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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-27754
HUB GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4007085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
377 East Butterfield Road, Suite 700
Lombard, Illinois 60148
(Address, including zip code, of principal executive offices)
(630) 271-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
On November 13, 1998, the registrant had 7,003,950 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.
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HUB GROUP, INC.
INDEX
PART I. Financial Information: Page
Hub Group, Inc. - Registrant
Unaudited Condensed Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 3
Unaudited Condensed Consolidated Statements of Operations - Three
Months and Nine Months Ended September 30, 1998 and 1997 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1998 5
Unaudited Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1998 and 1997 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II. Other Information 16
2
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
-------------- --------------
1998 1997
-------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 17,453 $ 12,056
Accounts receivable, net 145,899 127,673
Deferred taxes - 1,222
Prepaid expenses and other current assets 3,235 1,961
-------------- --------------
Total current assets 166,587 142,912
Property and equipment, net 20,071 19,616
Goodwill, net 115,705 102,151
Deferred taxes 1,071 2,479
Other assets 696 668
-------------- --------------
Total assets $ 304,130 $ 267,826
============== ==============
Liabilities and stockholders' equity Current liabilities:
Accounts payable
Trade $ 123,084 $ 102,364
Other 9,882 12,639
Accrued expenses
Payroll 7,264 6,013
Other 3,977 3,259
Deferred taxes 1,413 -
Current portion of long-term debt 3,493 3,428
-------------- --------------
Total current liabilities 149,113 127,703
Long-term debt, excluding current portion 30,520 22,873
Contingencies and commitments
Minority interest 7,677 6,788
Stockholders' equity:
Preferred stock - -
Common stock 77 77
Additional paid-in capital 109,927 109,878
Purchase price in excess of predecessor basis (25,764) (25,764)
Tax benefit of purchase price in excess of predecessor basis 10,306 10,306
Retained earnings 22,274 15,965
-------------- --------------
Total stockholders' equity 116,820 110,462
-------------- --------------
Total liabilities and stockholders' equity $ 304,130 $ 267,826
============== ==============
See notes to unaudited condensed consolidated financial statements.
3
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- -------------------------
1998 1997 1998 1997
------------- ------------- ------------ ------------
Revenue $ 295,859 $ 273,521 $ 834,043 $ 792,841
Transportation costs 259,336 239,754 733,453 696,400
------------- ------------- ------------ ------------
Net revenue 36,523 33,767 100,590 96,441
Costs and expenses:
Salaries and benefits 18,396 16,153 52,861 47,450
Selling, general and administrative 7,994 6,776 23,159 19,856
Depreciation and amortization 1,491 1,132 4,721 3,121
------------- ------------- ------------ ------------
Total costs and expenses 27,881 24,061 80,741 70,427
Operating income 8,642 9,706 19,849 26,014
------------- ------------- ------------ ------------
Other income (expense):
Interest expense (620) (511) (1,913) (1,653)
Interest income 260 458 712 1,019
Other, net (37) 99 103 155
------------- ------------- ------------ ------------
Total other income (expense) (397) 46 (1,098) (479)
Income before minority interest and provision for income taxes 8,245 9,752 18,751 25,535
------------- ------------- ------------ ------------
Minority interest 3,902 5,490 8,238 14,282
------------- ------------- ------------ ------------
Income before provision for income taxes 4,343 4,262 10,513 11,253
Provision for income taxes 1,737 1,705 4,204 4,501
------------- ------------- ------------ ------------
Net income $ 2,606 $ 2,557 $ 6,309 $ 6,752
============= ============= ============ ============
Basic earnings per common share $ 0.34 $ 0.41 $ 0.82 $ 1.12
============= ============= ============ ============
Diluted earnings per common share $ 0.34 $ 0.41 $ 0.82 $ 1.10
============= ============= ============ ============
See notes to unaudited condensed consolidated financial statements.
4
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1998
(in thousands, except shares)
Tax Benefit
Purchase of Purchase
Price in Price
Common Stock Additional Excess of in Excess of Total
-------------------- Paid-in Predecessor Predecessor Retained Stockholders'
Shares Amount Capital Basis Basis Earnings Equity
----------- -------- ----------- ------------- ------------- ---------- ---------------
Balance at December 31, 1997 7,653,246 $ 77 $ 109,878 $ (25,764) $ 10,306 $ 15,965 $ 110,462
Net income - - - - - 6,309 6,309
Exercise of non-qualified
stock options 3,000 - 49 - - - 49
=========== ======== =========== ============= ============= ========== ===============
Balance at September 30, 1998 7,656,246 $ 77 $ 109,927 $ (25,764) $ 10,306 $ 22,274 $ 116,820
=========== ======== =========== ============= ============= ========== ===============
See notes to unaudited condensed consolidated financial statements.
5
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
--------------------------------
1998 1997
--------------- --------------
Cash flows from operating activities:
Net income $ 6,309 $ 6,752
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,537 3,927
Deferred taxes 4,043 916
Minority interest 8,238 14,282
Loss/(Gain) on sale of assets (51) 20
Changes in working capital, net of effects of purchase transactions:
Accounts receivable, net (9,528) (9,267)
Prepaid expenses and other current assets (1,217) (1,153)
Accounts payable 10,480 15,074
Accrued expenses 1,508 5,176
Other assets (13) 1,341
--------------- --------------
Net cash provided by operating activities 25,306 37,068
--------------- --------------
Cash flows from investing activities:
Cash used in acquisitions, net (3,989) -
Purchases of minority interest (6,152) (1,575)
Purchases of property and equipment, net (3,145) (8,335)
--------------- --------------
Net cash used in investing activities (13,286) (9,910)
--------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock in initial public offering, net - (45)
Proceeds from sale of common stock in secondary offering, net - 54,763
Proceeds from sale of common stock 49 95
Distributions to minority interest (7,349) (14,407)
Payments on long-term debt (25,706) (6,392)
Proceeds from issuance of long-term debt 26,383 3,461
--------------- --------------
Net cash provided by (used in) financing activities (6,623) 37,475
--------------- --------------
Net increase/(decrease) in cash 5,397 64,633
Cash and cash equivalents, beginning of period 12,056 13,893
--------------- --------------
Cash and cash equivalents, end of period $ 17,453 $ 78,526
=============== ==============
Supplemental disclosures of cash flow information Cash paid for:
Interest $ 1,223 $ 230
Income taxes 1,139 240
Non-cash investing and financing activities:
Liability assumed to purchase minority interest $ - $ 59,379
See notes to unaudited condensed consolidated financial statements.
6
HUB GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
of Hub Group, Inc. (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements have been
condensed or omitted pursuant to those rules and regulations. However, the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading.
The financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to present fairly the Company's financial position and results of operations.
NOTE 2. Business Combinations
On October 31, 1997, the Company acquired the remaining 50% interest in
its international logistics joint venture, HLX Company, LLC for $300,000. The
acquisition was recorded using the purchase method of accounting resulting in
goodwill of $466,000.
On April 1, 1998, the Company acquired all the outstanding stock of
Quality Intermodal Corporation ("Quality") for $4,080,000 in cash and $6,300,000
through the issuance of a three-year note, bearing interest at an annual rate of
5.6%. The acquisition was recorded using the purchase method of accounting
resulting in goodwill of $9,028,000.
On August 1, 1998, Hub Distribution acquired all the outstanding stock
of Corporate Express Distribution Services ("CEDS") for $750,000 in cash. The
acquisition was recorded using the purchase method of accounting resulting in
goodwill of $390,750.
Results of operations from acquisitions recorded under the purchase
method of accounting are included in the Company's financial statements from
their respective dates of acquisition. The purchase price allocations presented
are preliminary.
Business acquisitions which involved the use of cash were accounted for as
follows:
Nine Months
Ended September 30,
1998
---------------------
(000's)
Accounts receivable $ 8,698
Prepaid expenses and other current assets 57
Property and equipment 779
Goodwill 9,419
Other assets 15
Accounts payable (7,483)
Accrued expenses (461)
Long-term debt (7,035)
---------------------
Cash used in acquisitions, net $ 3,989
---------------------
7
NOTE 3. Earnings per Share
The following is a reconciliation of the Company's Earnings per Share:
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
--------------------------- ---------------------------
(000's) (000's)
---------------- ----------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------- -------- ---------- ------- -------- ----------
Basic Earnings per Share
Income available to
common stockholders $2,606 7,655 $ 0.34 $2,557 6,175 $ 0.41
------- -------- ---------- ------- ------- ----------
Effect of Dilutive Securities
Stock options - 60 - - 126 -
------- -------- ---------- ------- ------- ----------
Diluted Earnings per Share
Income available to
common stockholders
plus assumed exercises $2,606 7,715 $ 0.34 $2,557 6,301 $ 0.41
------- -------- ---------- ------- ------- ----------
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
--------------------------- ---------------------------
(000's) (000's)
---------------- ----------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------- -------- ---------- ------- -------- ----------
Basic Earnings per Share
Income available to
common stockholders $6,309 7,654 $ 0.82 $6,752 6,008 $ 1.12
------- -------- ---------- ------- ------- ----------
Effect of Dilutive Securities
Stock options - 83 - - 113 -
------- -------- ---------- ------- ------- ----------
Diluted Earnings per Share
Income available to
common stockholders
plus assumed exercises $6,309 7,737 $ 0.82 $6,752 6,121 $ 1.10
------- -------- ---------- ------- ------- ----------
NOTE 4. Purchases of Minority Interest
On March 1, 1997, the Company purchased an approximate 44% minority
interest in Hub Group Distribution Services for approximately $1,576,000 in
cash.
On September 17, 1997, the Company purchased the remaining 70% minority
interests in Hub City Los Angeles, L.P.and Hub City Golden Gate, L.P. for
approximately $59,379,000 in cash.
On October 31, 1997, the Company purchased the remaining 70% minority
interest in Hub City New Orleans, L.P. for one dollar.
On April 1, 1998, the Company purchased the remaining 70% minority
interest in Hub City Dallas, L.P., Hub City Houston, L.P. and Hub City Rio
Grande, L.P. for approximately $6,152,000 in cash.
As the amount paid for each of the purchases of minority interest
equaled the basis in excess of the fair market value of assets acquired and
liabilities assumed, the amount paid was recorded as goodwill.
8
NOTE 5. Property and Equipment
Property and equipment consist of the following:
September 30, December 31,
1998 1997
----------------- ------------------
(000's)
Land $ 56 $ 56
Building and improvements 120 233
Leasehold improvements 1,031 886
Computer equipment and software 16,195 14,512
Furniture and equipment 5,065 4,172
Transportation equipment and automobiles 5,385 5,828
----------------- ------------------
27,852 25,687
Less: Accumulated depreciation and amortization (7,781) (6,071)
----------------- ------------------
PROPERTY AND EQUIPMENT, net $ 20,071 $ 19,616
================= ==================
9
HUB GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS COMBINATIONS
On April 1, 1998, Hub Group, Inc. ("Hub Group" or the "Company")
acquired the outstanding stock of Quality Intermodal Corporation ("Quality").
The Company paid $4.1 million in cash and issued a three-year note for $6.3
million, bearing interest at an annual rate of 5.6%.
On August 1, 1998, the Company, through Hub Group Distribution
Services, acquired a customer list and certain fixed assets from Corporate
Express Distribution Services ("CEDS") for $750,000 in cash. CEDS is a
specialized logistics provider that offers a niche service in the delivery of
pharmaceutical samples.
CALL OPTIONS
On April 1, 1998, the Company exercised its call options to acquire the
remaining 70% minority interests in Hub City RioGrande, L.P. ("Hub Rio Grande"),
Hub City Dallas, L.P. ("Hub Dallas"), and Hub City Houston, L.P. ("Hub
Houston"). The Company paid $6.2 million in cash.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998, Compared to Three Months Ended
September 30, 1997
Revenue
Revenue for the Company increased 8.2% to $295.9 million from $273.5
million in 1997. Brokerage revenue increased 27.6% to $43.0 million from $33.7
million in 1997. The increase is attributable to an increase in business with
existing customers and new customers as well as the acquisition of Quality.
Logistics revenue decreased 21.1% to $18.0 million from $22.8 million in 1997.
This decrease is attributed to the Company terminating its contract to provide
third-party logistics to a significant customer in January 1998. Intermodal
revenue increased 8.2% to $234.9 million from $217.1 million in 1997. The
increase is attributable to an increase in business with new customers as well
as the acquisition of Quality. The well-publicized service disruptions in the
intermodal industry continued into the third quarter of 1998. Although
management is unable to quantify the effect, management believes these service
issues have inhibited Hub Group's intermodal revenue growth rate.
Net Revenue
Net revenue increased to $36.5 million from $33.8 million in 1997. As a
percentage of revenue, net revenue was 12.3% compared to 12.3% in 1997.
Salaries and Benefits
Salaries and benefits increased 13.9% to $18.4 million from $16.2
million in 1997. As a percentage of revenue, salaries and benefits increased to
6.2% of revenue from 5.9% in 1997. The increase in the percentage is primarily
attributable to two factors. First, expenditures increased due to the normal
year-over-year merit and cost of living increases granted to the Company's
employees. Second, the rail service disruptions, which continued through the
third quarter of 1998, created a significantly expanded work load requiring
additional staff to handle our customers' intermodal transportation.
10
Selling, General and Administrative
Selling, general and administrative expenses increased 18.0% to $8.0
million from $6.8 million in 1997. These expenses as a percentage of revenue
increased to 2.7% from 2.5% in 1997. This increase is primarily attributable to
expenditures made related to information systems, rent and equipment leases.
Information systems expense increased primarily due to expenditures for
consulting fees related to assessing the Company's information systems strategy.
Rent expense increased due to the expansion of some of Hub Group's operating
facilities. Equipment lease expense continues to increase as the Company
increasingly utilizes operating leases for its information systems hardware.
Depreciation and Amortization
Depreciation and amortization expense increased 31.7% to $1.5 million
from $1.1 million in 1997. This expense as a percentage of revenue increased to
0.5% from 0.4% in 1997. The increase is primarily attributable to increased
goodwill amortization related to the following purchases: (i) the 70% minority
interests in Hub City Los Angeles, L.P. and Hub City Golden Gate, L.P. in
September 1997, (ii) the 70% minority interests in Hub Rio Grande, Hub Dallas
and Hub Houston in April 1998 and (iii) the acquisition of Quality in April
1998.
Other Income (Expense)
Other income (expense) netted to $(0.4) million in 1998 compared to
$0.0 million in 1997. Interest expense increased to $0.6 million in 1998 from
$0.5 million in 1997. Interest expense increased primarily due to the purchases
of minority interests and the acquisition of Quality in April 1998 (see
"Depreciation and Amortization"). Interest income decreased to $0.3 million from
$0.5 million in 1997. The average available cash balance decreased in 1998 as
the Company attempts to minimize the amounts outstanding under its lines of
credit.
Minority Interest
Minority interest decreased 28.9% to $3.9 million from $5.5 million in
1997. Minority interest as a percentage of income before minority interest
decreased to 47.3% from 56.3% in 1997. The purchase of the minority interests as
discussed in "Depreciation and Amortization" had the effect of lowering minority
interest as a percentage of income before minority interest when comparing 1998
to 1997.
Income Taxes
The provision for income taxes remained constant at $1.7 million. The
Company is providing for income taxes at an effective rate of 40%.
Net Income
Net income remained constant at $2.6 million.
Earnings Per Share
Basic and diluted earnings per share decreased 17.1% to $0.34 from
$0.41 in 1997.
Nine Months Ended September 30, 1998, Compared to Nine Months Ended September
30, 1997.
Revenue
Revenue increased 5.2% to $834.0 million from $792.8 million in 1997.
Brokerage revenue increased 25.9% to $119.1 million from $94.6 million in 1997.
The increase is attributable to an increase in business with existing customers
and new customers as well as the acquisition of Quality. Logistics revenue
11
decreased 29.8% to $45.4 million from $64.6 million in 1997. This decrease is
attributable to the Company terminating its contract to provide third-party
logistics to a significant customer in January 1998. Intermodal revenue
increased 5.7% to $669.6 million from $633.6 million in 1997. The increase is
attributable to an increase in business with new customers as well as the
acquisition of Quality. The well-publicized service disruptions in the
intermodal industry continued into the first nine months of 1998. Although
management is unable to quantify the effect, management believes these service
issues have inhibited Hub Group's intermodal revenue growth rate.
Net Revenue
Net revenue increased to $100.6 million from $96.4 million in 1997. As
a percentage of revenue, net revenue decreased to 12.1% from 12.2% in 1997. The
decrease in the percentage was due to the Company incurring additional costs for
purchased transportation due to rate increases, alternate routing around
congested rail lanes, repositioning empty equipment and detention charges
related to the service disruptions in the intermodal industry.
Salaries and Benefits
Salaries and benefits increased to $52.9 million from $47.5 million in
1997. These expenses as a percentage of revenue increased to 6.3% from 6.0% in
1997. The increase in the percentage is primarily attributable to two factors.
First, expenditures increased due to the normal year-over-year merit and cost of
living increases granted to the Company's employees. Second, the rail service
disruptions, which continued through the first nine months of 1998, created a
significantly expanded work load requiring additional staff to handle our
customers' intermodal transportation.
Selling, General and Administrative
Selling, general and administrative expenses increased to $23.2 million
from $19.9 million in 1997. These expenses as a percentage of revenue increased
to 2.8% from 2.5% in 1997. This increase is primarily attributable to
expenditures made related to rent, information systems, and equipment leases.
Rent expense increased due to the expansion of some of Hub Group's operating
facilities. Information systems expense increased primarily due to expenditures
for consulting fees related to assessing the Company's information systems
strategy and to reprogram software for Year 2000 compliance. Equipment lease
expense continues to increase as the Company increasingly utilizes operating
leases for its information systems hardware.
Depreciation and Amortization
Depreciation and amortization increased to $4.7 million from $3.1
million in 1997. This expense as a percentage of revenue increased to 0.6% from
0.4% in 1997. The increase is primarily attributable to increased goodwill
amortization related to the following purchases: (i) the 70% minority interests
in Hub City Los Angeles, L.P. and Hub City Golden Gate, L.P. in September 1997,
(ii) the 70% minority interests in Hub Rio Grande, Hub Dallas and Hub Houston in
April 1998 and (iii) the acquisition of Quality in April 1998.
Other Income (Expense)
Other income (expense) netted to an expense of $(1.1) million in 1998
compared to a net expense of $(0.5) million in 1997. Interest expense increased
to $1.9 million in 1998 from $1.7 million in 1997. Interest expense increased
primarily due to the purchases of minority interests and the acquisition of
Quality in April 1998 (see "Depreciation and Amortization"). Interest income
decreased to $0.7 million from $1.0 million in 1997. The average available cash
balance decreased in 1998 as the Company attempts to minimize the amounts
outstanding under its lines of credit.
12
Minority Interest
Minority interest decreased 42.3% to $8.2 million from $14.3 million in
1997. Minority interest as a percentage of income before minority interest
decreased to 43.9% from 55.9% in 1997. The purchase of the minority interests as
discussed in "Depreciation and Amortization" had the effect of lowering minority
interest as a percentage of income before minority interest when comparing 1998
to 1997.
Income Taxes
The provision for income taxes decreased to $4.2 million from $4.5
million in 1997. The Company is providing for income taxes at an effective rate
of 40%.
Net Income
Net income decreased 6.6% to $6.3 million from $6.8 million in 1997.
Earnings Per Share
Basic earnings per share decreased 26.8% to $0.82 from $1.12 in 1997.
Diluted earnings per share decreased 25.5% to $0.82 from $1.10 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the unused and available portion of the line of
credit with Cass Bank and Trust Company was $5.0 million. At September 30, 1998,
there was $20.5 million outstanding and $15.5 million unused and available under
the line of credit with Harris Trust and Savings Bank.
OUTLOOK, RISKS AND UNCERTAINTIES
This "Outlook, Risks and Uncertainties" section contains statements
regarding expectations, hopes, beliefs, intentions or strategies regarding the
future which are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and involve risks and uncertainties
described below that could cause actual results to differ materially from those
projected. The Company assumes no liability to update any such forward-looking
statements. In addition to those mentioned elsewhere in this section, such risks
and uncertainties include the impact of competitive pressures in the
marketplace, the degree and rate of market growth in the markets served by the
Company, changes in industry-wide capacity, further consolidation of rail
carriers, changes in governmental regulation, changes in the cost of services
from vendors and fluctuations in interest rates.
Year 2000
"Year 2000" refers to the issue surrounding the compatibility of
computer and other technology based systems with dates beyond December 31, 1999.
This section will include an assessment of the Company's state of readiness, the
costs to address the issues, the risks the issues represent and the Company's
contingency plan.
State of Readiness
Management has broken down its Year 2000 program into four phases.
Those phases are awareness, assessment, renovation and validation. The Company
has contracted with an outside consulting firm to perform a readiness review,
which is currently ongoing. This review will conclude in November 1998 and is
designed to verify that the Company is aware of all material relevant areas of
concern regarding Year 2000 compatibility. Furthermore, the review should serve
to validate existing assessments and identify areas where further assessment is
needed.
13
Management believes that it is aware of the risk areas facing the
Company regarding Year 2000 and has broken those areas into six categories. The
six categories are: (i) the Company's main operating system that has been
created and enhanced in-house, (ii) the Company's ancillary operating software
applications which were purchased, (iii) desktop hardware and software
applications, (iv) the Company's financial reporting system, (v) the Company's
telephone systems, and (vi) embedded technology in the Company's office
equipment, physical environment and drayage tractors.
The Company's main operating system is currently being renovated. The
renovation, which consists of reprogramming the source code, should be completed
before December 31, 1998. The validation phase will therefore start by December
31, 1998, and management estimates that the validation phase will be completed
by September 30, 1999.
The Company believes all of its ancillary operating software
applications have been assessed. All of the supporting vendors, with one
exception, have stated that their products are Year 2000 compliant. For the one
exception, the Company has identified a renovation solution. The renovation
stage for the exception has not yet been started but is expected to be completed
by March 31, 1999. The validation stage for the exception is expected to be
completed by June 30, 1999. The validation phase for the software that is Year
2000 compliant per the vendors is to begin before December 31, 1998, and should
be completed by September 30, 1999.
The Company's financial reporting system vendor has stated that their
application is Year 2000 compliant. The Company plans to execute the validation
phase for the financial reporting system as the Company's operating system
generates Year 2000 activity during its validation phase. The validation phase
for the financial reporting system is expected to be completed by September 30,
1999.
The Company's desktop hardware and software application assessment is
ongoing. The Company is in the process of creating an inventory of all desktop
hardware and software applications. Once completed, the Company anticipates
hiring an outside consulting firm to execute the renovation and validation
phases. The renovation phase will consist of updating or replacing the hardware
or software application if it is not Year 2000 compliant. The renovation phase
is expected to begin prior to December 31, 1998, and the validation phase is
expected to be completed by September 30, 1999.
The Company is still assessing its many telephone systems. The amount
of time for renovation and validation has not yet been determined.
The Company is aware of the potential issues regarding embedded
technology in its office equipment, physical environment and drayage tractors.
While the Company has not assessed each piece of office equipment, such as fax
machines and copiers, it believes its contingency plan will deal effectively
enough with the risks of failure that such assessment is not a high priority.
Similarly, the Company recognizes the potential issues regarding its physical
environment, such as heat, electricity, elevators, security systems, etc., but
has not ranked the assessment of each to be a higher priority than the
resolution of items (i) through (v) above. The Company has assessed its embedded
technology in its drayage tractors and received a statement from the engine
manufacturers that the tractors' embedded technology is Year 2000 compliant.
The Company has identified four categories of key third parties with
which the Company has a material relationship that should be assessed. Those
categories are: (i) significant customers who rely on their computer systems to
determine their transportation needs, (ii) key vendors such as the railroads and
14
significant providers of drayage and over-the-road services, (iii) our
information network communications provider and (iv) significant third party
freight payment vendors utilized by the Company's customers. The Company has not
received any statements from its customers or from its customers' third party
freight payment vendors regarding their Year 2000 readiness. The Company has no
plans to obtain such statements. The Company has received statements from the
major railroads and many of the Company's drayage and over-the-road service
providers that they are Year 2000 compliant. The Company believes at this time
that its information network communications provider is not Year 2000 compliant,
but is working to become compliant.
Costs
Through October 31, 1998, the Company has expensed approximately
$608,000 related to Year 2000. These costs include not only amounts paid to
outside parties but also the payroll costs for those employees spending
significant amount of time on Year 2000 issues. The Company estimates it will
spend approximately $2.0 to $2.5 million in total. The Company expects to
continue to fund these costs through cash flow from operations.
Risk
Management believes its most likely worst-case scenario is a complete
shut down of the Company's, the railroads' or the Company's customers' main
operating systems. The Company believes any of these risks, as well as other
risks or combination of risks addressed herein or otherwise, could have a
material adverse effect on the Company's results of operations, financial
condition and liquidity.
Contingency Plan
The Company has not yet developed a formal written contingency plan.
Certain aspects of the Year 2000 contingency plan, such as dealing with an
inoperative system, will simply be a matter of integrating the Company's current
contingency plan for dealing with the temporary shut downs that occur from time
to time. Other aspects of the contingency plan will be developed as the Company
works through the phases of readiness. The creation of the contingency plan will
be an ongoing process that should be completed early in the fourth quarter of
1999.
15
PART II. Other Information
None.
16
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly authorized this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUB GROUP, INC.
DATE: November 13, 1998 /s/ William L. Crowder
----------------------
William L. Crowder
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)