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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)	 	 	
þ	 	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934	
 	 	For the Fiscal Year Ended December 30, 2006	
 	 	or	
o	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 	 	For the transition period from          to	
 
Commission File Number: 0-21238

 
Landstar System, Inc.
(Exact name of registrant as specified in its charter)

Delaware	 	06-1313069	
(State or other jurisdiction of	 	(I.R.S. Employer	
incorporation or organization)	 	Identification No.)	
 	 	 	
13410 Sutton Park Drive South	 	32224	
Jacksonville, Florida	 	(Zip Code)	
(Address of principal executive offices)	 	 	
 
(904) 398-9400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	 	Name of Exchange on Which Registered	
 	 	 	
Common Stock, $0.01 Par Value	 	The NASDAQ Stock Market, Inc.	
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No  o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o
 
Indicate by check mark 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.   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the voting stock held by non-affiliates of the registrant was $2,715,389,000 (based on the per share closing price on June 30, 2006, the last business day of the Company’s second fiscal quarter, as reported on the NASDAQ Global Select Market). In making this calculation, the registrant has assumed, without admitting for any purpose, that all directors and executive officers of the registrant, and no other persons, are affiliates.
 
The number of shares of the registrant’s common stock, par value $.01 per share (the “Common Stock”), outstanding as of the close of business on February 16, 2007 was 56,052,780.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the following document are incorporated by reference in this Form 10-K as indicated herein:

 	 	Part of 10-K
	
Document	 	into Which Incorporated	
 	 	 	 	 	
Proxy Statement relating to Landstar System, Inc.’s Annual Meeting of Stockholders scheduled to be held on May 3, 2007	 	 	Part III	 	

 
 
LANDSTAR SYSTEM, INC.
 
2006 ANNUAL REPORT ON FORM 10-K
 
TABLE OF CONTENTS

 	 	 	 	Page	
 	 	 	 	 	 	 	 	 	
PART I	
 	Item 1.	 	 	Business	 	 	3	 	
 	Item 1A.	 	 	Risk Factors	 	 	11	 	
 	Item 1B.	 	 	Unresolved Staff Comments	 	 	15	 	
 	Item 2.	 	 	Properties	 	 	15	 	
 	Item 3.	 	 	Legal Proceedings	 	 	15	 	
 	Item 4.	 	 	Submission of Matters to a Vote of Security Holders	 	 	16	 	
 	
PART II	
 	Item 5.	 	 	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	 	 	16	 	
 	Item 6.	 	 	Selected Financial Data	 	 	19	 	
 	Item 7.	 	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	19	 	
 	Item 7A.	 	 	Quantitative and Qualitative Disclosures About Market Risk	 	 	31	 	
 	Item 8.	 	 	Financial Statements and Supplementary Data	 	 	33	 	
 	Item 9.	 	 	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	 	 	59	 	
 	Item 9A.	 	 	Controls and Procedures	 	 	59	 	
 	Item 9B.	 	 	Other Information	 	 	62	 	
 	
PART III	
 	Item 10.	 	 	Directors, Executive Officers and Corporate Governance	 	 	62	 	
 	Item 11.	 	 	Executive Compensation	 	 	63	 	
 	Item 12.	 	 	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	 	 	63	 	
 	Item 13.	 	 	Certain Relationships and Related Transactions, and Director Independence	 	 	63	 	
 	Item 14.	 	 	Principal Accounting Fees and Services	 	 	63	 	
 	
PART IV	
 	Item 15.	 	 	Exhibits, Financial Statement Schedules	 	 	63	 	
Signatures	 	 	67	 	
 EX-10.13 Form of Key Exec Employment Agreement	
 EX-10.19 Amendment to Solicitation Agreement	
 EX-21.1 List of Subsidiaries	
 EX-23.1 Consent of KPMG	
 EX-24.1 Powers of Attorney	
 EX-31.1 Section 302 Certification of CEO	
 EX-31.2 Section 302 Certification of co-CFO	
 EX-31.3 Section 302 Certification of co-CFO	
 EX-32.1 Section 906 Certification of CEO	
 EX-32.2 Section 906 Certification of co-CFO	
 EX-32.3 Section 906 Certification of co-CFO	

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PART I

Item 1.  	Business	
 
General
 
Landstar System, Inc. was incorporated in January 1991 under the laws of the State of Delaware. It acquired all of the capital stock of its predecessor, Landstar System Holdings, Inc. (“LSHI”) on March 28, 1991. 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 Carrier Services”), Landstar Global Logistics, Inc. (“Landstar Global Logistics”), Landstar Logistics, Inc. (“Landstar Logistics”), Landstar Express America, Inc. (“Landstar Express America”), Landstar Contractor Financing, Inc. (“LCFI”), Risk Management Claim Services, Inc. (“RMCS”) and Signature Insurance Company (“Signature”). Landstar Ranger, Landstar Inway, Landstar Ligon, Landstar Gemini, Landstar Carrier Services, Landstar Global Logistics, Landstar Logistics and Landstar Express America are collectively herein referred to as Landstar’s “Operating Subsidiaries.” Landstar System, Inc., LSHI, LCFI, RMCS, Signature and the Operating Subsidiaries are collectively referred to herein as “Landstar” or the “Company,” unless the context otherwise requires. The Company’s principal executive offices are located at 13410 Sutton Park Drive South, Jacksonville, Florida 32224 and its telephone number is (904) 398-9400. The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, proxy and current reports on Form 8-K as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). The Company’s website is www.landstar.com. The SEC maintains a website at http://www.sec.gov that contains the Company’s current and periodic reports, proxy and information statements and other information filed electronically with the SEC.
 
Historical 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, an affiliate of DB Alex. Brown LLC (formerly known as Alex. Brown & Sons Incorporated), and certain management employees of the Company. In March 1993, Landstar completed a recapitalization which consisted of three principal components: (i) an initial public offering of Common Stock at a price of $13.00 per share, $1.625 per share adjusted for subsequent stock splits, (ii) the retirement of all its outstanding 14% Senior Subordinated 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.
 
On July 17, 2002, the Company declared a two-for-one stock split effected in the form of a 100% stock dividend distributed on August 12, 2002 to stockholders of record on August 2, 2002.
 
On October 15, 2003, the Company declared a two-for-one stock split effected in the form of a 100% stock dividend distributed on November 13, 2003 to stockholders of record on November 3, 2003.
 
On December 9, 2004, the Company declared a two-for-one stock split effected in the form of a 100% stock dividend distributed on January 7, 2005 to stockholders of record on December 28, 2004.
 
Description of Business
 
Landstar is a non-asset based transportation and logistics services company, providing transportation capacity and related transportation services to shippers throughout the United States, and to a lesser extent, in Canada, and between the United States and Canada, Mexico and other countries. These business services emphasize safety, information coordination and customer service and are delivered through a network of independent commission sales agents and third party capacity providers linked together by a series of technological applications which are provided and coordinated by the Company. The Company’s independent
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commission sales agents typically enter into non-exclusive contractual arrangements with Landstar and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “Business Capacity Owner Independent Contractors” or “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under non-exclusive contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers, railroads, unrelated bus providers and Warehouse Capacity Owners (as defined below). Through this network of agents and capacity providers, Landstar operates a transportation and logistics services business primarily throughout North America with revenue exceeding $2.5 billion during the most recently completed fiscal year.
 
Landstar provides transportation services to a variety of industries, including iron and steel, automotive products, paper, lumber and building products, aluminum, chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military hardware. In addition, Landstar provides transportation services to other transportation companies including logistics and less-than-truckload service providers. 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), temperature-controlled vans and containers. In addition, Landstar provides dedicated contract and logistics solutions, including freight optimization and less than truckload freight consolidations. Landstar also provides expedited land and air delivery of time-critical freight and the movement of containers via ocean.
 
Landstar focuses on providing transportation and logistics services which emphasize customer service and information coordination among its independent commission sales agents, customers and capacity providers. Landstar intends to continue developing appropriate systems and technologies that offer integrated transportation and logistics solutions to meet the total needs of its customers.
 
During the second half of 2006, the Company began the roll-out of its warehouse initiative. The Company’s strategy is to offer its customers, through its independent commission sales agent network, national warehousing services without owning or leasing facilities or hiring employees to work at warehouses. The initial phase of developing the product offering included the identification of qualified independent regional warehouse facilities. As of December 30, 2006, the Company has entered into non-exclusive arrangements with 102 independent warehouse capacity providers (“Warehouse Capacity Owners” or “WCOs”) in the United States. The Company’s warehouse offering is designed to provide the availability of warehouse capacity nationally to its customers utilizing a network of independently owned and operated regional warehouse facilities linked by a single warehouse information technology application. The Company believes the addition of warehousing services to its transportation and logistics product offerings will contribute to additional freight transportation opportunities to and from the network of warehouse facilities. Revenue derived directly from warehouse storage and services will be reported net of the amount earned by the WCO. In general, WCOs are paid a fixed percentage of the gross revenue for storage and services provided through their warehouse. The roll-out of warehousing services will continue throughout 2007. Warehousing services were not a significant contributor to revenue or earnings in 2006.
 
The Company has three reportable business segments. These are the carrier, global logistics and insurance segments. The financial information relating to the Company’s reportable business segments as of and for the fiscal years ending 2006, 2005 and 2004 is included in Footnote 10 of Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
 
The carrier segment consists of Landstar Ranger, Landstar Inway, Landstar Ligon, Landstar Gemini and Landstar Carrier Services. The carrier segment primarily provides transportation services to the truckload market for a wide range of general commodities over irregular or non-repetitive routes utilizing dry and specialty vans and unsided trailers, including flatbed, drop deck and specialty. It also 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 Business Capacity Owner Independent Contractors and Truck Brokerage Carriers.
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The nature of the carrier segment business is such that a significant portion of its operating costs varies directly with revenue. At December 30, 2006, the carrier segment operated a fleet of 8,794 tractors, provided by 8,140 BCO Independent Contractors, and 13,560 trailers. Approximately 4,800 of the trailers available to the carrier segment are provided by BCO Independent Contractors, 1,022 are leased by the Company at rental rates that vary with the revenue generated through the trailer, 6,028 are owned by the Company, 1,591 are under a long-term rental arrangement at a fixed rate, and 119 are rented on a short-term basis from trailer rental companies. In addition, the Company has over 23,000 qualified Truck Brokerage Carriers who provide additional tractor and trailer capacity. Over 15,000 of these qualified Truck Brokerage Carriers have moved at least one load of freight for the Company during the 180 day period immediately preceding December 30, 2006. The use of BCO Independent Contractors, Truck Brokerage Carriers and other third party capacity providers enables the carrier segment to utilize a large fleet of revenue equipment while minimizing capital investment and fixed costs, thereby enhancing return on investment. BCO Independent Contractors who provide a tractor receive a percentage of the revenue generated for the freight hauled and a larger percentage of such revenue for providing both a tractor and a trailer. Truck Brokerage Carriers are paid a negotiated rate for each load they haul. The carrier segment’s network of over 1,100 independent commission sales agent locations provides an in-market presence throughout the continental United States and Canada.
 
The global logistics segment is comprised of Landstar Global Logistics and its subsidiaries, Landstar Logistics and Landstar Express America. Transportation and logistics services provided by the global logistics segment include the arrangement of multimodal (ground, air, ocean and rail) moves, contract logistics, truck brokerage, emergency and expedited ground, air and ocean freight, bus brokerage and warehousing. The global logistics segment markets its services primarily through independent commission sales agents and utilizes capacity provided by BCO Independent Contractors and other third party capacity providers, including Truck Brokerage Carriers, railroads, air and ocean cargo carriers, bus providers and WCOs. Global logistics independent commission sales agents generally receive a percentage of the gross profit from each load they generate or a percentage of the gross revenue from warehousing services. BCO Independent Contractors who provide truck capacity to the global logistics segment are compensated based on a percentage of the revenue generated by the haul depending on the type and timing of the shipment. Truck Brokerage Carriers are paid either a negotiated rate for each load they haul or a contractually agreed-upon fixed amount per load. Railroads, air and ocean cargo carriers generally receive a contractually fixed amount per load and bus providers receive a negotiated rate per mile or per day. Warehouse Capacity Owners generally are paid a fixed percentage of the gross revenue for storage and services provided through their warehouse.
 
The nature of the global logistics segment business is such that a significant portion of its operating costs also varies directly with revenue. At December 30, 2006, the global logistics segment operated a fleet of 411 trucks, provided by approximately 376 BCO Independent Contractors. Global logistics segment BCO Independent Contractors primarily provide cargo vans and straight trucks that are utilized for emergency and expedited freight services. The global logistics segment’s network of over 170 independent commission sales agents provides over 170 sales locations. Approximately 29% of the global logistics segment’s revenue and 8% of consolidated revenue is contributed by one independent commission sales agent who derives the majority of his revenue from one customer. During the fiscal years 2006, 2005 and 2004, 15%, 35% and 12%, respectively, of the global logistics segment’s revenue was derived from transportation services provided in support of disaster relief efforts provided primarily under a contract between Landstar Express America and the United States Department of Transportation/Federal Aviation Administration (the “FAA Contract”).
 
The insurance segment is comprised of Signature, a wholly-owned offshore insurance subsidiary, and RMCS. The insurance segment provides risk and claims management services to Landstar’s operating subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to Landstar’s operating subsidiaries.
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Factors Significant to the Company’s Operations
 
Management believes the following factors are particularly significant to the Company’s operations:
 
Agent Network
 
Management believes the Company has more independent commission sales agents than any other non-asset based transportation and logistics services company. Landstar’s network of over 1,300 independent commission sales agent locations provides the Company with regular contact with shippers at the local level and the capability to be highly responsive to shippers’ changing needs. The agent network also 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. Through its agent network, the Company believes it offers smaller shippers a level of service comparable to that typically enjoyed only by larger customers. Examples of services that Landstar is able to make available through the agent network to smaller shippers include the ability to provide transportation services on short notice (often within hours from notification to time 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).
 
The typical Landstar agent maintains a relationship with a number of shippers and services these shippers by providing a base of operations for the Company’s BCO Independent Contractors and other third party capacity providers. Independent commission sales agents in the carrier segment receive a commission generally between 5% and 8% of the revenue they generate if the load is hauled by a BCO Independent Contractor and a contractually agreed-upon percentage of the revenue or the gross profit, defined as revenue less the cost of purchased transportation, from each load they generate if hauled by a Truck Brokerage Carrier. In most cases, the carrier segment independent commission sales agents are paid volume-based incentives for freight hauled by BCO Independent Contractors. Global logistics independent commission sales agents are typically paid a contractually agreed-upon percentage of the gross profit from each load they generate or a percentage of the gross revenue from sourcing warehousing services.
 
The Company’s primary day to day contact with its customers is through its agents and not through employees of the Company. Nevertheless, it is important to note that Operating Subsidiaries contract directly with customers and generally assume the credit risk and liability for freight losses or damages.
 
The carrier segment’s independent commission sales agents use the Company’s Landstar Electronic Administrative Dispatch System (LEADS) software program which enables these agents to enter available freight, dispatch capacity and process most administrative procedures and then communicate that information to Landstar and its capacity providers via the internet. The global logistics segment’s independent commission sales agents use other Landstar proprietary software to process customer shipments and communicate the necessary information to third party capacity providers and Landstar. The Company’s web-based available freight and truck information system provides a listing of available trucks to the Company’s independent commission sales agents.
 
The Operating Subsidiaries emphasize programs to support the agents’ operations and to establish pricing parameters. The carrier segment and global logistics segment maintain regular contact with their independent commission sales agents and Landstar holds an annual company-wide agent convention.
 
During 2006, 490 agents generated revenue for Landstar of at least $1 million each, or approximately $2.3 billion of Landstar’s total revenue, and one agent generated approximately $196,000,000 of Landstar’s total revenue.
 
Although the Company generally enters into non-exclusive contractual relationships with its independent commission sales agents, management believes that the majority of the agents who generate revenue of $1 million or more choose to represent Landstar exclusively. Historically, Landstar has experienced very limited agent turnover among its larger-volume agents.
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Capacity
 
The Company relies exclusively on independent third parties for its hauling and warehousing capacity. These third party capacity providers consist of BCO Independent Contractors, Truck Brokerage Carriers, air and ocean cargo carriers, railroads, bus providers and WCOs. Landstar’s use of capacity provided by its BCO Independent Contractors and other third party capacity providers allows it to maintain a lower level of capital investment, resulting in lower fixed costs. Historically, with the exception of air revenue, the margin generated from freight hauled by BCO Independent Contractors has been greater than from freight hauled by other third party capacity providers.
 
BCO Independent Contractors.  Management believes the Company has the largest fleet of truckload BCO Independent Contractors in the United States. This provides marketing, operating, safety, recruiting, retention and financial advantages to the Company. The Company’s BCO Independent Contractors are compensated based on a fixed percentage of the revenue generated from the freight they haul. This percentage generally ranges from 60% to 70% where the BCO Independent Contractor provides only a tractor and from 73% to 79% where the BCO Independent Contractor provides both a tractor and a trailer. The BCO Independent Contractor must pay substantially all of 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 BCO Independent Contractors can view a complete listing of all the Company’s available freight, allowing them to consider rate, size, origin and destination when planning trips.
 
The Landstar Contractors’ Advantage Purchasing Program leverages Landstar’s purchasing power to provide discounts to eligible BCO Independent Contractors when they purchase equipment, fuel, tires and other items. In addition, LCFI provides a source of funds at competitive interest rates to the BCO Independent Contractors to purchase primarily trailing equipment and mobile communication equipment.
 
Trucks provided to the Company by the BCO Independent Contractors were 9,205 at December 30, 2006, compared to 8,728 at December 31, 2005. The number of trucks provided by BCO Independent Contractors fluctuates daily as a result of truck recruiting and truck terminations. Trucks recruited were higher in 2006 than in 2005 and truck terminations were lower in 2006 compared to 2005 resulting in a net gain of 477 trucks. Landstar’s truck turnover ratio was approximately 28% in 2006 compared to 31% in 2005. Approximately half of this turnover was attributable to BCO Independent Contractors who had been BCO Independent Contractors with the Company for less than one year. Management believes that factors that have historically favorably impacted turnover include the Company’s extensive agent network, the Company’s programs to reduce the operating costs of its BCO Independent Contractors and Landstar’s reputation for quality, service and reliability. Management believes that a reduction in the amount of available freight may cause an increase in truck turnover.
 
Truck Brokerage Carriers.  The Company maintains a database of over 23,000 qualified Truck Brokerage Carriers who provide additional truck hauling capacity to the Company. Truck Brokerage Carriers are paid either a negotiated rate for each load they haul or a contractually agreed-upon amount per load. The Company recruits, qualifies, establishes contracts with, tracks safety ratings and service records of and generally maintains the relationships with these third party trucking companies. In addition to augmenting the Company’s capability, the use of Truck Brokerage Carriers enables the Company to pursue different types and quality of freight such as temperature-controlled, short-haul traffic and, in certain instances, lower priced freight that would generally not be handled by the Company’s BCO Independent Contractors.
 
The Company maintains an internet site through which Truck Brokerage Carriers can view a listing of all the Company’s freight that is available to be hauled by Truck Brokerage Carriers.
 
The Landstar SavingsPlus Program leverages Landstar’s purchasing power to provide discounts to eligible Truck Brokerage Carriers when they purchase fuel and equipment and provides the Truck Brokerage Carriers with an electronic payment option.
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Third Party Rail, Air, Ocean and Other Transportation Capacity.  The Company maintains contractual relationships with various railroads and air cargo capacity providers. These relationships allow the Company to pursue the freight best serviced by these forms of transportation capacity. Railroads and air and ocean cargo carriers are generally paid a contractually fixed amount per load. The Company also contracts with other third party capacity providers, such as air charter and bus companies, when required by specific customer needs.
 
Warehouse Capacity Owners.  The Company maintains non-exclusive contractual relationships with 102 WCOs. The Company expects that warehousing services, introduced in August 2006, will provide its customers with additional resources to manage their warehousing services and storage needs. WCOs generally are paid a fixed percentage of the gross revenue for storage and services provided through their warehouse.
 
Diversity of Services Offered
 
The Company offers its customers a wide range of transportation and logistics services through the Operating Subsidiaries, including a fleet of diverse trailing equipment, extensive geographic coverage and more recently, warehousing services. Specialized services offered by the Company include those provided by a large fleet of flatbed trailers, multi-axle trailers capable of hauling extremely heavy or oversized loads, drivers certified to handle ammunition and explosives shipments for the U.S. Department of Defense, emergency and expedited surface and air cargo services and intermodal capability with railroads and, to a lesser extent, steamship lines.
 
The following table illustrates the diversity of the trailing equipment available to the Company as of December 30, 2006:

Trailers by Type	 	 	 	
 	 	 	 	 	
Vans	 	 	9,830	 	
Temperature-controlled	 	 	117	 	
Flatbeds, including step decks, drop decks and low boys	 	 	3,622	 	
 	 	 	 	 	
Total	 	 	13,569	 	

Customers
 
The Company has a diversified group of customers. The Company’s top 100 customers accounted for approximately 51% and 55% of the Company’s revenue during fiscal 2006 and 2005, respectively. Management believes that 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. Increasingly, larger shippers are substantially reducing the number of authorized carriers they use in favor of a small number of “core carriers”, such as the Company, whose size and diverse service capabilities enable these core carriers to satisfy most of the shippers’ transportation needs. Examples of national account customers include the United States Department of Defense, the United States Department of Transportation/Federal Aviation Administration (the “FAA”) and many of the companies included in the Fortune 500. Large shippers are also using third party logistics providers (“3PLs”) to outsource the management and coordination of their transportation needs. In turn, 3PLs require significant amounts of capacity from carriers, such as the Company, to service the needs of shippers. In addition, other transportation companies utilize the Company’s transportation capacity to satisfy their obligations to their shippers. There were 11 transportation service providers, including 3PLs, included in the Company’s top 25 revenue generating accounts for the fiscal year ended December 30, 2006. In addition, management believes the Company’s network of agents and third party capacity providers allows it to efficiently attract and service smaller shippers which may not be as desirable to other large transportation providers (see above under “Agent Network”).
 
Prior to fiscal year 2005, no customer accounted for more than 10% of the Company’s revenue. Historically, the United States Government has been the Company’s largest customer. During 2006, 2005 and 2004, revenue derived from the United States Government was approximately 9%, 17% and 9% of revenue, respectively. Included in the revenue derived from the United States Government in all three fiscal years was
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revenue related to disaster relief services provided by the Company for storms that impacted the United States. These disaster relief services were provided primarily under a contract with the FAA. Revenue included $100.7 million, $275.9 million and $63.8 million in 2006, 2005 and 2004, respectively, generated primarily under the FAA contract. The FAA contract was scheduled to expire on December 31, 2006. Landstar Express America and the FAA entered into an amendment (the “Amendment”) to the existing contract extending the term through June 30, 2007. The Amendment also provides the FAA with the option to extend the term of the FAA contract through December 31, 2007.
 
The amount of revenue derived under the FAA contract, if any, is dependent on the occurrence of specific events, primarily disasters, natural or otherwise, for which the Company provides emergency transportation services in support of disaster relief efforts undertaken by the United States Government and administered by the FAA. Because of the unpredictable nature of the occurrence and severity of such events, there can be no assurance that such events will occur, and if such events occur, the extent to which the FAA will require the services of Landstar Express America, if at all.
 
Technology
 
Management believes leadership in the development and application of technology is an ongoing part of providing high quality service at competitive prices. The Company’s focus is on developing and implementing software applications which are designed to improve its operational and administrative efficiency, assist its independent commission sales agents in sourcing capacity, assist customers in meeting their transportation needs and assist its third party capacity providers in identifying desirable freight. Landstar manages its technology programs centrally through its information services department.
 
The Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and, to a lesser extent, in Rockford, Illinois. Landstar relies, in the regular course of its business, on the proper operation of its information technology systems.
 
Corporate Services
 
Management believes that significant advantages result from the collective expertise and corporate services afforded by Landstar’s corporate management. The primary services provided are:

accounting, budgeting and taxes	 	quality programs	
finance and treasury services	 	risk management insurance services	
human resource management	 	safety	
legal	 	strategic planning	
purchasing	 	technology and management information systems	
 
Competition
 
Landstar competes primarily in the transportation and logistics services industry with truckload carriers, intermodal transportation and logistics service providers, railroads, less-than-truckload carriers and other non-asset based transportation and logistics service providers. The transportation services industry is extremely competitive and fragmented.
 
Management believes that competition for the freight transported by the Company is based primarily on service and efficiency and, to a lesser degree, on freight rates alone. 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 and logistics service providers.
 
Self-Insured Claims
 
Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. Landstar’s retained liability for individual commercial trucking claims varies depending on when such claims are incurred. For commercial trucking claims incurred prior to June 19, 2003 and subsequent
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to March 30, 2004, Landstar retains liability up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and $250,000 for each cargo claim. The Company’s exposure to liability associated with accidents incurred by other third party capacity providers who transport freight on behalf of the Company is reduced by various factors including the extent to which they maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo or workers’ compensation claims or the unfavorable development of existing claims could be expected to materially adversely affect Landstar’s results of operations.
 
Insurance Above Self-Insured Retention
 
The Company has historically maintained insurance coverage above its self-insured retention amounts. For the fiscal year ended and as of December 30, 2006, the Company maintains insurance for liabilities attributable to commercial trucking accidents with third party insurance companies for each and every occurrence in an amount in excess of $200,000,000 per occurrence above the Company’s $5,000,000 self insured retention. Historically, the Company has relied on a limited number of third party insurance companies to provide insurance coverage for commercial trucking claims in excess of specific per occurrence limits, up to various maximum amounts. Over the past few years, the premiums proposed by the third party insurance companies providing coverage for commercial trucking liability insurance over the Company’s self insured retention amounts have varied dramatically. In an attempt to manage the significant fluctuations in the cost of these premiums required by the third party insurance companies, the Company has historically increased or decreased the level of its exposure to commercial trucking claims on a per occurrence basis. To the extent that the third party insurance companies increase their proposed premiums for coverage of commercial trucking claims, the Company may increase its exposure in aggregate or on a per occurrence basis. However, to the extent the third party insurance companies reduce their premiums proposed for coverage of commercial trucking claims, the Company may reduce its exposure in aggregate or on a per occurrence basis.
 
Regulation
 
Certain of the Operating Subsidiaries are considered motor carriers and/or brokers authorized to arrange for transportation services by motor carriers which are regulated by the Federal Motor Carrier Safety Administration (the “FMCSA”) and by various state agencies. The FMCSA has broad regulatory powers, with respect to activities such as motor carrier operations, practices, periodic financial reporting and insurance. Subject to federal and state regulatory authorities or regulation, the Company may transport most types of freight to and from any point in the United States over any route selected by the Company.
 
Interstate motor carrier operations are subject to safety requirements prescribed by the FMCSA. Each driver, whether a BCO Independent Contractor or Truck Brokerage Carrier, is required to have a commercial driver’s license and is subject to mandatory drug and alcohol testing. The FMCSA’s commercial driver’s license and drug and alcohol testing requirements have not adversely affected the Company’s ability to source the capacity necessary to meet its customers’ transportation needs.
 
In addition, certain of the Operating Subsidiaries are licensed as ocean transportation intermediaries by the U.S. Federal Maritime Commission as non-vessel-operating common carriers and/or as ocean freight forwarders. The Company’s air transportation activities in the United States are subject to regulation by the U.S. Department of Transportation as an indirect air carrier. The Company is also subject to regulations and requirements relating to safety and security promulgated by, among others, the U.S. Department of Homeland Security through the Bureau of U.S. Customs and Border Protection and the Transportation Security Administration, the Canada Border Services Agency and various state and local agencies and port authorities.
 
The transportation industry is subject to possible regulatory and legislative changes (such as the possibility of more 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
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the demand for common or contract carrier services or the cost of providing truckload or other transportation or logistics services.
 
Seasonality
 
Landstar’s operations are subject to seasonal trends common to the trucking industry. Results of operations for the quarter ending in March are typically lower than the quarters ending in June, September and December.
 
Employees
 
As of December 30, 2006, the Company and its subsidiaries employed 1,298 individuals. Approximately 20 Landstar Ranger drivers (out of a Company total of 9,205 drivers for BCO Independent Contractors) are members of the International Brotherhood of Teamsters. The Company considers relations with its employees to be good.

Item 1A.  	Risk Factors	
 
Increased severity or frequency of accidents and other claims.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Self Insured-Claims,” potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. Landstar’s retained liability for individual commercial trucking claims varies depending on when such claims are incurred. For commercial trucking claims incurred prior to June 19, 2003 and subsequent to March 30, 2004, Landstar retains liability up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and $250,000 for each cargo claim. The Company’s exposure to liability associated with accidents incurred by other third party capacity providers who haul freight on behalf of the Company is reduced by various factors including the extent to which they maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo or workers’ compensation claims or the unfavorable development of existing claims could be expected to materially adversely affect Landstar’s results of operations.
 
Dependence on third party insurance companies.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Insurance Above Self-Insured Retention,” the Company is dependent on a limited number of third party insurance companies to provide insurance coverage in excess of its self-insured retention amounts. Historically, the Company has maintained insurance coverage for commercial trucking claims in excess of specific per occurrence limits, up to various maximum amounts, with a limited number of third party insurance companies. Over the past three years, the premiums proposed by the third party insurance companies providing coverage for commercial trucking liability insurance above the Company’s self-insured retention amounts have varied dramatically. In an attempt to manage the significant fluctuations in the cost of these premiums required by the third party insurance companies, the Company has historically increased or decreased the level of its exposure to commercial trucking claims on a per occurrence basis. To the extent the third party insurance companies increase their proposed premiums for coverage of commercial trucking liability claims, the Company may increase its exposure or reduce the maximum amount of coverage in aggregate or on a per occurrence basis. However, to the extent the third party insurance companies reduce their premiums proposed for coverage of commercial trucking claims, the Company may reduce its exposure or increase the maximum amount of coverage in aggregate or on a per occurrence basis.
 
Dependence on independent commission sales agents.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Agent Network,” the Company markets its services primarily through independent commission sales agents, and currently has a network of over 1,100 such agents. During 2006, 490 agents generated revenue for Landstar of at least $1 million each, or approximately 92% of Landstar’s consolidated revenue and one agent generated approximately $196,000,000, or 8%, of Landstar’s total revenue. Although the Company competes with motor carriers and other third parties for the services of these independent commission sales agents, Landstar has historically experienced very limited agent turnover
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among its larger-volume agents. However, Landstar’s contracts with its agents are typically terminable upon 10 to 30 days notice by either party and generally do not restrict the ability of a former agent to compete with Landstar following any such termination. The loss of some of the Company’s key agents or a significant decrease in volume generated by Landstar’s larger agents could have a material adverse effect on Landstar, including its results of operations and revenue.
 
Dependence on third party capacity providers.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Capacity,” Landstar does not own trucks or other transportation equipment (other than trailing equipment) and relies on third party capacity providers, including BCO Independent Contractors, Truck Brokerage Carriers, railroads, and air and ocean cargo carriers to transport freight for its customers. The Company competes with motor carriers and other third parties for the services of BCO Independent Contractors and other third party capacity providers. Freight hauled by BCO Independent Contractors represented 54.7% of Landstar’s revenue in 2006. A significant decrease in available capacity provided by either the Company’s BCO Independent Contractors or other third party capacity providers could have a material adverse effect on Landstar, including its results of operations and revenue.
 
Change in capacity mix.  Historically, the Company’s carrier segment has primarily relied on capacity provided by BCO Independent Contractors. Pursuant to a plan to augment its available capacity and increase its revenue, the Company has been increasing the carrier segment’s use of capacity provided by Truck Brokerage Carriers. Freight hauled by BCO Independent Contractors represented 54.7%, 55.9% and 64.2% of Landstar’s consolidated revenue in 2006, 2005 and 2004, respectively. Historically, with the exception of air revenue, the net margin (defined as revenue less the cost of purchased transportation and agent commissions) generated from freight hauled by BCO Independent Contractors has been greater than freight hauled by other third party capacity providers. An increase in the amount of revenue generated through other third party capacity providers without an increase in total revenue and/or a corresponding reduction in other costs, including other operating, insurance and claims, selling, general and administrative and depreciation and amortization could have a negative effect on the Company’s operating margin (defined as operating income divided by revenue).
 
Contract with the United States Department of Transportation/Federal Aviation Administration.   Historically, the United States Government has been the Company’s largest customer. During fiscal years 2001 through 2003, revenue derived from various departments of the United States Government, primarily the United States Department of Defense, contributed between 5.0% and 7.5% of the Company’s annual revenue. During 2006, 2005 and 2004, revenue derived from the United States Government, represented approximately 9%, 17% and 9% of consolidated revenue, respectively. Included in revenue derived from United States Government during fiscal years 2006, 2005 and 2004 was $100.7 million, $275.9 million and $63.8 million of revenue, respectively, related to disaster relief services provided by the Company for storms that impacted the United States. These emergency transportation services were provided primarily under a contract (the “FAA Contract”) with the Federal Aviation Administration (the “FAA”). The $100.7 million of revenue recognized under the FAA Contract during the 2006 fiscal year generated $14.6 million of operating income which, net of related income taxes, increased net income $8.9 million. The $275.9 million of revenue recognized under the FAA Contract during the 2005 fiscal year generated $51.9 million of operating income which, net of related income taxes, increased net income $31.6 million. The $63.8 million of revenue recognized under the FAA Contract during the 2004 fiscal year generated $11.8 million of operating income which, net of related income taxes, increased net income $7.3 million.
 
On December 20, 2006, the FAA Contract was amended to extend the term of the contract through June 30, 2007, with an option held by the FAA to extend the term through December 31, 2007. The FAA also notified the public that the United States Government intends to award a new contract by June 30, 2007, but requires the six month option referred to above in the event the award of a new contract is not made by the intended date or a post-award transition period is required.
 
It is expected that the United States Government will request proposals from various companies for a new contract regarding disaster relief services. The Company cannot predict whether a request for proposal, if any, will: a) be made to Landstar Express America, b) include pricing and other provisions that are the same or
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similar to the current contract provisions, or c) if a request for proposal is received by Landstar Express America, there can be no assurances that Landstar Express America would submit a proposal, or if it did, the FAA would select Landstar Express America as the transportation provider for disaster relief services in periods subsequent to June 2007. Nor can there be any assurance that the FAA will remain the agency of the United States Government responsible for contracting transportation services in support of disaster relief efforts.
 
The amount of revenue derived under the United States Government contract, if any, is dependent on the occurrence of specific events, primarily disasters, natural or otherwise, for which the Company provides emergency transportation services in support of disaster relief efforts undertaken by the United States Government and administered by the FAA. Because of the unpredictable nature of the occurrence and severity of such events, even if Landstar Express America were to enter into a new contract with the United States Government, there can be no assurance that such events will occur, and if such events occur, the extent to which the United States Government will require the services of Landstar Express America, if at all.
 
Decreased demand for transportation services.  The transportation industry historically has experienced cyclical financial results as a result of slowdowns in economic activity, the business cycles of customers, price increases by capacity providers, interest rate fluctuations, and other economic factors beyond Landstar’s control. Certain of the Company’s third party capacity providers can be expected to charge higher prices to cover increased operating expenses, and the Company’s operating income may decline if it is unable to pass through to its customers the full amount of such higher transportation costs. If a slowdown in economic activity or a downturn in the Company’s customers’ business cycles causes a reduction in the volume of freight shipped by those customers, the Company’s operating results could be materially adversely affected.
 
Substantial industry competition.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Competition,” Landstar competes primarily in the transportation and logistics services industry. The transportation and logistics services industry is extremely competitive and fragmented. Landstar competes primarily with truckload carriers, intermodal transportation service providers, railroads, less-than-truckload carriers, third party broker carriers and other non-asset based transportation and logistics service providers. Management believes that competition for the freight transported by the Company is based primarily on service and efficiency and, to a lesser degree, on freight rates alone. Historically, competition has created downward pressure on freight rates. In addition, many large shippers are using third party logistics providers (“3PLs”) to outsource the management and coordination of their transportation needs rather than directly arranging for transportation services with carriers, such as the Company. Usage by large shippers of 3PLs often provide carriers, such as the Company, with a less direct relationship with the shipper and, as a result, may increase pressure on freight rates while making it more difficult for the Company to compete primarily based on service and efficiency. A decrease in freight rates could have a material adverse effect on Landstar, including its revenue and operating income.
 
Dependence on key personnel.  The Company is dependent on the services of certain of its executive officers. Although the Company believes it has an experienced and highly qualified management group, the loss of the services of certain of the Company’s executive officers could have a material adverse effect on the Company.
 
Disruptions or failures in the Company’s computer systems.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Technology,” the Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and to a lesser extent in Rockford, Illinois. Landstar relies in the regular course of its business on the proper operation of its information technology systems to link its extensive network of customers, agents and third party capacity providers, including its BCO Independent Contractors. Any significant disruption or failure of its technology systems could significantly disrupt the Company’s operations and impose significant costs on the Company.
 
Potential changes in fuel taxes.  From time to time, various legislative proposals are introduced to increase federal, state, or local taxes, including taxes on motor fuels. The Company cannot predict whether, or in what form, any increase in such taxes applicable to the transportation services provided by the Company will be enacted and, if enacted, whether or not the Company’s BCO Independent Contractors and Truck
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Brokerage Carriers would attempt to pass the increase onto the Company or if the Company will be able to reflect this potential increased cost of capacity, if any, in prices to customers. Any such increase in fuel taxes could have a material adverse effect on Landstar, including its results of operations and financial condition. Moreover, competition from other transportation service companies including those that provide non-trucking modes of transportation and intermodal transportation would likely increase if state or federal taxes on fuel were to increase without a corresponding increase in taxes imposed upon other modes of transportation.
 
Status of independent contractors.  From time to time, various legislative or regulatory proposals are introduced at the federal or state levels to change the status of independent contractors’ classification to employees for either employment tax purposes (withholding, social security, medicare and unemployment taxes) or other benefits available to employees. Currently, most individuals are classified as employees or independent contractors for employment tax purposes based on 20 “common-law” factors rather than any definition found in the Internal Revenue Code or Internal Revenue Service regulations. In addition, under Section 530 of the Revenue Act of 1978, taxpayers that meet certain criteria may treat an individual as an independent contractor for employment tax purposes if they have been audited without being told to treat similarly situated workers as employees, if they have received a ruling from the Internal Revenue Service or a court decision affirming their treatment, or if they are following a long-standing recognized practice.
 
The Company classifies all of its BCO Independent Contractors and independent commission sales agents as independent contractors for all purposes, including employment tax and employee benefit purposes. There can be no assurance that legislative, judicial, or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the employee/independent contractor classification of BCO Independent Contractors or independent commission sales agents currently doing business with the Company. Although management believes that there are no proposals currently pending that would change the employee/independent contractor classification of BCO Independent Contractors or independent commission sales agents currently doing business with the Company, the costs associated with potential changes, if any, with respect to these BCO Independent Contractor classifications could have a material adverse effect on Landstar, including its results of operations and financial condition if Landstar were unable to reflect them in its fee arrangements with the BCO Independent Contractors or independent commission sales agents or in the prices charged to its customers.
 
Regulatory and legislative changes.  As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Regulation,” certain of the Operating Subsidiaries are motor carriers and/or brokers authorized to arrange for transportation services by motor carriers which are regulated by the Federal Motor Carrier Safety Administration (FMCSA), an agency of the U.S. Department of Transportation, and by various state agencies. Certain of the Operating Subsidiaries are licensed as ocean transportation intermediaries by the U.S. Federal Maritime Commission as non-vessel-operating common carriers and/or as ocean freight forwarders. The Company’s air transportation activities in the United States are subject to regulation by the U.S. Department of Transportation as an indirect air carrier. The Company is also subject to regulations and requirements relating to safety and security promulgated by, among others, the U.S. Department of Homeland Security through the Bureau of U.S. Customs and Border Protection and the Transportation Security Administration, the Canada Border Services Agency and various state and local agencies and port authorities. The transportation industry is subject to possible regulatory and legislative changes (such as increasingly stringent environmental 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 or other transportation or logistics services. Any such regulatory or legislative changes could have a material adverse effect on Landstar, including its results of operations and financial condition.
 
Catastrophic loss of a Company facility.  The Company faces the risk of a catastrophic loss of the use of all or a portion of its facilities located in Jacksonville, Florida and Rockford, Illinois due to hurricanes, flooding, tornados or other weather conditions or natural disasters, terrorist attack or otherwise. The Company’s corporate headquarters and approximately two-thirds of the Company’s employees are located in its Jacksonville, Florida facility and a significant portion of the Company’s operations with respect to the carrier segment and Truck Brokerage Carriers is located in its Rockford, Illinois facility. In particular, a
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Category 3, 4 or 5 hurricane that impacts the Jacksonville, Florida metropolitan area or a tornado that strikes the Rockford, Illinois area could significantly disrupt the Company’s operations and impose significant costs on the Company .
 
Although the Company maintains insurance covering its facilities, including business interruption insurance, the Company’s insurance may not be adequate to cover all losses that may be incurred in the event of a catastrophic loss of either the Jacksonville, Florida or Rockford, Illinois facility. In addition, such insurance, including business interruption insurance, could in the future become more expensive and difficult to maintain and may not be available on commercially reasonable terms or at all.

Item 1B.  	Unresolved Staff Comments	
 
None.

Item 2.  	Properties	
 
The Company owns or leases various properties in the U.S. for the Company’s operations and administrative staff that support its independent commission sales agents, BCO Independent Contractors and other third party capacity providers. The carrier segment’s primary facilities are located in Jacksonville, Florida and Rockford, Illinois. The global logistics segment’s primary facility is located in Jacksonville, Florida. In addition, the Company’s corporate headquarters are located in Jacksonville, Florida. The Rockford, Illinois facility is owned by the Company and all other primary facilities are leased.
 
Management believes that Landstar’s owned and leased properties are adequate for its current needs and that leased properties can be retained or replaced at an acceptable cost.

Item 3.  	Legal Proceedings	
 
On November 1, 2002, the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and certain BCO Independent Contractors (as defined below) (collectively with OOIDA, the “Plaintiffs”) filed a putative class action complaint on behalf of independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (“BCO Independent Contractors”) in the United States District Court for the Middle District of Florida (the “Court”) in Jacksonville, Florida, against the Company and certain of its subsidiaries, which was amended on April 7, 2005 (the “Amended Complaint”). The Amended Complaint alleges that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violate certain federal leasing regulations and seeks injunctive relief, an unspecified amount of damages and attorney’s fees. On August 30, 2005, the Court granted a motion by the Plaintiffs to certify the case as a class action.
 
On October 6, 2006, the Court issued a summary judgment ruling which found, among other things, that (1) the lease agreements of the Defendants (as defined below) literally complied with the requirements of Section 376.12(d) of the applicable federal leasing regulations in regards to provisions relating to reductions to revenue derived from freight upon which BCO Independent Contractors’ compensation is calculated, (2) charge-back amounts which include fees and profits to the motor carrier are not unlawful under Section 376.12(h) and (3) the Defendants had violated 376.12(h) of the regulations by failing to provide access to documents to determine the validity of certain charges. On January 12, 2007, the Court ruled that the monetary remedy available to the Plaintiffs would be limited to damages sustained as a result of the violation and rejected Plaintiffs’ request for equitable relief in the form of restitution or disgorgement.
 
On January 16, 2007, the Court ordered the decertification of the class of BCO Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial commenced for purposes of determining what remedies, if any, would be awarded to the remaining named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company: Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the “Defendants”). On January 18, 2007, in response to a motion filed by the Defendants following the presentation by the Plaintiffs of their case in chief, the Court granted judgment as a matter of law in favor of the Defendants and stated that the Plaintiffs had failed to present evidence that any of the
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Plaintiffs had sustained damages as a result of any violation of the applicable federal leasing regulations. On that date, the Court also ruled that access to documents describing a third party vendor’s charges to determine the validity of charge-back amounts under 376.12(h) was not required under Defendants’ current lease with respect to programs where the lease contains a price to a BCO Independent Contractor that is not calculated on the basis of a third party vendor’s charge to the Defendants. Plaintiffs’ request for injunctive relief remains pending. Upon entry by the Court of a written final judgment, the Plaintiffs will have the right to appeal the Court’s rulings.
 
The Company is involved in certain other claims and pending litigation arising from the normal conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such other claims and pending litigation and that the ultimate outcome, after provisions thereof, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.

Item 4.  	Submission of Matters to a Vote of Security Holders	
 
No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2006.
 
PART II

Item 5.  	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	
 
The Common Stock of the Company is listed and traded on the NASDAQ Global Select Market under the symbol “LSTR.” The following table sets forth the high and low reported sale prices for the Common Stock on the NASDAQ Global Select Market and the per share value of dividends declared for the periods indicated.

 	 	2006 Market Price	 	 	2005 Market Price	 	 	Dividends Declared	 	
Fiscal Period	 	High	 	 	Low	 	 	High	 	 	Low	 	 	2006	 	 	2005	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
First Quarter	 	$	48.10	 	 	$	38.72	 	 	$	39.25	 	 	$	29.25	 	 	$	0.025	 	 	$	—	 	
Second Quarter	 	 	47.68	 	 	 	40.55	 	 	 	35.85	 	 	 	26.75	 	 	 	0.025	 	 	 	—	 	
Third Quarter	 	 	49.01	 	 	 	39.27	 	 	 	40.42	 	 	 	27.45	 	 	 	0.030	 	 	 	0.025	 	
Fourth Quarter	 	 	47.76	 	 	 	37.75	 	 	 	44.50	 	 	 	36.10	 	 	 	0.030	 	 	 	0.025	 	
 
The reported last sale price per share of the Common Stock as reported on the NASDAQ Global Select Market on February 1, 2007 was $45.73 per share. As of such date, Landstar had 55,969,934 shares of Common Stock outstanding. As of February 1, 2007, the Company had 83 stockholders of record of its Common Stock. However, the Company estimates that it has a significantly greater number of stockholders because a substantial number of the Company’s shares are held by brokers or dealers for their customers in street name.
 
It is the intention of the Board of Directors to pay a quarterly dividend going forward.
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Purchases of Equity Securities by the Company
 
The following table provides information regarding the Company’s purchases of its Common Stock during the period from October 1, 2006 to December 30, 2006, the Company’s fourth fiscal quarter:

 	 	 	 	 	 	 	 	Total Number of
	 	 	 	 	
 	 	 	 	 	 	 	 	Shares Purchased
	 	 	Maximum Number of
	 	
 	 	 	 	 	Average
	 	 	as Part of Publicly
	 	 	Shares that May Yet be
	 	
 	 	Total Number of
	 	 	Price Paid
	 	 	Announced
	 	 	Purchased Under the
	 	
Fiscal Period	 	Shares Purchased	 	 	per share	 	 	Programs	 	 	Programs	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
October 1, 2006	 	 	 	 	 	 	 	 	 	 	 	 	 	 	1,866,800	 	
Oct. 1, 2006 — Oct. 28, 2006	 	 	 	 	 	 	 	 	 	 	 	 	 	 	1,866,800	 	
Oct. 29, 2006 — Nov. 25, 2006	 	 	 	 	 	 	 	 	 	 	 	 	 	 	1,866,800	 	
Nov. 26, 2006 — Dec. 30, 2006	 	 	1,039,299	 	 	$	40.31	 	 	 	1,039,299	 	 	 	827,501	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	1,039,299	 	 	$	40.31	 	 	 	1,039,299	 	 	 	 	 	

On July 28, 2005, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to 2,000,000 shares of its Common Stock from time to time in the open market and in privately negotiated transactions. During the thirteen week period ended September 30, 2006, the Company completed the purchase of shares authorized for purchase under this program. On August 3, 2006, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to an additional 2,000,000 shares of its Common Stock from time to time in the open market and in privately negotiated transactions. No specific expiration date has been assigned to the August 3, 2006 authorization.
 
The Company maintains three stock option plans and one stock compensation plan. The following table presents information related to securities authorized for issuance under these plans at December 30, 2006:

 	 	 	 	 	 	 	 	Number of Securities
	 	
 	 	Number of Securities
	 	 	 	 	 	Remaining Available for
	 	
 	 	to be Issued Upon
	 	 	Weighted-Average
	 	 	Future Issuance Under
	 	
 	 	Exercise of
	 	 	Exercise Price of
	 	 	Equity Compensation
	 	
Plan Category	 	Outstanding Options	 	 	Outstanding Options	 	 	Plans	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity Compensation Plans Approved by Security Holders	 	 	2,566,571	 	 	$	27.35	 	 	 	3,896,800	 	
Equity Compensation Plans Not Approved by Security Holders	 	 	0	 	 	 	0	 	 	 	0	 	
 
Included in the number of securities remaining available for future issuance under equity compensation plans was 164,000 shares of Common Stock reserved for issuance under the 2003 Directors’ Stock Compensation Plan.
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Financial Model Shareholder Returns
 
The following graph illustrates the return that would have been realized assuming reinvestment of dividends by an investor who invested $100 in each of the Company’s Common Stock, the Standard and Poor’s 500 Stock Index and the Dow Jones Transportation Stock Index for the period commencing December 31, 2001 through December 31, 2006.

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Item 6.  	Selected Financial Data	
 
Prior to 2006, the Company accounted for share-based payment plans in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Under APB 25, no stock-based compensation was reflected in net income from stock options granted as all options granted had an exercise price equal to the fair market value of the underlying common stock on the date of grant. On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (“FAS 123R”), Share-Based Payment. The Company adopted FAS 123R using the modified retrospective method. Amounts for periods prior to 2006 in the table below, “Selected Consolidated Financial Data”, have been adjusted to reflect the adoption of FAS 123R.
 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA

 	 	Fiscal Years	 	
Income Statement Data:	 	2006	 	 	2005	 	 	2004	 	 	2003	 	 	2002	 	
 	 	(Dollars in thousands, except per share amounts)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	2,513,756	 	 	$	2,517,828	 	 	$	2,019,936	 	 	$	1,596,571	 	 	$	1,506,555	 	
Investment income	 	 	4,250	 	 	 	2,695	 	 	 	1,346	 	 	 	1,220	 	 	 	1,950	 	
Costs and expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchased transportation	 	 	1,890,755	 	 	 	1,880,431	 	 	 	1,510,963	 	 	 	1,185,043	 	 	 	1,116,009	 	
Commissions to agents	 	 	199,775	 	 	 	203,730	 	 	 	161,011	 	 	 	125,997	 	 	 	118,864	 	
Other operating costs	 	 	45,700	 	 	 	36,709	 	 	 	37,130	 	 	 	37,681	 	 	 	34,325	 	
Insurance and claims	 	 	39,522	 	 	 	50,166	 	 	 	60,339	 	 	 	45,690	 	 	 	42,188	 	
Selling, general and administrative	 	 	134,239	 	 	 	140,345	 	 	 	124,357	 	 	 	111,227	 	 	 	106,192	 	
Depreciation and amortization	 	 	16,796	 	 	 	15,920	 	 	 	13,959	 	 	 	12,736	 	 	 	11,520	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total costs and expenses	 	 	2,326,787	 	 	 	2,327,301	 	 	 	1,907,759	 	 	 	1,518,374	 	 	 	1,429,098	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	 	 	191,219	 	 	 	193,222	 	 	 	113,523	 	 	 	79,417	 	 	 	79,407	 	
Interest and debt expense	 	 	6,821	 	 	 	4,744	 	 	 	3,025	 	 	 	3,240	 	 	 	4,292	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	 	 	184,398	 	 	 	188,478	 	 	 	110,498	 	 	 	76,177	 	 	 	75,115	 	
Income taxes	 	 	71,313	 	 	 	72,880	 	 	 	42,661	 	 	 	29,146	 	 	 	28,867	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	113,085	 	 	$	115,598	 	 	$	67,837	 	 	$	47,031	 	 	$	46,248	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share	 	$	1.95	 	 	$	1.95	 	 	$	1.13	 	 	$	0.77	 	 	$	0.72	 	
Diluted earnings per share	 	$	1.93	 	 	$	1.91	 	 	$	1.10	 	 	$	0.75	 	 	$	0.70	 	
Dividends paid per common share	 	$	0.11	 	 	$	0.05	 	 	 	 	 	 	 	 	 	 	 	 	 	

 	 	Dec. 30,
	 	 	Dec. 31,
	 	 	Dec. 25,
	 	 	Dec. 27,
	 	 	Dec. 28,
	 	
Balance Sheet Data:	 	2006	 	 	2005	 	 	2004	 	 	2003	 	 	2002	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	646,651	 	 	$	765,814	 	 	$	586,802	 	 	$	441,072	 	 	$	402,984	 	
Long-term debt, including current maturities	 	 	129,321	 	 	 	166,973	 	 	 	92,090	 	 	 	91,456	 	 	 	77,360	 	
Shareholders’ equity	 	 	230,274	 	 	 	255,689	 	 	 	215,129	 	 	 	145,130	 	 	 	151,329	 	

Item 7.  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
 
Forward-Looking Statements
 
The following is a “safe harbor” statement under the Private Securities Litigation Reform Act of 1995. Statements contained in this document that are not based on historical facts are “forward-looking statements.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-K contain forward-looking statements, such as statements which relate to Landstar’s
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business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “predicts,” “may,” “should,” “could,” “will,” the negative thereof and similar expressions are intended to identify forward-looking statements. Such statements are by nature subject to uncertainties and risks, including but not limited to: an increase in the frequency or severity of accidents or other claims; unfavorable development of existing accident claims; dependence on third party insurance companies; dependence on independent commission sales agents; dependence on third party capacity providers; substantial industry competition; dependence on key personnel; disruptions or failures in our computer systems; changes in fuel taxes; status of independent contractors; a downturn in economic growth or growth in the transportation sector; and other operational, financial or legal risks or uncertainties detailed in this and Landstar’s other SEC filings from time to time and described in Item 1A of this Form 10-K under the heading “Risk Factors”. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements, and the Company undertakes no obligation to publicly update or revise any forward-looking statements.
 
Introduction
 
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred to herein as “Landstar” or the “Company”), 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, Mexico and other countries through its operating subsidiaries. Landstar’s business strategy is to be a non-asset based provider of transportation capacity and logistics services delivering safe, specialized transportation services globally, utilizing a network of independent commission sales agents, third party capacity providers and employees. Landstar focuses on providing transportation services which emphasize safety, customer service and information coordination among its independent commission sales agents, customers and capacity providers. The Company markets its services primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue. The Company has three reportable business segments. These are the carrier, global logistics and insurance segments.
 
The carrier segment consists of Landstar Ranger, Inc., Landstar Inway, Inc., Landstar Ligon, Inc., Landstar Gemini, Inc. and Landstar Carrier Services, Inc. The carrier segment primarily provides transportation services to the truckload market for a wide range of general commodities over irregular or non-repetitive routes utilizing dry and specialty vans and unsided trailers, including flatbed, drop deck and specialty. It also 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 independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “Business Capacity Owner Independent Contractors” or “BCO Independent Contractors”) and other third party truck capacity providers under non-exclusive contractual arrangements (“Truck Brokerage Carriers”).
 
The global logistics segment is comprised of Landstar Global Logistics, Inc. and its subsidiaries, Landstar Logistics, Inc. and Landstar Express America, Inc. Transportation and logistics services provided by the global logistics segment include the arrangement of multimodal (ground, air, ocean and rail) moves, contract logistics, truck brokerage, emergency and expedited ground, air and ocean freight, bus brokerage and warehousing. The global logistics segment markets its services primarily through independent commission sales agents and utilizes capacity provided by BCO Independent Contractors and other third party capacity providers, including Truck Brokerage Carriers, railroads, air and ocean cargo carriers, bus providers and warehouse owners. Beginning in August 2006, the global logistics segment began the rollout of warehousing services with independent contractors who provide warehouse capacity to the Company under non-exclusive contractual arrangements (“Warehouse Capacity Owners” or “WCO Independent Contractors”). As of December 30, 2006, Landstar Global Logistics, Inc. has executed contracts with 102 Warehouse Capacity Owners.
 
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 subsidiaries. In addition, it reinsures certain risks of
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the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to Landstar’s operating subsidiaries.
 
During the fiscal year ended December 30, 2006, the carrier segment contributed 72% of Landstar’s consolidated revenue, the global logistics segment contributed 27% of Landstar’s consolidated revenue and the insurance segment contributed 1% of Landstar’s consolidated revenue.
 
Changes in Financial Condition and Results of Operations
 
Management believes the Company’s success principally depends on its ability to generate freight through its network of independent commission sales agents and to efficiently deliver that freight utilizing third party capacity providers. Management believes the most significant factors to the Company’s success include increasing revenue, sourcing capacity and controlling costs.
 
While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s primary focus with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents”). Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents and increasing the revenue opportunities generated by existing independent commission sales agents. The following table shows the number of Million Dollar Agents, the average revenue generated by these agents, the percent of consolidated revenue generated by these agents during the past three fiscal years and the number of agent locations at each fiscal year end:

 	 	Fiscal Year	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Number of Million Dollar Agents	 	 	490	 	 	 	466	 	 	 	427	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Average revenue generated per Million Dollar Agent	 	$	4,700,000	 	 	$	5,063,000	 	 	$	4,374,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Percent of consolidated revenue generated by Million Dollar Agents	 	 	92	%	 	 	94	%	 	 	92	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Number of independent commission sales agent locations at year end	 	 	1,345	 	 	 	1,150	 	 	 	1,025	 	

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Management monitors business activity by tracking the number of loads (volume) and revenue per load generated by the carrier and global logistics segments. In addition, management tracks revenue per revenue mile, average length of haul and total revenue miles at the carrier segment. Revenue per revenue mile and revenue per load (collectively, price) as well as the number of loads, can be influenced by many factors which do not necessarily indicate a change in price or volume. Those factors include the average length of haul, freight type, special handling and equipment requirements and delivery time requirements. The following table summarizes this data by reportable segment for the past three fiscal years:

 	 	Fiscal Year	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Carrier Segment:	 	 	 	 	 	 	 	 	 	 	 	 	
External revenue generated through (in thousands):	 	 	 	 	 	 	 	 	 	 	 	 	
BCO Independent Contractors	 	$	1,270,649	 	 	$	1,249,159	 	 	$	1,191,605	 	
Truck Brokerage Carriers	 	 	525,967	 	 	 	442,509	 	 	 	263,257	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	1,796,616	 	 	$	1,691,668	 	 	$	1,454,862	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue per revenue mile	 	$	2.02	 	 	$	1.92	 	 	$	1.79	 	
Revenue per load	 	$	1,621	 	 	$	1,542	 	 	$	1,391	 	
Average length of haul (miles)	 	 	803	 	 	 	804	 	 	 	779	 	
Number of loads	 	 	1,108,000	 	 	 	1,097,000	 	 	 	1,046,000	 	
Global Logistics Segment:	 	 	 	 	 	 	 	 	 	 	 	 	
External revenue generated through (in thousands):	 	 	 	 	 	 	 	 	 	 	 	 	
BCO Independent Contractors(1)	 	$	103,588	 	 	$	159,273	 	 	$	105,815	 	
Truck Brokerage Carriers	 	 	396,141	 	 	 	439,604	 	 	 	308,106	 	
Rail, Air, Ocean and Bus Carriers(2)	 	 	182,813	 	 	 	196,259	 	 	 	121,001	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	682,542	 	 	$	795,136	 	 	$	534,922	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue per load(3)	 	$	1,504	 	 	$	1,555	 	 	$	1,454	 	
Number of loads(3)	 	 	387,000	 	 	 	334,000	 	 	 	324,000	 	

 	 	 	
(1)	 	Includes revenue from freight hauled by carrier segment BCO Independent Contractors for global logistics customers.	
 	 	 	
(2)	 	Included in the 2006 and 2005 fiscal year was $25,067,000 and $44,007,000, respectively, of revenue attributable to buses provided under a contract between Landstar Express America, Inc. and the United States Department of Transportation/Federal Aviation Administration (the “FAA”).	
 	 	 	
(3)	 	Number of loads and revenue per load for the 2006, 2005 and 2004 fiscal years exclude the effect of $100,655,000, $275,929,000 and $63,790,000, respectively, of revenue derived from transportation services provided primarily under a contract with the FAA as discussed further in the paragraphs that follow. (See the section “ Use of Non-GAAP Financial Measures ” on page 27.)	

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Also critical to the Company’s success is its ability to secure capacity, particularly truck capacity, at rates that allow the Company to profitably transport customers’ freight. The following table summarizes available truck capacity providers as of the end of the three most recent fiscal years:

 	 	Dec. 30,
	 	 	Dec. 31,
	 	 	Dec. 25,
	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
BCO Independent Contractors	 	 	8,516	 	 	 	8,011	 	 	 	7,800	 	
Truck Brokerage Carriers:	 	 	 	 	 	 	 	 	 	 	 	 	
Approved and active(1)	 	 	15,247	 	 	 	14,014	 	 	 	11,077	 	
Other approved	 	 	8,574	 	 	 	8,497	 	 	 	7,144	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	23,821	 	 	 	22,511	 	 	 	18,221	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total available truck capacity providers	 	 	32,337	 	 	 	30,522	 	 	 	26,021	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Number of trucks provided by BCO Independent Contractors	 	 	9,205	 	 	 	8,728	 	 	 	8,677	 	

 
 	 	 	
(1)	 	Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal year end.	
 
Historically, the Company’s carrier segment has primarily relied on capacity provided by BCO Independent Contractors. Pursuant to a continuing plan to augment its available capacity and increase its revenue, the Company has been increasing the carrier segment’s use of capacity provided by Truck Brokerage Carriers. The percent of consolidated revenue generated through all Truck Brokerage Carriers was 36.7% during 2006, 35.0% during 2005 and 28.3% during 2004.
 
The Company incurs costs that are directly related to the transportation of freight that include purchased transportation and commissions to agents. The Company incurs indirect costs associated with the transportation of freight that include other operating costs and insurance and claims. In addition, the Company incurs selling, general and administrative costs essential to administering its business operations. Management continually monitors all components of the costs incurred by the Company and establishes annual cost budgets which, in general, are used to benchmark costs incurred on a monthly basis.
 
Purchased transportation represents the amount a BCO Independent Contractor or other third party capacity provider is paid to haul freight. The amount of purchased transportation paid to a BCO Independent Contractor is primarily based on a contractually agreed-upon percentage of revenue generated by the haul. Purchased transportation for the brokerage services operations of the carrier segment is based on a negotiated rate for each load hauled. Purchased transportation for the brokerage services operations of the global logistics segment is based on either a negotiated rate for each load hauled or a contractually agreed-upon rate. Purchased transportation for the rail intermodal, air and ocean freight operations of the global logistics segment is based on a contractually agreed-upon fixed rate. Purchased transportation for bus services is based upon a negotiated rate per mile or per day. Purchased transportation as a percentage of revenue for truck brokerage services, rail intermodal and bus operations is normally higher than that of Landstar’s other transportation operations. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases in proportion to the revenue generated through BCO Independent Contractors, other third party capacity providers and revenue from the insurance segment.
 
Commissions to agents are based on contractually agreed-upon percentages of revenue or gross profit, defined as revenue less the cost of purchased transportation, at the carrier segment and of gross profit at the global logistics segment. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the carrier segment, the global logistics segment and the insurance segment and with changes in gross profit at the global logistics segment and the truck brokerage operations of the carrier segment.
 
Trailing equipment rent, maintenance costs for trailing equipment, BCO Independent Contractor recruiting costs and bad debts from BCO Independent Contractors and independent commission sales agents are the largest components of other operating costs.
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Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. Landstar’s retained liability for individual commercial trucking claims varies depending on when such claims are incurred. For commercial trucking claims incurred prior to June 19, 2003 and subsequent to March 30, 2004, Landstar retains liability up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and $250,000 for each cargo claim. The Company’s exposure to liability associated with accidents incurred by other third party capacity providers who haul freight on behalf of the Company is reduced by various factors including the extent to which they maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo or workers’ compensation claims or the unfavorable development of existing claims could be expected to materially adversely affect Landstar’s results of operations.
 
Employee compensation and benefits account for over half of the Company’s selling, general and administrative costs.
 
Depreciation and amortization primarily relate to depreciation of trailing equipment and management information services equipment.
 
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (“FAS 123R”), Share-Based Payment. The Company adopted FAS 123R using the modified retrospective method. Amounts for prior periods have been adjusted to reflect the adoption of FAS 123R.
 
The following table sets forth the percentage relationships of income and expense items to revenue for the periods indicated:

 	 	Fiscal Year	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	 	100.0	%	 	 	100.0	%	 	 	100.0	%	
Investment income	 	 	0.2	 	 	 	0.1	 	 	 	0.1	 	
Costs and expenses:	 	 	 	 	 	 	 	 	 	 	 	 	
Purchased transportation	 	 	75.2	 	 	 	74.7	 	 	 	74.8	 	
Commissions to agents	 	 	8.0	 	 	 	8.1	 	 	 	8.0	 	
Other operating costs	 	 	1.8	 	 	 	1.5	 	 	 	1.8	 	
Insurance and claims	 	 	1.6	 	 	 	2.0	 	 	 	3.0	 	
Selling, general and administrative	 	 	5.3	 	 	 	5.5	 	 	 	6.2	 	
Depreciation and amortization	 	 	0.7	 	 	 	0.6	 	 	 	0.7	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total costs and expenses	 	 	92.6	 	 	 	92.4	 	 	 	94.5	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	 	 	7.6	 	 	 	7.7	 	 	 	5.6	 	
Interest and debt expense	 	 	0.3	 	 	 	0.2	 	 	 	0.1	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	 	 	7.3	 	 	 	7.5	 	 	 	5.5	 	
Income taxes	 	 	2.8	 	 	 	2.9	 	 	 	2.1	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	4.5	%	 	 	4.6	%	 	 	3.4	%	

Fiscal Year Ended December 30, 2006 Compared to Fiscal Year Ended December 31, 2005
 
Revenue for the fiscal year 2006 was $2,513,756,000, compared to revenue of $2,517,828,000 for the 2005 fiscal year. Revenue increased $104,948,000 and $3,574,000 at the carrier and insurance segments, respectively, and decreased $112,594,000 at the global logistics segment, primarily attributable to decreased revenue related to disaster relief services for storms that impacted the United States. With respect to the carrier segment, revenue per load increased approximately 5% while the number of loads delivered in 2006 increased
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approximately 1% over the number of loads delivered in 2005. The average length of haul per load at the carrier segment remained approximately the same as prior year, however, revenue per revenue mile increased approximately 5%. Included in revenue at the global logistics segment for the 2006 and 2005 fiscal years was $100,655,000 and $275,929,000, respectively, of revenue related to disaster relief efforts for the storms that impacted the United States. These disaster relief transportation services were provided primarily under a contract between Landstar Express America, Inc. and the United States Department of Transportation/Federal Aviation Administration (the “FAA”). Excluding the number of loads and revenue related to the disaster relief efforts provided by the global logistics segment in 2006 and 2005, the number of loads delivered by the global logistics segment in fiscal year 2006 increased approximately 16% over 2005, however, average revenue per load decreased approximately 3%.
 
Investment income at the insurance segment was $4,250,000 and $2,695,000 for fiscal years 2006 and 2005, respectively. The increase in investment income was primarily due to an increased rate of return attributable to a general increase in interest rates on investments held by the insurance segment.
 
Purchased transportation was 75.2% of revenue in 2006 compared with 74.7% in 2005. The increase in purchased transportation as a percentage of revenue was primarily attributable to an increase in the portion of revenue generated under the FAA contract attributable to bus, air and fuel delivery services, which have a higher cost of purchased transportation, and increased truck brokerage and rail intermodal revenue, which tend to have a higher cost of purchased transportation compared to revenue generated through BCO Independent Contractors, partially offset by lower rates paid to Truck Brokerage Carriers. Commissions to agents were 8.0% of revenue in 2006 and 8.1% of revenue in 2005. The decrease in commissions to agents as a percentage of revenue was primarily attributable to the change in the mix of revenue generated under the FAA contract in 2006 towards transportation services which have a lower commission rate. Other operating costs were 1.8% of revenue in 2006 and 1.5% of revenue in 2005, primarily attributable to trailer rental costs incurred in support of disaster relief services provided under the FAA contract, partially offset by reduced other trailer rent expense and maintenance costs, as a result of the Company’s on-going effort to reduce the cost of Company provided trailing equipment. Insurance and claims were 1.6% of revenue in 2006 and 2.0% of revenue in 2005. The decrease in insurance and claims as a percentage of revenue was primarily attributable to favorable development of prior year claims in 2006, lower frequency and severity of commercial trucking accidents in 2006, and increased truck brokerage revenue, which has a lower claims risk profile than revenue hauled by BCO Independent Contractors. Selling, general and administrative costs were 5.3% of revenue in 2006 and 5.5% in 2005. The decrease in selling, general and administrative costs as a percentage of revenue was primarily attributable to a decreased provision for bonuses under the Company’s incentive compensation programs. Depreciation and amortization was 0.7% of revenue in 2006 and 0.6% of revenue in 2005. The increase in depreciation and amortization as a percentage of revenue was primarily due to an increase in Company owned trailing equipment as opposed to trailing equipment obtained through operating leases.
 
Interest and debt expense was 0.3% of revenue in 2006 and 0.2% of revenue in 2005. This increase in interest and debt expense was primarily attributable to increased interest rates on the Company’s revolving credit facility, increased capital lease obligations and increased borrowings under the Company’s credit facility during the first half of 2006, which were used to fund a portion of the December 31, 2005 receivable from the FAA and to fund purchases of the Company’s common stock under its authorized share repurchase program.
 
The provisions for income taxes for the 2006 and 2005 fiscal years were based on an estimated full year combined effective income tax rate of approximately 38.7% for each annual period, which is higher than the statutory federal income tax rate primarily as a result of state income taxes, the meals and entertainment exclusion and non-deductible stock compensation expense. The Company believes that deferred income tax benefits are more likely than not to be realized because of the Company’s ability to generate future taxable earnings.
 
Net income for the 2006 fiscal year was $113,085,000, or $1.95 per common share ($1.93 per diluted share), which included approximately $14,590,000 of operating income related to the $100,655,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $14,590,000 of operating income, net of related income taxes, increased net income approximately $8,944,000, or $0.15 per
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common share ($0.15 per diluted share). Net income for the 2005 fiscal year was $115,598,000, or $1.95 per common share ($1.91 per diluted share), which included approximately $51,945,000 of operating income related to the $275,929,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $51,945,000 of operating income, net of related income taxes, increased net income approximately $31,626,000, or $0.53 per common share ($0.52 per diluted share).
 
Fiscal Year Ended December 31, 2005 Compared to Fiscal Year Ended December 25, 2004
 
Revenue for the fiscal year 2005 was $2,517,828,000, an increase of $497,892,000, or 24.6%, compared to revenue for the 2004 fiscal year. Revenue increased $236,806,000, $260,214,000 and $872,000 at the carrier, global logistics and insurance segments, respectively. With respect to the carrier segment, revenue per load increased approximately 11% while the number of loads delivered in 2005 increased approximately 5% over the number of loads delivered in 2004. The average length of haul per load at the carrier segment increased approximately 3% and revenue per revenue mile increased approximately 7%. Included in revenue at the global logistics segment for the 2005 and 2004 fiscal years was $275,929,000 and $63,790,000, respectively, of revenue related to disaster relief efforts for the storms that impacted the United States. These emergency transportation services were provided primarily under a contract between Landstar Express America, Inc. and the United States Department of Transportation/Federal Aviation Administration (the “FAA”). Excluding the number of loads and revenue related to the disaster relief efforts provided by the global logistics segment in 2005 and 2004, the number of loads delivered by the global logistics segment in fiscal year 2005 increased approximately 3% over 2004 and average revenue per load increased approximately 7%. The increase in average revenue per load was primarily attributable to an increase in the average length of haul of truck brokerage loads.
 
Investment income at the insurance segment was $2,695,000 and $1,346,000 for fiscal years 2005 and 2004, respectively. The increase in investment income was primarily due to an increased rate of return attributable to a general increase in interest rates on investments held by the insurance segment.
 
Purchased transportation was 74.7% of revenue in 2005 compared with 74.8% in 2004. The decrease in purchased transportation as a percentage of revenue was primarily attributable to increased revenue provided for disaster relief services under the FAA contract which tends to have a lower cost of purchased transportation and lower rates paid to Truck Brokerage Carriers for non-FAA related revenue. These reductions in costs were partially offset by an increase in revenue generated through truck brokerage which tends to have a higher cost of purchased transportation compared to revenue generated through BCO Independent Contractors. Commissions to agents were 8.1% of revenue in 2005 and 8.0% of revenue in 2004. The increase in commissions to agents as a percentage of revenue was primarily attributable to a change in revenue mix and the increase in gross profit on truck brokerage loads. Other operating costs were 1.5% of revenue in 2005 and 1.8% of revenue in 2004, primarily due to increased brokerage revenue, which does not incur significant other operating costs, and reduced trailer maintenance and repair costs, reflecting a reduction in the average age of Company provided trailing equipment. Insurance and claims were 2.0% of revenue in 2005 and 3.0% of revenue in 2004. The decrease in insurance and claims as a percentage of revenue was primarily attributable to $7,600,000 of costs incurred to settle one severe accident that occurred early in fiscal year 2004, favorable development of prior year claims in 2005 and increased truck brokerage revenue, which has a lower claims risk profile than revenue hauled by BCO Independent Contractors. Selling, general and administrative costs were 5.5% of revenue in 2005 and 6.2% in 2004. The decrease in selling, general and administrative costs as a percentage of revenue was primarily due to the effect of increased revenue, partially offset by an increased provision for bonuses under the Company’s incentive compensation programs. Depreciation and amortization was 0.6% of revenue in 2005 and 0.7% of revenue in 2004. The decrease in depreciation and amortization as a percentage of revenue was due to the effect of increased revenue in 2005.
 
Interest and debt expense was 0.2% of revenue in 2005 and 0.1% of revenue in 2004. This increase was primarily attributable to increased interest rates on the Company’s revolving credit facility, increased capital lease obligations and increased borrowings under the Company’s credit facility, partially offset by the effect of increased revenue.
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The provisions for income taxes for the 2005 and 2004 fiscal years were based on estimated full year combined effective income tax rates of approximately 38.7% and 38.6%, respectively, which are higher than the statutory federal income tax rate primarily as a result of state income taxes and the meals and entertainment exclusion and non-deductible stock compensation expense. The increase in the combined effective income tax rate was primarily attributable to increased apportionment of income to states having higher tax rates and changes in tax laws enacted by a number of states in which the Company operates.
 
Net income for the 2005 fiscal year was $115,598,000, or $1.95 per common share ($1.91 per diluted share), which included approximately $51,945,000 of operating income related to the $275,929,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $51,945,000 of operating income, net of related income taxes, increased net income approximately $31,626,000, or $0.53 per common share ($0.52 per diluted share). Net income for the 2004 fiscal year was $67,837,000, or $1.13 per common share ($1.10 per diluted share), which included the $7,600,000 charge to settle one accident referenced above. This charge, net of related income tax benefits, reduced 2004 net income by $4,900,000, or $0.08 per common share ($0.08 per diluted share). Also included in net income for the 2004 fiscal year is approximately $11,847,000 of operating income related to the $63,790,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $11,847,000 of operating income, net of related income taxes, increased net income approximately $7,314,000, or $0.12 per common share ($0.12 per diluted share).
 
Use of Non-GAAP Financial Measures
 
In this annual report on Form 10-K, Landstar provided the following information that may be deemed non-GAAP financial measures for the 2006, 2005 and 2004 fiscal years: (1) revenue per load for the global logistics segment excluding revenue and loads related to disaster relief transportation services provided primarily under a contract with the FAA and (2) the percentage change in revenue per load for the global logistics segment excluding revenue and loads related to disaster relief transportation services provided primarily under a contract with the FAA as compared to revenue per load for the global logistics segment for the corresponding prior year periods. Each of the foregoing financial measures should be considered in addition to, and not as a substitute for, the corresponding GAAP financial information also presented in this Form 10-K.
 
Management believes that it is appropriate to present this financial information for the following reasons: (1) a significant portion of the disaster relief transportation services were provided under the FAA contract on the basis of a daily rate for the use of transportation equipment in question, and therefore load and per load information is not necessarily available or appropriate for a significant portion of the related revenue, (2) disclosure of the effect of the transportation services provided by Landstar relating to disaster relief efforts for the storms that impacted the United States will allow investors to better understand the underlying trends in Landstar’s financial condition and results of operations, (3) this information will facilitate comparisons by investors of Landstar’s results as compared to the results of peer companies and (4) management considers this financial information in its decision making.
 
Capital Resources and Liquidity
 
Shareholders’ equity was $230,274,000, or 64% of total capitalization (defined as total debt plus equity), at December 30, 2006, compared with $255,689,000, or 60% of total capitalization, at December 31, 2005. The decrease in shareholders’ equity was primarily attributable to the purchase of 3,697,726 shares of the Company’s common stock at a total cost of $156,492,000, partially offset by current year net income. As of December 30, 2006, the Company may purchase an additional 827,501 shares of its common stock under its authorized stock purchase program. Long-term debt including current maturities was $129,321,000 at December 30, 2006, compared to $166,973,000 at December 31, 2005. Working capital and the ratio of current assets to current liabilities were $221,168,000 and 1.9 to 1, respectively, at December 30, 2006, compared with $317,359,000 and 2.1 to 1, respectively, at December 31, 2005. Landstar has historically operated with current ratios within the range of 1.5 to 1 to 2.0 to 1. Cash provided by operating activities was $292,168,000 in 2006 compared with cash used by operating activities of $507,000 in 2005. Included in
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accounts receivable at December 31, 2005 was trade accounts receivable due from various departments of the United States Government of $226,057,000, which included $215,250,000 in trade receivables from disaster relief services provided under the contract with the FAA. The increase in cash provided by operating activities in 2006 was primarily due to the collection of the receivables resulting in large part from revenue related to the emergency transportation services provided under the FAA contract during 2006.
 
On July 8, 2004, Landstar renegotiated its existing credit agreement with a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the “Fourth Amended and Restated Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees.
 
At December 30, 2006, the Company had $60,000,000 in borrowings outstanding and $27,219,000 of letters of credit outstanding under its Fourth Amended and Restated Credit Agreement. At December 30, 2006, there was $137,781,000 available for future borrowings under the Company’s Fourth Amended and Restated Credit Agreement. In addition, the Company has $42,703,000 in letters of credit outstanding, as collateral for insurance claims that are secured by investments and cash equivalents totaling $44,654,000.
 
Borrowings under the Fourth Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar, either (i) the greatest of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the federal funds effective rate 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 Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 30, 2006, the margin was equal to 75.0/100 of 1%.
 
The unused portion of the Fourth Amended and Restated Credit Agreement carries a commitment fee determined based on the level of the Leverage Ratio, as therein defined. As of December 30, 2006, the commitment fee for the unused portion of the Fourth Amended and Restated Credit Agreement was 0.20%. At December 30, 2006, the weighted average interest rate on borrowings outstanding under the Fourth Amended and Restated Credit Agreement was 5.975%.
 
The Fourth Amended and Restated Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness, the incurrence of operating or capital lease obligations and the purchase of operating property. The Fourth Amended and Restated Credit Agreement also requires Landstar to meet certain financial tests. Landstar is required to, among other things, maintain minimum levels of consolidated Net Worth and Fixed Charge Coverage and limit its borrowings to a specified ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (the “Leverage Ratio”), as each is defined in the Fourth Amended and Restated Credit Agreement. Under the most restrictive covenant, the Fixed Charge Coverage, fixed charges were $83,706,000 lower than the maximum amount allowed at December 30, 2006.
 
The Fourth Amended and Restated Credit Agreement provides for an event of default related to a person or group acquiring 25% or more of the outstanding capital stock of the Company or obtaining the power to elect a majority of the Company’s directors.
 
Borrowings under the Fourth Amended and Restated Credit Agreement are unsecured, however, Landstar System, Inc., LSHI and all but one subsidiary guarantee the obligations under the Fourth Amended and Restated Credit Agreement.
 
The Fourth Amended and Restated Credit Agreement provides for a restriction on cash dividends on the Company’s capital stock only to the extent there is an event of default under the Fourth Amended and Restated Credit Agreement.
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Historically, the Company has generated sufficient operating cash flow to meet its debt service requirements, fund continued growth, both internal and through acquisitions, complete or execute share purchases of its common stock under authorized share purchase programs, pay dividends and meet working capital needs. As a non-asset based provider of transportation capacity and logistics services, the Company’s annual capital requirements for operating property are generally for trailers and management information services equipment. In addition, a significant portion of the trailing equipment used by the Company is provided by third party capacity providers and through leases at rental rates that vary with the revenue generated through the use of the leased equipment, thereby reducing the Company’s capital requirements. During 2006, the Company purchased $4,173,000 of operating property and acquired $36,594,000 of trailing equipment by entering into capital leases. Landstar anticipates acquiring approximately $46,000,000 of operating property during fiscal year 2007 either by purchase or by lease financing. Prior to 2003, the Company historically funded its acquisition of Company provided fixed cost trailing equipment using capital leases. During 2004 and 2003, the Company acquired van trailing equipment under a long-term operating lease at a fixed monthly rental price per trailer. The Company does not currently anticipate any other significant capital requirements in 2007.
 
Since January 1997, the Company has purchased $588,220,000 of its common stock under programs authorized by the Board of Directors of the Company in open market and private block transactions. The Company has used cash provided by operating activities and borrowings on the Company’s revolving credit facilities to fund the purchases.
 
Contractual Obligations and Commitments
 
At December 30, 2006, the Company’s obligations and commitments to make future payments under contracts, such as debt and lease agreements, were as follows (in thousands):

 	 	Payments Due By Period	 	
 	 	 	 	 	Less Than
	 	 	1-3
	 	 	4-5
	 	 	More Than
	 	
Contractual Obligation	 	Total	 	 	1 Year	 	 	Years	 	 	Years	 	 	5 Years	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Long-term debt	 	$	60,000	 	 	 	 	 	 	$	60,000	 	 	 	 	 	 	 	 	 	
Capital lease obligations	 	 	76,915	 	 	$	21,857	 	 	 	36,761	 	 	$	18,297	 	 	 	 	 	
Operating leases	 	 	28,155	 	 	 	7,241	 	 	 	10,373	 	 	 	4,605	 	 	$	5,936	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	165,070	 	 	$	29,098	 	 	$	107,134	 	 	$	22,902	 	 	$	5,936	 	

Long-term debt represents borrowings under the Fourth Amended and Restated Credit Agreement and does not include interest. Capital lease obligations above include $7,594,000 of imputed interest. Operating leases primarily include $15,553,000 related to the Company’s main office facility located in Jacksonville, Florida and $9,518,000 related to a long-term operating lease for trailing equipment.
 
Off-Balance Sheet Arrangements
 
As of December 30, 2006, the Company had no off-balance sheet arrangements, other than operating leases as disclosed in the table of Contractual Obligations and Commitments above, that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Legal Matters
 
On November 1, 2002, the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and certain BCO Independent Contractors (as defined below) (collectively with OOIDA, the “Plaintiffs”) filed a putative class action complaint on behalf of independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (“BCO Independent Contractors”) in the United States District Court for the Middle District of Florida (the “Court”) in Jacksonville, Florida, against the Company and certain of its subsidiaries, which was amended on April 7, 2005 (the “Amended Complaint”). The
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Amended Complaint alleges that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violate certain federal leasing regulations and seeks injunctive relief, an unspecified amount of damages and attorney’s fees. On August 30, 2005, the Court granted a motion by the Plaintiffs to certify the case as a class action.
 
On October 6, 2006, the Court issued a summary judgment ruling which found, among other things, that (1) the lease agreements of the Defendants (as defined below) literally complied with the requirements of Section 376.12(d) of the applicable federal leasing regulations in regards to provisions relating to reductions to revenue derived from freight upon which BCO Independent Contractors’ compensation is calculated, (2) charge-back amounts which include fees and profits to the motor carrier are not unlawful under Section 376.12(h) and (3) the Defendants had violated 376.12(h) of the regulations by failing to provide access to documents to determine the validity of certain charges. On January 12, 2007, the Court ruled that the monetary remedy available to the Plaintiffs would be limited to damages sustained as a result of the violation and rejected Plaintiffs’ request for equitable relief in the form of restitution or disgorgement.
 
On January 16, 2007, the Court ordered the decertification of the class of BCO Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial commenced for purposes of determining what remedies, if any, would be awarded to the remaining named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company: Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the “Defendants”). On January 18, 2007, in response to a motion filed by the Defendants following the presentation by the Plaintiffs of their case in chief, the Court granted judgment as a matter of law in favor of the Defendants and stated that the Plaintiffs had failed to present evidence that any of the Plaintiffs had sustained damages as a result of any violation of the applicable federal leasing regulations. On that date, the Court also ruled that access to documents describing a third party vendor’s charges to determine the validity of charge-back amounts under 376.12(h) was not required under Defendants’ current lease with respect to programs where the lease contains a price to a BCO Independent Contractor that is not calculated on the basis of a third party vendor’s charge to the Defendants. Plaintiffs’ request for injunctive relief remains pending. Upon entry by the Court of a written final Judgment, the Plaintiffs will have the right to appeal the Court’s rulings.
 
The Company is involved in certain other claims and pending litigation arising from the normal conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such other claims and pending litigation and that the ultimate outcome, after provisions thereof, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
 
Critical Accounting Policies and Estimates
 
The allowance for doubtful accounts for both trade and other receivables represents management’s estimate of the amount of outstanding receivables that will not be collected. Historically, management’s estimates for uncollectible receivables have been materially correct. Although management believes the amount of the allowance for both trade and other receivables at December 30, 2006 is appropriate, a prolonged period of low or no economic growth may adversely affect the collection of these receivables. Conversely, a more robust economic environment may result in the realization of some portion of the estimated uncollectible receivables.
 
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. Historically, the Company has experienced both favorable and unfavorable development of prior year claims estimates. The Company continually revises its existing claim estimates as new or revised information becomes available on the status of each claim. During fiscal years 2006 and 2005, insurance and claims costs included $7,739,000 and $1,525,000, respectively, of favorable adjustments to prior years claims estimates. During fiscal year 2004, insurance and claims costs included
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$4,390,000, of unfavorable adjustments to prior years claims estimates. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims reserve at December 30, 2006.
 
The Company utilizes certain income tax planning strategies to reduce its overall cost of income taxes. Upon audit, it is possible that certain strategies might be disallowed resulting in an increased liability for income taxes. The Company has provided for its estimated exposure attributable to income tax planning strategies. Management believes that the provision for liabilities resulting from the implementation of income tax planning strategies is appropriate. To date, the Company has not experienced an examination by governmental revenue authorities that would lead management to believe that the Company’s past provisions for exposures related to income tax planning strategies are not appropriate.
 
Significant variances from management’s estimates for the amount of uncollectible receivables, the ultimate resolution of claims or the provision for liabilities for income tax planning strategies can be expected to positively or negatively affect Landstar’s earnings in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations.
 
Effects of Inflation
 
Management does not believe inflation has had a material impact on the results of operations or financial condition of Landstar in the past five years. However, inflation higher than that experienced in the past five years might have an adverse effect on the Company’s results of operations.
 
Seasonality
 
Landstar’s operations are subject to seasonal trends common to the trucking industry. Results of operations for the quarter ending in March are typically lower than the quarters ending June, September and December.
 
Recently Issued Accounting Standards Not Currently Effective
 
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return based on whether it is more likely than not that certain return positions will be sustained upon examination by taxing authorities. Implementation of FIN No. 48 is required for fiscal years beginning after December 15, 2006. Management believes that the implementation of FIN No. 48 will not have a material effect on the financial position or results of operations of the Company.

Item 7a.  	Quantitative and Qualitative Disclosures about Market Risk	
 
The Company is exposed to changes in interest rates as a result of its financial activities, primarily its borrowings under the revolving credit facility, and investing activities with respect to investments held by the insurance segment.
 
On July 8, 2004, Landstar entered into a new senior credit facility with a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the “Fourth Amended and Restated Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees.
 
Borrowings under the Fourth Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar, 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
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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 Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the borrowing capacity. As of December 30, 2006, the weighted average interest rate on borrowings outstanding was 5.975%. During fiscal 2006, the average outstanding balance under the Fourth Amended and Restated Credit Agreement was approximately $83,280,000. Based on the borrowing rates in the Fourth Amended and Restated Credit Agreement and the repayment terms, the fair value of the outstanding borrowings as of December 30, 2006 was estimated to approximate carrying value. Assuming that debt levels on the Fourth Amended and Restated Credit Agreement remain at $60,000,000, the balance at December 30, 2006, a hypothetical increase of 100 basis points in current rates provided for under the Fourth Amended and Restated Credit Agreement is estimated to result in an increase in interest expense of $600,000 on an annualized basis.
 
Borrowings under the Fourth Amended and Restated Credit Agreement are unsecured, however, Landstar System, Inc., LSHI and all but one subsidiary guarantee the obligations under the Fourth Amended and Restated Credit Agreement.
 
Long-term investments, all of which are available-for-sale, consist of investment grade bonds having maturities of up to two years. Assuming that the long-term portion of investments in bonds remains at $2,884,000, the balance at December 30, 2006, a hypothetical increase or decrease in interest rates of 100 basis points would not have a material impact on future earnings on an annualized basis. Short-term investments consist of short-term investment grade instruments and the current maturities of investment grade bonds. Accordingly, any future interest rate risk on these short-term investments would not be material.
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Item 8.  	Financial Statements and Supplementary Data	
 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)

 	 	Dec. 30,
	 	 	Dec. 31,
	 	
 	 	2006	 	 	2005	 	
 	 	 	 	 	 	 	 	 	
ASSETS	
Current Assets	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	91,491	 	 	$	29,398	 	
Short-term investments	 	 	21,548	 	 	 	20,693	 	
Trade accounts receivable, less allowance of $4,834 and $4,655	 	 	318,983	 	 	 	534,274	 	
Other receivables, including advances to independent contractors, less allowance of $4,512 and $4,342	 	 	14,198	 	 	 	11,384	 	
Deferred income taxes and other current assets	 	 	25,142	 	 	 	21,106	 	
 	 	 	 	 	 	 	 	 	
Total current assets	 	 	471,362	 	 	 	616,855	 	
 	 	 	 	 	 	 	 	 	
Operating property, less accumulated depreciation and amortization of $77,938 and $68,561	 	 	110,957	 	 	 	89,131	 	
Goodwill	 	 	31,134	 	 	 	31,134	 	
Other assets	 	 	33,198	 	 	 	28,694	 	
 	 	 	 	 	 	 	 	 	
Total assets	 	$	646,651	 	 	$	765,814	 	

LIABILITIES AND SHAREHOLDERS’ EQUITY	
Current Liabilities	 	 	 	 	 	 	 	 	
Cash overdraft	 	$	25,435	 	 	$	29,829	 	
Accounts payable	 	 	122,313	 	 	 	164,509	 	
Current maturities of long-term debt	 	 	18,730	 	 	 	12,122	 	
Insurance claims	 	 	25,238	 	 	 	27,887	 	
Accrued compensation	 	 	11,993	 	 	 	20,299	 	
Other current liabilities	 	 	46,485	 	 	 	44,850	 	
 	 	 	 	 	 	 	 	 	
Total current liabilities	 	 	250,194	 	 	 	299,496	 	
 	 	 	 	 	 	 	 	 	
Long-term debt, excluding current maturities	 	 	110,591	 	 	 	154,851	 	
Insurance claims	 	 	36,232	 	 	 	37,840	 	
Deferred income taxes	 	 	19,360	 	 	 	17,938	 	
Shareholders’ Equity	 	 	 	 	 	 	 	 	
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 64,993,143 and 64,151,902 shares	 	 	650	 	 	 	642	 	
Additional paid-in capital	 	 	108,020	 	 	 	84,532	 	
Retained earnings	 	 	499,273	 	 	 	392,549	 	
Cost of 9,028,009 and 5,344,883 shares of common stock in treasury	 	 	(377,662	)	 	 	(221,776	)	
Accumulated other comprehensive loss	 	 	(7	)	 	 	(211	)	
Note receivable arising from exercise of stock options	 	 	 	 	 	 	(47	)	
 	 	 	 	 	 	 	 	 	
Total shareholders’ equity	 	 	230,274	 	 	 	255,689	 	
 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	 	$	646,651	 	 	$	765,814	 	

See accompanying notes to consolidated financial statements.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)

 	 	Fiscal Years Ended	 	
 	 	Dec. 30,
	 	 	Dec. 31,
	 	 	Dec. 25,
	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	2,513,756	 	 	$	2,517,828	 	 	$	2,019,936	 	
Investment income	 	 	4,250	 	 	 	2,695	 	 	 	1,346	 	
Costs and expenses:	 	 	 	 	 	 	 	 	 	 	 	 	
Purchased transportation	 	 	1,890,755	 	 	 	1,880,431	 	 	 	1,510,963	 	
Commissions to agents	 	 	199,775	 	 	 	203,730	 	 	 	161,011	 	
Other operating costs	 	 	45,700	 	 	 	36,709	 	 	 	37,130	 	
Insurance and claims	 	 	39,522	 	 	 	50,166	 	 	 	60,339	 	
Selling, general and administrative	 	 	134,239	 	 	 	140,345	 	 	 	124,357	 	
Depreciation and amortization	 	 	16,796	 	 	 	15,920	 	 	 	13,959	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total costs and expenses	 	 	2,326,787	 	 	 	2,327,301	 	 	 	1,907,759	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	 	 	191,219	 	 	 	193,222	 	 	 	113,523	 	
Interest and debt expense	 	 	6,821	 	 	 	4,744	 	 	 	3,025	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	 	 	184,398	 	 	 	188,478	 	 	 	110,498	 	
Income taxes	 	 	71,313	 	 	 	72,880	 	 	 	42,661	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	113,085	 	 	$	115,598	 	 	$	67,837	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share	 	$	1.95	 	 	$	1.95	 	 	$	1.13	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share	 	$	1.93	 	 	$	1.91	 	 	$	1.10	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Average number of shares outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share	 	 	57,854,000	 	 	 	59,199,000	 	 	 	60,154,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share	 	 	58,654,000	 	 	 	60,413,000	 	 	 	61,757,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid per common share	 	$	0.11	 	 	$	0.05	 	 	 	 	 	

See accompanying notes to consolidated financial statements.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

 	 	Fiscal Years Ended	 	
 	 	Dec. 30,
	 	 	Dec. 31,
	 	 	Dec. 25,
	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
OPERATING ACTIVITIES	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	113,085	 	 	$	115,598	 	 	$	67,837	 	
Adjustments to reconcile net income to net cash provided (used) by operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Depreciation and amortization of operating property	 	 	16,796	 	 	 	15,920	 	 	 	13,959	 	
Non-cash interest charges	 	 	174	 	 	 	174	 	 	 	348	 	
Provisions for losses on trade and other accounts receivable	 	 	5,349	 	 	 	5,939	 	 	 	6,250	 	
(Gains) losses on sales and disposals of operating property	 	 	(475	)	 	 	(340	)	 	 	215	 	
Deferred income taxes, net	 	 	3,297	 	 	 	(2,019	)	 	 	4,292	 	
Stock-based compensation	 	 	7,173	 	 	 	6,453	 	 	 	6,298	 	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Decrease (increase) in trade and other accounts receivable	 	 	207,128	 	 	 	(198,894	)	 	 	(126,718	)	
Decrease (increase) in other assets	 	 	(7,761	)	 	 	686	 	 	 	677	 	
Increase (decrease) in accounts payable	 	 	(42,196	)	 	 	44,312	 	 	 	48,484	 	
Increase (decrease) in other liabilities	 	 	(6,145	)	 	 	10,979	 	 	 	9,786	 	
Increase (decrease) in insurance claims	 	 	(4,257	)	 	 	685	 	 	 	11,467	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES	 	 	292,168	 	 	 	(507	)	 	 	42,895	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
INVESTING ACTIVITIES	 	 	 	 	 	 	 	 	 	 	 	 	
Net change in other short-term investments	 	 	(4,462	)	 	 	(1,747	)	 	 	8,461	 	
Sales and maturities of investments	 	 	42,334	 	 	 	4,977	 	 	 	4,006	 	
Purchases of investments	 	 	(41,239	)	 	 	(6,450	)	 	 	(12,606	)	
Purchases of operating property	 	 	(4,173	)	 	 	(3,857	)	 	 	(6,377	)	
Proceeds from sales of operating property	 	 	2,620	 	 	 	4,492	 	 	 	971	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
NET CASH USED BY INVESTING ACTIVITIES	 	 	(4,920	)	 	 	(2,585	)	 	 	(5,545	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
FINANCING ACTIVITIES	 	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) in cash overdraft	 	 	(4,394	)	 	 	6,282	 	 	 	3,024	 	
Proceeds from repayment of notes receivable arising from exercises of stock options	 	 	47	 	 	 	423	 	 	 	115	 	
Dividends paid	 	 	(6,361	)	 	 	(2,922	)	 	 	 	 	
Proceeds from exercises of stock options	 	 	10,533	 	 	 	9,216	 	 	 	16,036	 	
Excess tax benefit on stock option exercises	 	 	5,758	 	 	 	7,036	 	 	 	6,849	 	
Borrowings on revolving credit facility	 	 	5,000	 	 	 	57,000	 	 	 	71,000	 	
Purchases of common stock	 	 	(156,492	)	 	 	(95,600	)	 	 	(27,001	)	
Principal payments on long-term debt and capital lease obligations	 	 	(79,246	)	 	 	(10,629	)	 	 	(88,329	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
NET CASH USED BY FINANCING ACTIVITIES	 	 	(225,155	)	 	 	(29,194	)	 	 	(18,306	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) in cash and cash equivalents	 	 	62,093	 	 	 	(32,286	)	 	 	19,044	 	
Cash and cash equivalents at beginning of period	 	 	29,398	 	 	 	61,684	 	 	 	42,640	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents at end of period	 	$	91,491	 	 	$	29,398	 	 	$	61,684	 	

See accompanying notes to consolidated financial statements.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Fiscal Years Ended December 30, 2006,
December 31, 2005 and December 25, 2004
(Dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Notes
	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Receivable
	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Arising
	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Accumulated
	 	 	from
	 	 	 	 	
 	 	 	 	 	 	 	 	Add’l
	 	 	 	 	 	 	 	 	 	 	 	Other
	 	 	Exercises
	 	 	 	 	
 	 	Common Stock	 	 	Paid-In
	 	 	Retained
	 	 	Treasury Stock at Cost	 	 	Comprehensive
	 	 	of Stock
	 	 	 	 	
 	 	Shares	 	 	Amount	 	 	Capital	 	 	Earnings	 	 	Shares	 	 	Amount	 	 	Income (Loss)	 	 	Options	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance December 27, 2003	 	 	31,816,860	 	 	$	318	 	 	$	33,025	 	 	$	212,340	 	 	 	1,809,930	 	 	$	(100,150	)	 	$	182	 	 	$	(585	)	 	$	145,130	 	
Net income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	67,837	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	67,837	 	
Purchases of common stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	681,000	 	 	 	(27,001	)	 	 	 	 	 	 	 	 	 	 	(27,001	)	
Exercises of stock options, including excess tax benefit	 	 	996,700	 	 	 	10	 	 	 	22,875	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	22,885	 	
Director compensation paid in common stock	 	 	9,000	 	 	 	 	 	 	 	402	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	402	 	
Stock-based compensation expense	 	 	 	 	 	 	 	 	 	 	5,896	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	5,896	 	
Repayment of notes receivable arising from exercises of stock options	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	115	 	 	 	115	 	
Unrealized loss on available-for-sale investments, net of income taxes	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(135	)	 	 	 	 	 	 	(135	)	
Stock split effected in the form of a 100% stock dividend	 	 	30,331,630	 	 	 	304	 	 	 	 	 	 	 	(304	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance December 25, 2004	 	 	63,154,190	 	 	 	632	 	 	 	62,198	 	 	 	279,873	 	 	 	2,490,930	 	 	 	(127,151	)	 	 	47	 	 	 	(470	)	 	 	215,129	 	
Net income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	115,598	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	115,598	 	
Dividends paid ($0.05 per share)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(2,922	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(2,922	)	
Purchases of common stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,873,053	 	 	 	(95,600	)	 	 	 	 	 	 	 	 	 	 	(95,600	)	
Exercises of stock options, including excess tax benefit	 	 	991,712	 	 	 	10	 	 	 	16,242	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	16,252	 	
Director compensation paid in common stock	 	 	6,000	 	 	 	 	 	 	 	193	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	193	 	
Stock-based compensation expense	 	 	 	 	 	 	 	 	 	 	6,260	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	6,260	 	
Repayment of notes receivable arising from exercises of stock options	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	423	 	 	 	423	 	
Incentive compensation paid in common stock	 	 	 	 	 	 	 	 	 	 	(361	)	 	 	 	 	 	 	(19,100	)	 	 	975	 	 	 	 	 	 	 	 	 	 	 	614	 	
Unrealized loss on available-for-sale investments, net of income taxes	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(258	)	 	 	 	 	 	 	(258	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance December 31, 2005	 	 	64,151,902	 	 	 	642	 	 	 	84,532	 	 	 	392,549	 	 	 	5,344,883	 	 	 	(221,776	)	 	 	(211	)	 	 	(47	)	 	 	255,689	 	
Net income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	113,085	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	113,085	 	
Dividends paid ($0.11 per share)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(6,361	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(6,361	)	
Purchases of common stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	3,697,726	 	 	 	(156,492	)	 	 	 	 	 	 	 	 	 	 	(156,492	)	
Exercises of stock options, including excess tax benefit	 	 	835,241	 	 	 	8	 	 	 	16,283	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	16,291	 	
Director compensation paid in common stock	 	 	6,000	 	 	 	 	 	 	 	265	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	265	 	
Stock-based compensation expense	 	 	 	 	 	 	 	 	 	 	6,908	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	6,908	 	
Repayment of note receivable arising from exercise of stock options	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	47	 	 	 	47	 	
Incentive compensation paid in common stock	 	 	 	 	 	 	 	 	 	 	32	 	 	 	 	 	 	 	(14,600	)	 	 	606	 	 	 	 	 	 	 	 	 	 	 	638	 	
Unrealized gain on available-for-sale investments, net of income taxes	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	204	 	 	 	 	 	 	 	204	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance December 30, 2006	 	 	64,993,143	 	 	$	650	 	 	$	108,020	 	 	$	499,273	 	 	 	9,028,009	 	 	$	(377,662	)	 	$	(7	)	 	$	0	 	 	$	230,274	 	

See accompanying notes to consolidated financial statements.
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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
 
The Company is the primary obligor with respect to freight delivery and assumes the related credit risk. Accordingly, transportation revenue and the related direct freight expenses of the carrier and global logistics segments are recognized on a gross basis upon completion of freight delivery. Insurance premiums of the insurance segment are recognized over the period earned, which is usually on a monthly basis. Fuel surcharges billed to customers for freight hauled by independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “Business Capacity Owner Independent Contractors” or “BCO Independent Contractors”) are excluded from revenue and paid in entirety to the BCO Independent Contractors.
 
Insurance Claim Costs
 
Landstar provides, primarily on an actuarially determined basis, for the estimated costs of cargo, property, casualty, general liability and workers’ compensation claims both reported and for claims incurred but not reported. Landstar retains liability for individual commercial trucking claims incurred prior to June 19, 2003 or subsequent to March 30, 2004, up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and $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.
 
Cash and Cash Equivalents
 
Included in cash and cash equivalents are all investments, except those provided for collateral, with an original maturity of 3 months or less.
 
Investments
 
Investments, all of which are available-for-sale, consist of investment-grade bonds having maturities of up to two years. Investments are carried at fair value, with unrealized gains and losses, net of related income taxes, reported as accumulated other comprehensive income. Short-term investments include $16,630,000 in current maturities of investment grade bonds and $4,918,000 of cash equivalents held by the Company’s insurance segment at December 30, 2006. These short-term investments together with $2,884,000 of the non-current portion of investment grade bonds and $20,222,000 of cash equivalents included in other assets at
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 30, 2006, provide collateral for the $42,703,000 of letters of credit issued to guarantee payment of insurance claims. Based upon quoted market prices, the unrealized loss on these bonds was $11,000 and $336,000 at December 30, 2006 and December 31, 2005, respectively.
 
Investment income represents the earnings on the insurance segment’s assets. Investment income earned from the assets of the insurance segment are included as a component of operating income as the investing activities and earnings thereon comprise a significant portion of the insurance segment’s profitability.
 
Operating Property
 
Operating property is recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Trailing equipment is being depreciated over 7 years. Hardware and software included in management information services equipment is generally being depreciated over 3 years.
 
Income Taxes
 
Income tax expense is equal to the current year’s liability for income taxes and a provision for deferred income taxes. Deferred tax assets and liabilities are recorded for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.
 
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.
 
The following table provides a reconciliation of the average number of common shares outstanding used to calculate earnings per share to the average number of common shares and common share equivalents outstanding used in calculating diluted earnings per share (in thousands):

 	 	Fiscal Year	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Average number of common shares outstanding	 	 	57,854	 	 	 	59,199	 	 	 	60,154	 	
Incremental shares under stock option plans	 	 	800	 	 	 	1,214	 	 	 	1,603	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Average number of common shares and common share equivalents outstanding	 	 	58,654	 	 	 	60,413	 	 	 	61,757	 	

For the fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004, there were 5,000, 470,000 and 130,000, respectively, options outstanding to purchase shares of common stock excluded from the calculation of diluted earnings per share because they were antidilutive.
 
Share-Based Payments
 
On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (“FAS 123R”), Share-Based Payment. The Company adopted FAS 123R using the modified retrospective method. Under the modified retrospective method, compensation cost is recognized in the financial statements for all share-based payments granted after January 1, 2006 based on the requirements of FAS 123R and based on the requirements of FAS 123 for all unvested awards granted prior to January 1,
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2006. The Company recognizes compensation cost for stock option awards on a straight line basis over the requisite service period for the entire award. Amounts for periods prior to 2006 have been adjusted to reflect the adoption of FAS 123R.
 
(2)  Comprehensive Income
 
The following table includes the components of comprehensive income for the fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004 (in thousands):

 	 	Fiscal Year	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	113,085	 	 	$	115,598	 	 	$	67,837	 	
Unrealized holding gains (losses) on available-for-sale investments, net of income taxes	 	 	204	 	 	 	(258	)	 	 	(135	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	$	113,289	 	 	$	115,340	 	 	$	67,702	 	

The unrealized holding gain on available-for-sale investments for 2006 represents the mark-to-market adjustment of $316,000 net of related income taxes of $112,000. The unrealized holding loss on available-for-sale investments for 2005 represents the mark-to- market adjustment of $400,000 net of related income tax benefits of $142,000. The unrealized holding loss on available-for-sale investments for 2004 represents the mark-to-market adjustment of $218,000 net of related income tax benefits of $83,000.
 
(3)  Income Taxes
 
The provisions for income taxes consisted of the following (in thousands):

 	 	Fiscal Year	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Current:	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	$	60,599	 	 	$	65,804	 	 	$	35,333	 	
State	 	 	7,417	 	 	 	9,095	 	 	 	3,036	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	68,016	 	 	 	74,899	 	 	 	38,369	 	
Deferred:	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	 	2,650	 	 	 	(2,104	)	 	 	3,683	 	
State	 	 	647	 	 	 	85	 	 	 	609	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	3,297	 	 	 	(2,019	)	 	 	4,292	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Income taxes	 	$	71,313	 	 	$	72,880	 	 	$	42,661	 	

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities consisted of the following (in thousands):

 	 	Dec. 30,
	 	 	Dec. 31,
	 	
 	 	2006	 	 	2005	 	
 	 	 	 	 	 	 	 	 	
Deferred tax assets:	 	 	 	 	 	 	 	 	
Receivable valuations	 	$	3,847	 	 	$	3,702	 	
Share-based payments	 	 	3,989	 	 	 	3,054	 	
Self-insured claims	 	 	4,081	 	 	 	4,365	 	
State net operating loss carryforwards	 	 	130	 	 	 	633	 	
Other	 	 	4,432	 	 	 	5,165	 	
 	 	 	 	 	 	 	 	 	
 	 	$	16,479	 	 	$	16,919	 	
 	 	 	 	 	 	 	 	 	
Deferred tax liabilities:	 	 	 	 	 	 	 	 	
Operating property	 	$	18,718	 	 	$	16,384	 	
Goodwill	 	 	4,982	 	 	 	4,459	 	
 	 	 	 	 	 	 	 	 	
 	 	$	23,700	 	 	$	20,843	 	
 	 	 	 	 	 	 	 	 	
Net deferred tax liability	 	$	7,221	 	 	$	3,924	 	

The following table summarizes the differences between income taxes calculated at the federal income tax rate of 35% on income before income taxes and the provisions for income taxes (in thousands):

 	 	Fiscal Year	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Income taxes at federal income tax rate	 	$	64,539	 	 	$	65,967	 	 	$	38,674	 	
State income taxes, net of federal income tax benefit	 	 	5,234	 	 	 	5,967	 	 	 	2,369	 	
Meals and entertainment exclusion	 	 	720	 	 	 	229	 	 	 	789	 	
Share-based payments	 	 	443	 	 	 	457	 	 	 	362	 	
Other, net	 	 	377	 	 	 	260	 	 	 	467	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Income taxes	 	$	71,313	 	 	$	72,880	 	 	$	42,661	 	

Landstar paid income taxes of $67,062,000 in 2006, $65,367,000 in 2005 and $30,644,000 in 2004.
 
(4)  Operating Property
 
Operating property is summarized as follows (in thousands):

 	 	Dec. 30,
	 	 	Dec. 31,
	 	
 	 	2006	 	 	2005	 	
 	 	 	 	 	 	 	 	 	
Land	 	$	1,921	 	 	$	1,921	 	
Leasehold improvements	 	 	8,955	 	 	 	8,926	 	
Buildings and improvements	 	 	7,741	 	 	 	8,117	 	
Trailing equipment	 	 	140,426	 	 	 	110,226	 	
Other equipment	 	 	29,852	 	 	 	28,502	 	
 	 	 	 	 	 	 	 	 	
 	 	 	188,895	 	 	 	157,692	 	
Less accumulated depreciation and amortization	 	 	77,938	 	 	 	68,561	 	
 	 	 	 	 	 	 	 	 	
 	 	$	110,957	 	 	$	89,131	 	

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Included above is $99,107,000 in 2006 and $62,708,000 in 2005 of operating property under capital leases, $80,707,000 and $52,841,000, respectively, net of accumulated amortization. Landstar acquired operating property by entering into capital leases in the amount of $36,594,000 in 2006, $28,512,000 in 2005 and $17,963,000 in 2004.
 
(5)  Retirement Plan
 
Landstar sponsors an Internal Revenue Code section 401(k) defined contribution plan for the benefit of full-time employees who have completed one year of service. Eligible employees make voluntary contributions up to 75% of their base salary, subject to certain limitations. Landstar contributes an amount equal to 100% of the first 3% and 50% of the next 2% of such contributions, subject to certain limitations.
 
The expense for the Company-sponsored defined contribution plan was $1,367,000 in 2006, $1,312,000 in 2005 and $1,201,000 in 2004.
 
(6)  Debt
 
Long-term debt is summarized as follows (in thousands):

 	 	Dec. 30,
	 	 	Dec. 31,
	 	
 	 	2006	 	 	2005	 	
 	 	 	 	 	 	 	 	 	
Capital leases	 	$	69,321	 	 	$	46,973	 	
Revolving credit facility	 	 	60,000	 	 	 	120,000	 	
 	 	 	 	 	 	 	 	 	
 	 	 	129,321	 	 	 	166,973	 	
Less current maturities	 	 	18,730	 	 	 	12,122	 	
 	 	 	 	 	 	 	 	 	
Total long-term debt	 	$	110,591	 	 	$	154,851	 	

On July 8, 2004, Landstar renegotiated its existing credit agreement with a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the “Fourth Amended and Restated Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees.
 
Borrowings under the Fourth Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar, 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 Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 30, 2006, the margin was equal to 75.0/100 of 1%.
 
The unused portion of the Fourth Amended and Restated Credit Agreement carries a commitment fee determined based on the level of the Company’s Leverage Ratio, as therein defined. As of December 30, 2006, the commitment fee for the unused portion of the Fourth Amended and Restated Credit Agreement was 0.20%. At December 30, 2006, the weighted average interest rate on borrowings outstanding under the Fourth Amended and Restated Credit Agreement was 5.975%. Based on the borrowing rates in the Fourth Amended and Restated Credit Agreement and the repayment terms, the fair value of the outstanding borrowings under the Fourth Amended and Restated Credit Agreement was estimated to approximate carrying value.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Fourth Amended and Restated Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness, the incurrence of operating or capital lease obligations and the purchase of operating property. The Fourth Amended and Restated Credit Agreement also requires Landstar to meet certain financial tests. Landstar is required to, among other things, maintain minimum levels of consolidated Net Worth and Fixed Charge Coverage and limit its borrowings to a specified ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (the “Leverage Ratio”), as each is defined in the Fourth Amended and Restated Credit Agreement. Under the most restrictive covenant, the Fixed Charge Coverage, fixed charges were $83,706,000 lower than the maximum amount allowed at December 30, 2006.
 
The Company’s Fourth Amended and Restated Credit Agreement provides for a restriction on cash dividends on the Company’s capital stock only to the extent there is an event of default under the Fourth Amended and Restated Credit Agreement.
 
The Fourth Amended and Restated Credit Agreement provides for an event of default related to a person or group acquiring 25% or more of the outstanding capital stock of the Company or obtaining the power to elect a majority of the Company’s directors.
 
Borrowings under the Fourth Amended and Restated Credit Agreement are unsecured, however, Landstar System, Inc., LSHI and all but one subsidiary guarantee the obligations under the Fourth Amended and Restated Credit Agreement.
 
Landstar paid interest of $8,135,000 in 2006, $5,040,000 in 2005 and $3,247,000 in 2004.
 
(7)  Leases
 
The future minimum lease payments under all noncancelable leases at December 30, 2006, principally for trailing equipment and the Company’s headquarters facility in Jacksonville, Florida, are shown in the following table (in thousands):

 	 	Capital
	 	 	Operating
	 	
 	 	Leases	 	 	Leases	 	
 	 	 	 	 	 	 	 	 	
2007	 	$	21,857	 	 	$	7,241	 	
2008	 	 	18,847	 	 	 	6,810	 	
2009	 	 	17,914	 	 	 	3,563	 	
2010	 	 	12,255	 	 	 	2,388	 	
2011	 	 	6,042	 	 	 	2,217	 	
Thereafter	 	 	 	 	 	 	5,936	 	
 	 	 	 	 	 	 	 	 	
 	 	 	76,915	 	 	$	28,155	 	
 	 	 	 	 	 	 	 	 	
Less amount representing interest (3.6% to 5.9%)	 	 	7,594	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Present value of minimum lease payments	 	$	69,321	 	 	 	 	 	

Total rent expense, net of sublease income, was $25,156,000 in 2006, $17,969,000 in 2005 and $17,106,000 in 2004.
 
(8)  Stock Compensation Plans
 
Retrospective Application
 
The Consolidated Statement of Changes in Shareholders’ Equity as of December 25, 2004 and December 27, 2003, reflects the adoption of FAS 123R as follows: (1) retained earnings has been reduced by
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$16,063,000 and $12,028,000, respectively, representing the cumulative share-based compensation expense, net of related income tax benefits, for stock options granted from 1995 through 2004 or 2003, depending on the year-end date, and (2) additional paid-in capital has been increased by $18,353,000 and $14,643,000, respectively, representing the cumulative share-based compensation expense and reduced by income tax benefits realized excluding tax benefits in excess of recognized compensation costs (“excess tax benefits”) for stock options granted from 1995 through 2004 or 2003, depending on the year-end date.
 
The Consolidated Balance Sheet as of December 31, 2005, reflects the adoption of FAS 123R as follows: (1) retained earnings has been reduced by $20,421,000, representing cumulative share-based compensation expense, net of related income tax benefits, for stock options granted from 1995 through 2005, (2) additional paid-in-capital has been increased by $23,475,000, representing cumulative share-based compensation expense and reduced by income tax benefits realized excluding tax benefits in excess of recognized compensation costs (“excess tax benefits”), for stock options granted from 1995 through 2005, and (3) deferred tax assets have been increased by $3,054,000 representing the estimated future tax benefits attributable to share-based compensation expense expected to be realized.
 
As a result of the FAS 123R retroactive application, for the fiscal years ended December 31, 2005 and December 25, 2004, net income was reduced by $4,358,000 and $4,035,000, respectively, and earnings per common share was reduced by $0.07 in both fiscal years ended December 31, 2005 and December 25, 2004 and diluted earnings per share was reduced by $0.07 in both fiscal years ended December 31, 2005 and December 25, 2004.
 
Prior to the adoption of FAS 123R, under APB 25, the Company was required to record tax benefits realized from share-based payment arrangements as an operating cash flow. However, FAS 123R requires that excess tax benefits be recorded as a financing cash inflow and corresponding operating cash outflow. The change in presentation of tax benefits from share-based payment arrangements results in a decrease in cash from operating activities and an increase in cash from financing activities of the same amount and does not impact the Company’s overall cash position. The cash flow presentation for the fiscal years ended December 31, 2005 and December 25, 2004, have been adjusted to conform to the current year presentation. In the accompanying Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004, the Company realized tax benefits of $5,758,000, $7,036,000 and $6,849,000, respectively, in excess of recognized compensation cost and reported those amounts as a cash outflow from operating activities and a cash inflow from financing activities.
 
Share-based payment arrangements
 
As of December 30, 2006, the Company had two employee stock option plans and one stock option plan for members of its Board of Directors (the “Plans”).
 
The Plans have been approved by the Company’s shareholders and are further described below. Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands):

 	 	Fiscal Years	 	
 	 	Dec. 30,
	 	 	Dec. 31,
	 	 	Dec. 25,
	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total cost of share-based payment plans during the period	 	$	6,908	 	 	$	6,260	 	 	$	5,896	 	
Amount of related income tax benefit recognized during the period	 	 	2,169	 	 	 	1,902	 	 	 	1,861	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cost of share based payment plans during the period	 	$	4,739	 	 	$	4,358	 	 	$	4,035	 	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Employee and director stock option plans
 
Under the 1993 Stock Option Plan, as amended, the Compensation Committee of the Board of Directors was authorized to grant options to Company employees to purchase up to 4,460,000 shares of common stock. Under the 2002 Employee Stock Option Plan, the Compensation Committee of the Board of Directors is authorized to grant options to Company employees to purchase up to 6,400,000 shares of common stock. Under the 1994 Directors’ Stock Option Plan, as amended (the “DSOP”), options to purchase up to 420,000 shares of common stock were authorized to be granted to outside members of the Board of Directors upon election or re-election to the Board of Directors. Effective May 15, 2003, no further grants will be made under the DSOP. Also, no further grants will be made under the 1993 Stock Option Plan as it has expired.
 
Options granted under the Plans become exercisable in either three or five equal annual installments commencing on the first anniversary of the date of grant or vest 100% four and one-half years from the date of grant or 100% on the third or fifth anniversary from the date of grant, subject to acceleration in certain circumstances. All options granted under the Plans expire on the tenth anniversary of the date of grant. Under the Plans, the exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. As of December 30, 2006, there were 6,293,371 shares of the Company’s common stock reserved for issuance upon exercise of options granted and to be granted under the Plans.
 
The fair value of each option grant on its grant date was calculated using the Black-Scholes option pricing model with the following assumptions for grants made in 2006, 2005 and 2004: risk-free interest rate of 4.75%, 4.5% and 3.5% in 2006, 2005 and 2004, respectively, expected lives of 4.5 years in 2006 and 5 years in 2005 and 2004, a dividend yield of 0.3% in 2006 and no dividend yield in 2005 or 2004. The expected volatility used in calculating the fair market value of stock options granted was 34%, 31% and 40% in 2006, 2005 and 2004, respectively. The Company utilizes historical data, including exercise patterns and employee departure behavior, in estimating the term options will be outstanding. Expected volatility was based on historical volatility and other factors, such as expected changes in volatility arising from planned changes to the Company’s business, if any. The risk-free interest rate was based on the yield of zero coupon U.S. Treasury bonds for terms that approximated the term of the options granted.
 
The weighted average grant date fair value of stock options granted during 2006, 2005 and 2004 was $15.33, $12.76 and $8.32, respectively.
 
The total intrinsic value of stock options exercised during 2006, 2005 and 2004 was $26,411,000, $27,162,000 and $31,805,000, respectively. At December 30, 2006, the total intrinsic value of stock options outstanding was $27,808,000. At December 30, 2006, the total intrinsic value of options outstanding and exercisable was $17,067,000.
 
As of December 30, 2006, there was $12,425,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The compensation cost related to these non-vested options is expected to be recognized over a weighted average period of 1.8 years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 27, 2003	 	 	4,559,324	 	 	$	9.18	 	 	 	1,328,204	 	 	$	7.11	 	
Granted	 	 	660,000	 	 	$	20.59	 	 	 	 	 	 	 	 	 	
Exercised	 	 	(1,993,400	)	 	$	8.04	 	 	 	 	 	 	 	 	 	
Forfeited	 	 	(110,160	)	 	$	9.85	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Options at December 25, 2004	 	 	3,115,764	 	 	$	12.31	 	 	 	664,324	 	 	$	8.56	 	
Granted	 	 	683,000	 	 	$	35.77	 	 	 	 	 	 	 	 	 	
Exercised	 	 	(991,712	)	 	$	9.29	 	 	 	 	 	 	 	 	 	
Forfeited	 	 	(12,400	)	 	$	22.31	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Options at December 31, 2005	 	 	2,794,652	 	 	$	19.07	 	 	 	855,816	 	 	$	10.37	 	
Granted	 	 	650,000	 	 	$	43.61	 	 	 	 	 	 	 	 	 	
Exercised	 	 	(835,241	)	 	$	12.61	 	 	 	 	 	 	 	 	 	
Forfeited	 	 	(42,840	)	 	$	21.14	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Options at December 30, 2006	 	 	2,566,571	 	 	$	27.35	 	 	 	779,739	 	 	$	16.29	 	

The following tables summarize stock options outstanding and exercisable at December 30, 2006:

 	 	Options Outstanding	 	
 	 	 	 	 	Weighted
	 	 	Weighted
	 	
 	 	Number
	 	 	Average
	 	 	Average
	 	
 	 	Outstanding
	 	 	Remaining
	 	 	Exercise
	 	
 	 	Dec. 30,
	 	 	Contractual
	 	 	Price
	 	
Range of Exercise Prices per Share	 	2006	 	 	Life (Years)	 	 	per Share	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
$ 3.99 - $ 6.00	 	 	64,000	 	 	 	1.4	 	 	$	 3.99	 	
$ 6.01 - $ 9.00	 	 	305,600	 	 	 	4.2	 	 	$	7.94	 	
$ 9.01 - $13.50	 	 	221,372	 	 	 	5.9	 	 	$	13.06	 	
$13.51 - $20.00	 	 	540,532	 	 	 	6.7	 	 	$	17.74	 	
$20.01 - $30.00	 	 	146,000	 	 	 	7.5	 	 	$	26.10	 	
$30.01 - $40.00	 	 	646,067	 	 	 	8.0	 	 	$	35.87	 	
$40.01 - $45.76	 	 	643,000	 	 	 	9.1	 	 	$	43.60	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	2,566,571	 	 	 	7.2	 	 	$	27.35	 	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 	 	 	 	 	 	 	 	 	
 	 	Options Exercisable	 	
 	 	Number
	 	 	Weighted Average
	 	
 	 	Exercisable
	 	 	Exercise Price
	 	
Range of Exercise Prices per Share	 	Dec. 30, 2006	 	 	per Share	 	
 	 	 	 	 	 	 	 	 	
$ 3.99 - $ 6.00	 	 	64,000	 	 	$	3.99	 	
$ 6.01 - $ 9.00	 	 	305,600	 	 	$	7.94	 	
$ 9.01 - $13.50	 	 	92,732	 	 	$	13.00	 	
$13.51 - $20.00	 	 	139,734	 	 	$	16.80	 	
$20.01 - $30.00	 	 	—	 	 	 	—	 	
$30.01 - $37.31	 	 	177,673	 	 	$	36.40	 	
 	 	 	 	 	 	 	 	 	
 	 	 	779,739	 	 	$	16.29	 	

Under the Directors’ Stock Compensation Plan, outside members of the Board of Directors who are elected or re-elected to the Board will receive 6,000 shares of common stock of the Company, subject to certain restrictions including restrictions on transfer. 6,000 shares of the Company’s common stock were issued to a member of the Board of Directors upon such member’s re-election at the 2006 and 2005 annual shareholders’ meetings and 18,000 shares of the Company’s common stock were issued to members of the Board of Directors upon such members’ re-election at the 2004 annual shareholders meeting. During 2006, 2005 and 2004, the Company reported $265,000, $193,000 and $402,000, respectively, in compensation expense representing the fair market value of these share awards. As of December 30, 2006, there were 164,000 shares of the Company’s common stock reserved for issuance upon the grant of common stock under the Directors’ Stock Compensation Plan.
 
(9)  Shareholders’ Equity
 
On July 28, 2005, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to 2,000,000 shares of its common stock from time to time in the open market and in privately negotiated transactions. During 2006, the Company completed the purchase of shares authorized under this program. On August 3, 2006, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to an additional 2,000,000 shares of its common stock from time to time in the open market and in privately negotiated transactions.
 
During 2006, Landstar purchased 3,697,726 shares of its common stock at a total cost of $156,492,000 pursuant to its previously announced stock purchase programs. As of December 30, 2006, Landstar may purchase an additional 827,501 shares of its common stock under its authorized stock purchase programs.
 
The Company has 2,000,000 shares of preferred stock authorized and unissued.
 
(10)  Segment Information
 
The Company has three reportable business segments. These are the carrier, global logistics and insurance segments. The carrier segment primarily provides transportation services to the truckload market for a wide range of general commodities over irregular or non-repetitive routes utilizing dry and specialty vans and unsided trailers, including flatbed, drop deck and specialty. It also 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 independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “Business Capacity Owner Independent Contractors” or “BCO Independent Contractors”) and other third party truck capacity providers under non-exclusive contractual arrangements (“Truck Brokerage Carriers”). Transportation and logistics services provided by the global logistics segment include the arrangement of multimodal (ground, air, ocean

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and rail) moves, contract logistics, truck brokerage, emergency and expedited ground, air and ocean freight, buses and warehousing. The global logistics segment markets its services primarily through independent commission sales agents and utilizes capacity provided by BCO Independent Contractors and other third party capacity providers, including Truck Brokerage Carriers, railroads, air and ocean cargo carriers, bus providers and warehouse capacity owners. The nature of the carrier and global logistics segments’ businesses is such that a significant portion of their operating costs varies directly with revenue. The insurance segment provides risk and claims management services to Landstar’s operating subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to Landstar’s operating subsidiaries.
 
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.
 
Internal revenue for transactions between the carrier and global logistics segments is based on quoted rates which are believed to approximate the cost that would have been incurred had similar services been obtained from an unrelated third party. Internal revenue for premiums billed by the insurance segment to the carrier and global logistics segments is calculated each fiscal period based primarily on an actuarial calculation of historical loss experience and is believed to approximate the cost that would have been incurred by the carrier and global logistics segments had similar insurance been obtained from an unrelated third party.
 
During 2006, 2005 and 2004, revenue derived from various departments of the United States Government represented 9%, 17% and 9%, respectively, of consolidated revenue. Included in consolidated revenue derived from the various departments of the United States Government in 2006, 2005 and 2004 was $100,655,000, $275,929,000 and $63,790,000, respectively, of emergency transportation services related to disaster relief efforts for storms that impacted the United States. These emergency transportation services were provided primarily under a contract between Landstar Express America and the United States Department of Transportation/Federal Aviation Administration and reflected in revenue of the global logistics segment. No other single customer accounted for more than 10% of consolidated revenue in 2006, 2005 or 2004. In addition, during 2006 approximately 10% of the Company’s revenue was attributable to the automotive industry. One agent in the global logistics segment contributed approximately $196,000,000 of the Company’s revenue in 2006. Substantially all of the Company’s revenue is generated in the United States.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following tables summarize information about the Company’s reportable business segments as of and for the fiscal years ending December 30, 2006, December 31, 2005 and December 25, 2004 (in thousands):

 	 	Carrier	 	 	Global Logistics	 	 	Insurance	 	 	Other	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2006	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
External revenue	 	$	1,796,616	 	 	$	682,542	 	 	$	34,598	 	 	 	 	 	 	$	2,513,756	 	
Internal revenue	 	 	54,837	 	 	 	2,478	 	 	 	28,293	 	 	 	 	 	 	 	85,608	 	
Investment income	 	 	 	 	 	 	 	 	 	 	4,250	 	 	 	 	 	 	 	4,250	 	
Interest and debt expense	 	 	 	 	 	 	 	 	 	 	 	 	 	$	6,821	 	 	 	6,821	 	
Depreciation and amortization	 	 	12,814	 	 	 	152	 	 	 	 	 	 	 	3,830	 	 	 	16,796	 	
Operating income	 	 	181,550	 	 	 	31,433	 	 	 	35,673	 	 	 	(57,437	)	 	 	191,219	 	
Expenditures on long-lived assets	 	 	637	 	 	 	174	 	 	 	 	 	 	 	3,362	 	 	 	4,173	 	
Goodwill	 	 	20,496	 	 	 	10,638	 	 	 	 	 	 	 	 	 	 	 	31,134	 	
Capital lease additions	 	 	36,594	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	36,594	 	
Total assets	 	 	357,575	 	 	 	115,729	 	 	 	106,322	 	 	 	67,025	 	 	 	646,651	 	
2005	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
External revenue	 	$	1,691,668	 	 	$	795,136	 	 	$	31,024	 	 	 	 	 	 	$	2,517,828	 	
Internal revenue	 	 	95,872	 	 	 	2,222	 	 	 	31,036	 	 	 	 	 	 	 	129,130	 	
Investment income	 	 	 	 	 	 	 	 	 	 	2,695	 	 	 	 	 	 	 	2,695	 	
Interest and debt expense	 	 	 	 	 	 	 	 	 	 	 	 	 	$	4,744	 	 	 	4,744	 	
Depreciation and amortization	 	 	11,262	 	 	 	309	 	 	 	 	 	 	 	4,349	 	 	 	15,920	 	
Operating income	 	 	169,882	 	 	 	60,115	 	 	 	19,374	 	 	 	(56,149	)	 	 	193,222	 	
Expenditures on long-lived assets	 	 	798	 	 	 	20	 	 	 	 	 	 	 	3,039	 	 	 	3,857	 	
Goodwill	 	 	20,496	 	 	 	10,638	 	 	 	 	 	 	 	 	 	 	 	31,134	 	
Capital lease additions	 	 	28,512	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	28,512	 	
Total assets	 	 	360,083	 	 	 	304,727	 	 	 	58,379	 	 	 	42,625	 	 	 	765,814	 	
2004	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
External revenue	 	$	1,454,862	 	 	$	534,922	 	 	$	30,152	 	 	 	 	 	 	$	2,019,936	 	
Internal revenue	 	 	48,673	 	 	 	4,967	 	 	 	30,538	 	 	 	 	 	 	 	84,178	 	
Investment income	 	 	 	 	 	 	 	 	 	 	1,346	 	 	 	 	 	 	 	1,346	 	
Interest and debt expense	 	 	 	 	 	 	 	 	 	 	 	 	 	$	3,025	 	 	 	3,025	 	
Depreciation and amortization	 	 	9,473	 	 	 	270	 	 	 	 	 	 	 	4,216	 	 	 	13,959	 	
Operating income	 	 	126,831	 	 	 	25,392	 	 	 	12,456	 	 	 	(51,156	)	 	 	113,523	 	
Expenditures on long-lived assets	 	 	730	 	 	 	206	 	 	 	 	 	 	 	5,441	 	 	 	6,377	 	
Goodwill	 	 	20,496	 	 	 	10,638	 	 	 	 	 	 	 	 	 	 	 	31,134	 	
Capital lease additions	 	 	17,963	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	17,963	 	
Total assets	 	 	317,466	 	 	 	136,311	 	 	 	91,183	 	 	 	41,842	 	 	 	586,802	 	
 
(11)  Commitments and Contingencies
 
At December 30, 2006, in addition to the $42,703,000 letters of credit secured by investments, Landstar had $27,219,000 of letters of credit outstanding under the Company’s revolving credit facility.
 
On November 1, 2002, the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and certain BCO Independent Contractors (as defined below) (collectively with OOIDA, the “Plaintiffs”) filed a putative
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
class action complaint on behalf of independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (“BCO Independent Contractors”) in the United States District Court for the Middle District of Florida (the “Court”) in Jacksonville, Florida, against the Company and certain of its subsidiaries, which was amended on April 7, 2005 (the “Amended Complaint”). The Amended Complaint alleges that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violate certain federal leasing regulations and seeks injunctive relief, an unspecified amount of damages and attorney’s fees. On August 30, 2005, the Court granted a motion by the Plaintiffs to certify the case as a class action.
 
On October 6, 2006, the Court issued a summary judgment ruling which found, among other things, that (1) the lease agreements of the Defendants (as defined below) literally complied with the requirements of Section 376.12(d) of the applicable federal leasing regulations in regards to provisions relating to reductions to revenue derived from freight upon which BCO Independent Contractors’ compensation is calculated, (2) charge-back amounts which include fees and profits to the motor carrier are not unlawful under Section 376.12(h) and (3) the Defendants had violated 376.12(h) of the regulations by failing to provide access to documents to determine the validity of certain charges. On January 12, 2007, the Court ruled that the monetary remedy available to the Plaintiffs would be limited to damages sustained as a result of the violation and rejected Plaintiffs’ request for equitable relief in the form of restitution or disgorgement.
 
On January 16, 2007, the Court ordered the decertification of the class of BCO Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial commenced for purposes of determining what remedies, if any, would be awarded to the remaining named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company: Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the “Defendants”). On January 18, 2007, in response to a motion filed by the Defendants following the presentation by the Plaintiffs of their case in chief, the Court granted judgment as a matter of law in favor of the Defendants and stated that the Plaintiffs had failed to present evidence that any of the Plaintiffs had sustained damages as a result of any violation of the applicable federal leasing regulations. On that date, the Court also ruled that access to documents describing a third party vendor’s charges to determine the validity of charge-back amounts under 376.12(h) was not required under Defendants’ current lease with respect to programs where the lease contains a price to a BCO Independent Contractor that is not calculated on the basis of a third party vendor’s charge to the Defendants. Plaintiffs’ request for injunctive relief remains pending. Upon entry by the Court of a written final Judgment, the Plaintiffs will have the right to appeal the Court’s rulings.
 
The Company is involved in certain other claims and pending litigation arising from the normal conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such other claims and pending litigation and that the ultimate outcome, after provisions thereof, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders
Landstar System, Inc.:
 
We have audited the accompanying consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 30, 2006 and December 31, 2005, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Landstar System, Inc. and subsidiary as of December 30, 2006 and December 31, 2005, and the results of their operations and their cash flows for the fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment, effective January 1, 2006.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Landstar System, Inc.’s internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
 
/s/  KPMG LLP
 
February 26, 2007
Jacksonville, Florida
Certified Public Accountants
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
(Unaudited)

 	 	Fourth
	 	 	Third
	 	 	Second
	 	 	First
	 	
 	 	Quarter
	 	 	Quarter
	 	 	Quarter
	 	 	Quarter
	 	
 	 	2006	 	 	2006	 	 	2006	 	 	2006	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	611,279	 	 	$	649,197	 	 	$	643,238	 	 	$	610,042	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	 	$	48,652	 	 	$	51,701	 	 	$	49,255	 	 	$	41,611	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	 	$	46,781	 	 	$	49,893	 	 	$	47,963	 	 	$	39,761	 	
Income taxes	 	 	18,091	 	 	 	19,313	 	 	 	18,498	 	 	 	15,411	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	28,690	 	 	$	30,580	 	 	$	29,465	 	 	$	24,350	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share(1)	 	$	0.51	 	 	$	0.53	 	 	$	0.50	 	 	$	0.41	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share(1)	 	$	0.50	 	 	$	0.53	 	 	$	0.50	 	 	$	0.41	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid per common share	 	$	0.030	 	 	$	0.030	 	 	$	0.025	 	 	$	0.025	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Fourth
	 	 	Third
	 	 	Second
	 	 	First
	 	
 	 	Quarter
	 	 	Quarter
	 	 	Quarter
	 	 	Quarter
	 	
 	 	2005	 	 	2005	 	 	2005	 	 	2005	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	800,442	 	 	$	676,070	 	 	$	539,104	 	 	$	502,212	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income(2)	 	$	69,553	 	 	$	57,547	 	 	$	37,675	 	 	$	28,447	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes(2)	 	$	68,003	 	 	$	56,342	 	 	$	36,623	 	 	$	27,510	 	
Income taxes(2)	 	 	26,216	 	 	 	21,773	 	 	 	14,199	 	 	 	10,692	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income(2)	 	$	41,787	 	 	$	34,569	 	 	$	22,424	 	 	$	16,818	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share(1)(2)	 	$	0.71	 	 	$	0.59	 	 	$	0.38	 	 	$	0.28	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share(1)(2)	 	$	0.70	 	 	$	0.58	 	 	$	0.37	 	 	$	0.27	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid per common share	 	$	0.025	 	 	$	0.025	 	 	 	 	 	 	 	 	 	

 
 	 	 	
(1)	 	Due to the changes in the number of average common shares and common stock equivalents outstanding during the year, the sum of earnings per share amounts for each quarter do not necessarily add to the earnings per share amounts for the full year.	
 	 	 	
(2)	 	On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“FAS 123R”), under the modified retrospective method. Financial information for 2005 has been adjusted to reflect the retrospective implementation of FAS 123R.	

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders
Landstar System, Inc.:
 
Under date of February 26, 2007, we reported on the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 30, 2006 and December 31, 2005, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004, as contained in the 2006 annual report to shareholders. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in Item 15(a)(2). These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
 
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
 
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment, effective January 1, 2006.
 
/s/  KPMG LLP
 
February 26, 2007
Jacksonville, Florida
Certified Public Accountants
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LANDSTAR SYSTEM, INC.
 
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEET INFORMATION
(Dollars in thousands, except per share amounts)

 	 	Dec. 30,
	 	 	Dec. 31,
	 	
 	 	2006	 	 	2005	 	
 	 	 	 	 	 	 	 	 	
ASSETS	
Investment in Landstar System Holdings, Inc., net of advances	 	$	230,274	 	 	$	255,689	 	
 	 	 	 	 	 	 	 	 	
Total assets	 	$	230,274	 	 	$	255,689	 	

LIABILITIES AND SHAREHOLDERS’ EQUITY	
Shareholders’ equity:	 	 	 	 	 	 	 	 	
Common stock, $.01 par value, authorized 160,000,000 shares, issued 64,993,143 and 64,151,902	 	$	650	 	 	$	642	 	
Additional paid-in capital	 	 	108,020	 	 	 	84,532	 	
Retained earnings	 	 	499,273	 	 	 	392,549	 	
Cost of 9,028,009 and 5,344,883 shares of common stock in treasury	 	 	(377,662	)	 	 	(221,776	)	
Accumulated other comprehensive loss	 	 	(7	)	 	 	(211	)	
Note receivable arising from exercise of stock options	 	 	 	 	 	 	(47	)	
 	 	 	 	 	 	 	 	 	
Total shareholders’ equity	 	 	230,274	 	 	 	255,689	 	
 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	 	$	230,274	 	 	$	255,689	 	

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LANDSTAR SYSTEM, INC.
 
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF INCOME INFORMATION
(Dollars in thousands, except per share amounts)

 	 	Fiscal Years Ended	 	
 	 	Dec. 30,
	 	 	Dec. 31,
	 	 	Dec. 25,
	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity in undistributed earnings of Landstar System Holdings, Inc	 	$	113,079	 	 	$	115,020	 	 	$	67,933	 	
Income taxes	 	 	(6	)	 	 	(578	)	 	 	96	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	113,085	 	 	$	115,598	 	 	$	67,837	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share	 	$	1.95	 	 	$	1.95	 	 	$	1.13	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share	 	$	1.93	 	 	$	1.91	 	 	$	1.10	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid per common share	 	$	0.11	 	 	$	0.05	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Average number of shares outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share	 	 	57,854,000	 	 	 	59,199,000	 	 	 	60,154,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share	 	 	58,654,000	 	 	 	60,413,000	 	 	 	61,757,000	 	

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LANDSTAR SYSTEM, INC.
 
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF CASH FLOWS INFORMATION
(Dollars in thousands)

 	 	Fiscal Years Ended	 	
 	 	Dec. 30,
	 	 	Dec. 31,
	 	 	Dec. 25,
	 	
 	 	2006	 	 	2005	 	 	2004	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Activities	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	113,085	 	 	$	115,598	 	 	$	67,837	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Equity in undistributed earnings of Landstar System Holdings, Inc. 	 	 	(113,079	)	 	 	(115,020	)	 	 	(67,933	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Cash Provided (Used) By Operating Activities	 	 	6	 	 	 	578	 	 	 	(96	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Investing Activities	 	 	 	 	 	 	 	 	 	 	 	 	
Additional investments in and advances from Landstar System Holdings, Inc., net	 	 	146,509	 	 	 	81,269	 	 	 	4,097	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Cash Provided By Investing Activities	 	 	146,509	 	 	 	81,269	 	 	 	4,097	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Financing Activities	 	 	 	 	 	 	 	 	 	 	 	 	
Excess tax benefit on stock option exercises	 	 	5,758	 	 	 	7,036	 	 	 	6,849	 	
Proceeds from repayment of notes arising from exercises of stock options	 	 	47	 	 	 	423	 	 	 	115	 	
Proceeds from exercises of stock options	 	 	10,533	 	 	 	9,216	 	 	 	16,036	 	
Dividends paid	 	 	(6,361	)	 	 	(2,922	)	 	 	 	 	
Purchases of common stock	 	 	(156,492	)	 	 	(95,600	)	 	 	(27,001	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Cash Used By Financing Activities	 	 	(146,515	)	 	 	(81,847	)	 	 	(4,001	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in cash	 	 	0	 	 	 	0	 	 	 	0	 	
Cash at beginning of period	 	 	0	 	 	 	0	 	 	 	0	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash at end of period	 	$	0	 	 	$	0	 	 	$	0	 	

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 30, 2006

COL A	 	COL B	 	 	COL C	 	 	COL D	 	 	COL E	 	
 	 	 	 	 	Additions	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Charged to
	 	 	 	 	 	 	 	
 	 	Balance at
	 	 	Charged to
	 	 	Other
	 	 	Deductions
	 	 	Balance at
	 	
 	 	Beginning of
	 	 	Costs and
	 	 	Accounts
	 	 	Describe
	 	 	End of
	 	
 	 	Period	 	 	Expenses	 	 	Describe	 	 	(A)	 	 	Period	 	
 	 	(Dollars in thousands)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Description	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for doubtful accounts:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Deducted from trade receivables	 	$	4,655	 	 	$	3,235	 	 	 	 	 	 	$	(3,056	)	 	$	4,834	 	
Deducted from other receivables	 	 	4,342	 	 	 	2,099	 	 	 	 	 	 	 	(1,929	)	 	 	4,512	 	
Deducted from other non-current receivables	 	 	282	 	 	 	15	 	 	 	     	 	 	 	 	 	 	 	297	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	9,279	 	 	$	5,349	 	 	 	 	 	 	$	(4,985	)	 	$	9,643	 	

 
 	 	 	
(A)	 	Write-offs, net of recoveries.	

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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 31, 2005

COL A	 	COL B	 	 	COL C	 	 	COL D	 	 	COL E	 	
 	 	 	 	 	Additions	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Charged to
	 	 	 	 	 	 	 	
 	 	Balance at
	 	 	Charged to
	 	 	Other
	 	 	Deductions
	 	 	Balance at
	 	
 	 	Beginning of
	 	 	Costs and
	 	 	Accounts
	 	 	Describe
	 	 	End of
	 	
 	 	Period	 	 	Expenses	 	 	Describe	 	 	(A)	 	 	Period	 	
 	 	(Dollars in thousands)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Description	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for doubtful accounts:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Deducted from trade receivables	 	$	4,021	 	 	$	3,399	 	 	 	     	 	 	$	(2,765	)	 	$	4,655	 	
Deducted from other receivables	 	 	4,245	 	 	 	2,521	 	 	 	 	 	 	 	(2,424	)	 	 	4,342	 	
Deducted from other non-current receivables	 	 	263	 	 	 	19	 	 	 	 	 	 	 	 	 	 	 	282	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	8,529	 	 	$	5,939	 	 	 	 	 	 	$	(5,189	)	 	$	9,279	 	

 
 	 	 	
(A)	 	Write-offs, net of recoveries.	

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
 
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 25, 2004

COL A	 	COL B	 	 	COL C	 	 	COL D	 	 	COL E	 	
 	 	 	 	 	Additions	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Charged to
	 	 	 	 	 	 	 	
 	 	Balance at
	 	 	Charged to
	 	 	Other
	 	 	Deductions
	 	 	Balance at
	 	
 	 	Beginning of
	 	 	Costs and
	 	 	Accounts
	 	 	Describe
	 	 	End of
	 	
 	 	Period	 	 	Expenses	 	 	Describe	 	 	(A)	 	 	Period	 	
 	 	(Dollars in thousands)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Description	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for doubtful accounts:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Deducted from trade receivables	 	$	3,410	 	 	$	2,883	 	 	 	 	 	 	$	(2,272	)	 	$	4,021	 	
Deducted from other receivables	 	 	4,077	 	 	 	3,348	 	 	 	 	 	 	 	(3,180	)	 	 	4,245	 	
Deducted from other non-current receivables	 	 	244	 	 	 	19	 	 	 	     	 	 	 	 	 	 	 	263	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	7,731	 	 	$	6,250	 	 	 	 	 	 	$	(5,452	)	 	$	8,529	 	

 
 	 	 	
(A)	 	Write-offs, net of recoveries.	

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Item 9.  	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	
 
None.

Item 9A.  	Controls and Procedures	
 
Disclosure Controls and Procedure
 
As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and each of the Co-Chief Financial Officers (formerly, the Executive Vice President and Chief Financial Officer and the Vice President and Corporate Controller) (“Co-CFOs”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the CEO and Co-CFOs have concluded that the Company’s disclosure controls and procedures were effective as of December 30, 2006 to provide reasonable assurance that information required to be disclosed by the Company in reports that it filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
In designing and evaluating the disclosure controls and procedures, Company management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitation in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.
 
Internal Control Over Financial Reporting

  (a)  	Management’s Report on Internal Control over Financial Reporting	
 
Management of Landstar System, Inc. (the “Company”) is responsible for establishing and maintaining effective internal controls over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act, as amended.
 
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
 
Management, with the participation of the Company’s principal executive and principal financial officers, assessed the effectiveness of the Company’s internal control over financial reporting as of December 30, 2006. This assessment was performed using the criteria established under the Internal Control-Integrated Framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error or circumvention or
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overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and reporting and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Based on the assessment performed using the criteria established by COSO, management has concluded that the Company maintained effective internal control over financial reporting as of December 30, 2006.
 
KPMG LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K for the fiscal year ended December 30, 2006, has issued an audit report on management’s assessment of the Company’s internal control over financial reporting. Such report appears immediately below.

  (b)  	Attestation Report of the Registered Public Accounting Firm	

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders
Landstar System, Inc:
 
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Landstar System, Inc. maintained effective internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Landstar System, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that Landstar System, Inc. maintained effective internal control over financial reporting as of December 30, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by COSO. Also, in our opinion, Landstar System, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control — Integrated Framework issued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 30, 2006 and December 31, 2005, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004, and our report dated February 26, 2007 expressed an unqualified opinion on those consolidated financial statements.
 
/s/  KPMG LLP
 
February 26, 2007
Jacksonville, Florida
Certified Public Accountants
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  (c)  	Changes in Internal Control Over Financial Reporting	
 
There were no significant changes in the Company’s internal controls over financial reporting during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.  	Other Information	
 
On February 27, 2007, the Company entered into Key Executive Employment Protection Agreements with Larry S. Thomas, Vice President and Chief Information Officer of the Company, and Jim M. Handoush, President of Landstar Global Logistics, and amended the Key Executive Employment Protection Agreement of James B. Gattoni, Vice President and Co-Chief Financial Officer of the Company. A form of the agreements is attached hereto as Exhibit 10.13, and is incorporated herein by reference. The agreements become effective on the date on which a change of control of the Company occurs and coverage is effective for a period of two years thereafter. Benefits payable under the agreements are triggered by a change of control of the Company, or a potential change of control of the Company, followed by an involuntary termination by the Company (not for cause or disability), termination by the executive for good reason or upon a resignation by the executive during a sixty-day window beginning on the six-month anniversary of the change of control. In the event of such a qualifying termination during the two year effective period, Mr. Gattoni will receive, in addition to his accrued and vested but unpaid salary and benefits, a lump sum severance payment equal to two times the sum of his annual base salary and the amount that would have been payable to him as a bonus for the year in which the change of control occurs, determined by multiplying his annual base salary by his total “participant’s percentage participation” established for such year under the Company’s Incentive Compensation Plan (or any successor plan thereto). If Messrs. Thomas or Handoush experience such a qualifying termination during the two year effective period, he will receive, in addition to his accrued and vested but unpaid salary and benefits, a lump sum severance payment equal to one times the sum of his annual base salary and the amount that would have been payable to the executive as a bonus for the year in which the change of control occurs, determined by multiplying the executive’s annual base salary by his total “participant’s percentage participation” established for such year under the Company’s Incentive Compensation Plan (or any successor plan thereto). Under the agreements, if the executive officer incurs a qualifying termination he will also receive continued welfare and fringe benefit plan coverage for up to one year following the date of the qualifying termination or if earlier, until the date the executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer. In addition, to the extent that any payments are subject to the excise tax imposed on so-called “excess parachute payments,” a tax gross-up payment will be made to the executive officer.
 
PART III

Item 10.  	Directors, Executive Officers and Corporate Governance	
 
The information required by this Item concerning the Directors (and nominees for Directors) and Executive Officers of the Company is set forth under the captions “Election of Directors,” “Directors of the Company,” “Information Regarding Board of Directors and Committees,” and “Executive Officers of the Company” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. The information required by this Item concerning Director Independence, the Company’s Audit Committee and the Audit Committee’s Financial Expert is set forth under the caption “Information Regarding Board of Directors and Committees” and “Report of the Audit Committee” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
 
The Company has adopted a Code of Ethics that applies to each of its directors and employees, including its principal executive officer, principal financial officer, controller and all other employees performing similar
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functions. The Code of Ethics is available on the Company’s website at www.landstar.com under “Investors — Corporate Governance”. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendments to, or waivers from, a provision or provisions of the Code of Ethics by posting such information on its website at the web address indicated above.

Item 11.  	Executive Compensation	
 
The information required by this Item is set forth under the captions “Compensation of Directors”, “Compensation of Executive Officers,” “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Option Exercises and Stock Vested,” “Outstanding Equity Awards at Fiscal Year End,”, “Nonqualified Deferred Compensation,” “Report of the Compensation Committee on Executive Compensation,” and “Key Executive Employment Protection Agreements” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.

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

Item 13.  	Certain Relationships and Related Transactions, and Director Independence	
 
None.

Item 14.  	Principal Accounting Fees and Services	
 
The information required by this item is set forth under the caption “Report of the Audit Committee” and “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
 
PART IV

Item 15.  	Exhibits and Financial Statement Schedules	
 
(a)(1) Financial Statements and Supplementary Data

 	 	Page	
 	 	 	 	 	
Consolidated Balance Sheets	 	 	33	 	
Consolidated Statements of Income	 	 	34	 	
Consolidated Statements of Cash Flows	 	 	35	 	
Consolidated Statement of Changes in Shareholders’ Equity	 	 	36	 	
Notes to Consolidated Financial Statements	 	 	37	 	
Report of Independent Registered Public Accounting Firm	 	 	50	 	

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(2) Financial Statement Schedules
 
The report of the Company’s independent registered public accounting firm with respect to the financial statement schedules listed below appears on page 52 of this Annual Report on Form 10-K.

Schedule
	 	 	 	 	 	
Number	 	Description	 	Page	 	
 	 	 	 	 	 	 	
I	 	Condensed Financial Information of Registrant Parent Company Only Balance Sheet Information	 	 	53	 	
I	 	Condensed Financial Information of Registrant Parent Company Only Statement of Income Information	 	 	54	 	
I	 	Condensed Financial Information of Registrant Parent Company Only Statement of Cash Flows Information	 	 	55	 	
II	 	Valuation and Qualifying Accounts For the Fiscal Year Ended December 30, 2006	 	 	56	 	
II	 	Valuation and Qualifying Accounts For the Fiscal Year Ended December 31, 2005	 	 	57	 	
II	 	Valuation and Qualifying Accounts For the Fiscal Year Ended December 25, 2004	 	 	58	 	
 
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

Exhibit
	 	 	
No.	 	Description	
 	 	 	 	 	
 	(2)	 	 	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 By-Laws:	
 	3	.1	 	Restated Certificate of Incorporation of the Company dated March 6, 2006, including Certificate of Designation of Junior Participating Preferred Stock dated February 10, 1993. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (Commission File No. 0-21238))	
 	3	.2	 	The Company’s Bylaws, as amended and restated on February 9, 1993. (Incorporated by reference to Exhibit 3 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	 	Fourth Amended and Restated Credit Agreement, dated July 8, 2004, among LSHI, Landstar, the lenders named therein and JPMorgan Chase Bank as administrative agent (including exhibits and schedules thereto). (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K filed on July 12, 2004 (Commission File No. 0-21238))	
 	(10)	 	 	Material contracts:	
 	10	.1+	 	Landstar System, Inc. Executive Incentive Compensation Plan (Incorporated by reference to Exhibit B to the Registrant’s Definitive Proxy Statement filed on March 22, 2002 (Commission File No. 0-21238))	
 	10	.2+	 	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	.3+	 	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))	

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Exhibit
	 	 	
No.	 	Description	
 	 	 	 	 	
 	10	.4+	 	Amendment to the Landstar System, Inc. 1993 Stock Option Plan (Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997 (Commission File No. 0-21238))	
 	10	.5+	 	Landstar System, Inc. 2002 Employee Stock Option Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on March 22, 2002 (Commission File No. 0-21238))	
 	10	.6+	 	Landstar System, Inc. 1994 Director’s Stock Option Plan. (Incorporated by reference to Exhibit 99 to the Registrant’s Registration Statement on Form S-8 filed July 5, 1995. (Registration No. 33-94304))	
 	10	.7+	 	First Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 0-21238))	
 	10	.8+	 	Second Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 0-21238))	
 	10	.9+	 	Directors Stock Compensation Plan, dated May 15, 2003 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 (Commission File No. 0-21238))	
 	10	.10+	 	Form of Indemnification Agreement between the Company and each of the directors and certain executive officers of the Company. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 2003 (Commission No. 0-21238))	
 	10	.11+	 	Form of Key Executive Employment Protection Agreement dated January 30, 1998 between Landstar System, Inc. and Robert C. LaRose (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997 (Commission File No. 0-21238))	
 	10	.12+	 	Amendment to Key Executive Employment Protection Agreement, dated August 7, 2002, between Landstar System, Inc. and Robert C. LaRose (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (Commission File No. 0-21238))	
 	10	.13*+	 	Form of Key Executive Employment Protection Agreement between Landstar System, Inc. and each of Joseph J. Beacom, James B. Gattoni, Henry H. Gerkens, Jim M. Handoush, Michael K. Kneller, Jeffrey L. Pundt, Ronald G. Stanley and Larry S. Thomas	
 	10	.14+	 	Letter Agreement, dated July 2, 2002 from Jeffrey C. Crowe to Henry H. Gerkens. (Incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (Commission File No. 0-21238))	
 	10	.15+	 	Letter agreement, dated April 27, 2004, between Landstar System, Inc. and Henry H. Gerkens (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 28, 2004 (Commission File No. 0-21238))	
 	10	.16+	 	Letter Agreement, dated April 27, 2004, between Landstar System, Inc. and Jeffrey C. Crowe (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 28, 2004 (Commission No. 0-21238))	
 	10	.17+	 	Letter Agreement, dated January 2, 2007, between Landstar System, Inc. and Robert C. LaRose (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed January 3, 2007 (Commission No. 0-21238))	
 	10	.18+	 	Solicitation, Offer and Award Agreement, dated October 1, 2002, as amended January 31, 2003, January 1, 2004, January 10, 2005 and September 12, 2005, between the United States Department of Transportation/Federal Aviation Administration and Landstar Express America, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 24, 2005.) (Commission File No. 0-21238)	
65

Table of Contents
 	 	 	 	 	
Exhibit
	 	 	
No.	 	Description	
 	 	 	 	 	
 	10	.19*	 	Amendment to Solicitation, Offer and Award Agreement (as previously amended), dated December 20, 2006, between the United States Department of Transportation/Federal Aviation Administration and Landstar Express America, Inc.	
 	(21)	 	 	Subsidiaries of the Registrant:	
 	21	.1*	 	List of Subsidiary Corporations of the Registrant	
 	(23)	 	 	Consents of experts and counsel:	
 	23	.1*	 	Consent of KPMG LLP as Independent Registered Public Accounting Firm of the Registrant	
 	(24)	 	 	Power of attorney:	
 	24	.1*	 	Powers of Attorney	
 	(31)	 	 	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:	
 	31	.1*	 	Chief Executive Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	
 	31	.2*	 	Co-Chief Financial Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	
 	31	.3*	 	Co-Chief Financial Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	
 	(32)	 	 	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:	
 	32	.1**	 	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	32	.2**	 	Co-Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	32	.3**	 	Co-Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	

 	 	 	
+	 	management contract or compensatory plan or arrangement	
 	 	 	
*	 	Filed herewith.	
 	 	 	
**	 	Furnished herewith.	
 
THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO ANY SHAREHOLDER OF THE COMPANY WHO SO REQUESTS IN WRITING, A COPY OF ANY EXHIBITS, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ANY SUCH REQUEST SHOULD BE DIRECTED TO LANDSTAR SYSTEM, INC., ATTENTION: INVESTOR RELATIONS, 13410 SUTTON PARK DRIVE SOUTH, JACKSONVILLE, FLORIDA 32224.
66

Table of Contents
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
LANDSTAR SYSTEM, INC.

 	By: 	/s/  HENRY H. GERKENS	
Henry H. Gerkens
President and
Chief Executive Officer

 	By: 	/s/  ROBERT C. LAROSE	
Robert C. LaRose
Executive Vice President and Co-Chief
Financial Officer

 	By: 	/s/  JAMES B. GATTONI	
James B. Gattoni
Vice President and Co-Chief
Financial Officer
 
Date: February 26, 2007
 
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	 	February 26, 2007	
 	 	 	 	 	
/s/  HENRY H. GERKENS

Henry H. Gerkens	 	Director, President and Chief
Executive Officer; Principal
Executive Officer	 	February 26, 2007	
 	 	 	 	 	
/s/  ROBERT C. LAROSE

Robert C. LaRose	 	Executive Vice President and Co-Chief Financial Officer	 	February 26, 2007	
 	 	 	 	 	
/s/  JAMES B. GATTONI

James B. Gattoni	 	Vice President and Co-Chief
Financial Officer;
Principal Accounting Officer	 	February 26, 2007	
 	 	 	 	 	
*

David G. Bannister	 	Director	 	February 26, 2007	

67

Table of Contents
 	 	 	 	 	 	 	
Signature	 	Title	 	Date	
 	 	 	 	 	 	 	
*

Ronald W. Drucker	 	Director	 	February 26, 2007	
 	 	 	 	 	
*

Merritt J. Mott	 	Director	 	February 26, 2007	
 	 	 	 	 	
*

William S. Elston	 	Director	 	February 26, 2007	
 	 	 	 	 	
*

Diana M. Murphy	 	Director	 	February 26, 2007	
 	 	 	 	 	
By: 
/s/  MICHAEL K. KNELLER

Michael K. Kneller
Attorney In Fact*	 	 	 	 	

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EXHIBIT 10.13
FORM OF
KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
     THIS AGREEMENT between Landstar System, Inc., a Delaware corporation (the “Company”), and __________________ (the “Executive”), dated as of this ___ day of __________________, 200___.
WITNESSETH :
     WHEREAS, the Company has employed the Executive in an executive officer position and has determined that the Executive holds a position of significant importance with the Company;
     WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such situation in the best interests of shareholders;
     WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security;
     WHEREAS, the Company desires to assure itself of the Executive’s services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances;
     WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control (as defined in Section 2);
     NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows:
     1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the “Change of Control Date”),  provided that , except as provided in Section 1(b), if the Executive is not employed by the Company on the Change of Control Date, this Agreement shall be void and without effect. Notwithstanding the foregoing, if, prior to the occurrence of a Potential Change of Control (as defined in Section 2) or, if a Potential Change of Control has not occurred, prior to the occurrence of a Change of Control, the Executive is demoted, the Board of Directors shall have the right to declare this Agreement void and without effect.
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     (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section 1(a), if (i) the Executive’s employment is terminated by the Company without Cause (as defined in Section 2) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and ( ii ) a Change of Control occurs within one year of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company without Cause immediately after this Agreement becomes effective.
     (c) Termination of Employment Following Death or Disability. This Agreement shall terminate automatically upon the Executive’s termination of employment as a result of the executive’s death or due to Disability (as defined in Section 2).
     2. Definitions. (a) Change of Control. For the purposes of this Agreement, a “Change of Control” shall mean (i) any “person,” including a “group” (as such terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (“the Act”)), but excluding the Company, any of its subsidiaries, or any employee benefit plan of the Company or any of its subsidiaries, or any employee benefit plan of the Company or any of its subsidiaries, is or becomes the “beneficial owner” (as defined in Rule 13(d)(3) under the Act), directly or indirectly, of common stock of the Company representing 35% or more of the combined voting power of the Company’s then outstanding common stock; (ii) the Shareholders of the Company approve a definitive agreement (a “Definitive Agreement”) (a) for the merger or other business combination of the Company with or into another corporation, a majority of the directors of which were not directors of the Company immediately prior to the merger and in which the shareholders of the Company immediately prior to the effective date of such merger directly or indirectly own less than 50% of the voting power in such corporation or (b) for the sale or other disposition of all or substantially all of the assets of the Company, and the transactions contemplated by such Definitive Agreement are, in either case, consummated; or ( iii ) the purchase of common stock of the Company pursuant to any tender or exchange offer made by any “person,” including a “group” (as such terms are used in Sections 13(d) and 14(d)(2) of the Act), other than the Company, any of its subsidiaries, or an employee benefit plan of the Company or any of its subsidiaries for 35% or more of the common stock of the Company.
     (b) Potential Change of Control. For the purposes of this Agreement, a “Potential Change of Control” shall be deemed to have occurred if ( i ) any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Act) commences a tender or exchange offer for common stock, which if consummated, would result in such person owning 35% or more of the combined voting power of the Company’s then outstanding common stock; ( ii ) the Company enters into an agreement the consummation of which would constitute a Change of Control; ( iii ) proxies for the election of directors of the Company are solicited by anyone other than the Company; or ( iv ) any other event occurs which is deemed to be a Potential Change of Control by the Board of Directors of the Company.
     (c) Cause. For the purposes of this Agreement, “Cause” means (i) the Executive’s conviction or plea of nolo contendere  to a felony; ( ii ) an act or acts of extreme dishonesty
70

 
or gross misconduct on the Executive’s part which result or are intended to result in material damage to the Company’s business or reputation; or ( iii ) repeated material violations by the Executive of his position, authority or responsibilities as in effect at the Change of Control Date, which violations are demonstrably willful and deliberate on the Executive’s part and which result in material damage to the Company’s business or reputation.
     (d) Good Reason. “Good Reason” means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Potential Change of Control or a Change of Control:
     (i) (A) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive’s position, authority or responsibilities as in effect at the Change of Control Date, or ( B ) any other material adverse change in such position, including titles, authority or responsibilities;
     (ii) any failure by the Company, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive, to provide the Executive with ( A ) an annual base salary, as it may be increased from time to time (the “Base Salary”), which is at least equal to the Base Salary paid to the Executive immediately prior to the Change of Control Date, or ( B ) incentive compensation opportunities at a level which is at least equal to the level of incentive compensation opportunities made available, to the Executive immediately prior to the Change of Control Date;
     (iii) the failure by the Company to permit the Executive (and, to the extent applicable, his dependents) to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive’s participation in such plans immediately prior to the Change of Control Date (or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter);
     (iv) the Company’s requiring the Executive to be based at any office or location more than 50 miles from that location at which he performed his services for the Company immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive’s responsibilities; or
     (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 5.
     In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason.
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     (e) Disability. For purposes of this Agreement, “Disability” shall mean the Executive’s inability to perform the duties of his position, as determined in accordance with the policies and procedures applicable with respect to the Company’s long-term disability plan, as in effect immediately prior to the Change of Control Date.
     (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 6(d). For purposes of this Agreement, a “Notice of Termination” means a written notice given, in the case of a termination for Cause, within 10 business days of the Company’s having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the later to occur of ( x ) the Change of Control Date or ( y ) the Executive’s having actual knowledge of the events giving rise to such termination, and which ( i ) indicates the specific termination provision in this Agreement relied upon, ( ii ) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and ( iii ) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 30 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder.
     (g) Date of Termination. For the purpose of this Agreement, the term “Date of Termination” means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such notice of Termination or, if later, the date specified therein, as the case may be, and ( ii ) in all other cases, the actual date on which the Executive’s employment terminates.
     3. Employment Protection Benefits. (a) Basic Benefits. If (x) on or before the second anniversary of the Change in Control Date (i) the Company terminates the Executive’s employment for any reason other than for Cause or Disability or (ii) the Executive voluntarily terminates his employment for Good Reason or (y) the Executive voluntarily terminates his employment for any reason at any time within the 60-day period beginning on the 181 st  day following the Change in Control Date or (z) if the Executive’s employment is terminated by the Company for any reason other than death, Disability or Cause or by the Executive for Good Reason, after the execution of a Definitive Agreement but prior to the consummation thereof and the transaction contemplated by such Definitive Agreement are consummated, then the Company shall pay to the Executive the following amounts:
     (i) the Executive’s Base Salary earned through the Date of Termination (the “Earned Salary”);
     (ii) a cash amount (the “Severance Amount”) equal to [one][two][three] times the sum of
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 	(A)	 	[one-half (1/2) of] the Executive’s Annual Base Salary; and	
 	 	 	 	
 	(B)	 	the amount that would have been payable to the Executive as a bonus for the year in which the Change of Control occurs, determined by multiplying the Executive’s Annual Base Salary by his total Participant’s Percentage Participation established for such year under the Company’s Incentive Compensation Plan (or any successor plan thereto); and	
     (iii) any vested amounts or benefits owing to the Executive under the Company’s otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the “Accrued Obligations”).
     The Earned Salary and Severance Amount shall be paid in a single lump sum on the tenth business day following the Executive’s Date of Termination or, if payment is required to be delayed pursuant to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) because the Executive is deemed to be a “specified employee” within the meaning of Section 409A, on the first business day following the six-month anniversary of the Executive’s Date of Termination. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. The Severance Amount is inclusive of, and in lieu of, any amounts under any salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the Severance Amount.
     (b) Continuation of Benefits. If the Executive receives the Severance Amount described in this Section 3, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of ( x ) the first anniversary of his Date of Termination (the “End Date”) or ( y ) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company’s employee and executive welfare and fringe benefit plans (the “Benefit Plans”) as were generally provided to the Executive in accordance with the Company’s policies and practices immediately prior to the Change of Control Date. To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company’s general assets. The Executive’s participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date.
     (c) Indemnification. The Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or
73

 
out of the Executive’s performance as an officer, director or employee of the Company or any of its subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company’s Certificate of Incorporation and By-Laws (as each may be amended from time to time, and as then in effect, the “Governing Documents”),  provided that  in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Change of Control Date.
     (d) Certain Further Payments by the Company. In the event that any amounts or benefits paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the “Covered Payments”), are or become subject to the tax (the “Excise Tax”) imposed under Section 4999 of the Code, or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified below an additional amount (the “Tax Reimbursement Payment”) such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 3(d), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments.
     The Tax Reimbursement Payment shall be paid to the Executive not later than 10 business days following the payment of the Covered Payments;  provided ,  however , that if the amount of such Tax Reimbursement Payment cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Company’s independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such accountants (the “Accountants”) to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payments. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code).
     For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax,
     (i) such Covered Payments will be treated as “parachute payments” within the meaning of Section 280G of the Code, and all “parachute payments” in excess of the “base amount” (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the
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good faith judgment of the Accountants, the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute “parachute payments” or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the base amount, or such parachute payments are otherwise not subject to such Excise Tax, and
     (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code.
     For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay:
     (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and
     (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year.
     (e) Adjustments to the Tax Reimbursement Payment. In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive’s good faith claim for refund or credit is denied.
     In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the
75

 
Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined.
     (f) Discharge of the Company’s Obligations. Except as expressly provided in Section 4, the Severance Amount and the other amounts payable and benefits provided in respect of the Executive pursuant to this Section 3 following termination of his employment shall be in full and complete satisfaction of the Executive’s rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive’s receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive’s employment with the Company and its subsidiaries. Without limiting the generality of the foregoing, the Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. Nothing in this Section 3(f), however, shall in any way limit the Company’s obligations to the Executive pursuant to Section 3(c) hereof.
     4. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive’s legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney’s fees, on a quarterly basis, upon presentation of proof of such expenses,  provided that  the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if the Executive shall not prevail, in whole or in part, as to any material issue as to the validity, enforceability or interpretation of any provision of this Agreement.
     5. Successors. This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. This Agreement is personal to the Executive and is not assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.
     6. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, applied without reference to principles of conflict of laws.
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     (b) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in Jacksonville, Florida, and except to the extent inconsistent with this Agreement, shall be conducted pursuant to the terms and conditions of the Arbitration Agreement, dated ___, ___, between the Company and the Executive.
     (c) Entire Agreement. Upon the Change of Control Date, this Agreement shall constitute the entire agreement between the parties hereto with respect to the matters referred to herein [and expressly supercedes and replaces in all respects any Key Executive Employment Protection Agreement (and any amendments thereto) previously executed between the Company and the Executive]. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. In the event any provision of this Agreement is invalid or unenforceable, the validity and enforceability of the remaining provisions hereof shall not be affected. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences.
     (d) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
 	 	 	
If to the Executive:	 	at the home address of the Executive as noted in the
corporate records of the Company	
 	 	 	
If to the Company:	 	Landstar System, Inc.	
 	 	13410 Sutton Park Drive South	
 	 	Jacksonville, Florida 32224	
 	 	Attn.: General Counsel	
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
     (e) Section 409A. It is intended that this Agreement will comply with Section 409A of the Code (and any regulations and guidelines issued thereunder) to the extent the Agreement is subject thereto, and the Agreement shall be interpreted on a basis consistent with such intent. If an amendment to the Agreement is necessary in order for it to comply with Section 409A, the parties hereto will negotiate in good faith to amend the Agreement in a manner that preserves the original intent of the parties to the extent reasonably possible.
[signature page to follow]
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     IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf as of the day and year first above written.
 	 	 	 	 	
 	LANDSTAR SYSTEM, INC.
 	 	
 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	

 	 	 	
 	[Name of Executive] 	 	

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Exhibit 10.19

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT	 	 	1. CONTRACT TO CODE	 	 	PAGE OF PAGE	
 	 	 	 	 	 	 	1	 	 	 	 	2	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2. AMENDMENT MODIFICATION NO.	 	3. EFFECTIVE DATE	 	4. REQUISITION PURCHASE REQ. NO.	 	5. PROJECT NO. (if applicable)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
0014	 	12/19/2006	 	 	 	 	 	 	 	 	 	
 	 	
6. ISSUED BY	 	CODE	 	A900065-ARC	 	7. ADMINISTERED BY (if other than Item 8)	CODE	 	AS055-ARO	
ASO 55 LOGISTICS CONTRACTING TEAM	 	ASO 55 LOGISTICS CONTRACTING TEAM	 	 	 	 	 	
P.O. BOX 20636	 	P.O. BOX 20636	 	 	 	 	 	
ATTN: ASO 55	 	ATTN: ASO 55	 	 	 	 	 	
ATLANTA GA 30320	 	ATLANTA GA 30320	 	 	 	 	 	

8. NAME AND ADDRESS OF CONTRACTOR	 	 	 	9a AMENDMENT OF SOLICITATION NO.	 	
 	 	 	 	 	 	þ	 	 	 	
LANDSTAR EXPRESS AMERICA	 	 	 	 	 	
13410 SUTTON PARK DR S	 	 	 	9b DATED (SEE ITEM 11)	 	
JACKSONVILLE FL 32224	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	þ	 	10a MODIFICATION OF CONTRACT/ORDER NO.	 	
 	 	 	 	 	 	 	 	DTFA06-03-D-01715	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	10b DATED (SEE ITEM 13)	 	
 	 	 	 	 	 	 	 	 	 	
CODE	 	FACILITY CODE
 	 	 	 	10/01/2002	 	
 	 	
11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS

 	 	 	 	 	
o	 	The above numbered soliciation is amended as set forth in Item 14. The hour and date specified for receipt of Offers  o  is extended  o  is not extended. Offers must acknowledge receipt of this amendment prior to the hour and date specified in the solicitation or as amended by the following methods: (a) By completing Items 8 and 15, and returning ____ copies of the amendment; (b) By acknowledging receipt of this amendment on each copy of the offer submitted; or (c) By separate letter or telegram which includes a reference to the solicitation and amendment number. FAILURE OF YOUR ACKNOWLEDGEMENT TO BE RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by virtue of this amendment you desire to change an offer already submitted, such change may be made by telegram or letter, provided such telegram or letter makes reference to the solicitation and this amendment, and is received prior to the opening hour and date specified.	 	 	
 	
12. ACCOUNTING AND APPROPRIATION DATA(if required)	 	 $0.00	
See Schedule	 	 	
 	
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACTS/ORDERS. IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.

 	 	 	 	
þ	 	 	A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (specify authority). THE CHANGES SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.	
o	 	 	 	

o	 	 	B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVE CHANGES (such as changes in paying office, appropriation date, etc.) SET FORTH IN ITEM 14.	

o	 	 	C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO THE AUTHORITY OF:	

o	 	 	D. OTHER (Specify type of modification and authority)	

 	 	 	 	 	 	 	 	 	
E. IMPORTANT: Contractor o is not þ is required to sign this document and provide ______ copies to the issuing office.	
 	
14. DESCRIPTION OF AMENDMENT/MODIFICATION
This modification is hereby created to extend contract performance for six months , beginning January 1,2007 through June 30,2007, with an option to extend an additional six months beginning July 1,2007 through December 31, 2007, if necessary.
The contractor is to provide transportation and accessorial necessary to fulfill requirements of the U.S. Department of Transportation/Federal Aviation Administration (DOT/FAA), and other government agencies with which agreements or understanding are executed with the DOT/FAA for air, land and sea transportation of supplies and resources needed to respond to Presidentially-declared emergencies within the United States and its territories and possessions. The contractor also may be used to provided such services in continued...
Except as provided herein, all terms and conditions of the document referenced in Item 9A or 10A, 95 as heretofore changed, remain unchanged and in full force and effect.

15A. NAME AND TITLE OF SIGNER (Type or print)	 	16A. NAME AND TITLE OF CONTRACTING OFFICER (Type or print)	
Stephen J. Jones V.P. Corporate Operations	 	Phyllis Thames	
 	
I5B. CONTRACTOR/OFFEROR	 	15C. DATE SIGNED	 	16B. CONTRACT AUTHORITY	 	16C. DATE SIGNED	
 	 	12-20-2006	 	 	 	12-20-2006	
 	
79

 

CONTINUATION SHEET	 	 	REFERENCE NO. OF DOCUMENT BEING CONTINUED	 	Page 2 of 2	
 	 	 	DTFA06-03-D-01715/0014	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
NAME OF OFFEROR OR CONTRACTOR
LANDSTAR EXPRESS AMERICA

ITEM NO.	 	 	SUPPLIES/SERVICES	 	 	QUANTITY	 	 	UNIT	 	 	UNIT PRICE	 	 	AMOUNT	
(A)	 	 	(B)	 	 	(C)	 	 	(D)	 	 	(E)	 	 	(F)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	emergencies not declared by President decree, including pre–positioning of assets before declaration of emergencies. Movement of material may include special handling of unique and unusually large sites and quantities of equipment and commodities	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	All other terms and condition of the basic contract remain unchanged.

	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
80

 
Exhibit 21.1
LIST OF SUBSIDIARY CORPORATIONS OF LANDSTAR SYSTEM, INC.
 	 	 	 	 	
 	 	Jurisdiction of	 	% of Voting	
Name	 	Incorporation	 	Securities Owned	
Subsidiary of Landstar System, Inc.:	 	 	 	 	
Landstar System Holdings, Inc.	 	Delaware	 	100	
Subsidiaries of Landstar System Holdings, Inc.:	 	 	 	 	
Landstar Inway, Inc.	 	Delaware	 	100	
Also d/b/a Inway Nationwide Transportation Services	 	 	 	 	
Also d/b/a Independent Freightways, Inc.	 	 	 	 	
Landstar Global Logistics, Inc.	 	Delaware	 	100	
Landstar Ligon, Inc.	 	Delaware	 	100	
Also d/b/a Ligon Contract Services in Kentucky	 	 	 	 	
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	
Signature Insurance Company	 	Cayman Islands,	 	 	
 	 	BWI	 	100	
Signature Technology Services, Inc.	 	Delaware	 	100	
Subsidiaries of Landstar Global Logistics, Inc.	 	 	 	 	
Landstar Express America, Inc.	 	North Carolina	 	100	
Landstar Logistics, Inc.	 	Delaware	 	100	
Subsidiary of Landstar Ranger, Inc.	 	 	 	 	
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	 	 	 	 	
Also d/b/a Landstar Less Than Truck Load	 	 	 	 	
Also d/b/a Landstar LTL	 	 	 	 	
81

 
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
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 26, 2007, with respect to the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 30, 2006 and December 31, 2005, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004, and all related financial statement schedules, management’s assessment of the effectiveness of internal controls over financial reporting as of December 30, 2006 and the effectiveness of internal controls over financial reporting as of December 30, 2006, which reports appears in the December 30, 2006, annual report on
Form 10-K of Landstar System, Inc.
Our report refers to the adoption of Statement of Financial Accounting Standards No. 123R, Share Based Payment, effective January 1, 2006.
/s/ KPMG LLP
February 26, 2007
Jacksonville, Florida
Certified Public Accountants
82

 
Exhibit 24.1
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/30/06
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, 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 30, 2006, 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.
/s/ David G. Bannister                 
David G. Bannister
DATED: February 26, 2007
83

 
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/30/06
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, 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 30, 2006, 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.
/s/ Ronald W. Drucker                     
Ronald W. Drucker
DATED: February 26, 2007
84

 
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/30/06
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, 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 30, 2006, 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.
/s/ William S. Elston
William S. Elston
DATED: February 26, 2007
85

 
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/30/06
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, 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 30, 2006, 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.
/s/ Diana M. Murphy
Diana M. Murphy
DATED: February 26, 2007
86

 
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/30/06
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, 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 30, 2006, 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.
/s/ Jeffrey C. Crowe
Jeffrey C. Crowe
DATED: February 26, 2007
87

 
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/30/06
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint James B. Gattoni and Michael K. Kneller, 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 30, 2006, 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.
/s/ Merritt J. Mott
Merritt J. Mott
DATED: February 26, 2007
88

 
EXHIBIT 31.1
SECTION 302 CERTIFICATION
I, Henry H. Gerkens, certify that:
1.	 	I have reviewed this annual report on Form 10-K of Landstar System, Inc.;	
 	 	 	
2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 	 	 	
3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 	 	 	
4.	 	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:	
 	 	 	
a)	 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	 	
b)	 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	 	
c)	 	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	 	 	
d)	 	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 	 	 	
5.	 	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 	 	 	
a)	 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	 	 	
b)	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: February 26, 2007

 	/s/ Henry H. Gerkens  	 	
 	Henry H. Gerkens 	 	
 	President and Chief Executive Officer 	 	
89

 
 	 	 	 	 	
EXHIBIT 31.2
SECTION 302 CERTIFICATION
I, Robert C. LaRose, certify that:
1.	 	I have reviewed this annual report on Form 10-K of Landstar System, Inc.;	
 	 	 	
2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 	 	 	
3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 	 	 	
4.	 	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:	
 	 	 	
a)	 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	 	
b)	 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	 	
c)	 	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	 	 	
d)	 	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 	 	 	
5.	 	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 	 	 	
a)	 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	 	 	
b)	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: February 26, 2007

 	/s/ Robert C. LaRose  	 	
 	Robert C. LaRose 	 	
 	Executive Vice President and
Co-Chief Financial Officer 	 	
90

 
 	 	 	 	 	
EXHIBIT 31.3
SECTION 302 CERTIFICATION
I, James B. Gattoni, certify that:
1.	 	I have reviewed this annual report on Form 10-K of Landstar System, Inc.;	
 	 	 	
2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 	 	 	
3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 	 	 	
4.	 	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:	
 	 	 	
a)	 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	 	
b)	 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	 	
c)	 	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	 	 	
d)	 	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 	 	 	
5.	 	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 	 	 	
a)	 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	 	 	
b)	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: February 26, 2007

 	/s/ James B. Gattoni  	 	
 	James B. Gattoni 	 	
 	Vice President and
Co-Chief Financial Officer 	 	
91

 
 	 	 	 	 	
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Landstar System, Inc. (the “Company”) on Form 10-K for the period ending December 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Henry H. Gerkens, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 	/s/ Henry H. Gerkens  	 	
 	Henry H. Gerkens 	 	
February 26, 2007 	President and
Chief Executive Officer 	 	
92

 
 	 	 	 	 	
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Landstar System, Inc. (the “Company”) on Form 10-K for the period ending December 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert C. LaRose, Co-Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 	/s/ Robert C. LaRose  	 	
 	Robert C. LaRose 	 	
February 26, 2007 	Executive Vice President and
Co-Chief Financial Officer 	 	
93

 
 	 	 	 	 	
EXHIBIT 32.3
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Landstar System, Inc. (the “Company”) on Form 10-K for the period ending December 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James B. Gattoni, Co-Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 	/s/ James B. Gattoni  	 	
 	James B. Gattoni 	 	
February 26, 2007 	Vice President and
Co-Chief Financial Officer 	 	
94