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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                       SECURITIES AND EXCHANGE ACT OF 1934

              For the quarterly period ended September 30, 1998 or

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

               For the transition period from ________ to ________

                         Commission file number: 0-27754

                                 HUB GROUP, INC.
             (Exact name of registrant as specified in its charter)



               Delaware                               36-4007085
     (State or other jurisdiction of               (I.R.S. Employer
     incorporation or organization)               Identification No.)


                      377 East Butterfield Road, Suite 700
                             Lombard, Illinois 60148
          (Address, including zip code, of principal executive offices)
                                 (630) 271-3600
              (Registrant's telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __

         On November 13, 1998, the registrant had 7,003,950 outstanding shares
of Class A common stock, par value $.01 per share, and 662,296 outstanding
shares of Class B common stock, par value $.01 per share.
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                                 HUB GROUP, INC.


                                      INDEX



PART I.  Financial Information:                                            Page

Hub Group, Inc. - Registrant

Unaudited Condensed Consolidated Balance Sheets - September 30, 1998
         and December 31, 1997                                              3

Unaudited Condensed Consolidated Statements of Operations - Three
         Months and Nine Months Ended September 30, 1998 and 1997           4

Unaudited Condensed Consolidated Statement of Stockholders' Equity -
         Nine Months Ended September 30, 1998                               5

Unaudited Condensed Consolidated Statements of Cash Flows - Nine
         Months Ended September 30, 1998 and 1997                           6

Notes to Unaudited Condensed Consolidated Financial Statements              7

Management's Discussion and Analysis of Financial Condition and
         Results of Operations                                              10

PART II.  Other Information                                                 16

                                       2


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


5 This schedule contains summary financial information extracted from Unaudited Condensed Consolidated Statements of Operations and Unaudited Condensed Consolidated Balance Sheets and is qualified in its entirety by reference to such finanacial statements. 1,000 3-MOS DEC-31-1998 SEP-30-1998 17453 0 147449 1550 0 166587 27852 7781 304130 149113 0 0 0 77 116743 304130 0 295859 0 259336 27881 119 620 4343 1737 8642 0 0 0 2606 .34 .34