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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
     
(Mark One)
   
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the Fiscal Year Ended December 25, 2004
 
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to
Commission File Number: 0-21238
(Landstar Logo)
Landstar System, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware
  06-1313069
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
13410 Sutton Park Drive South
Jacksonville, Florida
  32224
(Zip Code)
(Address of principal executive offices)
   
(904) 398-9400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ         No o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o
     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes þ         No o
     The aggregate market value of the voting stock held by non-affiliates of the registrant was $1,532,107,646 (based on the $51.42 per share closing price on June 25, 2004, the last business day of the Company’s second fiscal quarter, as reported by NASDAQ National Market System, not adjusted for the two-for-one stock split effected in the form of a 100% stock dividend declared December 9, 2004). In making this calculation, the registrant has assumed, without admitting for any purpose, that all directors and executive officers of the registrant, and no other person, are affiliates.
     The number of shares of the registrant’s common stock, par value $.01 per share (the “Common Stock”), outstanding as of the close of business on February 24, 2005 was 59,983,218.
DOCUMENTS INCORPORATED BY REFERENCE
     Portions of the following document are incorporated by reference in this Form 10-K as indicated herein:
         
    Part of 10-K
Document   Into Which Incorporated
     
Proxy Statement relating to Landstar System, Inc.’s Annual Meeting of Shareholders to be held on May 12, 2005
    Part III  
 
 


LANDSTAR SYSTEM, INC.
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
             
        Page
         
 PART I
   Business     2  
   Properties     9  
   Legal Proceedings     9  
   Submission of Matters to a Vote of Security Holders     10  
 
 PART II
   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     10  
   Selected Financial Data     11  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     12  
   Quantitative and Qualitative Disclosures about Market Risk     26  
   Financial Statements and Supplementary Data     28  
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     55  
   Controls and Procedures     55  
   Other Information     57  
 
 PART III
   Directors and Executive Officers of the Registrant     57  
   Executive Compensation     57  
   Security Ownership of Certain Beneficial Owners and Management     58  
   Certain Relationships and Related Transactions     58  
   Principal Accounting Fees and Services     58  
 
 PART IV
   Exhibits, Financial Statement Schedules     58  
 Signatures     62  
 Form of Key Executive Employment Protection Agreement
 Amendment to Key Executive Employment Protection Agreement
 Amendment to Key Executive Employment Protection Agreement
 Subsidiaries
 Consent of KPMG LLP
 Powers of Attorney
 Section 302 CEO Certification
 Section 302 CFO Certification
 Section 906 CEO Certification
 Section 906 CFO Certification

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PART I
Item 1. Business
General
      Landstar System, Inc. was incorporated in January 1991 under the laws of the State of Delaware. It acquired all of the capital stock of its predecessor, Landstar System Holdings, Inc. (“LSHI”) on March 28, 1991. LSHI owns directly or indirectly all of the common stock of Landstar Ranger, Inc. (“Landstar Ranger”), Landstar Inway, Inc. (“Landstar Inway”), Landstar Ligon, Inc. (“Landstar Ligon”), Landstar Gemini, Inc. (“Landstar Gemini”), Landstar Carrier Services, Inc. (“Landstar Carrier Services”), Landstar Logistics, Inc. (“Landstar Logistics”), Landstar Express America, Inc. (“Landstar Express America”), Landstar Contractor Financing, Inc. (“LCFI”), Risk Management Claim Services, Inc. (“RMCS”) and Signature Insurance Company (“Signature”). Landstar Ranger, Landstar Inway, Landstar Ligon, Landstar Gemini, Landstar Carrier Services, Landstar Logistics and Landstar Express America are collectively herein referred to as Landstar’s “Operating Subsidiaries.” Landstar System, Inc., LSHI, LCFI, RMCS, Signature and the Operating Subsidiaries are collectively referred to herein as “Landstar” or the “Company,” unless the context otherwise requires. The Company’s principal executive offices are located at 13410 Sutton Park Drive South, Jacksonville, Florida 32224 and its telephone number is (904) 398-9400. The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, proxy and current reports on Form 8-K as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). The Company’s website is www.landstar.com. The SEC maintains a website at www.sec.gov that contains the Company’s current and periodic reports, proxy and information statements and other information filed electronically with the SEC.
Historical Background
      In March 1991, Landstar acquired LSHI in a buy-out organized by Kelso & Company, Inc. (“Kelso”). Investors in the acquisition included Kelso Investment Associates IV L.P. (“KIA IV”), an affiliate of Kelso, ABS MB Limited Partnership, an affiliate of DB Alex. Brown LLC (formerly known as Alex. Brown & Sons Incorporated), and certain management employees of the Company. In March 1993, Landstar completed a recapitalization which consisted of three principal components: (i) an initial public offering of Common Stock at a price of $13.00 per share, $1.625 per share adjusted for subsequent stock splits, (ii) the retirement of all its outstanding 14% Senior Subordinated Notes, and (iii) the refinancing of the Company’s then existing senior debt facility with a senior bank credit agreement.
      In October 1993, the Company completed a secondary public offering. Immediately subsequent to the offering, KIA IV no longer owned any shares of Landstar Common Stock and affiliates of DB Alex. Brown LLC retained approximately 1% of the Common Stock outstanding.
      On July 17, 2002, the Company declared a two-for-one stock split effected in the form of a 100% stock dividend distributed on August 12, 2002 to stockholders of record on August 2, 2002.
      On October 15, 2003, the Company declared a two-for-one stock split effected in the form of a 100% stock dividend distributed on November 13, 2003 to stockholders of record on November 3, 2003.
      On December 9, 2004, the Company declared a two-for-one stock split effected in the form of a 100% stock dividend distributed on January 7, 2005 to stockholders of record on December 28, 2004.
Description of Business
      Landstar is a non-asset based transportation services company, providing transportation capacity and related transportation services to shippers throughout the United States and to a lesser extent in Canada, and between the United States, Canada and Mexico through its operating subsidiaries. These business services emphasize safety, information coordination and customer service and are delivered through a network of independent commission sales agents and third party capacity providers linked together by a

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series of technological applications which are provided and coordinated by the Company. The Company’s independent commission sales agents typically enter into non-exclusive contractual arrangements with Landstar and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “Independent Contractors”), unrelated trucking companies, air cargo carriers, ocean carriers and railroads. Through this network of agents and capacity providers, Landstar operates a transportation services business throughout North America with revenue exceeding $2.0 billion during the most recently completed fiscal year.
      Landstar provides transportation services to a variety of industries, including iron and steel, automotive products, paper, lumber and building products, aluminum, chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military hardware. In addition, Landstar provides transportation services to other transportation companies including logistic and less-than-truckload service providers. Landstar’s transportation services include a full array of truckload transportation utilizing a wide range of specialized equipment including dry vans of various sizes, flatbeds (including drop decks and light specialty trailers), temperature-controlled vans and containers. In addition, Landstar provides dedicated contract and logistics solutions, including freight optimization and less than truckload freight consolidations. Landstar also provides truck brokerage, expedited land and air delivery of time-critical freight and the movement of containers via ocean.
      Landstar’s business strategy is to be a non-asset based provider of transportation capacity offering high quality, specialized transportation services to service sensitive customers. Landstar focuses on providing transportation services which emphasize customer service and information coordination among its independent commission sales agents, customers and capacity providers. Landstar intends to continue developing appropriate systems and technologies that offer integrated transportation solutions to meet the total transportation needs of its customers.
      The Company has three reportable business segments. These are the carrier, multimodal and insurance segments. The financial information relating to the Company’s reportable business segments as of and for the fiscal years ending 2004, 2003 and 2002 is included in Footnote 12 of Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
      The carrier segment consists of Landstar Ranger, Landstar Inway, Landstar Ligon, Landstar Gemini and Landstar Carrier Services. The carrier segment provides truckload transportation for a wide range of general commodities primarily over irregular or non-repetitive routes utilizing a fleet of dry and specialty vans and unsided trailers, including flatbed, drop deck and specialty. It also provides short-to-long haul movement of containers by truck, dedicated power-only truck capacity and truck brokerage. The carrier segment markets its services primarily through independent commission sales agents and utilizes tractors provided by Independent Contractors and other third party truck capacity providers (truck brokerage carriers).
      The nature of the carrier segment business is such that a significant portion of its operating costs varies directly with revenue. At December 25, 2004, the carrier segment operated a fleet of 8,291 tractors, provided by 7,466 Independent Contractors, and 14,220 trailers. Approximately 5,352 of the trailers available to the carrier segment are provided by Independent Contractors, 2,808 are leased by the Company at rental rates that vary with the revenue generated through the trailer, 4,334 are owned by the Company, 1,597 are under a long-term rental arrangement at a fixed rate, and 129 are rented on a short-term basis from trailer rental companies. In addition, the Company has over 18,000 qualified other third party truck capacity providers who provide additional tractor and trailer capacity. Over 11,000 of these qualified other third party truck capacity providers have moved at least one load of freight for the Company during the 180 day period immediately preceding December 25, 2004. The use of Independent Contractors and other third party capacity providers enables the carrier segment to utilize a large fleet of revenue equipment while minimizing capital investment and fixed costs, thereby enhancing return on investment. Independent Contractors who provide a tractor receive a percentage of the revenue generated

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for the freight hauled and a larger percentage of such revenue for providing both a tractor and a trailer. Other third party truck capacity providers are paid a negotiated rate for each load they haul. The carrier segment’s network of over 900 independent commission sales agent locations provides an in-market presence throughout the continental United States and Canada.
      The multimodal segment is comprised of Landstar Logistics and Landstar Express America. Transportation services provided by the multimodal segment include the arrangement of intermodal moves, contract logistics, truck brokerage and emergency and expedited ground and air and ocean freight. The multimodal segment markets its services through independent commission sales agents and utilizes capacity provided by Independent Contractors, other third party truck capacity providers, railroads and air and ocean cargo carriers. Multimodal independent commission sales agents generally receive a percentage of the gross profit from each load they generate. Independent Contractors who provide truck capacity to the multimodal segment are compensated based on a percentage of the revenue generated by the haul depending on the type and timing of the shipment. Other third party truck capacity providers are paid either a negotiated rate for each load they haul or a contractually agreed-upon fixed amount per load. Railroads, air and ocean cargo carriers generally receive a contractually fixed amount per load.
      The nature of the multimodal segment business is such that a significant portion of its operating costs also varies directly with revenue. At December 25, 2004, the multimodal segment operated a fleet of 386 trucks, provided by approximately 334 Independent Contractors. Multimodal segment Independent Contractors primarily provide cargo vans and straight trucks that are utilized for emergency and expedited freight services. The multimodal segment’s network of approximately 100 independent commission sales agents provide over 100 sales locations. Approximately 37% of the multimodal segment’s revenue is contributed by one independent commission sales agent who derives the majority of his revenue from 3 customers.
      The insurance segment is comprised of Signature, a wholly-owned offshore insurance subsidiary, and RMCS. The insurance segment provides risk and claims management services to Landstar’s Operating Subsidiaries. In addition, it reinsures certain property, casualty and occupational accident risks of certain Independent Contractors who have contracted to haul freight for Landstar and provides certain property and casualty insurance directly to Landstar’s Operating Subsidiaries.
      Management believes that the Company’s overall size, geographic coverage, equipment and service capability offer the Company significant competitive marketing and operating advantages. These advantages allow the Company to meet the needs of even the largest shippers. Increasingly, the larger shippers are substantially reducing the number of authorized carriers in favor of a small number of “core carriers”, such as the Company, whose size and diverse service capabilities enable these core carriers to satisfy most of the shippers’ transportation needs. Examples of national account customers include the U.S. Department of Defense and many of the companies included in the Fortune 500.
Factors Significant to the Company’s Operations
      Management believes the following factors are particularly significant to the Company’s operations:
Agent Network
        Management believes the Company has more independent commission sales agents than any other domestic truckload carrier. Landstar’s network of over 1,000 independent commission sales agent locations provides the Company with regular contact with shippers at the local level and the capability to be highly responsive to shippers’ changing needs. The agent network also enables Landstar to be responsive both in providing specialized equipment to both large and small shippers and in providing capacity on short notice from the Company’s large fleet. Through its agent network, the Company believes it offers smaller shippers a level of service comparable to that typically enjoyed only by larger customers. Examples of services that Landstar is able to make available through the agent network to smaller shippers include the ability to provide transportation services on short notice (often within hours from notification to time of pick-up), multiple pick-up and delivery points,

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  electronic data interchange capability and access to specialized equipment. In addition, a number of the Company’s agents specialize in certain types of freight and transportation services (such as oversized or heavy loads).
 
        The typical Landstar agent maintains a relationship with a number of shippers and services these shippers by providing a base of operations for the Company’s Independent Contractors and other third party capacity providers. Independent commission sales agents in the carrier segment receive a commission generally between 5% and 8% of the revenue they generate if the load is hauled by an Independent Contractor and a contractually agreed-upon percent of the revenue or the gross profit, defined as revenue less the cost of purchased transportation, from each load they generate if hauled by a third party trucking company. In most cases, the carrier segment independent commission sales agents are paid volume-based incentives. Multimodal independent commission sales agents are typically paid a contractually agreed-upon percentage of the gross profit from each load they generate.
 
        The Company’s primary day to day contact with its customers is through its agents and not through employees of the Company. Nevertheless, it is important to note that each Operating Subsidiary contracts directly with customers and generally assumes the credit risk and liability for freight losses or damages.
 
        The carrier segment’s independent commission sales agents use the Company’s Landstar Electronic Administrative Dispatch System (LEADS) software program which enables these agents to enter available freight, dispatch capacity and process most administrative procedures and then communicate that information to Landstar and its capacity providers via the internet. The multimodal segment’s independent commission sales agents use other Landstar proprietary software to process customer shipments and communicate the necessary information to third party capacity providers and Landstar. The Company’s web-based available freight and truck information system provides a listing of available trucks to the Company’s independent commission sales agents.
 
        The Operating Subsidiaries emphasize programs to support the agents’ operations and to establish pricing parameters. The carrier segment and multimodal segment hold regular regional agent meetings for their independent commission sales agents and Landstar holds an annual company-wide agent convention.
 
        During 2004, 427 agents generated revenue for Landstar of at least $1 million each, or approximately $1.9 billion of Landstar’s total revenue, and one agent generated approximately $200,000,000 of Landstar’s total revenue.
 
        Although the Company typically enters into non-exclusive contractual relationships with its independent commission sales agents, management believes that the majority of the agents who generate revenue of $1 million or more choose to represent Landstar exclusively. Historically, Landstar has experienced very limited agent turnover among its larger-volume agents.

Capacity
        The Company relies exclusively on independent third parties for its hauling capacity. These third party capacity providers consist of Independent Contractors, unrelated trucking companies, air and ocean cargo carriers and railroads. Landstar’s use of capacity provided by its Independent Contractors and other third party capacity providers allows it to maintain a lower level of capital investment, resulting in lower fixed costs. Historically, with the exception of air revenue, the margin generated from freight hauled by Independent Contractors has been greater than from freight hauled by other third party capacity providers.
 
        Independent Contractors. Management believes the Company has the largest fleet of truckload Independent Contractors in the United States. This provides marketing, operating, safety, recruiting, retention and financial advantages to the Company. The Company’s Independent Contractors are compensated based on a fixed percentage of the revenue generated from the freight they haul. This percentage generally ranges from 60% to 70% where the Independent Contractor provides only a

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  tractor and from 73% to 79% where the Independent Contractor provides both a tractor and a trailer. The Independent Contractor must pay substantially all of the expenses of operating his/her equipment, including driver wages and benefits, fuel, physical damage insurance, maintenance, highway use taxes and debt service.
 
        The Company maintains an internet site through which Independent Contractors can view a complete listing of all the Company’s available freight, allowing them to consider rate, size, origin and destination when planning trips.
 
        The Landstar Contractors’ Advantage Purchasing Program leverages Landstar’s purchasing power to provide discounts to eligible Independent Contractors when they purchase equipment, fuel, tires and other items. In addition, LCFI provides a source of funds at competitive interest rates to the Independent Contractors to purchase primarily trailing equipment and mobile communication equipment.
 
        Trucks provided to the Company by the Independent Contractors were 8,677 at December 25, 2004 compared to 8,573 at December 27, 2003. The number of trucks provided by Independent Contractors fluctuates daily as a result of truck recruiting and truck terminations. Trucks recruited were lower in 2004 than in 2003, however, lower truck terminations in 2004 resulted in a net gain of 104 trucks. Landstar’s truck turnover ratio was approximately 35% in 2004 compared to 45% in 2003. More than half of this turnover was attributable to Independent Contractors who had been Independent Contractors with the Company for less than one year. Management believes that factors that have historically favorably impacted turnover include the Company’s extensive agent network, the Company’s programs to reduce the operating costs of its Independent Contractors and Landstar’s reputation for quality, service and reliability. Management believes that a reduction in the amount of available freight may cause an increase in truck turnover.
 
        Other Third Party Truck Capacity. The Company maintains a database of over 18,000 qualified other third party truck capacity providers who provide additional truck hauling capacity to the Company. Other third party truck capacity providers are paid either a negotiated rate for each load they haul or a contractually agreed-upon amount per load. The Company recruits, qualifies, establishes contracts with, tracks safety ratings and service records of and generally maintains the relationships with these third party trucking companies. In addition to augmenting the Company’s capability during periods of extraordinary demand and traffic lane imbalance, the use of third party carriers enables the Company to pursue different types and quality of freight such as temperature-controlled, short-haul traffic and, in certain instances, lower priced freight that would generally not be handled by the Company’s Independent Contractors.
 
        The Landstar Savings Plus Program leverages Landstar’s purchasing power to provide discounts to eligible other third party trucking companies when they purchase fuel and equipment and provides the other third party trucking companies with an electronic payment option.
 
        Third Party Rail, Air and Ocean Capacity. The Company maintains contractual relationships with various railroads and air cargo capacity providers. These relationships allow the Company to pursue the freight best serviced by these forms of transportation capacity. Railroads and air and ocean cargo carriers are generally paid a contractually fixed amount per load.

Diversity of Services Offered
        The Company offers its customers a wide range of transportation services through the Operating Subsidiaries, including a fleet of diverse trailing equipment and extensive geographic coverage. Specialized services offered by the Company include those provided by a large fleet of flatbed trailers, multi-axle trailers capable of hauling extremely heavy or oversized loads, drivers certified to handle ammunition and explosives shipments for the U.S. Department of Defense, emergency and expedited surface and air cargo services and intermodal capability with railroads and, to a lesser extent, steamship lines.

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        The following table illustrates the diversity of the trailing equipment available to the Company as of December 25, 2004:
           
Trailers by Type    
     
Vans
    10,204  
Temperature-controlled
    127  
Flatbeds, including step decks, drop decks and low boys
    3,904  
       
 
Total
    14,235  
       
Technology
        Management believes leadership in the development and application of technology is an ongoing part of providing high quality service at competitive prices. The Company’s focus is on developing and implementing software applications which are designed to improve its operational and administrative efficiency, assist its independent commission sales agents in sourcing capacity and assist its third party capacity providers in identifying desirable freight. Landstar manages its technology programs centrally through its information services department.
 
        The Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and, to a lesser extent, in Rockford, Illinois. Landstar relies, in the regular course of its business, on the proper operation of its information technology systems.
Corporate Services
        Management believes that significant advantages result from the collective expertise and corporate services afforded by Landstar’s corporate management. The primary services provided are:
     
          accounting, budgeting and taxes
  quality programs
          finance
  risk management insurance services
          human resource management
  safety
          legal
  strategic planning
          operator and equipment compliance
  technology and management information systems
          purchasing
   
Competition
        Landstar competes primarily in the transportation services industry with truckload carriers, intermodal transportation service providers, railroads, less-than-truckload carriers, third party broker carriers and other non-asset based transportation service providers. The transportation services industry is extremely competitive and fragmented.
 
        Management believes that competition for the freight transported by the Company is based primarily on service and efficiency and, to a lesser degree, on freight rates alone. Management believes that Landstar’s overall size and availability of a wide range of equipment, together with its geographically-dispersed local independent agent network, present the Company with significant competitive advantages over many transportation service providers.
Insurance and Claims
        Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. Landstar’s retained liability for individual commercial trucking claims 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,

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  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.

     Dependence on Third Party Insurance Companies
        The Company is dependent on a limited number of third party insurance companies to provide insurance coverage in excess of its self-insured retention amounts. Historically, the Company has relied on various third party insurance companies to provide insurance coverage for commercial trucking claims in excess of specific per occurrence limits. Over the past three years, the premiums proposed by the third party insurance companies providing coverage for commercial trucking liability insurance over the Company’s self insured retention amounts have varied dramatically. In an attempt to manage the cost of these increasing premiums required by the third party insurance companies, the Company has historically increased or decreased the level of its exposure to commercial trucking claims on a per occurrence basis. To the extent that the third party insurance companies increase their proposed premiums for coverage of commercial trucking claims, the Company may increase its exposure on a per occurrence basis. However, to the extent the third party insurance companies reduce their premiums proposed for coverage of commercial trucking claims, the Company may reduce its exposure on a per occurrence basis.
     Regulation
        Each of the Operating Subsidiaries is a motor carrier which is regulated by the Federal Motor Carrier Safety Administration (FMCSA) and by various state agencies. The FMCSA has broad regulatory powers, with respect to activities such as motor carrier operations, practices, periodic financial reporting and insurance. Subject to federal and state regulatory authorities or regulation, the Company may transport most types of freight to and from any point in the United States over any route selected by the Company.
 
        The trucking industry is subject to possible regulatory and legislative changes (such as the possibility of more stringent environmental and/or safety/security regulations or limits on vehicle weight and size) that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services.
 
        Interstate motor carrier operations are subject to safety requirements prescribed by the FMCSA. Each of the Company’s drivers are required to have a commercial driver’s license and is subject to mandatory drug and alcohol testing. The FMCSA’s commercial driver’s license and drug and alcohol testing requirements have not adversely affected the Company’s ability to source the capacity necessary to meet its customers’ transportation needs.
     Seasonality
        Landstar’s operations are subject to seasonal trends common to the trucking industry. Results of operations for the quarter ending in March are typically lower than the quarters ending in June, September and December.

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     Employees
        As of December 25, 2004, the Company and its subsidiaries employed 1,251 individuals. Approximately 31 Landstar Ranger drivers (out of a Company total of 8,677) are members of the International Brotherhood of Teamsters. The Company considers relations with its employees to be good.
Item 2.     Properties
      The Company owns or leases various properties in the U.S. for the Company’s operations and administrative staff that support its independent commission sales agents, Independent Contractors and other third party capacity providers. The carrier segment’s primary facilities are located in Jacksonville, Florida and Rockford, Illinois. The multimodal segment’s primary facility is located in Jacksonville, Florida. In addition, the Company’s corporate headquarters are located in Jacksonville, Florida. The Rockford, Illinois facility is owned by the Company and all other primary facilities are leased.
      Management believes that Landstar’s owned and leased properties are adequate for its current needs and that leased properties can be retained or replaced at an acceptable cost.
Item 3.     Legal Proceedings
      On November 1, 2002, the Owner Operator Independent Drivers Association, Inc. (“OOIDA”) and six individual Independent Contractors (collectively, the “Plaintiffs”) filed a putative class action complaint (the “Complaint”) in the United States District Court for the Middle District of Florida (the “Court”) in Jacksonville, Florida, against Landstar System, Inc. and certain of its subsidiaries. The Complaint alleges that certain aspects of Company subsidiaries’ motor carrier leases with 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 individual Independent Contractor 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 pursuant to which claims involving certain federal leasing regulations may be filed in federal court subject to a four-year statute of limitations. On November 30, 2004, the Court heard oral argument on a motion by the remaining Plaintiffs to certify the case as a class action. On February 10, 2005, the remaining Plaintiffs filed a motion to amend the Complaint to expand it to include additional allegations with respect to compliance with certain federal leasing obligations. On February 11, 2005, the remaining Defendants filed a motion to amend their previously filed Answer in the event the Court certifies a plaintiffs’ class pursuant to the remaining Plaintiffs’ pending motion. The parties are opposing each others’ motions to amend. The Court is expected to rule within the next several months on the class-certification motion and on a motion, previously filed by the remaining Defendants, for partial summary judgment. Trial is scheduled for the trial term beginning October 3, 2005. Due to a number of factors, including the recent filing of the proposed amended Complaint, the related arrival of new discovery requests from the remaining Plaintiffs, and the lack of litigated final judgments in a number of similar cases or otherwise applicable precedents, the Company 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, the remaining Plaintiffs would be awarded should they prevail on all or any part of their claims. However, the Company believes that the remaining Defendants have meritorious defenses and intend 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

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thereof, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
Item 4.      Submission of Matters to a Vote of Security Holders
      No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2004.
PART II
Item 5.      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
      The Common Stock of the Company is quoted through the National Association of Securities Dealers, Inc. National Market System (the “NASDAQ National Market System”) under the symbol “LSTR.” The following table sets forth the high and low reported sale prices for the Common Stock as quoted through the NASDAQ National Market System for the periods indicated. All historical share-related financial information presented herein has been adjusted to reflect three two-for-one stock splits each effected in the form of a 100% stock dividend, the first being distributed on August 12, 2002 to stockholders of record on August 2, 2002, the second being distributed on November 13, 2003 to stockholders of record on November 3, 2003, and the third being distributed on January 7, 2005 to stockholders of record on December 28, 2004.
                                 
    2004 Market Price   2003 Market Price
         
Fiscal Period   High   Low   High   Low
                 
First Quarter
  $ 20.870     $ 17.000     $ 15.425     $ 12.760  
Second Quarter
    26.110       20.260       16.498       13.700  
Third Quarter
    28.590       23.140       16.975       14.625  
Fourth Quarter
    37.495       27.125       19.975       15.255  
      The reported last sale price per share of the Common Stock as quoted through the NASDAQ National Market System on February 24, 2005 was $34.91 per share. As of such date, Landstar had 59,983,218 shares of Common Stock outstanding. As of February 24, 2005, the Company had 84 stockholders of record of its Common Stock. However, the Company estimates that it has a significantly greater number of stockholders because a substantial number of the Company’s shares are held by brokers or dealers for their customers in street name.
      The Company has not paid any cash dividends on the Common Stock within the past three years and does not intend to pay dividends on the Common Stock for the foreseeable future. The declaration and payment of any future dividends will be determined by the Company’s Board of Directors based on Landstar’s results of operations, financial condition, cash requirements, certain corporate law requirements and other factors deemed relevant by the Board of Directors.
      On December 4, 2003, the Company announced that it had been authorized by its Board of Directors to purchase up to 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.
      At December 25, 2004, the Company had 1,398,280 shares of common stock remaining to be purchased under the authorized program.
      The Company did not purchase any shares of its common stock during the period from September 25, 2004, the end of the Company’s third fiscal quarter, to December 25, 2004, the end of the Company’s fourth fiscal quarter.

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      At the May 13, 2004 annual meeting of shareholders, the shareholders of the Company approved an amendment to Article IV of the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 50,000,000 shares to 80,000,000 shares.
      The Company maintains three stock option plans and one stock compensation plan. The following table presents information related to securities authorized for issuance under these plans at December 25, 2004:
                         
            Number of Securities
    Number of Securities       Remaining Available for
    to be Issued Upon   Weighted-average   Future Issuance Under
    Exercise of   Exercise Price of   Equity Compensation
Plan Category   Outstanding Options   Outstanding Options   Plans
             
Equity Compensation Plans Approved by Security Holders
    3,115,764     $ 12.3061       5,355,360  
Equity Compensation Plans Not Approved by Security Holders
    0       0       0  
Item 6. Selected Financial Data
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
                                             
    Fiscal Years
     
Income Statement Data:   2004   2003   2002   2001   2000
                     
Revenue
  $ 2,019,936     $ 1,596,571     $ 1,506,555     $ 1,392,771     $ 1,418,492  
Investment income
    1,346       1,220       1,950       3,567       4,317  
Costs and expenses:
                                       
 
Purchased transportation
    1,510,963       1,185,043       1,116,009       1,030,454       1,046,183  
 
Commissions to agents
    161,011       125,997       118,864       110,513       113,721  
 
Other operating costs
    37,130       37,681       34,325       32,750       29,568  
 
Insurance and claims
    60,339       45,690       42,188       32,930       31,935  
 
Selling, general and administrative
    118,461       105,849       101,918       99,762       105,786  
 
Depreciation and amortization
    13,959       12,736       11,520       13,543       13,003  
                               
   
Total costs and expenses
    1,901,863       1,512,996       1,424,824       1,319,952       1,340,196  
                               
Operating income
    119,419       84,795       83,681       76,386       82,613  
Interest and debt expense
    3,025       3,240       4,292       6,802       9,127  
                               
Income before income taxes
    116,394       81,555       79,389       69,584       73,486  
Income taxes
    44,522       30,855       30,168       26,790       28,292  
                               
Net income
  $ 71,872     $ 50,700     $ 49,221     $ 42,794     $ 45,194  
                               
Earnings per common share(1)
  $ 1.19     $ 0.82     $ 0.76     $ 0.64     $ 0.64  
Diluted earnings per share(1)
  $ 1.16     $ 0.79     $ 0.73     $ 0.63     $ 0.63  
 
(1)  All earnings per share amounts 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.

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    Dec. 25,   Dec. 27,   Dec. 28,   Dec. 29,   Dec. 30,
Balance Sheet Data:   2004   2003   2002   2001   2000
                     
Total assets
  $ 584,512     $ 438,457     $ 400,748     $ 364,651     $ 370,362  
Long-term debt, including current maturities
    92,090       91,456       77,360       101,874       94,643  
Shareholders’ equity
    212,839       142,515       149,093       117,440       107,859  
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
      Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (“Landstar” or the “Company”), provide transportation services to a variety of market niches throughout the United States and to a lesser extent in Canada, and between the United States, 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.
      During the fiscal year ended December 25, 2004, the carrier segment contributed 72% of Landstar’s consolidated revenue, the multimodal segment contributed 26% of Landstar’s consolidated revenue and the insurance segment contributed 2% of Landstar’s consolidated revenue.
Changes in Financial Condition and Results of Operations
      Management believes the Company’s success principally depends on its ability to generate freight through its network of independent commission sales agents and to efficiently deliver that freight utilizing

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third party capacity providers. Management believes the most significant factors to the Company’s success include increasing revenue, sourcing capacity and controlling costs.
      While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s primary focus with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents”). Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents and increasing the revenue opportunities generated by existing independent commission sales agents. The following table shows the number of Million Dollar Agents, the average revenue generated by these agents and the percent of consolidated revenue generated by these agents during the past three fiscal years:
                         
    Fiscal Year
     
    2004   2003   2002
             
Number of Million Dollar Agents
    427       396       384  
                   
Average revenue generated per Million Dollar Agent
  $ 4,374,000     $ 3,584,000     $ 3,483,000  
                   
Percent of consolidated revenue generated by Million Dollar Agents
    92 %     89 %     89 %
                   
      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 the average length of haul, freight type, special handling and equipment requirements and delivery time requirements. The following table summarizes this data by reportable segment for the past three fiscal years:
                             
    Fiscal Year
     
    2004   2003   2002
             
Carrier Segment:
                       
 
External revenue generated through (in thousands):
                       
   
Independent Contractors
  $ 1,191,605     $ 1,052,346     $ 1,038,298  
   
Other third party truck capacity providers
    263,257       174,825       139,965  
                   
    $ 1,454,862     $ 1,227,171     $ 1,178,263  
                   
 
Number of loads(1)
    1,046,000       1,007,000       1,012,000  
 
Revenue per load
  $ 1,391     $ 1,219     $ 1,164  
 
Revenue per revenue mile
  $ 1.79     $ 1.72     $ 1.66  
 
Average length of haul (miles)
    779       707       700  
Multimodal Segment:
                       
 
External revenue generated through (in thousands):
                       
   
Independent Contractors(2)
  $ 105,815     $ 53,766     $ 55,816  
   
Other third party truck capacity providers
    308,106       182,333       143,317  
   
Rail, Air and Ocean Carriers
    121,001       105,142       101,583  
                   
    $ 534,922     $ 341,241     $ 300,716  
                   
Number of loads(3)
    324,000       256,000       262,000  
Revenue per load(3)
  $ 1,454     $ 1,332     $ 1,150  

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(1)  Effective with the 2004 second quarter, the Company modified its methodology for reporting loads. The application of this new methodology to the 2003 and 2002 fiscal year periods resulted in an increase of 3,000 and 7,000 loads, respectively. 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 for the 2004 fiscal year exclude the effect of $63,790,000 of revenue derived from disaster relief efforts provided primarily under a contract with the United States Federal Aviation Administration (“FAA”) as discussed further in the paragraphs that follow. (See the section “Use of Non-GAAP Financial Measures” on page 18.)
      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 as of the end of the three most recent fiscal years:
                           
    Dec. 25,   Dec. 27,   Dec. 28,
    2004   2003   2002
             
Independent Contractors
    7,800       7,584       7,365  
Other third party truck capacity providers:
                       
 
Approved and active(1)
    11,077       9,296       8,610  
 
Other approved
    7,144       6,240       5,310  
                   
      18,221       15,536       13,920  
                   
Total available truck capacity providers
    26,021       23,120       21,285  
                   
Number of trucks provided by Independent Contractors
    8,677       8,573       8,402  
                   
 
(1)  Active refers to other third party truck capacity providers who moved at least one load in the 180 days immediately preceding the fiscal year end.
      Historically, the Company’s carrier segment has primarily relied on capacity provided by 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 28.3% during 2004, 22.4% during 2003 and 18.8% during 2002.
      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 services operations of the multimodal segment are based on contractually agreed-upon fixed rates. 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

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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 such providers maintain their own insurance coverage.
      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.

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      The following table sets forth the percentage relationships of income and expense items to revenue for the periods indicated:
                             
    Fiscal Year
     
    2004   2003   2002
             
Revenue
    100.0 %     100.0 %     100.0 %
Investment income
    0.1       0.1       0.1  
Costs and expenses:
                       
 
Purchased transportation
    74.8       74.2       74.1  
 
Commissions to agents
    8.0       7.9       7.9  
 
Other operating costs
    1.8       2.4       2.3  
 
Insurance and claims
    3.0       2.9       2.8  
 
Selling, general and administrative
    5.9       6.6       6.7  
 
Depreciation and amortization
    0.7       0.8       0.7  
                   
   
Total costs and expenses
    94.2       94.8       94.5  
                   
Operating income
    5.9       5.3       5.6  
Interest and debt expense
    0.1       0.2       0.3  
                   
Income before income taxes
    5.8       5.1       5.3  
Income taxes
    2.2       1.9       2.0  
                   
Net income
    3.6 %     3.2 %     3.3 %
                   
Fiscal Year Ended December 25, 2004 Compared to Fiscal Year Ended December 27, 2003
      Revenue for the fiscal year 2004 was $2,019,936,000, an increase of $423,365,000, or 26.5%, compared to revenue for the 2003 fiscal year. Revenue increased $227,691,000, $193,681,000 and $1,993,000 at the carrier, multimodal and insurance segments, respectively. With respect to the carrier segment, revenue per load increased approximately 14% while the number of loads delivered in 2004 increased approximately 4% over the number of loads delivered in 2003. The average length of haul per load at the carrier segment increased approximately 10% and revenue per revenue mile increased approximately 4%. Included in revenue at the multimodal segment for the 2004 fiscal year was $63,790,000 of revenue related to disaster relief efforts for the storms that impacted the southeastern United States during the 2004 third and fourth quarters. 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 the disaster relief efforts provided by the multimodal segment in 2004, the number of loads delivered by the multimodal segment in fiscal year 2004 increased approximately 27% over 2003 and average revenue per load increased approximately 9%. The increase in average revenue per load was primarily attributable to an increase in the average length of haul.
      Investment income at the insurance segment was $1,346,000 and $1,220,000 for fiscal year 2004 and 2003, 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 and an increase in the average investment balance.
      Purchased transportation was 74.8% of revenue in 2004 compared with 74.2% in 2003. The increase in purchased transportation as a percentage of revenue was primarily attributable to increased truck brokerage revenue and rail intermodal revenue, both of which tend to have a higher cost of purchased transportation than that associated with Independent Contractors, and increased rates charged by rail capacity providers, partially offset by increased use of Company provided trailing equipment versus trailing equipment provided by Independent Contractors. Commissions to agents were 8.0% of revenue in 2004 and 7.9% of revenue in 2003. The increase in commissions to agents as a percentage of revenue was primarily attributable to a change in revenue mix. Other operating costs were 1.8% of revenue in 2004 and 2.4% of

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revenue in 2003, primarily due to increased brokerage revenue, which does not incur significant other operating costs, and reduced trailer maintenance and repair costs, reflecting a reduction in the average age of Company provided trailing equipment. Insurance and claims were 3.0% of revenue in 2004 and 2.9% of revenue in 2003. The increase in insurance and claims as a percentage of revenue was primarily attributable to $7,600,000 of costs incurred to settle one severe accident that occurred early in fiscal year 2004 and unfavorable development of prior year claims in 2004, partially offset by increased truck brokerage revenue, which has a lower claims risk profile. Selling, general and administrative costs were 5.9% of revenue in 2004 and 6.6% in 2003. Included in selling, general and administrative costs in 2003 was $4,150,000 of costs to defend and settle the Gulf Bridge RoRo, Inc. litigation. Excluding these costs, selling, general and administrative costs were 6.4% of revenue in 2003. The decrease in selling, general and administrative costs as a percentage of revenue, excluding the costs of the Gulf Bridge RoRo, Inc. litigation, was primarily due to the effect of increased revenue, partially offset by an increased provision for bonuses under the Company’s incentive compensation programs. Depreciation and amortization was 0.7% of revenue in 2004 and 0.8% of revenue in 2003. The decrease in depreciation and amortization as a percentage of revenue was primarily due to the effect of increased revenue in 2004.
      Interest and debt expense was 0.1% of revenue in 2004 and 0.2% of revenue in 2003. This decrease was primarily attributable to a decrease in capital lease obligations partially offset by increased interest on the Company’s revolving credit facility resulting from higher average borrowings.
      The provisions for income taxes for the 2004 and 2003 fiscal years were based on estimated full year combined effective income tax rates of approximately 38.3% and 37.8%, 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 was attributable to changes in tax laws enacted by a number of states in which the Company operates. At December 25, 2004, the valuation allowance of $420,000 was attributable to deferred state income tax benefits, which primarily represented state operating loss carryforwards at one subsidiary. The valuation allowance and goodwill will be reduced by $392,000 when realization of deferred state income tax benefits becomes likely. The Company believes that deferred income tax benefits, net of the valuation allowance, are more likely than not to be realized because of the Company’s ability to generate future taxable earnings.
      Net income was $71,872,000, or $1.19 per common share ($1.16 per diluted share), which included the $7,600,000 charge to settle one accident referenced above. This charge, net of related income tax benefits, reduced 2004 net income by $4,900,000, or $0.08 per common share ($0.08 per diluted share). Also included in net income for the 2004 fiscal year is approximately $11,847,000 of operating income related to the $63,790,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $11,847,000 of operating income, net of related income taxes, increased net income approximately $7,314,000, or $0.12 per common share ($0.12 per diluted share). Net income for the 2003 fiscal year was $50,700,000, or $0.82 per common share ($0.79 per diluted share). After deducting related income tax benefits of $1,500,000, the cost of the Gulf Bridge RoRo, Inc. litigation, reduced net income by $2,650,000, or $0.04 per common share ($0.04 per diluted share), in 2003. Excluding the costs of the Gulf Bridge RoRo, Inc. litigation, net income would have been $53,350,000, or $0.87 per common share ($0.84 per diluted share), in 2003.
Fiscal Year Ended December 27, 2003 Compared to Fiscal Year Ended December 28, 2002
      Revenue for the fiscal year 2003 was $1,596,571,000, an increase of $90,016,000, or 6.0%, compared to revenue for the 2002 fiscal year. Revenue increased $48,908,000, $40,525,000 and $583,000 at the carrier, multimodal and insurance segments, respectively. With respect to the carrier segment, revenue per load increased approximately 4% while the number of loads delivered in 2003 remained consistent with the number of loads delivered in 2002. The average length of haul per load at the carrier segment increased approximately 1% and revenue per revenue mile increased approximately 3%. At the multimodal segment, the number of loads delivered in 2003 decreased approximately 2% compared to 2002, however average revenue per load increased approximately 16%. The increase in average revenue per load was primarily

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attributable to an increase in the average size of air expedited shipments, increased rates charged for expedited shipments and an increased length of haul.
      Investment income at the insurance segment was $1,220,000 and $1,950,000 for fiscal year 2003 and 2002, respectively. The decrease in investment income was primarily due to a reduced rate of return, attributable to a general decline in interest rates, on investments held by the insurance segment.
      Purchased transportation was 74.2% of revenue in 2003 compared with 74.1% in 2002. The increase in purchased transportation as a percentage of revenue was primarily attributable to increased brokerage revenue at the carrier segment, increased brokerage and rail intermodal revenue at the multimodal segment and increased rates charged by truck brokerage carriers, partially offset by increased use of Company provided trailing equipment versus trailing equipment provided by Independent Contractors. Commissions to agents were 7.9% of revenue in 2003 and 2002. An increase in commissions to agents as a percentage of revenue resulting from increased brokerage revenue at the carrier segment was offset by lower commissions as a percentage of revenue at the multimodal segment primarily due to reduced gross profit. Other operating costs were 2.4% of revenue in 2003 and 2.3% of revenue in 2002, as increased trailer maintenance costs were partially offset by reductions in Independent Contractor recruiting, qualification and incentive costs and a lower provision for independent commission sales agent and Independent Contractor bad debts. Insurance and claims were 2.9% of revenue in 2003 compared with 2.8% in 2002. The increase in insurance and claims as a percentage of revenue was primarily due to the increased cost of premiums for insurance above the Company’s self-insured retention amounts, partially offset by reduced commercial trucking claims in the $4 million excess of $1 million layer and a reduction in insurance claims resulting from increased revenue hauled by third party capacity providers other than the Company’s Independent Contractors. Selling, general and administrative costs were 6.6% of revenue in 2003 and 6.7% in 2002. Included in selling, general and administrative costs in 2003 was $4,150,000 of costs to defend and settle the Gulf Bridge RoRo, Inc. litigation. Excluding these costs, selling, general and administrative costs were 6.4% of revenue in 2003. The decrease in selling, general and administrative costs as a percentage of revenue, excluding the costs of the Gulf Bridge RoRo, Inc. litigation, was primarily due to a decreased provision for bonuses under the Company’s incentive compensation plans, decreased communications costs and a decreased provision for customer bad debts, attributable to an improving economic environment, partially offset by increased administrative costs for Independent Contractor programs at the insurance segment. Depreciation and amortization was 0.8% of revenue in 2003 and 0.7% of revenue in 2002. The increase in depreciation and amortization as a percentage of revenue was primarily due to increased depreciation expense for company-owned trailing equipment as the average number of company-owned trailers increased during 2003.
      Interest and debt expense was 0.2% of revenue in 2003 and 0.3% of revenue in 2002. This decrease was primarily attributable to lower interest rates and reduced average borrowings on the Company’s senior credit facility.
      The provisions for income taxes for the 2003 and 2002 fiscal years were based on effective income tax rates of approximately 37.8% and 38.0%, respectively, which is higher than the statutory federal income tax rate primarily as a result of state income taxes and the meals and entertainment exclusion.
      Net income was $50,700,000, or $0.82 per common share ($0.79 per diluted share), in 2003 compared with $49,221,000, or $0.76 per common share ($0.73 per diluted share), in 2002. After deducting related income tax benefits of $1,500,000, the cost of the Gulf Bridge RoRo, Inc. litigation, reduced net income by $2,650,000, or $0.04 per common share ($0.04 per diluted share), in 2003. Excluding the costs of the Gulf Bridge RoRo, Inc. litigation, net income would have been $53,350,000, or $0.87 per common share ($0.84 per diluted share), in 2003.
Use of Non-GAAP Financial Measures
      In this annual report on Form 10-K, Landstar provided the following non-GAAP financial measures for the 2004 fiscal year: (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

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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 periods. Also, in this annual report on Form 10-K, Landstar provided the following non-GAAP financial measures for the 2003 fiscal year: (1) selling, general and administrative costs, excluding the costs to defend and settle the Gulf Bridge RoRo, Inc. litigation, as a percentage of revenue, (2) earnings per common share before costs to defend and settle the Gulf Bridge RoRo, Inc. litigation, (3) earnings per share before costs to defend and settle the Gulf Bridge RoRo, Inc. litigation, and (4) net income excluding costs relating to the defense and settlement of the Gulf Bridge RoRo, Inc. litigation. 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-K.
      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) the circumstances relating to the Gulf Bridge RoRo, Inc. litigation are unusual and unique and thus are not likely to recur as part of Landstar’s normal operations, (3) 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 2004 third and fourth quarters and the settlement of the Gulf Bridge RoRo, Inc. litigation will allow investors to better understand the underlying trends in Landstar’s financial condition and results of operations, (4) this information will facilitate comparisons by investors of Landstar’s results as compared to the results of peer companies and (5) management considers this non-GAAP financial information in its decision making.
Capital Resources and Liquidity
      Shareholders’ equity was $212,839,000, or 70% of total capitalization (defined as total debt plus equity), at December 25, 2004, compared with $142,515,000, or 61% of total capitalization, at December 27, 2003. The increase in shareholders’ equity was attributable to current year net income, proceeds from the exercise of stock options including related income tax benefits and repayments of notes receivable arising from the exercise of stock options, partially offset by the purchase of 681,000 shares (not adjusted for the two-for-one stock split effected in the form of a 100% stock dividend declared December 9, 2004) of the Company’s common stock at a total cost of $27,001,000. As of December 25, 2004, the Company may purchase an additional 1,398,280 shares of its common stock under its authorized stock purchase program. Long-term debt including current maturities was $92,090,000 at December 25, 2004, compared to $91,456,000 at December 27, 2003. Working capital and the ratio of current assets to current liabilities were $209,753,000 and 1.87 to 1, respectively, at December 25, 2004, compared with $147,515,000 and 1.85 to 1, respectively, at December 27, 2003. 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 $49,744,000 in 2004 compared with $53,396,000 in 2003. The decrease in cash provided by operating activities was primarily due to an increase in trade receivables resulting in large part from revenue related to the emergency transportation services provided under the contract with the FAA.
      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 December 25, 2004, the Company had $63,000,000 in borrowings outstanding and $27,357,000 of letters of credit outstanding on its Fourth Amended and Restated Credit Agreement. At December 25, 2004, there was $134,643,000 available for future borrowings under the Company’s Fourth Amended and

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Restated Credit Agreement. In addition, the Company has $36,670,000 in letters of credit outstanding, as collateral for insurance claims, that are secured by investments and cash equivalents totaling $38,641,000.
      Borrowings under the Fourth Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar, either (i) the greatest of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%, or, (ii) the rate at the time offered to JPMorgan Chase Bank in the Eurodollar market for amounts and periods comparable to the relevant loan plus a margin that is determined based on the level of the Company’s Leverage Ratio, as defined in the Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 25, 2004, the margin was equal to 75.0/100 of 1%.
      The unused portion of the Fourth Amended and Restated Credit Agreement carries a commitment fee determined based on the level of the Leverage Ratio, as therein defined. As of December 25, 2004, the commitment fee for the unused portion of the Fourth Amended and Restated Credit Agreement was 0.20%. At December 25, 2004, the weighted average interest rate on borrowings outstanding under the Fourth Amended and Restated Credit Agreement was 3.10%.
      The Fourth Amended and Restated Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness, the incurrence of operating or capital lease obligations and the purchase of operating property. The Fourth Amended and Restated Credit Agreement also requires Landstar to meet certain financial tests. Landstar is required to, among other things, maintain minimum levels of consolidated Net Worth and Fixed Charge Coverage, as each is defined in the Fourth Amended and Restated Credit Agreement. Under the most restrictive covenant, Fixed Charge Coverage, earnings before interest, taxes, depreciation and amortization, less purchased capital expenditures, exceeded the required minimum by approximately $100,100,000 for the fiscal year ended December 25, 2004.
      The Fourth Amended and Restated Credit Agreement provides for an event of default related to a person or group acquiring 25% or more of the outstanding capital stock of the Company or obtaining the power to elect a majority of the Company’s directors.
      Borrowings under the Fourth Amended and Restated Credit Agreement are unsecured. However, Landstar System, Inc. and all but one of Landstar System Holdings, Inc.’s (“LSHI”) subsidiaries guarantee LSHI’s obligations under the Fourth Amended and Restated Credit Agreement.
      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 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 2004, the Company purchased $6,377,000 of operating property and acquired $17,963,000 of trailing equipment by entering into capital leases and $14,300,000 of trailing equipment by entering into a five year operating lease with a fixed monthly payment. Landstar anticipates acquiring between $35,000,000 and $40,000,000 of operating property during fiscal year 2005 either by purchase or by lease financing. Prior to 2003, the Company historically funded its acquisition of Company provided fixed cost trailing equipment using capital leases. During 2003 and 2004, the Company acquired van trailing equipment under a long-term operating lease at a fixed monthly rental price per trailer. 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.
      Since 1997, the Company has purchased $315,148,000 of its common stock under programs authorized by the Board of Directors of the Company in open market and private block transactions. The

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Company has used cash provided by operating activities and borrowings on the Company’s revolving credit facilities to fund the purchases.
     Contractual Obligations and Commitments
      At December 25, 2004, the Company’s obligations and commitments to make future payments under contracts, such as debt and lease agreements, were as follows (in thousands):
                                         
    Payments Due By Period
     
        Less Than   1-3   4-5   More Than
Contractual Obligation   Total   1 Year   Years   Years   5 Years
                     
Long-term debt
  $ 63,000                     $ 63,000          
Capital lease obligations
    32,065     $ 9,858     $ 14,934       7,273          
Operating leases
    41,141       7,711       14,633       9,647     $ 9,150  
                               
    $ 136,206     $ 17,569     $ 29,567     $ 79,920     $ 9,150  
                               
      Long-term debt does not include interest. Capital lease obligations above include $2,975,000 of imputed interest. Operating leases primarily include $18,324,000 related to the Company’s main office facility located in Jacksonville, Florida and $18,158,000 related to a long-term operating lease for trailing equipment.
     Off-Balance Sheet Arrangements
      As of December 25, 2004, the Company had no off-balance sheet arrangements, other than operating leases as disclosed in the table of Contractual Obligations and Commitments above, that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
     Legal Matters
      On November 1, 2002, the Owner Operator Independent Drivers Association, Inc. (“OOIDA”) and six individual Independent Contractors (collectively, the “Plaintiffs”) filed a putative class action complaint (the “Complaint”) in the United States District Court for the Middle District of Florida (the “Court”) in Jacksonville, Florida, against Landstar System, Inc. and certain of its subsidiaries. The Complaint alleges that certain aspects of Company subsidiaries’ motor carrier leases with 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 individual Independent Contractor 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 pursuant to which claims involving certain federal leasing regulations may be filed in federal court subject to a four-year statute of limitations. On November 30, 2004, the Court heard oral argument on a motion by the remaining Plaintiffs to certify the case as a class action. On February 10, 2005, the remaining Plaintiffs filed a motion to amend the Complaint to expand it to include additional allegations with respect to compliance with certain federal leasing obligations. On February 11, 2005, the remaining Defendants filed a motion to amend their previously filed Answer in the event the Court certifies a plaintiffs’ class pursuant to the remaining Plaintiffs’ pending motion. The parties are opposing each others’ motions to amend. The Court is expected to rule within the next several months on the class-certification motion and on a motion, previously filed by the remaining Defendants, for partial summary judgment. Trial is scheduled for the trial term beginning October 3, 2005. Due to a number of factors, including the recent filing of the proposed amended Complaint, the related arrival of new discovery requests from the

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remaining Plaintiffs, and the lack of litigated final judgments in a number of similar cases or otherwise applicable precedents, the Company 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, the remaining Plaintiffs would be awarded should they prevail on all or any part of their claims. However, the Company believes that the remaining Defendants have meritorious defenses and intend 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 December 25, 2004 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 fiscal year 2004, insurance and claims costs included $4,390,000 of unfavorable adjustments to prior years claims estimates. During fiscal year 2003, insurance and claims costs included $498,000 of unfavorable adjustments to prior years claims estimates. During fiscal year 2002, insurance and claims costs included $868,000 of favorable adjustments to prior years claims estimates. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims reserve at December 25, 2004.
      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.

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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 third quarter of 2005, 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-K statement contain forward-looking statements, such as statements which relate to Landstar’s business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “predicts,” “may,” “should,” “could,” “will,” the negative thereof and similar expressions are intended to identify forward-looking statements. Such statements are by nature subject to uncertainties and risks, including but not limited to: an increase in the frequency or severity of accidents or workers’ compensation claims; unfavorable development of existing accident claims; dependence on independent commission sales agents; dependence on third party capacity providers; disruptions or failures in our computer systems; a downturn in domestic economic growth or growth in the transportation sector; substantial industry competition; and other operational, financial or legal risks or uncertainties detailed in this and Landstar’s other SEC filings from time to time and described in the section Factors That May Affect Future Results and/or Forward-Looking Statements immediately below. 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.

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Factors That May Affect Future Results and/or Forward-Looking Statements
      Increased severity or frequency of accidents and other claims. As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Insurance and Claims,” potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. Landstar’s retained liability for individual commercial trucking claims 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 up to $1,000,000 for each general liability claim, $250,000 for each workers compensation claim, and $250,000 for each cargo claim. A material increase in the frequency or severity of accidents, cargo or workers’ compensation claims or the unfavorable development of existing claims could have a material adverse effect on Landstar, including its results of operations and financial condition.
      Dependence on third party insurance companies. The Company is dependent on a limited number of third party insurance companies to provide insurance coverage in excess of its self-insured retention amounts. Historically, the Company has relied on various third party insurance companies to provide insurance coverage for commercial trucking claims in excess of specific per occurrence limits. Over the past three years, the premiums proposed by the third party insurance companies providing coverage for commercial trucking liability insurance above the Company’s self-insured retention amounts have varied dramatically. In an attempt to manage the cost of these increasing premiums required by the third party insurance companies, the Company has historically increased or decreased the level of its exposure to commercial trucking claims on a per occurrence basis. To the extent the third party insurance companies increase their proposed premiums for coverage of commercial trucking liability claims, the Company may increase its exposure on a per occurrence basis. However, to the extent the third party insurance companies reduce their premiums proposed for coverage of commercial trucking claims, the Company may reduce its exposure on a per occurrence basis.
      Dependence on independent commission sales agents. As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Agent Network,” the Company markets its services primarily through independent commission sales agents, and currently has a network of over 900 such agents. During 2004, 427 agents generated revenue for Landstar of at least $1 million each, or approximately 92% of Landstar’s consolidated revenue and one agent generated approximately $200,000,000, or 9%, of Landstar’s total revenue. Although the Company competes with motor carriers and other third parties for the services of these independent commission sales agents, Landstar has historically experienced very limited agent turnover among its larger-volume agents. However, Landstar’s contracts with its agents are typically terminable upon 10 to 30 days notice by either party and do not restrict the ability of a former agent to compete with Landstar following any such termination. The loss of some of the Company’s key agents or a significant decrease in volume generated by Landstar’s larger agents could have a material adverse effect on Landstar, including its results of operations and revenue.
      Dependence on third party capacity providers. As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Capacity,” Landstar does not own trucks or other transportation equipment (other than trailing equipment) and relies on third party capacity providers, including Independent Contractors, unrelated trucking companies, railroads, air and ocean cargo carriers to transport freight for its customers. The Company competes with motor carriers and other third parties for the services of Independent Contractors and other third party capacity providers. Freight hauled by Independent Contractors represented 64% of Landstar’s revenue in 2004. A significant decrease in available capacity provided by either the Company’s Independent Contractors or other third party capacity providers could have a material adverse effect on Landstar, including its results of operations and revenue.

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      Change in Capacity Mix. 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. Freight hauled by Independent Contractors represented 64.2%, 69.3% and 72.6% of Landstar’s consolidated revenue in 2004, 2003 and 2002, respectively. Historically, with the exception of air revenue, the net margin (defined as revenue less the cost of purchased transportation and agent commissions) generated from freight hauled by Independent Contractors has been greater than freight hauled by other third party capacity providers. An increase in the amount of revenue generated through other third party capacity providers without an increase in total revenue and/or a corresponding reduction in other costs, including other operating, insurance and claims, selling, general and administrative and depreciation and amortization could have a negative effect on the Company’s operating margin (defined as operating income divided by revenue).
      Decreased demand for transportation services. The transportation industry historically has experienced cyclical financial results as a result of slowdowns in economic activity, the business cycles of customers, price increases by capacity providers, interest rate fluctuations, and other economic factors beyond Landstar’s control. Certain of the Company’s third party capacity providers can be expected to charge higher prices to cover increased operating expenses, and the Company’s operating income may decline if it is unable to pass through to its customers the full amount of such higher transportation costs. If a slowdown in economic activity or a downturn in the Company’s customers’ business cycles causes a reduction in the volume of freight shipped by those customers, the Company’s operating results could be materially adversely affected.
      Substantial industry competition. As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Competition,” Landstar competes primarily in the transportation services industry. The transportation services industry is extremely competitive and fragmented. Landstar competes primarily with truckload carriers, intermodal transportation service providers, railroads, less-than-truckload carriers, third party broker carriers and other non-asset based transportation service providers. Management believes that competition for the freight transported by the Company is based primarily on service and efficiency and, to a lesser degree, on freight rates alone. Historically, competition has created downward pressure on freight rates. A decrease in freight rates could have a material adverse effect on Landstar, including its revenue and operating income.
      Dependence on key personnel. The Company is dependent on the services of its executive officers. Although the Company believes it has an experienced and highly qualified management group, the loss of the services of the Company’s executive officers could have a material adverse effect on the Company.
      Disruptions or failures in the Company’s computer systems. As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Technology,” the Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and to a lesser extent in Rockford, Illinois. Landstar relies in the regular course of its business on the proper operation of its information technology systems to link its extensive network of customers, agents and third party capacity providers, including its Independent Contractors. Any significant disruption or failure of its technology systems could significantly disrupt the Company’s operations and impose significant costs on the Company.
      Potential changes in fuel taxes. From time to time, various legislative proposals are introduced to increase federal, state, or local taxes, including taxes on motor fuels. The Company cannot predict whether, or in what form, any increase in such taxes applicable to the transportation services provided by the Company will be enacted and, if enacted, whether or not the Company’s Independent Contractors and other third party truck capacity providers would attempt to pass the increase onto the Company or if the Company will be able to reflect this potential increased cost of capacity, if any, in prices to customers. Any such increase in fuel taxes could have a material adverse effect on Landstar, including its results of operations and financial condition. Moreover, competition from other transportation service companies including those that provide non-trucking modes of transportation and intermodal transportation would

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likely increase if state or federal taxes on fuel were to increase without a corresponding increase in taxes imposed upon other modes of transportation.
      Status of independent contractors. From time to time, various legislative or regulatory proposals are introduced at the federal or state levels to change the status of independent contractors’ classification to employees for either employment tax purposes (withholding, social security, medicare and unemployment taxes) or other benefits available to employees. Currently, most individuals are classified as employees or independent contractors for employment tax purposes based on 20 “common-law” factors rather than any definition found in the Internal Revenue Code or Internal Revenue Service regulations. In addition, under Section 530 of the Revenue Act of 1978, taxpayers that meet certain criteria may treat an individual as an independent contractor for employment tax purposes if they have been audited without being told to treat similarly situated workers as employees, if they have received a ruling from the Internal Revenue Service or a court decision affirming their treatment, or if they are following a long-standing recognized practice.
      The Company classifies all of its Independent Contractors and independent commission sales agents as independent contractors for all purposes, including employment tax and employee benefit purposes. There can be no assurance that legislative, judicial, or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the employee/independent contractor classification of Independent Contractors or independent commission sales agents currently doing business with the Company. Although management believes that there are no proposals currently pending that would change the employees/independent contractor classification of Independent Contractors or independent commission sales agents currently doing business with the Company, the costs associated with potential changes, if any, with respect to these Independent Contractor classifications could have a material adverse effect on Landstar, including its results of operations and financial condition if Landstar were unable to reflect them in its fee arrangements with the Independent Contractors or independent commission sales agents or in the prices charged to its customers.
      Regulatory and legislative changes. As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Regulation,” each of the Operating Subsidiaries is a motor carrier which is regulated by the Federal Motor Carrier Safety Administration (FMCSA) and by various state agencies. The trucking industry is subject to possible regulatory and legislative changes (such as increasingly stringent environmental and/or safety/security regulations or limits on vehicle weight and size) that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Any such regulatory or legislative changes could have a material adverse effect on Landstar, including its results of operations and financial condition.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
      The Company is exposed to changes in interest rates as a result of its financial activities, primarily its borrowings on the revolving credit facility, and investing activities with respect to investments held by the insurance segment.
      On July 8, 2004, Landstar entered into a new senior credit facility with a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the “Fourth Amended and Restated Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees. 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.
      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

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defined in the Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the borrowing capacity. As of December 25, 2004, the weighted average interest rate on borrowings outstanding was 3.10%. During fiscal 2004, the average outstanding balance under the Third and Fourth Amended and Restated Credit Agreements were approximately $57,000,000. 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 December 25, 2004 was estimated to approximate carrying value. Assuming that debt levels on the Fourth Amended and Restated Credit Agreement remain at $63,000,000, the balance at December 25, 2004, 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 $630,000 on an annualized basis.
      The Company’s obligations under the Fourth Amended and Restated Credit Agreement are guaranteed by all but one of LSHI’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 $16,699,000, the balance at December 25, 2004, a hypothetical increase or decrease in interest rates of 100 basis points would not have a material impact on future earnings on an annualized basis. Short-term investments consist of short-term investment grade instruments and the current maturities of investment grade bonds. Accordingly, any future interest rate risk on these short-term investments would not be material.

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Item 8.     Financial Statements and Supplementary Data
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
                     
    Dec. 25,   Dec. 27,
    2004   2003
         
ASSETS
Current Assets
               
 
Cash and cash equivalents
  $ 61,684     $ 42,640  
 
Short-term investments
    21,942       30,890  
 
Trade accounts receivable, less allowance of $4,021 and $3,410
    338,774       219,039  
 
Other receivables, including advances to independent contractors, less allowance of $4,245 and $4,077
    13,929       13,196  
 
Deferred income taxes and other current assets
    13,503       14,936  
             
   
Total current assets
    449,832       320,701  
             
Operating property, less accumulated depreciation and amortization of $65,315 and $58,480
    76,834       67,639  
Goodwill
    31,134       31,134  
Other assets
    26,712       18,983  
             
Total assets
  $ 584,512     $ 438,457  
             
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
               
 
Cash overdraft
  $ 23,547     $ 20,523  
 
Accounts payable
    120,197       71,713  
 
Current maturities of long-term debt
    8,797       9,434  
 
Insurance claims
    32,612       26,293  
 
Accrued compensation
    14,609       6,903  
 
Other current liabilities
    40,317       38,320  
             
   
Total current liabilities
    240,079       173,186  
             
Long-term debt, excluding current maturities
    83,293       82,022  
Insurance claims
    32,430       27,282  
Deferred income taxes
    15,871       13,452  
Shareholders’ Equity
               
 
Common stock, $0.01 par value, authorized 80,000,000 and 50,000,000 shares, issued 63,154,190 and 31,816,860 shares
    632       318  
 
Additional paid-in capital
    43,845       18,382  
 
Retained earnings
    295,936       224,368  
 
Cost of 2,490,930 and 1,809,930 shares of common stock in treasury
    (127,151 )     (100,150 )
 
Accumulated other comprehensive income
    47       182  
 
Notes receivable arising from exercises of stock options
    (470 )     (585 )
             
   
Total shareholders’ equity
    212,839       142,515  
             
Total liabilities and shareholders’ equity
  $ 584,512     $ 438,457  
             
See accompanying notes to consolidated financial statements.

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
                             
    Fiscal Years Ended
     
    Dec. 25,   Dec. 27,   Dec. 28,
    2004   2003   2002
             
Revenue
  $ 2,019,936     $ 1,596,571     $ 1,506,555  
Investment income
    1,346       1,220       1,950  
Costs and expenses:
                       
 
Purchased transportation
    1,510,963       1,185,043       1,116,009  
 
Commissions to agents
    161,011       125,997       118,864  
 
Other operating costs
    37,130       37,681       34,325  
 
Insurance and claims
    60,339       45,690       42,188  
 
Selling, general and administrative
    118,461       105,849       101,918  
 
Depreciation and amortization
    13,959       12,736       11,520  
                   
   
Total costs and expenses
    1,901,863       1,512,996       1,424,824  
                   
Operating income
    119,419       84,795       83,681  
Interest and debt expense
    3,025       3,240       4,292  
                   
Income before income taxes
    116,394       81,555       79,389  
Income taxes
    44,522       30,855       30,168  
                   
Net income
  $ 71,872     $ 50,700     $ 49,221  
                   
Earnings per common share(1)
  $ 1.19     $ 0.82     $ 0.76  
                   
Diluted earnings per share(1)
  $ 1.16     $ 0.79     $ 0.73  
                   
Average number of shares outstanding:
                       
 
Earnings per common share(1)
    60,154,000       61,458,000       64,565,000  
                   
 
Diluted earnings per share(1)
    61,800,000       63,840,000       67,069,000  
                   
 
(1)  All 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.

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
                               
    Fiscal Years Ended
     
    Dec. 25,   Dec. 27,   Dec. 28,
    2004   2003   2002
             
OPERATING ACTIVITIES
                       
 
Net income
  $ 71,872     $ 50,700     $ 49,221  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Depreciation and amortization of operating property
    13,959       12,736       11,520  
   
Non-cash interest charges
    348       272       273  
   
Provisions for losses on trade and other accounts receivable
    6,250       5,094       7,514  
   
Losses on sales and disposals of operating property
    215       344       642  
   
Director compensation paid in common stock
    402       85          
   
Deferred income taxes, net
    3,967       (2,899 )     5,513  
   
Tax benefit on stock option exercises
    9,035       5,110       1,404  
   
Changes in operating assets and liabilities:
                       
     
Increase in trade and other accounts receivable
    (126,718 )     (34,637 )     (11,221 )
     
Decrease (increase) in other assets
    677       (3,335 )     933  
     
Increase in accounts payable
    48,484       11,416       4,484  
     
Increase in other liabilities
    9,786       4,630       7,522  
     
Increase in insurance claims
    11,467       3,880       6,508  
                   
NET CASH PROVIDED BY OPERATING ACTIVITIES
    49,744       53,396       84,313  
                   
INVESTING ACTIVITIES
                       
   
Net change in other short-term investments
    8,461       (27,354 )        
   
Maturities of long-term investments
    4,006       4,219       2,500  
   
Purchases of long-term investments
    (12,606 )     (4,542 )     (8,889 )
   
Purchases of operating property
    (6,377 )     (5,557 )     (4,421 )
   
Proceeds from sales of operating property
    971       1,612       387  
                   
NET CASH USED BY INVESTING ACTIVITIES
    (5,545 )     (31,622 )     (10,423 )
                   
FINANCING ACTIVITIES
                       
   
Increase in cash overdraft
    3,024       3,978       3,527  
   
Proceeds from repayment of notes receivable arising from exercises of stock options
    115       605       4,867  
   
Proceeds from exercises of stock options
    16,036       10,584       2,467  
   
Borrowings on revolving credit facility
    71,000       38,000          
   
Purchases of common stock
    (27,001 )     (73,844 )     (26,306 )
   
Principal payments on long-term debt and capital lease obligations
    (88,329 )     (23,904 )     (40,884 )
                   
NET CASH USED BY FINANCING ACTIVITIES
    (25,155 )     (44,581 )     (56,329 )
                   
Increase (decrease) in cash and cash equivalents
    19,044       (22,807 )     17,561  
Cash and cash equivalents at beginning of period
    42,640       65,447       47,886  
                   
Cash and cash equivalents at end of period
  $ 61,684     $ 42,640     $ 65,447  
                   
See accompanying notes to consolidated financial statements.

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Fiscal Years Ended December 25, 2004,
December 27, 2003 and December 28, 2002
(Dollars in thousands)
                                                                         
                                Notes    
                                Receivable    
                                Arising    
                    Accumulated   from    
    Common Stock   Add’l       Treasury Stock at Cost   Other   Exercises    
        Paid-In   Retained       Comprehensive   of Stock    
    Shares   Amount   Capital   Earnings   Shares   Amount   Income   Options   Total
                                     
Balance December 29, 2001
    13,328,834     $ 133     $ 75,036     $ 258,162       5,241,841     $ (209,926 )           $ (5,965 )   $ 117,440  
Net income
                            49,221                                       49,221  
Retirement of treasury stock
    (5,241,841 )     (52 )     (76,389 )     (133,485 )     (5,241,841 )     209,926                        
Purchases of common stock
                                    554,879       (26,306 )                     (26,306 )
Exercises of stock options and related income tax benefit
    116,160       1       3,962                                       (92 )     3,871  
Repayment of notes receivable arising from exercises of stock options
                                                            4,867       4,867  
Stock split effected in the form of a 100% stock dividend
    8,134,353       81               (81 )                                      
                                                       
Balance December 28, 2002
    16,337,506       163       2,609       173,817       554,879       (26,306 )             (1,190 )     149,093  
Net income
                            50,700                                       50,700  
Purchases of common stock
                                    1,255,051       (73,844 )                     (73,844 )
Exercises of stock options and related income tax benefit
    564,021       6       15,688                                               15,694  
Director compensation paid in common stock
    1,500               85                                               85  
Repayment of notes receivable arising from exercises of stock options
                                                            605       605  
Unrealized gain on available-for-sale investments, net of income taxes
                                                  $ 182               182  
Stock split effected in the form of a 100% stock dividend
    14,913,833       149               (149 )                                      
                                                       
Balance December 27, 2003
    31,816,860       318       18,382       224,368       1,809,930       (100,150 )     182       (585 )     142,515  
Net income
                            71,872                                       71,872  
Purchases of common stock
                                    681,000       (27,001 )                     (27,001 )
Exercises of stock options and related income tax benefit
    996,700       10       25,061                                               25,071  
Director compensation paid in common stock
    9,000               402                                               402  
Repayment of notes receivable arising from exercises of stock options
                                                            115       115  
Unrealized loss on available-for-sale investments, net of income taxes
                                                    (135 )             (135 )
Stock split effected in the form of a 100% stock dividend
    30,331,630       304               (304 )                                      
                                                       
Balance December 25, 2004
    63,154,190     $ 632     $ 43,845     $ 295,936       2,490,930     $ (127,151 )   $ 47     $ (470 )   $ 212,839  
                                                       
See accompanying notes to consolidated financial statements.

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)     Significant Accounting Policies
     Consolidation
      The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary Landstar System Holdings, Inc. (“LSHI”). Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Significant inter-company accounts have been eliminated in consolidation. The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates.
     Fiscal Year
      Landstar’s fiscal year is the 52 or 53 week period ending the last Saturday in December.
     Revenue Recognition
      The Company is the primary obligor with respect to freight delivery and assumes the related credit risk. Accordingly, revenue and the related direct freight expenses of the carrier and multimodal segments are recognized on a gross basis upon completion of freight delivery. Insurance premiums of the insurance segment are recognized over the period earned, which is usually on a monthly basis. Fuel surcharges billed to customers for freight hauled by independent contractors who provide truck capacity to the Company under exclusive lease arrangements (“Independent Contractors”) are excluded from revenue and paid in entirety to the Independent Contractors.
     Insurance Claim Costs
      Landstar provides, primarily on an actuarially determined basis, for the estimated costs of cargo, property, casualty, general liability and workers’ compensation claims both reported and for claims incurred but not reported. Landstar retains liability for individual commercial trucking claims incurred subsequent to March 30, 2004, up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. 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.
     Tires
      Tires purchased as part of trailing equipment are capitalized as part of the cost of the equipment. Replacement tires are charged to expense when placed in service.
     Cash and Cash Equivalents
      Included in cash and cash equivalents are all investments, except those provided for collateral, with an original maturity of 3 months or less.
     Investments
      Investments, all of which are available–for-sale, consist of investment-grade bonds having maturities of up to five years. Investments are carried at fair value, with unrealized gains and losses, net of related income taxes, reported as accumulated other comprehensive income. Short-term investments include the current maturities of the investment grade bonds and $18,931,000 of cash equivalents held at the

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s insurance segment at December 25, 2004. These short-term investments together with $16,699,000 of the non-current portion of the investment grade bonds included in other assets at December 25, 2004 provided collateral for $36,670,000 of letters of credit issued to guarantee payment of insurance claims. Based upon quoted market prices, unrealized gains on these bonds at December 25, 2004 and December 27, 2003 were $64,000 and $282,000, respectively.
      Investment income represents the earnings on the insurance segment’s assets. Investment income earned from the assets of the insurance segment are included as a component of operating income as the investing activities and earnings thereon comprise a significant portion of the insurance segment’s profitability.
Operating Property
      Operating property is recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Trailing equipment is being depreciated over 7 years.
Income Taxes
      Income tax expense is equal to the current year’s liability for income taxes and a provision for deferred income taxes. Deferred tax assets and liabilities are recorded for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Stock-Based Compensation — Stock Options
      The 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

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts).
                           
    Fiscal Year
     
    2004   2003   2002
             
Net income, as reported
  $ 71,872     $ 50,700     $ 49,221  
Deduct:
                       
 
Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related income tax benefits
    (3,607 )     (3,522 )     (3,102 )
                   
Pro forma net income
  $ 68,265     $ 47,178     $ 46,119  
                   
Earnings per common share:
                       
 
As reported
  $ 1.19     $ 0.82     $ 0.76  
 
Pro forma
  $ 1.13     $ 0.77     $ 0.71  
Diluted earnings per share:
                       
 
As reported
  $ 1.16     $ 0.79     $ 0.73  
 
Pro forma
  $ 1.11     $ 0.75     $ 0.70  
Earnings Per Share
      Earnings per common share amounts are based on the weighted average number of common shares outstanding and diluted earnings per share amounts are based on the weighted average number of common shares outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options.
      The following table provides a reconciliation of the number of average common shares outstanding used to calculate earnings per share to the number of common shares and common share equivalents outstanding used in calculating diluted earnings per share (in thousands):
                         
    Fiscal Year
     
    2004   2003   2002
             
Average number of common shares outstanding
    60,154       61,458       64,565  
Incremental shares from assumed exercises of stock options
    1,646       2,382       2,504  
                   
Average number of common shares and common share equivalents outstanding
    61,800       63,840       67,069  
                   
      For the fiscal years ended December 25, 2004 and December 28, 2002, there were 130,000 and 72,000, respectively, of options outstanding to purchase shares of common stock excluded from the calculation of diluted earnings per share because of antidilution. For the fiscal year ended December 27, 2003, there were no options outstanding to purchase shares of common stock excluded from the calculation of diluted earnings per share because of antidilution.
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

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company, beginning in the third quarter of 2005, 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.
(2)     Stock Splits
      On 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.
      On October 15, 2003, 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 November 3, 2003 received one additional share of common stock for each share held. The additional shares were distributed on November 13, 2003.
      On July 17, 2002, 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 August 2, 2002 received one additional share of common stock for each share held. The additional shares were distributed on August 12, 2002.
      Unless otherwise indicated, all share and per share amounts have been adjusted to give retroactive effect to all stock split transactions.
(3)     Litigation Settlement Agreement
      On September 20, 2001, a suit was filed entitled Gulf Bridge RoRo, Inc. v. Landstar System, Inc., Landstar Logistics, Inc. and Ford Motor Co., Inc. in Federal District Court in Mobile, Alabama. The complaint alleged breach of contract, fraud and tortious interference with contractual business relationships against Landstar System, Inc. and Landstar Logistics, Inc. arising out of a contract between Landstar Logistics, Inc. and the plaintiff involving a trans-Gulf of Mexico roll-on/roll-off shipping venture developed by the plaintiff. The suit made claim for $25,000,000 for damages for breach of contract and $50,000,000 in punitive and other damages related to the fraud and tortious interference claims. Landstar System, Inc. and all of its subsidiaries denied all claims made by the plaintiff. In order to avoid the cost of protracted litigation, on September 9, 2003 Landstar entered into a comprehensive settlement agreement with the plaintiffs and the Company’s insurance carrier with respect to all claims asserted in this lawsuit. The total cost incurred, net of insurance recoveries, by Landstar to defend and settle this suit during 2003 was approximately $4,150,000. The settlement component, net of insurance recoveries, was $2,700,000. Net of related income tax benefits these costs reduced Landstar’s net income for 2003 by approximately $2,650,000, or $0.04 per common share ($0.04 per diluted share).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(4)     Comprehensive Income
      The following table includes the components of comprehensive income for the fiscal years ended December 25, 2004, and December 27, 2003. The Company did not have any transactions resulting in comprehensive income in years prior to 2003 (in thousands):
                 
    Fiscal Year
     
    2004   2003
         
Net income
  $ 71,872     $ 50,700  
Unrealized holding gains (losses) on available-for-sale investments, net of income taxes
    (135 )     182  
             
Comprehensive income
  $ 71,737     $ 50,882  
             
      The unrealized holding loss on available-for-sale investments for 2004 represents the mark-to-market adjustment of $218,000 net of related income tax benefits of $83,000. The unrealized holding gain on available-for-sale investments for 2003 represents the mark-to-market adjustment of $282,000, net of the related income taxes of $100,000.
(5)     Income Taxes
      The provisions for income taxes consisted of the following (in thousands):
                           
    Fiscal Year
     
    2004   2003   2002
             
Current:
                       
 
Federal
  $ 37,233     $ 25,217     $ 23,362  
 
State
    3,322       8,537       1,293  
                   
      40,555       33,754       24,655  
Deferred:
                       
 
Federal
    3,400       3,063       4,273  
 
State
    567       (5,962 )     1,240  
                   
      3,967       (2,899 )     5,513  
                   
Income taxes
  $ 44,522     $ 30,855     $ 30,168  
                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities consisted of the following (in thousands):
                   
    Dec. 25, 2004   Dec. 27, 2003
         
Deferred tax assets:
               
 
Receivable valuations
  $ 3,538     $ 3,509  
 
State net operating loss carryforwards
    1,282       1,486  
 
Self-insured claims
    4,045       3,182  
 
Other
    4,125       5,677  
             
      12,990       13,854  
 
Valuation allowance
    (420 )     (461 )
             
    $ 12,570     $ 13,393  
             
Deferred tax liabilities:
               
 
Operating property
  $ 16,913     $ 14,321  
 
Goodwill
    3,890       3,338  
             
    $ 20,803     $ 17,659  
             
      At December 25, 2004, the valuation allowance of $420,000 was attributable to deferred state income tax benefits, which primarily represented state operating loss carryforwards at one subsidiary. The valuation allowance and goodwill will be reduced by $392,000 when realization of deferred state income tax benefits becomes likely.
      The following table summarizes the differences between income taxes calculated at the federal income tax rate of 35% on income before income taxes and the provisions for income taxes (in thousands):
                         
    Fiscal Year
     
    2004   2003   2002
             
Income taxes at federal income tax rate
  $ 40,738     $ 28,544     $ 27,786  
State income taxes, net of federal income tax benefit
    2,528       1,674       1,646  
Meals and entertainment exclusion
    789       500       786  
Other, net
    467       137       (50 )
                   
Income taxes
  $ 44,522     $ 30,855     $ 30,168  
                   
      Landstar paid income taxes of $30,644,000 in 2004, $25,506,000 in 2003 and $23,540,000 in 2002.

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(6)     Operating Property
      Operating property is summarized as follows (in thousands):
                 
    Dec. 25, 2004   Dec. 27, 2003
         
Land
  $ 1,999     $ 1,999  
Leasehold improvements
    8,730       8,476  
Buildings and improvement
    8,221       8,250  
Trailing equipment
    93,739       80,355  
Other equipment
    29,460       27,039  
             
      142,149       126,119  
Less accumulated depreciation and amortization
    65,315       58,480  
             
    $ 76,834     $ 67,639  
             
      Included above is $57,941,000 in 2004 and $51,396,000 in 2003 of operating property under capital leases, $40,640,000 and $33,192,000, respectively, net of accumulated amortization. Landstar acquired operating property by entering into capital leases in the amount of $17,963,000 in 2004 and $16,370,000 in 2002. Landstar did not acquire any property by entering into capital leases in 2003.
(7)     Retirement Plan
      Landstar sponsors an Internal Revenue Code section 401(k) defined contribution plan for the benefit of full-time employees who have completed one year of service. Eligible employees make voluntary contributions up to 75% of their base salary, subject to certain limitations. Landstar contributes an amount equal to 100% of the first 3% and 50% of the next 2% of such contributions, subject to certain limitations.
      The expense for the Company-sponsored defined contribution plan was $1,201,000 in 2004, $1,127,000 in 2003 and $1,093,000 in 2002.
(8)     Debt
      Long-term debt is summarized as follows (in thousands):
                 
    Dec. 25, 2004   Dec. 27, 2003
         
Capital leases
  $ 29,090     $ 21,456  
Revolving credit facility
    63,000       70,000  
             
      92,090       91,456  
Less current maturities
    8,797       9,434  
             
Total long-term debt
  $ 83,293     $ 82,022  
             
      On July 8, 2004, Landstar renegotiated its existing credit agreement with a syndicate of banks and JP Morgan 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.
      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

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%, or, (ii) the rate at the time offered to JPMorgan Chase Bank in the Eurodollar market for amounts and periods comparable to the relevant loan plus a margin that is determined based on the level of the Company’s Leverage Ratio, as defined in the Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 25, 2004, the margin was equal to 75.0/100 of 1%.
      The unused portion of the Fourth Amended and Restated Credit Agreement carries a commitment fee determined based on the level of the Company’s Leverage Ratio, as therein defined. As of December 25, 2004, the commitment fee for the unused portion of the Fourth Amended and Restated Credit Agreement was 0.20%. At December 25, 2004, the weighted average interest rate on borrowings outstanding under the Fourth Amended and Restated Credit Agreement was 3.10%. Based on the borrowing rates in the Fourth Amended and Restated Credit Agreement and the repayment terms, the fair value of the outstanding borrowings under the Fourth Amended and Restated Credit Agreement was estimated to approximate carrying value.
      The Fourth Amended and Restated Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness, the incurrence of operating or capital lease obligations and the purchase of operating property. The Fourth Amended and Restated Credit Agreement also requires Landstar to meet certain financial tests. Landstar is required to, among other things, maintain minimum levels of Consolidated Net Worth and Fixed Charge Coverage, as each is defined in the Fourth Amended and Restated Credit Agreement. Under the most restrictive covenant, Fixed Charge Coverage, earnings before interest, taxes, depreciation and amortization, less purchased capital expenditures, exceeded the required minimum by approximately $100,100,000 for the fiscal year ended December 25, 2004.
      The Fourth Amended and Restated Credit Agreement provides for an event of default related to a person or group acquiring 25% or more of the outstanding capital stock of the Company or obtaining the power to elect a majority of the Company’s directors.
      Borrowings under the Fourth Amended and Restated Credit Agreement are unsecured, however, Landstar System, Inc. and all but one of LSHI’s subsidiaries guarantee LSHI’s obligations under the Fourth Amended and Restated Credit Agreement.
      Landstar paid interest of $3,247,000 in 2004, $3,475,000 in 2003 and $4,480,000 in 2002.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(9)     Leases
      The future minimum lease payments under all noncancelable leases at December 25, 2004, principally for trailing equipment and the Company’s headquarters facility in Jacksonville, Florida, are shown in the following table (in thousands):
                 
    Capital   Operating
    Leases   Leases
         
2005
  $ 9,858     $ 7,711  
2006
    7,691       7,612  
2007
    7,243       7,021  
2008
    4,103       6,453  
2009
    3,170       3,194  
Thereafter
            9,150  
             
      32,065     $ 41,141  
             
Less amount representing interest (3.6% to 8.3%)
    2,975          
             
Present value of minimum lease payments
  $ 29,090          
             
      Total rent expense, net of sublease income, was $17,106,000 in 2004, $18,125,000 in 2003 and $19,250,000 in 2002.
(10)      Stock Compensation Plans
      On May 15, 2003, the shareholders of the Company voted for the proposal to implement a new Directors’ Stock Compensation Plan. Under this new plan, all independent directors who are elected or re-elected to the Board will receive 6,000 shares of common stock of the Company, subject to certain restrictions including restrictions on transfer. During 2004 and 2003, 18,000 and 6,000 shares, respectively, of the Company’s common stock were issued to members of the Board of Directors upon re-election at the annual shareholder meetings. During 2004 and 2003, the Company reported $402,000 and $85,000, respectively, in compensation expense representing the fair market value of these share awards.
      Under the 1993 Stock Option Plan, as amended, the Compensation Committee of the Board of Directors was authorized to grant options to Company employees to purchase up to 4,460,000 shares of common stock. Under the 2002 Employee Stock Option Plan, the Compensation Committee of the Board of Directors was authorized to grant options to Company employees to purchase up to 6,400,000 shares of common stock. Under the 1994 Directors’ Stock Option Plan, as amended (the “DSOP”), options to purchase up to 420,000 shares of common stock were authorized to be granted to outside members of the Board of Directors upon election or re-election to the Board of Directors. Effective May 15, 2003, no further grants will be made under the DSOP. Also, no further grants will be made under the 1993 Stock Option Plan as it has expired.
      Options granted under the Plans become exercisable in either three or five equal annual installments commencing on the first anniversary of the date of grant or vest 100% four and one-half years from the date of grant or 100% on the fifth anniversary from the date of grant, subject to acceleration in certain circumstances. All options granted under the plans expire on the tenth anniversary of the date of grant. Under the Plans, the exercise price of each option equals the fair market price of the Company’s common stock on the date of grant. At December 25, 2004, there were 8,295,124 shares of the Company’s common stock reserved for issuance upon exercise of options granted and to be granted under the Plans and 176,000 shares reserved for issuance under the 2003 Directors’ Stock Compensation Plan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Information regarding the Company’s stock option plans is as follows:
                                   
    Options Outstanding   Options Exercisable
         
        Weighted Average       Weighted Average
        Exercise Price       Exercise Price
    Shares   Per Share   Shares   Per Share
                 
Options at December 29, 2001
    4,492,160     $ 5.82       1,661,440     $ 4.31  
 
Granted
    1,656,000     $ 9.22                  
 
Exercised
    (654,080 )   $ 3.92                  
                         
Options at December 28, 2002
    5,494,080     $ 7.07       1,861,752     $ 5.29  
 
Granted
    985,200     $ 14.06                  
 
Exercised
    (1,897,556 )   $ 5.58                  
 
Forfeited
    (22,400 )   $ 10.72                  
                         
Options at December 27, 2003
    4,559,324     $ 9.18       1,328,204     $ 7.11  
 
Granted
    660,000     $ 20.59                  
 
Exercised
    (1,993,400 )   $ 8.04                  
 
Forfeited
    (110,160 )   $ 9.85                  
                         
Options at December 25, 2004
    3,115,764     $ 12.31       664,324     $ 8.56  
                         
      The following tables summarize stock options outstanding and exercisable at December 25, 2004:
                         
    Options Outstanding
     
    Number   Weighted Average   Weighted Average
    Outstanding   Remaining Contractual   Exercise Price
Range of Exercise Prices Per Share   Dec. 25, 2004   Life (years)   Per Share
             
$ 3.99 - $ 6.00
    258,640       4.2     $ 4.89  
$ 6.01 - $ 9.00
    834,240       6.3     $ 8.16  
$ 9.01 - $13.50
    860,084       7.5     $ 10.87  
$13.51 - $20.00
    1,012,800       8.5     $ 16.82  
$20.01 - $26.47
    150,000       9.5     $ 25.95  
                   
      3,115,764       7.3     $ 12.31  
                   
                 
    Options Exercisable
     
    Number   Weighted Average
    Exercisable   Exercise Price
Range of Exercise Prices Per Share   Dec. 25, 2004   Per Share
         
$ 3.99 - $ 6.00
    134,000     $ 3.99  
$ 6.01 - $ 9.00
    376,000     $ 7.99  
$ 9.01 - $13.50
    68,724     $ 13.01  
$13.51 - $14.62
    85,600     $ 14.62  
             
      664,324     $ 8.56  
             
      The fair value of each option grant on its grant date was calculated using the Black-Scholes option pricing model with the following assumptions for grants made in 2004, 2003 and 2002: risk-free interest rate of 3.5%, expected lives of 5 years and no dividend yield. The expected volatility used in calculating the fair market value of stock options granted was 40%. The weighted average grant date fair value of stock options granted was $8.32, $5.67 and $3.72 per share in 2004, 2003 and 2002, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(11)     Shareholders’ Equity
      On May 15, 2003, the Company announced that it had been authorized by its Board of Directors to purchase up to 1,000,000 shares of its common stock, (without regard to any subsequent stock splits) from time to time in the open market and in privately negotiated transactions. 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 of its common stock (without regard to any subsequent stock splits) from time to time in the open market and in privately negotiated transactions.
      During 2004, Landstar purchased 681,000 shares of its common stock (not adjusted for the stock split declared on December 9, 2004) at a total cost of $27,001,000 pursuant to its previously announced stock purchase programs. The Company did not purchase any shares of its common stock under the programs during the period from September 25, 2004, the end of the Company’s third fiscal quarter, to December 25, 2004, the end of the Company’s fourth fiscal quarter. As of December 25, 2004, Landstar may purchase an additional 1,398,280 shares of its common stock under its authorized stock purchase programs.
      At the May 13, 2004 annual meeting of shareholders, the shareholders of the Company approved an amendment to Article IV of the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 50,000,000 shares to 80,000,000 shares.
      During 1998, the Company established an employee stock option loan program. Under the terms of the program, the Company provided employees financing in order for them to exercise fully vested stock options. The loans are full recourse with the principal repayable in lump sum on the fifth anniversary of the loan. During 2002, $92,000 of such loans were issued. Effective May 1, 2002, the Company ceased making loans under the employee stock option loan program and terminated the program with respect to future stock option exercises.
      The Company has 2,000,000 shares of preferred stock authorized and unissued.
(12)     Segment Information
      The Company has three reportable business segments. These are the carrier, multimodal and insurance segments. The carrier segment provides truckload transportation for a wide range of general commodities over irregular routes with its fleet of dry and specialty vans and unsided trailers, including flatbed, drop deck and specialty. It also provides short-to-long haul movement of containers by truck, dedicated power-only truck capacity and truck brokerage. The carrier segment markets its services primarily through independent commission sales agents and utilizes tractors provided by independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “Independent Contractors”) and other third party truck capacity providers. Transportation services provided by the multimodal segment include the arrangement of intermodal moves, contract logistics, truck brokerage and emergency and expedited ground and air freight. The multimodal segment markets its services through independent commission sales agents and primarily utilizes capacity provided by Independent Contractors and other third party capacity providers, including truck brokerage carriers, railroads and air and ocean cargo carriers. The nature of the carrier and multimodal segments’ business is such that a significant portion of their operating costs varies directly with revenue. The insurance segment provides risk and claims management services to Landstar’s operating subsidiaries. In addition, it reinsures certain property, casualty and occupational accident risks of certain Independent Contractors and provides certain property and casualty insurance directly to Landstar’s operating subsidiaries.
      The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates a segment’s performance based on operating income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Internal revenue for transactions between the carrier and multimodal segments is based on quoted rates which are believed to approximate the cost that would have been incurred had similar services been obtained from an unrelated third party. Internal revenue for premiums billed by the insurance segment to the carrier and multimodal segments is calculated each fiscal period based on an actuarial calculation of historical loss experience and is believed to approximate the cost that would have been incurred by the carrier and multimodal segments had similar insurance been obtained from an unrelated third party.
      No single customer accounts for more than 10% of consolidated revenue. In total, the various departments and agencies of the United States government accounted for approximately 9% of consolidated revenue, including $63,790,000 of emergency transportation services related to disaster relief efforts for storms that impacted the southeastern United States during the 2004 third and fourth quarters. These emergency transportation services were provided primarily under a contract between Landstar Express America and the United States Federal Aviation Administration and reflected in revenue of the multimodal segment. In addition, during 2004 approximately 8% of the Company’s revenue was attributable to the automotive industry. One agent in the multimodal segment contributed approximately $200,000,000 of the Company’s revenue in 2004. Substantially all of the Company’s revenue is generated in the United States.
      The following tables summarize information about the Company’s reportable business segments as of and for the fiscal years ending December 25, 2004, December 27, 2003 and December 28, 2002 (in thousands):
                                         
    Carrier   Multimodal   Insurance   Other   Total
                     
2004
                                       
External revenue
  $ 1,454,862     $ 534,922     $ 30,152             $ 2,019,936  
Internal revenue
    48,673       4,967       30,538               84,178  
Investment income
                    1,346               1,346  
Interest and debt expense
                          $ 3,025       3,025  
Depreciation and amortization
    9,473       270               4,216       13,959  
Operating income
    128,400       26,211       12,456       (47,648 )     119,419  
Expenditures on long-lived assets
    730       206               5,441       6,377  
Goodwill
    20,496       10,638                       31,134  
Capital lease additions
    17,963                               17,963  
Total assets
    317,466       136,311       91,183       39,552       584,512  
 
2003
                                       
External revenue
  $ 1,227,171     $ 341,241     $ 28,159             $ 1,596,571  
Internal revenue
    20,852       4,300       32,442               57,594  
Investment income
                    1,220               1,220  
Interest and debt expense
                          $ 3,240       3,240  
Depreciation and amortization
    8,728       272               3,736       12,736  
Operating income
    94,303       6,403       21,227       (37,138 )     84,795  
Expenditures on long-lived assets
    2,652       712               2,193       5,557  
Goodwill
    20,496       10,638                       31,134  
Total assets
    254,606       70,607       64,363       48,881       438,457  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                         
    Carrier   Multimodal   Insurance   Other   Total
                     
 
2002
                                       
External revenue
  $ 1,178,263     $ 300,716     $ 27,576             $ 1,506,555  
Internal revenue
    23,703       2,483       29,860               56,046  
Investment income
                    1,950               1,950  
Interest and debt expense
                          $ 4,292       4,292  
Depreciation and amortization
    7,546       126               3,848       11,520  
Operating income
    87,777       7,793       22,754       (34,643 )     83,681  
Expenditures on long-lived assets
    329                       4,092       4,421  
Goodwill
    20,496       10,638                       31,134  
Capital lease additions
    16,370                               16,370  
Total assets
    241,068       59,571       70,198       29,911       400,748  
(13)     Commitments and Contingencies
      At December 25, 2004, in addition to the $36,670,000 of letters of credit secured by investments, Landstar had $27,357,000 of letters of credit outstanding under the Company’s revolving credit facility.
      On November 1, 2002, the Owner Operator Independent Drivers Association, Inc. (“OOIDA”) and six individual Independent Contractors (collectively, the “Plaintiffs”) filed a putative class action complaint (the “Complaint”) in the United States District Court for the Middle District of Florida (the “Court”) in Jacksonville, Florida, against Landstar System, Inc. and certain of its subsidiaries. The Complaint alleges that certain aspects of Company subsidiaries’ motor carrier leases with 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 individual Independent Contractor 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 pursuant to which claims involving certain federal leasing regulations may be filed in federal court subject to a four-year statute of limitations. On November 30, 2004, the Court heard oral argument on a motion by the remaining Plaintiffs to certify the case as a class action. On February 10, 2005, the remaining Plaintiffs filed a motion to amend the Complaint to expand it to include additional allegations with respect to compliance with certain federal leasing obligations. On February 11, 2005, the remaining Defendants filed a motion to amend their previously filed Answer in the event the Court certifies a plaintiffs’ class pursuant to the remaining Plaintiffs’ pending motion. The parties are opposing each others’ motions to amend. The Court is expected to rule within the next several months on the class-certification motion and on a motion, previously filed by the remaining Defendants, for partial summary judgment. Trial is scheduled for the trial term beginning October 3, 2005. Due to a number of factors, including the recent filing of the proposed amended Complaint, the related arrival of new discovery requests from the remaining Plaintiffs, and the lack of litigated final judgments in a number of similar cases or otherwise applicable precedents, the Company 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, the remaining Plaintiffs would be awarded should they prevail on all or any part of their claims. However, the Company believes that the remaining Defendants have meritorious defenses and intend to continue asserting these defenses vigorously.

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The Company is involved in certain other claims and pending litigation arising from the normal conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such other claims and pending litigation and that the ultimate outcome, after provisions thereof, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Landstar System, Inc.:
      We have audited the accompanying consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 25, 2004 and December 27, 2003, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the fiscal years ended December 25, 2004, December 27, 2003 and December 28, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Landstar System, Inc. and subsidiary as of December 25, 2004 and December 27, 2003, and the results of their operations and their cash flows for the fiscal years ended December 25, 2004, December 27, 2003 and December 28, 2002 in conformity with U.S. generally accepted accounting principles.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Landstar System, Inc.’s internal control over financial reporting as of December 25, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
  /s/ KPMG LLP
Jacksonville, Florida
February 28, 2005

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
(Unaudited)
                                 
    Fourth   Third   Second   First
    Quarter   Quarter   Quarter   Quarter
    2004   2004   2004   2004
                 
Revenue
  $ 589,724     $ 526,883     $ 482,303     $ 421,026  
                         
Operating income
  $ 40,596     $ 35,666     $ 29,268     $ 13,889  
                         
Income before income taxes
  $ 39,784     $ 35,004     $ 28,485     $ 13,121  
Income taxes
    15,218       13,390       10,895       5,019  
                         
Net income
  $ 24,566     $ 21,614     $ 17,590     $ 8,102  
                         
Earnings per common share(1,2)
  $ 0.41     $ 0.36     $ 0.29     $ 0.14  
                         
Diluted earnings per share(1,2)
  $ 0.40     $ 0.35     $ 0.29     $ 0.13  
                         
                                 
    Fourth   Third   Second   First
    Quarter   Quarter   Quarter   Quarter
    2003   2003(3)   2003   2003
                 
Revenue
  $ 433,997     $ 406,772     $ 390,084     $ 365,718  
                         
Operating income
  $ 25,176     $ 19,963     $ 22,566     $ 17,090  
                         
Income before income taxes
  $ 24,336     $ 19,107     $ 21,792     $ 16,320  
Income taxes
    9,188       7,280       8,226       6,161  
                         
Net income
  $ 15,148     $ 11,827     $ 13,566     $ 10,159  
                         
Earnings per common share(1,2)
  $ 0.25     $ 0.20     $ 0.22     $ 0.16  
                         
Diluted earnings per share(1,2)
  $ 0.24     $ 0.19     $ 0.21     $ 0.15  
                         
 
(1)  Due to the changes in the number of average common shares and common stock equivalents outstanding during the year, the sum of earnings per share amounts for each quarter do not necessarily add to the earnings per share amounts for the full year.
 
(2)  All earnings per share amounts 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.
 
(3)  Includes a pre-tax charge of $4,150 to defend and settle the Gulf Bridge RoRo, Inc. litigation. After deducting related income tax benefits of $1,500, the litigation reduced net income by $2,650, or $0.04 per common share ($0.04 per diluted share).

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Landstar System, Inc.:
      Under date of February 28, 2005, we reported on the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 25, 2004 and December 27, 2003, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the fiscal years ended December 25, 2004, December 27, 2003 and December 28, 2002, as contained in the 2004 annual report to shareholders. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in Item 15(a)(2). These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
      In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
  /s/ KPMG LLP
Jacksonville, Florida
February 28, 2005

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LANDSTAR SYSTEM, INC.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEET INFORMATION
(Dollars in thousands, except per share amounts)
                   
    Dec. 25,   Dec. 27,
    2004   2003
         
ASSETS
Investment in Landstar System Holdings, Inc., net of advances
  $ 212,839     $ 142,515  
             
Total assets
  $ 212,839     $ 142,515  
             
LIABILITIES AND SHAREHOLDER’S EQUITY
Shareholders’ equity:
               
 
Common stock, $.01 par value, authorized 80,000,000 and 50,000,000 shares, issued 63,154,190 and 31,816,860
  $ 632     $ 318  
 
Additional paid-in capital
    43,845       18,382  
 
Retained earnings
    295,936       224,368  
 
Cost of 2,490,930 and 1,809,930 shares of common stock in treasury
    (127,151 )     (100,150 )
 
Accumulated other comprehensive income
    47       182  
 
Notes receivable arising from exercises of stock options
    (470 )     (585 )
             
Total shareholders’ equity
  $ 212,839     $ 142,515  
             
Total liabilities and shareholders’ equity
  $ 212,839     $ 142,515  
             

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LANDSTAR SYSTEM, INC.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF INCOME INFORMATION
(Dollars in thousands, except per share amounts)
                           
    Fiscal Years Ended
     
    Dec. 25,   Dec. 27,   Dec. 28,
    2004   2003   2002
             
Equity in undistributed earnings of Landstar System Holdings, Inc. 
  $ 71,968     $ 50,773     $ 49,309  
Income taxes
    96       73       88  
                   
Net income
  $ 71,872     $ 50,700     $ 49,221  
                   
Earnings per common share(1)
  $ 1.19     $ 0.82     $ 0.76  
                   
Diluted earnings per share(1)
  $ 1.16     $ 0.79     $ 0.73  
                   
Average number of shares outstanding:
                       
 
Earnings per common share(1)
    60,154,000       61,458,000       64,565,000  
                   
 
Diluted earnings per share(1)
    61,800,000       63,840,000       67,069,000  
                   
 
(1)  All 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.

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LANDSTAR SYSTEM, INC.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF CASH FLOWS INFORMATION
(Dollars in thousands)
                           
    Fiscal Years Ended
     
    Dec. 25,   Dec. 27,   Dec. 28,
    2004   2003   2002
             
Operating Activities
                       
Net income
  $ 71,872     $ 50,700     $ 49,221  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
 
Tax benefit on stock option exercises
    9,035       5,110       1,404  
 
Equity in undistributed earnings of Landstar System Holdings, Inc. 
    (71,968 )     (50,773 )     (49,309 )
                   
Net Cash Provided By Operating Activities
    8,939       5,037       1,316  
                   
Investing Activities
                       
Additional investments in and advances from Landstar System Holdings, Inc., net
    1,911       57,618       17,656  
                   
Net Cash Provided By Investing Activities
    1,911       57,618       17,656  
                   
Financing Activities
                       
Proceeds from repayment of notes arising from exercises of stock options
    115       605       4,867  
Proceeds from exercises of stock options
    16,036       10,584       2,467  
Purchases of common stock
    (27,001 )     (73,844 )     (26,306 )
                   
Net Cash Used By Financing Activities
    (10,850 )     (62,655 )     (18,972 )
                   
Change in cash
    0       0       0  
Cash at beginning of period
    0       0       0  
                   
Cash at end of period
  $ 0     $ 0     $ 0  
                   

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 25, 2004
(Dollars in thousands)
                                           
COL A   COL B   COL C   COL D   COL E
                 
        Additions        
                 
            Charged to        
    Balance at   Charged to   Other   Deductions   Balance at
    Beginning of   Costs and   Accounts   Describe   End of
    Period   Expenses   Describe   (A)   Period
                     
Description
                                       
Allowance for doubtful accounts:
                                       
 
Deducted from trade receivables
  $ 3,410     $ 2,883             $ (2,272 )   $ 4,021  
 
Deducted from other receivables
    4,077       3,348               (3,180 )     4,245  
 
Deducted from other non-current receivables
    244       19                       263  
                               
    $ 7,731     $ 6,250             $ (5,452 )   $ 8,529  
                               
 
(A)  Write-offs, net of recoveries.

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 27, 2003
(Dollars in thousands)
                                           
COL A   COL B   COL C   COL D   COL E
                 
        Additions        
                 
            Charged to        
    Balance at   Charged to   Other   Deductions   Balance at
    Beginning   Costs and   Accounts   Describe   End of
    of Period   Expenses   Describe   (A)   Period
                     
Description
                                       
Allowance for doubtful accounts:
                                       
 
Deducted from trade receivables
  $ 3,953     $ 2,401             $ (2,944 )   $ 3,410  
 
Deducted from other receivables
    5,331       2,674               (3,928 )     4,077  
 
Deducted from other non-current receivables
    230       19               (5 )     244  
                               
    $ 9,514     $ 5,094             $ (6,877 )   $ 7,731  
                               
 
(A)  Write-offs, net of recoveries.

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 28, 2002
(Dollars in thousands)
                                           
COL A   COL B   COL C   COL D   COL E
                 
        Additions        
                 
            Charged to        
    Balance at   Charged to   Other   Deductions   Balance at
    Beginning   Costs and   Accounts   Describe   End of
    of Period   Expenses   Describe   (A)   Period
                     
Description
                                       
Allowance for doubtful accounts:
                                       
 
Deducted from trade receivables
  $ 4,416     $ 3,936             $ (4,399 )   $ 3,953  
 
Deducted from other receivables
    4,740       3,576               (2,985 )     5,331  
 
Deducted from other non-current receivables
    228       2                       230  
                               
    $ 9,384     $ 7,514             $ (7,384 )   $ 9,514  
                               
 
(A) Write-offs, net of recoveries.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
      None.
Item 9a.  Controls and Procedures
Disclosure Controls and Procedure
      As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and 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 have concluded that the Company’s disclosure controls and procedures were effective as of December 25, 2004 to provide reasonable assurance that information required to be disclosed by the Company in reports that it filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
      In designing and evaluating the disclosure controls and procedures, Company management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitation in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.
Internal Control Over Financial Reporting
     (a)         Management’s Report on Internal Control over Financial Reporting
      Management of Landstar System, Inc. (the “Company”) is responsible for establishing and maintaining effective internal controls over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act, as amended.
      Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
      Management, with the participation of the Company’s principal executive and principal financial officers, assessed the effectiveness of the Company’s internal control over financial reporting as of December 25, 2004. This assessment was performed using the criteria established under the Internal Control-Integrated Framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error or circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and reporting and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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      Based on the assessment performed using the criteria established by COSO, management has concluded that the Company maintained effective internal control over financial reporting as of December 25, 2004.
      KPMG LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K for the fiscal year ended December 25, 2004, has issued an audit report on management’s assessment of the Company’s internal control over financial reporting. Such report appears immediately below.
     (b)         Attestation Report of the Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Landstar System, Inc:
      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Landstar System, Inc. maintained effective internal control over financial reporting as of December 25, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Landstar System, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary under the circumstances. We believe that our audit provides a reasonable basis for our opinion.
      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
      In our opinion, management’s assessment that Landstar System, Inc. maintained effective internal control over financial reporting as of December 25, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by COSO. Also, in our opinion, Landstar System, Inc. maintained, in all material respects, effective internal control over financial reporting

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as of December 25, 2004, based on criteria established in Internal Control — Integrated Framework issued by COSO.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 25, 2004 and December 27, 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the fiscal years ended December 25, 2004, December 27, 2003 and December 28, 2002, and our report dated February 28, 2005 expressed an unqualified opinion on those consolidated financial statements.
  /s/ KPMG LLP
Jacksonville, Florida
February 28, 2005
     (c) Changes in Internal Control Over Financial Reporting
      There were no significant changes in the Company’s internal controls over financial reporting during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9b. Other Information
      None.
PART III
Item 10. Directors and Executive Officers of the Registrant
      The information required by this Item concerning the Directors (and nominees for Directors) and Executive Officers of the Company is set forth under the captions “Election of Directors,” “Directors of the Company,” “Information Regarding Board of Directors and Committees,” and “Executive Officers of the Company” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s definitive Proxy Statement for its annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. The information required by this Item concerning Director Independence, the Company’s Audit Committee and the Audit Committee’s Financial Expert is set forth under the caption “Information Regarding Board of Directors and Committees” and “Report of the Audit Committee” in the Company’s definitive Proxy Statement for its annual meeting of shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
      The Company has adopted a Code of Ethics that applies to each of its directors and employees, including its principal executive officer, principal financial officer, controller and all other employees performing similar functions. The Code of Ethics is available on the Company’s website at www.landstar.com under “Investors — Corporate Governance”. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendments to, or waivers from, a provision or provisions of the Code of Ethics by posting such information on its website at the web address indicated above.
Item 11. Executive Compensation
      The information required by this Item is set forth under the captions “Compensation of Directors and Executive Officers,” “Summary Compensation Table,” “Number of Securities Underlying Options Granted”, “Aggregated Options Exercised in Last Fiscal Year and Fiscal Year-End Option Values,”

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“Report of the Compensation Committee on Executive Compensation,” “Performance Comparison” and “Key Executive Employment Protection Agreements” in the Company’s definitive Proxy Statement for its annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
      The information required by this Item pursuant to Item 201(d) of Regulation S-K is set forth under the caption “Market for Registrants Common Equity and Related Stockholder Matters” in Part II, Item 5 of this report, and is incorporated by reference herein.
      The information required by this Item pursuant to Item 403 of Regulation S-K is set forth under the caption “Security Ownership by Management and Others” in the Company’s definitive Proxy Statement for its annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
      None
Item 14. Principal Accountant Fees and Services
      The information required by this item is set forth under the caption “Report of the Audit Committee” and “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s definitive Proxy Statement for its annual meeting of shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
      (a)(1) Financial Statements and Supplementary Data
         
    Page
     
Consolidated Balance Sheets
    28  
Consolidated Statements of Income
    29  
Consolidated Statements of Cash Flows
    30  
Consolidated Statements of Changes in Shareholders’ Equity
    31  
Notes to Consolidated Financial Statements
    32  
Report of Independent Registered Public Accounting Firm
    46  

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      (2) Financial Statement Schedules
      The report of the Company’s independent registered public accounting firm with respect to the financial statement schedules listed below appears on page 48 of this Annual Report on Form 10-K.
                 
Schedule        
Number   Description   Page
         
  I     Condensed Financial Information of Registrant Parent Company Only Balance Sheet Information     49  
  I     Condensed Financial Information of Registrant Parent Company Only Statement of Income Information     50  
  I     Condensed Financial Information of Registrant Parent Company Only Statement of Cash Flows Information     51  
  II     Valuation and Qualifying Accounts For the Fiscal Year Ended December 25, 2004     52  
  II     Valuation and Qualifying Accounts For the Fiscal Year Ended December 27, 2003     53  
  II     Valuation and Qualifying Accounts For the Fiscal Year Ended December 28, 2002     54  
      All other financial statement schedules not listed above have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
      (3) Exhibits
         
Exhibit    
No.   Description
     
  (2)      Plan of acquisition, reorganization, arrangement, liquidation or succession
  2 .1   Asset Purchase Agreement by and between Landstar Poole, Inc. as the seller, and Landstar System, Inc., as the guarantor, and Schneider National, Inc., as the purchaser, dated as of July 15, 1998. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-K for the quarter ended June 27, 1998 (Commission File No. 0-21238))
  (3)      Articles of Incorporation and By-Laws:
  3 .1   Amended and Restated Certificate of Incorporation of the Company dated February 9, 1993, Certificate of Designation of Junior Participating Preferred Stock dated February 10, 1993 and Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company dated May 29, 2003. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 (Commission File No. 0-21238))
  3 .2   Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company, dated July 16, 2004 (Incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on form 10-Q for the quarter ended June 26, 2004 (Commission File No. 0-21238))
  3 .3   The Company’s Bylaws, as amended and restated on February 9, 1993. (Incorporated by reference to Exhibit 3 to the Registrant’s Registration Statement on Form S-1 (Registration No. 33-57174))
  (4)      Instruments defining the rights of security holders, including indentures:
  4 .1   Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 33-57174))
  4 .2   Fourth Amended and Restated Credit Agreement, dated July 8, 2004, among LSHI, Landstar, the lenders named therein and JPMorgan Chase Bank as administrative agent (including exhibits and schedules thereto). (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K filed on July 12, 2004 (Commission File No. 0-21238))
  (10)      Material contracts:
  10 .1+   Landstar System, Inc. 1993 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1. (Registration No. 33-67666))

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Exhibit    
No.   Description
     
  10 .2+   Form of Indemnification Agreement between the Company and each of the directors and certain executive officers of the Company. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 2003 (Commission No. 0-21238))
  10 .3+   LSHI Management Incentive Compensation Plan. (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 25, 1993. (Commission File No. 0-21238))
  10 .4+   Landstar System, Inc. 1994 Director’s Stock Option Plan. (Incorporated by reference to Exhibit 99 to the Registrant’s Registration Statement on Form S-8 filed July 5, 1995. (Registration No. 33-94304))
  10 .5+   Form of Key Executive Employment Protection Agreement dated January 30, 1998 between Landstar System, Inc. and each of Henry H. Gerkens, Robert C. LaRose, Gary W. Hartter and Ronald G. Stanley (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997 (Commission File No. 0-21238))
  10 .6+*   Form of Key Executive Employment Protection Agreement dated December 15, 2000 between Landstar System, Inc. and James B. Gattoni (Commission File No. 0-21238)
  10 .7+   Amendment to Key Executive Employment Protection Agreement, dated August 7, 2002, between Landstar System, Inc. and Henry H. Gerkens (Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (Commission File No. 0-21238))
  10 .8+   Amendment to Key Executive Employment Protection Agreement, dated August 7, 2002, between Landstar System, Inc. and Robert C. LaRose (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (Commission File No. 0-21238))
  10 .9+   Amendment to Key Executive Employment Protection Agreement, dated August 7, 2002, between Landstar System, Inc. and Gary W. Hartter (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (Commission File No. 0-21238))
  10 .10+   Amendment to the Landstar System, Inc. 1993 Stock Option Plan (Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997 (Commission File No. 0-21238))
  10 .11+   First Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 0-21238))
  10 .12+   Second Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 0-21238))
  10 .13+   Landstar System, Inc. 2002 Employee Stock Option Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on March 22, 2002 (Commission File No. 0-21238))
  10 .14+   Landstar System, Inc. Executive Incentive Compensation Plan (Incorporated by reference to Exhibit B to the Registrant’s Definitive Proxy Statement filed on March 22, 2002 (Commission File No. 0-21238))
  10 .15+   Letter Agreement, dated July 2, 2002 from Jeffrey C. Crowe to Henry H. Gerkens. (Incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (Commission File No. 0-21238))
  10 .16+   Directors Stock Compensation Plan, dated May 15, 2003 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 (Commission File No. 0-21238))

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Exhibit    
No.   Description
     
  10 .17+   Letter agreement, dated April 27, 2004, between Landstar System, Inc. and Henry H. Gerkens (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 28, 2004 (Commission File No. 0-21238)
  10 .18+   Letter agreement, dated April 27, 2004, between Landstar System, Inc. and Jeffrey C. Crowe (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 28, 2004 (Commission No. 0-21238)
  10 .19+*   Amendment to Key Executive Employment Protection Agreement, dated August 7, 2002, between Landstar System, Inc. and Ronald G. Stanley (Commission File No. 0-21238)
  10 .20+*   Amendment to Key Executive Employment Protection Agreement, dated August 7, 2002, between Landstar System, Inc. and James B. Gattoni (Commission File No. 0-21238)
  (21)      Subsidiaries of the Registrant:
  21 .1*   List of Subsidiary Corporations of the Registrant
  (23)      Consents of experts and counsel:
  23 .1*   Consent of KPMG LLP as Independent Registered Public Accounting Firm of the Registrant
  (24)      Power of attorney:
  24 .1*   Powers of Attorney
  (31)      Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
  31 .1*   Chief Executive Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31 .2*   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
 
 +  management contract or compensatory plan or arrangement
  Filed herewith.
**  Furnished herewith.
      THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO ANY SHAREHOLDER OF THE COMPANY WHO SO REQUESTS IN WRITING, A COPY OF ANY EXHIBITS, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ANY SUCH REQUEST SHOULD BE DIRECTED TO LANDSTAR SYSTEM, INC., ATTENTION: INVESTOR RELATIONS, 13410 SUTTON PARK DRIVE SOUTH, JACKSONVILLE, FLORIDA 32224.

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SIGNATURES
      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
  Landstar System, Inc.
  By:  /s/ Henry H. Gerkens
 
 
  Henry H. Gerkens
  President and
  Chief Executive Officer
  By:  /s/ Robert C. LaRose
 
 
  Robert C. LaRose
  Executive Vice President, Chief
  Financial Officer and Secretary
Date: February 28, 2005
      Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
             
Signature   Title   Date
         
 
*
 
Jeffrey C. Crowe
  Chairman of the Board   February 28, 2005
 
/s/ Henry H. Gerkens
 
Henry H. Gerkens
  Director, President and Chief Executive Officer; Principal Executive Officer   February 28, 2005
 
/s/ Robert C. LaRose
 
Robert C. LaRose
  Executive Vice President, Chief Financial Officer and Secretary; Principal Accounting Officer   February 28, 2005
 
*
 
David G. Bannister
  Director   February 28, 2005
 
*
 
Ronald W. Drucker
  Director   February 28, 2005
 
*
 
Merritt J. Mott
  Director   February 28, 2005
 
*
 
William S. Elston
  Director   February 28, 2005

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Signature   Title   Date
         
 
*
 
Diana M. Murphy
  Director   February 28, 2005
 
By: /s/ Robert C. LaRose
 
Robert C. LaRose
Attorney In Fact*
       

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