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%.
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.
(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
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.
ITEM 2.
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.
ITEM 3.
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
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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not applicable
ADDITIONAL ITEM
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
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.
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.
PART II
ITEM 5.
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.
ITEM 6.
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.
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.
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.
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
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - Not Applicable
PART III
ITEM 10.
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.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
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.
PART IV
ITEM 14.
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.
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.
(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
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
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.
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.
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.
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
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
SCHEDULE II
HUDSON GENERAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1998, 1997 and 1996
NOTES: (A) Write-offs. (B) Foreign exchange. (C) Recoveries. (D) Includes transfer of $1,804,000 to Hudson General LLC.
HUDSON GENERAL LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE (FORM 10-K)
JUNE 30, 1998 AND 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
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
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME Hudson General LLC and Subsidiaries (in thousands)
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS Hudson General LLC and Subsidiaries (in thousands)
See accompanying notes to consolidated financial statements.
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)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Hudson General LLC and Subsidiaries (in thousands)
See accompanying notes to consolidated financial statements.
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.
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
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.
3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Accounts, notes and long-term receivables - net at June 30, 1998 and June 30, 1997 consisted of the following:
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:
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.
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:
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
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.
7. INCOME TAXES
Provision for income taxes consisted of the following for fiscal 1998, 1997 and the month of June 1996.
Earnings before income taxes consisted of the following for fiscal 1998, 1997 and the month of June 1996.
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):
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
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;
$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.
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
NOTES: (A) Write-offs.
(B) Foreign exchange.
(C) Recoveries.
(D) Represents transfer of $1,804,000 from Hudson General Corporation.
KOHALA JOINT VENTURE AND SUBSIDIARY
Consolidated Financial Statements and Schedule
June 30, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
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
KOHALA JOINT VENTURE AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1998 and 1997
See accompanying notes to consolidated financial statements.
KOHALA JOINT VENTURE AND SUBSIDIARY
Consolidated Statements of Operations and Partners' Deficit
Years ended June 30, 1998, 1997 and 1996
See accompanying notes to consolidated financial statements.
KOHALA JOINT VENTURE AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
See accompanying notes to consolidated financial statements.
(Continued)
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)
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:
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)
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:
(Continued)
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:
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)
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:
(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:
(Continued)
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)
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.
Schedule II
KOHALA JOINT VENTURE AND SUBSIDIARY
Valuation and Qualifying Accounts
Years ended June 30, 1998, 1997 and 1996
(A) Write-offs
HUDSON GENERAL CORPORATION & SUBSIDIARIES
EXHIBIT INDEX