<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 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 1-5896
HUDSON GENERAL CORPORATION
(Exact Name of Registrant as specified in its charter)
Delaware 13-1947395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Great Neck Road, Great Neck, N.Y. 11021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (5l6) 487-8610
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $1 par value American Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by a 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]
Aggregate market value of voting stock held by non-affiliates of Registrant
based on the closing price on July 31, 1998 was $72,427,918.
The number of shares outstanding (net of treasury stock) of the Registrant's
common stock as of July 31, 1998 was 1,744,949 shares.
Specific portions of the following documents are incorporated herein by
reference in the parts hereof indicated, and only such specific portions are to
be deemed filed as part of this report:
<TABLE>
<CAPTION>
Document Part
-------- ----
<S> <C>
1998 Proxy Statement of Registrant (to be filed with the Commission pursuant to
Regulation 14A no later than 120 days after the close of its fiscal year) III
Registrant's 1998 Annual Report to Shareholders I, II, IV
</TABLE>
<PAGE> 2
PART I
ITEM 1. BUSINESS
General Development of Business
Hudson General Corporation (the "Corporation" or "Registrant")
was organized in Delaware in 1961. Effective June 1, 1996, pursuant to the terms
of a Unit Purchase and Option Agreement dated February 27, 1996 (the Purchase
Agreement) between the Corporation and Lufthansa Airport and Ground Services
GmbH (LAGS), a German corporation and an indirect wholly-owned subsidiary of
Deutsche Lufthansa AG, the Corporation transferred substantially all of the
assets and liabilities of its aviation services business (the Aviation Business)
to Hudson General LLC (Hudson LLC), a newly formed limited liability company. In
exchange for the transfer of such assets and liabilities and the assumption by
Hudson LLC, as co-obligor with the Corporation, of all of the Corporation's 7%
convertible subordinated debentures, the Corporation received a 74% interest in
Hudson LLC. In addition, Hudson LLC sold LAGS a 26% interest in Hudson LLC, for
a purchase price of $23,686,000 in cash (after certain adjustments), of which
$15,848,000 was paid at the closing, and deferred payments of $2,650,000 and
$5,188,000 plus interest thereon were made, respectively, in September 1996 and
December 1996. The Purchase Agreement, as amended, provides LAGS an option (the
LAGS Option), exercisable on October 1 of each year through 1999, effective as
of the preceding July 1, pursuant to which LAGS may increase its equity
ownership in Hudson LLC from 26% to a maximum of 49%, for a price based on a
formula related to the average earnings of the Aviation Business over the four
fiscal years preceding the exercise of the option, subject to certain minimum
and maximum amounts. On September 16, 1998, the Corporation was advised that the
Supervisory Board of Deutsche Lufthansa AG approved the exercise by its
subsidiary LAGS USA Inc., of the LAGS Option to increase its equity interest in
Hudson LLC from 26% to 49%.
2
<PAGE> 3
As a result, the Corporation expects LAGS to give notice of its exercise of the
LAGS Option on or about October 1, 1998. The exercise price is approximately
$29,600,000.
Hudson LLC is principally engaged in providing a broad range
of services to the aviation industry. The services, which are conducted by
Hudson LLC and its subsidiaries, include aircraft ground handling; aircraft
fueling; fuel management; ground transportation; snow removal; cargo
warehousing; and sale, leasing and maintenance of airline ground support
equipment. In addition to its interest in Hudson LLC, the Corporation is a 50%
partner with Oxford First Corporation in a joint venture for the development and
sale of land on the Island of Hawaii (see Note 3 to Item 14(a)(1) Financial
Statements).
Narrative Description of Business
Hudson LLC's snow removal and aircraft de-icing services are
seasonal in nature. The majority of the results of these operations are normally
reflected in the second and third quarters of the Corporation's fiscal year, and
fluctuate depending upon the severity of the winter season. Additional
information required to be provided under this item is incorporated by reference
from pages 5-7 of the Registrant's 1998 Annual Report to Shareholders.
General Information
The Corporation does not spend a material amount for research
and development activities.
During the year ended June 30, 1996, sources of the
Corporation's revenues which exceeded 10% of consolidated revenues were:
aircraft ground handling services (including de-icing) $85,948,000; aircraft
fueling services (including fixed base operations) $23,701,000; ground
transportation services $21,108,000; and snow removal services $17,487,000.
3
<PAGE> 4
(Note: In fiscal 1996, revenues are for the eleven months ended May 31, 1996.
Foreign revenues included above are translated at the average rates of exchange
during the fiscal year.)
No customer of the Corporation accounted for more than 10% of
consolidated revenues during fiscal 1998.
Hudson LLC's services are generally subject to competitive
bidding, and Hudson LLC competes principally with airlines and other aviation
services companies, some of which are larger and have resources greater than
Hudson LLC. The major bases of competition are the prices at which services are
offered and the quality and efficiency in the performance of services.
The compliance with federal, state and local provisions which
have been enacted or adopted regulating the discharge of materials into the
environment did not have a material effect upon the Corporation's or Hudson
LLC's capital expenditures or results of operations for fiscal 1998 and 1997, or
competitive position. However, the federal government and many state and local
governments have enacted or proposed legislation and regulations with respect to
storage facilities for fuel, petroleum-based products and chemicals, the
disposal of hazardous waste materials, storm water discharges, and financial
responsibility for possible liability exposures relating to fuel storage
facilities. Compliance with such legislation and regulations has resulted in
expenditures by the Corporation and Hudson LLC, including expenditures for the
testing, decommissioning and/or replacement of certain of its fuel and de-icing
fluid storage facilities, and the cleanup of fuel spills. It is anticipated that
additional such expenditures by Hudson LLC, the amount of which is presently not
expected to be material, will be required.
In addition, airport authorities are coming under increasing
pressure to clean up previous contamination at their facilities, and are seeking
financial contributions from airport tenants and companies which
4
<PAGE> 5
operate at their airports. The Corporation cannot predict at this time the
amount, if any, that it or Hudson LLC may be required to pay in connection with
such airport authority initiatives.
The Corporation and Hudson LLC employ approximately 45 and
4,600 persons, respectively.
Financial Information About Foreign and Domestic Operations and Export Sales
The Corporation, through its ownership interest in Hudson LLC,
operates in only one industry segment. For information as to foreign operations,
see Note 4 to Item 14(a)(1) Financial Statements and Note 5 to Item 14(a)(2)
Financial Statements of Hudson LLC. For information relating to the
Corporation's investment in a joint venture to develop and sell land in Hawaii
(the Venture), see Note 3 to Item 14(a)(1) Financial Statements.
5
<PAGE> 6
ITEM 2. PROPERTIES
The Corporation's executive offices at 111 Great Neck Road,
Great Neck, New York contain approximately 14,000 square feet and are under
lease through December 31, 2002.
Hudson LLC leases office, warehouse, hangar and maintenance
shop space as well as fuel storage facilities at various airport locations in
the United States and Canada. These leases expire at various dates through 2009
and contain various renewal options through 2020. A portion of this leased space
has been sublet to non-affiliated sublessees. The properties owned and leased by
Hudson LLC are suitable and adequate to conduct its business.
For information relating to the Corporation's interest in land
in Hawaii, see Note 3 to Item 14(a)(1) Financial Statements and page 7 of the
Registrant's 1998 Annual Report to Shareholders.
6
<PAGE> 7
ITEM 3. LEGAL PROCEEDINGS
In 1988, Texaco Canada Inc. (Texaco) (now known as
McColl-Frontenac Inc.) instituted a lawsuit (the Texaco Lawsuit) in the Supreme
Court of Ontario, Canada against the Corporation, the Corporation's Canadian
subsidiary (now owned by Hudson LLC) and Petro-Canada Inc. (the corporation
which supplied aviation fuel for the Corporation's Canadian fixed base
operations). The Texaco Lawsuit's allegations, as amended, were that the
defendants interfered with contractual and fiduciary relations, conspired to
injure, and induced the breach of a fuel supply agreement between Texaco and
Innotech Aviation Limited (Innotech) in connection with the purchase by the
Corporation from Innotech in 1984 of certain assets of Innotech's airport ground
services business. The Texaco Lawsuit sought compensatory and punitive damages
totaling $110,000,000 (Canadian) (approximately $80,000,000 (U.S.)) plus all
profits earned by the defendants subsequent to the alleged breach. The trial,
which began in May 1996, concluded after several adjournments on May 7, 1997. On
May 25, 1998, the trial judge issued an oral decision in the Corporation's
favor.
In finding that there was no liability on the part of the
Corporation, its Canadian subsidiary or Petro-Canada, the judge ruled that none
of these parties had induced any breach of the fuel supply agreement, nor had
any of them interfered with the plaintiff's contractual and fiduciary relations.
The judge also ruled that Innotech did not breach its fuel supply agreement with
Texaco, nor was there any fiduciary relationship between Innotech and Texaco.
The trial judge rendered an oral decision, and Texaco, which
has served a Notice of Appeal, cannot pursue any appeal until the decision has
been issued in written form. The decision dealt solely with the issue of
liability, and a separate hearing before another judicial officer would have to
be held on the issue of damages. It is expected that a hearing on damages
7
<PAGE> 8
would not be held unless Texaco decides to pursue, and is successful in, its
appeal of the liability decision.
The Corporation has agreed to indemnify and hold harmless
Hudson LLC, LAGS and each affiliate of LAGS against all losses related to the
Texaco Lawsuit.
8
<PAGE> 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- Not applicable
ADDITIONAL ITEM
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE CORPORATION
-------------------------------------
Name Age Position with Corporation
---- --- -------------------------
<S> <C> <C>
Jay B. Langner 68 Chairman of the Board, Chief Executive Officer and
Director
Richard D. Segal 44 Vice Chairman of the Board and Director
Michael Rubin 51 President and Director
Paul R. Pollack 56 Executive Vice President, Chief Operating Officer
and Director
Fernando DiBenedetto 49 Senior Vice President - Operations
Raymond J. Rieder 48 Senior Vice President and Chief Marketing
Officer
Noah E. Rockowitz 49 Senior Vice President, Secretary and General
Counsel
Barry I. Regenstein 41 Vice President, Chief Financial Officer and
Controller
</TABLE>
No family relationships exist among the executive officers of the
Corporation. Each of the executive officers holds office at the pleasure of the
Board of Directors, except as noted below.
Mr. Langner has served as a Director of the Corporation since 1961
and as Chairman since 1977. He served as President from 1989 until September
1996, and previously served in such capacity from 1961 until 1979. The
Corporation has an employment contract with Mr. Langner pursuant to which Mr.
Langner has agreed to render services to the Corporation as Chairman and Chief
Executive Officer for a period ending January 31, 2001.
Mr. Segal has served as a Director of the Corporation since 1981 and
was elected Vice Chairman of the Board in February 1998. He is Chairman and
Chief Executive Officer of Seavest Inc., a private investment company.
Mr. Rubin was elected a Director of the Corporation in November 1996.
Mr. Rubin has served as President of the Corporation since September 1996 and
served from 1990 until such date as Executive Vice President and until July
9
<PAGE> 10
1997 as Chief Financial Officer of the Corporation. Previously, Mr. Rubin had
been Vice President-Finance since 1985 and Treasurer from 1983 until July 1998.
He has been employed in various capacities with the Corporation since 1971. Mr.
Rubin is a Certified Public Accountant.
Mr. Pollack was elected a Director of the Corporation in November
1996. Mr. Pollack has served as Executive Vice President and Chief Operating
Officer of the Corporation since 1990, and prior thereto as Senior Vice
President since 1984. He has served as President of Hudson LLC since September
1996. He has been employed in various capacities with the Corporation, including
as a divisional officer, since 1968. Mr. Pollack is a Certified Public
Accountant.
Mr. DiBenedetto has served as Senior Vice President-Operations since
1994. Prior thereto he was Vice President-Operations since 1984. He has been
employed in various capacities with the Corporation, including as a divisional
officer, since 1970.
Mr. Rieder has served as Senior Vice President and Chief Marketing
Officer of the Corporation since 1990, and prior thereto as Vice President
Marketing since 1984. Mr. Rieder has served as Executive Vice President of
Hudson LLC since September 1996. He has been employed in various capacities with
the Corporation, including as a divisional officer, since 1967.
Mr. Rockowitz was elected Senior Vice President of the Corporation in
July 1998 and has served as Vice President-General Counsel since 1985 and as
Secretary since 1986. Prior to joining the Corporation in 1985, he had been
Corporate Secretary and Assistant General Counsel of Belco Petroleum Corporation
since 1978.
Mr. Regenstein was elected Chief Financial Officer of the Corporation
in July 1997 and has served as a Vice President since 1994 and as the
Corporation's Controller since 1987. He has been employed in various capacities
with the Corporation since 1982. Mr. Regenstein is a Certified Public
Accountant.
10
<PAGE> 11
The Corporation has employment contracts with Messrs. Rubin, Pollack
and Rieder which currently extend until December 31, 1998 and are subject to
extension for additional three year periods unless on or before the September
30th preceding any then-existing expiration date, the Corporation notifies the
executive that it elects not to so extend the term. The Corporation also has
employment contracts with Messrs. DiBenedetto, Rockowitz and Regenstein which
currently extend until December 31, 1999 and are subject to extension for
additional two year periods unless on or before the September 30th preceding any
then-existing expiration date, the Corporation notifies the executive that it
elects not to so extend the term.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information required to be provided under Part II, Item 5(a)
and (c) is incorporated by reference from page 12 of the Registrant's 1998
Annual Report to Shareholders under the caption "Selected Consolidated Financial
Data". At June 30, 1998, there were 182 holders of record of the Corporation's
common stock.
The Corporation's Revolving Credit Agreement, as amended (Credit
Agreement), permits the payment of dividends (see Note 6 to Item 14(a)(1)
Financial Statements) and the purchase, redemption or retirement by the
Corporation of its stock so long as certain financial covenants are maintained.
In fiscal 1997, the Board of Directors authorized the repurchase
of up to 400,000 shares of the Corporation's common stock, which purchases could
be made from time to time in either open market or privately negotiated
transactions. Prior to the fiscal 1997 authorizations, the Corporation still had
authority to repurchase up to 35,700 shares from a previous authorization.
During fiscal 1997, the Corporation repurchased 243,000 shares in the open
market for an aggregate purchase price of $9,152,000. No shares were repurchased
by the Corporation during fiscal 1998.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The information required to be provided under Part II, Item 6 is
incorporated by reference from page 12 of the Registrant's 1998 Annual Report to
Shareholders under the caption "Selected Consolidated Financial Data".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required to be provided under Part II, Item 7 is
incorporated by reference from pages 8-11 of the Registrant's 1998 Annual Report
to Shareholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information relating to the Corporation's marketable securities,
see Note 1 to Item 14(a)(1) Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and the required financial
statement schedule of the Corporation and the independent auditors' reports
thereon of KPMG Peat Marwick LLP, independent auditors, for the Corporation's
fiscal years ended June 30, 1998, 1997 and 1996 are filed pursuant to Items
14(a)(1) and (2) of this Report. The financial statements and the required
financial statement schedule of Hudson LLC and the independent auditors' report
thereon of KPMG Peat Marwick LLP, independent auditors, for the fiscal years
ended June 30, 1998, 1997 and the month ended June 30, 1996 and the financial
statements and the required financial statement schedule of the Venture and the
independent auditors' report thereon of KPMG Peat Marwick LLP, independent
auditors, for the fiscal years ended June 30, 1998, 1997 and 1996, are filed
pursuant to Item 14(d) of this Report. All such financial statements and
financial statement schedules are
13
<PAGE> 14
included herein, except for the consolidated financial statements of the
Corporation which are incorporated herein by reference.
Selected quarterly financial data of the Registrant for the fiscal
years ended June 30, 1998 and 1997 appears in Note 12 to Item 14(a)(1) Financial
Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE - Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be provided under Part III, Item 10,
relative to Directors of the Registrant is incorporated by reference from the
Registrant's 1998 definitive proxy statement to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A no later than
120 days after the close of its fiscal year and, relative to executive officers,
to Part I of this report under the caption "Executive Officers of the
Corporation".
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be provided under Part III, Items 11, 12
and 13 is incorporated by reference from the Registrant's 1998 definitive proxy
statement to be filed with the Commission pursuant to Regulation 14A no later
than 120 days after the close of its fiscal year.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)
FINANCIAL STATEMENTS OF THE REGISTRANT, all of which are incorporated herein by
reference to the Registrant's 1998 Annual Report to Shareholders.
Independent Auditors' Report of KPMG Peat Marwick LLP, independent auditors,
appearing on page 24 of the 1998 Annual Report to Shareholders.
Consolidated Balance Sheets of Hudson General Corporation and Subsidiaries at
June 30, 1998 and 1997, appearing on page 14 of the 1998 Annual Report to
Shareholders.
Consolidated Statements of Earnings of Hudson General Corporation and
Subsidiaries for the Years Ended June 30, 1998, 1997 and 1996, appearing on page
13 of the 1998 Annual Report to Shareholders.
Consolidated Statements of Cash Flows of Hudson General Corporation and
Subsidiaries for the Years Ended June 30, 1998, 1997 and 1996, appearing on page
16 of the 1998 Annual Report to Shareholders.
Consolidated Statements of Stockholders' Equity of Hudson General Corporation
and Subsidiaries for the Years Ended June 30, 1998, 1997 and 1996, appearing on
page 15 of the 1998 Annual Report to Shareholders.
Notes to Consolidated Financial Statements appearing on pages 17-24 of the 1998
Annual Report to Shareholders.
<TABLE>
<CAPTION>
Location
in 10-K
--------
<S> <C>
(a)(2)
FINANCIAL STATEMENT SCHEDULE OF THE REGISTRANT FOR THE YEARS ENDED
JUNE 30, 1998, 1997 AND 1996
Independent Auditors' Report of KPMG Peat Marwick LLP on Financial Statement F1
Schedule
II - Valuation and Qualifying Accounts F2
FINANCIAL STATEMENTS OF HUDSON GENERAL LLC AND SUBSIDIARIES:
Independent Auditors' Report of KPMG Peat Marwick LLP. F4
Consolidated Balance Sheets of Hudson General LLC and Subsidiaries at June 30, F6
1998 and 1997.
Consolidated Statements of Earnings and Comprehensive Income of Hudson General F5
LLC and Subsidiaries for the Years Ended June 30, 1998, 1997 and the Period
June 1, 1996 (Inception) to June 30, 1996.
Consolidated Statements of Members' Equity of Hudson General LLC and F7
Subsidiaries for the Years Ended June 30, 1998, 1997 and the Period June 1,
1996 (Inception) to June 30, 1996.
Consolidated Statements of Cash Flows of Hudson General LLC and F8
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
Subsidiaries for the Years Ended June 30, 1998, 1997 and the Period June 1, 1996
(Inception) to June 30, 1996.
Notes to Consolidated Financial Statements. F9-F17
FINANCIAL STATEMENT SCHEDULE OF HUDSON GENERAL LLC AND
SUBSIDIARIES FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND THE
MONTH ENDED JUNE 30, 1996:
II - Valuation and Qualifying Accounts F18
FINANCIAL STATEMENTS OF KOHALA JOINT VENTURE AND SUBSIDIARY:
Independent Auditors' Report of KPMG Peat Marwick LLP. F20
Consolidated Balance Sheets of Kohala Joint Venture and Subsidiary at F21
June 30, 1998 and 1997.
Consolidated Statements of Operations and Partners' Deficit of Kohala Joint F22
Venture and Subsidiary for the Years Ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows of Kohala Joint Venture and Subsidiary for F23
the Years Ended June 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements. F24-F30
FINANCIAL STATEMENT SCHEDULE OF KOHALA JOINT VENTURE AND
SUBSIDIARY FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996:
II - Valuation and Qualifying Accounts F31
</TABLE>
Schedules other than those listed above are omitted because of the absence of
the conditions under which they are required or because the information required
therein is set forth in all material respects in the financial statements,
including the notes thereto.
16
<PAGE> 17
(a)(3) Exhibits
EXHIBIT
NO. EXHIBIT DESCRIPTION
------- ------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Registrant, as
amended to date, filed as Exhibit 3.1 to Quarterly Report on
Form 10-Q for the quarter ended December 31, 1986, incorporated
herein by reference.
3.2 By-laws of the Registrant, as amended to date. Filed as Exhibit
3.2(b) to Current Report on Form 8-K dated as of July 24, 1998,
incorporated herein by reference.
4.4(a) Revolving Credit Agreement dated as of November 25, 1992 among
Hudson General Aviation Services Inc., various banking
institutions named therein and Bank of Boston Canada, as
agent, filed as Exhibit 4.4(i) to Quarterly Report on Form 10-Q
for the quarter ended March 31, 1993, incorporated herein by
reference.
4.4(b) First Amendment to the Revolving Credit Agreement dated as of
November 25, 1992 among Hudson General Aviation Services Inc.,
various banking institutions named therein and The Chase
Manhattan Bank of Canada, as successor agent, dated as of March
15, 1995, filed as Exhibit 4.4(f) to Annual Report on Form 10-K
for the fiscal year ended June 30, 1995, incorporated herein by
reference.
4.4(c) Second Amendment to the Revolving Credit Agreement dated as of
November 25, 1992, among Hudson General Aviation Services Inc.,
ABN Amro Bank Canada and The Chase Manhattan Bank of Canada
individually and as successor agent, dated as of June 1, 1996,
filed as Exhibit 4.4(c) to Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, incorporated herein by
reference.
4.4(d) Revolving Credit Agreement dated as of June 1, 1996 among
Hudson General Corporation and The First National Bank of
Boston, European American Bank, The Chase Manhattan Bank, N.A.
and The First National Bank of Boston, as agent, filed as
Exhibit 4.4(d) to Annual Report on Form 10-K for the fiscal
year ended June 30, 1996, incorporated herein by reference.
4.4(e) Amended and Restated Revolving Credit Agreement dated as of
November 25, 1992 among Hudson General Corporation, Hudson
General LLC and The First National Bank of Boston, European
American Bank, The Chase Manhattan Bank, N.A. and The First
National Bank of Boston, as agent, as amended and restated as
of June 1, 1996, filed as Exhibit 4.4(e) to Annual Report on
Form 10-K for the fiscal year ended June 30, 1996, incorporated
herein by reference.
10.1(a) Development Agreement dated April 29, 1981 between Kahua Ranch,
Limited, and the Registrant, filed as Exhibit 3 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1981,
incorporated herein by reference.
10.1(b) Amended and Restated Joint Venture Agreement dated April 29,
1981 between Hudson Kohala Inc. and The Hilton Head Company of
Hawaii
17
<PAGE> 18
Inc. (now Oxford Kohala, Inc.), filed as Exhibit 4 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1981,
incorporated herein by reference.
10.1(c) First Amendment to the Joint Venture Agreement, Amendment and
Restatement dated April 29, 1981, such Amendment being
effective as of June 30, 1984, filed as Exhibit 10 to Quarterly
Report on Form 10-Q for the quarter ended September 30, 1984,
incorporated herein by reference.
10.1(d) Agreement constituting an amendment to the Joint Venture
Agreement, Amendment and Restatement dated April 29, 1981,
dated November 2, 1990 among the Registrant, Hudson Kohala
Inc., Oxford Kohala, Inc. and Oxford First Corporation relating
to receivables of the Kohala Joint Venture, filed as Exhibit
10.1(f) to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990, incorporated herein by reference.
10.1(e) Agreement constituting an amendment to the Joint Venture
Agreement, Amendment and Restatement dated April 29, 1981,
dated September 5, 1991 among the Registrant, Hudson Kohala
Inc., Oxford Kohala, Inc. and Oxford First Corporation relating
to distributions from the Kohala Joint Venture, filed as
Exhibit 10.1(g) to Annual Report on Form 10-K for the fiscal
year ended June 30, 1991, incorporated herein by reference.
10.1(f) Agreement constituting an amendment to the Joint Venture
Agreement, Amendment and Restatement dated April 29, 1981,
dated September 26, 1991 among the Registrant, Hudson Kohala
Inc., Oxford Kohala, Inc. and Oxford First Corporation relating
to distributions from the Kohala Joint Venture, filed as
Exhibit 10.1(h) to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1991, incorporated herein by
reference.
10.1(g) Second Amendment to the Joint Venture Agreement, Amendment and
Restatement dated April 29, 1981, such Amendment being
effective as of October 1, 1994, filed as Exhibit 10.1(i) to
Quarterly Report on Form 10-Q for the quarter ended September
30, 1994, incorporated herein by reference.
10.2* 1981 Non-Qualified Stock Option and Stock Appreciation Rights
Plan, filed as Exhibit 15.1 to Form S-8 Registration Statement
under the Securities Act of 1933, Registration No. 2-75137,
incorporated herein by reference.
10.3* 1981 Incentive Stock Option and Stock Appreciation Rights Plan,
filed as Exhibit 15.2 to Form S-8 Registration Statement under
the Securities Act of 1933, Registration No. 2-75137,
incorporated herein by reference.
10.4(a)* Form of Severance Agreement, dated as of June 3, 1986, between
the Registrant and Michael Rubin, filed as Exhibit 10.5(a) to
Annual Report on Form 10-K for the fiscal year ended June 30,
1988, incorporated herein by reference.
10.4(b)* Amendment effective January 23, 1996, amending the Form of
Severance Agreement between the Registrant and Michael Rubin
dated as of June 3, 1986, filed as Exhibit 10.4(c) to Quarterly
18
<PAGE> 19
Report on Form 10-Q for the quarter ended March 31, 1996,
incorporated herein by reference.
10.4(c)* Amendment effective February 6, 1998, amending the Form of
Severance Agreement between the Registrant and Michael Rubin,
dated as of June 3, 1986, as amended, filed as Exhibit 10.4(d)
to Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, incorporated herein by reference.
10.4(d)* Amended schedule of executive officers entitled to benefits of
Severance Agreements, filed as Exhibit 10.4(e) to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998,
incorporated herein by reference.
10.5(a)* Employment Agreement dated July 28, 1988, between the
Registrant and Jay B. Langner, filed as Exhibit 10.6(a) to
Annual Report on Form 10-K for the fiscal year ended June 30,
1988, incorporated herein by reference.
10.5(b)* Amendment dated April 16, 1990, amending the Employment
Agreement between the Registrant and Jay B. Langner dated as of
July 28, 1988, filed as Exhibit 10.5(b) to Annual Report on
Form 10-K for the fiscal year ended June 30, 1990, incorporated
herein by reference.
10.5(c)* Amendment dated August 16, 1994, amending the Employment
Agreement between the Registrant and Jay B. Langner dated as of
July 28, 1988, as amended, filed as Exhibit 10.5(c) to Annual
Report on Form 10-K for the fiscal year ended June 30, 1994,
incorporated herein by reference.
10.5(d)* Amendment effective January 23, 1996, amending the Employment
Agreement between the Registrant and Jay B. Langner dated July
28, 1988, as amended, filed as Exhibit 10.5(e) to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996,
incorporated herein by reference.
10.5(e)* Amendment effective February 6, 1998, amending the Employment
Agreement between the Registrant and Jay B. Langner dated as of
July 28, 1988, as amended, filed as Exhibit 10.5(g) to
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, incorporated herein by reference.
10.5(f)* Severance Agreement dated April 16, 1990 between the Registrant
and Jay B. Langner, filed as Exhibit 10.5(c) to Annual Report
on Form 10-K for the fiscal year ended June 30, 1990,
incorporated herein by reference.
10.5(g)* Amendment effective January 23, 1996, amending the Severance
Agreement between the Registrant and Jay B. Langner dated April
16, 1990, filed as Exhibit 10.5(f) to Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, incorporated herein
by reference.
10.5(h)* Amendment effective February 6, 1998, amending the Severance
Agreement between the Registrant and Jay B. Langner dated April
16, 1990, as amended, filed as Exhibit 10.5(h) to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998,
incorporated herein by reference.
19
<PAGE> 20
10.6(a)* Form of Employment Agreement, dated February 8, 1990, between
the Registrant and Michael Rubin, filed as Exhibit 10.7(a) to
Annual Report on Form 10-K for the fiscal year ended June 30,
1990, incorporated herein by reference.
10.6(b)* Amendment effective January 23, 1996, amending the Form of
Employment Agreement between the Registrant and Michael Rubin,
dated February 8, 1990, filed as Exhibit 10.7(c) to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996,
incorporated herein by reference.
10.6(c)* Amendment effective February 6, 1998, amending the Form of
Employment Agreement between the Registrant and Michael Rubin,
dated February 8, 1990, as amended, filed as Exhibit 10.6(d) to
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 incorporated herein by reference.
10.6(d)* Amendment effective May 15, 1998, amending the Employment
Agreement between the Registrant and Michael Rubin, dated
February 8, 1990, as amended.
10.6(e)* Amended schedule of executive officers entitled to benefits of
Employment Agreements.
10.7* Description of Executive Incentive Program adopted by the
Compensation Committee of the Board of Directors on December 1,
1993, as amended on May 17, 1996, filed as Exhibit 10.9 to
Annual Report on Form 10-K for the fiscal year ended June 30,
1996, incorporated herein by reference.
10.8(a) Unit Purchase and Option Agreement, dated February 27, 1996
between the Registrant and Lufthansa Airport and Ground
Services GmbH, a German corporation, filed as Exhibit 99.1 to
Form 8-K dated March 6, 1996, incorporated herein by reference.
10.8(b) Limited Liability Company Agreement dated May 31, 1996,
effective as of June 1, 1996, among the Registrant, LAGS (USA)
Inc. and Hudson General LLC, filed as Exhibit 99.3 to Form 8-K
dated May 31, 1996, incorporated herein by reference.
10.8(c) First Amendment to the Unit Purchase and Option Agreement dated
February 27, 1996 between the Registrant and Lufthansa Airport
and Ground Services GmbH, a German corporation, dated as of
December 12, 1996, filed as Exhibit 10.10(c) to Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996,
incorporated herein by reference.
10.8(d) Third Amendment to the Limited Liability Company Agreement
dated May 31, 1996, effective as of June 1, 1996, among the
Registrant, LAGS (USA) Inc. and Hudson General LLC dated as of
December 12, 1996, filed as Exhibit 10.10(d) to Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996,
incorporated herein by reference.
20
<PAGE> 21
13 The Registrant's 1998 Annual Report to Shareholders, which
report, except for those portions thereof which are expressly
incorporated by reference in this filing, is furnished for the
information of the Commission and is not to be deemed to be
filed as part of this filing.
21 Subsidiaries of the Registrant, filed as Exhibit 21 to Annual
Report on Form 10-K for the fiscal year ended June 30, 1997,
incorporated herein by reference.
23 Consent of KPMG Peat Marwick LLP, the Corporation's independent
auditors, to the incorporation by reference into the
Corporation's Registration Statement on Form S-8, as amended,
Registration No. 2-75137.
(b) No reports on Form 8-K have been filed by the Registrant during
the last quarter of the period covered by this report.
(c) Reference is made to Item 14(a)(3) above.
(d) Reference is made to Item 14(a)(2) above.
* Denotes management contract for compensatory plan or
arrangement.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned Chief Executive Officer, President and Chief Financial
Officer/Controller, thereunto duly authorized on the 24th day of September 1998.
HUDSON GENERAL CORPORATION
/s/ Signature Title
/s/ Jay B. Langner Chairman of the Board, and
-------------- Chief Executive Officer
Jay B. Langner
/s/ Michael Rubin President
-------------
Michael Rubin
/s/ Barry I. Regenstein Chief Financial Officer and Controller
-------------------
Barry I. Regenstein
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in their capacities as Directors on the 24th day of September 1998.
/s/ Jay B. Langner /s/ Michael Rubin
-------------- -------------
Jay B. Langner Michael Rubin
/s/ Milton H. Dresner /s/ Hans H. Sammer
----------------- --------------
Milton H. Dresner Hans H. Sammer
/s/ Paul R. Pollack /s/ Richard D. Segal
--------------- ----------------
Paul R. Pollack Richard D. Segal
/s/ Edward J. Rosenthal /s/ Stanley S. Shuman
------------------- -----------------
Edward J. Rosenthal Stanley S. Shuman
22
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hudson General Corporation:
Under date of August 14, 1998, except for note 2, which is as of September 16,
1998, we reported on the consolidated balance sheets of Hudson General
Corporation and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1998, as contained in
the fiscal 1998 annual report to stockholders. These consolidated financial
statements and our report thereon are incorporated by reference in the annual
report on Form 10-K for the year 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedule listed in item 14(a)2. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, 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.
KPMG PEAT MARWICK LLP
Jericho, New York
September 16, 1998
23
<PAGE> 24
SCHEDULE II
HUDSON GENERAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
.......ADDITIONS.......
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS RESERVES OF YEAR
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 and 1997 - Allowance for
doubtful accounts
receivable... $ --- $ --- $ --- $ --- $ ---
========== ========= =========== ========= =========
1996 - Allowance for doubtful
accounts receivable.. $1,579,000 $ 362,000 $(1,820,000)(B,C,D) $ 121,000(A) $ ---
========== ========= =========== ========= =========
</TABLE>
NOTES:
(A) Write-offs.
(B) Foreign exchange.
(C) Recoveries.
(D) Includes transfer of $1,804,000 to Hudson General LLC.
24
<PAGE> 25
HUDSON GENERAL LLC
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
(FORM 10-K)
JUNE 30, 1998 AND 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
1
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Member Representatives
Hudson General LLC
We have audited the accompanying consolidated balance sheets of Hudson General
LLC and subsidiaries as of June 30, 1998 and 1997 and the related consolidated
statements of earnings and comprehensive income, members' equity and cash flows
for the years ended June 30, 1998, 1997 and the period June 1 (inception) to
June 30, 1996. We have also audited financial statement schedule II. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hudson General LLC
and subsidiaries at June 30, 1998 and 1997 and the results of their operations
and their cash flows for the years ended June 30, 1998, 1997 and the period June
1 (inception) to June 30, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, 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.
KPMG PEAT MARWICK LLP
Jericho, New York
August 14, 1998, except for note 2,
which is as of September 16, 1998
2
<PAGE> 27
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
Hudson General LLC and Subsidiaries
(in thousands)
<TABLE>
<CAPTION>
YEAR YEAR PERIOD JUNE 1
ENDED ENDED (INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues ...................................... $ 168,947 $ 167,729 $ 12,096
--------- --------- --------
Costs and expenses:
Operating ................................. 131,643 128,749 9,259
Depreciation and amortization ............. 8,237 7,510 673
Selling, general & administrative ......... 14,459 13,625 1,317
--------- --------- --------
Total costs and expenses ............... 154,339 149,884 11,249
--------- --------- --------
Operating income .............................. 14,608 17,845 847
Interest income ............................... 411 1,137 217
Interest expense .............................. (533) (958) (168)
--------- --------- --------
Earnings before provision for income taxes .... 14,486 18,024 896
Provision for income taxes .................... 1,748 2,085 41
--------- --------- --------
Net earnings .................................. 12,738 15,939 855
--------- --------- --------
Other comprehensive income:
Foreign currency translation adjustment.... (830) (123) 43
--------- --------- --------
Other comprehensive income .................... (830) (123) 43
--------- --------- --------
Comprehensive income .......................... $ 11,908 $ 15,816 $ 898
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 28
CONSOLIDATED BALANCE SHEETS
Hudson General LLC and Subsidiaries
(in thousands)
<TABLE>
<CAPTION>
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................. $ 3,393 $ 12,324
Accounts and notes receivable - net ................... 16,886 15,289
Inventory ............................................. 1,523 1,272
Prepaid expenses and other assets ..................... 4,868 2,939
-------- --------
Total current assets ............................ 26,670 31,824
Property, equipment and leasehold rights at cost,
less accumulated depreciation and amortization ........ 45,639 44,948
Long-term receivables - net .............................. --- 1,361
Deferred income taxes .................................... --- 174
Excess cost over fair value of net assets acquired ....... 643 713
-------- --------
$ 72,952 $ 79,020
======== ========
Liabilities and Members' Equity
Current liabilities:
Accounts payable ...................................... $ 17,326 $ 18,528
Income taxes payable .................................. 590 1,280
Accrued expenses and other liabilities ................ 18,455 19,011
Advances from Hudson General Corporation - net ........ 2,057 361
-------- --------
Total current liabilities ....................... 38,428 39,180
-------- --------
Deferred income taxes .................................... 319 ---
Note payable to Hudson General Corporation ............... 3,130 4,630
-------- --------
Total noncurrent liabilities .................... 3,449 4,630
-------- --------
Members' Equity:
Contributed capital ................................... 19,966 19,966
Retained earnings ..................................... 13,489 16,794
Accumulated other comprehensive income ................ (2,380) (1,550)
-------- --------
Total members' equity ........................... 31,075 35,210
-------- --------
$ 72,952 $ 79,020
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 29
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
Hudson General LLC and Subsidiaries
Years Ended June 30, 1998, 1997 and the Period June 1 (Inception) to June 30,
1996 (in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Contributed Retained Comprehensive Members'
Capital Earnings Income Equity
------- -------- ------ ------
<S> <C> <C> <C> <C>
Balance, June 1, 1996 (Inception) ............................. $ --- $ --- $ --- $ ---
Equity contributions ...................................... 12,123 --- (1,470) 10,653
Equity adjustment from foreign currency translation ....... --- --- 43 43
Net earnings .............................................. --- 855 --- 855
---------------------------------------------------------
Balance, June 30, 1996 ........................................ 12,123 855 (1,427) 11,551
Equity contributions ...................................... 7,843 --- --- 7,843
Equity adjustment from foreign currency translation ....... --- --- (123) (123)
Net earnings .............................................. --- 15,939 --- 15,939
---------------------------------------------------------
Balance, June 30, 1997 ........................................ 19,966 16,794 (1,550) 35,210
Cash distributions ........................................ --- (15,783) --- (15,783)
Distributions in the form of a tax credit ................. --- (260) --- (260)
Equity adjustment from foreign currency translation ....... --- --- (830) (830)
Net earnings .............................................. --- 12,738 --- 12,738
---------------------------------------------------------
Balance, June 30, 1998 ........................................ $19,966 $ 13,489 ($2,380) $ 31,075
======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
Hudson General LLC and Subsidiaries
(in thousands)
<TABLE>
<CAPTION>
PERIOD JUNE 1
YEAR ENDED YEAR ENDED (INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ................................................................ $ 12,738 $ 15,939 $ 855
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation and amortization ........................................ 8,237 7,510 673
(Recovery of) provision for losses on accounts receivable - net ...... (113) 188 14
Loss (gain) on sale of equipment ..................................... (170) (60) 67
Change in other current assets and liabilities:
Accounts and notes receivables - net ............................... (2,015) 2,533 (7,011)
Inventory .......................................................... (284) (162) (40)
Prepaid expenses and other assets .................................. (2,043) (1,742) (256)
Accounts payable ................................................... (1,148) 3,435 2,365
Income taxes payable ............................................... (640) 940 38
Accrued expenses and other liabilities ............................. (271) 1,321 (1,698)
Decrease in long-term receivables - net .............................. 1,361 666 36
Decrease in deferred income taxes .................................... 494 676 ---
Other - net .......................................................... 42 44 6
-------- -------- --------
Net cash provided (used) by operating activities ................... 16,188 31,288 (4,951)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ..................................... (10,045) (15,218) (1,825)
Proceeds from sale of property and equipment ............................ 663 166 23
-------- -------- --------
Net cash used by investing activities .............................. (9,382) (15,052) (1,802)
-------- -------- --------
Cash flows from financing activities:
Capital contributions ................................................... --- 7,843 15,848
Distributions to members ................................................ (15,783) --- ---
Advances from (repayments to) Hudson General Corporation ................ 696 (7,302) 7,233
Principal repayment of note payable to Hudson General
Corporation .......................................................... (500) (21,283) ---
Principal repayments on long-term debt .................................. --- (2,408) (70)
-------- -------- --------
Net cash (used) provided by financing activities ................... (15,587) (23,150) 23,011
-------- -------- --------
Effect of exchange rate changes on cash ..................................... (150) (31) 9
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ........................ (8,931) (6,945) 16,267
Cash and cash equivalents at beginning of period ............................ 12,324 19,269 3,002
-------- -------- --------
Cash and cash equivalents at end of period .................................. $ 3,393 $ 12,324 $ 19,269
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hudson General LLC and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of Hudson General LLC and its subsidiaries (Hudson LLC). All material
intercompany accounts and transactions have been eliminated in consolidation.
Description of Business: Hudson LLC provides a broad and diverse range of
services to the aviation industry at twenty-four (24) airports throughout the
United States and Canada. These services include aircraft ground handling;
aircraft fueling; fuel management; ground transportation; snow removal; cargo
warehousing; and sale, leasing and maintenance of airline ground support
equipment. In addition to its airport related services, Hudson LLC provides
transportation management services for various governmental agencies and
authorities.
Inventories: Inventories are carried at the lower of average cost or market.
Depreciation and Amortization: Depreciation of property and equipment is
provided on the straight-line method over their estimated useful lives.
Leasehold rights are amortized over the original and anticipated renewal terms
of the underlying leases.
Excess Cost over Fair Value of Net Assets Acquired: The excess cost over fair
value of net assets acquired, net of accumulated amortization of $1,317,000 and
$1,275,000 at June 30, 1998 and 1997, respectively, is amortized on a
straight-line basis over periods not to exceed forty years. When events and
circumstances so indicate, all long-term assets including the Excess Cost over
Fair Value of Net Assets Acquired, are assessed for recoverability based upon
undiscounted future operating cash flows.
Income Taxes: Hudson LLC has adopted Statement of Financial Accounting Standards
(SFAS) No. 109 "Accounting for Income Taxes", which requires the use of the
asset and liability method of accounting for deferred income taxes.
Financial Instruments: Hudson LLC believes that the book values of its monetary
assets and liabilities approximate fair values as a result of the short-term
nature of such assets and liabilities.
Foreign Currency Translation: The financial position and results of operations
of Hudson LLC's Canadian operations are measured using local currency as the
functional currency. Assets and liabilities are translated into U.S. dollars at
year-end rates of exchange, and revenues and expenses are translated at the
average rates of exchange for the year. Gains or losses resulting from
translating foreign currency financial statements are accumulated as a separate
component of members' equity.
7
<PAGE> 32
Statements of Cash Flows: For purposes of the consolidated statements of cash
flows, Hudson LLC considers all securities with an original maturity of
approximately three months or less at the date of acquisition to be cash
equivalents. In fiscal 1998 and 1997, income taxes (net of refunds) of
$1,839,000 and $843,000, respectively, were paid. Interest of $352,000 and
$933,000 was paid in fiscal 1998 and 1997, respectively. No income taxes or
interest was paid during the month of June 1996.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Long-Lived Assets: Effective July 1, 1996 Hudson LLC adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", which requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The adoption of SFAS No.
121 did not have any impact on Hudson LLC's financial position or results of
operations.
Comprehensive Income: Effective for fiscal 1998, Hudson LLC adopted the
provisions of SFAS No. 130 "Reporting Comprehensive Income", which requires the
reporting of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income. Hudson LLC's only item of
other comprehensive income is foreign currency translation adjustments and the
accumulated balance of such adjustments is shown in "Accumulated other
comprehensive income" in the accompanying consolidated balance sheets.
Reclassifications: Certain items previously reported in specific financial
statement captions have been reclassified to conform with the fiscal 1998
presentation.
2. FORMATION AND STRUCTURE OF HUDSON GENERAL LLC
Effective June 1, 1996, pursuant to the terms of the Unit Purchase and Option
Agreement dated February 27, 1996 (the Purchase Agreement) between Hudson
General Corporation (the Corporation) and Lufthansa Airport and Ground Services
GmbH (LAGS), a German corporation and an indirect wholly-owned subsidiary of
Deutsche Lufthansa AG, the Corporation transferred substantially all of the
assets and liabilities of its aviation services business (the Aviation Business)
to Hudson LLC, a newly formed limited liability company (the Transaction). In
exchange for the transfer of such assets and liabilities and the assumption by
Hudson LLC, as co-obligor with the Corporation, of all of the Corporation's 7%
convertible subordinated debentures, the Corporation received a 74% interest in
Hudson LLC. In addition, Hudson LLC sold LAGS a 26% interest in Hudson LLC for a
purchase price of $23,686,000 in cash (after certain adjustments), of which
$15,848,000 was paid at the closing, and deferred payments (the Deferred
Payments) of $2,650,000 and $5,188,000 plus interest
8
<PAGE> 33
thereon were made, respectively, in September 1996 and December 1996. The
Purchase Agreement, as amended, provides LAGS an option (the LAGS Option),
exercisable on October 1 of each year through 1999, effective as of the
preceding July 1, pursuant to which LAGS may increase its equity ownership in
Hudson LLC from 26% to a maximum of 49%, for a price based on a formula related
to the average earnings of the Aviation Business over the four fiscal years
preceding the exercise of the option, subject to certain minimum and maximum
amounts. On September 16, 1998, Hudson LLC was advised that the Supervisory
Board of Deutsche Lufthansa AG approved the exercise by its subsidiary LAGS USA
Inc., of the LAGS Option to increase its equity interest in Hudson LLC from 26%
to 49%. As a result, Hudson LLC expects LAGS to give notice of its exercise of
the LAGS Option on or about October 1, 1998. The exercise price is approximately
$29,600,000.
Pursuant to the Purchase Agreement, Hudson LLC, the Corporation and LAGS USA
Inc., a wholly owned subsidiary of LAGS (LAGS USA), entered into a Limited
Liability Company Agreement effective June 1, 1996 (the LLC Agreement). The LLC
Agreement, as amended, stipulates that the Corporation and LAGS USA will share
profits and losses in the same proportion as their respective equity interests
in Hudson LLC, except that the Corporation was entitled to all interest earned
on the Deferred Payments. In addition, LAGS USA would not share in any pre-tax
earnings, as defined, of the Aviation Business in excess of $14,690,000 and
$15,863,000 in fiscal 1997 and 1998, respectively, unless the aggregate of the
pre-tax earnings of the Aviation Business for fiscal 1997 and 1998 exceeded
$30,533,000. Such pre-tax earnings exceeded $30,553,000, and as a result, LAGS
USA is not limited by the LLC Agreement from sharing in pre-tax earnings of the
Aviation Business for those years. Hudson LLC's net earnings in June 1996 were
allocated 100% to the Corporation.
In June 1996, primarily as a result of the Corporation retaining certain trade
receivables, the Corporation made net advances of $7,233,000 on behalf of Hudson
LLC. Such balance was repaid to the Corporation by Hudson LLC (together with
accrued interest at the Corporation's incremental borrowing rate) during fiscal
1997. Hudson LLC's net advances from the Corporation were $2,057,000 and
$361,000 at June 30, 1998 and 1997, respectively.
Pursuant to the LLC Agreement, as amended, the Corporation will continue to
manage the Aviation Business and will be entitled to charge Hudson LLC an
overhead fee equal to the sum of an agreed upon percentage of Hudson LLC's
consolidated domestic revenues and an agreed upon percentage of Hudson LLC's
consolidated Canadian revenues. (The Corporation and LAGS USA agreed to overhead
fees for fiscal 1998 of 3 1/2% and 1 1/4%, respectively, and overhead fees for
fiscal 1997 of 3% and 1%, respectively.) The LLC Agreement, as amended, also
provides for a Member Board on which the Corporation has three votes and LAGS
USA has two votes, and allows either Member to veto certain major transactions
and to veto any reduction in distributions stipulated in the LLC Agreement, as
amended. The LLC Agreement, as amended, provides that distributions will be paid
annually in an amount at least equal to 50% of domestic net income and 10% of
Canadian pre-tax earnings, as defined, from the Aviation Business. Such
distributions, totaling approximately $8,300,000 for fiscal 1997 and the month
of June 1996, were made in October 1997. An additional distribution of
$7,500,000 with respect to fiscal 1997 was made in December 1997.
9
<PAGE> 34
3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Accounts, notes and long-term receivables - net at June 30, 1998 and June 30,
1997 consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, June 30,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Rental and service fees receivable........................................... $16,886 $14,762
Note receivable ............................................................. --- 1,888
------- -------
16,886 16,650
Less: current portion (net of allowance for doubtful
accounts of $1,484,000 and $1,670,000).................................. 16,886 15,289
------- -------
Long-term portion............................................................ $ --- $ 1,361
========== =======
</TABLE>
On January 6, 1994, the Corporation assigned its leases and ceased operations at
Long Island MacArthur Airport in Islip, New York (LIMA) where the Corporation
had provided ground handling and fueling services to commercial airlines and
related fixed base operation services to general aviation aircraft. At the
closing, the Corporation was paid $150,000 in cash and received a promissory
note from the purchaser of its leases in the amount of $3,750,000, payable over
seven years with interest at the rate of 7%. The outstanding balance of the note
receivable of $1,756,000 was prepaid in October 1997, resulting in recognition
of $570,000 of deferred income during fiscal 1998.
Hudson LLC provides various services at airports throughout the United States
and Canada. Hudson LLC grants credit to customers based upon an analysis of its
customers' financial position and then-existing conditions in the aviation
industry. Four of Hudson LLC's customers had individual balances outstanding
greater than 5%, and aggregating 25%, of accounts and notes receivable-net at
June 30, 1998. Bad debt (recovery) expenses were ($113,000), $188,000 and
$14,000 for fiscal 1998, 1997 and the month of June 1996, respectively.
Accrued expenses and other liabilities at June 30, 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Salaries and wages ....... $ 6,598 $ 6,327
Insurance ................ 5,433 7,108
Operating expenses payable 4,210 3,102
Other .................... 2,214 2,474
------- -------
$18,455 $19,011
======= =======
</TABLE>
Maintenance and repair expenses were $9,603,000, $8,760,000 and $664,000 for
fiscal 1998, 1997 and the month of June 1996, respectively.
10
<PAGE> 35
4. PROPERTY, EQUIPMENT AND LEASEHOLD RIGHTS
The number of years over which major classes of assets are being depreciated and
amortized, and the costs and related accumulated depreciation and amortization
as of June 30, 1998 and 1997 are set forth below:
<TABLE>
<CAPTION>
Estimated
Useful Lives 1998 1997
------------ ---- ----
(in thousands)
<S> <C> <C> <C>
Operating equipment........................................ 2 - 12 $89,989 $85,349
Leasehold rights........................................... 25 2,400 2,400
Buildings.................................................. 20 1,811 1,474
Office furnishings and equipment........................... 3 - 10 4,246 3,868
Leasehold improvements..................................... 2 - 28 6,967 6,464
------- -------
105,413 99,555
Accumulated depreciation and amortization (59,774) (54,607)
------- -------
$45,639 $44,948
======= =======
</TABLE>
5. CANADIAN OPERATIONS
The consolidated financial statements include: assets of $19,662,000 and
$18,635,000, and net assets of $13,541,000 and $12,406,000 at June 30, 1998 and
1997, respectively; and revenues of $42,186,000, $45,987,000 and $3,197,000 and
earnings of $1,927,000, $1,784,000 and $52,000 for fiscal 1998, 1997 and the
month of June 1996, respectively, related to Hudson LLC's Canadian operations.
6. LONG-TERM DEBT
In connection with the Transaction, the revolving credit agreement that the
Corporation had with a group of banks dated November 25, 1992, as amended, was
amended and restated as of June 1, 1996, and Hudson LLC assumed and agreed to
become jointly and severally liable for any obligations thereunder (the LLC
Credit Agreement). Pursuant to the LLC Credit Agreement, Hudson LLC may borrow
funds (including outstanding letters of credit) up to a limit of $18,000,000
(the LLC Limit) until September 30, 1998. At such time, and at the end of each
subsequent quarter, the LLC Limit will be reduced by one-sixteenth of the LLC
Limit that was in effect on June 30, 1998 until June 30, 2002, at which time the
LLC Credit Agreement terminates. The limit may also be reduced by asset sales in
excess of certain amounts. There were no direct borrowings outstanding at June
30, 1998 and 1997 and $2,425,000 and $3,020,000 of outstanding letters of credit
at June 30, 1998 and 1997, respectively. The LLC Credit Agreement provides
Hudson LLC with the option of selecting a rate of interest at either the base
rate or 1 3/8% above the LIBO rate, as defined.
The LLC Credit Agreement requires that Hudson LLC maintain certain minimum
effective net worth requirements, as defined, which are subject to incremental
annual increases and further stipulates that Hudson LLC not incur a consolidated
net loss for any fiscal year. The LLC Credit Agreement
11
<PAGE> 36
also requires that Hudson LLC meet certain other financial covenants. Hudson LLC
has granted the banks a security interest in substantially all of its domestic
assets.
Hudson LLC also has an agreement with a group of banks to provide a credit
facility for its Canadian subsidiary (the Canadian Agreement) in the amount of
$5,000,000 (Cdn) (the Canadian Limit). The Canadian Limit will be reduced
commencing September 30, 1998 on the same basis as the LLC Limit. The Canadian
Agreement provides Hudson LLC with the option of selecting a rate of interest at
either 1/2% above the Canadian prime rate or 1 5/8% above the cost of funds
rate, as defined. In connection with the Canadian Agreement, Hudson LLC has
guaranteed the obligations of its Canadian subsidiary and granted the banks a
security interest in substantially all of its Canadian accounts receivable and
certain of its other assets.
In July 1986, the Corporation issued $30,000,000 of 7% convertible subordinated
debentures due 2011 (the Debentures). In connection with the Transaction,
effective June 1, 1996, Hudson LLC assumed the obligations of the Debentures and
the Corporation remained as a co-obligor. The Debentures were convertible at any
time prior to maturity into shares of the Corporation's common stock.
At June 1, 1996, there was $28,821,000 principal balance of the Debentures
outstanding. During June and August 1996, the Debentures were called for
redemption and as a result, $2,408,000 principal balance of the Debentures were
redeemed during fiscal 1997. In addition, during fiscal 1997 and the month of
June 1996, $26,343,000 and $70,000, respectively, of the Debentures were
converted into shares of the Corporation's common stock and to such extent
Hudson LLC became indebted, on a subordinated basis, to the Corporation (the
Corporate Subordinated Debt). At September 5, 1996, no Debentures remained
outstanding.
During fiscal 1997, Hudson LLC utilized the proceeds from the Deferred Payments
together with a portion of the proceeds received at the closing of the
Transaction to repay $21,283,000 of the outstanding balance of the Corporate
Subordinated Debt. At June 30, 1998 and 1997 the balance of the Corporate
Subordinated Debt was $4,630,000 and $5,130,000, respectively. The noncurrent
portion of such debt at June 30, 1998 and 1997 of $3,130,000 and $4,630,000,
respectively, is shown as "Note payable to Hudson General Corporation" in the
accompanying consolidated balance sheets. Hudson LLC is obligated to repay the
remaining balance of $4,630,000 to the Corporation as follows: (i) $1,500,000 on
July 15, 1998; and (ii) $1,500,000 on each July 15th thereafter until the entire
principal balance is satisfied. The current portion of this debt at June 30,
1998 (which was paid in July 1998) and 1997 of $1,500,000 and $500,000,
respectively, is included in "Advances from Hudson General Corporation - net" in
the accompanying consolidated balance sheets. Interest on the Corporate
Subordinated Debt is payable semi-annually in January and July at the rate of 7%
per annum.
12
<PAGE> 37
7. INCOME TAXES
Provision for income taxes consisted of the following for fiscal 1998, 1997 and
the month of June 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Foreign: (in thousands)
Current................................................. $1,105 $1,061 $ 41
Deferred................................................ 411 659 ---
State:
Current................................................. 149 344 ---
Deferred................................................ 83 21 ---
------ ------ ----
$1,748 $2,085 $ 41
====== ====== ====
</TABLE>
Earnings before income taxes consisted of the following for fiscal 1998, 1997
and the month of June 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Domestic $11,042 $14,520 $ 803
Foreign 3,444 3,504 93
------- ------- -------
$14,486 $18,024 $ 896
======= ======= =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following as of June 30,
1998 and 1997 (Deferred tax assets were transferred to Hudson LLC from the
Corporation on June 1, 1996):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets: (in thousands)
Reserves for doubtful accounts, claims - foreign .... $ 237 $ 277
----- -----
Total deferred tax assets .................... 237 277
----- -----
Deferred tax liabilities:
State and local income taxes ........................ (104) (21)
Property, equipment and leasehold rights, principally
depreciation - foreign ........................... (452) (82)
----- -----
Total deferred tax liabilities ............... (556) (103)
----- -----
Net deferred tax (liability) asset ....... $(319) $ 174
===== =====
</TABLE>
Hudson LLC has adopted SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
requires that deferred income taxes be recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
In April 1997, Hudson LLC's Canadian subsidiary was notified by Canadian
taxation authorities of their intention to disallow loss and depreciation
deductions and carryforwards
13
<PAGE> 38
related to an internal recapitalization in fiscal 1990 by the Corporation of
such Canadian subsidiary. If the position of the Canadian taxation authorities
(as currently proposed) is sustained, a foreign income tax liability of
approximately $3,900,000, plus interest, would result. The Corporation has
agreed to indemnify and hold harmless Hudson LLC, LAGS and each affiliate of
LAGS against any liability resulting from this matter. The Corporation's
management disagrees with the position of the Canadian taxation authorities and
intends to vigorously contest any potential assessments made by them.
Accordingly, no provision has been made in the accompanying consolidated
financial statements for foreign income taxes related to this matter.
As a limited liability company, Hudson LLC has elected to be taxed as a
partnership under the provisions of the Internal Revenue Code, and therefore,
the U.S. taxable results and available tax credits of Hudson LLC pass directly
to the Members' U.S. corporate income tax returns in the manner prescribed in
the LLC Agreement, as amended.
8. RETIREMENT PLANS
As of January 1, 1997, Hudson LLC established a 401(k) Profit Sharing Plan
covering substantially all of its domestic employees not subject to collective
bargaining agreements (the LLC Plan). Pursuant to the LLC Plan, Hudson LLC makes
a matching contribution equal to 25% of the Compensation (as defined in the LLC
Plan) that each participant elects to defer (up to 5% of the participant's
Compensation) and contribute to the LLC Plan. In addition, Hudson LLC may make a
discretionary annual contribution. Prior to January 1, 1997 such employees were
covered under the Corporation's 401(k) Profit Sharing Plan (the Plan), which
contains terms and conditions similar to those of the LLC Plan. During fiscal
1998, 1997 and the month of June 1996, Hudson LLC contributed $743,000, $766,000
and $11,000, respectively, to the LLC Plan and the Plan representing employer
matching and discretionary contributions for Hudson LLC's covered employees.
Hudson LLC maintains a Group Registered Retirement Savings Plan (RRSP) covering
substantially all of its Canadian employees not subject to collective bargaining
agreements. Under the RRSP, Hudson LLC may make a discretionary annual
contribution. During fiscal 1998, 1997 and the month of June 1996, Hudson LLC
contributed $124,000, $114,000 and $44,000, respectively, to the RRSP.
Net retirement expense was $858,000, $861,000 and $91,000 for fiscal 1998, 1997
and the month of June 1996, respectively.
9. COMMITMENTS AND CONTINGENCIES
(a) Leases
Minimum rental payments for leased premises and operating equipment for future
fiscal years under non-cancelable operating leases (including $2,753,000 to be
paid subsequent to June 30, 1998 for operating equipment on lease to Hudson LLC
from the Corporation and excluding $1,221,000 to be received subsequent to June
30, 1998 under non-cancelable subleases) are: $5,083,000 in 1999;
14
<PAGE> 39
$4,027,000 in 2000; $3,528,000 in 2001; $2,875,000 in 2002; $2,148,000 in 2003;
and $7,080,000 thereafter.
Total rental expense incurred amounted to $6,874,000, $6,486,000 and $475,000
(excluding sublease income of $632,000, $755,000 and $36,000) for fiscal 1998,
1997 and the month of June 1996, respectively.
(b) Purchase Commitments
At June 30, 1998, Hudson LLC is obligated to expend funds of $5,578,000 and
$1,906,000 in fiscal 1999 and 2000, respectively, for equipment to be used in
providing de-icing and snow removal services at Lester B. Pearson International
Airport in Toronto pursuant to a contract entered into in December 1997 with the
Greater Toronto Airports Authority.
(c) Litigation
In 1988, Texaco Canada Inc. (Texaco) (now known as McColl-Frontenac Inc.)
instituted a lawsuit (the Texaco Lawsuit) in the Supreme Court of Ontario,
Canada against the Corporation, the Corporation's Canadian subsidiary (now owned
by Hudson LLC) and Petro-Canada Inc. (the corporation which supplied aviation
fuel for the Corporation's Canadian fixed base operations). The Texaco Lawsuit's
allegations, as amended, were that the defendants interfered with contractual
and fiduciary relations, conspired to injure, and induced the breach of a fuel
supply agreement between Texaco and Innotech Aviation Limited (Innotech) in
connection with the purchase by the Corporation from Innotech in 1984 of certain
assets of Innotech's airport ground services business. The Texaco Lawsuit sought
compensatory and punitive damages totaling $110,000,000 (Canadian)
(approximately $80,000,000 (U.S.)) plus all profits earned by the defendants
subsequent to the alleged breach. The trial, which began in May 1996, concluded
after several adjournments on May 7, 1997. On May 25, 1998, the trial judge
issued an oral decision in the Corporation's favor.
In finding that there was no liability on the part of the Corporation, its
Canadian subsidiary or Petro-Canada, the judge ruled that none of these parties
had induced any breach of the fuel supply agreement, nor had any of them
interfered with the plaintiff's contractual and fiduciary relations. The judge
also ruled that Innotech did not breach its fuel supply agreement with Texaco,
nor was there any fiduciary relationship between Innotech and Texaco.
The trial judge rendered an oral decision, and Texaco, which has served a Notice
of Appeal, cannot pursue any appeal until the decision has been issued in
written form. The decision dealt solely with the issue of liability, and a
separate hearing before another judicial officer would have to be held on the
issue of damages. It is expected that a hearing on damages would not be held
unless Texaco decides to pursue, and is successful in, its appeal of the
liability decision.
The Corporation has agreed to indemnify and hold harmless Hudson LLC, LAGS and
each affiliate of LAGS against all losses related to the Texaco Lawsuit.
15
<PAGE> 40
SCHEDULE II
HUDSON GENERAL LLC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1998, 1997 AND PERIOD JUNE 1 (INCEPTION) TO JUNE 30, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND OTHER FROM END
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
<S> <C> <C> <C> <C> <C>
1998 - Allowance for doubtful
accounts receivable $1,670,000 ($113,000) $(40,000) (B,C) $ 33,000 (A) $1,484,000
========== ========= ========= ======== ==========
1997 - Allowance for doubtful
accounts receivable $1,784,000 $188,000 $ 30,000 (B,C) $332,000 (A) $1,670,000
========== ======== ======== ======== ==========
1996 - Allowance for doubtful
accounts receivable $1,804,000 (D) $ 14,000 $(31,000) (B,C) $ 3,000 (A) $1,784,000
========== ======== ========= ======== ==========
</TABLE>
NOTES:
(A) Write-offs.
(B) Foreign exchange.
(C) Recoveries.
(D) Represents transfer of $1,804,000 from Hudson General
Corporation.
16
<PAGE> 41
KOHALA JOINT VENTURE
AND SUBSIDIARY
Consolidated Financial Statements
and Schedule
June 30, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hudson General Corporation
The Board of Directors
Oxford First Corporation:
We have audited the accompanying consolidated balance sheets of the
Kohala Joint Venture and subsidiary as of June 30, 1998 and 1997, and
the related consolidated statements of operations and partners'
deficit, and cash flows for each of the years in the three-year period
ended June 30, 1998. We have also audited financial statement schedule
II. These consolidated financial statements and the financial statement
schedule are the responsibility of the Venture's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
For the years ended June 30, 1998, 1997 and 1996, the Venture incurred
net losses of $5,642,900, $22,584,200 and $6,042,200, respectively, and
at June 30, 1998, the amount of the partners' deficit was $43,601,200.
During fiscal 1998, the partners did not make any advances to the
Venture. Additional contributions from the partners may be required in
fiscal 1999.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Kohala Joint Venture and subsidiary as of June 30, 1998 and 1997 and
the results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, 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.
KPMG PEAT MARWICK LLP
August 14, 1998
<PAGE> 43
KOHALA JOINT VENTURE AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
Cash $ 354,900 730,000
Accounts receivable 42,800 39,200
Accrued interest receivable 89,700 179,200
Mortgage notes receivable, net 2,004,300 2,561,000
Land and development costs 9,210,400 9,264,200
Property, plant and equipment, net 1,480,500 1,560,900
Foreclosed real estate, net 2,186,300 2,853,600
Other 67,600 28,700
----------- -----------
$15,436,500 17,216,800
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
<S> <C> <C>
Partner advances and accrued interest payable 58,178,000 54,012,600
Accounts payable and accrued expenses 859,700 1,162,500
------------ ------------
Total liabilities 59,037,700 55,175,100
Contingencies
Partners' deficit (43,601,200) (37,958,300)
------------ ------------
$ 15,436,500 17,216,800
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 44
KOHALA JOINT VENTURE AND SUBSIDIARY
Consolidated Statements of Operations and Partners' Deficit
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 665,600 1,455,300 676,800
Cost of sales 325,500 1,106,400 365,400
Write-down of real estate assets -- 17,000,000 --
Selling, general and administrative
expenses 2,046,300 2,340,000 2,952,400
------------ ------------ ------------
Operating loss (1,706,200) (18,991,100) (2,641,000)
Other (income) expense:
Interest expense 4,185,900 3,858,300 3,755,400
Interest income and other (249,200) (265,200) (354,200)
------------ ------------ ------------
Net loss (5,642,900) (22,584,200) (6,042,200)
Partners' deficit, beginning of year (37,958,300) (15,374,100) (9,331,900)
------------ ------------ ------------
Partners' deficit, end of year $(43,601,200) (37,958,300) (15,374,100)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 45
KOHALA JOINT VENTURE AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Proceeds from land sales $ 183,400 765,500 105,200
Interest income received 244,900 266,800 347,300
Proceeds from water company sales 316,200 294,500 341,300
Land and development cost expenditures (239,000) (115,200) (159,000)
Interest paid (18,600) (118,100) (212,000)
Selling, general and administrative expenditures paid (1,758,000) (1,533,700) (1,847,500)
Collections on mortgage notes 686,100 1,279,500 1,678,300
Proceeds from sale of and deposits relating to assets
held in foreclosure 218,900 209,100 57,000
----------- ----------- -----------
Net cash (used in) provided by
operating activities (366,100) 1,048,400 310,600
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (9,000) (12,500) (21,000)
Proceeds from sale of property, plant and equipment -- 500 --
----------- ----------- -----------
Net cash used in investing activities (9,000) (12,000) (21,000)
----------- ----------- -----------
Cash flows from financing activities:
Net advances received from partners -- -- 2,714,400
Payments on notes payable -- (573,200) (2,826,200)
----------- ----------- -----------
Net cash used in financing activities -- (573,200) (111,800)
----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents (375,100) 463,200 177,800
Cash and cash equivalents at beginning of year 730,000 266,800 89,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 354,900 730,000 266,800
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE> 46
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE BUSINESS
The Kohala Joint Venture (the Venture) is a partnership which was
formed to acquire, develop and sell approximately 4,000 contiguous
acres of land in Hawaii (the Project). The Partners in the Venture
are Hudson Kohala Inc. (Hudson, a wholly-owned subsidiary of
Hudson General Corporation) and Oxford Kohala, Inc. (Oxford, a
wholly-owned subsidiary of Oxford First Corporation) (Oxford
First)) (together, the Partners). The terms of the partnership are
contained in the Restated Joint Venture Agreement dated April 29,
1981, as amended (the Agreement). The Project is being developed
in four successive phases. The first two phases, containing
approximately 2,100 acres, have been developed and substantially
sold. The third phase, containing approximately 550 acres, has
also been developed and has 84 parcels remaining available for
sale. The fourth phase has yet to be developed, except to the
extent common improvements (main roadway, water wells, etc.) have
been completed. The Partners plan to reevaluate the fourth phase
of the Project.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Venture and its 99% owned subsidiary, the Kohala Ranch Water
Company (KRWC) (note 8). All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) PARTNERS' DEFICIT AND ALLOCATION OF PROFITS AND LOSSES
Partners' deficit includes the Partners' capital accounts in
the Venture and the minority interest (the remaining 1%) of
the Partners in KRWC.
In accordance with the Agreement, profits are shared equally by
the Partners. Losses are shared by the Partners on a pro-rata
basis, based first on their respective capital accounts and then
on their respective combined advances to the Venture including
accrued interest (note 6).
(d) REVENUE RECOGNITION AND LAND SALES
All sales to date have been from the first, second and third
phases of the Project. Revenue is being recognized under the full
accrual method of accounting. The minimum down payment for sales
to be recorded is 10%.
(e) INTEREST INCOME ON MORTGAGE NOTES RECEIVABLE
Interest is not accrued on mortgage notes receivable in arrears 90
days or more.
(f) CAPITALIZATION OF COSTS
Land and development costs (including interest) are initially
capitalized and subsequently carried at the lower of average cost
or fair value. These costs are charged to cost of sales when the
corresponding land sale is recorded based upon the relative fair
value of the parcel sold to the aggregate fair value of all
parcels in the phase. As indicated in note 2, the Venture recorded
a $17,000,000 write-down of its real estate assets in fiscal 1997.
(Continued)
<PAGE> 47
2
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(f) CONTINUED
The Venture capitalized interest costs, as appropriate, for each
phase of the Project. Effective July 1, 1994, as a result of the
lack of further development activity, capitalization of interest
was discontinued.
(g) ESTIMATED COSTS TO COMPLETE
At June 30, 1998 and 1997, the Venture estimated that $2,479,000
of additional costs were necessary to complete the development of
Phase III. The portion of such amount relating to unsold parcels
has been offset against land and development costs, net in the
accompanying consolidated balance sheets.
(h) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at the lower of cost or
fair value.
Depreciation is provided on the straight-line method. The number
of years over which major classes of assets are depreciated and
the costs and related accumulated depreciation as of June 30, 1998
and 1997 are set forth below:
<TABLE>
<CAPTION>
Estimated
useful lives 1998 1997
------------ ---- ----
<S> <C> <C> <C>
Water distribution systems 20-50 years $ 2,782,100 2,773,700
Plant structures and equipment 3-10 years 183,400 182,900
----------- -----------
2,965,500 2,956,600
Accumulated depreciation (956,500) (867,200)
Contributions in aid of construction (528,500) (528,500)
----------- -----------
$ 1,480,500 1,560,900
=========== ===========
</TABLE>
Contributions in aid of construction represent contributions by
customers for plant additions made for the benefit of the
customer. Accordingly, such contributions are recorded as a
reduction against property, plant and equipment.
Depreciation expense, included in "Selling, general and
administrative" expenses in the accompanying consolidated
statements of operations and partners' deficit was $89,300,
$183,400 and $173,600 for fiscal 1998, 1997 and 1996,
respectively.
(i) IMPAIRMENT OF LONG-LIVED ASSETS
Effective July 1, 1996, the Venture adopted Statement of Financial
Accounting Standards (SFAS) No.121, "Accounting for the Impairment
of Long Lived Assets and for Long Lived Assets to Be Disposed Of".
SFAS No.121 addresses accounting for the impairment of long-lived
assets
(Continued)
<PAGE> 48
3
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(i), CONTINUED
(including real estate), certain identifiable intangibles and
goodwill relating to those assets to be held and used and for long
lived assets and certain identifiable intangibles to be disposed
of. The adoption of SFAS No.121 did not have an effect on the
Venture's consolidated financial position or results of
operations.
(j) INCOME TAXES
As a partnership, the Venture is not a taxable entity under the
provisions of the Internal Revenue Code. The taxable results and
available tax credits of the Venture and KRWC pass directly to the
Partners' corporate income tax returns in the manner prescribed in
the Agreement.
(k) STATEMENTS OF CASH FLOWS
For the purposes of presenting the consolidated statements of cash
flows, the Venture considers all securities with an original
maturity of approximately three months or less at the date of
acquisition to be cash equivalents.
A reconciliation of net loss to net cash (used in) provided by
operating activities for fiscal 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss $(5,642,900) (22,584,200) (6,042,200)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Write-down of real estate assets -- 17,000,000 --
Depreciation and amortization 89,300 183,400 173,600
Provision for losses and discounts on
mortgages receivable 100,000 600,000 600,000
Provision for losses on foreclosed real estate 400,000 -- 356,300
Sale of assets held in foreclosure 218,900 209,100 57,000
Interest expense in excess of interest paid 4,167,300 3,740,200 3,543,400
Mortgage loans originated on land sales (142,500) (339,900) (206,000)
Cash collections on mortgage loans 686,100 1,279,500 1,678,300
Excess of cost of sales over land and
development costs paid 86,500 991,200 206,400
Accrued interest on mortgages receivable 89,500 58,400 2,200
Cash for water sales in excess of accrual (3,500) 9,100 (4,900)
Real estate tax accruals (382,000) (48,000) 35,700
Other (32,800) (50,400) (89,200)
----------- ----------- -----------
Total adjustments 5,276,800 23,632,600 6,352,800
----------- ----------- -----------
Net cash (used in) provided by operating activities $ (366,100) 1,048,400 310,600
=========== =========== ===========
</TABLE>
(Continued)
<PAGE> 49
4
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(l) USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reported period. Management has
made significant estimates as to the amounts required for
allowance for uncollectible accounts and the allowance for losses
on foreclosed real estate, as well as the recoverability of land
and development costs. Actual results could differ from those
estimates.
(2) WRITE-DOWN OF REAL ESTATE ASSETS
In the fourth quarter of fiscal 1997, the Venture recorded a charge of
$17,000,000 to write-down its real estate assets to their estimated fair
values. The charge was a result of the continuing periodic evaluation of
the carrying value of the Venture's real estate assets. The Partners
concluded, as a result of their in-depth analysis of an updated
independent appraisal of such assets and the consideration of other
factors affecting the development of the property, that the carrying
value of the real estate assets should be reduced. Factors considered by
the Partners included the Partners' plans to reevaluate the fourth phase
of the Project which has to date only had limited development, the
current condition of the Hawaiian real estate market and general economic
conditions.
(3) MORTGAGE NOTES RECEIVABLE
The Venture deems certain loans impaired when, based upon current
information and events, it is probable that the Venture will be unable to
collect all amounts due, both principal and accrued interest. The Venture
measures impairment based on a loan's observable market price or the fair
value of the collateral since the loan is collateral dependent and
foreclosure is probable. The amount of the valuation allowance is
determined by comparing principal plus accrued interest to the fair value
of the underlying collateral. The Venture recognizes an impairment by
adjusting its existing valuation allowance with a corresponding charge to
bad debt expense. Subsequent changes in fair value, if any, are treated
in the same manner.
At June 30, 1998 and 1997, mortgage notes receivable from land sales
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Mortgage notes receivable $ 4,945,100 5,796,600
Allowance for uncollectible accounts (2,871,500) (3,166,300)
Reserve for cash discounts and other
allowances (69,300) (69,300)
----------- -----------
Mortgage notes receivable, net $ 2,004,300 2,561,000
=========== ===========
</TABLE>
At June 30, 1998 and 1997, 14 and 20 mortgage notes receivable were 90
days or more in arrears, aggregating $2,525,140 and $3,705,500,
respectively. Accrued interest receivable on delinquent mortgage notes
receivable was $77,819 and $171,900 as of June 30, 1998 and 1997,
respectively.
(Continued)
<PAGE> 50
5
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3), CONTINUED
Stated interest rates on mortgage notes receivable outstanding at June
30, 1998 and 1997, range from 11% to 6.5% (averaging 8.2% as of June
30, 1998 and 8.9% as of June 30, 1997).
The Venture typically provides financing in connection with the sale of
land parcels. None of the Venture's mortgage notes receivable comprised
more than 5% of the total mortgage notes receivable balance at June 30,
1998 and 1997. The Venture is the first lien holder on all outstanding
mortgage notes receivable.
Purchasers of land parcels are entitled to discounts if certain
conditions are met. Discounts are generally given if the purchase price
is paid in cash at the closing. If the cash is paid within specified
periods after the closing, a reduced sales discount is given. Reserves
have been established for estimated discounts to be taken by purchasers
under the various discount programs.
Scheduled collections of principal during the next five fiscal years are
as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C> <C>
1999 $ 3,282,700
2000 186,500
2001 146,300
2002 831,200
2003 498,400
------------
$ 4,945,100
============
</TABLE>
(4) LAND AND DEVELOPMENT COSTS
Land and development costs include all costs directly associated with the
acquisition and development of the land parcels. Major components of land
and development costs are the initial costs to acquire the land,
roadways, water drainage, electrical and telephone lines, and various
project management expenditures.
(5) FORECLOSED REAL ESTATE
Foreclosed real estate represents land parcels that were reacquired in
connection with previously financed mortgages. Such parcels are valued at
the lower of their remaining receivable balance outstanding, or their
estimated fair value (determined in the same manner as the allowance for
uncollectible accounts), as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Foreclosed real estate $ 3,134,300 3,530,300
Allowance for losses (948,000) (676,700)
----------- -----------
Foreclosed real estate, net $ 2,186,300 2,853,600
=========== ===========
</TABLE>
(Continued)
<PAGE> 51
6
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5), CONTINUED
During fiscal 1998 and 1997, four and ten mortgage notes receivable were
transferred to foreclosed real estate, respectively. Five parcels in
foreclosed real estate were sold in both fiscal 1998 and 1997. The
carrying values of the mortgage notes receivable transferred to and
parcels sold from foreclosed real estate were $515,000 and $911,000 in
fiscal 1998 and $1,212,500 and $585,500 in fiscal 1997, respectively.
(6) PARTNER ADVANCES PAYABLE
The Partners have agreed to make equal advances to the Venture for all
costs necessary for the orderly development of the Project. During fiscal
1997, the Partners each advanced $300,000 to the Venture. Such advances
were repaid by the Venture on June 30, 1997. During fiscal 1998, the
Partners did not make any advances to the Venture. Additional
contributions from the Partners may be required in fiscal 1999. Advances
earn interest from the date of the advance compounded quarterly at the
prime rate minus 1% (7.50% at June 30, 1998 and 1997).
Advances accrued an average rate of interest of 7.5% during fiscal 1998,
1997 and 1996.
(7) NOTE PAYABLE
During fiscal 1991, the Venture entered into agreements with banks
pursuant to which $8,797,000 of the Venture's mortgage receivables were
sold. An additional sale of $3,148,000 of mortgage receivables to a bank
was completed during fiscal 1992. These transactions were accounted for
as financing arrangements. On April 30, 1996, the Venture repurchased
$1,373,000 of such mortgage receivables which represented the entire
outstanding balance thereof. The maximum amount of notes payable
outstanding during fiscal 1996 was $2,826,000. The average amount
outstanding for fiscal 1996, based upon month-end balances, was
$1,561,000. The weighted average interest rate for fiscal 1996 was 11.3%.
At June 30, 1996, the Company had a note payable outstanding in the
amount of $576,200 relating to certain development costs. The note was
repaid in December 1996 and bore interest at the prime rate plus 1%.
(8) KOHALA RANCH WATER COMPANY
KRWC provides water to the Project, as well as to other customers, and is
owned by the Venture (99%), Hudson (.5%), and Oxford (.5%). The assets of
KRWC are comprised principally of property, plant and equipment. KRWC
recorded revenues of $319,700, $285,400 and $336,300 and incurred net
losses (including interest expense due to the Venture) of $534,400,
$566,900 and $489,700 for fiscal 1998, 1997 and 1996, respectively.
(9) CONTINGENCIES
During fiscal 1992, the County of Hawaii passed an ordinance pursuant to
which the Venture, after subdivision approvals are obtained, would be
able to develop the fourth phase of the Project into 1,490 units. Shortly
after passage of the ordinance, a lawsuit against the County of Hawaii
was filed in the Circuit Court of Hawaii by two local residents of Hawaii
(Plaintiffs) seeking to invalidate such ordinance on various grounds,
including that the ordinance was adopted without following State of
Hawaii
(Continued)
<PAGE> 52
7
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9), CONTINUED
procedure relating to the preparation of an Environmental Impact
Statement. During fiscal 1993, the Judge in this action granted
Plaintiffs' motion for partial summary judgment without indicating any
effect on zoning of the fourth phase. The County and the Venture appealed
this ruling to the Hawaii Supreme Court, and in May 1997, the Supreme
Court vacated the summary judgment which was previously granted and
remanded certain related issues to the Circuit Court for that Court to
decide. In March and April 1998, the Circuit Court ruled in favor of the
County and the Venture on the remanded issues and certain other issues.
In July 1998, the Circuit Court granted summary judgment in favor of the
County and the Venture on all remaining claims in the suit. Although
Plaintiffs have indicated they intend to appeal any decision unfavorable
to them, it is uncertain at this time whether an appeal will be filed by
Plaintiffs. Since a final judgment has not yet been entered, the time
period for filing an appeal has not yet commenced. The Venture cannot
determine the effect of this litigation on the timing of development of
Phase IV or expenditures related thereto until it is known whether an
appeal will be filed. The joint venture partners continue to reevaluate
plans for Phase IV which has to date only had limited development.
(10) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures About Fair Value of Financial Instruments",
defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties. The carrying values of all of the Venture's monetary
assets and liabilities approximate fair value. Carrying values for
delinquent mortgage notes receivable are based on the fair value of the
underlying collateral obtained from an independent appraisal. The
carrying values of the remaining mortgage notes receivable approximate
market values, since the mortgage notes receivable are yielding, on
average, a return that is consistent with current market rates offered
for similar financing.
<PAGE> 53
Schedule II
KOHALA JOINT VENTURE AND SUBSIDIARY
Valuation and Qualifying Accounts
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
--------------------------
Balance at Charged to Charged to Deductions Balance at
beginning costs and other from end of
Description of year expenses accounts reserves year
----------- ------- -------- -------- -------- ----
<S> <C> <C> <C> <C> <C>
1998 - Allowance for
uncollectible accounts $ 3,166,300 100,000 - 394,800(A) 2,871,500
============= ========== =========== ========== =============
1997 - Allowance for
uncollectible accounts $ 2,949,400 600,000 - 383,100(A) 3,166,300
============= ========== =========== ========== =============
1996 - Allowance for
uncollectible accounts $ 2,464,200 600,000 - 114,800(A) 2,949,400
============= ========== =========== ========== =============
1998 - Allowance for loss on
foreclosed real estate $ 676,700 400,000 - 128,700(A) 948,000
============= ========== =========== ========== =============
1997 - Allowance for loss on
foreclosed real estate $ 703,100 - - 26,400(A) 676,700
============= ========== =========== ========== =============
1996 - Allowance for loss on
foreclosed real estate $ 486,400 356,300 - 139,600(A) 703,100
============= ========== =========== ========== =============
</TABLE>
(A) Write-offs
<PAGE> 54
HUDSON GENERAL CORPORATION & SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Exhibit Pages
<S> <C> <C>
10.6(d) Amendment effective May 15, 1998, amending the Employment Agreement between the Registrant
and Michael Rubin, dated February 8, 1990, as amended. 55-58
10.6(e) Amended schedule of executive officers entitled to benefits of Employment Agreements. 59-60
13 The Registrant's 1998 Annual Report to Shareholders, which report, except for those 61-89
portions thereof which are expressly incorporated by reference in this filing, is
furnished for the information of the Commission and is not to be deemed to be filed as
part of this filing.
23 Consent of KPMG Peat Marwick LLP, the Corporation's independent auditors, to the 90-91
incorporation by reference into the Corporation's Registration Statement on Form S-8, as
amended, Registration No. 2-75137.
27 Financial Data Schedule 92
</TABLE>
<PAGE> 1
EXHIBIT 10.6(d)
Amendment effective May 15, 1998, amending the Employment
Agreement between the Registrant and Michael Rubin, dated
February 8, 1990, as amended.
<PAGE> 2
AMENDMENT TO
EMPLOYMENT AGREEMENT
WHEREAS, Michael Rubin (the "Executive") and Hudson General
Corporation, a Delaware corporation (the "Company"), entered into an
Employment Agreement as of February 8, 1990, as amended from time to time
(the "Agreement"); and
WHEREAS, the Executive and the Company wish to further amend the
Agreement in certain respects;
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the Executive and the Company agree that the
Agreement shall be amended, effective as of May 15, 1998, as set forth
herein.
Unless otherwise defined herein, capitalized terms used herein shall
have the meaning ascribed to such terms in the Agreement.
1. Section 5(c) of the Agreement is hereby amended by adding the
following new sentence after the first sentence thereof:
Without limiting the generality of the foregoing, the
Executive shall be entitled to (i) participate in (A) the
Company's Executive Incentive Bonus Program and (B) any plan
which is adopted as a replacement for the Executive Incentive
Bonus Program, and (ii) a percentage of the total allocation
under such plan with respect to a given year (the "Measurement
Year") which is no less than the average percentage of the
total allocation under any such plan (or any predecessor
thereto) with respect to the three years immediately prior to
the Measurement Year.
<PAGE> 3
2. The second sentence of Section 7(a) of the Agreement is hereby
amended and restated to read as follows:
In addition, the Company shall make payments in substantially
equal periodic installments in accordance with the Company's
payroll practices then in effect for twelve months following
the Executive's date of death, which payments shall equal, in
the aggregate, the sum of (i) the Executive's Salary as in
effect on the date of the Executive's death and (ii) the
average of the annual bonuses (including awards under the
Company's Executive Incentive Bonus Program and any plan which
replaces it) earned by the Executive pursuant to any annual
bonus or incentive plan maintained by the Company in respect
of the three fiscal years ending immediately prior to the
fiscal year in which occurs the date of the Executive's death.
3. Section 8(a) of the Agreement is hereby amended and restated to read
as follows:
(a) Severance payments made to the Executive pursuant
to Section 7(d) hereof shall continue for a period of 24
months following the Termination Date. Severance payments made
to the Executive pursuant to Section 7(e) hereof shall
continue for a period equal to the greater of (i) 24 months or
(ii) the period from the Termination Date to the Expiration
Date. The period during which severance payments are to be
made by the Company to the Executive as determined in this
subsection (a) is referred to herein as the "Severance Payment
Period." During the Severance Payment Period, the Company
shall make severance payments to the Executive, which payments
shall equal, in the aggregate, the product of (i) the
multiplier obtained by dividing the number of full months in
the Severance Payment Period by 12 multiplied by (ii) the sum
of (A) the Executive's Salary as in effect on the Termination
Date and (B) the average of the annual bonuses (including
awards under the Company's Executive Incentive Bonus Program
and any plan
<PAGE> 4
which replaces it) earned by the Executive pursuant to any
annual bonus or incentive plan maintained by the Company in
respect of the three fiscal years ending immediately prior to
the fiscal year in which occurs the Termination Date.
Severance payments shall be paid to the Executive in
substantially equal periodic installments in accordance with
the Company's payroll practices then in effect. In the event
of the death of the Executive during the Severance Payment
Period, then notwithstanding anything to the contrary
contained herein, the Severance Payment Period shall terminate
at the earlier of (x) twelve months following the date of
death or (y) the scheduled expiration of the Severance Payment
Period. The Executive may, at any time and at his sole
discretion, upon written notice to the Company, terminate the
Severance Payment Period, whereupon the Company shall have no
further obligations to the Executive to make severance
payments or provide benefits pursuant to Section 9 hereof that
were required to be provided during the Severance Payment
Period.
Except as amended hereby, the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to
be executed by a duly authorized officer of the Company, and Executive
has executed this Amendment, on this ____ day of ________, 1998,
effective as of May 15, 1998.
HUDSON GENERAL CORPORATION
By:_______________________
Name: Jay B. Langner
Title: Chief Executive
Officer
__________________________
Michael Rubin
<PAGE> 1
10.6(e)
Amended schedule of executive officers entitled to
benefits of Employment Agreements.
<PAGE> 2
EXECUTIVE OFFICERS ENTITLED TO BENEFITS
OF
EMPLOYMENT AGREEMENTS (1)
<TABLE>
<CAPTION>
MINIMUM TOTAL SEVERANCE PAYMENTS
SEVERANCE NOT SUBJECT TO
NAME POSITION TERM(2) PAYMENTS MITIGATION
---- -------- ------- -------- ----------
<S> <C> <C> <C> <C>
Fernando DiBenedetto Senior Vice President-Operations 24 18 9
Paul Pollack Executive Vice President and Chief 36 24 12
Operating Officer
Barry Regenstein Vice President and Chief Financial 24 15 7.5
Officer
Raymond Rieder Senior Vice President and Chief 36 24 12
Marketing Officer
Noah Rockowitz Senior Vice President, General Counsel 24 18 9
and Secretary
Michael Rubin (1) President 36 24 12
</TABLE>
(1) The provisions of the individual employment agreements differ only in
their term and the duration/amount of potential severance payments,
except that Mr. Rubin's employment agreement also provides that (a) he
is entitled to a specified minimum percentage of the total allocation
under the Corporation's Executive Incentive Program; and (b) severance
payments to him are based not only on his salary, but on the average of
his bonuses for the three preceding years.
(2) In Months.
<PAGE> 1
EXHIBIT 13
The Registrant's 1998 Annual Report to Shareholders, which report,
except for those portions thereof which are expressly incorporated by
reference in this filing, is furnished for the information of the
Commission and is not to be deemed to be filed as part of this filing.
<PAGE> 2
[HUDSON GENERAL LOGO]
A LEADING PROVIDER
OF DIVERSIFIED SERVICES TO THE TRANSPORTATION INDUSTRY
1998
ANNUAL REPORT
<PAGE> 3
COMPANY MOTTO
"To provide prompt efficient service at a competitive price, always mindful of
the reputation of the customers we represent."
CONTENTS
Letter to Shareholders...................................... 1
Aviation Services........................................... 5
Land Development............................................ 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 8
Selected Consolidated Financial Data........................ 12
Consolidated Financial Statements........................... 13
Notes to Consolidated Financial Statements.................. 17
Independent Auditors' Report................................ 24
Corporate Information........................ Inside Back Cover
[HUDSON GENERAL LOGO]
<PAGE> 4
FELLOW SHAREHOLDERS
GROWTH THROUGH DEPENDABILITY
[PHOTO]
Fiscal 1998 financial results were the proverbial "mixed bag". While Hudson
General Corporation reported significantly improved results from the prior year,
operating income of our 74% owned aviation services business, Hudson General
LLC, declined. Please see page 8 of this report for a summary table of operating
results of the Aviation Business.
The improvement in Hudson General Corporation's results primarily reflects the
fact that in fiscal 1997, the Corporation recorded a pre-tax charge of $8.5
million relating to its 50% interest in the Kohala Joint Venture real estate
development project in Hawaii. Excluding this pre-tax charge, financial results
from the Kohala Joint Venture in fiscal 1998 and fiscal 1997 were comparable.
However, the Joint Venture realized success on the legal front. In early 1998,
the Joint Venture received two favorable court rulings in the lawsuit filed by
two local residents of Hawaii seeking to invalidate an ordinance passed by the
County of Hawaii, permitting Kohala Joint Venture to develop Phase IV of its
real estate project into 1,490 units. In July 1998, the Court granted summary
judgment in favor of the County and the Venture on all remaining claims in the
suit. Although plaintiffs have indicated they intend to appeal any decision
unfavorable to them, we cannot be certain whether an appeal of the Court's
ruling will actually be made. Barring an appeal and reversal of the Court's
decision, the favorable action by the Court eliminates the need for a trial in
this matter. Notwithstanding the positive outcome in this suit to date, Hudson
General and its partner continue to reevaluate their plans relating to Phase IV.
The decline in operating income of our aviation services business was due mainly
to lower earnings from ground transportation services, as two contracts were
renewed at reduced rates, and from snow removal services, as the winter in the
northeast was significantly warmer than last year's. On the positive side,
expanded aircraft fueling operations generated
1
<PAGE> 5
increased revenues and operating profits. In addition, in October 1997, we
recognized deferred income of $.6 million related to the prepayment of a
promissory note associated with the sale in January 1994 of leases and other
assets utilized at our fixed base operation (FBO) at Long Island MacArthur
Airport. Our sole remaining FBO is in Salt Lake City, and we are pleased to
report that it is performing well.
During fiscal 1998 we began providing services under two significant new
long-term contracts. In December 1997 we were awarded a ten year contract by the
Greater Toronto Airports Authority to operate the new central de-icing facility
(CDF) being developed at Lester B. Pearson International Airport. Although the
CDF is not expected to be completed until the fall of 1999, we began limited
operations under this contract, at temporary facilities, during this past
winter. The CDF will be the largest facility of its kind in the world and will
incorporate proven advanced technology de-icing equipment to de-ice up to ten
A320 or B737 aircraft simultaneously. We were selected over several other ground
handling companies, and are proud that both our proposal and our reputation led
to the award of this important contract. We expect that this new contract will
offset the discontinuation of our de-icing business at terminal buildings in
Toronto once the CDF is fully operational.
May 1998 saw the opening of Terminal One, the new international terminal at JFK
International Airport in New York. Hudson General LLC has been designated as
Terminal One's exclusive provider of ground handling services under a five year
contract. Terminal One was built through efforts of a partnership formed by four
of the world's premier international airlines, Air France, Japan Airlines,
Korean Airlines and Lufthansa German Airlines, and Hudson General LLC was there
to handle the inaugural flights into this spectacular new terminal.
Also in May 1998, Hudson General received the long-awaited and favorable
decision in the Canadian lawsuit that was initiated a decade ago by Texaco
Canada Inc. (now known as McColl-Frontenac Inc. and controlled by Imperial Oil
Limited). In finding that there was no liability on the part of Hudson General,
its Canadian subsidiary (now owned by Hudson General LLC) and Petro-Canada Inc.,
the trial judge ruled that Innotech Aviation Limited had not breached a fuel
supply agreement with Texaco in connection with the purchase by Hudson General
from Innotech in 1984 of certain assets of Innotech's Canadian airport
[HUDSON LOGO]
2
<PAGE> 6
ground services business. The judge also ruled that Hudson General and
Petro-Canada Inc. had not induced the breach of that agreement, nor had they
interfered with Texaco's contractual and fiduciary relations.
The trial judge rendered an oral decision, and Texaco, which has served a notice
of appeal, cannot pursue any appeal until the decision has been issued in
written form. The decision dealt solely with the issue of liability, and a
separate hearing before another judicial officer would have to be held on the
issue of damages. It is expected that a hearing on damages would not be held
unless Texaco decides to pursue, and is successful in, its appeal of the
liability decision.
[2 PHOTOS]
3
<PAGE> 7
On September 16, 1998, the Corporation was advised that the Supervisory Board of
Deutsche Lufthansa AG approved the exercise by its subsidiary LAGS USA Inc., of
LAGS' option to increase its equity interest in Hudson General LLC from 26% to
49%. As a result, we expect LAGS to give notice of its exercise of such option
on or about October 1, 1998. The exercise price is approximately $29.6 million.
As we conclude another fiscal year and approach a new millennium, we recognize
that the successes we have attained would not have been possible without the
efforts of the thousands of men and women who are part of the Hudson General
team. We thank each of them, as well as all of our customers and shareholders,
for their continued loyalty and support.
Sincerely,
/s/ Jay B. Langner
Jay B. Langner
Chairman of the Board and Chief Executive Officer
/s/ Michael Rubin
Michael Rubin
President
/s/ Paul R. Pollack
Paul R. Pollack
Executive Vice President and Chief Operating Officer
[3 PHOTOS]
[HUDSON LOGO]
4
<PAGE> 8
AVIATION SERVICES
BROAD AND DIVERSE
Hudson General Corporation (the Corporation) through its 74% ownership interest
in Hudson General LLC (Hudson LLC) provides a full range of services to the
aviation industry at twenty-four (24) airports throughout the United States and
Canada. These services include aircraft ground handling; aircraft fueling; fuel
management; ground transportation; snow removal; cargo warehousing; and sale,
leasing and maintenance of airline ground support equipment.
Aircraft ground handling services are provided to both domestic and
international airlines, and include: aircraft marshaling; loading and
off-loading of baggage, freight and commissary items; passenger ticketing;
porter and wheelchair services; aircraft cleaning; ramp sweeping and scrubbing;
aircraft de-icing and glycol recovery; water and lavatory services; maintenance
and service checks; weight and balance; cargo and mail handling; aircraft
pushbacks; as well as ancillary services such as ground power and
air-conditioning.
Aircraft fueling services are offered through contract fueling, fuel management,
retail sales of fuel and maintenance and operation of airport fuel storage
facilities. Contract fueling services are provided to airlines and fuel
suppliers by delivery of fuel from airport storage facilities into commercial
aircraft. Fuel management services consist of functioning as the out-sourced
fuel procurement department responsible for managing the sourcing, negotiation,
purchase, payment, supply and distribution of fuel both domestically and
internationally for scheduled and charter passenger and cargo airlines.
Ground transportation services are provided for airline passengers and airport
employees through Hudson LLC operated airport shuttle bus systems. These
operations also include operation and maintenance of passenger boarding bridges
and specialized airfield passenger transport vehicles. In addition to its
airport-related transportation services, Hudson LLC provides transportation
management services for various governmental agencies and authorities.
5
<PAGE> 9
[PHOTO OF SNOW PLOW]
Snow removal services are performed at airports in the northeastern and
midwestern United States under contracts with airport authorities as well as
airlines and other business entities serving these airports. Snow removal
services are also performed at east coast seaport facilities.
Hudson LLC also operates one of the newest and most technologically advanced
airport perishables centers in the United States for cargo requiring a
climate-controlled environment.
Maintenance services are provided for ground support, cargo handling, ground
transportation and other airport related equipment. In addition, building
maintenance services are provided at both terminal and hangar facilities. In
Salt Lake City, hangar facilities and tie-down services are offered to the
general aviation community comprised of corporate and private aircraft owners.
For thirty-seven years, Hudson General has set the standard for quality in the
aviation services industry. Its knowledgeable, experienced employees, wide-range
of capabilities, attention to detail and commitment to customer satisfaction
continue to make it the company of choice for more than 100 airlines and airport
authorities seeking superior services that will enhance their standing with the
traveling public.
[HUDSON LOGO]
6
<PAGE> 10
LAND DEVELOPMENT
HAWAIIAN JOINT VENTURE
The Corporation is a 50% partner in a joint venture to develop approximately
4,000 contiguous acres of land situated in the North Kohala District on the
Island of Hawaii (the Joint Venture). The Project is being developed in four
successive phases. Substantially all of the parcels in Phases I and II, which
comprise approximately 2,100 acres of the Project, have been sold. Phase III
consists of 100 five acre parcels, with 84 parcels remaining available for sale.
During fiscal 1992, the County of Hawaii passed an ordinance pursuant to which,
after the obtaining of subdivision approvals, Phase IV could be developed into
1,490 units. The validity of this ordinance was challenged in a lawsuit brought
by two local residents of Hawaii, and development of Phase IV has been delayed
pending the ultimate outcome of this litigation. Between March and July 1998,
the court issued rulings, including summary judgment, on all remaining issues in
favor of the County and the Joint Venture. The Joint Venture partners do not
know at this time whether the plaintiffs will appeal these rulings.
The Joint Venture partners are continuing to reevaluate plans for Phase IV which
has to date only had limited development.
[HAWAII GRAPHIC]
7
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED WITH FISCAL 1997
Effective June 1, 1996, the Corporation consummated a transaction (the
Transaction) in which a third party, Lufthansa Airport and Ground Services GmbH
(LAGS), acquired a 26% interest in the Corporation's aviation services business
(the Aviation Business). As part of the Transaction, the Corporation transferred
substantially all of the assets and liabilities of the Aviation Business to
Hudson General LLC (Hudson LLC), a newly formed limited liability company (see
Notes 1 and 2). Effective June 1, 1996, the Corporation has accounted for its
interest in Hudson LLC under the equity method of accounting. As a result,
effective June 1, 1996 the consolidated statements of earnings of the
Corporation contain the operating results of the Aviation Business under the
equity method of accounting. (For an analysis of the results of the Aviation
Business, see the table and related management's discussion which appear below.)
The Corporation's revenues increased from $5.1 to $5.8 million, an
increase of $.7 million, or 14.2%. The increase is due primarily to higher
overhead fees billed by the Corporation to Hudson LLC. (The Corporation and LAGS
USA Inc., a wholly-owned subsidiary of LAGS and a party to the Limited Liability
Company Agreement of Hudson LLC, agreed to raise these overhead fees for fiscal
1998 to 3-1/2% of Hudson LLC's consolidated domestic revenues and 1-1/4% of
Hudson LLC's consolidated Canadian revenues.) Depreciation and amortization
decreased from $.8 to $.7 million, a decrease of $.1 million, or 14.0%. The
decrease was due primarily to the elimination of depreciation related to
operating equipment leased to Hudson LLC by the Corporation that became fully
depreciated. Selling, general and administrative expenses decreased from $8.0 to
$7.8 million, a decrease of $.2 million, or 2.5%, due mainly to lower legal fees
incurred in connection with the Texaco litigation in Canada (see Note 10).
The Corporation's 74% share of earnings from Hudson LLC decreased from
$12.0 to $9.4 million, a decrease of $2.5 million, or 21.2%. The Corporation's
50% share of losses from its real estate joint venture in Hawaii (the Venture)
decreased from $11.3 to $2.8 million, a decrease of $8.5 million, or 75.0%. The
decrease in the Venture's loss is due to the Venture recording a charge of $17.0
million in fiscal 1997 to write-down its real estate assets to their estimated
fair values as discussed further below. As is usual for companies with land
development operations, the contribution to future results from such operations
will fluctuate depending upon whether land sales are closed in each reported
period.
Interest income increased from $4.0 to $4.2 million, an increase of $.2
million, or 5.0%, due primarily to higher invested cash balances.
The Corporation's provision for income taxes increased $2.4 million,
which primarily reflects higher pre-tax earnings due mainly to the decrease in
the Corporation's share of losses from the Venture as noted above.
The following table is intended to provide a presentation and analysis
of results of the Aviation Business conducted by Hudson LLC for fiscal 1998,
1997 and 1996.
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $168,947 $167,729 $168,811
-------- -------- --------
Costs and expenses:
Operating 131,643 128,749 123,003
Depreciation and
amortization 8,237 7,510 7,693
Selling, general and
administrative 14,459 13,625 13,052
-------- -------- --------
Total costs and expenses 154,339 149,884 143,748
-------- -------- --------
Operating income $ 14,608 $ 17,845 $ 25,063
======== ======== ========
</TABLE>
The following discussion is intended to provide an analysis of results
of the Aviation Business for fiscal 1998 and 1997 on a comparable basis.
Revenues increased from $167.7 to $168.9 million, an increase of $1.2
million, or .7%. The increase reflects higher: (i) domestic ground handling and
cargo warehousing service revenues of $5.7 and $.7 million, respectively, due
primarily to expanded services to new and existing customers; and (ii) aircraft
fueling revenues of $2.2 million resulting primarily from expanded intoplane
fueling services. In addition, revenues include the recognition of $.6 million
of deferred income related to the prepayment (in October 1997) of a promissory
note associated with the sale (in January 1994) of leases and other assets at
Long Island MacArthur Airport. The revenue increase was partially offset by
lower: (i) snow removal revenues of $3.3 million due mainly to the warmer winter
weather season in fiscal 1998; (ii) ground transportation revenues of $.8
million due mainly to lower rates associated with renewals of existing contracts
at two domestic airport locations; (iii) Canadian ground handling revenues of
$2.1 million (net of expanded services to existing customers) due mainly to: (a)
lower sales of de-icing fluid; (b) the negative impact of the mandated
realignment by the local airport authority of flights between the two
international airports in Montreal; (c) the cessation of operations by two
airline customers; and (d) the decision by several airline customers to provide
ground handling services with their own personnel and equipment or through
subsidiaries or affiliated carriers; and (iv) revenues due to the effect of
fluctuation in the average rates of exchange used in translating Canadian
revenues to their U.S. dollar equivalent.
Operating costs increased from $128.7 to $131.6 million, an increase of
$2.9 million, or 2.2%. The increase reflects higher: (i) labor and related costs
associated with expanded domestic ground handling, aircraft fueling and cargo
warehousing operations; and (ii) fleet maintenance costs related primarily to
ground handling, ground transportation and aircraft fueling operations.
Partially offsetting the increase were lower: (i) snow removal costs; (ii) labor
and related costs associated with reduced Canadian ground handling operations;
(iii) fuel costs associated with the Company's fleet of equipment; (iv) cost of
sales of de-icing fluid in Canada; and (v) costs as a result of the effect of
fluctuation in the average rates of exchange used in translating Canadian costs
to their U.S. dollar equivalent.
[HUDSON LOGO]
8
<PAGE> 12
Hudson General Corporation and Subsidiaries
Depreciation and amortization expenses increased from $7.5 to $8.2
million, an increase of $.7 million, or 9.7%, due mainly to additions of ground
handling and fueling equipment.
Selling, general and administrative expenses increased from $13.6 to
$14.5 million, an increase of $.8 million, or 6.1%, primarily reflecting higher
overhead fees paid to the Corporation as noted above.
Operating income decreased from $17.8 to $14.6 million, a decrease of
$3.2 million, due primarily to: (i) decreased results associated with ground
transportation and snow removal operations; (ii) lower sales of de-icing fluid
in Canada; (iii) higher selling, general and administrative expenses as
described above; and (iv) higher depreciation and amortization. Partially
offsetting the decreases were improved results from expanded aircraft fueling
operations and the recognition of deferred income as noted above.
Results of aircraft ground handling operations fluctuate depending upon
the flight activity and schedules of customers and the ability to deploy
equipment and manpower in the most efficient manner to service such customers.
Snow removal and aircraft de-icing services are seasonal in nature. The
results of these operations are normally reflected in the second and third
quarters of the fiscal year, and fluctuate depending upon the severity of the
winter season.
The state of the North American aviation industry has resulted in
increased competitive pressures on the pricing of aviation services and in the
exploration of alliances between major commercial airline carriers. While these
factors may have an adverse effect on the Corporation, several airlines have
been outsourcing services to independent aviation service companies. To date,
this trend has provided additional opportunities for Hudson LLC. The Corporation
is unable, at this time, to evaluate the future impact of these factors.
The compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of materials into the environment
did not have a material effect upon the Corporation's or Hudson LLC's capital
expenditures or results of operations for fiscal 1998 and 1997, or competitive
position. However, the federal government and many state and local governments
have enacted or proposed legislation and regulations with respect to storage
facilities for fuel, petroleum-based products and chemicals, the disposal of
hazardous waste materials, storm water discharges, and financial responsibility
for possible liability exposures relating to fuel storage facilities. Compliance
with such legislation and regulations has resulted in expenditures by the
Corporation and Hudson LLC, including expenditures for the testing,
decommissioning and/or replacement of certain of its fuel and de-icing fluid
storage facilities, and the cleanup of fuel spills. It is anticipated that
additional such expenditures by Hudson LLC, the amount of which is presently not
expected to be material, will be required.
In addition, airport authorities are coming under increasing pressure
to clean up previous contamination at their facilities, and are seeking
financial contributions from airport tenants and companies which operate at
their airports. The Corporation cannot predict at this time, the amount, if any,
that it or Hudson LLC may be required to pay in connection with such airport
authority initiatives.
FISCAL 1997 COMPARED WITH FISCAL 1996
The Corporation's revenues of $5.1 million for fiscal 1997 reflect overhead fees
and equipment rentals billed by the Corporation to Hudson LLC. Depreciation and
amortization of $.8 million for fiscal 1997 primarily represent depreciation
related to operating equipment leased to Hudson LLC by the Corporation. Selling,
general and administrative expenses for fiscal 1997 of $8.0 million principally
reflect administrative and related costs of the Corporation.
The Corporation's 74% share of earnings from Hudson LLC for fiscal 1997
was $12.0 million. The Corporation's 50% share of losses from the Venture
increased from $3.0 to $11.3 million, an increase of $8.3 million. The increase
in the Venture's loss is due to the Venture recording a charge of $17.0 million
in the Corporation's fourth fiscal quarter to write-down its real estate assets
to their estimated fair values. The charge is a result of the continuing
periodic evaluation of the carrying value of the Venture's real estate assets.
The Corporation and its partner in the Venture, Oxford Kohala, Inc. (the
Partners) concluded, as a result of their most recent in-depth analysis of an
updated independent appraisal of such assets and the consideration of other
factors affecting the development of the property, that the carrying value of
the real estate assets should be reduced. Factors considered by the Partners
included the Partners' plans to reevaluate the fourth phase of the Project which
has to date only had limited development, the condition of the Hawaiian real
estate market and general economic conditions.
Interest income increased $1.7 million, or 78.1%. The increase
primarily reflects interest income associated with: (i) the subordinated note
receivable from Hudson LLC related to conversion of the 7% convertible
subordinated debentures (the Debentures) into shares of the Corporation's common
stock (see Note 8); (ii) advances made by the Corporation to Hudson LLC; and
(iii) higher invested cash balances. Interest expense for fiscal 1996 was
attributable to the Debentures.
The Corporation's provision for income taxes decreased $6.8 million
which primarily reflects: (i) lower pre-tax earnings in the U.S.; and (ii) the
absence in fiscal 1997 of a provision for foreign income taxes. As a result of
the Transaction, the Corporation is no longer required to provide for or reflect
foreign income taxes in its consolidated financial statements.
The following discussion is intended to provide an analysis of results
of the Aviation Business for fiscal 1997 and 1996 on a comparable basis.
Revenues decreased from $168.8 to $167.7 million, a decrease of $1.1
million, or .6%. The decrease reflects lower: (i) snow removal revenues of $8.9
million due mainly to the mild winter weather in the northeastern United States
during fiscal 1997; and (ii) ground transportation revenues of $.6 million due
primarily to the loss of contracts to operate information kiosks and airfield
passenger transport vehicles. Partially offsetting the revenue decrease were
higher: (i) ground handling service revenues (net of lower sales of de-icing
fluid in the U.S.) of $8.1 million due primarily to expanded services to new and
existing customers; and (ii) domestic aircraft fueling revenues of $.5 million
resulting primarily from expanded intoplane fueling services.
Costs and expenses increased from $143.7 to $149.9 million, an increase
of $6.1 million, or 4.3%. Operating costs increased from $123.0 to $128.7
million, an increase of $5.7 million, or 4.7%. The increase was attributable to
higher labor and related costs associated with expanded ground handling
operations and schedule changes by airline customers, and higher equipment
rental costs due primarily to expanded intoplane fueling services. Partially
offsetting the increases were lower costs related to: (i) snow removal
operations; (ii) workers' compensation insurance as a result of the positive
trend of related claims;
9
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
and (iii) the loss of ground transportation contracts to operate information
kiosks and airfield passenger transport vehicles.
Depreciation and amortization expenses decreased from $7.7 to $7.5
million, a decrease of $.2 million, or 2.4%. The decrease was due primarily to
the elimination of depreciation relating to equipment that became fully
depreciated.
Selling, general and administrative expenses increased from $13.1 to
$13.6 million, an increase of $.6 million, or 4.4%. The increases primarily
reflect higher administrative and related costs.
Operating income decreased from $25.1 to $17.8 million, a decrease of
$7.2 million, due primarily to decreased results associated with: (i) reduced
snow removal operations; (ii) lower sales of de-icing fluid in the U.S.; and
(iii) higher selling, general and administrative expenses as described above. In
addition, reduced ground handling margins in Canada caused mainly by increased
labor costs associated with schedule changes by airline customers also
contributed to the decrease in operating results. Partially offsetting the
decreases were improved results from domestic ground handling operations and
lower workers' compensation insurance costs.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure About
Segments of an Enterprise and Related Information", effective for fiscal years
beginning after December 31, 1997. SFAS No. 131 establishes standards for
defining operating segments and the reporting of certain information regarding
operating segments. Because this statement only impacts how financial
information is disclosed in interim and annual reports, the adoption will have
no impact on the Corporation's financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities at their fair value.
The Corporation is presently evaluating the impact of the adoption of this
statement.
LIQUIDITY, CAPITAL EXPENDITURES AND COMMITMENTS
The Corporation's recurring sources of liquidity are funds provided from Hudson
LLC and bank lines of credit. As a result of the Transaction, Hudson LLC pays to
the Corporation an overhead fee, which for fiscal 1998 was raised to the sum of
3 1/2% of Hudson LLC's consolidated domestic revenues and 1 1/4% of Hudson LLC's
consolidated Canadian revenues. It is anticipated that approximately $3.0
million of the Corporation's overhead will not be allocated to Hudson LLC on an
annual basis. In addition, the LLC Agreement provides that distributions from
Hudson LLC will be paid annually to the Corporation and LAGS (the Members) in
amounts at least equal to 50% of domestic net income and 10% of Canadian pre-tax
earnings for the fiscal year from the Aviation Business, as defined, multiplied
by the Members' respective equity interests in Hudson LLC. The Corporation's 74%
share of such minimum distribution, for fiscal 1997 and its 100% share of June
1996 earnings, in the total amount of $6.8 million, were received in October
1997. In December 1997, Hudson LLC made an additional distribution with respect
to fiscal 1997. The Corporation's 74% share of such additional distribution was
$5.9 million. Furthermore, as a result of the conversion of Debentures in fiscal
1996 and 1997 into shares of the Corporation's common stock, Hudson LLC is, on a
subordinated basis (as defined), indebted to the Corporation. During fiscal
1998, Hudson LLC repaid $.5 million of such debt to the Corporation. Hudson LLC
is obligated to repay the remaining balance of $4.6 million to the Corporation
as follows: (i) $1.5 million on July 15, 1998 (which was paid in July 1998); and
(ii) $1.5 million on each July 15th thereafter until the entire principal
balance is satisfied.
Pursuant to a Revolving Credit Agreement (the Credit Agreement) with a
group of banks dated June 1, 1996, the Corporation may borrow funds (including
outstanding letters of credit) up to a limit of $6.0 million until June 30, 1999
at which time the Credit Agreement terminates. There were no direct borrowings
or letters of credit outstanding during the fiscal year ended June 30, 1998.
In fiscal 1998, net cash provided by operating activities was nominal.
In fiscal 1997 net cash used by operating activities was $3.5 million due mainly
to equity in earnings of Hudson LLC which were not distributed to the
Corporation, while in fiscal 1996, net cash provided by operating activities was
$25.5 million. Net cash provided by investing activities in fiscal 1998 and 1997
was $2.2 and $19.5 million, respectively, due mainly to the distributions from
Hudson LLC to the Corporation in October and December 1997 and Hudson LLC's
partial repayment of the outstanding balance of its subordinated debt to the
Corporation in fiscal 1997, both of which were partially offset by net purchases
of investment securities. Capital expenditures net of proceeds from the sale of
property and equipment were $.2, $.2 and $12.9 million in fiscal 1998, 1997 and
1996, respectively. The majority of capital expenditures were made in respect of
the Aviation Business and as such are now made by Hudson LLC. Net cash used by
financing activities (primarily related to dividend payments and, in fiscal
1997, to repurchases of the Corporation's common stock as discussed below) was
$1.6, $10.3 and $.6 million for fiscal 1998, 1997 and 1996, respectively. Cash
and cash equivalents were $19.0, $18.4 and $12.7 million at June 30, 1998, 1997
and 1996, respectively.
At June 30, 1998 and 1997, Hudson LLC reflected working capital
deficits of $11.8 and $7.4 million, respectively, due mainly to Hudson LLC's
significant investment in long-lived assets and earnings distributions to the
Members. Hudson LLC's recurring sources of liquidity are funds provided from
operations, advances from the Corporation and bank lines of credit. Pursuant to
a Revolving Credit Agreement (the LLC Credit Agreement) with a group of banks
dated June 1, 1996, Hudson LLC may borrow funds (including outstanding letters
of credit) up to a limit of $18.0 million (the LLC Limit) until September 30,
1998. At such time, and at the end of each subsequent quarter, the LLC Limit
will be reduced by one-sixteenth of the LLC Limit that was in effect on June 30,
1998 until June 30, 2002, at which time the LLC Credit Agreement terminates.
There were no direct borrowings and $2.4 million of outstanding letters of
credit at
10
[Hudson Logo]
<PAGE> 14
Hudson General Corporation and Subsidiaries
June 30, 1998. In addition, net advances to Hudson LLC from the Corporation were
$2.1 million as of June 30, 1998. At June 30, 1998, Hudson LLC had commitments
to fund $3.4 million for operating equipment, the majority of which is expected
to be expended during fiscal 1999. In addition to such commitments, Hudson LLC
is obligated to expend funds of $5.6 and $1.9 million in fiscal 1999 and 2000,
respectively, for equipment to be used in providing de-icing and snow removal
services at Lester B. Pearson International Airport in Toronto pursuant to a
contract entered into in December 1997 with the Greater Toronto Airports
Authority. Capital expenditures are primarily for equipment and facilities used
in Hudson LLC's operations. Hudson LLC is unable to determine the extent of
additional future capital expenditures since, as a service company, its capital
expenditure requirements fluctuate depending upon facility requirements and
equipment purchases associated with Hudson LLC's ability to successfully obtain
additional contracts.
In fiscal 1997, the Board of Directors authorized the repurchase of up
to 400,000 shares of the Corporation's common stock, which purchases could be
made from time to time in either open market or privately negotiated
transactions. Prior to the fiscal 1997 authorizations, the Corporation still had
authority to repurchase up to 35,700 shares from a previous authorization.
During fiscal 1997, the Corporation repurchased 243,000 shares in the open
market for an aggregate purchase price of $9.2 million. No shares were
repurchased by the Corporation during fiscal 1998.
During fiscal 1992, the County of Hawaii passed an ordinance pursuant
to which the Venture, after subdivision approvals are obtained, would be able to
develop Phase IV of the project into 1,490 units. Pursuant to such ordinance,
the Venture is required to expend approximately $2.3 million for public
infrastructural improvements and in lieu payments. Shortly after passage of the
ordinance, a lawsuit against the County of Hawaii was filed in the Circuit Court
of Hawaii by two local residents of Hawaii (Plaintiffs) seeking to invalidate
such ordinance on various grounds including that the ordinance was adopted
without following State of Hawaii procedure relating to the preparation of an
Environmental Impact Statement. During fiscal 1993, the Judge in this action
granted Plaintiffs' motion for partial summary judgment without indicating any
effect on Phase IV zoning. The County and the Venture appealed this ruling to
the Hawaii Supreme Court, and in May 1997, the Supreme Court vacated the summary
judgment which was previously granted and remanded certain related issues to the
Circuit Court for that Court to decide. In March and April 1998, the Circuit
Court ruled in favor of the County and the Venture on the remanded issues and
certain other issues. In July 1998 the Circuit Court granted summary judgment in
favor of the County and the Venture on all remaining claims in the suit.
Although Plaintiffs have indicated they intend to appeal any decision
unfavorable to them, it is uncertain at this time whether an appeal will be
filed by Plaintiffs. Since a final judgment has not yet been entered, the time
period for filing an appeal has not yet commenced. The Venture cannot determine
the effect of this litigation on the timing of development of Phase IV or
expenditures related thereto until it is known whether an appeal will be filed.
The Joint Venture Agreement provides that the Corporation and its
partner in the Venture, Oxford Kohala, Inc. (the Partner), are obligated to make
equal advances of any of the Venture's required fundings. It is anticipated that
the Venture's capital commitments will be funded by cash flow from its
operations and advances from the Corporation and the Partner, and that any
advances which the Corporation may be required to make to the Venture will be
provided from the Corporation's cash flow and lines of credit. Pursuant to the
Credit Agreement the Corporation may advance up to $2.0 million to the Venture
in any fiscal year or up to $5.0 million during the term of the Credit
Agreement, net of any distributions received from the Venture by the Corporation
during such periods. Since the inception of the Credit Agreement, the
Corporation has not increased its net advances to the Venture. At present, it is
anticipated that the advances required to meet the obligations of the Venture
will not exceed the limits set forth in the Credit Agreement. During fiscal
1998, the Corporation did not make any advances to the Venture.
At June 30, 1998, the Venture had commitments (in addition to the
commitments noted above) aggregating $2.3 million for project expenditures.
Included in this amount is $1.7 million for the construction of water well
equipment and a reservoir by June 30, 1999. It is currently expected that funds
for most of the Venture's other commitments will be expended subsequent to
fiscal 1999.
The extent to which advances to the Venture will be required in the
future, as well as the timing of the return to the Corporation of the advances
made by it, will depend upon the amount of sales generated by the Venture, the
terms upon which parcels are sold and expenses incurred in the planning and
development of future phases of the Project.
It is expected that the sources of the Corporation's liquidity, as
noted above, will provide sufficient funding to allow the Corporation to meet
its liquidity requirements.
The so-called "Year 2000" issue (the Year 2000) results from computer
programs that do not differentiate between years commencing in 1900 and years
commencing in 2000 because they were written using two digits rather than four
to define the applicable year (i.e. ignoring the century). Accordingly, computer
systems and programs that process or utilize time-sensitive calculations may not
properly recognize the Year 2000. The Corporation has instituted a company wide
initiative to examine the implications of the Year 2000 on the Corporation's
computer systems and applications to ensure that the Corporation's computer
systems will function properly in the Year 2000 and thereafter.
The Corporation anticipates completing its Year 2000 project in early
calendar 1999 and believes that the Year 2000 issue will not pose significant
operational problems for its computer systems. The Corporation has also
initiated procedures to communicate with suppliers and customers regarding
compliance with Year 2000 requirements. The Corporation has not determined the
impact, if any, on its operations if outside third parties with which it has a
business relationship fail to comply with Year 2000 requirements.
Management currently believes that the costs related to the
Corporation's compliance with the Year 2000 issue should not have a material
adverse effect on its consolidated financial position, results of operations or
cash flows. While the Corporation has developed plans to test its business
critical computer systems prior to the Year 2000, there can be no assurance that
the systems of other parties upon which the Corporation's business also relies
will be Year 2000 compliant on a timely basis.
11
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Years Ended June 30, 1998(a) 1997(a) 1996(a) 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ 5,783 $ 5,064 $157,100 $134,862 $141,784
-------- -------- -------- -------- --------
Earnings before extraordinary items and
cumulative effect of change in the method
of accounting for income taxes ............ 5,256 475(b) 10,466 4,593 7,310
-------- -------- -------- -------- --------
Earnings per share before extraordinary items
and cumulative effect of change in the
method of accounting for income taxes:
Basic ................................... 3.02 .26 9.09 3.72 5.87
Diluted ................................. 2.99 .26 5.60 2.70 3.96
-------- -------- -------- -------- --------
Net earnings ................................ 5,256 475(b) 10,466 4,593 7,760
-------- -------- -------- -------- --------
Net earnings per share:
Basic ................................... 3.02 .26 9.09 3.72 6.23
Diluted ................................. 2.99 .26 5.60 2.70 4.17
-------- -------- -------- -------- --------
Total assets ................................ 73,466 68,188 48,776 87,568 77,889
-------- -------- -------- -------- --------
Long-term obligations less current maturities -- -- -- 29,000 29,000
-------- -------- -------- -------- --------
Stockholders' equity ........................ 68,441 65,384 43,895 21,616 19,223
-------- -------- -------- -------- --------
Capital expenditures ........................ 178 326 13,158 10,806 9,815
-------- -------- -------- -------- --------
Cash dividends per common share ............. 1.00 .75 .50 .50 --
======== ======== ======== ======== ========
</TABLE>
(a) As a result of a transaction with Lufthansa Airport and Ground Services GmbH
(see Note 2), effective June 1, 1996 the Corporation's interest in its
aviation services business is accounted for under the equity method.
(b) Includes a pre-tax charge of $8,500 related to the Corporation's investment
in and advances to the Kohala Joint Venture (see Note 3).
<TABLE>
<CAPTION>
FISCAL 1998 Fiscal 1997
------------------- -------------------
Market Price Range* HIGH LOW High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter .............. 44 1/4 38 40 32 3/4
Second Quarter ............. 48 1/2 42 1/2 39 1/2 34
Third Quarter .............. 49 42 3/4 41 3/8 36
Fourth Quarter ............. 50 5/8 45 7/8 40 3/8 35 5/8
</TABLE>
*The range of per share closing prices of the Corporation's common stock on the
American Stock Exchange in each fiscal quarter from July 1, 1996 through June
30, 1998.
At June 30, 1998 there were 182 record holders of the Corporation's common
stock.
[HUDSON GENERAL LOGO]
12
<PAGE> 16
Hudson General Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30, 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues ................................. $ 5,783 $ 5,064 $ 157,100
--------- --------- ---------
Costs and expenses:
Operating .............................. -- -- 113,744
Depreciation and amortization .......... 664 772 7,165
Selling, general and administrative .... 7,843 8,047 16,755
--------- --------- ---------
Total costs and expenses ............. 8,507 8,819 137,664
--------- --------- ---------
Operating income (loss) .................. (2,724) (3,755) 19,436
Equity in earnings of Hudson General LLC . 9,426 11,955 855
Equity in loss of Kohala Joint Venture ... (2,822) (11,292) (3,021)
Interest income .......................... 4,156 3,958 2,222
Interest expense ......................... -- -- (1,843)
--------- --------- ---------
Earnings before provision for income taxes 8,036 866 17,649
Provision for income taxes ............... 2,780 391 7,183
--------- --------- ---------
Net earnings ............................. $ 5,256 $ 475 $ 10,466
========= ========= =========
Earnings per share, basic ................ $ 3.02 $ .26 $ 9.09
========= ========= =========
Earnings per share, diluted .............. $ 2.99 $ .26 $ 5.60
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, 1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 19,001 $ 18,425
Investment securities available for sale ......................... 19,002 8,792
Receivables ...................................................... 563 540
Advances to Hudson General LLC -- net ............................ 2,057 361
Prepaid expenses and other assets ................................ 56 250
-------- --------
Total current assets ........................................... 40,679 28,368
Property and equipment at cost, less accumulated
depreciation and amortization .................................... 2,389 2,902
Investment in Hudson General LLC ................................... 22,306 26,395
Investment in Kohala Joint Venture -- net .......................... 4,962 5,893
Note receivable from Hudson General LLC ............................ 3,130 4,630
-------- --------
$ 73,466 $ 68,188
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 200 $ 161
Accrued expenses and other liabilities ........................... 2,628 2,536
-------- --------
Total current liabilities ..................................... 2,828 2,697
-------- --------
Deferred income taxes .............................................. 2,197 107
-------- --------
Stockholders' Equity:
Serial preferred stock (authorized 100,000 shares of $1 par value)
-- none outstanding ............................................. -- --
Common stock (authorized 7,000,000 shares of $1 par value)
-- issued 2,102,260 and 2,092,160 shares ........................ 2,102 2,092
Paid in capital .................................................. 48,266 48,732
Retained earnings ................................................ 29,235 25,722
Treasury stock, at cost, 357,311 shares .......................... (11,162) (11,162)
-------- --------
Total stockholders' equity ..................................... 68,441 65,384
-------- --------
$ 73,466 $ 68,188
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
[HUDSON GENERAL LOGO]
14
<PAGE> 18
Hudson General Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Issued Other
Years Ended ------------------- Paid in Retained Comprehensive Treasury Stockholders'
June 30, 1998, 1997 and 1996 Shares Amounts Capital Earnings Income Stock Equity
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 ............ 1,253,802 $ 1,254 $ 6,759 $ 16,707 $ (1,483) $ (1,621) $ 21,616
Common stock issued in
connection with exercise of
stock options ................. 16,000 16 249 -- -- -- 265
Dividends ($.50 per share) ...... -- -- -- (578) -- -- (578)
Equity adjustment from foreign
currency translation .......... -- -- -- -- 13 -- 13
Effect of equity infusion in
Hudson General LLC -- net ..... -- -- 10,783 -- 1,470 -- 12,253
Purchase of treasury stock ...... -- -- -- -- -- (389) (389)
Conversion of convertible
subordinated debentures ....... 7,599 7 242 -- -- -- 249
Net earnings .................... -- -- -- 10,466 -- -- 10,466
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1996 ............ 1,277,401 1,277 18,033 26,595 -- (2,010) 43,895
Common stock issued in
connection with exercise of
stock options ................. 10,500 11 154 -- -- -- 165
Dividends ($.75 per share) ...... -- -- -- (1,348) -- -- (1,348)
Equity adjustment from foreign
currency translation .......... -- -- (101) -- -- -- (101)
Effect of equity infusion in
Hudson General LLC -- net ..... -- -- 5,805 -- -- -- 5,805
Purchase of treasury stock ...... -- -- -- -- -- (9,152) (9,152)
Conversion of convertible
subordinated debentures ....... 804,259 804 24,841 -- -- -- 25,645
Net earnings .................... -- -- -- 475 -- -- 475
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1997 ............ 2,092,160 2,092 48,732 25,722 -- (11,162) 65,384
Common stock issued in
connection with exercise of
stock options ................. 10,100 10 148 -- -- -- 158
Dividends ($1.00 per share) ..... -- -- -- (1,743) -- -- (1,743)
Equity adjustment from foreign
currency translation .......... -- -- (614) -- -- -- (614)
Net earnings .................... -- -- -- 5,256 -- -- 5,256
--------- --------- --------- --------- --------- --------- ---------
BALANCE, JUNE 30, 1998 ............ 2,102,260 $ 2,102 $ 48,266 $ 29,235 -- $ (11,162) $ 68,441
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended June 30, 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ............................................................................. $ 5,256 $ 475 $ 10,466
Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
Depreciation and amortization .......................................................... 664 772 7,165
Provision for losses on accounts receivable -- net ..................................... -- -- 362
Deferred income taxes .................................................................. 2,090 (655) (1,090)
Equity in earnings of Hudson General LLC ............................................... (9,426) (11,955) (855)
Equity in loss of Kohala Joint Venture ................................................. 2,822 11,292 3,021
Accrual of interest income on Kohala Joint Venture advances ............................ (1,891) (1,765) (1,604)
Gain on sale of equipment .............................................................. -- -- (139)
Change in other current assets and liabilities:
Accounts and notes receivables ....................................................... (23) (302) 2,845
Prepaid expenses and other assets .................................................... 194 52 (504)
Deferred income taxes ................................................................ -- -- 2,342
Accounts payable ..................................................................... 39 (310) 892
Income taxes payable ................................................................. -- -- 165
Accrued expenses and other liabilities ............................................... 286 (1,112) 1,785
Decrease in long-term receivables -- net ............................................... -- -- 522
Other -- net ........................................................................... -- 23 91
-------- -------- --------
Net cash provided (used) by operating activities ................................... 11 (3,485) 25,464
-------- -------- --------
Cash flows from investing activities:
Purchases of investment securities available for sale .................................... (21,918) (8,792) --
Proceeds from maturity and sale of investment securities available for sale .............. 11,708 -- --
Purchases of property and equipment ...................................................... (178) (326) (13,158)
Proceeds from sale of property and equipment ............................................. 27 80 244
Distributions from Hudson General LLC .................................................... 12,707 -- --
(Advances to) repayments from Hudson General LLC ......................................... (696) 7,302 (7,233)
Collections of note receivable from Hudson General LLC ................................... 500 21,283 --
Advances to Kohala Joint Venture -- net .................................................. -- -- (772)
Net cash transferred to Hudson General LLC upon formation ................................ -- -- (3,002)
Fees related to transfer of assets to Hudson General LLC ................................. -- -- (825)
-------- -------- --------
Net cash provided (used) by investing activities ................................... 2,150 19,547 (24,746)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ................................................... 158 162 335
Cash dividends paid ...................................................................... (1,743) (1,348) (578)
Purchase of treasury stock ............................................................... -- (9,152) (389)
-------- -------- --------
Net cash used by financing activities .............................................. (1,585) (10,338) (632)
-------- -------- --------
Effect of exchange rate changes on cash .................................................... -- -- 2
-------- -------- --------
Net increase in cash and cash equivalents .................................................. 576 5,724 88
Cash and cash equivalents at beginning of year ............................................. 18,425 12,701 12,613
-------- -------- --------
Cash and cash equivalents at end of year ................................................... $ 19,001 $ 18,425 $ 12,701
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
[HUDSON LOGO]
16
<PAGE> 20
Hudson General Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Hudson General Corporation and the subsidiaries for which it
exercises effective control (the Corporation). All material intercompany
accounts and transactions have been eliminated in consolidation. Kohala Joint
Venture, a land development venture in Hawaii in which the Corporation has a 50%
interest (the Venture), is accounted for under the equity method of accounting
(see Note 3). Effective June 1, 1996, the Corporation consummated a transaction
(the Transaction) in which a third party, Lufthansa Airport and Ground Services
GmbH (LAGS), an indirect wholly-owned subsidiary of Deutsche Lufthansa AG,
acquired a 26% interest in the Corporation's aviation services business (the
Aviation Business). As part of the Transaction, the Corporation transferred
substantially all of the assets and liabilities of the Aviation Business to
Hudson General LLC (Hudson LLC), a newly-formed limited liability company (see
Note 2). LAGS received a 26% interest in Hudson LLC. At the same time, the
Corporation, Hudson LLC and LAGS USA Inc., a wholly-owned subsidiary of LAGS
(LAGS USA), entered into a Limited Liability Company Agreement effective June 1,
1996 (the LLC Agreement). Due to the provisions in the LLC Agreement, as
amended, effective June 1, 1996, the Corporation has accounted for its interest
in Hudson LLC under the equity method of accounting. As a result, the fiscal
1998 and 1997 consolidated statements of earnings of the Corporation contain the
operating results of the Aviation Business under the equity method of
accounting. The fiscal 1996 consolidated statement of earnings of the
Corporation contains the operating results of the Aviation Business on a
consolidated basis for eleven months and under the equity method of accounting
for one month. As a result of the Corporation's transfer of substantially all of
the Aviation Business assets and liabilities to Hudson LLC, such assets and
liabilities are not reflected in the Corporation's accompanying consolidated
balance sheets. The Corporation's stockholders' equity was increased by
$5,704,000 and $12,253,000 in fiscal 1997 and the month of June 1996,
respectively, as a result of the Corporation's equity interest in Hudson LLC's
capital transactions.
DESCRIPTION OF BUSINESS: The Corporation through its 74% ownership interest in
Hudson LLC, provides a broad and diverse range of services to the aviation
industry at twenty-four (24) airports throughout the United States and Canada.
These services include aircraft ground handling; aircraft fueling; fuel
management; ground transportation; snow removal; cargo warehousing; and sale,
leasing and maintenance of airline ground support equipment. In addition to its
airport related services, Hudson LLC provides transportation management services
for various governmental agencies and authorities.
DEPRECIATION AND AMORTIZATION: Depreciation of property and equipment is
provided on the straight-line method over their estimated useful lives.
INCOME TAXES: Effective July 1, 1993, the Corporation adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for
Income Taxes", which requires the use of the asset and liability method of
accounting for deferred income taxes.
FINANCIAL INSTRUMENTS: The Corporation believes that the book values of its
monetary assets and liabilities approximate fair values as a result of the
short-term nature of such assets and liabilities.
FOREIGN CURRENCY TRANSLATION: The financial position and results of operations
of the Corporation's Canadian operations were measured using local currency as
the functional currency. Assets and liabilities were translated into U.S.
dollars at year-end rates of exchange, and revenues and expenses were translated
at the average rates of exchange for the year. Gains or losses resulting from
translating foreign currency financial statements were accumulated as a separate
component of stockholders' equity.
STATEMENTS OF CASH FLOWS: For purposes of the consolidated statements of cash
flows, the Corporation considers all securities with an original maturity of
approximately three months or less at the date of acquisition to be cash
equivalents. The changes in specified asset and liability accounts in the
accompanying consolidated statements of cash flows for fiscal 1996 are exclusive
of the effect of the transfer of specified assets and liabilities of the
Aviation Business to Hudson LLC. In fiscal 1998, 1997 and 1996 income taxes (net
of refunds) of $132,000, $963,000 and $5,064,000, respectively, were paid.
During fiscal 1998 and 1997, there was no interest paid. Interest of $2,030,000
was paid in fiscal 1996.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE: In the second quarter of fiscal 1998, the Corporation
adopted the provisions of SFAS No. 128, "Earnings Per Share", and has restated
all prior-period earnings per share (EPS) data presented. This statement
establishes standards for computing and presenting EPS, replacing the
presentation of previously required primary EPS with a presentation of Basic
EPS. For entities with complex capital structures, the statement requires the
dual presentation of both Basic EPS and Diluted EPS on the face of the statement
of earnings. The impact of the Corporation's adoption of this statement was not
material to previously reported EPS amounts.
17
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the years ended June 30, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Net earnings ........................... $5,256 $ 475 $10,466
Add: Interest on 7% convertible
subordinated debentures due 2011
less applicable income taxes ......... -- -- (a) 1,032
------ ------ -------
Net earnings for computing earnings
per share, diluted ................... $5,256 $ 475 $11,498
====== ====== =======
Weighted average number of
common shares outstanding ............ 1,742 1,814 1,151
Add: Incremental shares from assumed:
Exercise of stock options ............ 15 18 17
Conversion of 7% convertible
subordinated debentures ............ -- -- (a) 884
------ ------ -------
Weighted average number of
common and potential common
shares outstanding for computing
earnings per share, diluted .......... 1,757 1,832 2,052
====== ====== =======
Earnings per common share, basic ....... $ 3.02 $ .26 $ 9.09
====== ====== =======
Earnings per common share, diluted ..... $ 2.99 $ .26 $ 5.60
====== ====== =======
</TABLE>
(a)Assumed conversion is antidilutive, and accordingly, the 7% convertible
subordinated debentures are excluded from the computation.
LONG-LIVED ASSETS: Effective July 1, 1996 the Corporation adopted the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", which requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of by an entity
be reviewed for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of SFAS No. 121 did not have any impact on the Corporation's
consolidated financial position or results of operations.
STOCK-BASED COMPENSATION: Effective July 1, 1996 the Corporation adopted the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", which
encourages, but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Corporation has
chosen to continue to account for stock-based compensation under the existing
accounting rules contained in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations, but
will provide pro forma disclosures of any future stock-based compensation
expense determined under the fair-value provisions of SFAS No. 123, if material.
As of June 30, 1995, no further grants were available under any of the
Corporation's stock-based employee compensation plans.
MARKETABLE SECURITIES: The Corporation had invested $19,002,000 and $8,792,000
at June 30, 1998 and 1997, respectively, in commercial paper, and government and
corporate fixed income securities. The maturities of such investments are
generally less than one year. The book values of the investments approximate
their respective market values as a result of the short-term nature of the
securities and the low level of risk in these types of investments.
COMPREHENSIVE INCOME: Effective for fiscal 1998, the Corporation has adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income", which requires the
reporting of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income. The Corporation has no
activities which represent items of other comprehensive income and, accordingly,
the adoption of SFAS No. 130 did not have a material effect on the Corporation's
consolidated financial statements.
RECLASSIFICATIONS: Certain items previously reported in specific financial
statement captions have been reclassified to conform with the fiscal 1998
presentation.
2. INVESTMENT IN HUDSON GENERAL LLC
Effective June 1, 1996 pursuant to the terms of the Unit Purchase and Option
Agreement dated February 27, 1996 (the Purchase Agreement) between the
Corporation and LAGS, the Corporation transferred substantially all of the
assets and liabilities of the Aviation Business to Hudson LLC. In exchange for
the transfer of such assets and liabilities and the assumption by Hudson LLC, as
co-obligor with the Corporation, of all of the Corporation's 7% convertible
subordinated debentures (see Note 7), the Corporation received a 74% interest in
Hudson LLC. In addition, Hudson LLC sold LAGS a 26% interest in Hudson LLC for a
purchase price of $23,686,000 in cash (after certain adjustments), of which
$15,848,000 was paid at the closing, and deferred payments (the Deferred
Payments) of $2,650,000 and $5,188,000 plus interest thereon were made,
respectively, in September 1996 and December 1996. The Corporation's investment
in Hudson LLC and paid in capital were increased by its 74% interest in the
Deferred Payments. The Purchase Agreement, as amended, provides LAGS an option
(the LAGS Option), exercisable on October 1 of each year through 1999, effective
as of the preceding July 1, pursuant to which LAGS may increase its equity
ownership in Hudson LLC from 26% to a maximum of 49%, for a price based on a
formula related to the average earnings of the Aviation Business over the four
fiscal years preceding the exercise of the option, subject to certain minimum
and maximum amounts. On September 16, 1998, the Corporation was advised that the
Supervisory Board of Deutsche Lufthansa AG approved the exercise by LAGS USA of
the LAGS Option to increase its equity interest in Hudson LLC from 26% to 49%.
As a result, the Corporation expects LAGS to give notice of its exercise of the
LAGS Option on or about October 1, 1998. The exercise price is approximately
$29,600,000.
The LLC Agreement, as amended, stipulates that the Corporation and LAGS
USA will share profits and losses in the same proportion as their respective
equity interests in Hudson LLC, except that the Corporation was entitled to all
interest
18
<PAGE> 22
Hudson General Corporation and Subsidiaries
earned on the Deferred Payments. In addition, LAGS USA would not share in any
pre-tax earnings, as defined, of the Aviation Business in excess of $14,690,000
and $15,863,000 in fiscal 1997 and 1998, respectively, unless the aggregate of
the pre-tax earnings of the Aviation Business for fiscal 1997 and 1998 exceeded
$30,553,000. Such pre-tax earnings exceeded $30,553,000, and as a result, LAGS
USA is not limited by the LLC Agreement from sharing in pre-tax earnings of the
Aviation Business for those years. Hudson LLC's net earnings in June 1996 were
allocated 100% to the Corporation.
In June 1996, primarily as a result of the Corporation retaining
certain trade receivables, the Corporation made net advances of $7,233,000 on
behalf of Hudson LLC. Such balance was repaid to the Corporation by Hudson LLC
(together with accrued interest at the Corporation's incremental borrowing rate)
during fiscal 1997. The Corporation's net advances to Hudson LLC were $2,057,000
and $361,000 at June 30, 1998 and 1997, respectively.
Pursuant to the LLC Agreement, as amended, the Corporation will
continue to manage the Aviation Business and will be entitled to charge Hudson
LLC an overhead fee equal to the sum of an agreed upon percentage of Hudson
LLC's consolidated domestic revenues and an agreed upon percentage of Hudson
LLC's consolidated Canadian revenues. (The Corporation and LAGS USA agreed to
overhead fees for fiscal 1998 of 3 1/2% and 1 1/4%, respectively, and overhead
fees for fiscal 1997 of 3% and 1%, respectively). The LLC Agreement, as amended,
also provides for a Member Board on which the Corporation has three votes and
LAGS USA has two votes, and allows either Member to veto certain major
transactions and to veto any reduction in distributions stipulated in the LLC
Agreement, as amended. The LLC Agreement, as amended, provides that
distributions will be paid annually in an amount at least equal to 50% of
domestic net income and 10% of Canadian pre-tax earnings, as defined, from the
Aviation Business. Such distributions, totaling approximately $8,300,000 for
fiscal 1997 and the month of June 1996, were made in October 1997. An additional
distribution of $7,500,000 with respect to fiscal 1997 was made in December
1997.
The summary consolidated balance sheets for Hudson LLC as of June 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
------- -------
<S> <C> <C>
Cash and cash equivalents ...................... $ 3,393 $12,324
Accounts and notes receivable -- net ........... 16,886 15,289
Other current assets ........................... 6,391 4,211
------- -------
Total current assets ....................... 26,670 31,824
Property, equipment and leasehold
rights at cost, less accumulated
depreciation and amortization ................ 45,639 44,948
Other assets -- net ............................ 643 2,248
------- -------
$72,952 $79,020
======= =======
Accounts payable ............................... $17,326 $18,528
Accrued expenses and other liabilities ......... 19,045 20,291
Advances from Hudson General
Corporation -- net ........................... 2,057 361
------- -------
Total current liabilities .................. 38,428 39,180
Deferred income taxes .......................... 319 --
Note payable to Hudson General Corporation ..... 3,130 4,630
Members' equity ................................ 31,075 35,210
------- -------
$72,952 $79,020
======= =======
</TABLE>
Summary results of operations for Hudson LLC for fiscal 1998, 1997 and
the month of June 1996 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Revenues ......................... $ 168,947 $167,729 $12,096
--------- -------- -------
Operating costs .................. 131,643 128,749 9,259
Depreciation and amortization .... 8,237 7,510 673
Selling, general and
administrative costs ........... 14,459 13,625 1,317
--------- -------- -------
Total costs and expenses ..... 154,339 149,884 11,249
--------- -------- -------
Operating income ................. 14,608 17,845 847
Interest (expense) income -- net . (122) 179 49
--------- -------- -------
Earnings before provision for
income taxes ................... 14,486 18,024 896
Provision for income taxes ....... 1,748 2,085 41
--------- -------- -------
Net earnings ................. $ 12,738 $ 15,939 $ 855
========= ======== =======
</TABLE>
The Corporation's share of Hudson LLC's results is shown as "Equity in
earnings of Hudson General LLC" in the accompanying consolidated statements of
earnings.
3. INVESTMENT IN KOHALA JOINT VENTURE
The Venture was formed to acquire, develop and sell approximately 4,000
contiguous acres of land in Hawaii (the Project). The Project is being developed
in four successive phases. The first two phases, containing approximately 2,100
acres, have been developed and substantially sold. The third phase, containing
approximately 550 acres, has also been developed and has 84 parcels available
for sale. The fourth phase has yet to be developed, except to the extent common
improvements (main road, water wells, etc.) have been completed. During fiscal
1992, the County of Hawaii passed an ordinance pursuant to which the Venture,
after subdivision approvals are obtained, would be able to develop Phase IV into
1,490 units. Shortly after passage of the ordinance, a lawsuit against the
County of Hawaii was filed in the Circuit Court of Hawaii by two local residents
of Hawaii (Plaintiffs) seeking to invalidate such ordinance on various grounds
including that the ordinance was adopted without following State of Hawaii
procedure relating to the preparation of an Environmental Impact Statement.
During fiscal 1993, the Judge in this action granted Plaintiffs' motion for
partial summary judgment without indicating any effect on Phase IV zoning. The
County and the Venture appealed this ruling to the Hawaii Supreme Court, and in
May 1997, the Supreme Court vacated the summary judgment which was previously
granted and remanded certain related issues to the Circuit Court for that Court
to decide. In March and April 1998, the Circuit Court ruled in favor of the
County and the Venture on the remanded issues and certain other issues. In July
1998 the Circuit Court granted summary judgment in favor of the County and the
Venture on all remaining claims in the suit. Although Plaintiffs have indicated
they intend to appeal any decision unfavorable to them, it is uncertain at this
time whether an appeal will be filed by Plaintiffs. Since a final judgment has
not yet been entered, the time period for filing an appeal has not yet
commenced. The Venture cannot determine the effect of this litigation on the
timing of development of Phase IV or expenditures related thereto until it is
known whether an appeal will be filed. The joint venture partners continue to
reevaluate plans for Phase IV which has to date only had limited development.
19
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Corporation's partner in the Venture is Oxford Kohala, Inc. (the
Partner), a wholly-owned subsidiary of Oxford First Corporation (Oxford First).
Under the Restated Joint Venture Agreement dated April 29, 1981, as amended (the
Agreement), the Partners have agreed to make equal advances to the Venture for
all costs necessary for the orderly development of the land and to share profits
equally. During fiscal 1998, the Corporation did not make any advances to the
Venture.
The Corporation accrues interest income on its advances to the Venture
at the rate agreed to by the Partners (currently 1% below prime). The
Corporation defers recognition of such interest income to the extent that such
interest rate exceeds the Corporation's weighted average cost of funds. At June
30, 1998 and 1997, the amount of deferred interest income was $2,352,000 and
$2,159,000, respectively. The Corporation will recognize deferred interest
income when additional distributions or payments related to the Venture, if any,
are made to the Corporation. Interest income accrued by the Corporation for
fiscal 1998 and 1997 was $1,891,000 and $1,765,000, respectively.
The summary consolidated balance sheets for the Venture as of June 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
-------- --------
<S> <C> <C>
Cash and equivalents ......................... $ 355 $ 730
Land and development costs (including
capitalized interest of $6,548,000
and $6,591,000) ............................ 9,210 9,264
Mortgages, accounts and notes receivable ..... 2,137 2,779
Foreclosed real estate -- net ................ 2,186 2,854
Other assets -- net .......................... 1,549 1,590
-------- --------
$ 15,437 $ 17,217
======== ========
Partner advances and accrued
interest payable ........................... $ 58,178 $ 54,013
Accounts payable and accrued expenses ........ 860 1,162
Partners' deficit ............................ (43,601) (37,958)
-------- --------
$ 15,437 $ 17,217
======== ========
</TABLE>
In the fourth quarter of fiscal 1997, the Venture recorded a charge of
$17,000,000 to write-down its real estate assets to their estimated fair values.
The charge is the result of the continuing periodic evaluation of the carrying
value of the Venture's real estate assets. The Partners concluded, as a result
of their most recent in-depth analysis of an updated independent appraisal of
such assets and the consideration of other factors affecting the development of
the property, that the carrying value of the real estate assets should be
reduced. Factors considered by the Partners included the Partners' plans to
reevaluate the fourth phase of the Project which has to date only had limited
development, the current condition of the Hawaiian real estate market and
general economic conditions. In connection with the Venture's reduction of the
carrying value of its real estate assets, the Corporation reduced the carrying
value of a portion of its advances to the Venture in the amount of $8,500,000.
The Corporation's total advances (including accrued interest and after such
reduction) at June 30, 1998 and 1997 were $20,589,000 and $18,506,000,
respectively.
Summary results of operations for the Venture for the fiscal years
ended June 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
Net sales ........................ $ 666 $ 1,455 $ 677
------- -------- -------
Cost of sales .................... 326 1,106 365
Write-down of real estate assets . -- 17,000 --
Selling, general and
administrative costs ........... 2,046 2,340 2,953
Interest -- net .................. 3,937 3,593 3,401
------- -------- -------
Net loss ......................... $(5,643) $(22,584) $(6,042)
======= ======== =======
</TABLE>
As a partnership, the Venture is not subject to federal or state income
taxes. The Corporation's share of the Venture's results is shown as "Equity in
loss of Kohala Joint Venture" in the accompanying consolidated statements of
earnings.
4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
(a) Accrued expenses and other liabilities at June 30, 1998 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
------ ------
<S> <C> <C>
Salaries and wages ..................... $1,917 $1,940
Retirement plan costs .................. 307 319
Other .................................. 404 277
------ ------
$2,628 $2,536
====== ======
</TABLE>
Maintenance and repair expenses were $7,536,000 for fiscal 1996. Bad
debt expenses were $362,000 for fiscal 1996.
(b) The consolidated financial statements include: revenues of
$38,005,000 and earnings of $3,166,000 in fiscal 1996 related to the
Corporation's Canadian operations.
5. PROPERTY AND EQUIPMENT
The number of years over which major classes of assets are being depreciated and
amortized, and the costs and related accumulated depreciation and amortization
as of June 30, 1998 and 1997 are set forth below:
<TABLE>
<CAPTION>
Estimated
Useful Lives 1998 1997
------------ ---- ----
<S> <C> <C> <C>
(in thousands)
Operating equipment ................ 2 - 12 $ 7,416 $ 7,640
Office furnishings
and equipment .................... 5 - 10 943 821
Leasehold improvements ............. 6 - 9 246 239
------- -------
8,605 8,700
Accumulated depreciation
and amortization ................. $(6,216) (5,798)
======= =======
$ 2,389 $ 2,902
======= =======
</TABLE>
At June 30, 1998 and 1997, the Corporation leased operating equipment
to Hudson LLC with a net book value of $1,853,000 and $2,394,000, respectively.
20
<PAGE> 24
Hudson General Corporation and Subsidiaries
6. LONG-TERM DEBT
Pursuant to a Revolving Credit Agreement with a group of banks dated June 1,
1996 (the Credit Agreement), the Corporation may borrow funds (including
outstanding letters of credit) up to a limit of $6,000,000 until June 30, 1999
at which time the Credit Agreement terminates. There were no direct borrowings
or letters of credit outstanding under the Credit Agreement at June 30, 1998 and
1997. The Credit Agreement provides the Corporation with the option of selecting
a rate of interest at either the base rate or 1-3/8% above the LIBO rate, as
defined.
The Credit Agreement requires that the Corporation meet certain
financial covenants and allows the Corporation to pay dividends or purchase,
redeem or retire its stock so long as such financial covenants are met. Pursuant
to the Credit Agreement, the Corporation may advance up to $2,000,000 to the
Venture in any fiscal year or up to $5,000,000 during the term of the Credit
Agreement, net of any distributions received from the Venture by the Corporation
during such periods. Since the inception of the Credit Agreement the Corporation
has not increased its net advances to the Venture. The Corporation has granted
the banks a security interest in all of its membership units of Hudson LLC and
certain other assets.
In July 1986 the Corporation issued $30,000,000 of 7% convertible
subordinated debentures due 2011 (the Debentures). In connection with the
Transaction, effective June 1, 1996, Hudson LLC assumed the obligations of the
Debentures and the Corporation remained as a co-obligor. The Debentures were
convertible at any time prior to maturity into shares of the Corporation's
common stock at a conversion price of $32.75 per share.
At June 1, 1996 there was $28,821,000 principal balance of the
Debentures outstanding. During June and August 1996, the Debentures were called
for redemption and as a result, $2,408,000 principal balance of the Debentures
were redeemed during fiscal 1997. In addition, during fiscal 1997 and the month
of June 1996, $26,343,000 and $70,000, respectively, of the Debentures were
converted into shares of the Corporation's common stock and to such extent
Hudson LLC became indebted, on a subordinated basis, to the Corporation (the
Corporate Subordinated Debt). At September 5, 1996, no Debentures remained
outstanding.
During fiscal 1997, Hudson LLC utilized the proceeds from the Deferred
Payments together with a portion of the proceeds received at the closing of the
Transaction to repay $21,283,000 of the outstanding balance of the Corporate
Subordinated Debt. At June 30, 1998 and 1997, the balance of the Corporate
Subordinated Debt was $4,630,000 and $5,130,000, respectively. The noncurrent
portion of such debt at June 30, 1998 and 1997 of $3,130,000 and $4,630,000,
respectively, is shown as "Note receivable from Hudson General LLC" in the
accompanying consolidated balance sheets. Hudson LLC is obligated to repay the
remaining balance of $4,630,000 to the Corporation as follows: (i) $1,500,000 on
July 15, 1998; and (ii) $1,500,000 on each July 15th thereafter until the entire
principal balance is satisfied. The current portion of this debt at June 30,
1998 (which was paid in July 1998) and 1997, of $1,500,000 and $500,000,
respectively, is included in "Advances to Hudson General LLC -- net" in the
accompanying consolidated balance sheets. Interest on the Corporate Subordinated
Debt is payable semi-annually in January and July at the rate of 7% per annum.
7. INCOME TAXES
Provision for income taxes consisted of the following for the years ended June
30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal:
Current ..................... $ 445 $ 97 $ 3,415
Deferred .................... 1,535 (456) 1,485
Foreign:
Current ..................... -- -- 324
Deferred .................... -- -- 449
State:
Current ..................... 245 687 789
Deferred .................... 555 63 721
------- ------- -------
$ 2,780 $ 391 $ 7,183
======= ======= =======
</TABLE>
A reconciliation of the provision for income taxes to the amount
computed by applying the statutory federal income tax rate to earnings before
provision for income taxes for the years ended June 30, 1998, 1997 and 1996
follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at federal statutory rate ....... $ 2,732 $ 295 $ 6,001
Increase (decrease) in income
taxes resulting from:
Reevaluation of valuation
allowance ..................... -- -- (960)
Foreign tax differential ........ -- -- 395
Effect of foreign income,
previously taxed .............. (485) (449) --
State income taxes, net of
federal income tax effect ..... 528 495 997
Provision for future repatriation
of Canadian earnings .......... -- -- 750
Other -- net .................... 5 50 --
------- ------- -------
Provision for income taxes .......... $ 2,780 $ 391 $ 7,183
======= ======= =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following as of
June 30, 1998 and 1997:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Reserves for doubtful accounts,
claims, etc .................................. $ 149 $ 319
Retirement plans ............................... 104 108
Alternative minimum tax ........................ 471 285
------- -------
Current deferred tax assets ................ 724 712
------- -------
State income taxes ............................. -- 510
Difference between book and tax
carrying value of Hudson LLC ................. -- 193
Difference in the Venture's book and
tax year-end ................................. 449 525
------- -------
Noncurrent deferred tax assets ............. 449 1,228
------- -------
Net deferred tax assets .................... $ 1,173 $ 1,940
------- -------
Deferred tax liabilities:
Difference between book and tax
carrying value of Hudson LLC ................. $(1,056) $ --
State income taxes ............................. (271) --
Property, equipment and leasehold rights,
principally depreciation -- domestic ......... (929) (857)
Provision for future repatriation of
Canadian earnings ............................ (750) (750)
Interest capitalized on financial statements ... (364) (440)
------- -------
Noncurrent deferred tax liabilities ........ (3,370) (2,047)
------- -------
Net deferred tax liabilities ............... $(2,197) $ (107)
======= =======
</TABLE>
21
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Under SFAS No. 109, a valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. At July 1, 1993, the Corporation provided a 100% valuation allowance
for the net operating loss carryforwards and depreciation differences relating
to its Canadian operations since realization of the related deferred tax assets
was uncertain at that time. The net change in the valuation allowance for fiscal
1996 was a decrease of $960,000. The decrease reflects the recognition of
$960,000 of deferred tax assets resulting from a review of prior Canadian
operating results and anticipation of future Canadian earnings, which together
with cessation of operations of the Corporation's Canadian fixed base
operations, made the realization of additional Canadian depreciation differences
more likely than not.
As a result of the Transaction, $852,000 of deferred tax assets related
to the Corporation's Canadian subsidiary were transferred to Hudson LLC on June
1, 1996 and the Corporation will no longer be required to provide for or reflect
foreign taxes in its consolidated financial statements. In addition, beginning
June 30, 1996, the Corporation's deferred tax assets and liabilities relating to
Hudson LLC appear as a separate item within deferred taxes. Due to anticipation
by the Corporation of the future repatriation of Canadian earnings, the
Corporation provided in fiscal 1996 for U.S. income taxes of $750,000.
In April 1997, Hudson LLC's Canadian subsidiary was notified by
Canadian taxation authorities of their intention to disallow loss and
depreciation deductions and carryforwards related to an internal
recapitalization in fiscal 1990 by the Corporation of such Canadian subsidiary.
If the position of the Canadian taxation authorities (as currently proposed) is
sustained, a foreign income tax liability of approximately $3,900,000, plus
interest, would result. The Corporation has agreed to indemnify and hold
harmless Hudson LLC, LAGS and each affiliate of LAGS against any liability
resulting from this matter. The Corporation's management disagrees with the
position of the Canadian taxation authorities and intends to vigorously contest
any potential assessments made by them. Accordingly, no provision has been made
in the accompanying consolidated financial statements for foreign income taxes
related to this matter.
For tax purposes, the Corporation will receive a pass-through of its
share of taxable income or loss from Hudson LLC and will provide for and pay
federal and state taxes on its share of the income or loss of Hudson LLC.
8. COMMON STOCK
(a) The Corporation's 1981 Non-Qualified Stock Option and Stock Appreciation
Rights Plan (the Plan) provided for the issuance of non-qualified stock options
(Options) to key employees. In connection with these Options, the Board of
Directors' Stock Option and Appreciation Rights Committee (the Committee) could
also grant stock appreciation rights (Rights) exercisable in lieu of the
Options, and/or limited rights (Limited Rights) exercisable under certain
circumstances in lieu of the Options. No further Options or Rights may be
granted under the Plan. The exercise price of outstanding Options under the Plan
is the fair market value (as defined in the Plan) of the shares of the
Corporation's common stock on the date of grant.
Activity in Options during fiscal 1998 and 1997 was as follows:
<TABLE>
<S> <C>
Outstanding June 30, 1996 .............................. 49,400
Exercised ($14.79 per share) ........................... (8,500)
Exercised ($19.07 per share) ........................... (700)
-------
Outstanding June 30, 1997 .............................. 40,200
Exercised ($14.79 per share) ........................... (8,400)
Exercised ($19.07 per share) ........................... (400)
-------
Outstanding June 30, 1998 .............................. 31,400
=======
</TABLE>
Limited Rights were also granted in conjunction with Options granted in
May 1990 and June 1991 of which 28,100 ($14.79 per share) and 3,300 ($19.07 per
share) were outstanding at June 30, 1998. At June 30, 1998 the aggregate Option
price and quoted market value of Corporation stock subject to outstanding
Options were $479,000 and $1,590,000, respectively. All outstanding Options and
Rights were granted with a term of ten years and are currently exercisable.
(b) The Corporation's 1981 Incentive Stock Option (ISO) and Stock
Appreciation Rights Plan (the Plan) provided for the issuance of ISO's to key
employees. The fair market value, as defined, at the date of grant, for which an
individual may have been awarded ISO's, was limited to $100,000 per calendar
year. No further ISO's may be granted under the Plan. The exercise price of all
ISO's outstanding under the Plan is one hundred percent (100%) of the fair
market value (as defined in the Plan) of the shares of the Corporation's common
stock on the date of grant.
The Committee was also authorized to grant Rights and/or Limited Rights
in conjunction with ISO's granted under the Plan. In all material respects,
Rights and Limited Rights granted under the ISO Plan operate in a manner
identical to Rights and Limited Rights granted under the 1981 Non-Qualified
Stock Option and Stock Appreciation Rights Plan.
Activity in ISO's (and Rights) during fiscal 1998 and 1997 was as
follows:
<TABLE>
<S> <C>
Outstanding June 30, 1996 ............................... 8,300
Exercised ($19.88 per share) ............................ (1,300)
------
Outstanding June 30, 1997 ............................... 7,000
Exercised ($19.88 per share) ............................ (1,300)
------
Outstanding June 30, 1998 ............................... 5,700
======
</TABLE>
Limited Rights were also granted in conjunction with ISO's granted in
June 1991 of which 5,700 ($19.88 per share) were outstanding at June 30, 1998.
At June 30, 1998 the aggregate ISO price and quoted market value of Corporation
stock subject to outstanding ISO's were $113,000 and $289,000, respectively. All
outstanding ISO's were granted with a term of ten years and are currently
exercisable.
22
<PAGE> 26
Hudson General Corporation and Subsidiaries
(c) Common Stock Reserved: Common shares were reserved for issuance at
June 30, 1998 as follows:
<TABLE>
<S> <C>
Exercise of incentive stock options -- 1981 Plan ............... 5,700
Exercise of non-qualified stock options -- 1981 Plan ........... 31,400
------
Total ........................................................ 37,100
======
</TABLE>
(d) In fiscal 1997, the Board of Directors authorized the repurchase of
up to 400,000 shares of the Corporation's common stock, which purchases could be
made from time to time in either open market or privately negotiated
transactions. Prior to the fiscal 1997 authorizations, the Corporation still had
authority to repurchase up to 35,700 shares from a previous authorization.
During fiscal 1997, the Corporation repurchased 243,000 shares in the open
market for an aggregate purchase price of $9,152,000. No shares were repurchased
during fiscal 1998.
(e) In connection with the conversion of the Debentures, during fiscal
1997, the Corporation issued 804,259 shares of its common stock. As a result,
"Stockholders' equity" as shown in the accompanying consolidated statements of
stockholders' equity increased by $25,645,000.
9. RETIREMENT PLANS
The Corporation maintains a 401(k) Profit Sharing Plan (the Plan) covering
substantially all of its domestic employees not subject to collective bargaining
agreements. Pursuant to the Plan, the Corporation makes a matching contribution
equal to 25% of the Compensation (as defined in the Plan) that each participant
elects to defer (up to 5% of the participant's Compensation) and contribute to
the Plan. In addition, the Corporation may make a discretionary annual
contribution. As of January 1, 1997, Hudson LLC established a 401(k) Profit
Sharing Plan covering substantially all of its domestic employees not subject to
collective bargaining agreements which contains terms and conditions similar to
those of the Plan. Prior to this date, such employees were covered under the
Plan. During fiscal 1998, 1997 and 1996, the Corporation contributed $234,000,
$219,000 and $798,000, respectively, to the Plan representing employer matching
and discretionary contributions.
During fiscal 1995, the Corporation's Canadian subsidiary (which
effective June 1, 1996 became a direct subsidiary of Hudson LLC) established a
Group Registered Retirement Savings Plan (RRSP) covering substantially all of
its employees not subject to collective bargaining agreements. Under the RRSP
such subsidiary may make a discretionary annual contribution. During fiscal
1996, such subsidiary contributed $79,000 to the RRSP.
Net expense related to the Corporation's retirement plans was $239,000,
$238,000 and $877,000 (including the RRSP) for fiscal 1998, 1997 and 1996,
respectively.
10. COMMITMENTS AND CONTINGENCIES
(a) LEASES
Minimum rental payments for future fiscal years under non-cancelable operating
leases are: $433,000 in 1999; $442,000 in 2000; $451,000 in 2001; $461,000 in
2002; and $235,000 in 2003.
Total rental expense incurred amounted to $412,000, $346,000 and
$5,740,000 for fiscal 1998, 1997 and 1996 (excluding sublease income amounting
to $517,000 in fiscal 1996).
(b) LITIGATION
In 1988, Texaco Canada Inc. (Texaco) (now known as McColl-Frontenac Inc.)
instituted a lawsuit (the Texaco Lawsuit) in the Supreme Court of Ontario,
Canada against the Corporation, the Corporation's Canadian subsidiary (now owned
by Hudson LLC) and Petro-Canada Inc. (the corporation which supplied aviation
fuel for the Corporation's Canadian fixed base operations). The Texaco Lawsuit's
allegations, as amended, were that the defendants interfered with contractual
and fiduciary relations, conspired to injure, and induced the breach of a fuel
supply agreement between Texaco and Innotech Aviation Limited (Innotech) in
connection with the purchase by the Corporation from Innotech in 1984 of certain
assets of Innotech's airport ground services business. The Texaco Lawsuit sought
compensatory and punitive damages totaling $110,000,000 (Canadian)
(approximately $80,000,000 (U.S.)) plus all profits earned by the defendants
subsequent to the alleged breach. The trial, which began in May 1996, concluded
after several adjournments on May 7, 1997. On May 25, 1998, the trial judge
issued an oral decision in the Corporation's favor.
In finding that there was no liability on the part of the Corporation,
its Canadian subsidiary or Petro-Canada, the judge ruled that none of these
parties had induced any breach of the fuel supply agreement, nor had any of them
interfered with the plaintiff's contractual and fiduciary relations. The judge
also ruled that Innotech did not breach its fuel supply agreement with Texaco,
nor was there any fiduciary relationship between Innotech and Texaco.
The trial judge rendered an oral decision, and Texaco, which has served
a Notice of Appeal, cannot pursue any appeal until the decision has been issued
in written form. The decision dealt solely with the issue of liability, and a
separate hearing before another judicial officer would have to be held on the
issue of damages. It is expected that a hearing on damages would not be held
unless Texaco decides to pursue, and is successful in, its appeal of the
liability decision.
The Corporation has agreed to indemnify and hold harmless Hudson LLC,
LAGS and each affiliate of LAGS against all losses related to the Texaco
Lawsuit.
11. RELATED PARTY TRANSACTIONS
Since February 1988, the Corporation has engaged an investment banking firm of
which a director of the Corporation is affiliated to render certain investment
banking services. In connection with the Transaction, such investment banking
firm was paid $517,000 for services rendered in fiscal 1996, and if the LAGS
Option is exercised, would be entitled to a fee of 2% of the option price.
23
<PAGE> 27
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth unaudited quarterly financial information for
fiscal 1998 and 1997:
<TABLE>
<CAPTION>
(in thousands, except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998(a)
REVENUES .......................... $ 1,384 $ 1,381 $ 1,570 $ 1,448
GROSS PROFIT ...................... 1,238 1,240 1,438 1,326
NET EARNINGS ...................... 782 1,383 2,145 946
EARNINGS PER SHARE, BASIC:
NET EARNINGS .................... $ .45 $ .79 $ 1.23 $ .54
======= ======= ====== =======
EARNINGS PER SHARE, DILUTED:
NET EARNINGS .................... $ .45 $ .79 $ 1.22 $ .54
======= ======= ====== =======
1997(a)
Revenues .......................... $ 1,150 $ 1,154 $ 1,426 $ 1,334
Gross profit ...................... 982 988 1,267 1,175
Net earnings (loss) ............... 686 1,660 1,901 (3,772)(b)
Earnings (loss) per share, basic:
Net earnings (loss) ............. $ .39 $ .86 $ 1.05 $ (2.14)
======= ======= ======= =======
Earnings (loss) per share, diluted:
Net earnings (loss) ............. $ .37 $ .85 $ 1.04 $ (2.12)
======= ======= ======= =======
</TABLE>
(a) As a result of the Transaction (see Note 2), effective June 1, 1996 the
Corporation's interest in the Aviation Business is accounted for under the
equity method.
(b) Includes a pre-tax charge of $8,500 related to the Corporation's investment
in and advances to the Kohala Joint Venture (see Note 3).
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Hudson General Corporation
We have audited the accompanying consolidated balance sheets of Hudson General
Corporation and subsidiaries as of June 30, 1998 and 1997 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three year period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hudson
General Corporation and subsidiaries at June 30, 1998 and 1997 and the results
of their operations and their cash flows for each of the years in the three year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
[KPMG PEAT MARWICK LLP]
Jericho, New York
August 14, 1998, except for
note 2, which is as of
September 16, 1998.
24
<PAGE> 28
Hudson General Corporation and Subsidiaries
CORPORATE INFORMATION
DIRECTORS
JAY B. LANGNER
Chairman of the Corporation
RICHARD D. SEGAL
Chairman and Chief Executive Officer
Seavest Inc.
Vice Chairman of the Corporation
MILTON H. DRESNER
Developer, Builder and Private Investor
PAUL R. POLLACK
Executive Vice President
EDWARD J. ROSENTHAL
Vice Chairman
Cramer Rosenthal McGlynn, Inc.
MICHAEL RUBIN
President
HANS H. SAMMER
Consultant, Retired Director,
Investment Banking Group
Prudential Securities Incorporated
STANLEY S. SHUMAN
Executive Vice President
and Managing Director
Allen & Company Incorporated
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A.
c/o Boston EquiServe, L.P.
P.O. Box 8040
Boston, Massachusetts 02266-8040
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
One Jericho Plaza
Jericho, New York 11753
SHARES LISTED
Common --
American Stock Exchange
(Symbol: HGC)
10-K AVAILABLE
The Annual Report, on Form 10-K, as filed with the Securities and Exchange
Commission, is available to shareholders without charge upon written request to:
Secretary
Hudson General Corporation
111 Great Neck Road
Great Neck, New York 11021
CORPORATE OFFICERS
JAY B. LANGNER
Chairman of the Board
and Chief Executive Officer
RICHARD D. SEGAL
Vice Chairman of the Board
MICHAEL RUBIN
President
PAUL R. POLLACK
Executive Vice President
and Chief Operating Officer;
President, Hudson General LLC
FERNANDO DiBENEDETTO
Senior Vice President -- Operations
RAYMOND J. RIEDER
Senior Vice President
and Chief Marketing Officer;
Executive Vice President,
Hudson General LLC
NOAH E. ROCKOWITZ
Senior Vice President, General Counsel
and Secretary
ROCCO DALOIA
Vice President -- Maintenance and Facilities
BARRY I. REGENSTEIN
Vice President and Chief Financial Officer
HENRY A. SATINSKAS
Vice President -- Transportation Services
THOMAS M. LUCARELLI
Treasurer
DIVISIONAL OFFICERS
CANADA
THOMAS D. CULP
Vice President -- Marketing
AUDREY J. LAURIN
Vice President and Controller
DENIS A. A. LAWN
Vice President -- Operations
UNITED STATES
SALVATORE J. ALTIZIO, JR.
Vice President -- Operations Administration
GLENN J. BASSETT
Regional Vice President
DAVID L. FINCH
Vice President -- Contract Services
D. ROSS JACOBS
Vice President -- Marketing
FREDERICK C. KNAPP, JR.
Vice President -- Fuel Services and Planning
BERT J. SMITH
Vice President -- Airport Operations
GARY D. WATSON
Regional Vice President
DAVID M. ZIOLKOWSKI
Regional Vice President
CORPORATE HEADQUARTERS
111 Great Neck Road
Great Neck, New York 11021
(516) 487-8610
CANADIAN LOCATIONS
Administrative Offices
100 Alexis Nihon, Suite 400
Ville St. Laurent, Quebec
H4M 2N9
(514) 748-2277
Calgary International Airport
Edmonton International Airport
Halifax International Airport
Montreal International Airport (Dorval)
Montreal International Airport (Mirabel)
Ottawa International Airport
St. John's International Airport
Toronto International Airport
Vancouver International Airport
Winnipeg International Airport
UNITED STATES LOCATIONS
Baltimore-Washington
International Airport
Fort Lauderdale/Hollywood
International Airport
Houston
Ellington Field
William P. Hobby Airport
JFK International Airport
LaGuardia Airport
Logan International Airport
Los Angeles International Airport
Miami International Airport
Newark International Airport
O'Hare International Airport
Orlando International Airport
Salt Lake City International Airport
Washington National Airport
Designed by Curran & Connors, Inc.
<PAGE> 29
[HUDSON GENERAL LOGO]
111 Great Neck Road
P.O. Box 355
Great Neck, New York 11022 0722-AR-98
<PAGE> 1
EXHIBIT 23
Consent of KPMG Peat Marwick LLP, the Corporation's independent auditors to the
incorporation by reference into the Corporation's Registration Statement on Form
S-8, as amended, Registration No. 2-75137.
90
<PAGE> 2
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Hudson General Corporation:
We consent to the incorporation by reference in the Registration Statement (No.
2-75137) on Form S-8 of Hudson General Corporation of (i) our report dated
August 14, 1998, except for note 2, which is as of September 16, 1998, relating
to the consolidated balance sheets of Hudson General Corporation and
subsidiaries as of June 30, 1998 and 1997 and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended June 30, 1998 which report is incorporated
by reference in the June 30, 1998 annual report on Form 10-K of Hudson General
Corporation, and (ii) our report dated August 14, 1998, except for note 2, which
is as of September 16, 1998, relating to the financial statement schedule of
Hudson General Corporation for each of the years in the three-year period ended
June 30, 1998, our report dated August 14, 1998, except for note 2, which is as
of September 16, 1998, relating to the consolidated balance sheets of Hudson
General LLC and subsidiaries as of June 30, 1998 and 1997 and the related
consolidated statements of earnings and comprehensive income, members' equity
and cash flows and related financial statement schedule for the years ended June
30, 1998, 1997 and the period June 1 (inception) to June 30, 1996, and (iii) our
report dated August 14, 1998, relating to the consolidated balance sheets of
Kohala Joint Venture and subsidiary as of June 30, 1998 and 1997 and the related
consolidated statements of operations and partners' deficit, and cash flows and
related financial statement schedule for each of the years in the three-year
period ended June 30, 1998 which reports appear in the June 30, 1998 annual
report on Form 10-K of Hudson General Corporation.
KPMG PEAT MARWICK LLP
Jericho, New York
September 24, 1998
91
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 19,001
<SECURITIES> 19,002
<RECEIVABLES> 563
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,679
<PP&E> 2,389
<DEPRECIATION> 0
<TOTAL-ASSETS> 73,466
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 2,102
<OTHER-SE> 66,339
<TOTAL-LIABILITY-AND-EQUITY> 73,466
<SALES> 5,783
<TOTAL-REVENUES> 5,783
<CGS> 0
<TOTAL-COSTS> 8,507
<OTHER-EXPENSES> 7,843
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,036
<INCOME-TAX> 2,780
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,256
<EPS-PRIMARY> 3.02<F1>
<EPS-DILUTED> 2.99
<FN>
<F1>Amount reported is EPS basic.
</FN>
</TABLE>
