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EXHIBIT 13
The Registrant's 1998 Annual Report to Shareholders, which report,
except for those portions thereof which are expressly incorporated by
reference in this filing, is furnished for the information of the
Commission and is not to be deemed to be filed as part of this filing.
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[HUDSON GENERAL LOGO]
A LEADING PROVIDER
OF DIVERSIFIED SERVICES TO THE TRANSPORTATION INDUSTRY
1998
ANNUAL REPORT
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COMPANY MOTTO
"To provide prompt efficient service at a competitive price, always mindful of
the reputation of the customers we represent."
CONTENTS
Letter to Shareholders...................................... 1
Aviation Services........................................... 5
Land Development............................................ 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 8
Selected Consolidated Financial Data........................ 12
Consolidated Financial Statements........................... 13
Notes to Consolidated Financial Statements.................. 17
Independent Auditors' Report................................ 24
Corporate Information........................ Inside Back Cover
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FELLOW SHAREHOLDERS
GROWTH THROUGH DEPENDABILITY
[PHOTO]
Fiscal 1998 financial results were the proverbial "mixed bag". While Hudson
General Corporation reported significantly improved results from the prior year,
operating income of our 74% owned aviation services business, Hudson General
LLC, declined. Please see page 8 of this report for a summary table of operating
results of the Aviation Business.
The improvement in Hudson General Corporation's results primarily reflects the
fact that in fiscal 1997, the Corporation recorded a pre-tax charge of $8.5
million relating to its 50% interest in the Kohala Joint Venture real estate
development project in Hawaii. Excluding this pre-tax charge, financial results
from the Kohala Joint Venture in fiscal 1998 and fiscal 1997 were comparable.
However, the Joint Venture realized success on the legal front. In early 1998,
the Joint Venture received two favorable court rulings in the lawsuit filed by
two local residents of Hawaii seeking to invalidate an ordinance passed by the
County of Hawaii, permitting Kohala Joint Venture to develop Phase IV of its
real estate project into 1,490 units. In July 1998, the Court granted summary
judgment in favor of the County and the Venture on all remaining claims in the
suit. Although plaintiffs have indicated they intend to appeal any decision
unfavorable to them, we cannot be certain whether an appeal of the Court's
ruling will actually be made. Barring an appeal and reversal of the Court's
decision, the favorable action by the Court eliminates the need for a trial in
this matter. Notwithstanding the positive outcome in this suit to date, Hudson
General and its partner continue to reevaluate their plans relating to Phase IV.
The decline in operating income of our aviation services business was due mainly
to lower earnings from ground transportation services, as two contracts were
renewed at reduced rates, and from snow removal services, as the winter in the
northeast was significantly warmer than last year's. On the positive side,
expanded aircraft fueling operations generated
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increased revenues and operating profits. In addition, in October 1997, we
recognized deferred income of $.6 million related to the prepayment of a
promissory note associated with the sale in January 1994 of leases and other
assets utilized at our fixed base operation (FBO) at Long Island MacArthur
Airport. Our sole remaining FBO is in Salt Lake City, and we are pleased to
report that it is performing well.
During fiscal 1998 we began providing services under two significant new
long-term contracts. In December 1997 we were awarded a ten year contract by the
Greater Toronto Airports Authority to operate the new central de-icing facility
(CDF) being developed at Lester B. Pearson International Airport. Although the
CDF is not expected to be completed until the fall of 1999, we began limited
operations under this contract, at temporary facilities, during this past
winter. The CDF will be the largest facility of its kind in the world and will
incorporate proven advanced technology de-icing equipment to de-ice up to ten
A320 or B737 aircraft simultaneously. We were selected over several other ground
handling companies, and are proud that both our proposal and our reputation led
to the award of this important contract. We expect that this new contract will
offset the discontinuation of our de-icing business at terminal buildings in
Toronto once the CDF is fully operational.
May 1998 saw the opening of Terminal One, the new international terminal at JFK
International Airport in New York. Hudson General LLC has been designated as
Terminal One's exclusive provider of ground handling services under a five year
contract. Terminal One was built through efforts of a partnership formed by four
of the world's premier international airlines, Air France, Japan Airlines,
Korean Airlines and Lufthansa German Airlines, and Hudson General LLC was there
to handle the inaugural flights into this spectacular new terminal.
Also in May 1998, Hudson General received the long-awaited and favorable
decision in the Canadian lawsuit that was initiated a decade ago by Texaco
Canada Inc. (now known as McColl-Frontenac Inc. and controlled by Imperial Oil
Limited). In finding that there was no liability on the part of Hudson General,
its Canadian subsidiary (now owned by Hudson General LLC) and Petro-Canada Inc.,
the trial judge ruled that Innotech Aviation Limited had not breached a fuel
supply agreement with Texaco in connection with the purchase by Hudson General
from Innotech in 1984 of certain assets of Innotech's Canadian airport
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ground services business. The judge also ruled that Hudson General and
Petro-Canada Inc. had not induced the breach of that agreement, nor had they
interfered with Texaco's contractual and fiduciary relations.
The trial judge rendered an oral decision, and Texaco, which has served a notice
of appeal, cannot pursue any appeal until the decision has been issued in
written form. The decision dealt solely with the issue of liability, and a
separate hearing before another judicial officer would have to be held on the
issue of damages. It is expected that a hearing on damages would not be held
unless Texaco decides to pursue, and is successful in, its appeal of the
liability decision.
[2 PHOTOS]
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On September 16, 1998, the Corporation was advised that the Supervisory Board of
Deutsche Lufthansa AG approved the exercise by its subsidiary LAGS USA Inc., of
LAGS' option to increase its equity interest in Hudson General LLC from 26% to
49%. As a result, we expect LAGS to give notice of its exercise of such option
on or about October 1, 1998. The exercise price is approximately $29.6 million.
As we conclude another fiscal year and approach a new millennium, we recognize
that the successes we have attained would not have been possible without the
efforts of the thousands of men and women who are part of the Hudson General
team. We thank each of them, as well as all of our customers and shareholders,
for their continued loyalty and support.
Sincerely,
/s/ Jay B. Langner
Jay B. Langner
Chairman of the Board and Chief Executive Officer
/s/ Michael Rubin
Michael Rubin
President
/s/ Paul R. Pollack
Paul R. Pollack
Executive Vice President and Chief Operating Officer
[3 PHOTOS]
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AVIATION SERVICES
BROAD AND DIVERSE
Hudson General Corporation (the Corporation) through its 74% ownership interest
in Hudson General LLC (Hudson LLC) provides a full range of services to the
aviation industry at twenty-four (24) airports throughout the United States and
Canada. These services include aircraft ground handling; aircraft fueling; fuel
management; ground transportation; snow removal; cargo warehousing; and sale,
leasing and maintenance of airline ground support equipment.
Aircraft ground handling services are provided to both domestic and
international airlines, and include: aircraft marshaling; loading and
off-loading of baggage, freight and commissary items; passenger ticketing;
porter and wheelchair services; aircraft cleaning; ramp sweeping and scrubbing;
aircraft de-icing and glycol recovery; water and lavatory services; maintenance
and service checks; weight and balance; cargo and mail handling; aircraft
pushbacks; as well as ancillary services such as ground power and
air-conditioning.
Aircraft fueling services are offered through contract fueling, fuel management,
retail sales of fuel and maintenance and operation of airport fuel storage
facilities. Contract fueling services are provided to airlines and fuel
suppliers by delivery of fuel from airport storage facilities into commercial
aircraft. Fuel management services consist of functioning as the out-sourced
fuel procurement department responsible for managing the sourcing, negotiation,
purchase, payment, supply and distribution of fuel both domestically and
internationally for scheduled and charter passenger and cargo airlines.
Ground transportation services are provided for airline passengers and airport
employees through Hudson LLC operated airport shuttle bus systems. These
operations also include operation and maintenance of passenger boarding bridges
and specialized airfield passenger transport vehicles. In addition to its
airport-related transportation services, Hudson LLC provides transportation
management services for various governmental agencies and authorities.
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[PHOTO OF SNOW PLOW]
Snow removal services are performed at airports in the northeastern and
midwestern United States under contracts with airport authorities as well as
airlines and other business entities serving these airports. Snow removal
services are also performed at east coast seaport facilities.
Hudson LLC also operates one of the newest and most technologically advanced
airport perishables centers in the United States for cargo requiring a
climate-controlled environment.
Maintenance services are provided for ground support, cargo handling, ground
transportation and other airport related equipment. In addition, building
maintenance services are provided at both terminal and hangar facilities. In
Salt Lake City, hangar facilities and tie-down services are offered to the
general aviation community comprised of corporate and private aircraft owners.
For thirty-seven years, Hudson General has set the standard for quality in the
aviation services industry. Its knowledgeable, experienced employees, wide-range
of capabilities, attention to detail and commitment to customer satisfaction
continue to make it the company of choice for more than 100 airlines and airport
authorities seeking superior services that will enhance their standing with the
traveling public.
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LAND DEVELOPMENT
HAWAIIAN JOINT VENTURE
The Corporation is a 50% partner in a joint venture to develop approximately
4,000 contiguous acres of land situated in the North Kohala District on the
Island of Hawaii (the Joint Venture). The Project is being developed in four
successive phases. Substantially all of the parcels in Phases I and II, which
comprise approximately 2,100 acres of the Project, have been sold. Phase III
consists of 100 five acre parcels, with 84 parcels remaining available for sale.
During fiscal 1992, the County of Hawaii passed an ordinance pursuant to which,
after the obtaining of subdivision approvals, Phase IV could be developed into
1,490 units. The validity of this ordinance was challenged in a lawsuit brought
by two local residents of Hawaii, and development of Phase IV has been delayed
pending the ultimate outcome of this litigation. Between March and July 1998,
the court issued rulings, including summary judgment, on all remaining issues in
favor of the County and the Joint Venture. The Joint Venture partners do not
know at this time whether the plaintiffs will appeal these rulings.
The Joint Venture partners are continuing to reevaluate plans for Phase IV which
has to date only had limited development.
[HAWAII GRAPHIC]
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED WITH FISCAL 1997
Effective June 1, 1996, the Corporation consummated a transaction (the
Transaction) in which a third party, Lufthansa Airport and Ground Services GmbH
(LAGS), acquired a 26% interest in the Corporation's aviation services business
(the Aviation Business). As part of the Transaction, the Corporation transferred
substantially all of the assets and liabilities of the Aviation Business to
Hudson General LLC (Hudson LLC), a newly formed limited liability company (see
Notes 1 and 2). Effective June 1, 1996, the Corporation has accounted for its
interest in Hudson LLC under the equity method of accounting. As a result,
effective June 1, 1996 the consolidated statements of earnings of the
Corporation contain the operating results of the Aviation Business under the
equity method of accounting. (For an analysis of the results of the Aviation
Business, see the table and related management's discussion which appear below.)
The Corporation's revenues increased from $5.1 to $5.8 million, an
increase of $.7 million, or 14.2%. The increase is due primarily to higher
overhead fees billed by the Corporation to Hudson LLC. (The Corporation and LAGS
USA Inc., a wholly-owned subsidiary of LAGS and a party to the Limited Liability
Company Agreement of Hudson LLC, agreed to raise these overhead fees for fiscal
1998 to 3-1/2% of Hudson LLC's consolidated domestic revenues and 1-1/4% of
Hudson LLC's consolidated Canadian revenues.) Depreciation and amortization
decreased from $.8 to $.7 million, a decrease of $.1 million, or 14.0%. The
decrease was due primarily to the elimination of depreciation related to
operating equipment leased to Hudson LLC by the Corporation that became fully
depreciated. Selling, general and administrative expenses decreased from $8.0 to
$7.8 million, a decrease of $.2 million, or 2.5%, due mainly to lower legal fees
incurred in connection with the Texaco litigation in Canada (see Note 10).
The Corporation's 74% share of earnings from Hudson LLC decreased from
$12.0 to $9.4 million, a decrease of $2.5 million, or 21.2%. The Corporation's
50% share of losses from its real estate joint venture in Hawaii (the Venture)
decreased from $11.3 to $2.8 million, a decrease of $8.5 million, or 75.0%. The
decrease in the Venture's loss is due to the Venture recording a charge of $17.0
million in fiscal 1997 to write-down its real estate assets to their estimated
fair values as discussed further below. As is usual for companies with land
development operations, the contribution to future results from such operations
will fluctuate depending upon whether land sales are closed in each reported
period.
Interest income increased from $4.0 to $4.2 million, an increase of $.2
million, or 5.0%, due primarily to higher invested cash balances.
The Corporation's provision for income taxes increased $2.4 million,
which primarily reflects higher pre-tax earnings due mainly to the decrease in
the Corporation's share of losses from the Venture as noted above.
The following table is intended to provide a presentation and analysis
of results of the Aviation Business conducted by Hudson LLC for fiscal 1998,
1997 and 1996.
(in thousands) 1998 1997 1996
---- ---- ----
Revenues $168,947 $167,729 $168,811
-------- -------- --------
Costs and expenses:
Operating 131,643 128,749 123,003
Depreciation and
amortization 8,237 7,510 7,693
Selling, general and
administrative 14,459 13,625 13,052
-------- -------- --------
Total costs and expenses 154,339 149,884 143,748
-------- -------- --------
Operating income $ 14,608 $ 17,845 $ 25,063
======== ======== ========
The following discussion is intended to provide an analysis of results
of the Aviation Business for fiscal 1998 and 1997 on a comparable basis.
Revenues increased from $167.7 to $168.9 million, an increase of $1.2
million, or .7%. The increase reflects higher: (i) domestic ground handling and
cargo warehousing service revenues of $5.7 and $.7 million, respectively, due
primarily to expanded services to new and existing customers; and (ii) aircraft
fueling revenues of $2.2 million resulting primarily from expanded intoplane
fueling services. In addition, revenues include the recognition of $.6 million
of deferred income related to the prepayment (in October 1997) of a promissory
note associated with the sale (in January 1994) of leases and other assets at
Long Island MacArthur Airport. The revenue increase was partially offset by
lower: (i) snow removal revenues of $3.3 million due mainly to the warmer winter
weather season in fiscal 1998; (ii) ground transportation revenues of $.8
million due mainly to lower rates associated with renewals of existing contracts
at two domestic airport locations; (iii) Canadian ground handling revenues of
$2.1 million (net of expanded services to existing customers) due mainly to: (a)
lower sales of de-icing fluid; (b) the negative impact of the mandated
realignment by the local airport authority of flights between the two
international airports in Montreal; (c) the cessation of operations by two
airline customers; and (d) the decision by several airline customers to provide
ground handling services with their own personnel and equipment or through
subsidiaries or affiliated carriers; and (iv) revenues due to the effect of
fluctuation in the average rates of exchange used in translating Canadian
revenues to their U.S. dollar equivalent.
Operating costs increased from $128.7 to $131.6 million, an increase of
$2.9 million, or 2.2%. The increase reflects higher: (i) labor and related costs
associated with expanded domestic ground handling, aircraft fueling and cargo
warehousing operations; and (ii) fleet maintenance costs related primarily to
ground handling, ground transportation and aircraft fueling operations.
Partially offsetting the increase were lower: (i) snow removal costs; (ii) labor
and related costs associated with reduced Canadian ground handling operations;
(iii) fuel costs associated with the Company's fleet of equipment; (iv) cost of
sales of de-icing fluid in Canada; and (v) costs as a result of the effect of
fluctuation in the average rates of exchange used in translating Canadian costs
to their U.S. dollar equivalent.
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Hudson General Corporation and Subsidiaries
Depreciation and amortization expenses increased from $7.5 to $8.2
million, an increase of $.7 million, or 9.7%, due mainly to additions of ground
handling and fueling equipment.
Selling, general and administrative expenses increased from $13.6 to
$14.5 million, an increase of $.8 million, or 6.1%, primarily reflecting higher
overhead fees paid to the Corporation as noted above.
Operating income decreased from $17.8 to $14.6 million, a decrease of
$3.2 million, due primarily to: (i) decreased results associated with ground
transportation and snow removal operations; (ii) lower sales of de-icing fluid
in Canada; (iii) higher selling, general and administrative expenses as
described above; and (iv) higher depreciation and amortization. Partially
offsetting the decreases were improved results from expanded aircraft fueling
operations and the recognition of deferred income as noted above.
Results of aircraft ground handling operations fluctuate depending upon
the flight activity and schedules of customers and the ability to deploy
equipment and manpower in the most efficient manner to service such customers.
Snow removal and aircraft de-icing services are seasonal in nature. The
results of these operations are normally reflected in the second and third
quarters of the fiscal year, and fluctuate depending upon the severity of the
winter season.
The state of the North American aviation industry has resulted in
increased competitive pressures on the pricing of aviation services and in the
exploration of alliances between major commercial airline carriers. While these
factors may have an adverse effect on the Corporation, several airlines have
been outsourcing services to independent aviation service companies. To date,
this trend has provided additional opportunities for Hudson LLC. The Corporation
is unable, at this time, to evaluate the future impact of these factors.
The compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of materials into the environment
did not have a material effect upon the Corporation's or Hudson LLC's capital
expenditures or results of operations for fiscal 1998 and 1997, or competitive
position. However, the federal government and many state and local governments
have enacted or proposed legislation and regulations with respect to storage
facilities for fuel, petroleum-based products and chemicals, the disposal of
hazardous waste materials, storm water discharges, and financial responsibility
for possible liability exposures relating to fuel storage facilities. Compliance
with such legislation and regulations has resulted in expenditures by the
Corporation and Hudson LLC, including expenditures for the testing,
decommissioning and/or replacement of certain of its fuel and de-icing fluid
storage facilities, and the cleanup of fuel spills. It is anticipated that
additional such expenditures by Hudson LLC, the amount of which is presently not
expected to be material, will be required.
In addition, airport authorities are coming under increasing pressure
to clean up previous contamination at their facilities, and are seeking
financial contributions from airport tenants and companies which operate at
their airports. The Corporation cannot predict at this time, the amount, if any,
that it or Hudson LLC may be required to pay in connection with such airport
authority initiatives.
FISCAL 1997 COMPARED WITH FISCAL 1996
The Corporation's revenues of $5.1 million for fiscal 1997 reflect overhead fees
and equipment rentals billed by the Corporation to Hudson LLC. Depreciation and
amortization of $.8 million for fiscal 1997 primarily represent depreciation
related to operating equipment leased to Hudson LLC by the Corporation. Selling,
general and administrative expenses for fiscal 1997 of $8.0 million principally
reflect administrative and related costs of the Corporation.
The Corporation's 74% share of earnings from Hudson LLC for fiscal 1997
was $12.0 million. The Corporation's 50% share of losses from the Venture
increased from $3.0 to $11.3 million, an increase of $8.3 million. The increase
in the Venture's loss is due to the Venture recording a charge of $17.0 million
in the Corporation's fourth fiscal quarter to write-down its real estate assets
to their estimated fair values. The charge is a result of the continuing
periodic evaluation of the carrying value of the Venture's real estate assets.
The Corporation and its partner in the Venture, Oxford Kohala, Inc. (the
Partners) concluded, as a result of their most recent in-depth analysis of an
updated independent appraisal of such assets and the consideration of other
factors affecting the development of the property, that the carrying value of
the real estate assets should be reduced. Factors considered by the Partners
included the Partners' plans to reevaluate the fourth phase of the Project which
has to date only had limited development, the condition of the Hawaiian real
estate market and general economic conditions.
Interest income increased $1.7 million, or 78.1%. The increase
primarily reflects interest income associated with: (i) the subordinated note
receivable from Hudson LLC related to conversion of the 7% convertible
subordinated debentures (the Debentures) into shares of the Corporation's common
stock (see Note 8); (ii) advances made by the Corporation to Hudson LLC; and
(iii) higher invested cash balances. Interest expense for fiscal 1996 was
attributable to the Debentures.
The Corporation's provision for income taxes decreased $6.8 million
which primarily reflects: (i) lower pre-tax earnings in the U.S.; and (ii) the
absence in fiscal 1997 of a provision for foreign income taxes. As a result of
the Transaction, the Corporation is no longer required to provide for or reflect
foreign income taxes in its consolidated financial statements.
The following discussion is intended to provide an analysis of results
of the Aviation Business for fiscal 1997 and 1996 on a comparable basis.
Revenues decreased from $168.8 to $167.7 million, a decrease of $1.1
million, or .6%. The decrease reflects lower: (i) snow removal revenues of $8.9
million due mainly to the mild winter weather in the northeastern United States
during fiscal 1997; and (ii) ground transportation revenues of $.6 million due
primarily to the loss of contracts to operate information kiosks and airfield
passenger transport vehicles. Partially offsetting the revenue decrease were
higher: (i) ground handling service revenues (net of lower sales of de-icing
fluid in the U.S.) of $8.1 million due primarily to expanded services to new and
existing customers; and (ii) domestic aircraft fueling revenues of $.5 million
resulting primarily from expanded intoplane fueling services.
Costs and expenses increased from $143.7 to $149.9 million, an increase
of $6.1 million, or 4.3%. Operating costs increased from $123.0 to $128.7
million, an increase of $5.7 million, or 4.7%. The increase was attributable to
higher labor and related costs associated with expanded ground handling
operations and schedule changes by airline customers, and higher equipment
rental costs due primarily to expanded intoplane fueling services. Partially
offsetting the increases were lower costs related to: (i) snow removal
operations; (ii) workers' compensation insurance as a result of the positive
trend of related claims;
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
and (iii) the loss of ground transportation contracts to operate information
kiosks and airfield passenger transport vehicles.
Depreciation and amortization expenses decreased from $7.7 to $7.5
million, a decrease of $.2 million, or 2.4%. The decrease was due primarily to
the elimination of depreciation relating to equipment that became fully
depreciated.
Selling, general and administrative expenses increased from $13.1 to
$13.6 million, an increase of $.6 million, or 4.4%. The increases primarily
reflect higher administrative and related costs.
Operating income decreased from $25.1 to $17.8 million, a decrease of
$7.2 million, due primarily to decreased results associated with: (i) reduced
snow removal operations; (ii) lower sales of de-icing fluid in the U.S.; and
(iii) higher selling, general and administrative expenses as described above. In
addition, reduced ground handling margins in Canada caused mainly by increased
labor costs associated with schedule changes by airline customers also
contributed to the decrease in operating results. Partially offsetting the
decreases were improved results from domestic ground handling operations and
lower workers' compensation insurance costs.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure About
Segments of an Enterprise and Related Information", effective for fiscal years
beginning after December 31, 1997. SFAS No. 131 establishes standards for
defining operating segments and the reporting of certain information regarding
operating segments. Because this statement only impacts how financial
information is disclosed in interim and annual reports, the adoption will have
no impact on the Corporation's financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities at their fair value.
The Corporation is presently evaluating the impact of the adoption of this
statement.
LIQUIDITY, CAPITAL EXPENDITURES AND COMMITMENTS
The Corporation's recurring sources of liquidity are funds provided from Hudson
LLC and bank lines of credit. As a result of the Transaction, Hudson LLC pays to
the Corporation an overhead fee, which for fiscal 1998 was raised to the sum of
3 1/2% of Hudson LLC's consolidated domestic revenues and 1 1/4% of Hudson LLC's
consolidated Canadian revenues. It is anticipated that approximately $3.0
million of the Corporation's overhead will not be allocated to Hudson LLC on an
annual basis. In addition, the LLC Agreement provides that distributions from
Hudson LLC will be paid annually to the Corporation and LAGS (the Members) in
amounts at least equal to 50% of domestic net income and 10% of Canadian pre-tax
earnings for the fiscal year from the Aviation Business, as defined, multiplied
by the Members' respective equity interests in Hudson LLC. The Corporation's 74%
share of such minimum distribution, for fiscal 1997 and its 100% share of June
1996 earnings, in the total amount of $6.8 million, were received in October
1997. In December 1997, Hudson LLC made an additional distribution with respect
to fiscal 1997. The Corporation's 74% share of such additional distribution was
$5.9 million. Furthermore, as a result of the conversion of Debentures in fiscal
1996 and 1997 into shares of the Corporation's common stock, Hudson LLC is, on a
subordinated basis (as defined), indebted to the Corporation. During fiscal
1998, Hudson LLC repaid $.5 million of such debt to the Corporation. Hudson LLC
is obligated to repay the remaining balance of $4.6 million to the Corporation
as follows: (i) $1.5 million on July 15, 1998 (which was paid in July 1998); and
(ii) $1.5 million on each July 15th thereafter until the entire principal
balance is satisfied.
Pursuant to a Revolving Credit Agreement (the Credit Agreement) with a
group of banks dated June 1, 1996, the Corporation may borrow funds (including
outstanding letters of credit) up to a limit of $6.0 million until June 30, 1999
at which time the Credit Agreement terminates. There were no direct borrowings
or letters of credit outstanding during the fiscal year ended June 30, 1998.
In fiscal 1998, net cash provided by operating activities was nominal.
In fiscal 1997 net cash used by operating activities was $3.5 million due mainly
to equity in earnings of Hudson LLC which were not distributed to the
Corporation, while in fiscal 1996, net cash provided by operating activities was
$25.5 million. Net cash provided by investing activities in fiscal 1998 and 1997
was $2.2 and $19.5 million, respectively, due mainly to the distributions from
Hudson LLC to the Corporation in October and December 1997 and Hudson LLC's
partial repayment of the outstanding balance of its subordinated debt to the
Corporation in fiscal 1997, both of which were partially offset by net purchases
of investment securities. Capital expenditures net of proceeds from the sale of
property and equipment were $.2, $.2 and $12.9 million in fiscal 1998, 1997 and
1996, respectively. The majority of capital expenditures were made in respect of
the Aviation Business and as such are now made by Hudson LLC. Net cash used by
financing activities (primarily related to dividend payments and, in fiscal
1997, to repurchases of the Corporation's common stock as discussed below) was
$1.6, $10.3 and $.6 million for fiscal 1998, 1997 and 1996, respectively. Cash
and cash equivalents were $19.0, $18.4 and $12.7 million at June 30, 1998, 1997
and 1996, respectively.
At June 30, 1998 and 1997, Hudson LLC reflected working capital
deficits of $11.8 and $7.4 million, respectively, due mainly to Hudson LLC's
significant investment in long-lived assets and earnings distributions to the
Members. Hudson LLC's recurring sources of liquidity are funds provided from
operations, advances from the Corporation and bank lines of credit. Pursuant to
a Revolving Credit Agreement (the LLC Credit Agreement) with a group of banks
dated June 1, 1996, Hudson LLC may borrow funds (including outstanding letters
of credit) up to a limit of $18.0 million (the LLC Limit) until September 30,
1998. At such time, and at the end of each subsequent quarter, the LLC Limit
will be reduced by one-sixteenth of the LLC Limit that was in effect on June 30,
1998 until June 30, 2002, at which time the LLC Credit Agreement terminates.
There were no direct borrowings and $2.4 million of outstanding letters of
credit at
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Hudson General Corporation and Subsidiaries
June 30, 1998. In addition, net advances to Hudson LLC from the Corporation were
$2.1 million as of June 30, 1998. At June 30, 1998, Hudson LLC had commitments
to fund $3.4 million for operating equipment, the majority of which is expected
to be expended during fiscal 1999. In addition to such commitments, Hudson LLC
is obligated to expend funds of $5.6 and $1.9 million in fiscal 1999 and 2000,
respectively, for equipment to be used in providing de-icing and snow removal
services at Lester B. Pearson International Airport in Toronto pursuant to a
contract entered into in December 1997 with the Greater Toronto Airports
Authority. Capital expenditures are primarily for equipment and facilities used
in Hudson LLC's operations. Hudson LLC is unable to determine the extent of
additional future capital expenditures since, as a service company, its capital
expenditure requirements fluctuate depending upon facility requirements and
equipment purchases associated with Hudson LLC's ability to successfully obtain
additional contracts.
In fiscal 1997, the Board of Directors authorized the repurchase of up
to 400,000 shares of the Corporation's common stock, which purchases could be
made from time to time in either open market or privately negotiated
transactions. Prior to the fiscal 1997 authorizations, the Corporation still had
authority to repurchase up to 35,700 shares from a previous authorization.
During fiscal 1997, the Corporation repurchased 243,000 shares in the open
market for an aggregate purchase price of $9.2 million. No shares were
repurchased by the Corporation during fiscal 1998.
During fiscal 1992, the County of Hawaii passed an ordinance pursuant
to which the Venture, after subdivision approvals are obtained, would be able to
develop Phase IV of the project into 1,490 units. Pursuant to such ordinance,
the Venture is required to expend approximately $2.3 million for public
infrastructural improvements and in lieu payments. Shortly after passage of the
ordinance, a lawsuit against the County of Hawaii was filed in the Circuit Court
of Hawaii by two local residents of Hawaii (Plaintiffs) seeking to invalidate
such ordinance on various grounds including that the ordinance was adopted
without following State of Hawaii procedure relating to the preparation of an
Environmental Impact Statement. During fiscal 1993, the Judge in this action
granted Plaintiffs' motion for partial summary judgment without indicating any
effect on Phase IV zoning. The County and the Venture appealed this ruling to
the Hawaii Supreme Court, and in May 1997, the Supreme Court vacated the summary
judgment which was previously granted and remanded certain related issues to the
Circuit Court for that Court to decide. In March and April 1998, the Circuit
Court ruled in favor of the County and the Venture on the remanded issues and
certain other issues. In July 1998 the Circuit Court granted summary judgment in
favor of the County and the Venture on all remaining claims in the suit.
Although Plaintiffs have indicated they intend to appeal any decision
unfavorable to them, it is uncertain at this time whether an appeal will be
filed by Plaintiffs. Since a final judgment has not yet been entered, the time
period for filing an appeal has not yet commenced. The Venture cannot determine
the effect of this litigation on the timing of development of Phase IV or
expenditures related thereto until it is known whether an appeal will be filed.
The Joint Venture Agreement provides that the Corporation and its
partner in the Venture, Oxford Kohala, Inc. (the Partner), are obligated to make
equal advances of any of the Venture's required fundings. It is anticipated that
the Venture's capital commitments will be funded by cash flow from its
operations and advances from the Corporation and the Partner, and that any
advances which the Corporation may be required to make to the Venture will be
provided from the Corporation's cash flow and lines of credit. Pursuant to the
Credit Agreement the Corporation may advance up to $2.0 million to the Venture
in any fiscal year or up to $5.0 million during the term of the Credit
Agreement, net of any distributions received from the Venture by the Corporation
during such periods. Since the inception of the Credit Agreement, the
Corporation has not increased its net advances to the Venture. At present, it is
anticipated that the advances required to meet the obligations of the Venture
will not exceed the limits set forth in the Credit Agreement. During fiscal
1998, the Corporation did not make any advances to the Venture.
At June 30, 1998, the Venture had commitments (in addition to the
commitments noted above) aggregating $2.3 million for project expenditures.
Included in this amount is $1.7 million for the construction of water well
equipment and a reservoir by June 30, 1999. It is currently expected that funds
for most of the Venture's other commitments will be expended subsequent to
fiscal 1999.
The extent to which advances to the Venture will be required in the
future, as well as the timing of the return to the Corporation of the advances
made by it, will depend upon the amount of sales generated by the Venture, the
terms upon which parcels are sold and expenses incurred in the planning and
development of future phases of the Project.
It is expected that the sources of the Corporation's liquidity, as
noted above, will provide sufficient funding to allow the Corporation to meet
its liquidity requirements.
The so-called "Year 2000" issue (the Year 2000) results from computer
programs that do not differentiate between years commencing in 1900 and years
commencing in 2000 because they were written using two digits rather than four
to define the applicable year (i.e. ignoring the century). Accordingly, computer
systems and programs that process or utilize time-sensitive calculations may not
properly recognize the Year 2000. The Corporation has instituted a company wide
initiative to examine the implications of the Year 2000 on the Corporation's
computer systems and applications to ensure that the Corporation's computer
systems will function properly in the Year 2000 and thereafter.
The Corporation anticipates completing its Year 2000 project in early
calendar 1999 and believes that the Year 2000 issue will not pose significant
operational problems for its computer systems. The Corporation has also
initiated procedures to communicate with suppliers and customers regarding
compliance with Year 2000 requirements. The Corporation has not determined the
impact, if any, on its operations if outside third parties with which it has a
business relationship fail to comply with Year 2000 requirements.
Management currently believes that the costs related to the
Corporation's compliance with the Year 2000 issue should not have a material
adverse effect on its consolidated financial position, results of operations or
cash flows. While the Corporation has developed plans to test its business
critical computer systems prior to the Year 2000, there can be no assurance that
the systems of other parties upon which the Corporation's business also relies
will be Year 2000 compliant on a timely basis.
11
15
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
Fiscal Years Ended June 30, 1998(a) 1997(a) 1996(a) 1995 1994
-------- -------- -------- -------- --------
Revenues .................................... $ 5,783 $ 5,064 $157,100 $134,862 $141,784
-------- -------- -------- -------- --------
Earnings before extraordinary items and
cumulative effect of change in the method
of accounting for income taxes ............ 5,256 475(b) 10,466 4,593 7,310
-------- -------- -------- -------- --------
Earnings per share before extraordinary items
and cumulative effect of change in the
method of accounting for income taxes:
Basic ................................... 3.02 .26 9.09 3.72 5.87
Diluted ................................. 2.99 .26 5.60 2.70 3.96
-------- -------- -------- -------- --------
Net earnings ................................ 5,256 475(b) 10,466 4,593 7,760
-------- -------- -------- -------- --------
Net earnings per share:
Basic ................................... 3.02 .26 9.09 3.72 6.23
Diluted ................................. 2.99 .26 5.60 2.70 4.17
-------- -------- -------- -------- --------
Total assets ................................ 73,466 68,188 48,776 87,568 77,889
-------- -------- -------- -------- --------
Long-term obligations less current maturities -- -- -- 29,000 29,000
-------- -------- -------- -------- --------
Stockholders' equity ........................ 68,441 65,384 43,895 21,616 19,223
-------- -------- -------- -------- --------
Capital expenditures ........................ 178 326 13,158 10,806 9,815
-------- -------- -------- -------- --------
Cash dividends per common share ............. 1.00 .75 .50 .50 --
======== ======== ======== ======== ========
(a) As a result of a transaction with Lufthansa Airport and Ground Services GmbH
(see Note 2), effective June 1, 1996 the Corporation's interest in its
aviation services business is accounted for under the equity method.
(b) Includes a pre-tax charge of $8,500 related to the Corporation's investment
in and advances to the Kohala Joint Venture (see Note 3).
FISCAL 1998 Fiscal 1997
------------------- -------------------
Market Price Range* HIGH LOW High Low
------ ------ ------ ------
First Quarter .............. 44 1/4 38 40 32 3/4
Second Quarter ............. 48 1/2 42 1/2 39 1/2 34
Third Quarter .............. 49 42 3/4 41 3/8 36
Fourth Quarter ............. 50 5/8 45 7/8 40 3/8 35 5/8
*The range of per share closing prices of the Corporation's common stock on the
American Stock Exchange in each fiscal quarter from July 1, 1996 through June
30, 1998.
At June 30, 1998 there were 182 record holders of the Corporation's common
stock.
[HUDSON GENERAL LOGO]
12
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Hudson General Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
Year Ended June 30, 1998 1997 1996
--------- --------- ---------
Revenues ................................. $ 5,783 $ 5,064 $ 157,100
--------- --------- ---------
Costs and expenses:
Operating .............................. -- -- 113,744
Depreciation and amortization .......... 664 772 7,165
Selling, general and administrative .... 7,843 8,047 16,755
--------- --------- ---------
Total costs and expenses ............. 8,507 8,819 137,664
--------- --------- ---------
Operating income (loss) .................. (2,724) (3,755) 19,436
Equity in earnings of Hudson General LLC . 9,426 11,955 855
Equity in loss of Kohala Joint Venture ... (2,822) (11,292) (3,021)
Interest income .......................... 4,156 3,958 2,222
Interest expense ......................... -- -- (1,843)
--------- --------- ---------
Earnings before provision for income taxes 8,036 866 17,649
Provision for income taxes ............... 2,780 391 7,183
--------- --------- ---------
Net earnings ............................. $ 5,256 $ 475 $ 10,466
========= ========= =========
Earnings per share, basic ................ $ 3.02 $ .26 $ 9.09
========= ========= =========
Earnings per share, diluted .............. $ 2.99 $ .26 $ 5.60
========= ========= =========
See accompanying notes to consolidated financial statements.
13
17
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, 1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 19,001 $ 18,425
Investment securities available for sale ......................... 19,002 8,792
Receivables ...................................................... 563 540
Advances to Hudson General LLC -- net ............................ 2,057 361
Prepaid expenses and other assets ................................ 56 250
-------- --------
Total current assets ........................................... 40,679 28,368
Property and equipment at cost, less accumulated
depreciation and amortization .................................... 2,389 2,902
Investment in Hudson General LLC ................................... 22,306 26,395
Investment in Kohala Joint Venture -- net .......................... 4,962 5,893
Note receivable from Hudson General LLC ............................ 3,130 4,630
-------- --------
$ 73,466 $ 68,188
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 200 $ 161
Accrued expenses and other liabilities ........................... 2,628 2,536
-------- --------
Total current liabilities ..................................... 2,828 2,697
-------- --------
Deferred income taxes .............................................. 2,197 107
-------- --------
Stockholders' Equity:
Serial preferred stock (authorized 100,000 shares of $1 par value)
-- none outstanding ............................................. -- --
Common stock (authorized 7,000,000 shares of $1 par value)
-- issued 2,102,260 and 2,092,160 shares ........................ 2,102 2,092
Paid in capital .................................................. 48,266 48,732
Retained earnings ................................................ 29,235 25,722
Treasury stock, at cost, 357,311 shares .......................... (11,162) (11,162)
-------- --------
Total stockholders' equity ..................................... 68,441 65,384
-------- --------
$ 73,466 $ 68,188
======== ========
See accompanying notes to consolidated financial statements.
[HUDSON GENERAL LOGO]
14
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Hudson General Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Accumulated
Common Stock Issued Other
Years Ended ------------------- Paid in Retained Comprehensive Treasury Stockholders'
June 30, 1998, 1997 and 1996 Shares Amounts Capital Earnings Income Stock Equity
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1995 ............ 1,253,802 $ 1,254 $ 6,759 $ 16,707 $ (1,483) $ (1,621) $ 21,616
Common stock issued in
connection with exercise of
stock options ................. 16,000 16 249 -- -- -- 265
Dividends ($.50 per share) ...... -- -- -- (578) -- -- (578)
Equity adjustment from foreign
currency translation .......... -- -- -- -- 13 -- 13
Effect of equity infusion in
Hudson General LLC -- net ..... -- -- 10,783 -- 1,470 -- 12,253
Purchase of treasury stock ...... -- -- -- -- -- (389) (389)
Conversion of convertible
subordinated debentures ....... 7,599 7 242 -- -- -- 249
Net earnings .................... -- -- -- 10,466 -- -- 10,466
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1996 ............ 1,277,401 1,277 18,033 26,595 -- (2,010) 43,895
Common stock issued in
connection with exercise of
stock options ................. 10,500 11 154 -- -- -- 165
Dividends ($.75 per share) ...... -- -- -- (1,348) -- -- (1,348)
Equity adjustment from foreign
currency translation .......... -- -- (101) -- -- -- (101)
Effect of equity infusion in
Hudson General LLC -- net ..... -- -- 5,805 -- -- -- 5,805
Purchase of treasury stock ...... -- -- -- -- -- (9,152) (9,152)
Conversion of convertible
subordinated debentures ....... 804,259 804 24,841 -- -- -- 25,645
Net earnings .................... -- -- -- 475 -- -- 475
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1997 ............ 2,092,160 2,092 48,732 25,722 -- (11,162) 65,384
Common stock issued in
connection with exercise of
stock options ................. 10,100 10 148 -- -- -- 158
Dividends ($1.00 per share) ..... -- -- -- (1,743) -- -- (1,743)
Equity adjustment from foreign
currency translation .......... -- -- (614) -- -- -- (614)
Net earnings .................... -- -- -- 5,256 -- -- 5,256
--------- --------- --------- --------- --------- --------- ---------
BALANCE, JUNE 30, 1998 ............ 2,102,260 $ 2,102 $ 48,266 $ 29,235 -- $ (11,162) $ 68,441
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
15
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended June 30, 1998 1997 1996
Cash flows from operating activities:
Net earnings ............................................................................. $ 5,256 $ 475 $ 10,466
Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
Depreciation and amortization .......................................................... 664 772 7,165
Provision for losses on accounts receivable -- net ..................................... -- -- 362
Deferred income taxes .................................................................. 2,090 (655) (1,090)
Equity in earnings of Hudson General LLC ............................................... (9,426) (11,955) (855)
Equity in loss of Kohala Joint Venture ................................................. 2,822 11,292 3,021
Accrual of interest income on Kohala Joint Venture advances ............................ (1,891) (1,765) (1,604)
Gain on sale of equipment .............................................................. -- -- (139)
Change in other current assets and liabilities:
Accounts and notes receivables ....................................................... (23) (302) 2,845
Prepaid expenses and other assets .................................................... 194 52 (504)
Deferred income taxes ................................................................ -- -- 2,342
Accounts payable ..................................................................... 39 (310) 892
Income taxes payable ................................................................. -- -- 165
Accrued expenses and other liabilities ............................................... 286 (1,112) 1,785
Decrease in long-term receivables -- net ............................................... -- -- 522
Other -- net ........................................................................... -- 23 91
-------- -------- --------
Net cash provided (used) by operating activities ................................... 11 (3,485) 25,464
-------- -------- --------
Cash flows from investing activities:
Purchases of investment securities available for sale .................................... (21,918) (8,792) --
Proceeds from maturity and sale of investment securities available for sale .............. 11,708 -- --
Purchases of property and equipment ...................................................... (178) (326) (13,158)
Proceeds from sale of property and equipment ............................................. 27 80 244
Distributions from Hudson General LLC .................................................... 12,707 -- --
(Advances to) repayments from Hudson General LLC ......................................... (696) 7,302 (7,233)
Collections of note receivable from Hudson General LLC ................................... 500 21,283 --
Advances to Kohala Joint Venture -- net .................................................. -- -- (772)
Net cash transferred to Hudson General LLC upon formation ................................ -- -- (3,002)
Fees related to transfer of assets to Hudson General LLC ................................. -- -- (825)
-------- -------- --------
Net cash provided (used) by investing activities ................................... 2,150 19,547 (24,746)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ................................................... 158 162 335
Cash dividends paid ...................................................................... (1,743) (1,348) (578)
Purchase of treasury stock ............................................................... -- (9,152) (389)
-------- -------- --------
Net cash used by financing activities .............................................. (1,585) (10,338) (632)
-------- -------- --------
Effect of exchange rate changes on cash .................................................... -- -- 2
-------- -------- --------
Net increase in cash and cash equivalents .................................................. 576 5,724 88
Cash and cash equivalents at beginning of year ............................................. 18,425 12,701 12,613
-------- -------- --------
Cash and cash equivalents at end of year ................................................... $ 19,001 $ 18,425 $ 12,701
======== ======== ========
See accompanying notes to consolidated financial statements.
[HUDSON LOGO]
16
20
Hudson General Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Hudson General Corporation and the subsidiaries for which it
exercises effective control (the Corporation). All material intercompany
accounts and transactions have been eliminated in consolidation. Kohala Joint
Venture, a land development venture in Hawaii in which the Corporation has a 50%
interest (the Venture), is accounted for under the equity method of accounting
(see Note 3). Effective June 1, 1996, the Corporation consummated a transaction
(the Transaction) in which a third party, Lufthansa Airport and Ground Services
GmbH (LAGS), an indirect wholly-owned subsidiary of Deutsche Lufthansa AG,
acquired a 26% interest in the Corporation's aviation services business (the
Aviation Business). As part of the Transaction, the Corporation transferred
substantially all of the assets and liabilities of the Aviation Business to
Hudson General LLC (Hudson LLC), a newly-formed limited liability company (see
Note 2). LAGS received a 26% interest in Hudson LLC. At the same time, the
Corporation, Hudson LLC and LAGS USA Inc., a wholly-owned subsidiary of LAGS
(LAGS USA), entered into a Limited Liability Company Agreement effective June 1,
1996 (the LLC Agreement). Due to the provisions in the LLC Agreement, as
amended, effective June 1, 1996, the Corporation has accounted for its interest
in Hudson LLC under the equity method of accounting. As a result, the fiscal
1998 and 1997 consolidated statements of earnings of the Corporation contain the
operating results of the Aviation Business under the equity method of
accounting. The fiscal 1996 consolidated statement of earnings of the
Corporation contains the operating results of the Aviation Business on a
consolidated basis for eleven months and under the equity method of accounting
for one month. As a result of the Corporation's transfer of substantially all of
the Aviation Business assets and liabilities to Hudson LLC, such assets and
liabilities are not reflected in the Corporation's accompanying consolidated
balance sheets. The Corporation's stockholders' equity was increased by
$5,704,000 and $12,253,000 in fiscal 1997 and the month of June 1996,
respectively, as a result of the Corporation's equity interest in Hudson LLC's
capital transactions.
DESCRIPTION OF BUSINESS: The Corporation through its 74% ownership interest in
Hudson LLC, provides a broad and diverse range of services to the aviation
industry at twenty-four (24) airports throughout the United States and Canada.
These services include aircraft ground handling; aircraft fueling; fuel
management; ground transportation; snow removal; cargo warehousing; and sale,
leasing and maintenance of airline ground support equipment. In addition to its
airport related services, Hudson LLC provides transportation management services
for various governmental agencies and authorities.
DEPRECIATION AND AMORTIZATION: Depreciation of property and equipment is
provided on the straight-line method over their estimated useful lives.
INCOME TAXES: Effective July 1, 1993, the Corporation adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for
Income Taxes", which requires the use of the asset and liability method of
accounting for deferred income taxes.
FINANCIAL INSTRUMENTS: The Corporation believes that the book values of its
monetary assets and liabilities approximate fair values as a result of the
short-term nature of such assets and liabilities.
FOREIGN CURRENCY TRANSLATION: The financial position and results of operations
of the Corporation's Canadian operations were measured using local currency as
the functional currency. Assets and liabilities were translated into U.S.
dollars at year-end rates of exchange, and revenues and expenses were translated
at the average rates of exchange for the year. Gains or losses resulting from
translating foreign currency financial statements were accumulated as a separate
component of stockholders' equity.
STATEMENTS OF CASH FLOWS: For purposes of the consolidated statements of cash
flows, the Corporation considers all securities with an original maturity of
approximately three months or less at the date of acquisition to be cash
equivalents. The changes in specified asset and liability accounts in the
accompanying consolidated statements of cash flows for fiscal 1996 are exclusive
of the effect of the transfer of specified assets and liabilities of the
Aviation Business to Hudson LLC. In fiscal 1998, 1997 and 1996 income taxes (net
of refunds) of $132,000, $963,000 and $5,064,000, respectively, were paid.
During fiscal 1998 and 1997, there was no interest paid. Interest of $2,030,000
was paid in fiscal 1996.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE: In the second quarter of fiscal 1998, the Corporation
adopted the provisions of SFAS No. 128, "Earnings Per Share", and has restated
all prior-period earnings per share (EPS) data presented. This statement
establishes standards for computing and presenting EPS, replacing the
presentation of previously required primary EPS with a presentation of Basic
EPS. For entities with complex capital structures, the statement requires the
dual presentation of both Basic EPS and Diluted EPS on the face of the statement
of earnings. The impact of the Corporation's adoption of this statement was not
material to previously reported EPS amounts.
17
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the years ended June 30, 1998, 1997 and 1996 is as
follows:
(in thousands, except per share amounts) 1998 1997 1996
------ ------ -------
Net earnings ........................... $5,256 $ 475 $10,466
Add: Interest on 7% convertible
subordinated debentures due 2011
less applicable income taxes ......... -- -- (a) 1,032
------ ------ -------
Net earnings for computing earnings
per share, diluted ................... $5,256 $ 475 $11,498
====== ====== =======
Weighted average number of
common shares outstanding ............ 1,742 1,814 1,151
Add: Incremental shares from assumed:
Exercise of stock options ............ 15 18 17
Conversion of 7% convertible
subordinated debentures ............ -- -- (a) 884
------ ------ -------
Weighted average number of
common and potential common
shares outstanding for computing
earnings per share, diluted .......... 1,757 1,832 2,052
====== ====== =======
Earnings per common share, basic ....... $ 3.02 $ .26 $ 9.09
====== ====== =======
Earnings per common share, diluted ..... $ 2.99 $ .26 $ 5.60
====== ====== =======
(a)Assumed conversion is antidilutive, and accordingly, the 7% convertible
subordinated debentures are excluded from the computation.
LONG-LIVED ASSETS: Effective July 1, 1996 the Corporation adopted the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", which requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of by an entity
be reviewed for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of SFAS No. 121 did not have any impact on the Corporation's
consolidated financial position or results of operations.
STOCK-BASED COMPENSATION: Effective July 1, 1996 the Corporation adopted the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", which
encourages, but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Corporation has
chosen to continue to account for stock-based compensation under the existing
accounting rules contained in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations, but
will provide pro forma disclosures of any future stock-based compensation
expense determined under the fair-value provisions of SFAS No. 123, if material.
As of June 30, 1995, no further grants were available under any of the
Corporation's stock-based employee compensation plans.
MARKETABLE SECURITIES: The Corporation had invested $19,002,000 and $8,792,000
at June 30, 1998 and 1997, respectively, in commercial paper, and government and
corporate fixed income securities. The maturities of such investments are
generally less than one year. The book values of the investments approximate
their respective market values as a result of the short-term nature of the
securities and the low level of risk in these types of investments.
COMPREHENSIVE INCOME: Effective for fiscal 1998, the Corporation has adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income", which requires the
reporting of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income. The Corporation has no
activities which represent items of other comprehensive income and, accordingly,
the adoption of SFAS No. 130 did not have a material effect on the Corporation's
consolidated financial statements.
RECLASSIFICATIONS: Certain items previously reported in specific financial
statement captions have been reclassified to conform with the fiscal 1998
presentation.
2. INVESTMENT IN HUDSON GENERAL LLC
Effective June 1, 1996 pursuant to the terms of the Unit Purchase and Option
Agreement dated February 27, 1996 (the Purchase Agreement) between the
Corporation and LAGS, the Corporation transferred substantially all of the
assets and liabilities of the Aviation Business to Hudson LLC. In exchange for
the transfer of such assets and liabilities and the assumption by Hudson LLC, as
co-obligor with the Corporation, of all of the Corporation's 7% convertible
subordinated debentures (see Note 7), the Corporation received a 74% interest in
Hudson LLC. In addition, Hudson LLC sold LAGS a 26% interest in Hudson LLC for a
purchase price of $23,686,000 in cash (after certain adjustments), of which
$15,848,000 was paid at the closing, and deferred payments (the Deferred
Payments) of $2,650,000 and $5,188,000 plus interest thereon were made,
respectively, in September 1996 and December 1996. The Corporation's investment
in Hudson LLC and paid in capital were increased by its 74% interest in the
Deferred Payments. The Purchase Agreement, as amended, provides LAGS an option
(the LAGS Option), exercisable on October 1 of each year through 1999, effective
as of the preceding July 1, pursuant to which LAGS may increase its equity
ownership in Hudson LLC from 26% to a maximum of 49%, for a price based on a
formula related to the average earnings of the Aviation Business over the four
fiscal years preceding the exercise of the option, subject to certain minimum
and maximum amounts. On September 16, 1998, the Corporation was advised that the
Supervisory Board of Deutsche Lufthansa AG approved the exercise by LAGS USA of
the LAGS Option to increase its equity interest in Hudson LLC from 26% to 49%.
As a result, the Corporation expects LAGS to give notice of its exercise of the
LAGS Option on or about October 1, 1998. The exercise price is approximately
$29,600,000.
The LLC Agreement, as amended, stipulates that the Corporation and LAGS
USA will share profits and losses in the same proportion as their respective
equity interests in Hudson LLC, except that the Corporation was entitled to all
interest
18
22
Hudson General Corporation and Subsidiaries
earned on the Deferred Payments. In addition, LAGS USA would not share in any
pre-tax earnings, as defined, of the Aviation Business in excess of $14,690,000
and $15,863,000 in fiscal 1997 and 1998, respectively, unless the aggregate of
the pre-tax earnings of the Aviation Business for fiscal 1997 and 1998 exceeded
$30,553,000. Such pre-tax earnings exceeded $30,553,000, and as a result, LAGS
USA is not limited by the LLC Agreement from sharing in pre-tax earnings of the
Aviation Business for those years. Hudson LLC's net earnings in June 1996 were
allocated 100% to the Corporation.
In June 1996, primarily as a result of the Corporation retaining
certain trade receivables, the Corporation made net advances of $7,233,000 on
behalf of Hudson LLC. Such balance was repaid to the Corporation by Hudson LLC
(together with accrued interest at the Corporation's incremental borrowing rate)
during fiscal 1997. The Corporation's net advances to Hudson LLC were $2,057,000
and $361,000 at June 30, 1998 and 1997, respectively.
Pursuant to the LLC Agreement, as amended, the Corporation will
continue to manage the Aviation Business and will be entitled to charge Hudson
LLC an overhead fee equal to the sum of an agreed upon percentage of Hudson
LLC's consolidated domestic revenues and an agreed upon percentage of Hudson
LLC's consolidated Canadian revenues. (The Corporation and LAGS USA agreed to
overhead fees for fiscal 1998 of 3 1/2% and 1 1/4%, respectively, and overhead
fees for fiscal 1997 of 3% and 1%, respectively). The LLC Agreement, as amended,
also provides for a Member Board on which the Corporation has three votes and
LAGS USA has two votes, and allows either Member to veto certain major
transactions and to veto any reduction in distributions stipulated in the LLC
Agreement, as amended. The LLC Agreement, as amended, provides that
distributions will be paid annually in an amount at least equal to 50% of
domestic net income and 10% of Canadian pre-tax earnings, as defined, from the
Aviation Business. Such distributions, totaling approximately $8,300,000 for
fiscal 1997 and the month of June 1996, were made in October 1997. An additional
distribution of $7,500,000 with respect to fiscal 1997 was made in December
1997.
The summary consolidated balance sheets for Hudson LLC as of June 30,
1998 and 1997 are as follows:
(in thousands) 1998 1997
------- -------
Cash and cash equivalents ...................... $ 3,393 $12,324
Accounts and notes receivable -- net ........... 16,886 15,289
Other current assets ........................... 6,391 4,211
------- -------
Total current assets ....................... 26,670 31,824
Property, equipment and leasehold
rights at cost, less accumulated
depreciation and amortization ................ 45,639 44,948
Other assets -- net ............................ 643 2,248
------- -------
$72,952 $79,020
======= =======
Accounts payable ............................... $17,326 $18,528
Accrued expenses and other liabilities ......... 19,045 20,291
Advances from Hudson General
Corporation -- net ........................... 2,057 361
------- -------
Total current liabilities .................. 38,428 39,180
Deferred income taxes .......................... 319 --
Note payable to Hudson General Corporation ..... 3,130 4,630
Members' equity ................................ 31,075 35,210
------- -------
$72,952 $79,020
======= =======
Summary results of operations for Hudson LLC for fiscal 1998, 1997 and
the month of June 1996 are as follows:
(in thousands) 1998 1997 1996
--------- -------- -------
Revenues ......................... $ 168,947 $167,729 $12,096
--------- -------- -------
Operating costs .................. 131,643 128,749 9,259
Depreciation and amortization .... 8,237 7,510 673
Selling, general and
administrative costs ........... 14,459 13,625 1,317
--------- -------- -------
Total costs and expenses ..... 154,339 149,884 11,249
--------- -------- -------
Operating income ................. 14,608 17,845 847
Interest (expense) income -- net . (122) 179 49
--------- -------- -------
Earnings before provision for
income taxes ................... 14,486 18,024 896
Provision for income taxes ....... 1,748 2,085 41
--------- -------- -------
Net earnings ................. $ 12,738 $ 15,939 $ 855
========= ======== =======
The Corporation's share of Hudson LLC's results is shown as "Equity in
earnings of Hudson General LLC" in the accompanying consolidated statements of
earnings.
3. INVESTMENT IN KOHALA JOINT VENTURE
The Venture was formed to acquire, develop and sell approximately 4,000
contiguous acres of land in Hawaii (the Project). The Project is being developed
in four successive phases. The first two phases, containing approximately 2,100
acres, have been developed and substantially sold. The third phase, containing
approximately 550 acres, has also been developed and has 84 parcels available
for sale. The fourth phase has yet to be developed, except to the extent common
improvements (main road, water wells, etc.) have been completed. During fiscal
1992, the County of Hawaii passed an ordinance pursuant to which the Venture,
after subdivision approvals are obtained, would be able to develop Phase IV into
1,490 units. Shortly after passage of the ordinance, a lawsuit against the
County of Hawaii was filed in the Circuit Court of Hawaii by two local residents
of Hawaii (Plaintiffs) seeking to invalidate such ordinance on various grounds
including that the ordinance was adopted without following State of Hawaii
procedure relating to the preparation of an Environmental Impact Statement.
During fiscal 1993, the Judge in this action granted Plaintiffs' motion for
partial summary judgment without indicating any effect on Phase IV zoning. The
County and the Venture appealed this ruling to the Hawaii Supreme Court, and in
May 1997, the Supreme Court vacated the summary judgment which was previously
granted and remanded certain related issues to the Circuit Court for that Court
to decide. In March and April 1998, the Circuit Court ruled in favor of the
County and the Venture on the remanded issues and certain other issues. In July
1998 the Circuit Court granted summary judgment in favor of the County and the
Venture on all remaining claims in the suit. Although Plaintiffs have indicated
they intend to appeal any decision unfavorable to them, it is uncertain at this
time whether an appeal will be filed by Plaintiffs. Since a final judgment has
not yet been entered, the time period for filing an appeal has not yet
commenced. The Venture cannot determine the effect of this litigation on the
timing of development of Phase IV or expenditures related thereto until it is
known whether an appeal will be filed. The joint venture partners continue to
reevaluate plans for Phase IV which has to date only had limited development.
19
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Corporation's partner in the Venture is Oxford Kohala, Inc. (the
Partner), a wholly-owned subsidiary of Oxford First Corporation (Oxford First).
Under the Restated Joint Venture Agreement dated April 29, 1981, as amended (the
Agreement), the Partners have agreed to make equal advances to the Venture for
all costs necessary for the orderly development of the land and to share profits
equally. During fiscal 1998, the Corporation did not make any advances to the
Venture.
The Corporation accrues interest income on its advances to the Venture
at the rate agreed to by the Partners (currently 1% below prime). The
Corporation defers recognition of such interest income to the extent that such
interest rate exceeds the Corporation's weighted average cost of funds. At June
30, 1998 and 1997, the amount of deferred interest income was $2,352,000 and
$2,159,000, respectively. The Corporation will recognize deferred interest
income when additional distributions or payments related to the Venture, if any,
are made to the Corporation. Interest income accrued by the Corporation for
fiscal 1998 and 1997 was $1,891,000 and $1,765,000, respectively.
The summary consolidated balance sheets for the Venture as of June 30,
1998 and 1997 are as follows:
(in thousands) 1998 1997
-------- --------
Cash and equivalents ......................... $ 355 $ 730
Land and development costs (including
capitalized interest of $6,548,000
and $6,591,000) ............................ 9,210 9,264
Mortgages, accounts and notes receivable ..... 2,137 2,779
Foreclosed real estate -- net ................ 2,186 2,854
Other assets -- net .......................... 1,549 1,590
-------- --------
$ 15,437 $ 17,217
======== ========
Partner advances and accrued
interest payable ........................... $ 58,178 $ 54,013
Accounts payable and accrued expenses ........ 860 1,162
Partners' deficit ............................ (43,601) (37,958)
-------- --------
$ 15,437 $ 17,217
======== ========
In the fourth quarter of fiscal 1997, the Venture recorded a charge of
$17,000,000 to write-down its real estate assets to their estimated fair values.
The charge is the result of the continuing periodic evaluation of the carrying
value of the Venture's real estate assets. The Partners concluded, as a result
of their most recent in-depth analysis of an updated independent appraisal of
such assets and the consideration of other factors affecting the development of
the property, that the carrying value of the real estate assets should be
reduced. Factors considered by the Partners included the Partners' plans to
reevaluate the fourth phase of the Project which has to date only had limited
development, the current condition of the Hawaiian real estate market and
general economic conditions. In connection with the Venture's reduction of the
carrying value of its real estate assets, the Corporation reduced the carrying
value of a portion of its advances to the Venture in the amount of $8,500,000.
The Corporation's total advances (including accrued interest and after such
reduction) at June 30, 1998 and 1997 were $20,589,000 and $18,506,000,
respectively.
Summary results of operations for the Venture for the fiscal years
ended June 30, 1998, 1997 and 1996 are as follows:
(in thousands) 1998 1997 1996
Net sales ........................ $ 666 $ 1,455 $ 677
------- -------- -------
Cost of sales .................... 326 1,106 365
Write-down of real estate assets . -- 17,000 --
Selling, general and
administrative costs ........... 2,046 2,340 2,953
Interest -- net .................. 3,937 3,593 3,401
------- -------- -------
Net loss ......................... $(5,643) $(22,584) $(6,042)
======= ======== =======
As a partnership, the Venture is not subject to federal or state income
taxes. The Corporation's share of the Venture's results is shown as "Equity in
loss of Kohala Joint Venture" in the accompanying consolidated statements of
earnings.
4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
(a) Accrued expenses and other liabilities at June 30, 1998 and 1997 consisted
of the following:
(in thousands) 1998 1997
------ ------
Salaries and wages ..................... $1,917 $1,940
Retirement plan costs .................. 307 319
Other .................................. 404 277
------ ------
$2,628 $2,536
====== ======
Maintenance and repair expenses were $7,536,000 for fiscal 1996. Bad
debt expenses were $362,000 for fiscal 1996.
(b) The consolidated financial statements include: revenues of
$38,005,000 and earnings of $3,166,000 in fiscal 1996 related to the
Corporation's Canadian operations.
5. PROPERTY AND EQUIPMENT
The number of years over which major classes of assets are being depreciated and
amortized, and the costs and related accumulated depreciation and amortization
as of June 30, 1998 and 1997 are set forth below:
Estimated
Useful Lives 1998 1997
------------ ---- ----
(in thousands)
Operating equipment ................ 2 - 12 $ 7,416 $ 7,640
Office furnishings
and equipment .................... 5 - 10 943 821
Leasehold improvements ............. 6 - 9 246 239
------- -------
8,605 8,700
Accumulated depreciation
and amortization ................. $(6,216) (5,798)
======= =======
$ 2,389 $ 2,902
======= =======
At June 30, 1998 and 1997, the Corporation leased operating equipment
to Hudson LLC with a net book value of $1,853,000 and $2,394,000, respectively.
20
24
Hudson General Corporation and Subsidiaries
6. LONG-TERM DEBT
Pursuant to a Revolving Credit Agreement with a group of banks dated June 1,
1996 (the Credit Agreement), the Corporation may borrow funds (including
outstanding letters of credit) up to a limit of $6,000,000 until June 30, 1999
at which time the Credit Agreement terminates. There were no direct borrowings
or letters of credit outstanding under the Credit Agreement at June 30, 1998 and
1997. The Credit Agreement provides the Corporation with the option of selecting
a rate of interest at either the base rate or 1-3/8% above the LIBO rate, as
defined.
The Credit Agreement requires that the Corporation meet certain
financial covenants and allows the Corporation to pay dividends or purchase,
redeem or retire its stock so long as such financial covenants are met. Pursuant
to the Credit Agreement, the Corporation may advance up to $2,000,000 to the
Venture in any fiscal year or up to $5,000,000 during the term of the Credit
Agreement, net of any distributions received from the Venture by the Corporation
during such periods. Since the inception of the Credit Agreement the Corporation
has not increased its net advances to the Venture. The Corporation has granted
the banks a security interest in all of its membership units of Hudson LLC and
certain other assets.
In July 1986 the Corporation issued $30,000,000 of 7% convertible
subordinated debentures due 2011 (the Debentures). In connection with the
Transaction, effective June 1, 1996, Hudson LLC assumed the obligations of the
Debentures and the Corporation remained as a co-obligor. The Debentures were
convertible at any time prior to maturity into shares of the Corporation's
common stock at a conversion price of $32.75 per share.
At June 1, 1996 there was $28,821,000 principal balance of the
Debentures outstanding. During June and August 1996, the Debentures were called
for redemption and as a result, $2,408,000 principal balance of the Debentures
were redeemed during fiscal 1997. In addition, during fiscal 1997 and the month
of June 1996, $26,343,000 and $70,000, respectively, of the Debentures were
converted into shares of the Corporation's common stock and to such extent
Hudson LLC became indebted, on a subordinated basis, to the Corporation (the
Corporate Subordinated Debt). At September 5, 1996, no Debentures remained
outstanding.
During fiscal 1997, Hudson LLC utilized the proceeds from the Deferred
Payments together with a portion of the proceeds received at the closing of the
Transaction to repay $21,283,000 of the outstanding balance of the Corporate
Subordinated Debt. At June 30, 1998 and 1997, the balance of the Corporate
Subordinated Debt was $4,630,000 and $5,130,000, respectively. The noncurrent
portion of such debt at June 30, 1998 and 1997 of $3,130,000 and $4,630,000,
respectively, is shown as "Note receivable from Hudson General LLC" in the
accompanying consolidated balance sheets. Hudson LLC is obligated to repay the
remaining balance of $4,630,000 to the Corporation as follows: (i) $1,500,000 on
July 15, 1998; and (ii) $1,500,000 on each July 15th thereafter until the entire
principal balance is satisfied. The current portion of this debt at June 30,
1998 (which was paid in July 1998) and 1997, of $1,500,000 and $500,000,
respectively, is included in "Advances to Hudson General LLC -- net" in the
accompanying consolidated balance sheets. Interest on the Corporate Subordinated
Debt is payable semi-annually in January and July at the rate of 7% per annum.
7. INCOME TAXES
Provision for income taxes consisted of the following for the years ended June
30, 1998, 1997 and 1996:
(in thousands) 1998 1997 1996
---- ---- ----
Federal:
Current ..................... $ 445 $ 97 $ 3,415
Deferred .................... 1,535 (456) 1,485
Foreign:
Current ..................... -- -- 324
Deferred .................... -- -- 449
State:
Current ..................... 245 687 789
Deferred .................... 555 63 721
------- ------- -------
$ 2,780 $ 391 $ 7,183
======= ======= =======
A reconciliation of the provision for income taxes to the amount
computed by applying the statutory federal income tax rate to earnings before
provision for income taxes for the years ended June 30, 1998, 1997 and 1996
follows:
(in thousands) 1998 1997 1996
---- ---- ----
Tax at federal statutory rate ....... $ 2,732 $ 295 $ 6,001
Increase (decrease) in income
taxes resulting from:
Reevaluation of valuation
allowance ..................... -- -- (960)
Foreign tax differential ........ -- -- 395
Effect of foreign income,
previously taxed .............. (485) (449) --
State income taxes, net of
federal income tax effect ..... 528 495 997
Provision for future repatriation
of Canadian earnings .......... -- -- 750
Other -- net .................... 5 50 --
------- ------- -------
Provision for income taxes .......... $ 2,780 $ 391 $ 7,183
======= ======= =======
Deferred tax assets (liabilities) are comprised of the following as of
June 30, 1998 and 1997:
(in thousands) 1998 1997
---- ----
Deferred tax assets:
Reserves for doubtful accounts,
claims, etc .................................. $ 149 $ 319
Retirement plans ............................... 104 108
Alternative minimum tax ........................ 471 285
------- -------
Current deferred tax assets ................ 724 712
------- -------
State income taxes ............................. -- 510
Difference between book and tax
carrying value of Hudson LLC ................. -- 193
Difference in the Venture's book and
tax year-end ................................. 449 525
------- -------
Noncurrent deferred tax assets ............. 449 1,228
------- -------
Net deferred tax assets .................... $ 1,173 $ 1,940
------- -------
Deferred tax liabilities:
Difference between book and tax
carrying value of Hudson LLC ................. $(1,056) $ --
State income taxes ............................. (271) --
Property, equipment and leasehold rights,
principally depreciation -- domestic ......... (929) (857)
Provision for future repatriation of
Canadian earnings ............................ (750) (750)
Interest capitalized on financial statements ... (364) (440)
------- -------
Noncurrent deferred tax liabilities ........ (3,370) (2,047)
------- -------
Net deferred tax liabilities ............... $(2,197) $ (107)
======= =======
21
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Under SFAS No. 109, a valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. At July 1, 1993, the Corporation provided a 100% valuation allowance
for the net operating loss carryforwards and depreciation differences relating
to its Canadian operations since realization of the related deferred tax assets
was uncertain at that time. The net change in the valuation allowance for fiscal
1996 was a decrease of $960,000. The decrease reflects the recognition of
$960,000 of deferred tax assets resulting from a review of prior Canadian
operating results and anticipation of future Canadian earnings, which together
with cessation of operations of the Corporation's Canadian fixed base
operations, made the realization of additional Canadian depreciation differences
more likely than not.
As a result of the Transaction, $852,000 of deferred tax assets related
to the Corporation's Canadian subsidiary were transferred to Hudson LLC on June
1, 1996 and the Corporation will no longer be required to provide for or reflect
foreign taxes in its consolidated financial statements. In addition, beginning
June 30, 1996, the Corporation's deferred tax assets and liabilities relating to
Hudson LLC appear as a separate item within deferred taxes. Due to anticipation
by the Corporation of the future repatriation of Canadian earnings, the
Corporation provided in fiscal 1996 for U.S. income taxes of $750,000.
In April 1997, Hudson LLC's Canadian subsidiary was notified by
Canadian taxation authorities of their intention to disallow loss and
depreciation deductions and carryforwards related to an internal
recapitalization in fiscal 1990 by the Corporation of such Canadian subsidiary.
If the position of the Canadian taxation authorities (as currently proposed) is
sustained, a foreign income tax liability of approximately $3,900,000, plus
interest, would result. The Corporation has agreed to indemnify and hold
harmless Hudson LLC, LAGS and each affiliate of LAGS against any liability
resulting from this matter. The Corporation's management disagrees with the
position of the Canadian taxation authorities and intends to vigorously contest
any potential assessments made by them. Accordingly, no provision has been made
in the accompanying consolidated financial statements for foreign income taxes
related to this matter.
For tax purposes, the Corporation will receive a pass-through of its
share of taxable income or loss from Hudson LLC and will provide for and pay
federal and state taxes on its share of the income or loss of Hudson LLC.
8. COMMON STOCK
(a) The Corporation's 1981 Non-Qualified Stock Option and Stock Appreciation
Rights Plan (the Plan) provided for the issuance of non-qualified stock options
(Options) to key employees. In connection with these Options, the Board of
Directors' Stock Option and Appreciation Rights Committee (the Committee) could
also grant stock appreciation rights (Rights) exercisable in lieu of the
Options, and/or limited rights (Limited Rights) exercisable under certain
circumstances in lieu of the Options. No further Options or Rights may be
granted under the Plan. The exercise price of outstanding Options under the Plan
is the fair market value (as defined in the Plan) of the shares of the
Corporation's common stock on the date of grant.
Activity in Options during fiscal 1998 and 1997 was as follows:
Outstanding June 30, 1996 .............................. 49,400
Exercised ($14.79 per share) ........................... (8,500)
Exercised ($19.07 per share) ........................... (700)
-------
Outstanding June 30, 1997 .............................. 40,200
Exercised ($14.79 per share) ........................... (8,400)
Exercised ($19.07 per share) ........................... (400)
-------
Outstanding June 30, 1998 .............................. 31,400
=======
Limited Rights were also granted in conjunction with Options granted in
May 1990 and June 1991 of which 28,100 ($14.79 per share) and 3,300 ($19.07 per
share) were outstanding at June 30, 1998. At June 30, 1998 the aggregate Option
price and quoted market value of Corporation stock subject to outstanding
Options were $479,000 and $1,590,000, respectively. All outstanding Options and
Rights were granted with a term of ten years and are currently exercisable.
(b) The Corporation's 1981 Incentive Stock Option (ISO) and Stock
Appreciation Rights Plan (the Plan) provided for the issuance of ISO's to key
employees. The fair market value, as defined, at the date of grant, for which an
individual may have been awarded ISO's, was limited to $100,000 per calendar
year. No further ISO's may be granted under the Plan. The exercise price of all
ISO's outstanding under the Plan is one hundred percent (100%) of the fair
market value (as defined in the Plan) of the shares of the Corporation's common
stock on the date of grant.
The Committee was also authorized to grant Rights and/or Limited Rights
in conjunction with ISO's granted under the Plan. In all material respects,
Rights and Limited Rights granted under the ISO Plan operate in a manner
identical to Rights and Limited Rights granted under the 1981 Non-Qualified
Stock Option and Stock Appreciation Rights Plan.
Activity in ISO's (and Rights) during fiscal 1998 and 1997 was as
follows:
Outstanding June 30, 1996 ............................... 8,300
Exercised ($19.88 per share) ............................ (1,300)
------
Outstanding June 30, 1997 ............................... 7,000
Exercised ($19.88 per share) ............................ (1,300)
------
Outstanding June 30, 1998 ............................... 5,700
======
Limited Rights were also granted in conjunction with ISO's granted in
June 1991 of which 5,700 ($19.88 per share) were outstanding at June 30, 1998.
At June 30, 1998 the aggregate ISO price and quoted market value of Corporation
stock subject to outstanding ISO's were $113,000 and $289,000, respectively. All
outstanding ISO's were granted with a term of ten years and are currently
exercisable.
22
26
Hudson General Corporation and Subsidiaries
(c) Common Stock Reserved: Common shares were reserved for issuance at
June 30, 1998 as follows:
Exercise of incentive stock options -- 1981 Plan ............... 5,700
Exercise of non-qualified stock options -- 1981 Plan ........... 31,400
------
Total ........................................................ 37,100
======
(d) In fiscal 1997, the Board of Directors authorized the repurchase of
up to 400,000 shares of the Corporation's common stock, which purchases could be
made from time to time in either open market or privately negotiated
transactions. Prior to the fiscal 1997 authorizations, the Corporation still had
authority to repurchase up to 35,700 shares from a previous authorization.
During fiscal 1997, the Corporation repurchased 243,000 shares in the open
market for an aggregate purchase price of $9,152,000. No shares were repurchased
during fiscal 1998.
(e) In connection with the conversion of the Debentures, during fiscal
1997, the Corporation issued 804,259 shares of its common stock. As a result,
"Stockholders' equity" as shown in the accompanying consolidated statements of
stockholders' equity increased by $25,645,000.
9. RETIREMENT PLANS
The Corporation maintains a 401(k) Profit Sharing Plan (the Plan) covering
substantially all of its domestic employees not subject to collective bargaining
agreements. Pursuant to the Plan, the Corporation makes a matching contribution
equal to 25% of the Compensation (as defined in the Plan) that each participant
elects to defer (up to 5% of the participant's Compensation) and contribute to
the Plan. In addition, the Corporation may make a discretionary annual
contribution. As of January 1, 1997, Hudson LLC established a 401(k) Profit
Sharing Plan covering substantially all of its domestic employees not subject to
collective bargaining agreements which contains terms and conditions similar to
those of the Plan. Prior to this date, such employees were covered under the
Plan. During fiscal 1998, 1997 and 1996, the Corporation contributed $234,000,
$219,000 and $798,000, respectively, to the Plan representing employer matching
and discretionary contributions.
During fiscal 1995, the Corporation's Canadian subsidiary (which
effective June 1, 1996 became a direct subsidiary of Hudson LLC) established a
Group Registered Retirement Savings Plan (RRSP) covering substantially all of
its employees not subject to collective bargaining agreements. Under the RRSP
such subsidiary may make a discretionary annual contribution. During fiscal
1996, such subsidiary contributed $79,000 to the RRSP.
Net expense related to the Corporation's retirement plans was $239,000,
$238,000 and $877,000 (including the RRSP) for fiscal 1998, 1997 and 1996,
respectively.
10. COMMITMENTS AND CONTINGENCIES
(a) LEASES
Minimum rental payments for future fiscal years under non-cancelable operating
leases are: $433,000 in 1999; $442,000 in 2000; $451,000 in 2001; $461,000 in
2002; and $235,000 in 2003.
Total rental expense incurred amounted to $412,000, $346,000 and
$5,740,000 for fiscal 1998, 1997 and 1996 (excluding sublease income amounting
to $517,000 in fiscal 1996).
(b) LITIGATION
In 1988, Texaco Canada Inc. (Texaco) (now known as McColl-Frontenac Inc.)
instituted a lawsuit (the Texaco Lawsuit) in the Supreme Court of Ontario,
Canada against the Corporation, the Corporation's Canadian subsidiary (now owned
by Hudson LLC) and Petro-Canada Inc. (the corporation which supplied aviation
fuel for the Corporation's Canadian fixed base operations). The Texaco Lawsuit's
allegations, as amended, were that the defendants interfered with contractual
and fiduciary relations, conspired to injure, and induced the breach of a fuel
supply agreement between Texaco and Innotech Aviation Limited (Innotech) in
connection with the purchase by the Corporation from Innotech in 1984 of certain
assets of Innotech's airport ground services business. The Texaco Lawsuit sought
compensatory and punitive damages totaling $110,000,000 (Canadian)
(approximately $80,000,000 (U.S.)) plus all profits earned by the defendants
subsequent to the alleged breach. The trial, which began in May 1996, concluded
after several adjournments on May 7, 1997. On May 25, 1998, the trial judge
issued an oral decision in the Corporation's favor.
In finding that there was no liability on the part of the Corporation,
its Canadian subsidiary or Petro-Canada, the judge ruled that none of these
parties had induced any breach of the fuel supply agreement, nor had any of them
interfered with the plaintiff's contractual and fiduciary relations. The judge
also ruled that Innotech did not breach its fuel supply agreement with Texaco,
nor was there any fiduciary relationship between Innotech and Texaco.
The trial judge rendered an oral decision, and Texaco, which has served
a Notice of Appeal, cannot pursue any appeal until the decision has been issued
in written form. The decision dealt solely with the issue of liability, and a
separate hearing before another judicial officer would have to be held on the
issue of damages. It is expected that a hearing on damages would not be held
unless Texaco decides to pursue, and is successful in, its appeal of the
liability decision.
The Corporation has agreed to indemnify and hold harmless Hudson LLC,
LAGS and each affiliate of LAGS against all losses related to the Texaco
Lawsuit.
11. RELATED PARTY TRANSACTIONS
Since February 1988, the Corporation has engaged an investment banking firm of
which a director of the Corporation is affiliated to render certain investment
banking services. In connection with the Transaction, such investment banking
firm was paid $517,000 for services rendered in fiscal 1996, and if the LAGS
Option is exercised, would be entitled to a fee of 2% of the option price.
23
27
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth unaudited quarterly financial information for
fiscal 1998 and 1997:
(in thousands, except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998(a)
REVENUES .......................... $ 1,384 $ 1,381 $ 1,570 $ 1,448
GROSS PROFIT ...................... 1,238 1,240 1,438 1,326
NET EARNINGS ...................... 782 1,383 2,145 946
EARNINGS PER SHARE, BASIC:
NET EARNINGS .................... $ .45 $ .79 $ 1.23 $ .54
======= ======= ====== =======
EARNINGS PER SHARE, DILUTED:
NET EARNINGS .................... $ .45 $ .79 $ 1.22 $ .54
======= ======= ====== =======
1997(a)
Revenues .......................... $ 1,150 $ 1,154 $ 1,426 $ 1,334
Gross profit ...................... 982 988 1,267 1,175
Net earnings (loss) ............... 686 1,660 1,901 (3,772)(b)
Earnings (loss) per share, basic:
Net earnings (loss) ............. $ .39 $ .86 $ 1.05 $ (2.14)
======= ======= ======= =======
Earnings (loss) per share, diluted:
Net earnings (loss) ............. $ .37 $ .85 $ 1.04 $ (2.12)
======= ======= ======= =======
(a) As a result of the Transaction (see Note 2), effective June 1, 1996 the
Corporation's interest in the Aviation Business is accounted for under the
equity method.
(b) Includes a pre-tax charge of $8,500 related to the Corporation's investment
in and advances to the Kohala Joint Venture (see Note 3).
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Hudson General Corporation
We have audited the accompanying consolidated balance sheets of Hudson General
Corporation and subsidiaries as of June 30, 1998 and 1997 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three year period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hudson
General Corporation and subsidiaries at June 30, 1998 and 1997 and the results
of their operations and their cash flows for each of the years in the three year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
[KPMG PEAT MARWICK LLP]
Jericho, New York
August 14, 1998, except for
note 2, which is as of
September 16, 1998.
24
28
Hudson General Corporation and Subsidiaries
CORPORATE INFORMATION
DIRECTORS
JAY B. LANGNER
Chairman of the Corporation
RICHARD D. SEGAL
Chairman and Chief Executive Officer
Seavest Inc.
Vice Chairman of the Corporation
MILTON H. DRESNER
Developer, Builder and Private Investor
PAUL R. POLLACK
Executive Vice President
EDWARD J. ROSENTHAL
Vice Chairman
Cramer Rosenthal McGlynn, Inc.
MICHAEL RUBIN
President
HANS H. SAMMER
Consultant, Retired Director,
Investment Banking Group
Prudential Securities Incorporated
STANLEY S. SHUMAN
Executive Vice President
and Managing Director
Allen & Company Incorporated
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A.
c/o Boston EquiServe, L.P.
P.O. Box 8040
Boston, Massachusetts 02266-8040
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
One Jericho Plaza
Jericho, New York 11753
SHARES LISTED
Common --
American Stock Exchange
(Symbol: HGC)
10-K AVAILABLE
The Annual Report, on Form 10-K, as filed with the Securities and Exchange
Commission, is available to shareholders without charge upon written request to:
Secretary
Hudson General Corporation
111 Great Neck Road
Great Neck, New York 11021
CORPORATE OFFICERS
JAY B. LANGNER
Chairman of the Board
and Chief Executive Officer
RICHARD D. SEGAL
Vice Chairman of the Board
MICHAEL RUBIN
President
PAUL R. POLLACK
Executive Vice President
and Chief Operating Officer;
President, Hudson General LLC
FERNANDO DiBENEDETTO
Senior Vice President -- Operations
RAYMOND J. RIEDER
Senior Vice President
and Chief Marketing Officer;
Executive Vice President,
Hudson General LLC
NOAH E. ROCKOWITZ
Senior Vice President, General Counsel
and Secretary
ROCCO DALOIA
Vice President -- Maintenance and Facilities
BARRY I. REGENSTEIN
Vice President and Chief Financial Officer
HENRY A. SATINSKAS
Vice President -- Transportation Services
THOMAS M. LUCARELLI
Treasurer
DIVISIONAL OFFICERS
CANADA
THOMAS D. CULP
Vice President -- Marketing
AUDREY J. LAURIN
Vice President and Controller
DENIS A. A. LAWN
Vice President -- Operations
UNITED STATES
SALVATORE J. ALTIZIO, JR.
Vice President -- Operations Administration
GLENN J. BASSETT
Regional Vice President
DAVID L. FINCH
Vice President -- Contract Services
D. ROSS JACOBS
Vice President -- Marketing
FREDERICK C. KNAPP, JR.
Vice President -- Fuel Services and Planning
BERT J. SMITH
Vice President -- Airport Operations
GARY D. WATSON
Regional Vice President
DAVID M. ZIOLKOWSKI
Regional Vice President
CORPORATE HEADQUARTERS
111 Great Neck Road
Great Neck, New York 11021
(516) 487-8610
CANADIAN LOCATIONS
Administrative Offices
100 Alexis Nihon, Suite 400
Ville St. Laurent, Quebec
H4M 2N9
(514) 748-2277
Calgary International Airport
Edmonton International Airport
Halifax International Airport
Montreal International Airport (Dorval)
Montreal International Airport (Mirabel)
Ottawa International Airport
St. John's International Airport
Toronto International Airport
Vancouver International Airport
Winnipeg International Airport
UNITED STATES LOCATIONS
Baltimore-Washington
International Airport
Fort Lauderdale/Hollywood
International Airport
Houston
Ellington Field
William P. Hobby Airport
JFK International Airport
LaGuardia Airport
Logan International Airport
Los Angeles International Airport
Miami International Airport
Newark International Airport
O'Hare International Airport
Orlando International Airport
Salt Lake City International Airport
Washington National Airport
Designed by Curran & Connors, Inc.
29
[HUDSON GENERAL LOGO]
111 Great Neck Road
P.O. Box 355
Great Neck, New York 11022 0722-AR-98