Hub Group
Annual Report 2002

Plain-text annual report

-------------------------------------------------------------------------------- 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, 2002 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 (I.R.S. Employer of incorporation of organization) Identification No.) 3050 HIGHLAND PARKWAY, SUITE 100 DOWNERS GROVE, ILLINOIS 60515 (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]Indicate by check mark whether the registrant is an accelerated filer (asdefined in Exchange Act Rule 12b-2).Yes No X ----- ------The aggregate market value of the Registrant's voting stock held bynon-affiliates on June 28, 2002, based upon the last reported sale price on thatdate on the NASDAQ National Market of $9.25 per share, was $58,033,761.On March 12, 2003, the Registrant had 7,046,250 outstanding shares of Class Acommon stock, par value $.01 per share, and 662,296 outstanding shares of ClassB common stock, par value $.01 per share. DOCUMENTS INCORPORATED BY REFERENCEThe Registrant's definitive Proxy Statement for the Annual Meeting ofStockholders to be held on May 13, 2003, (the "Proxy Statement") is incorporatedby reference in Part III of this Form 10-K to the extent stated herein. Exceptwith respect to information specifically incorporated by reference in this Form10-K, the Proxy Statement is not deemed to be filed as a part hereof.-------------------------------------------------------------------------------- PART IITEM 1. BUSINESSGENERAL Hub Group, Inc. ("Hub Group" or the "Company") is a Delaware corporationthat 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 22 officesor "Hubs" and Hub Group Distribution Services ("HGDS" or "Hub Distribution").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. Corporate management isresponsible for group strategic planning and administration, financial services,relationships with the railroads and management information systems support. HubDistribution, which performs certain specialized logistics services, isresponsible for its own operations, customer service, marketing and managementinformation systems support. Hub Group also maintains a National Accounts salesforce to provide centralized marketing of the Company's services to large andgeographically diversified shippers. Through a series of acquisitions, including the purchase of the remaining35% partnership interest in Hub Distribution on August 14, 2002 for $4 million,Hub Group now wholly-owns Hub Distribution and each of its other operatingsubsidiaries. Unless the context otherwise requires, references to Hub Group orthe Company include the Hubs, Hub Distribution and their respectivesubsidiaries.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 proprietary NetworkManagement System, to access containers and trailers owned by leasing companies,railroads and steamship lines. Because each Hub not only handles its ownoutbound shipments but also handles inbound shipments from other Hubs, each Hubis able to track trailers and containers entering its service area and reusethat equipment to fulfill its customers' outbound shipping requirements. Thiseffectively allows the Company to "capture" containers and trailers and keepthem within the Hub network without having to make a capital investment intransportation equipment. The Company also has exclusive use of the containersin its Premier Service Network. HIGHWAY SERVICES The Company arranges for the transportation of freight bytruck, providing customers another option for their transportation needs. Thisis accomplished by matching customers' needs with carriers' capacity to providethe appropriate service and price combination. The Company has contracts with asubstantial base of carriers allowing it to meet the varied needs of itscustomers. The Company negotiates rates, tracks shipments in transit and handlesclaims for freight loss and damage on behalf of its customers. 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 the Company to effectively meet its customer's needswithout owning the equipment. Through the Core Carrier-Plus One program, theCompany assumes the responsibility for over-the-road truckload shipments thatthe customer's core carriers cannot handle. This service supplements thecustomer's core carrier program and helps ensure the timely delivery of thecustomer's freight. 2 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 inDowners Grove. In addition, many of the Hubs have hired experienced logisticspersonnel exclusively dedicated to selling and servicing Hub Group's logisticsservice offering. The Supply Chain Solutions group acts as a central resourcefor the Hubs who then perform 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. Whenproviding complete transportation services, the Company essentially replaces thecustomer's transportation department. Once the Company is hired as a singlesource logistics provider, it negotiates with intermodal, railcar, truckload andless-than-truckload carriers to move the customer's product through the supplychain and then dispatches the move for the customer. DISTRIBUTION SERVICES Hub Distribution offers non-traditional logisticsservices such as installation of point of sale merchandise displays and deliveryof sample pharmaceuticals to sales representatives.HUB NETWORK Over the past 32 years, Hub Group has grown from a single office with twoemployees into a network of 22 Hubs and Hub Distribution. Hub Group also hasseveral satellite sales offices. In developing this network, the Company hascarefully selected each location to ensure coverage in areas with significantconcentrations of shipping customers and one or more railheads. Hub Groupcurrently has Hubs in the following cities: Atlanta Houston New York City San Francisco Baltimore Indianapolis Pittsburgh Seattle Boston Kansas City Portland Toledo Chicago Los Angeles Rochester Toronto Cleveland Memphis St. Louis Detroit Milwaukee Salt Lake CityThe entire Hub network is interactively connected through the Company'sproprietary Network Management System. This enables Hub Group to move freightinto and out of every major city in the United States and most locations inCanada and Mexico. Each Hub manages the freight originating in or destined for its servicearea. In a sample intermodal transaction, the customer contacts the local Hub,known as the selling Hub, to obtain shipping schedules and a price quote for aparticular freight movement. The local Hub obtains the necessary intermodalequipment, arranges for it to be delivered to the customer by a drayage companyand, after the freight is loaded, arranges for the transportation of thecontainer or trailer to the rail ramp. Information is entered into the NetworkManagement System by the local Hub. This information is simultaneouslytransmitted through the Network Management System to the Hub closest to thepoint of delivery. The Company's predictive track and trace technology thenmonitors the shipment to ensure that it will arrive as scheduled, alerting thecustomer service personnel at the local Hub if there are service delays. The Hubclosest to the point of delivery arranges for and confirms delivery by a drayagecompany. This arrangement among the Hubs is transparent to the customer andallows the customer to maintain its relationship solely with the selling Hub. The Company provides brokerage services to its customers in a similarmanner. In a sample 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, the 3Company 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 and Hub Distribution with primary responsibility for servicing localand regional accounts. These sales representatives work from the local Hubs, HubDistribution and the Company's satellite sales offices. This network provides alocal marketing contact for small and medium shippers in most major metropolitanareas 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 althoughmost large shippers originate freight from multiple locations throughout thecountry, their logistics function is usually centralized. The Companyessentially mirrored this structure by servicing national accounts from acentral location and parceling out the servicing of individual freight shipmentsto the appropriate Hub. There are currently 14 National Accounts salesrepresentatives who report either directly or indirectly to the Company'sExecutive Vice President of Marketing. The National Accounts salesrepresentatives regularly call on the nation's largest shippers to developbusiness relationships and to expand the Company's participation in servicingtheir transportation needs. When a business opportunity is identified by aNational Accounts sales representative, the Company's market development andpricing personnel and the local Hubs work together to provide a transportationsolution tailored to the customer's needs. Local Hubs provide transportationservices to National Accounts customers. After the plan is implemented, NationalAccounts' personnel maintain regular contact with the shipper to ensure customersatisfaction, to refine the process as necessary and attempt to sell additionalservices to the customer. In October 2002, the Company established a joint marketing relationshipwith TMM Logistics, a wholly owned subsidiary of Grupo TMM. The agreement callsfor TMM Logistics to provide all sales support and operational execution withinMexico and Hub Group to furnish the same capabilities in Canada and the UnitedStates. A newly formed division of Hub Group, called Hub Mexico, provides jointmarketing, door-to-door oversight, coordination and pricing support. This unique combination of local and regional marketing has produced alarge, diverse customer base. The Company services customers in a wide varietyof industries, including automotive, chemicals, consumer products, electronics,paper, printing, and retail.MANAGEMENT INFORMATION SYSTEMS A primary component of the Company's business strategy is the continuedimprovement of its Network Management System and other technology to ensure thatthe Company will remain a leader among transportation providers in informationprocessing for transportation services. Hub Group's Network Management Systemconsists of proprietary software running on IBM AS/400 computers located at asecure offsite data center. All of the Hubs are linked with these AS/400computers and each other using a frame relay network. This configurationprovides a real time environment for transmitting data among the Hubs and theCompany's headquarters. The Company also makes extensive use of electronic datainterchange ("EDI"), allowing each Hub to communicate electronically with eachrailroad, certain drayage companies and those customers with EDI capabilities. The Company's Network Management System is the primary mechanism used bythe Hubs to handle the Company's intermodal and highway services business. TheNetwork Management System processes customer transportation requests, schedulesand tracks shipments, prepares customer billing, establishes account profilesand retains critical information for analysis. The Network Management Systemprovides connectivity with each of the major rail carriers, enabling the Companyto electronically schedule and track shipments in a real time environment. Inaddition, the Network Management System's EDI features offer customers with EDIcapability a completely paperless process, including load tendering, shipmenttracking, customer billing and remittance processing. The Company aggressivelypursues opportunities to establish EDI interfaces with its customers andcarriers. To help manage its logistics business, the Company uses specializedsoftware that includes planning and execution solutions. This sophisticatedtransportation management software enables Hub Group to offer supply chainplanning tools and logistics managing, modeling, optimizing and monitoring toolsfor its customers. This software may be used by the Company when offeringlogistics management services to customers that ship via multiple modes,including intermodal, truckload, and less-than-truckload, allowing the Companyto optimize mode and carrier selection and routing for its customers. Thissoftware is integrated with Hub Group's Network Management System and HubGroup's accounting system. The Company's website, www.hubgroup.com, is designed to allow Hub Group'scustomers and vendors to easily do business with Hub Group online. Through 4Vendor Interface, the Company tenders loads to its drayage partners using theInternet rather than phones or faxes. Vendor Interface also captures eventstatus information, allows vendors to view outstanding paperwork requirementsand helps facilitate paperless invoicing for payment. Hub Group currentlytenders 98% of its drayage loads using Vendor Interface or EDI. CustomerAdvantage allows customers to receive immediate pricing, place orders, trackshipments and review historical shipping data through a variety of reports overthe Internet. Current Internet applications are integrated with the NetworkManagement System.RELATIONSHIP WITH RAILROADS A key element of the Company's business strategy is to strengthen its closeworking relationship with each of the major intermodal railroads in the UnitedStates. The Company views its relationship with the railroads as a partnership.Due to the Company's size and relative importance, many railroads have dedicatedsupport personnel to focus on the Company's day-to-day service requirements. Ona regular basis, senior executives of the Company and each of the railroads meetto discuss major strategic issues concerning intermodal transportation. Severalof the Company's executive officers, including both the Company's Chairman andPresident, 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., K-Line America, Inc. and Maersk Sea-Land. 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 2003. 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 agreements with both the BNSF and NS, theCompany manages, as of March 1, 2003, approximately 4,900 containers owned bythe BNSF and 1,300 containers owned by the NS. These containers are for HubGroup's dedicated use on the BNSF and NS rail systems. The BNSF containers andthe NS containers are fully interchangeable across both the BNSF and NS railnetworks.RELATIONSHIP WITH DRAYAGE COMPANIES The Company has a "Quality Drayage Program," which consists of agreementsand rules that govern the framework pursuant to which certain drayage companiesperform services for the Company. Participants in the program commit to providehigh quality service along with clean and safe equipment, maintain a definedon-time performance level and follow specified procedures designed to minimizefreight loss and damage. The local Hubs negotiate drayage rates fortransportation between specific origin and destination points. These ratesgenerally are valid, with minor exceptions for fuel surcharge increases, for aperiod of one year.RELATIONSHIP WITH TRUCKLOAD CARRIERS The Company's brokerage operation has a large and growing number of activecarriers in its database which it uses to transport freight. The local Hubs dealdaily with these carriers on an operational level. Hub Highway Services handlesthe administrative and regulatory aspects of the carrier relationship. Hub 5Group's relationships with its carriers are important since these relationshipsdetermine pricing, load coverage and overall service.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's insurance, $1.0 million in cargo insurance.Railroads, which are self-insured, provide limited cargo protection, generallyup 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$1.0 million per container or trailer and a limit of $20.0 million aggregate.The Company also carries general liability insurance with limits of $1.0 millionper occurrence and $2.0 million in the aggregate with a companion $25.0 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.GENERAL EMPLOYEES: As of February 28, 2003, the Company had approximately 1,405employees. 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 trademarks are believed to be materialto the Company. The Company's business is seasonal to the extent that certaincustomer groups, such as retail, are seasonal.ITEM 2. PROPERTIES The Company directly, or indirectly through its subsidiaries, operates 38offices throughout the United States and in Canada, including the Company'sheadquarters in Downers Grove, Illinois and its Company-owned drayageoperations. The office building used by the Hub located in Toledo is owned, andthe remainder are leased. Most office leases have initial terms of more than oneyear, and many include options to renew. While some of the Company's leasesexpire in the near term, the Company does not believe that it will havedifficulty in renewing them or in finding alternative office space. The Companybelieves that its offices are adequate for the purposes for which they arecurrently used.ITEM 3. LEGAL PROCEEDINGS On February 19, 2002, a purported class action lawsuit was filed by RiggsPartners, LLC in the United States District Court for the Northern District ofIllinois, Eastern Division. On October 23, 2002, the federal district courtgranted the Company's motion to dismiss the complaint in its entirety forfailing to allege facts sufficient to state a claim. The court also granted themotion of the Company's former auditors. The Court's order required plaintiffs 6to file any amended complaint by November 22, 2002. The plaintiffs did not filean amended complaint by this date and agreed that they would not appeal thecourt's order of October 23, 2002 dismissing the lawsuit. The suit is thereforeterminated. In addition, the Company is a party to litigation incident to its business,including claims for freight lost or damaged in transit, improperly shipped orimproperly warehoused. Some of the lawsuits to which the Company is party arecovered by insurance and are being defended by the Company's insurance carriers.Some of the lawsuits are not covered by insurance and are being defended by theCompany. Management does not believe that the outcome of this litigation willhave a materially adverse effect on the Company's financial position or resultsof operations. See Item 1 Business - Risk Management and Insurance.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's security holdersduring the fourth quarter of 2002.EXECUTIVE OFFICERS OF THE REGISTRANT In reliance on General Instruction G to Form 10-K, information on executiveofficers of the Registrant is included in this Part I. The table sets forthcertain information as of March 12, 2003 with respect to each person who is anexecutive officer of the Company. NAME AGE POSITION------------------------- --- ------------------------------------------- Phillip C. Yeager 75 Chairman of the Board of Directors David P. Yeager 49 Vice Chairman of the Board of Directors and Chief Executive Officer Thomas L. Hardin 57 President, Chief Operating Officer and Director Mark A. Yeager 38 President- Field Operations Thomas M. White 45 Senior Vice President, Chief Financial Officer and Treasurer Richard M. Rogan 63 Executive Vice President-Marketing Dennis R. Polsen 49 Vice President and Chief Information Officer David C. Zeilstra 33 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 City Terminals, Inc. ("Hub Chicago"). Mr. Yeager becameinvolved in intermodal transportation in 1959, five years after the introductionof intermodal transportation in the United States, as an employee of thePennsylvania and Pennsylvania Central Railroads. He spent 19 years with thePennsylvania and Pennsylvania Central Railroads, 12 of which involvedintermodal transportation. In 1991, Mr. Yeager was named Man of the Year by theIntermodal Transportation Association. In 1995, he received the SalzburgPractitioners Award from Syracuse University in recognition of his lifetimeachievements in the transportation industry. In October 1996, Mr. Yeager wasinducted into the Chicago Area Entrepreneurship Hall of Fame sponsored by theUniversity of Illinois at Chicago. In March 1997, he received the PresidentialMedal from Dowling College for his achievements in transportation services.In September 1998 he received the Silver Kingpin award from the IntermodalAssociation of North America and in February 1999 he was named TransportationPerson of the Year by the New York Traffic Club. Mr. Yeager graduated from theUniversity of Cincinnati in 1951 with a Bachelor of Arts degree in Economics.Mr. Yeager is the father of David P. Yeager and Mark A. Yeager. 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. 7 Thomas L. Hardin has served as the Company's President since October 1985and has served as Chief Operating Officer and a director of the Company sinceMarch 1995. From January 1980 to September 1985, Mr. Hardin was VicePresident-Operations and from June 1972 to December 1979, he was General Managerof the Company. Prior to joining the Company, Mr. Hardin worked for the MissouriPacific Railroad where he held various marketing and pricing positions. Mr.Hardin is the former Chairman of the Intermodal Association of North America. Mark A. Yeager has been the Company's President-Field Operations since July1999. From November 1997 through June 1999 Mr. Yeager was Division President,Secretary and General Counsel. From March 1995 to November 1997, Mr. Yeager wasVice President, Secretary and General Counsel. From May 1992 to March 1995, Mr.Yeager served as the Company's Vice President-Quality. Prior to joining theCompany in 1992, Mr. Yeager was an associate at the law firm of Grippo & Eldenfrom January 1991 through May 1992 and an associate at the law firm of Sidley &Austin from May 1989 through January 1991. Mr. Yeager received a Juris Doctordegree from Georgetown University in 1989 and a Bachelor of Arts degree fromIndiana University in 1986. Mr. Yeager is the son of Phillip C. Yeager and thebrother of David P. Yeager. Thomas M. White has been the Company's Senior Vice President, ChiefFinancial Officer and Treasurer since June 2002. Prior to joining the Company,Mr. White was a Managing Partner-Business Process Outsourcing at ArthurAndersen, LLP. Mr. White worked for Arthur Andersen, LLP for 23 years, holdingvarious positions including Managing Partner of the Kansas City, Missouri officeand Omaha, Nebraska office. Mr. White received a Masters in Science andIndustrial Administration from Purdue University in 1985 and a Bachelor ofBusiness Administration from Western Michigan University in 1979. Mr. White is aCPA and a member of the American Institute of Certified Public Accountants. Richard M. Rogan has been Executive Vice President of Marketing sinceNovember 1997 and was President of Hub Highway Services from May 1995 throughFebruary 2002. Prior to joining the Company, Mr. Rogan was Executive VicePresident of National Freight, Inc. from May 1993 to April 1995. Prior to that,Mr. Rogan was with Burlington Motor Carriers, Inc., where he served as Presidentand Chief Executive Officer from March 1988 to April 1993 and as an ExecutiveVice President from July 1985 to February 1988. Mr. Rogan's transportationcareer spans 25 years and includes earlier assignments with the Illinois CentralRailroad, North American Van Lines and Schneider National. He received aBachelor of Business Administration degree from Loyola University of Chicago in1962 and a Master of Business Administration degree from the Wharton School ofthe University of Pennsylvania in 1963. He has served on the Board of Directorsof the ATA Foundation as well as the Interstate Truckload Carrier Conference("ITCC"). He is a past Chairman of the ITCC Highway Policy Committee and hasalso served on the Advisory Board of the Trucking Profitability StrategiesConference at the University of Georgia. Dennis R. Polsen has been the Company's Vice President - Chief InformationOfficer since September 2001. From March 2000 through August 2001, Mr. Polsenwas the Company's Vice-President of Application Development. Prior to joiningthe Company, Mr. Polsen was Director of Applications for Humana, Inc. fromSeptember 1997 through February 2000 and spent 14 years prior to thatdeveloping, implementing, and directing transportation logistics applications atSchneider National, Inc. Mr. Polsen received a Bachelor of BusinessAdministration in May of 1976 from the University of Wisconsin, Milwaukee and aMasters in Business Administration in May of 1983 from the University ofWisconsin Graduate School of Business. Mr. Polsen is a past member of theAmerican Trucking Association. 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 & Plattfrom September 1994 through November 1996. Mr. Zeilstra received a Juris Doctordegree from the Duke University School of Law in 1994 and a Bachelor of Artsdegree from Wheaton College in 1990.DIRECTORS OF THE REGISTRANT In addition to Phillip C. Yeager, David P. Yeager and Thomas L. Hardin, thefollowing three individuals are also on the Company's Board of Directors: GaryD. Eppen - currently retired and formerly the Ralph and Dorothy KellerDistinguished Service Professor of Operations Management and Deputy Dean forpart-time Masters in Business Administration Programs at the Graduate School ofBusiness at the University of Chicago; Charles R. Reaves- Chief ExecutiveOfficer of Reaves Enterprises, Inc., a real estate development company andMartin P. Slark - President, Chief Operating Officer and Director of Molex,Incorporated, a manufacturer of electronic, electrical and fiber opticinterconnection products and systems. 8 PART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Class A common stock of the Company ("Class A Common Stock") tradeson the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol"HUBG." Set forth below are the high and low closing prices for shares of theClass A Common Stock of the Company for each full quarterly period in 2001 and2002. 2001 2002 ----------------- ----------------- HIGH LOW HIGH LOW ------ ----- ------ ----- First Quarter $11.88 $8.00 $11.28 $7.55 Second Quarter $14.20 $8.00 $11.20 $9.01 Third Quarter $15.14 $10.60 $9.70 $4.18 Fourth Quarter $11.19 $8.75 $8.19 $4.75 On March 5, 2003, there were approximately 98 stockholders of record of theClass A Common Stock and, in addition, there were an estimated 1,520 beneficialowners of the Class A Common Stock whose shares were held by brokers and otherfiduciary institutions. On March 5, 2003, there were 11 holders of record ofthe Company's Class B common stock (the "Class B Common Stock" together with theClass 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, --------------------------------------------------------------------- 2002 (1) 2001 2000 1999 1998 ---------------------------------------------------------------------STATEMENT OF OPERATIONS DATA: Revenue $1,335,660 $1,319,331 $ 1,382,880 $ 1,295,502 $ 1,145,906Gross margin 162,812 178,963 167,767 159,863 138,334Operating income 11,141 10,548 13,495 26,453 26,406Income before minority interest and taxes 2,015 902 2,878 19,928 25,324Income before income taxes 2,539 751 4,547 15,941 15,205Net income 1,498 443 2,683 9,405 8,908Basic earnings per common share $ .19 $ .06 $ 0.35 $ 1.22 $ 1.16Diluted earnings per common share $ .19 $ .06 $ 0.35 $ 1.21 $ 1.15 AS OF DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------------------------------------------------------------------BALANCE SHEET DATA: Working capital (deficiency) $ (7,109) $ (5,380) $ (5,902) $ 20,202 $ 20,313Total assets 399,262 416,024 469,373 441,421 304,791Long-term debt, excluding current portion 94,027 96,059 109,089 131,414 29,589Stockholders' equity 134,340 132,453 132,397 129,683 119,673 (1) As of January 1, 2002, the Company adopted Financial Accounting StandardsBoard Statement No. 142, "Goodwill and Other Intangible Assets ("Statement142")". Under Statement 142, goodwill is no longer amortized. Amortizationexpense for the years ended December 31, 2001, 2000, 1999 and 1998 was$5,741,000, $5,741,000, $5,069,000 and $2,912,000, respectively. The per shareeffect of amortization expense related to goodwill, net of tax was $0.44, $0.44,$0.39 and $0.22 for the years ended December 31, 2001, 2000, 1999 and 1998,respectively. 10ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCAPITAL STRUCTURE Hub Group, Inc. (the "Company") has authorized common stock comprised ofClass A common stock and Class B common stock. The rights of holders of Class Acommon stock and Class B common stock are identical, except each share of ClassB common stock entitles its holder to 20 votes, while each share of Class Acommon stock entitles its holder to one vote.RESULTS OF OPERATIONSYEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31, 2001REVENUE Revenue for the Company increased 1.2% to $1,335.7 million in 2002 from$1,319.3 million in 2001. The Company estimates that the West Coast port lockoutnegatively impacted revenue by between $7.0 and $9.0 million during the fourthquarter of 2002. Intermodal revenue increased 1.1% and truckload brokeragerevenue increased 8.3% over 2001 primarily due to increased volume. The increasein intermodal revenue is partially offset by a $32.8 million reduction in demandfrom the Company's steamship customers when comparing the first quarter of 2002with the first quarter of 2001. These customers ceased doing business with theCompany early in the second quarter of 2001. Supply chain solutions logisticsservices revenue increased 21.1% to $109.2 million in 2002 from $90.2 million in2001 as a result of adding new customers and increased business from existingcustomers. HGDS revenue decreased 27.1% to $80.9 million in 2002 from $110.9million in 2001. HGDS experienced a significant revenue decline due to the lossof a large logistics customer as well as a temporary decrease in theirinstallation business from a large customer during the first and second quarterof 2002.GROSS MARGIN Gross margin decreased to $162.8 million in 2002 from $179.0 million in2001. As a percent of revenue, gross margin decreased to 12.2% from 13.6% in2001. Intermodal gross margin, as a percentage of revenue, decreased due tochanges in customer mix, competitive pricing, and increased transportation costsas compared to 2001. In addition, the Company revised its estimates of accruedtransportation costs resulting in an increase in gross margin for the year endedDecember 31, 2002 of $1.6 million.SALARIES AND BENEFITS Salaries and benefits decreased 1.6% to $93.5 million in 2002 from $95.0million in 2001. As a percentage of revenue, salaries and benefits decreased to7.0% from 7.2% in 2001. Salaries and benefits include a severance charge of $0.5million in 2002 related to the termination of employees during the fourthquarter. The decrease as a percentage of revenue is due to a decrease inheadcount and the increase in revenue.SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses decreased 12.7% to $46.8million in 2002 from $53.6 million in 2001. As a percentage of revenue, theseexpenses decreased to 3.5% in 2002 from 4.1% in 2001. The decrease as apercentage of revenue is primarily attributed to a $4.7 million write-off in2001 associated with the bankruptcy and forced liquidation of a Korean steamshipline customer and a decrease in costs associated with the outsourcing of ourdata center. During 2002, the Company incurred $1.4 million of expenses forprofessional fees related to the investigation and restatement of HGDS's resultsof operations for the years ended December 31, 2000 and 1999. During the fourthquarter of 2002, the Company recorded a charge of $0.5 million related to aliability for the remaining lease obligation associated with a closed facility.DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT Depreciation and amortization increased 6.5% to $11.4 million in 2002 from$10.7 million in 2001. This expense as a percentage of revenue increased to 0.9%from 0.8% in 2001. The increase in depreciation expense in 2002 is due primarilyto new software applications placed in service throughout 2002 and accelerated 11depreciation and amortization of leasehold improvements related to officerelocations.AMORTIZATION OF GOODWILL As of January 1, 2002, the Company adopted Statement of FinancialAccounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets".Under SFAS No. 142, goodwill is no longer amortized and is tested annually forimpairment. Amortization of goodwill was $5.7 million in 2001. IMPAIRMENT OF PROPERTY AND EQUIPMENT There was no impairment charge in 2002. The $3.4 million impairment chargein 2001 was due to HGDS's exit from its initiative surrounding the home deliveryof large box items purchased over the internet.OTHER INCOME (EXPENSE) Interest expense decreased 8.6% to $9.5 million in 2002 from $10.3 millionin 2001. The decrease in interest expense is due primarily to carrying a loweraverage debt balance this year as compared to the prior year and lower interestrates. Interest income decreased to $0.2 million in 2002 from $0.7 million in 2000primarily as a result of lower customer finance charges.MINORITY INTEREST Minority interest was a $0.5 million benefit in 2002 compared with a $0.2million charge in 2001. Minority interest represented the 35% interest in HGDSprior to the Company's purchase of this interest in August 2002. See Note 4 tothe Consolidated Financial Statements.PROVISION FOR INCOME TAXES The provision for income taxes increased to $1.0 million in 2002 comparedto $0.3 million in 2001. The Company provided for income taxes using aneffective rate of 41.0% in 2002 and 2001.NET INCOME Net income increased to $1.5 million in 2002 from $0.4 million in 2001.EARNINGS PER COMMON SHARE Basic and diluted earnings per common share increased to $0.19 in 2002 from$0.06 in 2001.YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000REVENUE Revenue for the Company decreased 4.6% to $1,319.3 million in 2001 from$1,382.9 million in 2000. Overall, management believes that a soft economy hasnegatively impacted the current year growth. Intermodal revenue decreased 9.9%from 2000. The decline in intermodal revenue was primarily due to a $71.8million reduction in demand for intermodal service from the Company's steamshipcustomers. Two large steamship customers ceased doing business with the Companyin the second quarter of 2001. While one steamship customer has terminatedoperations worldwide, the other has changed its method of business. Truckloadbrokerage revenue increased 2.7% from 2000. Logistics revenue, which includesrevenue from the Company's supply chain solutions services and revenue fromHGDS, increased 17.8% compared to 2000. This increase was primarily due tosignificant growth from the Company's supply chain solutions business.GROSS MARGIN Gross margin increased 6.7% to $179.0 million in 2001 from $167.8 millionin 2000. As a percent of revenue, gross margin increased to 13.6% from 12.1% in2000. The increase in gross margin as a percent of revenue is primarily due to 12the increase in the intermodal gross margin percentage resulting in part fromthe loss of the high volume, lower margin steamship business.SALARIES AND BENEFITS Salaries and benefits decreased 1.3% to $95.0 million in 2001 from $96.2million in 2000. As a percentage of revenue, salaries and benefits increasedto 7.2% from 7.0% in 2000. The increase as a percentage of revenue is due tothe decrease in revenue.SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased 16.0% to $53.6million in 2001 from $46.2 million in 2000. As a percentage of revenue, theseexpenses increased to 4.1% from 3.3% in 2000. The increase as a percentage ofrevenue is primarily attributed to a $4.7 million write-off associated with thebankruptcy and forced liquidation of a Korean steamship line customer, increasedcosts associated with the outsourced data center and the decrease in revenue.DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT Depreciation and amortization increased 75.1% to $10.7 million in 2001 from$6.1 million in 2000. This expense as a percentage of revenue increased to 0.8%from 0.4% in 2000. The increase in depreciation and amortization is due in partto the depreciation of software applications placed into service throughout 2000and 2001. Additionally, during the first half of the year, the Companyrecognized $1.5 million in additional depreciation due primarily to a change inestimated useful lives for various assets. Of this amount, $0.9 million relatesto various assets, that in December 2000, were determined to be no longer usefulonce the Company's new operating system was completed. The remaining $0.6million of additional depreciation relates to the Company's decision toaccelerate depreciation for a piece of communications software that was replacedwith a more stable and cost effective software application during the secondquarter of 2001.AMORTIZATION OF GOODWILL Amortization of goodwill remained constant at $5.7 million in both 2001 and2000. IMPAIRMENT OF PROPERTY AND EQUIPMENT The $3.4 million impairment charge in 2001 was due to Hub Distribution'sexit from its initiative surrounding the home delivery of large box itemspurchased over the internet.OTHER INCOME (EXPENSE) Interest expense decreased 10.3% to $10.3 million in 2001 from $11.5million in 2000. The decrease in interest expense is due primarily to carrying alower average debt balance this year as compared to the prior year and lowerinterest rates. Interest income decreased to $0.7 million in 2001 from $0.8 million in2000. Other income decreased to $0.0 million in 2001 from $0.1 million in 2000.MINORITY INTEREST Minority interest decreased to a charge of $0.2 million in 2001 compared toa benefit of $1.7 million in 2000. Minority interest represents the 35% minorityinterest in Hub Distribution.PROVISION FOR INCOME TAXES The provision for income taxes decreased 83.5% to $0.3 million in 2001compared to $1.9 million in 2000. The Company provided for income taxes using aneffective rate of 41.0% in both years. 13NET INCOME Net income decreased to $0.4 million in 2001 from $2.7 million in 2000.EARNINGS PER COMMON SHARE Basic and diluted earnings per common share decreased to $0.06 in 2001 from$0.35 in 2000.LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations and capital expenditures through cashflows from operations and bank borrowings. Cash provided by operating activities for the year ended December 31, 2002,was approximately $12.6 million, which resulted primarily from net income fromoperations, non-cash charges of $16.9 million and a net decrease in workingcapital of $5.8 million. The decrease in working capital was primarily relatedto reduced accounts payable and accrued expenses offset by a reduction inaccounts receivable due to improved collection efforts. Net cash used in investing activities for the year ended December 31, 2002,was $10.5 million and related to the purchase of the minority interest in HGDSand capital expenditures. The capital expenditures were principally made toenhance the Company's information system capabilities. The net cash used in financing activities for the year ended December 31,2002, was $2.0 million. This was primarily comprised of $6.0 million ofborrowings on the Company's line of credit and $8.0 million of scheduledpayments on the Company's term debt and capital leases. The Company maintains a multi-bank credit facility (the "CreditFacility"). The Credit Facility is comprised of term debt and a revolving lineof credit. The revolving line of credit has a term that expires on June 24, 2005and bears interest at a maximum of LIBOR plus 3.0% or Prime plus 1.5%.Borrowings and weighted average interest rates on the revolving line of creditwere $25.0 million and 4.18% and $19.0 million and 4.46% at December 31, 2002and 2001, respectively. There was $24.3 million and $31.0 million unused andavailable under the revolving line of credit at December 31, 2002 and 2001,respectively. The term debt has quarterly payments ranging from $1.2 millionto $2.0 million with a balloon payment of $9.0 million due on June 24, 2005.Interest on the term debt is a maximum of LIBOR plus 3.25% or Prime plus 1.75%.Borrowings and weighted average interest rates on the term debt were $27.0million and 4.40% and $35.0 million and 4.66% at December 31, 2002 and 2001,respectively. The Credit Facility was amended three times during 2002. On March 27,2002, the Credit Facility was amended to waive any historical covenantviolations that resulted from the restatement of the Company's financialstatements from 1999 and 2000 and the adjustment made to the Company's financialstatements in the fourth quarter of 2001. The amendment also revised the minimumborrowing rate from January 1, 2002 through September 30, 2002. On August 14,2002, the Credit Facility was amended to waive the Company's non-compliance asof June 30, 2002 with certain covenants relating to the fixed charge coverageratio, minimum earnings before interest, taxes, depreciation and minorityinterest and cash flow leverage ratio. The amendment modified certain financialcovenants for the quarters ending September 30, 2002 and December 31, 2002. OnOctober 15, 2002, the Credit Facility was amended to modify the fixed chargecoverage ratio, minimum earnings before interest, taxes, depreciation,amortization and minority interest and the cash flow leverage ratio for allperiods subsequent to December 31, 2002. In addition, the capital expenditurelimitation was reduced to $9.0 million for the year ended December 31, 2003. Theamendment also provided that loans under the Credit Facility are secured bysubstantially all assets of the Company. The Credit Facility, as amended,provides for certain financial covenants including a fixed charge coverageratio, minimum earnings before interest, taxes, depreciation, amortization,minority interest and certain other charges (EBITDAM) and a cash flow leverageratio. The Company was in compliance with its debt covenants as of December 31,2002. Subsequent to December 31, 2002, the Company extended the expiration dateof the Credit Facility to June 24, 2005, modified the definition of EBITDAM andset covenants through the end of the extended term. The modified covenants areconsistent with the covenants of the private placement debt for the same timeperiod. The Company maintains $50.0 million of private placement debt (the"Notes"). These Notes have an eight-year average life and bear interest at 9.14%which is paid quarterly. These Notes mature on June 25, 2009, with annualpayments of $10.0 million commencing on June 25, 2005. The Notes were amendedthree times during 2002. The amendments were made currently with the changes to 14the Credit Facility discussed above and the revisions were similar to theamendments made to the Credit Facility. The Notes, as amended through October15, 2002, provide for certain financial covenants including a fixed chargecoverage ratio and a cash flow leverage ratio. The loans are secured bysubstantially all assets of the Company. The Company was in compliance with thecovenants as of December 31, 2002. As of December 31, 2002, the Company has standby letters of credit totaling$725,000 that expire from 2003 to 2012. At December 31, 2001, the Company hadstandby letters of credit totaling $925,000.CONTRACTUAL OBLIGATIONS The Company has ongoing commitments under various contractual andcommercial obligations at December 31, 2002, as follows (in millions): PAYMENTS DUE BY YEAR -------------------------------------------------------------------------------------- TOTAL 2003 2004 2005 2006 2007 THEREAFTER ------------ ---------- ------------ ------------ ------------ ----------- ----------- Long-term debt $ 102.1 $ 8.1 $ 8.0 $ 46.0 $ 10.0 $ 10.0 $ 20.0Operating leases 39.3 12.0 7.6 4.6 3.2 2.8 9.1 ------------ ---------- ------------ ------------ ------------ ----------- ----------- ------------ ---------- ------------ ------------ ------------ ----------- -----------Total $ 141.4 $ 20.1 $ 15.6 $ 50.6 $ 13.2 $ 12.8 $ 29.1 ============ ========== ============ ============ ============ =========== ===========CRITICAL ACCOUNTING POLICIES The Company's significant accounting policies are discussed inthe notes to the consolidated financial statements. The application of certainof these policies and the preparation of financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make significant judgments or rely on an estimation process thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expense during the reporting period. TheCompany bases it estimates on historical experience, current events and otherassumptions that it believes are reasonable. Significant estimates include theallowance for doubtful accounts, cost of purchased transportation and servicesand reserves for pricing and billing adjustments. If actual amounts areultimately different from previous estimates, the revisions are included in theCompany's results of operations for the period in which the actual amountsbecame known. The accounting policies that can have a significant impact uponthe results of operations, financial position and footnote disclosures of theCompany are as follows:ALLOWANCE FOR UNCOLLECTIBLE TRADE ACCOUNTS: In the normal course of business,the Company extends credit to customers after a review of each customer's credithistory. An allowance for uncollectible trade accounts has been establishedthrough an analysis of the accounts receivable aging, an assessment ofcollectibility based on historical trends and an evaluation of the currenteconomic conditions. Actual collections of accounts receivable could differ frommanagement's estimates due to changes in future economic, industry or customerfinancial condition.VALUATION OF LONG-LIVED ASSETS: The Company reviews long-lived assets forimpairment whenever events or changes in circumstances indicate the carryingamount of such assets many not be recoverable. An estimate of undiscounted cashflows produced by the asset or appropriate group of assets is compared to thecarrying value to determine whether impairment exists. The estimate of futurecash flows involves considerable management judgment and is based uponassumptions about anticipated future operating performance. The actual cash flowcould differ from management's estimates due to changes in business conditions,operating performance and economic conditions.VALUATION OF GOODWILL: As of January 1, 2002, the Company adopted FinancialAccounting Standards Board Statement No. 142, "Goodwill and Other IntangibleAssets" ("Statement 142"). Under Statement 142, goodwill and intangible assetsthat have indefinite useful lives are no longer amortized. In accordance withStatement 142, the Company reviews goodwill for impairment on an annual basis orwhenever events of changes in circumstances indicate the carrying amount ofgoodwill may not be recoverable. The Company utilizes a third-party independentvaluation firm to assist in performing the necessary valuations to be used inthe impairment testing. The valuations are based on market capitalization,discounted cash flow analysis or a combination of both methodologies. Theassumptions used by the Company in the above valuations include expectations 15regarding future operating performance, discount rates, control premiums andother factors which are subjective in nature. As previously mentioned, actualcash flows from operations could differ from management's estimates due tochanges in business conditions, operating performance and economic conditions.Should estimates differ materially from actual results, the Company may berequired to record impairment charges in the future.DEFERRED INCOME TAXES: Deferred income taxes are recognized for the future taxeffects of temporary differences between financial and income tax reportingusing tax rates in effect for the years in which the differences are expected toreverse. An assessment is made as to the likelihood that deferred tax assetswill be recoverable. As part of this assessment, management has consideredtax-planning strategies that it believes to be prudent and feasible to allow forthe realization of deferred tax assets. In the event the probability ofrealizing the deferred tax assets do not meet the more likely than not thresholdin the future, a valuation allowance would be established for the deferred taxassets deemed unrecoverable.OUTLOOK, RISKS AND UNCERTAINTIES Except for historical data, the information contained in this Annual Reportconstitutes forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements areinherently uncertain and subject to risks. Such statements should be viewed withcaution. Actual results or experience could differ materially from theforward-looking statements as a result of many factors. Forward-lookingstatements in this report include, but are not limited to, those contained inthis "Outlook, Risks and Uncertainties" section regarding expectations, hopes,beliefs, estimates, intentions or strategies regarding the future. The Companyassumes no liability to update any such forward-looking statements. In additionto those mentioned elsewhere in this section, such risks and uncertaintiesinclude the impact of competitive pressures in the marketplace, including theentry of new, web-based competitors 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, the threat of war or thecommencement of a war in the Middle East and fluctuations in interest rates.BUSINESS COMBINATIONS/DIVESTITURES Management believes that future acquisitions or dispositions made by theCompany 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, net income and the Company's debt level.Financial results may be impacted by additional factors as discussed below.REVENUE Management believes that the performance of the railroads and a more severeor prolonged slow-down of the economy are the most significant factors thatcould negatively influence the Company's revenue growth rate. Should there befurther consolidation in the rail industry causing a service disruption, theCompany believes its intermodal growth rate would likely be negatively impacted.Should there be another significant service disruption similar to the lock outof West Coast dock workers, the Company expects there may be some customers whowould switch from using the Company's intermodal service to other carriers'over-the-road service. The Company expects these customers may choose tocontinue to utilize these carriers even when intermodal service levels arerestored. Other factors that could negatively influence the Company's growthrate include, but are not limited to, the elimination of fuel surcharges, theentry of new web-based competitors, inadequate drayage service and inadequateequipment supply.GROSS MARGIN Management expects fluctuations in the gross margin percentage fromquarter-to-quarter caused by various factors including, but not limited to,changes in business mix, intermodal margins, highway brokerage margins,logistics business margins, trailer and container capacity, vendor pricing, fuelcosts, intermodal industry growth, intermodal industry service levels,competition and accounting estimates. Unlike the Company's other serviceofferings, the Company's distribution services are comprised of certain highermargin projects. There can be no assurance these higher margin projects willcontinue in the future.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 between 16revenue increases and changes in levels of staffing. Should the Companyeliminate more positions due to automation resulting from systems enhancementsor centralizing functions, this expense, as a percent of revenue, is likely tobe reduced. Factors that could affect the percentage from staying in the recenthistorical range include, but are not limited to, revenue growth ratessignificantly higher or lower than forecasted, a management decision to investin additional personnel to stimulate new or existing businesses, such as theCompany's expedited services initiative, changes in customer requirements andchanges in railroad intermodal service levels which could result in a lower orhigher cost of labor per move.SELLING, GENERAL AND ADMINISTRATIVE Management believes there are several factors that could cause selling,general and administrative expenses to increase as a percentage of revenue. Ascustomer expectations 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 depreciation and amortization of property andequipment will increase in the future. The most significant factor that couldcause an increase in depreciation and amortization expense is increased softwareamortization related to improvements in the Company's information systems.Additional factors that could cause an increase in depreciation expense include,but are not limited to, if the Company decided to purchase rather than lease agreater proportion of assets or accelerating depreciation due to changes inuseful lives of existing assets.AMORTIZATION OF GOODWILL With the adoption of Statement 142 effective January 1, 2002, the Company'sgoodwill is no longer being amortized but is subject to periodic impairmentreviews.IMPAIRMENT OF PROPERTY AND EQUIPMENT On an ongoing basis, the Company assesses the realizability of its assets.If, at any point during the year, management determines that an impairmentexists, the carrying amount of the asset is reduced by the estimated impairmentwith a corresponding charge to earnings. If it is determined that an impairmentexists, management estimates that the write down of specific assets could have amaterial adverse impact on earnings.OTHER INCOME (EXPENSE) Factors that could cause interest to fluctuate higher or lower thanforecasted include, but are not limited to, changes in lending rates,unanticipated debt repayments, unanticipated working capital needs,unanticipated software development expenses and unanticipated capitalexpenditures. Management estimates that interest income will likely remain relativelyconsistent with the prior year. Factors that could cause a change include, butare not limited to, the possible use of cash to make debt repayments, fundworking capital needs and fund capital expenditures.LIQUIDITY AND CAPITAL RESOURCES The Company believes that cash to be provided by operations, cash availableunder its lines of credit and the Company's ability to obtain additional creditwill be sufficient to meet the Company's short-term working capital and capitalexpenditure needs. The Company believes that the aforementioned items aresufficient to meet its anticipated long-term working capital, capitalexpenditure and debt repayment needs. The Company estimates that its capital expenditures will not exceed $9.0million in 2003.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to changes in interest rateson its bank line of credit and term notes which may adversely affect its results 17of operations and financial condition. The Company seeks to minimize the riskfrom interest rate volatility through its regular operating and financingactivities and, when deemed appropriate, through the use of derivative financialinstruments. The Company does not use financial instruments for tradingpurposes. The Company has both fixed and variable rate debt as described in Note 8 tothe Consolidated Financial Statements. The Company had an interest rate swapdesignated as a hedge on a portion of the Company's variable rate debt thatmatured September 30, 2002. The purpose of the swap was to fix the interest rateon a portion of the variable rate debt and reduce certain exposures to interestrate fluctuations. As of December 31, 2002, the Company did not have anyinterest rate swap agreements outstanding. A ten percent increase in marketinterest rates would not have a material impact on the results of operations forthe year ended December 31, 2002. The main objective of interest rate risk management is to reduce the totalfunding cost to the Company and to alter the interest rate exposure to thedesired risk profile. 18ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Report of Independent Auditors 20 Predecessor Auditor Opinion 21 Consolidated Balance Sheets - December 31, 2002 and December 31, 2001 22 Consolidated Statements of Operations - Years ended December 31, 2002, December 31, 2001 and December 31, 2000 23 Consolidated Statements of Stockholders; Equity - Years ended December 31, 2002, December 31, 2001 and December 31, 2000 24 Consolidated Statements of Cash Flows - Years ended December 31, 2002, December 31, 2001 and December 31, 2000 25 Notes to Consolidated Financial Statements 26 Schedule II - Valuation and Qualifying Accounts S-1 19 REPORT OF INDEPENDENT AUDITORSThe Board of Directors and Stockholders of Hub Group, Inc.: We have audited the consolidated balance sheet of Hub Group, Inc. as ofDecember 31, 2002, and the related consolidated statements of operations,stockholders' equity, and cash flows for the year then ended. Our audit alsoincluded the financial statement schedule listed in the index at Item 15(a) forthe year ended December 31, 2002. These financial statements and schedule arethe responsibility of the Company's management. Our responsibility is to expressan opinion on these financial statements based on our audit. The financialstatements of Hub Group, Inc. as of December 31, 2001, and for each of the twoyears in the period ended December 31, 2001 were audited by other auditors whohave ceased operations. Those auditors expressed an unqualified opinion on thosestatements in their report dated March 27, 2002 and included an explanatoryparagraph which disclosed that the selected quarterly financial data included inNote 19 contained information that they did not audit and were unable to reviewin accordance with standards established by the American Institute of CertifiedPublic Accountants because the Company did not restate its results on aquarterly basis. We conducted our audit 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 consolidatedfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion. In our opinion, the 2002 financial statements referred to above presentfairly, in all material respects, the consolidated financial position of HubGroup, Inc. at December 31, 2002, and the consolidated results of theiroperations and their cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States. Also, in ouropinion, the related financial statement schedule for the year ended December31, 2002, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein. As discussed in Note 1 to the consolidated financial statements,effective on January 1, 2002, the Company changed its method of accounting forgoodwill to conform with Statement of Financial Accounting Standards (Statement)142, "Goodwill and Other Intangible Assets". As discussed, the consolidated financial statements of Hub Group, Inc.as of December 31, 2001, and for each of the two years in the period endedDecember 31, 2001 were audited by other auditors who have ceased operations. Asdescribed in Note 1, these consolidated financial statements have been revisedto include the transitional disclosures required by Statement 142, "Goodwill andOther Intangible Assets", which was adopted by the Company as of January 1,2002. Our audit procedures with respect to the disclosures in Note 1 withrespect to 2001 and 2000 included (a) agreeing the previously reported netincome to the previously issued financial statements and the adjustments toreported net income representing amortization expense, including any related taxeffects, recognized in those periods related to goodwill as a result ofinitially applying Statement 142, to the Company's underlying records obtainedfrom management, and (b) testing the mathematical accuracy of the reconciliationof adjusted net income to reported net income, and the relatedearnings-per-share amounts. In our opinion, the disclosures for 2001 and 2000 inNote 1 are appropriate. However, we were not engaged to audit, review, or applyany procedures to the 2001 and 2000 financial statements of the Company otherthan with respect to such disclosures and, accordingly, we do not express anopinion or any other form of assurance on the 2001 and 2000 financial statementstaken as a whole. ERNST & YOUNG LLPChicago, IllinoisFebruary 19, 2003 20PREDECESSOR AUDITOR (ARTHUR ANDERSEN LLP) OPINION NOTE: THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHURANDERSEN LLP ("ANDERSEN") IN CONNECTION WITH HUB GROUP, INC.'S FORM 10-K FILINGFOR THE FISCAL YEAR ENDED DECEMBER 31, 2001. THE INCLUSION OF THIS PREVIOUSLYISSUED ANDERSEN REPORT IS PURSUANT TO THE " TEMPORARY FINAL RULE AND FINAL RULEREQUIREMENTS FOR ARTHUR ANDERSEN LLP AUDITING CLIENTS," ISSUED BY THE U.S.SECURITIES AND EXCHANGE COMMISSION IN MARCH 2002. NOTE THAT THIS PREVIOUSLYISSUED ANDERSEN REPORT INCLUDES REFERENCES TO CERTAIN FISCAL YEARS, WHICH ARENOT REQUIRED TO BE PRESENTED IN THE ACCOMPANYING CONSOLIDATED FINANCIALSTATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000. THIS AUDITREPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THISFILING ON FORM 10-K.To the Board of Directors and Stockholders of Hub Group, Inc.: We have audited the accompanying consolidated balance sheets of HubGroup, Inc. (a Delaware corporation) as of December 31, 2001 and 2000 and therelated consolidated statements of operations, stockholders' equity and cashflows for each of the three years in the period ended December 31, 2001 (2000and 1999 as restated - see Note 2). These consolidated financial statements andthe schedule referred to below are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements and the schedule based on our audits. 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 financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion. The selected quarterly financial data included in Note 20 containsinformation that we did not audit, and, accordingly, we do not express anopinion on that data. We were unable to review the quarterly financial data inaccordance with standards established by the American Institute of CertifiedPublic Accountants because the Company did not restate its results on aquarterly basis (see Note 2). 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, 2001 and 2000, and the results of its operations andcash flows for each of the three years in the period ended December 31, 2001, 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, IllinoisMarch 27, 2002 21 HUB GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ----------------------------------- DECEMBER 31, ----------------------------------- 2002 2001 ---------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ - $ - Accounts receivable Trade, net 126,736 137,463 Other 13,715 12,302 Deferred taxes 3,221 11,147 Prepaid expenses and other current assets 4,732 3,840 ---------------- ----------------- TOTAL CURRENT ASSETS 148,404 164,752 PROPERTY AND EQUIPMENT, net 34,209 39,098 GOODWILL, net 215,175 208,166 OTHER ASSETS 1,474 1,507 MINORITY INTEREST - 2,501 ---------------- ----------------- TOTAL ASSETS $ 399,262 $ 416,024 ================ =================LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable Trade $ 124,980 $ 135,588 Other 3,226 1,275 Accrued expenses Payroll 10,275 11,195 Other 8,971 14,020 Current portion of long-term debt 8,061 8,054 ---------------- ----------------- TOTAL CURRENT LIABILITIES 155,513 170,132 LONG-TERM DEBT, EXCLUDING CURRENT PORTION 94,027 96,059 DEFERRED TAXES 15,382 17,380 CONTINGENCIES AND COMMITMENTS STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares issued or outstanding in 2002 and 2001 - - Common stock, Class A: $.01 par value; 12,337,700 shares authorized; 7,046,250 shares issued and outstanding in 2002 and 2001 70 70 Class B: $.01 par value; 662,300 shares authorized; 662,296 shares issued and outstanding in 2002 and 2001 7 7 Additional paid-in capital 110,819 110,819 Purchase price in excess of predecessor basis, net of tax benefit of $10,306 (15,458) (15,458) Retained earnings 38,902 37,404 Accumulated other comprehensive loss - (389) --------------- ----------------- TOTAL STOCKHOLDERS' EQUITY 134,340 132,453 --------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 399,262 $ 416,024 =============== =================The accompanying notes to consolidated financial statements are an integralpart of these statements. 22 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31, ------------------------------------------------- 2002 2001 2000 --------------- ---------------- -------------- Revenue $ 1,335,660 $ 1,319,331 $ 1,382,880Transportation costs 1,172,848 1,140,368 1,215,113 --------------- ---------------- -------------- Gross margin 162,812 178,963 167,767Costs and expenses: Salaries and benefits 93,476 94,982 96,201 Selling, general and administrative 46,824 53,613 46,233 Depreciation and amortization of property and equipment 11,371 10,678 6,097 Amortization of goodwill - 5,741 5,741 Impairment of property and equipment - 3,401 - --------------- ---------------- -------------- Total costs and expenses 151,671 168,415 154,272 Operating income 11,141 10,548 13,495 --------------- ---------------- --------------Other income (expense): Interest expense (9,453) (10,345) (11,532) Interest income 230 693 779 Other, net 97 6 136 --------------- ---------------- -------------- Total other expense (9,126) (9,646) (10,617)Income before minority interest and provision for income taxes 2,015 902 2,878 --------------- ---------------- --------------Minority interest (524) 151 (1,669) --------------- ---------------- --------------Income before provision for income taxes 2,539 751 4,547Provision for income taxes 1,041 308 1,864 --------------- ---------------- --------------Net income $ 1,498 $ 443 $ 2,683 =============== ================ ==============Basic earnings per common share $ 0.19 $ 0.06 $ 0.35 =============== ================ ==============Diluted earnings per common share $ 0.19 $ 0.06 $ 0.35 =============== ================ ==============Basic weighted average number of shares outstanding 7,709 7,708 7,708 =============== ================ ==============Diluted weighted average number of shares outstanding 7,714 7,716 7,716 =============== ================ ==============The accompanying notes to consolidated financial statements are an integralpart of these statements. 23 HUB GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARES) YEARS ENDED DECEMBER 31, ------------------------------------------------- 2002 2001 2000 -------------- --------------- ---------------- Class A & B Common Stock Shares Beginning of year 7,708,546 7,708,346 7,706,246 Exercise of non-qualified stock options - 200 2,100 -------------- --------------- ---------------- Ending balance 7,708,546 7,708,546 7,708,346 -------------- --------------- ----------------Class A & B Common Stock Amount Beginning of year $ 77 $ 77 $ 77 -------------- --------------- ---------------- Ending balance 77 77 77 -------------- --------------- ----------------Additional Paid-in Capital Beginning of year 110,819 110,817 110,786 Exercise of non-qualified stock options - 2 31 -------------- --------------- ---------------- Ending balance 110,819 110,819 110,817 -------------- --------------- ----------------Purchase Price in Excess of Predecessor Basis, Net of Tax Beginning of year (15,458) (15,458) (15,458) -------------- --------------- ---------------- Ending balance (15,458) (15,458) (15,458) -------------- --------------- ----------------Retained Earnings Beginning of year 37,404 36,961 34,278 Net income 1,498 443 2,683 -------------- --------------- ---------------- Ending balance 38,902 37,404 36,961 -------------- --------------- ----------------Accumulated Other Comprehensive (Loss) Income Beginning of year (389) - - Other comprehensive income (loss) 389 (389) - -------------- --------------- ---------------- Ending balance - (389) - -------------- --------------- ---------------- TOTAL STOCKHOLDERS' EQUITY $ 134,340 $ 132,453 $ 132,397 ============== =============== ================Comprehensive Income Net income $ 1,498 $ 443 $ 2,683 Cumulative effect of adopting Statement 133, net of tax - 79 - Unrealized interest rate swap income (loss), net of taxes 389 (468) - ------------------------------------------------- Other comprehensive income (loss) 389 (389) - ------------------------------------------------- Total comprehensive income $ 1,887 $ 54 $ 2,683 =================================================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, ----------------------------------------------- 2002 2001 2000 -------------- -------------- --------------- Cash flows from operating activities: Net income $ 1,498 $ 443 $ 2,683 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 11,476 11,248 6,875 Amortization of goodwill - 5,741 5,741 Impairment of property and equipment - 3,401 - Deferred taxes 5,928 308 1,864 Minority interest (524) 151 (1,669) (Gain) loss on sale of assets (33) 426 128 Other assets 33 670 (215) Changes in working capital: Accounts receivable, net 9,314 43,204 (4,044) Prepaid expenses and other current assets (892) 697 (1,188) Accounts payable (8,657) (43,676) 26,446 Accrued expenses (5,580) 5,021 4,729 -------------- -------------- --------------- Net cash provided by operating activities 12,563 27,634 41,350 -------------- -------------- ---------------Cash flows from investing activities: Purchase of minority interest (4,000) - - Purchases of property and equipment, net (6,538) (10,319) (26,613) -------------- -------------- --------------- Net cash used in investing activities (10,538) (10,319) (26,613) -------------- -------------- ---------------Cash flows from financing activity: Proceeds from sale of common stock - 2 31 Distributions to minority interest - - (454) Net borrowings (payments) on revolver 6,000 (5,000) (10,000) Payments on long-term debt (8,025) (12,317) (6,179) -------------- -------------- --------------- Net cash used in financing activities (2,025) (17,315) (16,602) -------------- -------------- ---------------Net increase (decrease) in cash and cash equivalents - - (1,865) Cash and cash equivalents beginning of period - - 1,865 -------------- -------------- ---------------Cash and cash equivalents end of period $ - $ - $ - ============== ============== ===============Supplemental disclosures of cash flow information Cash paid for: Interest $ 8,283 $ 10,143 $ 12,520 Income taxes - - 567 Non-cash activity: Unrealized income (loss) on derivative instrument $ 389 $ (389) $ -The accompanying notes to consolidated financial statements are an integral partof these statements. 25 HUB GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBUSINESS: Hub Group, Inc. (the "Company") provides intermodal transportationservices utilizing primarily third party arrangements with railroads and drayagecompanies. The Company also arranges for transportation of freight by truck andperforms logistics services.PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include theaccounts of the Company and all entities in which the Company has more than a50% equity ownership or otherwise exercises unilateral control. All significantintercompany 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, of approximately $4,259,000 and $12,320,000 at December 31, 2002and 2001, respectively, are included in accounts payable trade.ACCOUNTS RECEIVABLE AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS: The Companycarries its accounts receivable at face amount less an allowance foruncollectible accounts. The allowance for uncollectible accounts is determinedthrough an analysis of the accounts receivable aging, an assessment ofcollectibility based on historical trends and an evaluation of current economicconditions. The Company's reserve for uncollectible accounts was approximately$5,362,000 and $4,020,000 at December 31, 2002 and 2001, respectively. TheCompany does not generally charge interest on past due accounts receivables.Recoveries of receivables previously charged off are recorded when received.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 the 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. Interest is capitalized on qualifying assets under development forinternal use. Maintenance and repairs are charged to operations as incurred andmajor improvements are capitalized. The cost of assets retired or otherwisedisposed of and the accumulated depreciation thereon are removed from theaccounts with any gain or loss realized upon sale or disposal charged orcredited to operations. The Company reviews long-lived assets for impairmentwhen events or changes in circumstances indicate the carrying amount of an assetmay not be recoverable. In the event that the undiscounted future cash flowsresulting from the use of the asset group is less than the carrying amount, animpairment loss equal to the excess of the assets carrying amount over its fairvalue is recorded. See Note 6 for impairment charges recorded in 2001.GOODWILL: Goodwill represents the excess of purchase price over the fair marketvalue of net assets acquired in connection with the Company's businesscombinations. As of January 1, 2002, the Company adopted Financial AccountingStandards Board Statement No. 142, "Goodwill and Other Intangible Assets"("Statement 142"). Under Statement 142, goodwill and intangible assets that haveindefinite useful lives are no longer amortized. Accumulated goodwillamortization was $21,517,000 as of December 31, 2002 and 2001.In connection with the adoption of SFAS 142, the Company completed the requiredtransitional and annual goodwill impairment testing. This testing useddiscounted cash flow and market capitalization methodologies to determine a fairmarket value of the reporting units. The results of the testing indicated noimpairment. The impairment testing was based on the Company's estimates of thevalue of the reporting units, future operating performance and discount rates.Should the estimates differ materially from actual results, the Company may berequired to record impairment charges in future periods. The Company willcontinue to test the value of its goodwill for any impairment at least annuallyas of November 1 and impairment, if any, will be recorded as expense in theperiod of impairment. The following table presents net income for 2002 incomparison to 2001 and 2000, exclusive of amortization expense recognized in the 26previous years related to goodwill which is no longer being amortized. Amountsare in thousands except per share information: YEARS ENDED DECEMBER 31, ----------------------------------- 2002 2001 2000 ------------ ----------- ---------- Net income as reported $ 1,498 $ 443 $ 2,683 Add back amortization of goodwill, net of tax - 3,387 3,387 ------------ ----------- ----------Adjusted net income $ 1,498 $ 3,830 $ 6,070 ============ =========== ==========Basic and diluted earnings per share, as reported $ 0.19 $ 0.06 $ 0.35Add back amortization of goodwill, net of tax - 0.44 0.44 ------------ ----------- ----------Adjusted basic and diluted earnings per share $ 0.19 $ 0.50 $ 0.79 ============ =========== ==========DEFERRED FINANCING COSTS: The accumulated amortization related to the deferredfinancing costs was $1,808,000 and $1,108,000 as of December 31, 2002 and 2001,respectively. The amortization expense related to deferred financing costs was$700,000, $476,000 and $387,000 for the years ending December 31, 2002, 2001 and2000, respectively. Deferred financing costs net of accumulated amortizationwere $1,592,327 at December 31, 2002.FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of cash and cashequivalents, accounts receivable and accounts payable approximates fair value atDecember 31, 2002 due to their short-term nature. The carrying value ofthe Company's term debt and revolving line of credit approximates fair value dueto their variable interest rates. The fair value of the Notes, estimated usingdiscounted cash flow analysis based on the Company's incremental borrowing ratefor similar instruments, approximates the carrying value at December 31, 2002.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. The Company primarilyserves customers located throughout the United States with no significantconcentration in any one region. No one customer accounted for more than 10% ofrevenue in 2002, 2001 and 2000. The Company reviews a customer's credit historybefore extending credit. In addition, the Company routinely assesses thefinancial strength of its customers and, as a consequence, believes that itstrade accounts receivable risk is limited.DERIVATIVE FINANCIAL INSTRUMENTS: The Company accounts for derivatives inaccordance with Financial Accounting Standards Board Statement No. 133,"Accounting for Derivatives and Hedging Activities" as amended (Statement 133).Under Statement 133, any derivatives are recorded on the balance sheet at fairvalue. Changes in the fair value of derivatives are recorded in earnings orother comprehensive income, based on hedge type. Gains or losses on derivativeinstruments are reclassified into earnings in the period in which earnings areimpacted by the underlying hedged item. Any ineffective portion of hedges isrecognized in earnings in the current period. As of December 31, 2002, theCompany was not a party to any derivative contracts.REVENUE RECOGNITION: Revenue represents sales of services to customers. Revenueis recognized at the time the transportation services are provided. Revenue forlogistics customers is recognized on the date the services are performed.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 financialstatement and tax bases of assets and liabilities applying enacted statutory taxrates in effect for the year in which the differences are expected to reverse.EARNINGS PER COMMON SHARE: In accordance with Statement of Financial AccountingStandards No. 128 ("Statement 128"), "Earnings per Share", basic earnings percommon share are based on the average quarterly weighted average number of ClassA and Class B shares of common stock outstanding. Diluted earnings per commonshare are adjusted for the assumed exercise of dilutive stock options. Incomputing the per share effect of assumed exercise, funds which would have beenreceived from the exercise of options, including tax benefits assumed to berealized, are considered to have been used to purchase shares at current marketprices, and the resulting net additional shares are included in the calculationof weighted average shares outstanding.STOCK BASED COMPENSATION: The Company currently utilizes Accounting PrinciplesBoard Opinion No. 25 in accounting for stock based compensation plans. APB No. 2725 requires the use of the intrinsic value method which measures compensationcosts as the excess of the quoted market price of the stock at the date of grantover the amount the employee must pay to acquire the stock. The following tableillustrates the effect on net income and income per share if the Company appliedthe fair value recognition provisions of Statement of Financial AccountingStandards No. 123 ("Statement 123"), "Accounting for Stock-based Compensation." YEARS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 ------------- ------------ ------------ Net income as reported (000's) $ 1,498 $ 443 $ 2,683Net income (loss) pro forma for Statement 123 (000's) 858 (288) 1,869Basic earnings (loss) per common share pro forma for Statement 123 $ 0.11 $ (0.04) $ 0.24Diluted earnings (loss) per common share pro forma for Statement 123 $ 0.11 $ (0.04) $ 0.24The 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. The Company's stock basedcompensation plans are discussed further in Note 11.USE OF ESTIMATES: The preparation of financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenue andexpense during the reporting period. Significant estimates include the allowancefor doubtful accounts, cost of purchased transportation and services andreserves for pricing and billing adjustments. Actual results could differ fromthose estimates.RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conformwith the current year presentation.NOTE 2. CAPITAL STRUCTURE The Company has authorized common stock comprised of Class A commonstock and Class B common stock. The rights of holders of Class A common stockand Class B common stock are identical, except each share of Class B commonstock entitles its holder to 20 votes, while each share of Class A common stockentitles its holder to one vote. The Company has authorized 2,000,000 shares ofpreferred stock.NOTE 3. EARNINGS PER SHARE The following is a reconciliation of the Company's earnings per share: YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000 ------------------------- ------------------------- ------------------------- (000'S) (000'S) (000'S) -------------- -------------- -------------- Per-Share Per-Share Per-Share INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT ------ ------ --------- ------ ------ --------- ------ ------ --------- BASIC EPS Income available to common stockholders $1,498 7,709 $0.19 $ 443 7,708 $0.06 $2,683 7,708 $0.35 ------ ------ --------- ------ ------ --------- ------ ------ ---------EFFECT OF DILUTIVE SECURITIES Stock options - 5 - - 8 - - 8 - ------ ------ --------- ------ ------ --------- ------ ------ ---------DILUTED EPS Income available to common stockholders plus assumed exercises $1,498 7,714 $0.19 $ 443 7,716 $0.06 $2,683 7,716 $0.35 ====== ====== ========= ====== ====== ========= ====== ====== ========= 28NOTE 4. PURCHASE OF MINORITY INTEREST HGDS was a 65% owned partnership until August of 2002 when Hubpurchased the minority partners' interest in HGDS. Pursuant to the HGDSPartnership Agreement, each of the partners had a legal obligation to thepartnership for any deficit balance in their respective capital accounts.Accordingly, there was a debit balance reflected in minority interest in theaccompanying consolidated balance sheets related to the minority partner'sdeficit capital account balance of approximately $2.5 million at December 31,2001. Management believed that the balance in the minority account wascollectable at December 31, 2001. Hub had a legal right to pursue the minoritypartner for the deficit balance in the capital account. In August of 2002, theCompany entered into a settlement agreement and release with the minoritypartner that resulted in the relinquishment of the minority partner's 35%interest in HGDS and release of the minority partner's claims against theCompany in exchange for $4.0 million in cash and release of Hub's claims againstthe minority partner including the $3.0 million balance in minority interest.The acquisition resulted in goodwill of approximately $7.0 million.NOTE 5. PROPERTY AND EQUIPMENTProperty and equipment consist of the following: YEARS ENDED DECEMBER 31, ------------------------------- 2002 2001 -------------- --------------- (000'S) Building and improvements $ 57 $ 57Leasehold improvements 1,582 2,126Computer equipment and software 52,095 49,373Furniture and equipment 8,234 7,542Transportation equipment and automobiles 2,127 3,690 -------------- --------------- 64,095 62,788Less: Accumulated depreciation and amortization (29,886) (23,690) -------------- --------------- Property and Equipment, net $ 34,209 $ 39,098 ============== =============== Depreciation expense, which includes depreciation of assets undercapital leases, was $11,476,000, $11,248,000 and $6,875,000 for 2002, 2001 and2000, respectively. Depreciation expense for 2000 included approximately$500,000 of additional depreciation due to the change in estimated useful livesof various assets that were no longer used once the new operating system wascompleted.NOTE 6. IMPAIRMENT OF PROPERTY AND EQUIPMENT On March 30, 2001, a $3.4 million pretax charge was recorded due to theimpairment of HGDS's e-Logistics software ("e-software"). This e-software wasused to process orders relating to the home delivery of large box itemspurchased over the internet. Management made the decision to exit the internethome delivery business and in conjunction with this decision, all customercontracts associated with the internet home delivery business were terminated asof March 30, 2001. Consequently, the e-software's fair value was reduced to zerobased on the lack of any future cash flows attributable to Hub Distribution'se-Logistics initiative. The Company does not intend to use the software in thefuture.NOTE 7. INCOME TAXESThe following is a reconciliation of the Company's effective tax rate to thefederal statutory tax rate: YEARS ENDED DECEMBER 31, ------------------------------------- 2002 2001 2000 ----------- ----------- ----------- U.S. federal statutory rate 34.0% 34.0% 34.0%State taxes, net of federal benefit (7.4) 3.9 3.9Goodwill amortization - 1.1 1.1Nondeductible expenses 14.8 - -Other (0.4) 2.0 2.0 ----------- ----------- -----------Net effective rate 41.0% 41.0% 41.0% ----------- ----------- ----------- 29 The Company and its subsidiaries file both, unitary and separatecompany, state income tax returns. The state tax benefit shown above is a resultof the tax benefit of the net operating losses incurred on a separate companybasis exceeding the tax expense incurred on the Company's unitary state filing. The following is a summary of the Company's provision for income taxes: YEARS ENDED DECEMBER 31, ------------------------------------- 2002 2001 2000 ----------- ----------- ----------- (000's)Current Federal $ (2,092) $ - $ - State and local - - -  ----------- ----------- ----------- (2,092) - - ----------- ----------- ----------- Deferred Federal 3,221 276 1,672 State and local (188) 32 192 ----------- ----------- ----------- 3,133 308 1,864 ----------- ----------- ----------- Total provision $ 1,041 $ 308 $ 1,864 ----------- ----------- ----------- The following is a summary of the Company's deferred tax assets andliabilities: YEARS ENDED DECEMBER 31, ------------------------------- 2002 2001 --------------- --------------- (000'S) Reserve for uncollectible accounts receivable $ 1,751 $ 1,537Accrued compensation 2,514 163Net operating loss carryforward - 9,500Other reserves 1,149 1,179 --------------- -------------- Current deferred tax assets 5,414 12,379Accrued compensation - 1,636Net operating loss and tax credit carryforwards 13,340 2,307Other 1 31Income tax basis in excess of financial basis of goodwill 6,845 7,678 --------------- -------------- Long-term deferred tax assets 20,186 11,652 --------------- -------------- Total deferred tax assets $ 25,600 $ 24,031 --------------- --------------Prepaids $ (33) $ -Receivables (2,160) (1,232) --------------- -------------- Current deferred tax liabilities (2,193) (1,232)Property and equipment (9,937) (9,929)Goodwill (25,631) (19,103) --------------- -------------- Long-term deferred tax liabilities (35,568) (29,032) --------------- -------------- Total deferred tax liabilities $ (37,761) $ (30,264) --------------- -------------- The Company had federal net operating loss carryforwards ofapproximately $23,495,000 at December 31, 2002. These federal net operating losscarryforwards expire as follows:(In thousands)2020 $ 5,5302021 6,1902022 11,775 30 The Company had federal tax credits of approximately $1,130,000 atDecember 31, 2002. The portion of the federal tax credits that have expirationdates, expire as follows:(In thousands)2019 $ 1392020 5432021 448NOTE 8. LONG-TERM DEBT AND FINANCING ARRANGEMENTSThe Company's outstanding debt is as follows (in thousands): YEARS ENDED DECEMBER 31, ----------------------------- 2002 2001 -------------- -------------- Bank line of credit $ 25,000 $ 19,000Term notes with quarterly payments ranging from $1,250,000 to $2,000,000 with a balloon payment of $9,000,000 due June 24, 2005; Interest is due quarterly at a floating rate. At December 31, 2002 and 2001, the weighted average interest rate was 4.40% and 4.66%, respectively 27,000 35,000Notes due on June 25, 2009 with annual payments of $10,000,000 commencing on June 25, 2005; interest is paid quarterly at a fixed rate of 9.14% 50,000 50,000Capital lease obligations collateralized by certain equipment 88 113 -------------- -------------Total long-term debt 102,088 104,113Less current portion (8,061) (8,054) -------------- ------------- $ 94,027 $ 96,059 -------------- -------------Aggregate principal payments, in thousands, due subsequent to December 31, 2002,are as follows:2003 $ 8,0612004 8,0072005 46,0092006 10,0072007 10,0042008 and thereafter 20,000 ----------- $ 102,088 =========== The Company maintains a multi-bank credit facility (the "CreditFacility"). The Credit Facility is comprised of term debt and a revolving lineof credit. The revolving line of credit has a term that expires on June 24, 2005and bears interest at a maximum of LIBOR plus 3.0% or Prime plus 1.5%.Borrowings and weighted average interest rates on the revolving line of creditwere $25.0 million and 4.18% and $19.0 million and 4.46% at December 31, 2002and 2001, respectively. There was $24.3 million and $31.0 million unused andavailable under the revolving line of credit at December 31, 2002 and 2001,respectively. The term debt has quarterly payments ranging from $1.2 million to$2.0 million with a balloon payment of $9.0 million due on June 24, 2005.Interest on the term debt is a maximum of LIBOR plus 3.25% or Prime plus 1.75%.Borrowings and weighted average interest rates on the term debt were $27.0million and 4.40% and $35.0 million and 4.66% at December 31, 2002 and 2001,respectively. The Credit Facility was amended three times during 2002. On March 27,2002, the Credit Facility was amended to waive any historical covenantviolations that resulted from the restatement of the Company's financialstatements from 1999 and 2000 and the adjustment made to the Company's financialstatements in the fourth quarter of 2001. The amendment also revised the minimumborrowing rate from January 1, 2002 through September 30, 2002. On August 14,2002, the Credit Facility was amended to waive the Company's non-compliance asof June 30, 2002 with certain covenants relating to the fixed charge coverageratio, minimum earnings before interest, taxes, depreciation and minorityinterest and cash flow leverage ratio. The amendment modified certain financialcovenants for the quarters ending September 30, 2002 and December 31, 2002. OnOctober 15, 2002, the Credit Facility was amended to modify the fixed chargecoverage ratio, minimum earnings before interest, taxes, depreciation, 31amortization and minority interest and the cash flow leverage ratio for allperiods subsequent to December 31, 2002. In addition, the capital expenditurelimitation was reduced to $9.0 million for the year ended December 31, 2003. Theamendment also provided that loans under the Credit Facility are secured bysubstantially all assets of the Company. The Credit Facility, as amended,provides for certain financial covenants including a fixed charge coverageratio, minimum earnings before interest, taxes, depreciation, amortization,minority interest and certain other charges (EBITDAM) and a cash flow leverageratio. The Company was in compliance with its debt covenants as of December 31,2002. Subsequent to December 31, 2002, the Company extended the expiration dateof the Credit Facility to June 24, 2005, modified the definition of EBITDAM andset covenants through the end of the extended term. The modified covenants areconsistent with the covenants of the private placement debt for the same timeperiod. The Company maintains $50.0 million of private placement debt (the"Notes"). These Notes have an eight-year average life and bear interest at 9.14%which is paid quarterly. These Notes mature on June 25, 2009, with annualpayments of $10.0 million commencing on June 25, 2005. The Notes were amendedthree times during 2002. The amendments were made currently with the changes tothe Credit Facility discussed above and the revisions were similar to theamendments made to the Credit Facility. The Notes, as amended through October15, 2002, provide for certain financial covenants including a fixed chargecoverage ratio and a cash flow leverage ratio. The loans are secured bysubstantially all assets of the Company. The Company was in compliance with thecovenants as of December 31, 2002. As of December 31, 2002, the Company has standby letters of credittotaling $725,000 that expire from 2003 to 2012. At December 31, 2001, theCompany had standby letters of credit totaling $925,000.NOTE 9. CAPITALIZED INTEREST AND INTEREST EXPENSE Capitalized interest on qualifying assets under development and totalinterest were as follows: YEARS ENDED DECEMBER 31, ----------------------------------------------- 2002 2001 2000 -------------- --------------- -------------- (000'S) Capitalized interest $ 28 $ 365 $ 836Interest expensed 9,453 10,345 11,532 -------------- --------------- --------------Total interest incurred $ 9,481 $ 10,710 $ 12,638 ============== =============== ============== NOTE 10. RENTAL EXPENSE, USER CHARGES AND LEASE COMMITMENTS Minimum annual rental commitments, in thousands, at December 31, 2002,under noncancellable operating leases, principally for real estate andequipment, are payable as follows:2003 $ 11,9652004 7,6472005 4,6462006 3,1482007 2,7892008 and thereafter 9,066 $ 39,261 Total rental expense included in selling general and administrativeexpense was approximately, $15,492,000, $15,157,000, and $13,230,000 for 2002,2001 and 2000, respectively. Many of the leases contain renewal options andescalation clauses which require payments of additional rent to the extent ofincreases in the related operating costs. Hub incurs user charges for its use of a fleet of dedicated containerswhich are included in transportation costs. Such charges, included intransportation costs, were $27,751,000 for the year ended December 31, 2002.Under the agreements, the Company has the ability to return the containers. As aresult, no minimum commitment has been included in the table above.NOTE 11. STOCK-BASED COMPENSATION PLAN In 1996, the Company adopted a Long-Term Incentive Plan (the "1996Incentive Plan"). The number of shares of Class A Common Stock reserved forissuance under the 1996 Incentive Plan was 450,000. In 1997, the Company adopteda second Long-Term Incentive Plan (the "1997 Incentive Plan"). The number ofshares of Class A Common Stock reserved for issuance under the 1997 IncentivePlan was 150,000. For the purpose of attracting and retaining key executive andmanagerial employees, in 1999 the Company adopted a third Long-Term Incentive 32Plan (the "1999 Incentive Plan"). The number of shares of Class A Common Stockreserved for issuance under the 1999 Incentive Plan was 600,000. In 2002, theCompany adopted a fourth Long-Term Incentive Plan (the "2002 Incentive Plan").The number of shares of Class A Common Stock reserved for issuance under the2002 Incentive Plan was 600,000. Under the 1996, 1997, 1999 and 2002 IncentivePlans, stock options, stock appreciation rights, restricted stock andperformance units may be granted for the purpose of attracting and motivatingkey employees and non-employee directors of the Company. The options granted tonon-employee directors vest ratably over a three-year period and expire 10 yearsafter the date of grant. The options granted to employees vest over a range ofthree to five years and expire 10 years after the date of grant. Information regarding these option plans for 2002, 2001 and 2000 is as follows: 2002 2001 2000 --------------------------------- ---------------------------------- --------------------------------- WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG. SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ----------------- -------------- ----------------- -------------- ------------------ -------------- Options outstanding, beginning of year 951,500 $ 16.28 877,800 $ 17.07 892,800 $ 17.86Options exercised 0 -- (200) 10.43 (2,100) 14.00Options granted 537,000 6.04 106,000 10.15 100,000 13.32Options forfeited (86,500) 15.14 (32,050) 17.64 (122,900) 20.11 ----------------- -------------- ----------------- -------------- ------------------ --------------Options outstanding, end of year 1,402,050 $ 12.43 951,550 $ 16.28 877,800 $ 17.07Weighted average fair value of options granted during the year $ 2.65 $ 4.66 $ 6.53Options exercisable at year end 615,250 520,900 355,300Option price range at end of year $ 4.87 to $28.16 $ 8.06 to $28.16 $ 8.31 to $28.16Option price for exercised shares $ -- $ 10.43 $ 14.00Options available for grant at end of year 337,950 188,450 262,400The following table summarizes information about options outstanding at December31, 2002: 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---------------- ----------- ------------------ ------------- ----------- --------------- $ 4.87 to $ 5.20 350,000 9.96 $ 5.19 -- $ --$ 5.66 to $10.81 273,000 9.16 $ 8.23 22,000 $ 9.25$11.23 to $18.56 349,800 4.22 $ 14.33 299,500 $ 14.25$18.75 to $28.16 429,250 6.72 $ 19.45 293,750 $ 19.60 ---------- ------------------ ------------- ----------- ---------------$ 4.87 to $28.16 1,402,050 7.38 $ 12.43 615,250 $ 16.63For purposes of determining the pro forma effect of these options as discussedin Note 1, the fair value of each option is estimated on the date of grant basedon the Black-Scholes single-option pricing model assuming: YEARS ENDED DECEMBER 31, ------------------------------------ 2002 2001 2000 ---------- ----------- ----------- Dividend yield 0.00% 0.00% 0.00%Risk-free interest rate 3.40% 4.50% 6.25%Volatility factor 40.00% 40.00% 40.00%Expected life in years 6.0 6.0 6.0 33NOTE 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 theenterprise wide disclosure requirements of Statement 131, the Company reportsrevenue, in thousands, for Intermodal Services, Brokerage Services, LogisticsServices and Distribution Services as follows: YEARS ENDED DECEMBER 31, ---------------------------------------------- 2002 2001 2000 -------------- -------------- -------------- Intermodal Services $ 914,577 $ 904,999 $ 1,004,434Brokerage Services 230,928 213,153 207,617Logistics Services 109,239 90,236 63,262Distribution Services 80,916 110,943 107,567 -------------- -------------- --------------Total Revenue $ 1,335,660 $ 1,319,331 $ 1,382,880 ============== ============== ==============NOTE 13. EMPLOYEE BENEFIT PLANS The Company has two profit-sharing plans and trusts under section401(k) of the Internal Revenue Code. Qualified contributions made by employeesto the plan are partially matched by the Company. The Company expensedapproximately $1,291,000 and $1,365,000 related to these plans in 2002 and 2001,respectively. Prior to 2001, for every dollar the employee contributed, theCompany had contributed an additional $.20 up to $100. In addition, prior to2001, the Company, at its discretion, typically had made profit sharingcontributions. Historically, the Company had contributed an amount equal to 3%of each participant's compensation up to a maximum of $5,100. The Company'scontributions to these plans were approximately $1,684,000 for 2000. The Company provides a deferred compensation plan that permits certainofficers and certain management employees to defer portions of theircompensation. Contributions made by employees to the plan are partially matchedby the Company. The Company expensed $654,000, $472,000 and $274,000 related tothis plan in 2002, 2001 and 2000, respectively.NOTE 14. RELATED PARTY TRANSACTIONS A shareholder of the Company is the owner of 20% of the Class Amembership interest of SmartOffices Services, LLC ("SmartOffices"). SmartOfficesis in the business of selling office supplies to various companies. The Companyspent $290,400, $334,200 and $166,200 buying various office supplies fromSmartOffices in 2002, 2001 and 2000, respectively. The shareholder sold this 20%interest in SmartOffices subsequent to December 31, 2002.NOTE 15. LEGAL MATTERS On February 19, 2002, a purported class action lawsuit was filed by RiggsPartners, LLC in the United States District Court for the Northern District ofIllinois, Eastern Division. On October 23, 2002, the federal district courtgranted the Company's motion to dismiss the complaint in its entirety forfailing to allege facts sufficient to state a claim. The court also granted themotion of the Company's former auditors. The Court's order required plaintiffsto file any amended complaint by November 22, 2002. The plaintiffs did not filean amended complaint by this date and agreed that they would not appeal thecourt's order of October 23, 2002 dismissing the lawsuit. The suit is thereforeterminated. In addition, the Company is a party to litigation incident to its business,including claims for freight lost or damaged in transit, improperly shipped orimproperly warehoused. Some of the lawsuits to which the Company is party arecovered by insurance and are being defended by the Company's insurance carriers.Some of the lawsuits are not covered by insurance and are being defended by theCompany. Management does not believe that the outcome of this litigation willhave a materially adverse effect on the Company's financial position or resultsof operations. See Item 1 Business - Risk Management and Insurance.NOTE 16. RESTRUCTURING CHARGES In the fourth quarter of 2002 the Company recorded a restructuringcharge of approximately $932,000 consisting of a severance charge for 74 34employees of $474,000 and a $458,000 liability for the remaining leaseobligation related to a closed facility. All severance payments have been madeas of December 31, 2002. Approximately $450,000 of lease obligation remains asof December 31, 2002 and will be reduced by future lease payments required underthe agreement. 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 was toresult in the reduction of 56 accounting-related positions from the operatingcompanies. All affected employees were informed of this decision in mid-November2000. In connection with this plan, the Company recorded a pre-tax charge of$250,000 that is included in salaries and benefits expense in the fourth quarterof 2000. During 2001, $206,000 was paid related to the accounting restructuringand thirty-one employees were terminated. The remaining $44,000 of the accrualwas reversed in 2001, thereby reducing salaries and benefits expense.NOTE 17. DERIVATIVE FINANCIAL INSTRUMENT In June 1998, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 133 ("Statement 133"), "Accounting forDerivative Instruments and Hedging Activities." On January 1, 2001, theCompany adopted Statement 133 and recorded the fair value of its interest rateswap of $79,000, net of related income taxes of $55,000, as an asset. Thetransition adjustment to record the asset was included in othercomprehensive income. The Company had an interest rate swap that matured on September 30, 2002with a notional amount of $25.0 million, a weighted average pay rate of 8.37%and a weighted average receive rate of 5.34% at December 31, 2001. Under theCredit Facility, the Company was required to enter into this interest rate swapagreement designated as a hedge on a portion of the Company's variable ratedebt. The Company used this interest rate swap to manage its exposure to changesin interest rates for its floating rate debt. This interest rate swap qualifiedas a cash flow hedge. The interest rate differential received or paid on theswap was recognized in the consolidated statements of operations as a reductionor increase in interest expense, respectively. The Company recorded incrementalinterest expense/(income) of $698,000, $312,000 and $(217,000) for this swap in2002, 2001, and 2000, respectively. The effective portion of the change in thefair value of the derivative instrument was recorded in the consolidated balancesheets as a component of current assets or liabilities and other comprehensiveincome. The ineffective portion of the change in the fair value of thederivative instrument, along with the gain or loss on the hedged item, wasrecorded in earnings and reported in the consolidated statements of operations,on the same line as the hedged item. For the twelve months ended December 31, 2002, the Company adjusted itsderivative financial instrument to fair value which resulted in an unrealizedincome of $389,000, net of the related income tax expense of $153,000. For thetwelve months ended December 31, 2001, the Company adjusted its derivativefinancial instrument to fair value which resulted in an unrealized loss of$468,000, net of the related income tax benefit of $325,000. These adjustments are included in other comprehensive income (loss).NOTE 18. BAD DEBT WRITE-OFF During September 2001, the Company recognized bad debt expense which isincluded in selling, general and administrative expense in the accompanyingconsolidated statements of operations and includes $4.7 million related to aKorean steamship line customer ("Customer"). The Customer filed forreorganization under the Corporate Reorganization Act of Korea in May 2001 andwas subsequently forced into liquidation by the Korean courts. According tocourt filings, the Customer does not have adequate funds to pay its securedcreditors. The Company, as an unsecured creditor, was notified by the trusteeappointed by the court during September 2001 that it should not expect torecover any funds from the Customer.NOTE 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) In 2001, the Company restated its consolidated financial statements forthe years ended December 31, 2000 and 1999 to properly report certain items ofrevenue and expense related to HGDS. These items principally related to revenue,transportation costs and selling, general and administrative expense. TheCompany did not restate the first, second or third quarter of 2001 and reflectedthe full impact of the adjustment in the fourth quarter of 2001. The followingtable sets forth selected quarterly financial data for each of the quarters in2002 and 2001 (in thousands, except per share amounts): 35 QUARTERS -------------------------------------------------------- FIRST SECOND THIRD FOURTH -------------- ------------- ------------- ------------- Year Ended December 31, 2002:Revenue $ 305,299 $ 327,595 $ 356,666 $ 346,100Gross margin 41,009 36,596 42,281 42,926Operating income (loss) 3,227 (897) 4,513 4,298Net income (loss) 940 (2,227) 1,379 1,406Basic earnings (loss) per share $ 0.12 $ (0.29) $ 0.18 $ 0.18Diluted earnings (loss) per share $ 0.12 $ (0.29) $ 0.18 $ 0.18 QUARTERS -------------------------------------------------------- FIRST SECOND THIRD FOURTH -------------- ------------- ------------- ------------- Year Ended December 31, 2001:Revenue $ 345,935 $ 318,023 $ 323,046 $ 332,327Gross margin 46,036 45,331 44,571 43,025Operating income 1,148 5,224 539 3,637Net income (loss) (676) 1,065 (1,112) 1,166Basic earnings (loss) per share $ (0.09) $ 0.14 $ (0.14) $ 0.15Diluted earnings (loss) per share $ (0.09) $ 0.14 $ (0.14) $ 0.15During the first quarter of 2002, the Company revised its estimate of accruedtransportation costs resulting in an increase in pretax income of approximately$2.8 million in the quarter. For the year ended December 31, 2002, this revisedestimate resulted in an increase in pre-tax income of $1.6 million since aportion of the increase would have been recognized in the last three quarters of2002. 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 13, 2003, sets forth certaininformation with respect to the directors of the Registrant and Section 16compliance and is incorporated herein by reference. Certain information withrespect to persons who are or may be deemed to be executive officers of theRegistrant is set forth under the caption "Executive Officers of the Registrant"in Part I of this report.ITEM 11. EXECUTIVE COMPENSATION The section entitled "Compensation of Directors and Executive Officers"appearing in the Registrant's proxy statement for the annual meeting ofstockholders to be held on May 13, 2003, 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 13, 2003, sets forth certain information withrespect to the ownership of the Registrant's Common Stock and is incorporatedherein by reference. The following table sets forth certain equity-based compensation planinformation for the Company as of December 31, 2002. EQUITY COMPENSATION PLAN INFORMATION------------------------------------------------------------------------------------------------------------------- NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING AVAILABLE FOR TO BE ISSUED WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS SECURITIES REFLECTED IN COLUMN (A)) (A)------------------------------ --------------------------- ---------------------------- --------------------------- Equity compensation plans approved by security holders 1,402,050 $12.43 337,950------------------------------ --------------------------- ---------------------------- --------------------------- Equity compensation plans not approved by security holders -- -- -------------------------------- --------------------------- ---------------------------- --------------------------- Total 1,402,050 $12.43 337,950------------------------------ --------------------------- ---------------------------- ---------------------------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 13,2003, 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. 37ITEM 14. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, an evaluationwas carried out under the supervision and with the participation of theCompany's management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures. Based upon this evaluation, the Chief Executive Officerand Chief Financial Officer concluded that the design and operation of thesedisclosure controls and procedures were effective. No significant changes weremade in our internal controls or in other factors that could significantlyaffect these controls subsequent to the date of this evaluation.ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS The following consolidated financial statements of the Registrant are included under Item 8 of this Form 10-K: Reports of Independent Auditors Consolidated Balance Sheets - December 31, 2002 and December 31, 2001 Consolidated Statements of Operations - Years ended December 31, 2002, December 31, 2001 and December 31, 2000 Consolidated Statements of Stockholders' Equity - Years ended December 31, 2002, December 31, 2001 and December 31, 2000 Consolidated Statements of Cash Flows - Years ended December 31, 2002, December 31, 2001 and December 31, 2000 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. PERIODIC REPORTS Upon written request, the Company's annual report to theSecurities and Exchange Commission on Form 10-K for the fiscal year endedDecember 31, 2002, and its quarterly reports on Form 10-Q will be furnished tostockholders free of charge; write to: Public Relations Department, Hub Group,Inc., 3050 Highland Parkway, Suite 100, Downers Grove, Illinois 60515. 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 12, 2003 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 12, 2003------------------------ Phillip C. Yeager /S/ DAVID P. YEAGER Vice Chairman, Chief Executive Officer and Director March 12, 2003--------------------- David P. Yeager /S/ THOMAS L. HARDIN President, Chief Operating Officer and Director March 12, 2003--------------------- Thomas L. Hardin /S/ THOMAS M. WHITE Vice President-Finance and Chief Accounting Officer March 12, 2003-------------------- Thomas M. White (Principal Financial and Accounting Officer) /S/ CHARLES R. REAVES Director March 12, 2003---------------------- Charles R. Reaves /S/ MARTIN P. SLARK Director March 12, 2003-------------------- Martin P. Slark /S/ GARY D. EPPEN Director March 12, 2003------------------ Gary D. Eppen CERTIFICATIONI, David P. Yeager, certify that:1) I have reviewed this annual report on Form 10-K of Hub Group, Inc.;2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and6) The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.DATE: MARCH 12, 2003 /S/ DAVID P.YEAGER Name: David P. Yeager Title: Chief Executive Officer CERTIFICATIONI, Thomas M. White, certify that:1) I have reviewed this annual report on Form 10-K of Hub Group, Inc.;2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and6) The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.DATE: MARCH 12, 2003 /S/ THOMAS M. WHITE Name: Thomas M. White Title: Chief Financial Officer SCHEDULE II HUB GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Deductions Balance at Beginning Costs & and End of Year Expenses Adjustments (a) of Year ---------------------- -------------------- ----------------------- ------------------------- Year Ended December 31: Allowance for uncollectible trade accounts 2002 $ 4,020,000 $ 1,761,000 $ (419,000) $ 5,362,000 2001 3,088,000 7,132,000 (6,200,000) 4,020,000 2000 2,134,000 2,766,000 (1,812,000) 3,088,000(a) For the year ended December 31, 2002, deductions and adjustments includes a $1.1 million adjustment to increase the reported allowance for uncollectible accounts receivable for the years presented in the schedule. This adjustment did not affect the amount of "Trade accounts receivable, net" reported in the Company's Consolidated Balance Sheets or operating results in the Consolidated Statements of Operations for those years. S-2INDEX 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 (incorporated by reference to Exhibit 10.13 to the Registrant's report on Form 10-K dated March 15, 2001 and filed March 16, 2001, File No. 000-27754)10.14 Amendment to $50 million Note Purchase Agreement among the Registrant, Hub City Terminals, Inc. and various purchasers (incorporated by reference to Exhibit 10.14 to the Registrant's report on Form 10-K dated March 15, 2001 and filed March 16, 2001, File No. 000-27754)10.15 Letter from the Registrant to Daniel L. Sellers dated December 24, 1998 (incorporated by reference to Exhibit 10.15 to the Registrant's report on Form 10-K dated March 15, 2001 and filed March 16, 2001, File No. 000-27754)10.16 Amendment to $100 million Credit Agreement among the Registrant, Hub City Terminals, Inc. and Harris Trust and Savings Bank (incorporated by reference to Exhibit 10.16 to the Registrant's report on Form 10-Q dated and filed April 19, 2001, File No. 000-27754)10.17 Amendment to $50 million Note Purchase Agreement among the Registrant, Hub City Terminals, Inc. and various purchasers (incorporated by reference to Exhibit 10.17 to the Registrant's report on Form 10-Q dated and filed April 19, 2001, File No. 000-27754)10.18 Amendment to $100 million Credit Agreement among the Registrant, Hub City Terminals, Inc. and Harris Trust and Savings Bank (incorporated by reference to Exhibit 10.18 to the Registrant's report on Form 10-Q dated and filed November 13, 2001, File No. 000-27754)10.19 Amendment to $50 million Note Purchase Agreement among the Registrant, Hub City Terminals, Inc. and various purchasers (incorporated by reference to Exhibit 10.19 to the Registrant's report on Form 10-Q dated and filed November 13, 2001, File No. 000-27754)10.20 Amendment to $100 million Credit Agreement among the Registrant, Hub City Terminals, Inc. and Harris Trust and Savings Bank dated March 27, 2002 (incorporated by reference to Exhibit 10.20 to the Registrant's report on Form 10-K dated and filed March 28, 2002, File No. 000-27754)10.21 Amendment to $50 million Note Purchase Agreement among the Registrant, Hub City Terminals, Inc. and various purchasers dated March 27, 2002 (incorporated by reference to Exhibit 10.21 to the Registrant's report on Form 10-K dated and filed March 28, 2002, File No. 000-27754)10.22 Amendment to $100 million Credit Agreement among the Registrant, Hub City Terminals, Inc. and Harris Trust and Savings Bank dated August 13, 2002 (incorporated by reference to Exhibit 10.22 to the Registrant's report on Form 10-Q dated and filed August 15, 2002, File No. 000-27754)10.23 Amendment to $50 million Note purchase Agreement among the Registrant, Hub City Terminals, Inc. and various purchasers dated August 14, 2002 (incorporated by reference to Exhibit 10.23 to the Registrant's report on Form 10-Q dated and filed August 15, 2002, File No. 000-27754)10.24 Amendment to $100 million Credit Agreement among the Registrant, Hub City Terminals, Inc. and Harris Trust and Savings Bank dated October 15, 2002 (incorporated by reference to Exhibit 10.24 to the Registrant's report on Form 10-Q dated and filed November 5, 2002, File No. 000-27754)10.25 Amendment to $50 million Note Purchase Agreement among the Registrant, Hub City Terminals, Inc. and various purchasers dated October 15, 2002 (incorporated by reference to Exhibit 10.25 to the Registrant's report on Form 10-Q dated and filed November 5, 2002, File No. 000-27754)10.26 Security Agreement among the Registrant, Hub City Terminals, Inc., Harris Trust and Savings Bank and various Note Holders dated October 15, 2002 (incorporated by reference to Exhibit 10.26 to the Registrant's report on Form 10-Q dated and filed November 5, 2002, File No. 000-27754)10.27 Amendment to $100 million Credit Agreement among the Registrant, Hub City Terminals, Inc. and Harris Trust and Savings Bank dated February 28, 200321 Subsidiaries of the Registrant23.1 Consent of Ernst & Young LLP99.1 Letter from the Company to the Securities and Exchange Commission dated March 27, 2002 regarding the Company's auditors, Arthur Andersen (incorporated by reference to Exhibit 99.1 to the Registrant's report on Form 10-K dated and filed March 28, 2002, File No. 000-27754)99.2 Section 906 Certifications 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 Bank Des Plaines, IllinoisCleveland, OhioLadies 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 have requested that the Lenders extend the RevolvingCredit Termination Date to June 24, 2005, modify certain financial covenants andmake certain other amendments to the Credit Agreement and the Lenders arewilling to do so under the terms and conditions set forth in this amendment(herein, the "AMENDMENT").1. AMENDMENTS. Subject to the satisfaction of the conditions precedent set forth inSection 2 below, the Credit Agreement shall be and hereby is amended as follows: 1.01. The last sentence of Section 1.3 of the Credit Agreement shall beamended and as so amended shall be restated in its entirety to read as follows: "Each Term Note shall be expressed to mature in installments, commencing on September 30, 1999 and continuing on the last day of each calendar quarter occurring thereafter to and including March 31, 2005, with the principal installments on the Term Notes to equal (in the aggregate for all the Term Notes taken together) $1,250,000 per installment through and including June 30, 2000; $1,500,000 per installment through and including June 30, 2001; $2,000,000 per installment through and including March 31, 2005; and with the final principal installment on all the Term Notes due on June 24, 2005 to equal (in the aggregate for all the Term Notes taken together) all principal not sooner paid; and the amount of each installment due on the Term Note held by each Lender shall be equal to such Lender's Percentage of such installment." 1.02. The chart appearing in the definition of "APPLICABLE MARGIN"appearing in Section 4.1 of the Credit Agreement shall be amended and as soamended, shall be restated to read as follows: Applicable Margin For Domestic Rate Portion of Revolving Credit Loans and Swing Applicable "When Following Loans Bearing Margin For Status Exists Interest with LIBOR Portions Applicable Margin Applicable For Any Margin Reference to of Revolving For Domestic Rate Margin For Determination Domestic Rate Credit Loans Portion of Term LIBOR Portions Commitment Fee Date Is: Is: Loan Is: of Term Loan Is: Is: Level I Status .50% 2.00% .50% 2.25% .35%Level II Status .75% 2.25% 1.00% 2.50% .40%Level III Status 1.25% 2.75% 1.50% 3.00% .45%Level IV Status 1.50% 3.00% 1.75% 3.25% .50%" 1.03. The definition of the terms "EBITDAM", "LEVEL I STATUS", "LEVEL IISTATUS" and "REVOLVING CREDIT TERMINATION DATE" appearing in Section 4.1 of theCredit Agreement shall be amended and as so amended shall be restated in theirentirety to read, respectively, as follows: ""EBITDAM" means, with reference to any period, Net Income for such period plus all amounts deducted in arriving at such Net Income amount in respect of (i) Interest Expense for such period, PLUS (ii) taxes (including federal, state and local income taxes) for such period, PLUS (iii) all amounts properly charged for depreciation and amortization during such period on the books of the Hub Group, PLUS (iv) any deduction for Minority Interest during such period, PLUS (v) all other non-cash restructuring charges during such period on the books of the Hub Group in accordance with GAAP to the extent the aggregate amount of such other non-cash restructuring charges do not exceed $1,500,000 during any period of four consecutive fiscal quarters of the Public Hub Company (prorated appropriately downward (or upward) for any shorter (or longer) period); PLUS (vi) if such period includes the fiscal quarter of the Public Hub Company ending on December 31, 2002 or March 31, 2003, restructuring charges during such quarters on the books of the Hub Group in accordance with GAAP (including cash severance payments) in an aggregate amount not in excess of 2 $1,000,000, PLUS (vii) if such period includes any fiscal quarter of the Public Hub Company ending during the period from and including March 31, 2003, through and including March 31, 2005, cash restructuring charges aggregating up to $1,000,000 (for all such quarters taken together) if and only if consented to in writing by the Required Lenders. "LEVEL I STATUS" means, for any Determination Date, that as of the close of the most recently completed fiscal quarter of the Public Hub Company with reference to which such Determination Date was set, the Cash Flow Leverage Ratio is less than 2.50 to 1. "LEVEL II STATUS" means, for any Determination Date, that as of the close of the most recently completed fiscal quarter of the Public Hub Company with reference to which such Determination Date was set, the Cash Flow Leverage Ratio is greater than or equal to 2.50 to 1 but less than 3.00 to 1. "REVOLVING CREDIT TERMINATION DATE" means June 24, 2005, or such earlier date on which the Revolving Credit Commitment is terminated in whole pursuant to Sections 3.4, 8.2 or 8.3 hereof." 1.04. Sections 7.8, 7.9, 7.10 and 7.26 of the Credit Agreement shall beamended and as so amended shall be restated in their entirety to read,respectively, as follows: "SECTION 7.8. FIXED CHARGE COVERAGE RATIO. The Hub Group shall not, as of the close of each fiscal quarter of the Public Hub Company specified below, permit the Fixed Charge Coverage Ratio as of such date to be less than: FIXED CHARGE COVERAGE RATIOAS OF THE FISCAL QUARTER ENDING ON: SHALL NOT BE LESS THAN: 3/31/03 0.80 to 1 6/30/03 0.95 to 1 9/30/03 1.00 to 1 12/31/03 1.05 to 1 3/31/04 1.05 to 1 6/30/04 1.05 to 1 9/30/04 1.05 to 1 3 12/31/04 1.05 to 1 3/31/05 1.10 to 1 6/30/05 1.10 to 1 SECTION 7.9. MINIMUM EBITDAM. The Hub Group shall, as of the close of each fiscal quarter of the Public Hub Company specified below, maintain EBITDAM for the four fiscal quarters of the Public Hub Company then ended of not less than: EBITDAM SHALL NOT BE LESSAS OF THE FISCAL QUARTER ENDING ON: THAN: 3/31/03 $20,000,000 6/30/03 $24,000,000 9/30/03 $25,000,000 12/31/03 $26,000,000 3/31/04 $26,000,000 6/30/04 $26,500,000 9/30/04 $26,500,000 12/31/04 $27,000,000 3/31/05 $27,000,000 6/30/05 $27,500,000 SECTION 7.10. CASH FLOW LEVERAGE RATIO. The Hub Group shall not, as of the close of each fiscal quarter of the Public Hub Company specified below, permit the Cash Flow Leverage Ratio as of such date to be more than: CASH FLOW LEVERAGE RATIO SHALL NOT AS OF THE FISCAL QUARTER ENDING BE ON: MORE THAN: 3/31/03 5.50 to 1 6/30/03 4.50 to 1 9/30/03 4.25 to 1 12/31/03 4.00 to 1 3/31/04 4.00 to 1 6/30/04 3.75 to 1 9/30/04 3.75 to 1 12/31/04 3.50 to 1 3/31/05 3.50 to 1 6/30/05 3.25 to 1 7.26. CAPITAL EXPENDITURES. The Hub Group shall not expend or become obligated for Capital Expenditures during the fiscal year ending December 31, 2003 in an aggregate amount in 4 excess of $9,000,000 and shall not expend or become obligated for Capital Expenditures during the fiscal year ending December 31, 2004 in an aggregate amount in excess of $10,000,000." 1.05. The Commitments of Harris Trust and Savings Bank ("HARRIS") andU.S. Bank National Association ("U.S. BANK") set forth opposite such Lenders'names on their respective signature pages of the Credit Agreement or on anAssignment Agreement delivered pursuant to Section 11.10 of the CreditAgreement, as the case may be, shall be amended and restated as set forth onAnnex I attached hereto. On the effective date of this Amendment, such Lendersshall make appropriate adjustments between themselves to reflect the changes inthe Commitments contemplated hereby and the Borrower shall be deemed to haverequested non-ratable Loans to effect such adjustments.2. CONDITIONS PRECEDENT. The effectiveness of this Amendment is subject to the satisfaction ofall of the following conditions precedent: 2.01. The Borrowers, the Guarantors and the Lenders shall have executedand delivered this Amendment. 2.02. The Borrowers shall have paid to the Agent, for the benefit of theLenders such upfront fees as the Borrowers and the Agent have previously agreed. 2.03. The Borrowers shall have executed and delivered to the Agent forHarris and U.S. Bank new Revolving Credit Notes in the amount of each suchLender's Revolving Credit Commitment and new Term Notes in the amount of eachsuch Lender's outstanding principal amount of Term Loans, in each case, aftergiving effect to this Amendment (the "NEW NOTES"). 2.04. Legal matters incident to the execution and delivery of thisAmendment and the New Notes shall be reasonably satisfactory to the Agent andits counsel.3. REPRESENTATIONS. In order to induce the Lenders to execute and deliver this Amendment,the Borrowers hereby represent to the Lenders that as of the date hereof, therepresentations and warranties set forth in Section 5 of the Credit Agreementare and remain true and correct in all material respects (except to the extentthe same expressly relate to an earlier date and except that for purposes ofthis paragraph the representations contained in Section 5.5 shall be deemed torefer to the most recent financial statements of the Public Hub Companydelivered to the Lenders) and the Borrowers are in full compliance with all ofthe terms and conditions of the Credit Agreement after giving effect to thisAmendment and no Default or Event of Default has occurred and is continuingunder the Credit Agreement or shall result after giving effect to thisAmendment. 54. 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. The Borrowers and the Guarantors have heretofore executed anddelivered to the Agent that certain Security Agreement dated as of October 15,2002 and certain other Collateral Documents. The Borrowers and the Guarantorshereby acknowledge and agree that the Liens created and provided for by theCollateral Documents continue to secure, among other things, the Obligationsarising under the Credit Agreement as amended hereby; and the CollateralDocuments and the rights and remedies of the Agent thereunder, the obligationsof the Borrowers and the Guarantors thereunder, and the Liens created andprovided for thereunder remain in full force and effect and shall not beaffected, impaired or discharged hereby. Nothing herein contained shall in anymanner affect or impair the priority of the liens and security interests createdand provided for by the Collateral Documents as to the indebtedness which wouldbe secured thereby prior to giving effect to this Amendment. 4.03. 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. 4.04. This Amendment may be executed in any number of counterparts, andby the different parties on different counterpart signature pages, all of whichtaken 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. 4.05. The Borrowers agree to pay, jointly and severally, all reasonableout-of-pocket costs and expenses incurred by the Agent in connection with thepreparation, execution and delivery of this Amendment and the documents andtransactions contemplated hereby, including the reasonable fees and expenses ofcounsel for the Agent with respect to the foregoing. 6 Dated as of February 28, 2003. HUB GROUP, INC., a Borrower HUB CITY TERMINALS, INC., a Borrower By David P. Yeager Chief Executive Officer for each of the above Companies 7 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:___________________________________ LASALLE BANK NATIONAL ASSOCIATION By Name:____________________________________ Title:___________________________________ NATIONAL CITY BANK By Name:_____________________________________ Title:____________________________________ 8 ANNEX I REVISED COMMITMENTS REVOLVING OUTSTANDING PRINCIPAL LENDER CREDIT COMMITMENT AMOUNT OF TERM LOANS Harris Trust and Savings Bank $20,545,603.82 $11,094,626.06 U.S. Bank National Association $13,454,396.18 $7,265,373.94 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. HUB CHICAGO HOLDINGS, INC., a Guarantor By David P. Yeager Chief Executive Officer 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 HUB GROUP ALABAMA, LLC HUB GROUP ATLANTA, LLC HUB GROUP BOSTON, LLC HUB GROUP CANADA, L.P. HUB GROUP CLEVELAND, LLC HUB GROUP DETROIT, LLC HUB GROUP FLORIDA, LLC HUB GROUP GOLDEN GATE, LLC HUB GROUP INDIANAPOLIS, LLC HUB GROUP KANSAS CITY, LLC HUB GROUP LOS ANGELES, LLC HUB GROUP MID ATLANTIC, LLC HUB GROUP NEW ORLEANS, LLC HUB GROUP NEW YORK STATE, LLC HUB GROUP NEW YORK-NEW JERSEY, LLC HUB GROUP NORTH CENTRAL, LLC HUB GROUP OHIO, LLC HUB GROUP PHILADELPHIA, LLC HUB GROUP PITTSBURGH, LLC HUB GROUP PORTLAND, LLC HUB GROUP ST. LOUIS, LLC HUB GROUP TENNESSEE, LLC HUB CITY TEXAS, L.P. HUB GROUP TRANSPORT, LLC HUB GROUP ASSOCIATES, INC. HUB FREIGHT SERVICES, INC. HUB HIGHWAY SERVICES HUB GROUP DISTRIBUTION SERVICES, LLC By David P. Yeager Chief Executive Officer for each of the above Guarantors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 DelawareHub Group St. Louis, LLC DelawareHub Group Tennessee, LLC DelawareHub City Texas, L.P. DelawareHub Group Associates, Inc. IllinoisHub Highway Services IllinoisHub Group Distribution Services, L.L.C. 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 EXHIBIT 23.1 Consent of Independent AuditorsWe consent to the incorporation by reference in the Registration Statements(Form S-8, Nos. 333-33006, 333-06327 and 333-48185) of Hub Group, Inc. of ourreport dated February 19, 2003, with respect to the consolidated financialstatements and schedule of Hub Group, Inc. included in this Annual Report onForm 10-K for the year ended December 31, 2002. /s/ Ernst & Young LLPChicago, IllinoisMarch 11, 2003 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The following statement is provided by the undersigned to accompany theAnnual Report on Form 10-K for the year ended December 31, 2002 of Hub Group,Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)and shall not be deemed filed pursuant to any provision of the Exchange Act of1934 or any other securities law. Each of the undersigned certifies that the foregoing Report on Form10-K fully complies with the requirements of Section 13(a) of the SecuritiesExchange Act of 1934 (15 U.S.C. 78m) and that the information contained in theForm 10-K fairly presents, in all material respects, the financial condition andresults of operations of Hub Group, Inc./S/DAVID P. YEAGER___________________ /S/THOMAS M. WHITE______________------------------------------------- --------------------------------David P. Yeager Thomas M. WhiteChief Executive Officer Chief Financial OfficerHub Group, Inc. Hub Group, Inc.

Continue reading text version or see original annual report in PDF format above