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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(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, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-27754
__________________
HUB GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4007085
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
377 E. Butterfield Road, Suite 700
Lombard, Illinois 60148
(Address and zip code of principal executive offices)
(630) 271-3600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: 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 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by non-
affiliates on March 6, 1997, based upon the last reported sale price on that
date on the Nasdaq National Market of $27 3/4 per share, was $145,314,262.
On March 17, 1997, the Registrant had 5,262,750 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 14, 1997, (the "Proxy Statement") is incorporated
by reference in Part III of this Form 10-K to the extent stated herein. Except
with respect to information specifically incorporated by reference in this Form
10-K, the Proxy Statement is not deemed to be filed as a part hereof.
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PART I
Item 1. BUSINESS
General
Hub Group, Inc. ("Hub Group" or the "Company") is a Delaware
corporation which was incorporated on March 8, 1995. Since its founding as an
intermodal marketing company ("IMC") in 1971, the Company has become a full
service transportation provider. As the largest IMC in the United States, Hub
Group, acting as agent, arranges for the movement of its customers' freight in
containers and trailers over long distances. In addition, Hub Group arranges for
the transportation of freight by truck where intermodal transportation is not
available or economical and performs comprehensive logistics services.
The Company operates through an extensive nationwide network of 34
offices or "Hubs." Each Hub is strategically located in a market that has a
significant concentration of shipping customers and one or more railheads. Each
Hub functions essentially as a stand alone business managed locally by an
executive, known as a "Principal," with significant transportation experienced
and, with the exception of Hub Chicago (defined below), Hub Tennessee (defined
below), Hub North Central (defined below) and Hub City New Orleans, L.P., an
equity ownership interest in that Hub. Local management is responsible for
operations, customer service and regional marketing, while corporate management
is responsible for group strategic planning and administration, financial
services, relationships with the railroads, management of the Company's
logistics services business and management information systems support. Hub
Group also maintains a National Accounts sales force to provide centralized
marketing of the Company's services to large and geographically diversified
shippers.
On March 18, 1996, Hub Group purchased Hub City Terminals, Inc. ("Hub
Chicago") in a stock-for-stock acquisition. Concurrent with the acquisition of
Hub Chicago, Hub Group completed the initial public offering of 4,261,250 shares
of its Class A common stock (the "Class A Common Stock"), with net proceeds to
Hub Group of $52.9 million. Simultaneously with the initial public offering, Hub
Group, through its new wholly owned subsidiary, Hub Chicago, acquired with cash
the general partnership interests in 26 operating partnerships, each with one or
more offices. In addition, Hub Group directly acquired with cash a controlling
interest in the Hub Group Distribution Services partnership ("Hub Distribution")
which performs certain specialized logistics functions (each of the 26 operating
partnerships and Hub Distribution are a "Hub Partnership" and collectively are
the "Hub Partnerships"). With the exception of Hub Distribution, the Company has
the continuing option, exercisable any time after the Principal currently
associated with a Hub Partnership ceases to be an employee, to purchase the
limited partnership interest in that Hub Partnership. The decision as to whether
or when to exercise an option to acquire the limited partnership interest in a
Hub Partnership will be made by the independent members of the Company's Board
of Directors. Unless the context otherwise requires, references to "Hub Group"
or the "Company" include Hub Chicago, the Hub Partnerships and their respective
subsidiaries.
In addition to the acquisitions made in connection with the initial
public offering, the Company made the following strategic investments in 1996.
After an investment by the Company of approximately $0.1 million, the Company's
newly formed joint venture with Norton Lilly International Inc. ("Norton
Lilly"), a large steamship agent, began operations in April 1996. The joint
venture facilitates international shipments of freight originating in or
destined for the United States. The North American intermodal freight movements
arranged by the joint venture are handled by the Hub network. Norton Lilly is
responsible for arranging steamship passage and local transportation in foreign
countries. On May 2, 1996, the Company acquired the domestic intermodal
marketing business of American President Lines Domestic Distribution Services
("APLDDS") from American President Companies, Ltd. ("APC") for approximately
$8.1 million. As a result of the APLDDS acquisition, the Company acquired the
right to service APLDDS customers, but did not assume any assets or liabilities
associated with that business. The Company hired 36 experienced intermodal
personnel from the APLDDS organization. On August 1, 1996, the Company purchased
the remaining 70% minority interest in one of the Hub Partnerships, Hub City
Tennessee, L.P. ("Hub Tennessee") for approximately $2.5 million. On December
12, 1996, the Company purchased the remaining 70%
1
minority interest in another Hub Partnership, Hub City North Central, L.P. ("Hub
North Central") for approximately $15.0 million.
Services Provided
The Company's transportation services can be broadly placed into the
following categories:
Intermodal As part of its intermodal services, the Company contracts
with railroads to provide transportation over the long-haul portion of the
shipment and, when not providing the services itself, contracts with drayage
companies for local pickup and delivery. The Company also negotiates rail and
drayage rates, electronically tracks shipments in transit, consolidates billing
and handles claims for freight loss or damage on behalf of its customers. The
Company uses its Hub network, connected through its proprietary advanced
intermodal management ("AIM") system, to access containers and trailers owned by
leasing companies, railroads and steamship lines. Because each Hub not only
handles its own outbound shipments but also handles inbound shipments from other
Hubs, each Hub is able to track trailers and containers entering its service
area and use that equipment to fulfill its customers' outbound shipping
requirements. This effectively allows the Company to "capture" containers and
trailers and keep them within the Hub network without having to make a capital
investment in transportation equipment.
The Company's ability to deliver its intermodal customers' freight on
time depends on the quality and service provided by the drayage companies with
which it does business. Due to the size of these drayage companies and their
limited access to capital for expansion, the Company's future growth will depend
in part on its ability to identify additional local drayage capacity to service
the Company's customers. In some locations, drayage service is limited or
customers require an enhanced level of service which cannot be competitively
accommodated by a third-party provider. In these locations, the Company has
begun to supplement third party drayage operations with company-owned tractors
to service portions of the Company's intermodal business. See Item 7
Management's Discussion and Analysis - Liquidity and Capital Resources.
Brokerage The Company arranges for the transportation of freight by
truck, providing customers another option for their transportation needs. This
is accomplished by matching customers' needs with carriers' capacity to provide
the best service and price combination. The Company has contracts with a
substantial base of carriers allowing it to meet the varied needs of its
customers. The Company negotiates rates, tracks shipments in transit,
consolidates billing and handles claims for freight loss and damage on behalf of
its customers. The Company's brokerage operation also provides customers with
specialized programs. Through the Dedicated Trucking program, certain carriers
have informally agreed to move freight for Hub's customers on a continuous
basis. This arrangement allows Hub to gain control of the trucking equipment to
effectively meet its customer's needs without owning the equipment. Through the
Managed Carrier program, Hub assumes the responsibility for all truckloads the
customer's core carriers cannot handle. This program is tailored to each
customer, and provides the customer with increased control and improved service
due to Hub's resources and expertise.
Logistics The Company has expanded its service capabilities as
customers increasingly outsource their logistics needs. Logistics functions
currently offered include comprehensive transportation management, arranging for
delivery to multiple locations at the shipment's destination, third party
warehousing and other customized logistics services, as well as other non-
traditional logistics services such as installation of point of sale merchandise
displays.
The Company operates its comprehensive transportation management
business from its corporate headquarters in Lombard, Illinois. From this central
location, the Company's Hub Logistics division provides complete transportation
services, essentially replacing the customer's transportation department. Once
the Company is hired as a single source logistics provider, Hub Logistics
negotiates with intermodal, railcar, truckload and less-than-truckload carriers
to move the customer's product through the supply chain and then dispatches the
move for the customer. Using its advanced transportation management software,
Hub Logistics consolidates orders into full truckload shipments, chooses a
shipping route, electronically tenders loads to carriers and reports the move to
the customer.
2
Hub Network
Over the past 25 years, Hub Group has grown from a single office with
two employees into a network of 32 Hubs in the United States, one Hub in Canada
and one Hub in Mexico. Hub Group also has several satellite sales offices. In
developing this network, the Company has carefully selected each location to
ensure coverage in areas with significant concentrations of shipping customers
and one or more railheads. Hub Group currently has Hubs in the following cities:
Atlanta Grand Rapids Milwaukee Rochester
Baltimore Houston Minneapolis St. Louis
Birmingham Indianapolis New Haven Salt Lake City
Boston Jacksonville New Orleans San Antonio
Chicago(3) Kansas City New York City San Francisco
Cleveland Los Angeles Philadelphia Seattle
Dallas Memphis Pittsburgh Toledo
Detroit Mexico City Portland Toronto
The entire Hub network is interactively connected through the Company's AIM
system. This enables Hub Group to move freight into and out of every major city
in the United States and most locations in Canada and Mexico.
Each Hub manages the freight originating in or destined for its
service area. In a typical intermodal transaction, the customer contacts the
local Hub to obtain shipping schedules and a price quote for a particular
freight movement. The local Hub obtains the necessary intermodal equipment,
arranges for it to be delivered to the customer by a drayage company and, after
the freight is loaded, arranges for the transportation of the container or
trailer to the rail ramp. Information is entered into the AIM system by the
local Hub, which monitors the shipment to ensure that it will arrive as
scheduled. This information is simultaneously transmitted through the AIM system
to the Hub closest to the point of delivery, which arranges for and confirms
delivery by a drayage company. This arrangement among the Hubs is transparent to
the customer and allows the customer to maintain its relationship solely with
the originating Hub.
The Company provides brokerage services to its customers in a similar
manner. In a typical brokerage transaction, the customer contacts the local Hub
to obtain transit information and a price quote for a particular freight
movement. The customer then provides appropriate shipping information to the
local Hub. The local Hub makes the delivery appointment and arranges with the
appropriate carrier to pick up the freight. Once it receives confirmation that
the freight has been picked up, the local Hub monitors the movement of the
freight until it reaches its destination and the delivery has been confirmed. If
the carrier notifies Hub Group that after delivering the load it will need
additional freight, the Hub located nearest the destination is notified
electronically of the carrier's availability. Although it is under no obligation
to do so, the local Hub then may attempt, if requested by the carrier, to secure
freight for the carrier.
Marketing and Customers
The Company believes that fostering long-term customer relationships
is critical to the Company's success. Through these long-term relationships, the
Company is able to better understand its customer's needs and to tailor
transportation services for a specific customer, regardless of the customer's
size or volume. The Company has created a database of current and prospective
customers, profiling each customer's shipping patterns, which the Company
periodically updates. This database allows the Company to target its marketing
to meet each customer's specific requirements.
3
The Company currently has full time marketing representatives at each
Hub with primary responsibility for servicing local and regional accounts. These
sales representatives work from the 34 Hubs and the Company's satellite sales
offices. This network provides a local marketing contact for small and medium
shippers in most major metropolitan areas within the United States.
In 1985, the Company organized National Accounts to service the needs
of the nation's largest shippers. The Company recognized that although large
shippers originate freight from multiple locations throughout the country, their
logistics function is usually centralized. The Company essentially mirrored this
structure by servicing national accounts from a central location and parceling
out the servicing of individual freight shipments to the appropriate Hub. The
are currently 16 National Accounts sales representatives who report to the
Company's Executive Vice President of National Accounts. The National Accounts
sales representatives regularly call on the nation's largest shippers to develop
business relationships and to expand the Company's participation in servicing
their transportation needs. When a business opportunity is identified by a
National Accounts sales representative, the Company's market development and
pricing personnel and the local Hubs work together to provide a transportation
solution tailored to the customer's needs. Local Hubs provide transportation
services to National Accounts customers. After the plan is implemented, National
Accounts' personnel maintain regular contact with the shipper to ensure customer
satisfaction and to refine the process as necessary.
This unique combination of local and regional marketing has produced a
large, diverse customer base. The Company services customers in a wide variety
of industries, including consumer products, printing, paper, retail, chemicals
and electronics.
Management Information System
A primary component of the Company's business strategy is the
continued improvement of its AIM system and other technology to ensure that the
Company will remain a leader among transportation providers in information
processing for intermodal transportation. The AIM system consists of a network
of IBM AS/400 computers located at the Hubs and linked to a host computer at the
Company's headquarters. Hub Group uses IBM's Global Network as the nucleus for
linking its computers and databases. This configuration provides a real time
environment for transmitting data among the Hubs and the Company's headquarters
using electronic data interchange ("EDI"), electronic mail and other protocols.
It also allows Hub to communicate electronically with each railroad, certain
drayage companies and those customers with EDI capabilities.
The Company's proprietary AIM system is the primary mechanism used by
the Hubs to process customer transportation requests, schedule and track
shipments, prepare customer billing, establish account profiles and retain
critical information for analysis. The AIM system provides mainframe-to-
mainframe connectivity with each of the major rail carriers, enabling the
Company to electronically schedule and track shipments in a real time
environment. In addition, the AIM system's EDI features offer customers with EDI
capability a completely paperless process, including load tendering, shipment
dispatch, shipment tracking, customer billing and remittance processing. The
Company aggressively pursues opportunities to establish EDI interfaces with its
customers and carriers.
Relationship with Railroads
A key element of the Company's business strategy is to strengthen its
close working relationship with each of the major intermodal railroads in the
United States. The Company views its relationship with the railroads as a
partnership. Due to the Company's size and relative importance, many railroads
have dedicated support personnel to focus on the Company's day-to-day service
requirements. On a semi-annual basis, senior executives of the Company and each
of the railroads meet to discuss major strategic issues concerning intermodal
transportation. Several of the Company's executive officers, including both the
Company's Chairman and President, are former railroad employees, which makes
them well-suited to understand the railroads' service capabilities.
4
The Company has contracts with each of the following railroads:
Atchison, Topeka & Santa Fe Illinois Central
Burlington Northern Kansas City Southern
Canadian Pacific Norfolk Southern
Conrail Southern Pacific
CSX Union Pacific
These contracts govern the transportation services and payment terms
pursuant to which the Company's intermodal shipments are handled by the
railroads. The contracts have staggered renewal terms with the earliest
expiration at the end of June 1997. While there can be no assurances that these
contracts will be renewed, the Company has in the past successfully negotiated
extensions of the contracts with the railroads. Transportation rates are market
driven and are typically negotiated between the Company and the railroads on a
customer specific basis. Consistent with industry practice, many of the rates
negotiated by the Company are special commodity quotations ("SCQs"), which
provide discounts from published price lists based on competitive market factors
and are designed by the railroads to attract new business or to retain existing
business. SCQ rates are generally issued for the account of a single IMC. SCQ
rates apply to specific customers in specified shipping lanes for a specific
period of time, usually six to 12 months.
Relationship with Drayage Companies
In 1990, the Company instituted its "Quality Drayage Program," which
consists of agreements and rules that govern the framework pursuant to which the
drayage companies perform services for the Company. Participants in the program
commit to provide high quality service, clean and safe equipment, maintain a
certain on-time performance level and follow specified procedures designed to
minimize freight loss and damage. Whenever possible, the Company uses the
services of drayage companies that participate in its Quality Drayage Program.
However, during periods of high demand for drayage services or at the request of
a customer, the Company will use the services of other drayage companies. The
local Hubs negotiate drayage rates for transportation between specific origin
and destination points. These rates generally are valid, with minor exceptions
for fuel surcharge increases, for a period of one year.
Relationship with Truckload Carriers
The Company's brokerage operation has a large and growing number of
active carriers in its database which it uses to transport freight. The local
Hubs deal daily with these carriers on an operational level. Hub Highway
Services handles the administrative and regulatory aspects of the carrier
relationship. Hub views its relationships with its carriers as important since
these relationships determine pricing, load coverage and overall service.
Risk Management and Insurance
The Company requires all drayage companies participating in the
Quality Drayage Program to carry at least $1.0 million in general liability
insurance and $1.0 million in cargo insurance. Railroads, which are self
insured, provide limited common carrier liability protection, generally up to
$250,000 per shipment, although higher coverage is available on a load-by-load
basis. To cover freight damage when a carrier's liability cannot be established
or a carrier's insurance is insufficient to cover freight loss or damage, the
Company carries its own $1.5 million cargo insurance and $2.0 million general
liability insurance. The Company also carries a companion $10.0 million umbrella
policy on its general liability insurance.
5
Government Regulation
Hub Highway Services, a partnership controlled by the Company, is
licensed by the Department of Transportation ("DOT") as a broker in arranging
for the transportation of general commodities by motor vehicle. To the extent
that the Hubs perform truck brokerage services, they do so under the license
granted to Hub Highway Services. The DOT prescribes qualifications for acting in
this capacity, including certain surety bonding requirements. While the DOT
requires a $10,000 surety bond to maintain this license, the Company has
voluntarily posted a $100,000 surety bond. To date, compliance with these
regulations has not had a material adverse effect on the Company's results of
operations or financial condition. However, the transportation industry is
subject to legislative or regulatory changes that can affect the economics of
the industry by requiring changes in operating practices or influencing the
demand for, and cost of providing, transportation services.
Competition
The transportation services industry is highly competitive. The
Company competes against other IMCs, as well as logistics companies, third party
brokers and railroads that market their own intermodal services. In addition,
there is an emerging trend for larger truckload carriers to enter into
agreements with railroads to market intermodal services nationwide. Competition
is based primarily on freight rates, quality of service, reliability, transit
time and scope of operations. Several transportation service companies and
truckload carriers, and all of the major railroads, have substantially greater
financial and other resources than the Company.
General
Employees As of February 28, 1997, the Company had approximately 1,050
employees. The Company is not a party to any collective bargaining agreement and
considers its relationship with its employees to be satisfactory.
Other No material portion of the Company's operations is subject to
renegotiation of profits or termination of contracts at the election of the
federal government. The Company has not spent a material amount on company
sponsored research and development activities or on customer sponsored research
activities. None of the Company's patents and trademarks is believed to be
material to the Company. The Company's business is seasonal to the extent that
certain customer groups, such as retail, are seasonal.
Item 2. PROPERTIES
The Company directly, or indirectly through the Hub Partnerships,
operates 40 offices throughout the United States and in Canada and Mexico,
including the Company's headquarters in Lombard, Illinois, its National Accounts
office in Stamford, Connecticut, four National Accounts sales offices, Hub
Logistics offices in Lombard and Stamford and Hub Distribution's office. The
office buildings used by the Hubs located in Milwaukee, Toledo, Detroit and
Kansas City are owned, and the remainder are leased. The office building in
Kansas City is subject to a mortgage. Most office leases have initial terms of
more than one year, and many include options to renew. While some of the
Company's leases are month-to-month and others expire in the near term, the
Company does not believe that it will have difficulty in renewing them or in
finding alternative office space. The Company believes that its offices are
adequate for the purposes for which they are currently used.
Item 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incident to its business,
primarily claims for freight lost or damaged in transit or improperly shipped.
Most of the lawsuits to which the Company is party are covered by
6
insurance and are being defended by the Company's insurance carriers. Management
does not believe that the litigation to which it is currently a party, if
determined adversely to the Company, would individually or in the aggregate have
a materially adverse effect on the Company's financial position or results of
operations. See Item 1 Business - Risk Management and Insurance.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of 1996.
Executive Officers of the Registrant
In reliance on General Instruction G to Form 10-K, information on
executive officers of the Registrant is included in this Part I. The table sets
forth certain information as of March 20, 1997 with respect to each person who
is an executive officer of the Company.
Name Age Position
- ---------------------- --- ----------------------------------------------------
Phillip C. Yeager 69 Chairman of the Board of Directors
David P. Yeager 44 Vice Chairman of the Board of Directors and Chief
Executive Officer
Thomas L. Hardin 51 President, Chief Operating Officer and Director
William L. Crowder 54 Vice President--Finance, Chief Financial Officer
and Treasurer
Daniel F. Hardman 48 President--Chicago Region
Mark A. Yeager 32 Vice President, Secretary and General Counsel
John T. Donnell 57 Executive Vice President--Marketing
Robert L. Maro 44 Vice President--Information Services
Robert J. Jensen 42 President--Hub Group Operations Management
Phillip C. Yeager, the Company's founder, has been Chairman of the
Board since October 1985. From April 1971 to October 1985, Mr. Yeager served as
President of Hub Chicago. Mr. Yeager became involved in intermodal
transportation in 1959, five years after the introduction of intermodal
transportation in the United States, as an employee of the Pennsylvania and
Pennsylvania Central Railroads. He spent 19 years with the Pennsylvania and
Pennsylvania Central Railroads, 12 of which involved intermodal transportation.
In 1991, Mr. Yeager was named the Man of the Year by the Intermodal
Transportation Association. In 1995, he received the Salzburg Practitioners
Award from Syracuse University in recognition of his lifetime achievements in
the transportation industry. In October 1996, Mr. Yeager was inducted into the
Chicago Area Entrepreneurship Hall of Fame sponsored by the University of
Illinois at Chicago. In March 1997, he received the Presidential Medal from
Dowling College for his achievements in transportation services. Mr. Yeager
graduated from the University of Cincinnati in 1951 with a Bachelor of Arts
degree in Economics. Mr. Yeager is the father of David P. Yeager and Mark A.
Yeager and the father-in-law of Robert J. Jensen.
7
David P. Yeager has served as the Company's Vice Chairman of the Board
since January 1992 and as Chief Executive Officer of the Company since March
1995. From October 1985 through December 1991, Mr. Yeager was President of Hub
Chicago. From 1983 to October 1985, he served as Vice President, Marketing of
Hub Chicago. Mr. Yeager founded the St. Louis Hub in 1980 and served as its
President from 1980 to 1983. Mr. Yeager founded the Pittsburgh Hub in 1975 and
served as its President from 1975 to 1977. Mr. Yeager received a Masters in
Business Administration degree from the University of Chicago in 1987 and a
Bachelor of Arts degree from the University of Dayton in 1975. Mr. Yeager is the
son of Phillip C. Yeager, the brother of Mark A. Yeager and the brother-in-law
of Robert J. Jensen.
Thomas L. Hardin has served as the Company's President since October
1985 and has served as Chief Operating Officer and a director of the Company
since March 1995. From January 1980 to September 1985, Mr. Hardin was Vice
President-Operations and from June 1972 to December 1979, he was General Manager
of the Company. Prior to joining the Company, Mr. Hardin worked for the Missouri
Pacific Railroad where he held various marketing and pricing positions. During
1996, Mr. Hardin was Chairman of the Intermodal Association of North America.
William L. Crowder has been the Company's Vice President of Finance
and Chief Financial Officer since April 1994 and Treasurer since July 1996. From
January 1990 through December 1993, Mr. Crowder was Vice President of Finance
and Treasurer of Sears Logistics Services, Inc., a transportation, distribution
and home delivery subsidiary of Sears Roebuck & Company. Mr. Crowder worked at
Sears Roebuck & Company from 1966 through 1989 in various senior financial
management positions. Mr. Crowder received a Bachelors of Business
Administration degree from Georgia State University in 1966.
Daniel F. Hardman has been the President--Chicago Region since
February 1996. Mr. Hardman has been employed by the Hub Group since 1982,
serving as President of Hub Chicago from December 1992 to February 1996, Vice
President of Hub Chicago from January 1987 to December 1992, General Manager of
Sales of Hub Chicago from August 1985 to January 1987, President of Hub
Charlotte from June 1984 to August 1985 and Regional Sales Manager of Hub
Chicago from December 1982 to June 1984. Mr. Hardman is a former Director of the
Intermodal Transportation Association and is presently a member of the Chicago
Traffic Club and the Chicago Intermodal Transportation Association. Mr. Hardman
is a 1991 graduate of the Certificate Program in Business Administration from
the University of Illinois.
Mark A. Yeager has been the Company's Vice President, Secretary and
General Counsel since March 1995. From May 1992 to March 1995, Mr. Yeager served
as the Company's Vice President--Quality. Prior to joining the Company in 1992,
Mr. Yeager was an associate at the law firm of Grippo & Elden from January 1991
through May 1992 and an associate at the law firm of Sidley & Austin from May
1989 through January 1991. Mr. Yeager received a Juris Doctor degree from
Georgetown University in 1989 and a Bachelor of Arts degree from Indiana
University in 1986. Mr. Yeager is the son of Phillip C. Yeager, the brother of
David P. Yeager and the brother-in-law of Robert J. Jensen.
John T. Donnell has been Executive Vice President of Marketing since
October 1993. From October 1985 through October 1993, Mr. Donnell served as Vice
President of National Accounts. Prior to joining the Company in 1985, Mr.
Donnell worked for Transamerica Leasing as Vice President of Marketing where he
was responsible for marketing 40,000 intermodal trailers to the railroads and
the intermodal marketing industry. Mr. Donnell received a Master of Business
Administration degree from Northwestern University in 1981 and a Bachelor of
Science degree in Marketing from Northeast Louisiana University in 1961.
Robert L. Maro has been Vice President of Information Services since
November 1991. From January 1978 through November 1991, Mr. Maro worked as
Director of Operations for Zink & Katich, an information technology consulting
firm that provided consulting services to the Company. Mr. Maro received a
Bachelor of Science degree in Mathematics from Chicago State University in 1974.
8
Robert J. Jensen has been President of Hub Group Operations Management
since July 1991. He served as President of Hub St. Louis from July 1985 through
July 1991 and as General Manager of Hub St. Louis from October 1980 through July
1985. Mr. Jensen received a Bachelor of Science degree in Finance from the
University of Illinois in 1977. Mr. Jensen is the son-in-law of Phillip C.
Yeager and the brother-in-law of both David P. Yeager and Mark A. Yeager.
PART II
Item 5. MARKETS FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Class A Common Stock of the Company trades on the Nasdaq National
Market tier of The Nasdaq Stock Market ("Nasdaq") under the symbol "HUBG." The
Class A Common Stock was first traded on Nasdaq on March 13, 1996, concurrent
with the underwritten initial public offering of the Company's Class A Common
Stock at an initial price to the public of $14.00 per share (the "Offering").
Prior to the Offering, there was no established public trading market for the
Class A Common Stock. Set forth below are the high and low prices for shares of
the Class A Common Stock of the Company in 1996 from March 13, 1996, the date of
the Offering, through the end of the first quarter of 1996 and for each full
quarterly period thereafter in 1996.
1996
--------
High Low
---- ---
First Quarter (From March 13, 1996) $19 $14
Second Quarter 24 1/4 17 5/8
Third Quarter 22 5/8 16
Fourth Quarter 27 1/2 21 1/4
On March 24, 1997, there were approximately 41 stockholders of
record of the Class A Common Stock and, in addition, there were an estimated
3,325 beneficial owners of the Class A Common Stock whose shares were held by
brokers and other fiduciary institutions. On March 24, 1997, there were nine
holders of record of the Company's Class B common stock (the "Class B Common
Stock" together with the Class A Common Stock, the "Common Stock").
The Company was incorporated in 1995 and has never paid cash dividends
on either the Class A Common Stock or the Class B Common Stock. The declaration
and payment of dividends by the Company are subject to the discretion of the
Board of Directors. Any determination as to the payment of dividends will depend
upon the results of operations, capital requirements and financial condition of
the Company, and such other factors as the Board of Directors may deem relevant.
Accordingly, there can be no assurance that the Board of Directors will declare
or pay dividends on the shares of Common Stock in the future. The certificate of
incorporation of the Company requires that any cash dividends must be paid
equally on each outstanding share of Class A Common Stock and Class B Common
Stock.
9
Item 6. SELECTED FINANCIAL DATA
Selected Financial Data
(in thousands except per share data)
Years Ended December 31,
----------------------------------------------------
1992 1993 1994 1995 1996(1)
----------------------------------------------------
Statement of Operations Data:
Revenue $64,446 $73,123 $86,876 $81,408 $754,243
Purchased transportation 59,360 67,985 80,588 75,142 662,679
----------------------------------------------------
Net revenue 5,086 5,138 6,288 6,266 91,564
Costs and expenses 3,007 3,295 3,940 3,699 63,639
----------------------------------------------------
Operating income 2,079 1,843 2,348 2,567 27,925
Other income (expense) 96 96 58 71 (221)
----------------------------------------------------
Income before minority interest and taxes 2,175 1,939 2,406 2,638 27,704
Minority interest -- -- -- -- 16,366
----------------------------------------------------
Income before taxes 2,175 1,939 2,406 2,638 11,338
Income taxes 29 32 37 39 4,294
----------------------------------------------------
Net income (as reported) 2,146 1,907 2,369 2,599 7,044
----------------------------------------------------
Pro forma provision for additional income taxes(2) 841 744 925 1,016 241
----------------------------------------------------
Pro forma net income $ 1,305 $ 1,163 $ 1,444 $ 1,583 $ 6,803
----------------------------------------------------
Pro forma earnings per share $ 0.79 $ 0.70 $ 0.87 $ 0.95 $ 1.35
----------------------------------------------------
Pro forma weighted average shares outstanding 1,662 1,662 1,662 1,662 5,058
----------------------------------------------------
As of December 31,
----------------------------------------------------
1992 1993 1994 1995 1996(1)
----------------------------------------------------
Balance Sheet Data:
Working capital $ 110 $ 1,125 $ 1,457 $ 804 $ 15,877
Total assets 7,239 9,511 10,360 9,083 201,225
Long-term debt, excluding current portion -- -- -- -- 28,714
Stockholders' equity 576 1,553 1,769 1,165 46,124
(1) On March 18, 1996, Hub Group, Inc. purchased Hub City Terminals, Inc. ("Hub
Chicago") in a stock-for-stock acquisition through the issuance of 1,000,000
shares of the Company's Class A common stock and 662,296 shares of the Company's
Class B common stock. Hub Chicago has been accounted for similar to the pooling
of interests method of accounting and has been included in all periods presented
on a historical cost basis. Concurrent with the acquisition of Hub Chicago, the
Company completed the initial public offering of 4,261,250 shares of its Class A
common stock, with net proceeds to the Company of approximately $52,945,000.
Coincident with the initial public offering, a selling stockholder sold
1,000,000 shares of the Company's Class A common stock through a secondary
offering. The Company did not receive any net proceeds from the sale of the
shares by the selling stockholder. Concurrent with the initial public offering,
the Company acquired with cash a controlling interest in each of 27 operating
partnerships. On May 2, 1996, the Company acquired the rights to service the
customers of American President Lines Domestic Distribution Services. See the
Notes to the Company's Consolidated Financial Statements.
(2) Prior to March 18, 1996, the Company was an S corporation and not subject
to Federal corporate income taxes. On March 18, 1996, the Company changed its
status from an S corporation to a C corporation. The statement of operations
data reflects a pro forma provision for income taxes as if the Company were
subject to Federal and state corporate income taxes for all period presented.
The pro forma provision reflects a combined Federal and state tax rate of 40%.
See the Notes to the Company's Consolidated Financial Statements.
10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAPITAL STRUCTURE
Hub Group, Inc. was incorporated on March 8, 1995. On March 18, 1996,
Hub Group, Inc. purchased Hub City Terminals, Inc. ("Hub Chicago") in a stock-
for stock acquisition through the issuance of 1,000,000 shares of Class A common
stock and 662,296 shares of Class B common stock. Hub Chicago has been
accounted for similar to the pooling of interests method of accounting and has
been included in all periods presented on a historical cost basis.
Concurrent with the acquisition of Hub Chicago in March 1996, Hub Group,
Inc. completed the initial public offering of 4,261,250 shares of its Class A
common stock. Coincident with the initial public offering, a selling
stockholder sold 1,000,000 shares of Hub Group, Inc.'s Class A common stock
through a secondary offering.
BUSINESS COMBINATIONS
Concurrent with the initial public offering, Hub Group, Inc., together
with its wholly owned subsidiary, Hub Chicago, acquired a controlling interest
in each of 27 operating partnerships (collectively referred to as "Hub
Partnerships"). Prior to March 18, 1996, Hub Chicago and Hub Partnerships were
under common control and formed a network that collectively worked with
customers and vendors. On May 2, 1996, Hub Group, Inc. purchased the rights to
service the customers of American President Lines Domestic Distribution Services
("APLDDS"), a division of APL Land Transport Services, Inc, from its parent
American President Companies, Ltd.
The revenue of the acquired businesses is many multiples of the revenue
of Hub Chicago. As a result, consolidated revenue and operating expense for Hub
Group, Inc. and its subsidiaries (the "Company") increased dramatically in the
periods subsequent to March 17, 1996.
As a result of the APLDDS acquisition, the Company acquired the right to
service APLDDS customers, but did not assume any assets or liabilities
associated with that business. Furthermore, the Company hired only 36 of the
more than 200 employees in the APLDDS organization. The APLDDS business was
absorbed directly into the operations of Hub Chicago and Hub Partnerships and
management believes the associated incremental operating costs are significantly
less than the historical operating costs experienced by APLDDS. Management does
not track the incremental purchased transportation and operating costs
attributable to the acquired APLDDS business. Consequently, discussion of
results of operations excluding acquisitions is limited to comparisons of
revenue. Discussion of pro forma financial data reflects results of operations
as if Hub Group, Inc. had acquired Hub Partnerships and APLDDS as of January 1,
1995.
RESULTS OF OPERATIONS
Year Ended December 31, 1996, Compared to Year Ended December 31, 1995
Revenue
Revenue totaled $754.2 million for 1996, representing an increase of
826.5% over 1995. Without the acquisitions, Company revenues totaled $85.2
million for 1996 for an increase of 4.7% over 1995. The minor increase in
revenue without acquisitions is attributed principally to Hub Chicago's loss of
a portion of a significant customer's business. This consumer products
manufacturer moved the production of one of its major products to a facility
which is now being served by one of the operating partnerships that comprise Hub
Partnerships.
Pro forma revenue increased 5.3% to $938.9 million from $891.8 million in
1995. The 1995 pro forma revenue was impacted significantly by the addition of
the revenue reported by APLDDS. The business acquired from APLDDS on May 2,
1996, had been experiencing significant decline during 1995 and the first
quarter of 1996. This decline had a negative influence on the pro forma revenue
growth rate. Despite the declining trend, management believes the Company has
successfully transitioned and retained greater than 90% of the APLDDS business
that existed on May 2, 1996.
11
Excluding the revenue relating to APLDDS prior to the acquisition on May
2, 1996, Hub Chicago and Hub Partnerships, on a combined basis assuming Hub
Chicago had acquired Hub Partnerships on January 1, 1995, experienced a revenue
increase of 25.7% to $893.2 million in 1996 from $710.8 million in 1995. This
percentage increase is primarily attributable to strong growth in truckload
brokerage and logistics as well as the acquisition of the APLDDS business.
Intermodal revenues, excluding APLDDS from all periods, increased moderately on
a percentage basis.
Net Revenue
Net revenue as a percentage of revenue increased to 12.1% for 1996
compared to 7.7% in 1995. This increase is primarily a reflection of the higher
net revenue as a percentage of revenue that is experienced by Hub Partnerships
as compared to Hub Chicago. Hub Chicago has a larger proportion of high
volume/low margin accounts than does Hub Partnerships.
Pro forma net revenue as a percentage of revenue increased to 11.9% in
1996 from 11.3% in 1995. On a pro forma basis, net revenue as a percentage of
revenue for the APLDDS business was 7.3% and 4.1% for 1995 and the period
January 1, 1996 through May 1, 1996, respectively. Management believes that the
net revenue percentage on the transitioned APLDDS business has improved modestly
over the APLDDS 1995 pro forma net revenue percentage. The lower pro forma
percentages experienced by APLDDS causes the current year percentages to compare
favorably to the prior year percentages. This favorable pro forma comparison is
partially offset by the lower net revenue percentage experienced by the addition
of new logistics customers in late 1995 and early 1996.
Salaries and Benefits
Salaries and benefits increased to $43.9 million in 1996 from $2.5
million in 1995. Pro forma salaries and benefits increased to $55.9 million in
1996 from $50.4 million in 1995. APLDDS was a division of APL Land Transport
Services, Inc. ("APL") and consequently received much of its support services
from APL. In return for these services, APLDDS was assessed a management fee.
This arrangement had the effect of deflating salaries and benefits while
inflating selling, general and administrative expenses. As a result, salaries
and benefits reported by APLDDS in servicing their customers were lower as a
percentage of revenue than traditionally experienced by the Company. For 1995
and the period January 1, 1996 through May 1, 1996, salaries and benefits as a
percentage of revenue for APLDDS were 3.8% and 4.8%, respectively. Pro forma
salaries and benefits as a percentage of revenue increased to 6.0% for 1996 from
5.7% in 1995, which is partially attributed to the historical cost structure of
APLDDS. The Company's investment in additional personnel in 1996 also
contributed to this increase. These additional personnel were hired to handle
additional truckload brokerage and logistics business, to expand the local and
national sales forces and to provide the financial and administrative services
required for continued growth.
Selling, General and Administrative
Selling, general and administrative expenses increased to $17.1 million
in 1996 from $1.2 million in 1995. Pro forma selling, general and
administrative expenses decreased to $23.2 million in 1996 from $29.8 million in
1995. As a percentage of revenue these pro forma expenses were 2.5% in 1996 and
3.3% for 1995. As explained in "Salaries and Benefits," APLDDS received much of
its support services through a management fee arrangement with APL. This caused
the APLDDS historical selling, general and administrative expenses to be a
significantly greater percentage of revenue than the percentage traditionally
experienced by the Company. For 1995 and the period January 1, 1996, through
May 1, 1996, selling, general and administrative expenses as a percentage of
revenue for APLDDS were 7.3% and 6.0%, respectively.
Depreciation and Amortization
Depreciation and amortization expense increased to $2.6 million in 1996
from a negligible amount in 1995. Pro forma depreciation and amortization
increased to $3.3 million in 1996 from $3.1 million in 1995. As a percentage of
revenue, pro forma depreciation and amortization increased to 0.4% in 1996 from
0.3% in 1995.
12
Other Income (Expense)
Interest expense was $1.0 million in 1996 and zero in 1995. All of the
interest expensed in 1996 was incurred subsequent to March 17, 1996. Pro forma
interest expense increased to $1.3 million in 1996 from $1.2 million in 1995.
There are three primary components of interest expense. First, the
Company assumed or issued $13.2 million of five-year balloon notes in
conjunction with the acquisition of Hub Partnerships in March 1996. These notes
bear interest at an annual rate of 5.45%. Interest expense on these notes began
to decline in the third quarter of 1996 as discretionary payments were made.
Second, in conjunction with the acquisition of APLDDS in May 1996, the Company
issued notes for $6.0 million bearing interest at an annual rate of 6%. There
were no payments made on these notes in 1996. Third, the Company has borrowed
to purchase tractors as it continues its strategy of starting small drayage
operations to service portions of its own business in those areas where it is
needed to enhance customer service (see "Liquidity and Capital Resources"). The
annual rate of interest on these loans is determined at the time each tractor is
purchased at a rate equal to 3% over the two-year Treasury note rate.
Interest income was $0.8 million in 1996 and $0.1 million in 1995. Pro
forma interest income was $0.8 million in 1996 and $0.7 million in 1995.
Minority Interest
Minority interest was $16.4 million in 1996 and zero in 1995. On a pro
forma basis, minority interest was $17.4 million in 1996 and $11.7 million in
1995. Management estimates that 20% of the acquired APLDDS business has accrued
to Hub Chicago. To calculate a pro forma minority interest factor, it was
estimated that the minority interest will accrue its 70% ownership in Hub
Partnerships which operates 80% of the APLDDS business. As such, minority
interest as a percentage of income before minority interest and provision for
income taxes of 56% was applied to pro forma income before minority interest for
APLDDS for 1995 and the period January 1, 1996, through May 1, 1996.
On a pro forma basis, minority interest as a percentage of income before
minority interest and provision for income taxes was 61.0% for 1996 and 69.2%
for 1995. The higher minority interest percentage in 1995 was the result of the
significant loss reported by APLDDS combined with a lower pro forma minority
interest factor that was applied to that loss as compared to the factor applied
to the rest of the Company's income.
The Company owns 100% of Hub Chicago. The Company acquired 30% of 26
operating partnerships and approximately 21% of another operating partnership
(collectively Hub Partnerships). On August 1, 1996, the Company purchased the
remaining 70% of Hub City Tennessee, L.P. ("Hub Tennessee"). On December 12,
1996, the Company purchased the remaining 70% minority interest in Hub City
North Central, L.P. ("Hub North Central").
Income Taxes
Income taxes were $4.3 million in 1996 and negligible in 1995. Other
than an insignificant provision for Illinois replacement tax, the Company had no
provision for income taxes prior to March 18, 1996, as the Company was a
federally non-taxable subchapter S corporation. The Company is providing for
income taxes at an effective rate of 40% for all income subsequent to March 17,
1996.
Pro Forma Provision For Additional Income Taxes
Additional pro forma income taxes were $0.2 million in 1996 and $1.0
million in 1995. Additional pro forma provision for income taxes are shown to
provide an assumed effective federal and state income tax rate of 40% of income
before taxes for periods prior to March 18, 1996.
Pro Forma Net Income
Pro forma net income (pro forma only regarding income taxes) increased to
$6.8 million in 1996 from $1.6 million in 1995. Pro forma net income (pro forma
to provide for income taxes and for the acquisitions of
13
Hub Partnerships and APLDDS) increased to $6.7 million in 1996 from $3.1 million
in 1995. The increase in pro forma net income, which gives effect to the
Company's acquisitions, is 113.3% when comparing 1996 to 1995. This large
increase was significantly influenced by the losses incurred by APLDDS before
being acquired by the Company.
Pro Forma Earnings Per Share
Pro forma earnings per share (pro forma only to provide for income taxes)
increased to $1.35 in 1996 from $0.95 in 1995. Pro forma earnings per share
(pro forma to provide for income taxes and for the Company's acquisitions)
increased to $1.15 in 1996 from $0.59 in 1995. The increase in pro forma
earnings per share, which gives effect to the Company's acquisitions, is 94.9%.
This large increase was significantly influenced by the losses incurred by
APLDDS before being acquired by the Company.
Year Ended December 31, 1995, Compared to Year Ended December 31, 1994
Revenue
Revenue decreased 6.3% to $81.4 million in 1995 from $86.9 million in
1994. Approximately 45% of the decrease resulted from a significant customer
moving it headquarters and distribution facility out of Hub Chicago's territory
and into the territory of one of the partnerships that comprise Hub Partnerships
at the end of the fourth quarter of 1994. A slowdown in the economy in 1995
reduced shipments by the Company's customers. However, Hub Chicago had been
increasingly successful in passing along to the customer, where appropriate,
additional trailer storage and detention charges, many of which were formerly
not billed by the Company, thus offsetting to some extent the effects of the
economic slowdown.
Net Revenue
Net revenue as a percentage of revenue increased to 7.7% in 1995 compared
to 7.2% in 1994. In 1995, the Company was able to negotiate reduced freight
charges with vendors due to the weakened demand for freight transportation.
Management also believes that net revenue as a percentage of revenue in 1995
increased as a result of the continued improvement in the Hubs' ability to
control equipment through the network the Company shares with Hub Partnerships.
The Company had also been successful in reducing trailer storage and detention
charges that it previously absorbed.
Salaries and Benefits
Salaries and benefits decreased $0.1 million but increased slightly a
percentage of revenues to 3.0% of revenues in 1995 compared to 2.9% of revenues
in 1994. This increase in salaries and benefits as a percentage of revenue was
a result of a decrease in revenue. Staffing levels, which increased in the
third and fourth quarters of 1994 to accommodate volume growth and service
levels required by customers, decreased during 1995 in response to reduced
revenue levels.
Selling, General and Administrative
Selling, general and administrative expenses remained constant at 1.5% of
revenues in 1994 and 1995.
Depreciation and Amortization
Depreciation and amortization expense was negligible in 1994 and 1995.
Other Income (Expense)
Interest income was negligible in 1994 and 1995.
Income Taxes
Income taxes were negligible in 1994 and 1995.
14
Pro Forma Provision For Additional Income Taxes
Additional pro forma income taxes were $1.0 million in 1995 and $0.9
million in 1994. Additional pro forma provision for income taxes are shown to
provide an assumed effective federal and state income tax rate of 40% of income
before taxes.
Pro Forma Net Income
Pro forma net income (pro forma only regarding income taxes) increased to
$1.6 million in 1995 from $1.4 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company had several significant transactions that
affected liquidity. These transactions were the initial public offering of the
Company's Class A common stock and the subsequent acquisition of a controlling
interest in Hub Partnerships, the APLDDS acquisition and the purchase of the
remaining 70% minority interest in Hub Tennessee and Hub North Central. These
items represented a cash inflow of $52.9 million and cash outflows of $35.5
million, $2.0 million, $2.5 million and zero, respectively. Related to the
acquisitions and purchases, the Company assumed long-term debt, including
current portions, of $35.9 million, approximately $12.5 million of which are
five-year balloon notes due in March of 2001, bearing interest at an annual rate
of 5.45%. Approximately $6.0 million bears interest at 6% and is due in three
equal annual installments beginning May 1997. Approximately $15.0 million is
due on January 1, 1998, and bears interest at an annual rate of 7%. Immediately
prior to the initial public offering and Hub Partnership acquisition, Hub
Chicago issued five-year balloon notes, due in March 2001, to its shareholders
for approximately $0.7 million, bearing interest at an annual rate of 5.45%. An
additional $1.7 million of miscellaneous debt was assumed in connection with the
acquisition of Hub Partnerships. The acquisitions resulted in the recognition
of a $12.8 million deferred tax asset, which will offset cash payments for taxes
ratably over the next 15 years. The resulting $42.8 million of goodwill from
the acquisitions and the minority interest purchases represents a tax deductible
expense to be recognized over the next 15 years.
Capital expenditures for 1996 were approximately $6.8 million. Capital
expenditures are principally made to enhance or expand the Company's information
systems and network capabilities and, most recently, to acquire a number of
tractors to support Company-owned drayage operations. Part of the Company's
strategy is to supplement third party drayage operations with Company-owned
tractors to service portions of the Company's intermodal business in those
locations where drayage service is limited or where customers require an
enhanced level of service which cannot be competitively accommodated by a third-
party provider.
As of December 31, 1996, the Company owned 83 tractors as part of
Company-owned drayage operations for the operating companies located in
Missouri, Michigan, New Jersey, Georgia, Kansas and Illinois. The Company-owned
drayage operation in Missouri has been functioning since 1994. The Michigan
operation started in the second quarter of 1996, the New Jersey and Illinois
operations started in the third quarter of 1996 and the Georgia and Kansas
operations started in the fourth quarter of 1996. Of the 83 tractors in
operation at December 31, 1996, 62 were acquired in 1996 at a cost of
approximately $65,000 each. Ten of these tractors were purchased with cash and
the remainder were financed at a rate of 3% over the two-year Treasury note rate
after an initial down payment of 10%.
The Company maintains a bank line of credit for $5.0 million. The
interest rate is set at the bank's discretion at a rate less than or equal to
the bank's prime rate. At December 31, 1996, the rate was 7.75%. As of
December 31, 1996, the unused and available portion of this credit line was $5.0
million. Although there are no assurances, management believes it can obtain an
additional line of credit, if necessary.
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
15
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.
Revenue
Management estimates that in 1997 revenue growth will decline from
current levels. This estimate is based on management's opinion that the
dramatic growth in the truckload brokerage and logistics businesses experienced
in 1996 provides too large of a revenue base to sustain the same growth rate in
1997. Furthermore, management cannot predict an acquisition similar to APLDDS
in 1997.
Net Revenue
Historically, the Company contracted for all its drayage needs with 100%
of the attendant costs being classified as purchased transportation. As the
Company sets up its own drayage operations, the salaries and benefits for non-
driver employees as well as general and administrative expenses are classified
below the net revenue line as operating expenses. Assuming that the Company
fulfills its drayage needs at or below the previously contracted cost, the
classification of a portion of the cost below net revenue will cause net revenue
as a percentage of revenue related to the Company's drayage operations to
increase. Management expects fluctuations in the net revenue percentage from
quarter-to-quarter caused by changes in business mix, changes in highway
brokerage margins, changes in logistics business margins, changes in trailer and
container capacity, changes in vendor pricing, changes in intermodal industry
growth and changes in accounting estimates. Some of the Company's rail vendors
have increased rates in the first quarter of 1997. The Company may not be able
to pass some or all of these rate increases along to its customers.
Salaries and Benefits
It is anticipated that salaries and benefits as a percentage of revenue
could fluctuate from quarter-to-quarter as there are timing differences between
revenue increases and changes in levels of staffing. Factors that could affect
the percentage from staying in the recent historical range are revenue growth
rates significantly higher or lower than forecasted, a management decision to
invest in additional personnel to stimulate new or existing businesses or
changes in customer requirements that result in a higher cost of labor per move.
Depreciation and Amortization
Management estimates that as a percentage of revenue, depreciation and
amortization will remain at current levels or increase in the future. Factors
that could cause an increase in the percentage are increased leasehold
improvement amortization as operating companies transition to larger facilities,
increased software amortization on planned implementation of new packages in the
truckload brokerage and logistics businesses and increased goodwill amortization
that would arise if the Company exercised any of its options to purchase the
remaining minority interest in any of its operating partnerships.
Other Income (Expense)
Interest expense in 1997 will increase significantly due to the issuance,
on December 12, 1996, of a note for approximately $15.0 in connection with the
purchase of the remaining 70% minority interest in Hub North Central. Interest
expense related to tractor purchases will continue to increase as the Company
continues expansion into Company-owned drayage operations. Management estimates
interest expense as it relates to the balloon notes assumed or issued in
connection with the acquisition of Hub Partnerships will continue to decline on
a quarterly basis as the various operating partnerships continue to make
discretionary principal payments. Interest expense related to the notes issued
in conjunction with the acquisition of APLDDS will decline from current levels
in May of 1997, 1998 and 1999, coincident with the required principal payment
terms.
Management estimates that interest income will likely decrease from
current levels. Factors that could cause such a decrease are the possible use
of cash to (i) make payments on the balloon notes, (ii) make payments on
16
the APLDDS notes, (iii) make payments on the note issued to acquire the
remaining interest in Hub North Central, (iv) make down payments on tractors,
(v) fund working capital needs for those operating companies starting their own
Company-owned drayage operations, (vi) fund the purchase of the remaining
minority interest in any of its operating partnerships and (vii) increase the
Company's capital investment in an international joint venture.
Minority Interest
Factors that could have a material impact and result in minority interest
percentages of income before minority interest to be outside the historical
range are (i) the exercise of any of the Company's options to purchase the
remaining minority interest in any of its operating companies and (ii)
disproportionate changes in the profitability of businesses between those which
are owned 100% by the Company and those which are owned less than 100% by the
Company. The purchase of the remaining minority interest in Hub North Central,
assuming all other factors affecting minority interest are equal, should cause
minority interest as a percentage of income before minority interest to decline.
Net Income
Management expects that net income growth rates after May 1997 will be
significantly less than the pro forma net income growth rates experienced since
May 1996. The Company acquired APLDDS in May 1996 and management cannot predict
a similar acquisition in 1997.
Earnings Per Share
Management expects that earnings per share growth rates after May 1997
will be significantly less than the pro forma net income growth rates
experienced since May 1996. The Company acquired APLDDS in May 1996 and
management cannot predict a similar acquisition in 1997.
Liquidity and Capital Resources
The Company expects to continue to pay down, as a prepayment, the balloon
notes from time to time as cash availability permits. The Company expects to
meet all other liabilities as they become due.
Management is considering additional sites for Company-owned tractors,
and it is anticipated that Company-owned drayage operations, in total, will
require the acquisition of approximately 110 tractors in 1997. The Company may
purchase up to 20 of these tractors with cash with the remainder being financed.
Management estimates that each start-up of a Company-owned drayage operation
requires working capital of $0.3 million to $0.4 million above and beyond the
cost of acquiring the tractors. Management estimates that an additional three
to five locations may start Company-owned drayage operations by the end of 1997.
Management intends to carefully evaluate existing and new drayage operations
before committing additional capital resources.
The Company has the continuing option, exercisable any time after the
President currently associated with an operating partnership ceases to be an
employee, to purchase the remaining interest in that partnership. The future
exercise of such options could result in the need for significant funds. Those
funds may come from existing cash, third-party debt, other financing or any
combination thereof.
The Company believes that existing cash, cash provided by operations and
cash available under a line of credit and its other financing commitment will be
sufficient to meet the Company's short-term working capital and capital
expenditure needs. The Company is currently negotiating a $15.0 million line of
credit. Although no assurances can be made, it is anticipated that this line of
credit will become effective in 1997. The Company believes that the
aforementioned items are sufficient to meet its anticipated long-term working
capital, capital expenditure and debt repayment needs through at least the year
2001.
17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants 19
Consolidated Balance Sheets--December 31, 1996 and December 31, 1995 20
Consolidated Statements of Operations--Years ended December 31, 1996,
December 31, 1995 and December 31, 1994 21
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1996, December 31, 1995 and December 31, 1994 22
Consolidated Statements of Cash Flows--Years ended December 31, 1996,
December 31, 1995 and December 31, 1994 23
Notes to Consolidated Financial Statements 24
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Hub Group, Inc.:
We have audited the accompanying consolidated balance sheets of Hub
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements and schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Hub
Group, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results
of its operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule on page S-1 is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 6, 1997
19
HUB GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
--------------------------------
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2 $ 13,893
Accounts receivable, net
Trade 6,197 114,125
Affiliate 2,376 -
Prepaid expenses and other current assets 147 3,532
---------- -----------
TOTAL CURRENT ASSETS 8,722 131,550
PROPERTY AND EQUIPMENT, net 137 14,058
GOODWILL, net - 42,255
DEFERRED TAXES - 11,357
OTHER ASSETS 224 2,005
---------- -----------
TOTAL ASSETS $ 9,083 $ 201,225
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 5,620 $ 94,884
Affiliate 1,774 -
Other 89 8,144
Accrued expenses
Payroll 286 4,988
Other 149 3,186
Deferred taxes - 1,307
Current portion of long-term debt - 3,164
---------- -----------
TOTAL CURRENT LIABILITIES 7,918 115,673
LONG-TERM DEBT, EXCLUDING CURRENT PORTION - 28,714
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST - 10,714
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 26 59
Additional paid-in capital 18 55,083
Purchase price in excess of predecessor basis - (25,764)
Tax benefit of purchase price in excess of
predecessor basis - 10,306
Retained earnings 1,121 6,440
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,165 46,124
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,083 $ 201,225
========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
20
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended December 31,
------------------------------------------------------
1994 1995 1996
---------- ----------- --------------
REVENUE:
Trade $ 74,991 $ 66,696 $ 750,784
Affiliate 11,885 14,712 3,459
---------- ----------- --------------
Total revenue 86,876 81,408 754,243
PURCHASED TRANSPORTATION 80,588 75,142 662,679
---------- ----------- --------------
Net revenue 6,288 6,266 91,564
COSTS AND EXPENSES:
Salaries and benefits 2,556 2,457 43,913
Selling, general and administrative 1,345 1,196 17,147
Depreciation and amortization 39 46 2,579
---------- ----------- --------------
Total costs and expenses 3,940 3,699 63,639
Operating income 2,348 2,567 27,925
---------- ----------- --------------
OTHER INCOME (EXPENSE):
Interest expense - - (996)
Interest income 58 71 786
Other, net - - (11)
---------- ----------- --------------
Total other income (expense) 58 71 (221)
INCOME BEFORE MINORITY INTEREST AND
PROVISION FOR INCOME TAXES 2,406 2,638 27,704
---------- ----------- --------------
MINORITY INTEREST - - 16,366
---------- ----------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,406 2,638 11,338
PROVISION FOR INCOME TAXES 37 39 4,294
---------- ----------- --------------
NET INCOME $ 2,369 $ 2,599 $ 7,044
========= ========== =============
PRO FORMA PROVISION FOR ADDITIONAL INCOME
TAXES 925 1,016 241
---------- ----------- --------------
PRO FORMA NET INCOME $ 1,444 $ 1,583 $ 6,803
========= ========== =============
PRO FORMA EARNINGS PER SHARE $ 0.87 $ 0.95 $ 1.35
========= ========== =============
PRO FORMA WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 1,662 1,662 5,058
========= ========== =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
21
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended December 31, 1996
(in thousands, except shares)
Tax Benefit
Purchase of Purchase
Price in Price
Common Stock Additional Excess of in Excess of Total
------------------- Paid-in Predecessor Predecessor Retained Stockholders'
Shares Amount Capital Basis Basis Earnings Equity
--------- ------ ---------- ----------- ------------ -------- -------------
Balance at January 1, 1994 200 $ 25 $ 17 $ - $ - $ 1,512 $ 1,554
Net income - - - - - 2,369 2,369
Distributions to stockholders - - - - - (2,154) (2,154)
--------- ---- ------- -------- ------- ------- --------
Balance at December 31, 1994 200 25 17 - - 1,727 1,769
Net income - - - - - 2,599 2,599
Distributions to stockholders - - - - - (3,205) (3,205)
Issuance of common stock 100 1 1 - - - 2
--------- ---- ------- -------- ------- ------- --------
Balance at December 31, 1995 300 26 18 - - 1,121 1,165
Net income - - - - - 7,044 7,044
Distributions to stockholders - (25) (17) - - (1,725) (1,767)
Issuance of common stock
in acquisition 1,662,296 - - - - - -
Retirement of shares acquired (200) - - - - - -
Sale of common stock in
initial public offering, net 4,261,250 59 55,083 - - - 55,142
Acquisition of general
partnership interests - - - (25,764) 10,306 - (15,458)
Purchase of common stock (100) (1) (1) - - - (2)
--------- ---- ------- -------- ------- ------- --------
Balance at December 31, 1996 5,923,546 $ 59 $55,083 $(25,764) $10,306 $ 6,440 $ 46,124
========= ==== ======= ======== ======= ======= ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
22
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
-----------------------------------
1994 1995 1996
-------- -------- --------
Cash flows from operating activities:
Net income $ 2,369 $ 2,599 $ 7,044
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 39 46 2,786
Deferred taxes - - 2,722
Minority interest - - 16,366
Loss(gain) on sale of assets 3 - (59)
Changes in working capital, net of effects of purchase transactions:
Accounts receivable, net (141) (757) (29,976)
Prepaid expenses and other current assets (21) 14 (1,801)
Accounts payable 626 (629) 20,851
Accrued expenses 7 (44) 2,549
Other assets 133 48 (1,153)
------- ------- --------
Net cash provided by operations 3,015 1,277 19,329
------- ------- --------
Cash flows from investing activities:
Cash used in acquisitions, net - - (37,459)
Purchase of minority interest - - (2,513)
Purchases of property and equipment, net (31) (98) (6,815)
------- ------- --------
Net cash used in investing activities (31) (98) (46,787)
------- ------- --------
Cash flows from financing activities:
Proceeds from sale of common stock in initial public offering, net - - 52,945
Proceeds from sale of common stock - 2 -
Purchase of common stock - - (2)
Distributions to stockholders (2,154) (3,205) (1,104)
Distributions to minority interest - - (5,814)
Payments on long-term debt - - (7,271)
Proceeds from issuance of long-term debt - - 2,595
------- ------- --------
Net cash provided by (used in) financing activities (2,154) (3,203) 41,349
------- ------- --------
Net increase (decrease) in cash 830 (2,024) 13,891
Cash, beginning of period 1,196 2,026 2
------- ------- --------
Cash, end of period $ 2,026 $ 2 $ 13,893
======= ======= ========
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ - $ - $ 117
Income taxes 32 41 2,344
Non-cash investing and financing activities:
Note payable issued for purchase of minority interest $ - $ - $ 14,970
Notes payable issued as distributions to stockholders - - 663
The accompanying notes to consolidated financial statements are an integral part
of these statements.
23
HUB GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Description of Business and Summary of Significant Accounting
Policies
Business: Hub Group, Inc. and its subsidiaries (the "Company") provide
intermodal transportation services utilizing third party arrangements with
railroads and drayage companies. The Company also arranges for transportation of
freight by truck and performs logistics services.
Principles of Consolidation: The consolidated financial statements include the
accounts of Hub Group, Inc. and all entities in which the Company has more than
a 50% equity ownership or otherwise exercises unilateral control. All
significant intercompany balances and transactions have been eliminated.
Cash and cash equivalents: The Company considers as cash equivalents all highly
liquid instruments with an original maturity of three months or less. Checks
outstanding, net, of approximately $474,000 and $1,548,000 at December 31, 1995
and 1996, respectively, are included in accounts payable.
Receivables: The Company's reserve for uncollectible accounts receivable was
approximately $125,000 and $1,355,000 at December 31, 1995, and 1996,
respectively.
Property and Equipment: Property and equipment are stated at cost. Depreciation
of property and equipment is computed using the straight-line and various
accelerated methods at rates adequate to depreciate the cost of applicable
assets over their expected useful lives: buildings and improvements 15 to 40
years; leasehold improvements the shorter of useful life or lease term; computer
equipment and software 3 to 5 years; furniture and equipment 3 to 10 years; and
transportation equipment and automobiles 3 to 12 years. Direct costs related to
internally developed software projects are capitalized and amortized over the
expected useful life on a straight-line basis not to exceed five years,
commencing when the asset is placed into service. Maintenance and repairs are
charged to operations as incurred and major improvements are capitalized. The
cost of assets retired or otherwise disposed of and the accumulated depreciation
thereon are removed from the accounts with any gain or loss realized upon sale
or disposal charged or credited to operations.
Goodwill: Goodwill is amortized on the straight-line method over 40 years. On
an ongoing basis, the Company estimates the future undiscounted cash flows
before interest of the operating units to which goodwill relates in order to
evaluate impairment. If impairment exists, the carrying amount of the goodwill
is reduced by the estimated shortfall of cash flows. Goodwill amortization
expense was $0, $0 and approximately $525,000 for the years ended December 31,
1994, 1995, and 1996, respectively.
Concentration of Credit Risk: The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company places its cash and
temporary investments with high quality financial institutions. At times, such
investments may be in excess of the FDIC insurance limit. Temporary investments
are valued at the lower of cost or market and at the balance sheet dates
approximate fair market value. The Company primarily serves customers located
throughout the United States with no significant concentration in any one
region. One customer in the food industry accounted for approximately 28% and
30% of revenue in 1994 and 1995, respectively. The same customer accounted for
less than 10% of revenue in 1996. Another customer in the consumer household
products industry accounted for 11.2% of revenue in 1995. This customer
accounted for less than 10% of revenue in 1994 and 1996. The Company reviews a
customer's credit history before extending credit. In addition, the Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable risk is limited.
Revenue Recognition: Revenue is recognized based on relative transit times and
expenses are recognized as incurred. The Company, in providing its services,
contracts with transportation providers, principally railroads, drayage
companies and truckload carriers, for shipment of customers' freight, the costs
of which are passed directly through to clients. Accordingly, revenues include
the charges for purchased transportation services together with the Company's
fees. Purchased transportation consists primarily of the cost of transportation
and transportation equipment, both provided by third party carriers. The
purchased transportation costs are deducted from revenues to derive net revenues
which then include only the Company's fees.
24
Income Taxes: Prior to March 18, 1996, the Company had elected to be taxed as an
S corporation under the Internal Revenue Code. The income of an S corporation is
taxable to its stockholders rather than the Company itself. Income tax expense
incurred prior to March 18, 1996, represents Illinois replacement tax. On March
18, 1996, the Company became a taxable C corporation. The pro forma provision
for additional income taxes was calculated assuming the Company was operating as
a taxable C corporation since January 1, 1994. The Company accounts for certain
income and expense items differently for financial reporting and income tax
purposes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities applying enacted statutory tax rates in effect for the year in which
the differences are expected to reverse.
Earnings Per Share: Earnings per share are based on the average quarterly
weighted average number of Class A and Class B shares of common stock
outstanding, adjusted for the assumed conversion of dilutive stock options. In
computing the per share effect of assumed conversion, funds which would have
been received from the exercise of options, including tax benefits assumed to be
realized, are considered to have been used to purchase shares at current market
prices, and the resulting net additional shares are included in the calculation
of weighted average shares outstanding.
Distributions: During the period prior to March 18, 1996, the Company operated
as an S corporation and made periodic distributions of income to its
stockholders which are reflected in the accompanying statements of stockholders'
equity.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
Reclassifications: Certain items previously reported have been reclassified to
conform with the 1996 presentation.
NOTE 2. Capital Structure
On March 8, 1995, Hub Group, Inc. was incorporated and issued 100
shares of Class A common stock to the sole incorporator. On March 18, 1996, Hub
Group, Inc. purchased Hub City Terminals, Inc. ("Hub Chicago") in a stock-for-
stock acquisition through the issuance of 1,000,000 shares of the Company's
Class A common stock and 662,296 shares of the Company's Class B common stock.
Hub Chicago has been accounted for similar to the pooling of interests method of
accounting and has been included in all periods presented on a historical cost
basis.
Concurrent with the acquisition of Hub Chicago in March 1996, the
Company completed the initial public offering of 4,261,250 shares of its Class A
common stock, with net proceeds to the Company of approximately $52,945,000.
Coincident with the initial public offering, a selling stockholder sold
1,000,000 shares of the Company's Class A common stock through a secondary
offering. The Company did not receive any net proceeds from the sale of the
shares by the selling stockholder.
Concurrent with the initial public offering, Hub Group, Inc., together
with its new wholly owned subsidiary, Hub Chicago, acquired with cash a
controlling interest in each of 27 operating partnerships (collectively referred
to as "Hub Partnerships"). The combined financial statements of Hub
Partnerships, the predecessor to the majority of the business of the Company,
are included under Item 14 of the Company's Form 10-K, filed with the Securities
and Exchange Commission.
25
NOTE 3. Business Combinations
On March 18, 1996, the Company acquired a controlling interest in Hub
Partnerships for a total purchase price of approximately $43,309,000 in cash.
The purchase price of these acquisitions was allocated to the assets acquired
and liabilities assumed based on the fair value at the date of acquisition using
the purchase method of accounting.
The portion of the difference between fair value and historical cost
of individual assets acquired and liabilities assumed attributable to interests
acquired by the Company from non-control group stockholders was recorded at fair
market value. This resulted in goodwill of approximately $17,207,000. The
remaining portion of the difference between fair value and historical cost
attributable to interests acquired from control group stockholders,
approximately $25,764,000, has been charged to equity as purchase price in
excess of predecessor basis.
In connection with the purchase of the controlling interest in Hub
Partnerships, approximately $10,306,000 has been recorded as a deferred tax
benefit utilizing an assumed effective tax rate of 40% representing the tax
effect of the purchase price in excess of predecessor basis, with the
corresponding credit recorded as an increase to equity.
On May 2, 1996, the Company purchased the rights to service the
customers of American President Lines Domestic Distribution Services, a division
of APL Land Transport Services, Inc., for approximately $8,000,000. The
$8,000,000 was financed with $2,000,000 in cash and $6,000,000 in notes. The
notes bear interest at an annual rate of 6% with three equal annual principal
payments due beginning May 2, 1997. The acquisition was recorded using the
purchase method of accounting resulting in goodwill of approximately $8,090,000.
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 following summarizes the effects of businesses acquired and
accounted for as purchases in 1996 as if they had been acquired as of January 1,
1995:
(Unaudited)
Years Ended December 31,
-------------------------
1995 1996
-------------------------
(000's)
Revenue as reported $ 81,408 $ 754,243
Revenue of purchased business for
period prior to acquisitions,
net of eliminations 810,343 184,660
-------------- ----------
Pro forma revenue $ 891,751 $ 938,903
-------------- ----------
Net income as reported $ 2,599 $ 7,044
Net income (loss) of purchased
businesses for period prior to
acquisitions 920 (260)
Adjustment for goodwill amortization (383) (96)
-------------- ----------
Pro forma net income $ 3,136 $ 6,688
-------------- ----------
Earnings per share as reported $ 0.95 $ 1.35
Effect of purchased businesses prior to
acquisitions (0.36) (0.20)
-------------- ----------
Pro forma earnings per share $ 0.59 $ 1.15
-------------- ----------
26
Business acquisitions which involved the use of cash were accounted for as
follows:
Year Ended
December 31,
1996
-----------------
(000's)
Accounts receivable $ 75,576
Prepaid expenses and other current assets 1,584
Property and equipment 9,308
Goodwill 25,297
Deferred tax benefit, net 10,575
Other assets 628
Accounts payable (74,694)
Accrued expenses (5,190)
Long-term debt (20,921)
Minority interest (162)
Purchase price in excess of predecessor basis 25,764
Tax benefit of purchase price in excess of predecessor basis (10,306)
-----------------
Cash used in acquisitions, net $ 37,459
-----------------
NOTE 4. Purchase of Minority Interest
On August 1, 1996, the Company purchased the remaining 70% minority
interest in Hub City Tennessee, L.P. for approximately $2,513,000 in cash. On
December 12, 1996, the Company purchased the remaining 70% minority interest in
Hub City North Central, L.P. in exchange for a note for approximately
$14,970,000, bearing interest at an annual rate of 7%. The entire purchase
price of each acquisition was recorded as goodwill. See Note 11.
NOTE 5. Property and Equipment
Property and equipment consist of the following:
December 31,
--------------------------------
1995 1996
--------------------------------
(000's)
Land $ - $ 92
Building and improvements - 841
Leasehold improvements 17 629
Computer equipment and software 478 7,258
Furniture and equipment 221 3,419
Transportation equipment and automobiles 29 4,541
--------------------------------
745 16,780
Less: Accumulated depreciation and amortization (608) (2,722)
---------------------------------
PROPERTY AND EQUIPMENT, net $ 137 $ 14,058
--------------------------------
27
NOTE 6. Income Taxes
The following is a reconciliation of the Company's effective tax
rate to the federal statutory tax rate:
Year Ended
December 31,
1996
------------------------
U.S. federal statutory rate 34.0%
State taxes, net of federal benefit 6.0
Income earned as
non-taxable Subchapter S
corporation prior to
March 18, 1996 (2.1)
------------------------
Net effective rate 37.9%
------------------------
The following is a summary of the Company's provision for income
taxes:
Year Ended
December 31,
1996
------------------------
(000's)
Current
Federal $ 1,336
State and local 236
------------------------
1,572
------------------------
Deferred
Federal 2,314
State and local 408
------------------------
2,722
-----------------------
Total provision $ 4,294
-----------------------
The following is a summary of the Company's deferred tax assets and
liabilities:
December 31,
1996
------------------------
(000's)
Reserve for uncollectible accounts receivable $ 152
Accrued compensation 206
------------------------
Current deferred tax asset 358
Income tax basis in excess of financial basis of
goodwill 11,845
-----------------------
Total deferred tax asset $ 12,203
-----------------------
Prepaids $ (43)
Receivables (1,622)
------------------------
Current deferred tax liability (1,665)
Property and equipment (293)
Goodwill (195)
------------------------
Long-term deferred tax liability (488)
------------------------
Total deferred tax liability $ (2,153)
------------------------
28
NOTE 7. Long-Term Debt and Financing Arrangements
Fair value approximates book value at the balance sheet dates.
December 31,
-------------------------
1995 1996
-------- -------
(000's)
Installment notes payable due through 2000, monthly
installments ranging from $325 - $16,898, including
interest, ranging from 7.9% to 12%, collateralized by
certain equipment $ - $ 2,976
Unsecured balloon notes, interest compounded annually
at 5.45%, interest and principal due March, 2001 (see Note 11) - 7,533
Mortgage note payable due in 1998 with monthly installments of
$2,381, including interest at 8.5%, collateralized by certain
property - 206
Notes payable due in three equal annual principal payments of
$2,000,000 beginning on May 2, 1997, interest is due at the
time the principal is paid at 6% compounded annually - 6,000
Note payable due January 1, 1998, with interest at an annual
rate of 7% (see Note 11) - 14,970
Capital lease obligations, collateralized by certain equipment - 193
------- ------
Total long-term debt - 31,878
Less current portion - (3,164)
------- ------
$ - $28,714
------- ------
Aggregate principal payments, in thousands, due subsequent to December
31, 1996, are as follows:
1997 $ 3,164
1998 18,141
1999 2,772
2000 268
2001 7,533
------
$31,878
------
On March 18, 1996, the Company assumed a line of credit for $5,000,000
which was unused at December 31, 1996. At December 31, 1996, the interest rate
was 7.75%. The interest rate is set at the bank's discretion at a rate less than
or equal to the bank's prime rate. Borrowings are secured by certain assets. The
line of credit has no expiration date. In October 1996, the Company authorized
the issuance of a standby letter of credit for $1,000,000, which has no
expiration date.
NOTE 8. Rental Expense and Lease Commitments
Minimum annual rental commitments, in thousands, at December 31, 1996,
under noncancellable operating leases, principally for real estate and
equipment, are payable as follows:
1997 $2,251
1998 1,878
1999 1,389
2000 999
2001 732
2002 383
-----
$7,632
-----
29
Total rental expense was approximately $100,000, $121,000 and
$1,896,000 for 1994, 1995 and 1996, respectively. Many of the leases contain
renewal options and escalation clauses which require payments of additional rent
to the extent of increases in the related operating costs.
NOTE 9. Stock-Based Compensation Plan
Concurrent with the initial public offering the Company adopted a
Long-Term Incentive Plan (the "1996 Incentive Plan"). The number of shares of
Class A Common Stock reserved for issuance under the 1996 Incentive Plan was
450,000. Under the 1996 Incentive Plan, stock options, and stock appreciation
rights, restricted stock and performance units may be granted for the purpose of
attracting and motivating key employees and non-employee directors of the
Company. Concurrent with the adoption of the Incentive Plan the Company granted
326,500 options to key employees and 36,000 options to non-employee directors.
All options granted have an exercise price of $14.00 per share, the initial
public offering price. The options granted to key employees vest ratably over a
five-year period and expire 10 years after the date they were granted. The
options granted to the non-employee directors vest ratably over a three-year
period and expire 10 years after the date of grant. As of December 31, 1996,
none of the options granted have vested. The Company canceled 5,000 options
during 1996. There were 92,500 shares available to be granted as of December 31,
1996.
The Company currently utilizes Accounting Principles Board Opinion No.
25 in its accounting for stock options. In October, 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123 ("Statement 123"), "Accounting for Stock-based Compensation." The
accounting method as provided in the pronouncement is not required to be
adopted; however, it is encouraged. The Company is not adopting the accounting
provisions of Statement 123. Had the Company accounted for its stock options in
accordance with Statement 123, pro forma net income and pro forma earnings per
share would have been approximately $6,599,000 and $1.30 for the year ended
December 31, 1996. The pro forma disclosure is not likely to be indicative of
pro forma results which may be expected in future years because of the fact that
options vest over several years, pro forma compensation expense is recognized as
the options vest and additional awards may also be granted.
For purposes of determining the pro forma effect of these options, the
fair value of each option is estimated on the date of grant based on the Black-
Scholes option pricing model assuming no dividend yield, a risk free interest
rate of 6.5%, a volatility factor of 25.0% and an expected life of 6.0 years.
The weighted average fair value of options granted under the Company's 1996
Incentive Plan for the year ended December 31, 1996, was $5.54.
NOTE 10. Profit-Sharing Plan
The Company has numerous profit-sharing plans and trusts under section
401(k) of the Internal Revenue Code. Generally, for every dollar the employee
contributes, the Company will contribute an additional $.20 up to $100. In
addition, the Company may make a profit sharing contribution at its discretion.
Historically, the Company has contributed an amount equal to 3% of each
participant's compensation up to a maximum of $4,500. The Company's
contributions to the Plan were approximately $57,000, $50,000 and $704,000 for
1994, 1995 and 1996, respectively.
NOTE 11. Related Party Transactions
In connection with the acquisition of a controlling interest in each
of the Hub Partnerships, the Company paid cash to the Class B Common Stock
("Class B") stockholders, some of whom are officers of the Company, as well as
officers of the Company who are not Class B stockholders totaling approximately
$16,571,000. The Company, related to this acquisition, also assumed balloon
notes that are payable, in part, to the above related parties totaling
approximately $4,758,000. Approximately 33% of the balloon notes payable at
December 31, 1996, is due to the related parties. The Class B stockholders have
voting control over the Company. The same related parties described above also
continue to receive
30
approximately 33% of minority interest distributions of income from the Company.
Furthermore, these parties received cash and notes from the Company totaling
approximately $6,062,000 when it acquired the remaining minority interest in Hub
City Tennessee, L.P. and Hub City North Central, L.P.
The Company provided transportation services to Hub Partnerships prior
to acquiring Hub Partnerships on March 18, 1996. Revenue from Hub Partnerships
was $11,885,000, $14,712,000 and $3,459,000 for 1994, 1995 and the period
January 1, through March 17, 1996, respectively. Net fees were approximately
$307,000, $440,000 and $104,000 for the same periods, respectively.
Hub Partnerships provided transportation services to the Company prior
to being acquired, which resulted in costs of $13,535,000, $21,720,000 and
$3,880,000 for 1994, 1995 and the period January 1, through March 17, 1996,
respectively.
The Company paid assessment fees based primarily on volume and sales
commission expenses to Hub Partnerships prior to acquiring Hub Partnerships.
These charges totaled approximately $657,000, $670,000 and $112,000 for 1994,
1995 and the period January 1, through March 17, 1996, respectively.
The Company leased a building from a shareholder. Monthly payments in
1995 were $9,178 and extended through November 1996. The Company no longer
leased the building from a shareholder beginning in December 1996.
NOTE 12. Legal Matters
In the ordinary course of conducting its business, the Company becomes
involved in various lawsuits related to its business. The Company does not
believe that the ultimate resolution of these matters will be material to its
business, financial position or results of operations.
NOTE 13. Equity
December 31, 1995
--------------------------
Issued and
Authorized Outstanding
------------ -------------
Preferred stock, $.01 par value 2,000,000 -
Common stock, no par value 200 200
Class A common stock, $.01 par value 12,337,700 100
Class B common stock, $.01 par value 662,300 -
December 31, 1996
--------------------------
Issued and
Authorized Outstanding
------------ -------------
Preferred stock, $.01 par value 2,000,000 -
Class A common stock, $.01 par value 12,337,700 5,261,250
Class B common stock, $.01 par value 662,300 662,296
NOTE 14. Selected Quarterly Financial Data (Unaudited)
The following table sets forth selected quarterly financial data for each
of the quarters in 1995 and 1996 (in thousands, except per share amounts):
Quarters
-----------------------------------------
First Second Third Fourth
-----------------------------------------
Year Ended December 31, 1995:
Revenue $18,934 $ 20,735 $ 20,590 $ 21,149
Net revenue 1,564 1,488 1,542 1,672
Operating income 610 588 667 702
Net income 634 599 668 698
Pro forma net income 386 365 407 425
Pro forma earnings per share $ 0.23 $ 0.22 $ 0.24 $ 0.26
Quarters
-----------------------------------------
First Second Third Fourth
-----------------------------------------
Year Ended December 31, 1996:
Revenue $48,797 $209,236 $238,584 $257,626
Net revenue 5,385 25,124 28,707 32,348
Operating income 1,755 6,843 8,951 10,376
Net income 883 1,662 2,105 2,394
Pro forma net income 642 1,662 2,105 2,394
Pro forma earnings per share $ 0.29 $ 0.28 $ 0.35 $ 0.40
31
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 the Registrant's proxy statement for the
annual meeting of stockholders to be held on May 14, 1997, sets forth certain
information with respect to the directors of the Registrant and Section 16
compliance and is incorporated herein by reference. Certain information with
respect to persons who are or may be deemed to be executive officers of the
Registrant is set forth under the caption "Executive Officers of the Registrant"
in Part I of this report.
Item 11. EXECUTIVE COMPENSATION
The section entitled "Compensation of Directors and Executive Officers"
appearing in the Registrant's proxy statement for the annual meeting of
stockholders to be held on May 14, 1997, sets forth certain information with
respect to the compensation of management of the Registrant and is incorporated
herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Ownership of the Capital Stock of the Company"
appearing in the Registrant's proxy statement for the annual meeting of
stockholders to be held on May 14, 1997, sets forth certain information with
respect to the ownership of the Registrant's Common Stock and is incorporated
herein by reference.
Item 13 CERTAIN TRANSACTIONS
Restructuring Transactions
Acquisition of Hub Chicago. In connection with the acquisition of the
outstanding stock of Hub Chicago, Phillip C. Yeager received 248,362 shares,
David P. Yeager (including members of his immediate family) received 193,169
shares, Robert J. Jensen (including members of his immediate family) received
110,383 shares and Mark A. Yeager (including members of his immediate family)
received 110,382 shares of Class B Common Stock in exchange for their shares of
stock of Hub Chicago. The shares of Class B Common Stock received by Phillip C.
Yeager, David P. Yeager (including members of his immediate family), Robert J.
Jensen (including members of his immediate family), and Mark A. Yeager
(including members of his immediate family) are convertible on a one-for-one
basis into shares of Class A Common Stock having a value, as of the date of the
Offering, of approximately $3,477,000, $2,704,000, $1,545,000 and $1,545,000,
respectively. The purchase price paid by the Company for Hub Chicago was based
on the relative value of Hub Chicago to the aggregate value of Hub Chicago, 100%
of the Hub Partnerships (defined below) and 100% of Hub Distribution (defined
below) (the "Combined Hub Companies"). The relative value of Hub Chicago was
determined by Duff & Phelps Capital Markets Co. ("Duff & Phelps") which was
retained for that purpose. The aggregate amount of consideration paid by the
Company in the acquisition of Hub Chicago consisted of 1,000,000 shares of Class
A Common Stock paid to the Frances T. Marino Trust and 662,296 shares of Class B
Common Stock paid to Phillip C. Yeager and members of his family as described
above.
Hub Partnerships. In connection with the corporate restructuring that
occurred at the closing of the Offering, all of the assets (excluding each Hub S
Corporations' interest in Hub Group Distribution Services ("Hub Distribution")
and all of the liabilities of each of the 28 separate corporations organized
under Subchapter S of the Internal Revenue Code (each a "Hub S Corporation"),
other than Hub Chicago, were contributed to the newly formed limited
partnerships (each a "Hub Partnership"). Upon the closing of the Offering, Hub
Chicago purchased the general partnership interest in each of these Hub
Partnerships from the Hub S Corporations for an aggregate purchase price based
on the initial public offering price of approximately $42.8 million. The
purchase price paid by Hub Chicago for the general partnership interest in each
of the Hub Partnerships was determined based upon the relative value of each
such interest in the Hub Partnerships to the aggregate value of the Combined Hub
Companies. The relative value of each of the interests in the Hub Partnerships
was determined by Duff & Phelps. The Hub S Corporations, which are the limited
partners in the Hub Partnerships, are entitled to 70% of the net income and net
cash flow from the Hub Partnerships. Phillip C. Yeager, David P. Yeager, Mark A.
Yeager, Robert J. Jensen, Thomas L. Hardin, John T. Donnell, who serves as
Executive Vice President-Marketing, and members of their respective immediate
families and trusts for the benefit of members of their immediate families have
retained their interests in the Hub S Corporations, thereby entitling them to
share indirectly in distributions from the Hub Partnerships. In connection with
the Company's acquisition of the general partnership interests in the Hub
Partnerships, Phillip C. Yeager received approximately $3,294,000, David P.
Yeager (including members of his immediate family) received approximately
$4,021,000, Mark A. Yeager (including members of his immediate family) received
approximately $3,160,000, Robert J. Jensen (including members of his immediate
family) received approximately $3,453,000, Thomas L. Hardin received
approximately $1,969,000 and John T. Donnell received approximately $469,000.
Additionally, immediately prior to the closing of the Offering, each of the
Hub S Corporations paid a dividend equal to the retained earnings and
substantially all of the common stock and the paid-in capital of that Hub S
Corporation. Phillip C. Yeager received approximately $1,049,000 in cash and a
five-year note in the principal amount of approximately $1,066,000, David P.
Yeager (including members of his immediate family) received approximately
$1,178,000 in cash and a five-year note in the principal amount of approximately
$1,198,000, Thomas L. Hardin received approximately $490,000 in cash and a five-
year note in the principal amount of approximately $498,000, Robert J. Jensen
(including members of his immediate family) received approximately $958,000 in
cash and a five-year note in the principal amount of approximately $974,000,
Mark A. Yeager (including members of his immediate family) received
approximately $885,000 in cash and a five-year note in the principal amount of
approximately $900,000 and John T. Donnell received approximately $120,000 in
cash and a five-year note in the principal amount of approximately $122,000. In
each case, the five-year notes bear interest at 5.45%.
On August 1, 1996, the Company purchased the remaining 70% minority
interest in Hub City Tennessee, L.P. for approximately $2,513,000 in cash. In
connection with this acquisition, Phillip C. Yeager received approximately
$251,000, David P. Yeager (including members of his immediate family) received
approximately $126,000, Thomas L. Hardin received approximately $126,000, Mark
A. Yeager (including members of his immediate family) received approximately
$126,000 and Robert J. Jensen (including members of his immediate family)
received approximately $126,000. The purchase price paid by the Company was
based upon the option formula contained in the Amended and Restated Limited
Partnership Agreement of Hub City Tennessee, L.P.
On December 12, 1996, the Company purchased the remaining 70% minority
interest in Hub City North Central, L.P. from Hub City North Central, Inc. in
exchange for a note for approximately $14,970,000, bearing interest at an annual
rate of 7%. This note is due and payable on January 1, 1998. Phillip C. Yeager,
David P. Yeager (including members of his immediate family), Thomas L. Hardin,
Mark A. Yeager (including members of his immediate family) and Robert J. Jensen
(including members of his immediate family) own approximately 10.5%, 8.5%,
10.0%, 3.5% and 3.5% of Hub City North Central, Inc., respectively. The purchase
price paid by the Company was based upon the option formula contained in the
Amended and Restated Limited Partnership Agreement of Hub City North Central,
L.P.
Hub Distribution. At the closing of the Offering, the Company acquired an
approximately 21% general partnership interest in Hub Distribution. In
connection with this acquisition, Phillip C. Yeager received approximately
$37,000, David P. Yeager (including members of his immediate family) received
approximately $52,000, Thomas L. Hardin received approximately $30,000, Mark A.
Yeager (including members of his immediate family) received approximately
$31,000, John T. Donnell received approximately $20,000 and Robert J. Jensen
(including members of his immediate family) received approximately $35,000. The
purchase price paid by the Company for an approximate 21% interest in Hub
Distribution was determined based upon the relative value of Hub Distribution to
the aggregate value of the combined Hub Companies. The relative value of Hub
Distribution was determined by Duff & Phelps.
On March 1, 1997, the Company exercised its option to acquire an additional
approximately 44% ownership interest in Hub Distribution for an aggregate price
of approximately $1,500,000, raising the Company's general partnership interest
in Hub Distribution to 65%. In connection with this acquisition, Phillip C.
Yeager received approximately $97,000, David P. Yeager (including members of his
immediate family) received approximately $151,000, Thomas L. Hardin received
approximately $98,000, Mark A. Yeager (including members of his immediate
family) received approximately $90,000, John T. Donnell received approximately
$65,000 and Robert J. Jensen (including members of his immediate family)
received approximately $103,000. The purchase price paid by the Company for this
approximate 44% interest was determined based upon a fixed option price
determined at the closing of the Offering.
Through the end of November 1996, Hub Chicago leased office space from
Phillip C. Yeager for $9,178 per month. The Company believes that the terms are
no less favorable than could have been obtained in an arms'-length transaction
with an unaffiliated third party.
The Company believes that the acquisition of (i) Hub Chicago, (ii) a 30%
general partnership interest in the Hub Partnerships, (iii) the 70% minority
interest in Hub Tennessee, (iv) the 70% minority interest in Hub North Central,
(v) the 21% interest in Hub Distribution and (vi) the additional 44% interest in
Hub Distribution were on terms no more favorable than could have been obtained
in arms'-length transactions with unaffiliated third parties.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the Registrant are
included under Item 8 of this Form 10-K:
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 1996 and December 31, 1995
32
Consolidated Statements of Operations - Years ended December 31, 1996,
December 31, 1995 and December 31, 1994
Consolidated Statements of Stockholders' Equity - Years ended December
31, 1996, December 31, 1995 and December 31, 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996,
December 31, 1995 and December 31, 1994
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules
The remaining financial statements and statement schedule for which
provision is made in Regulation S-X are set forth in the Index immediately
preceding such financial statements and statement schedule and are incorporated
herein by reference.
(a) (3) Exhibits
The exhibits included as part of this Form 10-K are set forth in the
Exhibit Index immediately preceding such Exhibits and are incorporated herein by
reference.
(b) Reports on Form 8-K
Registrant filed a Report on Form 8-K dated December 12, 1996
reporting under Item 5 the purchase of the remaining 70% minority interest in
Hub City North Central, L.P. in exchange for a note of approximately $15.0
million due January 1, 1998, which bears interest at an annual rate of 7%. No
financial statements were filed in connection with this Report.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused an amendment to this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 12, 1997 HUB GROUP, INC.
By /s/ David P. Yeager
-------------------
David P. Yeager
Chief Executive Officer and Vice Chairman
34
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Hub Partnerships
- ----------------
Report of Independent Accountants F-2
Combined Balance Sheet - December 31, 1995 F-3
Combined Statements of Operations - Years ended December 31, 1994
and December 31, 1995 and the period January 1 through March 17, 1996 F-4
Combined Statements of Stockholders' Equity - Years ended December 31, 1994
and December 31, 1995 and the period January 1 through March 17, 1996 F-5
Combined Statements of Cash Flows - Years ended December 31, 1994 and
December 31, 1995 and the period January 1 through March 17, 1996 F-6
Notes to Combined Financial Statements F-7
Hub Group, Inc.
- ---------------
Schedule II - Valuation and Qualifying Accounts S-1
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Hub Partnerships:
We have audited the accompanying combined balance sheet of Hub
Partnerships as of December 31, 1995 and the related combined statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1995 and the period January 1, 1996 through March 17,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hub Partnerships as
of December 31, 1995 and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1995 and the period
January 1, 1996 through March 17, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 6, 1997
F-2
HUB PARTNERSHIPS
COMBINED BALANCE SHEET
(in thousands)
December 31,
------------
1995
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,949
Accounts receivable, net
Trade 74,406
Affiliate 1,774
Prepaid expenses and other current assets 2,473
-------
TOTAL CURRENT ASSETS 89,602
PROPERTY AND EQUIPMENT, net 8,993
OTHER ASSETS 367
-------
TOTAL ASSETS $98,962
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $64,212
Affiliate 2,376
Other 3,323
Accrued expenses
Payroll 4,125
Other 1,115
Current portion of long-term debt 681
-------
TOTAL CURRENT LIABILITIES 75,832
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 1,007
CONTINGENCIES AND COMMITMENTS
MANDATORILY REDEEMABLE COMMON STOCK 10,386
STOCKHOLDERS' EQUITY:
Common stock 1,943
Additional paid-in capital 629
Treasury stock (32)
Retained earnings 9,197
-------
TOTAL STOCKHOLDERS' EQUITY 11,737
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $98,962
=======
The accompanying notes to combined financial statements are an integral part of
this balance sheet.
F-3
HUB PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
Years Ended December 31, January 1,
--------------------------------- through
1994 1995 March 17, 1996
----------- ------------ --------------
REVENUE:
Trade $611,694 $644,124 $142,413
Affiliate 14,192 22,390 3,992
-------- -------- --------
Total revenue 625,886 666,514 146,405
PURCHASED TRANSPORTATION 558,263 584,840 128,405
-------- -------- --------
Net revenue 67,623 81,674 18,000
COSTS AND EXPENSES:
Salaries and benefits 33,751 41,049 9,807
Selling, general and administrative 12,875 16,052 3,393
Depreciation and amortization 1,755 2,453 553
-------- -------- --------
Total costs and expenses 48,381 59,554 13,753
Operating income 19,242 22,120 4,247
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (258) (147) (56)
Interest income 709 623 120
Other, net 320 462 95
-------- -------- --------
Total other income (expense) 771 938 159
INCOME BEFORE INCOME TAXES 20,013 23,058 4,406
INCOME TAXES 310 290 126
-------- -------- --------
NET INCOME $ 19,703 $ 22,768 $ 4,280
======== ======== ========
The accompanying notes to combined financial statements are an integral part of
these statements.
F-4
HUB PARTNERSHIPS
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
For the two years ended December 31, 1995 and
January 1, 1996 to March 17, 1996
(in thousands, except shares)
Common Stock Additional Total
-------------------- Paid-in Treasury Retained Stockholders'
Shares Amount Capital Stock Earnings Equity
--------- --------- --------- --------- -------- -------------
Balance at January 1, 1994 102,217 $ 1,893 $ 509 $(42) $ 10,437 $ 12,797
Net income - - - - 19,703 19,703
Distributions to stockholders - - - - (15,085) (15,085)
Stock issued 4,633 25 - 14 - 39
Stock purchased (1,100) - - (4) - (4)
Retained earnings allocable to -
mandatorily redeemable stock - - - - (1,724) (1,724)
------- ------- ----- ---- --------- ---------
Balance at December 31, 1994 105,750 1,918 509 (32) 13,331 15,726
Net income - - - - 22,768 22,768
Distributions to stockholders - - - - (24,122) (24,122)
Stock issued 50 25 120 - - 145
Retained earnings allocable to
mandatorily redeemable stock - - - - (2,780) (2,780)
------- ------- ----- ---- --------- -------
Balance at December 31, 1995 105,800 1,943 629 (32) 9,197 11,737
Net income - - - - 4,280 4,280
Distributions to stockholders - (1,730) (629) 32 (13,477) (15,804)
------- ------- ----- ---- --------- ---------
Balance at March 17, 1996 105,800 $ 213 $ - $ - $ - $ 213
======= ======= ===== ==== ========= =========
The accompanying notes to combined financial statements are an integral part of
these statements.
F-5
HUB PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31, January 1,
------------------------------- through
1994 1995 March 17, 1996
------------ ----------- ---------------
Cash flows from operating activities:
Net income $ 19,703 $ 22,768 $ 4,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,755 2,453 553
Loss (gain) on sale of assets 58 (92) 3
Changes in working capital:
Accounts receivable, net (16,447) (2,822) 604
Prepaid expenses and other current assets (1,122) (780) 889
Accounts payable 13,088 1,794 4,783
Accrued expenses 1,789 508 (140)
Other assets 198 (58) (407)
------------ ----------- ---------------
Net cash provided by operations 19,022 23,771 10,565
------------ ----------- ---------------
Cash flows from investing activities:
Purchases of property and equipment, net (3,688) (4,485) (775)
------------ ----------- ---------------
Cash flows from financing activities:
Proceeds from sale of common stock 39 145 -
Distributions to stockholders (15,085) (24,122) (13,014)
Purchase and retirement of common stock (4) - -
Payments on long-term debt (511) (927) (361)
Proceeds from issuance of long-term debt 371 1,762 418
------------ ----------- ---------------
Net cash used in financing activities (15,190) (23,142) (12,957)
------------ ----------- ---------------
Net increase (decrease) in cash 144 (3,856) (3,167)
Cash, beginning of period 14,661 14,805 10,949
------------ ----------- ---------------
Cash, end of period $ 14,805 $ 10,949 $ 7,782
=========== =========== ===============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 75 $ 116 $ 56
Income taxes 335 262 130
Non-cash financing activity:
Notes payable issued as distributions to stockholders $ - $ - $ 13,176
The accompanying notes to combined financial statements are an integral part of these statements.
F-6
HUB PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. Description of Business and Summary of Significant Accounting Policies
Business: The Company (defined below) provides intermodal transportation
services utilizing third party arrangements with railroads and drayage
companies. The Company also arranges for transportation of freight by truck and
performs logistics services.
Principles of Combinations: These combined financial statements include the
financial statements of 26 S corporations and one partnership which are
substantially all under common ownership control (collectively referred to as
the "Company" or "Hub Partnerships"). The financial statements of Hub
Partnerships are presented herein to reflect the financial condition and results
of operations of Hub Partnerships as of and for the periods in which Hub
Partnerships was the predecessor to the business acquired by Hub Group, Inc., as
required pursuant to the rules and regulations of the Securities and Exchange
Commission. All significant intercompany transactions and balances have been
eliminated.
Cash and Cash Equivalents: The Company considers as cash equivalents all highly
liquid investments with an original maturity of three months or less.
Receivables: The Company has recorded a reserve for uncollectible accounts
receivable of approximately $898,000 at December 31, 1995.
Property and Equipment: Property and equipment are stated at cost. Depreciation
of property and equipment is computed using the straight-line and various
accelerated methods at rates adequate to depreciate the cost of applicable
assets over their expected useful lives: buildings and improvements 15 to 40
years; leasehold improvements the shorter of useful life or lease term;
furniture and equipment 3 to 10 years; and transportation equipment 3 to 12
years. Maintenance and repairs are charged to operations as incurred and major
improvements are capitalized. The cost of assets retired or otherwise disposed
of and the accumulated depreciation thereon are removed from the accounts with
any gain or loss realized upon sale or disposal charged or credited to
operations.
Concentration of Credit Risk: The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company places its cash and
temporary investments with high quality financial institutions. At times, such
investments may be in excess of the FDIC insurance limit. Temporary investments
are valued at the lower of cost or market and at the balance sheet date,
approximates fair market value. The Company primarily serves customers located
throughout the United States with no significant concentration in any one
region. The Company reviews a customer's credit history before extending credit.
In addition, the Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its trade accounts receivable
risk is limited.
Revenue Recognition: Revenue represents sales of services to customers.
Revenue is recognized based on relative transit time.
Income Taxes: The majority of the entities included in Hub Partnerships have
elected to be taxed as S Corporations. By this election, income of an S
Corporation is taxable to the stockholders rather than the Company itself.
Income tax expense primarily represents applicable state income taxes of those
states that do not recognize Subchapter S Corporations or states which impose
taxes on S Corporation income.
Distributions: The Company makes periodic distributions of income which are
reflected in the accompanying statements of stockholders' equity.
F-7
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
Reclassifications: Certain items previously reported have been reclassified to
conform with the 1996 presentation.
NOTE 2. Property and Equipment
Property and equipment consist of the following:
December 31,
1995
------------
(000's)
Land $ 92
Building and improvements 1,376
Leasehold improvements 674
Furniture and equipment 11,980
Transportation equipment 2,353
-----------
16,475
Less: Accumulated depreciation and
amortization (7,482)
-----------
PROPERTY AND EQUIPMENT, net $ 8,993
-----------
NOTE 3. Long-Term Debt and Financing Arrangements
Fair value approximates book value at the balance sheet date.
December 31,
1995
------------
(000's)
Line of credit loans due May 1996 and October 1996,
interest payable monthly, ranging from 1%
above the bank's prime lending rate to prime plus
2%, secured by certain property and equipment,
chattel paper, and intangibles $ 125
Installment notes payable through the
year 1999, monthly installments ranging from
$263-$10,929, including interest, ranging from
2.9% to 12%, collateralized by certain property 1,159
Mortgage note payable due in 1998 with
monthly installments of $2,381, including interest,
at 8.5% collateralized by certain receivables,
certain property and personally guaranteed by a
stockholder 217
Note payable to Hub Group, Inc., due on
demand, with interest payable quarterly at prime
plus 1% 100
Capital lease obligations, collateralized by certain
equipment 87
-----------
Total long-term debt 1,688
Less current maturities (681)
-----------
$ 1,007
-----------
F-8
Aggregate principal payments, in thousands, due subsequent to December
31, 1995, are as follows:
1996 $ 681
1997 406
1998 500
1999 101
-----------
$ 1,688
-----------
The Company had unused aggregate lines of credit of approximately
$5,975,000 at December 31, 1995 with expiration dates beginning in January 1996.
$5,000,000 has no expiration date. Interest rates range from prime less 3/4% to
prime plus 2%. Borrowings are secured by certain assets.
NOTE 4. Rental Expense and Lease Commitments
Minimum annual rental commitments, in thousands, at December 31, 1995,
under noncancellable operating leases, principally for real estate and
equipment, are payable as follows:
1996 $ 2,198
1997 1,557
1998 966
1999 716
2000 624
2001 & thereafter 853
-----------
Total minimum lease payments $ 6,914
-----------
Total rental expense was approximately $1,629,000, $2,190,000 and
$423,000 for 1994, 1995 and the period January 1, through March 17, 1996,
respectively. Many of the leases contain renewal options and escalation clauses
which require payments of additional rent to the extent of increases in the
related operating costs.
NOTE 5. Legal Matters
In the ordinary course of conducting its business, the Company becomes
involved in various lawsuits related to its business. The Company does not
believe that the ultimate resolution of these matters will be material to its
business, financial position or results of operations.
NOTE 6. Profit-Sharing Plan
The Company has numerous profit-sharing plans and trusts under section
401(k) of the Internal Revenue Code. Generally, for every dollar the employee
contributes the Company will contribute an additional $.20 up to $100. In
addition, the Company may make a profit sharing contribution at its discretion.
Historically, the Company has contributed an amount equal to 3% of each
participant's compensation up to a maximum of $4,500. The Company's
contributions to the Plan were approximately $562,000, $713,000 and $287,000 for
1994, 1995 and the period January 1, through March 17, 1996, respectively.
NOTE 7. Related Party Transactions
The Company provides transportation services to Hub Group, Inc. Revenue
from Hub Group, Inc. was $13,535,000, $21,720,000 and $3,880,000 for 1994, 1995
and the period January 1, through March 17, 1996, respectively. Net fees earned
were $670,000, $734,000 and $116,000 for the same periods, respectively.
F-9
Hub Group, Inc. provides transportation services to the Company, which
resulted in costs of $11,885,000, $14,712,000 and $3,459,000 for 1994, 1995 and
the period January 1 through March 17, 1996, respectively.
The Company charges assessment fees based primarily on volume and
sales commission expense to Hub Group, Inc. Revenue for such fees were
approximately $657,000, $670,000 and $112,000 for 1994, 1995 and the period
January 1 through March 17, 1996, respectively.
During 1994, the Company leased four facilities from stockholders.
During 1995 and the period January 1, through March 17, 1996, the Company leased
two facilities from stockholders. Rental expense relating to these agreements
was approximately $193,000, $147,000 and $39,000 for 1994, 1995 and the period
January 1 through March 17, 1996, respectively. The terms of the leases extend
through 2000.
NOTE 8. Stockholder Agreements
The majority of the entities included in Hub Partnerships have agreements
with certain of their stockholders which set forth rights of the stockholders
and the corporation. Generally, the agreements require that any stockholder
wishing to sell his shares must first offer the shares for sale to the
corporation and then to the other stockholders, before offering them to a third
party. Generally the agreements state that upon death, disability, or retirement
of a stockholder, the stockholder is required to offer to sell all of the shares
owned by the stockholder to the corporation. Certain agreements stipulate the
corporation is required to purchase these shares. Under the majority of the
agreements, selling price approximates book value, and under two agreements the
selling price approximates fair market value. Generally the agreements also
state that, in the event that a stockholder is terminated, the stockholder is
required to offer to sell his shares to the corporation. Certain agreements
stipulate the corporation is required to purchase the stockholder's shares.
Redemption amounts relating to agreements with mandatory redemption features are
included in Mandatorily Redeemable Common Stock in the accompanying balance
sheet. Payments for shares generally is made over a five-year period.
Additionally, these agreements generally contain non-compete clauses which
preclude a stockholder, while employed by the corporation, from managing,
operating, or controlling a business either similar or dissimilar to the
business carried on by the corporation. The clause also states that following
employment by the corporation, a stockholder may not be employed by or perform
services for any competitor for a period of up to two years. These agreements
continue with respect to the S Corporations' limited partnership interests in
the operating partnerships of Hub Group, Inc.
NOTE 9. Special Distribution
Immediately prior to March 18, 1996, the Company distributed substantially
all of its equity, including retained earnings through March 17, 1996, to its
shareholders in the form of cash and notes. The notes are five-year balloon
notes bearing interest at an annual rate of 5.45%. Interest is compounded
annually with all principal and interest due in March 2001.
F-10
NOTE 10. Stock
The following tables outline the shares of common stock and
mandatorily redeemable stock authorized, issued, outstanding and in treasury.
December 31,
Common Stock 1995
- ----------------------------------------------- ------------
Authorized 156,500
Issued 89,000
Outstanding 84,733
Treasury Stock 4,267
December 31,
Mandatorily Redeemable Stock 1995
- ------------------------------------------------ ------------
Authorized 33,967
Issued 21,067
Outstanding 21,067
Treasury Stock -
F-11
SCHEDULE II
HUB GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning Costs & Balance at
of Year Expenses Deduction End of Year
----------- ---------- ----------- -----------
Year Ended December 31:
Allowance for uncollectible accounts receivable
1996 $ 125,000 $ 768,000 $ (488,000) $ 405,000
1995 110,000 15,000 - 125,000
1994 - 110,000 - 110,000
S-1
INDEX TO EXHIBITS
Sequentially
Numbered
Number Exhibit Page
- ------ ------- ------------
2.1 Purchase Agreement among the Registrant, American President Companies,
Ltd. and APL Land Transport Services, Inc. (incorporated by reference to
the Registrants report on Form 8-K dated May 2, 1996 and filed May 17,
1996, File No. 0-27754)......................................................
2.2 Purchase and Sale Agreement among Hub Holdings, Inc. and Hub City North
Central, Inc.................................................................
3.1 Amended Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 and 3.3 to the Registrant's registration
statement on Form S-1, File No. 33-9021).....................................
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to
the Registrant's registration statement on Form S-1, File No. 33-9021).......
10.1 Form of Amended and Restated Limited Partnership Agreement...................
10.2 Amended and Restated Limited Partnership Agreement of Hub City Canada,
L.P..........................................................................
10.3 Form of Non-Competition Agreement............................................
10.4 Purchase and Sale Agreement between the Registrant and the Stockholders
of Hub City Terminals, Inc. (incorporated by reference to Exhibit 10.3
to the Registrant's registration statement on Form S-1, File No.
33-90210)....................................................................
10.5 Hub Group Distribution Services Purchase and Sale Agreement..................
10.6 Management Agreement.........................................................
10.7 Stockholders' Agreement......................................................
11.1 Statement re computation of per share earnings...............................
21 Subsidiaries of the Registrant...............................................
23.1 Consent of Arthur Andersen LLP...............................................
27 Financial Data Schedule......................................................