================================================================================
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 June 30, 1996 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)
(708) 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 August 12, 1996, the registrant had 5,261,350 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.
================================================================================
HUB GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
HUB GROUP, INC. - REGISTRANT
Unaudited Condensed Consolidated Balance Sheets - December 31, 1995
and June 30, 1996 3
Unaudited Condensed Consolidated Statements of Operations - Three Months and
Six Months Ended June 30, 1995 and 1996 4
Unaudited Condensed Consolidated Statement of Equity - Six Months
Ended June 30, 1996 5
Unaudited Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1995 and 1996 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
HUB PARTNERSHIPS - PREDECESSOR
Unaudited Condensed Combined Balance Sheet - December 31, 1995 17
Unaudited Condensed Combined Statement of Operations for the Three
Months Ended June 30, 1995 and the Six Months Ended June 30, 1995
and the Period January 1, 1996 through March 17, 1996 18
Unaudited Condensed Combined Statement of Equity - Period January 1, 1996
through March 17, 1996 19
Unaudited Condensed Combined Statements of Cash Flows for the Six
Months Ended June 30, 1995 and the Period January 1, 1996
through March 17, 1996 20
Notes to Unaudited Condensed Combined Financial Statements 21
Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
PART II. OTHER INFORMATION 23
2
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, June 30,
------------ --------
1995 1996
------------ --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2 $ 18,577
Accounts receivable, net
Trade 6,197 95,106
Affiliates 2,376 -
Prepaid expenses 33 948
Other current assets 114 624
------------ --------
TOTAL CURRENT ASSETS 8,722 115,255
PROPERTY AND EQUIPMENT, net 137 10,024
GOODWILL, net - 25,356
DEFERRED TAX BENEFIT - 10,225
OTHER ASSETS 224 916
------------ --------
TOTAL ASSETS $9,083 $161,776
============ ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade 5,620 84,181
Affiliates 1,774 -
Other 89 4,779
Accrued expenses
Payroll 286 4,698
Other 149 3,154
Current portion of long-term debt - 2,605
------------ --------
TOTAL CURRENT LIABILITIES 7,918 99,417
------------ --------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION - 18,406
DEFERRED TAXES - 99
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST - 4,388
EQUITY:
Preferred stock - -
Common stock 26 59
Additional paid-in capital 18 52,924
Purchase price in excess of predecessor basis - (25,764)
Tax benefit of purchase price in excess of predecessor basis - 10,306
Retained earnings 1,121 1,941
------------ --------
TOTAL EQUITY 1,165 39,466
------------ --------
TOTAL LIABILITIES AND EQUITY $9,083 $161,776
============ ========
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 Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1995 1996 1995 1996
------- -------- ------- --------
REVENUE:
Trade $16,998 $209,236 $33,172 $254,574
Affiliates 3,737 - 6,497 3,459
------- -------- ------- --------
Total revenue 20,735 209,236 39,669 258,033
PURCHASED TRANSPORTATION 19,247 184,112 36,617 227,524
------- -------- ------- --------
Net revenue 1,488 25,124 3,052 30,509
COSTS AND EXPENSES:
Salaries and benefits 586 12,514 1,228 15,101
Selling, general and administrative 305 4,947 608 5,945
Depreciation and amortization 9 820 18 865
------- -------- ------- --------
Total costs and expenses 900 18,281 1,854 21,911
Operating income 588 6,843 1,198 8,598
------- -------- ------- --------
OTHER INCOME (EXPENSE):
Interest expense - (302) - (339)
Interest income 26 274 54 305
Other, net (5) (46) - (38)
------- -------- ------- --------
Total other income (expense) 21 (74) 54 (72)
INCOME BEFORE MINORITY INTEREST AND PROVISION FOR
INCOME TAXES 609 6,769 1,252 8,526
------- -------- ------- --------
MINORITY INTEREST - 3,999 - 4,686
------- -------- ------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 609 2,770 1,252 3,840
PROVISION FOR INCOME TAXES - 1,108 - 1,295
------- -------- ------- --------
NET INCOME $ 609 $ 1,662 $ 1,252 $ 2,545
======= ======== ======= ========
PRO FORMA PROVISION FOR ADDITIONAL INCOME TAXES 244 - 501 241
------- -------- ------- --------
PRO FORMA NET INCOME $ 365 $ 1,662 $ 751 $ 2,304
======= ======== ======= ========
PRO FORMA EARNINGS PER SHARE $ 0.22 $ 0.28 $ 0.45 $ 0.56
======= ======== ======= ========
PRO FORMA WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,662 5,997 1,662 4,115
======= ======== ======= ========
See notes to unaudited condensed consolidated financial statements.
4
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Tax Benefit
Purchase of Purchase
Price in Price
Common Stock Additional Excess of in Excess of
----------------- Paid-in Predecessor Predecessor Retained
Shares Amount Capital Basis Basis Earnings Equity
--------- ------ ---------- ----------- ------------ -------- -------
BALANCE AT JANUARY 1, 1996 300 $ 26 $ 18 $ - $ - $ 1,121 $ 1,165
Net income - - - - 2,545 2,545
Distributions to shareholders (25) (17) - - (1,725) (1,767)
Issuance of common stock in
acquisitions 1,662,296 - - - - - -
Retirement of shares acquired (200) - - - - - -
Sale of common stock in initial
public offering, net of offering
costs 4,261,250 58 52,923 - - - 52,981
Acquisition of general
partnership interests - - - (25,764) 10,306 - (15,458)
--------- ------ ---------- ----------- ------------ -------- -------
BALANCE AT JUNE 30, 1996 5,923,646 $ 59 $ 52,924 $ (25,764) $ 10,306 $ 1,941 $39,466
========= ====== ========== =========== ============ ======== =======
See notes to unaudited condensed consolidated financial statements.
5
HUB GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six months ended
June 30,
-------------------
1995 1996
------- --------
Cash flows from operating activities:
Net income $ 1,252 $ 2,545
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 18 865
Deferred taxes - 180
Minority interest - 4,686
Gain on sale of assets - (1)
Changes in working capital, net of
effects of purchase transactions:
Accounts receivable, net (54) (10,957)
Prepaid expenses - (54)
Other current assets 14 214
Accounts payable (361) 6,784
Accrued expenses (120) 2,227
Other assets 1 9
------- --------
Net cash provided by operations 750 6,498
------- --------
Cash flows from investing activities:
Cash used in acquisitions, net - (37,544)
Purchases of property and equipment, net (6) (1,283)
------- --------
Net cash used in investing activities (6) (38,827)
------- --------
Cash flows from financing activities:
Proceeds from sale of common stock in initial
public offering, net of offering costs - 52,981
Proceeds from sale of common stock 2 -
Distributions to shareholders (1,981) (1,767)
Distributions to minority interest - (400)
Payments on long-term debt - (662)
Proceeds from long-term debt - 752
Collection of note receivable - affiliate 4 -
------- --------
Net cash provided by (used
in) financing activities (1,975) 50,904
------- --------
Net increase (decrease) in cash (1,231) 18,575
Cash, beginning of period 2,026 2
------- --------
Cash, end of period $ 795 $ 18,577
======= ========
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ - 39
Income taxes 19 278
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. CAPITAL STRUCTURE
On March 8, 1995, the Company was incorporated and issued 100 shares to the
sole incorporator. On March 18, 1996, the Company purchased Hub City Terminals,
Inc. ("Hub Chicago") in a stock-for-stock acquisition through issuance of
1,000,000 shares of the Company's Class A common stock and 662,296 shares of the
Company's Class B common stock. Hub Chicago has been accounted for similar to
the pooling of interests method of accounting and has been included in all
periods presented on a historical cost basis.
Concurrent with the acquisition of Hub Chicago in March 1996, the Company
completed the initial public offering of 4,261,250 shares of its Class A common
stock, with net proceeds to the Company of $53.0 million. Coincident with the
initial public offering, a selling stockholder sold 1,000,000 shares of the
Company's Class A common stock through a secondary offering. The Company did not
receive any net proceeds from the sale of the shares by the selling stockholder.
Concurrent with the initial public offering, the Company, through its new
wholly owned subsidiary, Hub Chicago, acquired with cash the general partnership
interests in 26 operating partnerships. In addition, the Company directly
acquired with cash a controlling interest in the Hub Group Distribution Services
partnership (together with the 26 operating partnerships collectively referred
to as "Hub Partnerships"). The combined financial statements of Hub
Partnerships , the predecessor to the business of the Company, are included
herein. Further reference is made to the Company's Registration Statement filed
on Form S-1 for the historical financial statements of Hub Chicago and Hub
Partnerships. See Note 3. "Business Combinations" for further discussion of
these acquisitions.
NOTE 3. BUSINESS COMBINATIONS
On March 18, 1996, the Company acquired the general partnership interests
in 26 operating partnerships and a controlling interest in the Hub Group
Distribution Services partnership for a total purchase price of approximately
$43,309,000. The purchase price of these acquisitions was allocated to the
assets acquired and liabilities assumed based on the fair value at the date of
acquisition using the purchase method of accounting.
The portion of the difference between fair value and historical cost of
individual assets acquired and liabilities assumed attributable to partnership
interests acquired by the Company from non-control
7
group stockholders was recorded at fair market value. This resulted in goodwill
of approximately $17,425,000 and an increase in property and equipment of
approximately $96,000. The remaining portion of the difference between fair
value and historical cost attributable to partnership interests acquired from
control group stockholders, approximately $25,764,000, has been charged to
equity as purchase price in excess of predecessor basis.
On May 2, 1996, the Company purchased the rights to service the customers
of American President Lines Domestic Distribution Services, a division of APL
Land Transport Services, Inc., for a purchase price of approximately $8,090,000.
The total purchase price has been recorded as goodwill under the purchase method
of accounting.
The allocations presented above represent preliminary purchase price
allocations. Goodwill, the cost of purchased businesses in excess of the market
value of net tangible and identifiable assets acquired, is being amortized over
40 years on a straight-line basis. On an ongoing basis, the Company will measure
realizability by the ability of the Hub Partnerships to generate current and
expected future operating income in excess of annual amortization of goodwill.
In connection with the purchase of the partnership interests in each of the
Hub Partnerships, approximately $10,306,000 has been recorded as a deferred tax
benefit (utilizing an assumed effective tax rate of 40%), representing the tax
effect of the difference between goodwill for income tax purposes of
approximately $43,189,000 and goodwill for financial reporting purposes of
approximately $17,425,000. The corresponding credit is recorded as an increase
in equity in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes."
The following summarizes the effects of businesses acquired and accounted
for as purchases in 1996 as if they had been acquired as of January 1, 1995:
SIX MONTHS ENDED JUNE 30,
--------------------------
1995 1996
---------- -------------
(000'S)
Revenue as reported $ 39,669 $ 258,033
Revenue of purchased business for
period prior to acquisitions,
net of eliminations 394,924 184,660
---------- -------------
Pro forma revenue $ 434,593 $ 442,693
---------- -------------
Net income as reported $ 751 $ 2,304
Net income of purchased businesses for
period prior to acquisition 1,315 82
Adjustment for goodwill amortization (318) (158)
---------- -------------
Pro forma net income $ 1,748 $ 2,228
---------- -------------
Earnings per share as reported $ 0.45 $ 0.56
Effect of purchased businesses prior to
acquisitions (0.12) (0.17)
----------- -------------
Pro forma earnings per share $ 0.33 $ 0.39
----------- -------------
8
Business acquisitions which involved the use of cash were accounted as follows:
SIX MONTHS
ENDED
JUNE 30, 1996
-------------
(000's)
Accounts receivable $ 75,576
Prepaid expenses 861
Other current expenses 724
Property and equipment 9,309
Goodwill 25,515
Deferred tax benefit 10,306
Other assets 701
Accounts payable (74,693)
Accrued expenses (5,190)
Long-term debt (20,921)
Minority interest (102)
Purchase price in excess of predecessor basis 25,764
Tax benefit of purchase price in excess of predecessor basis (10,306)
--------
Cash used in acquisition $ 37,544
--------
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, June 30,
1995 1996
----------- ---------
(000's)
Land - 92
Building and improvements - 1,399
Leasehold improvements 17 842
Computer equipment and software 478 9,710
Furniture and equipment 221 4,090
Transportation equipment and automobiles 29 3,181
----------- ---------
745 19,314
Less: Accumulated depreciation and amortization (608) (9,290)
----------- ---------
PROPERTY AND EQUIPMENT, net 137 10,024
----------- ---------
NOTE 5. INCOME TAXES
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires the
Company to compute deferred taxes based upon the amount of taxes payable in
future years, after considering known changes in tax rates and other statutory
provisions that will be in effect in those years. Prior to March 18, 1996, the
Company was a non-taxable Subchapter S corporation. The pro forma provision for
additional income taxes for the six months ended June 30, 1995 and 1996 assumes
that the Company operated as a taxable corporation since January 1, 1995.
9
The reconciliation of the Company's effective tax rate to the federal
statutory tax rate is as follows:
SIX MONTHS ENDED JUNE 30,
-------------------------
1995 1996
----------- -----------
U.S. federal statutory rate 34.0% 34.0%
State taxes, net of federal benefit 6.0 6.0
Income earned as non-taxable Subchapter S corporation
prior to March 18, 1996 (40.0) (6.3)
----------- -----------
Net effective rate 0.0% 33.7%
----------- -----------
The following is a summary of the Company's provision for income taxes:
SIX MONTHS ENDED JUNE 30,
-------------------------
1995 1996
----------- -----------
(000's)
Current $ - 1,017
Federal - 179
----------- -----------
State and local - 1,196
----------- -----------
Deferred
Federal - 84
State and local - 15
----------- -----------
- 99
----------- -----------
Total provision $ - 1,295
----------- -----------
See Note 3. "Business Combinations" for discussion of deferred taxes recorded
pursuant to acquisitions.
NOTE 6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Fair value approximates book value at the balance sheet date.
June 30,
1996
------------
(000's)
Installment notes payable due through 2000, monthly installments
ranging from $234 - 10,929, including interest, ranging from 2.9%
to 12%, collateralized by certain equipment $ 1,508
Unsecured balloon notes, interest compounded annually at 5.45%,
interest and principal due March, 2001 13,136
Mortgage note payable due in 1998 with monthly installments of
$2,381, including interest at 8.5%, collateralized by all property 211
Note payable due in three annual installments of $2,000,000
beginning on May 1, 1997, interest is due at the time the
principal is paid at 6% compounded annually 6,000
Capital lease obligations, collateralized by certain equipment 156
------------
Total long-term debt 21,011
Less current portion (2,605)
------------
$18,406
------------
10
NOTE 7. STOCK-BASED COMPENSATION PLAN
Concurrent with the initial public offering the Company adopted a Long-Term
Incentive Plan (the "Incentive Plan"). Under the Incentive Plan, stock options,
and stock appreciation rights, restricted stock and performance units may be
granted for the purpose of attracting and motivating key employees and non-
employee directors of the Company. Concurrent with the adoption of the Incentive
Plan the Company granted 326,500 options to key employees and 36,000 options to
non-employee directors. All options granted have an exercise price of $14.00 per
share, the initial public offering price. The options granted to key employees
vest ratably over a five-year period and expire 10 years after the date they
were granted. The options granted to the non-employee directors vest ratably
over a three-year period and expire 10 years after the date of grant.
In October 1995, the FASB issued Statement #123, "Accounting for Stock-
Based Compensation." The Company is required to adopt this standard no later
than December 31, 1996. This Statement encourages companies to recognize expense
for stock options at an estimated fair value based on an option pricing model.
If expense is not recognized for stock options, pro forma footnote disclosure is
required of what net income and earnings per share would have been under the
Statement's approach to valuing and expensing stock options. Certain other new
disclosures will be required. The Company will implement the provisions of this
statement in 1996, but has decided that it will not recognize the expense
related to stock options in the financial statements. The impact of this new
Statement has not yet been completely evaluated.
NOTE 8. EQUITY
December 31, 1995
-----------------------------
Issued and
Authorized Outstanding
----------- ------------
Preferred stock, $0.1 par value 2,000,000 -
Common stock, no par value 200 200
Class A common stock, $0.1 par value 12,337,700 100
Class B common stock, $0.1 par value 662,300 -
June 30, 1996
-----------------------------
Issued and
Authorized Outstanding
----------- ------------
Preferred stock, $.01 par value 2,000,000 -
Class A common stock, $.01 par value 12,337,700 5,261,350
Class B common stock, $.01 par value 662,300 662,296
NOTE 9. SUBSEQUENT EVENT
On August 1, 1996, the Company purchased the remaining minority interest in
Hub City Tennessee, L.P. for approximately $2,513,000 in cash. The purchase was
accounted for under the purchase method of accounting with substantially all of
the purchase price being allocated to goodwill.
11
HUB GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS COMBINATIONS
On March 18, 1996, Hub Group, Inc. (the "Company") acquired the
general partnership interests in 26 operating partnerships and a controlling
interest in the Hub Group Distribution Services partnership (collectively
referred to as "Hub Partnerships") for a total purchase price of approximately
$43,309,000. On May 2, 1996, the Company purchased the rights to service the
customers of American President Lines Domestic Distribution Services ("APLDDS"),
a division of APL Land Transport Services, Inc., for a purchase price of
approximately $8,090,000. The purchase price of these acquisitions was allocated
to the assets acquired and liabilities assumed based on the fair value on the
date of acquisition using the purchase method of accounting. Prior to the
acquisitions, the Company's business was comprised of the operations of its
wholly owned subsidiary, Hub City Terminals, Inc. ("Hub Chicago").
The acquired businesses' revenues are many multiples of the revenue of
Hub Chicago. As a result, consolidated revenues and operating expenses increased
dramatically in the period subsequent to March 17, 1996, as compared to the
prior year. This relationship will continue for the remainder of 1996.
Additionally, purchased transportation costs and operating costs as a percent to
revenue may differ from historical trends for Hub Chicago.
As a result of the APLDDS acquisition, the Company acquired the right
to service APLDDS customers. However, the Company did not assume any assets or
liabilities associated with that business. Furthermore, the Company was not
obligated to hire any of the more than 200 employees in the APLDDS organization.
The APLDDS business is being absorbed by Hub Chicago and the Hub Partnerships
and the associated incremental operating costs are significantly less than
APLDDS historical operating costs. Management is unable to track the specific
incremental purchased transportation and operating costs attributable to the
acquired APLDDS business. Consequently, our discussion will include estimates of
results excluding the acquisition.
RESULTS OF OPERATIONS
REVENUE
Revenues totaled $209.2 million for the three months ended June 30,
1996, representing a 1009.1% increase over the comparable period in 1995.
Without the acquisitions, revenues totaled $20.0 million for the three months
ended June 30, 1996, representing a 3.6% decrease over the comparable period in
1995. Revenues for the six months ended June 30, 1996 of $258.0 million
represent an increase of 650.5% over the comparable period in 1995. Without the
acquisitions, company revenues totaled $40.2 million for the six months ended
June 30, 1996 for an increase of 1.2% over the comparable period in 1995. The
decrease in the second quarter, which caused the six months to reflect only a
small increase, is attributed principally to the relocation of a significant
customer's distribution center. It should be noted that the distribution center
was relocated to a site that is now being served by one of the Hub Partnerships.
Pro forma consolidated revenues including the acquisitions increased
2.2% to $219.1 million and 1.9% to $442.7 million for the three and six month
periods ended June 30, 1996 versus $214.3 million and $434.6 million in the
comparable periods in 1995. It should be noted that the business acquired from
APLDDS in 1996 is substantially less than the business reported by APLDDS for
1995.
12
Excluding the APLDDS acquisition, Hub Chicago and Hub Partnerships
combined revenues increased 16.7% to $199.7 million and 14.6% to $387.5 million
for the three and the six month periods ending June 30, 1996 compared to $171.2
million and $338.2 million for the comparable periods in 1995. The increases
were primarily attributable to strong growth in the truckload brokerage and
logistics businesses. Intermodal revenues increased slightly in both periods.
NET REVENUE
Net revenue as a percentage of revenue increased for the three and six
months ended June 30, 1996 to 12.0% and 11.8% of revenues from 7.2% and 7.7% of
revenues for the comparable periods in 1995, respectively. Without the
acquisitions, management estimates that net revenue as a percentage of revenue
increased to 8.0% and 8.2% for the three and six months ended June 30, 1996 as
compared to 7.2% and 7.7% for the three and six months ended June 30, 1995,
respectively. Management has been successful in controlling purchased
transportation costs in a somewhat erratic transportation market exacerbated by
economic uncertainty and rising fuel costs. While fuel costs have leveled off
recently, future fuel price increases could adversely impact the Company's
ability to maintain purchased transportation costs at current levels.
Hub Partnerships' net revenues, without the APLDDS acquisition, as a
percent to revenue for the three and six month periods ending June 30, 1996 were
slightly over 12%. Based on historical data provided by APLDDS, management
estimates that net revenues as a percent to revenue for the business acquired
from APLDDS will be in the 7% to 8% range.
SALARIES AND BENEFITS
Salaries and benefits increased to $12.5 million and $15.1 million in
the three and six months ended June 30, 1996, from $0.6 million and $1.2 million
in the comparable periods in 1995. Without the acquisitions, management
estimates that salaries and benefits increased to $0.7 million and $1.4 million
for the three and six months periods ended June 30, 1996, from $0.6 million and
$1.2 million in the comparable periods in 1995. As a percentage of revenue,
salaries and benefits without acquisitions increased to 3.4% and 3.5% for the
three and six months ended June 30, 1996 from 2.8% and 3.1% in the comparable
periods in 1995. The increase in these percentages was primarily the result of
additional staffing to implement the Company's strategy to grow its truckload
brokerage operations and additional sales personnel to expand the local revenue
base. Furthermore, the increase in the percentage for the three months ended
June 30, 1996 over the percentage for the three months ended June 30, 1995 was
partially attributable to the decrease in revenue.
Management estimates that Hub Partnerships salaries and benefits,
without the APLDDS acquisition, increased to 6.2% as a percent of revenue in the
second quarter of 1996 compared to 6.0% in the second quarter of 1995 and
increased to 6.4% for the six months ended June 30, 1996 versus 6.0% for the
comparable period in 1995. During the first half of 1996, the Company invested
in additional personnel to handle new brokerage and logistics businesses, expand
our local and national sales forces and provide expanded financial and
administrative services required for continued growth.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $5.0 million
and $6.0 million for the three and six months ended June 30, 1996 from $0.3
million and $0.6 million in the comparable periods in 1995. Without the
acquisitions, management estimates that selling, general and administrative
costs were constant at $0.3 million and $0.6 million for the three and six
months ended June 30, 1995 and 1996, respectively. As a percentage of revenue,
selling, general and administrative expenses without acquisitions increased to
1.7% and 1.6% for the three and six months ended June 30, 1996 from 1.5% and
1.5% in the comparable periods in 1995. The increase in these percentages is
attributed to normal increases in expenses due to inflation combined with
negative or very low revenue growth.
13
Management estimates that Hub Partnerships selling, general and
administrative expenses, without the APLDDS acquisition, decreased slightly to
2.3% of revenues in the three and six month periods ending June 30, 1996 from
2.4% in the comparable periods in 1995.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $0.8 million and
$0.9 million for the three and the six months ended June 30, 1996 from $0.0
million in the comparable periods in 1995. Without acquisitions, depreciation
and amortization was $0.0 for the three and six months ended June 30, 1995 and
1996.
Depreciation and amortization for the Hub Partnerships was $0.7
million for the second quarter, 1996 and $1.3 million for the six month period
ending June 30, 1996 versus $0.6 million and $1.0 million in the comparable
periods in 1995.
OPERATING INCOME
Operating income increased to $6.8 million and $8.6 million for the
three and six months ended June 30, 1996 from $0.6 million and $1.2 million in
the comparable periods in 1995. Management estimates that, without the
acquisitions, operating income was $0.6 million and $1.2 million for the three
and six months ended June 30, 1996 versus $0.6 million and $1.3 million in the
comparable periods in 1995. As a percentage of revenue, operating income without
acquisitions was 2.8% and 3.0% for the three and six months ended June 30, 1995
and 1996.
OTHER INCOME (EXPENSE)
Interest expense was $0.3 million for the three and six months ended
June 30, 1996. All of the interest expensed in 1996 was incurred subsequent to
March 17, 1996 and relates primarily to notes assumed or issued in conjunction
with the acquisitions. Interest expense on these notes should begin to decrease
in future quarters as discretionary paydowns are made. Debt relating to the
acquisition of tractors will grow from June 30, 1996 levels as the Company
continues its strategy of starting small drayage operations to service portions
of its own business in those areas where it is needed to enhance customer
service (see Liquidity and Capital Resources). Without the acquisitions, the
Company would have incurred no interest expense in the first six months of 1996.
The Company incurred no interest expense in the first six months of 1995.
Interest income was $0.3 for the three and six months ended June 30,
1996 compared to $0.0 and $0.1 for the three and six months ended June 30, 1995.
Interest income is expected to decrease as the Company uses portions of its
available cash to pay down the notes as discussed above. Without the
acquisitions, interest income was $0.0 for the three and six months ended June
30, 1996.
MINORITY INTEREST
Minority interest was $4.0 million and $4.7 million for the three and
six months ended June 30, 1996. Without the acquisitions, the company had no
minority interest for the three and six months ended June 30, 1995 and 1996.
INCOME TAXES
Income taxes were $1.1 million and $1.3 million for the three and six
months ended June 30, 1996. The Company had no provision for income taxes prior
to March 18, 1996, as the Company was a non-taxable subchapter S corporation.
PRO FORMA PROVISION FOR ADDITIONAL INCOME TAXES
Additional pro forma income taxes were $0.0 million and $0.2 million
in the three and six months ended June 30, 1996 versus $0.2 million and $0.5
million in the comparable periods in 1995. Additional pro forma
14
provision for income taxes are shown to provide an assumed effective federal and
state income tax provision at a rate of 40% of income before taxes for any
periods which include activity prior to March 18, 1996.
PRO FORMA NET INCOME
Pro forma net income increased to $1.7 million and $2.3 million for
the three and six months ended June 30, 1996 versus $0.4 million and $0.8
million for the comparable periods in 1995. Management estimates that, without
the acquisitions, net income was $0.3 million and $0.7 million for the three and
six months ended June 30, 1996 versus $0.4 million and $0.8 million in the
comparable periods in 1995.
PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share increased to $0.28 and $0.56 for the
three and six months ended June 30, 1996 from $0.22 and $0.45 in the comparable
periods in 1996. Management estimates that, without the acquisitions, pro forma
earnings per share was $0.18 and $0.43 for the three and six months ended June
30, 1996 versus $0.22 and $0.45 in the comparable periods in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1996, the Company had three significant
transactions that affected liquidity. The transactions were the initial public
offering of the Company's common stock and the subsequent acquisitions of the
Hub Partnerships and APLDDS. These items represented a cash inflow of $53.0
million and cash outflows of $35.5 million and $2.0 million, respectively.
Related to the acquisitions, the Company assumed long-term debt, including
current portions, of $20.9 million, approximately $12.4 million of which are
5-year balloon notes due in March of 2001, bearing interest at an annual rate of
5.45%. Approximately $6.0 million bears interest at 6% and is due in three equal
annual installments beginning in May of 1997. Immediately prior to the initial
public offering and Hub Partnership acquisition, Hub Chicago issued 5-year
balloon notes, due in March 2001, to its shareholders for approximately
$663,000, bearing interest at an annual rate of 5.45%. The acquisitions resulted
in the recognition of a $10.3 million deferred tax asset which will offset cash
payments for taxes ratably over the next 15 years. The $25.5 million of goodwill
acquired will result in an annual tax deductible expense to be recognized
ratably over the next 15 years. For book purposes goodwill is being amortized
over 40 years.
The Company expects to pay down the balloon notes from time to time as
cash availability permits. The first pay downs are expected to occur in the
third quarter of 1996.
The Company maintains a bank line of credit totaling $5.0 million
which bears interest at the prime rate less 1/2%. As of June 30, 1996, the
unused and available portion of this credit line was $5.0 million. Although
there can be no assurances, management believes it can obtain a significant
additional line of credit, if necessary.
Capital expenditures are principally used to enhance or expand the
Company's computer system and network capabilities and, most recently, to
acquire a small number of tractors for drayage moves. Part of the Company's
strategy is to supplement third party drayage operations with modest numbers of
company-owned tractors to service portions of the Company's intermodal business
in those locations where drayage service is limited or where customers require
an enhanced level of service which cannot be competitively accommodated by a
third party provider.
As of June 30, 1996, the Company owns 21 tractors in St. Louis,
Missouri and 10 tractors in Battle Creek, Michigan. The company-owned drayage
operation in St. Louis has been functioning since 1994 and the Battle Creek
operation was established in 1996. Management is considering additional sites
for company-owned tractors and it is anticipated that several new operations
will be started requiring the acquisition of an additional 40 to 70 tractors
(approximately $60,000 each) by the end of 1996. The Company will purchase up to
20 tractors with cash with the remainder being financed under an existing
financing commitment. Financing terms include 48 month amortization at an annual
interest rate equal to the 24 month Treasury Bill rate plus 3%. Management
15
intends to carefully evaluate existing and new drayage operations before
committing to future locations beyond 1996.
Effective August 1, 1996, the Company acquired the 70% minority
interest in Hub Tennessee, L.P. for $2.5 million in cash. Substantially all of
the purchase price has been allocated to goodwill.
The Company believes that existing cash, cash provided by operations
and cash available under a line of credit and its other financing commitment
will be sufficient to meet the Company's short-term working capital and capital
expenditure needs. The company also believes that the aforementioned items are
sufficient to meet its anticipated long-term working capital, capital
expenditure and debt repayment needs through the year 1998.
16
HUB PARTNERSHIPS
UNAUDITED CONDENSED COMBINED BALANCE SHEET
(in thousands)
December 31,
------------
1995
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,949
Accounts receivable, net
Trade 74,406
Affiliate 1,774
Prepaid expenses 832
Other current assets 1,641
------------
TOTAL CURRENT ASSETS 89,602
PROPERTY AND EQUIPMENT, net 8,994
OTHER ASSETS 366
------------
TOTAL ASSETS $ 98,962
============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable
Trade $ 64,212
Affiliate 2,376
Other 3,323
Accrued expenses
Payroll 4,125
Other 1,115
Current portion of long-term debt 681
------------
TOTAL CURRENT LIABILITIES 75,832
------------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 1,007
CONTINGENCIES AND COMMITMENTS
MANDATORILY REDEEMABLE COMMON STOCK 10,386
EQUITY:
Common stock, $0-$100 par value 1,943
Additional paid-in capital 500
Treasury stock (32)
Partnership capital 129
Retained earnings 9,197
------------
TOTAL STOCKHOLDERS' EQUITY 11,737
------------
TOTAL LIABILITIES AND EQUITY $ 98,962
============
See notes to unaudited condensed combined financial statements.
17
HUB PARTNERSHIPS
UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS
(in thousands)
Three Months Six Months January 1
Ended Ended through
June 30, June 30, March 17,
1995 1995 1996
------------- ------------- -------------
REVENUE:
Trade $ 154,172 $ 305,051 $ 142,413
Affiliate 5,941 10,734 3,992
------------- ------------- -------------
Total revenue 160,113 315,785 146,405
PURCHASED TRANSPORTATION 141,200 278,473 128,405
------------- ------------- -------------
Net revenue 18,913 37,312 18,000
COSTS AND EXPENSES:
Salaries and benefits 9,689 18,975 9,807
Selling, general and administrative 3,976 7,658 3,393
Depreciation and amortization 564 1,102 553
------------- -------------- -------------
Total costs and expenses 14,229 27,735 13,753
Operating income 4,684 9,577 4,247
------------- ------------- -------------
INTEREST AND OTHER INCOME 338 538 159
------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,022 10,115 4,406
PROVISION FOR INCOME TAXES 109 225 126
------------- -------------- -------------
NET INCOME $ 4,913 $ 9,890 $ 4,280
============= ============= =============
See notes to unaudited condensed combined financial statements.
18
HUB PARTNERSHIPS
UNAUDITED CONDENSED COMBINED STATEMENT OF EQUITY
For the period January 1, 1996 through March 17, 1996
(in thousands, except share amounts)
Common Stock Additional
---------------------- Paid-in Treasury Partnership Retained
Shares Amount Capital Stock Capital Earnings Equity
---------- --------- ---------- -------- ----------- ---------- ----------
BALANCE AT JANUARY 1, 1996 84,763 $ 1,814 $ 629 $ (32) 129 $ 9,197 $ 11,737
Net income 4,280 4,280
Distributions (1,745) (629) 32 (13,477) (15,819)
---------- --------- ---------- -------- ----------- ---------- ----------
BALANCE AT MARCH 17, 1996 84,763 $ 69 $ - $ - $ 129 $ - $ 198
========== ========= ========== ========= =========== ========== ==========
See notes to unaudited condensed combined financial statements.
19
HUB PARTNERSHIPS
UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months January 1
Ended through
June 30, March 17,
1995 1996
---------- ---------
Cash flows from operating activities:
Net income $ 9,890 $ 4,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,102 553
Loss on sale of property and equipment 27 3
Changes in working capital:
Accounts receivable, net 2,786 604
Prepaid expenses (400) (29)
Other current assets (371) 918
Accounts payable 2,097 4,783
Accrued expenses (555) (140)
Other assets 36 (407)
-------- -------
Net cash provided by operations 14,612 10,565
-------- -------
Cash flows from investing activities:
Purchases of property and equipment, net (2,632) (775)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,404 13,594
Proceeds from sale of common stock 145 -
Distributions (12,882) (26,207)
Payments on long-term debt (355) (361)
-------- -------
Net cash used in financing activities (11,688) (12,974)
-------- -------
Net increase (decrease) in cash 292 (3,184)
Cash, beginning of period 14,805 10,949
-------- -------
Cash, end of period $ 15,097 $ 7,765
======== =======
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 72 $ 56
Income taxes 279 130
See notes to unaudited condensed combined financial statements.
20
HUB PARTNERSHIPS
NOTES TO UNAUDITED CONDENSED COMBINED
FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed combined financial statements of 26
Subchapter S corporations and the Hub Group Distributions Services partnership
(collectively referred to as "Hub Partnerships" or the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles 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. BASIS OF FINANCIAL STATEMENT PRESENTATION
The unaudited condensed combined financial statements of Hub Partnerships
are presented herein to reflect the financial condition and results of
operations of the Hub Partnerships as of and for the periods in which the Hub
Partnerships were the predecessor to the business acquired by Hub Group, Inc on
March 18, 1996, as necessary to disclose the financial statements of the
business acquired by Hub Group, Inc. pursuant to the rules and regulations of
the Securities and Exchange Commission.
NOTE 3. SPECIAL DISTRIBUTION
Immediately prior to March 18, 1996, the Company distributed substantially
all of its equity, including retained earnings through March 17, 1996, to its
shareholders in the form of cash and notes. The notes are five-year balloon
notes bearing interest at an annual rate of 5.45%. Interest is compounded
annually with all principal and interest due in March of 2001.
NOTE 4. PROPERTY AND EQUIPMENT
DECEMBER 31,
1995
--------------
(000's)
Land $ 92
Building and improvements 1,376
Leasehold improvements 674
Computer equipment and software 8,562
Furniture and equipment 3,418
Transportation equipment and automobiles 2,353
--------------
16,475
Less: Accumulated depreciation and amortization (7,481)
--------------
PROPERTY AND EQUIPMENT, net $ 8,994
--------------
21
HUB PARTNERSHIPS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS COMBINATIONS
On March 18, 1996, Hub Group, Inc. acquired the general partnership
interest in 26 operating partnerships and a controlling interest in the Hub
Group Distribution Services partnership (collectively referred to as "Hub
Partnerships"). The unaudited condensed combined financial statements of Hub
Partnerships are presented herein to reflect the financial condition and results
of operations of the Hub Partnerships as of and for the periods in which the Hub
Partnerships were the predecessor to the business acquired by Hub Group, Inc. on
March 18, 1996.
RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
Since the acquisition of the general partnerships in the Hub Partnerships
and the controlling interest in Hub Distribution on March 18, 1996, results of
operations have been consolidated with those of Hub Group, Inc. As no activity
is reported for the second quarter, 1996, management feels that a discussion of
period to period changes will not be meaningful.
22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Purchase Agreement dated May 2, 1996 among the Registrant, American
President Companies, Ltd. and APL Land Transport Services, Inc. incorporated by
reference from the corresponding exhibit to the Registrant's Report on Form 8-K
dated May 2, 1996.
(b) Reports on Form 8-K
Registrant filed a Report on Form 8-K dated May 2, 1996 reporting
under Item 2 the consummation of the acquisition of American President Lines
Domestic Distribution Services, a division of APL Land Transport Services, Inc.
The financial statements of the business acquired were filed supplementally on
July 15, 1996, on Form 8-K/A.
23
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: August 12, 1996 /s/ William L. Crowder
----------------------
William L. Crowder
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
5
1,000
3-MOS
DEC-31-1996
JUN-30-1996
18,577
0
96,162
1,056
0
115,255
19,314
9,290
161,776
99,417
0
59
0
0
39,407
161,776
0
209,236
0
184,112
18,281
209
302
2,770
1,108
6,843
0
0
0
1,662
0.29
0
