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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-27754
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HUB GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4007085
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification No.)
3050 HIGHLAND PARKWAY, SUITE 100
DOWNERS GROVE, ILLINOIS 60515
(Address and zip code of principal executive offices)
(630) 271-3600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
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The aggregate market value of the Registrant's voting stock held by
non-affiliates on June 28, 2002, based upon the last reported sale price on that
date on the NASDAQ National Market of $9.25 per share, was $58,033,761.
On March 12, 2003, the Registrant had 7,046,250 outstanding shares of Class 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 13, 2003, (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
that was incorporated on March 8, 1995. Since its founding as an intermodal
marketing company ("IMC") in 1971, Hub Group has grown to become the largest IMC
in the United States and a full service transportation provider, offering
intermodal, truck brokerage and comprehensive logistics services.
The Company operates through an extensive nationwide network of 22 offices
or "Hubs" and Hub Group Distribution Services ("HGDS" or "Hub Distribution").
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
with significant transportation experience. Local management is responsible for
operations, customer service and regional marketing. Corporate management is
responsible for group strategic planning and administration, financial services,
relationships with the railroads and management information systems support. Hub
Distribution, which performs certain specialized logistics services, is
responsible for its own operations, customer service, marketing 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.
Through a series of acquisitions, including the purchase of the remaining
35% partnership interest in Hub Distribution on August 14, 2002 for $4 million,
Hub Group now wholly-owns Hub Distribution and each of its other operating
subsidiaries. Unless the context otherwise requires, references to Hub Group or
the Company include the Hubs, Hub Distribution and their respective
subsidiaries.
SERVICES PROVIDED
The Company's transportation services can be broadly placed into the
following categories:
INTERMODAL As an IMC, the Company arranges for the movement of its
customers' freight in containers and trailers over long distances. Hub Group
contracts with railroads to provide transportation over the long-haul portion of
the shipment and with local trucking companies, known as "drayage companies,"
for pickup and delivery. In markets where adequate service is not available, the
Company supplements third party drayage services with Company-owned drayage
operations. As part of its intermodal services, the Company 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 Network
Management 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 reuse
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 also has exclusive use of the containers
in its Premier Service Network.
HIGHWAY SERVICES The Company arranges for the transportation of freight by
truck, providing customers another option for their transportation needs. This
is accomplished by matching customers' needs with carriers' capacity to provide
the appropriate 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 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 the Company to effectively meet its customer's needs
without owning the equipment. Through the Core Carrier-Plus One program, the
Company assumes the responsibility for over-the-road truckload shipments that
the customer's core carriers cannot handle. This service supplements the
customer's core carrier program and helps ensure the timely delivery of the
customer's freight.
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LOGISTICS The Company has expanded its service capabilities as customers
increasingly outsource their transportation needs. The Company has established a
Supply Chain Solutions group with logistics expertise at its headquarters in
Downers Grove. In addition, many of the Hubs have hired experienced logistics
personnel exclusively dedicated to selling and servicing Hub Group's logistics
service offering. The Supply Chain Solutions group acts as a central resource
for the Hubs who then perform the actual logistics services.
The Company currently offers various logistics services, including
comprehensive transportation management, arranging for delivery to multiple
locations at the shipment's destination, third party warehousing,
less-than-truckload consolidation and other customized logistics services. When
providing complete transportation services, the Company essentially replaces the
customer's transportation department. Once the Company is hired as a single
source logistics provider, it 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.
DISTRIBUTION SERVICES Hub Distribution offers non-traditional logistics
services such as installation of point of sale merchandise displays and delivery
of sample pharmaceuticals to sales representatives.
HUB NETWORK
Over the past 32 years, Hub Group has grown from a single office with two
employees into a network of 22 Hubs and Hub Distribution. 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 Houston New York City San Francisco
Baltimore Indianapolis Pittsburgh Seattle
Boston Kansas City Portland Toledo
Chicago Los Angeles Rochester Toronto
Cleveland Memphis St. Louis
Detroit Milwaukee Salt Lake City
The entire Hub network is interactively connected through the Company's
proprietary Network Management 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 sample intermodal transaction, the customer contacts the local Hub,
known as the selling 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 Network
Management System by the local Hub. This information is simultaneously
transmitted through the Network Management System to the Hub closest to the
point of delivery. The Company's predictive track and trace technology then
monitors the shipment to ensure that it will arrive as scheduled, alerting the
customer service personnel at the local Hub if there are service delays. The Hub
closest to the point of delivery arranges for and confirms delivery by a drayage
company. This arrangement among the Hubs is transparent to the customer and
allows the customer to maintain its relationship solely with the selling Hub.
The Company provides brokerage services to its customers in a similar
manner. In a sample 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 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
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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 currently has full time marketing representatives at
each Hub and Hub Distribution with primary responsibility for servicing local
and regional accounts. These sales representatives work from the local Hubs, Hub
Distribution 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 established the National Accounts group to service the
needs of the nation's largest shippers. The Company recognized that although
most 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. There are currently 14 National Accounts sales
representatives who report either directly or indirectly to the Company's
Executive Vice President of Marketing. 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, to refine the process as necessary and attempt to sell additional
services to the customer.
In October 2002, the Company established a joint marketing relationship
with TMM Logistics, a wholly owned subsidiary of Grupo TMM. The agreement calls
for TMM Logistics to provide all sales support and operational execution within
Mexico and Hub Group to furnish the same capabilities in Canada and the United
States. A newly formed division of Hub Group, called Hub Mexico, provides joint
marketing, door-to-door oversight, coordination and pricing support.
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 automotive, chemicals, consumer products, electronics,
paper, printing, and retail.
MANAGEMENT INFORMATION SYSTEMS
A primary component of the Company's business strategy is the continued
improvement of its Network Management System and other technology to ensure that
the Company will remain a leader among transportation providers in information
processing for transportation services. Hub Group's Network Management System
consists of proprietary software running on IBM AS/400 computers located at a
secure offsite data center. All of the Hubs are linked with these AS/400
computers and each other using a frame relay network. This configuration
provides a real time environment for transmitting data among the Hubs and the
Company's headquarters. The Company also makes extensive use of electronic data
interchange ("EDI"), allowing each Hub to communicate electronically with each
railroad, certain drayage companies and those customers with EDI capabilities.
The Company's Network Management System is the primary mechanism used by
the Hubs to handle the Company's intermodal and highway services business. The
Network Management System processes customer transportation requests, schedules
and tracks shipments, prepares customer billing, establishes account profiles
and retains critical information for analysis. The Network Management System
provides 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 Network Management System's EDI features offer customers with EDI
capability a completely paperless process, including load tendering, shipment
tracking, customer billing and remittance processing. The Company aggressively
pursues opportunities to establish EDI interfaces with its customers and
carriers.
To help manage its logistics business, the Company uses specialized
software that includes planning and execution solutions. This sophisticated
transportation management software enables Hub Group to offer supply chain
planning tools and logistics managing, modeling, optimizing and monitoring tools
for its customers. This software may be used by the Company when offering
logistics management services to customers that ship via multiple modes,
including intermodal, truckload, and less-than-truckload, allowing the Company
to optimize mode and carrier selection and routing for its customers. This
software is integrated with Hub Group's Network Management System and Hub
Group's accounting system.
The Company's website, www.hubgroup.com, is designed to allow Hub Group's
customers and vendors to easily do business with Hub Group online. Through
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Vendor Interface, the Company tenders loads to its drayage partners using the
Internet rather than phones or faxes. Vendor Interface also captures event
status information, allows vendors to view outstanding paperwork requirements
and helps facilitate paperless invoicing for payment. Hub Group currently
tenders 98% of its drayage loads using Vendor Interface or EDI. Customer
Advantage allows customers to receive immediate pricing, place orders, track
shipments and review historical shipping data through a variety of reports over
the Internet. Current Internet applications are integrated with the Network
Management System.
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 regular 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.
The Company has contracts with each of the following major railroads:
Burlington Northern Santa Fe Railway Kansas City Southern
Canadian National Norfolk Southern
Canadian Pacific Union Pacific
CSX
The Company also has contracts with each of the following major fourth-party
service providers: Mitsui O.S.K. Lines (America) Inc., Pacer International,
Inc., K-Line America, Inc. and Maersk Sea-Land.
These contracts govern the transportation services and payment terms
pursuant to which the Company's intermodal shipments are handled by the
railroads. The contracts have staggered renewal terms with the earliest
expiration occurring during 2003. While there can be no assurances that these
contracts will be renewed, the Company has in the past successfully negotiated
extensions of these contracts. Transportation rates are market driven and are
typically negotiated between the Company and the railroads or fourth-party
service providers 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 or fourth-party
service providers 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.
The Company also manages a fleet of containers under its Premier Service
Network. This program began with the Burlington Northern and Santa Fe Railway
Company ("BNSF") in May 1998 and in 1999 expanded to include the Norfolk
Southern Corporation ("NS"). Under agreements with both the BNSF and NS, the
Company manages, as of March 1, 2003, approximately 4,900 containers owned by
the BNSF and 1,300 containers owned by the NS. These containers are for Hub
Group's dedicated use on the BNSF and NS rail systems. The BNSF containers and
the NS containers are fully interchangeable across both the BNSF and NS rail
networks.
RELATIONSHIP WITH DRAYAGE COMPANIES
The Company has a "Quality Drayage Program," which consists of agreements
and rules that govern the framework pursuant to which certain drayage companies
perform services for the Company. Participants in the program commit to provide
high quality service along with clean and safe equipment, maintain a defined
on-time performance level and follow specified procedures designed to minimize
freight loss and damage. 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
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Group's relationships with its carriers are 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,
$1.0 million in truckman's auto liability insurance and to obtain, either on
their own or through the Company's insurance, $1.0 million in cargo insurance.
Railroads, which are self-insured, provide limited cargo protection, generally
up to $250,000 per shipment. To cover freight loss or damage when a carrier's
liability cannot be established or a carrier's insurance is insufficient to
cover the claim, the Company carries its own cargo insurance with a limit of
$1.0 million per container or trailer and a limit of $20.0 million aggregate.
The Company also carries general liability insurance with limits of $1.0 million
per occurrence and $2.0 million in the aggregate with a companion $25.0 million
umbrella policy on this general liability insurance.
GOVERNMENT REGULATION
Hub Highway Services is licensed by the Department of Transportation
("DOT") as a broker in arranging for the transportation of general 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 a $10,000 surety bond
which the Company has posted. 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, over-the-road truckload carriers and railroads that market their own
intermodal services. There is an emerging trend for larger truckload carriers to
enter into agreements with railroads to market intermodal services nationwide.
In addition, many existing and start-up companies are using the Internet to
market transportation services. 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, 2003, the Company had approximately 1,405
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. None of the Company's trademarks are 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 its subsidiaries, operates 38
offices throughout the United States and in Canada, including the Company's
headquarters in Downers Grove, Illinois and its Company-owned drayage
operations. The office building used by the Hub located in Toledo is owned, and
the remainder are leased. Most office leases have initial terms of more than one
year, and many include options to renew. While some of the Company's leases
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
On February 19, 2002, a purported class action lawsuit was filed by Riggs
Partners, LLC in the United States District Court for the Northern District of
Illinois, Eastern Division. On October 23, 2002, the federal district court
granted the Company's motion to dismiss the complaint in its entirety for
failing to allege facts sufficient to state a claim. The court also granted the
motion of the Company's former auditors. The Court's order required plaintiffs
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to file any amended complaint by November 22, 2002. The plaintiffs did not file
an amended complaint by this date and agreed that they would not appeal the
court's order of October 23, 2002 dismissing the lawsuit. The suit is therefore
terminated.
In addition, the Company is a party to litigation incident to its business,
including claims for freight lost or damaged in transit, improperly shipped or
improperly warehoused. Some of the lawsuits to which the Company is party are
covered by insurance and are being defended by the Company's insurance carriers.
Some of the lawsuits are not covered by insurance and are being defended by the
Company. Management does not believe that the outcome of this litigation will
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 2002.
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 12, 2003 with respect to each person who is an
executive officer of the Company.
NAME AGE POSITION
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Phillip C. Yeager 75 Chairman of the Board of Directors
David P. Yeager 49 Vice Chairman of the Board of Directors and
Chief Executive Officer
Thomas L. Hardin 57 President, Chief Operating Officer and
Director
Mark A. Yeager 38 President- Field Operations
Thomas M. White 45 Senior Vice President, Chief Financial
Officer and
Treasurer
Richard M. Rogan 63 Executive Vice President-Marketing
Dennis R. Polsen 49 Vice President and Chief Information
Officer
David C. Zeilstra 33 Vice President, Secretary and General
Counsel
Phillip C. Yeager, the Company's founder, has been Chairman of the Board
since October 1985. From April 1971 to October 1985, Mr. Yeager served as
President of Hub City Terminals, Inc. ("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 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.
In September 1998 he received the Silver Kingpin award from the Intermodal
Association of North America and in February 1999 he was named Transportation
Person of the Year by the New York Traffic Club. 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.
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 and the brother of Mark A. Yeager.
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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. Mr.
Hardin is the former Chairman of the Intermodal Association of North America.
Mark A. Yeager has been the Company's President-Field Operations since July
1999. From November 1997 through June 1999 Mr. Yeager was Division President,
Secretary and General Counsel. From March 1995 to November 1997, Mr. Yeager was
Vice President, Secretary and General Counsel. 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 and the
brother of David P. Yeager.
Thomas M. White has been the Company's Senior Vice President, Chief
Financial Officer and Treasurer since June 2002. Prior to joining the Company,
Mr. White was a Managing Partner-Business Process Outsourcing at Arthur
Andersen, LLP. Mr. White worked for Arthur Andersen, LLP for 23 years, holding
various positions including Managing Partner of the Kansas City, Missouri office
and Omaha, Nebraska office. Mr. White received a Masters in Science and
Industrial Administration from Purdue University in 1985 and a Bachelor of
Business Administration from Western Michigan University in 1979. Mr. White is a
CPA and a member of the American Institute of Certified Public Accountants.
Richard M. Rogan has been Executive Vice President of Marketing since
November 1997 and was President of Hub Highway Services from May 1995 through
February 2002. Prior to joining the Company, Mr. Rogan was Executive Vice
President of National Freight, Inc. from May 1993 to April 1995. Prior to that,
Mr. Rogan was with Burlington Motor Carriers, Inc., where he served as President
and Chief Executive Officer from March 1988 to April 1993 and as an Executive
Vice President from July 1985 to February 1988. Mr. Rogan's transportation
career spans 25 years and includes earlier assignments with the Illinois Central
Railroad, North American Van Lines and Schneider National. He received a
Bachelor of Business Administration degree from Loyola University of Chicago in
1962 and a Master of Business Administration degree from the Wharton School of
the University of Pennsylvania in 1963. He has served on the Board of Directors
of the ATA Foundation as well as the Interstate Truckload Carrier Conference
("ITCC"). He is a past Chairman of the ITCC Highway Policy Committee and has
also served on the Advisory Board of the Trucking Profitability Strategies
Conference at the University of Georgia.
Dennis R. Polsen has been the Company's Vice President - Chief Information
Officer since September 2001. From March 2000 through August 2001, Mr. Polsen
was the Company's Vice-President of Application Development. Prior to joining
the Company, Mr. Polsen was Director of Applications for Humana, Inc. from
September 1997 through February 2000 and spent 14 years prior to that
developing, implementing, and directing transportation logistics applications at
Schneider National, Inc. Mr. Polsen received a Bachelor of Business
Administration in May of 1976 from the University of Wisconsin, Milwaukee and a
Masters in Business Administration in May of 1983 from the University of
Wisconsin Graduate School of Business. Mr. Polsen is a past member of the
American Trucking Association.
David C. Zeilstra has been the Company's Vice President, Secretary and
General Counsel since July 1999. From December 1996 through June 1999, Mr.
Zeilstra was the Company's Assistant General Counsel. Prior to joining the
Company, Mr. Zeilstra was an associate with the law firm of Mayer, Brown & Platt
from September 1994 through November 1996. Mr. Zeilstra received a Juris Doctor
degree from the Duke University School of Law in 1994 and a Bachelor of Arts
degree from Wheaton College in 1990.
DIRECTORS OF THE REGISTRANT
In addition to Phillip C. Yeager, David P. Yeager and Thomas L. Hardin, the
following three individuals are also on the Company's Board of Directors: Gary
D. Eppen - currently retired and formerly the Ralph and Dorothy Keller
Distinguished Service Professor of Operations Management and Deputy Dean for
part-time Masters in Business Administration Programs at the Graduate School of
Business at the University of Chicago; Charles R. Reaves- Chief Executive
Officer of Reaves Enterprises, Inc., a real estate development company and
Martin P. Slark - President, Chief Operating Officer and Director of Molex,
Incorporated, a manufacturer of electronic, electrical and fiber optic
interconnection products and systems.
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Class A common stock of the Company ("Class A Common Stock") trades
on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol
"HUBG." Set forth below are the high and low closing prices for shares of the
Class A Common Stock of the Company for each full quarterly period in 2001 and
2002.
2001 2002
----------------- -----------------
HIGH LOW HIGH LOW
------ ----- ------ -----
First Quarter $11.88 $8.00 $11.28 $7.55
Second Quarter $14.20 $8.00 $11.20 $9.01
Third Quarter $15.14 $10.60 $9.70 $4.18
Fourth Quarter $11.19 $8.75 $8.19 $4.75
On March 5, 2003, there were approximately 98 stockholders of record of the
Class A Common Stock and, in addition, there were an estimated 1,520 beneficial
owners of the Class A Common Stock whose shares were held by brokers and other
fiduciary institutions. On March 5, 2003, there were 11 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. The Company's credit facility and private placement debt prohibit the
Company from paying dividends on the Common Stock if there has been, or
immediately following the payment of a dividend would be, a default or an event
of default under the credit facility or private placement debt. The Company is
currently in compliance with the covenants contained in the credit facility and
private placement debt.
9
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(in thousands except per share data)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 (1) 2001 2000 1999 1998
---------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenue $1,335,660 $1,319,331 $ 1,382,880 $ 1,295,502 $ 1,145,906
Gross margin 162,812 178,963 167,767 159,863 138,334
Operating income 11,141 10,548 13,495 26,453 26,406
Income before minority interest and taxes 2,015 902 2,878 19,928 25,324
Income before income taxes 2,539 751 4,547 15,941 15,205
Net income 1,498 443 2,683 9,405 8,908
Basic earnings per common share $ .19 $ .06 $ 0.35 $ 1.22 $ 1.16
Diluted earnings per common share $ .19 $ .06 $ 0.35 $ 1.21 $ 1.15
AS OF DECEMBER 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital (deficiency) $ (7,109) $ (5,380) $ (5,902) $ 20,202 $ 20,313
Total assets 399,262 416,024 469,373 441,421 304,791
Long-term debt, excluding current portion 94,027 96,059 109,089 131,414 29,589
Stockholders' equity 134,340 132,453 132,397 129,683 119,673
(1) As of January 1, 2002, the Company adopted Financial Accounting Standards
Board Statement No. 142, "Goodwill and Other Intangible Assets ("Statement
142")". Under Statement 142, goodwill is no longer amortized. Amortization
expense for the years ended December 31, 2001, 2000, 1999 and 1998 was
$5,741,000, $5,741,000, $5,069,000 and $2,912,000, respectively. The per share
effect of amortization expense related to goodwill, net of tax was $0.44, $0.44,
$0.39 and $0.22 for the years ended December 31, 2001, 2000, 1999 and 1998,
respectively.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAPITAL STRUCTURE
Hub Group, Inc. (the "Company") has authorized common stock comprised of
Class A common stock and Class B common stock. The rights of holders of Class A
common stock and Class B common stock are identical, except each share of Class
B common stock entitles its holder to 20 votes, while each share of Class A
common stock entitles its holder to one vote.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUE
Revenue for the Company increased 1.2% to $1,335.7 million in 2002 from
$1,319.3 million in 2001. The Company estimates that the West Coast port lockout
negatively impacted revenue by between $7.0 and $9.0 million during the fourth
quarter of 2002. Intermodal revenue increased 1.1% and truckload brokerage
revenue increased 8.3% over 2001 primarily due to increased volume. The increase
in intermodal revenue is partially offset by a $32.8 million reduction in demand
from the Company's steamship customers when comparing the first quarter of 2002
with the first quarter of 2001. These customers ceased doing business with the
Company early in the second quarter of 2001. Supply chain solutions logistics
services revenue increased 21.1% to $109.2 million in 2002 from $90.2 million in
2001 as a result of adding new customers and increased business from existing
customers. HGDS revenue decreased 27.1% to $80.9 million in 2002 from $110.9
million in 2001. HGDS experienced a significant revenue decline due to the loss
of a large logistics customer as well as a temporary decrease in their
installation business from a large customer during the first and second quarter
of 2002.
GROSS MARGIN
Gross margin decreased to $162.8 million in 2002 from $179.0 million in
2001. As a percent of revenue, gross margin decreased to 12.2% from 13.6% in
2001. Intermodal gross margin, as a percentage of revenue, decreased due to
changes in customer mix, competitive pricing, and increased transportation costs
as compared to 2001. In addition, the Company revised its estimates of accrued
transportation costs resulting in an increase in gross margin for the year ended
December 31, 2002 of $1.6 million.
SALARIES AND BENEFITS
Salaries and benefits decreased 1.6% to $93.5 million in 2002 from $95.0
million in 2001. As a percentage of revenue, salaries and benefits decreased to
7.0% from 7.2% in 2001. Salaries and benefits include a severance charge of $0.5
million in 2002 related to the termination of employees during the fourth
quarter. The decrease as a percentage of revenue is due to a decrease in
headcount and the increase in revenue.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased 12.7% to $46.8
million in 2002 from $53.6 million in 2001. As a percentage of revenue, these
expenses decreased to 3.5% in 2002 from 4.1% in 2001. The decrease as a
percentage of revenue is primarily attributed to a $4.7 million write-off in
2001 associated with the bankruptcy and forced liquidation of a Korean steamship
line customer and a decrease in costs associated with the outsourcing of our
data center. During 2002, the Company incurred $1.4 million of expenses for
professional fees related to the investigation and restatement of HGDS's results
of operations for the years ended December 31, 2000 and 1999. During the fourth
quarter of 2002, the Company recorded a charge of $0.5 million related to a
liability for the remaining lease obligation associated with a closed facility.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization increased 6.5% to $11.4 million in 2002 from
$10.7 million in 2001. This expense as a percentage of revenue increased to 0.9%
from 0.8% in 2001. The increase in depreciation expense in 2002 is due primarily
to new software applications placed in service throughout 2002 and accelerated
11
depreciation and amortization of leasehold improvements related to office
relocations.
AMORTIZATION OF GOODWILL
As of January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets".
Under SFAS No. 142, goodwill is no longer amortized and is tested annually for
impairment. Amortization of goodwill was $5.7 million in 2001.
IMPAIRMENT OF PROPERTY AND EQUIPMENT
There was no impairment charge in 2002. The $3.4 million impairment charge
in 2001 was due to HGDS's exit from its initiative surrounding the home delivery
of large box items purchased over the internet.
OTHER INCOME (EXPENSE)
Interest expense decreased 8.6% to $9.5 million in 2002 from $10.3 million
in 2001. The decrease in interest expense is due primarily to carrying a lower
average debt balance this year as compared to the prior year and lower interest
rates.
Interest income decreased to $0.2 million in 2002 from $0.7 million in 2000
primarily as a result of lower customer finance charges.
MINORITY INTEREST
Minority interest was a $0.5 million benefit in 2002 compared with a $0.2
million charge in 2001. Minority interest represented the 35% interest in HGDS
prior to the Company's purchase of this interest in August 2002. See Note 4 to
the Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $1.0 million in 2002 compared
to $0.3 million in 2001. The Company provided for income taxes using an
effective rate of 41.0% in 2002 and 2001.
NET INCOME
Net income increased to $1.5 million in 2002 from $0.4 million in 2001.
EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share increased to $0.19 in 2002 from
$0.06 in 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUE
Revenue for the Company decreased 4.6% to $1,319.3 million in 2001 from
$1,382.9 million in 2000. Overall, management believes that a soft economy has
negatively impacted the current year growth. Intermodal revenue decreased 9.9%
from 2000. The decline in intermodal revenue was primarily due to a $71.8
million reduction in demand for intermodal service from the Company's steamship
customers. Two large steamship customers ceased doing business with the Company
in the second quarter of 2001. While one steamship customer has terminated
operations worldwide, the other has changed its method of business. Truckload
brokerage revenue increased 2.7% from 2000. Logistics revenue, which includes
revenue from the Company's supply chain solutions services and revenue from
HGDS, increased 17.8% compared to 2000. This increase was primarily due to
significant growth from the Company's supply chain solutions business.
GROSS MARGIN
Gross margin increased 6.7% to $179.0 million in 2001 from $167.8 million
in 2000. As a percent of revenue, gross margin increased to 13.6% from 12.1% in
2000. The increase in gross margin as a percent of revenue is primarily due to
12
the increase in the intermodal gross margin percentage resulting in part from
the loss of the high volume, lower margin steamship business.
SALARIES AND BENEFITS
Salaries and benefits decreased 1.3% to $95.0 million in 2001 from $96.2
million in 2000. As a percentage of revenue, salaries and benefits increased
to 7.2% from 7.0% in 2000. The increase as a percentage of revenue is due to
the decrease in revenue.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 16.0% to $53.6
million in 2001 from $46.2 million in 2000. As a percentage of revenue, these
expenses increased to 4.1% from 3.3% in 2000. The increase as a percentage of
revenue is primarily attributed to a $4.7 million write-off associated with the
bankruptcy and forced liquidation of a Korean steamship line customer, increased
costs associated with the outsourced data center and the decrease in revenue.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Depreciation and amortization increased 75.1% to $10.7 million in 2001 from
$6.1 million in 2000. This expense as a percentage of revenue increased to 0.8%
from 0.4% in 2000. The increase in depreciation and amortization is due in part
to the depreciation of software applications placed into service throughout 2000
and 2001. Additionally, during the first half of the year, the Company
recognized $1.5 million in additional depreciation due primarily to a change in
estimated useful lives for various assets. Of this amount, $0.9 million relates
to various assets, that in December 2000, were determined to be no longer useful
once the Company's new operating system was completed. The remaining $0.6
million of additional depreciation relates to the Company's decision to
accelerate depreciation for a piece of communications software that was replaced
with a more stable and cost effective software application during the second
quarter of 2001.
AMORTIZATION OF GOODWILL
Amortization of goodwill remained constant at $5.7 million in both 2001 and
2000.
IMPAIRMENT OF PROPERTY AND EQUIPMENT
The $3.4 million impairment charge in 2001 was due to Hub Distribution's
exit from its initiative surrounding the home delivery of large box items
purchased over the internet.
OTHER INCOME (EXPENSE)
Interest expense decreased 10.3% to $10.3 million in 2001 from $11.5
million in 2000. The decrease in interest expense is due primarily to carrying a
lower average debt balance this year as compared to the prior year and lower
interest rates.
Interest income decreased to $0.7 million in 2001 from $0.8 million in
2000.
Other income decreased to $0.0 million in 2001 from $0.1 million in 2000.
MINORITY INTEREST
Minority interest decreased to a charge of $0.2 million in 2001 compared to
a benefit of $1.7 million in 2000. Minority interest represents the 35% minority
interest in Hub Distribution.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased 83.5% to $0.3 million in 2001
compared to $1.9 million in 2000. The Company provided for income taxes using an
effective rate of 41.0% in both years.
13
NET INCOME
Net income decreased to $0.4 million in 2001 from $2.7 million in 2000.
EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share decreased to $0.06 in 2001 from
$0.35 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and capital expenditures through cash
flows from operations and bank borrowings.
Cash provided by operating activities for the year ended December 31, 2002,
was approximately $12.6 million, which resulted primarily from net income from
operations, non-cash charges of $16.9 million and a net decrease in working
capital of $5.8 million. The decrease in working capital was primarily related
to reduced accounts payable and accrued expenses offset by a reduction in
accounts receivable due to improved collection efforts.
Net cash used in investing activities for the year ended December 31, 2002,
was $10.5 million and related to the purchase of the minority interest in HGDS
and capital expenditures. The capital expenditures were principally made to
enhance the Company's information system capabilities.
The net cash used in financing activities for the year ended December 31,
2002, was $2.0 million. This was primarily comprised of $6.0 million of
borrowings on the Company's line of credit and $8.0 million of scheduled
payments on the Company's term debt and capital leases.
The Company maintains a multi-bank credit facility (the "Credit
Facility"). The Credit Facility is comprised of term debt and a revolving line
of credit. The revolving line of credit has a term that expires on June 24, 2005
and bears interest at a maximum of LIBOR plus 3.0% or Prime plus 1.5%.
Borrowings and weighted average interest rates on the revolving line of credit
were $25.0 million and 4.18% and $19.0 million and 4.46% at December 31, 2002
and 2001, respectively. There was $24.3 million and $31.0 million unused and
available under the revolving line of credit at December 31, 2002 and 2001,
respectively. The term debt has quarterly payments ranging from $1.2 million
to $2.0 million with a balloon payment of $9.0 million due on June 24, 2005.
Interest on the term debt is a maximum of LIBOR plus 3.25% or Prime plus 1.75%.
Borrowings and weighted average interest rates on the term debt were $27.0
million and 4.40% and $35.0 million and 4.66% at December 31, 2002 and 2001,
respectively.
The Credit Facility was amended three times during 2002. On March 27,
2002, the Credit Facility was amended to waive any historical covenant
violations that resulted from the restatement of the Company's financial
statements from 1999 and 2000 and the adjustment made to the Company's financial
statements in the fourth quarter of 2001. The amendment also revised the minimum
borrowing rate from January 1, 2002 through September 30, 2002. On August 14,
2002, the Credit Facility was amended to waive the Company's non-compliance as
of June 30, 2002 with certain covenants relating to the fixed charge coverage
ratio, minimum earnings before interest, taxes, depreciation and minority
interest and cash flow leverage ratio. The amendment modified certain financial
covenants for the quarters ending September 30, 2002 and December 31, 2002. On
October 15, 2002, the Credit Facility was amended to modify the fixed charge
coverage ratio, minimum earnings before interest, taxes, depreciation,
amortization and minority interest and the cash flow leverage ratio for all
periods subsequent to December 31, 2002. In addition, the capital expenditure
limitation was reduced to $9.0 million for the year ended December 31, 2003. The
amendment also provided that loans under the Credit Facility are secured by
substantially all assets of the Company. The Credit Facility, as amended,
provides for certain financial covenants including a fixed charge coverage
ratio, minimum earnings before interest, taxes, depreciation, amortization,
minority interest and certain other charges (EBITDAM) and a cash flow leverage
ratio. The Company was in compliance with its debt covenants as of December 31,
2002. Subsequent to December 31, 2002, the Company extended the expiration date
of the Credit Facility to June 24, 2005, modified the definition of EBITDAM and
set covenants through the end of the extended term. The modified covenants are
consistent with the covenants of the private placement debt for the same time
period.
The Company maintains $50.0 million of private placement debt (the
"Notes"). These Notes have an eight-year average life and bear interest at 9.14%
which is paid quarterly. These Notes mature on June 25, 2009, with annual
payments of $10.0 million commencing on June 25, 2005. The Notes were amended
three times during 2002. The amendments were made currently with the changes to
14
the Credit Facility discussed above and the revisions were similar to the
amendments made to the Credit Facility. The Notes, as amended through October
15, 2002, provide for certain financial covenants including a fixed charge
coverage ratio and a cash flow leverage ratio. The loans are secured by
substantially all assets of the Company. The Company was in compliance with the
covenants as of December 31, 2002.
As of December 31, 2002, the Company has standby letters of credit totaling
$725,000 that expire from 2003 to 2012. At December 31, 2001, the Company had
standby letters of credit totaling $925,000.
CONTRACTUAL OBLIGATIONS
The Company has ongoing commitments under various contractual and
commercial obligations at December 31, 2002, as follows (in millions):
PAYMENTS DUE BY YEAR
--------------------------------------------------------------------------------------
TOTAL 2003 2004 2005 2006 2007 THEREAFTER
------------ ---------- ------------ ------------ ------------ ----------- -----------
Long-term debt $ 102.1 $ 8.1 $ 8.0 $ 46.0 $ 10.0 $ 10.0 $ 20.0
Operating leases 39.3 12.0 7.6 4.6 3.2 2.8 9.1
------------ ---------- ------------ ------------ ------------ ----------- -----------
------------ ---------- ------------ ------------ ------------ ----------- -----------
Total $ 141.4 $ 20.1 $ 15.6 $ 50.6 $ 13.2 $ 12.8 $ 29.1
============ ========== ============ ============ ============ =========== ===========
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are discussed in
the notes to the consolidated financial statements. The application of certain
of these policies and the preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make significant judgments or rely on an estimation process 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. The
Company bases it estimates on historical experience, current events and other
assumptions that it believes are reasonable. Significant estimates include the
allowance for doubtful accounts, cost of purchased transportation and services
and reserves for pricing and billing adjustments. If actual amounts are
ultimately different from previous estimates, the revisions are included in the
Company's results of operations for the period in which the actual amounts
became known. The accounting policies that can have a significant impact upon
the results of operations, financial position and footnote disclosures of the
Company are as follows:
ALLOWANCE FOR UNCOLLECTIBLE TRADE ACCOUNTS: In the normal course of business,
the Company extends credit to customers after a review of each customer's credit
history. An allowance for uncollectible trade accounts has been established
through an analysis of the accounts receivable aging, an assessment of
collectibility based on historical trends and an evaluation of the current
economic conditions. Actual collections of accounts receivable could differ from
management's estimates due to changes in future economic, industry or customer
financial condition.
VALUATION OF LONG-LIVED ASSETS: The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of such assets many not be recoverable. An estimate of undiscounted cash
flows produced by the asset or appropriate group of assets is compared to the
carrying value to determine whether impairment exists. The estimate of future
cash flows involves considerable management judgment and is based upon
assumptions about anticipated future operating performance. The actual cash flow
could differ from management's estimates due to changes in business conditions,
operating performance and economic conditions.
VALUATION OF GOODWILL: As of January 1, 2002, the Company adopted Financial
Accounting Standards Board Statement No. 142, "Goodwill and Other Intangible
Assets" ("Statement 142"). Under Statement 142, goodwill and intangible assets
that have indefinite useful lives are no longer amortized. In accordance with
Statement 142, the Company reviews goodwill for impairment on an annual basis or
whenever events of changes in circumstances indicate the carrying amount of
goodwill may not be recoverable. The Company utilizes a third-party independent
valuation firm to assist in performing the necessary valuations to be used in
the impairment testing. The valuations are based on market capitalization,
discounted cash flow analysis or a combination of both methodologies. The
assumptions used by the Company in the above valuations include expectations
15
regarding future operating performance, discount rates, control premiums and
other factors which are subjective in nature. As previously mentioned, actual
cash flows from operations could differ from management's estimates due to
changes in business conditions, operating performance and economic conditions.
Should estimates differ materially from actual results, the Company may be
required to record impairment charges in the future.
DEFERRED INCOME TAXES: Deferred income taxes are recognized for the future tax
effects of temporary differences between financial and income tax reporting
using tax rates in effect for the years in which the differences are expected to
reverse. An assessment is made as to the likelihood that deferred tax assets
will be recoverable. As part of this assessment, management has considered
tax-planning strategies that it believes to be prudent and feasible to allow for
the realization of deferred tax assets. In the event the probability of
realizing the deferred tax assets do not meet the more likely than not threshold
in the future, a valuation allowance would be established for the deferred tax
assets deemed unrecoverable.
OUTLOOK, RISKS AND UNCERTAINTIES
Except for historical data, the information contained in this Annual Report
constitutes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
inherently uncertain and subject to risks. Such statements should be viewed with
caution. Actual results or experience could differ materially from the
forward-looking statements as a result of many factors. Forward-looking
statements in this report include, but are not limited to, those contained in
this "Outlook, Risks and Uncertainties" section regarding expectations, hopes,
beliefs, estimates, intentions or strategies regarding the future. The Company
assumes no liability to update any such forward-looking statements. In addition
to those mentioned elsewhere in this section, such risks and uncertainties
include the impact of competitive pressures in the marketplace, including the
entry of new, web-based competitors and direct marketing efforts by the
railroads, the degree and rate of market growth in the intermodal, brokerage and
logistics markets served by the Company, changes in rail and truck capacity,
further consolidation of rail carriers, deterioration in relationships with
existing rail carriers, rail service conditions, changes in governmental
regulation, adverse weather conditions, fuel shortages, changes in the cost of
services from rail, drayage and other vendors, the threat of war or the
commencement of a war in the Middle East and fluctuations in interest rates.
BUSINESS COMBINATIONS/DIVESTITURES
Management believes that future acquisitions or dispositions made by the
Company could significantly impact financial results. Financial results most
likely to be impacted include, but are not limited to, revenue, gross margin,
salaries and benefits, selling general and administrative expenses, depreciation
and amortization, interest expense, net income and the Company's debt level.
Financial results may be impacted by additional factors as discussed below.
REVENUE
Management believes that the performance of the railroads and a more severe
or prolonged slow-down of the economy are the most significant factors that
could negatively influence the Company's revenue growth rate. Should there be
further consolidation in the rail industry causing a service disruption, the
Company believes its intermodal growth rate would likely be negatively impacted.
Should there be another significant service disruption similar to the lock out
of West Coast dock workers, the Company expects there may be some customers who
would switch from using the Company's intermodal service to other carriers'
over-the-road service. The Company expects these customers may choose to
continue to utilize these carriers even when intermodal service levels are
restored. Other factors that could negatively influence the Company's growth
rate include, but are not limited to, the elimination of fuel surcharges, the
entry of new web-based competitors, inadequate drayage service and inadequate
equipment supply.
GROSS MARGIN
Management expects fluctuations in the gross margin percentage from
quarter-to-quarter caused by various factors including, but not limited to,
changes in business mix, intermodal margins, highway brokerage margins,
logistics business margins, trailer and container capacity, vendor pricing, fuel
costs, intermodal industry growth, intermodal industry service levels,
competition and accounting estimates. Unlike the Company's other service
offerings, the Company's distribution services are comprised of certain higher
margin projects. There can be no assurance these higher margin projects will
continue in the future.
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
16
revenue increases and changes in levels of staffing. Should the Company
eliminate more positions due to automation resulting from systems enhancements
or centralizing functions, this expense, as a percent of revenue, is likely to
be reduced. Factors that could affect the percentage from staying in the recent
historical range include, but are not limited to, revenue growth rates
significantly higher or lower than forecasted, a management decision to invest
in additional personnel to stimulate new or existing businesses, such as the
Company's expedited services initiative, changes in customer requirements and
changes in railroad intermodal service levels which could result in a lower or
higher cost of labor per move.
SELLING, GENERAL AND ADMINISTRATIVE
Management believes there are several factors that could cause selling,
general and administrative expenses to increase as a percentage of revenue. As
customer expectations and the competitive environment require the development of
web-based business interfaces and the restructuring of the Company's information
systems and related platforms, the Company believes there could be significant
expenses incurred, some of which would not be capitalized. Costs incurred to
formulate the Company's strategy as well as any costs that would be identified
as reengineering or training would be expensed.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
Management estimates that depreciation and amortization of property and
equipment will increase in the future. The most significant factor that could
cause an increase in depreciation and amortization expense is increased software
amortization related to improvements in the Company's information systems.
Additional factors that could cause an increase in depreciation expense include,
but are not limited to, if the Company decided to purchase rather than lease a
greater proportion of assets or accelerating depreciation due to changes in
useful lives of existing assets.
AMORTIZATION OF GOODWILL
With the adoption of Statement 142 effective January 1, 2002, the Company's
goodwill is no longer being amortized but is subject to periodic impairment
reviews.
IMPAIRMENT OF PROPERTY AND EQUIPMENT
On an ongoing basis, the Company assesses the realizability of its assets.
If, at any point during the year, management determines that an impairment
exists, the carrying amount of the asset is reduced by the estimated impairment
with a corresponding charge to earnings. If it is determined that an impairment
exists, management estimates that the write down of specific assets could have a
material adverse impact on earnings.
OTHER INCOME (EXPENSE)
Factors that could cause interest to fluctuate higher or lower than
forecasted include, but are not limited to, changes in lending rates,
unanticipated debt repayments, unanticipated working capital needs,
unanticipated software development expenses and unanticipated capital
expenditures.
Management estimates that interest income will likely remain relatively
consistent with the prior year. Factors that could cause a change include, but
are not limited to, the possible use of cash to make debt repayments, fund
working capital needs and fund capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that cash to be provided by operations, cash available
under its lines of credit and the Company's ability to obtain additional credit
will be sufficient to meet the Company's short-term working capital and capital
expenditure needs. The Company believes that the aforementioned items are
sufficient to meet its anticipated long-term working capital, capital
expenditure and debt repayment needs.
The Company estimates that its capital expenditures will not exceed $9.0
million in 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates
on its bank line of credit and term notes which may adversely affect its results
17
of operations and financial condition. The Company seeks to minimize the risk
from interest rate volatility through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments. The Company does not use financial instruments for trading
purposes.
The Company has both fixed and variable rate debt as described in Note 8 to
the Consolidated Financial Statements. The Company had an interest rate swap
designated as a hedge on a portion of the Company's variable rate debt that
matured September 30, 2002. The purpose of the swap was to fix the interest rate
on a portion of the variable rate debt and reduce certain exposures to interest
rate fluctuations. As of December 31, 2002, the Company did not have any
interest rate swap agreements outstanding. A ten percent increase in market
interest rates would not have a material impact on the results of operations for
the year ended December 31, 2002.
The main objective of interest rate risk management is to reduce the total
funding cost to the Company and to alter the interest rate exposure to the
desired risk profile.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Auditors 20
Predecessor Auditor Opinion 21
Consolidated Balance Sheets - December 31, 2002 and December 31, 2001 22
Consolidated Statements of Operations - Years ended December 31, 2002,
December 31, 2001 and December 31, 2000 23
Consolidated Statements of Stockholders; Equity - Years ended December
31, 2002, December 31, 2001 and December 31, 2000 24
Consolidated Statements of Cash Flows - Years ended December 31, 2002,
December 31, 2001 and December 31, 2000 25
Notes to Consolidated Financial Statements 26
Schedule II - Valuation and Qualifying Accounts S-1
19
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Hub Group, Inc.:
We have audited the consolidated balance sheet of Hub Group, Inc. as of
December 31, 2002, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the index at Item 15(a) for
the year ended December 31, 2002. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of Hub Group, Inc. as of December 31, 2001, and for each of the two
years in the period ended December 31, 2001 were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified opinion on those
statements in their report dated March 27, 2002 and included an explanatory
paragraph which disclosed that the selected quarterly financial data included in
Note 19 contained information that they did not audit and were unable to review
in accordance with standards established by the American Institute of Certified
Public Accountants because the Company did not restate its results on a
quarterly basis.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hub
Group, Inc. at December 31, 2002, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the year ended December
31, 2002, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements,
effective on January 1, 2002, the Company changed its method of accounting for
goodwill to conform with Statement of Financial Accounting Standards (Statement)
142, "Goodwill and Other Intangible Assets".
As discussed, the consolidated financial statements of Hub Group, Inc.
as of December 31, 2001, and for each of the two years in the period ended
December 31, 2001 were audited by other auditors who have ceased operations. As
described in Note 1, these consolidated financial statements have been revised
to include the transitional disclosures required by Statement 142, "Goodwill and
Other Intangible Assets", which was adopted by the Company as of January 1,
2002. Our audit procedures with respect to the disclosures in Note 1 with
respect to 2001 and 2000 included (a) agreeing the previously reported net
income to the previously issued financial statements and the adjustments to
reported net income representing amortization expense, including any related tax
effects, recognized in those periods related to goodwill as a result of
initially applying Statement 142, to the Company's underlying records obtained
from management, and (b) testing the mathematical accuracy of the reconciliation
of adjusted net income to reported net income, and the related
earnings-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in
Note 1 are appropriate. However, we were not engaged to audit, review, or apply
any procedures to the 2001 and 2000 financial statements of the Company other
than with respect to such disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 and 2000 financial statements
taken as a whole.
ERNST & YOUNG LLP
Chicago, Illinois
February 19, 2003
20
PREDECESSOR AUDITOR (ARTHUR ANDERSEN LLP) OPINION
NOTE: THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP ("ANDERSEN") IN CONNECTION WITH HUB GROUP, INC.'S FORM 10-K FILING
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001. THE INCLUSION OF THIS PREVIOUSLY
ISSUED ANDERSEN REPORT IS PURSUANT TO THE " TEMPORARY FINAL RULE AND FINAL RULE
REQUIREMENTS FOR ARTHUR ANDERSEN LLP AUDITING CLIENTS," ISSUED BY THE U.S.
SECURITIES AND EXCHANGE COMMISSION IN MARCH 2002. NOTE THAT THIS PREVIOUSLY
ISSUED ANDERSEN REPORT INCLUDES REFERENCES TO CERTAIN FISCAL YEARS, WHICH ARE
NOT REQUIRED TO BE PRESENTED IN THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000. THIS AUDIT
REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS
FILING ON FORM 10-K.
To the Board of Directors and Stockholders of Hub Group, Inc.:
We have audited the accompanying consolidated balance sheets of Hub
Group, Inc. (a Delaware corporation) as of December 31, 2001 and 2000 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001 (2000
and 1999 as restated - see Note 2). These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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.
The selected quarterly financial data included in Note 20 contains
information that we did not audit, and, accordingly, we do not express an
opinion on that data. We were unable to review the quarterly financial data in
accordance with standards established by the American Institute of Certified
Public Accountants because the Company did not restate its results on a
quarterly basis (see Note 2).
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hub Group,
Inc. as of December 31, 2001 and 2000, and the results of its operations and
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
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 Commissions 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, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 27, 2002
21
HUB GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
-----------------------------------
DECEMBER 31,
-----------------------------------
2002 2001
---------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ -
Accounts receivable
Trade, net 126,736 137,463
Other 13,715 12,302
Deferred taxes 3,221 11,147
Prepaid expenses and other current assets 4,732 3,840
---------------- -----------------
TOTAL CURRENT ASSETS 148,404 164,752
PROPERTY AND EQUIPMENT, net 34,209 39,098
GOODWILL, net 215,175 208,166
OTHER ASSETS 1,474 1,507
MINORITY INTEREST - 2,501
---------------- -----------------
TOTAL ASSETS $ 399,262 $ 416,024
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 124,980 $ 135,588
Other 3,226 1,275
Accrued expenses
Payroll 10,275 11,195
Other 8,971 14,020
Current portion of long-term debt 8,061 8,054
---------------- -----------------
TOTAL CURRENT LIABILITIES 155,513 170,132
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 94,027 96,059
DEFERRED TAXES 15,382 17,380
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares
issued or outstanding in 2002 and 2001 - -
Common stock, Class A: $.01 par value; 12,337,700 shares authorized;
7,046,250 shares issued and outstanding in 2002 and 2001 70 70
Class B: $.01 par value; 662,300 shares authorized; 662,296 shares
issued and outstanding in 2002 and 2001 7 7
Additional paid-in capital 110,819 110,819
Purchase price in excess of predecessor basis, net of tax benefit of
$10,306 (15,458) (15,458)
Retained earnings 38,902 37,404
Accumulated other comprehensive loss - (389)
--------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 134,340 132,453
--------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 399,262 $ 416,024
=============== =================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
22
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000
--------------- ---------------- --------------
Revenue $ 1,335,660 $ 1,319,331 $ 1,382,880
Transportation costs 1,172,848 1,140,368 1,215,113
--------------- ---------------- --------------
Gross margin 162,812 178,963 167,767
Costs and expenses:
Salaries and benefits 93,476 94,982 96,201
Selling, general and administrative 46,824 53,613 46,233
Depreciation and amortization of property and equipment 11,371 10,678 6,097
Amortization of goodwill - 5,741 5,741
Impairment of property and equipment - 3,401 -
--------------- ---------------- --------------
Total costs and expenses 151,671 168,415 154,272
Operating income 11,141 10,548 13,495
--------------- ---------------- --------------
Other income (expense):
Interest expense (9,453) (10,345) (11,532)
Interest income 230 693 779
Other, net 97 6 136
--------------- ---------------- --------------
Total other expense (9,126) (9,646) (10,617)
Income before minority interest and provision for income taxes 2,015 902 2,878
--------------- ---------------- --------------
Minority interest (524) 151 (1,669)
--------------- ---------------- --------------
Income before provision for income taxes 2,539 751 4,547
Provision for income taxes 1,041 308 1,864
--------------- ---------------- --------------
Net income $ 1,498 $ 443 $ 2,683
=============== ================ ==============
Basic earnings per common share $ 0.19 $ 0.06 $ 0.35
=============== ================ ==============
Diluted earnings per common share $ 0.19 $ 0.06 $ 0.35
=============== ================ ==============
Basic weighted average number of shares outstanding 7,709 7,708 7,708
=============== ================ ==============
Diluted weighted average number of shares outstanding 7,714 7,716 7,716
=============== ================ ==============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
23
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000
-------------- --------------- ----------------
Class A & B Common Stock Shares
Beginning of year 7,708,546 7,708,346 7,706,246
Exercise of non-qualified stock options - 200 2,100
-------------- --------------- ----------------
Ending balance 7,708,546 7,708,546 7,708,346
-------------- --------------- ----------------
Class A & B Common Stock Amount
Beginning of year $ 77 $ 77 $ 77
-------------- --------------- ----------------
Ending balance 77 77 77
-------------- --------------- ----------------
Additional Paid-in Capital
Beginning of year 110,819 110,817 110,786
Exercise of non-qualified stock options - 2 31
-------------- --------------- ----------------
Ending balance 110,819 110,819 110,817
-------------- --------------- ----------------
Purchase Price in Excess of Predecessor Basis, Net of Tax
Beginning of year (15,458) (15,458) (15,458)
-------------- --------------- ----------------
Ending balance (15,458) (15,458) (15,458)
-------------- --------------- ----------------
Retained Earnings
Beginning of year 37,404 36,961 34,278
Net income 1,498 443 2,683
-------------- --------------- ----------------
Ending balance 38,902 37,404 36,961
-------------- --------------- ----------------
Accumulated Other Comprehensive (Loss) Income
Beginning of year (389) - -
Other comprehensive income (loss) 389 (389) -
-------------- --------------- ----------------
Ending balance - (389) -
-------------- --------------- ----------------
TOTAL STOCKHOLDERS' EQUITY $ 134,340 $ 132,453 $ 132,397
============== =============== ================
Comprehensive Income
Net income $ 1,498 $ 443 $ 2,683
Cumulative effect of adopting Statement 133, net of tax - 79 -
Unrealized interest rate swap income (loss), net of taxes 389 (468) -
-------------------------------------------------
Other comprehensive income (loss) 389 (389) -
-------------------------------------------------
Total comprehensive income $ 1,887 $ 54 $ 2,683
=================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
24
HUB GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
Cash flows from operating activities:
Net income $ 1,498 $ 443 $ 2,683
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 11,476 11,248 6,875
Amortization of goodwill - 5,741 5,741
Impairment of property and equipment - 3,401 -
Deferred taxes 5,928 308 1,864
Minority interest (524) 151 (1,669)
(Gain) loss on sale of assets (33) 426 128
Other assets 33 670 (215)
Changes in working capital:
Accounts receivable, net 9,314 43,204 (4,044)
Prepaid expenses and other current assets (892) 697 (1,188)
Accounts payable (8,657) (43,676) 26,446
Accrued expenses (5,580) 5,021 4,729
-------------- -------------- ---------------
Net cash provided by operating activities 12,563 27,634 41,350
-------------- -------------- ---------------
Cash flows from investing activities:
Purchase of minority interest (4,000) - -
Purchases of property and equipment, net (6,538) (10,319) (26,613)
-------------- -------------- ---------------
Net cash used in investing activities (10,538) (10,319) (26,613)
-------------- -------------- ---------------
Cash flows from financing activity:
Proceeds from sale of common stock - 2 31
Distributions to minority interest - - (454)
Net borrowings (payments) on revolver 6,000 (5,000) (10,000)
Payments on long-term debt (8,025) (12,317) (6,179)
-------------- -------------- ---------------
Net cash used in financing activities (2,025) (17,315) (16,602)
-------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents - - (1,865)
Cash and cash equivalents beginning of period - - 1,865
-------------- -------------- ---------------
Cash and cash equivalents end of period $ - $ - $ -
============== ============== ===============
Supplemental disclosures of cash flow information Cash paid for:
Interest $ 8,283 $ 10,143 $ 12,520
Income taxes - - 567
Non-cash activity:
Unrealized income (loss) on derivative instrument $ 389 $ (389) $ -
The accompanying notes to consolidated financial statements are an integral part
of these statements.
25
HUB GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BUSINESS: Hub Group, Inc. (the "Company") provides intermodal transportation
services utilizing primarily 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 the Company 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, of approximately $4,259,000 and $12,320,000 at December 31, 2002
and 2001, respectively, are included in accounts payable trade.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS: The Company
carries its accounts receivable at face amount less an allowance for
uncollectible accounts. The allowance for uncollectible accounts is determined
through an analysis of the accounts receivable aging, an assessment of
collectibility based on historical trends and an evaluation of current economic
conditions. The Company's reserve for uncollectible accounts was approximately
$5,362,000 and $4,020,000 at December 31, 2002 and 2001, respectively. The
Company does not generally charge interest on past due accounts receivables.
Recoveries of receivables previously charged off are recorded when received.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation
of property and equipment is computed using the straight-line and various
accelerated methods at rates adequate to depreciate the cost of the 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 their expected useful life on a straight-line basis not to exceed five
years. Interest is capitalized on qualifying assets under development for
internal use. 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. The Company reviews long-lived assets for impairment
when events or changes in circumstances indicate the carrying amount of an asset
may not be recoverable. In the event that the undiscounted future cash flows
resulting from the use of the asset group is less than the carrying amount, an
impairment loss equal to the excess of the assets carrying amount over its fair
value is recorded. See Note 6 for impairment charges recorded in 2001.
GOODWILL: Goodwill represents the excess of purchase price over the fair market
value of net assets acquired in connection with the Company's business
combinations. As of January 1, 2002, the Company adopted Financial Accounting
Standards Board Statement No. 142, "Goodwill and Other Intangible Assets"
("Statement 142"). Under Statement 142, goodwill and intangible assets that have
indefinite useful lives are no longer amortized. Accumulated goodwill
amortization was $21,517,000 as of December 31, 2002 and 2001.
In connection with the adoption of SFAS 142, the Company completed the required
transitional and annual goodwill impairment testing. This testing used
discounted cash flow and market capitalization methodologies to determine a fair
market value of the reporting units. The results of the testing indicated no
impairment. The impairment testing was based on the Company's estimates of the
value of the reporting units, future operating performance and discount rates.
Should the estimates differ materially from actual results, the Company may be
required to record impairment charges in future periods. The Company will
continue to test the value of its goodwill for any impairment at least annually
as of November 1 and impairment, if any, will be recorded as expense in the
period of impairment. The following table presents net income for 2002 in
comparison to 2001 and 2000, exclusive of amortization expense recognized in the
26
previous years related to goodwill which is no longer being amortized. Amounts
are in thousands except per share information:
YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
------------ ----------- ----------
Net income as reported $ 1,498 $ 443 $ 2,683
Add back amortization of goodwill, net of tax - 3,387 3,387
------------ ----------- ----------
Adjusted net income $ 1,498 $ 3,830 $ 6,070
============ =========== ==========
Basic and diluted earnings per share, as reported $ 0.19 $ 0.06 $ 0.35
Add back amortization of goodwill, net of tax - 0.44 0.44
------------ ----------- ----------
Adjusted basic and diluted earnings per share $ 0.19 $ 0.50 $ 0.79
============ =========== ==========
DEFERRED FINANCING COSTS: The accumulated amortization related to the deferred
financing costs was $1,808,000 and $1,108,000 as of December 31, 2002 and 2001,
respectively. The amortization expense related to deferred financing costs was
$700,000, $476,000 and $387,000 for the years ending December 31, 2002, 2001 and
2000, respectively. Deferred financing costs net of accumulated amortization
were $1,592,327 at December 31, 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of cash and cash
equivalents, accounts receivable and accounts payable approximates fair value at
December 31, 2002 due to their short-term nature. The carrying value of
the Company's term debt and revolving line of credit approximates fair value due
to their variable interest rates. The fair value of the Notes, estimated using
discounted cash flow analysis based on the Company's incremental borrowing rate
for similar instruments, approximates the carrying value at December 31, 2002.
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 accounts receivable. The Company places its cash and temporary
investments with high quality financial institutions. The Company primarily
serves customers located throughout the United States with no significant
concentration in any one region. No one customer accounted for more than 10% of
revenue in 2002, 2001 and 2000. 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.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company accounts for derivatives in
accordance with Financial Accounting Standards Board Statement No. 133,
"Accounting for Derivatives and Hedging Activities" as amended (Statement 133).
Under Statement 133, any derivatives are recorded on the balance sheet at fair
value. Changes in the fair value of derivatives are recorded in earnings or
other comprehensive income, based on hedge type. Gains or losses on derivative
instruments are reclassified into earnings in the period in which earnings are
impacted by the underlying hedged item. Any ineffective portion of hedges is
recognized in earnings in the current period. As of December 31, 2002, the
Company was not a party to any derivative contracts.
REVENUE RECOGNITION: Revenue represents sales of services to customers. Revenue
is recognized at the time the transportation services are provided. Revenue for
logistics customers is recognized on the date the services are performed.
INCOME TAXES: 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 COMMON SHARE: In accordance with Statement of Financial Accounting
Standards No. 128 ("Statement 128"), "Earnings per Share", basic earnings per
common share are based on the average quarterly weighted average number of Class
A and Class B shares of common stock outstanding. Diluted earnings per common
share are adjusted for the assumed exercise of dilutive stock options. In
computing the per share effect of assumed exercise, 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.
STOCK BASED COMPENSATION: The Company currently utilizes Accounting Principles
Board Opinion No. 25 in accounting for stock based compensation plans. APB No.
27
25 requires the use of the intrinsic value method which measures compensation
costs as the excess of the quoted market price of the stock at the date of grant
over the amount the employee must pay to acquire the stock. The following table
illustrates the effect on net income and income per share if the Company applied
the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123 ("Statement 123"), "Accounting for Stock-based Compensation."
YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------------- ------------ ------------
Net income as reported (000's) $ 1,498 $ 443 $ 2,683
Net income (loss) pro forma
for Statement 123 (000's) 858 (288) 1,869
Basic earnings (loss) per common share
pro forma for Statement 123 $ 0.11 $ (0.04) $ 0.24
Diluted earnings (loss) per common share
pro forma for Statement 123 $ 0.11 $ (0.04) $ 0.24
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. The Company's stock based
compensation plans are discussed further in Note 11.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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. Significant estimates include the allowance
for doubtful accounts, cost of purchased transportation and services and
reserves for pricing and billing adjustments. Actual results could differ from
those estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
with the current year presentation.
NOTE 2. CAPITAL STRUCTURE
The Company has authorized common stock comprised of Class A common
stock and Class B common stock. The rights of holders of Class A common stock
and Class B common stock are identical, except each share of Class B common
stock entitles its holder to 20 votes, while each share of Class A common stock
entitles its holder to one vote. The Company has authorized 2,000,000 shares of
preferred stock.
NOTE 3. EARNINGS PER SHARE
The following is a reconciliation of the Company's earnings per share:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------- ------------------------- -------------------------
(000'S) (000'S) (000'S)
-------------- -------------- --------------
Per-Share Per-Share Per-Share
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ --------- ------ ------ ---------
BASIC EPS
Income available to
common stockholders $1,498 7,709 $0.19 $ 443 7,708 $0.06 $2,683 7,708 $0.35
------ ------ --------- ------ ------ --------- ------ ------ ---------
EFFECT OF DILUTIVE SECURITIES
Stock options - 5 - - 8 - - 8 -
------ ------ --------- ------ ------ --------- ------ ------ ---------
DILUTED EPS
Income available to
common stockholders
plus assumed exercises $1,498 7,714 $0.19 $ 443 7,716 $0.06 $2,683 7,716 $0.35
====== ====== ========= ====== ====== ========= ====== ====== =========
28
NOTE 4. PURCHASE OF MINORITY INTEREST
HGDS was a 65% owned partnership until August of 2002 when Hub
purchased the minority partners' interest in HGDS. Pursuant to the HGDS
Partnership Agreement, each of the partners had a legal obligation to the
partnership for any deficit balance in their respective capital accounts.
Accordingly, there was a debit balance reflected in minority interest in the
accompanying consolidated balance sheets related to the minority partner's
deficit capital account balance of approximately $2.5 million at December 31,
2001. Management believed that the balance in the minority account was
collectable at December 31, 2001. Hub had a legal right to pursue the minority
partner for the deficit balance in the capital account. In August of 2002, the
Company entered into a settlement agreement and release with the minority
partner that resulted in the relinquishment of the minority partner's 35%
interest in HGDS and release of the minority partner's claims against the
Company in exchange for $4.0 million in cash and release of Hub's claims against
the minority partner including the $3.0 million balance in minority interest.
The acquisition resulted in goodwill of approximately $7.0 million.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
YEARS ENDED DECEMBER 31,
-------------------------------
2002 2001
-------------- ---------------
(000'S)
Building and improvements $ 57 $ 57
Leasehold improvements 1,582 2,126
Computer equipment and software 52,095 49,373
Furniture and equipment 8,234 7,542
Transportation equipment and automobiles 2,127 3,690
-------------- ---------------
64,095 62,788
Less: Accumulated depreciation and amortization (29,886) (23,690)
-------------- ---------------
Property and Equipment, net $ 34,209 $ 39,098
============== ===============
Depreciation expense, which includes depreciation of assets under
capital leases, was $11,476,000, $11,248,000 and $6,875,000 for 2002, 2001 and
2000, respectively. Depreciation expense for 2000 included approximately
$500,000 of additional depreciation due to the change in estimated useful lives
of various assets that were no longer used once the new operating system was
completed.
NOTE 6. IMPAIRMENT OF PROPERTY AND EQUIPMENT
On March 30, 2001, a $3.4 million pretax charge was recorded due to the
impairment of HGDS's e-Logistics software ("e-software"). This e-software was
used to process orders relating to the home delivery of large box items
purchased over the internet. Management made the decision to exit the internet
home delivery business and in conjunction with this decision, all customer
contracts associated with the internet home delivery business were terminated as
of March 30, 2001. Consequently, the e-software's fair value was reduced to zero
based on the lack of any future cash flows attributable to Hub Distribution's
e-Logistics initiative. The Company does not intend to use the software in the
future.
NOTE 7. INCOME TAXES
The following is a reconciliation of the Company's effective tax rate to the
federal statutory tax rate:
YEARS ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
U.S. federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit (7.4) 3.9 3.9
Goodwill amortization - 1.1 1.1
Nondeductible expenses 14.8 - -
Other (0.4) 2.0 2.0
----------- ----------- -----------
Net effective rate 41.0% 41.0% 41.0%
----------- ----------- -----------
29
The Company and its subsidiaries file both, unitary and separate
company, state income tax returns. The state tax benefit shown above is a result
of the tax benefit of the net operating losses incurred on a separate company
basis exceeding the tax expense incurred on the Company's unitary state filing.
The following is a summary of the Company's provision for income taxes:
YEARS ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
(000's)
Current
Federal $ (2,092) $ - $ -
State and local - - -
----------- ----------- -----------
(2,092) - -
----------- ----------- -----------
Deferred
Federal 3,221 276 1,672
State and local (188) 32 192
----------- ----------- -----------
3,133 308 1,864
----------- ----------- -----------
Total provision $ 1,041 $ 308 $ 1,864
----------- ----------- -----------
The following is a summary of the Company's deferred tax assets and
liabilities:
YEARS ENDED DECEMBER 31,
-------------------------------
2002 2001
--------------- ---------------
(000'S)
Reserve for uncollectible accounts receivable $ 1,751 $ 1,537
Accrued compensation 2,514 163
Net operating loss carryforward - 9,500
Other reserves 1,149 1,179
--------------- --------------
Current deferred tax assets 5,414 12,379
Accrued compensation - 1,636
Net operating loss and tax credit carryforwards 13,340 2,307
Other 1 31
Income tax basis in excess of financial basis of goodwill 6,845 7,678
--------------- --------------
Long-term deferred tax assets 20,186 11,652
--------------- --------------
Total deferred tax assets $ 25,600 $ 24,031
--------------- --------------
Prepaids $ (33) $ -
Receivables
(2,160) (1,232)
--------------- --------------
Current deferred tax liabilities (2,193) (1,232)
Property and equipment (9,937) (9,929)
Goodwill (25,631) (19,103)
--------------- --------------
Long-term deferred tax liabilities (35,568) (29,032)
--------------- --------------
Total deferred tax liabilities $ (37,761) $ (30,264)
--------------- --------------
The Company had federal net operating loss carryforwards of
approximately $23,495,000 at December 31, 2002. These federal net operating loss
carryforwards expire as follows:
(In thousands)
2020 $ 5,530
2021 6,190
2022 11,775
30
The Company had federal tax credits of approximately $1,130,000 at
December 31, 2002. The portion of the federal tax credits that have expiration
dates, expire as follows:
(In thousands)
2019 $ 139
2020 543
2021 448
NOTE 8. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
The Company's outstanding debt is as follows (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
2002 2001
-------------- --------------
Bank line of credit $ 25,000 $ 19,000
Term notes with quarterly payments ranging from $1,250,000 to
$2,000,000 with a balloon payment of $9,000,000 due June 24, 2005; Interest is
due quarterly at a floating rate. At December 31, 2002 and 2001, the weighted
average interest rate was 4.40% and 4.66%,
respectively 27,000 35,000
Notes due on June 25, 2009 with annual payments
of $10,000,000 commencing on June 25, 2005; interest is paid quarterly
at a fixed rate of 9.14% 50,000 50,000
Capital lease obligations collateralized by certain equipment 88 113
-------------- -------------
Total long-term debt 102,088 104,113
Less current portion (8,061) (8,054)
-------------- -------------
$ 94,027 $ 96,059
-------------- -------------
Aggregate principal payments, in thousands, due subsequent to December 31, 2002,
are as follows:
2003 $ 8,061
2004 8,007
2005 46,009
2006 10,007
2007 10,004
2008 and thereafter 20,000
-----------
$ 102,088
===========
The Company maintains a multi-bank credit facility (the "Credit
Facility"). The Credit Facility is comprised of term debt and a revolving line
of credit. The revolving line of credit has a term that expires on June 24, 2005
and bears interest at a maximum of LIBOR plus 3.0% or Prime plus 1.5%.
Borrowings and weighted average interest rates on the revolving line of credit
were $25.0 million and 4.18% and $19.0 million and 4.46% at December 31, 2002
and 2001, respectively. There was $24.3 million and $31.0 million unused and
available under the revolving line of credit at December 31, 2002 and 2001,
respectively. The term debt has quarterly payments ranging from $1.2 million to
$2.0 million with a balloon payment of $9.0 million due on June 24, 2005.
Interest on the term debt is a maximum of LIBOR plus 3.25% or Prime plus 1.75%.
Borrowings and weighted average interest rates on the term debt were $27.0
million and 4.40% and $35.0 million and 4.66% at December 31, 2002 and 2001,
respectively.
The Credit Facility was amended three times during 2002. On March 27,
2002, the Credit Facility was amended to waive any historical covenant
violations that resulted from the restatement of the Company's financial
statements from 1999 and 2000 and the adjustment made to the Company's financial
statements in the fourth quarter of 2001. The amendment also revised the minimum
borrowing rate from January 1, 2002 through September 30, 2002. On August 14,
2002, the Credit Facility was amended to waive the Company's non-compliance as
of June 30, 2002 with certain covenants relating to the fixed charge coverage
ratio, minimum earnings before interest, taxes, depreciation and minority
interest and cash flow leverage ratio. The amendment modified certain financial
covenants for the quarters ending September 30, 2002 and December 31, 2002. On
October 15, 2002, the Credit Facility was amended to modify the fixed charge
coverage ratio, minimum earnings before interest, taxes, depreciation,
31
amortization and minority interest and the cash flow leverage ratio for all
periods subsequent to December 31, 2002. In addition, the capital expenditure
limitation was reduced to $9.0 million for the year ended December 31, 2003. The
amendment also provided that loans under the Credit Facility are secured by
substantially all assets of the Company. The Credit Facility, as amended,
provides for certain financial covenants including a fixed charge coverage
ratio, minimum earnings before interest, taxes, depreciation, amortization,
minority interest and certain other charges (EBITDAM) and a cash flow leverage
ratio. The Company was in compliance with its debt covenants as of December 31,
2002. Subsequent to December 31, 2002, the Company extended the expiration date
of the Credit Facility to June 24, 2005, modified the definition of EBITDAM and
set covenants through the end of the extended term. The modified covenants are
consistent with the covenants of the private placement debt for the same time
period.
The Company maintains $50.0 million of private placement debt (the
"Notes"). These Notes have an eight-year average life and bear interest at 9.14%
which is paid quarterly. These Notes mature on June 25, 2009, with annual
payments of $10.0 million commencing on June 25, 2005. The Notes were amended
three times during 2002. The amendments were made currently with the changes to
the Credit Facility discussed above and the revisions were similar to the
amendments made to the Credit Facility. The Notes, as amended through October
15, 2002, provide for certain financial covenants including a fixed charge
coverage ratio and a cash flow leverage ratio. The loans are secured by
substantially all assets of the Company. The Company was in compliance with the
covenants as of December 31, 2002.
As of December 31, 2002, the Company has standby letters of credit
totaling $725,000 that expire from 2003 to 2012. At December 31, 2001, the
Company had standby letters of credit totaling $925,000.
NOTE 9. CAPITALIZED INTEREST AND INTEREST EXPENSE
Capitalized interest on qualifying assets under development and total
interest were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
-------------- --------------- --------------
(000'S)
Capitalized interest $ 28 $ 365 $ 836
Interest expensed 9,453 10,345 11,532
-------------- --------------- --------------
Total interest incurred $ 9,481 $ 10,710 $ 12,638
============== =============== ==============
NOTE 10. RENTAL EXPENSE, USER CHARGES AND LEASE COMMITMENTS
Minimum annual rental commitments, in thousands, at December 31, 2002,
under noncancellable operating leases, principally for real estate and
equipment, are payable as follows:
2003 $ 11,965
2004 7,647
2005 4,646
2006 3,148
2007 2,789
2008 and thereafter 9,066
$ 39,261
Total rental expense included in selling general and administrative
expense was approximately, $15,492,000, $15,157,000, and $13,230,000 for 2002,
2001 and 2000, respectively. Many of the leases contain renewal options and
escalation clauses which require payments of additional rent to the extent of
increases in the related operating costs.
Hub incurs user charges for its use of a fleet of dedicated containers
which are included in transportation costs. Such charges, included in
transportation costs, were $27,751,000 for the year ended December 31, 2002.
Under the agreements, the Company has the ability to return the containers. As a
result, no minimum commitment has been included in the table above.
NOTE 11. STOCK-BASED COMPENSATION PLAN
In 1996, the Company adopted a Long-Term Incentive Plan (the "1996
Incentive Plan"). The number of shares of Class A Common Stock reserved for
issuance under the 1996 Incentive Plan was 450,000. In 1997, the Company adopted
a second Long-Term Incentive Plan (the "1997 Incentive Plan"). The number of
shares of Class A Common Stock reserved for issuance under the 1997 Incentive
Plan was 150,000. For the purpose of attracting and retaining key executive and
managerial employees, in 1999 the Company adopted a third Long-Term Incentive
32
Plan (the "1999 Incentive Plan"). The number of shares of Class A Common Stock
reserved for issuance under the 1999 Incentive Plan was 600,000. In 2002, the
Company adopted a fourth Long-Term Incentive Plan (the "2002 Incentive Plan").
The number of shares of Class A Common Stock reserved for issuance under the
2002 Incentive Plan was 600,000. Under the 1996, 1997, 1999 and 2002 Incentive
Plans, stock options, 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. The options granted to
non-employee directors vest ratably over a three-year period and expire 10 years
after the date of grant. The options granted to employees vest over a range of
three to five years and expire 10 years after the date of grant.
Information regarding these option plans for 2002, 2001 and 2000 is as follows:
2002 2001 2000
--------------------------------- ---------------------------------- ---------------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------------- -------------- ----------------- -------------- ------------------ --------------
Options outstanding,
beginning of year 951,500 $ 16.28 877,800 $ 17.07 892,800 $ 17.86
Options exercised 0 -- (200) 10.43 (2,100) 14.00
Options granted 537,000 6.04 106,000 10.15 100,000 13.32
Options forfeited (86,500) 15.14 (32,050) 17.64 (122,900) 20.11
----------------- -------------- ----------------- -------------- ------------------ --------------
Options outstanding,
end of year 1,402,050 $ 12.43 951,550 $ 16.28 877,800 $ 17.07
Weighted average fair
value of options
granted during the year $ 2.65 $ 4.66 $ 6.53
Options exercisable at
year end 615,250 520,900 355,300
Option price range at end
of year $ 4.87 to $28.16 $ 8.06 to $28.16 $ 8.31 to $28.16
Option price for exercised
shares $ -- $ 10.43 $ 14.00
Options available for
grant at end of year 337,950 188,450 262,400
The following table summarizes information about options outstanding at December
31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------ -----------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE PRICE OF SHARES PRICE
- ---------------- ----------- ------------------ ------------- ----------- ---------------
$ 4.87 to $ 5.20 350,000 9.96 $ 5.19 -- $ --
$ 5.66 to $10.81 273,000 9.16 $ 8.23 22,000 $ 9.25
$11.23 to $18.56 349,800 4.22 $ 14.33 299,500 $ 14.25
$18.75 to $28.16 429,250 6.72 $ 19.45 293,750 $ 19.60
---------- ------------------ ------------- ----------- ---------------
$ 4.87 to $28.16 1,402,050 7.38 $ 12.43 615,250 $ 16.63
For purposes of determining the pro forma effect of these options as discussed
in Note 1, the fair value of each option is estimated on the date of grant based
on the Black-Scholes single-option pricing model assuming:
YEARS ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ----------- -----------
Dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 3.40% 4.50% 6.25%
Volatility factor 40.00% 40.00% 40.00%
Expected life in years 6.0 6.0 6.0
33
NOTE 12. BUSINESS SEGMENT
The Company has no separately reportable segments in accordance with
Statement of Financial Accounting Standards No. 131 ("Statement 131")
"Disclosure About Segments of an Enterprise and Related Information". Under the
enterprise wide disclosure requirements of Statement 131, the Company reports
revenue, in thousands, for Intermodal Services, Brokerage Services, Logistics
Services and Distribution Services as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Intermodal Services $ 914,577 $ 904,999 $ 1,004,434
Brokerage Services 230,928 213,153 207,617
Logistics Services 109,239 90,236 63,262
Distribution Services 80,916 110,943 107,567
-------------- -------------- --------------
Total Revenue $ 1,335,660 $ 1,319,331 $ 1,382,880
============== ============== ==============
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company has two profit-sharing plans and trusts under section
401(k) of the Internal Revenue Code. Qualified contributions made by employees
to the plan are partially matched by the Company. The Company expensed
approximately $1,291,000 and $1,365,000 related to these plans in 2002 and 2001,
respectively. Prior to 2001, for every dollar the employee contributed, the
Company had contributed an additional $.20 up to $100. In addition, prior to
2001, the Company, at its discretion, typically had made profit sharing
contributions. Historically, the Company had contributed an amount equal to 3%
of each participant's compensation up to a maximum of $5,100. The Company's
contributions to these plans were approximately $1,684,000 for 2000.
The Company provides a deferred compensation plan that permits certain
officers and certain management employees to defer portions of their
compensation. Contributions made by employees to the plan are partially matched
by the Company. The Company expensed $654,000, $472,000 and $274,000 related to
this plan in 2002, 2001 and 2000, respectively.
NOTE 14. RELATED PARTY TRANSACTIONS
A shareholder of the Company is the owner of 20% of the Class A
membership interest of SmartOffices Services, LLC ("SmartOffices"). SmartOffices
is in the business of selling office supplies to various companies. The Company
spent $290,400, $334,200 and $166,200 buying various office supplies from
SmartOffices in 2002, 2001 and 2000, respectively. The shareholder sold this 20%
interest in SmartOffices subsequent to December 31, 2002.
NOTE 15. LEGAL MATTERS
On February 19, 2002, a purported class action lawsuit was filed by Riggs
Partners, LLC in the United States District Court for the Northern District of
Illinois, Eastern Division. On October 23, 2002, the federal district court
granted the Company's motion to dismiss the complaint in its entirety for
failing to allege facts sufficient to state a claim. The court also granted the
motion of the Company's former auditors. The Court's order required plaintiffs
to file any amended complaint by November 22, 2002. The plaintiffs did not file
an amended complaint by this date and agreed that they would not appeal the
court's order of October 23, 2002 dismissing the lawsuit. The suit is therefore
terminated.
In addition, the Company is a party to litigation incident to its business,
including claims for freight lost or damaged in transit, improperly shipped or
improperly warehoused. Some of the lawsuits to which the Company is party are
covered by insurance and are being defended by the Company's insurance carriers.
Some of the lawsuits are not covered by insurance and are being defended by the
Company. Management does not believe that the outcome of this litigation will
have a materially adverse effect on the Company's financial position or results
of operations. See Item 1 Business - Risk Management and Insurance.
NOTE 16. RESTRUCTURING CHARGES
In the fourth quarter of 2002 the Company recorded a restructuring
charge of approximately $932,000 consisting of a severance charge for 74
34
employees of $474,000 and a $458,000 liability for the remaining lease
obligation related to a closed facility. All severance payments have been made
as of December 31, 2002. Approximately $450,000 of lease obligation remains as
of December 31, 2002 and will be reduced by future lease payments required under
the agreement.
In the fourth quarter of 2000, management approved a plan to
restructure the Company's accounting functions and centralize them at its
corporate headquarters in Lombard, Illinois. This centralization plan was to
result in the reduction of 56 accounting-related positions from the operating
companies. All affected employees were informed of this decision in mid-November
2000. In connection with this plan, the Company recorded a pre-tax charge of
$250,000 that is included in salaries and benefits expense in the fourth quarter
of 2000. During 2001, $206,000 was paid related to the accounting restructuring
and thirty-one employees were terminated. The remaining $44,000 of the accrual
was reversed in 2001, thereby reducing salaries and benefits expense.
NOTE 17. DERIVATIVE FINANCIAL INSTRUMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("Statement 133"), "Accounting for
Derivative Instruments and Hedging Activities." On January 1, 2001, the
Company adopted Statement 133 and recorded the fair value of its interest rate
swap of $79,000, net of related income taxes of $55,000, as an asset. The
transition adjustment to record the asset was included in other
comprehensive income.
The Company had an interest rate swap that matured on September 30, 2002
with a notional amount of $25.0 million, a weighted average pay rate of 8.37%
and a weighted average receive rate of 5.34% at December 31, 2001. Under the
Credit Facility, the Company was required to enter into this interest rate swap
agreement designated as a hedge on a portion of the Company's variable rate
debt. The Company used this interest rate swap to manage its exposure to changes
in interest rates for its floating rate debt. This interest rate swap qualified
as a cash flow hedge. The interest rate differential received or paid on the
swap was recognized in the consolidated statements of operations as a reduction
or increase in interest expense, respectively. The Company recorded incremental
interest expense/(income) of $698,000, $312,000 and $(217,000) for this swap in
2002, 2001, and 2000, respectively. The effective portion of the change in the
fair value of the derivative instrument was recorded in the consolidated balance
sheets as a component of current assets or liabilities and other comprehensive
income. The ineffective portion of the change in the fair value of the
derivative instrument, along with the gain or loss on the hedged item, was
recorded in earnings and reported in the consolidated statements of operations,
on the same line as the hedged item.
For the twelve months ended December 31, 2002, the Company adjusted its
derivative financial instrument to fair value which resulted in an unrealized
income of $389,000, net of the related income tax expense of $153,000. For the
twelve months ended December 31, 2001, the Company adjusted its derivative
financial instrument to fair value which resulted in an unrealized loss of
$468,000, net of the related income tax benefit of $325,000. These adjustments
are included in other comprehensive income (loss).
NOTE 18. BAD DEBT WRITE-OFF
During September 2001, the Company recognized bad debt expense which is
included in selling, general and administrative expense in the accompanying
consolidated statements of operations and includes $4.7 million related to a
Korean steamship line customer ("Customer"). The Customer filed for
reorganization under the Corporate Reorganization Act of Korea in May 2001 and
was subsequently forced into liquidation by the Korean courts. According to
court filings, the Customer does not have adequate funds to pay its secured
creditors. The Company, as an unsecured creditor, was notified by the trustee
appointed by the court during September 2001 that it should not expect to
recover any funds from the Customer.
NOTE 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
In 2001, the Company restated its consolidated financial statements for
the years ended December 31, 2000 and 1999 to properly report certain items of
revenue and expense related to HGDS. These items principally related to revenue,
transportation costs and selling, general and administrative expense. The
Company did not restate the first, second or third quarter of 2001 and reflected
the full impact of the adjustment in the fourth quarter of 2001. The following
table sets forth selected quarterly financial data for each of the quarters in
2002 and 2001 (in thousands, except per share amounts):
35
QUARTERS
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------- ------------- ------------- -------------
Year Ended December 31, 2002:
Revenue $ 305,299 $ 327,595 $ 356,666 $ 346,100
Gross margin 41,009 36,596 42,281 42,926
Operating income (loss) 3,227 (897) 4,513 4,298
Net income (loss) 940 (2,227) 1,379 1,406
Basic earnings (loss) per share $ 0.12 $ (0.29) $ 0.18 $ 0.18
Diluted earnings (loss) per share $ 0.12 $ (0.29) $ 0.18 $ 0.18
QUARTERS
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------- ------------- ------------- -------------
Year Ended December 31, 2001:
Revenue $ 345,935 $ 318,023 $ 323,046 $ 332,327
Gross margin 46,036 45,331 44,571 43,025
Operating income 1,148 5,224 539 3,637
Net income (loss) (676) 1,065 (1,112) 1,166
Basic earnings (loss) per share $ (0.09) $ 0.14 $ (0.14) $ 0.15
Diluted earnings (loss) per share $ (0.09) $ 0.14 $ (0.14) $ 0.15
During the first quarter of 2002, the Company revised its estimate of accrued
transportation costs resulting in an increase in pretax income of approximately
$2.8 million in the quarter. For the year ended December 31, 2002, this revised
estimate resulted in an increase in pre-tax income of $1.6 million since a
portion of the increase would have been recognized in the last three quarters of
2002.
36
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 13, 2003, 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 13, 2003, 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 13, 2003, sets forth certain information with
respect to the ownership of the Registrant's Common Stock and is incorporated
herein by reference.
The following table sets forth certain equity-based compensation plan
information for the Company as of December 31, 2002.
EQUITY COMPENSATION PLAN INFORMATION
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS SECURITIES REFLECTED IN
COLUMN (A))
(A)
- ------------------------------ --------------------------- ---------------------------- ---------------------------
Equity compensation
plans approved by
security holders 1,402,050 $12.43 337,950
- ------------------------------ --------------------------- ---------------------------- ---------------------------
Equity compensation
plans not approved
by security holders -- -- --
- ------------------------------ --------------------------- ---------------------------- ---------------------------
Total 1,402,050 $12.43 337,950
- ------------------------------ --------------------------- ---------------------------- ---------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" appearing in the Registrant's
proxy statement for the annual meeting of stockholders to be held on May 13,
2003, sets forth certain information with respect to certain business
relationships and transactions between the Registrant and its directors and
officers and it is incorporated herein by reference.
37
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon this evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective. No significant changes were
made in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of this evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant
are included under Item 8 of this Form 10-K:
Reports of Independent Auditors
Consolidated Balance Sheets - December 31, 2002 and December 31,
2001
Consolidated Statements of Operations - Years ended December 31,
2002, December 31, 2001 and December 31, 2000
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2002, December 31, 2001 and December 31, 2000
Consolidated Statements of Cash Flows - Years ended December 31,
2002, December 31, 2001 and December 31, 2000
Notes to Consolidated Financial Statements
(A) (2) FINANCIAL STATEMENT SCHEDULES
The remaining financial statements and statement schedule 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
None.
PERIODIC REPORTS
Upon written request, the Company's annual report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 2002, and its quarterly reports on Form 10-Q will be furnished to
stockholders free of charge; write to: Public Relations Department, Hub Group,
Inc., 3050 Highland Parkway, Suite 100, Downers Grove, Illinois 60515.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 12, 2003 HUB GROUP, INC.
By /S/ DAVID P. YEAGER
David P. Yeager
Chief Executive Officer and Vice Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Title Date
/S/ PHILLIP C. YEAGER Chairman and Director March 12, 2003
- ------------------------
Phillip C. Yeager
/S/ DAVID P. YEAGER Vice Chairman, Chief Executive Officer and Director March 12, 2003
- ---------------------
David P. Yeager
/S/ THOMAS L. HARDIN President, Chief Operating Officer and Director March 12, 2003
- ---------------------
Thomas L. Hardin
/S/ THOMAS M. WHITE Vice President-Finance and Chief Accounting Officer March 12, 2003
- --------------------
Thomas M. White (Principal Financial and Accounting Officer)
/S/ CHARLES R. REAVES Director March 12, 2003
- ----------------------
Charles R. Reaves
/S/ MARTIN P. SLARK Director March 12, 2003
- --------------------
Martin P. Slark
/S/ GARY D. EPPEN Director March 12, 2003
- ------------------
Gary D. Eppen
CERTIFICATION
I, David P. Yeager, certify that:
1) I have reviewed this annual report on Form 10-K of Hub Group, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
DATE: MARCH 12, 2003
/S/ DAVID P.YEAGER
Name: David P. Yeager
Title: Chief Executive Officer
CERTIFICATION
I, Thomas M. White, certify that:
1) I have reviewed this annual report on Form 10-K of Hub Group, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
DATE: MARCH 12, 2003
/S/ THOMAS M. WHITE
Name: Thomas M. White
Title: Chief Financial Officer
SCHEDULE II
HUB GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Deductions Balance at
Beginning Costs & and End
of Year Expenses Adjustments (a) of Year
---------------------- -------------------- ----------------------- -------------------------
Year Ended December 31:
Allowance for uncollectible trade accounts
2002 $ 4,020,000 $ 1,761,000 $ (419,000) $ 5,362,000
2001 3,088,000 7,132,000 (6,200,000) 4,020,000
2000 2,134,000 2,766,000 (1,812,000) 3,088,000
(a) For the year ended December 31, 2002, deductions and
adjustments includes a $1.1 million adjustment to increase the
reported allowance for uncollectible accounts receivable for
the years presented in the schedule. This adjustment did not
affect the amount of "Trade accounts receivable, net" reported
in the Company's Consolidated Balance Sheets or operating
results in the Consolidated Statements of Operations for those
years.
S-2
INDEX TO EXHIBITS
NUMBER EXHIBIT
2.1 Purchase Agreement among the Registrant, American President
Companies, Ltd. and APL Land Transport Services, Inc.
(incorporated by reference to the Registrants report on Form 8-K
dated May 2, 1996 and filed May 17, 1996, File No. 0-27754)
2.2 Purchase and Sale Agreement among Hub Holdings, Inc. and Hub City
North Central, Inc. (incorporated by reference to Exhibit 2.2 to
the Registrants report on Form 10-K dated March 26, 1997 and
filed March 27, 1997, File No. 000-27754)
3.1 Amended Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 and 3.3 to the
Registrant's registration statement on Form S-1, File
No. 33-90210)
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit
3.2 to the Registrant's registration statement on Form S-1,
File No. 33-90210)
10.1 Form of Amended and Restated Limited Partnership Agreement
(incorporated by reference to Exhibit 10.1 to the Registrants
report on Form 10-K dated March 26, 1997 and filed March 27,
1997, File No 000-27754)
10.2 Amended and Restated Limited Partnership Agreement of Hub City
Canada, L.P. (incorporated by reference to Exhibit 10.2 to the
Registrants report on Form 10-K dated March 26, 1997 and filed
March 27, 1997, File No 000-27754)
10.3 Form of Non-Competition Agreement (incorporated by reference to
Exhibit 10.3 to the Registrants report on Form 10-K dated
March 26, 1997 and filed March 27,1997, File No 000-27754)
10.4 Purchase and Sale Agreement between the Registrant and the
Stockholders of Hub City Terminals, Inc. (incorporated by
reference to Exhibit 10.3 to the Registrant's registration
statement on Form S-1, File No. 33-90210)
10.5 Hub Group Distribution Services Purchase and Sale Agreement
(incorporated by reference to Exhibit 10.5 to the Registrant's
report on Form 10-K dated March 26, 1997 and filed March 27,
1997, File No. 000-27754)
10.6 Management Agreement (incorporated by reference to Exhibit 10.6
to the Registrant's report on Form 10-K dated March 26, 1997 and
filed March 27, 1997, File No. 000-27754)
10.7 Stockholders' Agreement (incorporated by reference to Exhibit
10.7 to the Registrant's report on Form 10-K dated March 26, 1997
and filed March 27, 1997, File No. 000-27754)
10.8 Credit Agreement dated as of September 27, 1997, among the
Registrant, Hub City Terminals, Inc., Hub Holdings, Inc. and
Harris Trust and Savings Bank (incorporated by reference to
Exhibit 10.8 to the Registrant's report on Form 10-Q dated
and filed November 13, 1997, File No. 000-27754)
10.9 $100 million Credit Agreement dated as of April 30, 1999, among
the Registrant, Hub City Terminals, Inc., Hub Holdings, Inc.
and Harris Trust and Savings Bank (incorporated by reference to
Exhibit 10.9 to the Registrant's report on Form 10-Q dated and
filed May 10, 1999, File No. 000-27754)
10.10 $40 million Bridge Credit Agreement dated as of April 30, 1999
among the Registrant, Hub City Terminals, Inc., Hub Holdings,
Inc. and Harris Trust and Savings Bank (incorporated by reference
to Exhibit 10.10 to the Registrant's report on Form 10-Q dated
and filed May 10, 1999, File No. 000-27754)
10.11 $50 million Note Purchase Agreement dated as of June 25, 1999,
among the Registrant, Hub City Terminals, Inc., Hub Holdings,
Inc. and various purchasers (incorporated by reference to Exhibit
10.11 to the Registrant's report on Form 10-Q dated and filed
August 16, 1999, File No. 000-27754)
10.12 Amendment to $100 million Credit Agreement among the Registrant,
Hub City Terminals, Inc. and Harris Trust and Savings Bank
(incorporated by reference to Exhibit 10.12 to the Registrant's
report on Form 10-Q dated and filed November 13, 2000, File No.
000-27754)
10.13 Amendment to $100 million Credit Agreement among the Registrant,
Hub City Terminals, Inc. and Harris Trust and Savings Bank
(incorporated by reference to Exhibit 10.13 to the Registrant's
report on Form 10-K dated March 15, 2001 and filed March 16,
2001, File No. 000-27754)
10.14 Amendment to $50 million Note Purchase Agreement among the
Registrant, Hub City Terminals, Inc. and various purchasers
(incorporated by reference to Exhibit 10.14 to the Registrant's
report on Form 10-K dated March 15, 2001 and filed March 16,
2001, File No. 000-27754)
10.15 Letter from the Registrant to Daniel L. Sellers dated December
24, 1998 (incorporated by reference to Exhibit 10.15 to the
Registrant's report on Form 10-K dated March 15, 2001 and filed
March 16, 2001, File No. 000-27754)
10.16 Amendment to $100 million Credit Agreement among the Registrant,
Hub City Terminals, Inc. and Harris Trust and Savings Bank
(incorporated by reference to Exhibit 10.16 to the Registrant's
report on Form 10-Q dated and filed April 19, 2001, File No.
000-27754)
10.17 Amendment to $50 million Note Purchase Agreement among the
Registrant, Hub City Terminals, Inc. and various purchasers
(incorporated by reference to Exhibit 10.17 to the Registrant's
report on Form 10-Q dated and filed April 19, 2001, File No.
000-27754)
10.18 Amendment to $100 million Credit Agreement among the Registrant,
Hub City Terminals, Inc. and Harris Trust and Savings Bank
(incorporated by reference to Exhibit 10.18 to the Registrant's
report on Form 10-Q dated and filed November 13, 2001, File No.
000-27754)
10.19 Amendment to $50 million Note Purchase Agreement among the
Registrant, Hub City Terminals, Inc. and various purchasers
(incorporated by reference to Exhibit 10.19 to the Registrant's
report on Form 10-Q dated and filed November 13, 2001, File No.
000-27754)
10.20 Amendment to $100 million Credit Agreement among the Registrant,
Hub City Terminals, Inc. and Harris Trust and Savings Bank dated
March 27, 2002 (incorporated by reference to Exhibit 10.20 to the
Registrant's report on Form 10-K dated and filed March 28, 2002,
File No. 000-27754)
10.21 Amendment to $50 million Note Purchase Agreement among the
Registrant, Hub City Terminals, Inc. and various purchasers dated
March 27, 2002 (incorporated by reference to Exhibit 10.21 to the
Registrant's report on Form 10-K dated and filed March 28, 2002,
File No. 000-27754)
10.22 Amendment to $100 million Credit Agreement among the Registrant,
Hub City Terminals, Inc. and Harris Trust and Savings Bank dated
August 13, 2002 (incorporated by reference to Exhibit 10.22 to
the Registrant's report on Form 10-Q dated and filed August 15,
2002, File No. 000-27754)
10.23 Amendment to $50 million Note purchase Agreement among the
Registrant, Hub City Terminals, Inc. and various purchasers dated
August 14, 2002 (incorporated by reference to Exhibit 10.23 to
the Registrant's report on Form 10-Q dated and filed August 15,
2002, File No. 000-27754)
10.24 Amendment to $100 million Credit Agreement among the Registrant,
Hub City Terminals, Inc. and Harris Trust and Savings Bank dated
October 15, 2002 (incorporated by reference to Exhibit 10.24 to
the Registrant's report on Form 10-Q dated and filed November 5,
2002, File No. 000-27754)
10.25 Amendment to $50 million Note Purchase Agreement among the
Registrant, Hub City Terminals, Inc. and various purchasers dated
October 15, 2002 (incorporated by reference to Exhibit 10.25 to
the Registrant's report on Form 10-Q dated and filed November 5,
2002, File No. 000-27754)
10.26 Security Agreement among the Registrant, Hub City Terminals,
Inc., Harris Trust and Savings Bank and various Note Holders
dated October 15, 2002 (incorporated by reference to Exhibit
10.26 to the Registrant's report on Form 10-Q dated and filed
November 5, 2002, File No. 000-27754)
10.27 Amendment to $100 million Credit Agreement among the Registrant,
Hub City Terminals, Inc. and Harris Trust and Savings Bank
dated February 28, 2003
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
99.1 Letter from the Company to the Securities and Exchange Commission
dated March 27, 2002 regarding the Company's auditors, Arthur
Andersen (incorporated by reference to Exhibit 99.1 to the
Registrant's report on Form 10-K dated and filed March 28, 2002,
File No. 000-27754)
99.2 Section 906 Certifications
HUB GROUP, INC.
HUB CITY TERMINALS, INC.
AMENDMENT TO CREDIT AGREEMENT
Harris Trust and Savings Bank LaSalle Bank National Association
Chicago, Illinois Chicago, Illinois
U.S. Bank National Association National City Bank Des Plaines, Illinois
Cleveland, Ohio
Ladies and Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of
April 30, 1999 (the "CREDIT AGREEMENT"), as amended and currently in effect, by
and among Hub Group, Inc. (the "PUBLIC HUB COMPANY"), Hub City Terminals, Inc.
for itself and as successor by merger to Hub Holdings, Inc. ("HUB CHICAGO";
together with the Public Hub Company, the "BORROWERS") and you (the "LENDERS").
All capitalized terms used herein without definition shall have the same
meanings herein as such terms have in the Credit Agreement.
The Borrowers have requested that the Lenders extend the Revolving
Credit Termination Date to June 24, 2005, modify certain financial covenants and
make certain other amendments to the Credit Agreement and the Lenders are
willing to do so under the terms and conditions set forth in this amendment
(herein, the "AMENDMENT").
1. AMENDMENTS.
Subject to the satisfaction of the conditions precedent set forth in
Section 2 below, the Credit Agreement shall be and hereby is amended as follows:
1.01. The last sentence of Section 1.3 of the Credit Agreement shall be
amended and as so amended shall be restated in its entirety to read as follows:
"Each Term Note shall be expressed to mature in installments,
commencing on September 30, 1999 and continuing on the last
day of each calendar quarter occurring thereafter to and
including March 31, 2005, with the principal installments on
the Term Notes to equal (in the aggregate for all the Term
Notes taken together) $1,250,000 per installment through and
including June 30, 2000; $1,500,000 per installment through
and including June 30, 2001; $2,000,000 per installment
through and including March 31, 2005; and with the final
principal installment on all the Term Notes due on June 24,
2005 to equal (in the aggregate for all the Term Notes taken
together) all principal not sooner paid; and the amount of
each installment due on the Term Note held by each Lender
shall be equal to such Lender's Percentage of such
installment."
1.02. The chart appearing in the definition of "APPLICABLE MARGIN"
appearing in Section 4.1 of the Credit Agreement shall be amended and as so
amended, shall be restated to read as follows:
Applicable
Margin For
Domestic Rate
Portion of
Revolving
Credit Loans
and Swing Applicable
"When Following Loans Bearing Margin For
Status Exists Interest with LIBOR Portions Applicable Margin Applicable
For Any Margin Reference to of Revolving For Domestic Rate Margin For
Determination Domestic Rate Credit Loans Portion of Term LIBOR Portions Commitment Fee
Date Is: Is: Loan Is: of Term Loan Is: Is:
Level I Status .50% 2.00% .50% 2.25% .35%
Level II Status .75% 2.25% 1.00% 2.50% .40%
Level III Status 1.25% 2.75% 1.50% 3.00% .45%
Level IV Status 1.50% 3.00% 1.75% 3.25% .50%"
1.03. The definition of the terms "EBITDAM", "LEVEL I STATUS", "LEVEL II
STATUS" and "REVOLVING CREDIT TERMINATION DATE" appearing in Section 4.1 of the
Credit Agreement shall be amended and as so amended shall be restated in their
entirety to read, respectively, as follows:
""EBITDAM" means, with reference to any period, Net Income for
such period plus all amounts deducted in arriving at such Net
Income amount in respect of (i) Interest Expense for such
period, PLUS (ii) taxes (including federal, state and local
income taxes) for such period, PLUS (iii) all amounts properly
charged for depreciation and amortization during such period
on the books of the Hub Group, PLUS (iv) any deduction for
Minority Interest during such period, PLUS (v) all other
non-cash restructuring charges during such period on the books
of the Hub Group in accordance with GAAP to the extent the
aggregate amount of such other non-cash restructuring charges
do not exceed $1,500,000 during any period of four consecutive
fiscal quarters of the Public Hub Company (prorated
appropriately downward (or upward) for any shorter (or longer)
period); PLUS (vi) if such period includes the fiscal quarter
of the Public Hub Company ending on December 31, 2002 or March
31, 2003, restructuring charges during such quarters on the
books of the Hub Group in accordance with GAAP (including cash
severance payments) in an aggregate amount not in excess of
2
$1,000,000, PLUS (vii) if such period includes any fiscal
quarter of the Public Hub Company ending during the period
from and including March 31, 2003, through and including March
31, 2005, cash restructuring charges aggregating up to
$1,000,000 (for all such quarters taken together) if and only
if consented to in writing by the Required Lenders.
"LEVEL I STATUS" means, for any Determination Date, that as of
the close of the most recently completed fiscal quarter of the
Public Hub Company with reference to which such Determination
Date was set, the Cash Flow Leverage Ratio is less than 2.50
to 1.
"LEVEL II STATUS" means, for any Determination Date, that as
of the close of the most recently completed fiscal quarter of
the Public Hub Company with reference to which such
Determination Date was set, the Cash Flow Leverage Ratio is
greater than or equal to 2.50 to 1 but less than 3.00 to 1.
"REVOLVING CREDIT TERMINATION DATE" means June 24, 2005, or
such earlier date on which the Revolving Credit Commitment is
terminated in whole pursuant to Sections 3.4, 8.2 or 8.3
hereof."
1.04. Sections 7.8, 7.9, 7.10 and 7.26 of the Credit Agreement shall be
amended and as so amended shall be restated in their entirety to read,
respectively, as follows:
"SECTION 7.8. FIXED CHARGE COVERAGE RATIO. The Hub
Group shall not, as of the close of each fiscal quarter of the
Public Hub Company specified below, permit the Fixed Charge
Coverage Ratio as of such date to be less than:
FIXED CHARGE COVERAGE RATIO
AS OF THE FISCAL QUARTER ENDING ON: SHALL NOT BE LESS THAN:
3/31/03 0.80 to 1
6/30/03 0.95 to 1
9/30/03 1.00 to 1
12/31/03 1.05 to 1
3/31/04 1.05 to 1
6/30/04 1.05 to 1
9/30/04 1.05 to 1
3
12/31/04 1.05 to 1
3/31/05 1.10 to 1
6/30/05 1.10 to 1
SECTION 7.9. MINIMUM EBITDAM. The Hub Group shall, as
of the close of each fiscal quarter of the Public Hub Company
specified below, maintain EBITDAM for the four fiscal quarters
of the Public Hub Company then ended of not less than:
EBITDAM SHALL NOT BE LESS
AS OF THE FISCAL QUARTER ENDING ON: THAN:
3/31/03 $20,000,000
6/30/03 $24,000,000
9/30/03 $25,000,000
12/31/03 $26,000,000
3/31/04 $26,000,000
6/30/04 $26,500,000
9/30/04 $26,500,000
12/31/04 $27,000,000
3/31/05 $27,000,000
6/30/05 $27,500,000
SECTION 7.10. CASH FLOW LEVERAGE RATIO. The Hub Group
shall not, as of the close of each fiscal quarter of the
Public Hub Company specified below, permit the Cash Flow
Leverage Ratio as of such date to be more than:
CASH FLOW LEVERAGE RATIO SHALL NOT
AS OF THE FISCAL QUARTER ENDING BE
ON: MORE THAN:
3/31/03 5.50 to 1
6/30/03 4.50 to 1
9/30/03 4.25 to 1
12/31/03 4.00 to 1
3/31/04 4.00 to 1
6/30/04 3.75 to 1
9/30/04 3.75 to 1
12/31/04 3.50 to 1
3/31/05 3.50 to 1
6/30/05 3.25 to 1
7.26. CAPITAL EXPENDITURES. The Hub Group shall not
expend or become obligated for Capital Expenditures during the
fiscal year ending December 31, 2003 in an aggregate amount in
4
excess of $9,000,000 and shall not expend or become obligated
for Capital Expenditures during the fiscal year ending
December 31, 2004 in an aggregate amount in excess of
$10,000,000."
1.05. The Commitments of Harris Trust and Savings Bank ("HARRIS") and
U.S. Bank National Association ("U.S. BANK") set forth opposite such Lenders'
names on their respective signature pages of the Credit Agreement or on an
Assignment Agreement delivered pursuant to Section 11.10 of the Credit
Agreement, as the case may be, shall be amended and restated as set forth on
Annex I attached hereto. On the effective date of this Amendment, such Lenders
shall make appropriate adjustments between themselves to reflect the changes in
the Commitments contemplated hereby and the Borrower shall be deemed to have
requested non-ratable Loans to effect such adjustments.
2. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of
all of the following conditions precedent:
2.01. The Borrowers, the Guarantors and the Lenders shall have executed
and delivered this Amendment.
2.02. The Borrowers shall have paid to the Agent, for the benefit of the
Lenders such upfront fees as the Borrowers and the Agent have previously agreed.
2.03. The Borrowers shall have executed and delivered to the Agent for
Harris and U.S. Bank new Revolving Credit Notes in the amount of each such
Lender's Revolving Credit Commitment and new Term Notes in the amount of each
such Lender's outstanding principal amount of Term Loans, in each case, after
giving effect to this Amendment (the "NEW NOTES").
2.04. Legal matters incident to the execution and delivery of this
Amendment and the New Notes shall be reasonably satisfactory to the Agent and
its counsel.
3. REPRESENTATIONS.
In order to induce the Lenders to execute and deliver this Amendment,
the Borrowers hereby represent to the Lenders that as of the date hereof, the
representations and warranties set forth in Section 5 of the Credit Agreement
are and remain true and correct in all material respects (except to the extent
the same expressly relate to an earlier date and except that for purposes of
this paragraph the representations contained in Section 5.5 shall be deemed to
refer to the most recent financial statements of the Public Hub Company
delivered to the Lenders) and the Borrowers are in full compliance with all of
the terms and conditions of the Credit Agreement after giving effect to this
Amendment and no Default or Event of Default has occurred and is continuing
under the Credit Agreement or shall result after giving effect to this
Amendment.
5
4. MISCELLANEOUS.
4.01. Each Borrower and each Guarantor acknowledges and agrees that,
except as modified by this Amendment, all of the Loan Documents to which it is a
party remain in full force and effect for the benefit and security of, among
other things, the Obligations as modified hereby. Each Borrower and each
Guarantor further acknowledges and agrees that all references in such Loan
Documents to the Obligations shall be deemed a reference to the Obligations as
so modified. Each Borrower and each Guarantor further agrees to execute and
deliver any and all instruments or documents as may be reasonably required by
the Agent or the Required Lenders to confirm any of the foregoing.
4.02. The Borrowers and the Guarantors have heretofore executed and
delivered to the Agent that certain Security Agreement dated as of October 15,
2002 and certain other Collateral Documents. The Borrowers and the Guarantors
hereby acknowledge and agree that the Liens created and provided for by the
Collateral Documents continue to secure, among other things, the Obligations
arising under the Credit Agreement as amended hereby; and the Collateral
Documents and the rights and remedies of the Agent thereunder, the obligations
of the Borrowers and the Guarantors thereunder, and the Liens created and
provided for thereunder remain in full force and effect and shall not be
affected, impaired or discharged hereby. Nothing herein contained shall in any
manner affect or impair the priority of the liens and security interests created
and provided for by the Collateral Documents as to the indebtedness which would
be secured thereby prior to giving effect to this Amendment.
4.03. Except as specifically amended hereby, the Credit Agreement shall
continue in full force and effect in accordance with its original terms.
Reference to this specific Amendment need not be made in the Credit Agreement,
the Notes, or any other instrument or document executed in connection therewith,
or in any certificate, letter or communication issued or made pursuant to or
with respect to the Credit Agreement, any reference in any of such items to the
Credit Agreement being sufficient to refer to the Credit Agreement as
specifically amended hereby.
4.04. This Amendment may be executed in any number of counterparts, and
by the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the parties
hereto may execute this Amendment by signing any such counterpart and each of
such counterparts shall for all purposes be deemed to be an original. This
Amendment shall be governed by the internal laws of the State of Illinois.
4.05. The Borrowers agree to pay, jointly and severally, all reasonable
out-of-pocket costs and expenses incurred by the Agent in connection with the
preparation, execution and delivery of this Amendment and the documents and
transactions contemplated hereby, including the reasonable fees and expenses of
counsel for the Agent with respect to the foregoing.
6
Dated as of February 28, 2003.
HUB GROUP, INC., a Borrower
HUB CITY TERMINALS, INC., a Borrower
By
David P. Yeager
Chief Executive Officer for each of the
above Companies
7
Accepted and agreed to as of the date and year last above written.
HARRIS TRUST AND SAVINGS BANK
By
Name:____________________________________
Title:___________________________________
U.S. BANK NATIONAL ASSOCIATION
By
Name:____________________________________
Title:___________________________________
LASALLE BANK NATIONAL ASSOCIATION
By
Name:____________________________________
Title:___________________________________
NATIONAL CITY BANK
By
Name:_____________________________________
Title:____________________________________
8
ANNEX I
REVISED COMMITMENTS
REVOLVING OUTSTANDING PRINCIPAL
LENDER CREDIT COMMITMENT AMOUNT OF TERM LOANS
Harris Trust and Savings Bank $20,545,603.82 $11,094,626.06
U.S. Bank National Association $13,454,396.18 $7,265,373.94
GUARANTORS' CONSENT
The undersigned heretofore executed and delivered to the Lenders the
Guaranty Agreement. The undersigned hereby consent to the Amendment to the
Credit Agreement as set forth above and confirm that the Guaranty Agreement and
all of the obligations of the undersigned thereunder remain in full force and
effect. The undersigned further agree that their consent to any further
amendments to the Credit Agreement shall not be required as a result of this
consent having been obtained, except to the extent, if any, required by the
Guaranty Agreement.
HUB CHICAGO HOLDINGS, INC., a Guarantor
By
David P. Yeager
Chief Executive Officer
HLX COMPANY, L.L.C., a Guarantor
By
David P. Yeager
Vice Chairman and Chief Executive Officer
QSSC, INC.
QUALITY SERVICES, L.L.C.,
QUALITY SERVICES OF KANSAS, L.L.C.
QUALITY SERVICES OF NEW JERSEY, L.L.C.
Q.S. OF ILLINOIS, L.L.C.
Q.S. OF GEORGIA, L.L.C.
By
David P. Yeager
Chief Executive Officer for each of the
above Guarantors
HUB GROUP ALABAMA, LLC
HUB GROUP ATLANTA, LLC
HUB GROUP BOSTON, LLC
HUB GROUP CANADA, L.P.
HUB GROUP CLEVELAND, LLC
HUB GROUP DETROIT, LLC
HUB GROUP FLORIDA, LLC
HUB GROUP GOLDEN GATE, LLC
HUB GROUP INDIANAPOLIS, LLC
HUB GROUP KANSAS CITY, LLC
HUB GROUP LOS ANGELES, LLC
HUB GROUP MID ATLANTIC, LLC
HUB GROUP NEW ORLEANS, LLC
HUB GROUP NEW YORK STATE, LLC
HUB GROUP NEW YORK-NEW JERSEY, LLC
HUB GROUP NORTH CENTRAL, LLC
HUB GROUP OHIO, LLC
HUB GROUP PHILADELPHIA, LLC
HUB GROUP PITTSBURGH, LLC
HUB GROUP PORTLAND, LLC
HUB GROUP ST. LOUIS, LLC
HUB GROUP TENNESSEE, LLC
HUB CITY TEXAS, L.P.
HUB GROUP TRANSPORT, LLC
HUB GROUP ASSOCIATES, INC.
HUB FREIGHT SERVICES, INC.
HUB HIGHWAY SERVICES
HUB GROUP DISTRIBUTION SERVICES, LLC
By
David P. Yeager
Chief Executive Officer for each of the
above Guarantors
EXHIBIT 21
Subsidiaries of Hub Group, Inc.
SUBSIDIARIES JURISDICTION OF INCORPORATION/ORGANIZATION
Hub City Terminals, Inc. Delaware
Hub Group Atlanta, LLC Delaware
Hub Group Boston, LLC Delaware
Hub Group Canada, LP Delaware
Hub Group Cleveland, LLC Delaware
Hub Group Detroit, LLC Delaware
Hub Group Florida, LLC Delaware
Hub Group Golden Gate, LLC Delaware
Hub Group Indianapolis, LLC Delaware
Hub Group Kansas City, LLC Delaware
Hub Group Los Angeles, LLC Delaware
Hub Group Mid-Atlantic, LLC Delaware
Hub Group New Orleans, LLC Delaware
Hub Group New York State, LLC Delaware
Hub Group New York-New Jersey, LLC Delaware
Hub Group North Central, LLC Delaware
Hub Group Ohio, LLC Delaware
Hub Group Pittsburgh, LLC Delaware
Hub Group Portland, LLC Delaware
Hub Group St. Louis, LLC Delaware
Hub Group Tennessee, LLC Delaware
Hub City Texas, L.P. Delaware
Hub Group Associates, Inc. Illinois
Hub Highway Services Illinois
Hub Group Distribution Services, L.L.C. Illinois
Q.S. of Illinois, LLC Michigan
Q.S.S.C., Inc. Delaware
Quality Services L.L.C. Missouri
Quality Services of Kansas, L.L.C. Kansas
Quality Services of New Jersey, L.L.C. New Jersey
Q.S. of Georgia, L.L.C. Georgia
HLX Company, L.L.C. Delaware
Hub Chicago Holdings, Inc. Delaware
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8, Nos. 333-33006, 333-06327 and 333-48185) of Hub Group, Inc. of our
report dated February 19, 2003, with respect to the consolidated financial
statements and schedule of Hub Group, Inc. included in this Annual Report on
Form 10-K for the year ended December 31, 2002.
/s/ Ernst & Young LLP
Chicago, Illinois
March 11, 2003
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The following statement is provided by the undersigned to accompany the
Annual Report on Form 10-K for the year ended December 31, 2002 of Hub Group,
Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
and shall not be deemed filed pursuant to any provision of the Exchange Act of
1934 or any other securities law.
Each of the undersigned certifies that the foregoing Report on Form
10-K fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the
Form 10-K fairly presents, in all material respects, the financial condition and
results of operations of Hub Group, Inc.
/S/DAVID P. YEAGER___________________ /S/THOMAS M. WHITE______________
- ------------------------------------- --------------------------------
David P. Yeager Thomas M. White
Chief Executive Officer Chief Financial Officer
Hub Group, Inc. Hub Group, Inc.
