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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, 1997
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 16, 1998, based upon the last reported sale price on
that date on the NASDAQ National Market of $27 1/4 per share, was
$189,887,537.50.
On March 20, 1998, the Registrant had 6,990,950 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 19, 1998, (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 33 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, management of the Company's logistics services business 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 has
the continuing option, exercisable any time after the Principal currently
associated with a Hub Partnership ceases to be an employee, 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 will be 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.
During 1997, the Company made several significant strategic investments. On
March 1, 1997, the Company exercised its option to acquire an additional
approximately 44% ownership interest in Hub Distribution for an aggregate price
of approximately $1,500,000, raising the Company's general partnership interest
in Hub Distribution to 65%. In September 1997, the Company completed a secondary
offering of 1,725,000 shares of Class A Common Stock, with net proceeds to the
Company of approximately $54.8 million. On September 17, 1997, the Company
exercised its option to acquire the remaining 70% minority interests in Hub City
Los Angeles, L.P. ("Hub Los Angeles") and Hub City Golden Gate, L.P. ("Hub
Golden Gate") for approximately $59.4 million. On September 17, 1997, the
Company also closed on a new unsecured $36.0 million five-year revolving line of
credit with Harris Trust and Savings Bank. (See Item 7 Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.) On October 31, 1997 the Company exercised it option to
acquire the remaining 70% minority interest in Hub City New Orleans, L.P. ("Hub
New Orleans") for a nominal sum. On October 31, 1997, the Company also
purchased, for $300,000, the 50% joint venture interest in HLX Company, L.L.C.
("HLX") not owned by the Company, making HLX a wholly-owned subsidiary of Hub
Group.
On March 10, 1998, the Company announced that it would acquire the minority
interest in Hub City Rio Grande, L.P., Hub City Dallas, L.P. and Hub City
Houston, L.P. The Company estimates it will acquire the minority interests in
April 1998 at a cost of approximately $6 million. After the acquisition, all
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Hubs in Texas, as well as Mexico, will be wholly-owned by the Company. On March
12, 1998, the Company announced that it had recently signed a letter of intent
to purchase all of the outstanding stock of Quality Intermodal Corporation
("Quality"). The Company has offered to pay $4.1 million in cash and $6.3
million through the issuance of a three-year note, bearing interest at an annual
rate of 5.6%, for all of Quality's stock. Quality is an intermodal and truckload
brokerage service provider headquartered in Houston and with offices in Dallas,
Los Angeles, Chicago, Philadelphia and Atlanta. Quality had revenue of
approximately $70 million in 1997. Although there is no guarantee that the
acquisition will occur, the Company hopes to sign a definitive purchase
agreement in the near future.
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 drayage service is not
available, the Company supplements third party drayage services with
Company-owned drayage operations. (See Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.) 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. 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 use 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
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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, the Company consolidates orders
into full truckload shipments, chooses a shipping route, electronically tenders
loads to carriers and reports the move to the customer.
Hub Network
Over the past 25 years, Hub Group has grown from a single office with two
employees into a network of 31 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 Grand Rapids Milwaukee St. Louis
Baltimore Houston Minneapolis Salt Lake City
Birmingham Indianapolis New Orleans San Antonio
Boston Jacksonville New York City San Francisco
Chicago(3) Kansas City Philadelphia Seattle
Cleveland Los Angeles Pittsburgh Toledo
Dallas Memphis Portland Toronto
Detroit 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. The Company's Hub
in New Haven was recently closed and its operations transferred to Boston. In
connection with the reorganization in Texas, the Company anticipates that the
Hub in San Antonio will become a sales office in the near future.
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.
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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 33 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.
In 1985, the Company organized National Accounts 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 14 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 System
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 intermodal transportation. 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 mainframe-to-mainframe
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
recently installed software ("Visual Movement") that was co-developed with the
Visual Movement Corporation. Just as the AIM system has helped automate the
Company's intermodal operations, this software is designed to automate the
Company's highway services operations. Visual Movement 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.
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 semi-annual 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 railroads:
Burlington Northern Santa Fe Railway Illinois Central
Canadian National Kansas City Southern
Canadian Pacific Norfolk Southern
Conrail Union Pacific
CSX
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 at the end of December 1998. While there can be no assurances that
these contracts will be renewed, the Company has in the past successfully
negotiated extensions of the contracts with the railroads. Transportation rates
are market driven and are typically negotiated between the Company and the
railroads 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 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 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.
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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
and $1.0 million in cargo insurance. Railroads, which are self insured, provide
limited common carrier liability protection, generally up to $250,000 per
shipment, although higher coverage is available on a load-by-load basis. To
cover freight damage when a carrier's liability cannot be established or a
carrier's insurance is insufficient to cover freight loss or damage, the Company
carries its own cargo insurance with a limit of $1.5 million per container or
trailer and a limit of $20 million per occurrence. The Company also carries $2.0
million of general liability insurance with a companion $10.0 million umbrella
policy on this general liability insurance.
Government Regulation
Hub Highway Services, a partnership controlled by the Company, 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 $100,000 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. In addition, there is an emerging trend for larger
truckload carriers to enter into agreements with railroads to market intermodal
services nationwide. 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 28, 1998, the Company had approximately 1,246
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
39 offices throughout the United States and in Canada and Mexico, including the
Company's headquarters in Lombard, Illinois, its National Accounts office in
Stamford, Connecticut, four National Accounts sales offices, Hub Logistics
offices in Lombard and Stamford and Hub Distribution's office. The office
buildings used by the Hubs located in Toledo and Kansas City are owned, and the
remainder are leased. The office building in Kansas City is subject to a
mortgage. 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.
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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 1997.
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, 1998 with respect to each person who is an
executive officer of the Company.
Name Age Position
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Phillip C. Yeager 70 Chairman of the Board of Directors
David P. Yeager 45 Vice Chairman of the Board of Directors and
Chief Executive Officer
Thomas L. Hardin 52 President, Chief Operating Officer and Director
William L. Crowder 55 Vice President-Finance, Chief Financial Officer
and Treasurer
Daniel F. Hardman 49 President-Chicago Region
Mark A. Yeager 33 Division President, Secretary and General Counsel
John T. Donnell 58 Executive Vice President-National Accounts
Robert L. Maro 45 Vice President-Information Services
Robert J. Jensen 43 President-Hub Group Operations Management
Richard M. Rogan 58 President-Hub Highway Services, Executive Vice
President-Marketing
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. 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 and the
father-in-law of Robert J. Jensen.
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, the brother of Mark A. Yeager and the brother-in-law
of Robert J. Jensen. Mr. Yeager also serves as a director of SPR Inc.
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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. During
1996, Mr. Hardin was Chairman of the Intermodal Association of North America.
William L. Crowder has been the Company's Vice President of Finance and
Chief Financial Officer since April 1994 and Treasurer since July 1996. From
January 1990 through December 1993, Mr. Crowder was Vice President of Finance
and Treasurer of Sears Logistics Services, Inc., a transportation, distribution
and home delivery subsidiary of Sears Roebuck & Company. Mr. Crowder worked at
Sears Roebuck & Company from 1966 through 1989 in various senior financial
management positions. Mr. Crowder received a Bachelor of Business Administration
degree from Georgia State University in 1966.
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.
Mark A. Yeager has been the Company's Division President since November
1997 and Secretary and General Counsel since March 1995. 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, the brother of David P. Yeager
and the brother-in-law of Robert J. Jensen.
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.
Robert L. Maro has been Vice President of Information Services since
November 1991. From January 1978 through November 1991, Mr. Maro worked as
Director of Operations for Zink & Katich, an information technology consulting
firm that provided consulting services to the Company. Mr. Maro received a
Bachelor of Science degree in Mathematics from Chicago State University in 1974.
Robert J. Jensen has been President of Hub Group Operations Management
since July 1991. He served as President of Hub St. Louis from July 1985 through
July 1991 and as General Manager of Hub St. Louis from October 1980 through July
1985. Mr. Jensen received a Bachelor of Science degree in Finance from the
University of Illinois in 1977. Mr. Jensen is the son-in-law of Phillip C.
Yeager and the brother-in-law of both David P. Yeager and Mark A. Yeager.
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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.
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." The
Class A Common Stock was first traded on NASDAQ on March 13, 1996, concurrent
with the underwritten initial public offering of the Company's Class A Common
Stock at an initial price to the public of $14.00 per share (the "Offering").
Prior to the Offering, there was no established public trading market for the
Class A Common Stock. Set forth below are the high and low prices for shares of
the Class A Common Stock of the Company in 1996 from March 13, 1996, the date of
the Offering, through the end of the first quarter of 1996 and for each full
quarterly period thereafter in 1996 and 1997.
1996 1997
------------------- -------------------
High Low High Low
First Quarter $ 19 $ 14 $ 30 1/8 $ 24 1/2
Second Quarter $ 24 1/4 $ 17 5/8 $ 31 $ 24 1/4
Third Quarter $ 22 5/8 $ 16 $ 38 1/4 $ 30 1/8
Fourth Quarter $ 27 1/2 $ 21 1/4 $ 37 1/8 $ 28 3/8
On March 20, 1998, there were approximately 43 stockholders of record of
the Class A Common Stock and, in addition, there were an estimated 1,943
beneficial owners of the Class A Common Stock whose shares were held by brokers
and other fiduciary institutions. On March 20, 1998, 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 agreement prohibits 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 agreement. The Company is currently in compliance with the covenants
contained in the credit agreement.
9
Item 6. SELECTED FINANCIAL DATA
Selected Financial Data
(in thousands except per share data)
Years Ended December 31,
----------------------------------------------------------------
1997(1) 1996(2) 1995 1994 1993
----------------------------------------------------------------
Statement of Operations Data:
Revenue $ 1,064,479 $ 754,243 $ 81,408 $ 86,876 $ 73,123
Net revenue 129,855 91,564 6,266 6,288 5,138
Operating income 33,495 27,925 2,567 2,348 1,843
Income before minority interest and taxes 32,869 27,704 2,638 2,406 1,939
Income before taxes 15,874 11,338 2,638 2,406 1,939
Historical net income 9,525 7,044 2,599 2,369 1,907
Historical basic earnings per common share $ 1.48 $ 1.41 $ 1.56 $ 1.43 $ 1.15
Historical diluted earnings per common share $ 1.46 $ 1.39 $ 1.56 $ 1.43 $ 1.15
Pro forma provision for additional income taxes(3) 241 1,016 925 744
Pro forma net income $ 6,803 $ 1,583 $ 1,444 $ 1,163
Pro forma basic earnings per common share $ 1.36 $ 0.95 $ 0.87 $ 0.70
Pro forma diluted earnings per common share $ 1.35 $ 0.95 $ 0.87 $ 0.70
As of December 31,
----------------------------------------------------------------
1997(1) 1996(2) 1995 1994 1993
----------------------------------------------------------------
Balance Sheet Data:
Working capital $ 15,209 $ 15,877 $ 804 $ 1,457 $ 1,125
Total assets 267,826 201,225 9,083 10,360 9,511
Long-term debt, excluding current portion 22,873 28,714 - - -
Stockholders' equity 110,462 46,124 1,165 1,769 1,553
(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.
(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.
10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAPITAL STRUCTURE
Hub Group, Inc. 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.'s Class A common stock through a secondary
offering. In September 1997, the Company completed a secondary offering of
1,725,000 shares of Hub Group, Inc.'s Class A common stock.
BUSINESS COMBINATIONS
Concurrent with the initial public offering, Hub Group, Inc., together
with its wholly owned subsidiary, Hub Chicago, acquired a controlling interest
in each of 27 operating partnerships (collectively referred to as "Hub
Partnerships"). Prior to March 18, 1996, Hub Chicago and Hub Partnerships were
under common control and formed a network that collectively worked with
customers and vendors. On May 2, 1996, Hub Group, Inc. purchased the rights to
service the customers of American President Lines Domestic Distribution Services
("APLDDS"), a division of APL Land Transport Services, Inc, from its parent,
American President Companies, Ltd.
The revenue of Hub Partnerships and APLDDS is many multiples of the
revenue of Hub Chicago. As a result, consolidated revenue and operating expense
for Hub Group, Inc. and its subsidiaries (the "Company") increased dramatically
in the periods subsequent to March 17, 1996.
As a result of the APLDDS acquisition, the Company acquired the right
to service APLDDS customers, but did not assume any assets or liabilities
associated with that business. Furthermore, the Company hired only 36 of the
more than 200 employees in the APLDDS organization. The APLDDS business was
absorbed directly into the operations of Hub Chicago and Hub Partnerships and
management believes the associated incremental operating costs are significantly
less than the historical operating costs experienced by APLDDS. Management does
not track the incremental purchased transportation and operating costs
attributable to the acquired APLDDS business. Consequently, discussion of
results of operations excluding acquisitions, when comparing the results of
operations for the year ended December 31, 1996, to the year ended December 31,
1995, is limited to comparisons of revenue. Discussion of pro forma financial
data for the years ended December 31, 1996, and 1995, reflects results of
operations as if Hub Group, Inc. had acquired Hub Partnerships and APLDDS as of
January 1, 1995.
On October 31, 1997, the Company acquired the 50% interest in its
international joint venture, HLX Company, LLC, that it did not previously own
for $300,000 in cash.
On February 20, 1998, the Company signed letters of intent to acquire
all of the outstanding stock of Quality Intermodal Corporation ("Quality"). The
Company has offered to pay $4.1 million in cash and $6.3 million through the
issuance of a three-year note, bearing interest at an annual rate of 5.6%, for
all of Quality's stock. Quality primarily offers intermodal and truckload
brokerage services with offices in Houston, Dallas, Los Angeles, Chicago,
Atlanta, and Philadelphia.
11
TRIGGERED CALL OPTIONS
On March 5, 1998, the local in-charge executives of Hub City Rio
Grande, L.P. ("Hub Rio Grande"), Hub City Dallas, L.P. ("Hub Dallas"), and Hub
City Houston, L.P. ("Hub Houston") resigned, triggering the Company's ability to
exercise its call option to acquire the remaining 70% minority interest at a
price calculated in accordance with an agreed upon formula.
RESULTS OF OPERATIONS
Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
Revenue
Revenue totaled $1,064.5 million for 1997, representing an increase of
41.1% over 1996. The primary reason for the increase is attributed to having the
revenue from the Hub Partnerships and APLDDS acquisitions for the full year in
1997 and only a portion of the year in 1996. Revenue for 1997 increased 13.4%
over pro forma revenue for 1996. Intermodal revenue increased 7.6%, truckload
brokerage revenue increased 37.6% and logistics revenue increased 59.0% over pro
forma revenue for 1996. The 1996 pro forma revenue included the revenue
generated by APLDDS prior to being acquired by the Company. APLDDS was
experiencing significant decline in its revenue prior to being acquired. This
decline had a negative influence on the 1997 growth rate over the 1996 pro forma
revenue.
Excluding the revenue in 1996 relating to APLDDS prior to it being
acquired by the Company, Hub Chicago and Hub Partnerships, on a combined basis
assuming Hub Chicago had acquired Hub Partnerships on January 1, 1996,
experienced a revenue increase of 19.2% in 1997 compared to 1996. Intermodal
revenue, excluding APLDDS from all periods, increased 10.8% in 1997 when
compared to 1996. Management believes that the well-publicized railroad service
disruptions experienced by the intermodal industry during the fourth quarter of
1997 negatively impacted intermodal revenue growth. (See "Outlook, Risks and
Uncertainties")
Net Revenue
Net revenue as a percentage of revenue increased slightly to 12.2% in
1997 from 12.1% in 1996. The increase is attributed to Hub Chicago having a
lower net revenue percentage on its business as compared to Hub Partnerships.
Consequently, Hub Chicago lowered the net revenue percentage in 1996, as the Hub
Partnerships were not included in results of operations until after March 17,
1996.
Salaries and Benefits
Salaries and benefits increased to $64.3 million in 1997 over $43.9
million in 1996. As a percentage of revenue, salaries and benefits increased to
6.0% from 5.8%. The increase in the percentage is attributed to Hub Chicago
having a lower salaries and benefits percentage as compared to Hub Partnerships.
Consequently, Hub Chicago lowered the salaries and benefits percentage in 1996,
as the Hub Partnerships were not included in results of operations until after
March 17, 1996.
Selling, General and Administrative
Selling, general and administrative expenses increased to $27.5 million
in 1997 from $17.1 million in 1996. Selling, general and administrative expenses
as a percentage of revenue increased to 2.6% in 1997 from 2.3% in 1996. The
increase in the percentage is principally attributable to increased spending
related to information systems, rent and equipment leases. Expenditures for
information systems increased as the Company enhanced its operating systems to
12
provide better customer service as well as to further develop and expand the
capabilities of its web site. 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
Depreciation and amortization increased to $4.6 million in 1997 from
$2.6 million in 1996. As a percentage of revenue, depreciation and amortization
increased to 0.4% in 1997 from 0.3% in 1996. This increase is attributed
primarily to the increase in goodwill amortization. Goodwill amortization
related to the acquisitions of Hub Partnerships and APLDDS was incurred for the
entire year in 1997 versus only a portion of the year in 1996. In addition,
minority interest purchases related to Hub City Tennessee, L.P., Hub City North
Central, L.P. ("Hub North Central"), Hub Group Distribution Services, Hub City
Los Angeles, L.P. ("Hub Los Angeles") and Hub City Golden Gate, L.P. ("Hub
Golden Gate") occurred in August 1996, December 1996, March 1997, September 1997
and September 1997, respectively. The timing of these purchases also caused
goodwill amortization to be higher in 1997 as compared to 1996.
Other Income (Expense)
Interest expense increased to $2.2 million in 1997 from $1.0 million in
1996. The increase is primarily attributed to the note issued in conjunction
with the minority interest purchase related to Hub North Central in mid-December
of 1996. The $15.0 million note bore interest at an annual rate of 7% and was
outstanding for the entire year of 1997.
Interest income increased to $1.5 million in 1997 from $0.8 million in
1996. The increase is primarily attributed to two factors. First, net proceeds
from the Company's secondary stock offering of $54.8 million were invested for
approximately one month before such proceeds were used to purchase the minority
interests in Hub Los Angeles and Hub Golden Gate. Second, results of operations
included the interest income generated by Hub Partnerships for the entire year
of 1997 as compared to 1996, where Hub Partnerships was only included after
March 17, 1996.
Minority Interest
Minority interest increased to $17.0 million in 1997 from $16.4 million
in 1996. Minority interest as a percentage of income before minority interest
and provision for income taxes was 51.7% in 1997 as compared to 59.1% in 1996.
The decrease in the percentage is attributed to purchases of minority interest
as discussed above (See "Depreciation and Amortization").
Provision for Income Taxes
Provision for income taxes was increased to $6.3 million in 1997 from
$4.3 million in 1996. Other than an insignificant provision for Illinois
replacement tax, the Company had no provision for income taxes prior to March
18, 1996, as the Company was a federally non-taxable subchapter S corporation.
The Company is providing for income taxes at a net effective rate of 40% for all
income subsequent to March 17, 1996.
Pro Forma Provision for Additional Income Taxes
There was no pro forma provision for additional income taxes in 1997.
The pro forma provision for additional income taxes was $0.2 million in 1996.
The pro forma provision for additional income taxes was recorded to provide an
assumed net effective federal and state income tax rate of 40% for periods prior
to March 18, 1996.
13
Net Income
Historical net income increased 40.0% to $9.5 million in 1997 over pro
forma net income (pro forma only to provide for income taxes) of $6.8 million in
1996. The increase is attributed primarily to the additional net income
generated from the use of the proceeds from the Company's initial public
offering in March 1996 and the secondary offering in September 1997. Historical
net income for 1997 increased 42.4% over pro forma net income (pro forma to
provide for income taxes and for the Company's acquisitions) for 1996.
Earnings Per Common Share
Historical diluted earnings per common share increased 8.1% to $1.46 in
1997 over pro forma diluted earnings per common share (pro forma only to provide
for income taxes) of $1.35 in 1996. Historical diluted earnings per common share
for 1997 increased 27.0% over pro forma historical diluted earnings per common
share (pro forma to provide for income taxes and the Company's acquisitions) for
1996. This larger increase was significantly influenced by the losses incurred
by APLDDS prior to being acquired by the Company.
Year Ended December 31, 1996, Compared to Year Ended December 31, 1995
Revenue
Revenue totaled $754.2 million for 1996, representing an increase of
826.5% over 1995. Without the acquisitions, Company revenues totaled $85.2
million for 1996 for an increase of 4.7% over 1995. The minor increase in
revenue without acquisitions is attributed principally to Hub Chicago's loss of
a portion of a significant customer's business. This consumer product
manufacturer moved the production of one of its major products to a facility
that is now being served by one of the operating partnerships that comprise Hub
Partnerships.
Pro forma revenue increased 5.3% to $938.9 million from $891.8 million
in 1995. The 1995 pro forma revenue was impacted significantly by the addition
of the revenue reported by APLDDS. The business acquired from APLDDS on May 2,
1996 had been experiencing significant decline during 1995 and the first quarter
of 1996. This decline had a negative influence on the pro forma revenue growth
rate.
Excluding the revenue relating to APLDDS prior to the acquisition on
May 2, 1996, Hub Chicago and Hub Partnerships, on a combined basis assuming Hub
Chicago had acquired Hub Partnerships on January 1, 1995, experienced a revenue
increase of 25.7% to $893.2 million in 1996 from $710.8 million in 1995. This
percentage increase is primarily attributable to strong growth in truckload
brokerage and logistics as well as the acquisition of the APLDDS business.
Intermodal revenues, excluding APLDDS from all periods, increased moderately on
a percentage basis.
Net Revenue
Net revenue as a percentage of revenue increased to 12.1% for 1996
compared to 7.7% in 1995. This increase is primarily a reflection of the higher
net revenue as a percentage of revenue that is experienced by Hub Partnerships
as compared to Hub Chicago. Hub Chicago has a larger proportion of high
volume/low margin accounts than does Hub Partnerships.
Pro forma net revenue as a percentage of pro forma revenue increased to
11.9% in 1996 from 11.3% in 1995. On a pro forma basis, net revenue as a
percentage of revenue for the APLDDS business was 7.3% and 4.1% for 1995 and the
period January 1, 1996 through May 1, 1996, respectively. Management believes
that the net revenue percentage on the transitioned APLDDS business has improved
modestly over the APLDDS 1995 pro forma net revenue percentage. The lower pro
forma percentages experienced by APLDDS causes the current year percentages to
compare favorably to the prior year percentages. This favorable pro forma
comparison is partially offset by the lower net revenue percentage experienced
by the addition of new logistics customers in late 1995 and early 1996.
Salaries and Benefits
Salaries and benefits increased to $43.9 million in 1996 from $2.5
million in 1995. Pro forma salaries and benefits increased to $55.9 million in
1996 from $50.4 million in 1995. APLDDS was a division of APL Land Transport
14
Services, Inc. ("APL") and consequently received much of its support services
from APL. In return for these services, APLDDS was assessed a management fee.
This arrangement had the effect of deflating salaries and benefits while
inflating selling, general and administrative expenses. As a result, salaries
and benefits reported by APLDDS in servicing their customers were lower as a
percentage of revenue than traditionally experienced by the Company. For 1995
and the period January 1, 1996 through May 1, 1996, salaries and benefits as a
percentage of revenue for APLDDS were 3.8% and 4.8%, respectively. Pro forma
salaries and benefits as a percentage of pro forma revenue increased to 6.0% for
1996 from 5.7% in 1995, which is partially attributed to the historical cost
structure of APLDDS. The Company's investment in additional personnel in 1996
also contributed to this increase. These additional personnel were hired to
handle additional truckload brokerage and logistics business, to expand the
local and national sales forces and to provide the financial and administrative
services required for continued growth.
Selling, General and Administrative
Selling, general and administrative expenses increased to $17.1 million
in 1996 from $1.2 million in 1995. Pro forma selling, general and administrative
expenses decreased to $23.2 million in 1996 from $29.8 million in 1995. As a
percentage of pro forma revenue these pro forma expenses were 2.5% in 1996 and
3.3% for 1995. As explained in "Salaries and Benefits," APLDDS received much of
its support services through a management fee arrangement with APL. This caused
the APLDDS historical selling, general and administrative expenses to be a
significantly greater percentage of revenue than the percentage traditionally
experienced by the Company. For 1995 and the period January 1, 1996, through May
1, 1996, selling, general and administrative expenses as a percentage of revenue
for APLDDS were 7.3% and 6.0%, respectively.
Depreciation and Amortization
Depreciation and amortization expense increased to $2.6 million in 1996
from a negligible amount in 1995. Pro forma depreciation and amortization
increased to $3.3 million in 1996 from $3.1 million in 1995. As a percentage of
pro forma revenue, pro forma depreciation and amortization increased to 0.4% in
1996 from 0.3% in 1995.
Other Income (Expense)
Interest expense was $1.0 million in 1996 and zero in 1995. All of the
interest expensed in 1996 was incurred subsequent to March 17, 1996. Pro forma
interest expense increased to $1.3 million in 1996 from $1.2 million in 1995.
There were three primary components of interest expense. First, the
Company assumed or issued $13.2 million of five-year balloon notes in
conjunction with the acquisition of Hub Partnerships in March 1996. These notes
bear interest at an annual rate of 5.45%. Interest expense on these notes began
to decline in the third quarter of 1996 as discretionary payments were made.
Second, in conjunction with the acquisition of APLDDS in May 1996, the Company
issued notes for $6.0 million bearing interest at an annual rate of 6%. There
were no payments made on these notes in 1996. Third, the Company has borrowed to
purchase tractors as it continues its strategy of starting small drayage
operations to service portions of its own business in those areas where it is
needed to enhance customer service. The annual rate of interest on these loans
is determined at the time each tractor is purchased at a rate equal to 3% over
the two-year Treasury note rate.
Interest income was $0.8 million in 1996 and $0.1 million in 1995. Pro
forma interest income was $0.8 million in 1996 and $0.7 million in 1995.
Minority Interest
Minority interest was $16.4 million in 1996 and zero in 1995. On a pro
forma basis, minority interest was $17.4 million in 1996 and $11.7 million in
1995. Management estimates that 20% of the acquired APLDDS business has accrued
to Hub Chicago. To calculate a pro forma minority interest factor, it was
15
estimated that the minority interest would accrue its 70% ownership in Hub
Partnerships, which operates 80% of the APLDDS business. As such, minority
interest as a percentage of income before minority interest and provision for
income taxes of 56% was applied to pro forma income before minority interest for
APLDDS for 1995 and the period January 1, 1996, through May 1, 1996.
On a pro forma basis, minority interest as a percentage of income
before minority interest and provision for income taxes was 61.0% for 1996 and
69.2% for 1995. The higher minority interest percentage in 1995 was the result
of the significant loss reported by APLDDS combined with a lower pro forma
minority interest factor that was applied to that loss as compared to the factor
applied to the rest of the Company's income.
Provision for Income Taxes
Provision for income taxes was $4.3 million in 1996 and negligible in
1995. Other than an insignificant provision for Illinois replacement tax, the
Company had no provision for income taxes prior to March 18, 1996, as the
Company was a federally non-taxable subchapter S corporation. The Company is
providing for income taxes at a net effective rate of 40% for all income
subsequent to March 17, 1996.
Pro Forma Provision For Additional Income Taxes
Additional pro forma income taxes were $0.2 million in 1996 and $1.0
million in 1995. Additional pro forma provision for income taxes are shown to
provide an assumed net effective federal and state income tax rate of 40% of
income before taxes for periods prior to March 18, 1996.
Pro Forma Net Income
Pro forma net income (pro forma only regarding income taxes) increased
to $6.8 million in 1996 from $1.6 million in 1995. Pro forma net income (pro
forma to provide for income taxes and for the Company's acquisitions) increased
to $6.7 million in 1996 from $3.1 million in 1995. The increase in pro forma net
income, which gives effect to the Company's acquisitions, is 113.3% when
comparing 1996 to 1995. This large increase was significantly influenced by the
losses incurred by APLDDS before being acquired by the Company.
Pro Forma Earnings Per Common Share
Pro forma diluted earnings per common share (pro forma only to provide
for income taxes) increased to $1.35 in 1996 from $0.95 in 1995. Pro forma
historical diluted earnings per common share (pro forma to provide for income
taxes and for the Company's acquisitions) increased to $1.15 in 1996 from $0.59
in 1995. The increase in pro forma earnings per common share, which gives effect
to the Company's acquisitions, is 94.9%. This large increase was significantly
influenced by the losses incurred by APLDDS before being acquired by the
Company.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company had two significant transactions that affected
liquidity. These transactions were the secondary offering of the Company's Class
A common stock and the subsequent purchase of the remaining 70% minority
interest in Hub Los Angeles and Hub Golden Gate. These two transactions
represented a cash inflow of $54.8 million and a cash outflow of $59.4 million.
The $59.4 million was recorded as goodwill and will be deducted for tax purposes
over a 15-year period.
The Company had capital expenditures of $8.5 million during 1997.
Capital expenditures are principally made to enhance or expand the Company's
information systems and network capabilities and, earlier in the year, to
purchase tractors to support the Company-owned drayage operations. Part of the
Company's strategy is to supplement third party drayage operations with
Company-owned tractors to service portions of the Company's intermodal business
in those locations where drayage service is limited or where customers require
an enhanced level of service which cannot be competitively accommodated by a
third-party provider. During 1997, the Company began utilizing operating leases
to fulfill it needs for additional tractors.
16
The Company maintains a bank line of credit 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, 1997, the rate was 8%. As of December 31,
1997, the unused and available portion of this credit line was $5.0 million.
In September 1997, the Company obtained an unsecured $36.0 million
five-year revolving line of credit with a bank. The amount available under the
line will decrease by $5.4 million at the beginning of year three and by $7.2
million at the beginning of each of years four and five. The Company can borrow
at the prime rate on a day-to-day basis or may borrow for 30, 60, 90 or 180 day
periods at LIBOR (London Interbank Offered Rate) plus 0.80% to 1.25% based on
the Company's funded debt to EBITDA (earnings before interest expense, income
taxes, depreciation and amortization) ratio. The line of credit agreement
contains certain customary covenants. As of December 31, 1997, the unused and
available portion of this credit line was $36.0 million. On January 1, 1998, the
Company borrowed $15.0 million on the line and used the proceeds to pay off the
$15.0 million note issued in December 1996 related to the Company's purchase of
the remaining 70% minority interest in Hub North Central.
OUTLOOK, RISKS AND UNCERTAINTIES
This "Outlook, Risks and Uncertainties" section contains statements
regarding expectations, hopes, beliefs, intentions or strategies regarding the
future which are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and involve risks and uncertainties
described below that could cause actual results to differ materially from those
projected. 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, the degree and rate of market growth in the markets served by the
Company, changes in industry-wide capacity, further consolidation of rail
carriers, changes in governmental regulation, changes in the cost of services
from vendors and fluctuations in interest rates.
Year 2000
Based on management's recent assessment, the Company has determined
that it is required to modify portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. If such upgrades
or modifications are not made, or are not made in a timely manner, the Year 2000
issue could have a material adverse effect on the Company's results of
operations, financial condition and liquidity. In the event that any of the
Company's significant suppliers or customers does not successfully and timely
achieve Year 2000 compliance, there could be a material adverse effect on the
Company's results of operations, financial condition and liquidity.
The Company will utilize both internal and external resources to
reprogram and test software for Year 2000 compliance. The Company plans to
complete the Year 2000 project not later than December 31, 1998. The Year 2000
total project cost is estimated to range from $1.0 million to $1.5 million.
Costs are expected to be expensed as incurred. The Company had not incurred
significant costs prior to December 31, 1997.
Triggered Call Options
The Company plans to consolidate all of its Texas operations into one
entity after it exercises its options to purchase the remaining 70% minority
interests in Hub Rio Grande, Hub Houston and Hub Dallas. The Company estimates
that these three minority interest purchases will cost $6.0 million in total.
Revenue
Management believes there are two significant factors that could
negatively influence the Company's revenue growth rate. First, the service
disruption in the intermodal industry that peaked in the fourth quarter of 1997
has not yet been fully rectified. Although there has been improvement in the
first quarter of 1998, management cannot predict when normal service levels will
be restored. Furthermore, due to this service disruption, there may be some
customers who switched from using the Company's intermodal service to other
carriers' over-the-road service. These customers may choose to continue to
utilize these carriers even when intermodal service levels are restored. Second,
the Company terminated its contract to provide third-party logistics to a
17
significant customer in January 1998. This customer accounted for $32.5 million
of the Company's revenue in 1997. Revenue should be positively impacted if the
Company should complete its proposed acquisition of Quality, which had revenue
of approximately $70 million in 1997.
Net Revenue
Management expects fluctuations in the net revenue percentage from
quarter-to-quarter caused by changes in business mix, changes in highway
brokerage margins, changes in logistics business margins, changes in trailer and
container capacity, changes in vendor pricing, changes in intermodal industry
growth, changes in intermodal industry service levels and changes in 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 or
changes in customer requirements 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. Should
management decide that customer expectations and the competitive environment
require restructuring of its information systems and related platforms, 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. The Company
also expects to spend approximately $1.0 million to $1.5 million in programming
costs to make its systems compliant with Year 2000 requirements.
Depreciation and Amortization
Management estimates that as a percentage of revenue, depreciation and
amortization will increase in the future. Factors that will cause an increase in
the percentage are increased leasehold improvement amortization as operating
companies transition to larger facilities, increased software amortization
related to the new packages in the truckload brokerage and logistics businesses
and a full year of goodwill amortization associated with the minority interests
purchased in September 1997 related to Hub Los Angeles and Hub Golden Gate.
Should the Company complete its proposed acquisition of Quality, the Company
will incur additional goodwill amortization. Should the Company carry out its
plan to purchase the remaining 70% minority interests related to Hub Rio Grande,
Hub Dallas and Hub Houston, the Company will incur additional goodwill
amortization. Factors that could cause an increase in the percentage are
additional acquisitions or minority interest purchases as well as increased
depreciation expense on any capitalized costs that could be incurred in
conjunction with a change in the Company's information systems strategy.
Other Income (Expense)
Management estimates interest expense will increase primarily due to
the increase in debt that will result if the Company completes its proposed
acquisition of Quality and concurrently exercises its call options to purchase
the remaining 70% minority interests in Hub Rio Grande, Hub Houston and Hub
Dallas. The Company estimates that these transactions will increase debt by
approximately $16.4 million.
18
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 (i) make payments on the balloon notes, (ii) make payments on the APLDDS
notes, (iii) make payments on the Company's line of credit, (iv) fund the
purchase of the remaining minority interest in any of its operating
partnerships, (v) fund working capital needs and (vi) fund capital expenditures.
Minority Interest
Factors that could have a material impact and result in minority
interest percentages of income before minority interest to be outside the
historical range are (i) the exercise of any of the Company's options to
purchase the remaining minority interest in any of its operating companies and
(ii) disproportionate changes in the profitability of businesses between those
which are owned 100% by the Company and those which are owned less than 100% by
the Company. The purchase of the remaining minority interests in Hub Los Angeles
and Hub Golden Gate in September 1997, assuming all other factors affecting
minority interest are equal, should cause minority interest as a percentage of
income before minority interest to decline. The decline in this percentage
should be even greater if the Company exercises its existing triggered call
options for Hub Rio Grande, Hub Houston and Hub Dallas.
Earnings Per Common Share
Management believes the Company will continue to see downward pressure
on diluted earnings per common share in 1998 as the railroad industry continues
to rectify its the well-publicized intermodal service problems that peaked
during the fourth quarter of 1997. Diluted earnings per common share were $0.40
in the fourth quarter of 1996 and dropped to $0.36 in the fourth quarter of
1997. The first quarter of 1997 resulted in diluted earnings per common share of
$0.33. It is management's belief that diluted earnings per common share in the
first quarter of 1998 will decrease $0.10 to $0.13 from the same quarter in
1997. A decline in diluted earnings per common share from the prior year will
likely continue until the intermodal industry recovers from its service problems
and reestablishes itself as a dependable service provider.
Liquidity and Capital Resources
The Company has the continuing option, exercisable any time after the
local in-charge executive currently associated with an operating partnership
ceases to be an employee, to purchase the remaining interest in that
partnership. The future exercise of such options could result in the need for
significant funds. Those funds may come from existing cash, third-party debt,
other financing or any combination thereof.
The Company expects to complete the acquisition of Quality as well as
exercise its call options related to Hub Rio Grande, Hub Dallas and Hub Houston.
Management believes its line of credit will be sufficient to fund the cash
requirements related to these transactions.
The Company believes that cash, cash to be provided by operations and
cash available under its lines of credit 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 through
at least the year 2002.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants 21
Consolidated Balance Sheets - December 31, 1997 and December 31, 1996 22
Consolidated Statements of Operations - Years ended December 31, 1997,
December 31, 1996 and December 31, 1995 23
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1997, December 31, 1996 and December 31, 1995 24
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
December 31, 1996 and December 31, 1995 25
Notes to Consolidated Financial Statements 26
20
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) and subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements and schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. and subsidiaries as of December 31, 1997 and 1996, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
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, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 15, 1998
(except with
respect to the
matter discussed
in Note 16, as to
which the date is
February 20, 1998)
21
HUB GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
----------------------
1997 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,056 $ 13,893
Accounts receivable, net 127,673 114,125
Deferred taxes 1,222 --
Prepaid expenses and other current assets 1,961 3,532
--------- ---------
TOTAL CURRENT ASSETS 142,912 131,550
PROPERTY AND EQUIPMENT, net 19,616 15,105
GOODWILL, net 102,151 42,255
DEFERRED TAXES 2,479 11,357
OTHER ASSETS 668 958
--------- ---------
TOTAL ASSETS $ 267,826 $ 201,225
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 102,364 $ 94,884
Other 12,639 8,144
Accrued expenses
Payroll 6,013 4,988
Other 3,259 3,186
Deferred taxes - 1,307
Current portion of long-term debt 3,428 3,164
--------- ---------
TOTAL CURRENT LIABILITIES 127,703 115,673
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 22,873 28,714
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST 6,788 10,714
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 77 59
Additional paid-in capital 109,878 55,083
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 15,965 6,440
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 110,462 46,124
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 267,826 $ 201,225
========= =========
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
22
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended December 31,
--------------------------------------
1997 1996 1995
----------- ----------- ---------
REVENUE:
Trade $ 1,064,479 $ 750,784 $ 66,696
Affiliates - 3,459 14,712
------------ ----------- ---------
Total revenue 1,064,479 754,243 81,408
TRANSPORTATION COSTS 934,624 662,679 75,142
------------ ----------- ---------
Net revenue 129,855 91,564 6,266
COSTS AND EXPENSES:
Salaries and benefits 64,280 43,913 2,457
Selling, general and administrative 27,478 17,147 1,196
Depreciation and amortization 4,602 2,579 46
------------ ----------- ---------
Total costs and expenses 96,360 63,639 3,699
Operating income 33,495 27,925 2,567
------------ ----------- ---------
OTHER INCOME (EXPENSE):
Interest expense (2,225) (996) -
Interest income 1,466 786 71
Other, net 133 (11) -
------------ ----------- ---------
Total other income (expense) (626) (221) 71
Income before minority interest and provision for income taxes 32,869 27,704 2,638
------------ ----------- ---------
Minority interest 16,995 16,366 -
------------ ----------- ---------
Income before provision for income taxes 15,874 11,338 2,638
Provision for income taxes 6,349 4,294 39
------------ ----------- ---------
Historical net income $ 9,525 $ 7,044 $ 2,599
============ =========== =========
Historical basic earnings per common share $ 1.48 $ 1.41 $ 1.56
============ =========== =========
Historical diluted earnings per common share $ 1.46 $ 1.39 $ 1.56
============ =========== =========
Pro forma provision for additional income taxes 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
=========== =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
23
HUB GROUP, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended December 31, 1997
(in thousands, except shares)
Tax Benefit
Purchase of Purchase
Price in Price
Common Stock Additional Excess of in Excess of
---------------------- Paid-in Predecessor Predecessor Retained Stockholders'
Shares Amount Capital Basis Basis Earnings Equity
---------- ----------- ------------ -------------- -------------- ---------- -------------
Balance at January 1, 1995 200 $ 25 $ 17 $ - $ - $ 1,727 $ 1,769
Net income - - - - - 2,599 2,599
Distributions to stockholders - - - - - (3,205) (3,205)
Issuance of common stock 100 1 1 - - - 2
---------- ----------- ------------ -------------- -------------- ----------- -------------
Balance at December 31, 1995 300 26 18 - - 1,121 1,165
Net income - - - - - 7,044 7,044
Distributions to stockholders - (25) (17) - - (1,725) (1,767)
Issuance of common stock in
acquisition 1,662,296 - - - - - -
Retirement of shares acquired (200) - - - - - -
Sale of common stock in
initial public offering, net 4,261,250 59 55,083 - - - 55,142
Acquisition of general
partnership interests - - - (25,764) 10,306 - (15,458)
Purchase of common stock (100) (1) (1) - - - (2)
---------- ----------- ------------ -------------- -------------- ----------- -------------
Balance at December 31, 1996 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
========== =========== ============ ============== ============== =========== =============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
24
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Cash flows from operating activities:
Net income $ 9,525 $ 7,044 $ 2,599
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,688 2,786 46
Deferred taxes 6,349 2,722 -
Minority interest 16,995 16,366 -
Gain on sale of assets (107) (59) -
Changes in working capital, net of effects of purchase transactions:
Accounts receivable, net (13,663) (29,976) (757)
Prepaid expenses and other current assets 1,583 (1,801) 14
Accounts payable 11,759 20,851 (629)
Accrued expenses 1,023 2,549 (44)
Other assets 303 (106) 48
-------------- -------------- --------------
Net cash provided by operations 39,455 20,376 1,277
-------------- -------------- --------------
Cash flows from investing activities:
Cash used in acquisitions, net (164) (37,459) -
Purchases of minority interest (60,955) (2,513) -
Purchases of property and equipment, net (8,488) (7,862) (98)
-------------- -------------- --------------
Net cash used in investing activities (69,607) (47,834) (98)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock in initial public offering, net (45) 52,945 -
Proceeds from sale of common stock in secondary offering, net 54,763 - -
Proceeds from sale of common stock 95 - 2
Purchase of common stock - (2) -
Distributions to stockholders - (1,104) (3,205)
Distributions to minority interest (20,921) (5,814) -
Payments on long-term debt (6,409) (7,271) -
Proceeds from issuance of long-term debt 832 2,595 -
-------------- -------------- --------------
Net cash provided by (used in) financing activities 28,315 41,349 (3,203)
-------------- -------------- --------------
Net increase/(decrease) in cash (1,837) 13,891 (2,024)
Cash and cash equivalents, beginning of period 13,893 2 2,026
-------------- -------------- --------------
Cash and cash equivalents, end of period $ 12,056 $ 13,893 $ 2
============== ============== ==============
Supplemental disclosures of cash flow information Cash paid for:
Interest $ 342 $ 117 $ -
Income taxes 386 2,344 41
Non-cash investing and financing activities:
Notes payable issued as distributions to stockholders $ - $ 663 $ -
Note payable issued to purchase minority interest - 14,970 -
The accompanying notes to consolidated financial statements are an
integral part of these statements.
25
HUB GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Description of Business and Summary of Significant Accounting
Policies
Business: Hub Group, Inc. and its subsidiaries (the "Company") provide
intermodal transportation services utilizing 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 $6,425,000 and $1,548,000 at December 31,
1997 and 1996, respectively, are included in accounts payable.
Receivables: The Company's reserve for uncollectible accounts receivable
was approximately $303,000 and $405,000 at December 31, 1997, and 1996,
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 the
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 $2,050,000 and
$525,000 as of December 31, 1997 and 1996, 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 trade 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 1996 and 1997.
One customer in the food industry accounted for approximately 30% of revenue in
1995. Another customer in the consumer household products industry accounted for
11.2% of revenue in 1995. 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.
26
Income Taxes: Prior to March 18, 1996, the Company had elected to be taxed as
an S corporation under the Internal Revenue Code. The income of an S corporation
is taxable to its stockholders rather than the Company itself. Income tax
expense incurred prior to March 18, 1996, represents Illinois replacement tax.
On March 18, 1996, the Company became a taxable C corporation. The pro forma
provision for additional income taxes was calculated assuming the Company was
operating as a taxable C corporation since January 1, 1995. The Company accounts
for certain income and expense items differently for financial reporting and
income tax purposes. Deferred tax assets 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 February 1997, the Financial Accounting Standards
Board issued Financial Accounting Standard No. 128 ("SFAS 128") addressing
earnings per share. SFAS 128 changed the methodology of calculating earnings per
share and requires disclosure of basic earnings per share and diluted earnings
per share. The company adopted SFAS 128 in December 1997 and has retroactively
restated all periods presented. 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.
Distributions: During the period prior to March 18, 1996, the Company operated
as an S corporation and made periodic distributions of income to its
stockholders which are reflected in the accompanying statements of stockholders'
equity.
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.
Reclassifications: Certain items previously reported have been reclassified
to conform with the 1997 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 and has been included in all periods presented on
a historical cost basis.
Concurrent with the acquisition of Hub Chicago in March 1996, 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, Hub Group, Inc., together
with its new wholly owned subsidiary, Hub Chicago, acquired with cash a
27
controlling interest in each of 27 operating partnerships (collectively referred
to as "Hub Partnerships"). The combined financial statements of Hub
Partnerships, the predecessor to the majority of the business of the Company,
are included under Item 14 of the Company's Form 10-K, filed with the Securities
and Exchange Commission.
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 $54.8 million.
NOTE 3. Business Combinations
On March 18, 1996, the Company acquired a controlling interest in Hub
Partnerships for a total purchase price of approximately $43,309,000 in cash.
The purchase price of these acquisitions was allocated to the assets acquired
and liabilities assumed based on the fair value at the date of acquisition using
the purchase method of accounting.
The portion of the difference between fair value and historical cost of
individual assets acquired and liabilities assumed attributable to interests
acquired by the Company from non-control group stockholders was recorded at fair
market value. This resulted in goodwill of approximately $17,207,000. The
remaining portion of the difference between fair value and historical cost
attributable to interests acquired from control group stockholders,
approximately $25,764,000, has been charged to equity as purchase price in
excess of predecessor basis.
In connection with the purchase of the controlling interest in Hub
Partnerships, approximately $10,306,000 has been recorded as a deferred tax
benefit utilizing an assumed effective tax rate of 40% representing the tax
effect of the purchase price in excess of predecessor basis, with the
corresponding credit recorded as an increase to equity.
On May 2, 1996, the Company purchased the rights to service the
customers of American President Lines Domestic Distribution Services, a division
of APL Land Transport Services, Inc., for approximately $8,000,000. The
$8,000,000 was financed with $2,000,000 in cash and $6,000,000 in notes. The
notes bear interest at an annual rate of 6% with three equal annual principal
payments due beginning May 2, 1997. The acquisition was recorded using the
purchase method of accounting resulting in goodwill of approximately $8,090,000.
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.
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 purchase price allocations presented
are preliminary.
28
The following summarizes the effects of businesses acquired and
accounted for as purchases in 1996 as if they had been acquired as of January 1,
1995:
(Unaudited)
Years Ended December 31,
------------------------
1996 1995
----------- -----------
(000's)
Revenue as reported $ 754,243 $ 81,408
Revenue of purchased businesses for period prior to
acquisitions, net of eliminations 184,660 810,343
----------- -----------
Pro forma revenue $ 938,903 $ 891,751
----------- -----------
Historical net income as reported $ 7,044 $ 2,599
Net income (loss) of purchased businesses for
period prior to acquisitions (260) 920
Adjustment for goodwill amortization (96) (383)
----------- -----------
Pro forma net income $ 6,688 $ 3,136
----------- -----------
Historical diluted earnings per share as reported $ 1.39 $ 1.56
Effect of purchased businesses prior to acquisitions (0.24) (0.97)
----------- -----------
Pro forma historical diluted earnings per share $ 1.15 $ 0.59
----------- -----------
Business acquisitions which involved the use of cash were accounted for as
follows:
Years Ended
December 31,
-----------------------
1997 1996
----------- -----------
(000's)
Accounts receivable $ (115) $ 75,576
Prepaid expenses and other current assets 12 1,584
Property and equipment 79 9,308
Goodwill 466 25,297
Deferred tax benefit, net - 10,575
Other assets 13 628
Accounts payable (216) (74,694)
Accrued expenses (75) (5,190)
Long-term debt - (20,921)
Minority interest - (162)
Purchase price in excess of predecessor basis - 25,764
Tax benefit of purchase price in excess of predecessor basis - (10,306)
----------- ------------
Cash used in acquisitions, net $ 164 $ 37,459
----------- ------------
29
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, 1997 December 31, 1996 December 31, 1995
----------------------- ----------------------- -----------------------
(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 $9,525 6,420 $1.48 $7,044 5,000 $1.41 $2,599 1,662 $1.56
------ ------ --------- ------ ------ --------- ------ ------ ---------
Effect of Dilutive Securities
Stock options - 114 - - 58 - - - -
------ ------ --------- ------ ------ --------- ------ ------ ---------
Historical Diluted EPS
Income available to
common stockholders
plus assumed exercises $9,525 6,534 $1.46 $7,044 5,058 $1.39 $2,599 1,662 $1.56
------ ------ --------- ------ ------ --------- ------ ------ ---------
NOTE 5. Purchases of Minority Interest
On August 1, 1996, the Company purchased the remaining 70% minority
interest in Hub City Tennessee, L.P. for approximately $2,513,000 in cash.
On December 12, 1996, the Company purchased the remaining 70% minority
interest in Hub City North Central, L.P. in exchange for a note for
approximately $14,970,000.
On March 1, 1997, the Company purchased an approximate 44% minority
interest in Hub Group Distribution Services 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.
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.
30
NOTE 6. Property and Equipment
Property and equipment consist of the following:
Years Ended December 31,
1997 1996
----------- ------------
(000's)
Land $ 56 $ 92
Building and improvements 233 841
Leasehold improvements 886 629
Computer equipment and software 14,512 8,305
Furniture and equipment 4,172 3,419
Transportation equipment and automobiles 5,828 4,541
----------- ------------
25,687 17,827
Less: Accumulated depreciation and amortization (6,071) (2,722)
----------- ------------
PROPERTY AND EQUIPMENT, net $ 19,616 $ 15,105
=========== ============
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,
1997 1996
------------ -----------
U.S. federal statutory rate 34.0% 34.0%
State taxes, net of federal benefit 6.0 6.0
Income earned as non-taxable Subchapter S corporation
prior to March 18, 1996 - (2.1)
------------ -----------
Net effective rate 40.0% 37.9%
------------ -----------
The following is a summary of the Company's provision for income taxes:
Years Ended December 31,
1997 1996
----------- ------------
(000's)
Current
Federal $ - $ 1,336
State and local - 236
----------- ------------
- 1,572
----------- ------------
Deferred
Federal 5,397 2,314
State and local 952 408
----------- ------------
6,349 2,722
----------- ------------
Total provision $ 6,349 $ 4,294
----------- ------------
31
The following is a summary of the Company's deferred tax assets and
liabilities:
Years Ended December 31,
1997 1996
------------ -----------
(000's)
Reserve for uncollectible accounts receivable $ 361 $ 152
Accrued compensation 172 206
Net operating loss carryforward 2,635 -
------------ -----------
Current deferred tax asset 3,168 358
Property and equipment 1,851 8,531
Income tax basis in excess of financial basis of goodwill 11,012 11,845
------------ -----------
Long-term deferred tax asset 12,863 20,376
------------ -----------
Total deferred tax asset $ 16,031 $ 20,734
------------ -----------
Prepaids $ (53) $ (43)
Receivables (1,893) (1,622)
------------ -----------
Current deferred tax liability (1,946) (1,665)
Goodwill (10,384) (9,019)
------------ -----------
Total deferred tax liability $ (12,330) $ (10,684)
------------ -----------
NOTE 8. Long-Term Debt and Financing Arrangements
Fair value approximates book value at the balance sheet dates.
Years Ended December 31,
-----------------------------
1997 1996
-------------- --------------
(000's)
Installment notes payable due through 2001, monthly installments ranging from
$365 - $16,898, including interest, ranging from 2.9%
to 10.9%, collateralized by certain equipment $ 2,948 $ 2,976
Unsecured balloon notes, interest compounded annually at 5.45%, interest and
principal due March, 2001 (see Note 12) 4,032 7,533
Mortgage note payable due in 1998 with monthly installments of $2,381, including
interest at 8.5%, collateralized by certain property 195 206
Notes 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 4,000 6,000
Note payable due January 1, 1998, with interest at an annual rate of 7% (see
Note 12 and below) 14,970 14,970
Capital lease obligations, collateralized by certain equipment 156 193
-------------- --------------
Total long-term debt 26,301 31,878
Less current portion (3,428) (3,164)
-------------- --------------
$ 22,873 $ 28,714
-------------- --------------
The note payable for $14,970,000 due on January 1, 1998 was refinanced
through the $36.0 million credit facility which is described below and is
classified as long-term.
32
Aggregate principal payments, in thousands, due subsequent to December
31, 1997, are as follows:
1998 $ 3,428
1999 3,068
2000 729
2001 4,106
2002 14,970
----------
$ 26,301
----------
On March 18, 1996, the Company assumed a line of credit for $5,000,000
which was unused at December 31, 1997 and 1996. At December 31, 1997, the
interest rate was 8.00%. The interest rate is set 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. In October 1996, the
Company authorized the issuance of a standby letter of credit for $1,000,000,
which has no expiration date.
On September 17, 1997, the Company closed on an unsecured $36.0 million
five-year revolving line of credit with a bank. The amount available under the
line will decrease by $5.4 million at the beginning of year three and by $7.2
million at the beginning of each of years four and five. The Company can borrow
at the prime rate on a day-to-day basis or may borrow for 30, 60, 90 or 180 day
periods at LIBOR (London Interbank Offered Rate) plus 0.80% to 1.25% based on
the Company's funded debt to EBITDA (earnings before interest expense, income
taxes, depreciation and amortization) ratio. The credit facility also contains
certain financial covenants which, among others, requires that the Company
maintain required levels of EBITDA, funded debt to EBITDA, 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, 1997. The
line was unused at December 31, 1997.
NOTE 9. Rental Expense and Lease Commitments
Minimum annual rental commitments, in thousands, at December 31, 1997,
under noncancellable operating leases, principally for real estate and
equipment, are payable as follows:
1998 $ 4,098
1999 3,429
2000 2,807
2001 2,275
2002 1,444
2003 26
----------
$ 14,079
----------
Total rental expense was approximately $4,535,000, $2,773,000 and
$121,000 for 1997, 1996 and 1995, 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. Under the 1996 and 1997 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.
33
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 is not adopting the accounting
provisions of 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,
1997 1996
----------- ------------
Pro forma net income as reported (000's) 9,525 6,803
Pro forma net income pro forma for Statement 123 (000's) 9,261 6,599
Historical basic earnings per common share pro forma for
Statement 123 $ 1.44 $ 1.32
Historical diluted earnings per common share pro forma
for Statement 123 $ 1.42 $ 1.30
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.
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,
1997 1996
----------- ------------
Dividend yield 0.0% 0.0%
Risk-free interest rate 5.8% 6.5%
Volatility factor 40.0% 25.0%
Expected life in years 6.0 6.0
Information regarding these option plans for 1997 and 1996 is as follows:
1997 1996
-------------------------------- ---------------------------
Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price
----------------- -------------- ---------- --------------
Options outstanding, beginning of year 357,500 $ 14.00 - $ -
Options exercised (4,700) 14.00 - -
Options granted 49,000 29.23 362,500 14.00
Options forfeited - - (5,000) 14.00
----------------- -------------- ---------- --------------
Options outstanding, end of year 401,800 $ 15.86 357,500 $ 14.00
Weighted-average fair value of options
granted during the year $ 11.02 $ 5.54
Option price range at end of year $14.00 to $31.25 $ 14.00
Option price for exercised shares $ 14.00 $ -
Options available for grant at end of year 193,500 92,500
34
The following table summarizes information about options outstanding at
December 31, 1997:
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
- ----------------- --------- ---------------- ----------- --------- -------------
$ 14.00 352,800 8.19 $ 14.00 71,600 $ 14.00
$ 29.00 44,000 9.82 29.00 - -
$ 31.25 5,000 9.90 31.25 - -
--------- ---------------- ----------- --------- ------------
$14.00 to $31.25 401,800 8.39 $ 15.86 71,600 $ 14.00
NOTE 11. 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 $1,163,000, $704,000 and $50,000
for 1997, 1996 and 1995, respectively.
NOTE 12. 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 are payable, in part, to the above related parties totaling
approximately $4,758,000. Approximately 33% of the balloon notes payable at
December 31, 1997 and 1996, is due to the related parties. The Class B
stockholders have voting control over the Company. The same related parties
described above also continue to receive approximately 33% of minority interest
distributions of income from the Company. Furthermore, these parties received
cash and notes from the Company totaling approximately $24,366,000 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. and Hub Group
Distribution Services.
The Company provided transportation services to Hub Partnerships prior
to acquiring Hub Partnerships on March 18, 1996. Revenue from Hub Partnerships
was $3,459,000 and $14,712,000 for the period January 1 through March 17, 1996
and 1995, respectively. Net fees were approximately $104,000 and $440,000 for
the period January 1 through March 17, 1996 and 1995, respectively.
Hub Partnerships provided transportation services to the Company prior
to being acquired, which resulted in costs of $3,880,000 and $21,720,000 for the
period January 1 through March 17, 1996 and 1995, respectively.
The Company paid assessment fees based primarily on volume and sales
commission expenses to Hub Partnerships prior to acquiring Hub Partnerships.
These charges totaled approximately $112,000 and $670,000 for the period January
1 through March 17, 1996 and 1995, respectively.
The Company leased a building from a shareholder. Monthly payments in
1995 were $9,178 and extended through November 1996. The Company no longer
leased the building from a shareholder beginning in December 1996.
35
NOTE 13. 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.
NOTE 14. Equity
December 31, 1997
--------------------------
Issued and
Authorized Outstanding
----------- ------------
Preferred stock, $.01 par value 2,000,000 -
Class A common stock, $.01 par value 12,337,700 6,990,950
Class B common stock, $.01 par value 662,300 662,296
December 31, 1996
--------------------------
Issued and
Authorized Outstanding
----------- ------------
Preferred stock, $.01 par value 2,000,000 -
Class A common stock, $.01 par value 12,337,700 5,261,250
Class B common stock, $.01 par value 662,300 662,296
NOTE 15. Selected Quarterly Financial Data (Unaudited)
The following table sets forth selected quarterly financial data for
each of the quarters in 1997 and 1996 (in thousands, except per share amounts):
Quarters
--------------------------------------------------------
First Second Third Fourth
------------- -------------- ------------ --------------
Year Ended December 31, 1997:
Revenue $ 251,120 $ 268,200 $ 273,521 $ 271,638
Net revenue 30,214 32,460 33,767 33,414
Operating income 7,916 8,392 9,706 7,481
Historical net income 1,978 2,217 2,557 2,773
Historical basic earnings per share $ 0.33 $ 0.37 $ 0.41 $ 0.36
Historical diluted earnings per share $ 0.33 $ 0.37 $ 0.41 $ 0.36
Quarters
--------------------------------------------------------
First Second Third Fourth
------------- -------------- ------------ --------------
Year Ended December 31, 1996:
Revenue $ 48,797 $ 209,236 $ 238,584 $ 257,626
Net revenue 5,385 25,124 28,707 32,348
Operating income 1,755 6,843 8,951 10,376
Historical net income 883 1,662 2,105 2,394
Historical basic earnings per share $ 0.40 $ 0.28 $ 0.35 $ 0.40
Historical diluted earnings per share $ 0.40 $ 0.28 $ 0.35 $ 0.40
Pro forma net income 642 1,662 2,105 2,394
Pro forma basic earnings per share $ 0.29 $ 0.28 $ 0.35 $ 0.40
Pro forma diluted earnings per share $ 0.29 $ 0.28 $ 0.35 $ 0.40
36
NOTE 16. Subsequent Event
On February 20, 1998, the Company signed letters of intent to acquire
all of the outstanding stock of Quality Intermodal Corporation ("Quality"). The
Company has offered to pay $4.1 million in cash and $6.3 million through the
issuance of a three-year note, bearing interest at an annual rate of 5.6%, for
all of Quality's stock.
37
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 19, 1998, 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 19, 1998, 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 19, 1998, 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 19,
1998, 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.
38
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, 1997 and December 31,
1996
Consolidated Statements of Operations - Years ended December 31,
1997, December 31, 1996 and December 31, 1995
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1997, December 31, 1996 and December 31, 1995
Consolidated Statements of Cash Flows - Years ended December 31,
1997, December 31, 1996 and December 31, 1995
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.
39
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 23, 1998 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 23, 1998
Phillip C. Yeager
/s/ David P. Yeager Vice Chairman, Chief Executive Officer and Director March 23, 1998
David P. Yeager
/s/ William L. Crowder Vice President-Finance and Chief Accounting Officer March 23, 1998
William L. Crowder (Principal Financial and Accounting Officer)
/s/ Thomas L. Hardin President, Chief Operating Officer and Director March 23, 1998
Thomas L. Hardin
/s/ Charles R. Reaves Director March 23, 1998
Charles R. Reaves
/s/ Martin P. Slark Director March 23, 1998
Martin P. Slark
/s/ Gary D. Eppen Director March 23, 1998
Gary D. Eppen
40
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Hub Partnerships
- ----------------
Report of Independent Accountants F-2
Combined Statements of Operations - For the period January 1 through
March 17, 1996 and the year ended December 31, 1995 F-3
Combined Statements of Stockholders' Equity - For the period January 1
through March 17, 1996 and the year ended December 31, 1995 F-4
Combined Statements of Cash Flows - For the period of January 1
through March 17, 1996 and the year ended December 31, 1995 F-5
Notes to Combined Financial Statements F-6
Hub Group, Inc.
- ---------------
Schedule II - Valuation and Qualifying Accounts S-1
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Hub Partnerships:
We have audited the accompanying combined statements of operations,
stockholders' equity and cash flows for the period January 1, 1996 through March
17, 1996 and the year ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statements of operations,
stockholders' equity and cash flows are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined statements of operations, stockholders' equity and
cash flows. 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 combined statements of operations, stockholders'
equity and cash flows referred to above present fairly, in all material
respects, the results of operations and cash flows of Hub Partnerships for the
period January 1, 1996 through March 17, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 6, 1997
F-2
HUB PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
January 1, Year Ended
through December 31,
March 17, 1996 1995
-------------- -------------
REVENUE:
Trade $ 142,413 $ 644,124
Affiliate 3,992 22,390
-------------- -------------
Total revenue 146,405 666,514
PURCHASED TRANSPORTATION 128,405 584,840
-------------- -------------
Net revenue 18,000 81,674
COSTS AND EXPENSES:
Salaries and benefits 9,807 41,049
Selling, general and administrative 3,393 16,052
Depreciation and amortization 553 2,453
-------------- -------------
Total costs and expenses 13,753 59,554
Operating income 4,247 22,120
-------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (56) (147)
Interest income 120 623
Other, net 95 462
-------------- -------------
Total other income 159 938
INCOME BEFORE INCOME TAXES 4,406 23,058
INCOME TAXES 126 290
-------------- -------------
NET INCOME $ 4,280 $ 22,768
============== =============
The accompanying notes to combined financial statements are an integral
part of these statements.
F-3
HUB PARTNERSHIPS
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
For the year ended December 31, 1995 and
January 1, 1996 to March 17, 1996
(in thousands, except shares)
Common Stock Additional Total
------------------------ Paid-in Treasury Retained Stockholders'
Shares Amount Capital Stock Earnings Equity
------------ ----------- ----------- ----------- ------------ ---------------
Balance at January 1, 1995 105,750 $ 1,918 $ 509 $ (32) $ 13,331 $ 15,726
Net income - - - - 22,768 22,768
Distributions to stockholders - - - - (24,122) (24,122)
Stock issued 50 25 120 - - 145
Retained earnings allocable to
mandatorily redeemable stock - - - - (2,780) (2,780)
------------ ----------- ----------- ----------- ------------ ---------------
Balance at December 31, 1995 105,800 1,943 629 (32) 9,197 11,737
Net income - - - - 4,280 4,280
Distributions to stockholders - (1,730) (629) 32 (13,477) (15,804)
============ =========== =========== =========== ============ ===============
Balance at March 17, 1996 105,800 $ 213 $ - $ - $ - $ 213
============ =========== =========== =========== ============ ===============
The accompanying notes to combined financial statements are an
integral part of these statements.
F-4
HUB PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
January 1, Year Ended
through December 31,
March 17, 1996 1995
-------------- --------------
Cash flows from operating activities:
Net income $ 4,280 $ 22,768
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 553 2,453
Loss (gain) on sale of assets 3 (92)
Changes in working capital:
Accounts receivable, net 604 (2,822)
Prepaid expenses and other current assets 889 (780)
Accounts payable 4,783 1,794
Accrued expenses (140) 508
Other assets (407) (58)
-------------- --------------
Net cash provided by operations 10,565 23,771
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment, net (775) (4,485)
-------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock - 145
Distributions to stockholders (13,014) (24,122)
Purchase and retirement of common stock - -
Payments on long-term debt (361) (927)
Proceeds from issuance of long-term debt 418 1,762
-------------- --------------
Net cash used in financing activities (12,957) (23,142)
-------------- --------------
Net decrease in cash (3,167) (3,856)
Cash, beginning of period 10,949 14,805
============== ==============
Cash, end of period $ 7,782 $ 10,949
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 56 $ 116
Income taxes 130 262
Non-cash financing activity:
Notes payable issued as distributions to stockholders $ 13,176 $ -
The accompanying notes to combined financial statements are an integral
part of these statements.
F-5
HUB PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. Description of Business and Summary of Significant Accounting Policies
Business: The Company (defined below) provides intermodal transportation
services utilizing third party arrangements with railroads and drayage
companies. The Company also arranges for transportation of freight by truck and
performs logistics services.
Principles of Combinations: These combined financial statements include the
financial statements of 26 S corporations and one partnership which are
substantially all under common ownership control (collectively referred to as
the "Company" or "Hub Partnerships"). The financial statements of Hub
Partnerships are presented herein to reflect the financial condition and results
of operations of Hub Partnerships as of and for the periods in which Hub
Partnerships was the predecessor to the business acquired by Hub Group, Inc., as
required pursuant to the rules and regulations of the Securities and Exchange
Commission. All significant intercompany transactions and balances have been
eliminated.
Cash and Cash Equivalents: The Company considers as cash equivalents all highly
liquid investments with an original maturity of three months or less.
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;
furniture and equipment 3 to 10 years; and transportation equipment 3 to 12
years. 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.
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 trade 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 date,
approximates fair market value. The Company primarily serves customers located
throughout the United States with no significant concentration in any one
region. 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 majority of the entities included in Hub Partnerships have
elected to be taxed as S Corporations. By this election, income of an S
Corporation is taxable to the stockholders rather than the Company itself.
Income tax expense primarily represents applicable state income taxes of those
states that do not recognize Subchapter S Corporations or states which impose
taxes on S Corporation income.
Distributions: The Company makes periodic distributions of income which are
reflected in the accompanying statements of stockholders' equity.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
F-6
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.
Reclassifications: Certain items previously reported have been reclassified to
conform with the 1996 presentation.
NOTE 2. Rental Expense and Lease Commitments
Minimum annual rental commitments, in thousands, at December 31, 1995,
under noncancellable operating leases, principally for real estate and
equipment, are payable as follows:
1996 $ 2,198
1997 1,557
1998 966
1999 716
2000 624
2001 & thereafter 853
----------
Total minimum lease payments $ 6,914
----------
Total rental expense was approximately $1,629,000, $2,190,000 and
$423,000 for 1994, 1995 and the period January 1, through March 17, 1996,
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 3. 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.
NOTE 4. 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 $4,500. The Company's
contributions to the Plan were approximately $562,000, $713,000 and $287,000 for
1994, 1995 and the period January 1, through March 17, 1996, respectively.
NOTE 5. Related Party Transactions
The Company provides transportation services to Hub Group, Inc. Revenue
from Hub Group, Inc. was $13,535,000, $21,720,000 and $3,880,000 for 1994, 1995
and the period January 1, through March 17, 1996, respectively. Net fees earned
were $670,000, $734,000 and $116,000 for the same periods, respectively.
F-7
Hub Group, Inc. provides transportation services to the Company, which
resulted in costs of $11,885,000, $14,712,000 and $3,459,000 for 1994, 1995 and
the period January 1, through March 17, 1996, respectively.
The Company charges assessment fees based primarily on volume and sales
commission expense to Hub Group, Inc. Revenue for such fees were approximately
$657,000, $670,000 and $112,000 for 1994, 1995 and the period January 1, through
March 17, 1996, respectively.
During 1994, the Company leased four facilities from stockholders.
During 1995 and the period January 1, through March 17, 1996, the Company leased
two facilities from stockholders. Rental expense relating to these agreements
was approximately $193,000, $147,000 and $39,000 for 1994, 1995 and the period
January 1, through March 17, 1996, respectively. The terms of the leases extend
through 2000.
NOTE 6. Stockholder Agreements
The majority of the entities included in Hub Partnerships have
agreements with certain of their stockholders which set forth rights of the
stockholders and the corporation. Generally, the agreements require that any
stockholder wishing to sell his shares must first offer the shares for sale to
the corporation and then to the other stockholders, before offering them to a
third party. Generally the agreements state that upon death, disability, or
retirement of a stockholder, the stockholder is required to offer to sell all of
the shares owned by the stockholder to the corporation. Certain agreements
stipulate the corporation is required to purchase these shares. Under the
majority of the agreements, selling price approximates book value, and under two
agreements the selling price approximates fair market value. Generally the
agreements also state that, in the event that a stockholder is terminated, the
stockholder is required to offer to sell his shares to the corporation. Certain
agreements stipulate the corporation is required to purchase the stockholder's
shares. Redemption amounts relating to agreements with mandatory redemption
features are included in Mandatorily Redeemable Common Stock in the accompanying
balance sheet. Payments for shares generally is made over a five-year period.
Additionally, these agreements generally contain non-compete clauses which
preclude a stockholder, while employed by the corporation, from managing,
operating, or controlling a business either similar or dissimilar to the
business carried on by the corporation. The clause also states that following
employment by the corporation, a stockholder may not be employed by or perform
services for any competitor for a period of up to two years. These agreements
continue with respect to the S Corporations' limited partnership interests in
the operating partnerships of Hub Group, Inc.
NOTE 9. Special Distribution
Immediately prior to March 18, 1996, the Company distributed
substantially all of its equity, including retained earnings through March 17,
1996, to its shareholders in the form of cash and notes. The notes are five-year
balloon notes bearing interest at an annual rate of 5.45%. Interest is
compounded annually with all principal and interest due in March 2001.
F-8
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
1997 $ 405,000 $ 1,005,000 $ (1,107,000) $ 303,000
1996 125,000 768,000 (488,000) 405,000
1995 110,000 15,000 - 125,000
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 Registrants
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 Registrants 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 Registrants 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
Registrants report on Form 10-Q dated and filed November 13, 1997,
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 City Alabama, L.P. Delaware
Hub City Atlanta, L.P. Delaware
Hub City Boston, L.P. Delaware
Hub City Canada, L.P. Delaware
Hub City Cleveland, L.P. Delaware
Hub City Dallas, L.P. Delaware
Hub City Detroit, L.P. Delaware
Hub City Florida, L.P. Delaware
Hub City Golden Gate, L.P. Delaware
Hub City Houston, L.P. Delaware
Hub City Indianapolis, L.P. Delaware
Hub City Kansas City, L.P. Delaware
Hub City Los Angeles, L.P. Delaware
Hub City Mid-Atlantic, L.P. Delaware
Hub City New Haven, L.P. Delaware
Hub City New Orleans, L.P. Delaware
Hub City New York State, L.P. Delaware
Hub City New York-New Jersey, L.P. Delaware
Hub City North Central, L.P. Delaware
Hub City Ohio, L.P. Delaware
Hub City Philadelphia, L.P. Delaware
Hub City Pittsburgh, L.P. Delaware
Hub City Portland, L.P. Delaware
Hub City Rio Grande, L.P. Delaware
Hub City St. Louis, L.P. Delaware
Hub City Tennessee, L.P. Delaware
Hub Group Associates, Inc. Illinois
Hub Highway Services Illinois
Hub Group Distribution Services Illinois
Hub Holdings, Inc. Delaware
Q.S. of Illinois, Inc. Illinois
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
EXHIBIT 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports dated February 15, 1998, except with respect to the matter discussed in
Note 16, as to which the date is February 20, 1998, for Hub Group, Inc. and
February 6, 1997 for Hub Partnerships included in this Form 10-K, into Hub
Group, Inc.'s previously filed Registration Statement File No. 333-6327 on Form
S-8, and Registrations File No. 333-48185 on Form S-8.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 20, 1998