Capital Resources and Liquidity

      Shareholders’ equity was $142,515,000, or 61% of total capitalization (defined as total debt plus equity), at December 27, 2003, compared with $149,093,000, or 66% of total capitalization, at December 28, 2002. The decrease in shareholders’ equity was a result of the purchase of 1,255,051 shares (not adjusted for the two-for-one stock split effected in the form of a 100% stock dividend declared October 15, 2003) of the Company’s common stock at a total cost of $73,844,000, partially offset by current year net income, repayment of notes receivable arising from exercises of stock options and exercises of stock options. As of December 27, 2003, the Company may purchase an additional 1,380,140 shares of its common stock under its authorized stock purchase program. Long-term debt including current maturities was $91,456,000 at December 27, 2003, $14,096,000 more than at December 28, 2002. Working capital and the ratio of current assets to current liabilities were $147,515,000 and 1.85 to 1, respectively, at December 27, 2003, compared with $120,630,000 and 1.78 to 1, respectively, at December 28, 2002. 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 $53,396,000 in 2003 compared with $84,313,000 in 2002. The decrease in cash provided by operating activities was primarily due to an increase in trade receivables as a result of increased revenue during the last month of the year.

      On December 20, 2001, Landstar renegotiated its existing credit agreement with a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the “Third Amended and Restated Credit Agreement”). The Third Amended and Restated Credit Agreement provides $175,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees.

      At December 27, 2003, the Company had $70,000,000 in borrowings outstanding and $9,580,000 of letters of credit outstanding on its Third Amended and Restated Credit Agreement. At December 27, 2003, there was $95,420,000 available for future borrowings under the Company’s Third Amended and Restated Credit Agreement. In addition, the Company has $37,330,000 in letters of credit outstanding, as collateral for insurance claims, that are secured by investments and cash equivalents totaling $38,438,000.

      Borrowings under the Third Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar, either (i) the greatest of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the federal funds effective rate plus  1/2%, or, (ii) the rate at the time offered to JPMorgan Chase Bank in the Eurodollar market for amounts and periods comparable to the relevant loan plus a margin that is determined based on the level of the Company’s Leverage Ratio, as defined in the Third Amended and Restated Credit Agreement. The margin is subject to an increase of .125% if the aggregate amount outstanding under the Third Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 27, 2003, the margin was equal to 87.5/100 of 1%.

      The unused portion of the Third Amended and Restated Credit Agreement carries a commitment fee determined based on the level of the Leverage Ratio, as therein defined. As of December 27, 2003, the commitment fee for the unused portion of the Third Amended and Restated Credit Agreement was 0.250%. At December 27, 2003, the weighted average interest rate on borrowings outstanding under the Third Amended and Restated Credit Agreement was 2.02%.

      The Third Amended and Restated Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness, the incurrence of operating or capital lease obligations and the purchase of operating property. The Third Amended and Restated Credit Agreement also requires Landstar to meet certain financial tests. Landstar is required to, among other things, maintain minimum levels of Net Worth, as defined in the Third Amended and Restated Credit Agreement, and Interest and Fixed Charge Coverages, as therein defined. Under the most restrictive covenant, Interest

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      The Third Amended and Restated Credit Agreement provides for an event of default related to a person or group acquiring 25% or more of the outstanding capital stock of the Company or obtaining the power to elect a majority of the Company’s directors.

      Borrowings under the Third Amended and Restated Credit Agreement are unsecured. However, Landstar System, Inc. and all but one of Landstar System Holdings, Inc.’s (“LSHI”) subsidiaries guarantee LSHI’s obligations under the Third Amended and Restated Credit Agreement.

      The Company’s Third Amended and Restated Credit Agreement expires on January 5, 2005. The Company expects to obtain financing to renew or replace the Third Amended and Restated Credit Agreement with a similar agreement during the summer of 2004 with interest rates and fees in line with the market rates and fees available at the time of the refinancing.

      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 2003, the Company purchased $5,557,000 of operating property and acquired $16,200,000 of trailing equipment by entering into a five year operating lease with a fixed monthly payment. Landstar anticipates acquiring between $28,000,000 and $32,000,000 of operating property during fiscal year 2004 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, 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 trailer purchases of owned equipment made during 2004. The Company does not anticipate any other significant capital requirements in the near future.

      Since 1997, the Company has purchased $288,147,000 of its common stock under programs authorized by the Board of Directors of the Company in open market and private block transactions. The Company has used cash provided by operating activities and borrowings on the Company’s revolving credit facilities to fund the purchases.

      Capital lease obligations above include $1,441,000 of imputed interest. Operating leases primarily include $20,826,000 related to the Company’s main office facility located in Jacksonville, Florida and $11,486,000 related to a long-term operating lease for trailing equipment. The Company has a commitment to enter into additional operating leases for trailing equipment during the first half of the 2004 year with aggregate future rental payments estimated to be $2,000,000 annually over the next five years.

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      As of December 27, 2003, the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

      On November 1, 2002, the Owner Operator Independent Drivers Association, Inc. (“OOIDA”) and six individual Independent Contractors filed a putative class action suit in the Federal District Court in Jacksonville, Florida, against the Company. The suit alleges that certain aspects of the Company’s motor carrier leases with owner operators violate the federal leasing regulations. OOIDA seeks injunctive relief, an unspecified amount of damages and attorney’s fees. On December 16, 2002, the Company filed a Motion to Dismiss and, with respect to all of the leases that contain arbitration clauses, a Motion to Stay and Compel Arbitration. On September 30, 2003, the Federal District Court issued an Order denying the Company’s Motion to Stay and Compel Arbitration. The Company initially appealed this decision but, due to recent relevant legal developments, has filed a motion seeking to dismiss the appeal. Assuming the motion to dismiss the appeal is granted, the case will proceed in the Federal District Court rather than in arbitration. At the request of the Company, the district court has granted a stay with respect to all proceedings in its court related to the claims of all Plaintiffs except one plaintiff (whose claims were not subject to the arbitration motion because his lease lacked an arbitration clause) pending disposition of the appeal. The Federal District Court has yet to issue a ruling on Landstar’s Motion to Dismiss or on the issue of class certification. Due to a number of factors, including the lack of specificity in the plaintiff’s complaint, the early stage of this litigation and the lack of litigated final judgments in a number of similar pending cases or otherwise applicable precedent, Landstar does not believe it is in a position to conclude whether or not there is a reasonable possibility of an adverse outcome in this case, or what damages, if any, the plaintiffs would be awarded should they prevail on all or any part of their claims. However, Landstar believes it has meritorious defenses to this litigation and intends to continue defending it vigorously. Landstar also believes that it treats its Independent Contractors fairly and in a manner which reflects the important role they play in the Company’s operations.

      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. During fiscal years 2002 and 2001, the Company experienced abnormally high levels of bad debt expense. Management believes this resulted from the difficult economic environment experienced by the Company’s customers and Independent Contractors. 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 27, 2003 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

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      The Company utilizes certain income tax planning strategies to reduce its overall cost of income taxes. Upon audit, it is possible that certain strategies might be disallowed resulting in an increased liability for income taxes. The Company has provided for its estimated exposure attributable to income tax planning strategies. Management believes that the provision for liabilities resulting from the implementation of income tax planning strategies is appropriate. To date, the Company has not experienced an examination by governmental revenue authorities that would lead management to believe that the Company’s past provisions for exposures related to income tax planning strategies are not appropriate.

      Significant variances from management’s estimates for the amount of uncollectible receivables, the ultimate resolution of claims or the provision for liabilities for income tax planning strategies can be expected to positively or negatively affect Landstar’s earnings in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations.

Effects of Inflation

      Management does not believe inflation has had a material impact on the results of operations or financial condition of Landstar in the past five years. However, inflation higher than that experienced in the past five years might have an adverse effect on the Company’s results of operations.

Seasonality

      Landstar’s operations are subject to seasonal trends common to the trucking industry. Results of operations for the quarter ending in March are typically lower than the quarters ending June, September and December.

Subsequent Event

      On December 28, 2003, a truck operated by an Independent Contractor was involved in a serious accident resulting in fatalities. Management is still in the process of obtaining the facts concerning this incident and evaluating the potential financial cost of this claim to the Company. While management’s evaluation is preliminary, and investigation continues, it is possible that the ultimate resolution of this claim could result in a charge ranging anywhere from $5,000,000 up to an amount equal to the Company’s $10,000,000 self insured retention amount. A $10,000,000 pre tax charge would reduce earnings for the fiscal quarter ended March 27, 2004 and full year 2004 by approximately $.20 per diluted share.

Forward-Looking Statements

      The following is a “safe harbor” statement under the Private Securities Litigation Reform Act of 1995. Statements contained in this document that are not based on historical facts are “forward-looking statements.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-K statement contain forward-looking statements, such as statements which relate to Landstar’s business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “plans,” “predicts,” “may,” “should,” “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;

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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 retains liability for each individual commercial trucking claim up to $10,000,000 per occurrence. The Company also retains liability up to $1,000,000, and an additional $5,000,000 in excess of the first $5,000,000, 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 two years, the premiums proposed by the third party insurance companies coverage for commercial trucking liability insurance above the Company’s self-insured retention amounts have increased dramatically. In an attempt to control the increasing premiums required by the third party insurance companies, the Company has increased its exposure on commercial trucking claims over the past three years from $1,000,000 per occurrence to $10,000,000 per occurrence. While the increase in the Company’s retention for commercial trucking claims to $10,000,000 per occurrence has enabled the Company to manage the cost of its insurance premiums, it also increases the Company’s risk of liability with respect to individual accidents which can be severe. To the extent the third party insurance companies continue to increase proposed premiums for coverage of commercial trucking liability claims, the Company may further increase its exposure on a per occurrence basis in the near future. However, to the extent the third party insurance carriers reduce their premiums proposed for commercial trucking claim coverage, 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 2003, 396 agents generated revenue for Landstar of at least $1 million each, or approximately 89% of Landstar’s consolidated revenue and one agent generated approximately $120,000,000 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 and air cargo carriers to

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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 69.3%, 72.6% and 74.6% of Landstar’s consolidated revenue in 2003, 2002 and 2001, 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.

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      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. Although management is unaware of any proposals currently pending that would change the employee/independent contractor classification of Independent Contractors currently doing business with the Company, the costs associated with potential changes, if any, in the employee/independent contractor classification could 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 and 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.

      Effective January 4, 2004, the FMCSA has revised its regulations modifying its “hours of service rules.” The new regulations primarily change the amount of time a truck driver may drive and/or work during a 24-hour period. These new regulations also change the amount of time a truck driver is required to rest. Management has implemented programs to inform the Company’s Independent Contractors and customers of the new hours of service regulations. Management does not believe compliance with these regulations will have a material effect on the Company’s results of operations.