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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-27754
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HUB GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4007085
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
377 E. BUTTERFIELD ROAD, SUITE 700
LOMBARD, ILLINOIS 60148
(Address and zip code of principal executive offices)
(630) 271-3600
(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:
CLASS A COMMON STOCK, $.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 X No __
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. [X]
The aggregate market value of the Registrant's voting stock held by
non-affiliates on March 27, 2000, based upon the last reported sale price on
that date on the NASDAQ National Market of $15 7/8 per share, was $110,763,844.
On March 27, 2000, the Registrant had 7,043,950 outstanding shares of Class A
common stock, par value $.01 per share, and 662,296 outstanding shares of Class
B common stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 17, 2000, (the "Proxy Statement") is incorporated
by reference in Part III of this Form 10-K to the extent stated herein. Except
with respect to information specifically incorporated by reference in this Form
10-K, the Proxy Statement is not deemed to be filed as a part hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
Hub Group, Inc. ("Hub Group" or the "Company") is a Delaware corporation
which was incorporated on March 8, 1995. Since its founding as an intermodal
marketing company ("IMC") in 1971, Hub Group has grown to become the largest IMC
in the United States and a full service transportation provider, offering
intermodal, truck brokerage and comprehensive logistics services.
The Company operates through an extensive nationwide network of 29 offices
or "Hubs." Each Hub is strategically located in a market that has a significant
concentration of shipping customers and one or more railheads. Each Hub
functions essentially as a stand-alone business managed locally by an executive,
known as a "Principal," with significant transportation experience. Local
management is responsible for operations, customer service and regional
marketing, while corporate management is responsible for group strategic
planning and administration, financial services, relationships with the
railroads and management information systems support. Hub Group also maintains a
National Accounts sales force to provide centralized marketing of the Company's
services to large and geographically diversified shippers.
On March 18, 1996, Hub Group purchased Hub City Terminals, Inc. ("Hub
Chicago") in a stock-for-stock acquisition. Concurrent with the acquisition of
Hub Chicago, Hub Group completed the initial public offering of 4,261,250 shares
of its Class A common stock (the "Class A Common Stock"), with net proceeds to
Hub Group of $52.9 million. Simultaneously with the initial public offering, Hub
Group, through its new wholly owned subsidiary, Hub Chicago, acquired with cash
the general partnership interests in 26 operating partnerships, each with one or
more offices. In addition, Hub Group directly acquired with cash a controlling
interest in the Hub Group Distribution Services partnership ("Hub Distribution")
which performs certain specialized logistics functions (each of the 26 operating
partnerships and Hub Distribution are a "Hub Partnership" and collectively are
the "Hub Partnerships"). With the exception of Hub Distribution, the Company had
the continuing option, exercisable any time after the Principal currently
associated with a Hub Partnership ceased to be an employee of that Hub
Partnership, to purchase the limited partnership interest in that Hub
Partnership. The decision as to whether or when to exercise an option to acquire
the limited partnership interest in a Hub Partnership was made by the
independent members of the Company's Board of Directors. Unless the context
otherwise requires, references to "Hub Group" or the "Company" include Hub
Chicago, the Hub Partnerships and their respective subsidiaries.
On April 1, 1999, the Company exercised its option to acquire the remaining
70% minority interests in Hub City Alabama, L.P., Hub City Atlanta, L.P., Hub
City Boston, L.P., Hub City Canada, L.P., Hub City Cleveland, L.P., Hub City
Detroit, L.P., Hub City Florida, L.P., Hub City Indianapolis, L.P., Hub City
Kansas City, L.P., Hub City Mid-Atlantic, L.P., Hub City New York-New Jersey,
L.P., Hub City New York State, L.P., Hub City Ohio, L.P., Hub City Philadelphia,
L.P., Hub City Pittsburgh, L.P., Hub City Portland, L.P. and Hub City St. Louis,
L.P. (which purchase is referred to herein as the "April Purchase") for an
aggregate purchase price of approximately $108.7 million in cash. Except for
Hub Distribution, of which the Company owns 65%, the Company now wholly-owns all
of the Hub Partnerships and the Company's operations in North America and
Europe.
On May 1, 1998, the Company formally launched its new Hub Group Premier
Service Network in conjunction with the Burlington Northern and Santa Fe Railway
Company ("BNSF"). During 1998, the Company took on the management of
approximately 2000 48' x 102" containers and approximately 180 53' x 102"
containers from BNSF for dedicated use throughout the BNSF intermodal container
network. On March 1 1999, the Company and BNSF entered into a multi-year
extension and expansion of this program. In accordance with this new agreement,
the Company and BNSF added an additional 1000 53' x 102" containers during 1999.
On June 1, 1999, the Company and the Norfolk Southern Corporation ("NS")
entered into a multi-year agreement expanding the Company's Premier Service
Network onto NS's rail system. In accordance with this agreement, the Company
took on the management of 675 53' x 102" containers from the NS during 1999. The
BNSF containers and the NS containers are fully interchangeable across both the
BNSF and NS rail networks.
1
On December 31, 1999, each of the Hub Partnerships, except for Hub
Distribution and Hub City Texas, L.P., converted to a limited liability company.
Also on December 31, 1999, Hub Holdings, Inc., a wholly-owned subsidiary of Hub
Group, merged with and into Hub Chicago, making each limited liability company a
wholly-owned subsidiary of Hub Chicago.
On March 13, 2000, the Company signed a letter of intent pursuant to which
the Company agreed to sell its 65% interest in Hub Distribution for $65 million
in cash and warrants to purchase 5% of the outstanding shares of stock of Hub
Distribution. The sale of this interest is subject to a number of customary
conditions and there is therefore no guarantee that a transaction will
ultimately be consummated.
SERVICES PROVIDED
The Company's transportation services can be broadly placed into the
following categories:
INTERMODAL As an IMC, the Company arranges for the movement of its
customers' freight in containers and trailers over long distances. Hub Group
contracts with railroads to provide transportation over the long-haul portion of
the shipment and with local trucking companies, known as "drayage companies,"
for pickup and delivery. In markets where adequate service is not available, the
Company supplements third party drayage services with Company-owned drayage
operations. As part of its intermodal services, the Company negotiates rail and
drayage rates, electronically tracks shipments in transit, consolidates billing
and handles claims for freight loss or damage on behalf of its customers. The
Company uses its Hub network, connected through its proprietary advanced
intermodal management ("AIM") system, to access containers and trailers owned by
leasing companies, railroads and steamship lines. The Company also has exclusive
use of the containers in its Premier Service Network. Because each Hub not only
handles its own outbound shipments but also handles inbound shipments from other
Hubs, each Hub is able to track trailers and containers entering its service
area and reuse that equipment to fulfill its customers' outbound shipping
requirements. This effectively allows the Company to "capture" containers and
trailers and keep them within the Hub network without having to make a capital
investment in transportation equipment.
HIGHWAY SERVICES The Company arranges for the transportation of freight by
truck, providing customers another option for their transportation needs. This
is accomplished by matching customers' needs with carriers' capacity to provide
the appropriate service and price combination. The Company has contracts with a
substantial base of carriers allowing it to meet the varied needs of its
customers. The Company negotiates rates, tracks shipments in transit,
consolidates billing and handles claims for freight loss and damage on behalf of
its customers. The Company's brokerage operation also provides customers with
specialized programs. Through the Dedicated Trucking program, certain carriers
have informally agreed to move freight for Hub's customers on a continuous
basis. This arrangement allows Hub to gain control of the trucking equipment to
effectively meet its customer's needs without owning the equipment. Through the
Core Carrier-Plus One program, Hub assumes the responsibility for over-the-road
truckload shipments that the customer's core carriers cannot handle. This
service supplements the customer's core carrier program and helps ensure the
timely delivery of the customer's freight.
LOGISTICS The Company has expanded its service capabilities as customers
increasingly outsource their transportation needs. The Company currently offers
various logistics services, including comprehensive transportation management,
arranging for delivery to multiple locations at the shipment's destination,
third party warehousing and other customized logistics services, as well as
other non-traditional logistics services such as installation of point of sale
merchandise displays.
When providing complete transportation services, the Company essentially
replaces the customer's transportation department. Once the Company is hired as
a single source logistics provider, it negotiates with intermodal, railcar,
truckload and less-than-truckload carriers to move the customer's product
through the supply chain and then dispatches the move for the customer. Using
its advanced transportation management software ("ATMS"), the Company
consolidates orders into full truckload shipments, chooses a shipping route,
electronically tenders loads to carriers and reports the move to the customer.
2
HUB NETWORK
Over the past 29 years, Hub Group has grown from a single office with two
employees into a network of 27 Hubs in the United States, one Hub in Canada and
one Hub in Mexico. Hub Group also has several satellite sales offices. In
developing this network, the Company has carefully selected each location to
ensure coverage in areas with significant concentrations of shipping customers
and one or more railheads. Hub Group currently has Hubs in the following cities:
Atlanta Houston Milwaukee St. Louis
Baltimore Indianapolis New Orleans Salt Lake City
Boston Jacksonville New York City San Francisco
Chicago (3) Kansas City Philadelphia Seattle
Cleveland Los Angeles Pittsburgh Toledo
Detroit Memphis Portland Toronto
Grand Rapids Mexico City Rochester
The entire Hub network is interactively connected through the Company's AIM
system. This enables Hub Group to move freight into and out of every major city
in the United States and most locations in Canada and Mexico.
Each Hub manages the freight originating in or destined for its service
area. In a typical intermodal transaction, the customer contacts the local Hub
to obtain shipping schedules and a price quote for a particular freight
movement. The local Hub obtains the necessary intermodal equipment, arranges for
it to be delivered to the customer by a drayage company and, after the freight
is loaded, arranges for the transportation of the container or trailer to the
rail ramp. Information is entered into the AIM system by the local Hub, which
monitors the shipment to ensure that it will arrive as scheduled. This
information is simultaneously transmitted through the AIM system to the Hub
closest to the point of delivery, which arranges for and confirms delivery by a
drayage company. This arrangement among the Hubs is transparent to the customer
and allows the customer to maintain its relationship solely with the originating
Hub.
The Company provides brokerage services to its customers in a similar
manner. In a typical brokerage transaction, the customer contacts the local Hub
to obtain transit information and a price quote for a particular freight
movement. The customer then provides appropriate shipping information to the
local Hub. The local Hub makes the delivery appointment and arranges with the
appropriate carrier to pick up the freight. Once it receives confirmation that
the freight has been picked up, the local Hub monitors the movement of the
freight until it reaches its destination and the delivery has been confirmed. If
the carrier notifies Hub Group that after delivering the load it will need
additional freight, the Hub located nearest the destination is notified of the
carrier's availability. Although it is under no obligation to do so, the local
Hub then may attempt, if requested by the carrier, to secure freight for the
carrier.
MARKETING AND CUSTOMERS
The Company believes that fostering long-term customer relationships is
critical to the Company's success. Through these long-term relationships, the
Company is able to better understand its customer's needs and to tailor
transportation services for a specific customer, regardless of the customer's
size or volume. The Company has created a database of current and prospective
customers, profiling each customer's shipping patterns, which the Company
periodically updates. This database allows the Company to target its marketing
to meet each customer's specific requirements.
The Company currently has full time marketing representatives at each Hub
with primary responsibility for servicing local and regional accounts. These
sales representatives work from the 29 Hubs and the Company's satellite sales
offices. This network provides a local marketing contact for small and medium
shippers in most major metropolitan areas within the United States.
3
In 1985, the Company established the National Accounts group to service the
needs of the nation's largest shippers. The Company recognized that although
large shippers originate freight from multiple locations throughout the country,
their logistics function is usually centralized. The Company essentially
mirrored this structure by servicing national accounts from a central location
and parceling out the servicing of individual freight shipments to the
appropriate Hub. There are currently 21 National Accounts sales representatives
who report to the Company's Executive Vice President of National Accounts. The
National Accounts sales representatives regularly call on the nation's largest
shippers to develop business relationships and to expand the Company's
participation in servicing their transportation needs. When a business
opportunity is identified by a National Accounts sales representative, the
Company's market development and pricing personnel and the local Hubs work
together to provide a transportation solution tailored to the customer's needs.
Local Hubs provide transportation services to National Accounts customers. After
the plan is implemented, National Accounts' personnel maintain regular contact
with the shipper to ensure customer satisfaction and to refine the process as
necessary.
This unique combination of local and regional marketing has produced a
large, diverse customer base. The Company services customers in a wide variety
of industries, including automotive, consumer products, printing, paper, retail,
chemicals and electronics.
MANAGEMENT INFORMATION SYSTEMS
A primary component of the Company's business strategy is the continued
improvement of its AIM system and other technology to ensure that the Company
will remain a leader among transportation providers in information processing
for transportation services. The AIM system consists of a network of IBM AS/400
computers located at the Hubs and linked to a host computer at the Company's
headquarters. Hub Group uses IBM's Global Network as the nucleus for linking its
computers and databases. This configuration provides a real time environment for
transmitting data among the Hubs and the Company's headquarters using electronic
data interchange ("EDI"), electronic mail and other protocols. It also allows
Hub to communicate electronically with each railroad, certain drayage companies
and those customers with EDI capabilities.
The Company's proprietary AIM system is the primary mechanism used by the
Hubs to process customer transportation requests, schedule and track shipments,
prepare customer billing, establish account profiles and retain critical
information for analysis. The AIM system provides connectivity with each of the
major rail carriers, enabling the Company to electronically schedule and track
shipments in a real time environment. In addition, the AIM system's EDI features
offer customers with EDI capability a completely paperless process, including
load tendering, shipment dispatch, shipment tracking, customer billing and
remittance processing. The Company aggressively pursues opportunities to
establish EDI interfaces with its customers and carriers.
To more effectively manage its highway services business, the Company
utilizes software that is designed to automate the Company's highway services
operations. This software processes customer transportation requests, schedules
and tracks shipments, prepares customer billing, establishes account profiles
and retains critical information for analysis. It also interfaces with the
carrier by handling load tendering, shipment dispatch, shipment tracking,
customer billing and remittance processing.
During 1999 the Company began work on a number of web-based software
applications. The Company began the process of implementing the first of these
applications, Vendor Interface, in the fourth quarter of 1999. Vendor Interface
was designed to allow the Company's drayage partners to interface with the
Company using the internet rather than phone or faxes. Vendor Interface allows
the Company to tender loads to draymen, captures event status and helps
facilitate appropriate payment. Current internet applications are, and future
internet applications will be, integrated with the AIM system.
The Company also purchased a new software package in 1999 designed to
replace its existing ATMS. This software may be used by the Company when
offering logistics management services to customers that ship via multiple
modes, including intermodal, truckload, and less than truckload, allowing the
Company to optimize mode and carrier selection and routing for its customers.
The Company has installed this software package and is currently preparing the
software for its operational applications.
4
RELATIONSHIP WITH RAILROADS
A key element of the Company's business strategy is to strengthen its close
working relationship with each of the major intermodal railroads in the United
States. The Company views its relationship with the railroads as a partnership.
Due to the Company's size and relative importance, many railroads have dedicated
support personnel to focus on the Company's day-to-day service requirements. On
a regular basis, senior executives of the Company and each of the railroads meet
to discuss major strategic issues concerning intermodal transportation. Several
of the Company's executive officers, including both the Company's Chairman and
President, are former railroad employees, which makes them well-suited to
understand the railroads' service capabilities.
The Company has contracts with each of the following major railroads:
Burlington Northern Santa Fe Railway Kansas City Southern
Canadian Pacific Norfolk Southern
CSX Union Pacific
Illinois Central
The Company also has contracts with each of the following major fourth-party
service providers: Mitsui O.S.K. Lines (America) Inc., Pacer International, Inc.
and K-Line America, Inc..
These contracts govern the transportation services and payment terms
pursuant to which the Company's intermodal shipments are handled by the
railroads. The contracts have staggered renewal terms with the earliest
expiration occurring during 2000. While there can be no assurances that these
contracts will be renewed, the Company has in the past successfully negotiated
extensions of these contracts. Transportation rates are market driven and are
typically negotiated between the Company and the railroads or fourth-party
service providers on a customer specific basis. Consistent with industry
practice, many of the rates negotiated by the Company are special commodity
quotations ("SCQs"), which provide discounts from published price lists based on
competitive market factors and are designed by the railroads or fourth-party
service providers to attract new business or to retain existing business. SCQ
rates are generally issued for the account of a single IMC. SCQ rates apply to
specific customers in specified shipping lanes for a specific period of time,
usually six to 12 months.
RELATIONSHIP WITH DRAYAGE COMPANIES
In 1990, the Company instituted its "Quality Drayage Program," which
consists of agreements and rules that govern the framework pursuant to which the
drayage companies perform services for the Company. Participants in the program
commit to provide high quality service, clean and safe equipment, maintain a
defined on-time performance level and follow specified procedures designed to
minimize freight loss and damage. Whenever possible, the Company uses the
services of drayage companies that participate in its Quality Drayage Program.
However, during periods of high demand for drayage services or at the request of
a customer, the Company will use the services of other drayage companies. The
local Hubs negotiate drayage rates for transportation between specific origin
and destination points. These rates generally are valid, with minor exceptions
for fuel surcharge increases, for a period of one year.
RELATIONSHIP WITH TRUCKLOAD CARRIERS
The Company's brokerage operation has a large and growing number of active
carriers in its database which it uses to transport freight. The local Hubs deal
daily with these carriers on an operational level. Hub Highway Services, a
partnership controlled by the Company, handles the administrative and regulatory
aspects of the carrier relationship. Hub's relationships with its carriers are
important since these relationships determine pricing, load coverage and overall
service.
5
RISK MANAGEMENT AND INSURANCE
The Company requires all drayage companies participating in the Quality
Drayage Program to carry at least $1.0 million in general liability insurance,
$1.0 million in truckman's auto liability insurance and to obtain, either on
their own or through the Company, $1.0 million in cargo insurance. Railroads,
which are self insured, provide limited cargo protection, generally up to
$250,000 per shipment, although higher coverage is available on a load-by-load
basis. To cover freight loss or damage when a carrier's liability cannot be
established or a carrier's insurance is insufficient to cover the claim, the
Company carries its own cargo insurance with a limit of $2.0 million per
container or trailer and a limit of $20 million per occurrence. The Company also
carries general liability insurance with limits of $1.0 million per occurrence
and $2.0 million in the aggregate with a companion $10.0 million umbrella policy
on this general liability insurance.
GOVERNMENT REGULATION
Hub Highway Services is licensed by the Department of Transportation
("DOT") as a broker in arranging for the transportation of general commodities
by motor vehicle. To the extent that the Hubs perform truck brokerage services,
they do so under the license granted to Hub Highway Services. The DOT prescribes
qualifications for acting in this capacity, including certain surety bonding
requirements. While the DOT requires a $10,000 surety bond to maintain this
license, the Company has voluntarily posted a $300,000 surety bond. To date,
compliance with these regulations has not had a material adverse effect on the
Company's results of operations or financial condition. However, the
transportation industry is subject to legislative or regulatory changes that can
affect the economics of the industry by requiring changes in operating practices
or influencing the demand for, and cost of providing, transportation services.
COMPETITION
The transportation services industry is highly competitive. The Company
competes against other IMCs, as well as logistics companies, third party
brokers, over-the-road truckload carriers and railroads that market their own
intermodal services. There is an emerging trend for larger truckload carriers to
enter into agreements with railroads to market intermodal services nationwide.
In addition, many existing and start-up companies are using the internet to
market transportation services. Competition is based primarily on freight rates,
quality of service, reliability, transit time and scope of operations. Several
transportation service companies and truckload carriers, and all of the major
railroads, have substantially greater financial and other resources than the
Company.
GENERAL
EMPLOYEES As of February 29, 2000, the Company had approximately 1,593
employees. The Company is not a party to any collective bargaining agreement and
considers its relationship with its employees to be satisfactory.
OTHER No material portion of the Company's operations is subject to
renegotiation of profits or termination of contracts at the election of the
federal government. The Company has not spent a material amount on company
sponsored research and development activities or on customer sponsored research
activities. None of the Company's patents and trademarks is believed to be
material to the Company. The Company's business is seasonal to the extent that
certain customer groups, such as retail, are seasonal.
ITEM 2. PROPERTIES
The Company directly, or indirectly through the Hub Partnerships, operates
41 offices throughout the United States and in Canada and Mexico, including the
Company's headquarters in Lombard, Illinois and its Company-owned drayage
operations. On March 1, 1999, the Company relocated its National Accounts office
in Stamford, Connecticut to corporate headquarters in Lombard, Illinois. The
office building used by the Hub located in Toledo is owned, and the remainder
are leased. Most office leases have initial terms of more than one year, and
many include options to renew. While some of the Company's leases are
month-to-month and others expire in the near term, the Company does not believe
that it will have difficulty in renewing them or in finding alternative office
space. The Company believes that its offices are adequate for the purposes for
which they are currently used.
6
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incident to its business,
primarily claims for freight lost or damaged in transit or improperly shipped.
Most of the lawsuits to which the Company is party are covered by insurance and
are being defended by the Company's insurance carriers. Management does not
believe that the litigation to which it is currently a party, if determined
adversely to the Company, would individually or in the aggregate have a
materially adverse effect on the Company's financial position or results of
operations. See Item 1 Business - Risk Management and Insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of 2000.
7
EXECUTIVE OFFICERS OF THE REGISTRANT
In reliance on General Instruction G to Form 10-K, information on executive
officers of the Registrant is included in this Part I. The table sets forth
certain information as of March 20, 2000 with respect to each person who is an
executive officer of the Company.
NAME AGE POSITION
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Phillip C. Yeager 72 Chairman of the Board of Directors
David P. Yeager 47 Vice Chairman of the Board of Directors and Chief
Executive Officer
Thomas L. Hardin 54 President, Chief Operating Officer and Director
Mark A. Yeager 35 President- Field Operations
Daniel F. Hardman 51 President-Chicago Region
Jay E. Parker 35 Vice President-Finance, Chief Financial Officer
and Treasurer
John T. Donnell 60 Executive Vice President-National Accounts
Richard M. Rogan 60 President-Hub Highway Services, Executive Vice
President-Marketing
Daniel L. Sellers 44 Vice President-Information Services and Chief
Information Officer
David C. Zeilstra 30 Vice President, Secretary and General Counsel
Phillip C. Yeager, the Company's founder, has been Chairman of the Board
since October 1985. From April 1971 to October 1985, Mr. Yeager served as
President of Hub Chicago. Mr. Yeager became involved in intermodal
transportation in 1959, five years after the introduction of intermodal
transportation in the United States, as an employee of the Pennsylvania and
Pennsylvania Central Railroads. He spent 19 years with the Pennsylvania and
Pennsylvania Central Railroads, 12 of which involved intermodal transportation.
In 1991, Mr. Yeager was named Man of the Year by the Intermodal Transportation
Association. In 1995, he received the Salzburg Practitioners Award from Syracuse
University in recognition of his lifetime achievements in the transportation
industry. In October 1996, Mr. Yeager was inducted into the Chicago Area
Entrepreneurship Hall of Fame sponsored by the University of Illinois at
Chicago. In March 1997, he received the Presidential Medal from Dowling College
for his achievements in transportation services. In September 1998 he received
the Silver Kingpin award from the Intermodal Association of North America and in
February 1999 he was named Transportation Person of the Year by the New York
Traffic Club. Mr. Yeager graduated from the University of Cincinnati in 1951
with a Bachelor of Arts degree in Economics. Mr. Yeager is the father of David
P. Yeager and Mark A. Yeager.
David P. Yeager has served as the Company's Vice Chairman of the Board
since January 1992 and as Chief Executive Officer of the Company since March
1995. From October 1985 through December 1991, Mr. Yeager was President of Hub
Chicago. From 1983 to October 1985, he served as Vice President, Marketing of
Hub Chicago. Mr. Yeager founded the St. Louis Hub in 1980 and served as its
President from 1980 to 1983. Mr. Yeager founded the Pittsburgh Hub in 1975 and
served as its President from 1975 to 1977. Mr. Yeager received a Masters in
Business Administration degree from the University of Chicago in 1987 and a
Bachelor of Arts degree from the University of Dayton in 1975. Mr. Yeager is the
son of Phillip C. Yeager and the brother of Mark A. Yeager. Mr. Yeager also
serves as a director of SPR Inc.
Thomas L. Hardin has served as the Company's President since October 1985
and has served as Chief Operating Officer and a director of the Company since
March 1995. From January 1980 to September 1985, Mr. Hardin was Vice
President-Operations and from June 1972 to December 1979, he was General Manager
of the Company. Prior to joining the Company, Mr. Hardin worked for the Missouri
Pacific Railroad where he held various marketing and pricing positions. Mr.
Hardin is presently Chairman of the Intermodal Association of North America.
8
Mark A. Yeager has been the Company's President-Field Operations since
July 1999. From November 1997 through June 1999 Mr. Yeager was Division
President, Secretary and General Counsel. From March 1995 to November 1997,
Mr. Yeager was Vice President, Secretary and General Counsel. From May 1992 to
March 1995, Mr. Yeager served as the Company's Vice President-Quality. Prior to
joining the Company in 1992, Mr. Yeager was an associate at the law firm of
Grippo & Elden from January 1991 through May 1992 and an associate at the law
firm of Sidley & Austin from May 1989 through January 1991. Mr. Yeager received
a Juris Doctor degree from Georgetown University in 1989 and a Bachelor of Arts
degree from Indiana University in 1986. Mr. Yeager is the son of Phillip C.
Yeager and the brother of David P. Yeager.
Daniel F. Hardman has been the President-Chicago Region since February
1996. Mr. Hardman has been employed by the Hub Group since 1982, serving as
President of Hub Chicago from December 1992 to February 1996, Vice President of
Hub Chicago from January 1987 to December 1992, General Manager of Sales of Hub
Chicago from August 1985 to January 1987, President of Hub Charlotte from June
1984 to August 1985 and Regional Sales Manager of Hub Chicago from December 1982
to June 1984. Mr. Hardman is a former Director of the Intermodal Transportation
Association and is presently a member of the Chicago Traffic Club and the
Chicago Intermodal Transportation Association. Mr. Hardman is a 1991 graduate of
the Certificate Program in Business Administration from the University of
Illinois.
Jay E. Parker has been the Company's Vice President of Finance, Chief
Financial Officer and Treasurer since June 1999. From July 1995 through May 1999
Mr. Parker was the Company's Corporate Controller. Prior to joining the Company,
Mr. Parker was the Director of Financial Reporting at Discovery Zone, Inc. from
July 1994 through June 1995 and held various positions, including Audit Manager,
with Arthur Andersen from December 1988 through June 1994. Mr. Parker received a
Masters of Accounting Science from Northern Illinois University in 1988, became
a Certified Public Accountant in 1987 and received a Bachelor of Science degree
in Finance from Northern Illinois University in 1986.
John T. Donnell has been Executive Vice President of National Accounts
since October 1993. From October 1985 through October 1993, Mr. Donnell served
as Vice President of National Accounts. Prior to joining the Company in 1985,
Mr. Donnell worked for Transamerica Leasing as Vice President of Marketing where
he was responsible for marketing 40,000 intermodal trailers to the railroads and
the intermodal marketing industry. Mr. Donnell received a Master of Business
Administration degree from Northwestern University in 1981 and a Bachelor of
Science degree in Marketing from Northeast Louisiana University in 1961.
Richard M. Rogan has been Executive Vice President of Marketing since
November 1997 and President of Hub Highway Services since May 1995. Prior to
joining the Company, Mr. Rogan was Executive Vice President of National Freight,
Inc. from May 1993 to April 1995. Prior to that, Mr. Rogan was with Burlington
Motor Carriers, Inc., where he served as President and Chief Executive Officer
from March 1988 to April 1993 and as an Executive Vice President from July 1985
to February 1988. Mr. Rogan's transportation career spans 25 years and includes
earlier assignments with the Illinois Central Railroad, North American Van Lines
and Schneider National. He received a Bachelor of Business Administration degree
from Loyola University of Chicago in 1962 and a Master of Business
Administration degree from the Wharton School of the University of Pennsylvania
in 1963. He has served on the Board of Directors of the ATA Foundation as well
as the Interstate Truckload Carrier Conference ("ITCC"). He is a past Chairman
of the ITCC Highway Policy Committee and has also served on the Advisory Board
of the Trucking Profitability Strategies Conference at the University of
Georgia.
Daniel L. Sellers has been the Company's Vice President of Information
Services and Chief Information Officer since December 1998. Prior to joining
the Company, Mr. Sellers was Vice President of Information Systems with Humana,
Inc. from February 1997 to December 1998. Prior to that, Mr. Sellers was Vice
President and General Manager of OmniTracs software with Qualcomm, Inc. from
November 1993 to February 1997. Mr. Sellers also worked in the transportation
industry for 15 years with Schneider National, Inc. in a variety of positions,
including as Vice President and Chief Information Officer of Information
Systems. He received a Bachelor of Business Administration from the University
of Cincinnati in 1978 and a Masters in Business Administration from the
University of Wisconsin Graduate School of Business in 1983. Mr. Sellers is a
past member of the American Trucking Association's Management Systems Council.
9
David C. Zeilstra has been the Company's Vice President, Secretary and
General Counsel since July 1999. From December 1996 through June 1999, Mr.
Zeilstra was the Company's Assistant General Counsel. Prior to joining the
Company, Mr. Zeilstra was an associate with the law firm of Mayer, Brown and
Platt from September 1994 through November 1996. Mr. Zeilstra received a Juris
Doctor degree from the Duke University School of Law in 1994 and a Bachelor of
Arts degree from Wheaton College in 1990.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Class A Common Stock of the Company trades on the NASDAQ National
Market tier of The NASDAQ Stock Market ("NASDAQ") under the symbol "HUBG." Set
forth below are the high and low prices for shares of the Class A Common Stock
of the Company for each full quarterly period in 1998 and 1999.
1998 1999
---------- ----------
HIGH LOW HIGH LOW
-------- ------- -------- ---------
First Quarter $ 30 $ 25 $23 3/4 $18 7/8
Second Quarter $ 28 1/8 $ 19 3/4 $27 7/8 $21
Third Quarter $ 24 $ 15 3/4 $27 1/16 $20 7/16
Fourth Quarter $ 20 1/4 $ 12 3/4 $21 $14 11/16
On March 27, 2000, there were approximately 42 stockholders of record of
the Class A Common Stock and, in addition, there were an estimated 1,500
beneficial owners of the Class A Common Stock whose shares were held by brokers
and other fiduciary institutions. On March 27, 2000, there were nine holders of
record of the Company's Class B common stock (the "Class B Common Stock"
together with the Class A Common Stock, the "Common Stock").
The Company was incorporated in 1995 and has never paid cash dividends on
either the Class A Common Stock or the Class B Common Stock. The declaration and
payment of dividends by the Company are subject to the discretion of the Board
of Directors. Any determination as to the payment of dividends will depend upon
the results of operations, capital requirements and financial condition of the
Company, and such other factors as the Board of Directors may deem relevant.
Accordingly, there can be no assurance that the Board of Directors will declare
or pay dividends on the shares of Common Stock in the future. The certificate of
incorporation of the Company requires that any cash dividends must be paid
equally on each outstanding share of Class A Common Stock and Class B Common
Stock. The Company's credit facility and private placement debt prohibit the
Company from paying dividends on the Common Stock if there has been, or
immediately following the payment of a dividend would be, a default or an event
of default under the credit facility or private placement debt. The Company is
currently in compliance with the covenants contained in the credit facility and
private placement debt.
10
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(in thousands except per share data)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997(1) 1996(2) 1995
-------------- ------------- ------------ ------------ -----------
STATEMENT OF OPERATIONS DATA:
Revenue $ 1,296,799 $ 1,145,906 $1,064,479 $ 754,243 $ 81,408
Net revenue 162,415 138,334 129,855 91,564 6,266
Operating income 30,134 26,406 33,495 27,925 2,567
Income before minority interest and taxes 23,659 25,324 32,869 27,704 2,638
Income before taxes 18,384 15,205 15,874 11,338 2,638
Historical net income 10,846 8,908 9,525 7,044 2,599
Historical basic earnings per common share $ 1.41 $ 1.16 $ 1.48 $ 1.41 $ 1.56
Historical diluted earnings per common share $ 1.40 $ 1.15 $ 1.46 $ 1.39 $ 1.56
Pro forma provision for additional income taxes(3) 241 1,016
Pro forma net income $ 6,803 $ 1,583
Pro forma basic earnings per common share $ 1.36 $ 0.95
Pro forma diluted earnings per common share $ 1.35 $ 0.95
AS OF DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997(1) 1996(2) 1995
-------------- ------------- ------------ ------------ -----------
BALANCE SHEET DATA:
Working capital $ 21,504 $ 20,313 $ 15,209 $ 15,877 $ 804
Total assets 441,609 304,791 267,826 201,225 9,083
Long-term debt, excluding current portion 131,414 29,589 22,873 28,714 -
Stockholders' equity 131,124 119,673 110,462 46,124 1,165
(1) In September 1997, the Company issued 1,725,000 shares of Class A common
stock through a secondary offering which resulted in net proceeds of
approximately $54,763,000. These proceeds were used to purchase the remaining
70% minority interest in Hub City Los Angeles, L.P. and Hub City Golden Gate,
L.P. See the Notes to the Company's Consolidated Financial Statements.
(2) On March 18, 1996, Hub Group, Inc. purchased Hub City Terminals, Inc. ("Hub
Chicago") in a stock-for-stock acquisition through the issuance of 1,000,000
shares of the Company's Class A common stock and 662,296 shares of the Company's
Class B common stock. Hub Chicago has been accounted for similar to the pooling
of interests method of accounting and has been included in all periods presented
on a historical cost basis. Concurrent with the acquisition of Hub Chicago, the
Company completed the initial public offering of 4,261,250 shares of its Class A
common stock, with net proceeds to the Company of approximately $52,945,000.
Coincident with the initial public offering, a selling stockholder sold
1,000,000 shares of the Company's Class A common stock through a secondary
offering. The Company did not receive any net proceeds from the sale of the
shares by the selling stockholder. Concurrent with the initial public offering,
the Company acquired with cash a controlling interest in each of 27 operating
partnerships. On May 2, 1996, the Company acquired the rights to service the
customers of American President Lines Domestic Distribution Services. See the
Notes to the Company's Consolidated Financial Statements.
(3) Prior to March 18, 1996, the Company was an S corporation and not subject to
federal corporate income taxes. On March 18, 1996, the Company changed its
status from an S corporation to a C corporation. The statement of operations
data reflects a pro forma provision for income taxes as if the Company were
subject to federal and state corporate income taxes for all periods presented.
The pro forma provision reflects a combined federal and state tax rate of 40%.
See the Notes to the Company's Consolidated Financial Statements.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAPITAL STRUCTURE
Hub Group, Inc. (the "Company") was incorporated on March 8, 1995. On
March 18, 1996, Hub Group, Inc. purchased Hub City Terminals, Inc. ("Hub
Chicago") in a stock-for-stock acquisition through the issuance of 1,000,000
shares of Class A common stock and 662,296 shares of Class B common stock. Hub
Chicago has been accounted for similar to the pooling of interests method of
accounting and has been included in all periods presented on a historical cost
basis. Concurrent with the acquisition of Hub Chicago in March 1996, Hub Group,
Inc. completed the initial public offering of 4,261,250 shares of its Class A
common stock. Coincident with the initial public offering, a selling stockholder
sold 1,000,000 shares of Hub Group, Inc. Class A common stock through a
secondary offering. In September 1997, Hub Group, Inc. completed a secondary
offering of 1,725,000 shares of Hub Group, Inc.'s Class A common stock.
BUSINESS COMBINATIONS
On October 31, 1997, the Company acquired the 50% interest in its
international joint venture, HLX Company, LLC ("HLX"), that it did not
previously own. HLX offers point-to-point international transportation services
with a focus on the North American movement of import and export freight.
On April 1, 1998, the Company acquired all of the outstanding stock of
Quality Intermodal Corporation ("Quality"). Quality primarily offered intermodal
and truckload brokerage services with offices in Houston, Dallas, Los Angeles,
Chicago, Atlanta, and Philadelphia. The Company absorbed the Quality business
directly into its existing operations.
On August 1, 1998, the Company acquired the rights to service the
customers of Corporate Express Distribution Services ("CEDS") as well as certain
fixed assets. The CEDS business is being operated by Hub Group Distribution
Services ("Hub Distribution"), the Company's niche logistic services provider.
CEDS was a provider of niche logistic services including a pharmaceutical
sample delivery operation.
CALL OPTIONS
On March 1, 1997, the Company exercised its option to purchase an
approximate 44% minority interest in Hub Distribution. The Company paid $1.6
million in cash.
On September 17, 1997, the Company exercised its call options to
acquire the remaining 70% minority interests in Hub City Los Angeles, L.P. and
Hub City Golden Gate, L.P. The Company paid $59.4 million in cash.
On October 31, 1997, the Company exercised its call option to purchase
the remaining 70% minority interest in Hub City New Orleans, L.P. for one
dollar.
On April 1, 1998, the Company exercised its call options to acquire the
remaining 70% minority interests in Hub City Rio Grande, L.P., Hub City Dallas,
L.P., and Hub City Houston, L.P. ("Texas Hubs"). The Company paid $6.2 million
in cash.
On April 1, 1999, Hub Group, Inc. exercised its call options to acquire
the remaining 70% minority interests in Hub City Alabama, L.P., Hub City
Atlanta, L.P., Hub City Boston, L.P., Hub City Canada, L.P., Hub City Cleveland,
L.P., Hub City Detroit, L.P., Hub City Florida, L.P., Hub City Indianapolis,
L.P., Hub City Kansas City, L.P., Hub City Mid-Atlantic, L.P., Hub City New
York/New Jersey, L.P., Hub City New York State, L.P., Hub City Ohio, L.P., Hub
City Philadelphia, L.P., Hub City Pittsburgh, L.P., Hub City Portland, L.P., and
Hub City St. Louis, L.P. (collectively referred to as the "April 1999
Purchase"). The Company paid $108.7 million in cash.
12
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE
Revenue for the Company increased 13.2% to $1,296.8 million in 1999
from $1,145.9 million in 1998. Intermodal revenue increased 6.2% over 1998.
Management believes that the service disruption from the split-up of Conrail
which began on June 1, 1999 negatively impacted intermodal revenue growth.
Truckload brokerage revenue increased 19.3% over 1998. The Company has
successfully grown truckload brokerage by cross-selling to its intermodal
customers and employing dedicated and experienced personnel in each Hub.
Logistics revenue increased 88.3% compared to 1998. This increase was primarily
due to the increase in revenue from the Company's niche logistic services
performed by Hub Distribution.
NET REVENUE
Net revenue increased 17.4% to $162.4 million in 1999 from $138.3
million in 1998. Net revenue as a percentage of revenue increased to 12.5% from
12.1% in 1998. Management believes the primary cause of this increase is the
growth in niche logistic services which earns a higher net revenue percentage of
revenue than does the Company's core intermodal and brokerage service offerings.
SALARIES AND BENEFITS
Salaries and benefits increased 16.0% to $84.1 million in 1999 from
$72.5 million in 1998. As a percentage of revenue, salaries and benefits
increased to 6.5% from 6.3% in 1998. The increase in the percentage is primarily
attributed to the increased headcount supporting the Company's information
technology initiatives and growth in niche logistic services. The Company's
niche logistic services requires a higher level of salaries and benefits as
compared to revenue than does the Company's core intermodal and brokerage
service offerings.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 16.3% to $38.2
million in 1999 from $32.9 million in 1998. These expenses as a percentage of
revenue remained constant at 2.9%. While the percentage of revenue is consistent
with the prior year, the $5.3 million increase in expenses is primarily
attributed to information systems, travel and outside services. The Company's
increased information systems expenditures related to consulting, Year 2000
remediation and validation, and enhancements to the Company's operating system.
Travel and related expenses increased due primarily to a national sales meeting
held in 1999 that was not held in the previous year and increased expenditures
to support growth in the Company's niche logistic services. Outside service
expenditures relate to contracted temporary labor and other services to handle
increased business for niche logistic services and outside sales commissions.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization increased 9.5% to $4.0 million in 1999
from $3.7 million in 1998. This expense as a percentage of revenue remained
constant at 0.3%.
AMORTIZATION OF GOODWILL
Amortization of goodwill increased 74.1% to $5.1 million from $2.9
million in 1998. The expense as a percentage of revenue increased to 0.4% from
0.3% in 1998. The increase in expense is primarily attributable to the
amortization of the goodwill associated with the purchase of the remaining 70%
minority interests in connection with the April 1999 Purchase.
13
CHANGE IN ESTIMATE/IMPAIRMENT OF PROPERTY AND EQUIPMENT
In the second quarter of 1999, a $0.9 million pretax charge was
recorded due to a change in estimate and an impairment loss relating to certain
operating software applications. Specifically, $0.7 million of this charge was
attributable to a change in estimate of the useful life for the Visual Movement
software previously used primarily for brokerage. The Visual Movement software
is no longer being used by the Company and was replaced with enhancements to the
Company's proprietary intermodal operating software during the second quarter of
1999. These enhancements allow for greater network visibility of loads in a year
2000 compliant program. The $0.2 million impairment loss related to the
write-down of a logistics software program. The fair value was determined based
on the estimated future cash flows attributable to the single customer using
this program. The Company has installed this software package and is currently
preparing the software for its operational applications. This new software will
provide enhanced functionality.
OTHER INCOME (EXPENSE)
Interest expense increased to $8.6 million in 1999 from $2.5 million in
1998. The increase in interest expense is due primarily to the additional debt
required to fund the purchases of the remaining 70% minority interests in
connection with the April 1999 Purchase. In addition, debt increased as a result
of the acquisition of Quality and the purchase of the minority interest in the
Texas Hubs in April 1998.
Interest income decreased to $0.9 million in 1999 from $1.0 million in
1998. The primary cause for this decrease is the Company's increased
concentration of its cash balances to reduce debt and minimize interest expense
on borrowings.
Other income of $1.2 million in 1999 is primarily due to non-recurring
income recognized upon execution of an agreement with one of the Company's
vendors.
MINORITY INTEREST
Minority interest decreased 47.9% to $5.3 million in 1999 from $10.1
million in 1998. Minority interest as a percentage of income before minority
interest and provision for income taxes was 22.3% in 1999 compared to 40.0% in
1998. The decrease in the percentage is primarily attributed to the purchase of
remaining 70% minority interest in connection with the April 1999 Purchase as
well as the purchase of minority interest in the Texas Hubs in April 1998.
PROVISION FOR INCOME TAXES
The provision for income taxes increased 19.7% to $7.5 million compared
to $6.3 million in 1998. The Company provided for income taxes using an
effective rate of 41.0% in 1999 versus 41.4% in 1998.
NET INCOME
Historical net income increased 21.8% to $10.8 million in 1999 from
$8.9 million in 1998. Historical net income as a percentage of revenue remained
constant at 0.8%.
EARNINGS PER COMMON SHARE
Basic earnings per common share increased 21.6% to $1.41 from $1.16 in
1998. Diluted earnings per common share increased 21.7% to $1.40 in 1999 from
$1.15 in 1998.
14
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE
Revenue for the Company increased 7.6% to $1,145.9 million in 1998 from
$1,064.5 million in 1997. Intermodal revenue increased 7.2% over 1997.
Management believes that the well-publicized railroad service disruptions
experienced by the intermodal industry during 1998 negatively impacted
intermodal revenue growth. Truckload brokerage revenue increased 27.3% over
1997. The Company has successfully maintained its expansion into this service
offering by employing dedicated and experienced personnel in each Hub. Logistics
revenue decreased 17.4% over revenue for 1997. This decrease was due to the
Company's cancellation of its contract to provide third-party logistics services
to a significant customer in January 1998. This customer accounted for $32.5
million of the Company's revenue in 1997.
NET REVENUE
Net revenue increased 6.5% to $138.3 million in 1998 from $129.9
million in 1997. Net revenue as a percentage of revenue decreased slightly to
12.1% from 12.2% in 1997. Management believes the primary cause of this slight
decrease is due to the increased transportation costs resulting from the service
disruptions that were prevalent in 1998. At times the Company used higher cost
alternative routing and incurred accessorials for detention and storage which
were not passed on to the customer in an effort to maintain the long-term
relationships the Company enjoys with many of its customers.
SALARIES AND BENEFITS
Salaries and benefits increased 12.7% to $72.5 million in 1998 over
$64.3 million in 1997. As a percentage of revenue, salaries and benefits
increased to 6.3% from 6.0% in 1997. The increase in the percentage is
attributed to the increased number of personnel needed to handle the Company's
intermodal business. Due to the service disruptions, personnel were required to
spend significantly more time per load to operate and monitor the transit of
freight.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 19.7% to $32.9
million in 1998 from $27.5 million in 1997. Selling, general and administrative
expenses as a percentage of revenue increased to 2.9% in 1998 from 2.6% in 1997.
The increase in the percentage is principally attributable to increased spending
related to information systems, rent and equipment leases. Expenditures for
information systems included consulting costs related to the refinement of the
Company's information systems strategy and costs for the Year 2000 project. Rent
increased as many of the Company's Hubs were required to obtain larger office
space to accommodate present operations and future growth. Expenditures for
equipment leases increased as the Company moved towards leasing, as opposed to
purchasing, more of its office and computer equipment.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment increased 19.1%
to $3.7 million in 1998 from $3.1 million in 1997. This expense as a percentage
of revenue remained constant at 0.3%.
AMORTIZATION OF GOODWILL
Amortization of goodwill increased 91.0% to $2.9 million in 1998 from
$1.5 million in 1997. The expense as a percentage of revenue increased to 0.3%
from 0.1% in 1997. This increase is attributed primarily to the increase in
goodwill amortization related to the September 1997 purchase of the minority
interest in Hub City Los Angeles, L.P. and Hub City Golden Gate, L.P., the April
1998 purchase of the minority interest in the Texas Hubs and the April 1998
acquisition of Quality.
15
OTHER INCOME (EXPENSE)
Interest expense increased 11.5% to $2.5 million in 1998 from $2.2
million in 1997. The increase is primarily attributed to the use of cash and a
note issued in conjunction with the acquisition of Quality and the purchase of
the minority interest in the Texas Hubs in April 1998.
Interest income decreased 30.8% to $1.0 million in 1998 from $1.5
million in 1997. The primary cause of this decrease is the Company's increased
concentration of its cash balances to reduce debt to minimize interest expense
on borrowings.
MINORITY INTEREST
Minority interest decreased 40.5% to $10.1 million in 1998 from $17.0
million in 1997. Minority interest as a percentage of income before minority
interest and provision for income taxes was 40.0% in 1998 as compared to 51.7%
in 1997. The decrease in the percentage is attributed to purchases of minority
interest in September 1997 and April 1998.
PROVISION FOR INCOME TAXES
Provision for income taxes was $6.3 million in 1997 and 1998. The
Company provided for income taxes at an effective rate of 41.4% in 1998 versus
40.0% in 1997. The increase in the effective rate was primarily the result of
the purchases of minority interest in September 1997 and the Quality acquisition
in April 1998. The goodwill related to the Quality acquisition is not tax
deductible and therefore has the effect of increasing the Company's effective
rate.
NET INCOME
Historical net income decreased 6.5% to $8.9 million in 1998 from $9.5
million in 1997. Because of the severe rail service disruptions in 1998,
expenses grew faster than revenue in 1998. Although the decrease in minority
interest offset a substantial portion of the increase in expenses, historical
net income dropped to 0.8% of revenue in 1998 from 0.9% in 1997.
EARNINGS PER COMMON SHARE
Basic earnings per common share decreased 21.6% to $1.16 in 1998 from
$1.48 in 1997. Diluted earnings per common share decreased 21.2% to $1.15 in
1998 from $1.46 in 1997. The decrease in net income coupled with the increase in
shares outstanding due to the secondary equity offering in September 1997 caused
the decrease.
LIQUIDITY AND CAPITAL RESOURCES
On April 30, 1999, the Company borrowed approximately $108 million of
unsecured debt to pay for its purchase of the remaining 70% limited partnership
interests in connection with the April 1999 Purchase.
On April 30, 1999, the Company closed on a new bank facility with
Harris Trust and Savings Bank ("Harris") which replaced the previous facility.
The new facility is comprised of $50.0 million in term debt and a $50.0 million
revolving line of credit. At December 31, 1999, there was $47.5 million of
outstanding term debt and $34.0 million outstanding and $16.0 million unused and
available under the new line of credit with Harris. Borrowings under the line of
credit are unsecured and have a five-year term with a floating interest rate
based upon the LIBOR (London Interbank Offered Rate) or Prime Rate. The term
debt has quarterly payments ranging from $1,250,000 to $2,000,000 with a balloon
payment of $19.0 million due on March 31, 2004. Additionally, the Company closed
and drew down on a $40.0 million bridge facility with Harris on April 30, 1999.
The bridge facility had a three-month term and bore interest at the bank's prime
rate plus 1%. This bridge facility of $40.0 million was paid off on June 25,
1999 and replaced with the private placement debt described below.
16
On June 25, 1999, the Company closed on $50.0 million of private
placement debt (the "Notes"). These Notes are unsecured and have an eight-year
average life with a coupon interest rate of 8.64% paid quarterly. These Notes
mature on June 25, 2009, with annual payments of $10.0 million commencing on
June 25, 2005.
The Company maintains a bank line of credit with Cass Bank and Trust
Company for $5.0 million. The interest rate is set at the bank's discretion at a
rate less than or equal to the bank's prime rate. At December 31, 1999, the rate
was 8.25%. The Company had no outstanding advances on the line at December 31,
1999.
The Company had capital expenditures of approximately $11.2 million
during 1999 and $4.0 million during 1998. Capital expenditures were principally
made to enhance the Company's information systems capabilities.
OUTLOOK, RISKS AND UNCERTAINTIES
Except for historical data, the information contained in this Annual
Report constitutes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
inherently uncertain and subject to risks. Such statements should be viewed with
caution. Actual results or experience could differ materially from the
forward-looking statements as a result of many factors. Forward-looking
statements in this report include, but are not limited to, those contained in
this "Outlook, Risks and Uncertainties" section regarding expectations, hopes,
beliefs, estimates, intentions or strategies regarding the future. The Company
assumes no liability to update any such forward-looking statements. In addition
to those mentioned elsewhere in this section, such risks and uncertainties
include the impact of competitive pressures in the marketplace, including the
entry of new, web-based competitors, the degree and rate of market growth in the
intermodal, brokerage and logistics markets served by the Company, changes in
rail and truck capacity, further consolidation of rail carriers, rail service
conditions, changes in governmental regulation, adverse weather conditions, fuel
shortages, changes in the cost of services from rail, drayage and other vendors
and fluctuations in interest rates.
YEAR 2000
"Year 2000" refers to the issue surrounding the compatibility of
computer and other technology based systems with dates beyond December 31, 1999.
This section will include an assessment of the Company's state of readiness,
the risks the issues represent, the subsequent results of system assessments
after December 31, 1999 and the costs to address the issues.
STATE OF READINESS
Management has broken down its Year 2000 program into four phases.
Those phases are awareness, assessment, renovation and validation. The Company
contracted with an outside consulting firm to perform a readiness review, which
was completed in December 1998. This review was instrumental in identifying and
addressing Year 2000 issues.
Management believes that it has identified the risk areas facing the
Company regarding Year 2000 and had broken those areas into seven categories.
The seven categories are: (i) the Company's main operating system that has been
created and enhanced in-house, (ii) the Company's ancillary operating software
applications which were purchased, (iii) desktop hardware and software
applications, (iv) the Company's financial reporting system, (v) the Company's
telephone systems, (vi) embedded technology in the Company's office equipment,
physical environment and drayage tractors and (vii) the state of readiness of
the Company's customers, transportation service providers and other vendors.
The Company's main operating system was renovated. The renovation,
which consisted of reprogramming the source code, has been completed. No
material failures resulted from the main operating system renovation subsequent
to December 31, 1999.
17
The Company believes all of its ancillary operating software
applications have been assessed. All of the supporting vendors have stated that
their products are Year 2000 compliant. No material failures resulted from
ancillary operating software applications subsequent to December 31, 1999.
The Company's financial reporting system vendor has stated that their
application is Year 2000 compliant. No material failures resulted from the
financial reporting system subsequent to December 31, 1999.
The Company's desktop hardware and software application assessment is
complete. The Company engaged an outside consulting firm to execute the
renovation and validation phases. No material failures resulted from the desktop
hardware and software applications subsequent to December 31, 1999.
The Company assessed its many telephone systems. No material telephone
system failures resulted subsequent to December 31, 1999.
The Company did not experience any material issues regarding embedded
technology in its office equipment, physical environment and drayage tractors
subsequent to December 31, 1999.
The Company identified four categories of key third parties with which
the Company has a material relationship that were assessed. Those categories
were: (i) significant customers who rely on their computer systems to determine
their transportation needs, (ii) key vendors such as the railroads and
significant providers of drayage and over-the-road services, (iii) the Company's
information network communications provider and (iv) significant third party
freight payment vendors utilized by the Company's customers. The Company
experienced no material problems in the noted four categories related to Year
2000 issues subsequent to December 31, 1999.
COSTS
In 1999, the Company expensed approximately $1,900,000 related to Year
2000. In 2000, through January 31st, the Company has expensed an additional
$69,000 related to testing and monitoring of its systems. These costs include
not only amounts paid to outside parties but also the payroll costs for those
employees spending significant amounts of time on Year 2000 issues. The Company
has spent approximately $ 2.7 million in total related to Year 2000. The Company
does not expect to continue to spend additional funds related to Year 2000 since
no material systems problems were experienced.
BUSINESS COMBINATIONS/DIVESTITURES
Management believes that future acquisitions or dispositions made by
the Company could significantly impact financial results. Financial results most
likely to be impacted include but are not limited to revenue, net revenue,
salaries and benefits, selling general and administrative expenses, depreciation
and amortization, interest expense, minority interest, net income and the
Company's debt level. In this regard, on March 13, 2000, the Company signed a
letter of intent pursuant to which the Company agreed to sell its 65% interest
in Hub Distribution for $65 million in cash and warrants to purchase 5% of the
outstanding shares of stock of Hub Distribution. The sale of this interest is
subject to a number of customary conditions and there is therefore no guarantee
that a transaction will ultimately be consummated. Financial results may be
impacted by additional factors as discussed below.
REVENUE
Management believes that the performance of the railroads is the most
significant factor that could negatively influence the Company's revenue growth
rate. The service disruptions in the intermodal industry due to the split-up of
Conrail, which began on June 1, 1999, appear to have been significantly
rectified. Should this trend reverse, the Company believes its intermodal growth
rate would likely be negatively impacted. Should the proposed merger between
Burlington Northern Santa Fe and Canadian National Railway cause a similar or
more severe service disruption, the Company believes its intermodal growth rate
would likely be negatively impacted. Should there be another significant service
disruption, the Company expects there may be some customers who would switch
18
from using the Company's intermodal service to other carriers' over-the-road
service. The Company expects these customers may choose to continue to utilize
these carriers even when intermodal service levels are restored. Other factors
that could negatively influence the Company's growth rate include, but are not
limited to, the entry of new web-based competitors, inadequate drayage service
and inadequate equipment supply.
NET REVENUE
Management expects fluctuations in the net revenue percentage from
quarter-to-quarter caused by changes in business mix, highway brokerage margins,
logistics business margins, trailer and container capacity, vendor pricing,
intermodal industry growth, intermodal industry service levels and accounting
estimates.
SALARIES AND BENEFITS
It is anticipated that salaries and benefits as a percentage of revenue
could fluctuate from quarter-to-quarter as there are timing differences between
revenue increases and changes in levels of staffing. Factors that could affect
the percentage from staying in the recent historical range are revenue growth
rates significantly higher or lower than forecasted, a management decision to
invest in additional personnel to stimulate new or existing businesses, such as
the Company's current boxcar and flatbed initiative, changes in customer
requirements and changes in railroad intermodal service levels which could
result in a lower or higher cost of labor per move.
SELLING, GENERAL AND ADMINISTRATIVE
There are several factors that could cause selling, general and
administrative expenses to increase as a percentage of revenue. As customer
expectations and the competitive environment require the development of
web-based business interfaces and the restructuring of the Company's information
systems and related platforms, the Company believes there could be significant
expenses incurred, some of which would not be capitalized. Costs incurred to
formulate the Company's strategy as well as any costs that would be identified
as reengineering or training would be expensed.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Management estimates that, as a percentage of revenue, depreciation and
amortization of property and equipment will increase in the future. A factor
that could cause an increase in the percentage is increased software
amortization related to improving the Company's information systems
capabilities. Another factor that could cause an increase in the percentage is
increased depreciation expense if the Company decided to purchase rather than
lease a greater proportion of assets.
AMORTIZATION OF GOODWILL
Management estimates that, as a percentage of revenue, amortization of
goodwill will increase in 2000 based on a full year of goodwill amortization
related to the April 1999 Purchase. A factor that could cause an increase in the
percentage is if the Company were to make additional acquisitions resulting in
the recording of goodwill.
OTHER INCOME (EXPENSE)
Management estimates that as a percentage of revenue interest expense
will increase over the prior year due to a full year of debt after financing the
April 1999 Purchase and the recent trend of rising interest rates. This increase
is believed to be offset by debt repayments anticipated in the year 2000.
Factors that could cause interest to fluctuate higher or lower than forecasted
are changes in lending rates, anticipated debt repayments, working capital needs
and capital expenditures.
19
Management estimates that interest income will likely decrease from
current levels. Factors that could cause such a decrease are the possible use of
cash to make debt repayments, fund working capital needs and fund capital
expenditures.
MINORITY INTEREST
Management estimates that minority interest will likely decrease in the
future due to the April 1999 Purchase where all of the remaining 70% minority
interests were acquired. Disproportionate changes in Hub Distribution's profits
and the 100% owned entities, acquisitions of entities with a minority interest
or disposition of Hub Distribution could have a material impact and result in
minority interest percentages of income before minority interest to differ from
the historical range.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that cash, cash to be provided by operations, cash
available under its lines of credit and the Company's ability to obtain
additional credit capacity will be sufficient to meet the Company's short-term
working capital and capital expenditure needs. The Company believes that the
aforementioned items are sufficient to meet its anticipated long-term working
capital, capital expenditure and debt repayment needs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest
rates which may adversely affect its results of operations and financial
condition. The Company seeks to minimize the risk from interest rate volatility
through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. The Company
does not use financial instruments for trading purposes.
The Company uses both fixed and variable rate debt as described in Note
8. The Company has entered into an interest rate swap agreement designated as a
hedge on a portion of the Company's variable rate debt. The purpose of the swap
is to fix the interest rate on a portion of the variable rate debt and reduce
certain exposures to interest rate fluctuations. At December 31, 1999, the
Company had an interest rate swap with a notional amount of $25.0 million, a
weighted average pay rate of 8.37%, a weighted average receive rate of 8.26% and
a maturity date of September 30, 2002. This swap agreement involves the exchange
of amounts based on the variable interest rate for amounts based on the fixed
interest rate over the life of the agreement, without an exchange of the
notional amount upon which the payments are based. The differential to be paid
or received as interest rates change is accrued and recognized as an adjustment
of interest expense related to the debt.
The main objective of interest rate risk management is to reduce the
total funding cost to the Company and to alter the interest rate exposure to the
desired risk profile.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Public Accountants 22
Consolidated Balance Sheets - December 31, 1999 and December 31, 1998 23
Consolidated Statements of Operations - Years ended December 31, 1999,
December 31, 1998 and December 31, 1997 24
Consolidated Statements of Stockholders' Equity - Years ended December
31, 1999, December 31, 1998 and December 31, 1997 25
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
December 31, 1998 and December 31, 1997 26
Notes to Consolidated Financial Statements 27
Schedule II - Valuation and Qualifying Accounts S-1
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Hub Group, Inc.:
We have audited the accompanying consolidated balance sheets of Hub
Group, Inc. (a Delaware corporation) as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standard in the 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 Hub Group,
Inc. as of December 31, 1999 and 1998, and the results of its operations and
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule on page S-1 is presented for
purposes of complying with the Securities and Exchange Commissions rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 4, 2000
(except with respect
to the matter discussed
in Note 18, as to
which the date is
March 15, 2000)
22
HUB GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,865 $ 15,178
Accounts receivable, net 190,221 148,104
Prepaid expenses and other current assets 2,771 6,036
---------------- ----------------
TOTAL CURRENT ASSETS 194,857 169,318
PROPERTY AND EQUIPMENT, net 24,244 19,111
GOODWILL, net 219,648 115,858
DEFERRED TAXES 898 -
OTHER ASSETS 1,962 504
---------------- ----------------
TOTAL ASSETS $ 441,609 $ 304,791
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 141,592 $ 123,513
Other 11,246 7,909
Accrued expenses
Payroll 7,936 6,339
Other 6,384 6,332
Deferred taxes - 1,751
Current portion of long-term debt 6,195 3,161
---------------- ----------------
TOTAL CURRENT LIABILITIES 173,353 149,005
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 131,414 29,589
DEFERRED TAXES 4,959 556
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST 759 5,968
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 77 77
Additional paid-in capital 110,786 110,181
Purchase price in excess of predecessor basis (25,764) (25,764)
Tax benefit of purchase price in excess of predecessor basis 10,306 10,306
Retained earnings 35,719 24,873
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 131,124 119,673
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 441,609 $ 304,791
================ ================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
23
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Revenue $ 1,296,799 $ 1,145,906 $ 1,064,479
Transportation costs 1,134,384 1,007,572 934,624
-------------- -------------- --------------
Net revenue 162,415 138,334 129,855
Costs and expenses:
Salaries and benefits 84,082 72,465 64,280
Selling, general and administrative 38,232 32,885 27,478
Depreciation and amortization of property and equipment 4,014 3,666 3,077
Amortization of goodwill 5,069 2,912 1,525
Change in estimate/impairment of property and equipment 884 - -
-------------- -------------- --------------
Total costs and expenses 132,281 111,928 96,360
Operating income 30,134 26,406 33,495
-------------- -------------- --------------
Other income (expense):
Interest expense (8,592) (2,480) (2,225)
Interest income 926 1,014 1,466
Other, net 1,191 384 133
-------------- -------------- --------------
Total other expense (6,475) (1,082) (626)
Income before minority interest and provision for income taxes 23,659 25,324 32,869
-------------- -------------- --------------
Minority interest 5,275 10,119 16,995
-------------- -------------- --------------
Income before provision for income taxes 18,384 15,205 15,874
Provision for income taxes 7,538 6,297 6,349
-------------- -------------- --------------
Net income $ 10,846 $ 8,908 $ 9,525
============== ============== ==============
Basic earnings per common share $ 1.41 $ 1.16 $ 1.48
============== ============== ==============
Diluted earnings per common share $ 1.40 $ 1.15 $ 1.46
============== ============== ==============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
24
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended December 31, 1999
(in thousands, except shares)
TAX BENEFIT
PURCHASE OF PURCHASE
PRICE IN PRICE
COMMON STOCK ADDITIONAL EXCESS OF IN EXCESS OF TOTAL
----------------------- PAID-IN PREDECESSOR PREDECESSOR RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL BASIS BASIS EARNINGS EQUITY
------------ ---------- ------------- ------------- --------------- ------------ --------------
Balance at January 1, 1997 5,923,546 $ 59 $ 55,083 $ (25,764) $ 10,306 $ 6,440 $ 46,124
Net income - - - - - 9,525 9,525
Sale of common stock in
initial public offering, net - - (45) - - - (45)
Sale of common stock in
secondary offering, net 1,725,000 18 54,745 - - - 54,763
Exercise of non-qualified
stock options 4,700 - 95 - - - 95
------------ ---------- ------------- -------------- -------------- ------------- -------------
Balance at December 31, 1997 7,653,246 77 109,878 (25,764) 10,306 15,965 110,462
Net income - - - - - 8,908 8,908
Exercise of non-qualified
stock options 19,000 - 303 - - - 303
------------ ---------- ------------- -------------- -------------- ------------- -------------
Balance at December 31, 1998 7,672,246 77 110,181 (25,764) 10,306 24,873 119,673
Net income - - - - - 10,846 10,846
Exercise of non-qualified
stock options 34,000 - 605 - - - 605
------------ ---------- ------------- -------------- -------------- ------------- -------------
Balance at December 31, 1999 7,706,246 $ 77 $ 110,786 $ (25,764) $ 10,306 $35,719 $ 131,124
============ ========== ============= ============== ============== ============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
25
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Cash flows from operating activities:
Net income $ 10,846 $ 8,908 $ 9,525
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 5,013 4,743 4,163
Amortization of goodwill 5,069 2,913 1,525
Change in estimate/impairment of property and equipment 884 - -
Deferred taxes 1,754 6,008 6,349
Minority interest 5,275 10,119 16,995
Loss/(Gain) on sale of assets 205 135 (107)
Changes in working capital, net of effects of purchase transactions:
Accounts receivable, net (42,117) (11,978) (13,663)
Prepaid expenses and other current assets 3,265 (4,018) 1,583
Accounts payable 21,416 8,933 11,759
Accrued expenses 1,649 2,758 1,023
Other assets (1,458) 167 303
-------------- -------------- --------------
Net cash provided by operating activities 11,801 28,688 39,455
-------------- -------------- --------------
Cash flows from investing activities:
Cash used in acquisitions, net - (3,989) (164)
Purchases of minority interest (108,710) (6,730) (60,955)
Purchases of property and equipment, net (11,234) (3,975) (8,488)
-------------- -------------- --------------
Net cash used in investing activities (119,944) (14,694) (69,607)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock in initial public offering, net - - (45)
Proceeds from sale of common stock in secondary offering, net - - 54,763
Proceeds from sale of common stock 605 303 95
Distributions to minority interest (10,484) (10,939) (20,921)
Payments on long-term debt (50,930) (28,843) (6,409)
Proceeds from issuance of long-term debt 155,639 28,607 832
-------------- -------------- --------------
Net cash provided by/(used in) financing activities 94,830 (10,872) 28,315
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (13,313) 3,122 (1,837)
Cash and cash equivalents, beginning of period 15,178 12,056 13,893
-------------- -------------- --------------
Cash and cash equivalents, end of period $ 1,865 $ 15,178 $ 12,056
============== ============== ==============
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 8,293 $ 2,343 $ 2,138
Income taxes 2,474 2,680 386
Non-cash financing activity:
Acquisition purchase price adjustment of note payable $ 150 $ - $ -
The accompanying notes to consolidated financial statements are an integral part
of these statements.
26
HUB GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BUSINESS: Hub Group, Inc. (the "Company") provides intermodal transportation
services utilizing primarily third party arrangements with railroads and drayage
companies. The Company also arranges for transportation of freight by truck
and performs logistics services.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Hub Group, Inc. and all entities in which the Company has more than
a 50% equity ownership or otherwise exercises unilateral control. All
significant intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS: The Company considers as cash equivalents all highly
liquid instruments with an original maturity of three months or less. Checks
outstanding, net, of approximately $13,638,000 and $1,482,000 at December 31,
1999 and 1998, respectively, are included in accounts payable.
RECEIVABLES: The Company's reserve for uncollectible accounts receivable was
approximately $2,134,000 and $691,000 at December 31, 1999 and 1998,
respectively.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation
of property and equipment is computed using the straight-line and various
accelerated methods at rates adequate to depreciate the cost of applicable
assets over their expected useful lives: buildings and improvements, 15 to 40
years; leasehold improvements, the shorter of useful life or lease term;
computer equipment and software, 3 to 5 years; furniture and equipment, 3 to 10
years; and transportation equipment and automobiles, 3 to 12 years. Direct costs
related to internally developed software projects are capitalized and amortized
over their expected useful life on a straight-line basis not to exceed five
years, commencing when the asset is placed into service. Maintenance and repairs
are charged to operations as incurred and major improvements are capitalized.
The cost of assets retired or otherwise disposed of and the accumulated
depreciation thereon are removed from the accounts with any gain or loss
realized upon sale or disposal charged or credited to operations.
GOODWILL: Goodwill is amortized on the straight-line method over 40 years. On an
ongoing basis, the Company estimates the future undiscounted cash flows before
interest of the operating units to which goodwill relates in order to evaluate
impairment. If impairment exists, the carrying amount of the goodwill is reduced
by the estimated shortfall of cash flows. The Company has not experienced any
impairment of goodwill. Accumulated goodwill amortization was $10,032,000 and
$4,963,000 as of December 31, 1999 and 1998, respectively.
CONCENTRATION OF CREDIT RISK: The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. The Company places its cash and temporary
investments with high quality financial institutions. At times, such investments
may be in excess of the FDIC insurance limit. Temporary investments are valued
at the lower of cost or market and at the balance sheet dates approximate fair
market value. The Company primarily serves customers located throughout the
United States with no significant concentration in any one region. No one
customer accounted for more than 10% of revenue in 1997, 1998 or 1999. The
Company reviews a customer's credit history before extending credit. In
addition, the Company routinely assesses the financial strength of its customers
and, as a consequence, believes that its trade accounts receivable risk is
limited.
REVENUE RECOGNITION: Revenue represents sales of services to customers.
Revenue is recognized based on relative transit time.
INCOME TAXES: The Company accounts for certain income and expense items
differently for financial reporting and income tax purposes. Deferred tax assets
27
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities applying enacted statutory tax
rates in effect for the year in which the differences are expected to reverse.
EARNINGS PER COMMON SHARE: In accordance with Statement of Financial Accounting
Standards No. 128 ("Statement 128"), "Earnings per Share", basic earnings per
common share are based on the average quarterly weighted average number of Class
A and Class B shares of common stock outstanding. Diluted earnings per common
share are adjusted for the assumed exercise of dilutive stock options. In
computing the per share effect of assumed exercise, funds which would have been
received from the exercise of options, including tax benefits assumed to be
realized, are considered to have been used to purchase shares at current market
prices, and the resulting net additional shares are included in the calculation
of weighted average shares outstanding.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133
("Statement 133"), "Accounting for Derivative Instruments and Hedging
Activities". This standard requires that an entity recognize derivatives as
either assets or liabilities on its balance sheet and measure those instruments
at fair value. As a result of Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of Statement 133", the Company will adopt this standard in
the first quarter of 2001. Based on current circumstances, the Company does not
believe that the application of Statement 133 will have a material effect on the
Company's financial condition or results of operations.
RECLASSIFICATIONS: Certain items previously reported have been reclassified
to conform with the 1999 presentation.
NOTE 2. CAPITAL STRUCTURE
On March 8, 1995, Hub Group, Inc. was incorporated and issued 100
shares of Class A common stock to the sole incorporator. On March 18, 1996, Hub
Group, Inc. purchased Hub City Terminals, Inc. ("Hub Chicago") in a
stock-for-stock acquisition through the issuance of 1,000,000 shares of the
Company's Class A common stock and 662,296 shares of the Company's Class B
common stock. The rights of holders of Class A common stock and Class B common
stock are identical, except each share of Class B common stock entitles its
holder to 20 votes, while each share of Class A common stock entitles its holder
to one vote. Hub Chicago has been accounted for similar to the pooling of
interests method of accounting.
In September 1997, the Company completed a secondary offering of
1,725,000 shares of its Class A common stock. The net proceeds of the offering
were approximately $54.8 million.
NOTE 3. BUSINESS COMBINATIONS
On October 31, 1997, the Company acquired the remaining 50% interest in
its international logistics joint venture, HLX Company, LLC for $300,000. The
acquisition was recorded using the purchase method of accounting resulting in
goodwill of $466,000.
On April 1, 1998, the Company acquired all the outstanding stock of
Quality Intermodal Corporation for $4,080,000 in cash and a $6,100,000
three-year note, bearing interest at an annual rate of 5.6%. The acquisition was
recorded using the purchase method of accounting resulting in preliminary
goodwill of $9,458,000. The purchase price was subsequently adjusted resulting
in goodwill of $9,608,000.
On August 1, 1998, the Company acquired the rights to service the
customers of Corporate Express Distribution Services as well as certain fixed
assets for $750,000 in cash. The acquisition was recorded using the purchase
method of accounting resulting in goodwill of $432,000.
28
Results of operations from acquisitions recorded under the purchase
method of accounting are included in the Company's financial statements from
their respective dates of acquisition. The 1998 purchase price allocations
presented are preliminary.
Business acquisitions which involved the use of cash were accounted for as
follows:
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997
---------------- ---------------
(000'S)
Accounts receivable $ 8,453 $ (115)
Prepaid expenses and other current assets 57 12
Property and equipment 398 79
Goodwill 9,890 466
Other assets 3 13
Accounts payable (7,486) (216)
Accrued expenses (641) (75)
Long-term debt (6,685) -
---------------- ---------------
Cash used in acquisitions, net $ 3,989 $ 164
---------------- ---------------
NOTE 4. EARNINGS PER SHARE
The following is a reconciliation of the Company's Earnings Per Share:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- ------------------------- ------------------------
(000'S) (000'S) (000'S)
--------------- -------------- --------------
Per-Share Per-Share Per-Share
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------ ------ --------- ------ ------ ---------
HISTORICAL BASIC EPS
Income available to
common stockholders $10,846 7,693 $1.41 $8,908 7,657 $1.16 $9,525 6,420 $1.48
------- ------ --------- ------ ------ --------- ------ ------ ---------
EFFECT OF DILUTIVE SECURITIES
Stock options - 67 - - 72 - - 114 -
------- ------ --------- ------ ------ --------- ------ ------ ---------
HISTORICAL DILUTED EPS
Income available to
common stockholders
plus assumed exercises $10,846 7,760 $1.40 $8,908 7,729 $1.15 $9,525 6,534 $1.46
------- ------ --------- ------ ----- -------- ------ ----- ---------
NOTE 5. PURCHASES OF MINORITY INTEREST
On March 1, 1997, the Company purchased an approximate 44% minority
interest in Hub Group Distribution Services ("Hub Distribution") for
approximately $1,576,000 in cash.
On September 17, 1997, the Company purchased the remaining 70%
minority interests in Hub City Los Angeles, L.P. and Hub City Golden Gate, L.P.
for approximately $59,379,000 in cash.
On October 31, 1997, the Company purchased the remaining 70% minority
interest in Hub City New Orleans, L.P. for one dollar.
On April 1, 1998, the Company purchased the remaining 70% minority
interest in Hub City Dallas, L.P., Hub City Houston, L.P. and Hub City Rio
Grande, L.P. for approximately $6,152,000 in cash. The purchase price was
subsequently adjusted, resulting in goodwill of $6,730,000.
29
On April 1, 1999, the Company purchased the remaining 70% minority
interests in Hub City Alabama, L.P., Hub City Atlanta, L.P., Hub City Boston,
L.P., Hub City Canada, L.P., Hub City Cleveland, L.P., Hub City Detroit, L.P.,
Hub City Florida, L.P., Hub City Indianapolis, L.P., Hub City Kansas City, L.P.,
Hub City Mid-Atlantic, L.P., Hub City New York/New Jersey, L.P., Hub City New
York State, L.P., Hub City Ohio, L.P., Hub City Philadelphia, L.P., Hub City
Pittsburgh, L.P., Hub City Portland, L.P., and Hub City St. Louis, L.P. for
approximately $108,710,000 in cash (collectively referred to as the "April 1999
Purchase").
As the amount paid for each of the purchases of minority interest
equaled the basis in excess of the fair market value of assets acquired and
liabilities assumed, the amount paid was recorded as goodwill.
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998
------------- --------------
(000'S)
Building and improvements $ 56 $ 53
Leasehold improvements 1,526 1,206
Computer equipment and software 23,795 15,816
Furniture and equipment 6,365 5,722
Transportation equipment and automobiles 4,742 5,318
------------- --------------
36,484 28,115
Less: Accumulated depreciation and amortization (12,240) (9,004)
------------- --------------
PROPERTY AND EQUIPMENT, net $ 24,244 $ 19,111
============= ==============
NOTE 7. INCOME TAXES
The following is a reconciliation of the Company's effective tax rate
to the federal statutory tax rate:
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
U.S. federal statutory rate 35.0% 34.4% 34.5%
State taxes, net of federal benefit 4.1 5.3 4.9
Goodwill amortization 0.5 0.5 -
Other 1.4 1.2 0.6
----------- ----------- ----------
Net effective rate 41.0% 41.4% 40.0%
----------- ----------- ----------
30
The following is a summary of the Company's provision for income taxes:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
(000'S)
Current
Federal $ 5,177 $ 250 $ -
State and local 607 39 -
------------- ------------- -------------
5,784 289 -
------------- ------------- -------------
Deferred
Federal 1,570 5,206 5,559
State and local 184 802 790
------------- ------------- -------------
1,754 6,008 6,349
------------- ------------- -------------
Total provision $ 7,538 $ 6,297 $ 6,349
------------- ------------- -------------
The following is a summary of the Company's deferred tax assets and
liabilities:
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998
--------------- ---------------
(000'S)
Reserve for uncollectible accounts receivable $ 875 $ 277
Accrued compensation 588 533
--------------- ---------------
Current deferred tax asset 1,463 810
Property and equipment - 861
Other 55 -
Income tax basis in excess of financial basis of goodwill 9,345 10,178
--------------- ---------------
Long-term deferred tax asset 9,400 11,039
--------------- ---------------
Total deferred tax asset $ 10,863 $ 11,849
--------------- ---------------
Prepaids $ (170) $ (84)
Receivables (395) (2,477)
--------------- ---------------
Current deferred tax liability (565) (2,561)
Property and equipment (132) -
Goodwill (14,227) (11,595)
--------------- ---------------
Long-term deferred tax liability (14,359) (11,595)
--------------- ---------------
Total deferred tax liability $ (14,792) $ (14,156)
--------------- ---------------
31
NOTE 8. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Fair value approximates book value at the balance sheet dates.
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
----------- -----------
(000'S)
Installment notes payable due through 2004, monthly installments ranging from
$441 to $20,896, including interest ranging from 2.9%
to 9.5%, collateralized by certain equipment $ 748 $ 1,793
Bank lines of credit (see below) 34,000 20,550
Unsecured balloon notes, interest compounded annually at 5.45%,
interest and principal due March 2001 (see Note 13) - 2,260
Note payable due in three equal annual principal payments of $2,000,000
beginning on May 2, 1997; interest is due at the time the principal
is paid at 6% compounded annually - 2,000
Unsecured term notes, with quarterly payments ranging from $1,250,000 to
$2,000,000 with a balloon payment of $19 million due March 31, 2004;
interest is due quarterly at a floating rate based upon
LIBOR (London Interbank Offered Rate) or Prime rate (see below). At
December 31, 1999, interest rates range from 8.37% to 8.93% 47,500 -
Unsecured notes, mature on June 25, 2009 with annual payments
of $10,000,000 commencing on June 25, 2005; interest is paid quarterly
at 8.64% 50,000 -
Unsecured notes payable due in one balloon payment of $5,225,000 on
April 1, 2001; interest is due annually and is paid at 5.6% 5,225 5,950
Note payable due in nine equal monthly payments of $71,160
beginning on July 1, 1998; interest is 5.9% compounded monthly - 141
Capital lease obligations, collateralized by certain equipment 136 56
------------ -----------
Total long-term debt 137,609 32,750
Less current portion (6,195) (3,161)
------------ -----------
$ 131,414 $ 29,589
------------ -----------
Aggregate principal payments, in thousands, due subsequent to December
31, 1999, are as follows:
2000 $ 6,195
2001 12,337
2002 8,032
2003 8,034
2004 and thereafter 103,011
------------
$ 137,609
------------
On March 18, 1996, the Company assumed a line of credit for $5,000,000.
This line of credit was not used at December 31, 1999. Advances on this line of
credit at December 31, 1998, were $2,050,000. At December 31, 1999 and December
31, 1998, the interest rate was 8.25% and 7.5%, respectively. The interest rate
is established at the bank's discretion at a rate less than or equal to the
bank's prime rate. Borrowings are secured by certain assets. The line of credit
has no expiration date.
On April 30, 1999, the Company closed on an unsecured $50.0 million
five-year revolving line of credit with a bank. The Company can borrow at the
prime rate or up to prime plus 1% on a day-to-day basis or may borrow for 30,
60, 90 or 180 day periods at LIBOR plus 1.25% to 2.50% based on the Company's
funded debt to EBITDAM (earnings before interest expense, income taxes,
depreciation, amortization and minority interest) ratio. The credit facility
also contains certain financial covenants which, among others, requires that the
32
Company maintain required levels of EBITDAM, funded debt to EBITDAM, fixed
charge coverage and current assets to current liabilities. In addition, there
are limitations on additional indebtedness as well as acquisitions and minority
interest purchases. The Company was in compliance with these covenants at
December 31, 1999. Advances on this line of credit at December 31, 1999 were
$34.0 million with interest rates ranging between 8.64% and 9.5% and are
classified as long term debt. At December 31, 1999, there was $16.0 million
unused and available under the line of credit.
The unsecured term notes have a floating interest rate. The Company can
borrow at the prime rate or up to prime plus 1.25% on a day-to-day basis or may
borrow for 30, 60, 90 or 180 day periods at LIBOR plus 1.50% to 2.75% based on
the Company's funded debt to EBITDAM ratio. The unsecured term notes share the
same financial covenants as noted above for the line of credit.
On April 30, 1999, under the term notes and the $50.0 million line of
credit debt agreement, the Company was required to enter into an interest rate
swap agreement designated as a hedge on a portion of the Company's variable rate
debt. The purpose of the swap was to fix the interest rate on a portion of the
variable rate debt and reduce certain exposures to interest rate fluctuations.
At December 31, 1999, the Company had an interest rate swap with a notional
amount of $25.0 million, a weighted average pay rate of 8.37%, a weighted
average receive rate of 8.26% and a maturity date of September 30, 2002. This
swap agreement involves the exchange of amounts based on the variable interest
rate for amounts based on the fixed interest rate over the life of the
agreement, without an exchange of the notional amount upon which the payments
are based. The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment of interest expense related to the debt.
On June 25, 1999, the Company closed on $50.0 million of private
placement debt. These notes are unsecured and have an eight-year average life
with a coupon interest rate of 8.64% paid quarterly. The notes contain certain
financial covenants which, among others, requires that the Company maintain
required levels of funded debt to EBITDA (earnings before interest expense,
income taxes, depreciation and amortization), fixed charge coverage and current
assets to current liabilities. In addition, there are limitations on additional
indebtedness as well as acquisitions and minority interest purchases. The
Company was in compliance with these covenants at December 31, 1999.
On September 17, 1997, the Company closed on an unsecured $36.0 million
five-year revolving line of credit with a bank. The Company could borrow at the
prime rate on a day-to-day basis or may borrow for 30, 60, 90 or 180 day periods
at LIBOR plus 0.80% to 1.25% based on the Company's funded debt to EBITDA ratio.
The credit facility also contained certain financial covenants which, among
others, required that the Company maintain required levels of EBITDA, funded
debt to EBITDA, fixed charge coverage and current assets to current liabilities.
In addition, there were limitations on additional indebtedness as well as
acquisitions and minority interest purchases. The Company was in compliance with
these covenants at December 31, 1998. Advances on this line of credit at
December 31, 1998 were $18,500,000 with interest rates ranging between 6.34% and
6.36%. This 1997 line of credit agreement was cancelled in April 1999 when the
new $50.0 million revolving line of credit described above was obtained.
In October 1996, the Company authorized the issuance of a standby
letter of credit for $1,000,000, which has no expiration date.
33
NOTE 9. RENTAL EXPENSE AND LEASE COMMITMENTS
Minimum annual rental commitments, in thousands, at December 31, 1999,
under noncancellable operating leases, principally for real estate and
equipment, are payable as follows:
2000 $ 7,759
2001 6,418
2002 4,157
2003 1,954
2004 710
2005 167
-----------
$ 21,165
-----------
Total rental expense was approximately $8,840,000, $7,487,000 and
$4,535,000 for 1999, 1998 and 1997, respectively. Many of the leases contain
renewal options and escalation clauses which require payments of additional rent
to the extent of increases in the related operating costs.
NOTE 10. STOCK-BASED COMPENSATION PLAN
Concurrent with the initial public offering the Company adopted a
Long-Term Incentive Plan (the "1996 Incentive Plan"). The number of shares of
Class A Common Stock reserved for issuance under the 1996 Incentive Plan was
450,000. Concurrent with the secondary offering the Company adopted a second
Long-Term Incentive Plan (the "1997 Incentive Plan"). The number of shares of
Class A Common Stock reserved for issuance under the 1997 Incentive Plan was
150,000. For the purpose of attracting and retaining key executive and
managerial employees, in 1999 the Company adopted a third Long-Term Incentive
Plan (the "1999 Incentive Plan"). The number of shares of Class A Common Stock
reserved for issuance under the 1999 Incentive Plan was 600,000. Under the 1996,
1997 and 1999 Incentive Plans, stock options, stock appreciation rights,
restricted stock and performance units may be granted for the purpose of
attracting and motivating key employees and non-employee directors of the
Company. The options granted to non-employee directors vest ratably over a
three-year period and expire 10 years after the date of grant. The options
granted to employees vest over a range of three to five years and expire 10
years after the date of grant.
The Company currently utilizes Accounting Principles Board Opinion No.
25 in its accounting for stock options. In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123 ("Statement 123"), "Accounting for Stock-based Compensation." The
accounting method as provided in the pronouncement is not required to be
adopted; however, it is encouraged. The Company provides the disclosure below in
accordance with Statement 123. Had the Company accounted for its stock options
in accordance with Statement 123, pro forma net income and pro forma earnings
per share would have been:
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- -------------- --------------
Net income as reported (000's) 10,846 8,908 9,525
Net income pro forma
for Statement 123 (000's) 10,359 8,501 9,261
Historical basic earnings per common
share pro forma for Statement 123 $ 1.35 $ 1.11 $ 1.44
Historical diluted earnings per common
share pro forma for Statement 123 $ 1.33 $ 1.10 $ 1.42
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest over
several years, pro forma compensation expense is recognized as the options vest
and additional awards may also be granted.
34
For purposes of determining the pro forma effect of these options, the
fair value of each option is estimated on the date of grant based on the
Black-Scholes single-option pricing model assuming:
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------------ ---------- ------------
Dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 6.25% 5.10% 5.80%
Volatility factor 40.00% 40.00% 40.00%
Expected life in years 6.0 6.0 6.0
Information regarding these option plans for 1999, 1998 and 1997 is as follows:
1999 1998 1997
--------------------------------- ---------------------------------- ---------------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------------- -------------- ----------------- -------------- ------------------ --------------
Options outstanding,
beginning of year 469,300 $ 16.58 401,800 $ 15.86 357,500 $ 14.00
Options exercised (34,000) 14.00 (19,000) 14.00 (4,700) 14.00
Options granted 480,000 18.85 161,500 21.91 49,000 29.23
Options forfeited (22,500) 17.97 (75,000) 24.85 - -
Options outstanding,
end of year 892,800 $ 17.86 469,300 $ 16.58 401,800 $ 15.86
Weighted average fair
value of options
granted during the year $ 9.25 $ 10.30 $ 11.02
Options exercisable at
year end 220,400 137,200 71,600
Option price range at end
of year $14.00 to $28.16 $14.00 to $28.16 $14.00 to $31.25
Option price for exercised
shares $ 14.00 $ 14.00 $ 14.00
Options available for
grant at end of year 249,500 107,000 193,500
The following table summarizes information about options outstanding at December
31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------ -----------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE PRICE OF SHARES PRICE
- ---------------- ----------- ------------------ ------------- ----------- ---------------
$ 14.00 268,800 6.19 $ 14.00 173,200 $ 14.00
$ 18.56 25,000 8.82 $ 18.56 5,000 $ 18.56
$ 18.75 450,500 9.94 $ 18.75 - $ -
$ 19.25 10,000 9.20 $ 19.25 - $ -
$ 19.94 35,000 8.93 $ 19.94 15,000 $ 19.94
$ 20.13 5,000 8.57 $ 20.13 1,000 $ 20.13
$ 20.75 5,000 8.65 $ 20.75 1,000 $ 20.75
$ 21.06 19,500 9.48 $ 21.06 - $ -
$ 21.75 49,000 7.87 $ 21.75 18,600 $ 21.75
$ 28.16 25,000 8.17 $ 28.16 6,600 $ 28.16
---------- ----------------- ------------- ---------- --------------
$14.00 to $28.16 892,800 8.55 $ 17.86 220,400 $ 15.64
35
NOTE 11. BUSINESS SEGMENT
The Company has no separately reportable segments in accordance with
Statement of Financial Accounting Standards No. 131 ("Statement 131")
"Disclosure About Segments of an Enterprise and Related Information". Under the
enterprise wide disclosure requirements of Statement 131, the Company reports
revenue, in thousands, for Intermodal Services, Brokerage Services, and
Logistics Services as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------- ------------
Intermodal Services $ 967,033 $ 910,396 $ 849,398
Brokerage Services 196,434 164,706 129,356
Logistics Services 133,332 70,804 85,725
------------ ------------- ------------
Total Revenue $ 1,296,799 $ 1,145,906 $ 1,064,479
------------ ------------- ------------
NOTE 12. PROFIT-SHARING PLAN
The Company has numerous profit-sharing plans and trusts under section
401(k) of the Internal Revenue Code. Generally, for every dollar the employee
contributes, the Company will contribute an additional $.20 up to $100. In
addition, the Company may make a profit sharing contribution at its discretion.
Historically, the Company has contributed an amount equal to 3% of each
participant's compensation up to a maximum of $4,800. The Company's
contributions to the Plan were approximately $1,645,000, $1,458,000 and
$1,163,000 for 1999, 1998 and 1997, respectively.
NOTE 13. RELATED PARTY TRANSACTIONS
In connection with the acquisition of a controlling interest in each of
the Hub Partnerships, the Company paid cash to the Class B Common Stock
("Class B") stockholders, some of whom are officers of the Company, as well as
officers of the Company who are not Class B stockholders, totaling approximately
$16,571,000. The Company, related to this acquisition, also assumed balloon
notes that were payable, in part, to the above related parties totaling
approximately $4,758,000. Approximately 33% of the balloon notes payable at
December 31, 1998 are due to the related parties. The Class B stockholders have
voting control over the Company. The same related parties described above also
continued to receive approximately 33% of minority interest distributions of
income from the Company up until the remaining 70% minority interest was
purchased in connection with the April 1999 Purchase. Furthermore, these
parties received cash and notes from the Company totaling approximately
$72,330,000 when it acquired minority interest in Hub City Tennessee, L.P., Hub
City North Central, L.P., Hub City Los Angeles, L.P., Hub City Golden Gate,
L.P., Hub Group Distribution Services, Hub City Dallas, L.P., Hub City Houston,
L.P., Hub City Rio Grande, L.P., Hub City Alabama, L.P., Hub City Atlanta,
L.P., Hub City Boston, L.P., Hub City Canada, L.P., Hub City Cleveland, L.P.,
Hub City Detroit, L.P., Hub City Florida, L.P., Hub City Indianapolis, L.P.,
Hub City Kansas, L.P., Hub City Mid-Atlantic, L.P., Hub City New
York/New Jersey, L.P., Hub City New York State, L.P., Hub City Ohio, L.P., Hub
City Philadelphia, L.P., Hub City Pittsburgh, L.P., Hub City Portland, L.P. and
Hub City St. Louis, L.P.
NOTE 14. LEGAL MATTERS
In the ordinary course of conducting its business, the Company becomes
involved in various lawsuits related to its business. The Company does not
believe that the ultimate resolution of these matters will be material to its
business, financial position or results of operations.
36
NOTE 15. EQUITY
DECEMBER 31, 1999
---------------------------------
ISSUED AND
AUTHORIZED OUTSTANDING
---------------- ----------------
Preferred stock, $.01 par value 2,000,000 -
Class A common stock, $.01 par value 12,337,700 7,043,950
Class B common stock, $.01 par value 662,300 662,296
DECEMBER 31, 1998
---------------------------------
ISSUED AND
AUTHORIZED OUTSTANDING
---------------- ----------------
Preferred stock, $.01 par value 2,000,000 -
Class A common stock, $.01 par value 12,337,700 7,009,950
Class B common stock, $.01 par value 662,300 662,296
NOTE 16. CHANGE IN ESTIMATE/IMPAIRMENT OF PROPERTY AND EQUIPMENT
In the second quarter of 1999, a $0.9 million pretax charge was
recorded due to a change in estimate and an impairment loss relating to certain
operating software applications. Specifically, $0.7 million of this charge was
attributable to a change in estimate of the useful life for the Visual Movement
software previously used primarily for brokerage. The Visual Movement software
is no longer being used by the Company and was replaced with enhancements to the
Company's proprietary intermodal operating software during the second quarter of
1999. These enhancements allow for greater network visibility of loads in a year
2000 compliant program. The $0.2 million impairment loss related to the
write-down of a logistics software program. The fair value was determined based
on the estimated future cash flows attributable to the single customer using
this program. The Company has installed this software package and is currently
preparing the software for its operational applications. This new software will
provide enhanced functionality.
37
NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data for
each of the quarters in 1999 and 1998 (in thousands, except per share amounts):
QUARTERS
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------- ------------- ------------- -------------
Year Ended December 31, 1999:
Revenue $ 307,682 $ 319,448 $ 333,337 $ 336,332
Net revenue 39,169 39,045 41,493 42,708
Operating income 7,386 5,848 8,578 8,322
Historical net income 1,943 2,638 3,199 3,066
Historical basic earnings per share $ 0.25 $ 0.34 $ 0.42 $ 0.40
Historical diluted earnings per share $ 0.25 $ 0.34 $ 0.41 $ 0.40
QUARTERS
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------- ------------- ------------- -------------
Year Ended December 31, 1998:
Revenue $ 255,133 $ 283,051 $ 295,859 $ 311,863
Net revenue 30,447 33,620 36,523 37,744
Operating income 4,434 6,773 8,642 6,557
Historical net income 1,627 2,076 2,606 2,599
Historical basic earnings per share $ 0.21 $ 0.27 $ 0.34 $ 0.34
Historical diluted earnings per share $ 0.21 $ 0.27 $ 0.34 $ 0.34
NOTE 18. SUBSEQUENT EVENT
On March 13, 2000, the Company signed a letter of intent pursuant to
which the Company agreed to sell its 65% interest in Hub Distribution for $65
million in cash and warrants to purchase 5% of the outstanding shares of stock
of Hub Distribution. The sale of this interest is subject to a number of
customary conditions and there is therefore no guarantee that a transaction will
ultimately be consummated.
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Election of Directors" and "Ownership of the Capital
Stock of the Company" appearing in the Registrant's proxy statement for the
annual meeting of stockholders to be held on May 17, 2000, sets forth certain
information with respect to the directors of the Registrant and Section 16
compliance and is incorporated herein by reference. Certain information with
respect to persons who are or may be deemed to be executive officers of the
Registrant is set forth under the caption "Executive Officers of the Registrant"
in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Compensation of Directors and Executive Officers"
appearing in the Registrant's proxy statement for the annual meeting of
stockholders to be held on May 17, 2000, sets forth certain information with
respect to the compensation of management of the Registrant and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Ownership of the Capital Stock of the Company"
appearing in the Registrant's proxy statement for the annual meeting of
stockholders to be held on May 17, 2000, sets forth certain information with
respect to the ownership of the Registrant's Common Stock and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" appearing in the Registrant's
proxy statement for the annual meeting of stockholders to be held on May 17,
2000, sets forth certain information with respect to certain business
relationships and transactions between the Registrant and its directors and
officers and it is incorporated herein by reference.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant
are included under Item 8 of this Form 10-K:
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 1999 and December 31,
1998
Consolidated Statements of Operations - Years ended December 31,
1999, December 31, 1998 and December 31, 1997
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1999, December 31, 1998 and December 31, 1997
Consolidated Statements of Cash Flows - Years ended December 31,
1999, December 31, 1998 and December 31, 1997
Notes to Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES
The remaining financial statements and statement schedule for
which provision is made in Regulation S-X are set forth in the Index immediately
preceding such financial statements and statement schedule and are incorporated
herein by reference.
(A)(3) EXHIBITS
The exhibits included as part of this Form 10-K are set forth in
the Exhibit Index immediately preceding such Exhibits and are incorporated
herein by reference.
(B) REPORTS ON FORM 8-K
None.
40
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.
Date: March 29, 2000 HUB GROUP, INC.
By /S/ DAVID P. YEAGER
----------------------
David P. Yeager
Chief Executive Officer and Vice Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Title Date
/S/ PHILLIP C. YEAGER Chairman and Director March 29, 2000
- --------------------------
Phillip C. Yeager
/S/ DAVID P. YEAGER Vice Chairman, Chief Executive Officer and Director March 29, 2000
- --------------------------
David P. Yeager
/S/ THOMAS L. HARDIN President, Chief Operating Officer and Director March 29, 2000
- --------------------------
Thomas L. Hardin
/S/ JAY E. PARKER Vice President-Finance and Chief Accounting Officer March 29, 2000
- --------------------------
Jay E. Parker (Principal Financial and Accounting Officer)
/S/ CHARLES R. REAVES Director March 29, 2000
- --------------------------
Charles R. Reaves
/S/ MARTIN P. SLARK Director March 29, 2000
- --------------------------
Martin P. Slark
/S/ GARY D. EPPEN Director March 29, 2000
- --------------------------
Gary D. Eppen
41
SCHEDULE II
HUB GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning Costs & Balance at
of Year Expenses Deduction End of Year
------------- ------------- ------------- --------------
Year Ended December 31:
Allowance for uncollectible accounts receivable
1999 $ 691,000 $2,321,000 $ (878,000) $ 2,134,000
1998 303,000 1,523,000 (1,135,000) 691,000
1997 405,000 1,005,000 (1,107,000) 303,000
S-1
INDEX TO EXHIBITS
NUMBER EXHIBIT
- ------ -------
2.1 Purchase Agreement among the Registrant, American President
Companies, Ltd. and APL Land Transport Services, Inc. (incorporated
by reference to the Registrants report on Form 8-K dated May 2,
1996 and filed May 17, 1996, File No. 0-27754)
2.2 Purchase and Sale Agreement among Hub Holdings, Inc. and Hub City
North Central, Inc. (incorporated by reference to Exhibit 2.2 to
the Registrants report on Form 10-K dated March 26, 1997 and filed
March 27, 1997, File No. 000-27754)
3.1 Amended Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 and 3.3 to the
Registrant's registration statement on Form S-1, File No. 33-90210)
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2
to the Registrant's registration statement on Form S-1, File
No. 33-90210)
10.1 Form of Amended and Restated Limited Partnership Agreement
(incorporated by reference to Exhibit 10.1 to the Registrants
report on Form 10-K dated March 26, 1997 and filed March 27,
1997, File No. 000-27754)
10.2 Amended and Restated Limited Partnership Agreement of Hub City
Canada, L.P. (incorporated by reference to Exhibit 10.2 to the
Registrants report on Form 10-K dated March 26, 1997 and filed
March 27, 1997, File No. 000-27754)
10.3 Form of Non-Competition Agreement (incorporated by reference to
Exhibit 10.3 to the Registrants report on Form 10-K dated March
26, 1997 and filed March 27,1997, File No. 000-27754)
10.4 Purchase and Sale Agreement between the Registrant and the
Stockholders of Hub City Terminals, Inc. (incorporated by reference
to Exhibit 10.3 to the Registrant's registration statement on Form
S-1, File No. 33-90210)
10.5 Hub Group Distribution Services Purchase and Sale Agreement
(incorporated by reference to Exhibit 10.5 to the Registrant's
report on Form 10-K dated March 26, 1997 and filed March 27,
1997, File No. 000-27754)
10.6 Management Agreement (incorporated by reference to Exhibit 10.6
to the Registrant's report on Form 10-K dated March 26, 1997 and
filed March 27, 1997, File No. 000-27754)
10.7 Stockholders' Agreement (incorporated by reference to Exhibit
10.7 to the Registrant's report on Form 10-K dated March 26, 1997
and filed March 27, 1997, File No. 000-27754)
10.8 Credit Agreement dated as of September 27, 1997, among the
Registrant, Hub City Terminals, Inc., Hub Holdings, Inc. and Harris
Trust and Savings Bank (incorporated by reference to Exhibit 10.8
to the Registrant's report on Form 10-Q dated and filed November
13, 1997, File No. 000-27754)
10.9 $100 million Credit Agreement dated as of April 30, 1999, among the
Registrant, Hub City Terminals, Inc., Hub Holdings, Inc. and Harris
Trust and Savings Bank (incorporated by reference to Exhibit 10.9
to the Registrant's report on Form 10-Q dated and filed May 10,
1999, File No. 000-27754)
10.10 $40 million Bridge Credit Agreement dated as of April 30, 1999
among the Registrant, Hub City Terminals, Inc., Hub Holdings,
Inc. and Harris Trust and Savings Bank (incorporated by reference
to Exhibit 10.10 to the Registrant's report on Form 10-Q dated
and filed May 10, 1999, File No. 000-27754)
10.11 $50 million Note Purchase Agreement dated as of June 25, 1999,
among the Registrant, Hub City Terminals, Inc., Hub Holdings, Inc.
and various purchasers (incorporated by reference to Exhibit 10.11
to the Registrant's report on Form 10-Q dated and filed August 16,
1999, File No. 000-27754)
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
EXHIBIT 21
Subsidiaries of Hub Group, Inc.
SUBSIDIARIES JURISDICTION OF INCORPORATION/ORGANIZATION
Hub City Terminals, Inc. Delaware
Hub Group Alabama, LLC Delaware
Hub Group Atlanta, LLC Delaware
Hub Group Boston, LLC Delaware
Hub Group Canada, LLC Delaware
Hub Group Cleveland, LLC Delaware
Hub Group Detroit, LLC Delaware
Hub Group Florida, LLC Delaware
Hub Group Golden Gate, LLC Delaware
Hub Group Indianapolis, LLC Delaware
Hub Group Kansas City, LLC Delaware
Hub Group Los Angeles, LLC Delaware
Hub Group Mid-Atlantic, LLC Delaware
Hub Group New Orleans, LLC Delaware
Hub Group New York State, LLC Delaware
Hub Group New York-New Jersey, LLC Delaware
Hub Group North Central, LLC Delaware
Hub Group Ohio, LLC Delaware
Hub Group Philadelphia, LLC Delaware
Hub Group Pittsburgh, LLC Delaware
Hub Group Portland, LLC Delaware
Hub Group St. Louis, LLC Delaware
Hub Group Tennessee, LLC Delaware
Hub City Texas, L.P. Delaware
Hub Group Associates, Inc. Illinois
Hub Highway Services Illinois
Hub Group Distribution Services Illinois
Q.S. of Illinois, Inc. Illinois
Q.S.S.C., Inc. Delaware
Quality Services L.L.C. Missouri
Quality Services of Kansas, L.L.C. Kansas
Quality Services of New Jersey, L.L.C. New Jersey
Quality Services of Michigan L.L.C. Michigan
Q.S. of Georgia, L.L.C. Georgia
HLX Company, L.L.C. Delaware
Hub Chicago Holdings, Inc. Delaware
Quality Intermodal Corporation Texas
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated February 4, 2000, except with respect to the matter discussed in
Note 18, as to which the date is March 15, 2000 included in this Form 10-K, into
Hub Group, Inc.'s previously filed Registration Statement File No. 333-6327 of
Form S-8, and Registrations File No. 333-48185 on Form S-8.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 28, 2000