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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 26, 2005 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 LandstarLogo LANDSTAR SYSTEM, INC.


Delaware
    
    06-1313069(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)


13410 Sutton Park Drive South, Jacksonville, Florida
(Address of principal executive offices)32224
(Zip Code)(904) 398-9400
(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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No o

The number of shares of the registrants Common Stock, par value $0.01 per share, outstanding as
of the close of business on April 27, 2005 was 59,720,276.









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PART I FINANCIAL INFORMATION Index  
 PageItem 1. Financial StatementsConsolidated Balance Sheets as of March 26, 2005 and December 25, 2004
    
    
    3Consolidated Statements of Income for the Thirteen Weeks Ended March 26, 2005 and March 27, 2004
    
    
    4Consolidated Statements of Cash Flows for the Thirteen Weeks Ended March 26, 2005 and March 27, 2004
    
    
    5Consolidated Statement of Changes in Shareholders Equity for the Thirteen Weeks Ended March 26, 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    17Section 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CFO Certification
  
 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 thirteen weeks ended March 26, 2005 are not necessarily indicative of the results that
may be expected for the entire fiscal year ending December 31, 2005. These interim financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Companys 2004 Annual Report on Form 10-K. 2




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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited) March 26,
    
    
    Dec. 25,2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    73,118
    
    
    $
    61,684Short-term investments
    
    
    21,683
    
    
    
    21,942Trade accounts receivable, less allowance of $4,420 and $4,021
    
    
    294,875
    
    
    
    338,774Other receivables, including advances to independent
contractors, less allowance of $4,347 and $4,245
    
    
    22,820
    
    
    
    13,929Deferred income taxes and other current assets
    
    
    11,036
    
    
    
    13,503Total current assets
    
    
    423,532
    
    
    
    449,832Operating property, less accumulated depreciation and
amortization of $66,024 and $65,315
    
    
    76,574
    
    
    
    76,834Goodwill
    
    
    31,134
    
    
    
    31,134Other assets
    
    
    25,891
    
    
    
    26,712Total assets
    
    $
    557,131
    
    
    $
    584,512LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesCash overdraft
    
    $
    24,270
    
    
    $
    23,547Accounts payable
    
    
    99,903
    
    
    
    120,197Current maturities of long-term debt
    
    
    8,464
    
    
    
    8,797Insurance claims
    
    
    33,797
    
    
    
    32,612Other current liabilities
    
    
    53,359
    
    
    
    54,926Total current liabilities
    
    
    219,793
    
    
    
    240,079Long-term debt, excluding current maturities
    
    
    87,168
    
    
    
    83,293Insurance claims
    
    
    33,774
    
    
    
    32,430Deferred income taxes
    
    
    15,639
    
    
    
    15,871Shareholders EquityCommon stock, $0.01 par value, authorized 80,000,000
shares, issued 63,482,706 and 63,154,190 shares
    
    
    635
    
    
    
    632Additional paid-in capital
    
    
    47,657
    
    
    
    43,845Retained earnings
    
    
    313,814
    
    
    
    295,936Cost of
3,464,248 and 2,490,930 shares of common stock in treasury
    
    
    (161,123
    )
    
    
    (127,151
    )Accumulated other comprehensive income (loss)
    
    
    (31
    )
    
    
    47Notes receivable arising from exercises of stock options
    
    
    (195
    )
    
    
    (470
    )Total shareholders equity
    
    
    200,757
    
    
    
    212,839Total liabilities and shareholders equity
    
    $
    557,131
    
    
    $
    584,512
 See accompanying notes to consolidated financial statements. 3




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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited) Thirteen WeeksEndedMarch 26,
    
    
    March 27,2005
    
    
    2004Revenue
    
    $
    502,212
    
    
    $
    421,026Investment income
    
    
    539
    
    
    
    303Costs and expenses:Purchased transportation
    
    
    377,578
    
    
    
    313,797Commissions to agents
    
    
    39,126
    
    
    
    32,434Other operating costs
    
    
    8,698
    
    
    
    9,894Insurance and claims
    
    
    13,125
    
    
    
    20,706Selling, general and administrative
    
    
    30,303
    
    
    
    27,410Depreciation and amortization
    
    
    3,962
    
    
    
    3,199Total costs and expenses
    
    
    472,792
    
    
    
    407,440Operating income
    
    
    29,959
    
    
    
    13,889Interest and debt expense
    
    
    937
    
    
    
    768Income before income taxes
    
    
    29,022
    
    
    
    13,121Income taxes
    
    
    11,144
    
    
    
    5,019Net income
    
    $
    17,878
    
    
    $
    8,102Earnings per common share (1)
    
    $
    0.30
    
    
    $
    0.14Diluted earnings per share (1)
    
    $
    0.29
    
    
    $
    0.13Average number of shares outstanding:Earnings per common share (1)
    
    
    60,396,000
    
    
    
    59,709,000Diluted earnings per share (1)
    
    
    61,881,000
    
    
    
    61,935,000
   (1)
    
    2004 earnings per share amounts and average number of shares outstanding have been
adjusted to give retroactive effect to a two-for-one stock split effected in the form of a 100%
stock dividend declared December 9, 2004. See accompanying notes to consolidated financial statements. 4




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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited) Thirteen Weeks EndedMarch 26,
    
    
    March 27,2005
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    17,878
    
    
    $
    8,102Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of operating property
    
    
    3,962
    
    
    
    3,199Non-cash interest charges
    
    
    44
    
    
    
    68Provisions for losses on trade and other accounts receivable
    
    
    1,617
    
    
    
    1,626(Gains) losses on sales and disposals of operating property
    
    
    (248
    )
    
    
    72Deferred income taxes, net
    
    
    (232
    )
    
    
    42Tax benefit on stock option exercises
    
    
    1,201
    
    
    
    1,175Changes in operating assets and liabilities:Decrease (increase) in trade and other accounts receivable
    
    
    33,391
    
    
    
    (9,344
    )Decrease in other assets
    
    
    4,302
    
    
    
    2,606Increase (decrease) in accounts payable
    
    
    (20,294
    )
    
    
    11,229Increase in insurance claims
    
    
    2,529
    
    
    
    6,195Decrease in other liabilities
    
    
    (910
    )
    
    
    (2,979
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    43,240
    
    
    
    21,991INVESTING ACTIVITIESNet change in other short-term investments
    
    
    (1,111
    )
    
    
    1,579Maturities of long-term investments
    
    
    1,500Purchases of long-term investments
    
    
    (1,309
    )Purchases of operating property
    
    
    (739
    )
    
    
    (2,273
    )Proceeds from sales of operating property
    
    
    1,582
    
    
    
    352NET CASH USED BY INVESTING ACTIVITIES
    
    
    (77
    )
    
    
    (342
    )FINANCING ACTIVITIESIncrease (decrease) in cash overdraft
    
    
    723
    
    
    
    (1,185
    )Proceeds from repayment of notes receivable arising from exercises of stock options
    
    
    275Proceeds from exercises of stock options
    
    
    2,975
    
    
    
    3,458Borrowings on revolving credit facility
    
    
    2,000
    
    
    
    1,000Principal payments on capital lease obligations
    
    
    (2,755
    )
    
    
    (2,679
    )Purchases of common stock
    
    
    (34,947
    )
    
    
    (16,407
    )NET CASH USED BY FINANCING ACTIVITIES
    
    
    (31,729
    )
    
    
    (15,813
    )Increase in cash and cash equivalents
    
    
    11,434
    
    
    
    5,836Cash and cash equivalents at beginning of period
    
    
    61,684
    
    
    
    42,640Cash and cash equivalents at end of period
    
    $
    73,118
    
    
    $
    48,476
 See accompanying notes to consolidated financial statements. 5




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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
Thirteen Weeks Ended March 26, 2005
(Dollars in thousands)
(Unaudited) NotesReceivableArisingTreasury Stock
    
    
    Accumulated
    
    
    fromCommon Stock
    
    
    Addl
    
    
    
    
    
    
    at Cost
    
    
    Other
    
    
    ExercisesPaid-In
    
    
    Retained
    
    
    
    
    
    
    
    
    
    
    Comprehensive
    
    
    of StockShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Shares
    
    
    Amount
    
    
    Income (Loss)
    
    
    Options
    
    
    TotalBalance December 25, 2004
    
    
    63,154,190
    
    
    $
    632
    
    
    $
    43,845
    
    
    $
    295,936
    
    
    
    2,490,930
    
    
    $
    (127,151
    )
    
    $
    47
    
    
    $
    (470
    )
    
    $
    212,839Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,878
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,878Purchases of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    992,418
    
    
    
    (34,947
    )
    
    
    
    
    
    
    
    
    
    
    (34,947
    )Exercises of stock options and
related income tax benefit
    
    
    328,516
    
    
    
    3
    
    
    
    4,173
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,176Repayment of notes receivable
arising
from exercises of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275
    
    
    
    275Incentive compensation paid in
common stock
    
    
    
    
    
    
    
    
    
    
    (361
    )
    
    
    
    
    
    
    (19,100
    )
    
    
    975
    
    
    
    
    
    
    
    
    
    
    
    614Unrealized loss on
available-for-sale
investments, net of income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    (78
    )Balance March 26, 2005
    
    
    63,482,706
    
    
    $
    635
    
    
    $
    47,657
    
    
    $
    313,814
    
    
    
    3,464,248
    
    
    $
    (161,123
    )
    
    $
    (31
    )
    
    $
    (195
    )
    
    $
    200,757
 See accompanying notes to consolidated financial statements. 6




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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 or the Company.(1)
    Stock SplitOn December 9, 2004, Landstar declared a two-for-one stock-split of its common stock to be
effected in the form of a 100% stock dividend. Stockholders of record on December 28, 2004
received one additional share of common stock for each share held. The additional shares
were distributed on January 7, 2005.Unless otherwise indicated, all share and per share amounts have been adjusted to give
retroactive effect to this stock-split.(2)
    Income TaxesThe provisions for income taxes for the 2005 and 2004 thirteen week periods were based on
estimated full year combined effective income tax rates of approximately 38.4% and 38.3%,
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.(3)
    Earnings Per ShareEarnings 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): Thirteen Weeks EndedMarch 26,
    
    
    March 27,2005
    
    
    2004Average number of common shares outstanding
    
    
    60,396
    
    
    
    59,709Incremental shares from
assumed exercises of stock options
    
    
    1,485
    
    
    
    2,226Average number of common shares
and common share equivalents outstanding
    
    
    61,881
    
    
    
    61,935
  For the thirteen week periods ended March 26, 2005 and March 27, 2004, there were
470,000 and 508,000, respectively, of options outstanding to purchase shares of common stock
excluded from the calculation of diluted earnings per share because they were antidilutive.(4)
    Additional Cash Flow InformationDuring the 2005 thirteen week period, Landstar paid income taxes and interest of $536,000
and $1,048,000, respectively. During the 2004 thirteen week period, Landstar paid income
taxes and interest of $483,000 and $856,000, respectively. Landstar acquired operating
property by entering into capital leases in the amount of $4,297,000 in the 2005 thirteen
week period. The Company did not acquire any property by entering into capital leases in the
2004 thirteen week period. 7




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(5)
    Segment InformationThe following tables summarize information about Landstars reportable business segments as
of and for the thirteen weeks ended March 26, 2005 and March 27, 2004 (in thousands): Thirteen Weeks Ended March 26, 2005Carrier
    
    
    Multimodal
    
    
    Insurance
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    371,043
    
    
    $
    123,696
    
    
    $
    7,473
    
    
    
    
    
    
    $
    502,212Investment income
    
    
    
    
    
    
    
    
    
    
    539
    
    
    
    
    
    
    
    539Internal revenue
    
    
    5,884
    
    
    
    350
    
    
    
    6,590
    
    
    
    
    
    
    
    12,824Operating income
    
    
    31,358
    
    
    
    5,351
    
    
    
    4,092
    
    
    $
    (10,842
    )
    
    
    29,959Goodwill
    
    
    20,496
    
    
    
    10,638
    
    
    
    
    
    
    
    
    
    
    
    31,134
 Thirteen Weeks Ended March 27, 2004Carrier
    
    
    Multimodal
    
    
    Insurance
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    321,608
    
    
    $
    92,014
    
    
    $
    7,404
    
    
    
    
    
    
    $
    421,026Investment income
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    303Internal revenue
    
    
    5,129
    
    
    
    2,484
    
    
    
    6,981
    
    
    
    
    
    
    
    14,594Operating income
    
    
    23,697
    
    
    
    2,739
    
    
    
    (2,826
    )
    
    $
    (9,721
    )
    
    
    13,889Goodwill
    
    
    20,496
    
    
    
    10,638
    
    
    
    
    
    
    
    
    
    
    
    31,134
  (6)
    Stock-Based Compensation  Stock OptionsThe Company has two employee stock option plans and one stock option plan for members of its
Board of Directors (the Plans). The Company accounts for stock options issued under the
Plans pursuant to the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No stock-based
employee compensation is reflected in net income from the Plans, as all options granted
under the Plans had an exercise price equal to the fair market value of the underlying
common stock on the date of grant. The following table illustrates the effect on net income
and earnings per share from the Plans as if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123 (revised
2004), Accounting for Stock-Based Compensation, to stock-based employee compensation (in
thousands, except per share amounts): Thirteen Weeks EndedMarch 26,
    
    
    March 27,2005
    
    
    2004Net income, as reported
    
    $
    17,878
    
    
    $
    8,102Deduct:Total stock-based
employee
compensation expense
determined under the fair
value based method for
all awards, net of related
income tax benefits
    
    
    (1,060
    )
    
    
    (1,050
    )Pro forma net income
    
    $
    16,818
    
    
    $
    7,052Earnings per common share:As reported
    
    $
    0.30
    
    
    $
    0.14Pro forma
    
    $
    0.28
    
    
    $
    0.12Diluted earnings per share:As reported
    
    $
    0.29
    
    
    $
    0.13Pro forma
    
    $
    0.27
    
    
    $
    0.11
 8




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(7)
    Comprehensive IncomeThe following table includes the components of comprehensive income for the thirteen week
period ended March 26, 2005 and March 27, 2004. Thirteen Weeks EndedMarch 26,
    
    
    March 27,2005
    
    
    2004Net income
    
    $
    17,878
    
    
    $
    8,102Unrealized holding gains (losses) on
available-for- sale
investments, net of income
taxes
    
    
    (78
    )
    
    
    6Comprehensive income
    
    $
    17,800
    
    
    $
    8,108
  Accumulated other comprehensive loss at March 26, 2005 of $31,000 represents the
unrealized holding losses on available-for-sale investments of $48,000, net of an income tax
benefit of $17,000.(8)
    Commitments and ContingenciesAt March 26, 2005, Landstar had $27,357,000 of letters of credit outstanding under the
Companys revolving credit facility and $37,514,000 of letters of credit secured by
investments held at the Companys insurance segment. The short-term investments of
$21,683,000 combined with $17,757,000 of the non-current portion of investment grade bonds
included in other assets at March 26, 2005, provide collateral for the $37,514,000 of
letters of credit issued to guarantee payment of insurance claims.On November 1, 2002, the Owner Operator Independent Drivers Association, Inc. (OOIDA) and six
individual Independent Contractors filed a putative class action complaint in the United States
District Court for the Middle District of Florida (the Court) in Jacksonville, Florida, against
the Company (the Complaint). The Complaint alleges that certain aspects of the Companys motor
carrier leases with its Independent Contractors violate certain federal leasing regulations and
seeks injunctive relief, an unspecified amount of damages and attorneys fees. On March 8 and
June 4, 2004, the Court dismissed all claims of one of the six plaintiffs on the grounds that the
ICC Termination Act (the Act) is not applicable to leases signed before the Acts January 1,
1996, effective date, and dismissed all claims of all remaining Plaintiffs against four of the
seven Company entities previously named as Defendants (Landstar System, Inc., Landstar Express
America, Inc., Landstar Gemini, Inc. and Landstar Logistics, Inc.). With respect to the remaining
claims, the June 4, 2004 order held that the Act created a private right of action to which a
four-year statute of limitations applies. On November 30, 2004, the Court heard oral argument on
a motion by OOIDA to certify the case as a class action. The Court is expected to rule within
the next several months on the class-certification motion. Trial for this matter has been set for
the trial term beginning October 3, 2005. On March 28, 2005, the Court granted Plaintiffs
motion to amend their Complaint to expand it to include additional alleged
compensation-adjustments and charge-backs, the original Complaints allegations of inadequate
disclosures and unauthorized charges under the federal leasing regulations. On March 30, 2005,
the Court invited Defendants to file a revised motion for partial summary judgment to address the
claims of the Amended Complaint. Subsequently, the Defendants did file a partial motion for
summary judgment.Due to a number of factors, including the early stage of this litigation, the recent arrival of
new discovery requests, and the lack of litigated final judgments in a number of similar cases or
otherwise applicable precedents, Landstar does not believe it is in a position to conclude
whether or not there is a reasonable possibility of an adverse outcome in this case or what
damages, if any, Plaintiffs would be awarded should they prevail on all or any part of their
claims. However, Landstar believes it has meritorious defenses, including to the expanded
allegations in the Amended Complaint, and it intends to continue asserting these defenses
vigorously.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. 9




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Item 2.
    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 25, 2004 and Managements Discussion and
Analysis of Financial Condition and Results of Operations included in the 2004 Annual Report
on Form 10-K. Introduction Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (Landstar or the
Company), provide transportation services to a variety of market niches throughout the United
States and to a lesser extent in Canada, and between the United States, Canada and Mexico through
its operating subsidiaries. Landstars business strategy is to be a non-asset based provider of
transportation capacity delivering safe, specialized transportation services to a broad range of
customers throughout North America utilizing a network of independent commission sales agents and
third party capacity providers. Landstar focuses on providing transportation services which
emphasize 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 utilizes exclusively 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, multimodal 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 Independent Contractors) and other third party truck capacity providers
(truck brokerage carriers). The multimodal segment is comprised of Landstar Logistics, Inc. and Landstar Express America,
Inc. Transportation services provided by the multimodal segment include the arrangement of
intermodal moves, contract logistics, truck brokerage and emergency and expedited ground and air
and ocean freight. The multimodal segment markets its services primarily through independent
commission sales agents and utilizes capacity provided by Independent Contractors and other
third party capacity providers, including truck brokerage carriers, railroads, air and ocean
cargo carriers. 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 the Companys Independent Contractors and provides certain
property and casualty insurance directly to Landstars operating subsidiaries. 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. During the 2004 fiscal year, 427 independent commission sales agents generated $1 million or
more of Landstars revenue and thus qualified as Million Dollar Agents. During the 2004 fiscal
year, the average revenue generated by a Million Dollar Agent was $4,374,000 and revenue
generated by Million Dollar Agents in the aggregate represented 92% of consolidated Landstar
revenue. Management monitors business activity by tracking the number of loads (volume) and revenue per
load generated by the carrier and multimodal 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 10




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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: Fiscal QuarterMarch 26,
    
    
    March 27,2005
    
    
    2004Carrier Segment:External revenue generated through (in thousands):Independent Contractors
    
    $
    282,675
    
    
    $
    272,231Other third party truck capacity providers
    
    
    88,368
    
    
    
    49,377$
    371,043
    
    
    $
    321,608Revenue per revenue mile
    
    $
    1.80
    
    
    $
    1.75Revenue per load
    
    $
    1,444
    
    
    $
    1,266Average length of haul (miles)
    
    
    802
    
    
    
    723Number of loads(1)
    
    
    257,000
    
    
    
    254,000Multimodal Segment:External revenue generated through (in thousands):Independent Contractors(2)
    
    $
    17,838
    
    
    $
    15,413Other third party truck capacity providers
    
    
    79,081
    
    
    
    53,484Rail, air and ocean carriers
    
    
    26,777
    
    
    
    23,117$
    123,696
    
    
    $
    92,014Revenue per load(3)
    
    $
    1,541
    
    
    $
    1,373Number of loads(3)
    
    
    76,000
    
    
    
    67,000
   (1)
    
    Effective with the 2004 second quarter, the Company modified its methodology for
reporting loads. The application of this new methodology to the 2004 thirteen week period
resulted in an increase of 10,000 loads. This change in load recognition had no impact on
reported revenue in any period.(2)
    
    Includes revenue generated through Carrier Segment Independent Contractors.(3)
    
    Number of loads and revenue per load excludes the effect of revenue derived from
emergency transportation services provided under the FAA contract. 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: March 26, 2005
    
    
    March 27, 2004Independent Contractors
    
    
    7,828
    
    
    
    7,637Other third party truck
capacity providers:Approved and active(1)
    
    
    11,737
    
    
    
    9,584Other approved
    
    
    7,255
    
    
    
    6,32118,992
    
    
    
    15,905Total available truck
capacity providers
    
    
    26,820
    
    
    
    23,542Number of trucks provided
by Independent Contractors
    
    
    8,659
    
    
    
    8,583
   (1)
    
    Active refers to other third party truck capacity providers who moved at least
one load in the 180 days immediately preceding the fiscal quarter end. Historically, the Companys carrier segment has primarily relied on capacity provided by
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 other
third party truck capacity providers. The percent of consolidated revenue generated through all
truck brokerage carriers was 33.3% during the first quarter of 2005 and 24.4% during the first
quarter of 2004. 11




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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 an Independent Contractor or other third party
capacity provider is paid to haul freight. The amount of purchased transportation paid to an
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 multimodal segment is based on either a negotiated rate
for each load hauled or a contractually agreed-upon rate. Purchased transportation for the
intermodal, air and ocean freight operations of the multimodal segment is based on a
contractually agreed-upon fixed rate. Purchased transportation as a percentage of revenue for
brokerage services and rail intermodal 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, other third party capacity providers and revenue from
the insurance segment. Commissions to agents are primarily based on contractually agreed-upon percentages of revenue at
the carrier segment and of gross profit, defined as revenue less the cost of purchased
transportation, at the multimodal 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 multimodal segment and the insurance segment and with changes in
gross profit at the multimodal segment. Trailing equipment rent, maintenance costs for trailing equipment, Independent Contractor
recruiting costs and bad debts from Independent Contractors and independent commission sales
agents are the largest components of other operating costs. Potential liability associated with accidents in the trucking industry is severe and occurrences
are unpredictable. Landstars retained liability for individual commercial trucking claims
depends on when such claims are incurred. For commercial trucking claims incurred 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. For commercial trucking claims incurred from May 1, 2001 through
June 18, 2003, Landstar retains liability up to $5,000,000 per occurrence. For commercial
trucking claims incurred prior to May 1, 2001, Landstar retains liability up to $1,000,000 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. All historical share-related financial information presented herein has been adjusted to
reflect 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. 12




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The following table sets forth the percentage relationships of income and expense items to
revenue for the periods indicated: Thirteen Weeks EndedMarch 26,
    
    
    March 27,2005
    
    
    2004Revenue
    
    
    100.0
    %
    
    
    100.0
    %Investment income
    
    
    0.1
    
    
    
    0.1Costs and expenses:Purchased transportation
    
    
    75.2
    
    
    
    74.5Commissions to agents
    
    
    7.8
    
    
    
    7.7Other operating costs
    
    
    1.7
    
    
    
    2.4Insurance and claims
    
    
    2.6
    
    
    
    4.9Selling, general and administrative
    
    
    6.0
    
    
    
    6.5Depreciation and amortization
    
    
    0.8
    
    
    
    0.8Total costs and expenses
    
    
    94.1
    
    
    
    96.8Operating income
    
    
    6.0
    
    
    
    3.3Interest and debt expense
    
    
    0.2
    
    
    
    0.2Income before income taxes
    
    
    5.8
    
    
    
    3.1Income taxes
    
    
    2.2
    
    
    
    1.2Net income
    
    
    3.6
    %
    
    
    1.9
    %
 THIRTEEN WEEKS ENDED MARCH 26, 2005 COMPARED TO THIRTEEN WEEKS ENDED MARCH 27, 2004 Revenue for the 2005 thirteen week period was $502,212,000, an increase of $81,186,000, or
19.3%, compared to the 2004 thirteen week period. The increase was attributable to increased
revenue of $49,435,000, $31,682,000 and $69,000 at the carrier, multimodal and insurance
segments, respectively. With respect to the carrier segment, revenue per load increased
approximately 14% in the 2005 thirteen week period while the number of loads delivered in the
2005 thirteen week period increased approximately 1%. The average length of haul per load at the
carrier segment increased approximately 11% and revenue per revenue mile increased approximately
3%. Included in revenue at the multimodal segment for the 2005 thirteen week period was
$7,300,000 of revenue related to disaster relief efforts for the storms that impacted the
southeastern United States in the later half of 2004. These emergency transportation services
were provided primarily under a contract between Landstar Express America, Inc. and the United
States Federal Aviation Administration (FAA). Excluding the number of loads and revenue
related to disaster relief efforts provided by the multimodal segment in the 2005 thirteen week
period, the number of loads delivered by the multimodal segment in the 2005 thirteen week period
increased approximately 13% and revenue per load increased approximately 12% over the 2004
period. Investment income at the insurance segment was $539,000 and $303,000 in the 2005 and 2004
periods, 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% and 74.5% of revenue in 2005 and 2004, respectively. The
increase in purchased transportation as a percentage of revenue was primarily attributable to
increased truck brokerage revenue, which tends to have a higher cost of purchased
transportation, partially offset by a reduction in rates charged by third party truck brokerage
carriers. Commissions to agents were 7.8% and 7.7% of revenue in 2005 and 2004, respectively.
The increase in commissions to agents as a percentage of revenue was primarily attributable to a
change in revenue mix. Other operating costs were 1.7% of revenue in 2005 and 2.4% of revenue in
2004. The decrease in other operating costs as a percentage of revenue was primarily
attributable to increased brokerage revenue, which does not incur significant other operating
costs, and decreased rent expense for Company provided trailing equipment, which reflected an
increase in the number of Company owned trailers, and reduced rental rates on leased trailers.
Insurance and claims were 2.6% of revenue in 2005 compared with 4.9% 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 the first
quarter of 2004 and a lower frequency of accidents compared to 2004. Selling, general and
administrative costs were 6.0% of revenue in 2005 compared with 6.5% of revenue in 2004. The
decrease in selling, general and administrative costs as a percentage of revenue was primarily
attributable to increased revenue, partially offset by an increased provision for bonuses under
the Companys incentive compensation plans. Depreciation and amortization was 0.8% of revenue in
both 2005 and 2004. Interest and debt expense was 0.2% of revenue in both 2005 and 2004. 13




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The provisions for income taxes for the 2005 and 2004 thirteen week periods were based on
estimated full year combined effective income tax rates of approximately 38.4% and 38.3%,
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. The increase in the combined
effective income tax rate is attributable to changes in the tax law enacted by a number of
states in which the Company operates. Net income was $17,878,000, or $0.30 per common share ($0.29 per diluted share), in the 2005
thirteen week period compared with $8,102,000, or $0.14 per common share ($0.13 per diluted share),
in the 2004 thirteen week period, 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). USE OF NON-GAAP FINANCIAL MEASURES In this quarterly report on Form 10-Q, Landstar provided the following non-GAAP financial measures:
(1) revenue per load for the multimodal segment excluding revenue and loads related to emergency
transportation services provided primarily under a contract with the FAA and (2) the percentage
change in revenue per load for the multimodal segment excluding revenue and loads related to
emergency transportation services provided primarily under a contract with the FAA as compared to
revenue per load for the multimodal segment for the corresponding prior year period. The non-GAAP
financial information should be considered in addition to, and not as a substitute for, the
corresponding GAAP financial information also presented in this Form 10-Q. Management believes that it is appropriate to present this non-GAAP financial information for the
following reasons: (1) a significant portion of the emergency 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
emergency transportation services provided by Landstar relating to disaster relief efforts for the
storms that impacted the southeastern United States during the later half of 2004 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 non-GAAP financial
information in its decision making. CAPITAL RESOURCES AND LIQUIDITY Shareholders equity was $200,757,000 at March 26, 2005, compared to $212,839,000 at December
25, 2004. The decrease in shareholders equity was a result of the purchase of 992,418 shares
of the Companys common stock at a total cost of $34,947,000, partially offset by net income for
the 2005 thirteen week period and exercises of stock options. At March 26, 2005, the Company may
purchase up to an additional 405,862 shares of its common stock under its authorized stock
purchase program. Shareholders equity was 68% of total capitalization (defined as total debt
plus equity) at March 26, 2005 compared to 70% at December 25, 2004. Long-term debt including current maturities was $95,632,000 at March 26, 2005, $3,542,000 higher
than at December 25, 2004, primarily as a result of capital lease additions during the 2005
thirteen week period. Working capital and the ratio of current assets to current liabilities were $203,739,000 and
1.93 to 1, respectively, at March 26, 2005, compared with $209,753,000 and 1.87 to 1,
respectively, at December 25, 2004. 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 $43,240,000
in the 2005 thirteen week period compared with $21,991,000 in the 2004 thirteen week period. The
increase in cash flow provided by operating activities was primarily attributable to the timing
of collections of trade accounts receivable, including a portion of the receivable from the FAA
for emergency transportation services provided during the later half of fiscal 2004. 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 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. The initial borrowing of $70,000,000 under the facility was used to refinance
the Companys prior credit facility, which has been terminated. At March 26, 2005, the Company had $65,000,000 in borrowings outstanding and $27,357,000 of letters
of credit outstanding under the Fourth Amended and Restated Credit Agreement. At March 26, 2005,
there was $132,643,000 available for future borrowings under the Companys Fourth Amended and
Restated Credit Agreement. In addition, the Company has $37,514,000 in letters of credit
outstanding, as collateral for insurance claims, that are secured by investments and cash
equivalents totaling $39,440,000. Historically, the Company has generated sufficient operating cash flow to meet its debt service
requirements, fund continued growth, both internal and through acquisitions and to meet working
capital needs. As a non-asset based provider of transportation capacity, the Companys annual
capital requirements for operating property are generally for trailers and management information
services 14




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##### Table of Contents



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 the 2005 thirteen week period, the Company purchased $739,000 of operating
property and acquired $4,297,000 worth of trailing equipment by entering into capital leases.
Landstar anticipates acquiring approximately $30,000,000 of operating property during the remainder
of the 2005 fiscal year either by purchase or by lease financing. It is expected that capital
leases will fund any significant acquisitions of Company provided trailing equipment made during
2005. The Company does not anticipate any other significant capital requirements in the near
future. Management believes that cash flow from operations combined with the Companys borrowing
capacity under the Fourth Amended and Restated Credit Agreement will be adequate to meet
Landstars debt service requirements, fund continued growth, both internal and through
acquisitions, complete the authorized share purchase program and meet working capital needs. LEGAL MATTERS On November 1, 2002, the Owner Operator Independent Drivers Association, Inc. (OOIDA) and six
individual Independent Contractors filed a putative class action complaint in the United States
District Court for the Middle District of Florida (the Court) in Jacksonville, Florida, against
the Company (the Complaint). The Complaint alleges that certain aspects of the Companys motor
carrier leases with its Independent Contractors violate certain federal leasing regulations and
seeks injunctive relief, an unspecified amount of damages and attorneys fees. On March 8 and June
4, 2004, the Court dismissed all claims of one of the six plaintiffs on the grounds that the ICC
Termination Act (the Act) is not applicable to leases signed before the Acts January 1, 1996,
effective date, and dismissed all claims of all remaining Plaintiffs against four of the seven
Company entities previously named as Defendants (Landstar System, Inc., Landstar Express America,
Inc., Landstar Gemini, Inc. and Landstar Logistics, Inc.). With respect to the remaining claims,
the June 4, 2004 order held that the Act created a private right of action to which a four-year
statute of limitations applies. On November 30, 2004, the Court heard oral argument on a motion by
OOIDA to certify the case as a class action. The Court is expected to rule within the next several
months on the class-certification motion. Trial for this matter has been set for the trial term
beginning October 3, 2005. On March 28, 2005, the Court granted Plaintiffs motion to amend their
Complaint to expand it to include additional alleged compensation-adjustments and charge-backs, the
original Complaints allegations of inadequate disclosures and unauthorized charges under the
federal leasing regulations. On March 30, 2005, the Court invited Defendants to file a revised
motion for partial summary judgment to address the claims of the Amended Complaint. Subsequently,
the Defendants did file a partial motion for summary judgment. Due to a number of factors, including the early stage of this litigation, the recent arrival of new
discovery requests, and the lack of litigated final judgments in a number of similar cases or
otherwise applicable precedents, Landstar does not believe it is in a position to conclude whether
or not there is a reasonable possibility of an adverse outcome in this case or what damages, if
any, Plaintiffs would be awarded should they prevail on all or any part of their claims. However,
Landstar believes it has meritorious defenses, including to the expanded allegations in the Amended
Complaint, and it intends to continue asserting these defenses vigorously. 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 March 26,
2005 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
is continually revising its existing claim estimates as new or revised information becomes
available on the status of each claim. During the 2005 thirteen week period, insurance and claims
costs included $1,404,000 of unfavorable adjustments to prior years claims estimates. During the
2004 thirteen week period, insurance and claims costs included $1,700,000 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 March
26, 2005. 15




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##### Table of Contents



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 December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (FAS No. 123). FAS No. 123 establishes
standards for the accounting for transactions in which an entity exchanges its equity instruments
for goods and services. FAS No. 123 focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. Under FAS No. 123, the
Company, beginning in the first quarter of 2006, will be required to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant date fair value
of the award (with limited exceptions). The cost will be recognized over the period during which an
employee is required to provide services in exchange for the award. Currently, the Company discloses the estimated effect on net income of these share-based payments
in the footnotes to the financial statements. The estimated fair value (cost) of the share-based
payments has historically been determined using the Black-Scholes pricing model. As of the date of
this report, the Company has not determined which method to use upon implementation of this
standard. The actual compensation cost resulting from share-based payments to be included in the
Companys future results of operations may vary significantly from the amounts currently disclosed
in the footnotes to the financial statements. 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-Q statement contain forward-looking
statements, such as statements which relate to Landstars business objectives, plans, strategies
and expectations. Terms such as anticipates, believes, estimates, 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: the operational, financial or legal
risks or uncertainties detailed in Landstars Form 10-K for the 2004 fiscal year, described in
the section Factors That May Affect Future Results and/or Forward-Looking Statements, this
report or in Landstars other Securities and Exchange Commission filings from time to time.
These risks and uncertainties could cause actual results or events to differ materially from
historical results or those anticipated. Investors should not place undue reliance on such
forward-looking statements and the Company undertakes no obligation to publicly update or revise
any forward-looking statements. 
 Item 3. 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 on the revolving credit facility, and investing activities with respect to
investments held by the insurance segment. 16




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##### Table of Contents



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. The initial borrowing of $70,000,000
under the facility has been used to refinance the Companys prior credit facility, which has been
terminated. 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. Landstar is required to, among other
things, maintain minimum levels of Consolidated Net Worth and Fixed Charge Coverage, as each is
defined in the Fourth Amended and Restated Credit Agreement. 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 borrowing capacity. As of March 26, 2005,
the weighted average interest rate on borrowings outstanding was 3.31%. During the first quarter of
fiscal 2005, the average outstanding balance under the Fourth Amended and Restated Credit Agreement
was approximately $76,000,000. 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 March
26, 2005 was estimated to approximate carrying value. Assuming that debt levels on the Fourth
Amended and Restated Credit Agreement remain at $65,000,000, the balance at March 26, 2005, 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 $650,000
on an annualized basis. All amounts outstanding on the Fourth Amended and Restated Credit Agreement are payable on July
8, 2009, the expiration of the Fourth Amended and Restated Credit Agreement. The Companys obligations under the Fourth Amended and Restated Credit Agreement are guaranteed
by all but one of Landstar System Holdings, Inc.s subsidiaries. Long-term investments, all of which are available-for-sale, consist of investment grade bonds
having maturities of up to five years. Assuming that the long-term portion of investments in
bonds remains at $17,757,000, the balance at March 26, 2005, 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. 
 Item 4. Controls and Procedures As of the end of the period covered by this report, an evaluation was carried out, under the
supervision and with the participation of the Companys management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), 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 CFO
concluded that the Companys disclosure controls and procedures were effective as of March 26,
2005, 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. There were no significant changes in the Companys internal controls over financial reporting
during the Companys fiscal quarter ended March 26, 2005 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting. 17




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##### Table of Contents



PART II OTHER INFORMATION Item 1. Legal Proceedings On November 1, 2002, the Owner Operator Independent Drivers Association, Inc. (OOIDA) and six
individual Independent Contractors filed a putative class action complaint in the United States
District Court for the Middle District of Florida (the Court) in Jacksonville, Florida, against
the Company (the Complaint). The Complaint alleges that certain aspects of the Companys motor
carrier leases with its Independent Contractors violate certain federal leasing regulations and
seeks injunctive relief, an unspecified amount of damages and attorneys fees. On March 8 and June
4, 2004, the Court dismissed all claims of one of the six plaintiffs on the grounds that the ICC
Termination Act (the Act) is not applicable to leases signed before the Acts January 1, 1996,
effective date, and dismissed all claims of all remaining Plaintiffs against four of the seven
Company entities previously named as Defendants (Landstar System, Inc., Landstar Express America,
Inc., Landstar Gemini, Inc. and Landstar Logistics, Inc.). With respect to the remaining claims,
the June 4, 2004 order held that the Act created a private right of action to which a four-year
statute of limitations applies. On November 30, 2004, the Court heard oral argument on a motion by
OOIDA to certify the case as a class action. The Court is expected to rule within the next several
months on the class-certification motion. Trial for this matter has been set for the trial term
beginning October 3, 2005. On March 28, 2005, the Court granted Plaintiffs motion to amend their
Complaint to expand it to include additional alleged compensation-adjustments and charge-backs, the
original Complaints allegations of inadequate disclosures and unauthorized charges under the
federal leasing regulations. On March 30, 2005, the Court invited Defendants to file a revised
motion for partial summary judgment to address the claims of the Amended Complaint. Subsequently,
the Defendants did file a partial motion for summary judgment. Due to a number of factors, including the early stage of this litigation, the recent arrival of new
discovery requests, and the lack of litigated final judgments in a number of similar cases or
otherwise applicable precedents, Landstar does not believe it is in a position to conclude whether
or not there is a reasonable possibility of an adverse outcome in this case or what damages, if
any, Plaintiffs would be awarded should they prevail on all or any part of their claims. However,
Landstar believes it has meritorious defenses, including to the expanded allegations in the Amended
Complaint, and it intends to continue asserting these defenses vigorously. The Company is routinely a party to litigation incidental to its business, primarily involving
claims for personal injury and property damage incurred in the transportation of freight. The
Company maintains insurance which covers liability amounts in excess of retained liabilities
from personal injury and property damages claims. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 December 26, 2004 to March 26, 2005, the Companys first fiscal quarter: Total number of shares
    
    
    Maximum number ofpurchased as part of
    
    
    shares that may yet beTotal number of
    
    
    Average price paid
    
    
    publicly announced
    
    
    purchased under theFiscal period
    
    shares purchased
    
    
    per share
    
    
    programs
    
    
    programsDec. 26, 2004 
Jan. 22, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,398,280Jan. 23, 2005 
Feb. 19, 2005
    
    
    687,100
    
    
    $
    35.46
    
    
    
    687,100
    
    
    
    711,180Feb. 20, 2005 
Mar. 26, 2005
    
    
    305,318
    
    
    $
    34.65
    
    
    
    305,318
    
    
    
    405,862Total
    
    
    992,418
    
    
    $
    35.21
    
    
    
    992,418
 On December 4, 2003, the Company announced that it had been authorized by its Board of
Directors to purchase up to an additional 1,000,000 shares, (not adjusted for the two-for-one stock
split effected in the form of a 100% stock dividend declared December 9, 2004) 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 December 4, 2003 authorization. 18




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##### Table of Contents



Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None. Item 6. Exhibits The exhibits listed on the Exhibit Index are furnished as part of this quarterly report on Form
10-Q. 19




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##### Table of Contents



EXHIBIT INDEX Registrants Commission File No.: 0-21238 Exhibit No.
    
    Description(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*
    
    
    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**
    
    
    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.
   *
    
    Filed herewith**
    
    Furnished herewith 20




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##### Table of Contents



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: April 29, 2005
    /s/ Henry H. GerkensHenry H. GerkensPresident and
Chief Executive Officer Date: April 29, 2005
    /s/ Robert C. LaRoseRobert C. LaRoseExecutive Vice President, Chief Financial
Officer and Secretary 21