Hub Group
Annual Report 2005

Plain-text annual report

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 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, 2005 OR [ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-27754__________________HUB GROUP, INC.(Exact name of registrant as specified in its charter)Delaware 36-4007085(State or other jurisdiction of (I.R.S. Employerincorporation of organization) Identification No.)3050 Highland Parkway, Suite 100Downers 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: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value(Title of Class) Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes X No Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes No X Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period thatthe Registrant was required to file such reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K. Yes X No __ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):Large Accelerated FilerAccelerated Filer XNon-Accelerated Filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes No X The aggregate market value of the Registrant’s voting stock held by non-affiliates on June 30, 2005 , basedupon the last reported sale price on that date on the NASDAQ National Market of $25.05 per share, was$457,261,332. On February 20, 2006, the Registrant had 19,948,043 outstanding shares of Class A Common Stock, par value$.01 per share, and 662,296 outstanding shares of Class B Common Stock, par value $.01 per share. Documents Incorporated by Reference The Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 11,2006 (the “Proxy Statement”) is incorporated by reference in Part III of this Form 10-K to the extent statedherein. Except with respect to information specifically incorporated by reference in this Form 10-K, the ProxyStatement is not deemed to be filed as a part hereof.  PART I Item 1.BUSINESS General Hub Group, Inc. (“we”, “us” or “our”) is a Delaware corporation that was incorporated on March 8, 1995.We are one of North America’s leading asset-light freight transportation management companies. We offercomprehensive intermodal, truck brokerage, logistics and distribution services. Since our founding in 1971, wehave grown to become the largest intermodal marketing company (“IMC”) in the United States and one of thelargest truck brokers. We operate through a network of 22 operating centers throughout the United States and Canada. Eachoperating center is strategically located in a market with a significant concentration of shipping customers andone or more railheads. Through our network, we have the ability to move freight in and out of every major cityin the United States, Canada and Mexico. We service a large and diversified customer base in a broad range ofindustries, including consumer products, retail, manufactured products and electronic equipment. We utilize anasset-light strategy in order to minimize our investment in equipment and facilities and reduce our workingcapital requirements. We arrange freight movement for our customers through transportation carriers andequipment providers. We also operate Hub Group Distribution Services, LLC (“HGDS” or “Hub Distribution”). Hub Distributionperforms certain specialized logistics services, predominately installation of point of purchase displays, and isresponsible for its own operations, customer service, marketing and management information systems support.Unless the context otherwise requires, “we”, “us” or “our” includes the operating centers, Hub Distribution andour subsidiaries. Services Provided Our transportation services can be broadly placed into the following categories: Intermodal. As an IMC, we arrange for the movement of our customers’ freight in containers and trailers,typically over long distances of 750 miles or more. We contract with railroads to provide transportation for thelong-haul portion of the shipment and with local trucking companies, known as “drayage companies,” forpickup and delivery. In certain markets, we supplement third party drayage services with Company-owneddrayage operations. As part of our intermodal services, we negotiate rail and drayage rates, electronically trackshipments in transit, consolidate billing and handle claims for freight loss or damage on behalf of ourcustomers. We use our network to access containers and trailers owned by leasing companies, railroads and steamshiplines. We are able to track trailers and containers entering a service area and reuse that equipment to fulfill thecustomers’ outbound shipping requirements. This effectively allows us to “capture” containers and trailers andkeep them within our network. Through our Premier Service Network (“PSN”), we also have exclusive access to6,600 rail-owned containers for our dedicated use on the Burlington Northern Santa Fe (“BNSF”) and theNorfolk Southern (“NS”) rail networks as of January 31, 2006. In addition to these containers, during 2005, weadded 3,400 new 53’ containers to our PSN fleet. We financed these 3,400 containers with operating leases.These arrangements are included in Note 7 to the consolidated financial statements. Our drayage services are provided by our subsidiary, Quality Services, LLC (“QS”). QS has terminals inChicago, Kansas City, St. Louis, Atlanta, Stockton, Los Angeles, Jacksonville, Cleveland, Columbus andEvansville. QS assists us in providing reliable, cost effective intermodal services to our customers. AtDecember 31, 2005, QS owned 46 tractors and leased 77 tractors and employed 182 drivers and contracted with374 owner-operators. On January 19, 2006, we entered into a definitive agreement to acquire Comtrak, Inc. Comtrak is atransportation company whose services include primarily rail and international drayage for the intermodalsector. Comtrak has terminals in Atlanta, Birmingham, Charleston, Charlotte, Chattanooga, Dallas, Houston,Huntsville, Jacksonville, Kansas City, Memphis, Nashville, Norfolk, Savannah and Tampa. At December 31,2005, Comtrak owned 250 tractors and leased or owned 650 trailers and employed 253 drivers and contractedwith 307 owner-operators. 1Truck Brokerage (Highway Services). We are one of the largest truck brokers in the United States,providing customers with another option for their transportation needs. We match the customers’ needs withcarriers’ capacity to provide the most effective service and price combinations. We have contracts with asubstantial base of carriers allowing us to meet the varied needs of our customers. As part of the truck brokerageservices, we negotiate rates, track shipments in transit and handle claims for freight loss and damage on behalfof our customers. Our truck brokerage operation also provides customers with specialized programs. Through the DedicatedTrucking program, certain carriers have informally agreed to move freight for our customers on a continuousbasis. This arrangement allows us to effectively meet our customer’s needs without owning the equipment. Logistics. In March of 2005, our logistics business began operating under the name of Unyson Logistics.Unyson Logistics is comprised of a national network of logistics professionals dedicated to developing,implementing and operating customized logistics solutions. Unyson offers a wide range of transportationmanagement services and technology solutions including shipment optimization, load consolidation, modeselection, carrier management, load planning and execution and web-based shipment visibility. Our multi-modal transportation capabilities include small parcel, heavyweight expedited, less-than-truckload, truckload,intermodal and railcar. Unyson Logistics operates throughout North America with offices strategically locatedin key market areas. Distribution Services. Hub Distribution offers certain specialized services, predominately installation ofpoint of purchase displays. Hub Network Hub Group currently has operating centers in the following metropolitan areas: AtlantaIndianapolisMinneapolisSan FranciscoBaltimoreKansas CityNew York CitySeattleBostonLaredoOntarioSt. LouisChicagoLos AngelesPittsburghToledoClevelandMemphisSalt Lake City HoustonMilwaukeeSan Diego Our entire network is interactively connected through our proprietary Network Management System. Thisenables us to move freight into and out of every major city in the United States, Canada and Mexico. Each operating center manages the freight originating in its service area. In a typical intermodaltransaction, the customer contacts the local operating center to place an order. The operating center consultswith the centralized pricing group, obtains the necessary intermodal equipment, arranges for it to be deliveredto the customer by a drayage company and, after the freight is loaded, arranges for the transportation of thecontainer or trailer to the rail ramp. Relevant information is entered into our Network Management System bythe assigned operating center. Our predictive track and trace technology then monitors the shipment to ensurethat it arrives as scheduled and alerts the customer service personnel if there are service delays. The assignedoperating center then arranges for and confirms delivery by a drayage company at destination. After unloading,the empty equipment is made available for reloading by the local operating center in the delivery market. We provide truck brokerage services to our customers in a similar manner. In a typical truck brokeragetransaction, the customer contacts the local operating center to obtain a price quote for a particular freightmovement. The customer then provides appropriate shipping information to the local operating center. Thelocal operating center makes the delivery appointment and arranges with the appropriate carrier to pick up thefreight. Once it receives confirmation that the freight has been picked up, the local operating center monitorsthe movement of the freight until it reaches its destination and the delivery has been confirmed. If the carriernotifies us that after delivering the load it will need additional freight, we may notify the operating centerlocated nearest the destination of the carrier’s availability. Although under no obligation to do so, the localoperating center then may attempt to secure freight for the carrier. Marketing and Customers We believe that fostering long-term customer relationships is critical to our success. Through these long-term relationships, we are able to better understand our customers’ needs and tailor our transportation servicesto the specific customer, regardless of the customer’s size or volume. We currently have full-time marketingrepresentatives at each operating center and sales office with primary responsibility for servicing local,regional 2and national accounts. These sales representatives directly or indirectly report to an Executive Vice President –Sales. This model allows us to provide our customers with both a local marketing contact and access to ourcompetitive rates as a result of being a large, national transportation services provider. Our marketing efforts have produced a large, diverse customer base, with no customer representing morethan 5.0% of our total revenue in 2005. We service customers in a wide variety of industries, includingconsumer products, retail, manufactured products and electronic equipment. We have a joint marketing relationship with TMM Logistics, a wholly owned subsidiary of Grupo TMM, aMexican logistics and transportation company. TMM Logistics provides sales support and operatingexecution within Mexico, and we furnish the same capabilities in Canada and the United States for TMMLogistics. Management Information Systems A primary component of our business strategy is the continued improvement of our Network ManagementSystem and other technology to ensure that we remain a leader among transportation providers in informationprocessing for transportation services. Our Network Management System consists of proprietary softwarerunning on IBM iSeries computers located at a secure offsite data center. All of the operating centers are linkedtogether with these i-series computers using a frame relay network. This configuration provides a real timeenvironment for transmitting data among our operating centers and headquarters. We also make extensive useof electronic data interchange (“EDI”), allowing each operating center to communicate electronically witheach railroad, many drayage companies, certain trucking companies and those customers with EDI capabilities. Our Network Management System is the primary mechanism used in our operating centers to handle ourintermodal and truck brokerage business. The Network Management System processes customer transportationrequests, tenders and tracks shipments, prepares customer billing, establishes account profiles and retainscritical information for analysis. The Network Management System provides connectivity with each of themajor rail carriers. This enables us to electronically tender and track shipments in a real time environment. Inaddition, the Network Management System’s EDI features offer customers with EDI capability a completelypaperless process, including load tendering, shipment tracking, billing and remittance processing. Weaggressively pursue opportunities to establish EDI interfaces with our customers, railroads, trucking companiesand drayage companies. To manage our logistics business, we use specialized software that includes planning and executionsolutions. This sophisticated transportation management software enables us to offer supply chain planningand logistics managing, modeling, optimizing and monitoring for our customers. We use this software whenoffering logistics management services to customers that ship via multiple modes, including intermodal,truckload, and less-than-truckload, allowing us to optimize mode and carrier selection and routing for ourcustomers. This software is integrated with Hub Group’s Network Management System and our accountingsystem. Our website, www.hubgroup.com, is designed to allow our customers and vendors to easily do businesswith us online. Through Vendor Interface, we tender loads to our drayage partners using the Internet rather thanphones or faxes. Vendor Interface also captures event status information, allows vendors to view outstandingpaperwork requirements and helps facilitate paperless invoicing. We currently tender substantially all of ourdrayage loads using Vendor Interface or EDI. Through Trucker Advantage, Hub Group and our over-the-roadpartners exchange information on available Hub loads and available carrier capacity, and then carriers reportevent status information to Hub Group. Through Customer Advantage, customers receive immediate pricing,place orders, track shipments, and review historical shipping data through a variety of reports over the Internet.All of our Internet applications are integrated with the Network Management System. Relationship with Railroads A key element of our business strategy is to strengthen our close working relationship with each of themajor intermodal railroads in the United States. We view our relationship with the railroads as a partnership.Due to our size and relative importance, many railroads have dedicated support personnel to focus on our day-to-day service requirements. On a regular basis, our senior executives and each of the railroads meet to discussmajor strategic issues concerning intermodal transportation. Several of our top executive officers are formerrailroad employees, which makes them well suited to understand the railroads’ service capabilities. 3We have relationships with each of the following major railroads: Burlington Northern Santa FeFlorida East Coast Canadian NationalKansas City Southern Canadian PacificNorfolk Southern CSXUnion Pacific We also have relationships with each of the following major service providers: Mitsui O.S.K. Lines (America)Inc., Pacer International, K-Line America, Hanjin Shipping and Maersk Sea-Land. These relationships govern the transportation services and payment terms pursuant to which ourintermodal shipments are handled by the railroads. Transportation rates are market driven and we typicallynegotiate with the railroads or other major service providers on a route or customer specific basis. Consistentwith industry practice, many of the rates we negotiate are special commodity quotations (“SCQs”), whichprovide discounts from published price lists based on competitive market factors and are designed by therailroads or major service providers to attract new business or to retain existing business. SCQ rates aregenerally issued for the account of a single IMC. SCQ rates apply to specific customers in specified shippinglanes for a specific period of time, usually six to 12 months. Under agreements with both the BNSF and NS as part of our PSN, we managed, as of January 31, 2006,approximately 6,600 rail-owned containers. These containers are for Hub Group’s dedicated use on therespective rail systems and are fully interchangeable across both rail networks. In addition to these containers,we added 3,400 new 53’ containers to our PSN fleet during 2005. We financed these containers with operatingleases. Relationship with Drayage Companies We have a “Quality Drayage Program,” which consists of agreements and rules that govern the frameworkby which many drayage companies perform services for us. Participants in the program commit to provide highquality service along with clean and safe equipment, maintain a defined on-time performance level and followspecified procedures designed to minimize freight loss and damage. We negotiate drayage rates fortransportation between specific origin and destination points. We also supplement third-party drayage services with our own drayage operations, which we operatethrough our QS subsidiary. Our drayage operations employ their own drivers and also contract with owner-operators who supply their own trucks. Relationship with Trucking Companies Our truck brokerage operation has a large and growing number of active trucking companies that we use totransport freight. The local operating centers deal daily with these carriers on an operational level. Ourcorporate headquarters handles the administrative and regulatory aspects of the trucking company relationship.Our relationships with these trucking companies are important since these relationships determine pricing, loadcoverage and overall service. Risk Management and Insurance We require all drayage companies participating in the Quality Drayage Program to carry at least $1.0million in general liability insurance, $1.0 million in truckman’s auto liability insurance and a minimum of$100,000 in cargo insurance. Railroads, which are self-insured, provide limited cargo protection, generally upto $250,000 per shipment. To cover freight loss or damage when a carrier's liability cannot be established or acarrier's insurance is insufficient to cover the claim, we carry our own cargo insurance with a limit of $1.0million per container or trailer and a limit of $20.0 million in the aggregate. We also carry general liabilityinsurance with limits of $1.0 million per occurrence and $2.0 million in the aggregate with a companion $25.0million umbrella policy on this general liability insurance. We maintain separate insurance policies to cover potential exposure from our company-owned drayageoperations. We have general liability insurance with limits of $1.0 million per occurrence and $1.0 million inthe aggregate, truckman’s auto liability with limits of $1.0 million and a companion $20.0 million umbrellaliability policy. 4Government Regulation Hub Group, Inc. and various subsidiaries are licensed by the Department of Transportation as brokers inarranging for the transportation of general commodities by motor vehicle. To the extent that the operatingcenters perform truck brokerage services, they do so under these licenses. The Department of Transportationprescribes qualifications for acting in this capacity, including a $10,000 surety bond that we have posted. Todate, compliance with these regulations has not had a material adverse effect on our results of operations orfinancial condition. However, the transportation industry is subject to legislative or regulatory changes thatcan affect the economics of the industry by requiring changes in operating practices or influencing the demandfor, and cost of providing, transportation services. Competition The transportation services industry is highly competitive. We compete against other IMCs, as well aslogistics companies, third party brokers, trucking companies and railroads that market their own intermodalservices. Several larger trucking companies have entered into agreements with railroads to market intermodalservices nationwide. Competition is based primarily on freight rates, quality of service, reliability, transit timeand scope of operations. Several transportation service companies and trucking companies, and all of the majorrailroads, have substantially greater financial and other resources than we do. General Employees: As of December 31, 2005, we had approximately 1,184 employees. We are not a party to anycollective bargaining agreement and consider our relationship with our employees to be satisfactory. Other: No material portion of our operations is subject to renegotiation of profits or termination ofcontracts at the election of the federal government. None of our trademarks are believed to be material to us.Our business is seasonal to the extent that certain customer groups, such as retail, are seasonal. Our code ofethics can be found on our website at www.hubgroup.com. Periodic Reports Upon written request, our annual report to the Securities and Exchange Commission on Form 10-K for thefiscal year ended December 31, 2005, and our quarterly reports on Form 10-Q will be furnished to stockholdersfree of charge; write to: Public Relations Department, Hub Group, Inc., 3050 Highland Parkway, Suite 100,Downers Grove, Illinois 60515. Our filings are also accessible through our website at www.hubgroup.com. Item 1A.RISK FACTORS Since our business is concentrated on intermodal marketing, any decrease in demand for intermodaltransportation services compared to other transportation services could have an adverse effect on ourresults of operations. In 2005, 2004 and 2003, we derived 71%, 71% and 72%, respectively, of our revenue from our intermodalservices. As a result, any decrease in demand for intermodal transportation services compared to othertransportation services could have an adverse effect on our results of operations. Because we depend on railroads for our operations, our operating results and financial condition are likelyto be adversely affected by any reduction or deterioration in rail service. We depend on the major railroads in the United States for virtually all of the intermodal services we provide. Inmany markets, rail service is limited to one or a few railroads. Consequently, a reduction in, or elimination of,rail service to a particular market is likely to adversely affect our ability to provide intermodal transportationservices to some of our customers. In addition, the railroads are relatively free to adjust shipping rates up ordown as market conditions permit. Rate increases would result in higher intermodal transportation costs,reducing the attractiveness of intermodal transportation compared to truck or other transportation modes,which could cause a decrease in demand for our services. Further, our ability to continue to expand ourintermodal transportation business is dependent upon the railroads’ ability to increase capacity for intermodalfreight and provide consistent service. Our business could also be adversely affected by a work stoppage at oneor more railroads or by adverse weather conditions or other factors that hinder the railroads’ ability to providereliable transportation services. In the past, there have been service issues when railroads have merged. As aresult, we cannot predict what effect, if any, further consolidation among railroads may have on intermodaltransportation services or our results of operations. 5Because our relationships with the major railroads are critical to our ability to provide intermodaltransportation services, our business may be adversely affected by any change to those relationships. We have important relationships with each of the major U.S. railroads. To date, the railroads have chosen torely on us, other IMCs and other intermodal competitors to market their intermodal services rather than fullydeveloping their own marketing capabilities. If one or more of the major railroads were to decide to reducetheir dependence on us, the volume of intermodal shipments we arrange would likely decline, which couldadversely affect our results of operations and financial condition. Because we rely on drayage companies in our intermodal operations, our ability to expand our business ormaintain our profitability may be adversely affected by a shortage of drayage capacity. In many of the markets we serve, we use third-party drayage companies for pickup and delivery of intermodalcontainers. Most drayage companies operate relatively small fleets and have limited access to capital for fleetexpansion. In some of our markets, there are a limited number of drayage companies that can meet our qualitystandards. This could limit our ability to expand our intermodal business or require us to establish our owndrayage operations in some markets, which could increase our operating costs and could adversely affect ourprofitability and financial condition. Also, the trucking industry chronically experiences a shortage ofavailable drivers, which may limit the ability of third-party drayage companies to expand their fleets. Thisshortage also may require them to increase drivers’ compensation, thereby increasing our cost of providingdrayage services to our customers. Therefore, the driver shortage could also adversely affect our profitabilityand limit our ability to expand our intermodal business. Because we depend on trucking companies for our truck brokerage services, our ability to maintain orexpand our truck brokerage business may be adversely affected by a shortage of trucking capacity. In 2005, 2004 and 2003, we derived 17%, 16% and 15%, respectively, of our revenue from our truck brokerageservices. We depend upon various third-party trucking companies for the transportation of our customers’loads. Particularly during periods of economic expansion, trucking companies may be unable to expand theirfleets due to capital constraints or chronic driver shortages, and these trucking companies also may raise theirrates. If we face insufficient capacity among our third-party trucking companies, we may be unable to maintainor expand our truck brokerage business. Also, we may be unable to pass rate increases on to our customers,which could adversely affect our profitability. We depend on third parties for equipment essential to operate our business, and if we fail to securesufficient equipment, we could lose customers and revenue. We depend on third parties for transportation equipment, such as containers and trailers, necessary for theoperation of our business. Our industry has experienced equipment shortages in recent years, particularlyduring the peak-shipping season in the Fall. A substantial amount of intermodal freight originates at or near themajor West Coast ports, which has historically caused these equipment shortages to be most severe at or nearthese locations. If we cannot secure sufficient transportation equipment at a reasonable price from third partiesto meet our customers’ needs, our customers may seek to have their transportation needs met by otherproviders. This could have an adverse effect on our business, results of operations and financial position. Our business could be adversely affected by strikes or work stoppages by draymen, truckers, longshoremenand railroad workers. There has been labor unrest, including work stoppages, among draymen. We could lose business from anysignificant work stoppage or slowdown and, if labor unrest results in increased rates for draymen, we may notbe able to pass these cost increases on to our customers. In the Fall of 2002, all of the West Coast ports wereshut down as a result of a dispute with the longshoremen. The ports remained closed for nearly two weeks, untilreopened as the result of a court order under the Taft-Hartley Act. Our operations were adversely affected by theshutdown. In January 2003, a new six-year contract was agreed to by the International Longshoremen andWarehouse Union and the Pacific Maritime Association. In the past several years, there have been strikesinvolving railroad workers. Future strikes by railroad workers in the United States, Canada or anywhere elsethat our customers’ freight travels by railroad could adversely affect our business and results of operations. Anysignificant work stoppage, slowdown or other disruption involving ports, railroads, truckers or draymen couldadversely affect our business and results of operations. Our results of operations are susceptible to changes in general economic conditions and cyclicalfluctuations. 6Economic recession, customers’ business cycles, changes in fuel prices and supply, interest rate fluctuations,increases in fuel or energy taxes and other general economic factors affect the demand for transportationservices and the operating costs of railroads, trucking companies and drayage companies. We have little or nocontrol over any of these factors or their effects on the transportation industry. Increases in the operating costsof railroads, trucking companies or drayage companies can be expected to result in higher freight rates. Ouroperating margins could be adversely affected if we were unable to pass through to our customers the fullamount of higher freight rates. Economic recession or a downturn in customers’ business cycles also may havean adverse effect on our results of operations and growth by reducing demand for our services. Therefore, ourresults of operations, like the entire freight transportation industry, are cyclical and subject to significantperiod-to-period fluctuations. Relatively small increases in our transportation costs that we are unable to pass through to our customersare likely to have a significant effect on our gross margin and operating income. Transportation costs represented 88%, 87% and 87% of our consolidated revenue in 2005, 2004 and 2003,respectively. Because transportation costs represent such a significant portion of our costs, even relativelysmall increases in these transportation costs, if we are unable to pass them through to our customers, are likelyto have a significant effect on our gross margin and operating income. The installation services provided by Hub Distribution are project-based and provided to only a fewcustomers. The loss of any one of these customers or variability in the timing of these projects couldsignificantly affect our results of operations. Our installation services business is a project-based business with significant customer concentration. Anydecrease in the demand from these customers or our failure to secure new project business could have a materialadverse effect on our results of operations. A prolonged downturn in Hub Distribution’s business couldadversely affect the value of its assets. Our business could be adversely affected by heightened security measures, actual or threatened terroristattacks, efforts to combat terrorism, military action against a foreign state or other similar event. We cannot predict the effects on our business of heightened security measures, actual or threatened terroristattacks, efforts to combat terrorism, military action against a foreign state or other similar events. It is possiblethat one or more of these events could be directed at U.S. or foreign ports, borders, railroads or highways.Heightened security measures or other events are likely to slow the movement of freight through U.S. or foreignports, across borders or on U.S. or foreign railroads or highways and could adversely affect our business andresults of operations. Any of these events could also negatively affect the economy and consumer confidence,which could cause a downturn in the transportation industry. If we fail to maintain and enhance our information technology systems, we may be at a competitivedisadvantage and lose customers. Our information technology systems are critical to our operations and our ability to compete effectively as anIMC, truck broker and logistics provider. We expect our customers to continue to demand more sophisticatedinformation technology applications from their suppliers. If we do not continue to enhance our NetworkManagement System to meet the increasing demands of our customers, we may be placed at a competitivedisadvantage and could lose customers. Our information technology systems are subject to risks that we cannot control and the inability to use ourinformation technology systems could materially adversely affect our business. Our information technology systems are dependent upon global communications providers, web browsers,telephone systems and other aspects of the Internet infrastructure that have experienced significant systemfailures and electrical outages in the past. Our systems are susceptible to outages from fire, floods, power loss,telecommunications failures, break-ins and similar events. Our servers are vulnerable to computer viruses,break-ins and similar disruptions from unauthorized tampering with our computer systems. The occurrence ofany of these events could disrupt or damage our information technology systems and inhibit our internaloperations, our ability to provide services to our customers and the ability of our customers and vendors toaccess our information technology systems. This could result in our loss of customers or a reduction in demandfor our services. 7The transportation industry is subject to government regulation, and regulatory changes could have amaterial adverse effect on our operating results or financial condition. Hub Group, Inc. and various subsidiaries are licensed by the Department of Transportation as motor carrierfreight brokers. The Department of Transportation prescribes qualifications for acting in this capacity,including surety-bonding requirements. To date, compliance with these regulations has not had a materialadverse effect on our results of operations or financial condition. However, the transportation industry issubject to legislative or regulatory changes that can affect the economics of the industry by requiring changesin operating practices or influencing the demand for, and cost of providing, transportation services. Future lawsand regulations may be more stringent and require changes in operating practices, influence the demand fortransportation services or increase the cost of providing transportation services, any of which could adverselyaffect our business. Our operations are subject to various environmental laws and regulations, the violation of which couldresult in substantial fines or penalties. From time to time, we arrange for the movement of hazardous materials at the request of our customers. As aresult, we are subject to various environmental laws and regulations relating to the handling of hazardousmaterials. If we are involved in a spill or other accident involving hazardous materials, or if we are found to bein violation of applicable laws or regulations, we could be subject to substantial fines or penalties and to civiland criminal liability, any of which could have an adverse effect on our business and results of operations. We derive a significant portion of our revenue from our largest customers and the loss of several of thesecustomers could have a material adverse effect on our revenue and business. For 2005, our largest 20 customers accounted for approximately 36% of our revenue. A reduction in ortermination of our services by several of our largest customers could have a material adverse effect on ourrevenue and business. Insurance and claims expenses could significantly reduce our earnings. Our future insurance claims expenses might exceed historical levels, which could reduce our earnings. If thenumber or severity of claims increases, our operating results could be adversely affected. We maintaininsurance with licensed insurance companies. Insurance carriers have recently raised premiums. As a result, ourinsurance and claims expenses could increase when our current coverage expires. If these expenses increase,and we are unable to offset the increase with higher freight rates, our earnings could be materially andadversely affected. Our success depends upon our ability to recruit and retain key personnel. Our success depends upon attracting and retaining the services of our management team as well as our abilityto attract and retain a sufficient number of other qualified personnel to run our business. There is substantialcompetition for qualified personnel in the transportation services industry. As all key personnel devote theirfull time to our business, the loss of any member of our management team or other key person could have anadverse effect on us. We do not have written employment agreements with any of our executive officers and donot maintain key man insurance on any of our executive officers. We believe that future acquisitions or dispositions that we make could significantly impact financialresults. Financial results most likely to be impacted include, but are not limited to, revenue, gross margin,salaries and benefits, selling general and administrative expenses, depreciation and amortization, interestexpense, net income and our debt level. In January 2006, we entered into a definitive agreement to acquire Comtrak, Inc. The closing is subject tocertain customary closing conditions and approvals. Hub will pay $38.0 million in cash at closing, which isexpected to occur during the first quarter of 2006. The purchase price will be subject to adjustment based onComtrak’s working capital at closing. In addition, the agreement provides for an earn-out for 2006 and 2007,consisting of two cash payments, each of which will not exceed $5 million. We expect this acquisition toincrease revenue, gross margin, salaries and benefits, general and administrative expense, depreciation and alsoimpact net income. If we do not close and successfully integrate this transaction or if Comtrak’s future resultsdo not approximate their projections, our earnings could be negatively impacted. Item 1B.UNRESOLVED STAFF COMMENTS None.8Item 2.PROPERTIES We directly, or indirectly through our subsidiaries, operate 32 offices throughout the United States and inCanada, including our headquarters in Downers Grove, Illinois and our Company-owned drayage operations.All of our office space is leased. Most office leases have initial terms of more than one year, and many includeoptions to renew. While some of our leases expire in the near term, we do not believe that we will havedifficulty in renewing them or in finding alternative office space. We believe that our offices are adequate forthe purposes for which they are currently used. Item 3.LEGAL PROCEEDINGS We are a party to litigation incident to our business, including claims for personal injury and/or propertydamage, freight lost or damaged in transit, improperly shipped or improperly billed. Some of the lawsuits towhich we are party are covered by insurance and are being defended by our insurance carriers. Some of thelawsuits are not covered by insurance and we defend those ourselves. We do not believe that the outcome ofthis litigation will have a materially adverse effect on our financial position or results of operations. See Item 1Business - Risk Management and Insurance. Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS There were no matters submitted to a vote of our security holders during the fourth quarter of 2005. Executive Officers of the Registrant In reliance on General Instruction G to Form 10-K, information on executive officers of the Registrant isincluded in this Part I. The table sets forth certain information as of February 1, 2006 with respect to eachperson who is an executive officer of the Company. Name Age Position Phillip C. Yeager 78 Chairman of the Board of Directors David P. Yeager 52 Vice Chairman of the Board of Directors and Chief ExecutiveOfficer Mark A. Yeager 41 President, Chief Operating Officer and Director Thomas M. White48Senior Vice President, Chief Financial Officer and Treasurer Stephen P. Cosgrove46Executive Vice President-Intermodal and Administration James B. Gaw55Executive Vice President-SalesChristopher R. Kravas40Executive Vice President-Strategy and Yield ManagementDonald G. Maltby51Executive Vice President-LogisticsDavid L. Marsh38Executive Vice President-Highway Dennis R. Polsen52Executive Vice President of Information Services Terri A. Pizzuto47Vice President-FinanceDavid C. Zeilstra36Vice President, Secretary and General Counsel Phillip C. Yeager, our founder, has been Chairman of the Board since October 1985. From April 1971 toOctober 1985, Mr. Yeager served as President of Hub City Terminals, Inc. (“Hub Chicago”). Mr. Yeager becameinvolved in intermodal transportation in 1959, five years after the introduction of intermodal transportation inthe United States, as an employee of the Pennsylvania and Pennsylvania Central Railroads. He spent 19 yearswith the Pennsylvania and Pennsylvania Central Railroads, 12 of which involved intermodal transportation. In1991, Mr. Yeager was named Man of the Year by the Intermodal Transportation Association. In 1995, hereceived the Salzburg Practitioners Award from Syracuse University in recognition of his lifetime achievementsin the transportation industry. In October 1996, Mr. Yeager was inducted into the Chicago AreaEntrepreneurship Hall of Fame sponsored by the University of Illinois at Chicago. In March 1997, he receivedthe Presidential Medal from Dowling College for his achievements in transportation services. In September1998, he received the Silver Kingpin award from the Intermodal Association of North America and in February1999, he was named Transportation Person of the Year by the New York Traffic Club. Mr. Yeager graduatedfrom the University of Cincinnati in 1951 with a Bachelor of Arts degree in Economics. Mr. Yeager is the fatherof David P. Yeager and Mark A. Yeager.9 David P. Yeager has served as our Vice Chairman of the Board since January 1992 and as Chief ExecutiveOfficer since March 1995. From October 1985 through December 1991, Mr. Yeager was President of HubChicago. From 1983 to October 1985, he served as Vice President, Marketing of Hub Chicago. Mr. Yeagerfounded the St. Louis Hub in 1980 and served as its President from 1980 to 1983. Mr. Yeager founded thePittsburgh Hub in 1975 and served as its President from 1975 to 1977. Mr. Yeager received a Masters inBusiness Administration degree from the University of Chicago in 1987 and a Bachelor of Arts degree from theUniversity of Dayton in 1975. Mr. Yeager is the son of Phillip C. Yeager and the brother of Mark A. Yeager. Mark A. Yeager became the President of the Company effective in January 2005 and has been our ChiefOperating Officer and a director since May 2004. From July 1999 to December 2004, Mr. Yeager was President-Field Operations. From November 1997 through June 1999 Mr. Yeager was Division President, Secretary andGeneral Counsel. From March 1995 to November 1997, Mr. Yeager was Vice President, Secretary and GeneralCounsel. From May 1992 to March 1995, Mr. Yeager served as our Vice President-Quality. Prior to joining usin 1992, Mr. Yeager was an associate at the law firm of Grippo & Elden from January 1991 through May 1992and an associate at the law firm of Sidley & Austin from May 1989 through January 1991. Mr. Yeager receiveda Juris Doctor degree from Georgetown University in 1989 and a Bachelor of Arts degree from IndianaUniversity in 1986. Mr. Yeager is the son of Phillip C. Yeager and the brother of David P. Yeager. Thomas M. White has been our Senior Vice President, Chief Financial Officer and Treasurer since June2002. Prior to joining us, Mr. White was a partner at Arthur Andersen, LLP where he worked for 23 years. Mr.White received a Masters in Science and Industrial Administration from Purdue University in 1985 and aBachelor of Business Administration from Western Michigan University in 1979. Mr. White is a CPA and amember of the board of directors of FTD Group, Inc. and Landauer, Inc. Stephen P. Cosgrove became our Executive Vice President-Intermodal and Administration in January2005. Prior to this promotion, Mr. Cosgrove was Vice President- Intermodal and Administration for the CentralRegion from February 2004 through December 2004. Mr. Cosgrove served as Vice President of Hub Chicagofrom December 1996 through January 2004 and from September 1995 to November 1996 was General Managerof sales and marketing for Hub Chicago. Mr. Cosgrove worked for APL Stacktrain Services from 1986 through1995 prior to coming to Hub Chicago. James B. Gaw has been our Executive Vice President-Sales since February 2004. From December 1996through January 2004, Mr. Gaw was President of Hub North Central, located in Milwaukee. From 1990 throughlate 1996, he was Vice President and General Manager of Hub Chicago. Mr. Gaw joined Hub Chicago as SalesManager in 1988. Mr. Gaw’s entire career has been spent in the transportation industry, including 13 years ofprogressive leadership positions at Itofca, an intermodal marketing company, and Flex Trans. Mr. Gaw receiveda Bachelor of Science degree from Elmhurst College in 1973. Christopher R. Kravas has been our Executive Vice President -Strategy and Yield Management sinceDecember 2003. From February 2002 through November 2003, Mr. Kravas served as President of Hub HighwayServices. From February 2001 through December 2001, Mr. Kravas was Vice President-Enron Freight Markets.Mr. Kravas joined Enron after it acquired Webmodal, an intermodal business he founded. Mr. Kravas was ChiefExecutive Officer of Webmodal from July 1999 through February 2001. From 1989 through June 1999 Mr.Kravas worked for the Burlington Northern Santa Fe Railway in various positions in the intermodal businessunit and finance department. Mr. Kravas received a Bachelor of Arts degree in 1987 from Indiana Universityand a Masters in Business Administration in 1994 from the University of Chicago. Donald G. Maltby has been our Executive Vice President – Logistics since February 2004. Mr. Maltbypreviously served as President of Hub Online, our e-commerce division, from February 2000 through January2004. Mr. Maltby also served as President of Hub Cleveland from July 1990 through January 2000 and fromApril 2002 to January 2004. Prior to joining Hub Group, Mr. Maltby served as President of LyonsTransportation, a wholly owned subsidiary of Sherwin Williams Company, from 1988 to 1990. In his career atSherwin Williams, which began in 1981 and continued until he joined us in 1990, Mr. Maltby held a variety ofmanagement positions including Vice-President of Marketing and Sales for their Transportation Division. Mr.Maltby has been in the transportation and logistics industry since 1976, holding various executive andmanagement positions. Mr. Maltby received a Masters in Business Administration from Baldwin WallaceCollege in 1982 and a Bachelor of Science degree from the State University of New York in 1976. 10David L. Marsh has been our Executive Vice President – Highway since February 2004. Mr. Marshpreviously served as President of Hub Ohio from January 2000 through January 2004. Mr. Marsh joined us inMarch 1991 and became General Manager with Hub Indianapolis in 1993, a position he held throughDecember 1999. Prior to joining Hub Group, Mr. Marsh worked for Carolina Freight Corporation, an LTLcarrier, starting in January 1990. Mr. Marsh received a Bachelor of Science degree in Marketing and PhysicalDistribution from Indiana University-Indianapolis in December 1989. Mr. Marsh has been a member of theAmerican Society of Transportation and Logistics, the Indianapolis Traffic Club, the Council for LogisticsManagement and served as an advisor to the Indiana University-Indianapolis internship program fortransportation and logistics. Mr. Marsh was honored as the Indiana Transportation Person of the Year for 1999. Dennis R. Polsen has been our Executive Vice President of Information Services since February 2004.From September 2001 to January 2004, Mr. Polsen was Vice President - Chief Information Officer and fromMarch 2000 through August 2001, Mr. Polsen was our Vice-President of Application Development. Prior tojoining us, Mr. Polsen was Director of Applications for Humana, Inc. from September 1997 through February2000 and spent 14 years prior to that developing, implementing, and directing transportation logisticsapplications at Schneider National, Inc. Mr. Polsen received a Masters in Business Administration in May of1983 from the University of Wisconsin Graduate School of Business and a Bachelor of BusinessAdministration in May of 1976 from the University of Wisconsin-Milwaukee. Mr. Polsen is a past member ofthe American Trucking Association. Terri A. Pizzuto has been our Vice President of Finance since July 2002. Prior to joining us, Ms. Pizzutowas a Partner in the Assurance and Business Advisory Group at Arthur Andersen LLP. Ms. Pizzuto worked forArthur Andersen LLP for 22 years holding various positions and serving numerous transportation companies.Ms. Pizzuto received a Bachelor of Science in Accounting from the University of Illinois in 1981. Ms. Pizzutois a CPA and a member of the American Institute of Certified Public Accountants. David C. Zeilstra has been our Vice President, Secretary and General Counsel since July 1999. FromDecember 1996 through June 1999, Mr. Zeilstra was our Assistant General Counsel. Prior to joining us, Mr.Zeilstra was an associate with the law firm of Mayer, Brown & Platt from September 1994 through November1996. Mr. Zeilstra received a Juris Doctor degree from Duke University in 1994 and a Bachelor of Arts degreefrom Wheaton College in 1990. Directors of the Registrant In addition to Phillip C. Yeager, David P. Yeager and Mark A. Yeager, the following three individuals arealso on our Board of Directors: Gary D. Eppen – currently retired and formerly the Ralph and Dorothy KellerDistinguished Service Professor of Operations Management and Deputy Dean for part-time Masters in BusinessAdministration Programs at the Graduate School of Business at the University of Chicago; Charles R. Reaves-Chief Executive Officer of Reaves Enterprises, Inc., a real estate development company and Martin P. Slark –Vice Chairman and Chief Executive Officer of Molex, Incorporated, a manufacturer of electronic, electrical andfiber optic interconnection products and systems. PART II Item 5.MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our Class A Common Stock (“Class A Common Stock”) trades on the NASDAQ National Market tierof the NASDAQ Stock Market under the symbol “HUBG.” Set forth below are the high and low closing pricesfor shares of the Class A Common Stock for each full quarterly period in 2004 and 2005. 20042005HighLowHighLow First Quarter $15.33 $10.71 $32.92 $24.60 Second Quarter $19.45 $13.50 $32.06 $24.23 Third Quarter $18.88 $13.26 $36.93 $25.08 Fourth Quarter $27.13 $18.63 $40.92 $32.82 11On February 20, 2006, there were approximately 247 stockholders of record of the Class A CommonStock and, in addition, there were an estimated 4,275 beneficial owners of the Class A Common Stock whoseshares were held by brokers and other fiduciary institutions. On February 20, 2006, there were 11 holders ofrecord of our Class B Common Stock (the “Class B Common Stock” together with the Class A Common Stock,the “Common Stock”). We were incorporated in 1995 and have never paid cash dividends on either the Class A Common Stock orthe Class B Common Stock. The declaration and payment of dividends are subject to the discretion of theBoard of Directors. Any determination as to the payment of dividends will depend upon our results ofoperations, capital requirements and financial condition of the Company, and such other factors as the Boardof Directors may deem relevant. Accordingly, there can be no assurance that the Board of Directors will declareor pay cash dividends on the shares of Common Stock in the future. Our certificate of incorporation requiresthat any cash dividends must be paid equally on each outstanding share of Class A Common Stock and Class BCommon Stock. Our credit facility prohibits us from paying dividends on the Common Stock if there has been,or immediately following the payment of a dividend would be, a default or an event of default under the creditfacility. We are currently in compliance with the covenants contained in the credit facility. The Board of Directors approved a two-for-one stock split in the form of a stock dividend which was paidon May 11, 2005. All shares have been retroactively restated to give effect to the two-for-one stock split, whichwas affected in the form of a 100% stock dividend. Each of our Class A stockholders and Class B stockholdersreceived one Class A share on each share of Class A Common Stock and each share of Class B Common Stockheld by them on the record date in connection with the stock split. In accordance with the terms of ourCertificate of Incorporation, the number of votes held by each share of Class B Common Stock was adjusted inconnection with this stock dividend such that each share of Class B Common Stock now entitles its holder toapproximately 40 votes. Each share of Class A Common Stock entitles its holder to one vote. Note 13 of the Company’s Notes to Consolidated Financial Statements is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA Selected Financial Data(in thousands except per share data) Years Ended December 31, 20052004200320022001 (1)Statement of Income Data: Revenue$ 1,531,499$ 1,426,806$ 1,359,614$ 1,335,660$ 1,319,331Gross margin189,023179,548170,682162,812178,963Operating income54,38040,59824,29511,14110,548Income before minority interest and taxes55,18729,99816,8952,015902Income before income taxes55,18729,99816,8952,539751Net income32,94617,2798,4301,498443Basic earnings per common share$ 1.65$ .98$ .55$ .10$ .03Diluted earnings per common share$ 1.59$ .92$ .54$ .10$ .03 As of December 31, 20052004200320022001Balance Sheet Data: Working capital (deficiency)$ 51,145$ 23,173$ (9,631)$ (7,109)$ (5,380)Total assets444,418410,845388,527399,262416,024Long-term debt, excluding current portion--67,01794,02796,059Stockholders' equity242,075226,936143,035134,340132,453_________________ (1) As of January 1, 2002, we adopted Financial Accounting Standards Board Statement No. 142, “Goodwilland Other Intangible Assets” (“Statement 142”). Under Statement 142, goodwill is no longer amortized.Amortization expense for the year ended December 31, 2001 was $5,741,000. The per share effect ofamortization expense related to goodwill, net of tax was $.22 for the year ended December 31, 2001. 12Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS The information contained in this annual report contains forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “hopes,”“believes,” “intends,” “estimates,” “anticipates,” and variations of these words and similar expressions areintended to identify these forward-looking statements. Forward-looking statements are inherently uncertainand subject to risks. Such statements should be viewed with caution. Actual results or experience could differmaterially from the forward-looking statements as a result of many factors. We assume no liability to updateany such forward-looking statements contained in this annual report. Factors that could cause our actual resultsto differ materially, in addition to those set forth under Items 1A “Risk Factors,” include: •the degree and rate of market growth in the intermodal, truck brokerage and logistics markets servedby us; •deterioration in our relationships with existing railroads or adverse changes to the railroads’ operatingrules; •changes in rail service conditions or adverse weather conditions; •further consolidation of railroads; •the impact of competitive pressures in the marketplace, including entry of new competitors, directmarketing efforts by the railroads or marketing efforts of asset-based carriers; •changes in rail, drayage and trucking company capacity; •equipment shortages or equipment surplus; •changes in the cost of services from rail, drayage, truck or other vendors; •labor unrest in the rail, drayage or trucking company communities; •general economic and business conditions; •fuel shortages or prices; •increases in interest rates; •decrease in demand for our distribution services; •changes in homeland security or terrorist activity; •difficulties in maintaining or enhancing our information technology systems; •changes to or new governmental regulation; •loss of several of our largest customers; •inability to recruit and retain key personnel; •changes in insurance costs and claims expense; and •inability to close and successfully integrate business combinations CAPITAL STRUCTURE We have authorized common stock comprised of Class A Common Stock and Class B CommonStock. The rights of holders of Class A Common Stock and Class B Common Stock are identical, except eachshare of Class B Common Stock entitles its holder to approximately 40 votes, while each share of Class ACommon Stock entitles its holder to one vote. We have authorized 2,000,000 shares of preferred stock. EXECUTIVE SUMMARY Hub Group, Inc. (“we”, “us” or “our”) is the largest intermodal marketing company (“IMC”) in theUnited States and a full service transportation provider offering intermodal, truck brokerage and logisticsservices. These service offerings are referred to as the Core Transportation business. The Core Transportationbusiness operates through a nationwide network of operating centers. We also operate Hub Group DistributionServices LLC (“HGDS” or “Hub Distribution”). Hub Distribution performs certain specialized services,predominately installation of point of purchase displays, and is responsible for its own operations, customerservice, marketing and management information systems support. 13As an IMC, we arrange for the movement of our customers’ freight in containers and trailers over longdistances. We contract with railroads to provide transportation for the long-haul portion of the shipment andwith local trucking companies, known as “drayage companies,” for local pickup and delivery. As part of theintermodal services, we negotiate rail and drayage rates, electronically track shipments in transit, consolidatebilling and handle claims for freight loss or damage on behalf of our customers. Our drayage services are provided by our subsidiary, Quality Services, LLC (“QS”). QS has terminalsin Chicago, Kansas City, St. Louis, Atlanta, Stockton, Los Angeles, Jacksonville, Cleveland, Columbus andEvansville. QS assists us in providing reliable, cost effective intermodal services to our customers. AtDecember 31, 2005, QS owned 46 tractors and leased 77 tractors and employed 182 drivers and contracted with374 owner-operators. On January 19, 2006, we entered into a definitive agreement to acquire Comtrak, Inc. Comtrak is atransportation company whose services include primarily rail and international drayage for the intermodalsector. Comtrak has terminals in Atlanta, Birmingham, Charleston, Charlotte, Chattanooga, Dallas, Houston,Huntsville, Jacksonville, Kansas City, Memphis, Nashville, Norfolk, Savannah and Tampa. At December 31,2005, Comtrak owned 250 tractors and leased or owned 650 trailers and employed 253 drivers and contractedwith 307 owner-operators. We also arrange for the transportation of freight by truck, providing customers with another optionfor their transportation needs. We match the customers’ needs with carriers’ capacity to provide the mosteffective service and price combinations. As part of our truck brokerage services, we negotiate rates, trackshipments in transit and handle claims for freight loss or damage on behalf of our customers. Our logistics service consists of complex transportation management services, including loadconsolidation, mode optimization and carrier management. These service offerings are designed to takeadvantage of the increasing trend for shippers to outsource all or a greater portion of their transportation needs. We have full time marketing representatives throughout North America who service local, regionaland national accounts. We believe that fostering long-term customer relationships is critical to our success andallows us to better understand our customers’ needs and specifically tailor our transportation services to them. One of our primary goals is to grow our net income. We achieved this growth through an increase inrevenue from our existing Core Transportation customers as well as from winning new customers. Our top 50customers’ revenue, which represents about 54% of our Core Transportation revenue, has increased byapproximately 7.3% when comparing the year ended December 31, 2005 to December 31, 2004. During 2005and 2004, we severed relationships with certain low profitability customers which impeded our intermodalrevenue growth. Revenue growth resulted primarily from price increases, fuel surcharges and mix whencomparing 2005 to 2004. We use various performance indicators to manage our business. We closely monitor margin and gainsand losses for our top 50 customers and evaluate on-time performance, costs per load by location and dailysales outstanding by location. Vendor cost changes and vendor service issues are also monitored closely. RESULTS OF OPERATIONS Year Ended December 31, 2005, Compared to Year Ended December 31, 2004 The following table summarizes our revenue by business line (in thousands): Twelve Months Ended December 31, 2005 2004 % ChangeRevenue Core Transportation Intermodal $1,079,799 $1,014,533 6.4%Truck 266,546 225,466 18.2Logistics 135,535 140,723 (3.7)Total Core 1,481,880 1,380,722 7.3 Hub Distribution 49,619 46,084 7.7 Total Revenue $1,531,499 $1,426,806 7.3% 14The following table includes certain items in the consolidated statements of income as a percentage ofrevenue: Twelve Months Ended December 31, 2005 2004 Revenue100.0% 100.0% Transportation costs87.7 87.4 Gross margin12.3 12.6 Costs and Expenses: Salaries and benefits5.7 6.2 General and administrative2.4 2.7 Depreciation and amortization of property and equipment0.6 0.8 Total costs and expenses8.7 9.7 Operating income3.6 2.9 Other income (expense): Debt extinguishment expenses- (0.5) Interest income0.1 - Other expense, net- (0.2) Total other income (expense)0.1 (0.7) Income before provision for income taxes3.7 2.2 Provision for income taxes1.5 1.0 Net income2.2% 1.2% Revenue Revenue increased 7.3% to $1,531.5 million in 2005 from $1,426.8 million in 2004. Intermodal revenueincreased 6.4% to $1,079.8 million from $1,014.5 million due primarily to price increases, mix and fuelsurcharges, offset by a 5.1% decrease in volume. However, during the fourth quarter of 2005, intermodalvolume increased 1.3%. Truckload brokerage revenue increased 18.2% to $266.5 million from $225.5 milliondue primarily to price increases, mix and fuel surcharges and a 5.4% increase in volume. Logistics revenuedecreased 3.7% to $135.5 million from $140.7 million due primarily to the loss of two customers in 2005. Weexpect logistics revenue to decrease between 5 and 10% in 2006 resulting from these lost customers and twoother customers that we will no longer be servicing after the first quarter of 2006 offset by anticipated newcustomer additions. In addition, HGDS revenue increased 7.7% to $49.6 million from $46.1 million. Certain prior year amounts have been reclassified to conform to the current year presentation. Gross Margin Gross margin increased 5.3% to $189.0 million in 2005 from $179.5 million in 2004. Gross marginpercentage decreased from 12.6% in 2004 to 12.3% in 2005 due partially to additional costs for repositioningequipment in 2005, accessorial cost increases, ramp up costs for certain new customers and start up costsassociated with our new containers. We made a decision to reposition equipment to certain cities to expand thenumber of rail-controlled containers within our network in order to meet customer demand during the 2005peak season. In addition, in 2005 some of our rail carriers changed accessorial pricing and there is often a lagtime before we can pass along the increase to our customers. Further, in 2005 we incurred initial ramp up costsfor several large customers and we had extra drayage costs associated with moving our new containers from thepier. 15Salaries and Benefits Salaries and benefits remained constant at $88.2 million year over year. As a percentage of revenue,salaries and benefits decreased to 5.7% in 2005 from 6.2% 2004 due primarily to an increase in revenue.Headcount as of December 31, 2005 and 2004 was 1,184 and 1,172 respectively. General and Administrative General and administrative expenses decreased 6.0% to $36.9 million in 2005 from $39.2 million in2004. As a percentage of revenue, these expenses decreased to 2.4% in 2005 from 2.7% in 2004. General andadministrative expense decreased primarily due to reductions in outside services and equipment lease expense.Equipment lease expense decreased by approximately $1.3 million due primarily to equipment lease buy-outs.Outside services decreased by $0.6 million due primarily to lower professional service costs. Depreciation and Amortization of Property and Equipment Depreciation and amortization decreased 16.7% to $9.6 million from $11.5 million in 2004. This expenseas a percentage of revenue decreased to 0.6% from 0.8% The decrease in depreciation and amortization is dueprimarily to lower computer equipment and software depreciation. Other Income (Expense) Interest expense decreased 85.1% to $0.6 million from $4.3 million in 2004. The decrease in interestexpense is due primarily to carrying a lower average debt balance this year as compared to the prior year andthe extinguishment of the private placement debt during the third quarter of 2004. The debt extinguishmentexpenses of $7.3 million in 2004 includes a $6.8 million pre-payment penalty associated with paying off the$50 million of 9.14% debt and the $0.5 million write off of the related deferred financing costs. In 2004 and2005 other, net includes currency translation and gains on the sale of fixed assets. During 2004, other, netincluded a legal settlement. Provision for Income Taxes The provision for income taxes increased to $22.2 million in 2005 compared to $12.7 million in 2004.We provided for income taxes using an effective rate of 40.3% in 2005 compared to 42.4% in 2004. Thedecrease in the effective rate in 2005 resulted primarily from a lower increase in reserves for 2005 and a lowerstate tax rate due to business restructuring. Net Income Net income increased to $32.9 million in 2005 from $17.3 million in 2004 due primarily to an increase inour gross margin, lower general and administrative expenses and lower interest expense. Excluding the debtextinguishment expenses, adjusted net income for 2004 would have been $21.5 million. A tabularreconciliation of the differences between the adjusted financial results for 2004 and our financial resultsdetermined in accordance with U.S. generally accepted accounting principles are contained in the table below. Earnings Per Common Share Basic earnings per share increased to $1.65 in 2005 from $0.98 in 2004 and diluted earnings per shareincreased to $1.59 in 2005 from $0.92 in 2004. The weighted average diluted shares outstanding increased10.2% from 18,778,000 at December 31, 2004 to 20,696,000 at December 31, 2005 due primarily to the3,600,000 shares from our stock offering being outstanding the whole year in 2005 and the issuance ofrestricted stock. Excluding the debt extinguishment expenses, adjusted basic earnings per share would havebeen $1.22 in 2004 and adjusted diluted earnings per share would have been $1.15 in 2004. 16RECONCILIATION OF “AS REPORTED” FINANCIAL RESULTS TO “AS ADJUSTED” FINANCIAL RESULTS(in thousands, except per share amounts) Year ended December 31, 2004 As reported Adjustments As adjusted Operating income $ 40,598 $ - $ 40,598Interest expense (4,276) - (4,276)Interest income 260 - 260Debt extinguishment expenses (7,296) (7,296)(a)-Other, net 712 - 712Income before provision for income taxes 29,998 (7,296) 37,294 Provision for income taxes 12,719 (3,064)(b)15,783 Net income $ 17,279 $ (4,232) $ 21,511 Basic earnings (loss) per common share $ .98 $ (.24) $ 1.22Diluted earnings (loss) per common share $ .92 $ (.23) $ 1.15 Basic weighted average number of sharesoutstanding 17,600 17,600 17,600Diluted weighted average number of sharesoutstanding 18,778 18,778 18,778 a) Fees and expenses related to our early extinguishment of 9.14% debt 1) Pre-payment penalty of $6,804 2) Write-off of related deferred financing costs of $492b) Income taxes at 42% The purpose of this reconciliation is to reflect as adjusted earnings excluding the one time costs associatedwith prepaying our debt. Year Ended December 31, 2004, Compared to Year Ended December 31, 2003 The following table summarizes our revenue by business line (in thousands): Twelve Months Ended December 31, 2004 2003 % ChangeRevenue Core Transportation Intermodal $1,014,533 $976,723 3.9%Truck 225,466 210,493 7.1Logistics(1)140,723 118,601 18.7Total Core 1,380,722 1,305,817 5.7 Hub Distribution(1)46,084 53,797 (14.3) Total Revenue $1,426,806 $1,359,614 4.9% (1) HGDS transferred its pharmaceutical sample delivery business to logistics in August 2004, resulting in anincrease in logistics revenue of $4.3 million for the year ended December 31, 2004. 17The following table includes certain items in the consolidated statements of income as a percentage ofrevenue: Twelve Months Ended December 31, 2004 2003 Revenue100.0% 100.0% Transportation costs87.4 87.4 Gross Margin12.6 12.6 Costs and Expenses: Salaries and benefits6.2 6.6 General and administrative2.7 3.4 Depreciation and amortization of property and equipment0.8 0.8 Total costs and expense9.7 10.8 Operating Income2.9 1.8 Other expense: Debt Extinguishment expenses(0.5) - Interest income- - Other expense, net(0.2) (0.5) Total other expense(0.7) (0.5) Income before provision for income taxes2.2 1.3 Provision for income taxes1.0 0.7 Net income1.2% 0.6% Revenue Revenue increased 4.9% to $1,426.8 million in 2004 from $1,359.6 million in 2003. Intermodal revenueincreased 3.9% to $1,014.5 million from $976.7 million due primarily to price increases, mix and fuelsurcharges, offset by a 0.7% decrease in volume. Truckload brokerage revenue increased 7.1% to $225.5million from $210.5 million due primarily to price increases, mix and fuel surcharges. Logistics revenueincreased 18.7% to $140.7 million from $118.6 million due primarily to increased business from both new andexisting customers including the transfer of the pharmaceutical sample delivery business from HGDS in mid-year. In addition, the revenue of HGDS decreased 14.3% to $46.1 million from $53.8 million in 2003 dueprimarily to a decrease in the installation business for a significant customer and transferring its pharmaceuticalsample delivery business to our logistics division in August 2004. Pharmaceutical revenue included inlogistics is approximately $4.3 million for the year ended December 31, 2004. Certain prior year amounts have been reclassified to conform to the current year presentation. Gross Margin Gross margin increased 5.2% to $179.5 million in 2004 from $170.7 million in 2003. The increase relatessolely to our Core Transportation business. We proactively passed along rate increases to our customers for fueland increased costs from our transportation suppliers. We also increased our margins by eliminating businesswhere we do not receive adequate returns. This has caused part of the decline in intermodal volume. Salaries and Benefits Salaries and benefits decreased 2.0% to $88.2 million in 2004 from $90.0 million in 2003. As apercentage of revenue, salaries and benefits decreased to 6.2% in 2004 from 6.6% 2003 due primarily to adecrease in headcount and an increase in revenue. Headcount as of December 31, 2004 and 2003 was 1,172and 1,223 respectively, representing a 4% decrease. In late 2003, we stopped issuing stock options and beganissuing restricted stock, which vests over three years. As a result, salaries and benefits include a $2.1 millioncharge related to restricted stock in 2004 compared to $0.2 million in 2003. 18General and Administrative General and administrative expenses decreased 14.1% to $39.2 million in 2004 from $45.7 million in2003. As a percentage of revenue, these expenses decreased to 2.7% in 2004 from 3.4% in 2003. Selling,general and administrative expense decreased primarily due to reductions in equipment lease expense, outsideservices, bad debts, telephone, automotive, office expense and meals and entertainment. Equipment leaseexpense decreased by approximately $2.4 million due primarily to equipment lease buy-outs. Telephone andoffice expense decreased by $0.9 million due to closed offices and cost savings initiatives. Outside servicesdecreased by $0.8 million due primarily to lower legal fees. Travel and meals and entertainment decreased by$0.7 million due to closed offices, headcount reductions and cost savings initiatives. Automotive expensedecreased by $0.4 million due to changes in policies and cost reduction efforts. Depreciation and Amortization of Property and Equipment Depreciation and amortization increased 7.3% to $11.5 million from $10.8 million in 2003. This expenseas a percentage of revenue remained constant at 0.8%. The increase in depreciation and amortization is dueprimarily to more computer equipment being depreciated in 2004 as a result of lease buy-outs. Other Income (Expense) Interest expense decreased 44.4% to $4.3 million from $7.7 million in 2003. The decrease in interestexpense is due primarily to carrying a lower average debt balance this year as compared to the prior year andthe extinguishment of the private placement debt during the 3rd quarter of 2004. The debt extinguishmentexpenses of $7.3 million include a $6.8 million pre-payment penalty associated with paying off the $50million of 9.14% debt and the $0.5 million write off of the related deferred financing costs. Provision for Income Taxes The provision for income taxes increased to $12.7 million in 2004 compared to $8.5 million in 2003. Weprovided for income taxes using an effective rate of 42.4% in 2004 compared to 50.1% in 2003. In 2003, wewrote off $0.8 million of deferred tax assets related to the Illinois Research and Development credit as a resultof Illinois legislation enacted in June of 2003. The decrease in the effective rate in 2004 also resulted partiallyfrom a business restructuring impacting the deferred state income tax rate offset by the establishment of avaluation allowance on state tax net operating losses. Net Income Net income increased to $17.3 million in 2004 from $8.4 million in 2003 due primarily to higher grossmargin and lower selling, general and administrative expenses, partially offset by the one time debtextinguishment expenses of $7.3 million. Excluding the debt extinguishment expenses, adjusted net incomefor 2004 would have been $21.5 million. A tabular reconciliation of the differences between the adjustedfinancial results for 2004 and our financial results determined in accordance with U.S. generally acceptedaccounting principles are contained in the table above. Earnings Per Common Share Basic earnings per share increased to $0.98 in 2004 from $0.55 in 2003 and diluted earnings per shareincreased to $0.92 in 2004 from $0.54 in 2003. The weighted average diluted shares outstanding increased19% from 15,730,000 at December 31, 2003 to 18,778,000 at December 31, 2004 due primarily to our sale of3,600,000 shares of Class A Common Stock in July 2004 (in a follow-on offering). Excluding the debtextinguishment expenses, adjusted basic earnings per share would have been $1.22 and adjusted dilutedearnings per share would have been $1.15. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations, capital expenditures and stock buy backs through cash flows fromoperations. Cash provided by operating activities for the year ended December 31, 2005, was approximately $51.6million, which resulted primarily from net income from operations of $32.9 million and non-cash chargesrelating to deferred taxes and depreciation offset by changes in working capital. 19Net cash used in investing activities for the year ended December 31, 2005, was $3.8 million and relatedprimarily to capital expenditures made to enhance our information system capabilities. Assuming the Comtrakacquisition closes, we expect capital expenditures to be approximately $7 to $9 million in 2006. If the dealdoes not close, we expect capital expenditures to be between $4 and $6 million in 2006. The net cash used in financing activities for the year ended December 31, 2005, was $28.5 million. Usesof cash related to the purchase of $33.2 million of treasury stock. We generated cash from stock options beingexercised of approximately $4.7 million. On March 23, 2005, we entered into a revolving credit agreement that provides for unsecured borrowingsof up to $40.0 million. The interest rate ranges from LIBOR plus 0.75% to 1.25% or Prime plus 0.5%. Therevolving line of credit expires on March 23, 2010. The financial covenants require a minimum net worth of$175.0 million and a cash flow leverage ratio of not more than 2.0 to 1.0. The commitment fees charged on theunused line of credit are between 0.15% and 0.25% per annum. In February 2006, we amended the revolving credit agreement to provide for unsecured borrowing up to$50.0 million. No other terms of the credit agreement were amended. Our unused and available borrowings under our bank revolving line of credit at December 31, 2005 andDecember 31, 2004 were $39.0 million and $34.1 million, respectively. We were in compliance with our debtcovenants at December 31, 2005. We have standby letters of credit that expire from 2006 to 2012. As of December 31, 2005 our letters ofcredit were $1.0 million. In 2005, we added 3,400 new 53’ containers to our PSN fleet. We financed these 3,400 containers withoperating leases. These arrangements are included in Note 7 to the consolidated financial statements. CONTRACTUAL OBLIGATIONS Our contractual cash obligations as of December 31, 2005 are minimum rental commitments. Minimumannual rental commitments, at December 31, 2005, under noncancellable operating leases, principally for realestate, containers and equipment are payable as follows (in thousands): 2006$15,076200713,983200810,54720098,75220107,2952011 and thereafter12,343 CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions. In certain circumstances, those estimates andassumptions can affect amounts reported in the accompanying consolidated financial statements. We havemade our best estimates and judgments of certain amounts included in the financial statements, giving dueconsideration to materiality. We do not believe there is a great likelihood that materially different amountswould be reported related to the accounting policies described below. However, application of theseaccounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, asa result, actual results could differ from these estimates. The following is a brief discussion of the moresignificant accounting policies and estimates. Allowance for Uncollectible Trade Accounts Receivable In the normal course of business, we extend credit to customers after a review of each customer’s credithistory. An allowance for uncollectible trade accounts has been established through an analysis of the accountsreceivable aging, an assessment of collectibility based on historical trends and an evaluation of the currenteconomic conditions. To be more specific, we reserve every account balance that has aged over one year,certain customers in bankruptcy and account balances specifically identified as uncollectible. In addition, weprovide a reserve for accounts not specifically identified as uncollectible based upon historical trends that areupdated routinely. The allowance is reported on the balance sheet in net accounts receivable. Actualcollections of accounts receivable could differ from management’s estimates due to changes in futureeconomic, industry or customer financial conditions. Recoveries of receivables previously charged off arerecorded when received.20Revenue Recognition Revenue is recognized at the time 1) persuasive evidence of an arrangement exists, 2) services have beenrendered, 3) the sales price is fixed and determinable and 4) collectibility is reasonably assured. In accordancewith EITF 91-9, revenue and related transportation costs are recognized based on relative transit time. Further,we report revenue on a gross basis in accordance with the criteria in EITF 99-19, “Reporting Revenue Gross asa Principal versus Net as an Agent.” We are the primary obligor and are responsible for providing the servicedesired by the customer. The customer views us as responsible for fulfillment including the acceptability of theservice. Service requirements may include, for example, on-time delivery, handling freight loss and damageclaims, setting up appointments for pick up and delivery and tracing shipments in transit. We have discretionin setting sales prices and as a result, our earnings vary. In addition, we have the discretion to select ourvendors from multiple suppliers for the services ordered by our customers. Finally, we have credit risk for ourreceivables. These three factors, discretion in setting prices, discretion in selecting vendors and credit risk,further support reporting revenue on the gross basis. Deferred Income Taxes Deferred income taxes are recognized for the future tax effects of temporary differences between financialand income tax reporting using tax rates in effect for the years in which the differences are expected to reverse.We believe that it is more likely than not that our deferred tax assets will be realized with the exception of$489,000 related to state tax net operating losses and other state credits for which valuation allowances havebeen established. In the event the probability of realizing the remaining deferred tax assets do not meet themore likely than not threshold in the future, a valuation allowance would be established for the deferred taxassets deemed unrecoverable. Valuation of Goodwill We review goodwill for impairment on an annual basis or whenever events or changes in circumstancesindicate the carrying amount of goodwill may not be recoverable. We utilize a third-party independentvaluation firm to assist in performing the necessary valuations to be used in the impairment testing. Thesevaluations are based on market capitalization, discounted cash flow analysis or a combination of bothmethodologies. The assumptions used in the valuations include expectations regarding future operatingperformance, discount rates, control premiums and other factors which are subjective in nature. Actual cashflows from operations could differ from management’s estimates due to changes in business conditions,operating performance and economic conditions. Should estimates differ materially from actual results, we maybe required to record impairment charges in the future. New Pronouncement In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued toEmployees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach inStatement 123 (R) is similar to the approach described in Statement 123. However, Statement 123 (R) requiresall share-based payments to employees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longer an alternative. As permitted by Statement 123, prior to January 1, 2006 we accounted for share-based payments toemployees using Opinion 25’s intrinsic value method and, as such, recognized no compensation cost foremployee stock options. Had we adopted Statement 123 (R) in prior periods, the impact of that standard wouldhave approximated the impact of Statement 123 as described in Note 1 of the consolidated financialstatements. We will adopt Statement 123 (R) effective January 1, 2006 using the modified prospective method. Weexpect the 2006 impact of the adoption of Statement 123 (R) to be between $.01 and $.02 per share. Statement123 (R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported asa financing cash flow, rather than as an operating cash flow as required under the current literature. Thisrequirement will reduce net operating cash flow and increase net financing cash flows in periods after adoption.While we cannot estimate what those amounts will be in the future (because they depend on, among otherthings, when employees exercise stock options), the amount of operating cash flows recognized in priorperiods for such excess tax deductions were $8.5 million and $5.3 million in 2005 and 2004, respectively. 21OUTLOOK, RISKS AND UNCERTAINTIES Business Combinations/Divestitures We believe that future acquisitions or dispositions that we make could significantly impact financialresults. Financial results most likely to be impacted include, but are not limited to, revenue, gross margin,salaries and benefits, selling general and administrative expenses, depreciation and amortization, interestexpense, net income and our debt level. In January 2006, we entered into a definitive agreement to acquire Comtrak, Inc. The closing is subject tocertain customary closing conditions and approvals. Hub will pay $38.0 million in cash at closing, which isexpected to occur during the first quarter of 2006. The purchase price will be subject to adjustment based onComtrak’s working capital at closing. In addition, the agreement provides for an earn-out for 2006 and 2007,consisting of two cash payments, each of which will not exceed $5 million. We expect this acquisition toincrease revenue, gross margin, salaries and benefits, general and administrative expense, depreciation and alsoimpact net income. If we do not close this transaction or if Comtrak’s future results do not approximate theirprojections, our earnings could be negatively impacted. On November 11, 2004, we, along with our wholly owned subsidiary, Hub Group Distribution Services,LLC ("HGDS"), entered into the Purchase Option and Right of First Refusal Agreement pursuant to whichHGDS granted an entity controlled by William J. McKenna the exclusive option to purchase all orsubstantially all of the assets of HGDS for a cash purchase price of $11.3 million (subject to adjustment on theclosing date), plus the assumption of certain HGDS liabilities. Mr. McKenna agreed to serve as President ofHGDS effective December 1, 2004. McKenna's company may exercise the option during the period (the"Option Period") commencing on November 11, 2004, and ending on the earlier to occur of (i) March 31, 2007,and (ii) the date on which McKenna's employment with HGDS terminates; provided, however, that this periodmay be extended for up to 180 days depending on the circumstances of the termination of McKenna'semployment. Additionally, HGDS granted McKenna's company a right of first refusal with respect to anyacceptable third-party offers that we or HGDS receive during the Option Period for all or substantially all of theassets of HGDS. During the Option Period, we and HGDS agreed that, except as required by law, we would notsolicit or initiate discussions or negotiations with any person other than McKenna's company relating to thesale of HGDS or its assets. Excluding the Comtrak acquisition, financial results may be impacted by additional factors as discussedbelow. Revenue We believe that the performance of the railroads and a severe or prolonged slow-down of the economy arethe most significant factors that could negatively influence our revenue growth rate. Should there be furtherconsolidation in the rail industry causing a service disruption, we believe our intermodal business would likelybe negatively impacted. Should there be a significant service disruption, we expect that there may be somecustomers who would switch from using our intermodal service to other transportation services. We expect thatthese customers may choose to continue to utilize other services even when intermodal service levels arerestored. Other factors that could negatively influence our growth rate include, but are not limited to, theelimination of fuel surcharges, the entry of new web-based competitors, customer retention, inadequate drayageservice and inadequate equipment supply. Our installation services business, HGDS, is a project-based business with significant customerconcentration. Any decrease in the demand from these customers or our failure to secure new project businesscould have a material adverse effect on our revenue. Gross Margin We expect fluctuations in the gross margin as a percentage of revenue from quarter-to-quarter caused byvarious factors including, but not limited to, changes in the core transportation business mix, trailer andcontainer capacity, vendor pricing, fuel costs, intermodal industry growth, intermodal industry service levels,accessorials, competition and accounting estimates. Unlike other service offerings, our distribution services arecomprised of certain higher margin projects. There can be no assurance these higher margin projects willcontinue in the future. 22Salaries and Benefits We estimate that salaries and benefits as a percentage of revenue could fluctuate from quarter-to-quarteras there are timing differences between volume increases and changes in levels of staffing. Factors that couldaffect the percentage from staying in the recent historical range include, but are not limited to, revenue growthrates significantly higher or lower than forecasted, a management decision to invest in additional personnel tostimulate new or existing businesses, changes in customer requirements, changes in our operating structure andchanges in railroad intermodal service levels which could result in a lower or higher cost of labor per move. General and Administrative We believe there are several factors that could cause general and administrative expenses to fluctuate as apercentage of revenue. As customer expectations and the competitive environment require the development ofweb-based business interfaces and the restructuring of our information systems and related platforms, webelieve there could be significant expenses incurred, some of which would not be capitalized. Other factorsthat could cause selling, general and administrative expense to fluctuate include, but are not limited to,changes in insurance premiums and outside services expense. Depreciation and Amortization of Property and Equipment We estimate that depreciation and amortization of property and equipment will remain relativelyconsistent in 2006 assuming we close the Comtrak acquisition. If we do not acquire Comtrak, depreciation andamortization expense will likely decrease in 2006. Impairment of Property and Equipment and Goodwill On an ongoing basis, we assess the realizability of our assets. If, at any point during the year, managementdetermines that an impairment exists, the carrying amount of the asset is reduced by the estimated impairmentwith a corresponding charge to earnings. If it is determined that an impairment exists, management estimatesthat the write down of specific assets could have a material adverse impact on earnings. Other Income (Expense) We estimate that interest income will likely decrease compared to 2005 since we have entered into anagreement to purchase Comtrak. Other factors that could cause a change include, but are not limited to fundingworking capital needs, funding capital expenditures and buying back stock. Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK We are exposed to market risk related to changes in interest rates on our bank line of credit which mayadversely affect our results of operations and financial condition. We seek to minimize the risk from interestrate volatility through our regular operating and financing activities and when deemed appropriate, throughthe use of derivative financial instruments. No derivative financial instruments are outstanding at December31, 2005. We do not use financial instruments for trading purposes. The main objective of interest rate risk management is to reduce our total funding cost and to alter theinterest rate exposure to the desired risk profile. 23Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA INDEX TO FINANCIAL STATEMENTSAND FINANCIAL STATEMENT SCHEDULE Report of Independent Registered Public Accounting Firm25 Consolidated Balance Sheets – December 31, 2005 and December 31, 200426 Consolidated Statements of Income – Years ended December 31, 2005, December 31, 2004 and December 31, 200327 Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2005, December 31, 2004 and December 31, 200328 Consolidated Statements of Cash Flows – Years ended December 31, 2005, December 31, 2004 and December 31, 200329 Notes to Consolidated Financial Statements30 Schedule II – Valuation and Qualifying AccountsS-1 24REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Hub Group, Inc.: We have audited the accompanying consolidated balance sheets of Hub Group, Inc. as of December31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows foreach of the three years in the period ended December 31, 2005. Our audits also included the financial statementschedule listed in the index at Item 15(a) for the years ended December 31, 2005, 2004 and 2003. Thesefinancial statements and schedule are the responsibility of the Company's management. Our responsibility is toexpress an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall consolidated financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, theconsolidated financial position of Hub Group, Inc. at December 31, 2005 and 2004, and the consolidatedresults of their operations and their cash flows for each of the three years in the period ended December 31,2005 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the relatedfinancial statement schedule referred to above for the years ended December 31, 2005, 2004, and 2003 whenconsidered in relation to the basic consolidated financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of the Company’s internal control over financial reporting asof December 31, 2005, based on criteria established in Internal Control – Integrated Framework issued by theCommittee of Sponsoring Organizations of Treadway Commission and our report dated February 20, 2006expressed an unqualified opinion thereon. ERNST & YOUNG LLP Chicago, IllinoisFebruary 20, 2006 25HUB GROUP, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share amounts)December 31,20052004ASSETS CURRENT ASSETS: Cash and cash equivalents $ 36,133 $ 16,806 Restricted investments 1,387 — Accounts receivable Trade, net 156,864 140,762 Other 10,603 8,313 Deferred taxes — 4,667 Prepaid taxes 6,040 — Prepaid expenses and other current assets 4,007 4,746 TOTAL CURRENT ASSETS 215,034 175,294 PROPERTY AND EQUIPMENT, net 13,524 19,487 GOODWILL, net 215,175 215,175 OTHER ASSETS 685 889 TOTAL ASSETS $ 444,418 $ 410,845 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable Trade $ 117,712 $ 115,819 Other 3,735 1,660 Accrued expenses Payroll 22,092 19,542 Other 19,390 15,100 Deferred taxes 960 — TOTAL CURRENT LIABILITIES 163,889 152,121 DEFERRED TAXES 38,454 31,788 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares issued or outstanding in 2005 and 2004 — — Common stock Class A: $.01 par value; 47,337,700 shares authorized; 20,281,248 shares issued and 19,650,094 shares outstanding in 2005; 19,933,610 shares issued and outstanding in 2004; 203 199 Class B: $.01 par value; 662,300 shares authorized; 662,296 shares issued and outstanding in 2005 and 2004 7 7 Additional paid-in capital 183,733 182,262 Purchase price in excess of predecessor basis, net of tax benefit of $10,306 (15,458)(15,458) Retained earnings 97,557 64,611 Unearned compensation (6,259)(4,685) Treasury stock, at cost (631,154 shares in 2005) (17,708)— TOTAL STOCKHOLDERS' EQUITY 242,075 226,936 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 444,418 $ 410,845 The accompanying notes to consolidated financial statements are an integral part of these statements. 26HUB GROUP, INC.CONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share amounts) Years Ended December 31, 2005 2004 2003 Revenue $1,531,499 $1,426,806 $ 1,359,614 Transportation costs 1,342,476 1,247,258 1,188,932 Gross margin 189,023 179,548 170,682 Costs and expenses: Salaries and benefits 88,182 88,193 89,980 General and administrative 36,850 39,218 45,650 Depreciation and amortization of property and equipment 9,611 11,539 10,757 Total costs and expenses 134,643 138,950 146,387 Operating income 54,380 40,598 24,295 Other income (expense): Interest expense (638) (4,276) (7,691) Interest income 971 260 160 Debt extinguishment expenses - (7,296) - Other, net 474 712 131 Total other income (expense) 807 (10,600) (7,400) Income before provision for income taxes 55,187 29,998 16,895 Provision for income taxes 22,241 12,719 8,465 Net income $ 32,946 $ 17,279 $ 8,430 Basic earnings per common share $ 1.65 $ 0.98 $ 0.55Diluted earnings per common share $ 1.59 $ 0.92 $ 0.54 Basic weighted average number of shares outstanding 19,930 17,600 15,424Diluted weighted average number of shares outstanding 20,696 18,778 15,730 The accompanying notes to consolidated financial statements are an integral part of these statements. 27HUB GROUP, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(in thousands, except shares) Years ended December 31, 2005 2004 2003Class A & B Common Stock Shares Outstanding Beginning of year20,595,906 16,105,592 15,417,092 Exercise of non-qualified stock options346,258 745,766 74,532 Issuance of restricted stock1,380 104,148 654,368 Purchase of treasury shares(1,189,356) (256,480) (40,400) Stock offering- 3,600,000 - Treasury shares issued under restricted stock and stock option plan558,202 296,880 - Ending balance20,312,390 20,595,906 16,105,592 Class A & B Common Stock Amount Beginning of year $ 206 $ 162 $ 154 Issuance of restricted stock and exercise of stock options4 8 8 Stock offering- 36 - Ending balance210 206 162 Additional Paid-in Capital Beginning of year182,262 115,739 110,742 Exercise of non-qualified stock options(7,663) 3,045 232 Tax benefit of employee stock plans8,523 5,319 145 Issuance of restricted stock awards611 2,324 4,620 Stock offering- 55,835 - Ending balance183,733 182,262 115,739 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 year64,611 47,332 38,902 Net income32,946 17,279 8,430 Ending balance97,557 64,611 47,332 Unearned Compensation Beginning of year(4,685) (4,448) - Issuance of restricted stock awards, net of forfeitures(3,751) (2,385) (4,628) Compensation expense related to restricted stock awards2,177 2,148 180 Ending Balance(6,259) (4,685) (4,448) Treasury Stock Beginning of year- (292) - Purchase of treasury shares(33,245) (4,110) (292) Issuance of restricted stock and exercise of stock options15,537 4,402 - Ending balance(17,708) - (292) Total stockholders' equity$242,075 $226,936 $143,035 The accompanying notes to consolidated financial statements are an integral part of these statements 28HUB GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Years Ended December 31, 2005 2004 2003 Cash flows from operating activities: Net income$32,946 $17,279 $ 8,430Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment10,025 11,828 10,797Compensation expense related to restricted stock awards2,177 2,148 180Deferred taxes20,816 12,752 7,672Gain on sale of equipment(271) (294) (59)Other assets204 128 457Restricted investments(1,387) - -Changes in working capital: Accounts receivable, net(18,392) (13,849) 5,225Prepaid taxes(6,040) - -Prepaid expenses and other current assets739 (168) 154Accounts payable3,968 (2,866) (7,861)Accrued expenses6,840 8,893 6,503Net cash provided by operating activities51,625 35,851 31,498Cash flows from investing activities: Proceeds from sale of equipment579 383 59Purchases of property and equipment, net(4,370) (3,549) (4,443)Net cash used in investing activities(3,791) (3,166) (4,384)Cash flows from financing activities: Proceeds from stock offering- 55,871 -Proceeds from stock options exercised4,738 7,394 232Purchase of treasury stock(33,245) (4,110) (292)Net payments on revolver- (6,000) (19,000)Payments on long-term debt- (69,034) (8,054)Net cash used in financing activities(28,507) (15,879) (27,114)Net increase in cash and cash equivalents19,327 16,806 -Cash and cash equivalents beginning of period16,806 - -Cash and cash equivalents end of period $ 36,133 $ 16,806 $ -Supplemental disclosures of cash flow information Cash paid for: Interest$ 923 $ 2,995 $ 6,355Income taxes$ 6,811 $ 591 $ 441 The accompanying notes to consolidated financial statements are an integral part of these statements. 29 HUB GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1.Description of Business and Summary of Significant Accounting Policies Business: Hub Group, Inc. (“we”, “us”, or “our”) provides intermodal transportation services utilizing primarilythird party arrangements with railroads and drayage companies. We also arrange for transportation of freight bytruck and perform logistics, drayage and installation services. Principles of Consolidation: The consolidated financial statements include our accounts and all entities inwhich we have more than a 50% equity ownership or otherwise exercise unilateral control. All significantintercompany balances and transactions have been eliminated. Cash and Cash Equivalents: We consider as cash equivalents all highly liquid instruments with an originalmaturity of three months or less. Accounts Receivable and Allowance for Uncollectible Accounts: In the normal course of business, we extendcredit to customers after a review of each customer’s credit history. An allowance for uncollectible tradeaccounts has been established through an analysis of the accounts receivable aging, an assessment ofcollectibility based on historical trends and an evaluation of the current economic conditions. To be morespecific, we reserve every account balance that has aged over one year, certain customers in bankruptcy andaccount balances specifically identified as uncollectible. In addition, we provide a reserve for accounts notspecifically identified as uncollectible based upon historical trends which are updated routinely. Ourexperience resulted in a decrease in the reserve of approximately $1,200,000 in the fourth quarter of 2005. Theallowance is reported on the balance sheet in net accounts receivable. Actual collections of accountsreceivable could differ from management’s estimates due to changes in future economic, industry or customerfinancial conditions. Our reserve for uncollectible accounts was approximately $7,008,000 and $7,119,000 atDecember 31, 2005 and 2004, respectively. Recoveries of receivables previously charged off are recordedwhen received. Property and Equipment: Property and equipment are stated at cost. Depreciation of property and equipment iscomputed using the straight-line and various accelerated methods at rates adequate to depreciate the cost of theapplicable assets over their expected useful lives: leasehold improvements, the shorter of useful life or leaseterm; computer equipment and software, 3 to 5 years; furniture and equipment, 3 to 10 years; andtransportation equipment and automobiles, 3 to 8 years. Direct costs related to internally developed softwareprojects are capitalized and amortized over their expected useful life on a straight-line basis not to exceed fiveyears. Interest is capitalized on qualifying assets under development for internal use. Maintenance and repairsare charged to operations as incurred and major improvements are capitalized. The cost of assets retired orotherwise disposed of and the accumulated depreciation thereon are removed from the accounts with any gainor loss realized upon sale or disposal charged or credited to operations. We review long-lived assets forimpairment when events or changes in circumstances indicate the carrying amount of an asset may not berecoverable. In the event that the undiscounted future cash flows resulting from the use of the asset group isless than the carrying amount, an impairment loss equal to the excess of the assets carrying amount over its fairvalue is recorded. Goodwill: Goodwill represents the excess of purchase price over the fair market value of net assets acquired inconnection with our business combinations. Under Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (“Statement 142”), goodwill and intangible assets that have indefiniteuseful lives are not amortized but are subject to annual impairment tests. Accumulated goodwill amortizationwas $21,517,000 as of December 31, 2005 and 2004. We review goodwill for impairment on an annual basis as of November 1, or whenever events or changes incircumstances indicate the carrying amount of goodwill may not be recoverable. We utilize a third-partyindependent valuation firm to assist in performing the necessary valuations to be used in the impairmenttesting. These valuations are based on market capitalization, discounted cash flow analysis or a combination ofboth methodologies. The assumptions used in the valuations include expectations regarding future operatingperformance, discount rates, control premiums and other factors which are subjective in nature. Actual cashflows from operations could differ from management’s estimates due to changes in business conditions,operating performance and economic conditions. Should estimates differ materially from actual results, we maybe required to record impairment charges in the future. 30Fair Value of Financial Instruments: The carrying value of cash and cash equivalents, accounts receivable andaccounts payable approximates fair value at December 31, 2005 due to their short-term nature. Concentration of Credit Risk: Our financial instruments that are exposed to concentrations of credit riskconsist primarily of cash and cash equivalents and accounts receivable. We place our cash and temporaryinvestments with high quality financial institutions. We primarily serve customers located throughout theUnited States with no significant concentration in any one region. No one customer accounted for more than5% of revenue in 2005, 2004 or 2003. We review a customer’s credit history before extending credit. Inaddition, we routinely assess the financial strength of our customers and, as a consequence, believe that ourtrade accounts receivable risk is limited. Revenue Recognition: Revenue is recognized at the time 1) persuasive evidence of an arrangement exists, 2)services have been rendered, 3) the sales price is fixed and determinable and 4) collectibility is reasonablyassured. In accordance with EITF 91-9, revenue and related transportation costs are recognized based onrelative transit time. Further, we report our revenue on a gross basis in accordance with the criteria in EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” We are the primary obligor as we areresponsible for providing the service desired by the customer. Our customers view us as responsible forfulfillment including the acceptability of the service. Services requirements may include, for example, on-timedelivery, handling freight loss and damage claims, setting up appointments for pick up and delivery andtracing shipments in transit. We have discretion in setting sales prices and as a result, the amount we earnvaries. In addition, we have the discretion to select our vendors from multiple suppliers for the services orderedby our customers. Finally, we have credit risk for our receivables. These three factors, discretion in settingprices, discretion in selecting vendors and credit risk, further support reporting revenue on a gross basis. Deferred Income Taxes: Deferred income taxes are recognized for the future tax effects of temporary differencesbetween financial and income tax reporting using tax rates in effect for the years in which the differences areexpected to reverse. We believe that it is more likely than not that our deferred tax assets will be realized withthe exception of $489,000 related to state tax net operating losses and other state credits for which a valuationallowance has been established. In the event the probability of realizing the deferred tax assets do not meet themore likely than not threshold in the future, a valuation allowance would be established for the deferred taxassets deemed unrecoverable. Earnings Per Common Share: Basic earnings per common share are based on the average quarterly weightedaverage number of Class A and Class B shares of common stock outstanding. Diluted earnings per commonshare are adjusted for the assumed exercise of dilutive stock options and for restricted stock. In computing theper share effect of the assumed exercise of stock options, funds which would have been received from theexercise of options, including tax benefits assumed to be realized, are considered to have been used topurchase shares at current market prices, and the resulting net additional shares are included in the calculationof weighted average shares outstanding. The dilutive effect of restricted stock and stock options is computedusing the treasury method. Stock Based Compensation: Statement of Financial Accounting Standards No. 123 (“Statement 123”),“Accounting for Stock-Based Compensation,” as amended by Statement of Financial Accounting StandardsNo. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” encourages, but does notrequire, companies to record compensation cost for stock-based employee compensation plans at fair value. Wehave chosen to account for stock-based compensation for options using the intrinsic value method prescribedin Accounting Principles Board Opinion No. 25 (Opinion 25), “Accounting for Stock Issued to Employees,”and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, ifany, of the quoted market price of our stock at the date of the grant over the amount an employee must pay toacquire the stock. We grant options at fair market value and therefore recognize no compensation expense. 31 The following table illustrates the effect on the net income and net income per share if we had applied thefair value recognition provisions of Statement 123, to stock-based employee compensation (in thousands,except per share data): Years Ended December 31, 200520042003 Net income, as reported $ 32,946 $ 17,279 $ 8,430Add: Total stock-based employee compensationincluded in reported net income, net of relatedtax effects1,3001,237106 Deduct: Total stock-based employee compensationexpense determined under fair value based methodfor all awards, net of related tax effects(1,600)(1,820)(818) Net income, pro forma $ 32,646 $ 16,696 $ 7,718 Earnings per share: Basic — as reported $ 1.65 $ .98 $ .55Basic — pro forma$ 1.64$ .95$ .50Diluted — as reported$ 1.59$ .92$ .54Diluted — pro forma$ 1.58$ .89$ .49 The pro forma disclosure is not likely to be indicative of pro forma results which may be expected infuture periods because of the fact that options vest over several years, pro forma compensation expense isrecognized as the options vest and additional awards may also be granted. Our stock based compensation plansare further discussed in Note 8. In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(revised 2004), “Share-Based Payment,” which is a revision of Statement 123. Statement 123 (R) supersedesOpinion 25 and amends FASB Statement No. 95, “Statement of Cash Flows.” Generally, the approach inStatement 123 (R) is similar to the approach described in Statement 123. However, Statement 123 (R) requiresall share-based payments to employees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longer an alternative. As permitted by Statement 123, prior to January 1, 2006 we accounted for share-based payments toemployees using Opinion 25’s intrinsic value method and, as such, recognized no compensation cost foremployee stock options. Had we adopted Statement 123 (R) in prior periods, the impact of that standard wouldhave approximated the impact of Statement 123 as described in the table above. We will adopt Statement 123 (R) effective January 1, 2006 using the modified prospective method. Weexpect the 2006 impact of the adoption of Statement 123 (R) to be between $.01 and $.02 per share. Statement123 (R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported asa financing cash flow, rather than as an operating cash flow as required under the current literature. Thisrequirement will reduce net operating cash flow and increase net financing cash flows in periods after adoption.While we cannot estimate what those amounts will be in the future (because they depend on, among otherthings, when employees exercise stock options), the amount of operating cash flows recognized in priorperiods for such excess tax deductions were $8.5 million and $5.3 million in 2005 and 2004, respectively. Use of Estimates: The preparation of financial statements in conformity with accounting principles generallyaccepted in the United States requires us to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenue and expense during the reporting period. Significant estimates include theallowance for doubtful accounts and cost of purchased transportation. Actual results could differ from thoseestimates. Reclassifications: Certain prior year amounts have been reclassified to conform to the current yearpresentation. 32 NOTE 2.Capital Structure We have authorized common stock comprised of Class A Common Stock and Class B CommonStock. The rights of holders of Class A Common Stock and Class B Common Stock are identical, except eachshare of Class B Common Stock entitles its holder to approximately 40 votes, while each share of Class ACommon Stock entitles its holder to one vote. We have authorized 2,000,000 shares of preferred stock. NOTE 3.Earnings Per Share The following is a reconciliation of our earnings per share: Year EndedYear EndedYear Ended December 31, 2005December 31, 2004December 31, 2003 (000’s) (000’s) (000’s) Per-SharePer-SharePer-Share Income SharesAmountIncome Shares AmountIncome Shares Amount Basic EPS Net income$32,94619,930$1.65$17,27917,600$0.98$8,43015,424$0.55Effect of Dilutive Securities Stock options and restricted stock - 766 - - 1,178 - - 306 - Diluted EPS Net income plus assumed exercises and restricted stock$32,946 20,696$1.59$17,27918,778 $0.92$8,43015,730$0.54 There were no stock options that were not included in the calculation of diluted weighted averageshares because they would have been anti-dilutive in 2005. Stock options not included in the calculation ofdiluted weighted average shares because they would have been anti-dilutive were 11,500 and 1,504,226 for theyears ended December 31, 2004 and 2003, respectively. NOTE 4.Property and Equipment Property and equipment consist of the following (in thousands): Years Ended December 31, 2005 2004Building and improvements $ - $ 237Leasehold improvements 913 942 Computer equipment and software 53,050 52,442 Furniture and equipment 6,851 7,188 Transportation equipment 2,180 1,461 62,994 62,270 Less: Accumulated depreciation and amortization (49,470) (42,783) Property and Equipment, net $13,524 $19,487 Depreciation expense was $10,025,000, $11,828,000 and $10,797,000 for 2005, 2004 and 2003, respectively. NOTE 5.Income Taxes The following is a reconciliation of our effective tax rate to the federal statutory tax rate: 33 Years Ended December 31, 2005 2004 2003 U.S. federal statutory rate35.0% 35.0% 35.0%State taxes, net of federal benefit3.3 4.1 4.5Nondeductible expenses1.1 1.2 1.9Legislative elimination of Illinois Credits- - 4.7State tax impact of business restructuring- (3.4) -Provision for valuation allowance0.4 0.9 -Other0.5 4.6 4.0Net effective rate 40.3% 42.4% 50.1% We and our subsidiaries file both unitary and separate company state income tax returns. The following is a summary of our provision for income taxes (in thousands): Years Ended December 31,20052004 2003Current Federal $ 8,629 $ 4,548$ 343 State and local 1,319 749 595 9,948 5,297 938 Deferred Federal 11,301 6,318 6,565 State and local 992 1,104962 12,293 7,422 7,527 Total provision $22,241 $12,719 $ 8,465 The following is a summary of our deferred tax assets and liabilities (in thousands): Years Ended December 31, 2005 2004 Reserve for uncollectible accounts receivable$ 2,320 $ 2,336Accrued compensation2,883 3,445Other reserves1,272 1,184Current deferred tax assets6,475 6,965 Operating loss and tax credit carryforwards1,376 4,225Other37 48Income tax basis in excess of financial basis of goodwill5,294 5,641Less valuation allowance(489) (271)Long-term deferred tax assets6,218 9,643Total deferred tax assets$ 12,693 $ 16,608 Prepaids$ (958) $ (977)Receivables(6,477) (1,321)Current deferred tax liabilities(7,435) (2,298) Property and equipment(4,750) (7,082)Goodwill(39,922) (34,349)Long-term deferred tax liabilities(44,672) (41,431)Total deferred tax liabilities$ (52,107) $ (43,729) 34We had a federal net operating loss carryforward of approximately $4,197,000 at December 31, 2004.This federal net operating loss carryforward was utilized in 2005. Management believes it is more likely than not that the deferred tax assets will be realized with theexception of $489,000 related to state net operating losses and other state credits for which a valuationallowance has been established. We have federal tax credit carryforwards of approximately $761,000 at December 31, 2005. Thefederal tax credits have expiration dates as follows: (In thousands) 2020$3132021448Total$761 NOTE 6.Long-Term Debt and Financing Arrangements On July 6, 2004, we used the net proceeds from our public offering (see Note 15) to prepay our$50,000,000 of 9.14% debt as well as the majority of the make-whole penalty payment of $6,804,000. As aresult of the pre-payment, we recorded debt extinguishment expenses of $7,296,000 (after-tax of approximately$4,232,000) consisting of $6,804,000 in pre-payment penalties and $492,000 related to the write-off of therelated deferred financing costs. On March 23, 2005, we entered into a revolving credit agreement that provides for unsecuredborrowings of up to $40.0 million. The interest rate ranges from LIBOR plus 0.75% to 1.25% or Prime plus0.5%. The revolving line of credit expires on March 23, 2010. The financial covenants require a minimum networth of $175.0 million and a cash flow leverage ratio of not more than 2.0 to 1.0. The commitment feescharged on the unused line of credit are between 0.15% and 0.25% per annum. In February 2006, we amended the revolving credit agreement to provide for unsecured borrowing upto $50.0 million. No other terms of the credit agreement were amended. We had $39.0 million of unused and available borrowings under our bank revolving line of credit atDecember 31, 2005. We were in compliance with our debt covenants at December 31, 2005. We have standby letters of credit that expire from 2006 to 2012. As of December 31, 2005, theoutstanding letters of credit were $1.0 million. NOTE 7.Rental Expense, User Charges and Lease Commitments Minimum annual rental commitments, at December 31, 2005, under non-cancelable operating leases,principally for real estate, containers and equipment are payable as follows (in thousands): 2006 $ 15,0762007 13,9832008 10,5472009 8,7522010 7,2952011 and thereafter 12,343 $ 67,996 Total rental expense included in general and administrative expense was approximately $7,981,000,$9,697,000, and $12,526,000 for 2005, 2004 and 2003, respectively. Additional rental expense of $3,036,000,$1,085,000 and $1,694,000 was included in transportation costs for 2005, 2004 and 2003, respectively. Manyof the real estate leases contain renewal options and escalation clauses which require payments of additionalrent to the extent of increases in the related operating costs. We straight-line rental expense in accordance withStatement of Financial Accounting Standards No. 13, paragraph 15 and Financial Accounting Standards BoardTechnical Bulletin 85-3. We incur charges for our use of a fleet of dedicated containers which are included in transportationcosts. Such charges were $33,830,000, $31,063,000 and $28,451,000 for the years ended December 31, 2005,352004 and 2003, respectively. At December 31, 2005, under the agreements, we have the ability to return thecontainers. As a result, no minimum commitment has been included in the table above. NOTE 8.Stock-Based Compensation Plans In 1996, we adopted a Long-Term Incentive Plan (the “1996 Incentive Plan”). The number of shares ofClass A Common Stock reserved for issuance under the 1996 Incentive Plan was 900,000. In 1997, we adopteda second Long-Term Incentive Plan (the “1997 Incentive Plan”). The number of shares of Class A CommonStock reserved for issuance under the 1997 Incentive Plan was 300,000. In 1999 we adopted a third Long-TermIncentive Plan (the “1999 Incentive Plan”). The number of shares of Class A Common Stock reserved forissuance under the 1999 Incentive Plan was 1,200,000. In 2002, we 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 1,200,000. In 2003, we amended our 2002 Incentive Plan to add an additional1,000,000 shares of Class A Common Stock. Under the 1996, 1997, 1999 and 2002 Incentive Plans, stockoptions, stock appreciation rights, restricted stock and performance units may be granted for the purpose ofattracting and motivating our key employees and non-employee directors. The options granted to non-employee directors vest ratably over a three-year period and expire 10 years after the date of grant. The optionsgranted to employees vest over a range of three to five years and expire 10 years after the date of grant. Information regarding these option plans for 2005, 2004 and 2003 is as follows: 2005 2004 2003 Weighted Avg.Weighted Avg.Weighted Avg. SharesExercise PriceSharesExercise PriceSharesExercise Price Options outstanding, beginning of year1,700,148$4.972,854,868$5.742,804,100$6.21Options exercised (802,034) 5.91 (1,046,986) 7.07 (74,532) 3.12 Options granted-------- 387,000 2.92 Options forfeited (6,500) 7.04 (107,734) 4.86 (261,700) 7.43 Options outstanding, end of year891,614$4.121,700,148$4.972,854,868$5.74 Weighted average fair value of options granted during the year$-$-$1.29Options exercisable at year end736,4811,121,689 1,594,143 Option price range at end of year$2.43 to $14.08$2.43 to $14.08$2.43 to $14.08Weighted average optionprice for exercised shares$5.91 $7.07 $ 3.12Options available for grant at end of year791,232904,158896,232 The following table summarizes information about options outstanding at December 31, 2005: Options Outstanding Options Exercisable Weighted Avg.Weighted Avg.Weighted Avg.Range ofNumberRemainingExerciseNumberExerciseExercise Pricesof SharesContractual Life Price of Shares Price $ 2.43 to $ 2.51107,2007.07$ 2.4732,267$ 2.50$ 2.60 to $ 2.83 458,6656.96$ 2.63458,665$ 2.63$ 2.92 to $ 5.28 155,7996.62$ 4.1378,399$ 4.06$ 5.54 to $ 14.08 169,9503.29$ 9.16167,150$ 9.22$ 2.43 to $ 14.08 891,6146.21$ 4.12736,481$ 4.27 For purposes of determining the pro forma effect of these options as discussed in Note 1, the fair valueof each option is estimated on the date of grant based on the Black-Scholes single-option pricing modelassuming: 36 Year Ended December 31, 2003 Dividend yield 0.00% Risk-free interest rate 3.50% Volatility factor 40.00% Expected life in years 6.0 During 2005 and 2004, no stock options were granted. Restricted Stock During the fourth quarter of 2003, we granted 633,008 shares of restricted stock to certain employeesand 21,360 shares of restricted stock to outside directors with a weighted average grant date fair value of $7.05.The stock vests over a three year period. Compensation expense recorded related to the restricted stock wasapproximately $180,000 during 2003. During 2004, we granted 117,690 shares of restricted stock to certain employees and 6,948 shares ofrestricted stock to outside directors with a weighted average grant date fair value of $20.80. The stock vestsover a three year period. Compensation expense recorded related to the 2004 and 2003 restricted stock grantswas approximately $2,148,000 during 2004. During 2005, we granted 111,730 shares of restricted stock to certain employees and 5,322 shares ofrestricted stock to outside directors with a weighted average grant date fair value of $33.35. The stock vestsover a three year period. Compensation expense recorded related to the 2005, 2004 and 2003 restricted stockgrants was approximately $2,177,000 during 2005. NOTE 9.Business Segment We have no separately reportable segments. Under the enterprise wide disclosure requirements, wereport revenue (in thousands), for Intermodal Services, Truck Brokerage Services, Logistics Services andDistribution Services as follows: Years Ended December 31, 2005 2004 2003 Intermodal Services $ 1,079,799 $ 1,014,533 $ 976,723Truck Brokerage Services 266,546 225,466 210,493Logistics Services 135,535 140,723 118,601Distribution Services 49,619 46,084 53,797Total Revenue $ 1,531,499 $ 1,426,806 $ 1,359,614 In August 2004, HGDS transferred its pharmaceutical sample delivery business to logistics, resulting in anincrease in logistics revenue of $4,315,000 for the year ended December 31, 2004. NOTE 10.Employee Benefit Plans We had one profit-sharing plan and trust in 2005, 2004 and 2003 under section 401(k) of the InternalRevenue Code. At our discretion, we partially match qualified contributions made by employees to the plan.We expensed approximately $1,124,000, $1,091,000 and $1,148,000 related to these plans in 2005, 2004 and2003, respectively. In January 2005, we established the Hub Group, Inc. Nonqualified Deferred Compensation Plan (the“Plan”) to provide added incentive for the retention of certain key employees. Under the Plan, participants canelect to defer certain compensation. Accounts will grow on a tax-deferred basis to the participant. Restrictedinvestments included in the consolidated balance sheet represent the fair value of the mutual funds and othersecurity investments related to the Plan at December 31, 2005. Both realized and unrealized gains and losses,which have not been material, are included in income and expense and offset the change in the deferredcompensation liability. We provide a 50% match on the first 6% of employee compensation deferred under thePlan, with a maximum match equivalent to 3% of base salary. In addition, we have a legacy deferredcompensation plan. There are no new contributions being made into this legacy plan. We expensed $648,000,$884,000, and $742,000 related to these plans in 2005, 2004 and 2003, respectively. This expense includesinterest of $515,000, $667,000 and $556,000 in 2005, 2004 and 2003, respectively. 37 NOTE 11.Legal Matters We are a party to litigation incident to our business, including claims for personal injury and/orproperty damage, freight lost or damaged in transit, improperly shipped or improperly billed. Some of thelawsuits to which we are party to are covered by insurance and are being defended by our insurance carriers.Some of the lawsuits are not covered by insurance and we are defending them ourselves. Management does notbelieve that the outcome of this litigation will have a materially adverse effect on our financial position orresults of operations. NOTE 12.Restructuring Charges During the year ended December 31, 2003, we recorded a liability of $180,000 for the estimatedremaining lease obligation and closing costs related to a facility in Detroit and a severance charge for 165employees of $876,000. During the year ended December 31, 2004, we recorded a severance charge for 99 employees of$661,000. We also recorded a liability of $118,000 for the estimated remaining lease obligations and closingcosts related to two facilities. During the year ended December 31, 2005, we recorded a severance charge for 37 employees of$249,000. All severance charges are included in salaries and benefits in the statements of income and all leaseobligation and closing costs are included in general and administrative in the statements of income. The following table displays the activity and balances of the restructuring reserves in the consolidatedbalance sheets (in thousands): Headcount Consolidation Reduction of Facilities TotalBalance at December 31, 2002 $ - $ 458 $ 458Additional restructuring expenses 876 180 1,056Cash payments (801) (277) (1,078)Balance at December 31, 2003 75 361 436Additional restructuring expenses 661 118 779Cash payments (736) (333) (1,069)Balance at December 31, 2004 - 146 146Additional restructuring expenses 249 - 249Cash payments (222) (186) (408)Adjustments for previous estimate - 40 40Balance at December 31, 2005 $ 27 $ - $ 27 NOTE 13.Stock Buy Back Plans During the fourth quarter of 2003, the Board of Directors authorized the purchase of up to 500,000shares of our Class A Common Stock from time to time. The timing of the program was determined by financialand market conditions. During the fourth of quarter of 2003, we purchased 40,400 shares for $292,000. Wepurchased an additional 193,000 shares for $2,763,000 in 2004. During the first quarter of 2005, the Board ofDirectors terminated the prior buy back plan and authorized the purchase of up to $30.0 million worth of ourClass A Common Stock. During the second quarter of 2005, we completed the authorized purchase of $30.0million worth of our Class A Common Stock. We intend to hold the repurchased shares in treasury for futureuse.On August 22, 2005, the Board of Directors authorized the purchase of up to $45.0 million of its ClassA Common Stock. This authorization expires on December 31, 2006. Hub intends to make purchases from timeto time as market conditions warrant. Hub intends to hold the repurchased shares in treasury for future use. Nopurchases were made under this new plan during 2005. 38The following table displays the number of shares purchased and the maximum value of shares thatmay yet be purchased under the plans: TotalNumber ofSharesPurchased AveragePrice PaidPer Share Total Number ofShares Purchased asPart of PubliclyAnnounced Plan MaximumValue ofShares thatMay Yet BePurchasedUnder thePlans (in 000’s)January 1 toJune 301,094,799 $27.38 1,094,799 $ - July 1 toDecember 31- - - 45,000Total1,094,799 $27.38 1,094,799 $ 45,000 NOTE 14.Stock Split The Board of Directors approved a two-for-one stock split in the form of a stock dividend which waspaid on May 11, 2005. All shares have been retroactively restated to give effect to the two-for-one stock split,which was affected in the form of a 100% stock dividend. Each of our Class A stockholders and Class Bstockholders received one Class A share on each share of Class A Common Stock and each share of Class BCommon Stock held by them on the record date in connection with the stock split. In accordance with theterms of our Certificate of Incorporation, the number of votes held by each share of Class B Common Stock wasadjusted in connection with this stock dividend such that each share of Class B Common Stock now entitles itsholder to approximately 40 votes. Each share of Class A Common Stock entitles its holder to one vote. NOTE 15.Public Equity Offering We completed a public offering of Class A Common Stock priced at $16.50 per share, beforeunderwriting discounts and commissions, on July 2, 2004. We sold 3,600,000 shares and selling stockholderssold 770,000 shares. The Company’s net proceeds of $55,871,000 were used to prepay the $50,000,000 of9.14% debt on July 6, 2004 as well as the majority of the make-whole payment of $6,804,000 (see Note 6). NOTE 16.HGDS Purchase Option On November 11, 2004, we, along with our wholly owned subsidiary, Hub Group DistributionServices, LLC ("HGDS"), entered into the Purchase Option and Right of First Refusal Agreement pursuant towhich HGDS granted an entity controlled by William J. McKenna the exclusive option to purchase all orsubstantially all of the assets of HGDS for a cash purchase price of $11,300,000 (subject to adjustment on theclosing date), plus the assumption of certain HGDS liabilities. Mr. McKenna agreed to serve as President ofHGDS effective December 1, 2004. McKenna's company may exercise the option during the period (the"Option Period") commencing on November 11, 2004, and ending on the earlier to occur of (i) March 31, 2007,and (ii) the date on which McKenna's employment with HGDS terminates; provided, however, that this periodmay be extended for up to 180 days depending on the circumstances of the termination of McKenna'semployment. Additionally, HGDS granted McKenna's company a right of first refusal with respect to anyacceptable third-party offers that we or HGDS receive during the Option Period for all or substantially all of theassets of HGDS. During the Option Period, we and HGDS agreed that, except as required by law, we would not solicitor initiate discussions or negotiations with any person other than McKenna's company relating to the sale ofHGDS or its assets. NOTE 17.Subsequent Event On January 19, 2006, we entered into a definitive agreement to acquire Comtrak, Inc. Comtrak is atransportation company whose services include primarily rail and international drayage for the intermodalsector. The agreement states that we will pay $38 million in cash at closing, which is expected to occur duringthe first quarter of 2006. The purchase price will be subject to adjustment based on Comtrak’s working capitalat closing. In addition, the agreement provides for an earn-out for 2006 and 2007, consisting of two cashpayments, each of which will not exceed $5 million. The closing is subject to certain customary closingconditions and approvals.39NOTE 18.Selected Quarterly Financial Data (Unaudited) The following table sets forth selected quarterly financial data for each of the quarters in 2005 and2004 (in thousands, except per share amounts): Quarters First Second Third FourthYear Ended December 31, 2005: Revenue$ 339,858 $ 371,630 $ 399,400 $ 420,611Gross margin43,245 46,909 49,127 49,742Operating income9,135 13,464 15,430 16,351Net income5,348 7,925 9,610 10,063Basic earnings per share$ .26 $ .40 $ .49 $ .50Diluted earnings per share$ .25 $ .38 $ .47 $ .49 Quarters First Second Third FourthYear Ended December 31, 2004: Revenue$ 328,302 $ 348,971 $ 362,105 $ 387,428Gross margin41,804 43,665 48,028 46,051Operating income6,297 8,266 13,958 12,077Net income2,713 4,059 3,552 6,955Basic earnings per share$ .18 $ .26 $ .18 $ .35Diluted earnings per share$ .17 $ .24 $ .17 $ .33 Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE None. Item 9A.CONTROLS AND PROCEDURES MANAGEMENT’S REPORT ON DISCLOSURE CONTROLS AND PROCEDURES As of December 31, 2005, an evaluation was carried out under the supervision and with the participationof our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness ofour disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(f) under the SecuritiesExchange Act of 1934. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that these disclosure controls and procedures were effective. No significant changes were made in our internal control over financial reporting during the fourthquarter of 2005 that has materially affected, or is reasonably likely to materially affect, our internal controlover financial reporting. MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financialreporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. As ofDecember 31, 2005, management carried out an evaluation of the effectiveness of our internal controls andprocedures. Management based their assessment on the framework of Internal Control – Integrated Frameworkissued by the Committee of Sponsoring Organization of the Treadway Commission (COSO). Based upon thisevaluation, management concluded that, as of December 31, 2005, our internal control over financial reportingwas effective. Management believes, however, that a control system, no matter how well designed and operated, cannotprovide absolute assurance that the objectives of the controls system are met, and no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, if any, within the Company have beendetected.40Ernst & Young LLP, an independent registered public accounting firm, who audited and reported on theconsolidated financial statements, included in this report, has issued an attestation report on management’sassessment of internal control over financial reporting. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNALCONTROL OVER FINANCIAL REPORTING The Board of Directors and ShareholdersHub Group, Inc. We have audited management’s assessment, included in the accompanying Management’s Annual Report onInternal Control Over Financial Reporting, that Hub Group, Inc. (the Company) maintained effective internalcontrol over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (theCOSO criteria). The Company’s management is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether effective internal control over financial reporting was maintained in all material respects. Ouraudit included obtaining an understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operating effectiveness of internal control,and performing such other procedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financialstatements. Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate. In our opinion, management’s assessment that the Company maintained effective internal control overfinancial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSOcriteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2005, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), the Consolidated balance sheets of Hub Group, Inc. as of December 31, 2005 and 2004, and therelated Consolidated statements of income, shareholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2005 of Hub Group, Inc. and our report dated February 20, 2006 expressed anunqualified opinion thereon. Ernst & Young LLP Chicago, IllinoisFebruary 20, 200641Item 9B. OTHER INFORMATION None. PART III Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections entitled “Election of Directors” and “Ownership of the Capital Stock of the Company”appearing in our proxy statement for our annual meeting of stockholders to be held on May 11, 2006, sets forthcertain information with respect to our directors and Section 16 compliance and is incorporated herein byreference. Certain information with respect to persons who are or may be deemed to be our executive officers isset 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 our proxystatement for our annual meeting of stockholders to be held on May 11, 2006, sets forth certain informationwith respect to the compensation of our management and is incorporated herein by reference. Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The sections entitled “Ownership of the Capital Stock of the Company” appearing in our proxy statementfor our annual meeting of stockholders to be held on May 11, 2006, sets forth certain information with respectto the ownership of our Common Stock and is incorporated herein by reference. Equity Compensation Plan Information The following chart contains certain information regarding the Company’s Long-Term Incentive Plans: Plan Category Number of securitiesto be issuedupon exercise ofoutstanding options,warrants and rights(a) Weighted-averageexercise price ofoutstanding options,warrants and rightsNumber of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn (a))Equity compensationplans approved bysecurity holders 891,614 $4.12 791,232Equity compensationplans not approvedby security holders -- -- --Total891,614$4.12791,232 Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled “Certain Transactions” appearing in our proxy statement for the annual meeting ofour stockholders to be held on May 11, 2006, sets forth certain information with respect to certain businessrelationships and transactions between us and our directors and officers and it is incorporated herein byreference. Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES The section entitled “Principal Accountant Fees and Services” appearing in our proxy statement forour annual meeting of stockholders to be held on May 11, 2006, sets forth certain information with respect tocertain fees we have paid to our principal accountant for services and it is incorporated herein by reference. 42 Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Financial Statements The following consolidated financial statements of the Registrant are included under Item 8 of this Form 10-K: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets - December 31, 2005 and December 31, 2004 Consolidated Statements of Income - Years ended December 31, 2005, December 31, 2004 andDecember 31, 2003 Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2005, December31, 2004 and December 31, 2003 Consolidated Statements of Cash Flows - Years ended December 31, 2005, December 31, 2004and December 31, 2003 Notes to Consolidated Financial Statements (b) Financial Statement Schedules The following financial statement schedules of Hub Group, Inc. are filed as part of this report andshould be read in conjunction with the consolidated financial statements of Hub Group, Inc.: PageII. Valuation and qualifying accounts and reserves .......................................................................... S-1 All other schedules are omitted because they are not required, are not applicable, or the requiredinformation is shown in the consolidated financial statements or notes thereto. (c) Exhibits The exhibits included as part of this Form 10-K are set forth in the Exhibit Index immediatelypreceding such Exhibits and are incorporated herein by reference. 43  SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 22, 2006HUB 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, this report has been signed below bythe following persons in the capacities and on the dates indicated: TitleDate /s/Phillip C. Yeager Phillip C. YeagerChairman and DirectorFebruary 22, 2006 /s/ David P. Yeager David P. Yeager Vice Chairman, Chief Executive Officer and DirectorFebruary 22, 2006/s/ Mark A. Yeager Mark A. Yeager President, Chief Operating Officer and DirectorFebruary 22, 2006/s/ Thomas M. White Thomas M. White Senior Vice President-Chief Financial Officer andTreasurer (Principal Financial and AccountingOfficer)February 22, 2006/s/ Charles R. Reaves Charles R. Reaves DirectorFebruary 22, 2006/s/ Martin P. Slark Martin P. Slark DirectorFebruary 22, 2006/s/ Gary D. Eppen Gary D. EppenDirectorFebruary 22, 2006 44  SCHEDULE II HUB GROUP, INC.VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Deductions Balance at Beginning Costs & and End of Year Expenses Adjustments of YearYear Ended December 31: Allowance for uncollectible trade accounts 2005 $ 7,119,000 $ 523,000 $ (634,000) $ 7,008,000 2004 $ 6,304,000 $ 80,000 $ 735,000 $ 7,119,000 2003$ 6,272,000 $ 722,000 $ (690,000) $ 6,304,000 Deferred tax valuation allowance 2005 $ 271,000 $ 218,000 $ - $ 489,000 2004 $ - $ 271,000 $ - $ 271,000 S-1  INDEX TO EXHIBITS NumberExhibit 3.1Amended Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit3.1 and 3.3 to the Registrant’s registration statement on Form S-1, File No. 33-90210) 3.2By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’sregistration statement on Form S-1, File No. 33-90210) 10.1Amended and Restated Limited Partnership Agreement of Hub City Canada, L.P. (incorporatedby reference to Exhibit 10.2 to the Registrants report on Form 10-K dated March 26, 1997 andfiled March 27, 1997, File No 000-27754) 10.2Stockholders' Agreement (incorporated by reference to Exhibit 10.7 to the Registrant’s reporton Form 10-K dated March 26, 1997 and filed March 27, 1997, File No. 000-27754) 10.3Letter from the Registrant to Thomas M. White dated June 4, 2002 (incorporated by referenceto Exhibit 10.28 to the Registrant’s report on Form 10-K dated March 12, 2003 and filed onMarch 13, 2003, File No. 000-27754) 10.4Hub Group’s Nonqualified Deferred Compensation Plan Basic Plan Document (incorporatedby reference to Exhibit 10.15 to the Registrant’s report on Form 10-K dated February 25, 2005and filed on February 28, 2005, File No. 000-27754) 10.5Hub Group’s Nonqualified Deferred Compensation Plan Adoption Agreement (incorporated byreference to Exhibit 10.16 to the Registrant’s report on Form 10-K dated February 25, 2005and filed on February 28, 2005, File No. 000-27754) 10.6Hub Group’s Nonqualified Deferred Compensation Plan, Amendment 1 (incorporated byreference to Exhibit 10.17 to the Registrant’s report on Form 10-K dated February 25, 2005and filed on February 28, 2005, File No. 000-27754) 10.7Description of Executive Officer cash compensation for 2006 10.8Director compensation for 2006 10.9Hub Group’s 2002 Long Term Incentive Plan (as amended and restated effective December 3,2003) (incorporated by reference from Exhibit 4.1 from the Registrant’s report on Form S-8dated and filed May 17, 2004) 10.10Purchase Option and Right of Refusal Agreement dated November 11, 2004 (incorporated byreference from Exhibit 10.1 to the Registrant’s Report on Form 8-K dated and filed November16, 2004) 10.11Equipment Purchase Contract dated as of March 7, 2005 between Hub City Terminals, Inc.,and Shanghai Jindo Container Co., Ltd. (incorporated by reference to Exhibit 10.1 to theRegistrant’s report on Form 8-K dated March 7, 2005 and filed March 8, 2005, File No. 000-27754) 10.12$40 million Credit Agreement dated as of March 23, 2005 among the Registrant, Hub CityTerminals, Inc. and Harris Trust and Savings Bank (incorporated by reference to Exhibit 10.1to the Registrant’s report on Form 8-K dated March 23, 2005 and filed March 25, 2005, FileNo. 000-27754) 10.13Lease Agreement dated as of May 10, 2005, between Banc of America Leasing & Capital, LLCand Hub City Terminals, Inc., with form of Schedule thereto (incorporated by reference toExhibit 10.1 to the Registrant’s report on Form 8-K dated May 10, 2005 and filed May 16,2005, File No. 000-27754) 10.14Guaranty of Corporation, dated as of May 10, 2005, made by Registrant to, and for the benefitof, Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.2 to theRegistrant’s report on Form 8-K dated May 10, 2005 and filed May 16, 2005, File No. 000-27754) 10.15Asset Purchase Agreement, dated January 19, 2006, by and among Hub Group, Inc., Comtrak,Inc. and Michael J. Bruns (incorporated by reference to Exhibit 10.1 to the Registrant’s reporton Form 8-K dated January 19, 2006 and filed January 25, 2006, File No. 000-27754) 10.16Amendment to the $40 million Credit Agreement among the Registrant, Hub City Terminals,Inc. and Harris Trust and Savings Bank dated February 21, 2006 14Hub Group’s Code of Business Conduct and Ethics (incorporated by reference from Exhibit99.2 to the Registrant’s report on Form 10-K dated March 12, 2003 and filed on March 13,2003, File No. 000-27754) 16.1Letter from Grant Thornton LLP to the Securities and Exchange Commission (incorporated byreference to Exhibit 16.1 to the Registrant’s report on Form 8-K dated February 8, 2005 andfiled May 23, 2005, File No. 000-27754) 21Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 31.1Certification of David P. Yeager, Vice Chairman and Chief Executive Officer, Pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit of 31 of Item 601 ofRegulation S-K 31.2Certification of Thomas M. White, Senior Vice President - Chief Financial Officer, Pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit of 31 of Item601 of Regulation S-K 32.1Certification of David P. Yeager and Thomas M. White, Chief Executive Officer and ChiefFinancial Officer, respectively, Pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 ofItem 601 of Regulation S-K  EXHIBIT 10.7 Hub Group, Inc.Description of Executive Officer Cash CompensationFor 2006 Annual Cash Compensation Base SalarySet forth below are the base salaries of the Chief Executive Officer and each of the four most highlycompensated executive officers in 2005 effective January 1, 2006. The Company considers various factors inassigning executive officers to specific salary ranges, including job content, level of responsibility,accountability, and the competitive compensation market. On an annual basis, all executive officers’ salariesare reviewed and adjusted to reflect individual performance and position within their respective ranges. Bonus PlanExecutive officers are eligible for annual performance-based awards under the Company’s bonus plan,as are all salaried employees. For 2005, goals were weighted upon achievement of targeted levels of earningsper share and, for some executives, upon achievement of personal goals. The goals for 2006 will also beweighted. Restricted StockThe Company makes periodic grants of restricted stock to executive officers. Grants of restricted stockhave historically provided for vesting in three years after grant. David P. YeagerVice Chairman and Chief Executive Officer Base 2006$558,123 Mark A. YeagerPresident and Chief Operating Officer Base 2006$387,853 Thomas M. WhiteSr. Vice President, Treasurer and Chief Financial Officer Base 2006$349,211 David MarshExecutive Vice President Highway Base 2006$270,375 Christopher R. KravasExecutive Vice President – Strategy and Yield Management Base 2006$265,225  EXHIBIT 10.8 Hub Group, Inc.Directors’ Compensation For 2006 Directors’ Compensation Non-employee directors receive an annual retainer fee of $50,000 in 2006, paid in quarterly installments. Inaddition, expenses are paid for attendance at each Committee meeting. Directors who are also officers oremployees of the Company receive no compensation for duties performed as a director or a committeechairman. Stock Plan The Company makes periodic grants of restricted stock to the directors.  EXHIBIT 10.16 FIRST AMENDMENT TO CREDIT AGREEMENTThis First Amendment to Credit Agreement (herein, the “Amendment”) is entered into as ofFebruary 21, 2006 between Hub Group, Inc., a Delaware corporation (the “Public Hub Company”), and HubCity Terminals, Inc., a Delaware corporation (“Hub Chicago”) (the Public Hub Company and Hub Chicagobeing hereinafter referred to collectively as the “Borrowers” and individually as a “Borrower”), and HarrisN.A., successor by merger with Harris Trust and Savings Bank (the “Bank”).PRELIMINARY STATEMENTSA. The Borrowers and the Bank entered into a certain Credit Agreement, dated as of March 23,2005 (the “Credit Agreement”). All capitalized terms used herein without definition shall have the samemeanings herein as such terms have in the Credit Agreement.B. The Borrowers have requested that the Bank increase its Commitment from $40,000,000 to$50,000,000, and the Bank is willing to do so under the terms and conditions set forth in this Amendment.NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is herebyacknowledged, the parties hereto agree as follows:SECTION 1.AMENDMENTS.Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the CreditAgreement shall be and hereby is amended as follows:1.1. Section 1.1 of the Credit Agreement shall be amended by striking the amount“$40,000,000” appearing therein and substituting in lieu thereof the amount “$50,000,000”.SECTION 2.CONDITIONS PRECEDENT.The effectiveness of this Amendment is subject to the satisfaction of all of the following conditionsprecedent: 2.1.The Borrowers and the Bank shall have executed and delivered thisAmendment.2.2. The Borrowers shall have executed and delivered a new Revolving Note in theform attached hereto as Annex A (the “New Revolving Note”).2.3. The Bank shall have received copies (executed or certified, as may be appropriate)of resolutions of the Board of Directors of each Borrower authorizing the execution, delivery, andperformance of this Amendment and the New Revolving Note.2.4. Legal matters incident to the execution and delivery of this Amendment and theNew Revolving Note shall be satisfactory to the Bank and its counsel.SECTION 3.REPRESENTATIONS.In order to induce the Bank to execute and deliver this Amendment, the Borrowers hereby represent tothe Bank that as of the date hereof the representations and warranties set forth in Section 6 of the CreditAgreement and in the other Loan Documents are and shall be and remain true and correct in all materialrespects (except to the extent the same expressly relate to an earlier date) and no Default or Event of Defaulthas occurred and is continuing under the Credit Agreement or shall result after giving effect to thisAmendment. SECTION 4.MISCELLANEOUS.4.1. Except as specifically amended herein, the Credit Agreement shall continue in full force andeffect in accordance with its original terms. Reference to this specific Amendment need not be made in theCredit Agreement, the Note, or any other instrument or document executed in connection therewith, or in anycertificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, anyreference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement asamended hereby.4.2. The Borrowers agree to pay on demand all reasonable and documented out-of-pocket costs andexpenses of or incurred by the Bank in connection with the negotiation, preparation, execution and delivery ofthis Amendment, including the reasonable and documented fees and expenses of counsel for the Bank.4.3. This Amendment may be executed in any number of counterparts, and by the different partieson different counterpart signature pages, all of which taken together shall constitute one and the sameagreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each ofsuch counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by theinternal laws of the State of Illinois.[SIGNATURE PAGE FOLLOWS.]  This First Amendment to Credit Agreement is entered into as of the date and year first above written.HUB GROUP, INC. By/s/ Mark A. Yeager Name Mark A Yeager Title President HUB CITY TERMINALS, INC. By/s/ Mark A. Yeager Name Mark A Yeager Title President Accepted and agreed to.HARRIS N.A., successor by merger with Harris Trustand Savings Bank By Name Title ANNEX AREVOLVING NOTE$50,000,000.00February 21, 2006On the Termination Date, for value received, the undersigned, HUB GROUP, INC., a Delawarecorporation (the “Public Hub Company”), and HUB CITY TERMINALS, INC., a Delaware corporation (“HubChicago”) (the Public Hub Company and Hub Chicago being hereinafter referred to collectively as the“Borrowers” and individually as a “Borrower”), hereby jointly and severally promise to pay to the order ofHARRIS N.A., SUCCESSOR BY MERGER WITH HARRIS TRUST AND SAVINGS BANK (the “Bank”) at its office at 111West Monroe Street, Chicago, Illinois, the principal sum of (i) FIFTY MILLION and no/100 DOLLARS($50,000,000.00), or (ii) such lesser amount as may at the time of the maturity hereof, whether by accelerationor otherwise, be the aggregate unpaid principal amount of all Loans owing from the Borrowers to the Bankunder the Revolving Credit provided for in the Credit Agreement hereinafter mentioned.This Note evidences Loans made and to be made to the Borrowers by the Bank under the RevolvingCredit provided for under that certain Credit Agreement dated as of March 23, 2005 among the Borrowers andthe Bank (said Credit Agreement, as the same may be amended, modified or restated from time to time, beingreferred to herein as the “Credit Agreement”), and the Borrowers hereby jointly and severally promise to payinterest at the office described above on such Loans evidenced hereby at the rates and at the times and in themanner specified therefor in the Credit Agreement.This Note is issued by the Borrowers under the terms and provisions of the Credit Agreement and thisNote and the holder hereof are entitled to all of the benefits and security provided for thereby or referred totherein, to which reference is hereby made for a statement thereof. This Note may be declared to be, or be andbecome, due prior to its expressed maturity, voluntary prepayments may be made hereon, all in the events, onthe terms and with the effects provided in the Credit Agreement. All capitalized terms used herein withoutdefinition shall have the same meanings herein as such terms are defined in the Credit Agreement.The Borrowers hereby jointly and severally promise to pay all costs and expenses (includingattorneys’ fees) suffered or incurred by the holder hereof in collecting this Note or enforcing any rights in anycollateral therefor. The Borrowers hereby waive presentment for payment and demand.This Note is issued in substitution and replacement for that certain Revolving Note of the Borrowersdated March 23, 2005 payable to the order of the Bank in the face principal amount of $40,000,000.THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE INTERNAL LAWSOF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.HUB GROUP, INC. By Name Title HUB CITY TERMINALS, INC. By Name Title  EXHIBIT 21 Subsidiaries of Hub Group, Inc. SUBSIDIARIESJURISDICTION OF INCORPORATION/ORGANIZATION Hub City Terminals, Inc. DelawareHub Group Atlanta, L.L.C.DelawareHub Group Canada L.P.DelawareHub City Texas, L.P.DelawareHub Group Associates, Inc.IllinoisHub Group Distribution Services, L.L.C.IllinoisQuality Services L.L.C.MissouriHub Chicago Holdings, Inc.DelawareHub Group Transport, L.L.C.DelawareHub Freight Services, Inc.Delaware  EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-116304 andForms S-8, Nos. 333-115576, 333-33006, 333-06327, 333-107745, 333-103845 and 333-48185) of HubGroup, Inc. and the related Prospectuses of our reports dated February 20, 2006, with respect to theconsolidated financial statements and schedule of Hub Group, Inc., Hub Group, Inc. management’s assessmentof the effectiveness of internal control over financial reporting, and the effectiveness of internal control overfinancial reporting of Hub Group, Inc. included in this Annual Report on Form 10-K for the year endedDecember 31, 2005. /s/ Ernst & Young LLP Chicago, IllinoisFebruary 20, 2006 Exhibit 31.1CERTIFICATIONI, David P. Yeager, certify that:1) I have reviewed this report on Form 10-K of Hub Group, Inc.;2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with the generally accepted accounting principles;c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: February 22, 2006/s/ David P.YeagerName: David P. YeagerTitle: Vice Chairman and Chief Executive OfficerExhibit 31.2CERTIFICATIONI, Thomas M. White, certify that:1) I have reviewed this report on Form 10-K of Hub Group, Inc.;2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with the generally accepted accounting principles;c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: February 22, 2006/s/ Thomas M. WhiteName: Thomas M. WhiteTitle: Senior Vice President- Chief Financial Officer and TreasurerExhibit 32.1Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The following statement is provided by the undersigned to accompany the Annual Report on Form 10-K for the year ended December 31, 2005 of HubGroup, 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 theExchange Act of 1934 or any other securities law. Each of the undersigned certifies that the foregoing Report on Form 10-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 the Form 10-K fairly presents, in all material respects, the financial conditionand results of operations of Hub Group, Inc./s/David P. Yeager/s/Thomas M. WhiteDavid P. YeagerThomas M. WhiteVice Chairman and Chief Executive OfficerSenior Vice President- Chief FinancialOfficerHub Group, Inc.and TreasurerHub Group, Inc.

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