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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5896
HUDSON GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1947395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 GREAT NECK ROAD, GREAT NECK, NEW YORK 11021
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (516) 487-8610
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $1.00 per share: 1,744,949 shares outstanding at
October 31, 1998.
Page 1 of 25
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PART I - FINANCIAL INFORMATION
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CONSOLIDATED STATEMENTS OF EARNINGS
HUDSON GENERAL CORPORATION AND SUBSIDIARIES
(in thousands, except per share amounts)
Three Months Ended
September 30,
1998 1997
---- ----
(Unaudited) (Unaudited)
Revenues ................................... $ 1,401 $ 1,384
------- -------
Costs and expenses:
Depreciation and amortization ............ 156 176
Selling, general & administrative ........ 1,728 1,697
------- -------
Total costs and expenses ............... 1,884 1,873
------- -------
Operating loss ............................. (483) (489)
Equity in earnings of Hudson General LLC ... 769 1,429
Equity in loss of Kohala Joint Venture ..... (667) (694)
Interest income ............................ 1,013 922
------- -------
Earnings before provision for income taxes . 632 1,168
Provision for income taxes ................. 217 386
------- -------
Net earnings ............................... $ 415 $ 782
======= =======
Earnings per share, basic .................. $ .24 $ .45
======= =======
Earnings per share, diluted ................ $ .24 $ .45
======= =======
Cash dividends per common share ............ $ -- $ --
======= =======
Weighted average common shares outstanding:
Basic .................................... 1,745 1,738
======= =======
Diluted .................................. 1,760 1,752
======= =======
See accompanying notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
HUDSON GENERAL CORPORATION AND SUBSIDIARIES
(in thousands)
September 30, June 30,
1998 1998
---- ----
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents .......................... $ 17,030 $ 19,001
Investment securities available for sale ........... 19,853 19,002
Receivables ........................................ 734 563
Advances to Hudson General LLC - net ............... 2,895 2,057
Prepaid expenses and other assets .................. 43 56
-------- --------
Total current assets ............................. 40,555 40,679
Property and equipment at cost,
less accumulated depreciation and amortization ..... 2,259 2,389
Investment in Hudson General LLC ..................... 22,677 22,306
Investment in Kohala Joint Venture - net ............. 4,808 4,962
Note receivable from Hudson General LLC .............. 1,630 3,130
-------- --------
$ 71,929 $ 73,466
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................................... $ 83 $ 200
Accrued expenses and other liabilities ............. 1,191 2,628
-------- --------
Total current liabilities ........................ 1,274 2,828
-------- --------
Deferred income taxes ................................ 2,197 2,197
-------- --------
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 ......................... 2,102 2,102
Paid in capital .................................... 47,868 48,266
Retained earnings .................................. 29,650 29,235
Treasury stock, at cost, 357,311 shares ............ (11,162) (11,162)
-------- --------
Total stockholders' equity ....................... 68,458 68,441
-------- --------
$ 71,929 $ 73,466
======== ========
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
HUDSON GENERAL CORPORATION AND SUBSIDIARIES
(in thousands)
Three Months Ended
September 30,
1998 1997
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net earnings ......................................... $ 415 $ 782
Adjustments to reconcile net earnings to net
cash used by operating activities:
Depreciation and amortization ...................... 156 176
Equity in earnings of Hudson General LLC ........... (769) (1,429)
Equity in loss of Kohala Joint Venture ............. 667 694
Accrual of interest income on Kohala Joint
Venture advances ................................. (513) (477)
Change in other current assets and liabilities:
Receivables ..................................... (171) (73)
Prepaid expenses and other assets ............... 13 184
Accounts payable ................................ (117) (95)
Accrued expenses and other liabilities .......... (1,437) (1,326)
Other - net ........................................ 3 --
-------- --------
Net cash used by operating activities ........... (1,753) (1,564)
-------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale . (2,024) (972)
Proceeds from maturity and sale of investment
securities available for sale .................... 1,173 --
Purchases of property and equipment .................. (29) (12)
Proceeds from sale of property and equipment ......... -- 17
(Advances to) repayments from Hudson General LLC - net (838) 5
Collections of note receivable from Hudson General LLC 1,500 500
-------- --------
Net cash used by investing activities ........... (218) (462)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ............... -- 93
-------- --------
Net cash provided by financing activities ....... -- 93
-------- --------
Net decrease in cash and cash equivalents .............. (1,971) (1,933)
Cash and cash equivalents at beginning of period ....... 19,001 18,425
-------- --------
Cash and cash equivalents at end of period ............. $ 17,030 $ 16,492
======== ========
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HUDSON GENERAL CORPORATION AND SUBSIDIARIES
1. The accompanying unaudited consolidated financial statements were
prepared in accordance with generally accepted accounting principles
and include all adjustments which, in the opinion of management, are
necessary to present fairly the consolidated financial position of
Hudson General Corporation and Subsidiaries (the Corporation) as of
September 30, 1998 and June 30, 1998, and the results of operations and
cash flows for the three months ended September 30, 1998 and 1997. In
the opinion of management, all necessary adjustments that were made are
of a normal recurring nature. Results of operations for the three
months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full fiscal year.
The consolidated financial statements include the accounts of the
Corporation and the Subsidiaries for which it exercises effective
control. All material intercompany accounts and transactions have been
eliminated in consolidation. Hudson General LLC, the Corporation's
aviation services affiliate in which the Corporation has a 74% interest
(Hudson LLC), is accounted for under the equity method of accounting
(see Note 2). Kohala Joint Venture, a land development joint venture in
Hawaii in which the Corporation has a 50% interest (the Venture), is
also accounted for under the equity method of accounting (see Note 3).
The accounting policies followed by the Corporation are stated in Note
1 to the Corporation's consolidated financial statements in the 1998
Hudson General Corporation Annual Report filed under Item 8 to Form
10-K for the Corporation's fiscal year ended June 30, 1998.
2. The summary consolidated balance sheets for Hudson LLC are as follows:
September 30, June 30,
1998 1998
(in thousands) (Unaudited)
- ------------------------------------------------------------------------------------
Cash and cash equivalents ....................... $ 2,856 $ 3,393
Accounts and notes receivable - net ............. 16,070 16,886
Other current assets ............................ 7,863 6,391
------- -------
Total current assets ......................... 26,789 26,670
Property, equipment and leasehold rights at cost,
less accumulated depreciation and amortization . 45,944 45,639
Other assets - net .............................. 616 643
------- -------
$73,349 $72,952
======= =======
Accounts payable ................................ $19,952 $17,326
Accrued expenses and other liabilities .......... 16,322 19,045
Advances from Hudson General Corporation - net .. 2,895 2,057
------- -------
Total current liabilities .................... 39,169 38,428
Long term debt, senior .......................... 654 --
Deferred income taxes ........................... 319 319
Note payable to Hudson General Corporation ...... 1,630 3,130
Members' equity ................................. 31,577 31,075
------- -------
$73,349 $72,952
======= =======
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Summary results of operations for Hudson LLC are as follows:
Three Months Ended
September 30,
1998 1997
(in thousands) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------
Revenues ................................. $ 41,124 $ 39,356
-------- --------
Operating costs .......................... 33,740 31,347
Depreciation and amortization ............ 2,050 1,968
Selling, general & administrative costs .. 4,045 3,827
-------- --------
Total costs and expenses .............. 39,835 37,142
-------- --------
Operating income ......................... 1,289 2,214
Interest income .......................... 55 178
Interest expense ......................... (89) (84)
-------- --------
Earnings before provision for income taxes 1,255 2,308
Provision for income taxes ............... 215 377
-------- --------
Net earnings ............................. $ 1,040 $ 1,931
======== ========
On October 1, 1998, LAGS (USA) Inc. (an indirect wholly-owned subsidiary of
Deutsche Lufthansa AG) (LAGS) gave notice to the Corporation of exercise of its
option to increase LAGS' interest in Hudson LLC from 26% to 49% (the Option).
The exercise price of the Option is $29,627,000 and was paid to Hudson LLC by
LAGS together with interest (which will be recorded by Hudson LLC during the
three months ending December 31, 1998) aggregating $1,123,000, calculated at
the rate of 11% per annum from July 1, 1998 to the date of the Option closing
on November 2, 1998. LAGS (USA) Inc. is a direct wholly-owned subsidiary of
Lufthansa Airport and Ground Services GmbH, and was granted the Option under
the terms of the Unit Purchase and Option Agreement dated February 27, 1996
pursuant to which it acquired its initial 26% interest in Hudson LLC. After
giving effect to the exercise of the Option in the second quarter of fiscal
1999 on November 2, 1998, LAGS will have a 49% interest, and the Corporation
will have a 51% interest, effective as of July 1, 1998 in Hudson LLC. As a
result of the exercise of the Option, the Corporation's investment in Hudson
LLC and paid in capital will be increased by $25,509,000 and $12,570,000 (net
of deferred income taxes and transactional fees), respectively. The Corporation
is unable to determine when, or whether, such deferred income taxes will result
in a current tax liability.
Upon paying the exercise price to Hudson LLC, LAGS acquired from Hudson LLC 230
additional Class B Units of Hudson LLC. Concurrently therewith, the Corporation
converted 230 of the Class A Units of Hudson LLC held by it into 230 new
non-voting Preferred Units (the Preferred Units) of Hudson LLC. After giving
effect to the exercise of the Option and the Corporation's exchange of 230 Class
A Units for 230 Preferred Units, LAGS now owns 490 Class B Units and the
Corporation now owns 510 Class A Units (representing 49% and 51%, respectively,
of the aggregate number of outstanding Class A and Class B Units). The Preferred
Units have a liquidation preference of $128,811 per Unit, and are redeemable by
Hudson LLC at any time on or after August 1, 2001 for an amount equal to the
liquidation preference. From and after October 1, 2001, the Preferred Units, if
not previously called for redemption, are convertible, at the option of the
holders, into Class A Units on a one-for-one basis. The Preferred Units are
entitled to receive a fixed distribution of 3.95% per annum, payable quarterly,
commencing on December 31, 1998 until September 30, 2001, and at an Internal
Revenue Service safe harbor rate, as defined, thereafter. Such distributions are
cumulative, and all such distributions must be made in full before any
distribution may be made in respect of the Class A and Class B Units.
As a result of the timing of the Option closing, the Corporation was required to
account for a 74% interest in Hudson LLC's results for the three months ended
September 30, 1998. The Corporation's 74% share of Hudson LLC's results, as
calculated in accordance with the Limited Liability Company Agreement effective
June 1, 1996 among the Corporation, LAGS and Hudson LLC, as amended (the LLC
Agreement), was $769,000 and $1,429,000 for the three months ended September 30,
1998, and 1997, respectively, and are shown as "Equity in earnings of Hudson
General LLC" in the accompanying consolidated statements of earnings. The LLC
Agreement stipulates that the Corporation and LAGS will share profits and losses
in the same proportion as
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their respective equity interests in Hudson LLC. The effect of the
reduction in the Corporation's interest in Hudson LLC's results from
74% to 51% for the three months ended September 30, 1998 was $239,000,
and will be reflected in the second quarter of fiscal 1999 as a
reduction to the Corporation's paid in capital.
The LLC Agreement also provides that distributions will be paid
annually by Hudson LLC in an amount at least equal to 50% of its
domestic net income and 10% of its Canadian pre-tax earnings, as
defined. On October 30, 1998, the Member Board of Hudson LLC approved
distributions in respect of fiscal 1998 equal to 90% of its domestic
net income and 60% of its Canadian pre-tax earnings, as defined,
totaling approximately $11,800,000 which were paid in November 1998.
As a result of the conversion of Debentures into shares of the
Corporation's common stock in fiscal 1996 and 1997, Hudson LLC is, on a
subordinated basis (as defined), indebted to the Corporation (the
Corporate Subordinated Debt). At September 30, 1998, the balance of the
Corporate Subordinated Debt was $3,130,000. Hudson LLC is obligated to
repay $1,500,000 of such debt to the Corporation on July 15, 1999 and
on each July 15th thereafter until the entire principal balance is
satisfied. The noncurrent portion of the Corporate Subordinated Debt at
September 30, 1998, in the amount of $1,630,000, is shown as "Note
receivable from Hudson General LLC" in the accompanying consolidated
balance sheets. The current portion of this debt at September 30, 1998,
in the amount of $1,500,000, 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.
The effect of Hudson LLC's foreign currency translation adjustments for
the three months ended September 30, 1998 was a decrease of $538,000
and is included in Members' equity in the summary consolidated balance
sheets for Hudson LLC.
3. The Corporation is a partner in the Venture which was formed to
acquire, develop and sell approximately 4,000 contiguous acres of land
in Hawaii (the Project).
The summary consolidated balance sheets for the Venture are as follows:
September 30, June 30,
1998 1998
(in thousands) (Unaudited)
- -------------------------------------------------------------------------------------
Cash and equivalents .......................... $ 112 $ 355
Land and development costs .................... 9,268 9,210
Mortgages, accounts and notes receivable ...... 1,638 2,137
Foreclosed real estate - net .................. 2,671 2,186
Other assets - net ............................ 1,521 1,549
-------- --------
$ 15,210 $ 15,437
======== ========
Partner advances and accrued interest payable . $ 59,278 $ 58,178
Accounts payable and accrued expenses ......... 868 860
Partners' deficit ............................. (44,936) (43,601)
-------- --------
$ 15,210 $ 15,437
======== ========
Summary results of operations for the Venture are as follows:
Three Months Ended
September 30,
1998 1997
(in thousands) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------
Net sales ............................... $ 88 $ 76
------- -------
Selling, general and administrative costs 381 499
Interest - net .......................... 1,042 965
------- -------
Total costs .......................... 1,423 1,464
------- -------
Net loss ............................. $(1,335) $(1,388)
======= =======
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The Corporation's 50% share of the Venture's results were losses of
$667,000 and $694,000 for the three months ended 1998 and 1997,
respectively, and have been included in "Equity in loss of Kohala Joint
Venture" in the accompanying consolidated statements of earnings. 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. During the three months ended September 30,
1998, the Corporation did not make any advances to the Venture. The
Corporation's net advances (including accrued interest) at September
30, 1998 were $21,139,000.
4. Accrued expenses and other liabilities consisted of the following:
September 30, June 30,
1998 1998
(in thousands) (Unaudited)
- -------------------------------------------------------
Salaries and wages .. $ 109 $1,917
Retirement plan costs 369 307
Income taxes payable 459 192
Other ............... 254 212
------ ------
$1,191 $2,628
====== ======
5. In the second quarter of fiscal 1998 the Corporation adopted Statement
of Financial Accounting Standards No. 128, Earnings per Share, and has
restated all prior-period earnings per share (EPS) data presented.
A reconciliation of the numerators and denominators of the basic and
diluted EPS computations are as follows:
Three Months Ended
September 30,
1998 1997
(in thousands, except per share amounts) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------
Net earnings for computing earnings per share,
basic and diluted ........................... $ 415 $ 782
====== ======
Weighted average number of common
shares outstanding .......................... 1,745 1,738
Add: Incremental shares from assumed exercise
of stock options ........................ 15 14
------ ------
Weighted average number of common and potential
common shares outstanding for computing
earnings per share, diluted ................. 1,760 1,752
====== ======
Earnings per share, basic ..................... $ .24 $ .45
====== ======
Earnings per share, diluted ................... $ .24 $ .45
====== ======
6. Certain items previously reported in specific financial statement
captions have been reclassified to conform with the fiscal 1999
presentation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The Corporation's consolidated statements of earnings contain the
operating results of the Corporation's aviation services affiliate (Hudson LLC)
and of the land development joint venture in Hawaii in which the Corporation has
a 50% interest (the Venture) under the equity method of accounting. (For an
analysis of the results of Hudson LLC, see the table and related management's
discussion which appear below.)
The Corporation's revenues; depreciation and amortization; and selling,
general and administrative expenses for the three months ended September 30,
1998 approximated those of the corresponding period of the prior year.
The Corporation's 74% share of earnings from Hudson General LLC (Hudson
LLC) for the three months ended September 30, 1998 as compared with the
corresponding period of the prior year decreased from $1.4 to $.8 million. The
Corporation's 50% share of losses from the Venture for the three months ended
September 30, 1998 approximated that of the corresponding period of the previous
year. As is usual for companies with land development operations, the
contribution to future results from such operations will fluctuate depending
upon land sales closed in each reported period.
Interest income for the three months ended September 30, 1998 increased
from $.9 to $1.0 million, an increase of $.1 million, or 9.9%, due primarily to
higher invested cash balances compared with those of the corresponding period of
the prior year.
The Corporation's provision for income taxes for the three months ended
September 30, 1998 decreased $.2 million from the corresponding period of the
previous year, primarily reflecting lower pre-tax earnings due mainly to the
decrease in the Corporation's share of earnings from Hudson LLC as noted above.
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The following table and related management's discussion are intended to
provide a presentation and analysis of results of Hudson LLC for the three
months ended September 30, 1998 compared with results for the corresponding
period of the prior year.
Three Months Ended
September 30,
1998 1997
(in thousands)
Revenues ............................ $41,124 $39,356
------- -------
Costs and expenses:
Operating ......................... 33,740 31,347
Depreciation and amortization ..... 2,050 1,968
Selling, general and administrative 4,045 3,827
------- -------
Total costs and expenses ............ 39,835 37,142
------- -------
Operating income .................... $ 1,289 $ 2,214
======= =======
Revenues for the three months ended September 30, 1998 increased $1.8
million, or 4.5%. The increase reflects higher domestic ground handling service
revenues of $2.5 million due primarily to: (i) revenues generated from services
provided at Terminal One, the new international terminal at JFK International
Airport in New York which began operation in May 1998 at which Hudson LLC has
been designated as the exclusive provider of ground handling services; and (ii)
expanded services to new and existing customers at other domestic airport
locations. Additionally, the increase reflects higher domestic aircraft fueling
revenues of $.5 million resulting primarily from expanded intoplane fueling
services. The revenue increase was partially offset by lower revenues associated
with: (i) Canadian ground handling services of $.4 million due primarily to the
cessation of operations by two airline customers, and the decision by several
airline customers to provide ground handling services with their own personnel
and equipment or through subsidiaries or affiliated carriers; and (ii) the
effect of fluctuation in the average rates of exchange used in translating
Canadian revenues to their U.S. dollar equivalent.
Operating costs for the three months ended September 30, 1998 increased
from $31.3 to $33.7 million, an increase of $2.4 million, or 7.6%. The increase
in operating costs reflects higher: (i) labor and related costs associated with
the opening of Terminal One in New York, and expanded domestic ground handling
and aircraft fueling operations; and (ii) fleet maintenance costs related
primarily to ground handling and aircraft
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fueling operations. Partially offsetting the increase were lower: (i) labor and
related costs associated with Canadian ground handling operations; and (ii)
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.
Depreciation and amortization expenses increased from $2.0 to $2.1
million, an increase of $.1 million, or 4.2%, due mainly to additions of ground
handling and fueling equipment.
Selling, general and administrative expenses for the three months ended
September 30, 1998 increased from $3.8 to $4.0 million, an increase of $.2
million, or 5.7%, due primarily to higher administrative and related costs.
Operating income for the three months ended September 30, 1998 decreased
from $2.2 to $1.3 million, a decrease of $.9 million, or 41.8%, due primarily
to: (i) decreased results associated with domestic ground handling operations
related to higher labor and fleet maintenance costs; (ii) decreased results from
Canadian ground handling operations related to lower service revenues as noted
above; (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.
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. This trend
has provided additional opportunities for Hudson LLC. In addition, low
unemployment levels in locations throughout the United States in which Hudson
LLC operates have adversely affected Hudson
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LLC's ability to hire and retain service employees. This trend has resulted in
Hudson LLC incurring higher overtime, hiring and training costs, which has
negatively impacted Hudson LLC's operating margins. The Corporation is unable,
at this time, to evaluate the future impact of these factors.
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Liquidity and Capital Expenditures and Commitments
The Corporation's recurring sources of liquidity are funds provided from
Hudson LLC and bank lines of credit. Hudson LLC pays to the Corporation an
overhead fee, which for fiscal 1998 and 1999 is equal 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 Limited Liability Company Agreement between the
Corporation, Hudson LLC and LAGS (USA) Inc. (an indirect wholly-owned subsidiary
of Deutsche Lufthansa AG) (LAGS) 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 its domestic net income and 10% of its Canadian pre-tax
earnings for the fiscal year, as defined, multiplied by the Members'
respective equity interests in Hudson LLC. The Corporation's 74% share of the
distribution in respect of fiscal 1998, in the amount of $8.1 million, was
received in November 1998. Furthermore, as a result of the conversion of the
Corporation's 7% convertible subordinated debentures (the 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 the
three months ended September 30, 1998, Hudson LLC repaid $1.5 million of such
debt to the Corporation. Hudson LLC is obligated to repay to the Corporation
$1.5 million on July 15, 1999 and on each July 15th thereafter until the
remaining principal balance of $3.1 million is satisfied.
On October 1, 1998, LAGS gave notice to the Corporation of exercise of its
option to increase LAGS' interest in Hudson LLC from 26% to 49% (the Option).
The exercise price of the Option is $29,627,000 and was paid to Hudson LLC by
LAGS together with interest (which will be recorded by Hudson LLC during the
three months ending December 31, 1998) aggregating $1.1 million, calculated at
the rate of 11% per annum from July 1, 1998 to the date of the Option closing
on November 2, 1998. As a result of the exercise of the Option, the
Corporation's investment in Hudson LLC and paid in capital will be increased by
$25.5 and $12.6 million (net of deferred income taxes and transactional fees),
respectively. The Corporation is presently unable to determine when, or
whether, such deferred income taxes will result in a current tax liability.
LAGS (USA) Inc. is a
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direct wholly-owned subsidiary of Lufthansa Airport and Ground Services GmbH,
and was granted the Option under the terms of the Unit Purchase and Option
Agreement dated February 27, 1996 pursuant to which it acquired its initial 26%
interest in Hudson LLC. After giving effect to the exercise of the Option in the
second quarter of fiscal 1999, LAGS will have a 49% interest, and the
Corporation will have a 51% interest, effective as of July 1, 1998 in Hudson
LLC. In connection with the Option exercise, the Corporation received new
non-voting Preferred Units (the Preferred Units) of Hudson LLC. The Preferred
Units are entitled to receive a fixed distribution of 3.95% per annum, payable
quarterly, commencing on December 31, 1998 until September 30, 2001, and at an
Internal Revenue Service safe harbor rate, as defined, thereafter.
Pursuant to a Revolving Credit Agreement (the Credit Agreement) with a
group of banks dated June 1, 1996, the Corporation may borrow funds (including
outstanding letters of credit) up to a limit of $6.0 million until June 30, 1999
at which time the Credit Agreement terminates. There were no direct borrowings
or letters of credit outstanding at September 30, 1998.
During the three months ended September 30, 1998 and 1997, net cash used by
operating activities was $1.8 and $1.6 million, respectively, due mainly to
payments of accrued expenses and other liabilities. Cash and cash equivalents
were $17.0 and $19.0 million at September 30, 1998 and June 30, 1998,
respectively.
At September 30, 1998 and June 30, 1998, Hudson LLC reflected working
capital deficits of $12.4 and $11.8 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 could 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, the LLC Limit was reduced by $1.1 million and will continue
to reduce by $1.1 million at the end of each subsequent quarter until June 30,
2002, at which time the LLC Credit Agreement terminates. There were $.7 million
of borrowings and $1.3 million of outstanding letters of credit at September 30,
1998. In addition, net
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advances to Hudson LLC from the Corporation were $2.9 million as of September
30, 1998. At September 30, 1998, Hudson LLC had commitments to fund $4.4 million
for operating equipment, the majority of which is expected to be expended during
fiscal 1999. In addition to such commitments, Hudson LLC had made deposits of
$3.9 million as of September 30, 1998 and is obligated to expend funds of $3.7
and $1.8 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. Hudson LLC is currently in
negotiations to fund these commitments under long-term financing arrangements.
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.
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 1998, the Circuit Court ruled
in favor of the County and the Venture on the remanded issues. In July and
September 1998, the Circuit Court granted summary judgment in favor of the
County and the Venture on all remaining claims in the suit. In
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October 1998, a Plaintiff filed a timely notice of appeal from the judgment
entered in this matter. The Venture cannot determine the effect of this
litigation on the timing of development of Phase IV or expenditures related
thereto until a decision related to this appeal is rendered.
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 the three months ended September 30, 1998,
the Corporation did not make any advances to the Venture.
At September 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.
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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.
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PART II - OTHER INFORMATION
Item 5. Other Information
As previously reported by the Corporation on its Form 8-K dated October 16,
1998, on October 1, 1998 LAGS (USA) Inc. (an indirect wholly-owned subsidiary
of Deutsche Lufthansa AG) (LAGS) gave notice to the Corporation of exercise of
its option to increase LAGS' interest in Hudson General LLC (Hudson LLC) from
26% to 49% (the Option). The exercise price of the Option is $29,627,000 and
was paid to Hudson LLC by LAGS together with interest at the rate of 11% per
annum from July 1, 1998 to the date of the Option closing on November 2, 1998.
As a result of the exercise of the Option, the Corporation's investment in
Hudson LLC and paid in capital will be increased by $25,509,000 and
$12,570,000 (net of deferred income taxes and transaction fees), respectively.
The Corporation is presently unable to determine when, or whether, such
deferred income taxes will result in a current tax liability.
LAGS (USA) Inc. is a direct wholly-owned subsidiary of Lufthansa Airport and
Ground Services GmbH, and was granted the Option under the terms of the Unit
Purchase and Option Agreement dated February 27, 1996 pursuant to which it
acquired its initial 26% interest in Hudson LLC. After giving effect to the
exercise of the Option in the second quarter of fiscal 1999 on November 2,
1998, LAGS will have a 49% interest, and the Corporation will have a 51%
interest, effective as of July 1, 1998 in Hudson LLC. In connection with the
Option exercise, the Corporation received new non-voting Preferred Units (the
Preferred Units) of Hudson LLC. The Preferred Units are entitled to receive a
fixed distribution of 3.95% per annum, payable quarterly, commencing on
December 31, 1998 until September 30, 2001, and at an Internal Revenue Service
safe harbor rate, as defined, thereafter.
The Corporation is providing the following pro forma financial information
relating to this transaction: (i) Pro forma condensed consolidated balance
sheet as of September 30, 1998 which assumes that the transaction was completed
as of September 30, 1998; and (ii) Pro forma condensed consolidated statements
of earnings for the three months ended September 30, 1998 and the year ended
June 30, 1998 which assume that the transaction was completed as of July 1,
1997.
The Pro Forma Statements are for illustrative purposes only and are not
necessarily indicative of what the Corporation's results of operations or
balance sheet would actually have been if the transaction had been concluded as
of the assumed dates, nor are they necessarily indicative of future financial
performance or results of operations.
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HUDSON GENERAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited, amounts in thousands)
Historical Pro Forma Pro Forma
Adjustments
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents .................. $ 17,030 (750) (4) $ 16,280
Investment securities available for sale ... 19,853 19,853
Receivables ................................ 734 734
Advances to Hudson General LLC ............. 2,895 2,895
Prepaid expenses and other assets .......... 43 43
-----------------------------------------------------------------------
Total current assets .................... 40,555 (750) 39,805
Property, plant and equipment at cost-net ..... 2,259 2,259
Investment in Hudson General LLC .............. 22,677 25,509 (1),(2),(8) 48,186
Investment in Kohala Joint Venture-net ........ 4,808 4,808
Note receivable from Hudson General LLC ....... 1,630 1,630
-----------------------------------------------------------------------
$ 71,929 24,759 $ 96,688
=======================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................... $ 83 $ 83
Accrued expenses and other liabilities ..... 1,191 1,191
-----------------------------------------------------------------------
Total current liabilities ............... 1,274 1,274
-----------------------------------------------------------------------
Deferred income taxes ......................... 2,197 12,189 (3) 14,386
-----------------------------------------------------------------------
Stockholders' Equity:
Common stock ............................... 2,102 2,102
Paid in capital ............................ 47,868 12,570 (1),(2),(3),(4)(8) 60,438
Retained earnings .......................... 29,650 29,650
Treasury stock ............................. (11,162) (11,162)
-----------------------------------------------------------------------
Total stockholders' equity .............. 68,458 12,570 81,028
-----------------------------------------------------------------------
$ 71,929 24,759 $ 96,688
=======================================================================
See accompanying notes to pro forma condensed consolidated financial statements.
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HUDSON GENERAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited, amounts in thousands, except per share data)
Historical Pro Forma Pro Forma
Adjustments
- --------------------------------------------------------------------------------------------------------------------
Revenues .................................... $ 1,401 $1,401
-------------------------------------------------------------
Costs and expenses:
Depreciation and amortization ............ 156 156
Selling, general and administrative ...... 1,728 1,728
-------------------------------------------------------------
Total costs and expenses .............. 1,884 1,884
-------------------------------------------------------------
Operating loss ........................... (483) (483)
Equity in earnings of Hudson General LLC . 769 (239) (5) 530
Equity in loss of Kohala Joint Venture ... (667) (667)
Interest income .......................... 1,013 394 (6) 1,407
-------------------------------------------------------------
Earnings before provision for income taxes 632 155 787
Provision for income taxes ............... 217 53 (7) 270
-------------------------------------------------------------
Net earnings ............................. $ 415 102 $ 517
=============================================================
Earnings per share, basic ................ $ .24 $ .30
======= ======
Earnings per share, diluted .............. $ .24 $ .29
======= ======
Shares outstanding, basic ................ 1,745 1,745
Shares outstanding, diluted .............. 1,760 1,760
=============================================================
See accompanying notes to pro forma condensed consolidated financial statements.
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HUDSON GENERAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FISCAL YEAR ENDED JUNE 30, 1998
(Unaudited, amounts in thousands, except per share data)
Historical Pro Forma Pro Forma
Adjustments
- ---------------------------------------------------------------------------------------------------
Revenues $5,783 $5,783
-----------------------------------------------
Costs and expenses:
Depreciation and amortization 664 664
Selling, general and administrative 7,843 7,843
-----------------------------------------------
Total costs and expenses 8,507 8,507
-----------------------------------------------
Operating loss (2,724) (2,724)
Equity in earnings of Hudson General LLC 9,426 (2,930) (5) 6,496
Equity in loss of Kohala Joint Venture (2,822) (2,822)
Interest income 4,156 1,689 (6) 5,845
-----------------------------------------------
Earnings before provision (benefit) for
income taxes 8,036 (1,241) 6,795
Provision (benefit) for income taxes 2,780 (429) (7) 2,351
-----------------------------------------------
Net earnings $5,256 (812) $4,444
===============================================
Earnings per share, basic $3.02 $2.55
===== =====
Earnings per share, diluted $2.99 $2.53
===== =====
Shares outstanding, basic 1,742 1,742
Shares outstanding, diluted 1,757 1,757
===============================================
See accompanying notes to pro forma condensed consolidated financial statements.
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Notes to Pro Forma Condensed Consolidated Financial Statements
(1) To record the increase in the carrying amount of the investment in Hudson
LLC in connection with the issuance of units by Hudson LLC as a result of
the exercise of the Option by LAGS for an exercise price of $29,627,000.
(2) It is the accounting policy of the Corporation to reflect increases in the
Corporation's investment in subsidiaries that result from the direct sale of
shares by the subsidiary as a capital transaction in the Corporation's
consolidated financial statements. Thus, the increase in the Corporation's
investment in Hudson LLC as a result of the exercise of the Option by LAGS
has been reflected as an increase in the Corporation's paid in capital, net
of applicable deferred federal and state income taxes of $12,189,000 and
estimated transaction fees of $750,000.
(3) To record deferred income taxes relating to the exercise of the Option.
(4) To record estimated transaction fees of $750,000 to be paid by the
Corporation.
(5) To adjust the Corporation's share of Hudson LLC's results of operations from
74% to 51%.
(6) To reflect the fixed distribution to the Corporation from Hudson LLC related
to the Preferred Units.
(7) To record the U.S. tax effects of the pro forma statement of earnings
adjustments at an estimated combined effective federal and state tax rate.
(8) To adjust the Corporation's share of Hudson LLC's foreign currency
translation adjustments from 74% to 51%.
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Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule.
b) Reports on Form 8-K
Current Report on Form 8-K dated July 28, 1998, reporting under Item 5
Other Events (and including Item 7(c) Exhibits) that the Registrant's Board
of Directors adopted amendments to Article II, Section 2, and to Article
III, Section 3, of Registrant's By-Laws. The amendments require that in
order to be timely, written notice of a stockholder's intention to nominate
a person for election as a director or to propose business to be considered
at an Annual Meeting of Stockholders must be received by Registrant not less
than 90 or more than 120 days prior to the anniversary date of Registrant's
immediately preceding Annual Meeting. Prior to the adoption of these
amendments, the By-Laws required that such notice be received by Registrant
not less than 60 nor more than 90 days prior to the anniversary date of the
immediately preceding Annual Meeting.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON GENERAL CORPORATION
(Registrant)
Date: November 13, 1998
/s/ MICHAEL RUBIN
---------------------------------
Michael Rubin
President
/s/ BARRY REGENSTEIN
---------------------------------
Barry Regenstein
Chief Financial Officer
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HUDSON GENERAL CORPORATION & SUBSIDIARIES
EXHIBIT INDEX
Exhibit
No. Exhibit Page No.
- --- ------- --------
27 Financial Data Schedule 27
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