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EXHIBIT 13
The Registrant's 1996 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.
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[HUDSON GENERAL LOGO]
Pride in our people
[graphic] Hudson
General
Corporation
[graphic]
35th
Anniversary
1996
Annual Report
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CONTENTS
Letter to Our Shareholders ...................................... 1
Aviation Services ............................................... 4
Land Development ................................................ 8
Management's Discussion and Analysis of Financial Condition and
Results of Operation ............................................ 9
Selected Consolidated Financial Data ............................ 12
Consolidated Financial Statements ............................... 13
Notes to Consolidated Financial Statements ...................... 17
Independent Auditors' Report .................................... 24
Corporate Information ............................. Inside Back Cover
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Letter to OUR shareholders
FELLOW SHAREHOLDERS:
As we celebrate the thirty-fifth and most exciting year of Hudson General
Corporation (the Corporation), we dedicate the 1996 Annual Report to our
employees. Throughout this Report you will find pictures of some of the men and
women who have made the success of your company possible. Without these
individuals and the thousands more who work with us, the accomplishments of this
past year would not have been achieved.
[picture of Peter Bluth and Jay B. Langner]
PETER BLUTH, Managing Director of JAY B. LANGNER, Chief Executive Officer
Lufthansa Airport and Ground Services of Hudson General Corporation
The year was highlighted by a momentous event in the Corporation's history.
On May 31, 1996, Jay B. Langner, Chief Executive Officer of the Corporation, and
Peter Bluth, Managing Director of Lufthansa Airport and Ground Services GmbH
(LAGS), a wholly owned subsidiary of Deutsche Lufthansa AG, signed agreements
(pictured above) to complete a landmark transaction between the Corporation and
LAGS. In accordance with these agreements, effective June 1, 1996, 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. Hudson LLC also assumed, as
co-obligor with the Corporation, all of the Corporation's obligations on the
entire outstanding balance ($28.9 million) of the Corporation's 7% Convertible
Subordinated Debentures (the Debentures).
LAGS acquired a 26% interest in Hudson LLC for a price of approximately
$23.7 million. Approximately $7.8 million of this price was deferred, $5.2
million of which remains subject to potential downward adjustment based on
future earnings of the Aviation Business. The Corporation retained a 74%
interest in Hudson LLC. As part of the transaction, LAGS received an option,
exercisable until October 1, 2000, to increase its equity interest in Hudson LLC
from 26% up to a maximum of 49%. LAGS and its affiliates are prohibited from
acquiring an interest in the Corporation.
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In connection with our transaction with LAGS, the Corporation has extended
and amended its bank credit agreements. We now have a $6.0 million line of
credit with significantly reduced restrictions on dividend payments. In
addition, Hudson LLC has a revolving credit agreement with a bank commitment of
$18.0 million.
With the availability of the proceeds from the LAGS transaction, in June
1996 we called for redemption on July 22, 1996, $15.8 million of Debentures. On
July 22, 1996, $13.6 million of Debentures were converted into the Corporation's
common stock and $2.2 million of Debentures were redeemed. On August 5, 1996 the
remaining outstanding balance of the Debentures was called for redemption on
September 4, 1996. Of these Debentures $12.5 million principal amount were
converted and $.2 million were redeemed. Hudson LLC issued a subordinated note
to the Corporation for $26.4 million representing the principal amount of
Debentures that were converted into shares of the Corporation's common stock.
Hudson LLC is obligated to transfer $13.4 million to the Corporation,
representing the difference between the proceeds from the LAGS transaction and
the funds used to redeem the Debentures, as the initial payment under its
subordinated note to the Corporation.
While our transaction with LAGS created great excitement during fiscal 1996,
so did the Corporation's financial results. Net earnings for the fiscal year
ended June 30, 1996 were $10.5 million compared with $4.6 million in fiscal
1995. Revenues for the fiscal year ended June 30, 1996 were $157.7 million
compared with $135.5 million in fiscal 1995. As many of you know, our snow
removal and de-icing services can have a significant impact on the results of
the Aviation Business. During fiscal 1996, the northeastern United States
experienced record snow falls and as a result, both earnings and revenues
benefited from the increased
[picture of Ina Mika,]
INA MIKA, Management Information Systems
28 YEARS OF SERVICE
need for the Corporation's winter related services. In addition, we are pleased
that the results of our non-winter related activities improved from the previous
fiscal year.
The aviation industry which we serve continues to seek more efficient ways
to operate. To this end, airlines have formed alliances which seem to change
continually. Depending on the alliance, business may be gained or lost depending
on which airline alliance partner determines who will furnish the ground
services we offer. However, airline outsourcing continues to provide us with
opportunities as airlines accelerate their efforts to cut costs. The
U.S.-Canadian Open Skies Agreement has also proven beneficial. The benefits of
additional flights have been especially noticeable in Vancouver where a new
international terminal recently opened.
Understandably, not all the news is positive. In February 1996, we lost
through competitive bidding a contract under which we had
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operated ground transportation information kiosks at JFK and LaGuardia airports
in New York since 1989. However, the pluses far outweighed the minuses in fiscal
1996. We were able to expand our fueling operations in Boston and our cargo
handling services at JFK, and we opened a new station in Edmonton. We were also
able to expand our glycol recovery services from Canada to the U.S. beginning
with a pilot project in Baltimore. Overall we are encouraged by the progress of
our core aviation services business.
In Hawaii, results in fiscal 1996 were once again disappointing due to a
lack of sales activity at our real estate joint venture project. Some sales
contracts have been signed recently, and we are beginning to see a firming of
sales prices for the land parcels at Kohala Ranch. On a positive note, the
reorganization plan of our joint venture partner, Oxford First Corporation,
enabled that company to bring itself current with respect to advances owed by it
to the joint venture. Oxford First has also resumed making its 50% share of
advances to the joint venture. We encourage each of you who plans to be in
Hawaii to visit Kohala Ranch and experience its magnificent beauty firsthand.
Reflecting the growth of the Corporation and the formation of Hudson
General LLC, on September 13, 1996, Michael Rubin was elected President of
Hudson General Corporation and Paul R. Pollack was elected President of Hudson
General LLC. Jay B. Langner will continue to serve as Chairman of the Board
and Chief Executive Officer. We believe these changes will provide for an
effective management team as Hudson General continues to progress towards the
year 2000.
In closing, we must once again thank our employees, as well as our
customers, vendors and shareholders, for their continued support. A special
thank you goes to Donald S. Croot, Vice President--Canadian Operations. Don has
been with Hudson General since 1968, when we
[picture of George Brown]
GEORGE BROWN, Skycap/Wheelchair
25 YEARS OF SERVICE
acquired our Canadian operations, and will be retiring in December. Don has been
greatly responsible for both the quality of services provided and excellent
results in Canada. We will miss his loyalty and dedication and wish him well in
retirement.
Sincerely,
/s/ Jay B. Langner
Jay B. Langner
Chairman of the Board and
Chief Executive Officer
/s/ Michael Rubin
Michael Rubin
President and Principal Financial Officer
/s/ Paul R. Pollack
Paul R. Pollack
Executive Vice President and Chief Operating Officer
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Proud of OUR employees
[picture of Chester Tomlinson]
Chester Tomlinson, Fuel Management
7 years of service
[picture of Larry Turner and Gholam Nami]
Larry Turner, Bus Transportation Gholam Nami, Bus Transportation
18 years of service 18 years of service
AVIATION SERVICES
Hudson General Corporation through its ownership interest in Hudson LLC
provides a broad 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 ground support equipment.
Aircraft ground handling services are provided to 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; de-icing; ramp sweeping and glycol recovery; water
and lavatory service; maintenance and service checks; weight and balance; cargo
and mail handling; aircraft pushbacks; ground power and air-conditioning.
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[picture of Ray DiGianvittorio]
Ray DiGianvittorio, Ground Handling
22 years of service
[picture of Angela Torres]
Angela Torres, Cabin Grooming
6 years of service
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[picture of Asim Gader]
Asim Gader, De-icing/Glycol Recovery
10 years of service
Aircraft fueling services are offered through contract fueling, fuel
management and retail sales of fuel. Contract fueling services are provided to
airlines and fuel suppliers by delivery of fuel from airport storage facilities
into commercial aircraft. Fuel management services consists 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. Besides its
airport-related transportation services, Hudson LLC provides transportation
management services for various governmental agencies and authorities.
Snow removal services are performed at airports in the northeastern and
midwestern United States under contracts with airport operators and airlines
serving these airports. Snow removal services are also performed at several
seaport facilities.
Hudson LLC also operates one of the newest and most technologically advanced
airport perishables center in the United States for cargo requiring a
climate-controlled environment.
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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 including corporate and private aircraft owners.
As Hudson General Corporation completes its thirty-fifth year, it continues
to meet the service challenges of the aviation industry. Through the efforts
and commitment of its employees, Hudson General is dedicated to its customers'
satisfaction.
[picture of Nadir Ali]
Nadir Ali,
Ground Support Equipment Maintenance
27 years of service
[picture of John Hames]
John Hames, Snow Clearing
25 years of service
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[picture of Max D'Souga]
Max D'Souga, Passenger Handling
25 years of service
LAND DEVELOPMENT
Hudson General 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 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 86 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 has been challenged in a
lawsuit brought by two local residents of Hawaii, and development of Phase IV
must await the ultimate outcome of this litigation.
[picture of Tom Slattery]
Tom Slattery, Intoplane Fueling
22 years of service
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Hudson General Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED WITH FISCAL 1995
Effective June 1, 1996, the Corporation consummated a transaction (the
Transaction) in which a third party 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, the fiscal 1996 consolidated statements of earnings of
the Corporation contain the operating results of the Aviation Business on a
consolidated basis for eleven months and under the equity method of accounting
for one month. The table below summarizes the combined revenues, costs and
expenses and operating results for fiscal 1996 (including the Aviation Business
for June 1996) and compares them with fiscal 1995 amounts. The Corporation's
equity interest in the earnings of the Aviation Business for the month of June
1996 is included in "Equity in earnings of Hudson General LLC" in the
accompanying consolidated statements of earnings. The table and related
management's discussion are intended to provide a presentation and analysis of
fiscal 1996 and 1995 results on a comparable basis.
Hudson
General Hudson
Corporation LLC Combined
Fiscal June Fiscal Fiscal
1996 1996 1996 1995
---------------------------------------------------------
(in thousands)
Revenues ............................. $157,718 $12,313 $170,031 $135,453
Costs and expenses:
Operating .......................... 113,744 9,259 123,003 106,070
Depreciation and amortization ...... 7,165 673 7,838 7,528
Selling, general &
administrative ................... 16,755 1,317 18,072 14,306
Interest ........................... 239 168 407 559
---------------------------------------------------------
Total costs and expenses ............. 137,903 11,417 149,320 128,463
Earnings before equity in earnings
(loss) of investees and provision
(benefit) for income taxes ......... $ 19,815 $ 896 $ 20,711 $ 6,990
---------------------------------------------------------
Revenues increased from $135.5 to $170.0 million, an increase of $34.6
million, or 25.5%. The increase reflects higher: (i) snow removal revenues of
$14.0 million as a result of record snowfalls in the northeast; (ii) ground
handling service revenues of $18.2 million due primarily to expanded services to
new and existing customers and to higher sales of de-icing fluid; (iii) domestic
aircraft fueling revenues of $4.3 million resulting primarily from expanded
intoplane fueling services and retail sales of fuel at existing locations; 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. Partially
offsetting the revenue increases were lower: (i) aircraft fueling and hangar
rental revenues in Canada of $2.3 million as a result of the cessation of
operations of the Corporation's Canadian fixed base operations (FBO's) on
October 31, 1994; and (ii) ground transportation revenues of $1.0 million due
primarily to the loss of contracts to operate information kiosks and specialized
airfield passenger transport vehicles.
Costs and expenses increased from $128.5 to $149.3 million, an increase of
$20.9 million, or 16.2%. Operating costs increased $16.9 million, or 16.0%. The
increase was attributable to higher: (i) snow removal costs; (ii) labor and
related costs associated with expanded ground handling operations and domestic
aircraft fueling services; (iii) cost of sales of de-icing fluid; (iv) fuel
costs associated with higher volumes of retail fuel sales and internal fuel
usage in the U.S.; and (v) the effect of fluctuation in the average rates of
exchange used in translating Canadian costs to their U.S. dollar equivalent.
Partially offsetting the increases were lower costs as a result of: (i) the loss
of contracts to operate ground transportation information kiosks and specialized
airfield passenger transport vehicles; (ii) the positive trending of workers'
compensation insurance claims; and (iii) the cessation of operations of the
Corporation's Canadian FBO's.
Depreciation and amortization expenses increased from $7.5 to $7.8 million,
an increase of $.3 million, or 4.1%. The increase is due to additional
depreciation in the current year due mainly to purchases of ground handling
equipment. Partially offsetting the increase is the absence in fiscal 1996 of
accelerated amortization of the remaining carrying value of leasehold
improvements made to a hangar facility at a domestic airport location in the
prior year (the Accelerated Amortization) (see Note 5).
Selling, general and administrative expenses increased from $14.3 to $18.1
million, an increase of $3.8 million, or 26.3%, due primarily to the recording
of higher provisions relating to the Corporation's bonus and retirement plans
and to stock appreciation rights as a result of increases in the market price of
the Corporation's common stock.
Earnings before equity in earnings (loss) of investees and provision
(benefit) for income taxes increased from $7.0 to $20.7 million, an increase of
$13.7 million, due primarily to improved results from snow removal, ground
handling (including higher sales of de-icing fluid) and domestic aircraft
fueling operations. Adding to the increase was the absence of the Accelerated
Amortization, a decrease in workers' compensation insurance costs and the
elimination of operating losses associated with the Corporation's Canadian
FBO's. Partially offsetting the increases were higher selling, general and
administrative expenses as described above.
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.
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.
The Corporation's 50% share of losses from its real estate joint venture in
Hawaii (the Venture) increased from $2.7 to $3.0 million, an increase of $.3
million, or 10.0%. The increase in the Venture's loss is due mainly to higher
interest expense-net due mainly to higher balances of partner advances payable.
In addition, the Venture's interest income decreased as a result of the
reduction in mortgage receivables. As is usual for companies with land
development operations, the contribution to future results from such operations
will fluctuate depending upon land sales closed in each reported period.
The Corporation's provision (benefit) for income taxes increased from a
benefit of $.4 million to a provision of $7.2 million, an increase of $7.5
million. The increase primarily reflects: (i) increased pre-tax earnings in the
U.S. and Canada; (ii) the Corporation's recognition of a provision of $.8
million for income taxes associated with the anticipated repatriation of
Canadian earnings; and (iii) a decrease of $.3 million in fiscal 1996 compared
with fiscal 1995 of the recognition of deferred tax assets resulting from a
reevaluation of the operating results of the Corporation's Canadian subsidiary
(see Note 8).
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Hudson General Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
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, several airlines have begun to outsource services to
independent aviation service companies. This trend, as well as the Open Skies
Agreement between the United States and Canada, which provides increased access
to airlines to fly between these bordering countries, has provided additional
opportunities for Hudson LLC. The Corporation is unable, at this time, to
evaluate the full 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 1996 and 1995, 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, 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. The Corporation was and Hudson LLC is presently
engaged in several such decommissioning and cleanup projects, and it is
anticipated that additional such expenditures, the amount of which is presently
not expected to be material, will be required.
In addition, airport authorities are coming under increasing pressure to
cleanup 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 is required to adopt in fiscal 1997 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
requires, among other things, that long-lived assets held and used by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Corporation's
management does not believe that the adoption of SFAS No. 121 will have a
material impact on the Corporation's consolidated financial position or results
of operations.
FISCAL 1995 COMPARED WITH FISCAL 1994
Revenues decreased from $142.1 to $135.5 million, a decrease of $6.6
million, or 4.7%. The decrease reflects lower: (i) snow removal revenues of
$14.2 million due mainly to the mild winter weather during fiscal 1995; (ii)
aircraft fueling and hangar rental revenues in Canada of $6.2 million due to
lower volumes of retail fuel sales and the expiration on October 31, 1994 of the
Corporation's subleases at its Canadian FBO's; and (iii) revenues due to the
effect of fluctuation in the average rates of exchange used in translating
Canadian revenues to their U.S. dollar equivalent. Partially offsetting the
revenue decreases were higher: (i) ground handling service revenues (net of
decreased sales volumes of de-icing fluid) of $7.1 million due primarily to
expanded services to new and existing customers and to a new contract to provide
various winter related aircraft ground handling services at Terminal 1 in
Toronto's Lester B. Pearson International Airport; (ii) domestic aircraft
fueling revenues of $5.2 million resulting primarily from expanded intoplane
fueling services at new and existing locations; (iii) ground transportation
revenues of $1.6 million due mainly to expanded services to existing customers;
and (iv) building maintenance revenues of $.8 million due primarily to expanded
services to new and existing customers in the U.S.
Costs and expenses were substantially unchanged at $128.5 million in fiscal
1995 as compared with $128.6 million in fiscal 1994. Operating costs decreased
by $.4 million, or .3%. The decrease was attributable to lower: (i) snow removal
costs due to the mild winter weather in the U.S.; (ii) fuel and facility rental
costs related to the Corporation's Canadian FBO's; and (iii) the effect of
fluctuation in the average rates of exchange used in translating Canadian costs
to their U.S. dollar equivalent. Partially offsetting the decreases were higher:
(i) domestic labor and related costs due primarily to expanded services to new
and existing customers; (ii) equipment rental costs due to expanded intoplane
fueling services; (iii) labor and related costs associated with ground handling
operations in Canada due primarily to expanded services to new and existing
customers; and (iv) domestic maintenance associated with expansion of the
Corporation's fleet of equipment.
Depreciation and amortization expenses increased from $7.0 to $7.5 million,
an increase of $.5 million, or 6.9%. The increase was due primarily to the
Accelerated Amortization.
Selling, general and administrative expenses increased from $13.8 to $14.3
million, an increase of $.5 million, or 3.6%, due mainly to higher facility,
personnel and related costs associated with the Corporation's expanded
operations as noted above.
Interest expense decreased from $1.3 to $.6 million, a decrease of $.7
million, or 56.4%, due mainly to lower average outstanding borrowings and the
increase in the Corporation's accrual of interest on its advances to the
Venture.
Earnings before equity in earnings (loss) of investees, provision (benefit)
for income taxes and cumulative effect of change in the method of accounting for
income taxes decreased from $13.5 to $7.0 million, a decrease of $6.5 million,
or 48.3%, due primarily to reduced results from snow removal operations and
lower sales volumes of de-icing fluid due mainly to the mild winter weather; the
Accelerated Amortization; and higher selling, general and administrative
expenses as described above. Partially offsetting the decreases were improved
results from domestic aircraft fueling and ground transportation operations and
lower interest expense.
The Corporation's 50% share of losses from the Venture increased from $1.8
to $2.7 million, an increase of $.9 million, or 52.5%. The increase in the
Venture's losses is due mainly to the cessation of interest capitalization by
the Venture on Phase IV of the Project as of July 1, 1994.
The Corporation's provision (benefit) for income taxes decreased from a
provision of $4.4 million to a benefit of $.4 million, a decrease of $4.8
million. The decrease reflects lower federal and state tax provisions totaling
$3.5 million due to decreased pre-tax earnings in the U.S., and the recognition
in fiscal 1995 of $1.3 million of deferred tax assets resulting from a
reevaluation of the operating results of the Corporation's Canadian subsidiary
(see Note 8).
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LIQUIDITY AND 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
will pay to the Corporation an overhead fee equal to the sum of 3% of Hudson
LLC's consolidated domestic and 1% of Hudson LLC's consolidated Canadian
revenues. It is currently 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 Corporation is expected to receive distributions from Hudson
LLC annually in an amount substantially equal to 50% of domestic and 10% of
Canadian pre-tax earnings from the Aviation Business, as defined, multiplied by
the Corporation's respective equity interest in Hudson LLC. Furthermore, the
Corporation is entitled to receive the balance of trade receivables retained and
net advances made by the Corporation on behalf of Hudson LLC in June 1996 in the
aggregate amount of $7.2 million. Finally, to the extent that Debentures are
converted into shares of the Corporation's common stock, Hudson LLC will be
indebted to the Corporation. Hudson LLC is obligated to repay such debt to the
Corporation as follows: (i) to the extent that proceeds received by Hudson LLC
at the closing of the Transaction were not used to redeem Debentures; (ii) to
the extent that deferred payments made by LAGS are received by Hudson LLC (see
Note 2); (iii) $500,000 on July 15, 1997; and (iv) $1,500,000 on July 15, 1998
and 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 at June 30, 1996.
In fiscal 1996, 1995 and 1994, net cash provided by operating activities was
$25.5, $19.7 and $16.4 million, respectively. Capital expenditures net of
proceeds from the sale of property and equipment were $12.9, $9.9 and $9.2
million in fiscal 1996, 1995 and 1994, respectively. The majority of capital
expenditures were made in respect of the Aviation Business and as such the
majority of future capital expenditures are expected to be made by Hudson LLC.
Net cash advanced to the Venture was $.8, $1.7 and $.9 million in fiscal 1996,
1995 and 1994, respectively. Net cash advanced (including the effect of trade
receivables retained by the Corporation) to Hudson LLC was $7.2 million for the
month of June 1996. Net cash used by financing activities was $.6, $2.2 and $5.7
million for fiscal 1996, 1995 and 1994, respectively. Cash and cash equivalents
were $12.7, $12.6 and $6.7 million at June 30, 1996, 1995 and 1994,
respectively.
During fiscal 1995, the Board of Directors approved the repurchase of up to
150,000 shares of the Corporation's common stock from time to time in either
open market or privately negotiated transactions. As of June 30, 1996, the
Corporation had repurchased 114,300 shares of its common stock in the open
market for an aggregate purchase price of $2.0 million pursuant to this
authorization (see Note 9).
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 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 have appealed this ruling. The appeal was
heard before the Hawaii Supreme Court in March 1994, and because of an existing
backlog in its caseload, the Court has not rendered a decision. The Venture
cannot, at this time, determine the impact of the Court's ruling on the timing
of development of Phase IV or the expenditures related thereto.
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. It is expected 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. 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.
At June 30, 1996, the Venture had commitments (in addition to the
commitments noted above) aggregating $3.3 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 expected that the majority of
funds for the Venture's other commitments will be expended subsequent to fiscal
1997.
The Partner is a subsidiary of Oxford First Corporation (Oxford First). On
October 13, 1994, Oxford First filed for reorganization under Chapter 11 of the
Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, Oxford First
(through its subsidiary, The Oxford Finance Companies, Inc.) was permitted to
transfer certain amounts to the Partner. The amounts so authorized were not
sufficient to allow the Partner to make its full share of required advances. The
Corporation opted to make additional advances (the Additional Advances) to cover
the Partner's funding deficiency. During November 1995, the Partner resumed
making advances, and in January 1996, the Partner repaid to the Corporation the
entire amount of the Additional Advances of $.7 million together with interest
thereon. In addition, pursuant to an amended reorganization plan which was
approved by the Bankruptcy Court on September 7, 1995, Oxford First is permitted
to transfer funds to the Partner in an aggregate amount not to exceed $750,000
in each of the calendar years 1996 and 1997 (exclusive of the repayment of the
Additional Advances). The Corporation, at present, is unable to determine
whether such permitted transfers will be sufficient in order for the Partner to
make its share of future advances to the Venture or whether Oxford First will
receive permission from the Bankruptcy Court to transfer additional funds to the
Partner, if required. The Partner has advanced $675,000 to the Venture during
the first eight months of calendar 1996. Should the Partner be unable to make
its share of future advances to the Venture, the Corporation has the option to
make further advances on behalf of the Partner (subject to its right of
reimbursement) necessary up to the limits set forth in the Credit Agreement. The
Partner did not file for reorganization under Chapter 11 of the Bankruptcy Code.
During fiscal 1996, the Corporation made net advances of $.8 million to the
Venture.
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, expenses incurred in the planning and development
of future phases of the Project and the ability of the Partner to fund its
obligations under the Joint Venture Agreement.
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.
11
15
Hudson General Corporation and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
Fiscal Years Ended June 30,
-------------------------------------------------------------------------------
1996(a) 1995 1994 1993 1992
-------------------------------------------------------------------------------
Revenues......................................... $ 157,718 $ 135,453 $ 142,075 $ 132,186 $ 126,744
Earnings (loss) before extraordinary items and
cumulative effect of change in the method of
accounting for income taxes.................... 10,466 4,593 7,310 (2,045)(b) 1,128
Earnings (loss) per share before extraordinary
items and cumulative effect of change in the
method of accounting for income taxes:
Primary....................................... 8.87 3.69 5.86 (1.65) .90
Fully diluted................................. 5.56 2.67 3.96 (1.65) 1.06
Net earnings (loss).............................. 10,466 4,593 7,760 (2,180)(b) 2,005(c)
Net earnings (loss) per share:
Primary....................................... 8.87 3.69 6.22 (1.75) 1.60
Fully diluted................................. 5.56 2.67 4.17 (1.75) 1.47
Total assets..................................... 48,776 87,568 77,889 72,414 79,038
Long-term obligations less current maturities.... -- 29,000 29,000 32,700 34,800
Stockholders' equity............................. 43,895 21,616 19,223 12,141 15,066
Capital expenditures............................. 13,158 10,806 9,815 5,786 7,359
Cash dividends per common share.................. .50 .50 -- -- --
-------------------------------------------------------------------------------
(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 $4,287 of accelerated amortization of leasehold rights related to
the Corporation's Canadian Fixed Base Operations, which the Corporation
ceased operating during fiscal 1995.
(c) Includes extraordinary tax benefit from net operating loss carryforwards of
$800.
FISCAL 1996 Fiscal 1995
------------------------------------------------
Market Price Range* High Low High Low
------------------------------------------------
First Quarter................................................................... 24 20 20 15 1/8
Second Quarter.................................................................. 34 1/4 23 5/8 18 3/8 15 7/8
Third Quarter................................................................... 43 3/8 33 16 3/4 15 3/4
Fourth Quarter.................................................................. 43 3/8 34 3/8 20 1/2 16
* 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, 1994 through
June 30, 1996.
At June 30, 1996, there were 224 record holders of the Corporation's common
stock.
12
16
Hudson General Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended June 30,
------------------------------------------
1996 1995 1994
------------------------------------------
(in thousands, except per share amounts)
Revenues.............................................................................. $157,718 $135,453 $142,075
------------------------------------------
Costs and expenses:
Operating........................................................................... 113,744 106,070 106,424
Depreciation and amortization....................................................... 7,165 7,528 7,042
Selling, general & administrative................................................... 16,755 14,306 13,806
Interest--net....................................................................... 239 559 1,283
------------------------------------------
Total costs and expenses.......................................................... 137,903 128,463 128,555
------------------------------------------
Earnings before equity in earnings (loss) of investees, provision (benefit)
for income taxes and cumulative effect of change in the method of
accounting for income taxes ........................................................ 19,815 6,990 13,520
Equity in earnings of Hudson General LLC.............................................. 855 - -
Equity in loss of Kohala Joint Venture................................................ (3,021) (2,747) (1,801)
------------------------------------------
Earnings before provision (benefit) for income taxes and cumulative effect of
change in the method of accounting for income taxes................................. 17,649 4,243 11,719
Provision (benefit) for income taxes.................................................. 7,183 (350) 4,409
------------------------------------------
Earnings before cumulative effect of change in the method of accounting for
income taxes ....................................................................... 10,466 4,593 7,310
Cumulative effect of change in the method of accounting for income taxes.............. - - 450
------------------------------------------
Net earnings.......................................................................... $ 10,466 $ 4,593 $ 7,760
==========================================
Earnings per share, primary:
Earnings before cumulative effect of change in the method of accounting for
income taxes ..................................................................... $ 8.87 $ 3.69 $ 5.86
Cumulative effect of change in the method of accounting for income taxes............ - - .36
------------------------------------------
Net earnings........................................................................ $ 8.87 $ 3.69 $ 6.22
==========================================
Earnings per share, fully diluted:
Earnings before cumulative effect of change in the method of accounting for
income taxes ..................................................................... $ 5.56 $ 2.67 $ 3.96
Cumulative effect of change in the method of accounting for income taxes............ - - .21
------------------------------------------
Net earnings........................................................................ $ 5.56 $ 2.67 $ 4.17
==========================================
See accompanying notes to consolidated financial statements.
13
17
Hudson General Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
-----------------------------------
1996 1995
-----------------------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents............................................................. $ 12,701 $ 12,613
Accounts and notes receivable-net..................................................... 238 14,457
Advances to Hudson General LLC........................................................ 7,233 -
Inventory............................................................................. - 936
Prepaid expenses and other assets..................................................... 302 876
Deferred income taxes................................................................. - 4,602
-----------------------------------
Total current assets.......................................................... 20,474 33,484
Property, equipment and leasehold rights at cost, less accumulated
depreciation and amortization......................................................... 3,428 33,864
Investment in Hudson General LLC......................................................... 8,738 -
Investment in Kohala Joint Venture-net................................................... 15,420 16,065
Long-term receivables-net................................................................ - 2,585
Other assets-net......................................................................... 716 770
Excess cost over fair value of net assets acquired....................................... - 800
-----------------------------------
$ 48,776 $ 87,568
===================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................................................................... $ 471 $ 12,305
Income taxes payable.................................................................. - 1,557
Accrued expenses and other liabilities................................................ 3,648 21,233
-----------------------------------
Total current liabilities..................................................... 4,119 35,095
-----------------------------------
Long-term debt, subordinated............................................................. - 29,000
Deferred income taxes.................................................................... 762 1,857
-----------------------------------
Total noncurrent liabilities.................................................. 762 30,857
-----------------------------------
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 1,277,401 and 1,253,802 shares........................................... 1,277 1,254
Paid in capital....................................................................... 18,033 6,759
Retained earnings..................................................................... 26,595 16,707
Equity adjustments from foreign currency translation.................................. - (1,483)
Treasury stock, at cost, 114,300 and 96,600 shares.................................... (2,010) (1,621)
-----------------------------------
Total stockholders' equity.................................................... 43,895 21,616
-----------------------------------
$ 48,776 $ 87,568
===================================
See accompanying notes to consolidated financial statements.
14
18
Hudson General Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1996, 1995 and 1994
--------------------------------------------------------------------------------------
Common Stock Equity
Issued Adjustments from
--------------------- Paid in Retained Foreign Currency Treasury Stockholders'
Shares Amounts Capital Earnings Translation Stock Equity
--------------------------------------------------------------------------------------
(in thousands, except share amounts)
Balance, June 30, 1993................... 1,242,802 $1,243 $ 6,607 $ 4,956 $ (665) $ - $12,141
Common stock issued in connection with
exercise of stock options............ 8,000 8 110 - - - 118
Equity adjustment from foreign
currency translation................. - - - - (796) - (796)
Net earnings........................... - - - 7,760 - - 7,760
-------------------------------------------------------------------------------------
Balance, June 30, 1994................... 1,250,802 1,251 6,717 12,716 (1,461) - 19,223
Common stock issued in connection with
exercise of stock options............ 3,000 3 42 - - - 45
Dividends ($.50 per share)............. - - - (602) - - (602)
Equity adjustment from foreign
currency translation................. - - - - (22) - (22)
Purchase of treasury stock............. - - - - - (1,621) (1,621)
Net earnings........................... - - - 4,593 - - 4,593
-------------------------------------------------------------------------------------
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
=====================================================================================
See accompanying notes to consolidated financial statements.
15
19
Hudson General Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
----------------------------------------
1996 1995 1994
----------------------------------------
(in thousands)
Cash flows from operating activities:
Net earnings ....................................................... $ 10,466 $ 4,593 $ 7,760
Adjustments to reconcile net earnings before cumulative effect of
change in the method of accounting for income taxes to net cash
provided by operating activities:
Depreciation and amortization .................................. 7,165 7,528 7,042
Provision for losses on accounts receivable-net ................ 362 178 160
Increase (decrease) in deferred income taxes ................... (1,090) 149 (272)
Equity in earnings of Hudson General LLC ....................... (855) -- --
Equity in loss of Kohala Joint Venture ......................... 3,021 2,747 1,801
Accrual of interest income on Kohala Joint Venture advances .... (1,604) (1,471) (947)
Gain on sale of equipment ...................................... (139) (454) (133)
Change in other current assets and liabilities:
Accounts and notes receivable ................................ 2,845 5 (2,797)
Inventory-net ................................................ (135) (31) (121)
Prepaid expenses and other assets ............................ (369) 215 129
Deferred income taxes ........................................ 2,342 (1,656) (1,489)
Accounts payable ............................................. 892 3,650 1,261
Income taxes payable ......................................... 165 333 575
Accrued expenses and other liabilities ....................... 1,785 3,136 3,123
Decrease in other assets ....................................... 54 92 155
Decrease in long-term receivables-net .......................... 522 553 23
Other-net ...................................................... 37 127 130
----------------------------------------
Net cash provided by operating activities .................... 25,464 19,694 16,400
Cash flows from investing activities: ----------------------------------------
Purchases of property, equipment and leasehold rights .............. (13,158) (10,806) (9,815)
Proceeds from sale of property and equipment ....................... 244 935 648
Advances to Hudson General LLC ..................................... (7,233) -- --
Advances to Kohala Joint Venture-net ............................... (772) (1,720) (870)
Net cash transferred to Hudson General LLC upon formation .......... (3,002) -- --
Fees related to transfer of assets to Hudson General LLC ........... (825) -- --
----------------------------------------
Net cash used by investing activities ........................ (24,746) (11,591) (10,037)
----------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................. 335 45 118
Cash dividends paid ................................................ (578) (602) --
Purchase of treasury stock ......................................... (389) (1,621) --
Proceeds from borrowings ........................................... -- -- 500
Principal repayments of borrowings ................................. -- -- (6,333)
----------------------------------------
Net cash used by financing activities ........................ (632) (2,178) (5,715)
----------------------------------------
Effect of exchange rate changes on cash ............................... 2 (39) (297)
----------------------------------------
Net increase in cash and cash equivalents ............................. 88 5,886 351
Cash and cash equivalents at beginning of year ........................ 12,613 6,727 6,376
----------------------------------------
Cash and cash equivalents at end of year .............................. $ 12,701 $ 12,613 $ 6,727
========================================
See accompanying notes to consolidated financial statements.
16
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), 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,
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 1996
consolidated statements of earnings of the Corporation contain the operating
results of the Aviation Business on a consolidated basis for eleven months and
under the equity method of accounting for one month. The Corporation's
consolidated balance sheet as of June 30, 1996 includes the Corporation's
investment in Hudson LLC. As a result of the Corporation's transfer (as noted
above) 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 as of June 30, 1996. The Corporation's
stockholders' equity was increased by $12,253,000 in June 1996 as a result of
the Corporation's equity interest in Hudson LLC's capital transactions.
DESCRIPTION OF BUSINESS: The Corporation through its ownership interest in
Hudson LLC provides a broad range of aviation services to the aviation industry
at twenty-four (24) airports throughout the United States and Canada. These
services include aircraft ground handling; aircraft de-icing; aircraft fueling;
fuel management; ground transportation; snow removal; cargo warehousing; and
sale, leasing and maintenance of ground support equipment.
INVENTORIES: Inventories were 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 were 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 $1,188,000 at
June 30, 1995, was amortized on a straight-line basis over periods not to exceed
forty years.
INCOME TAXES: Effective July 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
which requires the use of the liability method of accounting for deferred income
taxes (see Note 8).
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
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 1996, 1995 and 1994 income taxes (net of
refunds) of $5,064,000, $362,000 and $4,677,000, respectively, were paid.
Interest of $2,030,000, $2,030,000 and $2,241,000 was paid in fiscal 1996, 1995
and 1994, respectively.
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: Primary earnings per common and common equivalent share have
been computed based upon the weighted average number of shares of common stock
outstanding and dilutive common stock equivalents assumed outstanding during the
respective years. The weighted average number of shares used in computing
primary earnings per common and common equivalent share was 1,179,841, 1,245,122
and 1,246,889 in fiscal 1996, 1995 and 1994, respectively. Fully diluted
earnings per common and common equivalent share have been computed based upon
the assumption that the Corporation's convertible debentures are converted into
common shares at the beginning of each period in which their effect is dilutive
and that the related interest expense that would not have been incurred had
conversion taken place, net of applicable taxes, is added back to net earnings.
The weighted average number of common and common equivalent shares used in
computing fully diluted earnings per share in fiscal 1996, 1995 and 1994 was
2,069,617, 2,145,175 and 2,134,789, respectively.
RECLASSIFICATIONS: Certain reclassifications of fiscal 1995 and 1994 balances
have been made to conform with the fiscal 1996 presentation.
2. INVESTMENT IN HUDSON GENERAL LLC
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 LAGS, a German corporation and an indirect wholly-owned
subsidiary of Deutsche Lufthansa AG(Lufthansa), 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, 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. The
17
21
Hudson General Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
remaining portion of the purchase price of $7,838,000 (the Deferred Payment) is
to be paid in three annual installments (together with accrued interest from
January 1, 1996 at a rate of 11% per annum), expected to be paid in September
1996, 1997 and 1998, and is subject to potential downward adjustment based on
the future earnings of the Aviation Business. The earnings of the Aviation
Business in fiscal 1996 were sufficient for Hudson LLC to earn the full portion
of the Deferred Payment due in September 1996 of $2,650,000, plus interest
thereon. The Purchase Agreement also provided for the grant to LAGS of an option
(the LAGS Option), exercisable on October 1 of each year from 1996 through 2000,
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.
The LLC Agreement 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 is entitled to all interest earned on
the Deferred Payment and LAGS USA will 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. In addition, 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 remained outstanding at June 30, 1996 and is expected to be
repaid to the Corporation by Hudson LLC (together with accrued interest at a
rate of 5.18%).
Pursuant to the LLC Agreement: (i) 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 3% of Hudson LLC's consolidated domestic revenues and 1% of
Hudson LLC's consolidated Canadian revenues; and (ii) there will be a Member
Board on which the Corporation has three votes and LAGS USA has two votes. The
LLC Agreement allows either Member to veto certain major transactions or any
reduction in distributions stipulated in the LLC Agreement. The LLC Agreement
provides that distributions will be paid annually in an amount at least equal
to 50% of domestic and 10% of Canadian pre-tax earnings, as defined, from the
Aviation Business.
The summary consolidated balance sheet for Hudson LLC as of June 30, 1996 (in
thousands) is as follows:
Cash and cash equivalents............................ $19,269
Accounts and notes receivable-net.................... 18,055
Other current assets................................. 2,317
-------
Total current assets............................... 39,641
Property, equipment and leasehold rights at cost,
less accumulated depreciation and amortization..... 37,442
Other assets-net..................................... 3,641
-------
$80,724
=======
Accounts payable..................................... $15,104
Accrued expenses and other liabilities............... 18,085
Advances from Hudson General Corporation............. 7,233
-------
Total current liabilities.......................... 40,422
Long-term debt, subordinated......................... 28,751
Members' equity...................................... 11,551
-------
$80,724
=======
Summary results of operations for Hudson LLC for the month of June 1996 (in
thousands) are as follows:
Revenues............................................. $12,313
-------
Operating costs...................................... 9,259
Depreciation and amortization........................ 673
Selling, general & administrative costs.............. 1,317
Interest............................................. 168
-------
Total costs and expenses........................... 11,417
Earnings before provision for foreign income taxes... 896
Provision for foreign income taxes................... 41
-------
Net earnings $ 855
=======
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 86 parcels 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. 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 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 have appealed this ruling. The appeal was heard before the Hawaii
Supreme Court in March 1994, and because of an existing backlog in its caseload,
the Court has not rendered a decision. The Venture cannot, at this time,
determine the impact of the Court's ruling on the timing of development of Phase
IV or the expenditures related thereto.
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. The Corporation's total advances (including accrued interest) at June
30, 1996 and 1995 were $25,110,000 and $22,565,000, respectively.
On October 13, 1994, Oxford First filed for reorganization under Chapter 11 of
the Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, Oxford First
(through its subsidiary, The Oxford Finance Companies, Inc.) was permitted to
transfer certain amounts to the Partner. The amounts so authorized were not
sufficient to allow the Partner to make its full share of required advances. The
Corporation opted to make additional advances (the Additional Advances) to cover
18
22
Hudson General Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the Partner's funding deficiency. During November 1995, the Partner resumed
making advances, and in January 1996, the Partner repaid to the Corporation the
entire amount of the Additional Advances of $702,000 together with $37,000 of
interest thereon. In addition, pursuant to an amended reorganization plan which
was approved by the Bankruptcy Court on September 7, 1995, Oxford First is
permitted to transfer funds to the Partner in an aggregate amount not to exceed
$750,000 in each of the calendar years 1996 and 1997 exclusive of the repayment
of the Additional Advances. The Corporation, at present, is unable to determine
whether such permitted transfers will be sufficient in order for the Partner to
make its share of future advances to the Venture or whether Oxford First will
receive permission from the Bankruptcy Court to transfer additional funds to the
Partner, if required. The Partner advanced $675,000 to the Venture during the
first eight months of calendar 1996. Should the Partner be unable to make its
share of future advances to the Venture, the Corporation has the option to make
further advances on behalf of the Partner (subject to its right of
reimbursement) necessary up to the limits set forth in the Credit Agreement (see
Note 7). The Partner did not file for reorganization under Chapter 11 of the
Bankruptcy Code. During fiscal 1996, the Corporation made net advances of
$772,000 to the Venture.
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. On April 30, 1996, the Venture repurchased $1,373,000 of such mortgage
receivables which represented the entire outstanding balance thereof. Since the
Venture had accounted for these transactions as financing arrangements, the
unpaid balance of the mortgage receivables in the amount of $2,826,000 is shown
as "Notes payable" in the consolidated balance sheet of the Venture at June 30,
1995.
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, 1996 and
1995, the amount of deferred interest income was $2,028,000 and $1,859,000,
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 1996 and
1995 was $1,604,000 and $1,471,000, respectively.
The summary consolidated balance sheets for the Venture as of June 30, 1996
and 1995 are as follows:
1996 1995
---------------
(in thousands)
Cash and equivalents........................ $ 267 $ 89
Land and development costs (including capitalized
interest of $6,706,000 and $6,736,000).... 26,710 26,863
Mortgages, accounts and notes receivable.... 5,212 7,732
Foreclosed real estate-net.................. 2,200 2,395
Other assets-net............................ 2,325 2,461
----------------
$ 36,714 $39,540
================
Notes payable............................... $ 576 $ 3,402
Partner advances and accrued interest
payable................................... 50,220 44,048
Accounts payable and accrued expenses....... 1,292 1,422
Partners' deficit........................... (15,374) (9,332)
-----------------
$ 36,714 $39,540
=================
Summary results of operations for the Venture for the fiscal years ended June
30, 1996, 1995 and 1994 are as follows:
1996 1995 1994
-----------------------
(in thousands)
Net sales........................ $ 677 $ 504 $ 536
-------------------------
Cost of sales.................... 365 191 163
Selling, general and
administrative costs........... 2,953 2,852 2,797
Interest-net..................... 3,401 2,956 1,178
-------------------------
Net loss......................... $(6,042) $(5,495) $(3,602)
=========================
As a partnership, the Venture is not subject to federal or state income taxes.
The Corporation's portion 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
Accounts, notes and long-term receivables-net at June 30, 1996 and 1995
consisted of the following:
1996 1995
--------------
(in thousands)
Rental and service fees receivable .................. $ 238 $13,905
Note receivable ..................................... -- 2,941
Equipment rental contracts and other notes receivable
(less unearned finance income of $59,000 in 1995) . -- 196
------- -------
238 17,042
Less: current portion (net of allowance for
doubtful accounts of $1,579,000 in 1995) .......... 238 14,457
------- -------
Long-term portion ................................... $ -- $ 2,585
=====================
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 at June 30, 1995 was $2,941,000. The promissory note is secured by
the assigned leases and other assets located at LIMA. This transaction did not
have a material effect on the Corporation's consolidated financial position or
results of operations.
The Corporation through its ownership interest in Hudson LLC provides various
services at airports throughout the United States and Canada. The Corporation
grants credit to customers based upon an analysis of its customers' financial
position and then-existing conditions in the aviation industry. Six of the
Corporation's customers had individual balances outstanding greater than 5%, and
aggregating 48%, of accounts receivable-net at June 30, 1995. During the three
fiscal years ended June 30, 1996 certain airline customers of the Corporation
filed for protection under the bankruptcy laws or ceased operations. Bad debt
expenses were $362,000, $178,000 and $160,000 for fiscal 1996, 1995 and 1994,
respectively.
19
23
Hudson General Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accrued expenses and other liabilities at June 30, 1996 and 1995 consisted of
the following:
1996 1995
---------------------
(in thousands)
Salaries and wages ........... $ 2,172 $ 5,353
Interest ..................... 767 956
Insurance .................... -- 6,022
Operating expenses payable ... -- 3,176
Customer advances and deposits -- 1,739
Retirement plan costs ........ 333 835
Other ........................ 376 3,152
---------------------
$ 3,648 $21,233
=====================
Maintenance and repair expenses were $7,536,000, $7,400,000 and $6,540,000 for
fiscal 1996, 1995 and 1994, respectively.
Interest income (excluding interest charged to the Venture) included in
revenues was $618,000, $615,000 and $374,000 for fiscal 1996, 1995 and 1994,
respectively.
5. PROPERTY, EQUIPMENT AND LEASEHOLD RIGHTS
The number of years over which major classes of assets are being depreciated
and amortized, and the costs and the related accumulated depreciation and
amortization thereof at June 30, 1996 and 1995 are set forth below:
Estimated
Useful Lives 1996 1995
------------- ----- ----
(in thousands)
Operating equipment ......................................... 2-12 $ 8,318 $ 70,232
Leasehold rights ............................................ 25 -- 2,400
Buildings ................................................... 14-20 -- 1,458
Office furnishings and equipment ............................ 3-10 669 3,193
Leasehold improvements ...................................... 2-28 216 5,829
-----------------------------
9,203 83,112
Accumulated depreciation and amortization ................... (5,775) (49,248)
--------------------
$ 3,428 $ 33,864
====================
At June 30, 1996, the Corporation leased operating equipment to Hudson LLC
with a net book value of $3,099,000.
Due to an early lease termination in fiscal 1995, the Corporation accelerated
the amortization of the remaining carrying value of leasehold improvements made
to a hangar facility at a domestic airport location in the amount of $744,000.
Such amount is included in "Depreciation and amortization" in the accompanying
consolidated statements of earnings.
6. CANADIAN OPERATIONS
The consolidated financial statements include: assets of $12,301,000 and
$14,895,000, and net assets of $7,655,000 and $8,866,000, at the end of fiscal
1995 and 1994, respectively; and revenues of $38,080,000, $34,376,000 and
$40,144,000; and earnings of $3,166,000, $3,352,000 and $1,717,000 in fiscal
1996, 1995 and 1994, respectively, related to the Corporation's Canadian
operations.
7. 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, 1996.
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.
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). At June 30, 1995, there were no direct borrowings and
$3,655,000 of outstanding letters of credit. The Corporation is a co-obligor
under the LLC Credit Agreement in an amount equal to the balance of outstanding
Debentures (see below). 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 Corporation has granted a
security interest to the banks in substantially all of its assets (excluding its
interest in the Venture).
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 are convertible at any
time prior to maturity, unless previously redeemed, into shares of the
Corporation's common stock at a conversion price of $32.75 per share (see Note
9), subject to adjustment in certain events. Interest on the Debentures is
payable semi-annually in January and July. The Debentures are redeemable at any
time at the option of the Corporation or Hudson LLC, in whole or in part, at
100.7% of the principal amount thereof until July 15, 1996 and thereafter at
par. The Debentures are subject to a mandatory sinking fund, beginning in July
1997, in annual installments of $1,500,000, which will retire 70% of the
Debentures prior to maturity. The Corporation previously repurchased $1,000,000
of the Debentures. In addition, as of June 30, 1996, $249,000 principal amount
of the Debentures had been converted into shares of the Corporation's common
stock. Such repurchased and converted amounts may, at the Corporation's and
Hudson LLC's discretion, be used to meet sinking fund obligations. The
Debentures are subordinate to all superior debt as defined in the indenture. At
June 30, 1996 and 1995 there were $28,751,000 and $29,000,000, respectively, of
the Debentures outstanding.
20
24
Hudson General Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On June 3, 1996, $15,825,000 aggregate principal amount of the Debentures was
called for redemption on July 22, 1996. On July 22, 1996, $2,166,000 of the
Debentures were redeemed, with the $13,659,000 balance having been converted
into shares of the Corporation's common stock on or prior to such redemption
date. In addition, on August 5, 1996 the balance of outstanding Debentures
(approximately $12,800,000) were called for redemption on September 4, 1996. On
September 4, 1996, $242,000 of the Debentures were redeemed, with the
$12,520,000 balance having been converted into shares of the Corporation's
common stock on or prior to such redemption date. At September 5, 1996 no
Debentures remained outstanding.
To the extent that the Debentures were converted into shares of the
Corporation's common stock, Hudson LLC will, on a subordinated basis (as
defined), be indebted to the Corporation. Hudson LLC is obligated to repay such
debt to the Corporation as follows: (i) to the extent that proceeds received by
Hudson LLC at the closing of the Transaction were not used to redeem Debentures;
(ii) to the extent that deferred payments made by LAGS are received by Hudson
LLC (see Note 2); (iii) $500,000 on July 15, 1997; and (iv) $1,500,000 on July
15, 1998 and on each July 15th thereafter until the entire principal balance is
satisfied.
8. INCOME TAXES
Provision (benefit) for income taxes consisted of the following for the years
ended June 30, 1996, 1995 and 1994:
1996 1995 1994
-----------------------
(in thousands)
Federal:
Current........................... $3,415 $ 847 $3,855
Deferred.......................... 1,485 (137) (946)
Foreign:
Current........................... 324 - -
Deferred.......................... 449 (1,300) -
State:
Current........................... 789 313 1,791
Deferred.......................... 721 (73) (291)
------------------------
$7,183 $ (350) $4,409
========================
A reconciliation of the provision (benefit) for income taxes to the amount
computed by applying the statutory federal income tax rate to earnings before
provision (benefit) for income taxes and cumulative effect of change in the
method of accounting for income taxes for the years ended June 30, 1996, 1995
and 1994 follows:
1996 1995 1994
-----------------------------
(in thousands)
Tax at federal statutory rate ............................... $6,001 $ 1,442 $3,984
Increase (decrease) in income taxes resulting from:
Reevaluation of valuation allowance ....................... (960) (1,300) --
Utilization of foreign net operating loss carry-
forwards and depreciation differences ................... -- (804) (752)
Foreign tax differential .................................. 395 204 168
State income taxes, net of Federal income
tax effect .............................................. 997 158 990
Provision for future repatriation of
Canadian earnings ....................................... 750 -- --
Other--net ................................................ -- (50) 19
----------------------------
Provision (benefit) for income taxes ........................ $7,183 $ (350) $4,409
============================
Deferred tax assets (liabilities) are comprised of the following as of June
30, 1996 and 1995:
1996 1995
-------------
(in thousands)
Deferred tax assets:
Reserves for doubtful accounts, claims, etc ............... $ 264 $ 860
Retirement plans ............................................ -- 368
Property, equipment and leasehold rights,
principally depreciation--foreign ......................... -- 2,235
Accrued insurance ........................................... -- 2,099
-------------------
Current deferred tax assets ............................. 264 5,562
-------------------
State income taxes ........................................ 137 618
Difference in the Venture's book and tax year-end ......... 554 545
-------------------
Noncurrent deferred tax assets .......................... 691 1,163
-------------------
955 6,725
Valuation allowance ....................................... -- (960)
-------------------
Net deferred tax assets ................................. 955 5,765
===================
Deferred tax liabilities:
Difference between book and tax carrying value
of Hudson LLC.............................. .............. (65) -
Property, equipment and leasehold rights,
principally depreciation--domestic.......... ............. (407) (2,463)
Provision for future repatriation of Canadian earnings (750) -
Interest capitalized on financial statements. .............. (495) (557)
---------------------
Noncurrent deferred tax liabilities...... .............. (1,717) (3,020)
---------------------
Net deferred tax assets (liabilities).... .............. $ (762) $ 2,745
=====================
Effective July 1, 1993, the Corporation adopted SFAS No. 109, "Accounting for
Income Taxes", and has reported the cumulative effect of the change in the
method of accounting for income taxes in the consolidated statement of earnings
for fiscal 1994, without restating prior period financial statements.
SFAS No. 109 requires a change from the deferred method under APB Opinion 11
to the asset and liability method of accounting for income taxes. Under the
asset and liability method of SFAS No. 109, deferred income taxes are 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.
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 and 1995 was a decrease of $960,000 and $2,104,000, respectively. The
decrease reflects: (i) the tax effect resulting from utilization of a portion of
the Corporation's Canadian depreciation differences to offset its provision for
foreign income taxes in the amount of $804,000 for fiscal 1995; and (ii) the
recognition of $960,000 and $1,300,000 for fiscal 1996 and 1995, respectively,
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.
21
25
Hudson General Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, at 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 has
provided in fiscal 1996 for U.S. income taxes of $750,000.
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.
9. 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 1996 and 1995 was as follows:
Outstanding June 30, 1994............................ 71,600
Exercised ($14.79 per share)......................... (3,000)
Canceled ($14.79 per share).......................... (6,500)
Canceled ($19.07 per share).......................... (600)
-------
Outstanding June 30, 1995............................ 61,500
Exercised ($14.79 per share)......................... (10,000)
Exercised ($19.07 per share)......................... (1,900)
Canceled ($19.07 per share).......................... (200)
-------
Outstanding June 30, 1996............................ 49,400
=======
Limited Rights were also granted in conjunction with Options granted in May
1990 and June 1991 of which 45,000 ($14.79 per share) and 4,400 ($19.07 per
share) were outstanding at June 30, 1996. At June 30, 1996 the aggregate Option
price and quoted market value of Corporation stock subject to outstanding
Options were $749,000 and $1,748,000, respectively. All outstanding Options and
Rights were granted with a term of ten years and are currently exercisable.
The Committee was also authorized to grant additional separate stock
appreciation rights (Independent Rights), which are not connected with any
Option.
Activity in Independent Rights during fiscal 1996 and 1995 was as follows:
Outstanding June 30, 1995 and 1994................... 18,000
Exercised ($17.32 per share)......................... (18,000)
-------
Outstanding June 30, 1996............................ -
=======
(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 1996 and 1995 was as follows:
Outstanding June 30, 1994............................ 51,900
Canceled ($17.00 per share).......................... (2,000)
Canceled ($19.88 per share).......................... (1,100)
------
Outstanding June 30, 1995............................ 48,800
Exercised ($17.00 per share)......................... (36,000)
Exercised ($19.88 per share)......................... (4,100)
Canceled ($19.88 per share).......................... (400)
-------
Outstanding June 30, 1996............................ 8,300
=======
Limited Rights were also granted in conjunction with ISO's granted in June
1991 of which 8,300 ($19.88 per share) were outstanding at June 30, 1996. At
June 30, 1996 the aggregate ISO price and quoted market value of Corporation
stock subject to outstanding ISO's were $165,000 and $294,000, respectively. All
outstanding ISO's were granted with a term of ten years and are currently
exercisable.
(c) Common Stock Reserved: Common shares were reserved for issuance at June
30, 1996 as follows:
Conversion of convertible debentures................. 877,893
Exercise of incentive stock options-1981 Plan........ 8,300
Exercise of non-qualified stock options-1981 Plan.... 49,400
-------
Total.............................................. 935,593
=======
(d) In April 1995, the Board of Directors approved the repurchase of up to
150,000 shares of the Corporation's common stock from time to time in either
open market or privately negotiated transactions. As of June 30, 1996 the
Corporation had repurchased 114,300 shares in the open market for an aggregate
purchase price of $2,010,000 pursuant to this authorization.
10. 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. Each year the Corporation contributes to the Plan a discretionary
contribution and 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. During fiscal 1996, 1995
and 1994, the Corporation contributed $798,000, $845,000 and $635,000,
respectively, to the Plan representing employer matching and discretionary
contributions.
22
26
During fiscal 1995, the Corporation established a Group Registered Retirement
Savings Plan (RRSP) covering substantially all of its Canadian employees not
subject to collective bargaining agreements. Under the RRSP the Corporation
contributes a discretionary contribution. During fiscal 1996 and 1995, the
Corporation contributed $79,000 and $61,000, respectively, to the RRSP.
Net expense related to the Corporation's retirement plans was $877,000,
$701,000 and $844,000 for fiscal 1996, 1995 and 1994, respectively.
11. COMMITMENTS AND CONTINGENCIES
(A) LEASES
Minimum rental payments for future fiscal years under non-cancelable operating
leases are: $395,000 in 1997; $404,000 in 1998; $413,000 in 1999; $421,000 in
2000; $430,000 in 2001; and $662,000 thereafter.
Total rental expense incurred amounted to $5,740,000, $6,592,000 and
$7,237,000 for fiscal 1996, 1995 and 1994 (excluding sublease income amounting
to $517,000, $1,337,000 and $3,411,000 in fiscal 1996, 1995 and 1994),
respectively.
(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, are 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 seeks
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, has been
adjourned until January 1997.
Innotech (which due to a name change is now called Aerospace Realties (1986)
Limited (Aerospace)) had agreed to defend and indemnify the Corporation against
claims of whatever nature asserted in connection with, arising out of or
resulting from the fuel supply agreement with Texaco. By a letter dated February
15, 1996, the Corporation was notified by Aerospace that Aerospace has entered
into a liquidation phase and can no longer defray the cost of defending the
Texaco Lawsuit or pay for any damages resulting therefrom.
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. The
Corporation's management believes, and counsel for the Corporation has advised
based on available facts, that the Corporation will successfully defend this
action.
12. RELATED PARTY TRANSACTION
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. The agreement pursuant to which such services are to be
rendered expires in March 1997. In connection with the Transaction, such
investment banking firm was paid $517,000 for services rendered in fiscal 1996.
If the LAGS Option is exercised, such investment banking firm will be entitled
to a fee of 2% of the option price.
13. QUARTERLY FINANCIAL DATA (Unaudited)
The following table sets forth unaudited quarterly financial information for
fiscal 1996 and 1995:
First Second Third Fourth
Quarter Quarter Quarter Quarter (a)
-----------------------------------------------------
(in thousands, except per share amounts)
1996
Revenues............................................................ $34,193 $41,052 $56,510 $25,963
Gross profit........................................................ 5,515 8,675 16,361 6,633
Net earnings........................................................ 480 2,395 6,059 1,532
Earnings per share, primary:
Net earnings...................................................... $ .41 $ 2.04 $ 5.10 $ 1.28
==================================================
Earnings per share, fully diluted:
Net earnings...................................................... $ .37 $ 1.30 $ 3.06 $ .83
==================================================
1995
Revenues............................................................ $31,348 $33,177 $37,953 $32,975
Gross profit........................................................ 4,446 5,296 7,008 5,397
Net earnings........................................................ 235 633 3,474(b) 251
Earnings per share, primary:
Net earnings...................................................... $ .19 $ .50 $ 2.76 $ .21
==================================================
Earnings per share, fully diluted:
Net earnings...................................................... $ .19 $ .43 $ 1.75 $ .21
==================================================
(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 the recognition of $1,300 of deferred tax assets
(see Note 8).
23
27
INDEPENDENT AUDITORS' REPORT
[KPMG PEAT MARWICK LLP LETTERHEAD]
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, 1996 and 1995 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, 1996. 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, 1996 and 1995 and the results
of their operations and their cash flows for each of the years in the three year
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the
Corporation adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," on a prospective basis in fiscal 1994.
KPMG PEAT MARWICK LLP
- -------------------------------------
Jericho, New York August 16, 1996, except for Note 7, which is as of September
5, 1996
24
28
CORPORATE INFORMATION
DIRECTORS
Jay B. Langner
Chairman
Milton H. Dresner
Developer, Builder
and Private Investor
Edward J. Rosenthal
Vice Chairman
Cramer Rosenthal McGlynn, Inc.
Hans H. Sammer
Consultant, Retired Director,
Investment Banking Group
Prudential Securities Incorporated
Richard D. Segal
Chairman and Chief Executive Officer
Seavest Inc.
Stanley S. Shuman
Executive Vice President
and Managing Director
Allen & Company Incorporated
TRANSFER AGENT AND REGISTRAR
First National Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
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 stockholders 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
Michael Rubin
President and
Principal Financial Officer
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
Donald S. Croot
Vice President--
Canadian Operations
Rocco Daloia
Vice President--Maintenance and Facilities
Barry I. Regenstein
Vice President and Controller
Noah E. Rockowitz
Vice President, General Counsel and Secretary
Henry A. Satinskas
Vice President--Transportation Services
DIVISIONAL OFFICERS
United States
Salvatore J. Altizio, Jr.
Regional Vice President
David L. Finch
Vice President--
Contract Services
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
Canada
Thomas D. Culp
Vice President--Marketing
Audrey J. Laurin
Vice President and Controller
Denis A. A. Lawn
Vice President--Operations
CORPORATE HEADQUARTERS
111 Great Neck Road
Great Neck, New York 11021
(516) 487-8610
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
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
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[HUDSON GENERAL LOGO]
HUDSON GENERAL CORPORATION
111 Great Neck Road
P.O. Box 355
Great Neck, New York 11022