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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5896
HUDSON GENERAL CORPORATION
(Exact Name of Registrant as specified in its charter)
Delaware 13-1947395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Great Neck Road, Great Neck, N.Y. 11021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (5l6) 487-8610
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $1 par value American Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of Registrant
based on the closing price on July 31, 1998 was $72,427,918.
The number of shares outstanding (net of treasury stock) of the Registrant's
common stock as of July 31, 1998 was 1,744,949 shares.
Specific portions of the following documents are incorporated herein by
reference in the parts hereof indicated, and only such specific portions are to
be deemed filed as part of this report:
Document Part
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1998 Proxy Statement of Registrant (to be filed with the Commission pursuant to
Regulation 14A no later than 120 days after the close of its fiscal year) III
Registrant's 1998 Annual Report to Shareholders I, II, IV
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PART I
ITEM 1. BUSINESS
General Development of Business
Hudson General Corporation (the "Corporation" or "Registrant")
was organized in Delaware in 1961. Effective June 1, 1996, pursuant to the terms
of a Unit Purchase and Option Agreement dated February 27, 1996 (the Purchase
Agreement) between the Corporation and Lufthansa Airport and Ground Services
GmbH (LAGS), a German corporation and an indirect wholly-owned subsidiary of
Deutsche Lufthansa AG, the Corporation transferred substantially all of the
assets and liabilities of its aviation services business (the Aviation Business)
to Hudson General LLC (Hudson LLC), a newly formed limited liability company. In
exchange for the transfer of such assets and liabilities and the assumption by
Hudson LLC, as co-obligor with the Corporation, of all of the Corporation's 7%
convertible subordinated debentures, the Corporation received a 74% interest in
Hudson LLC. In addition, Hudson LLC sold LAGS a 26% interest in Hudson LLC, for
a purchase price of $23,686,000 in cash (after certain adjustments), of which
$15,848,000 was paid at the closing, and deferred payments of $2,650,000 and
$5,188,000 plus interest thereon were made, respectively, in September 1996 and
December 1996. The Purchase Agreement, as amended, provides LAGS an option (the
LAGS Option), exercisable on October 1 of each year through 1999, effective as
of the preceding July 1, pursuant to which LAGS may increase its equity
ownership in Hudson LLC from 26% to a maximum of 49%, for a price based on a
formula related to the average earnings of the Aviation Business over the four
fiscal years preceding the exercise of the option, subject to certain minimum
and maximum amounts. On September 16, 1998, the Corporation was advised that the
Supervisory Board of Deutsche Lufthansa AG approved the exercise by its
subsidiary LAGS USA Inc., of the LAGS Option to increase its equity interest in
Hudson LLC from 26% to 49%.
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As a result, the Corporation expects LAGS to give notice of its exercise of the
LAGS Option on or about October 1, 1998. The exercise price is approximately
$29,600,000.
Hudson LLC is principally engaged in providing a broad range
of services to the aviation industry. The services, which are conducted by
Hudson LLC and its subsidiaries, include aircraft ground handling; aircraft
fueling; fuel management; ground transportation; snow removal; cargo
warehousing; and sale, leasing and maintenance of airline ground support
equipment. In addition to its interest in Hudson LLC, the Corporation is a 50%
partner with Oxford First Corporation in a joint venture for the development and
sale of land on the Island of Hawaii (see Note 3 to Item 14(a)(1) Financial
Statements).
Narrative Description of Business
Hudson LLC's snow removal and aircraft de-icing services are
seasonal in nature. The majority of the results of these operations are normally
reflected in the second and third quarters of the Corporation's fiscal year, and
fluctuate depending upon the severity of the winter season. Additional
information required to be provided under this item is incorporated by reference
from pages 5-7 of the Registrant's 1998 Annual Report to Shareholders.
General Information
The Corporation does not spend a material amount for research
and development activities.
During the year ended June 30, 1996, sources of the
Corporation's revenues which exceeded 10% of consolidated revenues were:
aircraft ground handling services (including de-icing) $85,948,000; aircraft
fueling services (including fixed base operations) $23,701,000; ground
transportation services $21,108,000; and snow removal services $17,487,000.
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(Note: In fiscal 1996, revenues are for the eleven months ended May 31, 1996.
Foreign revenues included above are translated at the average rates of exchange
during the fiscal year.)
No customer of the Corporation accounted for more than 10% of
consolidated revenues during fiscal 1998.
Hudson LLC's services are generally subject to competitive
bidding, and Hudson LLC competes principally with airlines and other aviation
services companies, some of which are larger and have resources greater than
Hudson LLC. The major bases of competition are the prices at which services are
offered and the quality and efficiency in the performance of services.
The compliance with federal, state and local provisions which
have been enacted or adopted regulating the discharge of materials into the
environment did not have a material effect upon the Corporation's or Hudson
LLC's capital expenditures or results of operations for fiscal 1998 and 1997, or
competitive position. However, the federal government and many state and local
governments have enacted or proposed legislation and regulations with respect to
storage facilities for fuel, petroleum-based products and chemicals, the
disposal of hazardous waste materials, storm water discharges, and financial
responsibility for possible liability exposures relating to fuel storage
facilities. Compliance with such legislation and regulations has resulted in
expenditures by the Corporation and Hudson LLC, including expenditures for the
testing, decommissioning and/or replacement of certain of its fuel and de-icing
fluid storage facilities, and the cleanup of fuel spills. It is anticipated that
additional such expenditures by Hudson LLC, the amount of which is presently not
expected to be material, will be required.
In addition, airport authorities are coming under increasing
pressure to clean up previous contamination at their facilities, and are seeking
financial contributions from airport tenants and companies which
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operate at their airports. The Corporation cannot predict at this time the
amount, if any, that it or Hudson LLC may be required to pay in connection with
such airport authority initiatives.
The Corporation and Hudson LLC employ approximately 45 and
4,600 persons, respectively.
Financial Information About Foreign and Domestic Operations and Export Sales
The Corporation, through its ownership interest in Hudson LLC,
operates in only one industry segment. For information as to foreign operations,
see Note 4 to Item 14(a)(1) Financial Statements and Note 5 to Item 14(a)(2)
Financial Statements of Hudson LLC. For information relating to the
Corporation's investment in a joint venture to develop and sell land in Hawaii
(the Venture), see Note 3 to Item 14(a)(1) Financial Statements.
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ITEM 2. PROPERTIES
The Corporation's executive offices at 111 Great Neck Road,
Great Neck, New York contain approximately 14,000 square feet and are under
lease through December 31, 2002.
Hudson LLC leases office, warehouse, hangar and maintenance
shop space as well as fuel storage facilities at various airport locations in
the United States and Canada. These leases expire at various dates through 2009
and contain various renewal options through 2020. A portion of this leased space
has been sublet to non-affiliated sublessees. The properties owned and leased by
Hudson LLC are suitable and adequate to conduct its business.
For information relating to the Corporation's interest in land
in Hawaii, see Note 3 to Item 14(a)(1) Financial Statements and page 7 of the
Registrant's 1998 Annual Report to Shareholders.
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ITEM 3. LEGAL PROCEEDINGS
In 1988, Texaco Canada Inc. (Texaco) (now known as
McColl-Frontenac Inc.) instituted a lawsuit (the Texaco Lawsuit) in the Supreme
Court of Ontario, Canada against the Corporation, the Corporation's Canadian
subsidiary (now owned by Hudson LLC) and Petro-Canada Inc. (the corporation
which supplied aviation fuel for the Corporation's Canadian fixed base
operations). The Texaco Lawsuit's allegations, as amended, were that the
defendants interfered with contractual and fiduciary relations, conspired to
injure, and induced the breach of a fuel supply agreement between Texaco and
Innotech Aviation Limited (Innotech) in connection with the purchase by the
Corporation from Innotech in 1984 of certain assets of Innotech's airport ground
services business. The Texaco Lawsuit sought compensatory and punitive damages
totaling $110,000,000 (Canadian) (approximately $80,000,000 (U.S.)) plus all
profits earned by the defendants subsequent to the alleged breach. The trial,
which began in May 1996, concluded after several adjournments on May 7, 1997. On
May 25, 1998, the trial judge issued an oral decision in the Corporation's
favor.
In finding that there was no liability on the part of the
Corporation, its Canadian subsidiary or Petro-Canada, the judge ruled that none
of these parties had induced any breach of the fuel supply agreement, nor had
any of them interfered with the plaintiff's contractual and fiduciary relations.
The judge also ruled that Innotech did not breach its fuel supply agreement with
Texaco, nor was there any fiduciary relationship between Innotech and Texaco.
The trial judge rendered an oral decision, and Texaco, which
has served a Notice of Appeal, cannot pursue any appeal until the decision has
been issued in written form. The decision dealt solely with the issue of
liability, and a separate hearing before another judicial officer would have to
be held on the issue of damages. It is expected that a hearing on damages
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would not be held unless Texaco decides to pursue, and is successful in, its
appeal of the liability decision.
The Corporation has agreed to indemnify and hold harmless
Hudson LLC, LAGS and each affiliate of LAGS against all losses related to the
Texaco Lawsuit.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- Not applicable
ADDITIONAL ITEM
EXECUTIVE OFFICERS OF THE CORPORATION
-------------------------------------
Name Age Position with Corporation
---- --- -------------------------
Jay B. Langner 68 Chairman of the Board, Chief Executive Officer and
Director
Richard D. Segal 44 Vice Chairman of the Board and Director
Michael Rubin 51 President and Director
Paul R. Pollack 56 Executive Vice President, Chief Operating Officer
and Director
Fernando DiBenedetto 49 Senior Vice President - Operations
Raymond J. Rieder 48 Senior Vice President and Chief Marketing
Officer
Noah E. Rockowitz 49 Senior Vice President, Secretary and General
Counsel
Barry I. Regenstein 41 Vice President, Chief Financial Officer and
Controller
No family relationships exist among the executive officers of the
Corporation. Each of the executive officers holds office at the pleasure of the
Board of Directors, except as noted below.
Mr. Langner has served as a Director of the Corporation since 1961
and as Chairman since 1977. He served as President from 1989 until September
1996, and previously served in such capacity from 1961 until 1979. The
Corporation has an employment contract with Mr. Langner pursuant to which Mr.
Langner has agreed to render services to the Corporation as Chairman and Chief
Executive Officer for a period ending January 31, 2001.
Mr. Segal has served as a Director of the Corporation since 1981 and
was elected Vice Chairman of the Board in February 1998. He is Chairman and
Chief Executive Officer of Seavest Inc., a private investment company.
Mr. Rubin was elected a Director of the Corporation in November 1996.
Mr. Rubin has served as President of the Corporation since September 1996 and
served from 1990 until such date as Executive Vice President and until July
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1997 as Chief Financial Officer of the Corporation. Previously, Mr. Rubin had
been Vice President-Finance since 1985 and Treasurer from 1983 until July 1998.
He has been employed in various capacities with the Corporation since 1971. Mr.
Rubin is a Certified Public Accountant.
Mr. Pollack was elected a Director of the Corporation in November
1996. Mr. Pollack has served as Executive Vice President and Chief Operating
Officer of the Corporation since 1990, and prior thereto as Senior Vice
President since 1984. He has served as President of Hudson LLC since September
1996. He has been employed in various capacities with the Corporation, including
as a divisional officer, since 1968. Mr. Pollack is a Certified Public
Accountant.
Mr. DiBenedetto has served as Senior Vice President-Operations since
1994. Prior thereto he was Vice President-Operations since 1984. He has been
employed in various capacities with the Corporation, including as a divisional
officer, since 1970.
Mr. Rieder has served as Senior Vice President and Chief Marketing
Officer of the Corporation since 1990, and prior thereto as Vice President
Marketing since 1984. Mr. Rieder has served as Executive Vice President of
Hudson LLC since September 1996. He has been employed in various capacities with
the Corporation, including as a divisional officer, since 1967.
Mr. Rockowitz was elected Senior Vice President of the Corporation in
July 1998 and has served as Vice President-General Counsel since 1985 and as
Secretary since 1986. Prior to joining the Corporation in 1985, he had been
Corporate Secretary and Assistant General Counsel of Belco Petroleum Corporation
since 1978.
Mr. Regenstein was elected Chief Financial Officer of the Corporation
in July 1997 and has served as a Vice President since 1994 and as the
Corporation's Controller since 1987. He has been employed in various capacities
with the Corporation since 1982. Mr. Regenstein is a Certified Public
Accountant.
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The Corporation has employment contracts with Messrs. Rubin, Pollack
and Rieder which currently extend until December 31, 1998 and are subject to
extension for additional three year periods unless on or before the September
30th preceding any then-existing expiration date, the Corporation notifies the
executive that it elects not to so extend the term. The Corporation also has
employment contracts with Messrs. DiBenedetto, Rockowitz and Regenstein which
currently extend until December 31, 1999 and are subject to extension for
additional two year periods unless on or before the September 30th preceding any
then-existing expiration date, the Corporation notifies the executive that it
elects not to so extend the term.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information required to be provided under Part II, Item 5(a)
and (c) is incorporated by reference from page 12 of the Registrant's 1998
Annual Report to Shareholders under the caption "Selected Consolidated Financial
Data". At June 30, 1998, there were 182 holders of record of the Corporation's
common stock.
The Corporation's Revolving Credit Agreement, as amended (Credit
Agreement), permits the payment of dividends (see Note 6 to Item 14(a)(1)
Financial Statements) and the purchase, redemption or retirement by the
Corporation of its stock so long as certain financial covenants are maintained.
In fiscal 1997, the Board of Directors authorized the repurchase
of up to 400,000 shares of the Corporation's common stock, which purchases could
be made from time to time in either open market or privately negotiated
transactions. Prior to the fiscal 1997 authorizations, the Corporation still had
authority to repurchase up to 35,700 shares from a previous authorization.
During fiscal 1997, the Corporation repurchased 243,000 shares in the open
market for an aggregate purchase price of $9,152,000. No shares were repurchased
by the Corporation during fiscal 1998.
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ITEM 6. SELECTED FINANCIAL DATA
The information required to be provided under Part II, Item 6 is
incorporated by reference from page 12 of the Registrant's 1998 Annual Report to
Shareholders under the caption "Selected Consolidated Financial Data".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required to be provided under Part II, Item 7 is
incorporated by reference from pages 8-11 of the Registrant's 1998 Annual Report
to Shareholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information relating to the Corporation's marketable securities,
see Note 1 to Item 14(a)(1) Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and the required financial
statement schedule of the Corporation and the independent auditors' reports
thereon of KPMG Peat Marwick LLP, independent auditors, for the Corporation's
fiscal years ended June 30, 1998, 1997 and 1996 are filed pursuant to Items
14(a)(1) and (2) of this Report. The financial statements and the required
financial statement schedule of Hudson LLC and the independent auditors' report
thereon of KPMG Peat Marwick LLP, independent auditors, for the fiscal years
ended June 30, 1998, 1997 and the month ended June 30, 1996 and the financial
statements and the required financial statement schedule of the Venture and the
independent auditors' report thereon of KPMG Peat Marwick LLP, independent
auditors, for the fiscal years ended June 30, 1998, 1997 and 1996, are filed
pursuant to Item 14(d) of this Report. All such financial statements and
financial statement schedules are
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included herein, except for the consolidated financial statements of the
Corporation which are incorporated herein by reference.
Selected quarterly financial data of the Registrant for the fiscal
years ended June 30, 1998 and 1997 appears in Note 12 to Item 14(a)(1) Financial
Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE - Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be provided under Part III, Item 10,
relative to Directors of the Registrant is incorporated by reference from the
Registrant's 1998 definitive proxy statement to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A no later than
120 days after the close of its fiscal year and, relative to executive officers,
to Part I of this report under the caption "Executive Officers of the
Corporation".
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be provided under Part III, Items 11, 12
and 13 is incorporated by reference from the Registrant's 1998 definitive proxy
statement to be filed with the Commission pursuant to Regulation 14A no later
than 120 days after the close of its fiscal year.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)
FINANCIAL STATEMENTS OF THE REGISTRANT, all of which are incorporated herein by
reference to the Registrant's 1998 Annual Report to Shareholders.
Independent Auditors' Report of KPMG Peat Marwick LLP, independent auditors,
appearing on page 24 of the 1998 Annual Report to Shareholders.
Consolidated Balance Sheets of Hudson General Corporation and Subsidiaries at
June 30, 1998 and 1997, appearing on page 14 of the 1998 Annual Report to
Shareholders.
Consolidated Statements of Earnings of Hudson General Corporation and
Subsidiaries for the Years Ended June 30, 1998, 1997 and 1996, appearing on page
13 of the 1998 Annual Report to Shareholders.
Consolidated Statements of Cash Flows of Hudson General Corporation and
Subsidiaries for the Years Ended June 30, 1998, 1997 and 1996, appearing on page
16 of the 1998 Annual Report to Shareholders.
Consolidated Statements of Stockholders' Equity of Hudson General Corporation
and Subsidiaries for the Years Ended June 30, 1998, 1997 and 1996, appearing on
page 15 of the 1998 Annual Report to Shareholders.
Notes to Consolidated Financial Statements appearing on pages 17-24 of the 1998
Annual Report to Shareholders.
Location
in 10-K
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(a)(2)
FINANCIAL STATEMENT SCHEDULE OF THE REGISTRANT FOR THE YEARS ENDED
JUNE 30, 1998, 1997 AND 1996
Independent Auditors' Report of KPMG Peat Marwick LLP on Financial Statement F1
Schedule
II - Valuation and Qualifying Accounts F2
FINANCIAL STATEMENTS OF HUDSON GENERAL LLC AND SUBSIDIARIES:
Independent Auditors' Report of KPMG Peat Marwick LLP. F4
Consolidated Balance Sheets of Hudson General LLC and Subsidiaries at June 30, F6
1998 and 1997.
Consolidated Statements of Earnings and Comprehensive Income of Hudson General F5
LLC and Subsidiaries for the Years Ended June 30, 1998, 1997 and the Period
June 1, 1996 (Inception) to June 30, 1996.
Consolidated Statements of Members' Equity of Hudson General LLC and F7
Subsidiaries for the Years Ended June 30, 1998, 1997 and the Period June 1,
1996 (Inception) to June 30, 1996.
Consolidated Statements of Cash Flows of Hudson General LLC and F8
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Subsidiaries for the Years Ended June 30, 1998, 1997 and the Period June 1, 1996
(Inception) to June 30, 1996.
Notes to Consolidated Financial Statements. F9-F17
FINANCIAL STATEMENT SCHEDULE OF HUDSON GENERAL LLC AND
SUBSIDIARIES FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND THE
MONTH ENDED JUNE 30, 1996:
II - Valuation and Qualifying Accounts F18
FINANCIAL STATEMENTS OF KOHALA JOINT VENTURE AND SUBSIDIARY:
Independent Auditors' Report of KPMG Peat Marwick LLP. F20
Consolidated Balance Sheets of Kohala Joint Venture and Subsidiary at F21
June 30, 1998 and 1997.
Consolidated Statements of Operations and Partners' Deficit of Kohala Joint F22
Venture and Subsidiary for the Years Ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows of Kohala Joint Venture and Subsidiary for F23
the Years Ended June 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements. F24-F30
FINANCIAL STATEMENT SCHEDULE OF KOHALA JOINT VENTURE AND
SUBSIDIARY FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996:
II - Valuation and Qualifying Accounts F31
Schedules other than those listed above are omitted because of the absence of
the conditions under which they are required or because the information required
therein is set forth in all material respects in the financial statements,
including the notes thereto.
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(a)(3) Exhibits
EXHIBIT
NO. EXHIBIT DESCRIPTION
------- ------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Registrant, as
amended to date, filed as Exhibit 3.1 to Quarterly Report on
Form 10-Q for the quarter ended December 31, 1986, incorporated
herein by reference.
3.2 By-laws of the Registrant, as amended to date. Filed as Exhibit
3.2(b) to Current Report on Form 8-K dated as of July 24, 1998,
incorporated herein by reference.
4.4(a) Revolving Credit Agreement dated as of November 25, 1992 among
Hudson General Aviation Services Inc., various banking
institutions named therein and Bank of Boston Canada, as
agent, filed as Exhibit 4.4(i) to Quarterly Report on Form 10-Q
for the quarter ended March 31, 1993, incorporated herein by
reference.
4.4(b) First Amendment to the Revolving Credit Agreement dated as of
November 25, 1992 among Hudson General Aviation Services Inc.,
various banking institutions named therein and The Chase
Manhattan Bank of Canada, as successor agent, dated as of March
15, 1995, filed as Exhibit 4.4(f) to Annual Report on Form 10-K
for the fiscal year ended June 30, 1995, incorporated herein by
reference.
4.4(c) Second Amendment to the Revolving Credit Agreement dated as of
November 25, 1992, among Hudson General Aviation Services Inc.,
ABN Amro Bank Canada and The Chase Manhattan Bank of Canada
individually and as successor agent, dated as of June 1, 1996,
filed as Exhibit 4.4(c) to Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, incorporated herein by
reference.
4.4(d) Revolving Credit Agreement dated as of June 1, 1996 among
Hudson General Corporation and The First National Bank of
Boston, European American Bank, The Chase Manhattan Bank, N.A.
and The First National Bank of Boston, as agent, filed as
Exhibit 4.4(d) to Annual Report on Form 10-K for the fiscal
year ended June 30, 1996, incorporated herein by reference.
4.4(e) Amended and Restated Revolving Credit Agreement dated as of
November 25, 1992 among Hudson General Corporation, Hudson
General LLC and The First National Bank of Boston, European
American Bank, The Chase Manhattan Bank, N.A. and The First
National Bank of Boston, as agent, as amended and restated as
of June 1, 1996, filed as Exhibit 4.4(e) to Annual Report on
Form 10-K for the fiscal year ended June 30, 1996, incorporated
herein by reference.
10.1(a) Development Agreement dated April 29, 1981 between Kahua Ranch,
Limited, and the Registrant, filed as Exhibit 3 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1981,
incorporated herein by reference.
10.1(b) Amended and Restated Joint Venture Agreement dated April 29,
1981 between Hudson Kohala Inc. and The Hilton Head Company of
Hawaii
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Inc. (now Oxford Kohala, Inc.), filed as Exhibit 4 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1981,
incorporated herein by reference.
10.1(c) First Amendment to the Joint Venture Agreement, Amendment and
Restatement dated April 29, 1981, such Amendment being
effective as of June 30, 1984, filed as Exhibit 10 to Quarterly
Report on Form 10-Q for the quarter ended September 30, 1984,
incorporated herein by reference.
10.1(d) Agreement constituting an amendment to the Joint Venture
Agreement, Amendment and Restatement dated April 29, 1981,
dated November 2, 1990 among the Registrant, Hudson Kohala
Inc., Oxford Kohala, Inc. and Oxford First Corporation relating
to receivables of the Kohala Joint Venture, filed as Exhibit
10.1(f) to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990, incorporated herein by reference.
10.1(e) Agreement constituting an amendment to the Joint Venture
Agreement, Amendment and Restatement dated April 29, 1981,
dated September 5, 1991 among the Registrant, Hudson Kohala
Inc., Oxford Kohala, Inc. and Oxford First Corporation relating
to distributions from the Kohala Joint Venture, filed as
Exhibit 10.1(g) to Annual Report on Form 10-K for the fiscal
year ended June 30, 1991, incorporated herein by reference.
10.1(f) Agreement constituting an amendment to the Joint Venture
Agreement, Amendment and Restatement dated April 29, 1981,
dated September 26, 1991 among the Registrant, Hudson Kohala
Inc., Oxford Kohala, Inc. and Oxford First Corporation relating
to distributions from the Kohala Joint Venture, filed as
Exhibit 10.1(h) to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1991, incorporated herein by
reference.
10.1(g) Second Amendment to the Joint Venture Agreement, Amendment and
Restatement dated April 29, 1981, such Amendment being
effective as of October 1, 1994, filed as Exhibit 10.1(i) to
Quarterly Report on Form 10-Q for the quarter ended September
30, 1994, incorporated herein by reference.
10.2* 1981 Non-Qualified Stock Option and Stock Appreciation Rights
Plan, filed as Exhibit 15.1 to Form S-8 Registration Statement
under the Securities Act of 1933, Registration No. 2-75137,
incorporated herein by reference.
10.3* 1981 Incentive Stock Option and Stock Appreciation Rights Plan,
filed as Exhibit 15.2 to Form S-8 Registration Statement under
the Securities Act of 1933, Registration No. 2-75137,
incorporated herein by reference.
10.4(a)* Form of Severance Agreement, dated as of June 3, 1986, between
the Registrant and Michael Rubin, filed as Exhibit 10.5(a) to
Annual Report on Form 10-K for the fiscal year ended June 30,
1988, incorporated herein by reference.
10.4(b)* Amendment effective January 23, 1996, amending the Form of
Severance Agreement between the Registrant and Michael Rubin
dated as of June 3, 1986, filed as Exhibit 10.4(c) to Quarterly
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Report on Form 10-Q for the quarter ended March 31, 1996,
incorporated herein by reference.
10.4(c)* Amendment effective February 6, 1998, amending the Form of
Severance Agreement between the Registrant and Michael Rubin,
dated as of June 3, 1986, as amended, filed as Exhibit 10.4(d)
to Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, incorporated herein by reference.
10.4(d)* Amended schedule of executive officers entitled to benefits of
Severance Agreements, filed as Exhibit 10.4(e) to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998,
incorporated herein by reference.
10.5(a)* Employment Agreement dated July 28, 1988, between the
Registrant and Jay B. Langner, filed as Exhibit 10.6(a) to
Annual Report on Form 10-K for the fiscal year ended June 30,
1988, incorporated herein by reference.
10.5(b)* Amendment dated April 16, 1990, amending the Employment
Agreement between the Registrant and Jay B. Langner dated as of
July 28, 1988, filed as Exhibit 10.5(b) to Annual Report on
Form 10-K for the fiscal year ended June 30, 1990, incorporated
herein by reference.
10.5(c)* Amendment dated August 16, 1994, amending the Employment
Agreement between the Registrant and Jay B. Langner dated as of
July 28, 1988, as amended, filed as Exhibit 10.5(c) to Annual
Report on Form 10-K for the fiscal year ended June 30, 1994,
incorporated herein by reference.
10.5(d)* Amendment effective January 23, 1996, amending the Employment
Agreement between the Registrant and Jay B. Langner dated July
28, 1988, as amended, filed as Exhibit 10.5(e) to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996,
incorporated herein by reference.
10.5(e)* Amendment effective February 6, 1998, amending the Employment
Agreement between the Registrant and Jay B. Langner dated as of
July 28, 1988, as amended, filed as Exhibit 10.5(g) to
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, incorporated herein by reference.
10.5(f)* Severance Agreement dated April 16, 1990 between the Registrant
and Jay B. Langner, filed as Exhibit 10.5(c) to Annual Report
on Form 10-K for the fiscal year ended June 30, 1990,
incorporated herein by reference.
10.5(g)* Amendment effective January 23, 1996, amending the Severance
Agreement between the Registrant and Jay B. Langner dated April
16, 1990, filed as Exhibit 10.5(f) to Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, incorporated herein
by reference.
10.5(h)* Amendment effective February 6, 1998, amending the Severance
Agreement between the Registrant and Jay B. Langner dated April
16, 1990, as amended, filed as Exhibit 10.5(h) to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998,
incorporated herein by reference.
19
20
10.6(a)* Form of Employment Agreement, dated February 8, 1990, between
the Registrant and Michael Rubin, filed as Exhibit 10.7(a) to
Annual Report on Form 10-K for the fiscal year ended June 30,
1990, incorporated herein by reference.
10.6(b)* Amendment effective January 23, 1996, amending the Form of
Employment Agreement between the Registrant and Michael Rubin,
dated February 8, 1990, filed as Exhibit 10.7(c) to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996,
incorporated herein by reference.
10.6(c)* Amendment effective February 6, 1998, amending the Form of
Employment Agreement between the Registrant and Michael Rubin,
dated February 8, 1990, as amended, filed as Exhibit 10.6(d) to
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 incorporated herein by reference.
10.6(d)* Amendment effective May 15, 1998, amending the Employment
Agreement between the Registrant and Michael Rubin, dated
February 8, 1990, as amended.
10.6(e)* Amended schedule of executive officers entitled to benefits of
Employment Agreements.
10.7* Description of Executive Incentive Program adopted by the
Compensation Committee of the Board of Directors on December 1,
1993, as amended on May 17, 1996, filed as Exhibit 10.9 to
Annual Report on Form 10-K for the fiscal year ended June 30,
1996, incorporated herein by reference.
10.8(a) Unit Purchase and Option Agreement, dated February 27, 1996
between the Registrant and Lufthansa Airport and Ground
Services GmbH, a German corporation, filed as Exhibit 99.1 to
Form 8-K dated March 6, 1996, incorporated herein by reference.
10.8(b) Limited Liability Company Agreement dated May 31, 1996,
effective as of June 1, 1996, among the Registrant, LAGS (USA)
Inc. and Hudson General LLC, filed as Exhibit 99.3 to Form 8-K
dated May 31, 1996, incorporated herein by reference.
10.8(c) First Amendment to the Unit Purchase and Option Agreement dated
February 27, 1996 between the Registrant and Lufthansa Airport
and Ground Services GmbH, a German corporation, dated as of
December 12, 1996, filed as Exhibit 10.10(c) to Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996,
incorporated herein by reference.
10.8(d) Third Amendment to the Limited Liability Company Agreement
dated May 31, 1996, effective as of June 1, 1996, among the
Registrant, LAGS (USA) Inc. and Hudson General LLC dated as of
December 12, 1996, filed as Exhibit 10.10(d) to Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996,
incorporated herein by reference.
20
21
13 The Registrant's 1998 Annual Report to Shareholders, which
report, except for those portions thereof which are expressly
incorporated by reference in this filing, is furnished for the
information of the Commission and is not to be deemed to be
filed as part of this filing.
21 Subsidiaries of the Registrant, filed as Exhibit 21 to Annual
Report on Form 10-K for the fiscal year ended June 30, 1997,
incorporated herein by reference.
23 Consent of KPMG Peat Marwick LLP, the Corporation's independent
auditors, to the incorporation by reference into the
Corporation's Registration Statement on Form S-8, as amended,
Registration No. 2-75137.
(b) No reports on Form 8-K have been filed by the Registrant during
the last quarter of the period covered by this report.
(c) Reference is made to Item 14(a)(3) above.
(d) Reference is made to Item 14(a)(2) above.
* Denotes management contract for compensatory plan or
arrangement.
21
22
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned Chief Executive Officer, President and Chief Financial
Officer/Controller, thereunto duly authorized on the 24th day of September 1998.
HUDSON GENERAL CORPORATION
/s/ Signature Title
/s/ Jay B. Langner Chairman of the Board, and
-------------- Chief Executive Officer
Jay B. Langner
/s/ Michael Rubin President
-------------
Michael Rubin
/s/ Barry I. Regenstein Chief Financial Officer and Controller
-------------------
Barry I. Regenstein
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in their capacities as Directors on the 24th day of September 1998.
/s/ Jay B. Langner /s/ Michael Rubin
-------------- -------------
Jay B. Langner Michael Rubin
/s/ Milton H. Dresner /s/ Hans H. Sammer
----------------- --------------
Milton H. Dresner Hans H. Sammer
/s/ Paul R. Pollack /s/ Richard D. Segal
--------------- ----------------
Paul R. Pollack Richard D. Segal
/s/ Edward J. Rosenthal /s/ Stanley S. Shuman
------------------- -----------------
Edward J. Rosenthal Stanley S. Shuman
22
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hudson General Corporation:
Under date of August 14, 1998, except for note 2, which is as of September 16,
1998, we reported on the consolidated balance sheets of Hudson General
Corporation and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1998, as contained in
the fiscal 1998 annual report to stockholders. These consolidated financial
statements and our report thereon are incorporated by reference in the annual
report on Form 10-K for the year 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedule listed in item 14(a)2. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Jericho, New York
September 16, 1998
23
24
SCHEDULE II
HUDSON GENERAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 and 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
.......ADDITIONS.......
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS RESERVES OF YEAR
- -----------------------------------------------------------------------------------------------------------
1998 and 1997 - Allowance for
doubtful accounts
receivable... $ --- $ --- $ --- $ --- $ ---
========== ========= =========== ========= =========
1996 - Allowance for doubtful
accounts receivable.. $1,579,000 $ 362,000 $(1,820,000)(B,C,D) $ 121,000(A) $ ---
========== ========= =========== ========= =========
NOTES:
(A) Write-offs.
(B) Foreign exchange.
(C) Recoveries.
(D) Includes transfer of $1,804,000 to Hudson General LLC.
24
25
HUDSON GENERAL LLC
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
(FORM 10-K)
JUNE 30, 1998 AND 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
1
26
INDEPENDENT AUDITORS' REPORT
The Board of Member Representatives
Hudson General LLC
We have audited the accompanying consolidated balance sheets of Hudson General
LLC and subsidiaries as of June 30, 1998 and 1997 and the related consolidated
statements of earnings and comprehensive income, members' equity and cash flows
for the years ended June 30, 1998, 1997 and the period June 1 (inception) to
June 30, 1996. We have also audited financial statement schedule II. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hudson General LLC
and subsidiaries at June 30, 1998 and 1997 and the results of their operations
and their cash flows for the years ended June 30, 1998, 1997 and the period June
1 (inception) to June 30, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Jericho, New York
August 14, 1998, except for note 2,
which is as of September 16, 1998
2
27
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
Hudson General LLC and Subsidiaries
(in thousands)
YEAR YEAR PERIOD JUNE 1
ENDED ENDED (INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
---- ---- ----
Revenues ...................................... $ 168,947 $ 167,729 $ 12,096
--------- --------- --------
Costs and expenses:
Operating ................................. 131,643 128,749 9,259
Depreciation and amortization ............. 8,237 7,510 673
Selling, general & administrative ......... 14,459 13,625 1,317
--------- --------- --------
Total costs and expenses ............... 154,339 149,884 11,249
--------- --------- --------
Operating income .............................. 14,608 17,845 847
Interest income ............................... 411 1,137 217
Interest expense .............................. (533) (958) (168)
--------- --------- --------
Earnings before provision for income taxes .... 14,486 18,024 896
Provision for income taxes .................... 1,748 2,085 41
--------- --------- --------
Net earnings .................................. 12,738 15,939 855
--------- --------- --------
Other comprehensive income:
Foreign currency translation adjustment.... (830) (123) 43
--------- --------- --------
Other comprehensive income .................... (830) (123) 43
--------- --------- --------
Comprehensive income .......................... $ 11,908 $ 15,816 $ 898
========= ========= ========
See accompanying notes to consolidated financial statements.
3
28
CONSOLIDATED BALANCE SHEETS
Hudson General LLC and Subsidiaries
(in thousands)
June 30,
--------
1998 1997
---- ----
Assets
Current assets:
Cash and cash equivalents ............................. $ 3,393 $ 12,324
Accounts and notes receivable - net ................... 16,886 15,289
Inventory ............................................. 1,523 1,272
Prepaid expenses and other assets ..................... 4,868 2,939
-------- --------
Total current assets ............................ 26,670 31,824
Property, equipment and leasehold rights at cost,
less accumulated depreciation and amortization ........ 45,639 44,948
Long-term receivables - net .............................. --- 1,361
Deferred income taxes .................................... --- 174
Excess cost over fair value of net assets acquired ....... 643 713
-------- --------
$ 72,952 $ 79,020
======== ========
Liabilities and Members' Equity
Current liabilities:
Accounts payable ...................................... $ 17,326 $ 18,528
Income taxes payable .................................. 590 1,280
Accrued expenses and other liabilities ................ 18,455 19,011
Advances from Hudson General Corporation - net ........ 2,057 361
-------- --------
Total current liabilities ....................... 38,428 39,180
-------- --------
Deferred income taxes .................................... 319 ---
Note payable to Hudson General Corporation ............... 3,130 4,630
-------- --------
Total noncurrent liabilities .................... 3,449 4,630
-------- --------
Members' Equity:
Contributed capital ................................... 19,966 19,966
Retained earnings ..................................... 13,489 16,794
Accumulated other comprehensive income ................ (2,380) (1,550)
-------- --------
Total members' equity ........................... 31,075 35,210
-------- --------
$ 72,952 $ 79,020
======== ========
See accompanying notes to consolidated financial statements.
4
29
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
Hudson General LLC and Subsidiaries
Years Ended June 30, 1998, 1997 and the Period June 1 (Inception) to June 30,
1996 (in thousands)
Accumulated
Other
Contributed Retained Comprehensive Members'
Capital Earnings Income Equity
------- -------- ------ ------
Balance, June 1, 1996 (Inception) ............................. $ --- $ --- $ --- $ ---
Equity contributions ...................................... 12,123 --- (1,470) 10,653
Equity adjustment from foreign currency translation ....... --- --- 43 43
Net earnings .............................................. --- 855 --- 855
---------------------------------------------------------
Balance, June 30, 1996 ........................................ 12,123 855 (1,427) 11,551
Equity contributions ...................................... 7,843 --- --- 7,843
Equity adjustment from foreign currency translation ....... --- --- (123) (123)
Net earnings .............................................. --- 15,939 --- 15,939
---------------------------------------------------------
Balance, June 30, 1997 ........................................ 19,966 16,794 (1,550) 35,210
Cash distributions ........................................ --- (15,783) --- (15,783)
Distributions in the form of a tax credit ................. --- (260) --- (260)
Equity adjustment from foreign currency translation ....... --- --- (830) (830)
Net earnings .............................................. --- 12,738 --- 12,738
---------------------------------------------------------
Balance, June 30, 1998 ........................................ $19,966 $ 13,489 ($2,380) $ 31,075
======= ======== ======= ========
See accompanying notes to consolidated financial statements.
5
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
Hudson General LLC and Subsidiaries
(in thousands)
PERIOD JUNE 1
YEAR ENDED YEAR ENDED (INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net earnings ................................................................ $ 12,738 $ 15,939 $ 855
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation and amortization ........................................ 8,237 7,510 673
(Recovery of) provision for losses on accounts receivable - net ...... (113) 188 14
Loss (gain) on sale of equipment ..................................... (170) (60) 67
Change in other current assets and liabilities:
Accounts and notes receivables - net ............................... (2,015) 2,533 (7,011)
Inventory .......................................................... (284) (162) (40)
Prepaid expenses and other assets .................................. (2,043) (1,742) (256)
Accounts payable ................................................... (1,148) 3,435 2,365
Income taxes payable ............................................... (640) 940 38
Accrued expenses and other liabilities ............................. (271) 1,321 (1,698)
Decrease in long-term receivables - net .............................. 1,361 666 36
Decrease in deferred income taxes .................................... 494 676 ---
Other - net .......................................................... 42 44 6
-------- -------- --------
Net cash provided (used) by operating activities ................... 16,188 31,288 (4,951)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ..................................... (10,045) (15,218) (1,825)
Proceeds from sale of property and equipment ............................ 663 166 23
-------- -------- --------
Net cash used by investing activities .............................. (9,382) (15,052) (1,802)
-------- -------- --------
Cash flows from financing activities:
Capital contributions ................................................... --- 7,843 15,848
Distributions to members ................................................ (15,783) --- ---
Advances from (repayments to) Hudson General Corporation ................ 696 (7,302) 7,233
Principal repayment of note payable to Hudson General
Corporation .......................................................... (500) (21,283) ---
Principal repayments on long-term debt .................................. --- (2,408) (70)
-------- -------- --------
Net cash (used) provided by financing activities ................... (15,587) (23,150) 23,011
-------- -------- --------
Effect of exchange rate changes on cash ..................................... (150) (31) 9
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ........................ (8,931) (6,945) 16,267
Cash and cash equivalents at beginning of period ............................ 12,324 19,269 3,002
-------- -------- --------
Cash and cash equivalents at end of period .................................. $ 3,393 $ 12,324 $ 19,269
======== ======== ========
See accompanying notes to consolidated financial statements.
6
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hudson General LLC and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of Hudson General LLC and its subsidiaries (Hudson LLC). All material
intercompany accounts and transactions have been eliminated in consolidation.
Description of Business: Hudson LLC provides a broad and diverse range of
services to the aviation industry at twenty-four (24) airports throughout the
United States and Canada. These services include aircraft ground handling;
aircraft fueling; fuel management; ground transportation; snow removal; cargo
warehousing; and sale, leasing and maintenance of airline ground support
equipment. In addition to its airport related services, Hudson LLC provides
transportation management services for various governmental agencies and
authorities.
Inventories: Inventories are carried at the lower of average cost or market.
Depreciation and Amortization: Depreciation of property and equipment is
provided on the straight-line method over their estimated useful lives.
Leasehold rights are amortized over the original and anticipated renewal terms
of the underlying leases.
Excess Cost over Fair Value of Net Assets Acquired: The excess cost over fair
value of net assets acquired, net of accumulated amortization of $1,317,000 and
$1,275,000 at June 30, 1998 and 1997, respectively, is amortized on a
straight-line basis over periods not to exceed forty years. When events and
circumstances so indicate, all long-term assets including the Excess Cost over
Fair Value of Net Assets Acquired, are assessed for recoverability based upon
undiscounted future operating cash flows.
Income Taxes: Hudson LLC has adopted Statement of Financial Accounting Standards
(SFAS) No. 109 "Accounting for Income Taxes", which requires the use of the
asset and liability method of accounting for deferred income taxes.
Financial Instruments: Hudson LLC believes that the book values of its monetary
assets and liabilities approximate fair values as a result of the short-term
nature of such assets and liabilities.
Foreign Currency Translation: The financial position and results of operations
of Hudson LLC's Canadian operations are measured using local currency as the
functional currency. Assets and liabilities are translated into U.S. dollars at
year-end rates of exchange, and revenues and expenses are translated at the
average rates of exchange for the year. Gains or losses resulting from
translating foreign currency financial statements are accumulated as a separate
component of members' equity.
7
32
Statements of Cash Flows: For purposes of the consolidated statements of cash
flows, Hudson LLC considers all securities with an original maturity of
approximately three months or less at the date of acquisition to be cash
equivalents. In fiscal 1998 and 1997, income taxes (net of refunds) of
$1,839,000 and $843,000, respectively, were paid. Interest of $352,000 and
$933,000 was paid in fiscal 1998 and 1997, respectively. No income taxes or
interest was paid during the month of June 1996.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Long-Lived Assets: Effective July 1, 1996 Hudson LLC adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", which requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The adoption of SFAS No.
121 did not have any impact on Hudson LLC's financial position or results of
operations.
Comprehensive Income: Effective for fiscal 1998, Hudson LLC adopted the
provisions of SFAS No. 130 "Reporting Comprehensive Income", which requires the
reporting of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income. Hudson LLC's only item of
other comprehensive income is foreign currency translation adjustments and the
accumulated balance of such adjustments is shown in "Accumulated other
comprehensive income" in the accompanying consolidated balance sheets.
Reclassifications: Certain items previously reported in specific financial
statement captions have been reclassified to conform with the fiscal 1998
presentation.
2. FORMATION AND STRUCTURE OF HUDSON GENERAL LLC
Effective June 1, 1996, pursuant to the terms of the Unit Purchase and Option
Agreement dated February 27, 1996 (the Purchase Agreement) between Hudson
General Corporation (the Corporation) and Lufthansa Airport and Ground Services
GmbH (LAGS), a German corporation and an indirect wholly-owned subsidiary of
Deutsche Lufthansa AG, the Corporation transferred substantially all of the
assets and liabilities of its aviation services business (the Aviation Business)
to Hudson LLC, a newly formed limited liability company (the Transaction). In
exchange for the transfer of such assets and liabilities and the assumption by
Hudson LLC, as co-obligor with the Corporation, of all of the Corporation's 7%
convertible subordinated debentures, the Corporation received a 74% interest in
Hudson LLC. In addition, Hudson LLC sold LAGS a 26% interest in Hudson LLC for a
purchase price of $23,686,000 in cash (after certain adjustments), of which
$15,848,000 was paid at the closing, and deferred payments (the Deferred
Payments) of $2,650,000 and $5,188,000 plus interest
8
33
thereon were made, respectively, in September 1996 and December 1996. The
Purchase Agreement, as amended, provides LAGS an option (the LAGS Option),
exercisable on October 1 of each year through 1999, effective as of the
preceding July 1, pursuant to which LAGS may increase its equity ownership in
Hudson LLC from 26% to a maximum of 49%, for a price based on a formula related
to the average earnings of the Aviation Business over the four fiscal years
preceding the exercise of the option, subject to certain minimum and maximum
amounts. On September 16, 1998, Hudson LLC was advised that the Supervisory
Board of Deutsche Lufthansa AG approved the exercise by its subsidiary LAGS USA
Inc., of the LAGS Option to increase its equity interest in Hudson LLC from 26%
to 49%. As a result, Hudson LLC expects LAGS to give notice of its exercise of
the LAGS Option on or about October 1, 1998. The exercise price is approximately
$29,600,000.
Pursuant to the Purchase Agreement, Hudson LLC, the Corporation and LAGS USA
Inc., a wholly owned subsidiary of LAGS (LAGS USA), entered into a Limited
Liability Company Agreement effective June 1, 1996 (the LLC Agreement). The LLC
Agreement, as amended, stipulates that the Corporation and LAGS USA will share
profits and losses in the same proportion as their respective equity interests
in Hudson LLC, except that the Corporation was entitled to all interest earned
on the Deferred Payments. In addition, LAGS USA would not share in any pre-tax
earnings, as defined, of the Aviation Business in excess of $14,690,000 and
$15,863,000 in fiscal 1997 and 1998, respectively, unless the aggregate of the
pre-tax earnings of the Aviation Business for fiscal 1997 and 1998 exceeded
$30,533,000. Such pre-tax earnings exceeded $30,553,000, and as a result, LAGS
USA is not limited by the LLC Agreement from sharing in pre-tax earnings of the
Aviation Business for those years. Hudson LLC's net earnings in June 1996 were
allocated 100% to the Corporation.
In June 1996, primarily as a result of the Corporation retaining certain trade
receivables, the Corporation made net advances of $7,233,000 on behalf of Hudson
LLC. Such balance was repaid to the Corporation by Hudson LLC (together with
accrued interest at the Corporation's incremental borrowing rate) during fiscal
1997. Hudson LLC's net advances from the Corporation were $2,057,000 and
$361,000 at June 30, 1998 and 1997, respectively.
Pursuant to the LLC Agreement, as amended, the Corporation will continue to
manage the Aviation Business and will be entitled to charge Hudson LLC an
overhead fee equal to the sum of an agreed upon percentage of Hudson LLC's
consolidated domestic revenues and an agreed upon percentage of Hudson LLC's
consolidated Canadian revenues. (The Corporation and LAGS USA agreed to overhead
fees for fiscal 1998 of 3 1/2% and 1 1/4%, respectively, and overhead fees for
fiscal 1997 of 3% and 1%, respectively.) The LLC Agreement, as amended, also
provides for a Member Board on which the Corporation has three votes and LAGS
USA has two votes, and allows either Member to veto certain major transactions
and to veto any reduction in distributions stipulated in the LLC Agreement, as
amended. The LLC Agreement, as amended, provides that distributions will be paid
annually in an amount at least equal to 50% of domestic net income and 10% of
Canadian pre-tax earnings, as defined, from the Aviation Business. Such
distributions, totaling approximately $8,300,000 for fiscal 1997 and the month
of June 1996, were made in October 1997. An additional distribution of
$7,500,000 with respect to fiscal 1997 was made in December 1997.
9
34
3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Accounts, notes and long-term receivables - net at June 30, 1998 and June 30,
1997 consisted of the following:
JUNE 30, June 30,
1998 1997
---- ----
(in thousands)
Rental and service fees receivable........................................... $16,886 $14,762
Note receivable ............................................................. --- 1,888
------- -------
16,886 16,650
Less: current portion (net of allowance for doubtful
accounts of $1,484,000 and $1,670,000).................................. 16,886 15,289
------- -------
Long-term portion............................................................ $ --- $ 1,361
========== =======
On January 6, 1994, the Corporation assigned its leases and ceased operations at
Long Island MacArthur Airport in Islip, New York (LIMA) where the Corporation
had provided ground handling and fueling services to commercial airlines and
related fixed base operation services to general aviation aircraft. At the
closing, the Corporation was paid $150,000 in cash and received a promissory
note from the purchaser of its leases in the amount of $3,750,000, payable over
seven years with interest at the rate of 7%. The outstanding balance of the note
receivable of $1,756,000 was prepaid in October 1997, resulting in recognition
of $570,000 of deferred income during fiscal 1998.
Hudson LLC provides various services at airports throughout the United States
and Canada. Hudson LLC grants credit to customers based upon an analysis of its
customers' financial position and then-existing conditions in the aviation
industry. Four of Hudson LLC's customers had individual balances outstanding
greater than 5%, and aggregating 25%, of accounts and notes receivable-net at
June 30, 1998. Bad debt (recovery) expenses were ($113,000), $188,000 and
$14,000 for fiscal 1998, 1997 and the month of June 1996, respectively.
Accrued expenses and other liabilities at June 30, 1998 and 1997 consisted of
the following:
1998 1997
---- ----
(in thousands)
Salaries and wages ....... $ 6,598 $ 6,327
Insurance ................ 5,433 7,108
Operating expenses payable 4,210 3,102
Other .................... 2,214 2,474
------- -------
$18,455 $19,011
======= =======
Maintenance and repair expenses were $9,603,000, $8,760,000 and $664,000 for
fiscal 1998, 1997 and the month of June 1996, respectively.
10
35
4. PROPERTY, EQUIPMENT AND LEASEHOLD RIGHTS
The number of years over which major classes of assets are being depreciated and
amortized, and the costs and related accumulated depreciation and amortization
as of June 30, 1998 and 1997 are set forth below:
Estimated
Useful Lives 1998 1997
------------ ---- ----
(in thousands)
Operating equipment........................................ 2 - 12 $89,989 $85,349
Leasehold rights........................................... 25 2,400 2,400
Buildings.................................................. 20 1,811 1,474
Office furnishings and equipment........................... 3 - 10 4,246 3,868
Leasehold improvements..................................... 2 - 28 6,967 6,464
------- -------
105,413 99,555
Accumulated depreciation and amortization (59,774) (54,607)
------- -------
$45,639 $44,948
======= =======
5. CANADIAN OPERATIONS
The consolidated financial statements include: assets of $19,662,000 and
$18,635,000, and net assets of $13,541,000 and $12,406,000 at June 30, 1998 and
1997, respectively; and revenues of $42,186,000, $45,987,000 and $3,197,000 and
earnings of $1,927,000, $1,784,000 and $52,000 for fiscal 1998, 1997 and the
month of June 1996, respectively, related to Hudson LLC's Canadian operations.
6. LONG-TERM DEBT
In connection with the Transaction, the revolving credit agreement that the
Corporation had with a group of banks dated November 25, 1992, as amended, was
amended and restated as of June 1, 1996, and Hudson LLC assumed and agreed to
become jointly and severally liable for any obligations thereunder (the LLC
Credit Agreement). Pursuant to the LLC Credit Agreement, Hudson LLC may borrow
funds (including outstanding letters of credit) up to a limit of $18,000,000
(the LLC Limit) until September 30, 1998. At such time, and at the end of each
subsequent quarter, the LLC Limit will be reduced by one-sixteenth of the LLC
Limit that was in effect on June 30, 1998 until June 30, 2002, at which time the
LLC Credit Agreement terminates. The limit may also be reduced by asset sales in
excess of certain amounts. There were no direct borrowings outstanding at June
30, 1998 and 1997 and $2,425,000 and $3,020,000 of outstanding letters of credit
at June 30, 1998 and 1997, respectively. The LLC Credit Agreement provides
Hudson LLC with the option of selecting a rate of interest at either the base
rate or 1 3/8% above the LIBO rate, as defined.
The LLC Credit Agreement requires that Hudson LLC maintain certain minimum
effective net worth requirements, as defined, which are subject to incremental
annual increases and further stipulates that Hudson LLC not incur a consolidated
net loss for any fiscal year. The LLC Credit Agreement
11
36
also requires that Hudson LLC meet certain other financial covenants. Hudson LLC
has granted the banks a security interest in substantially all of its domestic
assets.
Hudson LLC also has an agreement with a group of banks to provide a credit
facility for its Canadian subsidiary (the Canadian Agreement) in the amount of
$5,000,000 (Cdn) (the Canadian Limit). The Canadian Limit will be reduced
commencing September 30, 1998 on the same basis as the LLC Limit. The Canadian
Agreement provides Hudson LLC with the option of selecting a rate of interest at
either 1/2% above the Canadian prime rate or 1 5/8% above the cost of funds
rate, as defined. In connection with the Canadian Agreement, Hudson LLC has
guaranteed the obligations of its Canadian subsidiary and granted the banks a
security interest in substantially all of its Canadian accounts receivable and
certain of its other assets.
In July 1986, the Corporation issued $30,000,000 of 7% convertible subordinated
debentures due 2011 (the Debentures). In connection with the Transaction,
effective June 1, 1996, Hudson LLC assumed the obligations of the Debentures and
the Corporation remained as a co-obligor. The Debentures were convertible at any
time prior to maturity into shares of the Corporation's common stock.
At June 1, 1996, there was $28,821,000 principal balance of the Debentures
outstanding. During June and August 1996, the Debentures were called for
redemption and as a result, $2,408,000 principal balance of the Debentures were
redeemed during fiscal 1997. In addition, during fiscal 1997 and the month of
June 1996, $26,343,000 and $70,000, respectively, of the Debentures were
converted into shares of the Corporation's common stock and to such extent
Hudson LLC became indebted, on a subordinated basis, to the Corporation (the
Corporate Subordinated Debt). At September 5, 1996, no Debentures remained
outstanding.
During fiscal 1997, Hudson LLC utilized the proceeds from the Deferred Payments
together with a portion of the proceeds received at the closing of the
Transaction to repay $21,283,000 of the outstanding balance of the Corporate
Subordinated Debt. At June 30, 1998 and 1997 the balance of the Corporate
Subordinated Debt was $4,630,000 and $5,130,000, respectively. The noncurrent
portion of such debt at June 30, 1998 and 1997 of $3,130,000 and $4,630,000,
respectively, is shown as "Note payable to Hudson General Corporation" in the
accompanying consolidated balance sheets. Hudson LLC is obligated to repay the
remaining balance of $4,630,000 to the Corporation as follows: (i) $1,500,000 on
July 15, 1998; and (ii) $1,500,000 on each July 15th thereafter until the entire
principal balance is satisfied. The current portion of this debt at June 30,
1998 (which was paid in July 1998) and 1997 of $1,500,000 and $500,000,
respectively, is included in "Advances from Hudson General Corporation - net" in
the accompanying consolidated balance sheets. Interest on the Corporate
Subordinated Debt is payable semi-annually in January and July at the rate of 7%
per annum.
12
37
7. INCOME TAXES
Provision for income taxes consisted of the following for fiscal 1998, 1997 and
the month of June 1996.
1998 1997 1996
---- ---- ----
Foreign: (in thousands)
Current................................................. $1,105 $1,061 $ 41
Deferred................................................ 411 659 ---
State:
Current................................................. 149 344 ---
Deferred................................................ 83 21 ---
------ ------ ----
$1,748 $2,085 $ 41
====== ====== ====
Earnings before income taxes consisted of the following for fiscal 1998, 1997
and the month of June 1996.
1998 1997 1996
---- ---- ----
(in thousands)
Domestic $11,042 $14,520 $ 803
Foreign 3,444 3,504 93
------- ------- -------
$14,486 $18,024 $ 896
======= ======= =======
Deferred tax assets (liabilities) are comprised of the following as of June 30,
1998 and 1997 (Deferred tax assets were transferred to Hudson LLC from the
Corporation on June 1, 1996):
1998 1997
---- ----
Deferred tax assets: (in thousands)
Reserves for doubtful accounts, claims - foreign .... $ 237 $ 277
----- -----
Total deferred tax assets .................... 237 277
----- -----
Deferred tax liabilities:
State and local income taxes ........................ (104) (21)
Property, equipment and leasehold rights, principally
depreciation - foreign ........................... (452) (82)
----- -----
Total deferred tax liabilities ............... (556) (103)
----- -----
Net deferred tax (liability) asset ....... $(319) $ 174
===== =====
Hudson LLC has adopted SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
requires that deferred income taxes be recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
In April 1997, Hudson LLC's Canadian subsidiary was notified by Canadian
taxation authorities of their intention to disallow loss and depreciation
deductions and carryforwards
13
38
related to an internal recapitalization in fiscal 1990 by the Corporation of
such Canadian subsidiary. If the position of the Canadian taxation authorities
(as currently proposed) is sustained, a foreign income tax liability of
approximately $3,900,000, plus interest, would result. The Corporation has
agreed to indemnify and hold harmless Hudson LLC, LAGS and each affiliate of
LAGS against any liability resulting from this matter. The Corporation's
management disagrees with the position of the Canadian taxation authorities and
intends to vigorously contest any potential assessments made by them.
Accordingly, no provision has been made in the accompanying consolidated
financial statements for foreign income taxes related to this matter.
As a limited liability company, Hudson LLC has elected to be taxed as a
partnership under the provisions of the Internal Revenue Code, and therefore,
the U.S. taxable results and available tax credits of Hudson LLC pass directly
to the Members' U.S. corporate income tax returns in the manner prescribed in
the LLC Agreement, as amended.
8. RETIREMENT PLANS
As of January 1, 1997, Hudson LLC established a 401(k) Profit Sharing Plan
covering substantially all of its domestic employees not subject to collective
bargaining agreements (the LLC Plan). Pursuant to the LLC Plan, Hudson LLC makes
a matching contribution equal to 25% of the Compensation (as defined in the LLC
Plan) that each participant elects to defer (up to 5% of the participant's
Compensation) and contribute to the LLC Plan. In addition, Hudson LLC may make a
discretionary annual contribution. Prior to January 1, 1997 such employees were
covered under the Corporation's 401(k) Profit Sharing Plan (the Plan), which
contains terms and conditions similar to those of the LLC Plan. During fiscal
1998, 1997 and the month of June 1996, Hudson LLC contributed $743,000, $766,000
and $11,000, respectively, to the LLC Plan and the Plan representing employer
matching and discretionary contributions for Hudson LLC's covered employees.
Hudson LLC maintains a Group Registered Retirement Savings Plan (RRSP) covering
substantially all of its Canadian employees not subject to collective bargaining
agreements. Under the RRSP, Hudson LLC may make a discretionary annual
contribution. During fiscal 1998, 1997 and the month of June 1996, Hudson LLC
contributed $124,000, $114,000 and $44,000, respectively, to the RRSP.
Net retirement expense was $858,000, $861,000 and $91,000 for fiscal 1998, 1997
and the month of June 1996, respectively.
9. COMMITMENTS AND CONTINGENCIES
(a) Leases
Minimum rental payments for leased premises and operating equipment for future
fiscal years under non-cancelable operating leases (including $2,753,000 to be
paid subsequent to June 30, 1998 for operating equipment on lease to Hudson LLC
from the Corporation and excluding $1,221,000 to be received subsequent to June
30, 1998 under non-cancelable subleases) are: $5,083,000 in 1999;
14
39
$4,027,000 in 2000; $3,528,000 in 2001; $2,875,000 in 2002; $2,148,000 in 2003;
and $7,080,000 thereafter.
Total rental expense incurred amounted to $6,874,000, $6,486,000 and $475,000
(excluding sublease income of $632,000, $755,000 and $36,000) for fiscal 1998,
1997 and the month of June 1996, respectively.
(b) Purchase Commitments
At June 30, 1998, Hudson LLC is obligated to expend funds of $5,578,000 and
$1,906,000 in fiscal 1999 and 2000, respectively, for equipment to be used in
providing de-icing and snow removal services at Lester B. Pearson International
Airport in Toronto pursuant to a contract entered into in December 1997 with the
Greater Toronto Airports Authority.
(c) Litigation
In 1988, Texaco Canada Inc. (Texaco) (now known as McColl-Frontenac Inc.)
instituted a lawsuit (the Texaco Lawsuit) in the Supreme Court of Ontario,
Canada against the Corporation, the Corporation's Canadian subsidiary (now owned
by Hudson LLC) and Petro-Canada Inc. (the corporation which supplied aviation
fuel for the Corporation's Canadian fixed base operations). The Texaco Lawsuit's
allegations, as amended, were that the defendants interfered with contractual
and fiduciary relations, conspired to injure, and induced the breach of a fuel
supply agreement between Texaco and Innotech Aviation Limited (Innotech) in
connection with the purchase by the Corporation from Innotech in 1984 of certain
assets of Innotech's airport ground services business. The Texaco Lawsuit sought
compensatory and punitive damages totaling $110,000,000 (Canadian)
(approximately $80,000,000 (U.S.)) plus all profits earned by the defendants
subsequent to the alleged breach. The trial, which began in May 1996, concluded
after several adjournments on May 7, 1997. On May 25, 1998, the trial judge
issued an oral decision in the Corporation's favor.
In finding that there was no liability on the part of the Corporation, its
Canadian subsidiary or Petro-Canada, the judge ruled that none of these parties
had induced any breach of the fuel supply agreement, nor had any of them
interfered with the plaintiff's contractual and fiduciary relations. The judge
also ruled that Innotech did not breach its fuel supply agreement with Texaco,
nor was there any fiduciary relationship between Innotech and Texaco.
The trial judge rendered an oral decision, and Texaco, which has served a Notice
of Appeal, cannot pursue any appeal until the decision has been issued in
written form. The decision dealt solely with the issue of liability, and a
separate hearing before another judicial officer would have to be held on the
issue of damages. It is expected that a hearing on damages would not be held
unless Texaco decides to pursue, and is successful in, its appeal of the
liability decision.
The Corporation has agreed to indemnify and hold harmless Hudson LLC, LAGS and
each affiliate of LAGS against all losses related to the Texaco Lawsuit.
15
40
SCHEDULE II
HUDSON GENERAL LLC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1998, 1997 AND PERIOD JUNE 1 (INCEPTION) TO JUNE 30, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND OTHER FROM END
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
1998 - Allowance for doubtful
accounts receivable $1,670,000 ($113,000) $(40,000) (B,C) $ 33,000 (A) $1,484,000
========== ========= ========= ======== ==========
1997 - Allowance for doubtful
accounts receivable $1,784,000 $188,000 $ 30,000 (B,C) $332,000 (A) $1,670,000
========== ======== ======== ======== ==========
1996 - Allowance for doubtful
accounts receivable $1,804,000 (D) $ 14,000 $(31,000) (B,C) $ 3,000 (A) $1,784,000
========== ======== ========= ======== ==========
NOTES:
(A) Write-offs.
(B) Foreign exchange.
(C) Recoveries.
(D) Represents transfer of $1,804,000 from Hudson General
Corporation.
16
41
KOHALA JOINT VENTURE
AND SUBSIDIARY
Consolidated Financial Statements
and Schedule
June 30, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
42
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hudson General Corporation
The Board of Directors
Oxford First Corporation:
We have audited the accompanying consolidated balance sheets of the
Kohala Joint Venture and subsidiary as of June 30, 1998 and 1997, and
the related consolidated statements of operations and partners'
deficit, and cash flows for each of the years in the three-year period
ended June 30, 1998. We have also audited financial statement schedule
II. These consolidated financial statements and the financial statement
schedule are the responsibility of the Venture's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
For the years ended June 30, 1998, 1997 and 1996, the Venture incurred
net losses of $5,642,900, $22,584,200 and $6,042,200, respectively, and
at June 30, 1998, the amount of the partners' deficit was $43,601,200.
During fiscal 1998, the partners did not make any advances to the
Venture. Additional contributions from the partners may be required in
fiscal 1999.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Kohala Joint Venture and subsidiary as of June 30, 1998 and 1997 and
the results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
August 14, 1998
43
KOHALA JOINT VENTURE AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1998 and 1997
ASSETS 1998 1997
---- ----
Cash $ 354,900 730,000
Accounts receivable 42,800 39,200
Accrued interest receivable 89,700 179,200
Mortgage notes receivable, net 2,004,300 2,561,000
Land and development costs 9,210,400 9,264,200
Property, plant and equipment, net 1,480,500 1,560,900
Foreclosed real estate, net 2,186,300 2,853,600
Other 67,600 28,700
----------- -----------
$15,436,500 17,216,800
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Partner advances and accrued interest payable 58,178,000 54,012,600
Accounts payable and accrued expenses 859,700 1,162,500
------------ ------------
Total liabilities 59,037,700 55,175,100
Contingencies
Partners' deficit (43,601,200) (37,958,300)
------------ ------------
$ 15,436,500 17,216,800
============ ============
See accompanying notes to consolidated financial statements.
44
KOHALA JOINT VENTURE AND SUBSIDIARY
Consolidated Statements of Operations and Partners' Deficit
Years ended June 30, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Net sales $ 665,600 1,455,300 676,800
Cost of sales 325,500 1,106,400 365,400
Write-down of real estate assets -- 17,000,000 --
Selling, general and administrative
expenses 2,046,300 2,340,000 2,952,400
------------ ------------ ------------
Operating loss (1,706,200) (18,991,100) (2,641,000)
Other (income) expense:
Interest expense 4,185,900 3,858,300 3,755,400
Interest income and other (249,200) (265,200) (354,200)
------------ ------------ ------------
Net loss (5,642,900) (22,584,200) (6,042,200)
Partners' deficit, beginning of year (37,958,300) (15,374,100) (9,331,900)
------------ ------------ ------------
Partners' deficit, end of year $(43,601,200) (37,958,300) (15,374,100)
============ ============ ============
See accompanying notes to consolidated financial statements.
45
KOHALA JOINT VENTURE AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Proceeds from land sales $ 183,400 765,500 105,200
Interest income received 244,900 266,800 347,300
Proceeds from water company sales 316,200 294,500 341,300
Land and development cost expenditures (239,000) (115,200) (159,000)
Interest paid (18,600) (118,100) (212,000)
Selling, general and administrative expenditures paid (1,758,000) (1,533,700) (1,847,500)
Collections on mortgage notes 686,100 1,279,500 1,678,300
Proceeds from sale of and deposits relating to assets
held in foreclosure 218,900 209,100 57,000
----------- ----------- -----------
Net cash (used in) provided by
operating activities (366,100) 1,048,400 310,600
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (9,000) (12,500) (21,000)
Proceeds from sale of property, plant and equipment -- 500 --
----------- ----------- -----------
Net cash used in investing activities (9,000) (12,000) (21,000)
----------- ----------- -----------
Cash flows from financing activities:
Net advances received from partners -- -- 2,714,400
Payments on notes payable -- (573,200) (2,826,200)
----------- ----------- -----------
Net cash used in financing activities -- (573,200) (111,800)
----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents (375,100) 463,200 177,800
Cash and cash equivalents at beginning of year 730,000 266,800 89,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 354,900 730,000 266,800
=========== =========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
46
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE BUSINESS
The Kohala Joint Venture (the Venture) is a partnership which was
formed to acquire, develop and sell approximately 4,000 contiguous
acres of land in Hawaii (the Project). The Partners in the Venture
are Hudson Kohala Inc. (Hudson, a wholly-owned subsidiary of
Hudson General Corporation) and Oxford Kohala, Inc. (Oxford, a
wholly-owned subsidiary of Oxford First Corporation) (Oxford
First)) (together, the Partners). The terms of the partnership are
contained in the Restated Joint Venture Agreement dated April 29,
1981, as amended (the Agreement). The Project is being developed
in four successive phases. The first two phases, containing
approximately 2,100 acres, have been developed and substantially
sold. The third phase, containing approximately 550 acres, has
also been developed and has 84 parcels remaining available for
sale. The fourth phase has yet to be developed, except to the
extent common improvements (main roadway, water wells, etc.) have
been completed. The Partners plan to reevaluate the fourth phase
of the Project.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Venture and its 99% owned subsidiary, the Kohala Ranch Water
Company (KRWC) (note 8). All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) PARTNERS' DEFICIT AND ALLOCATION OF PROFITS AND LOSSES
Partners' deficit includes the Partners' capital accounts in
the Venture and the minority interest (the remaining 1%) of
the Partners in KRWC.
In accordance with the Agreement, profits are shared equally by
the Partners. Losses are shared by the Partners on a pro-rata
basis, based first on their respective capital accounts and then
on their respective combined advances to the Venture including
accrued interest (note 6).
(d) REVENUE RECOGNITION AND LAND SALES
All sales to date have been from the first, second and third
phases of the Project. Revenue is being recognized under the full
accrual method of accounting. The minimum down payment for sales
to be recorded is 10%.
(e) INTEREST INCOME ON MORTGAGE NOTES RECEIVABLE
Interest is not accrued on mortgage notes receivable in arrears 90
days or more.
(f) CAPITALIZATION OF COSTS
Land and development costs (including interest) are initially
capitalized and subsequently carried at the lower of average cost
or fair value. These costs are charged to cost of sales when the
corresponding land sale is recorded based upon the relative fair
value of the parcel sold to the aggregate fair value of all
parcels in the phase. As indicated in note 2, the Venture recorded
a $17,000,000 write-down of its real estate assets in fiscal 1997.
(Continued)
47
2
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(f) CONTINUED
The Venture capitalized interest costs, as appropriate, for each
phase of the Project. Effective July 1, 1994, as a result of the
lack of further development activity, capitalization of interest
was discontinued.
(g) ESTIMATED COSTS TO COMPLETE
At June 30, 1998 and 1997, the Venture estimated that $2,479,000
of additional costs were necessary to complete the development of
Phase III. The portion of such amount relating to unsold parcels
has been offset against land and development costs, net in the
accompanying consolidated balance sheets.
(h) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at the lower of cost or
fair value.
Depreciation is provided on the straight-line method. The number
of years over which major classes of assets are depreciated and
the costs and related accumulated depreciation as of June 30, 1998
and 1997 are set forth below:
Estimated
useful lives 1998 1997
------------ ---- ----
Water distribution systems 20-50 years $ 2,782,100 2,773,700
Plant structures and equipment 3-10 years 183,400 182,900
----------- -----------
2,965,500 2,956,600
Accumulated depreciation (956,500) (867,200)
Contributions in aid of construction (528,500) (528,500)
----------- -----------
$ 1,480,500 1,560,900
=========== ===========
Contributions in aid of construction represent contributions by
customers for plant additions made for the benefit of the
customer. Accordingly, such contributions are recorded as a
reduction against property, plant and equipment.
Depreciation expense, included in "Selling, general and
administrative" expenses in the accompanying consolidated
statements of operations and partners' deficit was $89,300,
$183,400 and $173,600 for fiscal 1998, 1997 and 1996,
respectively.
(i) IMPAIRMENT OF LONG-LIVED ASSETS
Effective July 1, 1996, the Venture adopted Statement of Financial
Accounting Standards (SFAS) No.121, "Accounting for the Impairment
of Long Lived Assets and for Long Lived Assets to Be Disposed Of".
SFAS No.121 addresses accounting for the impairment of long-lived
assets
(Continued)
48
3
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(i), CONTINUED
(including real estate), certain identifiable intangibles and
goodwill relating to those assets to be held and used and for long
lived assets and certain identifiable intangibles to be disposed
of. The adoption of SFAS No.121 did not have an effect on the
Venture's consolidated financial position or results of
operations.
(j) INCOME TAXES
As a partnership, the Venture is not a taxable entity under the
provisions of the Internal Revenue Code. The taxable results and
available tax credits of the Venture and KRWC pass directly to the
Partners' corporate income tax returns in the manner prescribed in
the Agreement.
(k) STATEMENTS OF CASH FLOWS
For the purposes of presenting the consolidated statements of cash
flows, the Venture considers all securities with an original
maturity of approximately three months or less at the date of
acquisition to be cash equivalents.
A reconciliation of net loss to net cash (used in) provided by
operating activities for fiscal 1998, 1997 and 1996 is as follows:
1998 1997 1996
---- ---- ----
Net loss $(5,642,900) (22,584,200) (6,042,200)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Write-down of real estate assets -- 17,000,000 --
Depreciation and amortization 89,300 183,400 173,600
Provision for losses and discounts on
mortgages receivable 100,000 600,000 600,000
Provision for losses on foreclosed real estate 400,000 -- 356,300
Sale of assets held in foreclosure 218,900 209,100 57,000
Interest expense in excess of interest paid 4,167,300 3,740,200 3,543,400
Mortgage loans originated on land sales (142,500) (339,900) (206,000)
Cash collections on mortgage loans 686,100 1,279,500 1,678,300
Excess of cost of sales over land and
development costs paid 86,500 991,200 206,400
Accrued interest on mortgages receivable 89,500 58,400 2,200
Cash for water sales in excess of accrual (3,500) 9,100 (4,900)
Real estate tax accruals (382,000) (48,000) 35,700
Other (32,800) (50,400) (89,200)
----------- ----------- -----------
Total adjustments 5,276,800 23,632,600 6,352,800
----------- ----------- -----------
Net cash (used in) provided by operating activities $ (366,100) 1,048,400 310,600
=========== =========== ===========
(Continued)
49
4
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(l) USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reported period. Management has
made significant estimates as to the amounts required for
allowance for uncollectible accounts and the allowance for losses
on foreclosed real estate, as well as the recoverability of land
and development costs. Actual results could differ from those
estimates.
(2) WRITE-DOWN OF REAL ESTATE ASSETS
In the fourth quarter of fiscal 1997, the Venture recorded a charge of
$17,000,000 to write-down its real estate assets to their estimated fair
values. The charge was a result of the continuing periodic evaluation of
the carrying value of the Venture's real estate assets. The Partners
concluded, as a result of their in-depth analysis of an updated
independent appraisal of such assets and the consideration of other
factors affecting the development of the property, that the carrying
value of the real estate assets should be reduced. Factors considered by
the Partners included the Partners' plans to reevaluate the fourth phase
of the Project which has to date only had limited development, the
current condition of the Hawaiian real estate market and general economic
conditions.
(3) MORTGAGE NOTES RECEIVABLE
The Venture deems certain loans impaired when, based upon current
information and events, it is probable that the Venture will be unable to
collect all amounts due, both principal and accrued interest. The Venture
measures impairment based on a loan's observable market price or the fair
value of the collateral since the loan is collateral dependent and
foreclosure is probable. The amount of the valuation allowance is
determined by comparing principal plus accrued interest to the fair value
of the underlying collateral. The Venture recognizes an impairment by
adjusting its existing valuation allowance with a corresponding charge to
bad debt expense. Subsequent changes in fair value, if any, are treated
in the same manner.
At June 30, 1998 and 1997, mortgage notes receivable from land sales
consisted of the following:
1998 1997
---- ----
Mortgage notes receivable $ 4,945,100 5,796,600
Allowance for uncollectible accounts (2,871,500) (3,166,300)
Reserve for cash discounts and other
allowances (69,300) (69,300)
----------- -----------
Mortgage notes receivable, net $ 2,004,300 2,561,000
=========== ===========
At June 30, 1998 and 1997, 14 and 20 mortgage notes receivable were 90
days or more in arrears, aggregating $2,525,140 and $3,705,500,
respectively. Accrued interest receivable on delinquent mortgage notes
receivable was $77,819 and $171,900 as of June 30, 1998 and 1997,
respectively.
(Continued)
50
5
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3), CONTINUED
Stated interest rates on mortgage notes receivable outstanding at June
30, 1998 and 1997, range from 11% to 6.5% (averaging 8.2% as of June
30, 1998 and 8.9% as of June 30, 1997).
The Venture typically provides financing in connection with the sale of
land parcels. None of the Venture's mortgage notes receivable comprised
more than 5% of the total mortgage notes receivable balance at June 30,
1998 and 1997. The Venture is the first lien holder on all outstanding
mortgage notes receivable.
Purchasers of land parcels are entitled to discounts if certain
conditions are met. Discounts are generally given if the purchase price
is paid in cash at the closing. If the cash is paid within specified
periods after the closing, a reduced sales discount is given. Reserves
have been established for estimated discounts to be taken by purchasers
under the various discount programs.
Scheduled collections of principal during the next five fiscal years are
as follows:
Year Amount
---- ------
1999 $ 3,282,700
2000 186,500
2001 146,300
2002 831,200
2003 498,400
------------
$ 4,945,100
============
(4) LAND AND DEVELOPMENT COSTS
Land and development costs include all costs directly associated with the
acquisition and development of the land parcels. Major components of land
and development costs are the initial costs to acquire the land,
roadways, water drainage, electrical and telephone lines, and various
project management expenditures.
(5) FORECLOSED REAL ESTATE
Foreclosed real estate represents land parcels that were reacquired in
connection with previously financed mortgages. Such parcels are valued at
the lower of their remaining receivable balance outstanding, or their
estimated fair value (determined in the same manner as the allowance for
uncollectible accounts), as follows:
1998 1997
---- ----
Foreclosed real estate $ 3,134,300 3,530,300
Allowance for losses (948,000) (676,700)
----------- -----------
Foreclosed real estate, net $ 2,186,300 2,853,600
=========== ===========
(Continued)
51
6
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5), CONTINUED
During fiscal 1998 and 1997, four and ten mortgage notes receivable were
transferred to foreclosed real estate, respectively. Five parcels in
foreclosed real estate were sold in both fiscal 1998 and 1997. The
carrying values of the mortgage notes receivable transferred to and
parcels sold from foreclosed real estate were $515,000 and $911,000 in
fiscal 1998 and $1,212,500 and $585,500 in fiscal 1997, respectively.
(6) PARTNER ADVANCES PAYABLE
The Partners have agreed to make equal advances to the Venture for all
costs necessary for the orderly development of the Project. During fiscal
1997, the Partners each advanced $300,000 to the Venture. Such advances
were repaid by the Venture on June 30, 1997. During fiscal 1998, the
Partners did not make any advances to the Venture. Additional
contributions from the Partners may be required in fiscal 1999. Advances
earn interest from the date of the advance compounded quarterly at the
prime rate minus 1% (7.50% at June 30, 1998 and 1997).
Advances accrued an average rate of interest of 7.5% during fiscal 1998,
1997 and 1996.
(7) NOTE PAYABLE
During fiscal 1991, the Venture entered into agreements with banks
pursuant to which $8,797,000 of the Venture's mortgage receivables were
sold. An additional sale of $3,148,000 of mortgage receivables to a bank
was completed during fiscal 1992. These transactions were accounted for
as financing arrangements. On April 30, 1996, the Venture repurchased
$1,373,000 of such mortgage receivables which represented the entire
outstanding balance thereof. The maximum amount of notes payable
outstanding during fiscal 1996 was $2,826,000. The average amount
outstanding for fiscal 1996, based upon month-end balances, was
$1,561,000. The weighted average interest rate for fiscal 1996 was 11.3%.
At June 30, 1996, the Company had a note payable outstanding in the
amount of $576,200 relating to certain development costs. The note was
repaid in December 1996 and bore interest at the prime rate plus 1%.
(8) KOHALA RANCH WATER COMPANY
KRWC provides water to the Project, as well as to other customers, and is
owned by the Venture (99%), Hudson (.5%), and Oxford (.5%). The assets of
KRWC are comprised principally of property, plant and equipment. KRWC
recorded revenues of $319,700, $285,400 and $336,300 and incurred net
losses (including interest expense due to the Venture) of $534,400,
$566,900 and $489,700 for fiscal 1998, 1997 and 1996, respectively.
(9) CONTINGENCIES
During fiscal 1992, the County of Hawaii passed an ordinance pursuant to
which the Venture, after subdivision approvals are obtained, would be
able to develop the fourth phase of the Project into 1,490 units. Shortly
after passage of the ordinance, a lawsuit against the County of Hawaii
was filed in the Circuit Court of Hawaii by two local residents of Hawaii
(Plaintiffs) seeking to invalidate such ordinance on various grounds,
including that the ordinance was adopted without following State of
Hawaii
(Continued)
52
7
KOHALA JOINT VENTURE AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9), CONTINUED
procedure relating to the preparation of an Environmental Impact
Statement. During fiscal 1993, the Judge in this action granted
Plaintiffs' motion for partial summary judgment without indicating any
effect on zoning of the fourth phase. The County and the Venture appealed
this ruling to the Hawaii Supreme Court, and in May 1997, the Supreme
Court vacated the summary judgment which was previously granted and
remanded certain related issues to the Circuit Court for that Court to
decide. In March and April 1998, the Circuit Court ruled in favor of the
County and the Venture on the remanded issues and certain other issues.
In July 1998, the Circuit Court granted summary judgment in favor of the
County and the Venture on all remaining claims in the suit. Although
Plaintiffs have indicated they intend to appeal any decision unfavorable
to them, it is uncertain at this time whether an appeal will be filed by
Plaintiffs. Since a final judgment has not yet been entered, the time
period for filing an appeal has not yet commenced. The Venture cannot
determine the effect of this litigation on the timing of development of
Phase IV or expenditures related thereto until it is known whether an
appeal will be filed. The joint venture partners continue to reevaluate
plans for Phase IV which has to date only had limited development.
(10) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures About Fair Value of Financial Instruments",
defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties. The carrying values of all of the Venture's monetary
assets and liabilities approximate fair value. Carrying values for
delinquent mortgage notes receivable are based on the fair value of the
underlying collateral obtained from an independent appraisal. The
carrying values of the remaining mortgage notes receivable approximate
market values, since the mortgage notes receivable are yielding, on
average, a return that is consistent with current market rates offered
for similar financing.
53
Schedule II
KOHALA JOINT VENTURE AND SUBSIDIARY
Valuation and Qualifying Accounts
Years ended June 30, 1998, 1997 and 1996
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
--------------------------
Balance at Charged to Charged to Deductions Balance at
beginning costs and other from end of
Description of year expenses accounts reserves year
----------- ------- -------- -------- -------- ----
1998 - Allowance for
uncollectible accounts $ 3,166,300 100,000 - 394,800(A) 2,871,500
============= ========== =========== ========== =============
1997 - Allowance for
uncollectible accounts $ 2,949,400 600,000 - 383,100(A) 3,166,300
============= ========== =========== ========== =============
1996 - Allowance for
uncollectible accounts $ 2,464,200 600,000 - 114,800(A) 2,949,400
============= ========== =========== ========== =============
1998 - Allowance for loss on
foreclosed real estate $ 676,700 400,000 - 128,700(A) 948,000
============= ========== =========== ========== =============
1997 - Allowance for loss on
foreclosed real estate $ 703,100 - - 26,400(A) 676,700
============= ========== =========== ========== =============
1996 - Allowance for loss on
foreclosed real estate $ 486,400 356,300 - 139,600(A) 703,100
============= ========== =========== ========== =============
(A) Write-offs
54
HUDSON GENERAL CORPORATION & SUBSIDIARIES
EXHIBIT INDEX
Sequentially
Exhibit Numbered
No. Exhibit Pages
10.6(d) Amendment effective May 15, 1998, amending the Employment Agreement between the Registrant
and Michael Rubin, dated February 8, 1990, as amended. 55-58
10.6(e) Amended schedule of executive officers entitled to benefits of Employment Agreements. 59-60
13 The Registrant's 1998 Annual Report to Shareholders, which report, except for those 61-89
portions thereof which are expressly incorporated by reference in this filing, is
furnished for the information of the Commission and is not to be deemed to be filed as
part of this filing.
23 Consent of KPMG Peat Marwick LLP, the Corporation's independent auditors, to the 90-91
incorporation by reference into the Corporation's Registration Statement on Form S-8, as
amended, Registration No. 2-75137.
27 Financial Data Schedule 92