Hub Group Annual Report 1999

-------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K(Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-27754 ------------------ 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 27, 2000, based upon the last reported sale price onthat date on the NASDAQ National Market of $15 7/8 per share, was $110,763,844.On March 27, 2000, the Registrant had 7,043,950 outstanding shares of Class 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 17, 2000, (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. BUSINESSGENERAL Hub Group, Inc. ("Hub Group" or the "Company") is a Delaware corporationwhich was incorporated on March 8, 1995. Since its founding as an intermodalmarketing company ("IMC") in 1971, Hub Group has grown to become the largest IMCin the United States and a full service transportation provider, offeringintermodal, truck brokerage and comprehensive logistics services. The Company operates through an extensive nationwide network of 29 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 hadthe continuing option, exercisable any time after the Principal currentlyassociated with a Hub Partnership ceased 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 was 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. On April 1, 1999, the Company exercised its option to acquire the remaining70% minority interests in Hub City Alabama, L.P., Hub City Atlanta, L.P., HubCity Boston, L.P., Hub City Canada, L.P., Hub City Cleveland, L.P., Hub CityDetroit, L.P., Hub City Florida, L.P., Hub City Indianapolis, L.P., Hub CityKansas City, L.P., Hub City Mid-Atlantic, L.P., Hub City New York-New Jersey,L.P., Hub City New York State, L.P., Hub City Ohio, L.P., Hub City Philadelphia,L.P., Hub City Pittsburgh, L.P., Hub City Portland, L.P. and Hub City St. Louis,L.P. (which purchase is referred to herein as the "April Purchase") for anaggregate purchase price of approximately $108.7 million in cash. Except forHub Distribution, of which the Company owns 65%, the Company now wholly-owns allof the Hub Partnerships and the Company's operations in North America andEurope. 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"). During 1998, the Company took on the management ofapproximately 2000 48' x 102" containers and approximately 180 53' x 102"containers from BNSF for dedicated use throughout the BNSF intermodal containernetwork. On March 1 1999, the Company and BNSF entered into a multi-yearextension and expansion of this program. In accordance with this new agreement,the Company and BNSF added an additional 1000 53' x 102" containers during 1999. On June 1, 1999, the Company and the Norfolk Southern Corporation ("NS")entered into a multi-year agreement expanding the Company's Premier ServiceNetwork onto NS's rail system. In accordance with this agreement, the Companytook on the management of 675 53' x 102" containers from the NS during 1999. TheBNSF containers and the NS containers are fully interchangeable across both theBNSF and NS rail networks. 1 On December 31, 1999, each of the Hub Partnerships, except for HubDistribution and Hub City Texas, L.P., converted to a limited liability company.Also on December 31, 1999, Hub Holdings, Inc., a wholly-owned subsidiary of HubGroup, merged with and into Hub Chicago, making each limited liability company awholly-owned subsidiary of Hub Chicago. On March 13, 2000, the Company signed a letter of intent pursuant to whichthe Company agreed to sell its 65% interest in Hub Distribution for $65 millionin cash and warrants to purchase 5% of the outstanding shares of stock of HubDistribution. The sale of this interest is subject to a number of customaryconditions and there is therefore no guarantee that a transaction willultimately be consummated.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 service is not available, theCompany supplements third party drayage services with Company-owned drayageoperations. As part of its intermodal services, the Company negotiates rail anddrayage rates, electronically tracks shipments in transit, consolidates billingand handles claims for freight loss or damage on behalf of its customers. TheCompany uses its Hub network, connected through its proprietary advancedintermodal management ("AIM") system, to access containers and trailers owned byleasing companies, railroads and steamship lines. The Company also has exclusiveuse of the containers in its Premier Service Network. Because each Hub not onlyhandles its own outbound shipments but also handles inbound shipments from otherHubs, each Hub is able to track trailers and containers entering its servicearea and reuse that equipment to fulfill its customers' outbound shippingrequirements. This effectively allows the Company to "capture" containers andtrailers and keep them within the Hub network without having to make a capitalinvestment in transportation equipment. HIGHWAY SERVICES The Company arranges for the transportation of freight bytruck, providing customers another option for their transportation needs. Thisis accomplished by matching customers' needs with carriers' capacity to providethe appropriate service and price combination. The Company has contracts with asubstantial base of carriers allowing it to meet the varied needs of itscustomers. The Company negotiates rates, tracks shipments in transit,consolidates billing and handles claims for freight loss and damage on behalf ofits customers. The Company's brokerage operation also provides customers withspecialized programs. Through the Dedicated Trucking program, certain carriershave informally agreed to move freight for Hub's customers on a continuousbasis. This arrangement allows Hub to gain control of the trucking equipment toeffectively meet its customer's needs without owning the equipment. Through theCore Carrier-Plus One program, Hub assumes the responsibility for over-the-roadtruckload shipments that the customer's core carriers cannot handle. Thisservice supplements the customer's core carrier program and helps ensure thetimely delivery of the customer's freight. LOGISTICS The Company has expanded its service capabilities as customersincreasingly outsource their transportation needs. The Company currently offersvarious logistics services, including comprehensive transportation management,arranging for delivery to multiple locations at the shipment's destination,third party warehousing and other customized logistics services, as well asother non-traditional logistics services such as installation of point of salemerchandise displays. When providing complete transportation services, the Company essentiallyreplaces the customer's transportation department. Once the Company is hired asa 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 ("ATMS"), the Companyconsolidates orders into full truckload shipments, chooses a shipping route,electronically tenders loads to carriers and reports the move to the customer. 2HUB NETWORK Over the past 29 years, Hub Group has grown from a single office with twoemployees into a network of 27 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 Milwaukee St. Louis Baltimore Indianapolis New Orleans Salt Lake City Boston Jacksonville New York City San Francisco Chicago (3) Kansas City Philadelphia Seattle Cleveland Los Angeles Pittsburgh Toledo Detroit Memphis Portland Toronto Grand Rapids Mexico City RochesterThe entire Hub network is interactively connected through the Company's AIMsystem. This enables Hub Group to move freight into and out of every major cityin the United States and most locations in Canada and Mexico. Each Hub manages the freight originating in or destined for its servicearea. In a typical intermodal transaction, the customer contacts the local Hubto obtain shipping schedules and a price quote for a particular freightmovement. The local Hub obtains the necessary intermodal equipment, arranges forit to be delivered to the customer by a drayage company and, after the freightis loaded, arranges for the transportation of the container or trailer to therail ramp. Information is entered into the AIM system by the local Hub, whichmonitors the shipment to ensure that it will arrive as scheduled. Thisinformation is simultaneously transmitted through the AIM system to the Hubclosest to the point of delivery, which arranges for and confirms delivery by adrayage company. This arrangement among the Hubs is transparent to the customerand allows the customer to maintain its relationship solely with the originatingHub. The Company provides brokerage services to its customers in a similarmanner. In a typical brokerage transaction, the customer contacts the local Hubto obtain transit information and a price quote for a particular freightmovement. The customer then provides appropriate shipping information to thelocal Hub. The local Hub makes the delivery appointment and arranges with theappropriate carrier to pick up the freight. Once it receives confirmation thatthe freight has been picked up, the local Hub monitors the movement of thefreight until it reaches its destination and the delivery has been confirmed. Ifthe carrier notifies Hub Group that after delivering the load it will needadditional freight, the Hub located nearest the destination is notified of thecarrier's availability. Although it is under no obligation to do so, the 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. The Company currently has full time marketing representatives at each Hubwith primary responsibility for servicing local and regional accounts. Thesesales representatives work from the 29 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. 3 In 1985, the Company established the National Accounts group to service theneeds of the nation's largest shippers. The Company recognized that althoughlarge shippers originate freight from multiple locations throughout the country,their logistics function is usually centralized. The Company essentiallymirrored this structure by servicing national accounts from a central locationand parceling out the servicing of individual freight shipments to theappropriate Hub. There are currently 21 National Accounts sales representativeswho report to the Company's Executive Vice President of National Accounts. TheNational Accounts sales representatives regularly call on the nation's largestshippers to develop business relationships and to expand the Company'sparticipation in servicing their transportation needs. When a businessopportunity is identified by a National Accounts sales representative, theCompany's market development and pricing personnel and the local Hubs worktogether to provide a transportation solution tailored to the customer's needs.Local Hubs provide transportation services to National Accounts customers. Afterthe plan is implemented, National Accounts' personnel maintain regular contactwith the shipper to ensure customer satisfaction and to refine the process asnecessary. 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 criticalinformation for analysis. The AIM system provides connectivity with each of themajor rail carriers, enabling the Company to electronically schedule and trackshipments in a real time environment. In addition, the AIM system's EDI featuresoffer customers with EDI capability a completely paperless process, includingload tendering, shipment dispatch, shipment tracking, customer billing andremittance processing. The Company aggressively pursues opportunities toestablish EDI interfaces with its customers 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. During 1999 the Company began work on a number of web-based softwareapplications. The Company began the process of implementing the first of theseapplications, Vendor Interface, in the fourth quarter of 1999. Vendor Interfacewas designed to allow the Company's drayage partners to interface with theCompany using the internet rather than phone or faxes. Vendor Interface allowsthe Company to tender loads to draymen, captures event status and helpsfacilitate appropriate payment. Current internet applications are, and futureinternet applications will be, integrated with the AIM system. The Company also purchased a new software package in 1999 designed toreplace its existing ATMS. This software may be used by the Company whenoffering logistics management services to customers that ship via multiplemodes, including intermodal, truckload, and less than truckload, allowing theCompany to optimize mode and carrier selection and routing for its customers.The Company has installed this software package and is currently preparing thesoftware for its operational applications. 4RELATIONSHIP WITH RAILROADS A key element of the Company's business strategy is to strengthen its closeworking relationship with each of the major intermodal railroads in the UnitedStates. The Company views its relationship with the railroads as a partnership.Due to the Company's size and relative importance, many railroads have dedicatedsupport personnel to focus on the Company's day-to-day service requirements. Ona 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 andPresident, 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 Kansas City Southern Canadian Pacific Norfolk Southern CSX Union Pacific Illinois CentralThe Company also has contracts with each of the following major fourth-partyservice providers: Mitsui O.S.K. Lines (America) Inc., Pacer International, Inc.and K-Line America, Inc.. 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 occurring during 2000. While there can be no assurances that thesecontracts will be renewed, the Company has in the past successfully negotiatedextensions of these contracts. Transportation rates are market driven and aretypically negotiated between the Company and the railroads or fourth-partyservice providers on a customer specific basis. Consistent with industrypractice, many of the rates negotiated by the Company are special commodityquotations ("SCQs"), which provide discounts from published price lists based oncompetitive market factors and are designed by the railroads or fourth-partyservice providers to attract new business or to retain existing business. SCQrates are generally issued for the account of a single IMC. SCQ rates apply tospecific customers in specified shipping lanes for a specific period of time,usually six to 12 months.RELATIONSHIP WITH DRAYAGE COMPANIES In 1990, the Company instituted its "Quality Drayage Program," 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. Thelocal Hubs negotiate drayage rates for transportation between specific originand destination points. These rates generally are valid, with minor exceptionsfor fuel surcharge increases, for a period of one year.RELATIONSHIP WITH TRUCKLOAD CARRIERS The Company's brokerage operation has a large and growing number of activecarriers in its database which it uses to transport freight. The local Hubs dealdaily with these carriers on an operational level. Hub Highway Services, 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. 5RISK MANAGEMENT AND INSURANCE The Company requires all drayage companies participating in the QualityDrayage Program to carry at least $1.0 million in general liability insurance,$1.0 million in truckman's auto liability insurance and to obtain, either ontheir own or through the Company, $1.0 million in cargo insurance. Railroads,which are self insured, provide limited cargo protection, generally up to$250,000 per shipment, although higher coverage is available on a load-by-loadbasis. To cover freight loss or damage when a carrier's liability cannot beestablished or a carrier's insurance is insufficient to cover the claim, theCompany carries its own cargo insurance with a limit of $2.0 million percontainer or trailer and a limit of $20 million per occurrence. The Company alsocarries general liability insurance with limits of $1.0 million per occurrenceand $2.0 million in the aggregate with a companion $10.0 million umbrella policyon this general liability insurance.GOVERNMENT REGULATION Hub Highway Services is licensed by the Department of Transportation("DOT") as a broker in arranging for the transportation of general 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 prescribesqualifications 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. There is an emerging trend for larger truckload carriers toenter into agreements with railroads to market intermodal services nationwide.In addition, many existing and start-up companies are using the internet tomarket transportation services. Competition is based primarily on freight rates,quality of service, 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 29, 2000, the Company had approximately 1,593employees. The Company is not a party to any collective bargaining agreement andconsiders its relationship with its employees to be satisfactory. OTHER No material portion of the Company's operations is subject torenegotiation of profits or termination of contracts at the election of thefederal government. The Company has not spent a material amount on companysponsored research and development activities or on customer sponsored researchactivities. None of the Company's patents and trademarks is believed to bematerial to the Company. The Company's business is seasonal to the extent thatcertain customer groups, such as retail, are seasonal.ITEM 2. PROPERTIES The Company directly, or indirectly through the Hub Partnerships, operates41 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. 6ITEM 3. LEGAL PROCEEDINGS The Company is a party to routine litigation incident to its business,primarily claims for freight lost or damaged in transit or improperly shipped.Most of the lawsuits to which the Company is party are covered by insurance andare being defended by the Company's insurance carriers. Management does notbelieve that the litigation to which it is currently a party, if determinedadversely to the Company, would individually or in the aggregate have amaterially adverse effect on the Company's financial position or results ofoperations. See Item 1 Business - Risk Management and Insurance.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's security holdersduring the fourth quarter of 2000. 7EXECUTIVE 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, 2000 with respect to each person who is anexecutive officer of the Company. NAME AGE POSITION------------------ ----- --------------------------------------------------Phillip C. Yeager 72 Chairman of the Board of DirectorsDavid P. Yeager 47 Vice Chairman of the Board of Directors and Chief Executive OfficerThomas L. Hardin 54 President, Chief Operating Officer and DirectorMark A. Yeager 35 President- Field OperationsDaniel F. Hardman 51 President-Chicago RegionJay E. Parker 35 Vice President-Finance, Chief Financial Officer and TreasurerJohn T. Donnell 60 Executive Vice President-National AccountsRichard M. Rogan 60 President-Hub Highway Services, Executive Vice President-MarketingDaniel L. Sellers 44 Vice President-Information Services and Chief Information OfficerDavid C. Zeilstra 30 Vice President, Secretary and General Counsel 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. 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 and the brother of Mark A. Yeager. Mr. Yeager alsoserves 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. Mr.Hardin is presently Chairman of the Intermodal Association of North America. 8 Mark A. Yeager has been the Company's President-Field Operations sinceJuly 1999. From November 1997 through June 1999 Mr. Yeager was DivisionPresident, Secretary and General Counsel. From March 1995 to November 1997,Mr. Yeager was Vice President, Secretary and General Counsel. From May 1992 toMarch 1995, Mr. Yeager served as the Company's Vice President-Quality. Prior tojoining the Company in 1992, Mr. Yeager was an associate at the law firm ofGrippo & Elden from January 1991 through May 1992 and an associate at the lawfirm of Sidley & Austin from May 1989 through January 1991. Mr. Yeager receiveda Juris Doctor degree from Georgetown University in 1989 and a Bachelor of Artsdegree from Indiana University in 1986. Mr. Yeager is the son of Phillip C.Yeager and the brother of David P. Yeager. Daniel F. Hardman has been the President-Chicago Region since 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. Jay E. Parker has been the Company's Vice President of Finance, ChiefFinancial Officer and Treasurer since June 1999. From July 1995 through May 1999Mr. Parker was the Company's Corporate Controller. Prior to joining the Company,Mr. Parker was the Director of Financial Reporting at Discovery Zone, Inc. fromJuly 1994 through June 1995 and held various positions, including Audit Manager,with Arthur Andersen from December 1988 through June 1994. Mr. Parker received aMasters of Accounting Science from Northern Illinois University in 1988, becamea Certified Public Accountant in 1987 and received a Bachelor of Science degreein Finance from Northern Illinois University in 1986. 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. 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. Daniel L. Sellers has been the Company's Vice President of InformationServices and Chief Information Officer since December 1998. Prior to joiningthe Company, 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. 9 David C. Zeilstra has been the Company's Vice President, Secretary andGeneral Counsel since July 1999. From December 1996 through June 1999, Mr.Zeilstra was the Company's Assistant General Counsel. Prior to joining theCompany, Mr. Zeilstra was an associate with the law firm of Mayer, Brown andPlatt from September 1994 through November 1996. Mr. Zeilstra received a JurisDoctor degree from the Duke University School of Law in 1994 and a Bachelor ofArts degree from Wheaton College in 1990. 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 1998 and 1999. 1998 1999 ---------- ---------- HIGH LOW HIGH LOW -------- ------- -------- --------- First Quarter $ 30 $ 25 $23 3/4 $18 7/8 Second Quarter $ 28 1/8 $ 19 3/4 $27 7/8 $21 Third Quarter $ 24 $ 15 3/4 $27 1/16 $20 7/16 Fourth Quarter $ 20 1/4 $ 12 3/4 $21 $14 11/16 On March 27, 2000, there were approximately 42 stockholders of record ofthe Class A Common Stock and, in addition, there were an estimated 1,500beneficial owners of the Class A Common Stock whose shares were held by brokersand other fiduciary institutions. On March 27, 2000, 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 facility and private placement debt prohibit theCompany from paying dividends on the Common Stock if there has been, orimmediately following the payment of a dividend would be, a default or an eventof default under the credit facility or private placement debt. The Company iscurrently in compliance with the covenants contained in the credit facility andprivate placement debt. 10ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (in thousands except per share data) YEARS ENDED DECEMBER 31, ------------------------------------------------------------------ 1999 1998 1997(1) 1996(2) 1995 -------------- ------------- ------------ ------------ ----------- STATEMENT OF OPERATIONS DATA:Revenue $ 1,296,799 $ 1,145,906 $1,064,479 $ 754,243 $ 81,408Net revenue 162,415 138,334 129,855 91,564 6,266Operating income 30,134 26,406 33,495 27,925 2,567Income before minority interest and taxes 23,659 25,324 32,869 27,704 2,638Income before taxes 18,384 15,205 15,874 11,338 2,638Historical net income 10,846 8,908 9,525 7,044 2,599Historical basic earnings per common share $ 1.41 $ 1.16 $ 1.48 $ 1.41 $ 1.56Historical diluted earnings per common share $ 1.40 $ 1.15 $ 1.46 $ 1.39 $ 1.56Pro forma provision for additional income taxes(3) 241 1,016Pro forma net income $ 6,803 $ 1,583Pro forma basic earnings per common share $ 1.36 $ 0.95Pro forma diluted earnings per common share $ 1.35 $ 0.95 AS OF DECEMBER 31, ------------------------------------------------------------------ 1999 1998 1997(1) 1996(2) 1995 -------------- ------------- ------------ ------------ ----------- BALANCE SHEET DATA:Working capital $ 21,504 $ 20,313 $ 15,209 $ 15,877 $ 804Total assets 441,609 304,791 267,826 201,225 9,083Long-term debt, excluding current portion 131,414 29,589 22,873 28,714 -Stockholders' equity 131,124 119,673 110,462 46,124 1,165(1) In September 1997, the Company issued 1,725,000 shares of Class A commonstock through a secondary offering which resulted in net proceeds ofapproximately $54,763,000. These proceeds were used to purchase the remaining70% 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. 11ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCAPITAL STRUCTURE Hub Group, Inc. (the "Company") was incorporated on March 8, 1995. 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 Class A common stock and 662,296 shares of Class B common stock. HubChicago has been accounted for similar to the pooling of interests method of accounting and has been included in all periods presented on a historical cost basis. Concurrent with the acquisition of Hub Chicago in March 1996, Hub Group,Inc. completed the initial public offering of 4,261,250 shares of its Class Acommon stock. Coincident with the initial public offering, a selling stockholdersold 1,000,000 shares of Hub Group, Inc. Class A common stock through asecondary offering. In September 1997, Hub Group, Inc. completed a secondary offering of 1,725,000 shares of Hub Group, Inc.'s Class A common stock.BUSINESS COMBINATIONS On October 31, 1997, the Company acquired the 50% interest in itsinternational joint venture, HLX Company, LLC ("HLX"), that it did notpreviously own. HLX offers point-to-point international transportation serviceswith a focus on the 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 its existing operations. 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 ("Hub Distribution"), the Company's niche logistic services provider.CEDS was a provider of niche logistic services including a pharmaceuticalsample delivery operation.CALL OPTIONS On March 1, 1997, the Company exercised its option to purchase anapproximate 44% minority interest in Hub Distribution. The Company paid $1.6million in cash. On September 17, 1997, the Company exercised its call options toacquire the remaining 70% minority interests in Hub City Los Angeles, L.P. andHub City Golden Gate, L.P. The Company paid $59.4 million in cash. On October 31, 1997, the Company exercised its call option to purchasethe remaining 70% minority interest in Hub City New Orleans, L.P. for onedollar. On April 1, 1998, the Company exercised its call options to acquire theremaining 70% minority interests in Hub City Rio Grande, L.P., Hub City Dallas,L.P., and Hub City Houston, L.P. ("Texas Hubs"). The Company paid $6.2 millionin cash. On April 1, 1999, Hub Group, Inc. exercised its call options to acquirethe remaining 70% minority interests in Hub City Alabama, L.P., Hub CityAtlanta, L.P., Hub City Boston, L.P., Hub City Canada, L.P., Hub City Cleveland,L.P., Hub City Detroit, L.P., Hub City Florida, L.P., Hub City Indianapolis,L.P., Hub City Kansas City, L.P., Hub City Mid-Atlantic, L.P., Hub City NewYork/New Jersey, L.P., Hub City New York State, L.P., Hub City Ohio, L.P., HubCity Philadelphia, L.P., Hub City Pittsburgh, L.P., Hub City Portland, L.P., andHub City St. Louis, L.P. (collectively referred to as the "April 1999Purchase"). The Company paid $108.7 million in cash. 12RESULTS OF OPERATIONSYEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998REVENUE Revenue for the Company increased 13.2% to $1,296.8 million in 1999from $1,145.9 million in 1998. Intermodal revenue increased 6.2% over 1998.Management believes that the service disruption from the split-up of Conrailwhich began on June 1, 1999 negatively impacted intermodal revenue growth.Truckload brokerage revenue increased 19.3% over 1998. The Company hassuccessfully grown truckload brokerage by cross-selling to its intermodalcustomers and employing dedicated and experienced personnel in each Hub.Logistics revenue increased 88.3% compared to 1998. This increase was primarilydue to the increase in revenue from the Company's niche logistic servicesperformed by Hub Distribution.NET REVENUE Net revenue increased 17.4% to $162.4 million in 1999 from $138.3million in 1998. Net revenue as a percentage of revenue increased to 12.5% from12.1% in 1998. Management believes the primary cause of this increase is thegrowth in niche logistic services which earns a higher net revenue percentage ofrevenue than does the Company's core intermodal and brokerage service offerings.SALARIES AND BENEFITS Salaries and benefits increased 16.0% to $84.1 million in 1999 from$72.5 million in 1998. As a percentage of revenue, salaries and benefitsincreased to 6.5% from 6.3% in 1998. The increase in the percentage is primarilyattributed to the increased headcount supporting the Company's informationtechnology initiatives and growth in niche logistic services. The Company'sniche logistic services requires a higher level of salaries and benefits ascompared to revenue than does the Company's core intermodal and brokerageservice offerings.SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased 16.3% to $38.2million in 1999 from $32.9 million in 1998. These expenses as a percentage ofrevenue remained constant at 2.9%. While the percentage of revenue is consistentwith the prior year, the $5.3 million increase in expenses is primarilyattributed to information systems, travel and outside services. The Company'sincreased information systems expenditures related to consulting, Year 2000remediation and validation, and enhancements to the Company's operating system.Travel and related expenses increased due primarily to a national sales meetingheld in 1999 that was not held in the previous year and increased expendituresto support growth in the Company's niche logistic services. Outside serviceexpenditures relate to contracted temporary labor and other services to handleincreased business for niche logistic services and outside sales commissions.DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT Depreciation and amortization increased 9.5% to $4.0 million in 1999from $3.7 million in 1998. This expense as a percentage of revenue remainedconstant at 0.3%.AMORTIZATION OF GOODWILL Amortization of goodwill increased 74.1% to $5.1 million from $2.9million in 1998. The expense as a percentage of revenue increased to 0.4% from0.3% in 1998. The increase in expense is primarily attributable to theamortization of the goodwill associated with the purchase of the remaining 70%minority interests in connection with the April 1999 Purchase. 13CHANGE IN ESTIMATE/IMPAIRMENT OF PROPERTY AND EQUIPMENT In the second quarter of 1999, a $0.9 million pretax charge wasrecorded due to a change in estimate and an impairment loss relating to certainoperating software applications. Specifically, $0.7 million of this charge wasattributable to a change in estimate of the useful life for the Visual Movementsoftware previously used primarily for brokerage. The Visual Movement softwareis no longer being used by the Company and was replaced with enhancements to theCompany's proprietary intermodal operating software during the second quarter of1999. These enhancements allow for greater network visibility of loads in a year2000 compliant program. The $0.2 million impairment loss related to thewrite-down of a logistics software program. The fair value was determined basedon the estimated future cash flows attributable to the single customer usingthis program. The Company has installed this software package and is currentlypreparing the software for its operational applications. This new software willprovide enhanced functionality.OTHER INCOME (EXPENSE) Interest expense increased to $8.6 million in 1999 from $2.5 million in1998. The increase in interest expense is due primarily to the additional debtrequired to fund the purchases of the remaining 70% minority interests inconnection with the April 1999 Purchase. In addition, debt increased as a resultof the acquisition of Quality and the purchase of the minority interest in theTexas Hubs in April 1998. Interest income decreased to $0.9 million in 1999 from $1.0 million in1998. The primary cause for this decrease is the Company's increasedconcentration of its cash balances to reduce debt and minimize interest expenseon borrowings. Other income of $1.2 million in 1999 is primarily due to non-recurringincome recognized upon execution of an agreement with one of the Company'svendors.MINORITY INTEREST Minority interest decreased 47.9% to $5.3 million in 1999 from $10.1million in 1998. Minority interest as a percentage of income before minorityinterest and provision for income taxes was 22.3% in 1999 compared to 40.0% in1998. The decrease in the percentage is primarily attributed to the purchase ofremaining 70% minority interest in connection with the April 1999 Purchase aswell as the purchase of minority interest in the Texas Hubs in April 1998.PROVISION FOR INCOME TAXES The provision for income taxes increased 19.7% to $7.5 million comparedto $6.3 million in 1998. The Company provided for income taxes using aneffective rate of 41.0% in 1999 versus 41.4% in 1998.NET INCOME Historical net income increased 21.8% to $10.8 million in 1999 from$8.9 million in 1998. Historical net income as a percentage of revenue remainedconstant at 0.8%.EARNINGS PER COMMON SHARE Basic earnings per common share increased 21.6% to $1.41 from $1.16 in1998. Diluted earnings per common share increased 21.7% to $1.40 in 1999 from$1.15 in 1998. 14YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997REVENUE Revenue for the Company increased 7.6% to $1,145.9 million in 1998 from$1,064.5 million in 1997. Intermodal revenue increased 7.2% over 1997.Management believes that the well-publicized railroad service disruptionsexperienced by the intermodal industry during 1998 negatively impactedintermodal revenue growth. Truckload brokerage revenue increased 27.3% over1997. The Company has successfully maintained its expansion into this serviceoffering by employing dedicated and experienced personnel in each Hub. Logisticsrevenue decreased 17.4% over revenue for 1997. This decrease was due to theCompany's cancellation of its contract to provide third-party logistics servicesto a significant customer in January 1998. This customer accounted for $32.5million of the Company's revenue in 1997.NET REVENUE Net revenue increased 6.5% to $138.3 million in 1998 from $129.9million in 1997. Net revenue as a percentage of revenue decreased slightly to12.1% 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 12.7% to $72.5 million in 1998 over$64.3 million in 1997. As a percentage of revenue, salaries and benefitsincreased to 6.3% from 6.0% in 1997. The increase in the percentage isattributed to the increased number of personnel needed to handle the Company'sintermodal business. Due to the service disruptions, personnel were required tospend significantly more time per load to operate and monitor the transit offreight.SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased 19.7% to $32.9million in 1998 from $27.5 million in 1997. Selling, general and administrativeexpenses as a percentage of revenue increased to 2.9% in 1998 from 2.6% in 1997.The increase in the percentage is principally attributable to increased spendingrelated to information systems, rent and equipment leases. Expenditures forinformation systems included consulting costs related to the refinement of theCompany's information systems strategy and costs for the Year 2000 project. Rentincreased as many of the Company's Hubs were required to obtain larger officespace to accommodate present operations and future growth. Expenditures forequipment leases increased as the Company moved towards leasing, as opposed topurchasing, more of its office and computer equipment.DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT Depreciation and amortization of property and equipment increased 19.1%to $3.7 million in 1998 from $3.1 million in 1997. This expense as a percentageof revenue remained constant at 0.3%.AMORTIZATION OF GOODWILL Amortization of goodwill increased 91.0% to $2.9 million in 1998 from$1.5 million in 1997. The expense as a percentage of revenue increased to 0.3%from 0.1% in 1997. This increase is attributed primarily to the increase ingoodwill amortization related to the September 1997 purchase of the minorityinterest in Hub City Los Angeles, L.P. and Hub City Golden Gate, L.P., the April1998 purchase of the minority interest in the Texas Hubs and the April 1998acquisition of Quality. 15OTHER INCOME (EXPENSE) Interest expense increased 11.5% to $2.5 million in 1998 from $2.2million in 1997. The increase is primarily attributed to the use of cash and anote issued in conjunction with the acquisition of Quality and the purchase ofthe minority interest in the Texas Hubs in April 1998. Interest income decreased 30.8% to $1.0 million in 1998 from $1.5million in 1997. The primary cause of this decrease is the Company's increasedconcentration of its cash balances to reduce debt to minimize interest expenseon borrowings.MINORITY INTEREST Minority interest decreased 40.5% to $10.1 million in 1998 from $17.0million in 1997. Minority interest as a percentage of income before minorityinterest and provision for income taxes was 40.0% in 1998 as compared to 51.7%in 1997. The decrease in the percentage is attributed to purchases of 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 at an effective rate of 41.4% in 1998 versus40.0% in 1997. The increase in the effective rate was primarily the result ofthe purchases of minority interest in September 1997 and the Quality acquisitionin April 1998. The goodwill related to the Quality acquisition is not taxdeductible and therefore has the effect of increasing the Company's effectiverate.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 Basic earnings per common share decreased 21.6% to $1.16 in 1998 from$1.48 in 1997. Diluted earnings per common share decreased 21.2% to $1.15 in1998 from $1.46 in 1997. The decrease in net income coupled with the increase inshares outstanding due to the secondary equity offering in September 1997 causedthe decrease.LIQUIDITY AND CAPITAL RESOURCES On April 30, 1999, the Company borrowed approximately $108 million ofunsecured debt to pay for its purchase of the remaining 70% limited partnershipinterests in connection with the April 1999 Purchase. On April 30, 1999, the Company closed on a new bank facility withHarris Trust and Savings Bank ("Harris") which replaced the previous facility.The new facility is comprised of $50.0 million in term debt and a $50.0 millionrevolving line of credit. At December 31, 1999, there was $47.5 million ofoutstanding term debt and $34.0 million outstanding and $16.0 million unused andavailable under the new line of credit with Harris. Borrowings under the line ofcredit are unsecured and have a five-year term with a floating interest ratebased upon the LIBOR (London Interbank Offered Rate) or Prime Rate. The termdebt has quarterly payments ranging from $1,250,000 to $2,000,000 with a balloonpayment of $19.0 million due on March 31, 2004. Additionally, the Company closedand drew down on a $40.0 million bridge facility with Harris on April 30, 1999.The bridge facility had a three-month term and bore interest at the bank's primerate plus 1%. This bridge facility of $40.0 million was paid off on June 25,1999 and replaced with the private placement debt described below. 16 On June 25, 1999, the Company closed on $50.0 million of privateplacement debt (the "Notes"). These Notes are unsecured and have an eight-yearaverage life with a coupon interest rate of 8.64% paid quarterly. These Notesmature on June 25, 2009, with annual payments of $10.0 million commencing onJune 25, 2005. The Company maintains a bank line of credit with Cass Bank and TrustCompany for $5.0 million. The interest rate is set at the bank's discretion at arate less than or equal to the bank's prime rate. At December 31, 1999, the ratewas 8.25%. The Company had no outstanding advances on the line at December 31,1999. The Company had capital expenditures of approximately $11.2 millionduring 1999 and $4.0 million during 1998. Capital expenditures were principallymade to enhance the Company's information systems capabilities.OUTLOOK, RISKS AND UNCERTAINTIES Except for historical data, the information contained in this AnnualReport constitutes forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements areinherently uncertain and subject to risks. Such statements should be viewed withcaution. Actual results or experience could differ materially from theforward-looking statements as a result of many factors. Forward-lookingstatements in this report include, but are not limited to, those contained inthis "Outlook, Risks and Uncertainties" section regarding expectations, hopes,beliefs, estimates, intentions or strategies regarding the future. The Companyassumes no liability to update any such forward-looking statements. In additionto those mentioned elsewhere in this section, such risks and uncertaintiesinclude the impact of competitive pressures in the marketplace, including theentry of new, web-based competitors, the degree and rate of market growth in theintermodal, brokerage and logistics markets served by the Company, changes inrail and truck capacity, further consolidation of rail carriers, rail serviceconditions, changes in governmental regulation, adverse weather conditions, fuelshortages, changes in the cost of services from rail, drayage and other vendorsand 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,the risks the issues represent, the subsequent results of system assessments after December 31, 1999 and the costs to address the issues.STATE OF READINESS Management has broken down its Year 2000 program into four phases.Those phases are awareness, assessment, renovation and validation. The 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 has identified the risk areas facing theCompany regarding Year 2000 and had 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 was renovated. The renovation,which consisted of reprogramming the source code, has been completed. Nomaterial failures resulted from the main operating system renovation subsequentto December 31, 1999. 17 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. No material failures resulted fromancillary operating software applications subsequent to December 31, 1999. The Company's financial reporting system vendor has stated that theirapplication is Year 2000 compliant. No material failures resulted from thefinancial reporting system subsequent to December 31, 1999. The Company's desktop hardware and software application assessment iscomplete. The Company engaged an outside consulting firm to execute therenovation and validation phases. No material failures resulted from the desktophardware and software applications subsequent to December 31, 1999. The Company assessed its many telephone systems. No material telephonesystem failures resulted subsequent to December 31, 1999. The Company did not experience any material issues regarding embeddedtechnology in its office equipment, physical environment and drayage tractorssubsequent to December 31, 1999. The Company identified four categories of key third parties with whichthe Company has a material relationship that were assessed. Those categorieswere: (i) significant customers who rely on their computer systems to determinetheir transportation needs, (ii) key vendors such as the railroads andsignificant providers of drayage and over-the-road services, (iii) the Company'sinformation network communications provider and (iv) significant third partyfreight payment vendors utilized by the Company's customers. The Companyexperienced no material problems in the noted four categories related to Year2000 issues subsequent to December 31, 1999.COSTS In 1999, the Company expensed approximately $1,900,000 related to Year2000. In 2000, through January 31st, the Company has expensed an additional$69,000 related to testing and monitoring of its systems. These costs includenot only amounts paid to outside parties but also the payroll costs for thoseemployees spending significant amounts of time on Year 2000 issues. The Companyhas spent approximately $ 2.7 million in total related to Year 2000. The Companydoes not expect to continue to spend additional funds related to Year 2000 sinceno material systems problems were experienced.BUSINESS COMBINATIONS/DIVESTITURES Management believes that future acquisitions or dispositions made bythe Company could significantly impact financial results. Financial results mostlikely to be impacted include but are not limited to revenue, net revenue,salaries and benefits, selling general and administrative expenses, depreciationand amortization, interest expense, minority interest, net income and theCompany's debt level. In this regard, on March 13, 2000, the Company signed aletter of intent pursuant to which the Company agreed to sell its 65% interestin Hub Distribution for $65 million in cash and warrants to purchase 5% of theoutstanding shares of stock of Hub Distribution. The sale of this interest issubject to a number of customary conditions and there is therefore no guaranteethat a transaction will ultimately be consummated. Financial results may beimpacted by additional factors as discussed below.REVENUE Management believes that the performance of the railroads is the mostsignificant factor that could negatively influence the Company's revenue growthrate. The service disruptions in the intermodal industry due to the split-up ofConrail, which began on June 1, 1999, appear to have been significantlyrectified. Should this trend reverse, the Company believes its intermodal growthrate would likely be negatively impacted. Should the proposed merger betweenBurlington Northern Santa Fe and Canadian National Railway cause a similar ormore severe service disruption, the Company believes its intermodal growth ratewould likely be negatively impacted. Should there be another significant servicedisruption, the Company expects there may be some customers who would switch 18from using the Company's intermodal service to other carriers' over-the-roadservice. The Company expects these customers may choose to continue to utilizethese carriers even when intermodal service levels are restored. Other factorsthat could negatively influence the Company's growth rate include, but are notlimited to, the entry of new web-based competitors, inadequate drayage serviceand inadequate equipment supply.NET REVENUE Management expects fluctuations in the net revenue percentage fromquarter-to-quarter caused by changes in business mix, highway brokerage margins,logistics business margins, trailer and container capacity, vendor pricing,intermodal industry growth, intermodal industry service levels and 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, such asthe Company's current boxcar and flatbed initiative, changes in customerrequirements and changes in railroad intermodal service levels which couldresult 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. As customerexpectations and the competitive environment require the development ofweb-based business interfaces and the restructuring of the Company's informationsystems and related platforms, the Company believes there could be significantexpenses incurred, some of which would not be capitalized. Costs incurred toformulate the Company's strategy as well as any costs that would be identifiedas reengineering or training would be expensed.DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT Management estimates that, as a percentage of revenue, depreciation andamortization of property and equipment will increase in the future. A factorthat could cause an increase in the percentage is increased softwareamortization related to improving the Company's information systemscapabilities. Another factor that could cause an increase in the percentage isincreased depreciation expense if the Company decided to purchase rather thanlease a greater proportion of assets.AMORTIZATION OF GOODWILL Management estimates that, as a percentage of revenue, amortization ofgoodwill will increase in 2000 based on a full year of goodwill amortizationrelated to the April 1999 Purchase. A factor that could cause an increase in thepercentage is if the Company were to make additional acquisitions resulting inthe recording of goodwill.OTHER INCOME (EXPENSE) Management estimates that as a percentage of revenue interest expensewill increase over the prior year due to a full year of debt after financing theApril 1999 Purchase and the recent trend of rising interest rates. This increaseis believed to be offset by debt repayments anticipated in the year 2000.Factors that could cause interest to fluctuate higher or lower than forecastedare changes in lending rates, anticipated debt repayments, working capital needsand capital expenditures. 19 Management estimates that interest income will likely decrease fromcurrent levels. Factors that could cause such a decrease are the possible use ofcash to make debt repayments, fund working capital needs and fund capitalexpenditures.MINORITY INTEREST Management estimates that minority interest will likely decrease in thefuture due to the April 1999 Purchase where all of the remaining 70% minorityinterests were acquired. Disproportionate changes in Hub Distribution's profitsand the 100% owned entities, acquisitions of entities with a minority interestor disposition of Hub Distribution could have a material impact and result inminority interest percentages of income before minority interest to differ fromthe historical range.LIQUIDITY AND CAPITAL RESOURCES 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.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to changes in interestrates which may adversely affect its results of operations and financialcondition. The Company seeks to minimize the risk from interest rate volatilitythrough its regular operating and financing activities and, when deemedappropriate, through the use of derivative financial instruments. The Companydoes not use financial instruments for trading purposes. The Company uses both fixed and variable rate debt as described in Note8. The Company has entered into an interest rate swap agreement designated as ahedge on a portion of the Company's variable rate debt. The purpose of the swapis to fix the interest rate on a portion of the variable rate debt and reducecertain exposures to interest rate fluctuations. At December 31, 1999, theCompany had an interest rate swap with a notional amount of $25.0 million, aweighted average pay rate of 8.37%, a weighted average receive rate of 8.26% anda maturity date of September 30, 2002. This swap agreement involves the exchangeof amounts based on the variable interest rate for amounts based on the fixedinterest rate over the life of the agreement, without an exchange of thenotional amount upon which the payments are based. The differential to be paidor received as interest rates change is accrued and recognized as an adjustmentof interest expense related to the debt. The main objective of interest rate risk management is to reduce thetotal funding cost to the Company and to alter the interest rate exposure to thedesired risk profile. 20ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULEReport of Independent Public Accountants 22Consolidated Balance Sheets - December 31, 1999 and December 31, 1998 23Consolidated Statements of Operations - Years ended December 31, 1999, December 31, 1998 and December 31, 1997 24Consolidated Statements of Stockholders' Equity - Years ended December 31, 1999, December 31, 1998 and December 31, 1997 25Consolidated Statements of Cash Flows - Years ended December 31, 1999, December 31, 1998 and December 31, 1997 26Notes to Consolidated Financial Statements 27Schedule II - Valuation and Qualifying Accounts S-1 21 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) as of December 31, 1999 and 1998 and therelated consolidated statements of operations, stockholders' equity and cashflows for each of the three years in the period ended December 31, 1999. Theseconsolidated financial statements and the schedule referred to below are theresponsibility of the Company's management. Our responsibility is to express anopinion on these consolidated financial statements and the schedule based on ouraudits. We conducted our audits in accordance with generally accepted auditingstandard in the United States. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion. In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Hub Group,Inc. as of December 31, 1999 and 1998, and the results of its operations andcash flows for each of the three years in the period ended December 31, 1999, inconformity with generally accepted accounting principles in the United States. 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, is fairly stated in all material respects in relation tothe basic financial statements taken as a whole. ARTHUR ANDERSEN LLPChicago, IllinoisFebruary 4, 2000(except with respectto the matter discussedin Note 18, as towhich the date isMarch 15, 2000) 22 HUB GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands) DECEMBER 31, --------------------------------- 1999 1998 ---------------- ---------------- ASSETSASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,865 $ 15,178 Accounts receivable, net 190,221 148,104 Prepaid expenses and other current assets 2,771 6,036 ---------------- ---------------- TOTAL CURRENT ASSETS 194,857 169,318 PROPERTY AND EQUIPMENT, net 24,244 19,111 GOODWILL, net 219,648 115,858 DEFERRED TAXES 898 - OTHER ASSETS 1,962 504 ---------------- ---------------- TOTAL ASSETS $ 441,609 $ 304,791 ================ ================LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable Trade $ 141,592 $ 123,513 Other 11,246 7,909 Accrued expenses Payroll 7,936 6,339 Other 6,384 6,332 Deferred taxes - 1,751 Current portion of long-term debt 6,195 3,161 ---------------- ---------------- TOTAL CURRENT LIABILITIES 173,353 149,005 LONG-TERM DEBT, EXCLUDING CURRENT PORTION 131,414 29,589 DEFERRED TAXES 4,959 556 CONTINGENCIES AND COMMITMENTS MINORITY INTEREST 759 5,968 STOCKHOLDERS' EQUITY: Preferred stock - - Common stock 77 77 Additional paid-in capital 110,786 110,181 Purchase price in excess of predecessor basis (25,764) (25,764) Tax benefit of purchase price in excess of predecessor basis 10,306 10,306 Retained earnings 35,719 24,873 ---------------- ---------------- TOTAL STOCKHOLDERS' EQUITY 131,124 119,673 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 441,609 $ 304,791 ================ ================The accompanying notes to consolidated financial statements are an integral partof these statements. 23 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) YEARS ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 -------------- -------------- -------------- Revenue $ 1,296,799 $ 1,145,906 $ 1,064,479Transportation costs 1,134,384 1,007,572 934,624 -------------- -------------- -------------- Net revenue 162,415 138,334 129,855Costs and expenses: Salaries and benefits 84,082 72,465 64,280 Selling, general and administrative 38,232 32,885 27,478 Depreciation and amortization of property and equipment 4,014 3,666 3,077 Amortization of goodwill 5,069 2,912 1,525 Change in estimate/impairment of property and equipment 884 - - -------------- -------------- -------------- Total costs and expenses 132,281 111,928 96,360 Operating income 30,134 26,406 33,495 -------------- -------------- --------------Other income (expense): Interest expense (8,592) (2,480) (2,225) Interest income 926 1,014 1,466 Other, net 1,191 384 133 -------------- -------------- -------------- Total other expense (6,475) (1,082) (626)Income before minority interest and provision for income taxes 23,659 25,324 32,869 -------------- -------------- --------------Minority interest 5,275 10,119 16,995 -------------- -------------- --------------Income before provision for income taxes 18,384 15,205 15,874Provision for income taxes 7,538 6,297 6,349 -------------- -------------- --------------Net income $ 10,846 $ 8,908 $ 9,525 ============== ============== ==============Basic earnings per common share $ 1.41 $ 1.16 $ 1.48 ============== ============== ==============Diluted earnings per common share $ 1.40 $ 1.15 $ 1.46 ============== ============== ==============The accompanying notes to consolidated financial statements are an integral partof these statements. 24 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three years ended December 31, 1999 (in thousands, except shares) TAX BENEFIT PURCHASE OF PURCHASE PRICE IN PRICE COMMON STOCK ADDITIONAL EXCESS OF IN EXCESS OF TOTAL ----------------------- PAID-IN PREDECESSOR PREDECESSOR RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL BASIS BASIS EARNINGS EQUITY ------------ ---------- ------------- ------------- --------------- ------------ -------------- Balance at January 1, 1997 5,923,546 $ 59 $ 55,083 $ (25,764) $ 10,306 $ 6,440 $ 46,124 Net income - - - - - 9,525 9,525 Sale of common stock in initial public offering, net - - (45) - - - (45) Sale of common stock in secondary offering, net 1,725,000 18 54,745 - - - 54,763 Exercise of non-qualified stock options 4,700 - 95 - - - 95 ------------ ---------- ------------- -------------- -------------- ------------- -------------Balance at December 31, 1997 7,653,246 77 109,878 (25,764) 10,306 15,965 110,462 Net income - - - - - 8,908 8,908 Exercise of non-qualified stock options 19,000 - 303 - - - 303 ------------ ---------- ------------- -------------- -------------- ------------- -------------Balance at December 31, 1998 7,672,246 77 110,181 (25,764) 10,306 24,873 119,673 Net income - - - - - 10,846 10,846 Exercise of non-qualified stock options 34,000 - 605 - - - 605 ------------ ---------- ------------- -------------- -------------- ------------- -------------Balance at December 31, 1999 7,706,246 $ 77 $ 110,786 $ (25,764) $ 10,306 $35,719 $ 131,124 ============ ========== ============= ============== ============== ============= =============The accompanying notes to consolidated financial statements are an integral partof these statements. 25 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) YEARS ENDED DECEMBER 31, ---------------------------------------------- 1999 1998 1997 -------------- -------------- -------------- Cash flows from operating activities: Net income $ 10,846 $ 8,908 $ 9,525 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 5,013 4,743 4,163 Amortization of goodwill 5,069 2,913 1,525 Change in estimate/impairment of property and equipment 884 - - Deferred taxes 1,754 6,008 6,349 Minority interest 5,275 10,119 16,995 Loss/(Gain) on sale of assets 205 135 (107) Changes in working capital, net of effects of purchase transactions: Accounts receivable, net (42,117) (11,978) (13,663) Prepaid expenses and other current assets 3,265 (4,018) 1,583 Accounts payable 21,416 8,933 11,759 Accrued expenses 1,649 2,758 1,023 Other assets (1,458) 167 303 -------------- -------------- -------------- Net cash provided by operating activities 11,801 28,688 39,455 -------------- -------------- --------------Cash flows from investing activities: Cash used in acquisitions, net - (3,989) (164) Purchases of minority interest (108,710) (6,730) (60,955) Purchases of property and equipment, net (11,234) (3,975) (8,488) -------------- -------------- -------------- Net cash used in investing activities (119,944) (14,694) (69,607) -------------- -------------- --------------Cash flows from financing activities: Proceeds from sale of common stock in initial public offering, net - - (45) Proceeds from sale of common stock in secondary offering, net - - 54,763 Proceeds from sale of common stock 605 303 95 Distributions to minority interest (10,484) (10,939) (20,921) Payments on long-term debt (50,930) (28,843) (6,409) Proceeds from issuance of long-term debt 155,639 28,607 832 -------------- -------------- -------------- Net cash provided by/(used in) financing activities 94,830 (10,872) 28,315 -------------- -------------- --------------Net increase (decrease) in cash and cash equivalents (13,313) 3,122 (1,837)Cash and cash equivalents, beginning of period 15,178 12,056 13,893 -------------- -------------- --------------Cash and cash equivalents, end of period $ 1,865 $ 15,178 $ 12,056 ============== ============== ==============Supplemental disclosures of cash flow information Cash paid for: Interest $ 8,293 $ 2,343 $ 2,138 Income taxes 2,474 2,680 386 Non-cash financing activity: Acquisition purchase price adjustment of note payable $ 150 $ - $ -The accompanying notes to consolidated financial statements are an integral partof these statements. 26 HUB GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBUSINESS: Hub Group, Inc. (the "Company") provides intermodal transportationservices utilizing primarily third party arrangements with railroads and drayagecompanies. The Company also arranges for transportation of freight by truckand 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 $13,638,000 and $1,482,000 at December 31,1999 and 1998, respectively, are included in accounts payable.RECEIVABLES: The Company's reserve for uncollectible accounts receivable wasapproximately $2,134,000 and $691,000 at December 31, 1999 and 1998,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 their expected useful life on a straight-line basis not to exceed fiveyears, commencing when the asset is placed into service. Maintenance and repairsare charged to operations as incurred and major improvements are capitalized.The cost of assets retired or otherwise disposed of and the accumulateddepreciation thereon are removed from the accounts with any gain or lossrealized upon sale or 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 $10,032,000 and$4,963,000 as of December 31, 1999 and 1998, respectively.CONCENTRATION OF CREDIT RISK: The Company's financial instruments that 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 1997, 1998 or 1999. 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: The Company accounts for certain income and expense itemsdifferently for financial reporting and income tax purposes. Deferred tax assets 27and liabilities are determined based on the difference between the financialstatement and tax bases of assets and liabilities applying enacted statutory taxrates in effect for the year in which the differences are expected to reverse.EARNINGS PER COMMON SHARE: In accordance with Statement of Financial AccountingStandards No. 128 ("Statement 128"), "Earnings per Share", basic earnings percommon share are based on the average quarterly weighted average number of ClassA and Class B shares of common stock outstanding. Diluted earnings per commonshare are adjusted for the assumed exercise of dilutive stock options. Incomputing the per share effect of assumed exercise, funds which would have beenreceived from the exercise of options, including tax benefits assumed to berealized, are considered to have been used to purchase shares at current marketprices, and the resulting net additional shares are included in the calculationof weighted average shares outstanding.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.RECENT ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 133("Statement 133"), "Accounting for Derivative Instruments and HedgingActivities". This standard requires that an entity recognize derivatives aseither assets or liabilities on its balance sheet and measure those instrumentsat fair value. As a result of Statement of Financial Accounting Standards No.137, "Accounting for Derivative Instruments and Hedging Activities - Deferral ofthe Effective Date of Statement 133", the Company will adopt this standard inthe first quarter of 2001. Based on current circumstances, the Company does notbelieve that the application of Statement 133 will have a material effect on theCompany's financial condition or results of operations.RECLASSIFICATIONS: Certain items previously reported have been reclassifiedto conform with the 1999 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. 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 approximately $54.8 million.NOTE 3. BUSINESS COMBINATIONS 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 a $6,100,000three-year note, bearing interest at an annual rate of 5.6%. The acquisition wasrecorded using the purchase method of accounting resulting in preliminarygoodwill of $9,458,000. The purchase price was subsequently adjusted resultingin goodwill of $9,608,000. 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. 28 Results of operations from acquisitions recorded under the purchasemethod of accounting are included in the Company's financial statements fromtheir respective dates of acquisition. The 1998 purchase price allocationspresented are preliminary.Business acquisitions which involved the use of cash were accounted for asfollows: YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 ---------------- --------------- (000'S) Accounts receivable $ 8,453 $ (115)Prepaid expenses and other current assets 57 12Property and equipment 398 79Goodwill 9,890 466Other assets 3 13Accounts payable (7,486) (216)Accrued expenses (641) (75)Long-term debt (6,685) - ---------------- ---------------Cash used in acquisitions, net $ 3,989 $ 164 ---------------- ---------------NOTE 4. EARNINGS PER SHARE The following is a reconciliation of the Company's Earnings Per Share: YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------- ------------------------- ------------------------ (000'S) (000'S) (000'S) --------------- -------------- -------------- Per-Share Per-Share Per-Share INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT ------- ------ --------- ------ ------ --------- ------ ------ --------- HISTORICAL BASIC EPS Income available to common stockholders $10,846 7,693 $1.41 $8,908 7,657 $1.16 $9,525 6,420 $1.48 ------- ------ --------- ------ ------ --------- ------ ------ ---------EFFECT OF DILUTIVE SECURITIES Stock options - 67 - - 72 - - 114 - ------- ------ --------- ------ ------ --------- ------ ------ ---------HISTORICAL DILUTED EPS Income available to common stockholders plus assumed exercises $10,846 7,760 $1.40 $8,908 7,729 $1.15 $9,525 6,534 $1.46 ------- ------ --------- ------ ----- -------- ------ ----- ---------NOTE 5. PURCHASES OF MINORITY INTEREST On March 1, 1997, the Company purchased an approximate 44% minorityinterest in Hub Group Distribution Services ("Hub Distribution") forapproximately $1,576,000 in cash. On September 17, 1997, the Company purchased the remaining 70%minority interests in Hub City Los Angeles, L.P. and Hub City Golden Gate, L.P.for approximately $59,379,000 in cash. On October 31, 1997, the Company purchased the remaining 70% 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 $6,152,000 in cash. The purchase price wassubsequently adjusted, resulting in goodwill of $6,730,000. 29 On April 1, 1999, the Company purchased the remaining 70% minorityinterests in Hub City Alabama, L.P., Hub City Atlanta, L.P., Hub City Boston,L.P., Hub City Canada, L.P., Hub City Cleveland, L.P., Hub City Detroit, L.P.,Hub City Florida, L.P., Hub City Indianapolis, L.P., Hub City Kansas City, L.P.,Hub City Mid-Atlantic, L.P., Hub City New York/New Jersey, L.P., Hub City NewYork State, L.P., Hub City Ohio, L.P., Hub City Philadelphia, L.P., Hub CityPittsburgh, L.P., Hub City Portland, L.P., and Hub City St. Louis, L.P. forapproximately $108,710,000 in cash (collectively referred to as the "April 1999Purchase"). 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.NOTE 6. PROPERTY AND EQUIPMENTProperty and equipment consist of the following: YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 ------------- -------------- (000'S) Building and improvements $ 56 $ 53Leasehold improvements 1,526 1,206Computer equipment and software 23,795 15,816Furniture and equipment 6,365 5,722Transportation equipment and automobiles 4,742 5,318 ------------- -------------- 36,484 28,115Less: Accumulated depreciation and amortization (12,240) (9,004) ------------- -------------- PROPERTY AND EQUIPMENT, net $ 24,244 $ 19,111 ============= ==============NOTE 7. INCOME TAXES The following is a reconciliation of the Company's effective tax rateto the federal statutory tax rate: YEARS ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ----------- ----------- ---------- U.S. federal statutory rate 35.0% 34.4% 34.5%State taxes, net of federal benefit 4.1 5.3 4.9Goodwill amortization 0.5 0.5 -Other 1.4 1.2 0.6 ----------- ----------- ----------Net effective rate 41.0% 41.4% 40.0% ----------- ----------- ---------- 30 The following is a summary of the Company's provision for income taxes: YEARS ENDED DECEMBER 31, ------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- (000'S) Current Federal $ 5,177 $ 250 $ - State and local 607 39 - ------------- ------------- ------------- 5,784 289 - ------------- ------------- -------------Deferred Federal 1,570 5,206 5,559 State and local 184 802 790 ------------- ------------- ------------- 1,754 6,008 6,349 ------------- ------------- ------------- Total provision $ 7,538 $ 6,297 $ 6,349 ------------- ------------- ------------- The following is a summary of the Company's deferred tax assets andliabilities: YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 --------------- --------------- (000'S) Reserve for uncollectible accounts receivable $ 875 $ 277Accrued compensation 588 533 --------------- --------------- Current deferred tax asset 1,463 810Property and equipment - 861Other 55 -Income tax basis in excess of financial basis of goodwill 9,345 10,178 --------------- --------------- Long-term deferred tax asset 9,400 11,039 --------------- --------------- Total deferred tax asset $ 10,863 $ 11,849 --------------- ---------------Prepaids $ (170) $ (84)Receivables (395) (2,477) --------------- --------------- Current deferred tax liability (565) (2,561)Property and equipment (132) -Goodwill (14,227) (11,595) --------------- --------------- Long-term deferred tax liability (14,359) (11,595) --------------- --------------- Total deferred tax liability $ (14,792) $ (14,156) --------------- --------------- 31NOTE 8. LONG-TERM DEBT AND FINANCING ARRANGEMENTSFair value approximates book value at the balance sheet dates. YEARS ENDED DECEMBER 31, ------------------------ 1999 1998 ----------- ----------- (000'S) Installment notes payable due through 2004, monthly installments ranging from $441 to $20,896, including interest ranging from 2.9% to 9.5%, collateralized by certain equipment $ 748 $ 1,793Bank lines of credit (see below) 34,000 20,550Unsecured balloon notes, interest compounded annually at 5.45%, interest and principal due March 2001 (see Note 13) - 2,260Note 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 - 2,000Unsecured term notes, with quarterly payments ranging from $1,250,000 to $2,000,000 with a balloon payment of $19 million due March 31, 2004; interest is due quarterly at a floating rate based upon LIBOR (London Interbank Offered Rate) or Prime rate (see below). At December 31, 1999, interest rates range from 8.37% to 8.93% 47,500 -Unsecured notes, mature on June 25, 2009 with annual payments of $10,000,000 commencing on June 25, 2005; interest is paid quarterly at 8.64% 50,000 -Unsecured notes payable due in one balloon payment of $5,225,000 on April 1, 2001; interest is due annually and is paid at 5.6% 5,225 5,950Note payable due in nine equal monthly payments of $71,160 beginning on July 1, 1998; interest is 5.9% compounded monthly - 141Capital lease obligations, collateralized by certain equipment 136 56 ------------ -----------Total long-term debt 137,609 32,750Less current portion (6,195) (3,161) ------------ ----------- $ 131,414 $ 29,589 ------------ ----------- Aggregate principal payments, in thousands, due subsequent to December31, 1999, are as follows:2000 $ 6,1952001 12,3372002 8,0322003 8,0342004 and thereafter 103,011 ------------ $ 137,609 ------------ On March 18, 1996, the Company assumed a line of credit for $5,000,000.This line of credit was not used at December 31, 1999. Advances on this line ofcredit at December 31, 1998, were $2,050,000. At December 31, 1999 and December31, 1998, the interest rate was 8.25% and 7.5%, respectively. The interest rateis established at the bank's discretion at a rate less than or equal to thebank's prime rate. Borrowings are secured by certain assets. The line of credithas no expiration date. On April 30, 1999, the Company closed on an unsecured $50.0 millionfive-year revolving line of credit with a bank. The Company can borrow at theprime rate or up to prime plus 1% on a day-to-day basis or may borrow for 30,60, 90 or 180 day periods at LIBOR plus 1.25% to 2.50% based on the Company'sfunded debt to EBITDAM (earnings before interest expense, income taxes,depreciation, amortization and minority interest) ratio. The credit facilityalso contains certain financial covenants which, among others, requires that the 32Company maintain required levels of EBITDAM, funded debt to EBITDAM, fixedcharge coverage and current assets to current liabilities. In addition, thereare limitations on additional indebtedness as well as acquisitions and minorityinterest purchases. The Company was in compliance with these covenants atDecember 31, 1999. Advances on this line of credit at December 31, 1999 were$34.0 million with interest rates ranging between 8.64% and 9.5% and areclassified as long term debt. At December 31, 1999, there was $16.0 millionunused and available under the line of credit. The unsecured term notes have a floating interest rate. The Company canborrow at the prime rate or up to prime plus 1.25% on a day-to-day basis or mayborrow for 30, 60, 90 or 180 day periods at LIBOR plus 1.50% to 2.75% based onthe Company's funded debt to EBITDAM ratio. The unsecured term notes share thesame financial covenants as noted above for the line of credit. On April 30, 1999, under the term notes and the $50.0 million line ofcredit debt agreement, the Company was required to enter into an interest rateswap agreement designated as a hedge on a portion of the Company's variable ratedebt. The purpose of the swap was to fix the interest rate on a portion of thevariable rate debt and reduce certain exposures to interest rate fluctuations.At December 31, 1999, the Company had an interest rate swap with a notionalamount of $25.0 million, a weighted average pay rate of 8.37%, a weightedaverage receive rate of 8.26% and a maturity date of September 30, 2002. Thisswap agreement involves the exchange of amounts based on the variable interestrate for amounts based on the fixed interest rate over the life of theagreement, without an exchange of the notional amount upon which the paymentsare based. The differential to be paid or received as interest rates change isaccrued and recognized as an adjustment of interest expense related to the debt. On June 25, 1999, the Company closed on $50.0 million of privateplacement debt. These notes are unsecured and have an eight-year average lifewith a coupon interest rate of 8.64% paid quarterly. The notes contain certainfinancial covenants which, among others, requires that the Company maintainrequired levels of funded debt to EBITDA (earnings before interest expense,income taxes, depreciation and amortization), fixed charge coverage and currentassets to current liabilities. In addition, there are limitations on additionalindebtedness as well as acquisitions and minority interest purchases. TheCompany was in compliance with these covenants at December 31, 1999. On September 17, 1997, the Company closed on an unsecured $36.0 millionfive-year revolving line of credit with a bank. The Company could borrow at theprime rate on a day-to-day basis or may borrow for 30, 60, 90 or 180 day periodsat LIBOR plus 0.80% to 1.25% based on the Company's funded debt to EBITDA ratio.The credit facility also contained certain financial covenants which, amongothers, required that the Company maintain required levels of EBITDA, fundeddebt to EBITDA, fixed charge coverage and current assets to current liabilities.In addition, there were limitations on additional indebtedness as well asacquisitions and minority interest purchases. The Company was in compliance withthese covenants at December 31, 1998. Advances on this line of credit atDecember 31, 1998 were $18,500,000 with interest rates ranging between 6.34% and6.36%. This 1997 line of credit agreement was cancelled in April 1999 when thenew $50.0 million revolving line of credit described above was obtained. In October 1996, the Company authorized the issuance of a standbyletter of credit for $1,000,000, which has no expiration date. 33NOTE 9. RENTAL EXPENSE AND LEASE COMMITMENTS Minimum annual rental commitments, in thousands, at December 31, 1999,under noncancellable operating leases, principally for real estate andequipment, are payable as follows:2000 $ 7,7592001 6,4182002 4,1572003 1,9542004 7102005 167 ----------- $ 21,165 ----------- Total rental expense was approximately $8,840,000, $7,487,000 and$4,535,000 for 1999, 1998 and 1997, respectively. Many of the leases 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. For the purpose of attracting and retaining key executive andmanagerial employees, in 1999 the Company adopted a third Long-Term IncentivePlan (the "1999 Incentive Plan"). The number of shares of Class A Common Stockreserved for issuance under the 1999 Incentive Plan was 600,000. Under the 1996,1997 and 1999 Incentive Plans, stock options, stock appreciation rights,restricted stock and performance units may be granted for the purpose ofattracting and motivating key employees and non-employee directors of theCompany. The options granted to non-employee directors vest ratably over athree-year period and expire 10 years after the date of grant. The optionsgranted to employees vest over a range of three to five years and expire 10years 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 provides the disclosure below inaccordance with Statement 123. Had the Company accounted for its stock optionsin accordance with Statement 123, pro forma net income and pro forma earningsper share would have been: YEARS ENDED DECEMBER 31, --------------------------------------------- 1999 1998 1997 ------------- -------------- -------------- Net income as reported (000's) 10,846 8,908 9,525Net income pro forma for Statement 123 (000's) 10,359 8,501 9,261Historical basic earnings per common share pro forma for Statement 123 $ 1.35 $ 1.11 $ 1.44Historical diluted earnings per common share pro forma for Statement 123 $ 1.33 $ 1.10 $ 1.42The 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. 34 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, -------------------------------------- 1999 1998 1997 ------------ ---------- ------------ Dividend yield 0.00% 0.00% 0.00%Risk-free interest rate 6.25% 5.10% 5.80%Volatility factor 40.00% 40.00% 40.00%Expected life in years 6.0 6.0 6.0Information regarding these option plans for 1999, 1998 and 1997 is as follows: 1999 1998 1997 --------------------------------- ---------------------------------- --------------------------------- WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG. SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ----------------- -------------- ----------------- -------------- ------------------ -------------- Options outstanding, beginning of year 469,300 $ 16.58 401,800 $ 15.86 357,500 $ 14.00Options exercised (34,000) 14.00 (19,000) 14.00 (4,700) 14.00Options granted 480,000 18.85 161,500 21.91 49,000 29.23Options forfeited (22,500) 17.97 (75,000) 24.85 - -Options outstanding, end of year 892,800 $ 17.86 469,300 $ 16.58 401,800 $ 15.86Weighted average fair value of options granted during the year $ 9.25 $ 10.30 $ 11.02Options exercisable at year end 220,400 137,200 71,600Option price range at end of year $14.00 to $28.16 $14.00 to $28.16 $14.00 to $31.25Option price for exercised shares $ 14.00 $ 14.00 $ 14.00Options available for grant at end of year 249,500 107,000 193,500The following table summarizes information about options outstanding at December31, 1999: OPTIONS OUTSTANDING OPTIONS EXERCISABLE------------------------------------------------------------------ ----------------------------- WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG. RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OF SHARES CONTRACTUAL LIFE PRICE OF SHARES PRICE---------------- ----------- ------------------ ------------- ----------- --------------- $ 14.00 268,800 6.19 $ 14.00 173,200 $ 14.00$ 18.56 25,000 8.82 $ 18.56 5,000 $ 18.56$ 18.75 450,500 9.94 $ 18.75 - $ -$ 19.25 10,000 9.20 $ 19.25 - $ -$ 19.94 35,000 8.93 $ 19.94 15,000 $ 19.94$ 20.13 5,000 8.57 $ 20.13 1,000 $ 20.13$ 20.75 5,000 8.65 $ 20.75 1,000 $ 20.75$ 21.06 19,500 9.48 $ 21.06 - $ -$ 21.75 49,000 7.87 $ 21.75 18,600 $ 21.75$ 28.16 25,000 8.17 $ 28.16 6,600 $ 28.16 ---------- ----------------- ------------- ---------- --------------$14.00 to $28.16 892,800 8.55 $ 17.86 220,400 $ 15.64 35NOTE 11. BUSINESS SEGMENT The Company has no separately reportable segments in accordance withStatement of Financial Accounting Standards No. 131 ("Statement 131")"Disclosure About Segments of an Enterprise and Related Information". Under theenterprise wide disclosure requirements of Statement 131, the Company reportsrevenue, in thousands, for Intermodal Services, Brokerage Services, andLogistics Services as follows: YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------ ------------- ------------ Intermodal Services $ 967,033 $ 910,396 $ 849,398Brokerage Services 196,434 164,706 129,356Logistics Services 133,332 70,804 85,725 ------------ ------------- ------------ Total Revenue $ 1,296,799 $ 1,145,906 $ 1,064,479 ------------ ------------- ------------NOTE 12. PROFIT-SHARING PLAN The Company has numerous profit-sharing plans and trusts under 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 $1,645,000, $1,458,000 and$1,163,000 for 1999, 1998 and 1997, respectively.NOTE 13. RELATED PARTY TRANSACTIONS In connection with the acquisition of a controlling interest in each ofthe Hub Partnerships, the Company paid cash to the Class B Common Stock("Class B") stockholders, some of whom are officers of the Company, as well asofficers of 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 are due to the related parties. The Class B stockholders havevoting control over the Company. The same related parties described above alsocontinued to receive approximately 33% of minority interest distributions ofincome from the Company up until the remaining 70% minority interest waspurchased in connection with the April 1999 Purchase. Furthermore, theseparties received cash and notes from the Company totaling approximately$72,330,000 when it acquired minority interest in Hub City Tennessee, L.P., HubCity North Central, L.P., Hub City Los Angeles, L.P., Hub City Golden Gate,L.P., Hub Group Distribution Services, Hub City Dallas, L.P., Hub City Houston,L.P., Hub City Rio Grande, L.P., Hub City Alabama, L.P., Hub City Atlanta,L.P., Hub City Boston, L.P., Hub City Canada, L.P., Hub City Cleveland, L.P.,Hub City Detroit, L.P., Hub City Florida, L.P., Hub City Indianapolis, L.P.,Hub City Kansas, L.P., Hub City Mid-Atlantic, L.P., Hub City NewYork/New Jersey, L.P., Hub City New York State, L.P., Hub City Ohio, L.P., HubCity Philadelphia, L.P., Hub City Pittsburgh, L.P., Hub City Portland, L.P. andHub City St. Louis, L.P.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, 1999 --------------------------------- ISSUED AND AUTHORIZED OUTSTANDING ---------------- ---------------- Preferred stock, $.01 par value 2,000,000 -Class A common stock, $.01 par value 12,337,700 7,043,950Class B common stock, $.01 par value 662,300 662,296 DECEMBER 31, 1998 --------------------------------- ISSUED AND AUTHORIZED OUTSTANDING ---------------- ---------------- Preferred stock, $.01 par value 2,000,000 -Class A common stock, $.01 par value 12,337,700 7,009,950Class B common stock, $.01 par value 662,300 662,296NOTE 16. CHANGE IN ESTIMATE/IMPAIRMENT OF PROPERTY AND EQUIPMENT In the second quarter of 1999, a $0.9 million pretax charge wasrecorded due to a change in estimate and an impairment loss relating to certainoperating software applications. Specifically, $0.7 million of this charge wasattributable to a change in estimate of the useful life for the Visual Movementsoftware previously used primarily for brokerage. The Visual Movement softwareis no longer being used by the Company and was replaced with enhancements to theCompany's proprietary intermodal operating software during the second quarter of1999. These enhancements allow for greater network visibility of loads in a year2000 compliant program. The $0.2 million impairment loss related to thewrite-down of a logistics software program. The fair value was determined basedon the estimated future cash flows attributable to the single customer usingthis program. The Company has installed this software package and is currentlypreparing the software for its operational applications. This new software willprovide enhanced functionality. 37NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth selected quarterly financial data foreach of the quarters in 1999 and 1998 (in thousands, except per share amounts): QUARTERS -------------------------------------------------------- FIRST SECOND THIRD FOURTH -------------- ------------- ------------- ------------- Year Ended December 31, 1999:Revenue $ 307,682 $ 319,448 $ 333,337 $ 336,332Net revenue 39,169 39,045 41,493 42,708Operating income 7,386 5,848 8,578 8,322Historical net income 1,943 2,638 3,199 3,066Historical basic earnings per share $ 0.25 $ 0.34 $ 0.42 $ 0.40Historical diluted earnings per share $ 0.25 $ 0.34 $ 0.41 $ 0.40 QUARTERS -------------------------------------------------------- FIRST SECOND THIRD FOURTH -------------- ------------- ------------- ------------- Year Ended December 31, 1998:Revenue $ 255,133 $ 283,051 $ 295,859 $ 311,863Net 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 $ 0.34NOTE 18. SUBSEQUENT EVENT On March 13, 2000, the Company signed a letter of intent pursuant towhich the Company agreed to sell its 65% interest in Hub Distribution for $65million in cash and warrants to purchase 5% of the outstanding shares of stockof Hub Distribution. The sale of this interest is subject to a number ofcustomary conditions and there is therefore no guarantee that a transaction willultimately be consummated. 38ITEM 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 17, 2000, 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 17, 2000, 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 17, 2000, 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 17,2000, 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. 39 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, 1999 and December 31, 1998 Consolidated Statements of Operations - Years ended December 31, 1999, December 31, 1998 and December 31, 1997 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1999, December 31, 1998 and December 31, 1997 Consolidated Statements of Cash Flows - Years ended December 31, 1999, December 31, 1998 and December 31, 1997 Notes to Consolidated Financial Statements (A)(2) FINANCIAL STATEMENT SCHEDULES The remaining financial statements and statement schedule 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. 40 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 29, 2000 HUB GROUP, INC. By /S/ DAVID P. YEAGER ---------------------- David P. Yeager Chief Executive Officer and Vice Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, 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 29, 2000-------------------------- Phillip C. Yeager /S/ DAVID P. YEAGER Vice Chairman, Chief Executive Officer and Director March 29, 2000-------------------------- David P. Yeager /S/ THOMAS L. HARDIN President, Chief Operating Officer and Director March 29, 2000-------------------------- Thomas L. Hardin /S/ JAY E. PARKER Vice President-Finance and Chief Accounting Officer March 29, 2000-------------------------- Jay E. Parker (Principal Financial and Accounting Officer) /S/ CHARLES R. REAVES Director March 29, 2000-------------------------- Charles R. Reaves /S/ MARTIN P. SLARK Director March 29, 2000-------------------------- Martin P. Slark /S/ GARY D. EPPEN Director March 29, 2000-------------------------- Gary D. Eppen 41 SCHEDULE II HUB GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Beginning Costs & Balance at of Year Expenses Deduction End of Year ------------- ------------- ------------- -------------- Year Ended December 31: Allowance for uncollectible accounts receivable 1999 $ 691,000 $2,321,000 $ (878,000) $ 2,134,000 1998 303,000 1,523,000 (1,135,000) 691,000 1997 405,000 1,005,000 (1,107,000) 303,000 S-1 INDEX TO 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, by reference to the Registrants report on Form 8-K dated May 2, 1996 and filed May 17, 1996, File No. 0-27754) 2.2 Purchase and Sale Agreement among Hub Holdings, Inc. and Hub City North Central, Inc. (incorporated by reference to Exhibit 2.2 to the Registrants report on Form 10-K dated March 26, 1997 and filed March 27, 1997, File No. 000-27754) 3.1 Amended Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 and 3.3 to the Registrant's registration statement on Form S-1, File No. 33-90210) 3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's registration statement on Form S-1, File No. 33-90210) 10.1 Form of Amended and Restated Limited Partnership Agreement (incorporated by reference to Exhibit 10.1 to the Registrants report on Form 10-K dated March 26, 1997 and filed March 27, 1997, File No. 000-27754) 10.2 Amended and Restated Limited Partnership Agreement of Hub City Canada, L.P. (incorporated by reference to Exhibit 10.2 to the Registrants report on Form 10-K dated March 26, 1997 and filed March 27, 1997, File No. 000-27754) 10.3 Form of Non-Competition Agreement (incorporated by reference to Exhibit 10.3 to the Registrants report on Form 10-K dated March 26, 1997 and filed March 27,1997, File No. 000-27754) 10.4 Purchase and Sale Agreement between the Registrant and the Stockholders of Hub City Terminals, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant's registration statement on Form S-1, File No. 33-90210) 10.5 Hub Group Distribution Services Purchase and Sale Agreement (incorporated by reference to Exhibit 10.5 to the Registrant's report on Form 10-K dated March 26, 1997 and filed March 27, 1997, File No. 000-27754) 10.6 Management Agreement (incorporated by reference to Exhibit 10.6 to the Registrant's report on Form 10-K dated March 26, 1997 and filed March 27, 1997, File No. 000-27754) 10.7 Stockholders' Agreement (incorporated by reference to Exhibit 10.7 to the Registrant's report on Form 10-K dated March 26, 1997 and filed March 27, 1997, File No. 000-27754) 10.8 Credit Agreement dated as of September 27, 1997, among the Registrant, Hub City Terminals, Inc., Hub Holdings, Inc. and Harris Trust and Savings Bank (incorporated by reference to Exhibit 10.8 to the Registrant's report on Form 10-Q dated and filed November 13, 1997, File No. 000-27754) 10.9 $100 million Credit Agreement dated as of April 30, 1999, among the Registrant, Hub City Terminals, Inc., Hub Holdings, Inc. and Harris Trust and Savings Bank (incorporated by reference to Exhibit 10.9 to the Registrant's report on Form 10-Q dated and filed May 10, 1999, File No. 000-27754)10.10 $40 million Bridge Credit Agreement dated as of April 30, 1999 among the Registrant, Hub City Terminals, Inc., Hub Holdings, Inc. and Harris Trust and Savings Bank (incorporated by reference to Exhibit 10.10 to the Registrant's report on Form 10-Q dated and filed May 10, 1999, File No. 000-27754)10.11 $50 million Note Purchase Agreement dated as of June 25, 1999, among the Registrant, Hub City Terminals, Inc., Hub Holdings, Inc. and various purchasers (incorporated by reference to Exhibit 10.11 to the Registrant's report on Form 10-Q dated and filed August 16, 1999, File No. 000-27754)21 Subsidiaries of the Registrant23.1 Consent of Arthur Andersen LLP27 Financial Data ScheduleEXHIBIT 21Subsidiaries of Hub Group, Inc.SUBSIDIARIES JURISDICTION OF INCORPORATION/ORGANIZATIONHub City Terminals, Inc. DelawareHub Group Alabama, LLC DelawareHub Group Atlanta, LLC DelawareHub Group Boston, LLC DelawareHub Group Canada, LLC DelawareHub Group Cleveland, LLC DelawareHub Group Detroit, LLC DelawareHub Group Florida, LLC DelawareHub Group Golden Gate, LLC DelawareHub Group Indianapolis, LLC DelawareHub Group Kansas City, LLC DelawareHub Group Los Angeles, LLC DelawareHub Group Mid-Atlantic, LLC DelawareHub Group New Orleans, LLC DelawareHub Group New York State, LLC DelawareHub Group New York-New Jersey, LLC DelawareHub Group North Central, LLC DelawareHub Group Ohio, LLC DelawareHub Group Philadelphia, LLC DelawareHub Group Pittsburgh, LLC DelawareHub Group Portland, LLC DelawareHub Group St. Louis, LLC DelawareHub Group Tennessee, LLC DelawareHub City Texas, L.P. DelawareHub Group Associates, Inc. IllinoisHub Highway Services IllinoisHub Group Distribution Services IllinoisQ.S. of Illinois, Inc. IllinoisQ.S.S.C., Inc. DelawareQuality 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. DelawareHub Chicago Holdings, Inc. DelawareQuality Intermodal Corporation TexasEXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTSAs independent public accountants, we hereby consent to the incorporation of ourreports dated February 4, 2000, except with respect to the matter discussed inNote 18, as to which the date is March 15, 2000 included in this Form 10-K, intoHub Group, Inc.'s previously filed Registration Statement File No. 333-6327 ofForm S-8, and Registrations File No. 333-48185 on Form S-8. ARTHUR ANDERSEN LLPChicago, IllinoisMarch 28, 2000

5 This schedule contains summary financial information extracted fromConsolidated Statements of Operations and Consolidated Balance Sheets and isqualified in its entirety by reference to such financial statements. 1,000 Year DEC-31-1999 DEC-31-1999 1865 0 193455 3234 0 194857 36484 12240 441609 173353 0 0 0 77 131047 441609 0 1296799 0 1134384 132281 781 8592 18384 7538 30134 0 0 0 10846 1.41 1.40

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Hub Group Annual Report 1999

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Hub Group
Annual Report 1999