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Hub Group- -------------------------------------------------------------------------------- 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, 1998 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 Item405 of 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 to thisForm 10-K. [X]The aggregate market value of the Registrant's voting stock held bynon-affiliates on March 15, 1999, based upon the last reported sale price onthat date on the NASDAQ National Market of $19 per share, was $132,193,450.On March 15, 1999, the Registrant had 7,009,950 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 12, 1999, (the "Proxy Statement") is incorporatedby reference in Part III of this Form 10-K to the extent stated herein. Exceptwith respect to information specifically incorporated by reference in this Form10-K, the Proxy Statement is not deemed to be filed as a part hereof.- -------------------------------------------------------------------------------- PART IITEM 1. BUSINESS GENERAL 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 31 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 and management information systems support. Hub Group also maintains aNational Accounts sales force to provide centralized marketing of the Company'sservices to 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 of that HubPartnership, to purchase the limited partnership interest in that HubPartnership. The decision as to whether or when to exercise an option to acquirethe limited partnership interest in a Hub Partnership will be made by theindependent members of the Company's Board of Directors. Unless the contextotherwise requires, references to "Hub Group" or the "Company" include HubChicago, the Hub Partnerships and their respective subsidiaries. During 1998, the Company made several significant strategic investments. OnApril 1, 1998, the Company exercised its option to acquire the remaining 70%minority interests in Hub City Dallas, L.P. ("Hub Dallas"), Hub City Houston,L.P. ("Hub Houston") and Hub City Rio Grande, L.P. ("Hub Rio Grande") forapproximately $7 million. After these acquisitions, Hub Houston and Hub RioGrande merged into Hub Dallas creating Hub City Texas, L.P. ("Hub Texas").During 1998, the operations of the former Hub Dallas and Hub Rio Grande wereconsolidated into Hub Texas' headquarters in Houston, allowing the offices inDallas and San Antonio to focus on sales. Also on April 1, 1998, the Company acquired all of the stock of QualityIntermodal Corporation ("Quality") for $4.1 million in cash and $6.0 millionthrough the issuance of a three-year note, bearing interest at an annual rate of5.6%. Quality had revenue of approximately $70 million in 1997. Quality was anintermodal and truckload brokerage service provider headquartered in Houstonwith offices in Dallas, Los Angeles, Chicago, Philadelphia and Atlanta. During1998, each of these offices was closed and the business conducted by the Qualityoffices transitioned to the appropriate Hub office. On May 1, 1998, the Company formally launched its new Hub Group PremierService Network in conjunction with the Burlington Northern and Santa Fe RailwayCompany ("BNSF"). Pursuant to this program, the Company manages a fleet ofapproximately 2000 48' x 102" containers and approximately 180 53' x 102"containers from BNSF for dedicated use throughout the BNSF intermodal container 1 network. The Company and BNSF entered into an eight month agreement that expiredin December 1998. The parties are currently in the process of formalizing athree year contract. On August 1, 1998, the Company, through Hub Distribution, acquired acustomer list and certain fixed assets from Corporate Express DistributionServices ("CEDS") for $750,000 in cash. CEDS is a specialized logistics providerthat offers a niche service in the delivery of pharmaceutical samples. In September 1998, HLX Company, L.L.C. ("HLX"), the Company's wholly-ownedsubsidiary that specializes in handling international cargo in North America,opened an office in Gothenborg, Sweeden. On March 22, 1999, the Company announced its intention to acquire thelimited partnership interest in each of the 17 Hub Partnerships (other than HubDistribution) in which it does not own the limited partnership interest. Afterthe acquisition, the Company will own all of the Hub Partnerships and theCompany's operations in North America and Europe, other than Hub Distribution.As part of the acquisition, the Company anticipates that the Principals of theseoperations will become employees of Hub Group and continue to function in theirpresent roles. The aggregate purchase price of these limited partnershipinterests is approximately $110 million and will be financed through acombination of bank borrowings under a new line of credit and privately placedunsecured senior debt. The Company expects to complete the acquisition in thesecond quarter of 1999.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. As part of its intermodal services, theCompany negotiates rail and drayage rates, electronically tracks shipments intransit, consolidates billing and handles claims for freight loss or damage onbehalf of its customers. The Company uses its Hub network, connected through itsproprietary advanced intermodal management ("AIM") system, to access containersand trailers owned by leasing companies, railroads and steamship lines. Becauseeach Hub not only handles its own outbound shipments but also handles inboundshipments from other Hubs, each Hub is able to track trailers and containersentering its service area and use that equipment to fulfill its customers'outbound shipping requirements. This effectively allows the Company to "capture"containers and trailers and keep them within the Hub network without having tomake a capital investment 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 28 years, Hub Group has grown from a single office with twoemployees into a network of 29 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 Houston Minneapolis Salt Lake City Baltimore Indianapolis New Orleans San Francisco Birmingham Jacksonville New York City Seattle Boston Kansas City Philadelphia Toledo Chicago (3) Los Angeles Pittsburgh Toronto Cleveland Memphis Portland Detroit Mexico City Rochester Grand Rapids Milwaukee St. LouisThe 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 closed in February of 1998 and its operations transferred toBoston. In connection with the reorganization of Hub Texas, the Hubs in Dallasand San Antonio recently became sales offices. 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 that the 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 localHub 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 31 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 15 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 SYSTEMS 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 transportation services. The AIM system consists of a network of IBM AS/400computers located at the Hubs and linked to a host computer at the Company'sheadquarters. Hub Group uses IBM's Global Network as the nucleus for linking itscomputers and databases. This configuration provides a real time environment fortransmitting data among the Hubs and the Company's headquarters using electronicdata interchange ("EDI"), electronic mail and other protocols. It also allowsHub to communicate electronically with each railroad, certain drayage companiesand 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 critical information 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. Inaddition, 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 Companyutilizes software that is designed to automate the Company's highway servicesoperations. This software processes customer transportation requests, schedulesand tracks shipments, prepares customer billing, establishes account profilesand retains critical information for analysis. It also interfaces with thecarrier by handling load tendering, shipment dispatch, shipment tracking,customer billing and remittance processing.RELATIONSHIP 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 regular basis, senior executives of the Company and each of the railroads meetto discuss major strategic issues concerning intermodal transportation. Severalof the Company's executive officers, including both the Company's Chairman and 4President, are former railroad employees, which makes them well-suited tounderstand the railroads' service capabilities.The Company has contracts with each of the following major railroads: Burlington Northern Santa Fe Railway Illinois Central Canadian Pacific Kansas City Southern Conrail Norfolk Southern CSX Union Pacific 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 June 1999. While there can be no assurances that thesecontracts will be renewed, the Company has in the past successfully negotiatedextensions of the contracts with the railroads. Transportation rates are marketdriven and are typically negotiated between the Company and the railroads on acustomer specific basis. Consistent with industry practice, many of the ratesnegotiated by the Company are special commodity quotations ("SCQs"), whichprovide discounts from published price lists based on competitive market factorsand are designed by the railroads to attract new business or to retain existingbusiness. SCQ rates are generally issued for the account of a single IMC. SCQrates apply to specific customers in specified shipping lanes for a specificperiod 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 ofa customer, the Company will use the services of other drayage companies. The local 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, apartnership controlled by the Company, handles the administrative and regulatoryaspects of the carrier relationship. Hub's relationships with its carriers areimportant since these relationships determine pricing, load coverage and overallservice.RISK 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 to obtain, either on their own or through the Company, $1.0 million in cargoinsurance. Railroads, which are self insured, provide limited common carrierliability protection, generally up to $250,000 per shipment, although highercoverage is available on a load-by-load basis. To cover freight damage when acarrier's liability cannot be established or a carrier's insurance isinsufficient to cover freight loss or damage, the Company carries its own cargoinsurance with a limit of $1.5 million per container or trailer and a limit of$20 million per occurrence. The Company also carries $2.0 million of generalliability insurance with a companion $10.0 million umbrella policy on thisgeneral liability insurance.GOVERNMENT REGULATION Hub Highway Services is licensed by the Department of Transportation("DOT") as a broker in arranging for the transportation of general commoditiesby motor vehicle. To the extent that the Hubs perform truck brokerage services,they do so under the license granted to Hub Highway Services. The DOT prescribes 5qualifications for acting in this capacity, including certain surety bondingrequirements. While the DOT requires a $10,000 surety bond to maintain thislicense, the Company has voluntarily posted a $300,000 surety bond. To date,compliance with these regulations has not had a material adverse effect on theCompany's results of operations or financial condition. However, thetransportation industry is subject to legislative or regulatory changes that canaffect the economics of the industry by requiring changes in operating practicesor influencing the demand for, and cost 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, 1999, the Company had approximately 1,337employees. 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 subjectto renegotiation 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, operates42 offices throughout the United States and in Canada and Mexico, including theCompany's headquarters in Lombard, Illinois and its Company-owned drayageoperations. On March 1, 1999, the Company relocated its National Accounts officein Stamford, Connecticut to corporate headquarters in Lombard, Illinois. Theoffice building used by the Hub located in Toledo is owned, and the remainderare leased. Most office leases have initial terms of more than one year, andmany include options to renew. While some of the Company's leases aremonth-to-month and others expire in the near term, the Company does not believethat it will have difficulty in renewing them or in finding alternative officespace. The Company believes that its offices are adequate for the purposes forwhich they are currently used.ITEM 3. LEGAL PROCEEDINGS The Company is a party to routine litigation incident to its business,primarily claims for freight lost or damaged in transit or improperly shipped.Most of the lawsuits to which the Company is party are covered by insurance 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 1998. 6EXECUTIVE 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, 1999 with respect to each person who is anexecutive officer of the Company. Name Age Position- ------------------- ------ -------------------------------------------------Phillip C. Yeager 71 Chairman of the Board of DirectorsDavid P. Yeager 46 Vice Chairman of the Board of Directors and Chief Executive OfficerThomas L. Hardin 53 President, Chief Operating Officer and DirectorWilliam L. Crowder 56 Vice President-Finance, Chief Financial Officer and TreasurerDaniel F. Hardman 50 President-Chicago RegionMark A. Yeager 34 Division President, Secretary and General CounselJohn T. Donnell 59 Executive Vice President-National AccountsRobert J. Jensen 44 Executive Program Director - Year 2000 Program OfficeRichard M. Rogan 59 President-Hub Highway Services, Executive Vice President-MarketingDaniel L. Sellers 43 Vice President-Information Services and Chief Information Officer 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. In September 1998 he receivedthe Silver Kingpin award from the Intermodal Association of North America and inFebruary 1999 he was named Transportation Person of the Year by the New YorkTraffic Club. Mr. Yeager graduated from the University of Cincinnati in 1951with a Bachelor of Arts degree in Economics. Mr. Yeager is the father of DavidP. Yeager and Mark A. Yeager and the father-in-law of Robert J. Jensen. David P. Yeager has served as the Company's Vice Chairman of the 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. 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. 7 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 J. Jensen has been the Executive Program Director of the Year 2000Program Office since December 1998. From July 1991 through December 1998, Mr.Jensen was President of Hub Group Operations Management. He served as Presidentof Hub St. Louis from July 1985 through July 1991 and as General Manager of HubSt. Louis from October 1980 through July 1985. Mr. Jensen received a Bachelor ofScience degree in Finance from the University of Illinois in 1977. Mr. Jensen isthe son-in-law of Phillip C. Yeager and the brother-in-law of both David P.Yeager and Mark A. Yeager. 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. 8 Daniel L. Sellers has been the Company's Vice President of InformationServices and Chief Information Officer since December 1998. Prior to joining theCompany, Mr. Sellers was Vice President of Information Systems with Humana, Inc.from February 1997 to December 1998. Prior to that, Mr. Sellers was VicePresident and General Manager of OmniTracs software with Qualcomm, Inc. fromNovember 1993 to February 1997. Mr. Sellers also worked in the transportationindustry for 15 years with Schneider National, Inc. in a variety of positions,including as Vice President and Chief Information Officer of InformationSystems. He received a Bachelor of Business Administration from the Universityof Cincinnati in 1978 and a Masters in Business Administration from theUniversity of Wisconsin Graduate School of Business in 1983. Mr. Sellers is apast member of the American Trucking Association's Management Systems Council. 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." Setforth below are the high and low prices for shares of the Class A Common Stockof the Company for each full quarterly period in 1997 and 1998. 1997 1998 ---------- ---------- High Low High Low ---- --- ---- --- First Quarter $ 30 1/8 $ 24 1/2 $ 30 $ 25 Second Quarter $ 31 $ 24 1/4 $ 28 1/8 $ 19 3/4 Third Quarter $ 38 1/4 $ 30 1/8 $ 24 $ 15 3/4 Fourth Quarter $ 37 1/8 $ 28 3/8 $ 20 1/4 $ 12 3/4 On March 16, 1999, there were approximately 47 stockholders of record ofthe Class A Common Stock and, in addition, there were an estimated 1,480beneficial owners of the Class A Common Stock whose shares were held by brokersand other fiduciary institutions. On March 16, 1999, 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, ------------ --------------- --------------- ------------ ----------- 1998 1997(1) 1996(2) 1995 1994 ------------ --------------- --------------- ------------ ----------- Statement of Operations Data:Revenue $1,145,906 $1,064,479 $ 754,243 $ 81,408 $ 86,876Net revenue 138,334 129,855 91,564 6,266 6,288Operating income 26,406 33,495 27,925 2,567 2,348Income before minority interest and taxes 25,324 32,869 27,704 2,638 2,406Income before taxes 15,205 15,874 11,338 2,638 2,406Historical net income 8,908 9,525 7,044 2,599 2,369Historical basic earnings per common share $ 1.16 $ 1.48 $ 1.41 $ 1.56 $ 1.43Historical diluted earnings per common share $ 1.15 $ 1.46 $ 1.39 $ 1.56 $ 1.43Pro forma provision for additional income taxes(3) 241 1,016 925Pro forma net income $ 6,803 $ 1,583 $ 1,444Pro forma basic earnings per common share $ 1.36 $ 0.95 $ 0.87Pro forma diluted earnings per common share $ 1.35 $ 0.95 $ 0.87 As of December 31, ------------ --------------- ---------------- ---------- ----------- 1998 1997(1) 1996(2) 1995 1994 ------------ --------------- ---------------- ---------- ----------- Balance Sheet Data:Working capital $ 20,313 $ 15,209 $ 15,877 $ 804 $ 1,457Total assets 304,791 267,826 201,225 9,083 10,360Long-term debt, excluding current portion 29,589 22,873 28,714 - -Stockholders' equity 119,673 110,462 46,124 1,165 1,769(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. These proceeds were used to purchase the remaining 70% minority interest in Hub City Los Angeles, L.P. and Hub City Golden Gate,L.P. See the Notes to the Company's Consolidated Financial Statements.(2) On March 18, 1996, Hub Group, Inc. purchased Hub City Terminals, Inc. ("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 liabilities associated 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 andmanagement 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, 1997, to the year ended December 31,1996, is limited to comparisons of revenue. Discussion of pro forma financialdata for the year ended December 31, 1997, reflects results of operations as ifHub Group, Inc. had acquired Hub Partnerships and APLDDS as of January 1, 1996. On October 31, 1997, the Company acquired the 50% interest in itsinternational joint venture, HLX Company, LLC, that it did not previously own.HLX offers point-to-point international transportation services with a focus onthe North American movement of import and export freight. On April 1, 1998, the Company acquired all of the outstanding stock ofQuality Intermodal Corporation ("Quality"). Quality primarily offered intermodaland truckload brokerage services with offices in Houston, Dallas, Los Angeles,Chicago, Atlanta, and Philadelphia. The Company absorbed the Quality businessdirectly into the operations of Hub Chicago and Hub Partnerships. On August 1, 1998, the Company acquired the rights to service thecustomers of Corporate Express Distribution Services ("CEDS") as well as certainfixed assets. The CEDS business is being operated by Hub Group DistributionServices, the Company's niche logistics services provider. CEDS was a providerof niche logistics services including a pharmaceutical sample deliveryoperation. 11RESULTS OF OPERATIONSYear Ended December 31, 1998, Compared to Year Ended December 31, 1997REVENUE Revenue totaled $1,145.9 million for 1998, representing an increase of7.6% over 1997. Intermodal revenue increased 7.2% over 1997. Management believesthat the well-publicized railroad service disruptions experienced by theintermodal industry during 1998 negatively impacted intermodal revenue growth.Truckload brokerage revenue increased 27.3% over 1997. The Company hassuccessfully maintained its expansion into this service offering by employingdedicated and experienced personnel in each Hub. Logistics revenue decreased17.4% compared to 1997. This decrease was due to the Company's cancellation ofits contract to provide third-party logistics services to a significant customerin January 1998. This customer accounted for $32.5 million of the Company'srevenue in 1997.NET REVENUE Net revenue as a percentage of revenue decreased slightly to 12.1% in1998 from 12.2% in 1997. Management believes the primary cause of this slightdecrease is due to the increased transportation costs resulting from the servicedisruptions that were prevalent in 1998. At times the Company used higher costalternative routing and incurred accessorials for detention and storage whichwere not passed on to the customer in an effort to maintain the long-termrelationships the Company enjoys with many of its customers.SALARIES AND BENEFITS Salaries and benefits increased to $72.5 million in 1998 from $64.3million in 1997. As a percentage of revenue, salaries and benefits increased to6.3% from 6.0%. The increase in the percentage is primarily attributed to theincreased number of personnel needed to handle the Company's intermodal business. Due to the service disruptions, personnel were required to spendsignificantly more time per load to operate and monitor the transit of freight.SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased to $32.9 millionin 1998 from $27.5 million in 1997. These expenses as a percentage of revenueincreased to 2.9% from 2.6%. The increase in the percentage is attributed to theincreased expenditures related to information systems, rent and equipmentleases. Expenditures for information systems included consulting costs relatedto the refinement of the Company's information systems strategy and costs forthe Year 2000 project (See "Outlooks, Risks and Uncertainties"). Rent increasedas the Company expanded its offices to meet space and service needs.Expenditures for equipment leases increased as the Company leased almost all ofits computer hardware additions in 1998.DEPRECIATION AND AMORTIZATION Depreciation and amortization increased to $6.6 million in 1998 from$4.6 million in 1997. As a percentage of revenue, depreciation and amortizationincreased to 0.6% from 0.4%. The increase is attributed to the increase ingoodwill amortization related to the September 1997 purchase of the minorityinterest in Hub City Los Angeles, L.P. ("Hub Los Angeles") and Hub City GoldenGate, L.P. ("Hub Golden Gate"), the April 1998 purchase of the minority interestin Hub City Rio Grande, L.P., Hub City Dallas, L.P. and Hub City Houston, L.P.("Texas Hubs") and the April 1998 acquisition of Quality.OTHER INCOME (EXPENSE) Interest expense increased to $2.5 million in 1998 from $2.2 million in1997. The primary cause of the increase in interest expense is the use of cashand issuance of a note related to both the acquisition of Quality and thepurchase of the minority interest in the Texas Hubs in April 1998. 12 Interest income decreased to $1.0 million in 1998 from $1.5 million in1997. The primary cause of this decrease is the Company's increasedconcentration of its cash balances to reduce debt and minimize interest expenseon current borrowings.MINORITY INTEREST Minority interest decreased to $10.1 million in 1998 from $17.0 millionin 1997. Minority interest as a percentage of income before minority interestand provision for income taxes was 40.0% in 1998 compared to 51.7% in 1997. Thedecrease in the percentage is primarily attributed to the purchase of minorityinterest in September 1997 and April 1998.PROVISION FOR INCOME TAXES Provision for income taxes was $6.3 million in 1997 and 1998. TheCompany provided for income taxes using an effective rate of 41.4% in 1998versus 40.0% in 1997. The increase in the effective rate was primarily theresult of the purchase of minority interest in September 1997 and the Qualityacquisition in April 1998. The goodwill related to the Quality acquisition isnot tax deductible and therefore has the effect of increasing the Company'seffective rate.NET INCOME Historical net income decreased 6.5% to $8.9 million in 1998 from $9.5million in 1997. Because of the severe rail service disruptions in 1998,expenses grew faster than revenue in 1998. Although the decrease in minorityinterest offset a substantial portion of the increase in expenses, historicalnet income dropped to 0.8% of revenue in 1998 from 0.9% in 1997. EARNINGS PER COMMON SHARE Historical diluted earnings per common share decreased 21.2% to $1.15in 1998 from $1.46 in 1997. The decrease in net income coupled with the increasein shares outstanding due to the secondary equity offering in September 1997caused the decrease.Year 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. 13NET 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 toprovide 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 LosAngeles and Hub Golden Gate occurred in August 1996, December 1996, March 1997,September 1997 and September 1997, respectively. The timing of these purchasesalso caused goodwill amortization to be higher in 1997 as compared to 1996.OTHER INCOME (EXPENSE) Interest expense increased to $2.2 million in 1997 from $1.0 million 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 interest 14and 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 through December 31, 1997.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.NET 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 public offering 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.LIQUIDITY AND CAPITAL RESOURCES During 1998, the Company had two significant transactions that affectedliquidity. These transactions were the acquisition of Quality and the purchaseof the minority interest in the Texas Hubs. Quality was acquired for $4,080,000in cash and $5,950,000 through the issuance of a three-year note, bearinginterest at an annual rate of 5.6%. The transaction resulted in the recording of$9,458,000 of goodwill which will not be deductible for income tax purposes. Theminority interest in the Texas Hubs was purchased for $6,730,000 in cash. Thetransaction was recorded all as goodwill which will be deductible over 15 yearsfor income tax purposes. The Company had capital expenditures of approximately $4.0 millionduring 1998. Capital expenditures were principally made in connection with theexpansion of the Company's offices and to enhance its information systemscapabilities. 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. Advances on the line at December 31, 1998, were$2,050,000 bearing interest at the rate of 7.5%. 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 $7.2 15million 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. Advances on the line at December 31, 1998,were $18.5 million bearing interest ranging from 6.34% to 6.36%.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 themarketplace, 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 "Year 2000" refers to the issue surrounding the compatibility ofcomputer and other technology based systems with dates beyond December 31, 1999.This section will include an assessment of the Company's state of readiness, thecosts to address the issues, the risks the issues represent and the Company'scontingency plan.STATE OF READINESS Management has broken down its Year 2000 program into four phases.Those phases are awareness, assessment, renovation and validation. The Companycontracted with an outside consulting firm to perform a readiness review, whichwas completed in December 1998. This review was instrumental in identifying andaddressing Year 2000 issues. Management believes that it is aware of the risk areas facing theCompany regarding Year 2000 and has broken those areas into seven categories.The seven categories are: (i) the Company's main operating system that has beencreated and enhanced in-house, (ii) the Company's ancillary operating softwareapplications which were purchased, (iii) desktop hardware and softwareapplications, (iv) the Company's financial reporting system, (v) the Company'stelephone systems, (vi) embedded technology in the Company's office equipment,physical environment and drayage tractors and (vii) the state of readiness ofthe Company's customers, transportation service providers and other vendors. The Company's main operating system is currently being renovated. Therenovation, which consists of reprogramming the source code, has been completed.The validation phase will start by April 1, 1999, and management estimates thatthe validation phase will be completed by September 30, 1999. The Company believes all of its ancillary operating softwareapplications have been assessed. All of the supporting vendors have stated thattheir products are Year 2000 compliant. The validation phase is to begin byApril 1, 1999, and should be completed by September 30, 1999. The Company's financial reporting system vendor has stated that theirapplication is Year 2000 compliant. The Company plans to execute the validationphase for the financial reporting system as the Company's operating systemgenerates Year 2000 activity during its validation phase. The validation phasefor the financial reporting system is expected to be completed by September 30,1999. The Company's desktop hardware and software application assessment isongoing. The Company is in the process of creating an inventory of all desktophardware and software applications. Once completed, the Company anticipates 16hiring an outside consulting firm to execute the renovation and validationphases. The renovation phase will consist of updating or replacing the hardwareor software application if it is not Year 2000 compliant. The renovation phaseis expected to begin during the second quarter of 1999, and the validation phaseis expected to be completed by September 30, 1999. The Company is still assessing its many telephone systems. The amountof time for renovation and validation has not yet been determined. The Company is aware of the potential issues regarding embeddedtechnology in its office equipment, physical environment and drayage tractors.While the Company has not assessed each piece of office equipment, such as faxmachines and copiers, it believes its contingency plan will deal effectivelyenough with the risks of failure that such assessment is not a high priority.Similarly, the Company recognizes the potential issues regarding its physicalenvironment, such as heat, electricity, elevators, security systems, etc., buthas not ranked the assessment of each to be a higher priority than theresolution of items (i) through (v) above. The Company has assessed its embedded technology in its drayage tractors and received a statement from the enginemanufacturers that the tractors' embedded technology is Year 2000 compliant. The Company has identified four categories of key third parties withwhich the Company has a material relationship that should be assessed. Thosecategories are: (i) significant customers who rely on their computer systems todetermine their transportation needs, (ii) key vendors such as the railroads andsignificant providers of drayage and over-the-road services, (iii) ourinformation network communications provider and (iv) significant third partyfreight payment vendors utilized by the Company's customers. The Company hasreceived statements from certain major customers and from certain majorcustomers' third party freight payment vendors regarding their Year 2000readiness. The Company has no plans to obtain such statements from all itscustomers or all its customers' third party freight payment vendors. The Companyhas received statements from the major railroads and many of the Company'sdrayage and over-the-road service providers that they are Year 2000 compliant.The Company believes at this time that its information network communicationsprovider will be Year 2000 compliant.COSTS In 1998, the Company expensed approximately $680,000 related to Year2000. In 1999, through February 28th, the Company has expensed an additional$369,000. These costs include not only amounts paid to outside parties but alsothe payroll costs for those employees spending significant amounts of time onYear 2000 issues. The Company estimates it will spend approximately $2.5 to $3.0million in total related to Year 2000. The Company expects to continue to fundthese costs through cash flow from operations or use of its credit facilities.RISK Management believes its most likely worst-case scenario is a completeshut down of the Company's, the railroads' or the Company's customers' mainoperating systems. The Company believes any of these risks, as well as otherrisks or combination of risks addressed herein or otherwise, could have amaterial adverse effect on the Company's results of operations, financialcondition and liquidity.CONTINGENCY PLAN The Company has not yet developed a formal written contingency plan.Certain aspects of the Year 2000 contingency plan, such as dealing with aninoperative system, will be a matter of integrating the Company's currentcontingency plans for dealing with the temporary shut downs that occur from timeto time. Other aspects of the contingency plan will be developed as the Companyworks through the phases of readiness. The creation of the contingency plan willbe an ongoing process that should be completed by September 30, 1999. 17REVENUE Management believes that the performance of the railroads is the mostsignificant factor that could negatively influence the Company's revenue growthrate. First, the service disruption in the intermodal industry that started inthe fourth quarter of 1997 appears to have been significantly rectified. Shouldthis trend reverse, the Company's intermodal growth rate would likely benegatively impacted. Should the split-up of Conrail, scheduled to begintransition on June 1, 1999, cause a similar service disruption, the Company'sintermodal growth rate would likely be negatively impacted. Should there beanother significant service disruption, there may be some customers who wouldswitch from using the Company's intermodal service to other carriers'over-the-road service. These customers may choose to continue to utilize thesecarriers even when intermodal service levels are restored.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 toinvest in additional personnel to stimulate new or existing businesses, changesin customer requirements or changes in railroad intermodal service levels whichcould result in a lower or higher cost of labor 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 $1.8 million to $2.3 million related to Year2000 issues in 1999. (See "Year 2000")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 improving the Company's information systems capabilities and a fullyear of goodwill amortization related to the purchase of the minority interestin the Texas Hubs as well as the acquisition of Quality. Factors that couldcause an increase in the percentage are additional acquisitions or minorityinterest purchases as well as increased depreciation expense on any capitalizedcosts that could be incurred in conjunction with a change in the Company'sinformation systems strategy.OTHER INCOME (EXPENSE) The purchase of additional minority interest or new businessacquisitions would likely cause an increase in the Company's debt levels andtherefore an increase in interest expense. Management estimates that interest income will likely decrease fromcurrent levels. Factors that could cause such a decrease are the possible use of 18cash to (i) make payments on the balloon notes, (ii) make payments on the APLDDSnote, (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.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 believes that cash, cash to be provided by operations, cashavailable under its lines of credit and the Company's ability to obtainadditional credit capacity will be sufficient to meet the Company's short-termworking capital and capital expenditure needs. The Company believes that theaforementioned items are sufficient to meet its anticipated long-term workingcapital, capital expenditure and debt repayment needs through at least the year2003.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKNone. 19ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULESReport of Independent Accountants 21Consolidated Balance Sheets - December 31, 1998 and December 31, 1997 22Consolidated Statements of Operations - Years ended December 31, 1998, December 31, 1997 and December 31, 1996 23Consolidated Statements of Stockholders' Equity - Years ended December 31, 1998, December 31, 1997 and December 31, 1996 24Consolidated Statements of Cash Flows - Years ended December 31, 1998, December 31, 1997 and December 31, 1996 25Notes to Consolidated Financial Statements 26 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTSTo 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, 1998and 1997 and the related consolidated statements of operations, stockholders'equity and cash flows for each of the three years in the period ended December31, 1998. 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 includes assessing 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, 1998 and 1997, and the results of itsoperations and cash flows for each of the three years in the period endedDecember 31, 1998, 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, 1999(except with respect to the matter discussed in Note 17, as to which the date is March 22, 1999) 21 HUB GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) DECEMBER 31, ------------------------------- 1998 1997 --------------- --------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 15,178 $ 12,056 Accounts receivable, net 148,104 127,673 Deferred taxes - 1,222 Prepaid expenses and other current assets 6,036 1,961 --------------- --------------- TOTAL CURRENT ASSETS 169,318 142,912 PROPERTY AND EQUIPMENT, net 19,111 19,616 GOODWILL, net 115,858 102,151 DEFERRED TAXES - 2,479 OTHER ASSETS 504 668 --------------- --------------- TOTAL ASSETS $ 304,791 $ 267,826 =============== ===============LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable Trade $ 123,513 $ 102,364 Other 7,909 12,639 Accrued expenses Payroll 6,339 6,013 Other 6,332 3,259 Deferred taxes 1,751 - Current portion of long-term debt 3,161 3,428 --------------- --------------- TOTAL CURRENT LIABILITIES 149,005 127,703 LONG-TERM DEBT, EXCLUDING CURRENT PORTION 29,589 22,873 DEFERRED TAXES 556 - CONTINGENCIES AND COMMITMENTS MINORITY INTEREST 5,968 6,788 STOCKHOLDERS' EQUITY: Preferred stock - - Common stock 77 77 Additional paid-in capital 110,181 109,878 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 24,873 15,965 --------------- --------------- TOTAL STOCKHOLDERS' EQUITY 119,673 110,462 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 304,791 $ 267,826 =============== ===============The accompanying notes to consolidated financial statements are an integral partof these balance sheets. 22 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 --------------- -------------- -------------- REVENUE: Trade $ 1,145,906 $ 1,064,479 $ 750,784 Affiliates - - 3,459 --------------- -------------- -------------- Total Revenue 1,145,906 1,064,479 754,243TRANSPORTATION COSTS 1,007,572 934,624 662,679 --------------- -------------- -------------- Net revenue 138,334 129,855 91,564COSTS AND EXPENSES: Salaries and benefits 72,465 64,280 43,913 Selling, general and administrative 32,885 27,478 17,147 Depreciation and amortization 6,578 4,602 2,579 --------------- -------------- -------------- Total costs and expenses 111,928 96,360 63,639 Operating income 26,406 33,495 27,925 --------------- -------------- --------------OTHER INCOME (EXPENSE): Interest expense (2,480) (2,225) (996) Interest income 1,014 1,466 786 Other, net 384 133 (11) --------------- -------------- -------------- Total other expense (1,082) (626) (221)Income before minority interest and provision for income taxes 25,324 32,869 27,704 --------------- -------------- --------------Minority interest 10,119 16,995 16,366 --------------- -------------- --------------Income before provision for income taxes 15,205 15,874 11,338Provision for income taxes 6,297 6,349 4,294 --------------- -------------- --------------Historical net income $ 8,908 $ 9,525 $ 7,044 =============== ============== ==============Historical basic earnings per common share $ 1.16 $ 1.48 $ 1.41 =============== ============== ==============Historical diluted earnings per common share $ 1.15 $ 1.46 $ 1.39 =============== ============== ==============Pro forma provision for additional income taxes 241 --------------Pro forma net income $ 6,803 ==============Pro forma basic earnings per common share $ 1.36 ==============Pro forma diluted earnings per common share $ 1.35 ==============The accompanying notes to consolidated financial statements are an integral partof these statements. 23 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT SHARES) TAX BENEFIT PURCHASE OF PURCHASE PRICE IN PRICE COMMON STOCK ADDITIONAL EXCESS OF IN EXCESS OF TOTAL ------------------------ PAID-IN PREDECESSOR PREDECESSOR RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL BASIS BASIS EARNINGS EQUITY ------------- ---------- ------------ --------------- --------------- ----------- -------------- Balance at January 1, 1996 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 Net income - - - - - 8,908 8,908 Exercise of non-qualified stock options 19,000 - 303 - - - 303 ------------- ---------- ------------ --------------- --------------- ----------- --------------Balance at December 31, 1998 7,672,246 $ 77 $ 110,181 $ (25,764) $ 10,306 $ 24,873 $ 119,673 ============= ========== ============ =============== =============== =========== ==============The accompanying notes to consolidated financial statements are an integral partof these statements. 24 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 --------------- --------------- ------------- Cash flows from operating activities: Net income $ 8,908 $ 9,525 $ 7,044 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,656 5,688 2,786 Deferred taxes 6,008 6,349 2,722 Minority interest 10,119 16,995 16,366 Loss (Gain) on sale of assets 135 (107) (59) Changes in working capital, net of effects of purchase transactions: Accounts receivable, net (11,978) (13,663) (29,976) Prepaid expenses and other current assets (4,018) 1,583 (1,801) Accounts payable 8,933 11,759 20,851 Accrued expenses 2,758 1,023 2,549 Other assets 167 303 (106) --------------- --------------- ------------- Net cash provided by operating activities 28,688 39,455 20,376 --------------- --------------- -------------Cash flows from investing activities: Cash used in acquisitions, net (3,989) (164) (37,459) Purchases of minority interest (6,730) (60,955) (2,513) Purchases of property and equipment, net (3,975) (8,488) (7,862) --------------- --------------- ------------- Net cash used in investing activities (14,694) (69,607) (47,834) --------------- --------------- -------------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 303 95 - Purchase of common stock - - (2) Distributions to stockholders - - (1,104) Distributions to minority interest (10,939) (20,921) (5,814) Payments on long-term debt (28,843) (6,409) (7,271) Proceeds from issuance of long-term debt 28,607 832 2,595 --------------- --------------- ------------- Net cash provided by (used in) financing activities (10,872) 28,315 41,349 --------------- --------------- -------------Net increase (decrease) in cash 3,122 (1,837) 13,891Cash and cash equivalents, beginning of period 12,056 13,893 2 --------------- --------------- -------------Cash and cash equivalents, end of period $ 15,178 $ 12,056 $ 13,893 =============== =============== =============Supplemental disclosures of cash flow information Cash paid for: Interest $ 2,343 $ 2,138 $ 491 Income taxes 2,680 386 2,344 Non-cash investing and financing activities: Notes payable issued as distributions to stockholders $ - $ - $ 663 Note payable issued to purchase minority interest - - 14,970 The accompanying notes to consolidated financial statements are an integral partof 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 primarily third party arrangementswith railroads and drayage companies. The Company also arranges fortransportation of freight by truck and performs logistics services.PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include theaccounts of Hub Group, Inc. and all entities in which the Company has more thana 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 $1,482,000 and $6,425,000 at December 31,1998 and 1997, respectively, are included in accounts payable.RECEIVABLES: The Company's reserve for uncollectible accounts receivable wasapproximately $691,000 and $303,000 at December 31, 1998, and 1997,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;computer equipment and software, 3 to 5 years; furniture and equipment, 3 to 10years; and transportation equipment and automobiles, 3 to 12 years. Direct costsrelated to internally developed software projects are capitalized and amortizedover the expected useful life on a straight-line basis not to exceed five years,commencing when the asset is placed into service. Maintenance and repairs 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 $4,963,000 and$2,050,000 as of December 31, 1998 and 1997, respectively.CONCENTRATION OF CREDIT RISK: The Company's financial instruments that areexposed to concentrations of credit risk consist primarily of cash and cashequivalents and accounts receivable. The Company places its cash and temporaryinvestments with high quality financial institutions. At times, such investmentsmay be in excess of the FDIC insurance limit. Temporary investments are valuedat the lower of cost or market and at the balance sheet dates approximate fairmarket value. The Company primarily serves customers located throughout theUnited States with no significant concentration in any one region. No onecustomer accounted for more than 10% of revenue in 1996, 1997 or 1998. TheCompany reviews a customer's credit history before extending credit. Inaddition, the Company routinely assesses the financial strength of its customersand, as a consequence, believes that its trade accounts receivable risk islimited. REVENUE RECOGNITION: Revenue represents sales of services to customers.Revenue is recognized based on relative transit time.INCOME TAXES: Prior to March 18, 1996, the Company had elected to be taxed as anS corporation under the Internal Revenue Code. The income of an S corporation is 26taxable to its stockholders rather than the Company itself. Income tax expenseincurred prior to March 18, 1996, represents Illinois replacement tax. On March18, 1996, the Company became a taxable C corporation. The pro forma provisionfor additional income taxes was calculated assuming the Company was operating asa taxable C corporation since January 1, 1996. The Company accounts for certainincome and expense items differently for financial reporting and income taxpurposes. Deferred tax assets and liabilities are determined based on thedifference between the financial statement and tax bases of assets andliabilities applying enacted statutory tax rates in effect for the year in whichthe differences are expected to reverse.EARNINGS PER COMMON SHARE: In February 1997, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standards No. 128 ("Statement128") addressing earnings per share. Statement 128 changed the methodology ofcalculating earnings per share and requires disclosure of basic earnings pershare and diluted earnings per share. The Company adopted Statement 128 inDecember 1997 and has retroactively restated all periods presented. Basicearnings per common share are based on the average quarterly weighted averagenumber of Class A and Class B shares of common stock outstanding. Dilutedearnings per common share are adjusted for the assumed exercise of dilutivestock options. In computing the per share effect of assumed exercise, fundswhich would have been received from the exercise of options, including taxbenefits assumed to be realized, are considered to have been used to purchaseshares at current market prices, and the resulting net additional shares areincluded in the calculation of weighted average shares outstanding.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 reclassified toconform with the 1998 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 $52.9 million. 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 acontrolling 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. 27NOTE 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 acquiredand 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 representing the tax effect of the purchase price in excess ofpredecessor basis, with the corresponding credit recorded as an increase toequity. 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. On April 1, 1998, the Company acquired all the outstanding stock ofQuality Intermodal Corporation for $4,080,000 in cash and $5,950,000 through theissuance of a three-year note, bearing interest at an annual rate of 5.6%. Theacquisition was recorded using the purchase method of accounting resulting ingoodwill of $9,458,000. On August 1, 1998, the Company acquired the rights to service thecustomers of Corporate Express Distribution Services as well as certain fixedassets for $750,000 in cash. The acquisition was recorded using the purchasemethod of accounting resulting in goodwill of $432,000. Results of operations from acquisitions recorded under the purchase method of accounting are included in the Company's financial statements fromtheir respective dates of acquisition. The 1998 purchase price allocationspresented are 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 1,1996: (UNAUDITED) YEAR ENDED DECEMBER 31, 1996 ----------------- (000'S) Revenue as reported $ 754,243Revenue of purchased businesses for period prior to acquisitions, net of eliminations 184,660 -----------------Pro forma revenue $ 938,903 -----------------Historical net income as reported $ 7,044Net income (loss) of purchased businesses for period prior to acquisitions (260)Adjustment for goodwill amortization (96) -----------------Pro forma net income $ 6,688 -----------------Historical diluted earnings per share as reported $ 1.39Effect of purchased businesses prior to acquisitions (0.24) -----------------Pro forma historical diluted earnings per share $ 1.15 -----------------Business acquisitions which involved the use of cash were accounted for asfollows: YEARS ENDED DECEMBER 31, ------------------------------------------------ 1998 1997 1996 --------------- ---------------- ------------- (000'S) Accounts receivable $ 8,453 $ (115) $ 75,576Prepaid expenses and other current assets 57 12 1,584Property and equipment 398 79 9,308Goodwill 9,890 466 25,297Deferred tax benefit, net - - 10,575Other assets 3 13 628Accounts payable (7,486) (216) (74,694)Accrued expenses (641) (75) (5,190)Long-term debt (6,685) - (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 $ 3,989 $ 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, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------------- ------------------------- ------------------------- (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 $8,908 7,657 $1.16 $9,525 6,420 $1.48 $7,044 5,000 $1.41 ------ ------ --------- ------ ------ --------- ------- ------ --------EFFECT OF DILUTIVE SECURITIES Stock options - 72 - - 114 - - 58 - ------ ------ --------- ------ ------ --------- ------- ------ --------HISTORICAL DILUTED EPS Income available to common stockholders plus assumed exercises $8,908 7,729 $1.15 $9,525 6,534 $1.46 $7,044 5,058 $1.39 ------ ------ --------- ------ ------ --------- ------- ------ --------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% minorityinterests in Hub City Los Angeles, L.P. and Hub City Golden Gate, L.P. forapproximately $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. On April 1, 1998, the Company purchased the remaining 70% minorityinterest in Hub City Dallas, L.P., Hub City Houston, L.P. and Hub City RioGrande, L.P. for approximately $6,730,000 in cash. 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, ---------------------------------- 1998 1997 --------------- ----------------- (000'S) Land $ - $ 56Building and improvements 53 233Leasehold improvements 1,206 886Computer equipment and software 15,816 14,512Furniture and equipment 5,722 4,172Transportation equipment and automobiles 5,318 5,828 --------------- ---------------- 28,115 25,687Less: Accumulated depreciation and amortization (9,004) (6,071) --------------- ---------------- PROPERTY AND EQUIPMENT, net $ 19,111 $ 19,616 =============== ================NOTE 7. INCOME TAXES The following is a reconciliation of the Company's effective tax rate to the federal statutory tax rate: YEARS ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- U.S. federal statutory rate 34.4% 34.5% 34.1%State taxes, net of federal benefit 5.3 4.9 4.8Income earned as non-taxable Subchapter S corporation prior to March 18, 1996 - - (2.1)Goodwill amortization 0.5 - -Other 1.2 0.6 1.1 -------------- -------------- --------------Net effective rate 41.4% 40.0% 37.9% -------------- -------------- -------------- The following is a summary of the Company's provision for income taxes: YEARS ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- (000'S) Current Federal $ 250 $ - $ 1,378 State and local 39 - 194 -------------- -------------- -------------- 289 - 1,572 -------------- -------------- --------------Deferred Federal 5,206 5,559 2,386 State and local 802 790 336 -------------- -------------- -------------- 6,008 6,349 2,722 -------------- -------------- -------------- Total provision $ 6,297 $ 6,349 $ 4,294 -------------- -------------- -------------- 31 The following is a summary of the Company's deferred tax assets andliabilities: YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 --------------- -------------- (000'S) Reserve for uncollectible accounts receivable $ 277 $ 361Accrued compensation 533 172Net operating loss carryforward - 2,635 --------------- -------------- Current deferred tax asset 810 3,168Property and equipment 861 1,851Income tax basis in excess of financial basis of goodwill 10,178 11,012 --------------- -------------- Long-term deferred tax asset 11,039 12,863 --------------- -------------- Total deferred tax asset $ 11,849 $ 16,031 --------------- --------------Prepaids $ (84) $ (53)Receivables (2,477) (1,893) --------------- -------------- Current deferred tax liability (2,561) (1,946)Goodwill (11,595) (10,384) --------------- -------------- Total deferred tax liability $ (14,156) $ (12,330) --------------- -------------- NOTE 8. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Fair value approximates book value at the balance sheet dates. YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 -------------- ---------------- (000'S) Installment notes payable due through 2001, monthly installments ranging from $365 - $16,103, including interest, ranging from 2.9% to 12.0%, collateralized by certain equipment $ 1,793 $ 2,948Bank lines of credit (see below) 20,550 -Unsecured balloon notes, interest compounded annually at 5.45%, interest and principal due March 2001 (see Note 13) 2,260 4,032Mortgage note payable due in 1998 with monthly installments of $2,381, including interest at 8.5%, collateralized by certain property - 195Note payable due in three equal annual principal payments of $2,000,000 beginning on May 2, 1997; interest is due at the time the principal is paid at 6% compounded annually 2,000 4,000Notes payable due in one balloon payment of $5,950,000 on April 1, 2001; interest is due annually and is paid at 5.6% 5,950 -Note payable due in nine equal monthly payments of $71,160 beginning on July 1, 1998; interest is 5.9% compounded monthly 141 -Note payable due January 1, 1998, with interest at an annual rate of 7% (see Note 13 and below) - 14,970Capital lease obligations, collateralized by certain equipment 56 156 -------------- ---------------Total long-term debt 32,750 26,301Less current portion (3,161) (3,428) -------------- --------------- $ 29,589 $ 22,873 -------------- --------------- 32 The note payable for $14,970,000 due on January 1, 1998, was refinancedthrough the $36.0 million credit facility which is described below and isclassified as long-term. Aggregate principal payments, in thousands, due subsequent to December31, 1998, are as follows:1999 $ 3,1612000 7502001 8,2842002 18,5032003 and thereafter 2,052 ------------- $ 32,750 ------------- On March 18, 1996, the Company assumed a line of credit for $5,000,000.Advances on this line of credit at December 31, 1998, were $2,050,000. This lineof credit was not used at December 31, 1997. At December 31, 1998, the interestrate was 7.5%. The interest rate is set at the bank's discretion at a rate lessthan or equal to the bank's prime rate. Borrowings are secured by certainassets. The line of credit 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, 1998.Advances on this line of credit at December 31, 1998 were $18,500,000 withinterest rates ranging between 6.34% and 6.36%. There were no borrowings on this line of credit at December 31, 1997. In October 1996, the Company authorized theissuance of a standby letter of credit for $1,000,000, which has no expirationdate.NOTE 9. RENTAL EXPENSE AND LEASE COMMITMENTS Minimum annual rental commitments, in thousands, at December 31, 1998,under noncancellable operating leases, principally for real estate andequipment, are payable as follows:1999 $ 5,9762000 5,5192001 4,3002002 2,3132003 6302004 310 ------------ $ 19,048 ------------ Total rental expense was approximately $7,487,000, $4,535,000 and$2,773,000 for 1998, 1997 and 1996, 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 secondLong-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, stock 33appreciation 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.The options granted to employees vest over a range of three to five years andexpire 10 years after the date of grant. The Company currently utilizes Accounting Principles Board Opinion No.25 in its accounting for stock options. In October, 1995, the 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, ---------------------------------------------------- 1998 1997 1996 ---------------- ---------------- ---------------- Pro forma net income as reported (000's) 8,908 9,525 6,803Pro forma net income pro forma for Statement 123 (000's) 8,501 9,261 6,599Historical basic earnings per common share pro forma for Statement 123 $ 1.11 $ 1.44 $ 1.32Historical diluted earnings per common share pro forma for Statement 123 $ 1.10 $ 1.42 $ 1.30 The 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, ---------------------------------------------------- 1998 1997 1996 ---------------- ---------------- ---------------- Dividend yield 0.0% 0.0% 0.0%Risk-free interest rate 5.1% 5.8% 6.5%Volatility factor 40.0% 40.0% 25.0%Expected life in years 6.0 6.0 6.0 34Information regarding these option plans for 1998, 1997 and 1996 is as follows: 1998 1997 1996 --------------------------------- ---------------------------------- ----------------------------- Weighted Avg. Weighted Avg. Weighted Avg. Shares Exercise Price Shares Exercise Price Shares Exercise Price ----------------- -------------- ------------------ -------------- ------------ -------------- Options outstanding, beginning of year 401,800 $ 15.86 357,500 $ 14.00 - $ -Options exercised (19,000) 14.00 (4,700) 14.00 - -Options granted 161,500 21.91 49,000 29.23 362,500 14.00Options forfeited (75,000) 24.85 - - (5,000) 14.00 ----------------- -------------- ------------------ -------------- ------------ --------------Options outstanding, end of year 469,300 $ 16.58 401,800 $ 15.86 357,500 $ 14.00Weighted average fair value of options granted during the year $ 10.30 $ 11.02 $ 5.54Options exercisable at year end 137,200 71,600 -Option price range at end of year $14.00 to $28.16 $14.00 to $31.25 $ 14.00Option price for exercised shares $ 14.00 $ 14.00 $ -Options available for grant at end of year 107,000 193,500 92,500The following table summarizes information about options outstanding at December31, 1998: 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- ----------------- ------------ ----------------- ------------- ----------- ------------- $ 14.00 312,800 7.19 $ 14.00 127,400 $ 14.00$ 18.56 25,000 9.82 $ 18.56 - $ -$ 19.94 35,000 9.93 $ 19.94 - $ -$ 20.13 5,000 9.57 $ 20.13 - $ -$ 20.75 12,500 9.65 $ 20.75 - $ -$ 21.75 54,000 8.87 $ 21.75 9,800 $ 21.75$ 28.16 25,000 9.17 $ 28.16 - $ -- ----------------- ------------ ----------------- ------------- ----------- -------------$14.00 to $28.16 469,300 7.93 $ 16.58 137,200 $ 14.55NOTE 11. BUSINESS SEGMENT The Company has no separately reportable segments in accordance withStatement of Financial Accounting Standards No. 131 "Disclosure About Segments of an Enterprise and Related Information". Under the enterprise wide disclosurerequirements of Statement No. 131, the Company reports revenue, in thousands,for Intermodal Services, Brokerage Services, and Logistic Services as follows: YEARS ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Intermodal Services $ 910,396 $ 849,398 $ 629,294Brokerage Services 164,706 129,356 79,408Logistics Services 70,804 85,725 45,541 ---------- ---------- ----------Total Revenue $1,145,906 $1,064,479 $ 754,243 ---------- ---------- ---------- 35NOTE 12. 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 $1,458,000, $1,163,000 and $704,000for 1998, 1997 and 1996, respectively.NOTE 13. 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 were payable, in part, to the above related parties totalingapproximately $4,758,000. Approximately 33% of the balloon notes payable atDecember 31, 1998 and 1997, are 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 $26,788,000 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., Hub GroupDistribution Services, Hub City Dallas, L.P., Hub City Houston, L.P., and HubCity Rio Grande, L.P. The Company provided transportation services to Hub Partnerships priorto acquiring Hub Partnerships on March 18, 1996. Revenue from Hub Partnershipswas $3,459,000 for the period January 1 through March 17, 1996. Net fees wereapproximately $104,000 for the period January 1 through March 17, 1996. Hub Partnerships provided transportation services to the Company priorto being acquired, which resulted in costs of $3,880,000 for the period January1 through March 17, 1996. 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 for the period January 1 throughMarch 17, 1996. The Company leased a building from a shareholder. Monthly payments in1996 were $9,178 and extended through November 1996.NOTE 14. 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. 36NOTE 15. EQUITY December 31, 1998 -------------------------- Issued and Authorized Outstanding ----------- ------------ Preferred stock, $.01 par value 2,000,000 -Class A common stock, $.01 par value 12,337,700 7,009,950Class B common stock, $.01 par value 662,300 662,296 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 662,300 662,296NOTE 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth selected quarterly financial data foreach of the quarters in 1998 and 1997 (in thousands, except per share amounts): Quarters -------------------------------------------------------- First Second Third Fourth ------------- -------------- ------------ --------------Year Ended December 31, 1998: Revenue $ 255,133 $ 283,051 $ 295,859 $ 311,863Net revenue 30,447 33,620 36,523 37,744Operating income 4,434 6,773 8,642 6,557Historical net income 1,627 2,076 2,606 2,599Historical basic earnings per share $ 0.21 $ 0.27 $ 0.34 $ 0.34Historical diluted earnings per share $ 0.21 $ 0.27 $ 0.34 $ 0.34 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 $ 0.36Historical diluted earnings per share $ 0.33 $ 0.37 $ 0.41 $ 0.36 NOTE 17. SUBSEQUENT EVENT On March 22, 1999, the Company's remaining call options, to purchasethe remaining 70% minority interest in its Hub operating companies, weretriggered and the Company intends to exercise these options in April 1999. Thepurchase price, estimated at approximately $110,000,000, is intended to befinanced through unsecured senior debt. 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 12, 1999, 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 12, 1999, 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 12, 1999, 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 12,1999, 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 Registrantare included under Item 8 of this Form 10-K: Report of Independent Accountants Consolidated Balance Sheets - December 31, 1998 and December 31, 1997 Consolidated Statements of Operations - Years ended December 31, 1998, December 31, 1997 and December 31, 1996 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1998, December 31, 1997 and December 31, 1996 Consolidated Statements of Cash Flows - Years ended December 31, 1998, December 31, 1997 and December 31, 1996 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 24, 1999 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 24, 1999- -------------------------------- Phillip C. Yeager /s/ David P. Yeager Vice Chairman, Chief Executive Officer and Director March 24, 1999- -------------------------------- David P. Yeager /s/ William L. Crowder Vice President-Finance and Chief Accounting Officer March 24, 1999- -------------------------------- William L. Crowder (Principal Financial and Accounting Officer) /s/ Thomas L. Hardin President, Chief Operating Officer and Director March 24, 1999- -------------------------------- Thomas L. Hardin /s/ Charles R. Reaves Director March 24, 1999- -------------------------------- Charles R. Reaves /s/ Martin P. Slark Director March 24, 1999- -------------------------------- Martin P. Slark /s/ Gary D. Eppen Director March 24, 1999- -------------------------------- Gary D. Eppen 40 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULEHUB PARTNERSHIPS- ----------------Report of Independent Accountants F-2Combined Statement of Operations - For the period January 1 through March 17, 1996 F-3Combined Statement of Stockholders' Equity - For the period January 1 through March 17, 1996 F-4Combined Statement of Cash Flows - For the period of January 1 through March 17, 1996 F-5Notes to Combined Financial Statements F-6HUB GROUP, INC.- ---------------Schedule II - Valuation and Qualifying Accounts S-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. These financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audit 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 LLP Chicago, IllinoisFebruary 6, 1997 F-2 HUB PARTNERSHIPS COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS) JANUARY 1, THROUGH MARCH 17, 1996 -------------------- REVENUE: Trade $ 142,413 Affiliate 3,992 -------------------- Total revenue 146,405PURCHASED TRANSPORTATION 128,405 -------------------- Net revenue 18,000COSTS AND EXPENSES: Salaries and benefits 9,807 Selling, general and administrative 3,393 Depreciation and amortization 553 -------------------- Total costs and expenses 13,753 Operating income 4,247 --------------------OTHER INCOME (EXPENSE): Interest expense (56) Interest income 120 Other, net 95 -------------------- Total other income 159INCOME BEFORE INCOME TAXES 4,406INCOME TAXES 126 --------------------NET INCOME $ 4,280 ==================== The accompanying notes to combined financial statements are an integralpart of this statement. F-3 HUB PARTNERSHIPS COMBINED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD 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, 1996 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 this statement. F-4 HUB PARTNERSHIPS COMBINED STATEMENT OF CASH FLOWS (IN THOUSANDS) JANUARY 1, THROUGH MARCH 17, 1996 ----------------- Cash flows from operating activities: Net income $ 4,280 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 553 Loss (gain) on sale of assets 3 Changes in working capital: Accounts receivable, net 604 Prepaid expenses and other current assets 889 Accounts payable 4,783 Accrued expenses (140) Other assets (407) ----------------- Net cash provided by operations 10,565 -----------------Cash flows from investing activities: Purchases of property and equipment, net (775) -----------------Cash flows from financing activities: Proceeds from sale of common stock - Distributions to stockholders (13,014) Purchase and retirement of common stock - Payments on long-term debt (361) Proceeds from issuance of long-term debt 418 ----------------- Net cash used in financing activities (12,957) -----------------Net decrease in cash (3,167)Cash, beginning of period 10,949 -----------------Cash, end of period $ 7,782 =================Supplemental disclosures of cash flow information: Cash paid for: Interest $ 56 Income taxes 130 Non-cash financing activity: Notes payable issued as distributions to stockholders $ 13,176 The accompanying notes to combined financial statements are an integralpart of this statement. 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 arereflected 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 and F-6 disclosure 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.NOTE 2. RENTAL EXPENSE AND LEASE COMMITMENTS Minimum annual rental commitments, in thousands, at March 17, 1996,under noncancellable operating leases, principally for real estate andequipment, are payable as follows:1996 $ 2,1981997 1,5571998 9661999 7162000 6242001 & thereafter 853 -------------Total minimum lease payments $ 6,914 ------------- Total rental expense was approximately $423,000 for the period January1, through March 17, 1996. Many of the leases contain renewal options andescalation clauses which require payments of additional rent to the extent ofincreases in the related 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's contributionto the Plan was approximately $287,000 for the period January 1, through March17, 1996.NOTE 5. RELATED PARTY TRANSACTIONS The Company provides transportation services to Hub Group, Inc.Revenue from Hub Group, Inc. was $3,880,000 for the period January 1, throughMarch 17, 1996. Net fees earned $116,000 for the same period. Hub Group, Inc. provides transportation services to the Company, whichresulted in costs of $3,459,000 for the period January 1, through March 17,1996. The Company charges assessment fees based primarily on volume and salescommission expense to Hub Group, Inc. Revenue for such fees was approximately$112,000 for the period January 1, through March 17, 1996. During the period January 1, through March 17, 1996, the Company leasedtwo facilities from stockholders. Rental expense relating to these agreementswas approximately $39,000 for the period January 1, through March 17, 1996. Theterms of the leases extend through 2000. F-7NOTE 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 7. 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 1998 $ 303,000 $ 1,523,000 $ (1,135,000) $ 691,000 1997 405,000 1,005,000 (1,107,000) 303,000 1996 125,000 768,000 (488,000) 405,000 S-1 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 21Subsidiaries 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. Delaware Hub City Detroit, L.P. DelawareHub City Florida, L.P. DelawareHub City Golden Gate, 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 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 St. Louis, L.P. DelawareHub City Tennessee, L.P. DelawareHub City Texas, 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, 1999, except with respect to the matter discussed inNote 17, as to which the date is March 22, 1999, 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 24, 1999
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