-------------------------------------------------------------------------------- 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, 2000 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-27754 ------------------ HUB GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-4007085 (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 377 E. BUTTERFIELD ROAD, SUITE 700 LOMBARD, ILLINOIS 60148 (Address and zip code of principal executive offices) (630) 271-3600 (Registrant's telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, $.01 PAR VALUE (Title of Class)Indicate by check mark whether the Registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes X No __Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of Registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. [X]The aggregate market value of the Registrant's voting stock held bynon-affiliates on March 15, 2001, based upon the last reported sale price onthat date on the NASDAQ National Market of $9 1/8 per share, was$57,232,913.On March 15, 2001, the Registrant had 7,046,050 outstanding shares of ClassA common stock, par value $.01 per share, and 662,296 outstanding shares ofClass B 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 15, 2001, (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 Form 10-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 27 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 executivewith significant transportation experience. Local management is responsible foroperations, customer service and regional marketing, while corporate managementis responsible for group strategic planning and administration, financialservices, relationships with the railroads and management information systemssupport. Hub Group also maintains a National Accounts sales force to providecentralized marketing of the Company's services to large and geographicallydiversified 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"). Through a series ofacquisitions, Hub Group now owns a 65% partnership interest in Hub GroupDistribution Services ("Hub Distribution"), which performs certain logisticsfunctions, and wholly-owns each of its other operating subsidiaries (each of theoperating subsidiaries and Hub Distribution are an "Operating Company" andcollectively are the "Operating Companies"). Unless the context otherwiserequires, references to "Hub Group" or the "Company" include Hub Chicago and theOperating Companies and their respective subsidiaries.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. The Company uses its Hub network, connected through its proprietaryadvanced intermodal management ("AIM") system, to access containers and trailersowned by leasing companies, railroads and steamship lines. Because each Hub notonly handles its own outbound shipments but also handles inbound shipments fromother Hubs, each Hub is able to track trailers and containers entering itsservice area and reuse that equipment to fulfill its customers' outboundshipping requirements. This effectively allows the Company to "capture"containers and trailers and keep them within the Hub network without having tomake a capital investment in transportation equipment. The Company also hasexclusive use of the containers in its Premier Service Network. HIGHWAY SERVICES The Company arranges for the transportation of freight by truck, 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. 1 The Company's brokerage operation also provides customers with specializedprograms. Through the Dedicated Trucking program, certain carriers haveinformally agreed to move freight for Hub's customers on a continuous basis.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 has established aSupply Chain Solutions group with logistics expertise at its headquarters inLombard. In addition, many of the Hubs have hired experienced logisticspersonnel exclusively dedicated to selling Hub's logistics service offering. TheSupply Chain Solutions group acts as a central resource for the Hubs who thenperform the actual logistics services. The Company currently offers various logistics services, includingcomprehensive transportation management, arranging for delivery to multiplelocations at the shipment's destination, third party warehousing,less-than-truckload consolidation and other customized logistics services, aswell as other non-traditional logistics services such as installation of pointof sale merchandise displays. When providing complete transportation services,the Company essentially replaces the customer's transportation department. Oncethe Company is hired as a single source logistics provider, it negotiates withintermodal, railcar, truckload and less-than-truckload carriers to move thecustomer's product through the supply chain and then dispatches the move for thecustomer. To help manage its logistics business, the Company uses i2 TradeMatrix Planand i2 TradeMatrix Fulfill from i2 Technologies, Inc. This sophisticatedtransportation management software enables Hub to offer supply chain planningtools and logistics managing, modeling, optimizing and monitoring tools for itscustomers. This software may be used by the Company when offering logisticsmanagement services to customers that ship via multiple modes, includingintermodal, truckload, and less-than-truckload, allowing the Company to optimizemode and carrier selection and routing for its customers. This software isintegrated with Hub's AIM system.HUB NETWORK Over the past 30 years, Hub Group has grown from a single office with twoemployees into a network of 25 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 Kansas City New York City San Francisco Chicago (3) Los Angeles Pittsburgh Seattle Cleveland Memphis Portland Toledo Detroit Mexico City Rochester Toronto Grand Rapids The 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. Thisinformation is simultaneously transmitted through the AIM system to the Hubclosest to the point of delivery. Hub's predictive track and trace technology 2then monitors the shipment to ensure that it will arrive as scheduled, alertingHub's customer service personnel at the local Hub if there are service delays.The Hub closest to the point of delivery 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 currently has full time marketing representatives ateach Hub with primary responsibility for servicing local and regional accounts.These sales representatives work from the 27 Hubs and the Company's satellitesales offices. This network provides a local marketing contact for small andmedium shippers in most major metropolitan areas within the United States. 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 16 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 contact with 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 IBM AS/400 computerslocated at a secure offsite data center. All of the Hubs are linked with theseAS/400 computers and each other using a frame relay network. This configurationprovides a real time environment for transmitting data among the Hubs and the 3Company's headquarters using electronic data interchange ("EDI"), electronicmail and other protocols. It also allows Hub to communicate electronically witheach railroad, certain drayage companies and those customers with EDIcapabilities. The Company's proprietary AIM system is the primary mechanism used by theHubs to handle the Company's intermodal and highway services business. The AIMsystem processes customer transportation requests, schedules and tracksshipments, prepares customer billing, establishes account profiles and retainscritical information for analysis. The AIM system provides connectivity witheach of the major rail carriers, enabling the Company to electronically scheduleand track shipments in a real time environment. In addition, the AIM system'sEDI features offer customers with EDI capability a completely paperless process,including load tendering, shipment dispatch, shipment tracking, customer billingand remittance processing. The Company aggressively pursues opportunities toestablish EDI interfaces with its customers and carriers. The Company's website, www.hubgroup.com, is designed to allow Hub'scustomers and vendors to easily do business with Hub online. The Companylaunched the Vendor Interface portion of this website in early 2000. ThroughVendor Interface, the Company tenders loads to its drayage partners using theinternet rather than phones or faxes. Vendor Interface also captures eventstatus information and helps facilitate appropriate payment. Vendor Interfaceusage grew steadily in 2000 and Hub currently tenders over 80% of its drayageloads using Vendor Interface and EDI. Hub launched the Customer Advantageportion of its website in early 2001. Customer Advantage allows customers toreceive immediate pricing, place orders, track shipments and review historicalshipping data over the internet. Current internet applications are, and futureinternet applications will be, integrated with the AIM system. During 2000, the Company updated and improved the operational software forits AIM system. The new software is designed to streamline operationalprocesses, improve the quality of data available to the Company and itscustomers, better integrate its various systems and software applications andreduce inter-Company transactions. The Company is currently testing this newsoftware and will begin using this new software once testing has been completed.RELATIONSHIP WITH RAILROADS A key element of the Company's business strategy is to strengthen its closeworking relationship with each of the major intermodal railroads in the UnitedStates. The Company views its relationship with the railroads as a partnership.Due to the Company's size and relative importance, many railroads have dedicatedsupport personnel to focus on the Company's day-to-day service requirements. Ona regular basis, senior executives of the Company and each of the railroads meetto discuss major strategic issues concerning intermodal transportation. Several of 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 National Norfolk Southern Canadian Pacific Union Pacific CSXThe 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 2001. 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. The Company also manages a fleet of containers under its Premier ServiceNetwork. This program began with the Burlington Northern and Santa Fe RailwayCompany ("BNSF") in May 1998 and in 1999 expanded to include the NorfolkSouthern Corporation ("NS"). Under multi-year agreements with both the BNSF andNS, the Company manages, as of March 6, 2001, approximately 5,550 containers 4owned by the BNSF and 1,650 containers owned by the NS. These containers are forHub's dedicated use on the BNSF and NS rail systems. The BNSF containers and theNS containers are fully interchangeable across both the BNSF and NS railnetworks.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 along with clean and safe equipment,maintain a defined on-time performance level and follow specified proceduresdesigned to minimize freight loss and damage. Whenever possible, the Companyuses the services of drayage companies that participate in its Quality DrayageProgram. However, during periods of high demand for drayage services or at therequest of a customer, the Company will use the services of other drayagecompanies. The local Hubs negotiate drayage rates for transportation betweenspecific origin and destination points. These rates generally are valid, withminor exceptions for fuel surcharge increases, for a period of one year.RELATIONSHIP WITH TRUCKLOAD CARRIERS The Company's brokerage operation has a large and growing number of 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 are important since these relationships determine pricing, load coverage and overallservice.RISK MANAGEMENT AND INSURANCE The Company requires all drayage companies participating in the QualityDrayage Program to carry at least $1.0 million in general liability 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. To cover freight loss or damage when a carrier'sliability cannot be established or a carrier's insurance is insufficient tocover the claim, the Company carries its own cargo insurance with a limit of$2.0 million per container or trailer and a limit of $20 million per occurrence.The Company also carries general liability insurance with limits of $1.0 millionper occurrence and $2.0 million in the aggregate with a companion $20.0 millionumbrella policy on this general liability insurance.GOVERNMENT REGULATION Hub Highway Services is licensed by the Department of Transportation("DOT") as a broker in arranging for the transportation of general 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 a $10,000 surety bondwhich the Company has posted. To date, compliance with these regulations has nothad a material adverse effect on the Company's results of operations orfinancial condition. However, the transportation industry is subject tolegislative or regulatory changes that can affect the economics of the industryby requiring changes in operating practices or influencing the demand for, andcost of providing, transportation services.COMPETITION The transportation services industry is highly competitive. The Companycompetes against other IMCs, as well as logistics companies, third partybrokers, over-the-road truckload carriers and railroads that market their ownintermodal services. 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. 5GENERAL EMPLOYEES As of February 28, 2001, the Company had approximately 1,590employees. 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. None of the Company's patents and trademarks is believed tobe material to the Company. The Company's business is seasonal to the extentthat certain customer groups, such as retail, are seasonal.ITEM 2. PROPERTIES The Company directly, or indirectly through the Operating Companies,operates 43 offices throughout the United States and in Canada and Mexico,including the Company's headquarters in Lombard, Illinois and its Company-owneddrayage operations. The office building used by the Hub located in Toledo isowned, and the remainder are leased. Most office leases have initial terms of more than one year, and many include options to renew. While some of theCompany's leases expire in the near term, the Company does not believe that itwill have difficulty in renewing them or in finding alternative office space.The Company believes that its offices are adequate for the purposes for whichthey are currently used.ITEM 3. LEGAL PROCEEDINGS The Company is a party to routine litigation incident to its business,primarily claims for freight lost or damaged in transit or improperly shipped.Many 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. 6EXECUTIVE OFFICERS OF THE REGISTRANT In reliance on General Instruction G to Form 10-K, information on executiveofficers of the Registrant is included in this Part I. The table sets forthcertain information as of March 7, 2001 with respect to each person who is anexecutive officer of the Company. Name Age Position ------------------ ----- ----------------------------------------------- Phillip C. Yeager 73 Chairman of the Board of Directors David P. Yeager 47 Vice Chairman of the Board of Directors and Chief Executive Officer Thomas L. Hardin 55 President, Chief Operating Officer and Director Mark A. Yeager 36 President-Field Operations Donald G. Maltby 46 President-Hub Online Jay E. Parker 36 Vice President-Finance, Chief Financial Officer and Treasurer John T. Donnell 61 Executive Vice President-National Accounts Richard M. Rogan 61 President-Hub Highway Services, Executive Vice President-Marketing Daniel L. Sellers 45 Vice President-Information Services and Chief Information Officer David C. Zeilstra 31 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 David P. 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. 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 the former Chairman of the Intermodal Association of North America. 7 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. Donald G. Maltby has served as President - Hub Online, the Company'se-commerce division, since February 2000. From July 1990 through January 2000,Mr. Maltby served as the President of the Company's Hub in Cleveland. Prior tojoining Hub Group, Mr. Maltby served as President of Lyons Transportation, awholly-owned subsidiary of Sherwin Williams Company, from 1988 to 1990. In hiscareer at Sherwin Williams, which began in 1981 and continued until he joinedthe Company in 1990, Mr. Maltby held a variety of management positions,including Vice-President of Marketing and Sales for their TransportationDivision. Mr. Maltby has been in the Transportation and Logistics industry since1976. Mr. Maltby received a Masters in Business Administration from BaldwinWallace College in 1982 and a Bachelor of Science degree from the StateUniversity of New York in 1976. Jay E. Parker has been the Company's Vice President of Finance, ChiefFinancial Officer and Treasurer since June 1999. From July 1995 through May1999, Mr. Parker was the Company's Corporate Controller. Prior to joining theCompany, Mr. Parker was the Director of Financial Reporting at Discovery Zone,Inc. from July 1994 through June 1995 and held various positions, includingAudit Manager, with Arthur Andersen from December 1988 through June 1994. Mr.Parker received a Masters of Accounting Science from Northern IllinoisUniversity in 1988, became a Certified Public Accountant in 1987 and received aBachelor of Science degree in 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 withHumana, Inc. from February 1997 to December 1998. Prior to that, Mr. Sellerswas Vice President and General Manager of OmniTracs software with Qualcomm, Inc.from November 1993 to February 1997. Mr. Sellers also worked in thetransportation industry for 15 years with Schneider National, Inc. in a varietyof positions, including as Vice President and Chief Information Officer ofInformation Systems. He received a Bachelor of Business Administration from theUniversity of Cincinnati in 1978 and a Masters in Business Administration fromthe University of Wisconsin Graduate School of Business in 1983. Mr. Sellers isa past member of the American Trucking Association's Management Systems Council. 8 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 1999 and 2000. 1999 2000 ---- ---- HIGH LOW HIGH LOW -------- --------- -------- ------- First Quarter $23 3/4 $18 7/8 $20 1/2 $15 1/4 Second Quarter $27 7/8 $21 $15 1/8 $10 1/2 Third Quarter $27 1/16 $20 7/16 $14 1/2 $9 9/16 Fourth Quarter $21 $14 11/16 $9 10/16 $6 1/2 On March 7, 2001, there were approximately 40 stockholders of record of theClass A Common Stock and, in addition, there were an estimated 1,450 beneficialowners of the Class A Common Stock whose shares were held by brokers and otherfiduciary institutions. On March 7, 2001, there were 11 holders of record of theCompany'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. 9ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (in thousands except per share data) YEARS ENDED DECEMBER 31, --------------------------------------------------------------------- 2000 1999 1998 1997(1) 1996(2) ------------ ------------- ------------ -------------- -------------- STATEMENT OF OPERATIONS DATA:Revenue $ 1,384,379 $ 1,296,799 $ 1,145,906 $ 1,064,479 $ 754,243Gross margin 173,278 162,415 138,334 129,855 91,564Operating income 18,399 30,134 26,406 33,495 27,925Income before minority interest and taxes 7,872 23,659 25,324 32,869 27,704Income before taxes 7,825 18,384 15,205 15,874 11,338Historical net income 4,617 10,846 8,908 9,525 7,044Historical basic earnings per common share $ 0.60 $ 1.41 $ 1.16 $ 1.48 $ 1.41Historical diluted earnings per common share $ 0.60 $ 1.40 $ 1.15 $ 1.46 $ 1.39Pro forma provision for additional income taxes(3) 241Pro forma net income $ 6,803Pro forma basic earnings per common share $ 1.36Pro forma diluted earnings per common share $ 1.35 AS OF DECEMBER 31, --------------------------------------------------------------------- 2000 1999 1998 1997(1) 1996(2) ------------ ------------- ------------ ------------- --------------- BALANCE SHEET DATA:Working capital $ 477 $ 21,912 $ 20,313 $ 15,209 $ 15,877Total assets 467,245 441,119 304,791 267,826 201,225Long-term debt, excluding current portion 109,089 131,414 29,589 22,873 28,714Stockholders' equity 135,772 131,124 119,673 110,462 46,124(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.(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 the shares 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.(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%. 10ITEM 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. OnMarch 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 ofaccounting and has been included in all periods presented on a historical costbasis. 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 secondaryoffering of 1,725,000 shares of Hub Group, Inc.'s Class A common stock.BUSINESS COMBINATIONS 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 logistics services provider.CEDS was a provider of niche logistics services including a pharmaceuticalsample delivery operation.CALL OPTIONS 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 CityNew York/New Jersey, L.P., Hub City New York State, L.P., Hub City Ohio, L.P.,Hub City Philadelphia, L.P., Hub City Pittsburgh, L.P., Hub City Portland, L.P.,and Hub City St. Louis, L.P. (collectively referred to as the "April 1999Purchase"). The Company paid $108.7 million in cash.RESULTS OF OPERATIONSYEAR ENDED DECEMBER 31, 2000, COMPARED TO YEAR ENDED DECEMBER 31, 1999 REVENUE Revenue for the Company increased 6.8% to $1,384.4 million in 2000 from$1,296.8 million in 1999. Early in 2000, the Company's underlying rail andtruckload carriers began passing on significant price increases related to theincrease in the cost of fuel. Accordingly, the Company increased the prices itcharges its customers. Based on the timing and magnitude of these increases,management estimates that such increases caused the Company's revenue to grow 4%to 5% for the year. Absent this increase, management estimates that revenuegrowth would have ranged from 2% to 3% for the year. Intermodal revenueincreased 3.9% over 1999. Management believes that this slower than historicalgrowth in intermodal is due in part to a softening economy and the termination 11of a significant customer contract in November 1999. Truckload brokeragerevenue increased 5.7% over 1999. Logistics revenue increased 29.2% compared to1999. This increase was primarily due to growth in the Company's supply chainsolutions logistics services revenue.GROSS MARGIN Gross margin increased 6.7% to $173.3 million in 2000 from $162.4million in 1999. Gross margin as a percentage of revenue remained constant at12.5%.SALARIES AND BENEFITS Salaries and benefits increased 14.4% to $96.2 million in 2000 from$84.1 million in 1999. As a percentage of revenue, salaries and benefitsincreased to 6.9% from 6.5% in 1999. The increase in the percentage is primarilyattributed to increased headcount supporting the Company's growing base ofservice offerings, information technology initiatives and e-businessinitiatives. The additional service offerings include the operational and salessupport of boxcar, flat bed, expedited and certain logistics applications.Additionally, in the fourth quarter of 2000, the Company recognized a $0.3million charge related to severance primarily for accounting personnel as partof a plan to centralize the Company's accounting functions at its corporateheadquarters in 2001.SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased 22.5% to $46.8million in 2000 from $38.2 million in 1999. As a percentage of revenue, theseexpenses increased to 3.4% from 2.9% in 1999. The increase as a percentage ofrevenue is primarily attributed to expenditures related to equipment leases,data center and data communications costs and rent. The increase in equipmentleases is primarily due to the leasing of computer hardware required to supportboth newly developed and future software applications. The increase in datacommunication costs and costs associated with the recently outsourced datacenter are related to supporting the Company's information technologyinitiatives. Rent expense increased as the Company's operating units wererequired to obtain larger office space to accommodate operations.DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT Depreciation and amortization increased 51.9% to $6.1 million in 2000from $4.0 million in 1999. This expense as a percentage of revenue increased to0.4% from 0.3% in 1999. The increase is primarily related to the amortization ofinternally developed software for the Company's e-business initiatives.Additionally, in the fourth quarter of 2000, the Company recognized $0.5 millionin additional depreciation due primarily to a change in estimated useful livesof various assets that will no longer be used once the new operating system iscompleted. AMORTIZATION OF GOODWILL Amortization of goodwill increased 13.3% to $5.7 million from $5.1million in 1999. The expense as a percentage of revenue remained constant at0.4%. The $0.6 million increase in expense over 1999 is attributable to having afull year of amortization of the goodwill associated with the purchase of theremaining 70% minority interests in connection with the April 1999 Purchase.OTHER INCOME (EXPENSE) Interest expense increased to $11.4 million in 2000 from $8.6 millionin 1999. The increase in interest expense is due primarily to having a full yearof the debt required to fund the purchase of the remaining 70% minorityinterests in connection with the April 1999 Purchase. Interest income decreased to $0.8 million in 2000 from $0.9 million in1999. The primary cause for this decrease is the Company's increasedconcentration of cash balances to reduce debt and minimize related interestexpense. 12 Other income decreased to $0.1 million in 2000 from $1.2 million in1999. This decrease is primarily attributed to $1.0 million of non-recurringincome recognized in 1999 upon execution of a confidential agreement with one ofthe Company's vendors.MINORITY INTEREST Minority interest decreased to $0.0 million in 2000 from $5.3 millionin 1999. Minority interest as a percentage of income before minority interestand provision for income taxes was 0.6% in 2000 compared to 22.3% in 1999. Thedecrease in the percentage is attributed to the lack of income for HubDistribution and the purchase of the remaining 70% minority interests inconnection with the April 1999 Purchase.PROVISION FOR INCOME TAXES The provision for income taxes decreased 57.4% to $3.2 million in 2000compared to $7.5 million in 1999. The Company provided for income taxes using aneffective rate of 41.0% in both years.NET INCOME Net income decreased 57.4% to $4.6 million in 2000 from $10.8 millionin 1999.EARNINGS PER COMMON SHARE Basic earnings per common share decreased 57.4% to $0.60 in 2000 from$1.41 in 1999. Diluted earnings per common share decreased 57.1% to $0.60 in2000 from $1.40 in 1999.YEAR 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 logistics servicesperformed by Hub Distribution. GROSS MARGIN Gross margin increased 17.4% to $162.4 million in 1999 from $138.3million in 1998. Gross margin 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 logistics services, which earns a higher gross margin percentageof revenue than does the Company's core intermodal and brokerage serviceofferings.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 logistics services. The Company'sniche logistics services requires a higher level of salaries and benefits ascompared to revenue than does the Company's core intermodal and brokerageservice offerings. 13SELLING, 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 logistics services. Outside serviceexpenditures relate to contracted temporary labor and other services to handleincreased business for niche logistics 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 in 1999 from$2.9 million in 1998. The expense as a percentage of revenue increased to 0.4%from 0.3% in 1998. The increase in expense is primarily attributable to theamortization of the goodwill associated with the purchase of the remaining 70%minority interests in connection with the April 1999 Purchase.IMPAIRMENT OF PROPERTY AND EQUIPMENT In the second quarter of 1999, a $0.9 million pretax charge wasrecorded relating to certain operating software applications. Specifically, $0.7million of this charge was attributable to a write-down of 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. Theremaining $0.2 million impairment loss related to the write-down of a logisticssoftware program. The fair value was determined based on the estimated futurecash flows attributable to the single customer using this program. The Companyinstalled a new software package in 1999 that provides enhanced functionalityfor its operational applications. 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 purchase 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 interests 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% in 141998. The decrease in the percentage is primarily attributed to the purchase ofthe remaining 70% minority interests in connection with the April 1999 Purchaseas well as the purchase of minority interests 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 Net income increased 21.8% to $10.8 million in 1999 from $8.9 millionin 1998. Historical net income as a percentage of revenue remained constant at0.8%.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.LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations and capital expenditures throughcash flows from operations and bank borrowings. Cash provided by operating activities for the year ended December 31,2000, was approximately $41.4 million, which resulted primarily from an increasein accounts payable and accrued expenses of $27.3 million, non-cash charges of$16.0 million and net income of $4.6 million, offset by a $5.5 million increasein accounts receivable and a $0.8 million increase in prepaid expenses and othercurrent assets, all of which were primarily related to the overall growth of theCompany. Net cash used in investing activities for the year ended December 31,2000, was $26.6 million related to capital expenditures. The capitalexpenditures were principally made to enhance the Company's information systemcapabilities. The most significant projects were Customer Advantage, a web-basedsystem used to transact business with our customers, and a customized operating system. The net cash used in financing activities for the year ended December31, 2000, was $16.6 million. This was primarily comprised of $10.0 million ofvoluntary payments on the Company's line of credit and $6.2 million of scheduledpayments on the Company's term debt, installment notes and capital leases. The Company maintains a multi-bank credit facility. The facility iscomprised of $50.0 million in term debt and a $50.0 million revolving line ofcredit. At December 31, 2000, there was $42.0 million of outstanding term debtand $24.0 million outstanding and $26.0 million unused and available under theline of credit. Borrowings under the line of credit are unsecured and have afive-year term that began on April 30, 1999, with a floating interest rate basedupon the LIBOR (London Interbank Offered Rate) or Prime Rate. The term debt hasquarterly payments ranging from $1,250,000 to $2,000,000 with a balloon paymentof $19.0 million due on March 31, 2004. On November 7, 2000, the Company amended its unsecured $50.0 millionterm debt and the $50.0 million five-year revolving line of credit agreement.The amendment increases the borrowing rate ranges of both the term note andrevolving line of credit. Under the amended line of credit, the Company canborrow, at its option, at the prime rate plus 0.25% to 1.25% or at a rateestablished at the bank's discretion on a day-to-day basis. The Company may alsoborrow for 30, 60, 90 or 180 day periods at LIBOR plus 1.50% to 2.75% based onthe Company's funded debt to EBITDAM (earnings before interest expense, incometaxes, depreciation, amortization and minority interest) ratio. Under theamended term debt, the Company can borrow at the prime rate plus 0.25% to 1.50%on a day-to-day basis or may borrow for 30, 60, 90 or 180 day periods at LIBORplus 1.75% to 3.00% based on the Company's funded debt to EBITDAM ratio. Thecredit facility also contains certain financial covenants which were amended. 15These covenants require that the Company maintain required levels of EBITDAM,funded debt to EBITDAM and fixed charge coverage ratios. The amendment has anadditional financial covenant that limits capital expenditures for 2001. TheCompany was in compliance with the financial covenants that were effective as ofDecember 31, 2000. On February 26, 2001, the Company executed a second amendment of itsunsecured $50.0 million term debt and the $50.0 million five-year revolving lineof credit agreement. The amendment has an additional financial covenant thatlimits capital expenditures for 2002. All provisions of the November 7, 2000amendment remained unchanged. The Company maintains $50.0 million of private placement debt (the"Notes"). These Notes are unsecured and have an eight-year average life.Interest is paid quarterly. These Notes mature on June 25, 2009, with annualpayments of $10.0 million commencing on June 25, 2005. On February 26, 2001, the Company amended the Notes. The amendment,effective December 31, 2000, increases the borrowing rate from 8.64% to 9.14%.The Notes also contain certain financial covenants which were amended. Thesecovenants require that the Company maintain required levels of funded debt toEBITDAM and fixed charge coverage ratios. The amendment has an additionalfinancial covenant that provides limitations on capital expenditures for 2001and 2002. The Company was in compliance with the financial covenants that wereeffective as of December 31, 2000.RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issuedStatement of Financial Accounting Standards No. 133 ("Statement 133"),"Accounting for Derivative Instruments and Hedging Activities". In June 1999,The FASB issued Statement 137 ("Statement 137"), "Accounting for DerivativeInstruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". In June 2000, the FASB issued Statement 138, "Accounting forCertain Derivative Instruments and Certain Hedging Activities, an amendment ofFASB Statement No. 133". Statement 133, as amended, establishes accounting andreporting standards requiring that every derivative instrument (includingcertain derivative instruments embedded in other contracts) be recorded in thebalance sheet as either an asset or liability measured at its fair value. As aresult of Statement 137, the Company will adopt Statement 133, as amended, inthe first quarter of 2001. The application of Statement 133, as amended, willnot have a material effect on the Company's financial position or results ofoperations. In March 2000, the FASB issued Interpretation No. 44("Interpretation 44"), "Accounting for Certain Transactions involving StockCompensation," an interpretation of Accounting Principles Board Opinion No. 25("Opinion 25"). Interpretation 44 clarifies (a) the definition of "employee" forpurposes of applying Opinion 25, (b) the criteria for determining whether a planqualifies as a non-compensatory plan, (c) the accounting consequences of variousmodifications to the terms of previously fixed stock options or awards, and (d)the accounting for the exchange of stock compensation awards in a businesscombination. Interpretation 44 was effective July 1, 2000, but certainconclusions in Interpretation 44 cover specific events that occurred aftereither December 15, 1998 or January 12, 2000. The application of Interpretation44 did not have a material impact on the Company's financial position or resultsof operations.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 addition 16to 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 and direct marketing efforts by therailroads, the degree and rate of market growth in the intermodal, brokerage andlogistics markets served by the Company, changes in rail and truck capacity,further consolidation of rail carriers, deterioration in relationships withexisting rail carriers, rail service conditions, changes in governmentalregulation, adverse weather conditions, fuel shortages, changes in the cost ofservices from rail, drayage and other vendors and fluctuations in interestrates.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, gross margin,salaries and benefits, selling general and administrative expenses, depreciationand amortization, interest expense, minority interest, net income and theCompany's debt level. Financial results may be impacted by additional factors asdiscussed below.REVENUE Management believes that the performance of the railroads, eliminationof fuel surcharges and a more severe or prolonged slow-down of the economy arethe most significant factors that could negatively influence the Company's revenue growth rate. The service disruptions in the intermodal industry due tothe split-up of Conrail, which began on June 1, 1999, appear to have beensignificantly rectified. Should this trend reverse, the Company believes itsintermodal growth rate would likely be negatively impacted. Should there befurther consolidation in the rail industry, causing a similar or more severeservice disruption, the Company believes its intermodal growth rate would likelybe negatively impacted. Should there be another significant service disruption,the Company expects there may be some customers who would switch from using theCompany's intermodal service to other carriers' over-the-road service. TheCompany expects these customers may choose to continue to utilize these carrierseven when intermodal service levels are restored. Starting in the Spring of2000, the Company has billed its customers on average an additional 5-6% tocover the costs of fuel surcharges. Should fuel surcharges be eliminated orreduced significantly, the Company expects that the revenue growth rate could benegatively impacted. Other factors that could negatively influence the Company'sgrowth rate include, but are not limited to, the entry of new web-basedcompetitors, inadequate drayage service and inadequate equipment supply.GROSS MARGIN Management expects fluctuations in the gross margin percentage fromquarter-to-quarter caused by changes in business mix, intermodal margins,highway brokerage margins, logistics business margins, trailer and containercapacity, vendor pricing, intermodal industry growth, intermodal industryservice levels, competition and accounting estimates.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. Should the Companyeliminate positions due to automation resulting from systems enhancements orcentralizing functions, this expense, as a percent of revenue, is likely to bereduced. Additional factors that could affect the percentage from staying in therecent historical range are revenue growth rates significantly higher or lowerthan forecasted, a management decision to invest in additional personnel tostimulate new or existing businesses, such as the Company's expedited servicesinitiative, changes in customer requirements and changes in railroad intermodalservice levels which could result in a lower or higher cost of labor per move.SELLING, GENERAL AND ADMINISTRATIVE There are several factors that could cause selling, general andadministrative expenses to increase as a percentage of revenue. As customer 17expectations 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 significantly in thefuture. The most significant factor that will cause an increase in thepercentage is increased software amortization related to improvements in theCompany's information systems. During the first half of 2001, the Companyexpects to place in service its new proprietary operating system, a purchasedlogistics package and various web applications. Additionally, the Company hasaccelerated depreciation due to a change in estimated useful lives of variousassets to be replaced by this new operating system. This change in estimate willresult in additional depreciation of approximately $0.9 million in the first quarter of 2001. Additional factors that could cause an increase in thepercentage are increased depreciation expense if the Company decided to purchaserather than lease a greater proportion of assets or accelerating depreciationdue to changes in useful lives of existing assets.AMORTIZATION OF GOODWILL Management estimates that amortization of goodwill will likely remainrelatively consistent with the prior year. Additional acquisitions resulting inthe recording of goodwill could cause an increase in the percentage.IMPAIRMENT OF PROPERTY AND EQUIPMENT On an ongoing basis, the Company assesses the realizability of itsassets. If, at any point during the year, management determines that animpairment exists, the carrying amount of the asset is reduced by theestimated impairment with a corresponding charge to earnings. If it isdetermined that an impairment exists, management estimates that the writedown of specific assets could have a material adverse impact on earnings.OTHER INCOME (EXPENSE) Management estimates that as a percentage of revenue interest expensewill likely remain relatively consistent with the prior year. Items that couldcause higher debt costs in the future include an increase in the interest ratesas a result of amending the Company's Notes or credit facilities and a reductionin capitalized interest from placing internally developed software into service.Such higher costs could be offset by debt repayments anticipated in the year2001. Factors that could cause interest to fluctuate higher or lower thanforecasted are changes in lending rates, unanticipated debt repayments,unanticipated working capital needs, unanticipated software development expensesand unanticipated capital expenditures. Management estimates that as a percentage of revenue interest incomewill likely remain relatively consistent with the prior year. Factors that couldcause a change are the possible use of cash to make debt repayments, fundworking capital needs and fund capital expenditures.MINORITY INTEREST Management estimates that minority interest as a percentage of revenuewill likely increase slightly in the future compared to 2000, based on theexpected profitability of Hub Distribution. Acquisitions of entities with aminority interest, disposition of Hub Distribution or fluctuations inprofitability of Hub Distribution could have a material impact on minorityinterest percentages of income before minority interest. 18LIQUIDITY AND CAPITAL RESOURCES The Company believes that cash to be provided by operations, cashavailable under its lines of credit and the Company's ability to obtainadditional credit will be sufficient to meet the Company's short-term workingcapital 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. The Company estimates that its capital expenditures will not exceed$12.0 million and $15.0 million in 2001 and 2002, respectively. 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 Company does not use financial instruments for trading purposes. The Company has 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, 2000, 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 9.19% 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. 19ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULEReport of Independent Public Accountants 21Consolidated Balance Sheets - December 31, 2000 and December 31, 1999 22Consolidated Statements of Operations - Years ended December 31, 2000, December 31, 1999 and December 31, 1998 23Consolidated Statements of Stockholders' Equity - Years ended December 31, 2000, December 31, 1999 and December 31, 1998 24Consolidated Statements of Cash Flows - Years ended December 31, 2000, December 31, 1999 and December 31, 1998 25Notes to Consolidated Financial Statements 26Schedule II - Valuation and Qualifying Accounts S-1 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTSTo the Stockholders of Hub Group, Inc.: We have audited the accompanying consolidated balance sheets of HubGroup, Inc. (a Delaware corporation) as of December 31, 2000 and 1999 and therelated consolidated statements of operations, stockholders' equity and cashflows for each of the three years in the period ended December 31, 2000. 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 auditing standards generallyaccepted 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 financial statement 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, 2000 and 1999, and the results of its operations andcash flows for each of the three years in the period ended December 31, 2000, inconformity with accounting principles generally accepted 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, IllinoisJanuary 31, 2001(except with respect to thematter discussed in Note 8,as to which the date isFebruary 26, 2001) 21 HUB GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) DECEMBER 31, ------------------------------- 2000 1999 --------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ - $ 1,865 Accounts receivable, net 195,765 190,221 Deferred taxes 7,933 408 Prepaid expenses and other current assets 3,609 2,771 --------------- -------------- TOTAL CURRENT ASSETS 207,307 195,265 PROPERTY AND EQUIPMENT, net 43,854 24,244 GOODWILL, net 213,907 219,648 OTHER ASSETS 2,177 1,962 --------------- -------------- TOTAL ASSETS $ 467,245 $ 441,119 =============== ==============LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable Trade $ 166,743 $ 141,592 Other 8,529 11,246 Accrued expenses Payroll 9,559 7,936 Other 9,658 6,384 Current portion of long-term debt 12,341 6,195 --------------- -------------- TOTAL CURRENT LIABILITIES 206,830 173,353 LONG-TERM DEBT, EXCLUDING CURRENT PORTION 109,089 131,414 DEFERRED TAXES 15,202 4,469 CONTINGENCIES AND COMMITMENTS MINORITY INTEREST 352 759 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares issued or outstanding in 2000 and 1999. - - Common stock, Class A: $.01 par value; 12,337,700 shares authorized; 7,046,050 shares issued and outstanding in 2000, 7,043,950 shares issued and outstanding in 1999. 70 70 Class B: $.01 par value; 662,300 shares authorized; 662,296 shares issued and outstanding in 2000 and 1999. 7 7 Additional paid-in capital 110,817 110,786 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 40,336 35,719 --------------- -------------- TOTAL STOCKHOLDERS' EQUITY 135,772 131,124 --------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 467,245 $ 441,119 =============== ==============The accompanying notes to consolidated financial statements are an integral partof these statements. 22 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) YEARS ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 -------------- -------------- -------------- Revenue $ 1,384,379 $ 1,296,799 $ 1,145,906Transportation costs 1,211,101 1,134,384 1,007,572 -------------- -------------- -------------- Gross margin 173,278 162,415 138,334Costs and expenses: Salaries and benefits 96,201 84,082 72,465 Selling, general and administrative 46,840 38,232 32,885 Depreciation and amortization of property and equipment 6,097 4,014 3,666 Amortization of goodwill 5,741 5,069 2,912 Impairment of property and equipment - 884 - -------------- -------------- -------------- Total costs and expenses 154,879 132,281 111,928 Operating income 18,399 30,134 26,406 -------------- -------------- --------------Other income (expense): Interest expense (11,442) (8,592) (2,480) Interest income 779 926 1,014 Other, net 136 1,191 384 -------------- -------------- -------------- Total other expense (10,527) (6,475) (1,082)Income before minority interest and provision for income taxes 7,872 23,659 25,324 -------------- -------------- --------------Minority interest 47 5,275 10,119 -------------- -------------- --------------Income before provision for income taxes 7,825 18,384 15,205Provision for income taxes 3,208 7,538 6,297 -------------- -------------- --------------Net income $ 4,617 $ 10,846 $ 8,908 ============== ============== ==============Basic earnings per common share $ 0.60 $ 1.41 $ 1.16 ============== ============== ==============Diluted earnings per common share $ 0.60 $ 1.40 $ 1.15 ============== ============== ==============The accompanying notes to consolidated financial statements are an integral partof these statements. 23 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three years ended December 31, 2000 (in thousands, except shares) TAX BENEFIT PURCHASE OF PURCHASE CLASS A & B 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, 1998 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 Net income - - - - - 4,617 4,617 Exercise of non-qualified stock options 2,100 - 31 - - - 31 ------------ -------- ------------ --------------- -------------- ------------ --------------Balance at December 31, 2000 7,708,346 $ 77 $ 110,817 $ (25,764) $ 10,306 $ 40,336 $ 135,772 ============ ======== ============ =============== ============== ============ ==============The accompanying notes to consolidated financial statements are an integral partof these statements. 24 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31, ----------------------------------------- 2000 1999 1998 ------------ ------------ ----------- Cash flows from operating activities: Net income $ 4,617 $ 10,846 $ 8,908 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 6,875 5,013 4,743 Amortization of goodwill 5,741 5,069 2,913 Impairment of property and equipment - 884 - Deferred taxes 3,208 1,754 6,008 Minority interest 47 5,275 10,119 Loss on sale of assets 128 205 135 Changes in working capital, net of effects of purchase transactions: Accounts receivable, net (5,544) (42,117) (11,978) Prepaid expenses and other current assets (838) 3,265 (4,018) Accounts payable 22,434 21,416 8,933 Accrued expenses 4,897 1,649 2,758 Other assets (215) (1,458) 167 ------------ ------------ ----------- Net cash provided by operating activities 41,350 11,801 28,688 ------------ ------------ -----------Cash flows from investing activities: Cash used in acquisitions, net - - (3,989) Purchases of minority interest - (108,710) (6,730) Purchases of property and equipment, net (26,613) (11,234) (3,975) ------------ ------------ ----------- Net cash used in investing activities (26,613) (119,944) (14,694) ------------ ------------ -----------Cash flows from financing activities: Proceeds from sale of common stock 31 605 303 Distributions to minority interest (454) (10,484) (10,939) Payments on long-term debt (16,206) (50,930) (28,843) Proceeds from issuance of long-term debt 27 155,639 28,607 ------------ ------------ ----------- Net cash provided by/(used in) financing activities (16,602) 94,830 (10,872) ------------ ------------ -----------Net increase/(decrease) in cash and cash equivalents (1,865) (13,313) 3,122Cash and cash equivalents, beginning of period 1,865 15,178 12,056 ------------ ------------ -----------Cash and cash equivalents, end of period $ - $ 1,865 $ 15,178 ------------ ------------ -----------Supplemental disclosures of cash flow information Cash paid for: Interest $ 12,520 $ 8,293 $ 2,343 Income taxes 567 2,474 2,680 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. 25 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 $23,494,000 and $13,638,000 at December 31,2000 and 1999, respectively, are included in accounts payable.RECEIVABLES: The Company's reserve for uncollectible accounts receivable wasapproximately $2,675,000 and $2,134,000 at December 31, 2000 and 1999,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. Interest is capitalizedon qualifying assets under development for internal use. 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 $15,774,000 and$10,032,000 as of December 31, 2000 and 1999, 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 1998, 1999 or 2000. 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 assetsand liabilities are determined based on the difference between the financial 26 statement 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 Accounting Standards Board ("FASB") issuedStatement of Financial Accounting Standards No. 133 ("Statement 133"),"Accounting for Derivative Instruments and Hedging Activities". In June 1999,The FASB issued Statement 137 ("Statement 137"), "Accounting for DerivativeInstruments and Hedging Activities - Deferral of the Effective Date of FASBStatement No. 133". In June 2000, the FASB issued Statement 138, "Accounting forCertain Derivative Instruments and Certain Hedging Activities, an amendment ofFASB Statement No. 133". Statement 133, as amended, establishes accounting andreporting standards requiring that every derivative instrument (includingcertain derivative instruments embedded in other contracts) be recorded in thebalance sheet as either an asset or liability measured at its fair value. As aresult of Statement 137, the Company will adopt Statement 133, as amended, inthe first quarter of 2001. The application of Statement 133, as amended, willnot have a material effect on the Company's financial position or results ofoperations. In March 2000, the FASB issued Interpretation No. 44 ("Interpretation44"), "Accounting for Certain Transactions involving Stock Compensation," aninterpretation of Accounting Principles Board Opinion No. 25 ("Opinion 25").Interpretation 44 clarifies (a) the definition of "employee" for purposes ofapplying Opinion 25, (b) the criteria for determining whether a plan qualifiesas a non-compensatory plan, (c) the accounting consequences of variousmodifications to the terms of previously fixed stock options or awards, and (d)the accounting for the exchange of stock compensation awards in a businesscombination. Interpretation 44 was effective July 1, 2000, but certainconclusions in Interpretation 44 cover specific events that occurred aftereither December 15, 1998 or January 12, 2000. The application of Interpretation44 did not have a material impact on the Company's financial position or resultsof operations.RECLASSIFICATIONS: Certain items previously reported have been reclassified toconform with the 2000 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 holder to 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. 27NOTE 3. BUSINESS COMBINATIONS 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. Results of operations from acquisitions recorded under the purchasemethod of accounting are included in the Company's financial statements fromtheir respective dates of acquisition.Business acquisitions which involved the use of cash were accounted for asfollows: YEAR ENDED DECEMBER 31, 1998 --------------- (000'S) Accounts receivable $ 8,453Prepaid expenses and other current assets 57Property and equipment 398Goodwill 9,890Other assets 3Accounts payable (7,486)Accrued expenses (641)Long-term debt (6,685) ---------------Cash used in acquisitions, net $ 3,989 ---------------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, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------------ ------------------------ ------------------------- (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 $4,617 7,708 $0.60 $10,846 7,693 $1.41 $8,908 7,657 $1.16 ------ ------ --------- ------- ------ --------- ------ ------ ----------EFFECT OF DILUTIVE SECURITIES Stock options - 8 - - 67 - - 72 - ------ ------ --------- ------- ------ --------- ------ ------ ----------HISTORICAL DILUTED EPS Income available to common stockholders plus assumed exercises $4,617 7,716 $0.60 $10,846 7,760 $1.40 $8,908 7,729 $1.15 ------ ------ --------- ------- ------ --------- ------ ------ ---------- 28NOTE 5. PURCHASES OF MINORITY INTEREST On April 1, 1998, the Company purchased the remaining 70% minorityinterests 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. 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, --------------------------- 2000 1999 ------------- ------------ (000'S) Building and improvements $ 57 $ 56Leasehold improvements 2,111 1,526Computer equipment and software 46,396 23,795Furniture and equipment 7,635 6,365Transportation equipment and automobiles 3,678 4,742 ------------- ------------ 59,877 36,484Less: Accumulated depreciation and amortization (16,023) (12,240) ------------- ------------ PROPERTY AND EQUIPMENT, net $ 43,854 $ 24,244 ============= ============ Depreciation expense was $6,875,000, $5,013,000 and $4,743,000 for2000, 1999 and 1998, respectively. Depreciation expense for 2000 includesapproximately $500,000 in additional depreciation due to the change in estimateduseful lives of various assets that will no longer be used once the newoperating system is completed.NOTE 7. INCOME TAXESThe following is a reconciliation of the Company's effective tax rate to thefederal statutory tax rate: YEARS ENDED DECEMBER 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- U.S. federal statutory rate 34.0% 35.0% 34.4%State taxes, net of federal benefit 3.9 4.1 5.3Goodwill amortization 1.1 0.5 0.5Other 2.0 1.4 1.2 ---------- ---------- ----------Net effective rate 41.0% 41.0% 41.4% ---------- ---------- ---------- 29 The following is a summary of the Company's provision for income taxes: YEARS ENDED DECEMBER 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- (000'S) Current Federal $ - $ 5,177 $ 250 State and local - 607 39 ---------- ---------- ---------- - 5,784 289 ---------- ---------- ----------Deferred Federal 2,878 1,570 5,206 State and local 330 184 802 ---------- ---------- ---------- 3,208 1,754 6,008 ---------- ---------- ---------- Total provision $ 3,208 $ 7,538 $ 6,297 ---------- ---------- ----------The following is a summary of the Company's deferred tax assets and liabilities: YEARS ENDED DECEMBER 31, ---------------------------- 2000 1999 ------------- ------------- (000'S) Reserve for uncollectible accounts receivable $ 1,093 $ 875Accrued compensation - 98Net operating loss carryforward 6,612 -Subsequent adjustment reserve 472 -Other reserves 197 - ------------- ------------- Current deferred tax asset 8,374 973Accrued compensation 938 490Other 98 55Income tax basis in excess of financial basis of goodwill 8,511 9,345 ------------- ------------- Long-term deferred tax asset 9,547 9,890 ------------- ------------- Total deferred tax asset $ 17,921 $ 10,863 ------------- -------------Prepaids $ (13) $ (170)Receivables (428) (395) ------------- ------------- ------------- ------------- Current deferred tax liability (441) (565)Property and equipment (7,453) (132)Goodwill (17,296) (14,227) ------------- ------------- Long-term deferred tax liability (24,749) (14,359) ------------- ------------- Total deferred tax liability $ (25,190) $ (14,924) ------------- ------------- 30NOTE 8. LONG-TERM DEBT AND FINANCING ARRANGEMENTSFair value approximates book value at the balance sheet dates. YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 ----------- ----------- (000'S) Installment notes payable due through 2001, monthly installments ranging from $1,587 to $7,112, including interest of 9.3%, collateralized by certain equipment $ 75 $ 748Bank lines of credit (see below) 24,000 34,000Unsecured term notes, with quarterly payments ranging from $1,250,000 to $2,000,000 with a balloon payment of $19,000,000 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, 2000, the interest rate was 9.19% 42,000 47,500Unsecured notes, mature on June 25, 2009 with annual payments of $10,000,000 commencing on June 25, 2005; interest is paid quarterly at 9.14% 50,000 50,000Unsecured 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 5,225Capital lease obligations, collateralized by certain equipment 130 136 ----------- -----------Total long-term debt 121,430 137,609Less current portion (12,341) (6,195) ----------- ----------- $ 109,089 $ 131,414 ----------- ----------- Aggregate principal payments, in thousands, due subsequent toDecember 31, 2000, are as follows:2001 $ 12,3412002 8,0352003 8,0382004 43,0142005 and thereafter 50,002 ----------- $ 121,430 ----------- On April 30, 1999, the Company closed on an unsecured $50.0 millionfive-year revolving line of credit and $50 million of term debt with a bank. OnNovember 7, 2000 and February 26, 2001, the Company amended the debt agreementto provide generally less restrictive financial covenants. In consideration forthe amendments, the interest rate was increased 0.25% and a limitation oncapital expenditures was added for the years 2001 and 2002. The Company can borrow, at its option, under the amended $50 millionrevolving line of credit at the prime rate plus 0.25% to 1.25% or at a rateestablished at the bank's discretion on a day-to-day basis. The Company may alsoborrow for 30, 60, 90 or 180 day periods at LIBOR plus 1.50% to 2.75% based onthe Company's funded debt to EBITDAM (earnings before interest expense, incometaxes, depreciation, amortization and minority interest) ratio. The amendedcredit facility also contains certain financial covenants which, among others,requires that the Company maintain required levels of EBITDAM and net worth andratios of fixed charge coverage and funded debt to EBITDAM. In addition, there are limitations on additional indebtedness, capital expenditures, acquisitionsand minority interest purchases. The Company was in compliance with thesecovenants at December 31, 2000. Advances and weighted average interest rates onthis line of credit were $24.0 million and 9.23% and $34.0 million and 8.82% atDecember 31, 2000 and 1999, respectively. There was $26.0 million and $16.0million unused and available under the line of credit at December 31, 2000 and1999, respectively. The amended $50 million of term debt is unsecured and has a floatinginterest rate. The Company can borrow at the prime rate plus 0.25% to 1.50% on aday-to-day basis or may borrow for 30, 60, 90 or 180 day periods at LIBOR plus 311.75% to 3.00% based on the Company's funded debt to EBITDAM ratio. The amendedunsecured term notes share the same financial covenants as noted above for theline 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, 2000, 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 9.19% 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. On February 26, 2001 the Company amended the debt agreement toprovide generally less restrictive financial covenants effective December 31,2000. In consideration for the amendments, the interest rate was increased 0.50%and a limitation on capital expenditures was added for the years 2001 and 2002.These notes are unsecured and have an eight-year average life with a couponinterest rate of 8.64% through December 31, 2000 and 9.14% thereafter. Interestis paid quarterly. The notes contain certain financial covenants which, amongothers, requires that the Company maintain required levels of net worth andratios of fixed charge coverage and funded debt to EBITDAM. In addition, thereare limitations on additional indebtedness, capital expenditures, acquisitionsand minority interest purchases. The Company was in compliance with thesecovenants at December 31, 2000. On April 21, 2000, the Company authorized the issuance of a standbyletter of credit for $1,000,000, which automatically renews each November 1.NOTE 9. CAPITALIZED INTEREST AND INTEREST EXPENSE Capitalized interest on qualifying assets under construction and totalinterest were as follows: YEARS ENDED DECEMBER 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- (000'S) Capitalized interest $ 836 $ 201 $ -Interest expensed 11,442 8,592 2,480 ---------- ---------- ----------Total interest incurred $ 12,278 $ 8,793 $ 2,480 ---------- ---------- ----------NOTE 10. RENTAL EXPENSE AND LEASE COMMITMENTS Minimum annual rental commitments, in thousands, at December 31, 2000,under noncancellable operating leases, principally for real estate andequipment, are payable as follows:2001 $ 11,6302002 8,8492003 5,3212004 2,8992005 1,8192006 and thereafter 9,791 ----------- $ 40,309 ----------- Total rental expense was approximately $13,230,000, $8,840,000 and$7,487,000 for 2000, 1999 and 1998, 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. 32NOTE 11. 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, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- Net income as reported (000's) 4,617 10,846 8,908Net income pro forma for Statement 123 (000's) 3,805 10,359 8,501 Basic earnings per common share pro forma for Statement 123 $ 0.49 $ 1.35 $ 1.11Diluted earnings per common share pro forma for Statement 123 $ 0.49 $ 1.33 $ 1.10The pro forma disclosure is not likely to be indicative of pro forma resultswhich may be expected in future years because of the fact that options vest overseveral years, pro forma compensation expense is recognized as the options vestand additional awards may also be granted. For purposes of determining the pro forma effect of these options, thefair value of each option is estimated on the date of grant based on theBlack-Scholes single-option pricing model assuming: YEARS ENDED DECEMBER 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- Dividend yield 0.00% 0.00% 0.00%Risk-free interest rate 6.25% 6.25% 5.10%Volatility factor 40.00% 40.00% 40.00%Expected life in years 6.0 6.0 6.0 33Information regarding these option plans for 2000, 1999 and 1998 is as follows: 2000 1999 1998 --------------------------------- ---------------------------------- --------------------------------- WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG. SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ----------------- -------------- ----------------- -------------- ------------------ -------------- Options outstanding, beginning of year 892,800 $ 17.86 469,300 $ 16.58 401,800 $ 15.86Options exercised (2,100) 14.00 (34,000) 14.00 (19,000) 14.00Options granted 100,000 13.32 480,000 18.85 161,500 21.91Options forfeited (112,900) 20.11 (22,500) 17.97 (75,000) 24.85 ----------------- -------------- ----------------- -------------- ------------------ --------------Options outstanding, end of year 877,800 $ 17.07 892,800 $ 17.86 469,300 $ 16.58Weighted average fair value of options granted during the year $ 6.53 $ 9.25 $ 10.30Options exercisable at year end 335,300 220,400 137,200Option price range at end of year $ 8.31 to $28.16 $14.00 to $28.16 $14.00 to $28.16Option price for exercised shares $ 14.00 $ 14.00 $ 14.00Options available for grant at end of year 262,400 249,500 107,000 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---------------- ----------- ------------------ ------------- ----------- --------------- $ 8.31 to $14.00 333,000 6.08 $ 13.50 218,200 $ 14.00$17.66 to $19.94 506,000 8.84 $ 18.78 121,600 $ 18.99$21.06 to $28.16 38,500 7.35 $ 25.44 15,500 $ 25.49 ---------- ------------------ ------------- ----------- ---------------$ 8.31 to $28.16 877,800 7.72 $ 17.07 355,300 $ 16.21NOTE 12. 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 the enterprise wide disclosure requirements of Statement 131, the Company reportsrevenue, in thousands, for Intermodal Services, Brokerage Services, andLogistics Services as follows: YEARS ENDED DECEMBER 31, ---------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Intermodal Services $ 1,004,434 $ 967,033 $ 910,396Brokerage Services 207,617 196,434 164,706Logistics Services 172,328 133,332 70,804 ------------ ------------ ------------Total Revenue $ 1,384,379 $ 1,296,799 $ 1,145,906 ------------ ------------ ------------NOTE 13. PROFIT-SHARING PLAN The Company has two profit-sharing plans and trusts under section401(k) of the Internal Revenue Code. Generally, for every dollar the employeecontributes, the Company has contributed an additional $.20 up to $100. Inaddition, the Company, at its discretion, typically has made profit sharing 34contributions. Historically, the Company has contributed an amount equal to 3%of each participant's compensation up to a maximum of $5,100. The Company'scontributions to the Plan were approximately $1,684,000, $1,645,000 and$1,458,000 for 2000, 1999 and 1998, respectively.NOTE 14. RELATED PARTY TRANSACTIONS The Class B Common Stock ("Class B") stockholders, some of whom areofficers of the Company, as well as officers of the Company who are not Class Bstockholders, received approximately 33% of minority interest distributionsof income from the Company up until the remaining 70% minority interests werepurchased in connection with the April 1999 Purchase. Furthermore, theseparties received approximately $66,268,000 when the Company acquired minorityinterests in Hub City Los Angeles, L.P., Hub City Golden Gate, L.P., Hub GroupDistribution Services, Hub City Dallas, L.P., Hub City Houston, L.P., Hub CityRio Grande, L.P., Hub City Alabama, L.P., Hub City Atlanta, L.P., Hub CityBoston, 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, L.P., Hub City Mid-Atlantic, L.P., Hub City New York/New Jersey, L.P.,Hub City New York State, L.P., Hub City Ohio, L.P., Hub City Philadelphia, L.P.,Hub City Pittsburgh, L.P., Hub City Portland, L.P. and Hub City St. Louis, L.P.NOTE 15. LEGAL MATTERS In the ordinary course of conducting its business, the Company becomesinvolved in various lawsuits related to its business. The Company does notbelieve that the ultimate resolution of these matters will be material to itsbusiness, financial position or results of operations.NOTE 16. IMPAIRMENT OF PROPERTY AND EQUIPMENT In the second quarter of 1999, a $0.9 million pretax charge wasrecorded relating to certain operating software applications. Specifically, $0.7million of this charge was attributable to a write-down of 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. The remaining $0.2 million impairment loss related to the write-down of a logisticssoftware program. The fair value was determined based on the estimated futurecash flows attributable to the single customer using this program. The Companyinstalled a new software package in 1999 that provides enhanced functionalityfor its operational applications.NOTE 17. RESTRUCTURING CHARGE In the fourth quarter of 2000, management approved a plan torestructure the Company's accounting functions and centralize them at itscorporate headquarters in Lombard, Illinois. This centralization plan willresult in the reduction of 56 accounting-related employees from the operatingcompanies. All affected employees were informed in mid-November 2000. Inconnection with this plan, the Company recorded a pretax charge of $250,000classified as salaries and benefits in the fourth quarter of 2000. These costsare expected to be paid during the first half of 2001 and have been included inaccrued payroll expenses. 35NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth selected quarterly financial data foreach of the quarters in 2000 and 1999 (in thousands, except per share amounts): QUARTERS -------------------------------------------------------- FIRST SECOND THIRD FOURTH -------------- ------------- ------------- ------------- Year Ended December 31, 2000:Revenue $ 328,568 $ 344,329 $ 354,797 $ 356,685Gross margin 39,465 44,583 44,223 45,007Operating income 2,334 6,689 4,934 4,442Net income/(loss) (317) 2,298 1,564 1,072Basic earnings/(loss) per share $ (0.04) $ 0.30 $ 0.20 $ 0.14Diluted earnings/(loss) per share $ (0.04) $ 0.30 $ 0.20 $ 0.14 QUARTERS -------------------------------------------------------- FIRST SECOND THIRD FOURTH -------------- ------------- ------------- ------------- Year Ended December 31, 1999:Revenue $ 307,682 $ 319,448 $ 333,337 $ 336,332Gross margin 39,169 39,045 41,493 42,708Operating income 7,386 5,848 8,578 8,322Net income 1,943 2,638 3,199 3,066Basic earnings per share $ 0.25 $ 0.34 $ 0.42 $ 0.40Diluted earnings per share $ 0.25 $ 0.34 $ 0.41 $ 0.40 36ITEM 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 15, 2001, sets forth certaininformation with respect to the directors of the Registrant and Section 16compliance and is incorporated herein by reference. Certain information with respect 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 15, 2001, 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 15, 2001, 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 15,2001, 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. 37 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, 2000 and December 31, 1999 Consolidated Statements of Operations - Years ended December 31, 2000, December 31, 1999 and December 31, 1998 Consolidated Statements of Stockholders' Equity - Years ended December 31, 2000, December 31, 1999 and December 31, 1998 Consolidated Statements of Cash Flows - Years ended December 31, 2000, December 31, 1999 and December 31, 1998 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. 38 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 15, 2001 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 15, 2001---------------------- Phillip C. Yeager /S/ DAVID P. YEAGER Vice Chairman, Chief Executive Officer and Director March 15, 2001-------------------- David P. Yeager /S/ THOMAS L. HARDIN President, Chief Operating Officer and Director March 15, 2001--------------------- Thomas L. Hardin /S/ JAY E. PARKER Vice President-Finance and Chief Accounting Officer March 15, 2001------------------ Jay E. Parker (Principal Financial and Accounting Officer) /S/ CHARLES R. REAVES Director March 15, 2001---------------------- Charles R. Reaves /S/ MARTIN P. SLARK Director March 15, 2001-------------------- Martin P. Slark /S/ GARY D. EPPEN Director March 15, 2001------------------ Gary D. Eppen 39 SCHEDULE II HUB GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Balance at Beginning Costs & End of Year Expenses Deduction of Year ----------- ----------- ------------ ----------- Year Ended December 31: Allowance for uncollectible accounts receivable 2000 $ 2,134,000 $ 2,353,000 $(1,812,000) $ 2,675,000 1999 691,000 2,321,000 (878,000) 2,134,000 1998 303,000 1,523,000 (1,135,000) 691,000 S-1 INDEX TO EXHIBITSNUMBER EXHIBIT------ ------- 2.1 Purchase Agreement among the Registrant, American President Companies, Ltd. and APL Land Transport Services, Inc. (incorporated by reference to the Registrants report on Form 8-K dated May 2, 1996 and filed May 17, 1996, File No. 0-27754) 2.2 Purchase and Sale Agreement among Hub Holdings, Inc. and Hub City North Central, Inc. (incorporated by reference to Exhibit 2.2 to the Registrants report on Form 10-K dated March 26, 1997 and filed March 27, 1997, File No. 000-27754) 3.1 Amended Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 and 3.3 to the Registrant's registration statement on Form S-1, File No. 33-90210) 3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's registration statement on Form S-1, File No. 33-90210) 10.1 Form of Amended and Restated Limited Partnership Agreement (incorporated by reference to Exhibit 10.1 to the Registrants report on Form 10-K dated March 26, 1997 and filed March 27, 1997, File No 000-27754) 10.2 Amended and Restated Limited Partnership Agreement of Hub City Canada, L.P. (incorporated by reference to Exhibit 10.2 to the Registrants report on Form 10-K dated March 26, 1997 and filed March 27, 1997, File No 000-27754) 10.3 Form of Non-Competition Agreement (incorporated by reference to Exhibit 10.3 to the Registrants report on Form 10-K dated March 26, 1997 and filed March 27,1997, File No 000-27754) 10.4 Purchase and Sale Agreement between the Registrant and the Stockholders of Hub City Terminals, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant's registration statement on Form S-1, File No. 33-90210) 10.5 Hub Group Distribution Services Purchase and Sale Agreement (incorporated by reference to Exhibit 10.5 to the 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) 10.12 Amendment to $100 million Credit Agreement among the Registrant, Hub City Terminals, Inc. and Harris Trust and Savings Bank (incorporated by reference to Exhibit 10.12 to the Registrant's report on Form 10-Q dated and filed November 13, 2000, File No. 000-27754) 10.13 Amendment to $100 million Credit Agreement among the Registrant, Hub City Terminals, Inc. and Harris Trust and Savings Bank 10.14 Amendment to $50 million Note Purchase Agreement among the Registrant, Hub City Terminals, Inc. and various purchasers 10.15 Letter from the Registrant to Daniel L. Sellers dated December 24, 1998 21 Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP EXHIBIT 21Subsidiaries of Hub Group, Inc.SUBSIDIARIES JURISDICTION OF INCORPORATION/ORGANIZATIONHub City Terminals, Inc. DelawareHub Group Atlanta, LLC DelawareHub Group Boston, LLC DelawareHub Group Canada, LP 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 Pittsburgh, LLC DelawareHub Group Portland, LLC Delaware Hub 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, LLC MichiganQ.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 JerseyQ.S. of Georgia, L.L.C. GeorgiaHLX Company, L.L.C. DelawareHub Chicago Holdings, Inc. Delaware HUB GROUP, INC. HUB CITY TERMINALS, INC. AMENDMENT TO CREDIT AGREEMENTHarris Trust and Savings Bank LaSalle Bank National AssociationChicago, Illinois Chicago, IllinoisU.S. Bank National Association National City BankDes Plaines, Illinois Cleveland, OhioFirstar Bank, N.A.Milwaukee, WisconsinLadies and Gentlemen: Reference is hereby made to that certain Credit Agreement dated as ofApril 30, 1999 (the "CREDIT AGREEMENT"), as amended and currently in effect, byand among Hub Group, Inc. (the "PUBLIC HUB COMPANY"), Hub City Terminals, Inc.for itself and as successor by merger to Hub Holdings, Inc. ("HUB CHICAGO";together with the Public Hub Company, the "BORROWERS") and you (the "LENDERS").All capitalized terms used herein without definition shall have the samemeanings herein as such terms have in the Credit Agreement. The Borrowers and the Required Lenders have agreed to amend the CapitalExpenditures financial covenant contained in the Credit Agreement and at theBorrowers' request, the Agent and Required Lenders have agreed to approve theincrease of the interest rate of the Senior Note Offering under the terms andconditions set forth in this amendment (herein, the "AMENDMENT").1. AMENDMENT. Subject to the satisfaction of the conditions precedent set forth inSection 3 below, Section 7.26 of the Credit Agreement shall be amended and as soamended shall be restated in its entirety to read as follows: "7.26. CAPITAL EXPENDITURES. The Hub Group shall not expend or become obligated for Capital Expenditures during the fiscal year ending December 31, 2001 in an aggregate amount in excess of $12,000,000 and shall not expend or become obligated for Capital Expenditures during the fiscal year ending December 31, 2002 in an aggregate amount in excess of $15,000,000."2. INCREASE IN INTEREST RATE OF SENIOR NOTE OFFERING. Subject to the satisfaction of the conditions precedent set forth inSection 3 below, the increase in the pre-default interest rate applicable to theSenior Note Offering, from 8.64% to 9.14%, is hereby approved by the Agent andRequired Lenders.3. CONDITIONS PRECEDENT. The effectiveness of the amendment made in Section 1 and the approvalmade in Section 2 of this Amendment are subject to the satisfaction of all ofthe following conditions precedent: 3.01. The Borrowers, the Guarantors and the Required Lenders shallhave executed and delivered this Amendment. 3.02. The Senior Note Offering shall have been modified by writteninstrument (the "SENIOR NOTE AMENDMENT") in form and substance reasonablysatisfactory to the Agent and Required Lenders to effect a waiver andmodification of the terms and conditions thereof such that the same are no moreburdensome on the Borrowers than the corresponding provisions of the CreditAgreement after giving effect to the modifications contemplated by this Amendment. 3.03. After giving effect to this Amendment, no Default or Event ofDefault shall have occurred and be continuing as of the date this Amendmentwould otherwise take effect.4. MISCELLANEOUS. 4.01. Each Borrower and each Guarantor acknowledges and agrees that,except as modified by this Amendment, all of the Loan Documents to which it is aparty remain in full force and effect for the benefit and security of, amongother things, the Obligations as modified hereby. Each Borrower and eachGuarantor further acknowledges and agrees that all references in such LoanDocuments to the Obligations shall be deemed a reference to the Obligations asso modified. Each Borrower and each Guarantor further agrees to execute anddeliver any and all instruments or documents as may be reasonably required bythe Agent or the Required Lenders to confirm any of the foregoing. 4.02. Except as specifically amended hereby, the Credit Agreement shallcontinue in full force and effect in accordance with its original terms.Reference to this specific Amendment need not be made in the Credit Agreement,the Notes, or any other instrument or document executed in connection therewith,or in any certificate, letter or communication issued or made pursuant to orwith respect to the Credit Agreement, any reference in any of such items to theCredit Agreement being sufficient to refer to the Credit Agreement asspecifically amended hereby. 4.03. This Amendment may be executed in any number of counterparts, andby the different parties on different counterpart signature pages, all of which 2taken together shall constitute one and the same agreement. Any of the partieshereto may execute this Amendment by signing any such counterpart and each ofsuch counterparts shall for all purposes be deemed to be an original. ThisAmendment shall be governed by the internal laws of the State of Illinois. 3 Dated as of February 26, 2001. HUB GROUP, INC., a Borrower HUB CITY TERMINALS, INC., a Borrower By David P. Yeager Chief Executive Officer for each of the above Companies 4 GUARANTORS' CONSENT The undersigned heretofore executed and delivered to the Lenders theGuaranty Agreement. The undersigned hereby consent to the Amendment to theCredit Agreement as set forth above and confirm that the Guaranty Agreement andall of the obligations of the undersigned thereunder remain in full force andeffect. The undersigned further agree that their consent to any furtheramendments to the Credit Agreement shall not be required as a result of thisconsent having been obtained, except to the extent, if any, required by theGuaranty Agreement. Without limiting the generality of the foregoing, each ofthe undersigned limited liability companies (other than HLX Company, L.L.C.,Quality Services, L.L.C., Quality Services of Kansas, L.L.C., Quality Services of New Jersey, L.L.C, Q.S. of Illinois, L.L.C. and Q.S. of Georgia, L.L.C.)acknowledge and agree that it (i) was previously organized as and is the sameentity as the limited partnership listed in the parenthesis next to its namebelow and that executed the Guaranty Agreement and (ii) is liable on theGuaranty Agreement to the same extent, and with the same force and effect, as ifit had originally executed the Guaranty Agreement in the place and stead of itsrespective converting limited partnership. HUB CHICAGO HOLDINGS, INC., a Guarantor By David P. Yeager Chief Executive Officer for each of the above Companies HLX COMPANY, L.L.C., a Guarantor By David P. Yeager Vice Chairman and Chief Executive Officer QSSC, INC. QUALITY SERVICES, L.L.C., QUALITY SERVICES OF KANSAS, L.L.C. QUALITY SERVICES OF NEW JERSEY, L.L.C. Q.S. OF ILLINOIS, L.L.C. Q.S. OF GEORGIA, L.L.C. By David P. Yeager Chief Executive Officer for each of the above Guarantors 2 HUB GROUP ALABAMA, LLC (formerly known as Hub City Alabama, L.P.) HUB GROUP ATLANTA, LLC (formerly known as Hub City Atlanta, L.P.) HUB GROUP BOSTON, LLC (formerly known as Hub City Boston, L.P.) HUB GROUP CANADA, L.P. (formerly known as Hub City Canada, LLC) HUB GROUP CLEVELAND, LLC (formerly known as Hub City Cleveland, L.P.) HUB GROUP DETROIT, LLC (formerly known as Hub City Detroit, L.P.) HUB GROUP FLORIDA, LLC (formerly known as Hub City Florida, L.P.) HUB GROUP GOLDEN GATE, LLC (formerly known as Hub City Golden Gate, L.P.) HUB GROUP INDIANAPOLIS, LLC (formerly known as Hub City Indianapolis, L.P.) HUB GROUP KANSAS CITY, LLC (formerly known as Hub City Kansas City, L.P.) HUB GROUP LOS ANGELES, LLC (formerly known as Hub City Los Angeles, L.P.) HUB GROUP MID ATLANTIC, LLC (formerly known as Hub City Mid Atlantic, L.P.) HUB GROUP NEW ORLEANS, LLC (formerly known as Hub City New Orleans, L.P.) HUB GROUP NEW YORK STATE, LLC (formerly known as Hub City New York State, L.P.) HUB GROUP NEW YORK-NEW JERSEY, LLC (formerly known as Hub City New York-New Jersey, L.P.) HUB GROUP NORTH CENTRAL, LLC (formerly known as Hub City North Central, L.P.) HUB GROUP OHIO, LLC (formerly known as Hub City Ohio, L.P.) HUB GROUP PHILADELPHIA, LLC (formerly known as Hub City Philadelphia, L.P.) HUB GROUP PITTSBURGH, LLC (formerly known as Hub City Pittsburgh, L.P.) HUB GROUP PORTLAND, LLC (formerly known as Hub City Portland, L.P.) HUB GROUP ST. LOUIS, LLC (formerly known as Hub City St. Louis, L.P.) 3 HUB GROUP TENNESSEE, LLC (formerly known as Hub City Tennessee, L.P.) HUB CITY TEXAS, L.P. By __________________________________ David P. Yeager Chief Executive Officer for each of the above Guarantors 4 Accepted and agreed to as of the date and year last above written. HARRIS TRUST AND SAVINGS BANK By Name:_______________________________ Title:______________________________ U.S. BANK NATIONAL ASSOCIATION By Name:_______________________________ Title:______________________________ FIRSTAR BANK, N.A. By Name:_______________________________ Title:______________________________ LASALLE BANK NATIONAL ASSOCIATION By Name:_______________________________ Title:______________________________ NATIONAL CITY BANK By Name:_______________________________ Title:______________________________ 5 ================================================================================ HUB GROUP, INC. and HUB CITY TERMINALS, INC. ----------------------------------- FIRST AMENDMENT Dated as of February 26, 2001 to NOTE PURCHASE AGREEMENTS Dated as of June 15, 1999 ----------------------------------- Re: $50,000,000 8.64% Senior Notes Due June 25, 2009================================================================================ FIRST AMENDMENT TO NOTE PURCHASE AGREEMENTS THIS FIRST AMENDMENT dated as of February 26, 2001 (the or this "FIRSTAMENDMENT") to the Note Purchase Agreements each dated as of June 15, 1999 isbetween HUB GROUP, INC., a Delaware corporation ("PUBLIC HUB COMPANY"), HUB CITYTERMINALS, INC., a Delaware corporation, for itself and as successor by mergerto Hub Holdings, Inc. ("HUB CHICAGO"; Public Hub Company and Hub Chicago beingindividually referred to herein as an "OBLIGOR" and collectively as the"OBLIGORS"), and each of the institutions which is a signatory to this FirstAmendment (collectively, the "NOTEHOLDERS"). RECITALS: A. The Obligors and each of the Noteholders have heretofore enteredinto separate and several Note Purchase Agreements each dated as of June 15,1999 (collectively, the "NOTE PURCHASE AGREEMENTS"). The Obligors haveheretofore issued the $50,000,000 8.64% Senior Notes Due June 25, 2009 (the"NOTES") dated June 25, 2000 pursuant to the Note Purchase Agreements. B. The Obligors and the Noteholders now desire to amend the NotePurchase Agreements in the respects, but only in the respects, hereinafter setforth. C. Capitalized terms used herein shall have the respective meaningsascribed thereto in the Note Purchase Agreements unless herein defined or thecontext shall otherwise require. D. All requirements of law have been fully complied with and all otheracts and things necessary to make this First Amendment a valid, legal andbinding instrument according to its terms for the purposes herein expressed have been done or performed. NOW, THEREFORE, upon the full and complete satisfaction of theconditions precedent to the effectiveness of this First Amendment set forth inSection 3.1 hereof, and in consideration of good and valuable consideration thereceipt and sufficiency of which is hereby acknowledged, the Obligors and theNoteholders do hereby agree as follows:SECTION 1. AMENDMENTS. SECTION 1.1. A new definition of Capital Expenditures shall be added inalphabetical order in Schedule B to the Note Purchase Agreements to read asfollows: "CAPITAL EXPENDITURES" shall mean for any period, the aggregate of all expenditures (whether paid in cash or accrued as a liability) of the Public Hub Company and its Restricted Subsidiaries during that period which, in accordance with GAAP are or should be included in "additions to property, plant or equipment" or similar items reflected in the statement of cash flows of the Public Hub Company and its Restricted Subsidiaries. 2 SECTION 1.2. The definition of "CONSOLIDATED EBITDA" appearing inSchedule B to the Note Purchase Agreements shall be amended and restated in itsentirety to read as follows: "CONSOLIDATED EBITDA" for any period means the sum of (a) Consolidated Net Income during such period PLUS (to the extent deducted in determining Consolidated Net Income), (b) all provisions for any Federal, state or local income taxes made by the Public Hub Company and the Restricted Subsidiaries during such period, (c) all provisions for depreciation and amortization (other than amortization of debt discount) made by the Public Hub Company and the Restricted Subsidiaries during such period, (d) Consolidated Interest Expense during such period, (e) Minority Interest Expense, (f) if such period includes the fiscal quarters of the Public Hub Company ending on December 31, 2000 or March 31, 2001, non-cash charges during such quarters on the books of the Public Hub Company and its Restricted Subsidiaries in accordance with GAAP aggregating up to $5,100,000 (for both such quarters taken together), (g) all other non-cash charges during such period on the books of the Public Hub Company and its Restricted Subsidiaries in accordance with GAAP to the extent the aggregate amount of such other non-cash charges do not exceed $2,500,000 during any period of four consecutive fiscal quarters of the Public Hub Company (prorated appropriately downward (or upward) for any shorter (or longer) period), (h) if such period includes the fiscal quarters of the Public Hub Company ending on December 31, 2000 or March 31, 2001, severance payments made during such quarters aggregating up to $1,200,000 (for both such quarters taken together) and (i) if such period includes the fiscal quarters of the Public Hub Company ending on March 31, 2001, June 30, 2001, September 30, 2001 or December 31, 2001, severance payments (in addition to those accounted for in clause (h) above) made during such quarters aggregating up to $600,000 (for all four such quarters taken together). For purposes of calculations under SECTION 10.3, Consolidated EBITDA shall be adjusted for the period in respect of which any such calculation is being made to give effect to (i) the audited "EBITDA" (determined in a manner consistent with the definition of "Consolidated EBITDA" contained in this Agreement) of any business entity acquired by the Public Hub Company or any Restricted Subsidiary (the "ACQUIRED BUSINESS") and (ii) all Debt incurred by the Public Hub Company or any Restricted Subsidiary in connection with such acquisition, and shall be computed as if the Acquired Business had been a Restricted Subsidiary throughout the period and all Debt incurred in connection with such acquisition had been incurred at the beginning of such period in respect of which such calculation is being made. Without limiting the foregoing, Consolidated EBITDA shall also be adjusted for the period in respect of which any such calculation is being made to eliminate (1) the audited "EBITDA" of any Subsidiary or other property or assets disposed of by the Public Hub Company or any Restricted Subsidiary (the "TRANSFERRED BUSINESS") and (2) Debt relating to such Subsidiary, property or assets, as the case may be, and shall be computed as if the Transferred Business had been transferred at the beginning of such period in respect of which such calculation is being made. In the case of any business entity acquired during the twelve calendar month period immediately preceding the date of any 3 determination hereunder whose financial records are not, and are not required to be in accordance with applicable laws, rules and regulations, audited by the Public Hub Company's independent public accountants at the time of the acquisition thereof, the Public Hub Company shall base such determination upon the Public Hub Company's internally audited net earnings of such business entity for the immediately preceding fiscal year or the net earnings of such business entity as audited by such business entity's independent auditors for the immediately preceding fiscal year. SECTION 1.3. The definition of "CONSOLIDATED EBITDAR" appearing inSchedule B to the Note Purchase Agreements shall be amended and restated in itsentirety to read as follows: "CONSOLIDATED EBITDAR" for any period means the sum of (a) Consolidated Net Income during such period, PLUS (to the extent deducted in determining Consolidated Net Income) (b) all provisions for any Federal, state or local income taxes made by the Public Hub Company and the Restricted Subsidiaries during such period, (c) all provisions for depreciation and amortization (other than amortization of debt discount) made by the Public Hub Company and the Restricted Subsidiaries during such period, (d) Consolidated Interest Expense during such period, (e) all Rentals (other than Rentals on Capital Leases) payable during such period by the Public Hub Company and the Restricted Subsidiaries, (f) Minority Interest Expense, (g) if such period includes the fiscal quarters of the Public Hub Company ending on December 31, 2000 or March 31, 2001, non-cash charges during such quarters on the books of the Public Hub Company and its Restricted Subsidiaries in accordance with GAAP aggregating up to $5,100,000 (for both such quarters taken together), (h) all other non-cash charges during such period on the books of the Public Hub Company and its Restricted Subsidiaries in accordance with GAAP to the extent the aggregate amount of such other non-cash charges do not exceed $2,500,000 during any period of four consecutive fiscal quarters of the Public Hub Company (prorated appropriately downward (or upward) for any shorter (or longer) period), (i) if such period includes the fiscal quarters of the Public Hub Company ending on December 31, 2000 or March 31, 2001, severance payments made during such quarters aggregating up to $1,200,000 (for both such quarters taken together) and (j) if such period includes the fiscal quarters of the Public Hub Company ending on March 31, 2001, June 30, 2001, September 30, 2001 or December 31, 2001, severance payments (in addition to those accounted for in clause (i) above) made during such quarters aggregating up to $600,000 (for all four such quarters taken together). Consolidated EBITDAR shall not be adjusted to take into account earnings or interest of an Acquired Business that were earned or accrued prior to its becoming an Acquired Business. SECTION 1.4. The definition of "CONSOLIDATED INTEREST EXPENSE"appearing in Schedule B to the Note Purchase Agreements shall be amended andrestated in its entirety to read as follows: 4 "CONSOLIDATED INTEREST EXPENSE" means for any period all interest (including the interest component on Rentals on Capital Leases) and all amortization of debt discount and expense on any particular Debt (including, without limitation, payment-in-kind, zero coupon and other like Securities) of the Public Hub Company and the Restricted Subsidiaries for which such calculations are being made. Computations of Consolidated Interest Expense on a PRO-FORMA basis for Debt having a variable interest rate shall be calculated at the rate in effect on the date of any determination. SECTION 1.5. Section 10.3 of the Note Purchase Agreements shall beamended and restated in its entirety to read as follows: "SECTION 10.3. CASH FLOW LEVERAGE RATIO. The Public Hub Company and its Restricted Subsidiaries will not, as of the close of each fiscal quarter specified below, permit the ratio of Consolidated Debt to Consolidated EBITDA for the immediately preceding four consecutive fiscal quarter period to exceed the ratios set forth below: CONSOLIDATED DEBT TO AS OF THE FISCAL QUARTER CONSOLIDATED EBITDA ENDING ON: SHALL NOT BE MORE THAN: December 31, 2000 3.85 to 1.00 March 31, 2001 3.75 to 1.00 June 30, 2001 3.75 to 1.00 September 30, 2001 3.50 to 1.00 December 31, 2001 3.25 to 1.00 March 31, 2002 3.25 to 1.00 June 30, 2002 3.00 to 1.00 September 30, 2002 3.00 to 1.00 December 31, 2002 2.75 to 1.00 March 31, 2003 2.75 to 1.00 June 30, 2003 and thereafter 2.50 to 1.00" SECTION 1.6. Section 10.2 of the Note Purchase Agreements shall beamended and restated in its entirety to read as follows: "SECTION 10.2. FIXED CHARGE COVERAGE RATIO. The Public Hub Company and its Restricted Subsidiaries will not, as of close of each fiscal quarter specified below, permit the ratio of (a) Consolidated EBITDAR for the immediately preceding four consecutive fiscal quarter period to (b) Consolidated Fixed Charges as of such date to be less than (i) 1.25 to 1.00 as of the end of the fiscal quarters ending March 31, 2001, June 30, 2001 and September 30, 2001, and (ii) 1.30 to 1.00 as of the close of each fiscal quarter thereafter." 5 SECTION 1.7. Section 10.6(b)(i) of the Note Purchase Agreements shallbe amended and restated in its entirety to read as follows: "(i) the sale, lease, transfer or other disposition ofassets of a Restricted Subsidiary to any Obligor or a Wholly-owned RestrictedSubsidiary or of an Obligor to any other Obligor; or" SECTION 1.8. Section 10 of the Note Purchase Agreements shall beamended by adding thereto a new Section 10.10 to read as follows: "SECTION 10.10. CAPITAL EXPENDITURES. The Public Hub Company and its Restricted Subsidiaries shall not expend or become obligated for Capital Expenditures during the fiscal year ending December 31, 2001 in an aggregate amount in excess of $12,000,000 and shall not expend or become obligated for Capital Expenditures during the fiscal year ending December 31, 2002 in an aggregate amount in excess of $15,000,000." SECTION 1.9. From and after December 31, 2000 interest on the Notesshall accrue at the rate of 9.14% per annum in lieu of 8.64% per annum and theoverdue rate on any overdue payment (including any overdue prepayment) ofprincipal, any overdue payment of interest and any overdue payment of anyMake-Whole Amount at a rate per annum from time to time equal to the greater of(i) 11.14% per annum or (ii) 2% over the rate of interest publicly announced byHarris Trust and Savings Bank, Chicago, Illinois from time to time as its "base"or "prime" rate.SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE OBLIGORS. SECTION 2.1. To induce the Noteholders to execute and deliver thisFirst Amendment (which representations shall survive the execution and deliveryof this First Amendment), the Obligors, jointly and severally, represent andwarrant to the Noteholders that: (a) this First Amendment has been duly authorized, executed and delivered by each Obligor and this First Amendment constitutes the legal, valid and binding obligation, contract and agreement of each Obligor enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) the Note Purchase Agreements, as amended by this First Amendment, constitute the legal, valid and binding obligations, contracts and agreements of the Obligors enforceable against them in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (c) the execution, delivery and performance by the Obligors of this First Amendment (i) has been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) does not 6 require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (1) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, or (3) any provision of any material indenture, agreement or other instrument to which any Obligor is a party or by which any Obligor's properties or assets are or may be bound, including, without limitation, the Credit Agreement dated as of April 30, 1999, among the Obligors, the Lenders party thereto and Harris Trust and Savings Bank, individually and as Agent, and all amendments, supplements and modifications thereto, or (B) result in a breach or constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause (iii)(A)(3) of this Section 2.1(c); (d) as of the date hereof and after giving effect to this First Amendment, no Default or Event of Default has occurred which is continuing; (e) all the representations and warranties contained in Section 5 of the Note Purchase Agreements (other than those contained in Sections 5.3, 5.4(a), 5.4(b) and 5.9) are true and correct in all material respects with the same force and effect as if made by the Obligors on and as of the date hereof (other than any representation and warranty that expressly relates to a specified earlier date, which was true and correct in all material respects as of such date); PROVIDED, THAT, notwithstanding any reference in Sections 5.4(c) and 5.4(d) of the Note Purchase Agreements to the Restricted Subsidiaries listed on Schedule 5.4 to the Note Purchase Agreements, the representations and warranties hereby made by the Obligors with reference to Sections 5.4(c) and 5.4(d) of the Note Purchase Agreements shall relate to the Restricted Subsidiaries existing on the date hereof; (f) The statements and information furnished to the Noteholders in connection with the negotiation of this Amendment do not, taken as a whole, and other than financial projections or forecasts, contain any untrue statements of a material fact or omit a material fact necessary to make the material statements contained herein or therein not misleading, the Noteholders acknowledging that as to any projections furnished to the Noteholders, the Obligors and the Constituent Company Guarantors only represent that the same were prepared on the basis of information and estimates the Obligors believed to be reasonable; and (g) All tax returns with respect to any income tax or other material tax required to be filed by the Obligors and the Restricted Subsidiaries in any jurisdiction have, in fact, been filed, and all taxes, assessments, fees and other governmental charges upon the Obligors or the Restricted Subsidiaries or upon any of their respective properties, income or franchises, which are shown to be due and payable in such returns, have been paid. The Obligors do not know of any proposed additional tax assessment against the Obligors or any Restricted Subsidiary for which adequate provision in accordance with GAAP has not been made. Adequate provisions in accordance with GAAP for taxes on the books of the Obligors and each Restricted Subsidiary have been made for all open years, and for its current fiscal period. 7SECTION 3. CONDITIONS TO EFFECTIVENESS OF THIS FIRST AMENDMENT. SECTION 3.1. This First Amendment shall not become effective until, andshall become effective when, each and every one of the following conditionsshall have been satisfied: (a) executed counterparts of this First Amendment, duly executed by the Obligors and the holders of at least 51% of the outstanding principal of the Notes, shall have been delivered to the Noteholders; (b) the Noteholders shall have received a copy of the resolutions of the Board of Directors of each Obligor authorizing the execution, delivery and performance by such Obligor of this First Amendment, certified by such Obligor's Secretary or an Assistant Secretary; (c) the representations and warranties of the Obligors set forth in Section 2 hereof are true and correct on and with respect to the date hereof; and (d) the Noteholders shall have received the favorable opinion of counsel to the Obligors as to the matters set forth in Sections 2.1(a), 2.1(b) and 2.1(c) hereof, which opinion shall be in form and substance satisfactory to the Noteholders.Upon receipt of all of the foregoing, this First Amendment shall becomeeffective as of December 31, 2000.SECTION 4. PAYMENT OF NOTEHOLDERS' COUNSEL FEES AND EXPENSES. SECTION 4.1. The Obligors agrees to pay upon demand, the reasonablefees and expenses of Chapman and Cutler, counsel to the Noteholders, in connection with the negotiation, preparation, approval, execution and deliveryof this First Amendment.SECTION 5. MISCELLANEOUS. SECTION 5.1. This First Amendment shall be construed in connection withand as part of each of the Note Purchase Agreements, and except as modified andexpressly amended by this First Amendment, all terms, conditions and covenantscontained in the Note Purchase Agreements and the Notes are hereby ratified andshall be and remain in full force and effect. SECTION 5.2. Any and all notices, requests, certificates and otherinstruments executed and delivered after the execution and delivery of thisFirst Amendment may refer to the Note Purchase Agreements without makingspecific reference to this First Amendment but nevertheless all such referencesshall include this First Amendment unless the context otherwise requires. 8 SECTION 5.3. The descriptive headings of the various Sections or partsof this First Amendment are for convenience only and shall not affect themeaning or construction of any of the provisions hereof. SECTION 5.4. This First Amendment shall be governed by and construed inaccordance with Illinois law. SECTION 5.5. The execution hereof by you shall constitute a contractbetween us for the uses and purposes hereinabove set forth, and this FirstAmendment may be executed in any number of counterparts, each executedcounterpart constituting an original, but all together only one agreement. [Signature Pages Begin on Next Page] 9 IN WITNESS WHEREOF, the Obligors and the Noteholders have caused thisinstrument to be executed this February 26, 2001. HUB GROUP, INC. HUB CITY TERMINALS, INC. By David P. Yeager Chief Executive Officer for each of the above CompaniesConsented, Accepted and Agreedthis February 26, 2001 HUB CHICAGO HOLDINGS, INC., a Constituent Company Guarantor By David P. Yeager Chief Executive Officer for each of the above Companies HLX COMPANY, L.L.C., a Constituent Company Guarantor By David P. Yeager Vice Chairman and Chief Executive Officer QSSC, INC. QUALITY SERVICES, L.L.C., QUALITY SERVICES OF KANSAS, L.L.C. QUALITY SERVICES OF NEW JERSEY, L.L.C. Q.S. OF ILLINOIS, L.L.C. Q.S. OF GEORGIA, L.L.C. By David P. Yeager Chief Executive Officer for each of the above Constituent Company Guarantors HUB GROUP ALABAMA, LLC (formerly known as Hub City Alabama, L.P.) HUB GROUP ATLANTA, LLC (formerly known as Hub City Atlanta, L.P.) HUB GROUP BOSTON, LLC (formerly known as Hub City Boston, L.P.) HUB GROUP CANADA, L.P. HUB GROUP CLEVELAND, LLC (formerly known as Hub City Cleveland, L.P.) HUB GROUP DETROIT, LLC (formerly known as Hub City Detroit, L.P.) HUB GROUP FLORIDA, LLC (formerly known as Hub City Florida, L.P.) HUB GROUP GOLDEN GATE, LLC (formerly known as Hub City Golden Gate, L.P.) HUB GROUP INDIANAPOLIS, LLC (formerly known as Hub City Indianapolis, L.P.) HUB GROUP KANSAS CITY, LLC (formerly known as Hub City Kansas City, L.P.) HUB GROUP LOS ANGELES, LLC (formerly known as Hub City Los Angeles, L.P.) HUB GROUP MID ATLANTIC, LLC (formerly known as Hub City Mid Atlantic, L.P.) HUB GROUP NEW ORLEANS, LLC (formerly known as Hub City New Orleans, L.P.) HUB GROUP NEW YORK STATE, LLC (formerly known as Hub City New York State, L.P.) HUB GROUP NEW YORK-NEW JERSEY, LLC (formerly known as Hub City New York-New Jersey, L.P.) HUB GROUP NORTH CENTRAL, LLC (formerly known as Hub City North Central, L.P.) HUB GROUP OHIO, LLC (formerly known as Hub City Ohio, L.P.) HUB GROUP PHILADELPHIA, LLC (formerly known as Hub City Philadelphia, L.P.) HUB GROUP PITTSBURGH, LLC (formerly known as Hub City Pittsburgh, L.P.) HUB GROUP PORTLAND, LLC (formerly known as Hub City Portland, L.P.) HUB GROUP ST. LOUIS, LLC (formerly known as Hub City St. Louis, L.P.) HUB GROUP TENNESSEE, LLC (formerly known as Hub City Tennessee, L.P.) HUB CITY TEXAS, L.P. By David P. Yeager Chief Executive Officer for each of the above Constituent Company Guarantors Consented, Accepted and Agreedthis February 26, 2001: BAYSTATE HEALTH SYSTEM, INC. By: David L. Babson & Company Inc. as Investment Adviser By___________________________________ Name: Title:Consented, Accepted and Agreedthis February 26, 2001: C.M. LIFE INSURANCE COMPANY By: David L. Babson & Company Inc. as Investment Sub-Adviser By___________________________________ Name: Title:Consented, Accepted and Agreedthis February 26, 2001: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: David L. Babson & Company Inc., as Investment Adviser By___________________________________ Name: Title:Consented, Accepted and Agreedthis February 26, 2001: INVESTORS PARTNER LIFE INSURANCE COMPANY By___________________________________ Name: Title:Consented, Accepted and Agreedthis February 26, 2001: JOHN HANCOCK LIFE INSURANCE COMPANY By___________________________________ Name: Title:Consented, Accepted and Agreedthis February 26, 2001: JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By___________________________________ Name: Title:Consented, Accepted and Agreedthis February 26, 2001: MELLON BANK, N.A., solely in its capacity as Trustee for the Bell Atlantic Master Trust (as directed by John Hancock Financial Services, Inc.), and not in its individual capacity By___________________________________ Name: Title:Consented, Accepted and Agreedthis February 26, 2001: ING INVESTMENT MANAGEMENT LLC, as agent on behalf of ReliaStar Life Insurance Company By___________________________________ Name: Title:Consented, Accepted and Agreedthis February 26, 2001: ING INVESTMENT MANAGEMENT LLC, as agent on behalf of ReliaStar Life Insurance Company of New York By___________________________________ Name: Title:Consented, Accepted and Agreedthis February 26, 2001: UNITED OF OMAHA LIFE INSURANCE COMPANY By___________________________________ Name: Title: Hub Group, Inc.377 East Butterfield RoadSuite 700Lombard, Illinois 60148December 24, 1998Mr. Dan Sellers3526 Winterberry CircleLouisville, Kentucky 40207Dear Dan:The purpose of this letter is to inform you that Hub Group will pay you $200,000should Hub Group be sold to a third party and, due to that sale, either of thefollowing happens (i) you are terminated without cause or (ii) Phillip C. Yeageror his immediate descendants cease to run the day-to-day operations of HubGroup.Please contact me with any questions.Sincerely,By /s/ David P. Yeager -------------------- David P. Yeager Vice Chairman and Chief Executive Officer