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Hargreaves Services Plc- -------------------------------------------------------------------------------- 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 ------------------ 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: NoneSecurities 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 requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes X No __Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of Registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. [X]The aggregate market value of the Registrant's voting stock held bynon-affiliates on March 16, 1998, based upon the last reported sale price onthat 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 Acommon stock, par value $.01 per share, and 662,296 outstanding shares of ClassB common stock, par value $.01 per share. Documents Incorporated by ReferenceThe Registrant's definitive Proxy Statement for the Annual Meeting ofStockholders to be held on May 19, 1998, (the "Proxy Statement") isincorporated by reference in Part III of this Form 10-K to the extent statedherein. Except with respect to information specifically incorporated byreference in this Form 10-K, the Proxy Statement is not deemed to be filed as apart hereof.- -------------------------------------------------------------------------------- PART I Item 1. BUSINESSGeneral Hub Group, Inc. ("Hub Group" or the "Company") is a Delaware corporationwhich was incorporated on March 8, 1995. Since its founding as an intermodalmarketing company ("IMC") in 1971, Hub Group has grown to become the largest IMCin the United States and a full service transportation provider, offeringintermodal, truck brokerage and comprehensive logistics services. The Company operates through an extensive nationwide network of 33 officesor "Hubs." Each Hub is strategically located in a market that has a significantconcentration of shipping customers and one or more railheads. Each Hubfunctions essentially as a stand-alone business managed locally by an executive,known as a "Principal," with significant transportation experience. Localmanagement is responsible for operations, customer service and regionalmarketing, while corporate management is responsible for group strategicplanning and administration, financial services, relationships with therailroads, management of the Company's logistics services business andmanagement information systems support. Hub Group also maintains a NationalAccounts sales force to provide centralized marketing of the Company's servicesto large and geographically diversified shippers. On March 18, 1996, Hub Group purchased Hub City Terminals, Inc. ("HubChicago") in a stock-for-stock acquisition. Concurrent with the acquisition ofHub Chicago, Hub Group completed the initial public offering of 4,261,250 sharesof its Class A common stock (the "Class A Common Stock"), with net proceeds toHub Group of $52.9 million. Simultaneously with the initial public offering, HubGroup, through its new wholly owned subsidiary, Hub Chicago, acquired with cashthe general partnership interests in 26 operating partnerships, each with one ormore offices. In addition, Hub Group directly acquired with cash a controllinginterest in the Hub Group Distribution Services partnership ("Hub Distribution")which performs certain specialized logistics functions (each of the 26 operatingpartnerships and Hub Distribution are a "Hub Partnership" and collectively arethe "Hub Partnerships"). With the exception of Hub Distribution, the Company hasthe continuing option, exercisable any time after the Principal currentlyassociated with a Hub Partnership ceases to be an employee, to purchase thelimited partnership interest in that Hub Partnership. The decision as to whetheror when to exercise an option to acquire the limited partnership interest in aHub Partnership will be made by the independent members of the Company's Boardof Directors. Unless the context otherwise requires, references to "Hub Group"or the "Company" include Hub Chicago, the Hub Partnerships and their respectivesubsidiaries. During 1997, the Company made several significant strategic investments. OnMarch 1, 1997, the Company exercised its option to acquire an additionalapproximately 44% ownership interest in Hub Distribution for an aggregate priceof approximately $1,500,000, raising the Company's general partnership interestin Hub Distribution to 65%. In September 1997, the Company completed a secondaryoffering of 1,725,000 shares of Class A Common Stock, with net proceeds to theCompany of approximately $54.8 million. On September 17, 1997, the Companyexercised its option to acquire the remaining 70% minority interests in Hub CityLos Angeles, L.P. ("Hub Los Angeles") and Hub City Golden Gate, L.P. ("HubGolden Gate") for approximately $59.4 million. On September 17, 1997, theCompany also closed on a new unsecured $36.0 million five-year revolving line ofcredit with Harris Trust and Savings Bank. (See Item 7 Management's Discussionand Analysis of Financial Condition and Results of Operations - Liquidity andCapital Resources.) On October 31, 1997 the Company exercised it option toacquire the remaining 70% minority interest in Hub City New Orleans, L.P. ("HubNew Orleans") for a nominal sum. On October 31, 1997, the Company alsopurchased, 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 HubGroup. On March 10, 1998, the Company announced that it would acquire the minorityinterest in Hub City Rio Grande, L.P., Hub City Dallas, L.P. and Hub CityHouston, 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 1Hubs in Texas, as well as Mexico, will be wholly-owned by the Company. On March12, 1998, the Company announced that it had recently signed a letter of intentto purchase all of the outstanding stock of Quality Intermodal Corporation("Quality"). The Company has offered to pay $4.1 million in cash and $6.3million through the issuance of a three-year note, bearing interest at an annualrate of 5.6%, for all of Quality's stock. Quality is an intermodal and truckloadbrokerage service provider headquartered in Houston and with offices in Dallas,Los Angeles, Chicago, Philadelphia and Atlanta. Quality had revenue ofapproximately $70 million in 1997. Although there is no guarantee that theacquisition will occur, the Company hopes to sign a definitive purchaseagreement in the near future.Services Provided The Company's transportation services can be broadly placed into thefollowing categories: Intermodal As an IMC, the Company arranges for the movement of itscustomers' freight in containers and trailers over long distances. Hub Groupcontracts with railroads to provide transportation over the long-haul portion ofthe shipment and with local trucking companies, known as "drayage companies,"for pickup and delivery. In markets where adequate drayage service is notavailable, the Company supplements third party drayage services withCompany-owned drayage operations. (See Item 7 Management's Discussion andAnalysis of Financial Condition and Results of Operations - Liquidity andCapital Resources.) As part of its intermodal services, the Company negotiatesrail and drayage rates, electronically tracks shipments in transit, consolidatesbilling and handles claims for freight loss or damage on behalf of itscustomers. The Company uses its Hub network, connected through its proprietaryadvanced intermodal management ("AIM") system, to access containers and trailersowned by leasing companies, railroads and steamship lines. Because each Hub notonly handles its own outbound shipments but also handles inbound shipments fromother Hubs, each Hub is able to track trailers and containers entering itsservice area and use that equipment to fulfill its customers' outbound shippingrequirements. This effectively allows the Company to "capture" containers andtrailers and keep them within the Hub network without having to make a capitalinvestment in transportation equipment. Highway Services The Company arranges for the transportation of freight bytruck, providing customers another option for their transportation needs. Thisis accomplished by matching customers' needs with carriers' capacity to providethe appropriate service and price combination. The Company has contracts with asubstantial base of carriers allowing it to meet the varied needs of itscustomers. The Company negotiates rates, tracks shipments in transit,consolidates billing and handles claims for freight loss and damage on behalf ofits customers. The Company's brokerage operation also provides customers withspecialized programs. Through the Dedicated Trucking program, certain carriershave informally agreed to move freight for Hub's customers on a continuousbasis. This arrangement allows Hub to gain control of the trucking equipment toeffectively meet its customer's needs without owning the equipment. Through theCore Carrier-Plus One program, Hub assumes the responsibility for over-the-roadtruckload shipments that the customer's core carriers cannot handle. Thisservice supplements the customer's core carrier program and helps ensure thetimely delivery of the customer's freight. Logistics The Company has expanded its service capabilities as customersincreasingly outsource their transportation needs. The Company currently offersvarious 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 asother non-traditional logistics services such as installation of point of salemerchandise displays. When providing complete transportation services, the Company essentiallyreplaces the customer's transportation department. Once the Company is hired as 2a single source logistics provider, it negotiates with intermodal, railcar,truckload and less-than-truckload carriers to move the customer's productthrough the supply chain and then dispatches the move for the customer. Usingits advanced transportation management software, the Company consolidates ordersinto full truckload shipments, chooses a shipping route, electronically tendersloads 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 twoemployees into a network of 31 Hubs in the United States, one Hub in Canada andone Hub in Mexico. Hub Group also has several satellite sales offices. Indeveloping this network, the Company has carefully selected each location toensure coverage in areas with significant concentrations of shipping customersand 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 RochesterThe entire Hub network is interactively connected through the Company's AIMsystem. This enables Hub Group to move freight into and out of every major cityin the United States and most locations in Canada and Mexico. The Company's Hubin New Haven was recently closed and its operations transferred to Boston. Inconnection with the reorganization in Texas, the Company anticipates that theHub in San Antonio will become a sales office in the near future. Each Hub manages the freight originating in or destined for its servicearea. In a typical intermodal transaction, the customer contacts the local Hubto obtain shipping schedules and a price quote for a particular freightmovement. The local Hub obtains the necessary intermodal equipment, arranges forit to be delivered to the customer by a drayage company and, after the freightis loaded, arranges for the transportation of the container or trailer to therail ramp. Information is entered into the AIM system by the local Hub, whichmonitors the shipment to ensure that it will arrive as scheduled. Thisinformation is simultaneously transmitted through the AIM system to the Hubclosest to the point of delivery, which arranges for and confirms delivery by adrayage company. This arrangement among the Hubs is transparent to the customerand allows the customer to maintain its relationship solely with the originatingHub. The Company provides brokerage services to its customers in a similarmanner. In a typical brokerage transaction, the customer contacts the local Hubto obtain transit information and a price quote for a particular freightmovement. The customer then provides appropriate shipping information to thelocal Hub. The local Hub makes the delivery appointment and arranges with theappropriate carrier to pick up the freight. Once it receives confirmation thatthe freight has been picked up, the local Hub monitors the movement of thefreight until it reaches its destination and the delivery has been confirmed. Ifthe carrier notifies Hub Group that after delivering the load it will needadditional freight, the Hub located nearest the destination is notified of thecarrier'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 thecarrier.Marketing and Customers The Company believes that fostering long-term customer relationships iscritical to the Company's success. Through these long-term relationships, theCompany is able to better understand its customer's needs and to tailortransportation services for a specific customer, regardless of the customer'ssize or volume. The Company has created a database of current and prospectivecustomers, profiling each customer's shipping patterns, which the Companyperiodically updates. This database allows the Company to target its marketingto meet each customer's specific requirements. 3 The Company currently has full time marketing representatives at each Hubwith primary responsibility for servicing local and regional accounts. Thesesales representatives work from the 33 Hubs and the Company's satellite salesoffices. This network provides a local marketing contact for small and mediumshippers in most major metropolitan areas within the United States. In 1985, the Company organized National Accounts to service the needs ofthe nation's largest shippers. The Company recognized that although largeshippers originate freight from multiple locations throughout the country, theirlogistics function is usually centralized. The Company essentially mirrored thisstructure by servicing national accounts from a central location and parcelingout the servicing of individual freight shipments to the appropriate Hub. Thereare currently 14 National Accounts sales representatives who report to theCompany's Executive Vice President of National Accounts. The National Accountssales representatives regularly call on the nation's largest shippers to developbusiness relationships and to expand the Company's participation in servicingtheir transportation needs. When a business opportunity is identified by aNational Accounts sales representative, the Company's market development andpricing personnel and the local Hubs work together to provide a transportationsolution tailored to the customer's needs. Local Hubs provide transportationservices to National Accounts customers. After the plan is implemented, NationalAccounts' personnel maintain regular contact with the shipper to ensure customersatisfaction and to refine the process as necessary. This unique combination of local and regional marketing has produced alarge, diverse customer base. The Company services customers in a wide varietyof 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 continuedimprovement of its AIM system and other technology to ensure that the Companywill remain a leader among transportation providers in information processingfor intermodal transportation. The AIM system consists of a network of IBMAS/400 computers located at the Hubs and linked to a host computer at theCompany's headquarters. Hub Group uses IBM's Global Network as the nucleus forlinking its computers and databases. This configuration provides a real timeenvironment for transmitting data among the Hubs and the Company's headquartersusing electronic data interchange ("EDI"), electronic mail and other protocols.It also allows Hub to communicate electronically with each railroad, certaindrayage companies and those customers with EDI capabilities. The Company's proprietary AIM system is the primary mechanism used by theHubs to process customer transportation requests, schedule and track shipments,prepare customer billing, establish account profiles and retain criticalinformation for analysis. The AIM system provides mainframe-to-mainframeconnectivity with each of the major rail carriers, enabling the Company toelectronically schedule and track shipments in a real time environment. In addition, the AIM system's EDI features offer customers with EDI capability acompletely paperless process, including load tendering, shipment dispatch,shipment tracking, customer billing and remittance processing. The Companyaggressively pursues opportunities to establish EDI interfaces with itscustomers and carriers. To more effectively manage its highway services business, the Companyrecently installed software ("Visual Movement") that was co-developed with theVisual Movement Corporation. Just as the AIM system has helped automate theCompany's intermodal operations, this software is designed to automate theCompany's highway services operations. Visual Movement processes customertransportation requests, schedules and tracks shipments, prepares customerbilling, establishes account profiles and retains critical information foranalysis. It also interfaces with the carrier by handling load tendering,shipment dispatch, shipment tracking, customer billing and remittanceprocessing. 4Relationship with Railroads A key element of the Company's business strategy is to strengthen its closeworking relationship with each of the major intermodal railroads in the UnitedStates. The Company views its relationship with the railroads as a partnership.Due to the Company's size and relative importance, many railroads have dedicatedsupport personnel to focus on the Company's day-to-day service requirements. Ona semi-annual basis, senior executives of the Company and each of the railroadsmeet to discuss major strategic issues concerning intermodal transportation.Several of the Company's executive officers, including both the Company'sChairman and President, are former railroad employees, which makes themwell-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 termspursuant to which the Company's intermodal shipments are handled by therailroads. The contracts have staggered renewal terms with the earliestexpiration at the end of December 1998. While there can be no assurances thatthese contracts will be renewed, the Company has in the past successfullynegotiated extensions of the contracts with the railroads. Transportation ratesare market driven and are typically negotiated between the Company and therailroads on a customer specific basis. Consistent with industry practice, manyof the rates negotiated by the Company are special commodity quotations("SCQs"), which provide discounts from published price lists based oncompetitive market factors and are designed by the railroads to attract newbusiness or to retain existing business. SCQ rates are generally issued for theaccount of a single IMC. SCQ rates apply to specific customers in specifiedshipping 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," whichconsists of agreements and rules that govern the framework pursuant to which thedrayage companies perform services for the Company. Participants in the programcommit to provide high quality service, clean and safe equipment, maintain adefined on-time performance level and follow specified procedures designed tominimize freight loss and damage. Whenever possible, the Company uses theservices 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. Thelocal Hubs negotiate drayage rates for transportation between specific originand destination points. These rates generally are valid, with minor exceptionsfor 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 activecarriers in its database which it uses to transport freight. The local Hubs dealdaily with these carriers on an operational level. Hub Highway Services handlesthe administrative and regulatory aspects of the carrier relationship. Hub'srelationships with its carriers are important since these relationshipsdetermine pricing, load coverage and overall service. 5Risk Management and Insurance The Company requires all drayage companies participating in the QualityDrayage Program to carry at least $1.0 million in general liability insuranceand $1.0 million in cargo insurance. Railroads, which are self insured, providelimited common carrier liability protection, generally up to $250,000 pershipment, although higher coverage is available on a load-by-load basis. Tocover freight damage when a carrier's liability cannot be established or acarrier's insurance is insufficient to cover freight loss or damage, the Companycarries its own cargo insurance with a limit of $1.5 million per container ortrailer and a limit of $20 million per occurrence. The Company also carries $2.0million of general liability insurance with a companion $10.0 million umbrellapolicy on this general liability insurance.Government Regulation Hub Highway Services, a partnership controlled by the Company, is licensedby the Department of Transportation ("DOT") as a broker in arranging for thetransportation of general commodities by motor vehicle. To the extent that theHubs perform truck brokerage services, they do so under the license granted toHub Highway Services. The DOT prescribes qualifications for acting in thiscapacity, including certain surety bonding requirements. While the DOT requiresa $10,000 surety bond to maintain this license, the Company has voluntarilyposted a $100,000 surety bond. To date, compliance with these regulations hasnot had a material adverse effect on the Company's results of operations orfinancial condition. However, the transportation industry is subject tolegislative or regulatory changes that can affect the economics of the industryby requiring changes in operating practices or influencing the demand for, andcost of providing, transportation services.Competition The transportation services industry is highly competitive. The Companycompetes against other IMCs, as well as logistics companies, third partybrokers, over-the-road truckload carriers and railroads that market their ownintermodal services. In addition, there is an emerging trend for largertruckload carriers to enter into agreements with railroads to market intermodalservices nationwide. Competition is based primarily on freight rates, quality ofservice, reliability, transit time and scope of operations. Severaltransportation service companies and truckload carriers, and all of the majorrailroads, have substantially greater financial and other resources than theCompany.General Employees As of February 28, 1998, the Company had approximately 1,246employees. The Company is not a party to any collective bargaining agreement andconsiders its relationship with its employees to be satisfactory. Other No material portion of the Company's operations is subject torenegotiation of profits or termination of contracts at the election of thefederal government. The Company has not spent a material amount on companysponsored research and development activities or on customer sponsored researchactivities. None of the Company's patents and trademarks is believed to bematerial to the Company. The Company's business is seasonal to the extent thatcertain customer groups, such as retail, are seasonal.Item 2. PROPERTIES The Company directly, or indirectly through the Hub Partnerships, operates39 offices throughout the United States and in Canada and Mexico, including theCompany's headquarters in Lombard, Illinois, its National Accounts office inStamford, Connecticut, four National Accounts sales offices, Hub Logisticsoffices in Lombard and Stamford and Hub Distribution's office. The officebuildings used by the Hubs located in Toledo and Kansas City are owned, and theremainder are leased. The office building in Kansas City is subject to amortgage. Most office leases have initial terms of more than one year, and manyinclude options to renew. While some of the Company's leases are month-to-monthand others expire in the near term, the Company does not believe that it willhave difficulty in renewing them or in finding alternative office space. TheCompany believes that its offices are adequate for the purposes for which theyare currently used. 6Item 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 andare being defended by the Company's insurance carriers. Management does notbelieve that the litigation to which it is currently a party, if determinedadversely to the Company, would individually or in the aggregate have amaterially adverse effect on the Company's financial position or results ofoperations. 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 holdersduring the fourth quarter of 1997.Executive Officers of the Registrant In reliance on General Instruction G to Form 10-K, information on executiveofficers of the Registrant is included in this Part I. The table sets forthcertain information as of March 20, 1998 with respect to each person who is anexecutive officer of the Company. Name Age Position ------------------ --- ------------------------------------------------- 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 Boardsince October 1985. From April 1971 to October 1985, Mr. Yeager served asPresident of Hub Chicago. Mr. Yeager became involved in intermodaltransportation in 1959, five years after the introduction of intermodaltransportation in the United States, as an employee of the Pennsylvania andPennsylvania Central Railroads. He spent 19 years with the Pennsylvania andPennsylvania Central Railroads, 12 of which involved intermodal transportation.In 1991, Mr. Yeager was named Man of the Year by the Intermodal TransportationAssociation. In 1995, he received the Salzburg Practitioners Award from SyracuseUniversity in recognition of his lifetime achievements in the transportationindustry. In October 1996, Mr. Yeager was inducted into the Chicago AreaEntrepreneurship Hall of Fame sponsored by the University of Illinois atChicago. In March 1997, he received the Presidential Medal from Dowling Collegefor his achievements in transportation services. Mr. Yeager graduated from theUniversity 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 thefather-in-law of Robert J. Jensen. David P. Yeager has served as the Company's Vice Chairman of the Boardsince January 1992 and as Chief Executive Officer of the Company since March1995. From October 1985 through December 1991, Mr. Yeager was President of HubChicago. From 1983 to October 1985, he served as Vice President, Marketing ofHub Chicago. Mr. Yeager founded the St. Louis Hub in 1980 and served as itsPresident from 1980 to 1983. Mr. Yeager founded the Pittsburgh Hub in 1975 andserved as its President from 1975 to 1977. Mr. Yeager received a Masters inBusiness Administration degree from the University of Chicago in 1987 and aBachelor of Arts degree from the University of Dayton in 1975. Mr. Yeager is theson of Phillip C. Yeager, the brother of Mark A. Yeager and the brother-in-lawof Robert J. Jensen. Mr. Yeager also serves as a director of SPR Inc. 7 Thomas L. Hardin has served as the Company's President since October 1985and has served as Chief Operating Officer and a director of the Company sinceMarch 1995. From January 1980 to September 1985, Mr. Hardin was VicePresident-Operations and from June 1972 to December 1979, he was General Managerof the Company. Prior to joining the Company, Mr. Hardin worked for the MissouriPacific Railroad where he held various marketing and pricing positions. During1996, Mr. Hardin was Chairman of the Intermodal Association of North America. William L. Crowder has been the Company's Vice President of Finance andChief Financial Officer since April 1994 and Treasurer since July 1996. FromJanuary 1990 through December 1993, Mr. Crowder was Vice President of Financeand Treasurer of Sears Logistics Services, Inc., a transportation, distributionand home delivery subsidiary of Sears Roebuck & Company. Mr. Crowder worked atSears Roebuck & Company from 1966 through 1989 in various senior financialmanagement positions. Mr. Crowder received a Bachelor of Business Administrationdegree from Georgia State University in 1966. Daniel F. Hardman has been the President-Chicago Region since February1996. Mr. Hardman has been employed by the Hub Group since 1982, serving asPresident of Hub Chicago from December 1992 to February 1996, Vice President ofHub Chicago from January 1987 to December 1992, General Manager of Sales of HubChicago from August 1985 to January 1987, President of Hub Charlotte from June1984 to August 1985 and Regional Sales Manager of Hub Chicago from December 1982to June 1984. Mr. Hardman is a former Director of the Intermodal TransportationAssociation and is presently a member of the Chicago Traffic Club and theChicago Intermodal Transportation Association. Mr. Hardman is a 1991 graduate ofthe Certificate Program in Business Administration from the University ofIllinois. Mark A. Yeager has been the Company's Division President since November1997 and Secretary and General Counsel since March 1995. From March 1995 toNovember 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 anassociate at the law firm of Grippo & Elden from January 1991 through May 1992and an associate at the law firm of Sidley & Austin from May 1989 throughJanuary 1991. Mr. Yeager received a Juris Doctor degree from GeorgetownUniversity in 1989 and a Bachelor of Arts degree from Indiana University in1986. Mr. Yeager is the son of Phillip C. Yeager, the brother of David P. Yeagerand the brother-in-law of Robert J. Jensen. John T. Donnell has been Executive Vice President of National Accountssince October 1993. From October 1985 through October 1993, Mr. Donnell servedas Vice President of National Accounts. Prior to joining the Company in 1985,Mr. Donnell worked for Transamerica Leasing as Vice President of Marketing wherehe was responsible for marketing 40,000 intermodal trailers to the railroads andthe intermodal marketing industry. Mr. Donnell received a Master of BusinessAdministration degree from Northwestern University in 1981 and a Bachelor ofScience degree in Marketing from Northeast Louisiana University in 1961. Robert L. Maro has been Vice President of Information Services sinceNovember 1991. From January 1978 through November 1991, Mr. Maro worked asDirector of Operations for Zink & Katich, an information technology consultingfirm that provided consulting services to the Company. Mr. Maro received aBachelor of Science degree in Mathematics from Chicago State University in 1974. Robert J. Jensen has been President of Hub Group Operations Managementsince July 1991. He served as President of Hub St. Louis from July 1985 throughJuly 1991 and as General Manager of Hub St. Louis from October 1980 through July1985. Mr. Jensen received a Bachelor of Science degree in Finance from theUniversity 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. 8 Richard M. Rogan has been Executive Vice President of Marketing sinceNovember 1997 and President of Hub Highway Services since May 1995. Prior tojoining 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 BurlingtonMotor Carriers, Inc., where he served as President and Chief Executive Officerfrom March 1988 to April 1993 and as an Executive Vice President from July 1985to February 1988. Mr. Rogan's transportation career spans 25 years and includesearlier assignments with the Illinois Central Railroad, North American Van Linesand Schneider National. He received a Bachelor of Business Administration degreefrom Loyola University of Chicago in 1962 and a Master of BusinessAdministration degree from the Wharton School of the University of Pennsylvaniain 1963. He has served on the Board of Directors of the ATA Foundation as wellas the Interstate Truckload Carrier Conference ("ITCC"). He is a past Chairmanof the ITCC Highway Policy Committee and has also served on the Advisory Boardof the Trucking Profitability Strategies Conference at the University ofGeorgia. PART IIItem 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Class A Common Stock of the Company trades on the NASDAQ NationalMarket tier of The NASDAQ Stock Market ("NASDAQ") under the symbol "HUBG." TheClass A Common Stock was first traded on NASDAQ on March 13, 1996, concurrentwith the underwritten initial public offering of the Company's Class A CommonStock 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 theClass A Common Stock. Set forth below are the high and low prices for shares ofthe Class A Common Stock of the Company in 1996 from March 13, 1996, the date ofthe Offering, through the end of the first quarter of 1996 and for each fullquarterly 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 ofthe Class A Common Stock and, in addition, there were an estimated 1,943beneficial owners of the Class A Common Stock whose shares were held by brokersand other fiduciary institutions. On March 20, 1998, there were nine holders ofrecord 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 oneither the Class A Common Stock or the Class B Common Stock. The declaration andpayment of dividends by the Company are subject to the discretion of the Boardof Directors. Any determination as to the payment of dividends will depend uponthe results of operations, capital requirements and financial condition of theCompany, and such other factors, as the Board of Directors may deem relevant.Accordingly, there can be no assurance that the Board of Directors will declareor pay dividends on the shares of Common Stock in the future. The certificate ofincorporation of the Company requires that any cash dividends must be paidequally on each outstanding share of Class A Common Stock and Class B CommonStock. The Company's credit agreement prohibits the Company from payingdividends on the Common Stock if there has been, or immediately following thepayment of a dividend would be, a default or an event of default under thecredit agreement. The Company is currently in compliance with the covenantscontained in the credit agreement. 9Item 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 $ 73,123Net revenue 129,855 91,564 6,266 6,288 5,138Operating income 33,495 27,925 2,567 2,348 1,843Income before minority interest and taxes 32,869 27,704 2,638 2,406 1,939Income before taxes 15,874 11,338 2,638 2,406 1,939Historical net income 9,525 7,044 2,599 2,369 1,907Historical basic earnings per common share $ 1.48 $ 1.41 $ 1.56 $ 1.43 $ 1.15Historical diluted earnings per common share $ 1.46 $ 1.39 $ 1.56 $ 1.43 $ 1.15Pro forma provision for additional income taxes(3) 241 1,016 925 744Pro forma net income $ 6,803 $ 1,583 $ 1,444 $ 1,163Pro forma basic earnings per common share $ 1.36 $ 0.95 $ 0.87 $ 0.70Pro 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 $ 1,125Total assets 267,826 201,225 9,083 10,360 9,511Long-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 commonstock through a secondary offering which resulted in net proceeds ofapproximately $54,763,000. (2) On March 18, 1996, Hub Group, Inc. purchased Hub City Terminals, Inc. ("HubChicago") in a stock-for-stock acquisition through the issuance of 1,000,000shares of the Company's Class A common stock and 662,296 shares of the Company'sClass B common stock. Hub Chicago has been accounted for similar to the poolingof interests method of accounting and has been included in all periods presentedon a historical cost basis. Concurrent with the acquisition of Hub Chicago, theCompany completed the initial public offering of 4,261,250 shares of its Class Acommon stock, with net proceeds to the Company of approximately $52,945,000.Coincident with the initial public offering, a selling stockholder sold1,000,000 shares of the Company's Class A common stock through a secondaryoffering. The Company did not receive any net proceeds from the sale of theshares by the selling stockholder. Concurrent with the initial public offering,the Company acquired with cash a controlling interest in each of 27 operatingpartnerships. On May 2, 1996, the Company acquired the rights to service thecustomers of American President Lines Domestic Distribution Services. See theNotes to the Company's Consolidated Financial Statements.(3) Prior to March 18, 1996, the Company was an S corporation and not subject toFederal corporate income taxes. On March 18, 1996, the company changed itsstatus from an S corporation to a C corporation. The statement of operationsdata reflects a pro forma provision for income taxes as if the Company weresubject 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. 10Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCAPITAL 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 astock-for-stock acquisition through the issuance of 1,000,000 shares of Class Acommon stock and 662,296 shares of Class B common stock. Hub Chicago has beenaccounted for similar to the pooling of interests method of accounting and hasbeen included in all periods presented on a historical cost basis. Concurrentwith the acquisition of Hub Chicago in March 1996, Hub Group, Inc. completed theinitial public offering of 4,261,250 shares of its Class A common stock.Coincident with the initial public offering, a selling stockholder sold1,000,000 shares of Hub Group, Inc.'s Class A common stock through a secondaryoffering. In September 1997, the Company completed a secondary offering of1,725,000 shares of Hub Group, Inc.'s Class A common stock.BUSINESS COMBINATIONS Concurrent with the initial public offering, Hub Group, Inc., togetherwith its wholly owned subsidiary, Hub Chicago, acquired a controlling interestin each of 27 operating partnerships (collectively referred to as "HubPartnerships"). Prior to March 18, 1996, Hub Chicago and Hub Partnerships wereunder common control and formed a network that collectively worked withcustomers and vendors. On May 2, 1996, Hub Group, Inc. purchased the rights toservice 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 therevenue of Hub Chicago. As a result, consolidated revenue and operating expensefor Hub Group, Inc. and its subsidiaries (the "Company") increased dramaticallyin the periods subsequent to March 17, 1996. As a result of the APLDDS acquisition, the Company acquired the rightto service APLDDS customers, but did not assume any assets or liabilitiesassociated with that business. Furthermore, the Company hired only 36 of themore than 200 employees in the APLDDS organization. The APLDDS business wasabsorbed directly into the operations of Hub Chicago and Hub Partnerships and management believes the associated incremental operating costs are significantlyless than the historical operating costs experienced by APLDDS. Management doesnot track the incremental purchased transportation and operating costsattributable to the acquired APLDDS business. Consequently, discussion ofresults of operations excluding acquisitions, when comparing the results ofoperations for the year ended December 31, 1996, to the year ended December 31,1995, is limited to comparisons of revenue. Discussion of pro forma financialdata for the years ended December 31, 1996, and 1995, reflects results ofoperations as if Hub Group, Inc. had acquired Hub Partnerships and APLDDS as ofJanuary 1, 1995. On October 31, 1997, the Company acquired the 50% interest in itsinternational joint venture, HLX Company, LLC, that it did not previously ownfor $300,000 in cash. On February 20, 1998, the Company signed letters of intent to acquireall of the outstanding stock of Quality Intermodal Corporation ("Quality"). TheCompany has offered to pay $4.1 million in cash and $6.3 million through theissuance of a three-year note, bearing interest at an annual rate of 5.6%, forall of Quality's stock. Quality primarily offers intermodal and truckloadbrokerage services with offices in Houston, Dallas, Los Angeles, Chicago,Atlanta, and Philadelphia. 11TRIGGERED CALL OPTIONS On March 5, 1998, the local in-charge executives of Hub City RioGrande, L.P. ("Hub Rio Grande"), Hub City Dallas, L.P. ("Hub Dallas"), and HubCity Houston, L.P. ("Hub Houston") resigned, triggering the Company's ability toexercise its call option to acquire the remaining 70% minority interest at aprice calculated in accordance with an agreed upon formula.RESULTS OF OPERATIONSYear Ended December 31, 1997, Compared to Year Ended December 31, 1996Revenue Revenue totaled $1,064.5 million for 1997, representing an increase of41.1% over 1996. The primary reason for the increase is attributed to having therevenue from the Hub Partnerships and APLDDS acquisitions for the full year in1997 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%, truckloadbrokerage revenue increased 37.6% and logistics revenue increased 59.0% over proforma revenue for 1996. The 1996 pro forma revenue included the revenuegenerated by APLDDS prior to being acquired by the Company. APLDDS wasexperiencing significant decline in its revenue prior to being acquired. Thisdecline had a negative influence on the 1997 growth rate over the 1996 pro formarevenue. Excluding the revenue in 1996 relating to APLDDS prior to it beingacquired by the Company, Hub Chicago and Hub Partnerships, on a combined basisassuming Hub Chicago had acquired Hub Partnerships on January 1, 1996,experienced a revenue increase of 19.2% in 1997 compared to 1996. Intermodalrevenue, excluding APLDDS from all periods, increased 10.8% in 1997 whencompared to 1996. Management believes that the well-publicized railroad servicedisruptions experienced by the intermodal industry during the fourth quarter of1997 negatively impacted intermodal revenue growth. (See "Outlook, Risks andUncertainties")Net Revenue Net revenue as a percentage of revenue increased slightly to 12.2% in1997 from 12.1% in 1996. The increase is attributed to Hub Chicago having alower net revenue percentage on its business as compared to Hub Partnerships.Consequently, Hub Chicago lowered the net revenue percentage in 1996, as the HubPartnerships 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 $43.9million in 1996. As a percentage of revenue, salaries and benefits increased to6.0% from 5.8%. The increase in the percentage is attributed to Hub Chicagohaving 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 afterMarch 17, 1996.Selling, General and Administrative Selling, general and administrative expenses increased to $27.5 millionin 1997 from $17.1 million in 1996. Selling, general and administrative expensesas a percentage of revenue increased to 2.6% in 1997 from 2.3% in 1996. Theincrease in the percentage is principally attributable to increased spendingrelated to information systems, rent and equipment leases. Expenditures forinformation systems increased as the Company enhanced its operating systems to 12provide better customer service as well as to further develop and expand thecapabilities of its web site. Rent increased as many of the Company's Hubs wererequired to obtain larger office space to accommodate present operations andfuture growth. Expenditures for equipment leases increased as the Company movedtowards leasing, as opposed to purchasing, more of its office and computerequipment.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 amortizationincreased to 0.4% in 1997 from 0.3% in 1996. This increase is attributedprimarily to the increase in goodwill amortization. Goodwill amortizationrelated to the acquisitions of Hub Partnerships and APLDDS was incurred for theentire 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 NorthCentral, L.P. ("Hub North Central"), Hub Group Distribution Services, Hub CityLos Angeles, L.P. ("Hub Los Angeles") and Hub City Golden Gate, L.P. ("HubGolden Gate") occurred in August 1996, December 1996, March 1997, September 1997and September 1997, respectively. The timing of these purchases also causedgoodwill 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 in1996. The increase is primarily attributed to the note issued in conjunctionwith the minority interest purchase related to Hub North Central in mid-Decemberof 1996. The $15.0 million note bore interest at an annual rate of 7% and wasoutstanding for the entire year of 1997. Interest income increased to $1.5 million in 1997 from $0.8 million in1996. The increase is primarily attributed to two factors. First, net proceedsfrom the Company's secondary stock offering of $54.8 million were invested forapproximately one month before such proceeds were used to purchase the minorityinterests in Hub Los Angeles and Hub Golden Gate. Second, results of operationsincluded the interest income generated by Hub Partnerships for the entire yearof 1997 as compared to 1996, where Hub Partnerships was only included afterMarch 17, 1996.Minority Interest Minority interest increased to $17.0 million in 1997 from $16.4 millionin 1996. Minority interest as a percentage of income before minority interestand 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 interestas 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 Illinoisreplacement tax, the Company had no provision for income taxes prior to March18, 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 allincome 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 anassumed net effective federal and state income tax rate of 40% for periods priorto March 18, 1996. 13Net Income Historical net income increased 40.0% to $9.5 million in 1997 over proforma net income (pro forma only to provide for income taxes) of $6.8 million in1996. The increase is attributed primarily to the additional net incomegenerated from the use of the proceeds from the Company's initial publicoffering in March 1996 and the secondary offering in September 1997. Historicalnet income for 1997 increased 42.4% over pro forma net income (pro forma toprovide 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 in1997 over pro forma diluted earnings per common share (pro forma only to providefor income taxes) of $1.35 in 1996. Historical diluted earnings per common sharefor 1997 increased 27.0% over pro forma historical diluted earnings per commonshare (pro forma to provide for income taxes and the Company's acquisitions) for1996. This larger increase was significantly influenced by the losses incurredby APLDDS prior to being acquired by the Company.Year Ended December 31, 1996, Compared to Year Ended December 31, 1995Revenue Revenue totaled $754.2 million for 1996, representing an increase of826.5% over 1995. Without the acquisitions, Company revenues totaled $85.2million for 1996 for an increase of 4.7% over 1995. The minor increase inrevenue without acquisitions is attributed principally to Hub Chicago's loss ofa portion of a significant customer's business. This consumer productmanufacturer moved the production of one of its major products to a facilitythat is now being served by one of the operating partnerships that comprise HubPartnerships. Pro forma revenue increased 5.3% to $938.9 million from $891.8 millionin 1995. The 1995 pro forma revenue was impacted significantly by the additionof the revenue reported by APLDDS. The business acquired from APLDDS on May 2,1996 had been experiencing significant decline during 1995 and the first quarterof 1996. This decline had a negative influence on the pro forma revenue growthrate. Excluding the revenue relating to APLDDS prior to the acquisition onMay 2, 1996, Hub Chicago and Hub Partnerships, on a combined basis assuming HubChicago had acquired Hub Partnerships on January 1, 1995, experienced a revenueincrease of 25.7% to $893.2 million in 1996 from $710.8 million in 1995. Thispercentage increase is primarily attributable to strong growth in truckloadbrokerage and logistics as well as the acquisition of the APLDDS business. Intermodal revenues, excluding APLDDS from all periods, increased moderately ona percentage basis.Net Revenue Net revenue as a percentage of revenue increased to 12.1% for 1996compared to 7.7% in 1995. This increase is primarily a reflection of the highernet revenue as a percentage of revenue that is experienced by Hub Partnershipsas compared to Hub Chicago. Hub Chicago has a larger proportion of highvolume/low margin accounts than does Hub Partnerships. Pro forma net revenue as a percentage of pro forma revenue increased to11.9% in 1996 from 11.3% in 1995. On a pro forma basis, net revenue as apercentage of revenue for the APLDDS business was 7.3% and 4.1% for 1995 and theperiod January 1, 1996 through May 1, 1996, respectively. Management believesthat the net revenue percentage on the transitioned APLDDS business has improvedmodestly over the APLDDS 1995 pro forma net revenue percentage. The lower proforma percentages experienced by APLDDS causes the current year percentages tocompare favorably to the prior year percentages. This favorable pro formacomparison is partially offset by the lower net revenue percentage experiencedby 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 $2.5million in 1995. Pro forma salaries and benefits increased to $55.9 million in1996 from $50.4 million in 1995. APLDDS was a division of APL Land Transport 14Services, Inc. ("APL") and consequently received much of its support servicesfrom APL. In return for these services, APLDDS was assessed a management fee.This arrangement had the effect of deflating salaries and benefits whileinflating selling, general and administrative expenses. As a result, salariesand benefits reported by APLDDS in servicing their customers were lower as apercentage of revenue than traditionally experienced by the Company. For 1995and the period January 1, 1996 through May 1, 1996, salaries and benefits as apercentage of revenue for APLDDS were 3.8% and 4.8%, respectively. Pro formasalaries and benefits as a percentage of pro forma revenue increased to 6.0% for1996 from 5.7% in 1995, which is partially attributed to the historical coststructure of APLDDS. The Company's investment in additional personnel in 1996also contributed to this increase. These additional personnel were hired tohandle additional truckload brokerage and logistics business, to expand thelocal and national sales forces and to provide the financial and administrativeservices required for continued growth.Selling, General and Administrative Selling, general and administrative expenses increased to $17.1 millionin 1996 from $1.2 million in 1995. Pro forma selling, general and administrativeexpenses decreased to $23.2 million in 1996 from $29.8 million in 1995. As apercentage of pro forma revenue these pro forma expenses were 2.5% in 1996 and3.3% for 1995. As explained in "Salaries and Benefits," APLDDS received much ofits support services through a management fee arrangement with APL. This causedthe APLDDS historical selling, general and administrative expenses to be asignificantly greater percentage of revenue than the percentage traditionallyexperienced by the Company. For 1995 and the period January 1, 1996, through May1, 1996, selling, general and administrative expenses as a percentage of revenuefor APLDDS were 7.3% and 6.0%, respectively.Depreciation and Amortization Depreciation and amortization expense increased to $2.6 million in 1996from a negligible amount in 1995. Pro forma depreciation and amortizationincreased to $3.3 million in 1996 from $3.1 million in 1995. As a percentage ofpro forma revenue, pro forma depreciation and amortization increased to 0.4% in1996 from 0.3% in 1995. Other Income (Expense) Interest expense was $1.0 million in 1996 and zero in 1995. All of theinterest expensed in 1996 was incurred subsequent to March 17, 1996. Pro formainterest expense increased to $1.3 million in 1996 from $1.2 million in 1995. There were three primary components of interest expense. First, theCompany assumed or issued $13.2 million of five-year balloon notes inconjunction with the acquisition of Hub Partnerships in March 1996. These notesbear interest at an annual rate of 5.45%. Interest expense on these notes beganto decline in the third quarter of 1996 as discretionary payments were made.Second, in conjunction with the acquisition of APLDDS in May 1996, the Companyissued notes for $6.0 million bearing interest at an annual rate of 6%. Therewere no payments made on these notes in 1996. Third, the Company has borrowed topurchase tractors as it continues its strategy of starting small drayageoperations to service portions of its own business in those areas where it isneeded to enhance customer service. The annual rate of interest on these loansis determined at the time each tractor is purchased at a rate equal to 3% overthe two-year Treasury note rate. Interest income was $0.8 million in 1996 and $0.1 million in 1995. Proforma 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 proforma basis, minority interest was $17.4 million in 1996 and $11.7 million in1995. Management estimates that 20% of the acquired APLDDS business has accruedto Hub Chicago. To calculate a pro forma minority interest factor, it was 15estimated that the minority interest would accrue its 70% ownership in HubPartnerships, which operates 80% of the APLDDS business. As such, minorityinterest as a percentage of income before minority interest and provision forincome taxes of 56% was applied to pro forma income before minority interest forAPLDDS for 1995 and the period January 1, 1996, through May 1, 1996. On a pro forma basis, minority interest as a percentage of incomebefore minority interest and provision for income taxes was 61.0% for 1996 and69.2% for 1995. The higher minority interest percentage in 1995 was the resultof the significant loss reported by APLDDS combined with a lower pro formaminority interest factor that was applied to that loss as compared to the factorapplied to the rest of the Company's income.Provision for Income Taxes Provision for income taxes was $4.3 million in 1996 and negligible in1995. Other than an insignificant provision for Illinois replacement tax, theCompany had no provision for income taxes prior to March 18, 1996, as theCompany was a federally non-taxable subchapter S corporation. The Company isproviding for income taxes at a net effective rate of 40% for all incomesubsequent to March 17, 1996.Pro Forma Provision For Additional Income Taxes Additional pro forma income taxes were $0.2 million in 1996 and $1.0million in 1995. Additional pro forma provision for income taxes are shown toprovide an assumed net effective federal and state income tax rate of 40% ofincome before taxes for periods prior to March 18, 1996.Pro Forma Net Income Pro forma net income (pro forma only regarding income taxes) increasedto $6.8 million in 1996 from $1.6 million in 1995. Pro forma net income (proforma 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 netincome, which gives effect to the Company's acquisitions, is 113.3% whencomparing 1996 to 1995. This large increase was significantly influenced by thelosses 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 providefor income taxes) increased to $1.35 in 1996 from $0.95 in 1995. Pro formahistorical diluted earnings per common share (pro forma to provide for incometaxes and for the Company's acquisitions) increased to $1.15 in 1996 from $0.59in 1995. The increase in pro forma earnings per common share, which gives effectto the Company's acquisitions, is 94.9%. This large increase was significantlyinfluenced by the losses incurred by APLDDS before being acquired by theCompany.LIQUIDITY AND CAPITAL RESOURCES During 1997, the Company had two significant transactions that affectedliquidity. These transactions were the secondary offering of the Company's ClassA common stock and the subsequent purchase of the remaining 70% minorityinterest in Hub Los Angeles and Hub Golden Gate. These two transactionsrepresented 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 purposesover 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'sinformation systems and network capabilities and, earlier in the year, topurchase tractors to support the Company-owned drayage operations. Part of theCompany's strategy is to supplement third party drayage operations withCompany-owned tractors to service portions of the Company's intermodal businessin those locations where drayage service is limited or where customers requirean enhanced level of service which cannot be competitively accommodated by athird-party provider. During 1997, the Company began utilizing operating leasesto fulfill it needs for additional tractors. 16 The Company maintains a bank line of credit for $5.0 million. Theinterest rate is set at the bank's discretion at a rate less than or equal tothe 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 millionfive-year revolving line of credit with a bank. The amount available under theline will decrease by $5.4 million at the beginning of year three and by $7.2million at the beginning of each of years four and five. The Company can borrowat the prime rate on a day-to-day basis or may borrow for 30, 60, 90 or 180 dayperiods at LIBOR (London Interbank Offered Rate) plus 0.80% to 1.25% based onthe Company's funded debt to EBITDA (earnings before interest expense, incometaxes, depreciation and amortization) ratio. The line of credit agreementcontains certain customary covenants. As of December 31, 1997, the unused andavailable portion of this credit line was $36.0 million. On January 1, 1998, theCompany 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 ofthe remaining 70% minority interest in Hub North Central.OUTLOOK, RISKS AND UNCERTAINTIES This "Outlook, Risks and Uncertainties" section contains statementsregarding expectations, hopes, beliefs, intentions or strategies regarding thefuture which are forward looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 and involve risks and uncertaintiesdescribed below that could cause actual results to differ materially from thoseprojected. The Company assumes no liability to update any such forward-lookingstatements. In addition to those mentioned elsewhere in this section, such risksand uncertainties include the impact of competitive pressures in the marketplace, the degree and rate of market growth in the markets served by theCompany, changes in industry-wide capacity, further consolidation of railcarriers, changes in governmental regulation, changes in the cost of servicesfrom vendors and fluctuations in interest rates.Year 2000 Based on management's recent assessment, the Company has determinedthat it is required to modify portions of its software so that its computersystems will properly utilize dates beyond December 31, 1999. If such upgradesor modifications are not made, or are not made in a timely manner, the Year 2000issue could have a material adverse effect on the Company's results ofoperations, financial condition and liquidity. In the event that any of theCompany's significant suppliers or customers does not successfully and timelyachieve Year 2000 compliance, there could be a material adverse effect on theCompany's results of operations, financial condition and liquidity. The Company will utilize both internal and external resources toreprogram and test software for Year 2000 compliance. The Company plans tocomplete the Year 2000 project not later than December 31, 1998. The Year 2000total 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 incurredsignificant costs prior to December 31, 1997.Triggered Call Options The Company plans to consolidate all of its Texas operations into oneentity after it exercises its options to purchase the remaining 70% minorityinterests in Hub Rio Grande, Hub Houston and Hub Dallas. The Company estimatesthat these three minority interest purchases will cost $6.0 million in total.Revenue Management believes there are two significant factors that couldnegatively influence the Company's revenue growth rate. First, the servicedisruption in the intermodal industry that peaked in the fourth quarter of 1997has not yet been fully rectified. Although there has been improvement in thefirst quarter of 1998, management cannot predict when normal service levels willbe restored. Furthermore, due to this service disruption, there may be somecustomers who switched from using the Company's intermodal service to othercarriers' over-the-road service. These customers may choose to continue toutilize these carriers even when intermodal service levels are restored. Second,the Company terminated its contract to provide third-party logistics to a 17significant customer in January 1998. This customer accounted for $32.5 millionof the Company's revenue in 1997. Revenue should be positively impacted if theCompany should complete its proposed acquisition of Quality, which had revenueof approximately $70 million in 1997.Net Revenue Management expects fluctuations in the net revenue percentage fromquarter-to-quarter caused by changes in business mix, changes in highwaybrokerage margins, changes in logistics business margins, changes in trailer andcontainer capacity, changes in vendor pricing, changes in intermodal industrygrowth, changes in intermodal industry service levels and changes in accountingestimates.Salaries and Benefits It is anticipated that salaries and benefits as a percentage of revenuecould fluctuate from quarter-to-quarter as there are timing differences betweenrevenue increases and changes in levels of staffing. Factors that could affectthe percentage from staying in the recent historical range are revenue growthrates significantly higher or lower than forecasted, a management decision to invest in additional personnel to stimulate new or existing businesses orchanges in customer requirements which could result in a lower or higher cost oflabor per move.Selling, General and Administrative There are several factors that could cause selling, general andadministrative expenses to increase as a percentage of revenue. Shouldmanagement decide that customer expectations and the competitive environmentrequire restructuring of its information systems and related platforms, therecould be significant expenses incurred, some of which would not be capitalized.Costs incurred to formulate the Company's strategy as well as any costs thatwould be identified as reengineering or training would be expensed. The Companyalso expects to spend approximately $1.0 million to $1.5 million in programmingcosts to make its systems compliant with Year 2000 requirements.Depreciation and Amortization Management estimates that as a percentage of revenue, depreciation andamortization will increase in the future. Factors that will cause an increase inthe percentage are increased leasehold improvement amortization as operatingcompanies transition to larger facilities, increased software amortizationrelated to the new packages in the truckload brokerage and logistics businessesand a full year of goodwill amortization associated with the minority interestspurchased in September 1997 related to Hub Los Angeles and Hub Golden Gate.Should the Company complete its proposed acquisition of Quality, the Companywill incur additional goodwill amortization. Should the Company carry out itsplan to purchase the remaining 70% minority interests related to Hub Rio Grande,Hub Dallas and Hub Houston, the Company will incur additional goodwillamortization. Factors that could cause an increase in the percentage areadditional acquisitions or minority interest purchases as well as increaseddepreciation expense on any capitalized costs that could be incurred inconjunction with a change in the Company's information systems strategy.Other Income (Expense) Management estimates interest expense will increase primarily due tothe increase in debt that will result if the Company completes its proposedacquisition of Quality and concurrently exercises its call options to purchasethe remaining 70% minority interests in Hub Rio Grande, Hub Houston and HubDallas. The Company estimates that these transactions will increase debt byapproximately $16.4 million. 18 Management estimates that interest income will likely decrease fromcurrent levels. Factors that could cause such a decrease are the possible use ofcash to (i) make payments on the balloon notes, (ii) make payments on the APLDDSnotes, (iii) make payments on the Company's line of credit, (iv) fund thepurchase of the remaining minority interest in any of its operatingpartnerships, (v) fund working capital needs and (vi) fund capital expenditures.Minority Interest Factors that could have a material impact and result in minorityinterest percentages of income before minority interest to be outside thehistorical range are (i) the exercise of any of the Company's options topurchase the remaining minority interest in any of its operating companies and(ii) disproportionate changes in the profitability of businesses between thosewhich are owned 100% by the Company and those which are owned less than 100% bythe Company. The purchase of the remaining minority interests in Hub Los Angelesand Hub Golden Gate in September 1997, assuming all other factors affectingminority interest are equal, should cause minority interest as a percentage ofincome before minority interest to decline. The decline in this percentageshould be even greater if the Company exercises its existing triggered calloptions for Hub Rio Grande, Hub Houston and Hub Dallas.Earnings Per Common Share Management believes the Company will continue to see downward pressureon diluted earnings per common share in 1998 as the railroad industry continuesto rectify its the well-publicized intermodal service problems that peakedduring the fourth quarter of 1997. Diluted earnings per common share were $0.40in the fourth quarter of 1996 and dropped to $0.36 in the fourth quarter of1997. 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 thefirst quarter of 1998 will decrease $0.10 to $0.13 from the same quarter in1997. A decline in diluted earnings per common share from the prior year willlikely continue until the intermodal industry recovers from its service problemsand reestablishes itself as a dependable service provider.Liquidity and Capital Resources The Company has the continuing option, exercisable any time after thelocal in-charge executive currently associated with an operating partnershipceases to be an employee, to purchase the remaining interest in thatpartnership. The future exercise of such options could result in the need forsignificant 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 asexercise 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 cashrequirements related to these transactions. The Company believes that cash, cash to be provided by operations andcash available under its lines of credit will be sufficient to meet theCompany's short-term working capital and capital expenditure needs. The Companybelieves that the aforementioned items are sufficient to meet its anticipatedlong-term working capital, capital expenditure and debt repayment needs throughat least the year 2002.Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKNone. 19 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULESReport of Independent Accountants 21Consolidated Balance Sheets - December 31, 1997 and December 31, 1996 22Consolidated Statements of Operations - Years ended December 31, 1997, December 31, 1996 and December 31, 1995 23Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, December 31, 1996 and December 31, 1995 24Consolidated Statements of Cash Flows - Years ended December 31, 1997, December 31, 1996 and December 31, 1995 25Notes 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 HubGroup, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997and 1996 and the related consolidated statements of operations, stockholders'equity and cash flows for each of the three years in the period ended December31, 1997. These financial statements and schedule referred to below are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 abovepresent 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 itsoperations and cash flows for each of the three years in the period endedDecember 31, 1997, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basicfinancial statements taken as a whole. The schedule on page S-1 is presented forpurposes of complying with the Securities and Exchange Commissions rules and isnot part of the basic financial statements. This schedule has been subjected tothe auditing procedures applied in the audit of the basic financial statementsand, in our opinion, fairly states in all material respects the financial datarequired to be set forth therein in relation to the basic financial statementstaken as a whole. ARTHUR ANDERSEN LLPChicago, IllinoisFebruary 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 integralpart 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 81,408TRANSPORTATION COSTS 934,624 662,679 75,142 ------------ ----------- --------- Net revenue 129,855 91,564 6,266COSTS 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 2,638Provision 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 anintegral 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 anintegral 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 anintegral part of these statements. 25 HUB GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. Description of Business and Summary of Significant Accounting PoliciesBusiness: Hub Group, Inc. and its subsidiaries (the "Company") provideintermodal transportation services utilizing third party arrangements withrailroads and drayage companies. The Company also arranges for transportation offreight by truck and performs logistics services.Principles of Consolidation: The consolidated financial statements includethe accounts of Hub Group, Inc. and all entities in which the Company has morethan a 50% equity ownership or otherwise exercises unilateral control. Allsignificant intercompany balances and transactions have been eliminated.Cash and cash equivalents: The Company considers as cash equivalents all highlyliquid instruments with an original maturity of three months or less. Checksoutstanding, 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 receivablewas approximately $303,000 and $405,000 at December 31, 1997, and 1996,respectively.Property and Equipment: Property and equipment are stated at cost. Depreciationof property and equipment is computed using the straight-line and variousaccelerated methods at rates adequate to depreciate the cost of applicableassets over their expected useful lives: buildings and improvements 15 to 40years; leasehold improvements the shorter of useful life or lease term; computerequipment and software 3 to 5 years; furniture and equipment 3 to 10 years; andtransportation equipment and automobiles 3 to 12 years. Direct costs related tointernally developed software projects are capitalized and amortized over theexpected useful life on a straight-line basis not to exceed five years,commencing when the asset is placed into service. Maintenance and repairs arecharged to operations as incurred and major improvements are capitalized. Thecost of assets retired or otherwise disposed of and the accumulated depreciationthereon are removed from the accounts with any gain or loss realized upon saleor disposal charged or credited to operations.Goodwill: Goodwill is amortized on the straight-line method over 40 years. On anongoing basis, the Company estimates the future undiscounted cash flows beforeinterest of the operating units to which goodwill relates in order to evaluateimpairment. If impairment exists, the carrying amount of the goodwill is reducedby the estimated shortfall of cash flows. The Company has not experienced anyimpairment 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 areexposed to concentrations of credit risk consist primarily of cash and cashequivalents and trade accounts receivable. The Company places its cash andtemporary investments with high quality financial institutions. At times, suchinvestments may be in excess of the FDIC insurance limit. Temporary investmentsare valued at the lower of cost or market and at the balance sheet datesapproximate fair market value. The Company primarily serves customers locatedthroughout the United States with no significant concentration in any oneregion. 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 in1995. Another customer in the consumer household products industry accounted for11.2% of revenue in 1995. The Company reviews a customer's credit history beforeextending credit. In addition, the Company routinely assesses the financialstrength of its customers and, as a consequence, believes that its tradeaccounts receivable risk is limited.Revenue Recognition: Revenue represents sales of services to customers. Revenueis recognized based on relative transit time. 26Income Taxes: Prior to March 18, 1996, the Company had elected to be taxed asan S corporation under the Internal Revenue Code. The income of an S corporationis taxable to its stockholders rather than the Company itself. Income taxexpense incurred prior to March 18, 1996, represents Illinois replacement tax.On March 18, 1996, the Company became a taxable C corporation. The pro formaprovision for additional income taxes was calculated assuming the Company wasoperating as a taxable C corporation since January 1, 1995. The Company accountsfor certain income and expense items differently for financial reporting andincome tax purposes. Deferred tax assets and liabilities are determined basedon the difference between the financial statement and tax bases of assets andliabilities applying enacted statutory tax rates in effect for the year inwhich the differences are expected to reverse.Earnings Per Common Share: In February 1997, the Financial Accounting StandardsBoard issued Financial Accounting Standard No. 128 ("SFAS 128") addressingearnings per share. SFAS 128 changed the methodology of calculating earnings pershare and requires disclosure of basic earnings per share and diluted earningsper share. The company adopted SFAS 128 in December 1997 and has retroactively restated all periods presented. Basic earnings per common share are based on theaverage quarterly weighted average number of Class A and Class B shares ofcommon stock outstanding. Diluted earnings per common share are adjusted for theassumed exercise of dilutive stock options. In computing the per share effect ofassumed exercise, funds which would have been received from the exercise ofoptions, including tax benefits assumed to be realized, are considered to havebeen used to purchase shares at current market prices, and the resulting netadditional shares are included in the calculation of weighted average sharesoutstanding.Distributions: During the period prior to March 18, 1996, the Company operatedas an S corporation and made periodic distributions of income to itsstockholders which are reflected in the accompanying statements of stockholders'equity.Use of Estimates: The preparation of financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expense during the reportingperiod. Actual results could differ from those estimates.Reclassifications: Certain items previously reported have been reclassifiedto conform with the 1997 presentation.NOTE 2. Capital Structure On March 8, 1995, Hub Group, Inc. was incorporated and issued 100shares of Class A common stock to the sole incorporator. On March 18, 1996, HubGroup, Inc. purchased Hub City Terminals, Inc. ("Hub Chicago") in astock-for-stock acquisition through the issuance of 1,000,000 shares of theCompany's Class A common stock and 662,296 shares of the Company's Class Bcommon stock. The rights of holders of Class A common stock and Class B commonstock are identical, except each share of Class B common stock entitles itsholder to 20 votes, while each share of Class A common stock entitles its holderto one vote. Hub Chicago has been accounted for similar to the pooling ofinterests method of accounting and has been included in all periods presented ona historical cost basis. Concurrent with the acquisition of Hub Chicago in March 1996, theCompany completed the initial public offering of 4,261,250 shares of its Class Acommon stock, with net proceeds to the Company of approximately $52,945,000.Coincident with the initial public offering, a selling stockholder sold1,000,000 shares of the Company's Class A common stock through a secondaryoffering. The Company did not receive any net proceeds from the sale of theshares by the selling stockholder. Concurrent with the initial public offering, Hub Group, Inc., togetherwith its new wholly owned subsidiary, Hub Chicago, acquired with cash a 27controlling interest in each of 27 operating partnerships (collectively referredto as "Hub Partnerships"). The combined financial statements of HubPartnerships, 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 Securitiesand Exchange Commission. In September 1997, the Company completed a secondary offering of1,725,000 shares of its Class A Common Stock. The net proceeds of the offeringwere $54.8 million.NOTE 3. Business Combinations On March 18, 1996, the Company acquired a controlling interest in HubPartnerships 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 usingthe purchase method of accounting. The portion of the difference between fair value and historical cost ofindividual assets acquired and liabilities assumed attributable to interestsacquired by the Company from non-control group stockholders was recorded at fairmarket value. This resulted in goodwill of approximately $17,207,000. Theremaining portion of the difference between fair value and historical costattributable to interests acquired from control group stockholders,approximately $25,764,000, has been charged to equity as purchase price inexcess of predecessor basis. In connection with the purchase of the controlling interest in HubPartnerships, approximately $10,306,000 has been recorded as a deferred taxbenefit utilizing an assumed effective tax rate of 40% representing the taxeffect of the purchase price in excess of predecessor basis, with thecorresponding credit recorded as an increase to equity. On May 2, 1996, the Company purchased the rights to service thecustomers of American President Lines Domestic Distribution Services, a divisionof 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. Thenotes bear interest at an annual rate of 6% with three equal annual principalpayments due beginning May 2, 1997. The acquisition was recorded using thepurchase method of accounting resulting in goodwill of approximately $8,090,000. On October 31, 1997, the Company acquired the remaining 50% interest inits international logistics joint venture, HLX Company, LLC for $300,000. Theacquisition was recorded using the purchase method of accounting resulting ingoodwill of $466,000. Results of operations from acquisitions recorded under the purchasemethod of accounting are included in the Company's financial statements fromtheir respective dates of acquisition. The purchase price allocations presentedare preliminary. 28 The following summarizes the effects of businesses acquired andaccounted 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 $ 81,408Revenue 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 $ 2,599Net income (loss) of purchased businesses for period prior to acquisitions (260) 920Adjustment 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 asfollows: Years Ended December 31, ----------------------- 1997 1996 ----------- ----------- (000's) Accounts receivable $ (115) $ 75,576Prepaid expenses and other current assets 12 1,584Property and equipment 79 9,308Goodwill 466 25,297Deferred tax benefit, net - 10,575Other assets 13 628Accounts payable (216) (74,694)Accrued expenses (75) (5,190)Long-term debt - (20,921)Minority interest - (162)Purchase price in excess of predecessor basis - 25,764Tax benefit of purchase price in excess of predecessor basis - (10,306) ----------- ------------Cash used in acquisitions, net $ 164 $ 37,459 ----------- ------------ 29NOTE 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% minorityinterest in Hub City Tennessee, L.P. for approximately $2,513,000 in cash. On December 12, 1996, the Company purchased the remaining 70% minorityinterest in Hub City North Central, L.P. in exchange for a note forapproximately $14,970,000. On March 1, 1997, the Company purchased an approximate 44% minorityinterest in Hub Group Distribution Services for approximately $1,576,000 incash. 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% minorityinterest in Hub City New Orleans, L.P. for one dollar. As the amount paid for each of the purchases of minority interestequaled the basis in excess of the fair market value of assets acquired andliabilities assumed, the amount paid was recorded as goodwill. 30NOTE 6. Property and EquipmentProperty and equipment consist of the following: Years Ended December 31, 1997 1996 ----------- ------------ (000's) Land $ 56 $ 92Building and improvements 233 841Leasehold improvements 886 629Computer equipment and software 14,512 8,305Furniture and equipment 4,172 3,419Transportation equipment and automobiles 5,828 4,541 ----------- ------------ 25,687 17,827Less: 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 rateto 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 6.0Income 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 andliabilities: Years Ended December 31, 1997 1996 ------------ ----------- (000's) Reserve for uncollectible accounts receivable $ 361 $ 152Accrued compensation 172 206Net operating loss carryforward 2,635 - ------------ ----------- Current deferred tax asset 3,168 358Property and equipment 1,851 8,531Income 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 $ 2,976Unsecured balloon notes, interest compounded annually at 5.45%, interest and principal due March, 2001 (see Note 12) 4,032 7,533Mortgage note payable due in 1998 with monthly installments of $2,381, including interest at 8.5%, collateralized by certain property 195 206Notes 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 6,000Note payable due January 1, 1998, with interest at an annual rate of 7% (see Note 12 and below) 14,970 14,970Capital lease obligations, collateralized by certain equipment 156 193 -------------- --------------Total long-term debt 26,301 31,878Less 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 isclassified as long-term. 32 Aggregate principal payments, in thousands, due subsequent to December31, 1997, are as follows:1998 $ 3,4281999 3,0682000 7292001 4,1062002 14,970 ---------- $ 26,301 ---------- On March 18, 1996, the Company assumed a line of credit for $5,000,000which was unused at December 31, 1997 and 1996. At December 31, 1997, theinterest rate was 8.00%. The interest rate is set at the bank's discretion at arate less than or equal to the bank's prime rate. Borrowings are secured bycertain assets. The line of credit has no expiration date. In October 1996, theCompany 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 millionfive-year revolving line of credit with a bank. The amount available under theline will decrease by $5.4 million at the beginning of year three and by $7.2million at the beginning of each of years four and five. The Company can borrowat the prime rate on a day-to-day basis or may borrow for 30, 60, 90 or 180 dayperiods at LIBOR (London Interbank Offered Rate) plus 0.80% to 1.25% based onthe Company's funded debt to EBITDA (earnings before interest expense, incometaxes, depreciation and amortization) ratio. The credit facility also containscertain financial covenants which, among others, requires that the Companymaintain required levels of EBITDA, funded debt to EBITDA, fixed charge coverageand current assets to current liabilities. In addition, there are limitations onadditional indebtedness as well as acquisitions and minority interest purchases.The Company was in compliance with these covenants at December 31, 1997. Theline 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 andequipment, are payable as follows:1998 $ 4,098 1999 3,4292000 2,8072001 2,2752002 1,4442003 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 containrenewal options and escalation clauses which require payments of additional rentto the extent of increases in the related operating costs.NOTE 10. Stock-Based Compensation Plan Concurrent with the initial public offering the Company adopted aLong-Term Incentive Plan (the "1996 Incentive Plan"). The number of shares ofClass A Common Stock reserved for issuance under the 1996 Incentive Plan was450,000. Concurrent with the secondary offering the Company adopted a second Long-Term Incentive Plan (the "1997 Incentive Plan"). The number of shares ofClass A Common Stock reserved for issuance under the 1997 Incentive Plan was150,000. Under the 1996 and 1997 Incentive Plans, stock options, stockappreciation rights, restricted stock and performance units may be granted forthe purpose of attracting and motivating key employees and non-employeedirectors of the Company. The options granted to non-employee directors vestratably 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 FinancialAccounting Standards Board issued Statement of Financial Accounting StandardsNo. 123 ("Statement 123"), "Accounting for Stock-based Compensation." Theaccounting method as provided in the pronouncement is not required to beadopted; however, it is encouraged. The Company is not adopting the accountingprovisions of Statement 123. Had the Company accounted for its stock options inaccordance with Statement 123, pro forma net income and pro forma earnings pershare would have been: Years Ended December 31, 1997 1996 ----------- ------------ Pro forma net income as reported (000's) 9,525 6,803Pro forma net income pro forma for Statement 123 (000's) 9,261 6,599Historical basic earnings per common share pro forma for Statement 123 $ 1.44 $ 1.32Historical diluted earnings per common share pro forma for Statement 123 $ 1.42 $ 1.30The pro forma disclosure is not likely to be indicative of pro forma resultswhich may be expected in future years because of the fact that options vest overseveral years, pro forma compensation expense is recognized as the options vestand additional awards may also be granted. For purposes of determining the pro forma effect of these options, thefair value of each option is estimated on the date of grant based on theBlack-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 6.0Information 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 14.00Options forfeited - - (5,000) 14.00 ----------------- -------------- ---------- --------------Options outstanding, end of year 401,800 $ 15.86 357,500 $ 14.00Weighted-average fair value of options granted during the year $ 11.02 $ 5.54Option price range at end of year $14.00 to $31.25 $ 14.00Option price for exercised shares $ 14.00 $ -Options available for grant at end of year 193,500 92,500 34The following table summarizes information about options outstanding atDecember 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 $ 14.00NOTE 11. Profit-Sharing Plan The Company has numerous profit-sharing plans and trusts under section401(k) of the Internal Revenue Code. Generally, for every dollar the employeecontributes, the Company will contribute an additional $.20 up to $100. Inaddition, the Company may make a profit sharing contribution at its discretion.Historically, the Company has contributed an amount equal to 3% of eachparticipant's compensation up to a maximum of $4,800. The Company'scontributions to the Plan were approximately $1,163,000, $704,000 and $50,000for 1997, 1996 and 1995, respectively.NOTE 12. Related Party Transactions In connection with the acquisition of a controlling interest in each ofthe Hub Partnerships, the Company paid cash to the Class B Common Stock ("ClassB") stockholders, some of whom are officers of the Company, as well as officersof the Company who are not Class B stockholders, totaling approximately$16,571,000. The Company, related to this acquisition, also assumed balloonnotes that are payable, in part, to the above related parties totalingapproximately $4,758,000. Approximately 33% of the balloon notes payable atDecember 31, 1997 and 1996, is due to the related parties. The Class Bstockholders have voting control over the Company. The same related partiesdescribed above also continue to receive approximately 33% of minority interestdistributions of income from the Company. Furthermore, these parties receivedcash and notes from the Company totaling approximately $24,366,000 when itacquired 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 GroupDistribution Services. The Company provided transportation services to Hub Partnerships priorto acquiring Hub Partnerships on March 18, 1996. Revenue from Hub Partnershipswas $3,459,000 and $14,712,000 for the period January 1 through March 17, 1996and 1995, respectively. Net fees were approximately $104,000 and $440,000 forthe period January 1 through March 17, 1996 and 1995, respectively. Hub Partnerships provided transportation services to the Company priorto being acquired, which resulted in costs of $3,880,000 and $21,720,000 for theperiod January 1 through March 17, 1996 and 1995, respectively. The Company paid assessment fees based primarily on volume and salescommission expenses to Hub Partnerships prior to acquiring Hub Partnerships.These charges totaled approximately $112,000 and $670,000 for the period January1 through March 17, 1996 and 1995, respectively. The Company leased a building from a shareholder. Monthly payments in1995 were $9,178 and extended through November 1996. The Company no longer leased the building from a shareholder beginning in December 1996. 35NOTE 13. Legal Matters In the ordinary course of conducting its business, the Company becomesinvolved in various lawsuits related to its business. The Company does notbelieve that the ultimate resolution of these matters will be material to itsbusiness, 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 6,990,950Class 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 5,261,250Class B common stock, $.01 par value 662,300 662,296NOTE 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 $ 271,638Net revenue 30,214 32,460 33,767 33,414Operating income 7,916 8,392 9,706 7,481Historical net income 1,978 2,217 2,557 2,773Historical 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 $ 257,626Net revenue 5,385 25,124 28,707 32,348Operating income 1,755 6,843 8,951 10,376Historical net income 883 1,662 2,105 2,394Historical basic earnings per share $ 0.40 $ 0.28 $ 0.35 $ 0.40Historical diluted earnings per share $ 0.40 $ 0.28 $ 0.35 $ 0.40Pro forma net income 642 1,662 2,105 2,394 Pro forma basic earnings per share $ 0.29 $ 0.28 $ 0.35 $ 0.40Pro forma diluted earnings per share $ 0.29 $ 0.28 $ 0.35 $ 0.40 36NOTE 16. Subsequent Event On February 20, 1998, the Company signed letters of intent to acquireall of the outstanding stock of Quality Intermodal Corporation ("Quality"). TheCompany has offered to pay $4.1 million in cash and $6.3 million through theissuance of a three-year note, bearing interest at an annual rate of 5.6%, forall of Quality's stock. 37Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART IIIItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections entitled "Election of Directors" and "Ownership of the CapitalStock of the Company" appearing in the Registrant's proxy statement for theannual meeting of stockholders to be held on May 19, 1998, sets forth certaininformation with respect to the directors of the Registrant and Section 16compliance and is incorporated herein by reference. Certain information withrespect to persons who are or may be deemed to be executive officers of theRegistrant 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 ofstockholders to be held on May 19, 1998, sets forth certain information withrespect to the compensation of management of the Registrant and is incorporatedherein 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 ofstockholders to be held on May 19, 1998, sets forth certain information withrespect to the ownership of the Registrant's Common Stock and is incorporatedherein by reference.Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Certain Transactions" appearing in the Registrant'sproxy statement for the annual meeting of stockholders to be held on May 19,1998, sets forth certain information with respect to certain businessrelationships and transactions between the Registrant and its directors andofficers and it is incorporated herein by reference. 38 PART IVItem 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 forwhich provision is made in Regulation S-X are set forth in the Index immediatelypreceding such financial statements and statement schedule and are incorporatedherein by reference. (a) (3) Exhibits The exhibits included as part of this Form 10-K are set forth inthe Exhibit Index immediately preceding such Exhibits and are incorporatedherein by reference. (b) Reports on Form 8-K None. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signed onits 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, thisreport has been signed below by the following persons in the capacities and onthe 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 SCHEDULEHub Partnerships- ----------------Report of Independent Accountants F-2Combined Statements of Operations - For the period January 1 throughMarch 17, 1996 and the year ended December 31, 1995 F-3Combined Statements of Stockholders' Equity - For the period January 1through March 17, 1996 and the year ended December 31, 1995 F-4Combined Statements of Cash Flows - For the period of January 1 through March 17, 1996 and the year ended December 31, 1995 F-5Notes to Combined Financial Statements F-6Hub Group, Inc.- ---------------Schedule II - Valuation and Qualifying Accounts S-1 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTSTo 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 March17, 1996 and the year ended December 31, 1995. These financial statements arethe responsibility of the Company's management. Our responsibility is to expressan opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the combined statements of operations,stockholders' equity and cash flows are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the combined statements of operations, stockholders' equity andcash flows. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion. In our opinion, the combined statements of operations, stockholders'equity and cash flows referred to above present fairly, in all materialrespects, the results of operations and cash flows of Hub Partnerships for theperiod January 1, 1996 through March 17, 1996, in conformity with generallyaccepted accounting principles. ARTHUR ANDERSEN LLPChicago, IllinoisFebruary 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 146,405 666,514PURCHASED TRANSPORTATION 128,405 584,840 -------------- ------------- Net revenue 18,000 81,674COSTS 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 938INCOME BEFORE INCOME TAXES 4,406 23,058INCOME TAXES 126 290 -------------- -------------NET INCOME $ 4,280 $ 22,768 ============== ============= The accompanying notes to combined financial statements are an integralpart 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 anintegral 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 integralpart of these statements. F-5 HUB PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTSNOTE 1. Description of Business and Summary of Significant Accounting PoliciesBusiness: The Company (defined below) provides intermodal transportationservices utilizing third party arrangements with railroads and drayagecompanies. The Company also arranges for transportation of freight by truck andperforms logistics services.Principles of Combinations: These combined financial statements include thefinancial statements of 26 S corporations and one partnership which aresubstantially all under common ownership control (collectively referred to asthe "Company" or "Hub Partnerships"). The financial statements of HubPartnerships are presented herein to reflect the financial condition and resultsof operations of Hub Partnerships as of and for the periods in which HubPartnerships was the predecessor to the business acquired by Hub Group, Inc., asrequired pursuant to the rules and regulations of the Securities and ExchangeCommission. All significant intercompany transactions and balances have beeneliminated.Cash and Cash Equivalents: The Company considers as cash equivalents all highlyliquid investments with an original maturity of three months or less.Property and Equipment: Property and equipment are stated at cost. Depreciationof property and equipment is computed using the straight-line and variousaccelerated methods at rates adequate to depreciate the cost of applicableassets over their expected useful lives: buildings and improvements 15 to 40years; leasehold improvements the shorter of useful life or lease term;furniture and equipment 3 to 10 years; and transportation equipment 3 to 12years. Maintenance and repairs are charged to operations as incurred and majorimprovements are capitalized. The cost of assets retired or otherwise disposedof and the accumulated depreciation thereon are removed from the accounts withany gain or loss realized upon sale or disposal charged or credited tooperations.Concentration of Credit Risk: The Company's financial instruments that areexposed to concentrations of credit risk consist primarily of cash and cashequivalents and trade accounts receivable. The Company places its cash andtemporary investments with high quality financial institutions. At times, suchinvestments may be in excess of the FDIC insurance limit. Temporary investmentsare valued at the lower of cost or market and at the balance sheet date,approximates fair market value. The Company primarily serves customers locatedthroughout the United States with no significant concentration in any oneregion. The Company reviews a customer's credit history before extending credit.In addition, the Company routinely assesses the financial strength of itscustomers and, as a consequence, believes that its trade accounts receivablerisk 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 haveelected to be taxed as S Corporations. By this election, income of an SCorporation is taxable to the stockholders rather than the Company itself.Income tax expense primarily represents applicable state income taxes of thosestates that do not recognize Subchapter S Corporations or states which imposetaxes 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 withgenerally accepted accounting principles requires management to make estimates F-6and assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expense during the reportingperiod. Actual results could differ from those estimates.Reclassifications: Certain items previously reported have been reclassified toconform 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 andequipment, are payable as follows:1996 $ 2,198 1997 1,5571998 9661999 7162000 6242001 & 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 clauseswhich require payments of additional rent to the extent of increases in therelated operating costs.NOTE 3. Legal Matters In the ordinary course of conducting its business, the Company becomesinvolved in various lawsuits related to its business. The Company does notbelieve that the ultimate resolution of these matters will be material to itsbusiness, financial position or results of operations.NOTE 4. Profit-Sharing Plan The Company has numerous profit-sharing plans and trusts under section401(k) of the Internal Revenue Code. Generally, for every dollar the employeecontributes the Company will contribute an additional $.20 up to $100. Inaddition, the Company may make a profit sharing contribution at its discretion.Historically, the Company has contributed an amount equal to 3% of eachparticipant's compensation up to a maximum of $4,500. The Company'scontributions to the Plan were approximately $562,000, $713,000 and $287,000 for1994, 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. Revenuefrom Hub Group, Inc. was $13,535,000, $21,720,000 and $3,880,000 for 1994, 1995and the period January 1, through March 17, 1996, respectively. Net fees earnedwere $670,000, $734,000 and $116,000 for the same periods, respectively. F-7 Hub Group, Inc. provides transportation services to the Company, whichresulted in costs of $11,885,000, $14,712,000 and $3,459,000 for 1994, 1995 andthe period January 1, through March 17, 1996, respectively. The Company charges assessment fees based primarily on volume and salescommission 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, throughMarch 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 leasedtwo facilities from stockholders. Rental expense relating to these agreementswas approximately $193,000, $147,000 and $39,000 for 1994, 1995 and the periodJanuary 1, through March 17, 1996, respectively. The terms of the leases extendthrough 2000.NOTE 6. Stockholder Agreements The majority of the entities included in Hub Partnerships haveagreements with certain of their stockholders which set forth rights of thestockholders and the corporation. Generally, the agreements require that anystockholder wishing to sell his shares must first offer the shares for sale tothe corporation and then to the other stockholders, before offering them to athird party. Generally the agreements state that upon death, disability, orretirement of a stockholder, the stockholder is required to offer to sell all ofthe shares owned by the stockholder to the corporation. Certain agreementsstipulate the corporation is required to purchase these shares. Under themajority of the agreements, selling price approximates book value, and under twoagreements the selling price approximates fair market value. Generally theagreements also state that, in the event that a stockholder is terminated, thestockholder is required to offer to sell his shares to the corporation. Certainagreements stipulate the corporation is required to purchase the stockholder'sshares. Redemption amounts relating to agreements with mandatory redemptionfeatures are included in Mandatorily Redeemable Common Stock in the accompanyingbalance sheet. Payments for shares generally is made over a five-year period.Additionally, these agreements generally contain non-compete clauses whichpreclude a stockholder, while employed by the corporation, from managing,operating, or controlling a business either similar or dissimilar to thebusiness carried on by the corporation. The clause also states that followingemployment by the corporation, a stockholder may not be employed by or performservices for any competitor for a period of up to two years. These agreementscontinue with respect to the S Corporations' limited partnership interests inthe operating partnerships of Hub Group, Inc.NOTE 9. Special Distribution Immediately prior to March 18, 1996, the Company distributedsubstantially 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-yearballoon notes bearing interest at an annual rate of 5.45%. Interest iscompounded 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 INDEX TO EXHIBITSNumber 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 ScheduleEXHIBIT 21 Subsidiaries of Hub Group, Inc.SUBSIDIARIES JURISDICTION OF INCORPORATION/ORGANIZATIONHub City Terminals, Inc. DelawareHub City Alabama, L.P. DelawareHub City Atlanta, L.P. DelawareHub City Boston, L.P. DelawareHub City Canada, L.P. DelawareHub City Cleveland, L.P. DelawareHub City Dallas, L.P. DelawareHub City Detroit, L.P. DelawareHub City Florida, L.P. DelawareHub City Golden Gate, L.P. DelawareHub City Houston, L.P. DelawareHub City Indianapolis, L.P. DelawareHub City Kansas City, L.P. DelawareHub City Los Angeles, L.P. DelawareHub City Mid-Atlantic, L.P. DelawareHub City New Haven, L.P. DelawareHub City New Orleans, L.P. DelawareHub City New York State, L.P. DelawareHub City New York-New Jersey, L.P. DelawareHub City North Central, L.P. DelawareHub City Ohio, L.P. DelawareHub City Philadelphia, L.P. DelawareHub City Pittsburgh, L.P. DelawareHub City Portland, L.P. DelawareHub City Rio Grande, L.P. DelawareHub City St. Louis, L.P. DelawareHub City Tennessee, L.P. DelawareHub Group Associates, Inc. IllinoisHub Highway Services IllinoisHub Group Distribution Services IllinoisHub Holdings, Inc. DelawareQ.S. of Illinois, Inc. IllinoisQuality Services L.L.C. MissouriQuality Services of Kansas, L.L.C. KansasQuality Services of New Jersey, L.L.C. New JerseyQuality Services of Michigan L.L.C. MichiganQ.S. of Georgia, L.L.C. GeorgiaHLX Company, L.L.C. DelawareEXHIBIT 23.1 Consent of Independent Public AccountantsAs independent public accountants, we hereby consent to the incorporation of ourreports dated February 15, 1998, except with respect to the matter discussed inNote 16, as to which the date is February 20, 1998, for Hub Group, Inc. andFebruary 6, 1997 for Hub Partnerships included in this Form 10-K, into HubGroup, Inc.'s previously filed Registration Statement File No. 333-6327 on FormS-8, and Registrations File No. 333-48185 on Form S-8. ARTHUR ANDERSEN LLPChicago, IllinoisMarch 20, 1998
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