Agreement was 0.250%. At December 29, 2001, the weighted average interest rate on borrowings outstanding under the Third Amended and Restated Credit Agreement was 2.81%. Based on the borrowing rates in the Third Amended and Restated Credit Agreement and the repayment terms, the fair value of the outstanding borrowings under the Third Amended and Restated Credit Agreement was estimated to approximate carrying value. The Third 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 Third 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 Third Amended and Restated Credit Agreement, and Interest and Fixed Charge Coverages, as therein defined. Under the most restrictive covenant, Landstar exceeded the required Interest Coverage level by approximately $11,719,000 at December 29, 2001. The Third Amended and Restated Credit Agreement provides for an event of default related to a person or group acquiring 25% or more of the outstanding capital stock of the Company or obtaining the power to elect a majority of the Company's directors. Borrowings under the Third Amended and Restated Credit Agreement are unsecured, however, the Company and all but one of LSHI's subsidiaries guarantee LSHI's obligations under the Third Amended and Restated Credit Agreement. The amount outstanding on the Third Amended and Restated Credit Agreement is due and payable on January 5, 2005. There are no other installments of long-term debt, excluding capital lease obligations, maturing in the next five years. Landstar paid interest of $7,874,000 in 2001, $9,658,000 in 2000 and $4,484,000 in 1999. (7) Leases The future minimum lease payments under all noncancelable leases at December 29, 2001, principally for trailing equipment and the Company's headquarters facility in Jacksonville, Florida, are shown in the following table (in thousands): 51 PAGE> Capital Operating Leases Leases ------- --------- 2002 $11,581 $ 3,206 2003 10,093 2,687 2004 6,876 2,110 2005 2,178 2,066 2006 2,023 Thereafter 16,183 ------- --------- 30,728 $ 28,275 ========= Less amount representing interest (5.9% to 8.3%) 3,354 Present value of minimum ------- lease payments $27,374 ======= Total rent expense, net of sublease income, was $19,976,000 in 2001, $19,620,000 in 2000 and $19,322,000 in 1999. (8) 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, as amended, (the "DSOP"), outside members of the Board of Directors will be granted up to an aggregate of 210,000 options to purchase common stock. Under the DSOP, each outside Director will be granted 9,000 options to purchase common stock upon election or re-election to the Board of Directors. All options granted under the Plan through December 29, 2001 become exercisable in five equal annual installments 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 29, 2001, there were 867,840 shares of the Company's stock reserved for issuance upon exercise of options granted under the plans. 52
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 26, 1998 520,300 $ 30.25 203,900 $ 26.40 Granted 71,600 $ 36.33 Exercised (22,400) $ 19.88 Forfeited (300) $ 25.50 -------- Options at December 25, 1999 569,200 $ 31.42 286,520 $ 28.53 Granted 107,400 $ 47.79 Exercised (169,900) $ 27.59 Forfeited (1,800) $ 25.50 -------- Options at December 30, 2000 504,900 $ 36.21 212,060 $ 31.19 Granted 198,100 $ 66.05 Exercised (94,960) $ 30.41 Forfeited (46,520) $ 50.25 -------- Options at December 29, 2001 561,520 $ 46.56 207,680 $ 34.43 ======== 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 2001, 2000 and 1999: risk-free interest rate of 5.0% in 2001 and 6.0% in both 2000 and 1999, 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 2001, 41% in 2000 and 38% in 1999. The weighted average grant date fair value of stock options granted was $28.32, $21.61 and $15.71 per share in 2001, 2000 and 1999, respectively. The following table summarizes stock options outstanding at December 29, 2001: Options Outstanding ------------------- Range of Exercise Weighted Average Weighted Average Prices Number Outstanding Remaining Contractual Exercise Price Per Share Dec. 29, 2001 Life (years) Per Share ----------------- ------------------ --------------------- ---------------- $22.531 - $35.734 174,280 5.9 $ 30.60 $35.735 - $46.875 197,740 7.4 $ 42.36 $46.876 - $69.266 189,500 9.3 $ 65.63 ---------------- $22.531 - $69.266 561,520 7.6 $ 46.56 ================ 53
Options Exercisable ------------------- Range of Exercise Number Weighted Average Prices Exercisable Exercise Price Per Share Dec. 29, 2001 Per Share ----------------- ---------------- ---------------- $22.531 - $38.900 121,620 $ 29.67 $38.901 - $56.891 86,060 $ 41.16 ---------------- $22.531 - $56.891 207,680 $ 34.43 ================ 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 No. 123, "Accounting for Stock-Based Compensation," the effect on net income and earnings per common share for the fiscal year would have been $1,274,000, or $0.15 per common share, in 2001, $1,145,000, or $0.13 per common share, in 2000 and $966,000, or $0.10 per common share, in 1999. (9) Shareholders' Equity During 2001, Landstar purchased 500,000 shares of its common stock at a total cost of $37,199,000 pursuant to a previously announced stock purchase program. As of December 29, 2001, Landstar may purchase an additional 500,000 shares of its common stock under its authorized stock purchase program. 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 2001, 2000 and 1999, $1,098,000, $4,596,000 and $384,000 of such loans were issued, respectively. The Company has 2,000,000 shares of preferred stock authorized and unissued. Under the terms of a Shareholder Rights Agreement (the "Agreement"), as amended, 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. 54
(10) Segment Information The Company 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. It also provides short-to-long haul movement of containers by truck, dedicated power-only truck capacity and truck brokerage. 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 and emergency and expedited ground and air freight. 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 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. 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 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. However, during 2001 approximately 14% of the Company's revenue was attributable to the automotive industry. Substantially all of the Company's revenue is generated in the United States. 55
The following tables summarize information about the Company's reportable business segments as of and for the fiscal years ending December 29, 2001, December 30, 2000 and December 25, 1999 (in thousands): 2001 Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- External revenue $1,098,268 $ 270,849 $ 23,654 $1,392,771 Internal revenue 28,587 2,367 27,313 58,267 Investment income 3,567 3,567 Interest and debt expense $ 6,802 6,802 Depreciation and amortization 8,382 783 4,378 13,543 Operating income 76,105 5,343 30,644 (35,706) 76,386 Expenditures on long-lived assets 2,994 159 2,290 5,443 Total assets 234,164 47,795 46,440 36,252 364,651 2000 Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- External revenue $1,117,042 $ 277,087 $ 24,363 $1,418,492 Internal revenue 34,669 1,241 21,919 57,829 Investment income 4,317 4,317 Interest and debt expense $ 9,127 9,127 Depreciation and amortization 7,999 905 4,099 13,003 Non-recurring costs 5,270 5,270 Operating income 88,507 9,346 24,464 (39,704) 82,613 Expenditures on long-lived assets 687 177 6,441 7,305 Capital lease additions 18,448 18,448 Total assets 256,690 54,294 33,267 26,111 370,362 1999 Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- External revenue $1,111,912 $ 250,395 $ 25,776 $1,388,083 Internal revenue 35,194 196 21,790 57,180 Investment income 2,502 2,502 Interest and debt expense $ 4,509 4,509 Depreciation and amortization 7,107 982 3,609 11,698 Operating income 86,282 7,949 27,141 (39,658) 81,714 Expenditures on long-lived assets 374 137 12,205 12,716 Capital lease additions 17,445 17,445 Total assets 251,922 57,337 28,180 28,002 365,441 56
(11) Commitments and Contingencies At December 29, 2001, Landstar had commitments for letters of credit outstanding in the amount of $19,929,000, primarily as collateral for estimated insurance claims, $9,080,000 of which were supported by the Third Amended and Restated Credit Agreement and $10,849,000 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. 57
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 29, 2001 and December 30, 2000, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Landstar System, Inc. and subsidiary as of December 29, 2001 and December 30, 2000, and the results of their operations and their cash flows for the fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Stamford, Connecticut February 5, 2002 58
LANDSTAR SYSTEM, INC. AND SUBSIDIARY QUARTERLY FINANCIAL DATA (Dollars in thousands, except per share amounts) Fourth Third Second First Quarter Quarter Quarter Quarter 2001 2001 2001 2001 ---------- ---------- ---------- ---------- Revenue $ 347,788 $ 355,684 $ 358,018 $ 331,281 ========== ========== ========== ========== Operating income $ 20,093 $ 21,000 $ 19,486 $ 15,807 ---------- ---------- ---------- ---------- Income before income taxes $ 18,820 $ 19,403 $ 17,776 $ 13,585 Income taxes 7,243 7,473 6,843 5,231 ---------- ---------- ---------- ---------- Net income $ 11,577 $ 11,930 $ 10,933 $ 8,354 ========== ========== ========== ========== Earnings per common share (1) $ 1.43 $ 1.45 $ 1.29 $ 0.98 ========== ========== ========== ========== Diluted earnings per share (1) $ 1.40 $ 1.41 $ 1.26 $ 0.96 ========== ========== ========== ========== 59
LANDSTAR SYSTEM, INC. AND SUBSIDIARY QUARTERLY FINANCIAL DATA (Dollars in thousands, except per share amounts) Fourth Third Second First Quarter Quarter Quarter Quarter 2000 2000 2000 2000 ---------- ---------- ---------- ---------- Revenue $ 380,575 $ 352,356 $ 358,555 $ 327,006 ========== ========== ========== ========== Operating income $ 27,953 $ 21,456 $ 17,715 $ 15,489 ---------- ---------- ---------- ---------- Income before income taxes $ 25,069 $ 19,036 $ 15,597 $ 13,784 Income taxes 9,167 7,520 6,160 5,445 ---------- ---------- ---------- ---------- Net income $ 15,902 $ 11,516 $ 9,437 $ 8,339 ========== ========== ========== ========== Earnings per common share (1) $ 1.89 $ 1.33 $ 1.06 $ 0.91 ========== ========== ========== ========== Diluted earnings per share (1) $ 1.85 $ 1.30 $ 1.04 $ 0.89 ========== ========== ========== ========== (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. 60
LANDSTAR SYSTEM, INC. AND SUBSIDIARY SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except per share amounts) Fiscal Years 2001 2000 1999 1998 1997 ------------------------------------------------------------ Income Statement Data: Revenue $1,392,771 $1,418,492 $1,388,083 $1,283,607 $1,219,311 Investment income 3,567 4,317 2,502 1,689 Costs and expenses: Purchased transportation 1,030,454 1,046,183 1,022,203 950,343 898,746 Commissions to agents 110,513 113,721 111,666 101,409 98,425 Other operating costs 32,750 29,568 30,000 27,516 32,747 Insurance and claims 32,930 31,935 34,064 39,388 42,885 Selling, general and administrative 99,762 100,516 99,240 95,028 85,586 Depreciation and amortization 13,543 13,003 11,698 10,158 11,354 Non-recurring costs 5,270 3,247 --------- --------- --------- --------- --------- Total costs and expenses 1,319,952 1,340,196 1,308,871 1,223,842 1,172,990 --------- --------- --------- --------- --------- Operating income 76,386 82,613 81,714 61,454 46,321 Interest and debt expense 6,802 9,127 4,509 3,503 2,705 --------- --------- --------- --------- --------- Income from continuing operations before income taxes 69,584 73,486 77,205 57,951 43,616 Income taxes 26,790 28,292 31,268 23,470 18,188 --------- --------- --------- --------- --------- Income from continuing operations 42,794 45,194 45,937 34,481 25,428 Discontinued operations, net of income taxes (22,589) (738) --------- --------- --------- --------- --------- Net income $ 42,794 $ 45,194 $ 45,937 $ 11,892 $ 24,690 ========= ========= ========= ========= ========= Earnings per common share: Income from continuing operations $ 5.13 $ 5.15 $ 4.60 $ 3.13 $ 2.03 Loss from discontinued operations (2.05) (0.06) --------- --------- --------- --------- --------- Earnings per common share $ 5.13 $ 5.15 $ 4.60 $ 1.08 $ 1.97 ========= ========= ========= ========= ========= Diluted earnings per share: Income from continuing operations $ 5.01 $ 5.03 $ 4.55 $ 3.10 $ 2.02 Loss from discontinued operations (2.03) (0.06) --------- --------- --------- --------- --------- Diluted earnings per share $ 5.01 $ 5.03 $ 4.55 $ 1.07 $ 1.96 ========= ========= ========= ========= ========= 61
Dec. 29, Dec. 30, Dec. 25, Dec. 26, Dec. 27, 2001 2000 1999 1998 1997 --------- --------- -------- --------- --------- Balance Sheet Data: Total assets $ 364,651 $ 370,362 $ 365,441 $ 313,665 $ 357,179 Long-term debt, including current maturities 101,874 94,643 67,298 34,440 50,446 Shareholders' equity 117,440 107,859 106,884 111,848 151,696 62
EXHIBIT 21.1 LIST OF SUBSIDIARY CORPORATIONS OF LANDSTAR SYSTEM, INC. Jurisdiction % of Voting Name of Incorporation Securities Owned - ---- ---------------- ---------------- Subsidiary of Landstar System, Inc.: Landstar System Holdings, Inc. Delaware 100 Subsidiaries of Landstar System Holdings, Inc.: Landstar Express America, Inc. North Carolina 100 Landstar Inway, Inc. Delaware 100 Also d/b/a Inway Nationwide Transportation Services Also d/b/a Independent Freightways, Inc. Landstar Logistics, Inc. Delaware 100 Landstar Ligon, Inc. Delaware 100 Also d/b/a Ligon Contract Services in Kentucky Landstar Acquisition Corporation Alabama 100 (formerly Landstar Poole, Inc.) Landstar Ranger, Inc. Delaware 100 Also d/b/a Ranger/Landstar, Inc. in South Carolina Risk Management Claim Services, Inc. Kentucky 100 Also d/b/a RMCS, Inc. in Alabama and California Landstar Carrier Services, Inc. Delaware 100 Landstar Contractor Financing, Inc. Delaware 100 Landstar Gemini, Inc. Delaware 100 Also d/b/a Gemini Transportation Services of Greensburg, PA in Ontario and New Jersey Also d/b/a GTSI Transportation Services in Ontario Landstar Capacity Services, Inc. Delaware 100 Signature Insurance Company Cayman Islands, BWI 100 Signature Technology Services, Inc. Delaware 100 Subsidiary of Landstar Gemini, Landstar Inway, Landstar Ligon and Landstar Ranger: Landstar Corporate Services, Inc. Delaware 100 Subsidiary of Landstar Inway, Inc. Landstar T.L.C., Inc. Delaware 100 63
Exhibit 23.1 Independent Auditors' Consent The Board of Directors Landstar System, Inc.: We consent to incorporation by reference in the registration statements (No. 33-76340 and No 33-94304) on Form S-8 of Landstar System, Inc. of our reports dated February 5, 2002, relating to the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 29, 2001 and December 30, 2000, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the fiscal years ended December 29, 2001, December 30, 2000, and December 25, 1999, and all related schedules, which reports appear in the December 29, 2001 annual report on Form 10-K of Landstar System, Inc. KPMG LLP Stamford, Connecticut March 21, 2002 64
Exhibit 24.1 POWER OF ATTORNEY Landstar System, Inc. Annual Report on Form 10-K for fiscal year ended 12/29/01 KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Henry H. Gerkens and Robert C. LaRose, and each of them, with full power in each to act without the other, his true and lawful attorney-in-fact and agent, in his name, place and stead to execute on his behalf, as an officer and/or director of Landstar System, Inc. (the "Company"), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2001, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Act"), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as he might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that his said attorneys-in- fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date indicated below. David G. Bannister -------------------------- David G. Bannister DATED: February 6, 2002 65
POWER OF ATTORNEY Landstar System, Inc. Annual Report on Form 10-K for fiscal year ended 12/29/01 KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Henry H. Gerkens and Robert C. LaRose, and each of them, with full power in each to act without the other, his true and lawful attorney-in-fact and agent, in his name, place and stead to execute on his behalf, as an officer and/or director of Landstar System, Inc. (the "Company"), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2001, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Act"), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as he might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that his said attorneys-in- fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date indicated below. Ronald W. Drucker -------------------------- Ronald W. Drucker DATED: February 6, 2002 66
POWER OF ATTORNEY Landstar System, Inc. Annual Report on Form 10-K for fiscal year ended 12/29/01 KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Henry H. Gerkens and Robert C. LaRose, and each of them, with full power in each to act without the other, his true and lawful attorney-in-fact and agent, in his name, place and stead to execute on his behalf, as an officer and/or director of Landstar System, Inc. (the "Company"), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2001, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Act"), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as he might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that his said attorneys-in- fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date indicated below. William S. Elston -------------------------- William S. Elston DATED: February 6, 2002 67
POWER OF ATTORNEY Landstar System, Inc. Annual Report on Form 10-K for fiscal year ended 12/29/01 KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Henry H. Gerkens and Robert C. LaRose, and each of them, with full power in each to act without the other, his true and lawful attorney-in-fact and agent, in his name, place and stead to execute on his behalf, as an officer and/or director of Landstar System, Inc. (the "Company"), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2001, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Act"), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as he might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that his said attorneys-in- fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date indicated below. Diana M. Murphy -------------------------- Diana M. Murphy DATED: February 6, 2002 68
POWER OF ATTORNEY Landstar System, Inc. Annual Report on Form 10-K for fiscal year ended 12/29/01 KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Henry H. Gerkens and Robert C. LaRose, and each of them, with full power in each to act without the other, his true and lawful attorney-in-fact and agent, in his name, place and stead to execute on his behalf, as an officer and/or director of Landstar System, Inc. (the "Company"), the Annual Report on Form 10-K of the Company for the fiscal year ended December 29, 2001, and file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Act"), and any and all other instruments which either of said attorneys-in-fact and agents deems necessary or advisable to enable the Company to comply with the Act, the rules, regulations and requirements of the SEC in respect thereof, giving and granting to each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as he might or could do if personally present at the doing thereof, with full power of substitution and resubstitution, hereby ratifying and confirming all that his said attorneys-in- fact and agents or substitutes may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date indicated below. Merritt J. Mott -------------------------- Merritt J. Mott DATED: February 6, 2002 69