UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 27, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to _____________________ Commission File Number: 0-21238 LANDSTAR SYSTEM, INC. (Exact name of registrant as specified in its charter) Delaware 06-1313069 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4160 Woodcock Drive, Jacksonville, Florida (Address of principal executive offices) 32207 (Zip Code) (904) 390-1234 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( ) The number of shares of the registrant's Common Stock, par value $.01 per share, outstanding as of the close of business on July 31, 1998 was 10,857,433.
PART I FINANCIAL INFORMATION Item 1. Financial Statements The interim consolidated financial statements contained herein reflect all adjustments (all of a normal, recurring nature) which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations, cash flows and changes in shareholders' equity for the periods presented. They have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the twenty-six weeks ended June 27, 1998 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 26, 1998. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's 1997 Annual Report on Form 10-K. Index Item 1 Consolidated Balance Sheets as of June 27, 1998 and December 27, 1997 ............................................... Page 3 Consolidated Statements of Income for the Twenty-Six and Thirteen Weeks Ended June 27, 1998 and June 28, 1997 .............................. Page 4 Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended June 27, 1998 and June 28, 1997 .............................. Page 5 Consolidated Statement of Changes in Shareholders' Equity for the Twenty-Six Weeks Ended June 27, 1998 ................ Page 6 Notes to Consolidated Financial Statements............................ Page 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... Page 9 2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> June 27, December 27, 1998 1997 ------------- ------------ ASSETS <S> <C> <C> Current assets: Cash $ 21,786 $ 17,994 Short-term investments 1,460 3,012 Trade accounts receivable, less allowance of $7,724 and $5,957 170,586 176,785 Other receivables, including advances to independent contractors, less allowance of $4,804 and $4,009 13,195 12,599 Prepaid expenses and other current assets 9,503 7,832 Assets held for sale 42,324 ---------- ----------- Total current assets 258,854 218,222 ---------- ----------- Operating property, less accumulated depreciation and amortization of $27,606 and $50,301 40,471 81,258 Goodwill, less accumulated amortization of $5,953 and $8,818 35,609 53,289 Deferred income taxes and other assets 10,274 4,410 ---------- ----------- Total assets $ 345,208 $ 357,179 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Cash overdraft $ 15,033 $ 12,475 Accounts payable 59,972 50,394 Current maturities of long-term debt 35,284 14,228 Insurance claims 31,490 28,247 Other current liabilities 35,329 33,827 ---------- ----------- Total current liabilities 177,108 139,171 ---------- ----------- Long-term debt, excluding current maturities 27,000 36,218 Insurance claims 31,367 27,890 Deferred income taxes 2,204 Shareholders' equity: Common stock, $.01 par value, authorized 20,000,000 shares, issued 12,943,174 shares and 12,900,974 shares 129 129 Additional paid-in capital 63,216 62,169 Retained earnings 103,672 112,345 Cost of 2,028,041 and 915,441 shares of common stock in treasury (57,284) (22,947) ---------- ----------- Total shareholders' equity 109,733 151,696 ---------- ----------- Total liabilities and shareholders' equity $ 345,208 $ 357,179 ========== =========== See accompanying notes to consolidated financial statements. </TABLE> 3
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> Twenty-Six Weeks Ended Thirteen Weeks Ended ----------------------- ----------------------- June 27, June 28, June 27, June 28, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenue $ 625,709 $ 589,823 $ 327,525 $ 311,558 Investment income 750 419 Costs and expenses: Purchased transportation 462,029 431,022 242,095 225,638 Other operating costs 14,244 20,109 6,814 10,174 Insurance and claims 24,586 22,069 12,363 14,674 Commissions to agents and brokers 49,115 46,923 25,849 24,715 Selling, general and administrative 46,648 43,248 22,376 21,230 Depreciation and amortization 4,853 5,782 2,400 2,930 Restructuring costs 3,247 2,068 ---------- ---------- ---------- ---------- Total costs and expenses 601,475 572,400 311,897 301,429 ---------- ---------- ---------- ---------- Operating income 24,984 17,423 16,047 10,129 Interest and debt expense 1,596 1,799 943 915 ---------- ---------- ---------- ---------- Income from continuing operations before income taxes 23,388 15,624 15,104 9,214 Income taxes 9,472 6,515 6,117 3,842 ---------- ---------- ---------- ---------- Income from continuing operations 13,916 9,109 8,987 5,372 Discontinued operations, net of income taxes (22,589) 336 (22,152) 1,068 ---------- ---------- ---------- ---------- Net income (loss) $ (8,673) $ 9,445 $ (13,165) $ 6,440 ========== ========== ========== ========== Earnings (loss) per common share: Income from continuing operations $ 1.21 $ 0.72 $ 0.80 $ 0.43 Income (loss) from discontinued operations (1.97) 0.03 (1.97) 0.08 ---------- ---------- ---------- ---------- Earnings (loss) per common share $ (0.76) $ 0.75 $ (1.17) $ 0.51 ========== ========== ========== ========== Diluted earnings (loss) per share: Income from continuing operations $ 1.21 $ 0.72 $ 0.79 $ 0.43 Income (loss) from discontinued operations (1.96) 0.02 (1.95) 0.08 ---------- ---------- ---------- ---------- Diluted earnings (loss) per share $ (0.75) $ 0.74 $ (1.16) $ 0.51 ========== ========== ========== ========== Average number of common shares outstanding: Earnings per common share 11,462,000 12,672,000 11,239,000 12,618,000 ========== ========== ========== ========== Diluted earnings per share 11,547,000 12,708,000 11,348,000 12,666,000 ========== ========== ========== ========== See accompanying notes to consolidated financial statements. </TABLE> 4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Twenty-Six Weeks Ended --------------------------- June 27, June 28, 1998 1997 ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES Net income (loss) $ (8,673) $ 9,445 Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations: Discontinued operations 22,589 (336) Depreciation and amortization of operating property 4,195 4,970 Amortization of goodwill and non-competition agreements 658 812 Non-cash interest charges 162 132 Provisions for losses on trade and other accounts receivable 2,604 1,712 Gains on sales of operating property (217) (274) Deferred income taxes, net 48 760 Changes in operating assets and liabilities, net of discontinued operations: Increase in trade and other accounts receivable (4,581) (6,016) Increase in prepaid expenses and other assets (4,019) (1,864) Increase in accounts payable 9,173 11,795 Decrease in other liabilities (3) (5,260) Increase in insurance claims 8,531 7,190 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 30,467 23,066 ----------- ----------- INVESTING ACTIVITIES OF CONTINUING OPERATIONS Purchase of investments (4,799) Maturities of short-term investments 1,552 Purchases of operating property (2,293) (6,876) Proceeds from sales of operating property 1,065 6,058 ----------- ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS 324 (5,617) ----------- ----------- FINANCING ACTIVITIES OF CONTINUING OPERATIONS Increase in cash overdraft 2,519 3,034 Borrowings on revolving credit facility 15,000 Proceeds from exercise of stock options and related income tax benefit 1,047 309 Purchases of common stock (34,337) (3,990) Principal payments on long-term debt and capital lease obligations (2,700) (23,375) ----------- ----------- NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (18,471) (24,022) ----------- ----------- NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS (8,528) 5,998 ----------- ----------- Increase (decrease) in cash 3,792 (575) Cash at beginning of period 17,994 4,187 ----------- ----------- Cash at end of period $ 21,786 $ 3,612 =========== =========== See accompanying notes to consolidated financial statements. </TABLE> 5
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Twenty-Six Weeks Ended June 27, 1998 (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Treasury Stock Common Stock Additional at Cost ------------------ Paid-In Retained ------------------- Shares Amount Capital Earnings Shares Amount Total ---------- ------- --------- --------- --------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Balance December 27, 1997 12,900,974 $ 129 $ 62,169 $ 112,345 915,441 $ (22,947) $ 151,696 Purchases of common stock 1,112,600 (34,337) (34,337) Exercise of stock options and related income tax benefit 42,200 1,047 1,047 Net loss (8,673) (8,673) ---------- ------- --------- --------- --------- --------- --------- Balance June 27, 1998 12,943,174 $ 129 $ 63,216 $ 103,672 2,028,041 $ (57,284) $ 109,733 ========== ======= ========= ========= ========= ========= ========= See accompanying notes to consolidated financial statements. </TABLE> 6
LANDSTAR SYSTEM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of the consolidated financial statements requires the use of management's estimates. Actual results could differ from those estimates. Landstar System, Inc. and its subsidiary are herein referred to as "Landstar". (1) Discontinued Operations On July 15, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned subsidiary of Landstar which comprised the entire company-owned tractor segment, entered into a definitive agreement to sell all of its tractors and trailers, certain operating assets and the Landstar Poole business to Schneider National, Inc. for approximately $41,592,000 in cash. In addition, Landstar Poole has entered into an agreement to sell its remaining truck terminal to an unrelated third party for approximately $732,000 in cash. Accordingly, the financial results of this segment have been reported as discontinued operations in the accompanying financial statements. Management anticipates these sales will be completed by the end of August 1998. The loss from discontinued operations of $22,589,000 in the twenty-six week period ended June 27, 1998, included an estimated loss on sale of $21,489,000, net of income tax benefits of $2,511,000, and a loss from operations of $1,100,000, net of income tax benefits of $597,000. The assets held for sale included in the accompanying financial statements consist primarily of property and equipment of the discontinued segment. Certain liabilities of the company-owned tractor segment were retained by Landstar, primarily insurance claims, accounts payable and capital lease obligations. The company-owned tractor segment had revenues of $45,358,000 and $23,374,000 for the twenty-six weeks and thirteen weeks ended June 27, 1998, respectively, and $49,417,000 and $22,124,000 for the twenty-six weeks and thirteen weeks ended June 28, 1997, respectively. (2) Reclassification of Certain Costs Certain costs have been reclassified for the 1997 period to conform with the classification of these costs in 1998. The reclassification had no effect on operating income or net income for the period. (3) Income Taxes The provisions for income taxes on continuing operations for the 1998 and 1997 twenty-six week periods were based on estimated combined full year effective income tax rates of 40.5% and 41.7%, which are higher than the statutory federal income tax rate, primarily as a result of state income taxes, amortization of certain goodwill and the meals and entertainment exclusion. 7
(4) 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. (5) Additional Cash Flow Information During the 1998 period, Landstar paid income taxes and interest of $9,052,000 and $2,057,000 ($695,000 related to Landstar Poole), respectively. During the 1997 period, Landstar paid income taxes and interest of $9,883,000 and $3,032,000 ($1,062,000 related to Landstar Poole), respectively. (6) Segment Information The following tables summarize information about Landstar's reportable business segments for the twenty-six and thirteen weeks ended June 27, 1998 and June 28, 1997 (in thousands): <TABLE> <CAPTION> Twenty-Six Weeks Ended June 27, 1998 ------------------------------------- Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- <S> <C> <C> <C> <C> <C> External revenue $ 482,211 $ 131,700 $ 11,798 $ 625,709 Investment income 750 750 Internal revenue 18,450 263 11,541 30,254 Operating income 30,995 2,750 6,426 $(15,187) 24,984 Twenty-Six Weeks Ended June 28, 1997 ------------------------------------- Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- <S> <C> <C> <C> <C> <C> External revenue $ 463,577 $ 118,552 $ 7,694 $ 589,823 Internal revenue 20,980 423 4,758 26,161 Operating income 29,188 590 2,961 $(15,316) 17,423 </TABLE> 8
<TABLE> <CAPTION> Thirteen Weeks Ended June 27, 1998 ----------------------------------- Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- <S> <C> <C> <C> <C> <C> External revenue $ 252,515 $ 69,122 $ 5,888 $ 327,525 Investment income 419 419 Internal revenue 9,840 143 6,299 16,282 Operating income 18,606 1,816 3,362 $ (7,737) 16,047 Thirteen Weeks Ended June 28, 1997 ----------------------------------- Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- <S> <C> <C> <C> <C> <C> External revenue $ 242,104 $ 61,760 $ 7,694 $ 311,558 Internal revenue 9,654 235 4,758 14,647 Operating income 15,782 (53) 2,961 $ (8,561) 10,129 </TABLE> (7) Commitments and Contingencies At June 27, 1998, Landstar had commitments for letters of credit outstanding in the amount of $26,292,000, primarily as collateral for insurance claims. The commitments for letters of credit outstanding included $19,292,000 under the Second Amended and Restated Credit Agreement and $7,000,000 secured by assets deposited with a financial institution. Landstar is involved in certain claims and pending litigation arising from the normal conduct of business. Based on the knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all claims and pending litigation and that the ultimate outcome, after provisions thereof, will not have a material adverse effect on the financial condition of Landstar, but could have a material effect on the results of operations in a given quarter or year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the attached interim consolidated financial statements and notes thereto, and with the Company's audited financial statements and notes thereto for the fiscal year ended December 27, 1997 and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 1997 Annual Report to Shareholders. 9
RESULTS OF OPERATIONS Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. ("Landstar" or the "Company"), provide transportation services to a variety of market niches throughout the United States and to a lesser extent in Canada and between the United States and Canada and Mexico through its operating subsidiaries which employ different operating strategies. The Company has three reportable business segments: the carrier segment, the multimodal segment and the insurance segment. The carrier segment consists of Landstar Ranger, Inc., Landstar Inway, Inc. ("Landstar Inway") and Landstar Ligon, Inc. The carrier segment provides truckload transportation for a wide range of general commodities over irregular routes with its fleet of dry and specialty vans and unsided trailers, including flatbed, drop deck and specialty. The carrier segment markets its services primarily through independent commission sales agents and utilizes tractors provided by independent contractors. The nature of the carrier segment's business is such that a significant portion of its operating costs varies directly with revenue. The multimodal segment is comprised of Landstar Logistics, Inc. and Landstar Express America, Inc. ("Landstar Express"). Transportation services provided by the multimodal segment include the arrangement of intermodal moves, contract logistics, truck brokerage, short-to-long haul movement of containers by truck and emergency and expedited air freight and truck services. The multimodal segment markets its services through independent commission sales agents and utilizes capacity provided by independent contractors, including railroads and air cargo carriers. The nature of the multimodal segment's business is such that a significant portion of its operating costs also varies directly with revenue. The insurance segment is Signature Insurance Company ("Signature"), a wholly- owned offshore insurance subsidiary, formed in March 1997. The insurance segment reinsures certain property, casualty and occupational accident risks of certain independent contractors who have contracted to haul freight for Landstar. In addition, the insurance segment provides certain property and casualty insurance directly to Landstar's operating subsidiaries. On July 15, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned subsidiary of Landstar which comprised the entire company-owned tractor segment, entered into a definitive agreement to sell all of its tractors and trailers, certain operating assets and the Landstar Poole business to Schneider National, Inc. for approximately $41,592,000 in cash. In addition, Landstar Poole has entered into an agreement to sell its remaining truck terminal to an unrelated third party for approximately $732,000 in cash. Accordingly, the financial results of this segment have been reported as discontinued operations in the accompanying financial statements. Management anticipates these sales will be completed by the end of August 1998. In accordance with a restructuring plan announced in the fourth quarter of 1996, the operations of Landstar T.L.C., Inc. ("Landstar T.L.C.") were merged into Landstar Inway, and all of Landstar T.L.C.'s company-owned tractors were disposed of by June 1997. 10
Purchased transportation represents the amount an independent contractor is paid to haul freight and is based on a contractually agreed-upon percentage of revenue generated by the haul for truck capacity provided by independent contractors. Purchased transportation for the intermodal services operations and the air freight operations of the multimodal segment is based on a contractually agreed-upon fixed rate. Purchased transportation as a percentage of revenue for the intermodal services operations is normally higher than that of Landstar's other transportation operations. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases in proportion to the revenue generated through independent contractors. Commissions to agents and brokers are primarily based on contractually agreed-upon percentages of revenue or contractually agreed-upon percentages of gross profit. Commissions to agents and brokers as a percentage of consolidated revenue will vary directly with revenue generated through independent commission sales agents. Both purchased transportation and commissions to agents and brokers generally will also increase or decrease as a percentage of the Company's consolidated revenue if there is a change in the percentage of revenue contributed by Signature or by the intermodal services operations or the air freight operations of the multimodal segment. Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. The industry is also subject to substantial workers' compensation expense. A material increase in the frequency or severity of accidents or workers' compensation claims or the unfavorable development of existing claims can be expected to adversely affect Landstar's operating income. Trailer rental and maintenance costs, paid to third parties, are the largest component of other operating costs. Employee compensation and benefits account for over half of the Company's selling, general and administrative expense. Other significant components of selling, general and administrative expense are data processing expense, communications costs and rent expense. 11
The following table sets forth the percentage relationships of expense and loss items and investment income to revenue for the periods indicated: <TABLE> <CAPTION> Twenty-Six Weeks Ended Thirteen Weeks Ended ---------------------- ---------------------- June 27, June 28, June 27, June 28, 1998 1997 1998 1997 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenue 100.0% 100.0% 100.0% 100.0% Investment income 0.1% 0.1% Costs and expenses: Purchased transportation 73.8% 73.1% 73.9% 72.4% Other operating costs 2.3% 3.4% 2.1% 3.3% Insurance and claims 3.9% 3.7% 3.8% 4.7% Commissions to agents and brokers 7.8% 8.0% 7.9% 7.9% Selling, general and administrative 7.5% 7.3% 6.8% 6.8% Depreciation and amortization 0.8% 1.0% 0.7% 0.9% Restructuring costs 0.6% 0.7% ------- ------ ------- ------ Total costs and expenses 96.1% 97.1% 95.2% 96.7% ------- ------ ------- ------ Operating income 4.0% 2.9% 4.9% 3.3% Interest and debt expense 0.3% 0.3% 0.3% 0.3% ------- ------ ------- ------ Income from continuing operations before income taxes 3.7% 2.6% 4.6% 3.0% Income taxes 1.5% 1.1% 1.9% 1.3% ------- ------ ------- ------ Income from continuing operations 2.2% 1.5% 2.7% 1.7% Discontinued operations, net of income taxes (3.6%) 0.1% (6.7%) 0.4% ------- ------ ------- ------ Net income (loss) (1.4%) 1.6% (4.0%) 2.1% ======= ====== ======= ====== </TABLE> TWENTY-SIX WEEKS ENDED JUNE 27, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 28, 1997 Revenue for the 1998 twenty-six week period was $625,709,000, an increase of $35,886,000, or 6.1%, over the 1997 twenty-six week period. The increase was attributable to increased revenue of $18,634,000, $13,148,000 and $4,104,000 at the carrier, multimodal and insurance segments, respectively. Overall, revenue per revenue mile (price) increased approximately 4%, which reflected improved freight quality, while revenue miles (volume) were approximately 1% higher than 1997. During the 1998 period, $750,000 of investment income was generated by the insurance segment. 12
Purchased transportation was 73.8% of revenue in 1998 compared with 73.1% in 1997. The increase in purchased transportation as a percentage of revenue was primarily attributable to an increase in brokerage revenue and the effects of the restructuring of the Landstar T.L.C. operations. Other operating costs were 2.3% of revenue in 1998 compared with 3.4% in 1997. The decrease in other operating costs was primarily due to the effects of the restructuring of the Landstar T.L.C. operations. Insurance and claims were 3.9% of revenue in 1998 compared with 3.7% in 1997. The increase in insurance and claims as a percentage of revenue was primarily attributable to the effects of insurance programs available to the Company's independent contractors which Signature reinsures. Excluding the premium revenue and insurance and claims expense related to the above reinsurance programs, insurance and claims as a percentage of revenue was 2.7% and 3.0% in 1998 and 1997, respectively. The decrease in insurance and claims as a percentage of revenue, excluding Signature's reinsurance programs, was primarily attributable to decreased frequency and severity of accidents. Commissions to agents and brokers were 7.8% of revenue in 1998 and 8.0% in 1997. The decrease in commissions to agents and brokers as a percentage of revenue was primarily due to the effect of increased premium revenue at the insurance segment. Selling, general and administrative costs were 7.5% of revenue in 1998 compared with 7.3% of revenue in 1997, primarily due to a higher provision for customer bad debts, increased management information systems costs, an increase in the provision for bonuses under the Company's management incentive compensation plan and one time costs of $560,000 related to the relocation of Landstar Express from Charlotte, North Carolina to Jacksonville, Florida. On December 18, 1996, the Company announced a plan to restructure its Landstar T.L.C. operations, in addition to the relocation of its Shelton, Connecticut corporate office headquarters to Jacksonville, Florida in the second quarter of 1997. During the 1997 period, the Company recorded $3,247,000 of restructuring costs. The restructuring was substantially completed by June 28, 1997. Interest and debt expense was 0.3% of revenue in both 1998 and 1997. The provisions for income taxes on continuing operations for the 1998 and 1997 twenty-six week periods were based on estimated full year combined effective income tax rates of approximately 40.5% and 41.7%, respectively, which are higher than the statutory federal income tax rate primarily as a result of state income taxes, amortization of certain goodwill and the meals and entertainment exclusion. Income from continuing operations was $13,916,000, or $1.21 per common share, in the 1998 period compared with $9,109,000, or $0.72 per common share, in the 1997 period. Including the dilutive effect of the Company's stock options, diluted earnings per share from continuing operations was $1.21 in the 1998 period and $0.72 in the 1997 period. Excluding restructuring costs, income from continuing operations for the 1997 period would have been $11,002,000, or $0.87 per common share ($0.87 diluted earnings per share). The Company recorded a loss from discontinued operations of $22,589,000, or $1.97 per share ($1.96 diluted loss per share), for the 1998 period, which included a loss from operations of $1,100,000, net of income tax benefits of $597,000 and an estimated loss on disposal of $21,489,000, net of income tax benefits of $2,511,000. Income from discontinued operations for 1997 was $336,000, or $0.03 earnings per share ($0.02 diluted earnings per share). 13
THIRTEEN WEEKS ENDED JUNE 27, 1998 COMPARED TO THIRTEEN WEEKS ENDED JUNE 28, 1997 Revenue for the 1998 thirteen-week period was $327,525,000, an increase of $15,967,000, or 5.1%, over the 1997 thirteen-week period. The increase was attributable to increased revenue of $10,411,000 and $7,362,000 at the carrier and multimodal segments, respectively, partially offset by reduced revenue of $1,806,000 at the insurance segment. Overall, revenue per revenue mile increased approximately 2%, which reflected improved freight quality, while revenue miles were approximately 3% higher than 1997. The decrease in premium revenue was attributable to the timing of establishing the insurance programs, which resulted in a retroactive premium in the second quarter of 1997. During the 1998 period, $419,000 of investment income was generated by the insurance segment Purchased transportation was 73.9% of revenue in 1998 compared with 72.4% in 1997. The increase in purchased transportation as a percentage of revenue was primarily attributable to an increase in intermodal revenue, the effect of the decrease in premium revenue at the insurance segment and the effects of the restructuring of the Landstar T.L.C. operations. Other operating costs were 2.1% of revenue in 1998 compared with 3.3% in 1997. The decrease in other operating costs was primarily attributable to the effects of the restructuring of the Landstar T.L.C. operations. Insurance and claims were 3.8% of revenue in 1998 compared with 4.7% in 1997. The decrease in insurance and claims as a percent of revenue was primarily attributable to decreased frequency and severity of accidents and the unfavorable development of prior year claims in 1997. Commissions to agents and brokers were 7.9% of revenue in both 1998 and 1997. Selling, general and administrative costs were 6.8% of revenue in 1998 and 1997, primarily due to increased management information systems costs and an increase in the provision for bonuses under the Company's management incentive compensation plan, offset by increased revenue. On December 18, 1996, the Company announced a plan to restructure its Landstar T.L.C. operations, in addition to the relocation of its Shelton, Connecticut corporate office headquarters to Jacksonville, Florida in the second quarter of 1997. During the second quarter of 1997, the Company recorded $2,068,000 of restructuring costs. The restructuring was substantially completed by June 28, 1997. Interest and debt expense was 0.3% of revenue in both 1998 and 1997. The provisions for income taxes on continuing operations for the 1998 and 1997 thirteen-week periods were based on estimated full year combined effective income tax rates of approximately 40.5% and 41.7%, respectively, which are higher than the statutory federal income tax rate primarily as a result of state income taxes, amortization of certain goodwill and the meals and entertainment exclusion. Income from continuing operations was $8,987,000, or $0.80 per common share, in the 1998 period compared with $5,372,000, or $0.43 per common share, in the 1997 period. Including the dilutive effect of the Company's stock options, diluted earnings per share for continuing operations was $0.79 in the 1998 period and $0.43 in the 1997 period. Excluding restructuring costs, income from continuing operations for the 1997 period would have been $6,578,000, or $0.52 per common share ($0.52 diluted earnings per share). 14
The Company recorded a loss from discontinued operations of $22,152,000 for the 1998 period, which included a loss from operations, for its company-owned tractor segment, of $663,000, net of income tax benefits of $429,000, and an estimated loss on disposal of $21,489,000, net of income tax benefits of $2,511,000. Income from discontinued operations for 1997 was $1,068,000. CAPITAL RESOURCES AND LIQUIDITY Shareholders' equity decreased to $109,733,000 at June 27, 1998, compared with $151,696,000 at December 27, 1997, primarily as a result of the repurchase of 1,112,600 shares of common stock, at an aggregate cost of $34,337,000, and the net loss for the period. Shareholders' equity was 64% and 75% of total capitalization at June 27, 1998 and December 27, 1997, respectively. Working capital and the ratio of current assets to current liabilities were $81,746,000 and 1.46 to 1, respectively, at June 27, 1998, compared with $79,051,000 and 1.57 to 1, respectively, at December 27, 1997. Landstar has historically operated with a current ratio of approximately 1.5 to 1. Cash provided by operating activities of continuing operations was $30,467,000 in the 1998 period compared with $23,066,000 in the 1997 period. The increase in cash flow provided by operating activities of continuing operations was primarily attributable to increased earnings from continuing operations and the timing of cash collections and payments. During the 1998 period, Landstar purchased $2,293,000 of operating property. Landstar plans to acquire approximately $17,000,000 of operating property during the remainder of fiscal year 1998 either by purchase or lease financing. The Company expects to receive proceeds, net of income taxes, capital lease obligations and retained liabilities, of approximately $6,000,000 from the sale of the assets of Landstar Poole. The Company is aware of the issues associated with the programming code in its existing computer systems in order for the systems to recognize date-sensitive information when the year changes to 2000. The Company believes it has identified and is in the process of modifying all computer software which requires change to ensure its computer systems will be year 2000 compliant as part of its scheduled maintenance and normal system upgrades. As such, management has not separately quantified the cost of year 2000 compliance, however, management does not believe that the future costs of maintaining and upgrading Landstar's computer systems will have a material adverse effect on results of operations. It is anticipated that all reprogramming and testing efforts will be completed by May of 1999. To date, confirmations have been received from the Company's primary outside processing vendors that plans have been developed to address the year 2000 issue. 15
Management believes that cash flow from operations combined with the Company's borrowing capacity under its revolving credit agreement will be adequate to meet Landstar's debt service requirements, fund continued growth, both internal and through acquisitions, and meet working capital needs. Management does not believe inflation has had a material impact on the results of operations or financial condition of Landstar in the past five years. However, inflation higher than that experienced in the past five years might have an adverse effect on the Company's results of operations. SEASONALITY Landstar's operations are subject to seasonal trends common to the trucking industry. Results of operations for the quarter ending in March is typically lower than the quarters ending June, September and December due to reduced shipments and higher operating costs in the winter months. 16
PART II OTHER INFORMATION Item 1. Legal Proceedings On August 5, 1997, suit was filed entitled Rene Alberto Rivas Vs. Landstar System, Inc., Landstar Gemini, Inc., Landstar Ranger, Inc., Risk Management Claims Services, Inc., Insurance Management Corporation, and Does 1 through 500, inclusive, in federal district court in Los Angeles. The suit claims Rivas represents a class of all drivers who, according to the suit, should be classified as employees and are therefore allegedly aggrieved by the practice of Landstar Gemini, Inc. requiring such drivers, as independent contractors, to provide either a worker's compensation certificate or to participate in an occupational accident insurance program. Rivas claims violations of federal leasing regulations for allegedly improperly disclosing the program. Rivas also claims violations of Racketeer Influence and Corrupt Organizations ("RICO") Act and the California Business and Professions Act. He seeks on behalf of himself and the class damages of $15 million trebled by virtue of trebling provisions in the RICO Act plus punitive damages. A motion to dismiss these claims was argued to the court on February 9, 1998, and the court's decision is pending. On March 24, 1998, the court granted defendant's motion to dismiss the RICO claim and invited briefs on the question of a private right of action to enforce the federal leasing regulations. The court will likely refer Rivas' remaining claims to arbitration if a private right of action and Federal court jurisdiction is sustained. Plaintiff may appeal dismissal of the RICO claim. The Company continues to vigorously contest this action. It believes that the drivers in question are properly classified as independent contractors and that it also has other meritorious defenses to the various claims. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders On May 20, 1998, Landstar System, Inc. (the "Company") held its Annual Meeting of Shareholders (the "Meeting") at the Ponte Vedra Inn, Ponte Vedra Beach, Florida, 32082. The matters voted upon at the Meeting included (i) the election of three Class II directors for the terms to expire at the 2001 Annual Meeting of Shareholders, (ii) the ratification of appointment of KPMG Peat Marwick LLP as the Company's independent auditors for fiscal year 1998, and (iii) to approve an increase in the number of shares available for distribution from the Company's 1993 Employee Stock Option Plan from 615,000 to 1,115,000 shares. 17
Pursuant to the Company's Restated Certificate of Incorporation, the Board of Directors has fixed the number of directors at seven: two Class III directors whose members' terms will expire at the 1999 Annual Meeting of Shareholders; two Class I directors whose members' terms will expire at the 2000 Annual Meeting of Shareholders; and the three Class II directors whose members' terms will expire at the 2001 Annual Meeting of Shareholders. With respect to the election of the three Class II directors, nominee Merritt J. Mott, nominee William S. Elston, and nominee Diana M. Murphy were elected to the Board of Directors of the Company. Mr. Mott received 10,380,513 votes for election to the Board and 53,594 were withheld. Mr. Elston received 10,379,513 votes for election to the Board and 54,594 were withheld. Mrs. Murphy received 10,378,113 votes for election and 55,994 were withheld. The names of the other directors whose terms of office as a director continued after the Meeting are as follows: John B. Bowron (a Class I director), Ronald W. Drucker (a Class I director), David Bannister (a Class III director), and Jeffrey C. Crowe (a Class III director). The appointment of KPMG Peat Marwick LLP as the Company's independent auditors for fiscal year 1998 was ratified by the Company's shareholders. Votes for the ratification were 10,382,943, votes against were 1,600 and votes abstaining were 49,564. The approval of an increase in the number of shares available for distribution from the Company's 1993 Employee Stock Option Plan from 615,000 to 1,115,000 shares was ratified by the Company's shareholders. Votes for the ratification were 7,447,155, votes against were 2,421,123 and votes abstaining were 565,829. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The exhibits listed on the Exhibit Index are filed as part of this quarterly report on Form 10-Q. (b) Form 8-K No reports on Form 8-K were filed by the Registrant during the thirteen week period ended June 27, 1998. 18
EXHIBIT INDEX Registrant's Commission File No.: 0-21238 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 (11) Statement re: Computation of Per Share Earnings: 11.1 * Landstar System, Inc. and Subsidiary Calculation of Earnings Per Common Share for the Twenty-Six and Thirteen Weeks Ended June 27, 1998 and June 28, 1997 11.2 * Landstar System, Inc. and Subsidiary Calculation of Diluted Earnings Per Share for the Twenty-Six and Thirteen Weeks Ended June 27, 1998 and June 28, 1997 (27) Financial Data Schedules: 27.1 * Restated 1997 Financial Data Schedule 27.2 * 1998 Financial Data Schedule __________________ * Filed herewith 19
SIGNATURES Pursuant to the requirements 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. Date: August 7, 1998 Henry H. Gerkens ---------------------------- Henry H. Gerkens Executive Vice President and Chief Financial Officer; Principal Financial Officer Date: August 7, 1998 Robert C. LaRose ---------------------------- Robert C. LaRose Vice President Finance and Treasurer; Principal Accounting Officer 20