-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WgCtA5neBTSO7A1wTaQAZN/qgQ7I9CwFPrLnYpP0kZEjT6Z5rA1AN/VlyOlsCoFt NAKl9bLZzk2uGhZBPO10lw== 0000950123-96-001845.txt : 19960426 0000950123-96-001845.hdr.sgml : 19960426 ACCESSION NUMBER: 0000950123-96-001845 CONFORMED SUBMISSION TYPE: DEFS14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960523 FILED AS OF DATE: 19960425 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUDSON GENERAL CORP CENTRAL INDEX KEY: 0000048948 STANDARD INDUSTRIAL CLASSIFICATION: AIRPORTS, FLYING FIELDS & AIRPORT TERMINAL SERVICES [4581] IRS NUMBER: 131947395 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: DEFS14A SEC ACT: 1934 Act SEC FILE NUMBER: 001-05896 FILM NUMBER: 96550370 BUSINESS ADDRESS: STREET 1: 111 GREAT NECK RD CITY: GREAT NECK STATE: NY ZIP: 11021 BUSINESS PHONE: 5164878610 MAIL ADDRESS: STREET 1: P O BOX 355 CITY: GREAT NECK STATE: NY ZIP: 11022 FORMER COMPANY: FORMER CONFORMED NAME: HUDSON LEASING CORP DATE OF NAME CHANGE: 19711207 DEFS14A 1 DEFINITIVE SPECIAL PROXY MATERIALS 1 SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 FILED BY THE REGISTRANT /X/ FILED BY A PARTY OTHER THAN THE REGISTRANT / / - -------------------------------------------------------------------------------- Check the appropriate box: / / Preliminary Proxy Statement /X/ Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) Hudson General Corporation (Name of Registrant as Specified in Its Charter) Hudson General Corporation (Name of Person(s) Filing Proxy Statement) PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX): / / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11: $10,655* (4) Proposed maximum aggregate value of transaction: $7,884,700* (5) Amount of Filing Fee: $1,577 /X/ Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: - --------------- * Estimated solely for purposes of calculating the filing fee. Based upon the pro forma book value ($10,655 per unit or $7,884,700 in the aggregate) calculated as of December 31, 1995 of the 740 Class A Units of Hudson General LLC to be received by the Registrant upon consummation of the Proposed Transaction described herein. 2 HUDSON GENERAL CORPORATION 111 GREAT NECK ROAD POST OFFICE BOX 355 GREAT NECK, NY 11022-0355 (516) 487-8610 TWX 5102212186 FAX (516) 487-4855 April 25, 1996 LOGO To Our Stockholders: You are cordially invited to attend a Special Meeting of Stockholders of Hudson General Corporation (the "Corporation") to be held at the offices of the Corporation, 111 Great Neck Road, Great Neck, New York on Thursday, May 23, 1996 at 2:30 P.M., local time. At the Special Meeting, you will be asked to consider and vote upon a resolution to approve the Unit Purchase and Option Agreement, dated February 27, 1996 (the "Purchase Agreement"), between the Corporation and Lufthansa Airport and Ground Services GmbH ("LAGS"), a German corporation and an indirect wholly-owned subsidiary of Deutsche Lufthansa AG ("Lufthansa"), and the transactions contemplated thereby, including (i) the transfer by the Corporation to Hudson General LLC, a newly-formed Delaware limited liability company ("Hudson LLC"), of substantially all the assets of the Corporation's aviation services business (the "Aviation Services Business") and the assumption by Hudson LLC of certain obligations relating to the Aviation Services Business, in exchange for a 74% interest in Hudson LLC (which interest may be reduced to not less than 51% upon exercise by LAGS of the option referred to below), (ii) the sale by Hudson LLC to LAGS of a 26% interest in Hudson LLC, for a purchase price of approximately $23.8 million in cash (subject to potential downward adjustment based on the future earnings of the Aviation Services Business) and (iii) the grant to LAGS of an option, exercisable on October 1 of each year from 1996 through 2000, effective as of the preceding July 1, to 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 Services Business over the four fiscal years preceding the exercise of the option, subject to certain minimum and maximum amounts, all as more fully described in the accompanying Proxy Statement. Following the consummation of the proposed transaction, as a stockholder of the Corporation you will retain your equity interest in the Corporation. The Corporation will retain a 74% interest in Hudson LLC (which interest may be reduced to not less than 51% if LAGS exercises its option in full to increase its interest in Hudson LLC to 49%) and the Corporation will continue to manage the Aviation Services Business. Neither LAGS nor Lufthansa will acquire any securities of the Corporation and the Purchase Agreement contains certain standstill provisions pursuant to which, among other things, LAGS, Lufthansa and their affiliates will not acquire any voting securities of the Corporation without the prior written consent of the Corporation's Board of Directors. The proposed transaction does not include the transfer of the Corporation's interest in the Kohala Joint Venture, a land development joint venture in Hawaii in which Hudson Kohala, Inc., a wholly-owned subsidiary of the Corporation, is a 50% partner. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED TRANSACTION AND RECOMMENDS THAT YOU VOTE FOR THE PROPOSED TRANSACTION. In arriving at its recommendation, the Board of Directors gave careful consideration to a number of factors as described in the enclosed Proxy Statement, including the opinion of Allen & Company Incorporated, the Corporation's financial advisor, that the proposed transaction (as described more fully in the accompanying Proxy Statement) is fair, from a financial point of view, to the Corporation. 3 The proposed transaction contemplates that approximately $16 million of the purchase price be paid in cash by LAGS at the closing, which is expected to occur by July 1, 1996. The balance of the purchase price of approximately $7.8 million, which is subject to potential downward adjustment based on the future earnings of the Aviation Services Business, is payable in cash in three annual installments expected to be paid in September 1996, 1997 and 1998. It is presently contemplated that approximately $16 million of the proceeds from the sale to LAGS of a 26% interest in Hudson LLC will be used by Hudson LLC to call an equivalent amount of the Corporation's 7% Convertible Subordinated Debentures due 2011 (the "Debentures") for redemption. Such proceeds, to the extent that the Debentures are converted instead of being redeemed, together with the deferred proceeds from such sale, will be used to retire additional Debentures, to satisfy other indebtedness of Hudson LLC or for other general purposes, including working capital requirements. Details of the proposed transaction and other important information are included in the accompanying Proxy Statement. Please give this material your careful attention. Whether or not you plan to attend the Special Meeting, please complete, sign and date the accompanying proxy card and return it in the enclosed prepaid envelope. If you attend the Special Meeting, you may vote in person even if you have previously returned your proxy card. Your prompt cooperation will be greatly appreciated. Yours sincerely, LOGO Jay B. Langner Chairman of the Board, President and Chief Executive Officer 4 LOGO NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF HUDSON GENERAL CORPORATION Notice is hereby given that a Special Meeting of Stockholders (including any adjournments or postponements thereof, the "Special Meeting") of Hudson General Corporation, a Delaware corporation (the "Corporation"), will be held at the offices of the Corporation, 111 Great Neck Road, Great Neck, New York on Thursday, May 23, 1996 at 2:30 P.M., local time, for the following purpose: To consider and vote upon a resolution to approve the Unit Purchase and Option Agreement, dated February 27, 1996 (the "Purchase Agreement"), between the Corporation and Lufthansa Airport and Ground Services GmbH ("LAGS"), a German corporation and an indirect wholly-owned subsidiary of Deutsche Lufthansa AG, and the transactions contemplated thereby, including (i) the transfer by the Corporation to Hudson General LLC, a newly-formed Delaware limited liability company ("Hudson LLC"), of substantially all the assets of the Corporation's aviation services business (the "Aviation Services Business") and the assumption by Hudson LLC of certain obligations relating to the Aviation Services Business, in exchange for a 74% interest in Hudson LLC (which interest may be reduced to not less than 51% upon exercise by LAGS of the option referred to below), (ii) the sale by Hudson LLC to LAGS of a 26% interest in Hudson LLC, for a purchase price of approximately $23.8 million in cash (subject to potential downward adjustment based on the future earnings of the Aviation Services Business) and (iii) the grant to LAGS of an option, exercisable on October 1 of each year from 1996 through 2000, effective as of the preceding July 1, to increase its equity interest 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 Services Business over the four fiscal years preceding the exercise of the option, subject to certain minimum and maximum amounts. As part of the foregoing transaction, a Limited Liability Company Agreement (the "LLC Agreement") will be entered into among the Corporation, LAGS and Hudson LLC. Copies of the Purchase Agreement and of the form of LLC Agreement are attached to the accompanying Proxy Statement as Annexes A and B, respectively. No other business will be transacted at the Special Meeting other than possible adjournments or postponements thereof. The Board of Directors has fixed the close of business on April 22, 1996 as the record date for the determination of holders of Common Stock entitled to notice of and to vote at the Special Meeting. By Order of the Board of Directors, NOAH E. ROCKOWITZ Vice President and Secretary Dated: Great Neck, New York April 25, 1996 IT IS HOPED THAT YOU CAN PERSONALLY ATTEND THE SPECIAL MEETING. IF YOU CANNOT ATTEND, YOU ARE REQUESTED TO DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING RETURN ENVELOPE, TO WHICH NO POSTAGE NEED BE AFFIXED IF MAILED WITHIN THE UNITED STATES. 5 HUDSON GENERAL CORPORATION 111 GREAT NECK ROAD GREAT NECK, NEW YORK 11021 (516) 487-8610 ------------------------ PROXY STATEMENT ------------------------ SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 23, 1996 ------------------------ INTRODUCTION This Proxy Statement is being furnished to holders of shares of common stock, par value $1.00 per share (the "Common Stock"), of Hudson General Corporation, a Delaware corporation (the "Corporation"), in connection with the solicitation of proxies by the Board of Directors of the Corporation (the "Board of Directors"), for a Special Meeting of Stockholders to be held on Thursday, May 23, 1996, at the time and place set forth in the accompanying Notice of Special Meeting of Stockholders, and at any adjournments or postponements thereof (the "Special Meeting"). A form of proxy for the Special Meeting is enclosed herewith. It is expected that this Proxy Statement and the enclosed form of proxy will be first mailed to stockholders of the Corporation on or about April 25, 1996. At the Special Meeting, stockholders will be asked to consider and vote upon a resolution to approve the Unit Purchase and Option Agreement, dated February 27, 1996 (the "Purchase Agreement"), between the Corporation and Lufthansa Airport and Ground Services GmbH ("LAGS"), a German corporation and an indirect wholly-owned subsidiary of Deutsche Lufthansa AG ("Lufthansa"), and the transactions contemplated thereby, including (i) the transfer by the Corporation to Hudson General LLC, a newly-formed Delaware limited liability company ("Hudson LLC"), of substantially all the assets of the Corporation's aviation services business (the "Aviation Services Business") and the assumption by Hudson LLC of certain obligations relating to the Aviation Services Business, in exchange for a 74% interest in Hudson LLC (which interest may be reduced to not less than 51% upon exercise by LAGS of the Option (as defined below)), (ii) the sale by Hudson LLC to LAGS of a 26% interest in Hudson LLC, for a purchase price of approximately $23.8 million in cash (subject to potential downward adjustment based on the future earnings of the Aviation Services Business) and (iii) the grant to LAGS of an option (the "Option"), exercisable on October 1 of each year from 1996 through 2000, effective as of the preceding July 1, to increase its equity interest 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 Services Business over the four fiscal years preceding the exercise of the Option, subject to certain minimum and maximum amounts, all pursuant to the Purchase Agreement and a Limited Liability Company Agreement to be entered into among the Corporation, LAGS and Hudson LLC as more fully described in this Proxy Statement. The foregoing transaction is referred to in this Proxy Statement as the "Proposed Transaction." The Purchase Agreement provides, among other things, that approximately $16 million of the purchase price be paid in cash by LAGS at the closing of the Proposed Transaction, which is expected to occur on or about July 1, 1996 (or at such other time as may be agreed upon by the Corporation and LAGS), with the balance payable in cash in three annual installments expected to be paid in September 1996, 1997 and 1998. i 6 For the year ended June 30, 1995 and the six months ended December 31, 1995, the Aviation Services Business generated virtually all of the Corporation's revenues during each such period. The Aviation Services Business constituted approximately 62% and 68% of the total assets of the Corporation as of June 30, 1995 and December 31, 1995, respectively. See "THE PURCHASE AGREEMENT -- Business to be Transferred." THE PROPOSED TRANSACTION IS CONDITIONED UPON, AMONG OTHER THINGS, APPROVAL OF THE PROPOSED TRANSACTION BY THE CORPORATION'S STOCKHOLDERS AND THE SECURING OF VARIOUS THIRD PARTY APPROVALS AND CONSENTS. THERE CAN BE NO ASSURANCE THAT THE CONDITIONS TO THE PROPOSED TRANSACTION WILL BE SATISFIED OR WAIVED AND THAT THE PROPOSED TRANSACTION WILL BE CONSUMMATED. SEE "THE PURCHASE AGREEMENT -- CONDITIONS." Following consummation of the Proposed Transaction, stockholders of the Corporation will retain their equity interest in the Corporation. The Corporation will retain a 74% interest in Hudson LLC (which interest may be reduced to not less than 51% if LAGS exercises its option in full to increase its interest in Hudson LLC to 49%) and the Corporation will continue to manage the Aviation Services Business conducted by Hudson LLC. Neither LAGS nor Lufthansa will acquire any securities of the Corporation, and the Purchase Agreement contains certain standstill provisions pursuant to which, among other things, LAGS, Lufthansa and their affiliates will not acquire any voting securities of the Corporation without the prior written consent of the Corporation's Board of Directors. The Proposed Transaction does not include the transfer of the Corporation's interest in the Kohala Joint Venture, a land development joint venture in Hawaii in which Hudson Kohala, Inc., a wholly-owned subsidiary of the Corporation, is a 50% partner, as well as certain other corporate assets. See "THE PURCHASE AGREEMENT -- Business to be Transferred." Information contained herein under "CERTAIN INFORMATION CONCERNING HUDSON LLC AND LAGS" relating to LAGS has been supplied by LAGS. NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION OR ANY OTHER PERSON. AVAILABLE INFORMATION The Corporation is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). The reports, proxy statements and other information filed by the Corporation with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the SEC's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material also can be obtained by mail from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, material filed by the Corporation can be inspected at the offices of the American Stock Exchange, 86 Trinity Place, New York, New York 10006-1881, on which the Common Stock is traded. ii 7 TABLE OF CONTENTS
PAGE ---- Introduction.......................... i Available Information................. ii Summary............................... 1 The Special Meeting................... 8 General............................. 8 Matters to be Considered at the Special Meeting.................. 8 Voting at the Special Meeting; Record Date...................... 8 Proxies............................. 8 The Proposed Transaction.............. 9 Background of the Proposed Transaction...................... 9 Recommendation of the Board of Directors; Reasons for the Proposed Transaction............. 11 Opinion of Financial Advisor........ 12 Levy/Schulte Proposal............... 15 Use of Proceeds..................... 17 Effect of the Proposed Transaction on Debentures.................... 17 Certain U.S. Federal Income Tax Consequences..................... 18 Accounting Treatment................ 19 No Appraisal Rights................. 19 The Purchase Agreement................ 20 Business to be Transferred.......... 20 Consideration....................... 20 Closing............................. 23 The Purchase Option................. 23 Representations and Warranties...... 24 Certain Covenants................... 24 Other Offers........................ 25 Conditions.......................... 25 Termination......................... 26 Indemnification..................... 26 Payment of Taxes.................... 27 Indemnification Against Results of Certain Litigation............... 27 Aviation Services Cooperation....... 27 Agreement Not to Compete............ 28 PAGE ---- No Impediment to Sale of Shares of the Corporation.................. 28 The LLC Agreement..................... 29 General............................. 29 The Units........................... 29 Distributions, Allocations and Capital Accounts................. 29 Board of Member Representatives..... 30 Restrictions on Transfer of Units; Rights of First Refusal.......... 32 Overhead Fees....................... 32 Officers............................ 33 Agreement Not to Compete............ 33 Indemnification..................... 33 Confidentiality..................... 33 Registration Rights................. 33 Certain Information Concerning Hudson LLC and LAGS........................ 34 Pro Forma Condensed Consolidated Financial Statements................ 34 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 42 Business Information Concerning the Corporation......................... 48 Market Price Data and Dividends....... 51 Security Ownership of Certain Beneficial Owners and Management.... 52 Five Percent Stockholders........... 52 Directors and Management............ 53 Independent Auditors.................. 54 Stockholder Proposals................. 54 Other Matters......................... 54 Index to Consolidated Financial Statements.......................... F-1 Annexes A. Purchase Agreement B. Form of LLC Agreement C. Opinion of Allen & Company Incorporated
iii 8 SUMMARY The following is a summary of certain information contained elsewhere in this Proxy Statement. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained, or incorporated by reference, in this Proxy Statement and the Annexes hereto. Unless otherwise defined herein, capitalized terms used in this summary have the respective meanings ascribed to them elsewhere in this Proxy Statement. Stockholders are urged to read this Proxy Statement and the Annexes hereto in their entirety. THE COMPANIES Hudson General Corporation.... The Corporation is principally engaged in providing a broad range of services to the aviation industry in the United States and Canada (collectively, the "Aviation Services Business"). The services, which are conducted by the Corporation and its subsidiaries, include aircraft ground handling; aircraft de-icing; aircraft fueling; ground transportation services; snow removal; fuel management; cargo warehousing; ramp sweeping and glycol recovery; the sale, leasing and maintenance of ground support equipment; specialized maintenance services; and the leasing of hangar, office and tie-down space to private aircraft owners. In addition to its operation of the Aviation Services Business, the Corporation, through its wholly-owned subsidiary Hudson Kohala, Inc., is a 50% partner with Oxford First Corporation in a joint venture for the development and sale of land in Hawaii. See "BUSINESS INFORMATION CONCERNING THE CORPORATION." Hudson General LLC............ Hudson LLC is a Delaware limited liability company formed by the Corporation to acquire substantially all the assets and assume certain obligations of the Aviation Services Business. See "CERTAIN INFORMATION CONCERNING HUDSON LLC AND LAGS." Lufthansa Airport and Ground Services GmbH............... LAGS is an indirect wholly-owned subsidiary of Lufthansa. LAGS engages in ground handling and airport services on a worldwide basis. See "CERTAIN INFORMATION CONCERNING HUDSON LLC AND LAGS." THE SPECIAL MEETING Time, Date and Place.......... The Special Meeting is to be held at 2:30 P.M., local time, on May 23, 1996 at the offices of the Corporation, 111 Great Neck Road, Great Neck, New York. See "THE SPECIAL MEETING -- General." Record Date; Shares Entitled to Vote..................... Holders of record of Common Stock at the close of business on April 22, 1996 (the "Record Date"), are entitled to notice of and to vote at the Special Meeting. On the Record Date there were 1,154,458 shares of Common Stock outstanding, each of which will be entitled to one vote on the Proposed Transaction. See "THE SPECIAL MEETING -- Voting at the Special Meeting; Record Date." 1 9 Vote Required................. The Proposed Transaction is conditioned on the affirmative vote of the holders of a majority of the shares of Common Stock outstanding and entitled to vote. See "THE SPECIAL MEETING -- Voting at the Special Meeting; Record Date." Security Ownership and Voting of Management and Certain Other Persons..................... As of March 31, 1996, directors and executive officers of the Corporation may be deemed to be the beneficial owners of approximately 27.8% of the outstanding shares of Common Stock (excluding shares of Common Stock which were issuable upon conversion of the Corporation's 7% Convertible Subordinated Debentures due 2011 (the "Debentures"), or upon the exercise of stock options, and which are not outstanding and entitled to vote as of the Record Date). The Corporation believes that all of such shares will be voted in favor of approval of the Proposed Transaction. As of March 12, 1996, GAMCO Investors, Inc., Mario J. Gabelli and their affiliates may be deemed to be the beneficial owners of approximately 47.3% of the outstanding shares of Common Stock (excluding shares of Common Stock which were issuable upon conversion of the Debentures and which are not outstanding and entitled to vote as of the Record Date). See "THE SPECIAL MEETING -- Voting at the Special Meeting; Record Date." Purpose of the Special Meeting....................... The purpose of the Special Meeting is to consider and vote upon the Proposed Transaction. THE PROPOSED TRANSACTION Business to be Transferred.... Pursuant to the Purchase Agreement, the Corporation will transfer substantially all of the assets of the Aviation Services Business to Hudson LLC and Hudson LLC will assume certain obligations relating to the Aviation Services Business (including, as a co-obligor with the Corporation, the obligations under the Debentures). For the year ended June 30, 1995 and the six months ended December 31, 1995, the Aviation Services Business generated virtually all of the Corporation's revenues during each such period. The Aviation Services Business constituted approximately 62% and 68% of the total assets of the Corporation as of June 30, 1995 and December 31, 1995, respectively. See "THE PURCHASE AGREEMENT--Business to be Transferred." Consideration................. The Purchase Agreement provides for the transfer by the Corporation to Hudson LLC of substantially all the assets of the Corporation's Aviation Services Business and the assumption by Hudson LLC of certain obligations relating to the Aviation Services Business, in exchange for a 74% interest in Hudson LLC (which interest may be reduced to not less than 51% upon exercise of the Option (as defined below)), and for the sale by Hudson LLC to LAGS of a 26% interest in Hudson LLC for a purchase price of approximately $23.8 million in cash (subject to potential downward adjustment based on the future earnings of 2 10 the Aviation Services Business) of which approximately $16 million will be paid in cash by LAGS at the closing of the Proposed Transaction, with the balance payable in cash in three annual installments expected to be paid in September 1996, 1997 and 1998, all as more fully described in this Proxy Statement. See "THE PURCHASE AGREEMENT -- Consideration." Purchase Option............... The Purchase Agreement provides that LAGS will have an option (the "Option"), exercisable on October 1 of each year from 1996 through 2000, effective as of the preceding July 1, to increase its equity ownership in Hudson LLC from 26% to a maximum of 49%. The Option price is based on a formula related to the average earnings of the Aviation Services Business over the four fiscal years preceding the exercise of the Option, subject to certain minimum and maximum amounts. The Option may be exercised on no more than two occasions, and the first exercise must be for at least an additional 12% interest in Hudson LLC. See "THE PURCHASE AGREEMENT -- The Purchase Option." Closing of the Proposed Transaction................... The Closing of the Proposed Transaction will take place on the day which is the later of (x) July 1, 1996 or (y) the third business day after the day on which all of the conditions to Closing (including the approval of the Proposed Transaction by the stockholders of the Corporation) set forth in the Purchase Agreement have been fulfilled or waived in writing, or at such other time as may be agreed upon by the Corporation and LAGS. See "THE PURCHASE AGREEMENT -- Closing." Recommendation of the Board of Directors................... The Board of Directors believes that the Proposed Transaction is in the best interests of the Corporation, and has unanimously approved the Purchase Agreement and the Limited Liability Company Agreement to be entered into among the Corporation, LAGS and Hudson LLC (the "LLC Agreement") and recommends that the Corporation's stockholders approve the Proposed Transaction. The Board of Directors' recommendation is based upon a number of factors described in this Proxy Statement. See "THE PROPOSED TRANSACTION -- Recommendation of the Board of Directors; Reasons for the Proposed Transaction." Opinion of Financial Advisor....................... Allen & Company Incorporated ("Allen & Co.") has served as the Corporation's financial advisor in connection with the Proposed Transaction. On February 27, 1996, the date the Board of Directors approved the Purchase Agreement, Allen & Co. delivered to the Board of Directors its written opinion to the effect that, as of the date of its opinion, the Proposed Transaction is fair, from a financial point of view, to the Corporation. A copy of the written opinion of Allen & Co. is attached to this Proxy Statement as Annex C. The attached opinion sets forth the assumptions made, matters considered, the scope and limitations of the review undertaken and procedures followed by Allen & Co., and should be read in its entirety. See "THE PROPOSED TRANSACTION -- Opinion of Financial Advisor." 3 11 Background of the Proposed Transaction; Levy/Schulte Proposal.................... For information concerning the background of the Proposed Transaction and an acquisition proposal made to the Corporation by a third party, see "THE PROPOSED TRANSACTION -- Background of the Proposed Transaction" and "-- Levy/Schulte Proposal." Use of Proceeds............... It is presently contemplated that approximately $16 million of the proceeds from the sale of a 26% interest in Hudson LLC to LAGS will be used by Hudson LLC to call an equivalent amount of the Debentures for redemption. Such proceeds, to the extent that the Debentures are converted instead of being redeemed, together with the deferred proceeds from such sale, will be used to retire additional Debentures, to satisfy other indebtedness of Hudson LLC or for other general purposes, including working capital requirements. See "THE PROPOSED TRANSACTION -- Use of Proceeds." LLC Agreement................. At the Closing of the Proposed Transaction, the Corporation, LAGS and Hudson LLC will enter into the LLC Agreement, which will provide, among other things, (i) that certain decisions concerning Hudson LLC will require the consent of representatives of LAGS, (ii) for certain restrictions on the transferability of interests in Hudson LLC (including restrictions on transfers to competitors and certain rights of first refusal) and (iii) for covenants not to compete. See "THE LLC AGREEMENT." Certain U.S. Federal Income Tax Consequences................ The Proposed Transaction will not result in U.S. Federal income tax consequences to holders of the Common Stock. The Corporation expects that Hudson LLC will be treated as a partnership for U.S. Federal income tax purposes, and that it therefore generally will not be subject to U.S. Federal income tax. The transfer of the Aviation Services Business to Hudson LLC, the assumption of certain liabilities by Hudson LLC, and any redemption or conversion of the Debentures generally should not result in the recognition of any gain or loss by Hudson LLC or the Corporation. For a discussion of certain U.S. Federal income tax consequences of the Proposed Transaction, see "THE PROPOSED TRANSACTION -- Certain U.S. Federal Income Tax Consequences." Conditions to the Proposed Transaction........ The obligations of the Corporation and LAGS to consummate the Proposed Transaction are subject to the satisfaction or waiver of the following conditions: (i) the representations and warranties of the other party being true and correct in all material respects at the Closing Date, but only if failure to be correct, individually or in the aggregate, have, or could reasonably be expected to have, a material adverse effect on Hudson LLC or subject the non-breaching party or its affiliates to significant liability; (ii) the other party having fulfilled in all material respects all its obligations; (iii) no order having been entered by any court or governmental authority and being in force which invalidates the 4 12 Purchase Agreement or restrains LAGS, the Corporation or Hudson LLC from completing the Proposed Transaction; (iv) the Corporation, LAGS or any of their respective subsidiaries not having been told or otherwise been given substantial reason to believe that a specified number of customers or airport authorities will not consent to the transfer of contracts or authorizations to Hudson LLC; (v) the Corporation having obtained all consents, approvals and authorizations required to be obtained under certain agreements, but only if failure to obtain such consents, approvals and authorizations would have, or could reasonably be expected to have, a material adverse effect on Hudson LLC or subject the Corporation or its affiliates, or LAGS or its affiliates, as the case may be, to significant liability; and (vi) the Closing Date being not later than July 31, 1996. The Corporation's obligation to consummate the Proposed Transaction is also subject to the condition that the stockholders of the Corporation approve the Proposed Transaction. LAGS's obligation to consummate the Proposed Transaction is also subject to the condition that, as of December 31, 1995, Hudson LLC and its subsidiaries will have had a pro forma consolidated ratio of stockholders' equity to total assets of at least 27% after adding back capital contribution receivable of $7,838,000 (which is the maximum deferred portion of the purchase price to be paid by LAGS for its 26% interest in Hudson LLC) to pro forma stockholders' equity. See "THE PURCHASE AGREEMENT -- Conditions." Termination................... The Purchase Agreement may be terminated prior to the Closing of the Proposed Transaction under the following circumstances: (i) by mutual consent of the Corporation and LAGS; (ii) by either the Corporation or LAGS, if, without fault of the terminating party, the Closing does not occur on or before July 31, 1996; (iii) by either the Corporation or LAGS if (a) the other party's representations and warranties were not correct in all material respects on the date of the Purchase Agreement or are not correct at the Closing, but only if failure to be correct, individually or in the aggregate, have, or could reasonably be expected to have, a material adverse effect on Hudson LLC or subject the non-breaching party or its affiliates to significant liability, or (b) any event occurs which makes it impossible for all the conditions to such party's obligations to be fulfilled; (iv) by either the Corporation or LAGS if the Corporation's Board of Directors, prior to the Special Meeting, withdraws or qualifies its unqualified recommendation that the Corporation's stockholders vote to approve the Proposed Transaction; (v) by the Corporation or by LAGS, if the Proposed Transaction is not approved by the requisite vote of the stockholders of the Corporation; or (vi) by either the Corporation or LAGS, if the Corporation notifies LAGS that the trustee of the Debentures does not consent to the assumption by Hudson LLC, as a co-obligor with the Corporation, of the obligations under the 5 13 Debentures. See "THE PURCHASE AGREEMENT -- Termination." Expense Reimbursement......... If the Purchase Agreement is terminated under certain circumstances, including termination arising out of certain third party contacts or offers relating to the Corporation or the Aviation Services Business, the Corporation will reimburse LAGS for its out-of-pocket expenses up to a maximum of $650,000. See "THE PURCHASE AGREEMENT -- Other Offers." Standstill Provisions......... The Purchase Agreement contains certain standstill provisions pursuant to which, among other things, LAGS, Lufthansa and their affiliates will not, without the prior written consent of the Corporation's Board of Directors, acquire any of the Corporation's voting securities, seek to acquire control of, or engage in a business combination with, the Corporation, until the later of (i) the third anniversary of the date of the Purchase Agreement, or (ii) the first anniversary of the date on which LAGS and its affiliates, or the Corporation and its affiliates, cease to beneficially own any interest in Hudson LLC. See "THE PURCHASE AGREEMENT -- Certain Covenants." Accounting Treatment.......... See "THE PROPOSED TRANSACTION -- Accounting Treatment." No Appraisal Rights........... Under the Delaware General Corporation Law, holders of shares of Common Stock will not be entitled to appraisal rights in connection with the Proposed Transaction. 6 14 SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following is a summary of certain selected historical and unaudited pro forma consolidated financial data of the Corporation. The selected unaudited pro forma financial data assumes that LAGS had acquired a 26% interest in the Aviation Services Business as of December 31, 1995 for purposes of the pro forma consolidated balance sheet data, and as of July 1, 1994 for purposes of the pro forma consolidated operations data. This summary has been derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Corporation and the related notes thereto beginning on page F-1 of this Proxy Statement. The selected unaudited pro forma consolidated financial data is derived from, and should be read in conjunction with, the Pro Forma Condensed Consolidated Financial Statements and the notes thereto beginning on page 34 of this Proxy Statement. Results of interim periods are not necessarily indicative of results to be expected for the year. The unaudited consolidated pro forma financial data is for illustrative purposes only and is not necessarily indicative of the financial position or the results of operations that would have occurred if the acquisition by LAGS of a 26% interest in the Aviation Services Business had been consummated as of the assumed dates indicated above, nor is it necessarily indicative of future financial position or results of operations.
SIX MONTHS ENDED FISCAL YEARS ENDED DECEMBER 31, JUNE 30, ------------------- ------------------------------------------------------------------------ PRO PRO FORMA ACTUAL FORMA ------- ------- ------- 1995 1995 1995 1995 1994 1993 1992 1991 ------- ------- ------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues................... $ 135 $75,245 $ 98 $135,453 $142,075 $132,186 $126,744 $128,978 Equity in earnings (loss) of joint venture......... (1,391) (1,391) (2,747) (2,747) (1,801) (2,788) (1,472) 1,119 Equity in earnings of Hudson LLC............... 5,489 -- 9,072 -- -- -- -- -- Earnings (loss) before extraordinary items and cumulative effect of change in the method of accounting for income taxes.................... 1,988 2,875 3,603 4,593 7,310 (2,045)(1) 1,128 2,723 Earnings (loss) per share before extraordinary items and cumulative effect of change in the method of accounting for income taxes: Primary................ 1.70 2.46 2.89 3.69 5.86 (1.65) .90 2.19 Fully diluted.......... 1.44 1.67 2.39 2.67 3.96 (1.65) 1.06 1.79 Net earnings (loss)........ 1,988 2,875 3,603 4,593 7,760 (2,180)(1) 2,005(2) 4,014(2) Net earnings (loss) per share: Primary................ 1.70 2.46 2.89 3.69 6.22 (1.75) 1.60 3.23 Fully diluted.......... 1.44 1.67 2.39 2.67 4.17 (1.75) 1.47 2.39 Total assets............... 42,490 99,130 -- 87,568 77,889 72,414 79,038 82,870 Long-term obligations less current maturities....... 0 0 -- 29,000 29,000 32,700 34,800 39,416 Book value per share....... 28.31 19.03 -- 17.24 15.37 9.77 12.12 11.04 Cash dividends per common share.................... .25 .25 .50 .50 -- -- -- --
- --------------- Notes: (1) Includes $4,287 of accelerated amortization of leasehold rights related to the Corporation's Canadian fixed base operations. (2) Includes extraordinary tax benefit from net operating loss carryforwards of $800 and $1,123 in fiscal 1992 and 1991, respectively. 7 15 THE SPECIAL MEETING GENERAL This Proxy Statement is being furnished to holders of the Corporation's Common Stock (the "Common Stock") in connection with the solicitation of proxies by the Board of Directors for use at the Special Meeting of Stockholders to be held at 2:30 P.M., local time, on Thursday, May 23, 1996, at the offices of the Corporation, 111 Great Neck Road, Great Neck, New York, and at any adjournments or postponements thereof (the "Special Meeting"). It is expected that this Proxy Statement and the enclosed form of proxy will be first mailed to the stockholders of the Corporation on or about April 25, 1996. MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING At the Special Meeting, the stockholders of the Corporation will be asked to consider and vote upon the Proposed Transaction. No other business will be transacted at the Special Meeting other than possible adjournments or postponements thereof. See "THE PROPOSED TRANSACTION." The Board of Directors has unanimously approved the Proposed Transaction and recommends a vote FOR approval of the Proposed Transaction by the stockholders of the Corporation. VOTING AT THE SPECIAL MEETING; RECORD DATE The Corporation had outstanding on April 22, 1996, the record date for the Special Meeting (the "Record Date"), 1,154,458 shares of Common Stock, each of which is entitled to one vote on the Proposed Transaction. The holders of a majority of the shares entitled to vote at the Special Meeting must be present in person or represented by proxy in order to constitute a quorum for the transaction of business at the Special Meeting. The approval of the Proposed Transaction by the stockholders of the Corporation requires the affirmative vote of the holders of a majority of the shares of Common Stock outstanding and entitled to vote. Accordingly, abstentions and broker non-votes will have the same effect as a vote against the Proposed Transaction. A majority of the shares of Common Stock present at the Special Meeting, in person or by proxy, whether or not constituting a quorum, may vote to adjourn the Special Meeting from time to time, including for purposes of soliciting additional proxies. Proxies containing a vote against the Proposed Transaction will not be used to vote in favor of any such adjournment. As of March 31, 1996, directors and executive officers of the Corporation and their affiliates may be deemed to be the direct or indirect beneficial owners of approximately 27.8% of the outstanding shares of Common Stock (excluding shares of Common Stock which were issuable upon the conversion of Debentures or exercise of stock options, and which are not outstanding and entitled to vote as of the Record Date). The Corporation believes that all of such shares will be voted in favor of the approval of the Proposed Transaction. As of March 12, 1996, GAMCO Investors, Inc., Mario J. Gabelli and their affiliates may be deemed to be the beneficial owners of approximately 47.3% of the outstanding shares of Common Stock (excluding shares of Common Stock which were issuable upon conversion of the Debentures and which are not outstanding and entitled to vote as of the Record Date). PROXIES This Proxy Statement is being furnished to stockholders of the Corporation in connection with the solicitation of proxies by and on behalf of the Board of Directors for use at the Special Meeting. The shares represented by all valid proxies in the enclosed form will be voted if received in time for the Special Meeting and will be voted in accordance with the directions, if any, given in the proxy. If no directions are given, the proxy will be voted FOR the approval of the Proposed Transaction. A proxy is revocable at any time prior to being voted by written notice to the Secretary of the Corporation, by submission of another proxy bearing a 8 16 later date, or by voting in person at the Special Meeting. The mere presence at the Special Meeting of a person appointing a proxy does not revoke the appointment. The costs of this solicitation will be paid by the Corporation. Such costs include preparation, printing and mailing of the Notice of Special Meeting and form of proxy and this Proxy Statement. The solicitation will be conducted principally by mail, although directors, officers and regular employees of the Corporation and its subsidiaries, without additional compensation, may solicit proxies personally or by telephone and telegram. Arrangements will be made with brokerage houses and other custodians, nominees and fiduciaries for proxy material to be sent to their principals, and the Corporation will reimburse such persons for their expenses in so doing. The Corporation has retained the firm of Morrow & Co., Inc. to assist in the solicitation of proxies at a cost of $4,000, plus reasonable out-of-pocket expenses. THE PROPOSED TRANSACTION BACKGROUND OF THE PROPOSED TRANSACTION The Corporation has, from time to time, discussed with other parties various strategic operating alternatives in connection with the Aviation Services Business, including discussions conducted periodically from 1990 to 1992 with LAGS concerning certain joint business operations. No agreements or understandings resulted from such discussions. In May 1995, a representative of LAGS contacted Jay B. Langner, Chairman of the Board, President and Chief Executive Officer of the Corporation, to inquire whether the Corporation would be interested in discussing a transaction involving the Corporation's Aviation Services Business. Following such conversation, the Corporation furnished to LAGS certain publicly-available information relating to the Corporation and its subsidiaries. On July 11, 1995, the Corporation and LAGS executed a confidentiality agreement and the Corporation began to furnish to LAGS certain non-public, confidential or proprietary information relating to the Corporation and its subsidiaries. In August and September 1995, representatives of the Corporation and representatives of LAGS discussed the terms of a possible transaction relating to the Aviation Services Business. In September 1995, the Corporation and LAGS reached a preliminary non-binding understanding that the parties would undertake to negotiate a transaction pursuant to which LAGS would acquire a 26% interest in the Aviation Services Business, with an option to acquire up to a 49% interest in such business for additional consideration. The Corporation and LAGS continued discussions with a view to reaching an understanding on the terms and structure of such transaction. In late November 1995, the Corporation and LAGS and their respective counsel commenced negotiation of documents pertaining to a transaction between the parties. On December 6, 1995, the supervisory board of Lufthansa approved a transaction between the Corporation and LAGS pursuant to which LAGS would acquire a 26% interest in the Corporation's Aviation Services Business for a maximum price of $23,838,000, with an option to increase its interest to a maximum of 49%. On December 7, 1995, Lufthansa issued a press release to such effect. On December 7, 1995, the Corporation issued the following press release: Great Neck, New York -- December 7, 1995 -- Hudson General Corporation (Hudson) stated today that it is engaged in negotiations with Lufthansa Airport and Ground Services GmbH (LAGS) concerning the acquisition by LAGS of a minority interest in Hudson's North American Aviation Services business (the Aviation Business). LAGS is a wholly-owned subsidiary of Deutsche Lufthansa AG (Lufthansa). The negotiations contemplate a transaction pursuant to which LAGS would acquire a 26% interest in the Aviation Business for a price of approximately $23.8 million, subject to adjustment based on future earnings of the Aviation Business. It is intended that approximately $16 million of the purchase price be 9 17 paid in cash by LAGS at the closing, with the balance payable over three years. The negotiations also contemplate that LAGS would have an option to increase its interest in the Aviation Business up to 49%. The option price would be based in part on a formula related to future earnings. The parties have not yet determined the form of the proposed transaction, but neither LAGS nor Lufthansa will acquire voting securities of Hudson, and Hudson will continue to manage the Aviation Business. Hudson's Aviation Business constitutes approximately 70% of Hudson's assets and virtually all of its revenues. Any transaction would be subject to negotiation and execution of definitive agreements, approval of Hudson's Board of Directors and certain other conditions. There can be no assurance that definitive agreements relating to the proposed transaction will be reached, or if agreements are reached, that any transaction will be consummated. Hudson provides various services at airports throughout the United States and Canada and is a participant in a joint venture to develop 4,000 acres of land in Hawaii. Hudson shares are traded on the American Stock Exchange under the ticker symbol HGC. In late December 1995, after considering various alternative structures, the Corporation and LAGS decided to structure the transaction as a transfer by the Corporation of substantially all the assets of the Aviation Services Business to a new limited liability company followed by the acquisition by LAGS of a 26% interest in such limited liability company. Negotiations between representatives of the Corporation and its legal advisors and representatives of LAGS and its legal advisors continued through February 27, 1996. On February 27, 1996, the Board of Directors of the Corporation unanimously determined that the form, terms and provisions of the Purchase Agreement and the LLC Agreement (as defined below) and the consummation of the Proposed Transaction contemplated thereby are in the best interests of the Corporation and voted to recommend that the stockholders of the Corporation approve and authorize the consummation of the Proposed Transaction. Immediately thereafter, the Corporation and LAGS executed the Purchase Agreement. On February 28, 1996, the Corporation issued the following press release: Great Neck, New York -- February 28, 1996 -- Hudson General Corporation announced today that Hudson General and Lufthansa Airport and Ground Services GmbH ("LAGS") have executed an agreement pursuant to which LAGS will acquire a 26% interest in Hudson General's aviation services business (the "Aviation Business"). Hudson General previously announced that it was engaged in negotiations with LAGS concerning this transaction. LAGS is a wholly owned subsidiary of Deutsche Lufthansa AG ("Lufthansa"). Pursuant to the Agreement, LAGS will acquire, for a price of approximately $23.8 million, a 26% interest in a newly formed Hudson General subsidiary which will conduct the Aviation Business. Approximately $16 million of the purchase price will be paid in cash by LAGS at the closing. The balance of the purchase price of approximately $7.8 million, which is subject to downward adjustment based on future earnings of the Aviation Business, is payable in three annual installments ending in September 1998. Neither LAGS nor Lufthansa will acquire any securities of Hudson General. The Agreement also provides that LAGS will have an option, exercisable until October 1, 2000, to increase its interest in the Aviation Business from 26% up to a maximum of 49%. The option price is based on a formula related to the earnings of the Aviation Business, subject to certain minimum and maximum amounts. Hudson General will continue to manage the Aviation Business. The Aviation Business constitutes approximately 70% of Hudson General's assets and virtually all of its revenues. 10 18 The transaction, which is expected to close on or about July 1, 1996, is subject to certain conditions, including the prior approval of the holders of a majority of Hudson General's outstanding stock. Allen & Company Incorporated is acting as financial advisor to Hudson General in connection with this transaction. Hudson General provides various services at airports throughout the United States and Canada and is a participant in a joint venture to develop 4,000 acres of land in Hawaii. Hudson General Corporation shares are traded on the American Stock Exchange under the ticker symbol HGC. RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE PROPOSED TRANSACTION The Board of Directors believes that the Proposed Transaction is in the best interests of the Corporation. Accordingly, the Board of Directors has unanimously approved the Purchase Agreement and the LLC Agreement and recommends to the Corporation's stockholders that they approve and authorize the consummation of the Proposed Transaction. At a meeting of the Board of Directors held on February 27, 1996, the Board of Directors received presentations from, and carefully reviewed the terms of the Purchase Agreement and the LLC Agreement with, the Corporation's management, representatives from Skadden, Arps, Slate, Meagher & Flom ("Skadden, Arps"), special counsel to the Corporation, and representatives from Allen & Company Incorporated ("Allen & Co."), the Corporation's financial advisor. See "Opinion of Financial Advisor." In reaching its conclusions to approve the Purchase Agreement and the LLC Agreement and recommend that the stockholders of the Corporation approve and authorize the consummation of the Proposed Transaction, the Board of Directors considered a number of factors, including, without limitation, the following: 1. the terms and conditions of the Purchase Agreement (including the purchase price and the terms of the Option) and the terms of the LLC Agreement; 2. presentations by management of the Corporation regarding anticipated operational and other benefits of the Proposed Transaction; 3. that, upon consummation of the Proposed Transaction, the Corporation will continue to manage the day to day operations of the Aviation Services Business, will at all times hold a majority interest in Hudson LLC and will designate three of the five persons serving on the Member Board of Hudson LLC (although certain decisions concerning Hudson LLC will require the consent of LAGS' representatives on the Member Board of Hudson LLC); 4. a comparison of the Corporation's recent stock price to the valuation of the Corporation's stock, both on a primary and fully diluted basis, as is implied by LAGS' valuation of the Aviation Services Business in the Proposed Transaction; 5. the written opinion of Allen & Co. presented to the Board of Directors of the Corporation on February 27, 1996 to the effect that, as of such date and based upon its review and analysis and subject to the limitations set forth therein, the Proposed Transaction is fair, from a financial point of view, to the Corporation. A copy of the written opinion, dated February 27, 1996, of Allen & Co., setting forth the assumptions made, the factors considered and scope of the review undertaken by Allen & Co., is attached as Annex C hereto and is incorporated herein by reference. STOCKHOLDERS ARE URGED TO READ THE OPINION OF ALLEN & CO. CAREFULLY AND IN ITS ENTIRETY. SEE "OPINION OF FINANCIAL ADVISOR"; 6. LAGS' desire to acquire a minority interest in the Aviation Services Business and its unwillingness to acquire any interest in the Kohala Joint Venture, a land development joint venture in Hawaii in which Hudson Kohala, Inc., a wholly-owned subsidiary of the Corporation, is a 50% partner (the "Kohala Joint Venture"); 7. that the Proposed Transaction is not conditioned on the availability of financing by LAGS; 11 19 8. current industry conditions relating to the Aviation Services Business, as well as the financial condition, businesses and operations of the Aviation Services Business, both on an historical and prospective basis; 9. that neither LAGS nor Lufthansa will be acquiring any of the Corporation's securities, that the Purchase Agreement and LLC Agreement do not prevent or limit the Corporation's ability after the Closing Date (as defined below) to engage in business combinations or other extraordinary transactions and that pending the Closing Date the Corporation may, in accordance with the Purchase Agreement, under certain circumstances furnish information to, and engage in discussions and negotiations with, parties other than LAGS; 10. that, if the Corporations's Board of Directors determines that its fiduciary duties so require, it can withdraw its recommendation that stockholders approve the Proposed Transaction, that the proposed Purchase Agreement does not provide for any termination fees to be paid by the Corporation if it exercises its fiduciary right to terminate the Purchase Agreement and that the Corporation's sole financial obligation to LAGS under such circumstance would be the reimbursement of LAGS' actual expenses up to a maximum of $650,000; 11. that the Purchase Agreement contains certain standstill provisions pursuant to which, among other things, LAGS, Lufthansa and their affiliates will not, without the prior written consent of the Corporation's Board of Directors, acquire any of the Corporation's voting securities, seek to acquire control of, or engage in a business combination with, the Corporation, until the later of (i) the third anniversary of the date of the Purchase Agreement or (ii) the first anniversary of the date on which LAGS and its affiliates, or the Corporation and its affiliates, cease to beneficially own an interest in Hudson LLC; 12. that the LLC Agreement contains limitations on the disposition by either LAGS or the Corporation of their interests in Hudson LLC, including certain rights of first refusal; 13. that Hudson LLC will assume, as a co-obligor with the Corporation, approximately $29 million aggregate principal amount of the Debentures and that a significant portion of the proceeds from the Proposed Transaction will be used to redeem such Debentures to the extent that they are not converted into shares of the Corporation's Common Stock; 14. the tax effects of the Proposed Transaction. See "Certain U.S. Federal Income Tax Consequences"; 15. the consents required to consummate the Proposed Transaction and the prospects of obtaining such consents; and 16. the belief of the Board of Directors that, based on the foregoing reasons, the Proposed Transaction at this time would be in the best interests of the Corporation. The foregoing discussion of the information and factors considered and given weight by the Board of Directors is not intended to be exhaustive. The Board of Directors did not assign relative weights to the above factors or determine that any factor was of particular importance. Rather, the Board of Directors viewed its position and recommendations as being based on the totality of the information presented to and considered by it. OPINION OF FINANCIAL ADVISOR Allen & Co. has acted as the Corporation's financial advisor in connection with the Proposed Transaction and related matters, based upon Allen & Co.'s qualifications, expertise and reputation, as well as Allen & Co.'s prior investment banking relationship and familiarity with the Corporation. In this connection, Allen & Co. has advised the Board of Directors with respect to the Proposed Transaction and, on February 27, 1996, at the meeting of the Board of Directors at which the Purchase Agreement, the LLC Agreement and the Proposed Transaction contemplated thereby were approved, Allen & Co. delivered a written opinion to the effect that the consummation of the Proposed Transaction is fair, from a financial point of view, to the Corporation. 12 20 THE FULL TEXT OF ALLEN & CO.'S WRITTEN OPINION DATED FEBRUARY 27, 1996, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS OF THE CORPORATION ARE URGED TO, AND SHOULD, READ THIS OPINION CAREFULLY AND IN ITS ENTIRETY. In arriving at its written opinion, Allen & Co. considered, among other factors it deemed relevant, (i) the terms of the Purchase Agreement, LLC Agreement and related documentation; (ii) the nature of the operations and financial history of the Corporation, based in part upon discussions with senior management of the Corporation relating to the business and prospects of the Corporation with respect to, among other things, the Corporation's operating budget and financial projections; (iii) the Corporation's filings with the SEC, including audited and unaudited financial statements for the Corporation; (iv) an analysis of the capital structure of the Corporation, including the potential impact of the consideration to be received by the Corporation as a result of the Proposed Transaction under alternative use of proceeds scenarios; (v) the historical price ranges for the Common Stock; (vi) the impact the Proposed Transaction would have on the earnings and cash flows of the Corporation; and (vii) certain financial and stock market information for certain other companies in businesses related to those of the Corporation. In addition to its review and analysis of the specific information set forth above, Allen & Co.'s opinion reflected and gave effect to its assessment of general economic, monetary and market conditions existing as of the date of its opinion as they may affect the business and prospects of the Corporation. In rendering its opinion, Allen & Co. did not conduct an independent appraisal of the Corporation's assets, or independently verify the information concerning the Corporation's operations or other data which it considered in its review and, for the purpose of expressing its opinion, it assumed that all such information is accurate, complete and current. In arriving at its opinion, Allen & Co. was not authorized to solicit, and did not solicit, interest from any third party with respect to the Corporation or any of its assets. The following is a brief summary of certain analyses performed by Allen & Co. and reviewed with the Corporation's Board of Directors on February 27, 1996 in connection with Allen & Co.'s opinion to the Corporation's Board of Directors on such date: Discounted Cash Flow Analysis of Aviation Services Business. Allen & Co. performed a discounted cash flow analysis of the Aviation Services Business for the six months ending June 30, 1996 and the fiscal years ending June 30, 1997 through June 30, 1999 based upon financial projections prepared by the management of the Corporation. Unlevered free cash flow was calculated as net income plus depreciation less the sum of changes in working capital and capital expenditures. Allen & Co. calculated terminal values by applying a range of Earnings Before Interest and Taxes ("EBIT") exit multiples for the Aviation Services Business. The cash-flow streams and terminal values were then discounted to present value using a range of discount rates, representing an estimated range of the weighted average cost of capital to the Aviation Services Business. Based on this analysis, Allen & Co. calculated the value of the equity of the Aviation Services Business as ranging between $61.2 million and $90.7 million. Comparison of Discounted Cash Flow Valuation to LAGS' Valuation of Aviation Services Business. Allen & Co. compared $76.6 million, a midpoint of its valuation range for the Aviation Services Business determined using the discounted cash flow analysis referred to above (which mid-point valuation assumes an EBIT exit multiple of 6.5x and a discount rate of 10% per annum) to $91.5 million, the implied valuation of the Aviation Services Business based upon the consideration to be paid by LAGS pursuant to the Proposed Transaction, and determined that the implied price to be paid by LAGS exceeds the midpoint of the discounted cash flow analysis valuation by 19.5%. Comparison of Recent Stock Prices to Estimated Value of the Common Stock of the Corporation. Allen & Co. estimated a value for the Common Stock by valuing the Corporation's equity stake in the Aviation Services Business, as implied by the LAGS valuation, using a range of values for the Corporation's investment in the Kohala Joint Venture, as well as capitalizing the value of unallocated corporate overhead expense and giving credit to the estimated cash in excess of working capital requirements at the Corporation as a result of the Proposed Transaction. Allen & Co. then compared this stock price, on both a primary and on a fully-diluted basis, to the closing market price of the Common Stock on (i) February 26, 1996, the day immediately 13 21 preceding the date of Allen & Co.'s opinion, (ii) December 6, 1995, the date one day before the Corporation publicly announced that it was engaged in negotiations with LAGS concerning the Proposed Transaction, (iii) November 7, 1995, the date one month before the Corporation's public announcement concerning its negotiations with LAGS, and (iv) September 7, 1995, the date three months before the Corporation's public announcement concerning its negotiations with LAGS. Allen & Co.'s analysis indicated an implied valuation of the Common Stock price (on a fully-diluted basis and giving effect to the foregoing assumptions) of (i) 13.5% to 26.6% higher than the closing market price of the Common Stock on February 26, 1996, (ii) 41.0% to 57.4% higher than the closing market price of the Common Stock on December 6, 1995, (iii) 67.0% to 86.3% higher than the closing market price of the Common Stock on November 7, 1995, and (iv) 101.1% to 193.4% higher than the closing market price of the Common Stock on September 7, 1995, with the implied valuation varying according to the value assumed for the Kohala Joint Venture. Pro Forma Accretion/Dilution Analysis. Allen & Co. analyzed the dilutive impact of the Proposed Transaction using a wide range of assumptions as to how the proceeds from the Proposed Transaction are used. Among the uses of proceeds considered were retirement of the Debentures, repurchasing stock, payment of a stockholder dividend and reinvesting the proceeds at various rates of return. In addition, Allen & Co. examined potential uses of proceeds if the Debentures were converted into Common Stock. Allen & Co. concluded that, across a wide variety of scenarios, the Proposed Transaction is generally accretive to the holders of Common Stock. Public Company Analysis. Allen & Co. compared certain financial information of the Corporation with that of a group of publicly traded companies involved in the aviation services business, including AAR Corp., Aviall, Inc., Butler International, Inc., Mercury Air Group, Inc., Ogden Corporation and UNC Incorporated (the "Public Companies"). Of the Public Companies, Mercury Air Group, Inc.'s business was considered to be the closest to that of the Corporation, although Allen & Co. found substantial differences between the operations of the two entities. Allen & Co. noted that, as of February 26, 1996, Mercury Air Group, Inc. traded at 11.6x latest 12 months ("LTM") earnings, and had enterprise value (equity value plus debt minus cash) multiples of 0.4x LTM revenues and 4.2x LTM earnings before interest and taxes. No company utilized in the Public Companies analysis as a comparison is identical to the Corporation. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of the Corporation and other factors that could affect the public trading of the Public Companies or Public Company to which they are being compared. Mathematical analysis (such as determining the mean or median) is not in itself a meaningful method of using comparable company data. Corporation's Stock Price. Allen & Co. reviewed the stock price of the Common Stock for the last five years. Allen & Co. noted that, from January 1, 1991 through February 26, 1996, the Common Stock's closing price has been in the range of $9.375 to $41.00 per share and, from January 1, 1995 through February 26, 1996, the Common Stock's closing price has been in the range of $15.625 to $41.00 per share. Allen & Co. further noted that, on February 26, 1996, the Common Stock's closing price was $39.00 per share, near its five-year and 12-month highs. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. Allen & Co. believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering all analyses, would create an incomplete view of the process underlying its opinion. Pursuant to an engagement letter with the Corporation dated February 16, 1988, as amended from time to time (the "Engagement Letter"), Allen & Co. is engaged to act as exclusive financial advisor until March 1997. Pursuant to the Engagement Letter, the Corporation has agreed to pay Allen & Co. a fee equal to two percent of the consideration (as defined in the Engagement Letter) received in connection with the Proposed Transaction. Stanley S. Shuman, a director of the Corporation, is a Managing Director and Executive Vice President of Allen & Co. 14 22 LEVY/SCHULTE PROPOSAL On December 7, 1995, Joel N. Levy of Joel N. Levy/Peter M. Schulte, L.L.C. ("Levy/Schulte") delivered a letter to Mr. Shuman of Allen & Co. in which he stated that Levy/Schulte has been "coordinating activities in preparation for an offer to purchase, in a negotiated transaction, all of the common shares of Hudson General Corporation for approximately $40.00 per share in cash." The letter also stated that Levy/Schulte intended to finalize its discussions with various co-investors "within the next 10 days." The Corporation's management declined Mr. Levy's request for a meeting. On February 27, 1996, prior to the meeting of the Corporation's Board of Directors held that day at which the Board approved the Proposed Transaction, Mr. Levy informed Mr. Shuman by telephone that Levy/Schulte anticipated it would be in a position to request a meeting with the Corporation's management in a few weeks for the purpose of discussing a possible proposal involving the Corporation. In early March 1996, Mr. Levy spoke by telephone with Eran Ashany, a Vice President of Allen & Co., and requested a meeting with Mr. Langner, the Corporation's Chairman of the Board, President and Chief Executive Officer. At Mr. Langner's request, Mr. Ashany offered to meet with Mr. Levy, and Messrs. Levy and Ashany met on March 13, 1996. At that meeting, Mr. Levy (i) stated that Levy/Schulte was interested in making a proposal to acquire all of the Corporation's Common Stock at a slight premium over the then current market price of the Corporation's Common Stock, and (ii) requested access to confidential information concerning the Corporation, subject to a Confidentiality Agreement, and requested a meeting with the Corporation's senior management. Mr. Levy also stated that Levy/Schulte would not take a position as to whether it would support or oppose the Proposed Transaction until it conducted its due diligence review. In subsequent telephone calls with Mr. Ashany, Mr. Levy requested a meeting with Mr. Langner. Following consultation with the Corporation, Mr. Ashany informed Mr. Levy that (i) the Corporation intended to proceed with the Proposed Transaction and did not intend to take any actions that could jeopardize the Proposed Transaction, and (ii) Mr. Langner did not wish at that time to meet with Mr. Levy or discuss Levy/Schulte's proposal. On March 19, 1996, Mr. Levy delivered a letter to Mr. Langner stating that Levy/Schulte was "proposing to purchase 100% of the outstanding common stock of [the Corporation] for a cash payment representing a premium over [the Corporation's] recent and historical market prices." In his letter, Mr. Levy stated that Levy/Schulte has "had discussions with our equity investors and lenders, including Swissair, Carl Marks & Co. and Nomura Securities, to arrange the necessary financing for this transaction." The letter further indicated that Levy/Schulte did not have financing at the present time and stated that the proposal also was subject to a due diligence condition. On March 25, 1996, Mr. Levy delivered a letter to Mr. Langner, with copies to the members of the Corporation's Board of Directors, stating that Levy/Schulte was proposing to acquire all outstanding shares of the Corporation's Common Stock in a negotiated transaction at a price "in excess of $41.25 per share in cash." In his letter, Mr. Levy requested a response to his letter by the close of business on March 27, 1996 and an opportunity to meet with the full Board of Directors by the close of business on April 1, 1996. Levy/Schulte was informed by the Corporation's representatives that the Corporation's Board of Directors would review Levy/Schulte's proposal at its next regularly scheduled Board meeting on April 2, 1996. On March 28, 1996, Levy/Schulte issued a press release concerning its unsolicited acquisition proposal. On March 29, 1996, the Corporation issued the following press release: Great Neck, New York -- March 29, 1996 -- Hudson General Corporation ("Hudson") stated today that it has received an unsolicited proposal from Joel N. Levy/Peter M. Schulte, LLC ("Levy/Schulte") to acquire all of Hudson's outstanding shares of Common Stock in a negotiated transaction at a price which Levy/Schulte said is "in excess of $41.25 per share in cash." On March 27, 1996, the day prior to the date on which Levy/Schulte publicly announced its proposal, the closing price per share of Hudson's Common Stock on the American Stock Exchange was $42.25. Levy/Schulte has indicated that it does not have financing at the present time and that its proposal is also subject to a due diligence condition. 15 23 Representatives of Hudson had informed Levy/Schulte earlier this week that Hudson's Board of Directors would review the Levy/Schulte proposal at a regularly scheduled Board meeting to be held on April 2, 1996. On April 2, 1996, the Corporation's Board of Directors, together with representatives of Allen & Co. and Skadden, Arps, reviewed the Levy/Schulte proposal. Following consideration of the Levy/Schulte proposal, the Proposed Transaction and the interests of the Corporation and its shareholders, the Corporation's Board of Directors unanimously concluded that the Corporation was not for sale, that the Board was not interested in entering into discussions with Levy/Schulte at the present time, and that Levy/Schulte should be urged not to take any action which would interfere with the Corporation's rights and obligations under, or the transactions contemplated by, the Purchase Agreement. At the Board's request, the Corporation's counsel promptly informed Levy/Schulte of the Board's position. After conclusion of the Board of Directors meeting, the Corporation issued the following press release on April 2, 1996: Great Neck, New York -- April 2, 1996 -- Hudson General Corporation ("Hudson") stated today that its Board of Directors has determined that it is not interested in entering into discussions with Joel N. Levy/Peter M. Schulte, L.L.C. ("Levy/Schulte") concerning a possible acquisition of Hudson. Levy/Schulte recently announced a proposal to acquire all of Hudson's outstanding shares of Common Stock in a negotiated transaction at a price which Levy/Schulte said is "in excess of $41.25 per share in cash." On April 11, 1996, Levy/Schulte furnished the Corporation with a copy of a proposal letter from Nomura Holding America Inc. ("Nomura") dated March 27, 1996, in which Nomura stated that any commitment on its part to furnish financing and to agree to any other matters set forth in a draft commitment letter, "if such commitment and agreement shall be forthcoming, will be subject, among other things, to completion of satisfactory preliminary due diligence by Nomura, market conditions, approval of Nomura's senior management and execution of a definitive commitment letter agreement on mutually satisfactory terms." On April 15, 1996, Mr. Levy sent a letter to the Corporation's Board of Directors stating that Levy/ Schulte remained interested in acquiring 100% of the outstanding shares of the Corporation's Common Stock in a negotiated transaction and proposing a purchase price of $44 per share in cash. Levy/Schulte's proposal continued to remain subject to financing and due diligence conditions. In his letter, Mr. Levy stated "our investors are Carl Marks & Co. and Swissair, which have stated their willingness to make an equity investment of $25 million, and our lender who has submitted a written proposal to finance up to $80 million of the purchase price." With regard to the Proposed Transaction, Mr. Levy stated in his letter: "We are not, however, seeking to interfere with your contractual obligations to Lufthansa. In fact, we may be interested in proceeding with an acquisition of the [Corporation] even if the Lufthansa transaction is consummated. In the alternative, we would consider including Lufthansa as a participant in our proposed transaction, subject to the agreement of the parties." In his letter, Mr. Levy requested a meeting with the Corporation's management and also requested a response to his letter by noon on April 17, 1996. On April 16, 1996, the Corporation issued the following press release: Great Neck, New York -- April 16, 1996 -- Hudson General Corporation ("Hudson") stated today that it has received a further unsolicited letter from Joel N. Levy/Peter M. Schulte LLC ("Levy/ Schulte") in which Levy/Schulte states that it remains interested in a negotiated acquisition of all of Hudson's outstanding shares of Common Stock and proposes a price of $44 per share in cash. Levy/ Schulte's proposal continues to remain subject to financing and due diligence conditions. Hudson stated that its Board of Directors would review Levy/Schulte's latest letter. Later in the day on April 16, 1996, Levy/Schulte issued a press release concerning its unsolicited acquisition proposal as set forth in Mr. Levy's April 15, 1996 letter. On April 19, 1996 in the late afternoon, the Corporation's Board of Directors, together with representatives of Allen & Co. and Skadden, Arps, reviewed the latest Levy/Schulte proposal. Following consideration 16 24 of the Levy/Schulte proposal, the Proposed Transaction and the interests of the Corporation and its shareholders, the Corporation's Board of Directors by a unanimous vote of all directors present concluded that the Corporation was not for sale, that the Board was not interested in entering into discussions with Levy/ Schulte at the present time, and that Levy/Schulte should be urged not to take any action which would interfere with the Corporation's rights and obligations under, or the transactions contemplated by, the Purchase Agreement. At the Board's request, on the morning of April 22, 1996, the Corporation's counsel informed Levy/Schulte of the Board's position. Also, on the morning of April 22, 1996, the Corporation issued the following press release: Great Neck, New York -- April 22, 1996 -- Hudson General Corporation ("Hudson") stated today that its Board of Directors has again determined that it is not interested in entering into discussions with Joel N. Levy/Peter M. Schulte, L.L.C. ("Levy/Schulte") concerning a possible acquisition of Hudson. Last week Levy/Schulte made a revised proposal to acquire all of Hudson's outstanding shares of Common Stock in a negotiated transaction at a price of $44 per share in cash. Levy/Schulte's proposal remains subject to financing and due diligence conditions. USE OF PROCEEDS It is presently contemplated that approximately $16 million of the proceeds from the sale to LAGS of a 26% interest in Hudson LLC will be used by Hudson LLC to call an equivalent amount of Debentures for redemption. To the extent that the Debentures are converted instead of being redeemed, Hudson LLC will be required to pay to the Corporation, in consideration for the shares of the Common Stock issued upon conversion, an amount in cash (or such other consideration acceptable to the Corporation) equal to the principal amount of the Debentures so converted. Any portion of such proceeds not applied to redemption of Debentures because of such conversion, together with any deferred payments made by LAGS in connection with its acquisition of a 26% interest in Hudson LLC, will be used to retire additional Debentures, to satisfy other indebtedness of Hudson LLC (including any indebtedness to the Corporation created as a result of the conversion of Debentures) or for other general purposes, which may include capital expenditures, working capital and other business opportunities. The Debentures, which mature on July 15, 2011, bear interest at the rate of 7% per annum. EFFECT OF THE PROPOSED TRANSACTION ON DEBENTURES The Corporation currently has outstanding approximately $29 million aggregate principal amount of the Debentures. The Debentures were issued under an Indenture, dated as of July 1, 1986 (the "Indenture"), between the Corporation and Chemical Bank Delaware, a Delaware banking corporation (the "Trustee"). The holder of any Debenture is currently entitled at any time on or prior to July 15, 2011, subject to prior redemption, to convert the Debentures or portions thereof into shares of Common Stock, at the conversion price of $32.75, subject to anti-dilution adjustments as described in the Indenture. The Corporation, Hudson LLC and the Trustee have entered into a supplemental indenture (the "First Supplemental Indenture"), pursuant to which, among other things, (i) Hudson LLC will become a co-obligor, together with the Corporation, under the Indenture and (ii) the Corporation has acknowledged that, upon conversion of the Debentures, holders will remain entitled to receive Common Stock of the Corporation. Hudson LLC has agreed to (i) pay to the Corporation, upon conversion of any Debentures, in consideration for the shares of the Common Stock issued upon conversion, an amount in cash (or such other consideration acceptable to the Corporation) equal to the principal amount of the Debentures so converted and (ii) reimburse the Corporation for any principal, premium, if any, interest or other payments made by the Corporation with respect to the Debentures or the Indenture. It is contemplated that approximately $16 million aggregate principal amount of the Debentures will be called for redemption by the Corporation and Hudson LLC after the Closing, at a price equal to 100% of the principal amount thereof, together with accrued and unpaid interest thereon to the redemption date. Any deferred payments made by LAGS in connection with its acquisition of a 26% interest in Hudson LLC may 17 25 also be applied to the redemption of Debentures. See "Use of Proceeds." To the extent that the conversion price for the Debentures at the time of any redemption is less than the market price for the Common Stock, many holders of the Debentures may decide to convert their Debentures into Common Stock in lieu of having their Debentures redeemed for cash. To the extent that such redemptions or conversions are effected, the trading market for the remaining Debentures will become more limited. A security with a smaller outstanding principal amount available for trading (a smaller "float") may command a lower price than would a comparable security with a greater float (although the market for the Debentures also reflects other factors, including the Corporation's operating results, the market value of the Common Stock and interest rates in general). Therefore, the market price for the remaining Debentures may be affected adversely to the extent that the number of Debentures redeemed or converted reduces the float. The reduced float may also tend to make the trading price more volatile. On December 6, 1995, the last trading day prior to the public announcement of the negotiations between LAGS and the Corporation regarding the Proposed Transaction, the high and low sale prices of the Debentures on the American Stock Exchange ("AMEX") were $102 1/2 and $102, respectively. On April 23, 1996, the closing price of the Debentures on the AMEX was $126. The Corporation and Hudson LLC may credit Debentures which are acquired upon redemption or conversion against the Corporation's and Hudson LLC's obligations to make sinking fund payments with respect to the Debentures. To the extent that Debentures are converted into Common Stock, the number of shares of Common Stock will be increased. On April 23, 1996, the closing price of the Common Stock on the AMEX was $42 1/4. See "Market Price Data and Dividends." The Corporation is unable to determine whether or not holders of Debentures will decide to convert their Debentures into Common Stock. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES The following summary is a general discussion of certain U.S. Federal income tax consequences of the Proposed Transaction to holders of the Common Stock, the Corporation and Hudson LLC, and is based on the assumption that the Proposed Transaction is consummated as contemplated herein. This summary is based on the Internal Revenue Code of 1986, as amended, applicable Treasury regulations thereunder and administrative rulings and judicial authority as of the date hereof, all of which are subject to change, possibly with retroactive effect. Any such change could affect the continuing validity of this summary. This summary does not discuss all aspects of income taxation that may be relevant, and it does not discuss any aspect of state, local, foreign or other tax laws, or any U.S. Federal tax other than the U.S. Federal income tax. No ruling is being sought from the Internal Revenue Service as to the anticipated U.S. Federal income tax consequences of the Proposed Transaction. Holders of the Common Stock. The Proposed Transaction will not result in U.S. Federal income tax consequences to holders of the Common Stock. Tax Status of Hudson LLC. The Corporation expects that Hudson LLC will be treated as a partnership for U.S. Federal income tax purposes. If Hudson LLC is treated as a partnership for U.S. Federal income tax purposes, then it generally will not be subject to U.S. Federal income tax. Instead, each of its partners (including the Corporation) will be required to take into account its allocable share of all items of Hudson LLC's income, gain, loss, deduction, and credit for the taxable year of Hudson LLC ending within or with the taxable year of such partner, without regard to whether such partner has received any distributions from Hudson LLC. The characterization of an item of profit or loss usually will be determined at the Hudson LLC level, rather than at the Corporation level. If Hudson LLC were treated as an association taxable as a corporation, rather than as a partnership, Hudson LLC would be subject to U.S. Federal income tax on its taxable income at regular corporate income tax rates, without deduction or credit for any distributions made to the Members. The discussion below assumes that Hudson LLC will be treated as a partnership for U.S. Federal income tax purposes. Transfer of Aviation Services Business. The Corporation believes that neither it nor Hudson LLC should recognize any gain or loss upon the transfer to Hudson LLC of the assets relating to the Aviation Services Business, or upon the assumption by Hudson LLC of certain liabilities relating to the Aviation Services Business. 18 26 Redemption and Conversion of the Debentures. If any of the Debentures are redeemed by the Corporation or Hudson LLC for cash, Hudson LLC or the Corporation, as the case may be, should not recognize any gain or loss on such redemption. However, any such redemption by Hudson LLC should be treated as a distribution of cash to the Corporation, which would increase the gain recognizable by the Corporation on any future sale of its interest in Hudson LLC (including a sale pursuant to the Option), or on any future liquidation of Hudson LLC. If any of the Debentures are instead converted into Common Stock, neither Hudson LLC nor the Corporation should recognize any gain or loss on such conversion. ACCOUNTING TREATMENT As a result of certain provisions contained in the LLC Agreement (see "THE LLC AGREEMENT -- Board of Member Representatives -- Voting"), the Corporation's investment in Hudson LLC will be accounted for utilizing the equity method. NO APPRAISAL RIGHTS Pursuant to the Delaware General Corporation Law, holders of shares of Common Stock will not be entitled to rights of appraisal in connection with the Proposed Transaction. 19 27 THE PURCHASE AGREEMENT The following summary of the material terms of the Purchase Agreement is not intended to be a complete description of the terms and conditions thereof and is qualified in its entirety by reference to the full text of the Purchase Agreement which is incorporated herein by reference and a copy of which is attached hereto as Annex A. Capitalized terms not otherwise defined in this Proxy Statement shall have the meanings set forth in the Purchase Agreement. BUSINESS TO BE TRANSFERRED Assets to be Transferred. Pursuant to the Purchase Agreement, the Corporation and its subsidiaries which are actively engaged in the Aviation Services Business (the "Aviation Services Subsidiaries") will transfer to Hudson LLC, directly or by transferring to Hudson LLC stock of the Aviation Services Subsidiaries, all the assets used by the Corporation and the Aviation Services Subsidiaries in connection with the Aviation Services Business (the "Transferred Assets"), other than the Excluded Assets (as defined below). The Transferred Assets include substantially all the operating assets of the Aviation Services Business. The Transferred Assets will not include the shares of Hudson Kohala, Inc., the Corporation's headquarters in Great Neck, New York and certain other immaterial assets not related to the Aviation Services Business. For the year ended June 30, 1995 and the six months ended December 31, 1995, the Aviation Services Business generated virtually all of the Corporation's revenues during each such period. The Aviation Services Business constituted approximately 62% and 68% of the total assets of the Corporation as of June 30, 1995 and December 31, 1995, respectively. Excluded Assets. The following assets which relate to the Aviation Services Business (the "Excluded Assets") are to be retained by the Corporation: cash, cash equivalents, accounts receivable and similar current items to the extent that the retention of such assets by the Corporation would not reduce the pro forma consolidated ratio of consolidated stockholders' equity to total assets of Hudson LLC and its subsidiaries to below 27% as of December 31, 1995, after adding back capital contribution receivable of $7,838,000 (which is the sum of the Maximum Deferred Payments (as defined below) to be paid by LAGS with respect to fiscal years 1996, 1997 and 1998) to pro forma stockholders' equity. Assumed Liabilities. Pursuant to the Purchase Agreement, Hudson LLC will assume all the obligations relating to the Aviation Services Business (the "Assumed Liabilities"), including, as a co-obligor with the Corporation, the obligations of the Corporation under the Debentures, with the exception of the Excluded Liabilities (as defined below). See "THE PROPOSED TRANSACTION -- Effect of the Proposed Transaction on Debentures." Excluded Liabilities. The Corporation will retain the following liabilities which relate to the Aviation Services Business (the "Excluded Liabilities"): (i) all losses, liabilities and expenses suffered or incurred in connection with the lawsuit entitled Texaco Canada Inc. (now McColl-Frontenac Inc.) v. Petro-Canada Inc., Hudson General Aviation Services Inc. and Hudson General Corporation (see "Indemnification against Results of Certain Litigation"), and (ii) all income, gains, franchise and similar tax liabilities related to the Aviation Services Business with respect to all periods ended on or before the Closing Date (see "Payment of Taxes"). CONSIDERATION Transfer of Transferred Assets to Hudson LLC. The Purchase Agreement provides for the transfer by the Corporation of the Transferred Assets to Hudson LLC in exchange for 740 Class A Units of Hudson LLC (the "Class A Units"), which is initially equivalent to a 74% interest in Hudson LLC, and the assumption by Hudson LLC of the Assumed Liabilities. Acquisition of a 26% interest in Hudson LLC by LAGS. The Purchase Agreement provides for the issuance by Hudson LLC to LAGS of 260 Class B Units of Hudson LLC (the "Class B Units" and, together with the Class A Units, the "Units"), which is initially equivalent to a 26% interest in Hudson LLC, for 20 28 approximately $23.8 million in cash, to be paid and subject to potential downward adjustment based on future earnings of the Aviation Services Business, as follows: At the closing of the Proposed Transaction (the "Closing"), LAGS will pay to Hudson LLC an amount (the "Initial Payment Amount") in cash equal to (i) $16,700,000, minus (ii) a sum (the "Sum") equal to 26% of (A) the pro forma net income (before all income taxes) of the Corporation and its subsidiaries (calculated as set forth below) for the six-month period commencing on January 1, 1996 and ending on June 30, 1996 (calculated as if the Proposed Transaction closed as of January 1, 1996), but in no event shall such amount in this clause (A) exceed $7,405,000, minus (B) provision for United States Federal, state and local income taxes at a rate of 48%, and minus (C) any income (before all income taxes) of Hudson General Aviation Services, Inc., the Corporation's Canadian subsidiary ("Hudson Canada"), except to the extent of dividends paid to the Corporation by Hudson Canada from January 1, 1996 until June 30, 1996. It is currently estimated that the Initial Payment Amount will be approximately $16,000,000. The pro forma net income of the Corporation and its subsidiaries for the six month period commencing on January 1, 1996 and ending on June 30, 1996 will be calculated on substantially the same basis as the pro forma net income was calculated in preparing the Pro Forma Condensed Consolidated Financial Statements included in this Proxy Statement at pages 34 to 41, except that (i) no principal reduction of the Debentures will be deemed to have been made as of the beginning of or during such period, (ii) any interest income earned during such six-month period on the Deferred Payments referred to below will be excluded and (iii) if any advances are made during such period from the Corporation to, or to the Corporation from, the Aviation Services Business, those advances will be deemed to bear interest at a rate of 7% per annum based on the month-end balance thereof. If any portion of the Sum shall arise from earnings generated by Hudson Canada, and such earnings are not distributed to the Corporation by Hudson Canada, the amount of such earnings will not be included in the Sum, but will be distributed to LAGS at the time that the Corporation receives its portion of such distribution from Hudson Canada. If the Closing occurs after July 1, 1996, the Purchase Price will be increased by $3,836 for each day starting July 2, 1996 through and including the Closing Date (defined below). For each of Hudson LLC's fiscal years ending June 30, 1996, 1997 and 1998, LAGS is required to make a payment (each, a "Deferred Payment") to Hudson LLC, in an amount as calculated below, to be paid on or before the tenth day after Hudson LLC delivers to LAGS consolidated financial statements of Hudson LLC with respect to such fiscal year (which payment is expected to occur in September of each such year): If Hudson LLC achieves at least 80% of Targeted Pre-Tax Earnings (as defined below), LAGS will pay to Hudson LLC, with respect to each such year, an amount (each, a "Maximum Deferred Payment") equal to $2,650,000 (in the case of fiscal years 1996 and 1997) and $2,538,000 (in the case of fiscal year 1998). If Hudson LLC does not achieve 80% of Targeted Pre-Tax Earnings, but still has positive Pre-Tax Earnings (as defined below), the Deferred Payment for such fiscal year will be reduced to the sum of (i) an amount (each, the "Deferred Base Payment") equal to $530,000 (in the case of fiscal years 1996 and 1997) and $507,600 (in the case of fiscal year 1998) plus (ii) an amount (the "Deferred Variable Amount") equal to the Maximum Deferred Payment for such fiscal year multiplied by a fraction, the numerator of which is the actual Pre-Tax Earnings for such fiscal year and the denominator of which is the Targeted Pre-Tax Earnings for such fiscal year. In other words, if Pre-Tax Earnings are positive but less than 80% of Targeted Pre-Tax Earnings, the Maximum Deferred Payment will be reduced 1% for each 1% that actual positive Pre-Tax Earnings falls below 80% of Targeted Pre-Tax Earnings. If Hudson LLC does not achieve positive Pre-Tax Earnings, the Deferred Payment for such fiscal year will equal the Deferred Base Payment, less an amount (not to exceed the amount of the applicable Deferred Base Payment) equal to the applicable Maximum Deferred Payment for such fiscal year multiplied by a fraction, the numerator of which is the actual negative Pre-Tax Earnings 21 29 for such fiscal year (shown as a positive number for such purpose) and the denominator of which is the Targeted Pre-Tax Earnings for such fiscal year. In other words, in any such fiscal year in which Hudson LLC has zero or negative Pre-Tax Earnings, the Deferred Payment will be reduced to, at a maximum, the Deferred Base Payment and, at a minimum, zero. After the end of Hudson LLC's fiscal year ending June 30, 1998, the Corporation may elect to have LAGS calculate the Deferred Payments on a cumulative three-year basis instead of on a year-by-year basis. In the case of each Deferred Payment, LAGS will pay interest on the amount paid to Hudson LLC at the rate of 11% per annum, compounded annually, commencing from January 1, 1996 to the date the payment is made. For purposes of the Purchase Agreement, (i) "Targeted Pre-Tax Earnings" means, for each of Hudson LLC's fiscal years ending June 30, 1996, 1997 and 1998, Pre-Tax Earnings of $11,337,500, $12,241,250 and $13,219,000, respectively, and (ii) "Pre-Tax Earnings" means the consolidated net income of Hudson LLC and its subsidiaries before provision for income taxes and the cumulative effect of any changes in accounting principles, computed in accordance with United States generally accepted accounting principles ("GAAP") (and, if the Corporation files reports with the SEC, applied in the same manner they are applied in preparing the financial statements included in those filings), except that Pre-Tax Earnings will not include (i) any income as a result of interest received under the Purchase Agreement, (ii) any charge for interest with regard to a principal amount of Debentures equal to the amount of the purchase price deferred as described above, (iii) any charge for interest on indebtedness to the Corporation resulting from conversion of Debentures, or (iv) any organizational expenses of forming Hudson LLC or issuing Units. Notwithstanding the foregoing, if (x) any agreements between the Corporation and a customer are terminated because the customer will not consent to the transfer or assignment of the agreements from the Corporation to Hudson LLC, (y) Hudson LLC is not able to render to a customer services which the Corporation is rendering at the date of the Purchase Agreement because governmental or quasi-governmental authorities which have issued to the Corporation licenses, permits, facilities leases or other authorizations to render services at airports ("Airport Authorizations") fail to consent to the Corporation's transferring those Airport Authorizations to Hudson LLC or to issue similar Airport Authorizations to Hudson LLC, or (z) any customer ceases using services of the Corporation (or after the Closing, Hudson LLC) and the Corporation can demonstrate to the reasonable satisfaction of LAGS that the customer did so because of the Proposed Transaction, then, in calculating Pre-Tax Earnings for purposes of the adjustment of the purchase price (and the exercise price of the Option described under "The Purchase Option" below) for any fiscal year, Pre-Tax Earnings for that fiscal year will be increased by an amount equal to 50% of the pre-tax operating earnings from such customer during the four full fiscal quarters preceding the later of (A) July 1, 1996 or (B) the date on which Hudson LLC is informed that the customer will cease doing business with it. The adjustment referred to in the preceding sentence with respect to business from a particular customer shall be made with respect to all periods through the date the agreement between such customer and the Corporation or Hudson LLC would have terminated at the expiration of its term. Pro forma Pre-Tax Earnings of Hudson LLC for the fiscal year ended June 30, 1995 and for the six months ended December 31, 1995 were $10,657,000 and $8,188,000 respectively. See Hudson LLC's pro forma condensed consolidated statements of earnings for the fiscal year ended June 30, 1995 and for the six months ended December 31, 1995 contained in "PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS." The Purchase Agreement further provides that LAGS may at any time after the Closing Date prepay the entire balance of the purchase price for the 260 Class B Units by paying $7,838,000, minus any amounts previously paid as purchase price, plus interest on the sum being prepaid from January 1, 1996 to the date of the prepayment at 11% per annum compounded annually on each January 1. If LAGS prepays the entire balance of the purchase price for the 260 Class B Units, there will be no reduction of the purchase price 22 30 regardless of the Pre-Tax Earnings during the three fiscal year period ending June 30, 1998 or any fiscal year during that period. CLOSING The Purchase Agreement provides that the Closing of the Proposed Transaction will take place on the day (the "Closing Date") which is the later of (i) July 1, 1996 or (ii) the third business day after the day on which all the conditions to Closing set forth in the Purchase Agreement have been fulfilled or waived in writing (see "Conditions" below), or at such other time as may be agreed by LAGS and the Corporation. THE PURCHASE OPTION The Option. The Purchase Agreement provides that LAGS will have the option (the "Option"), exercisable on October 1, 1996, 1997, 1998, 1999 and 2000 (each an "Option Date"), to purchase from the Corporation (or from Hudson LLC) additional Units which will be Class B Units ("Option Units") and which will increase the total outstanding Class B Units to up to 49% of all the Units of Hudson LLC which are outstanding after giving effect to the exercise of the Option. The Option may be exercised on no more than two occasions, and the first exercise must be with regard to Class B Units which will increase the total outstanding Class B Units to at least 38% of the Units which are outstanding after giving effect to such exercise of the Option. The second exercise must be with regard to Class B Units which will increase the total outstanding Class B Units to 49% of the Units which are outstanding after giving effect to such exercise of the Option. Exercise Price. The exercise price of the Option will be the amount which is equal to (i) the percentage which the Option Units as to which the Option is being exercised will be of all the outstanding Units after giving effect to such exercise of the Option, multiplied by (ii) the greater of (x) the Computed Value (as defined below) of Hudson LLC on the Option Date or (y) $73,348,000 if the Option Date is October 1, 1996, $77,932,250 if the Option Date is October 1, 1997, $82,516,500 if the Option Date is October 1, 1998, $87,100,750 if the Option Date is October 1, 1999 and $91,685,000 if the Option Date is October 1, 2000, but in no event more than (z) $102,687,000 if the Option Date is October 1, 1996, $115,010,000 if the Option Date is October 1, 1997, $128,811,000 if the Option Date is October 1, 1998, $144,268,000 if the Option Date is October 1, 1999, and $161,580,000 if the Option Date is October 1, 2000. At each closing of an Option, LAGS will deliver, among other things, to the Corporation or to Hudson LLC, as the case may be, the amount of the exercise price of the Option plus interest on the exercise price of the Option at the rate of 11% per annum from the July 1 next preceding the date of the closing of the Option to the date of such closing. Pursuant to the Purchase Agreement, the "Computed Value" of Hudson LLC on an Option Date will be (i) (x) the average of the Pre-Tax Earnings (after allocations of interest and other indirect expenses) of Hudson LLC and its subsidiaries during each of the four fiscal years prior to the fiscal year in which the Option Date falls from all aspects of its Aviation Services Business, other than snow removal services, divided by (y) 0.12, plus (ii) (A) the average of the Pre-Tax Earnings (after allocations of interest and other indirect expenses) of Hudson LLC and its subsidiaries during each of the four fiscal years prior to the fiscal year in which the Option Date falls from snow removal services, divided by (B) 0.135. For the purposes of the calculation of the exercise price, in determining the Pre-Tax Earnings from the various aspects of the Aviation Services Business, interest and other indirect expenses of the Aviation Services Business will be allocated among the aspects of the Aviation Services Business based upon the respective percentages of the Aviation Services Business revenues generated by each of them. Effect of Option Exercise. Pursuant to the Purchase Agreement, each purchase of Option Units will be effective as of the July 1 immediately preceding the Option Date on which the Option is exercised with regard to those Option Units and LAGS will be entitled to all earnings, gains, losses and other financial incidents allocable to those Option Units as though they had been issued on that July 1. Transfer of Sale Obligation to Hudson LLC. The Purchase Agreement provides that in each instance in which LAGS exercises the Option, the Corporation may, at its election, either (i) sell to LAGS the Option Units as to which the Option is being exercised or (ii) cause Hudson LLC to sell those Option Units to LAGS, in which case (x) the number of Option Units will be computed on the basis of a sale of Units from 23 31 Hudson LLC instead of a sale of Units from the Corporation, (y) Hudson LLC will be irrevocably obligated to sell those Option Units to LAGS, and (z) the proceeds of the sale will be paid to Hudson LLC instead of to the Corporation. REPRESENTATIONS AND WARRANTIES The Purchase Agreement contains various customary representations and warranties of the Corporation and LAGS. These include, among other things, representations and warranties by the Corporation as to its organization, corporate authority, subsidiaries, Hudson LLC, the Units of Hudson LLC, approvals, SEC filings, the Aviation Services Business, assets, indebtedness, litigation, absence of certain changes or events and financial statements. LAGS' representations and warranties include, among other things, those as to its organization, corporate authority and approvals. The Purchase Agreement provides that if as a result of occurrences after execution of the Purchase Agreement, representations and warranties of the Corporation or LAGS cease to be correct as of the Closing Date, and the Corporation or LAGS, as the case may be, corrects the information at or prior to the Closing then, whether or not the other party proceeds with the Closing, the Corporation or LAGS, as the case may be, has no liability concerning those changes in the representations and warranties. CERTAIN COVENANTS Covenants of the Corporation. Pursuant to the Purchase Agreement, the Corporation has agreed that from the date of the Purchase Agreement through the Closing Date, without LAGS' prior written approval, the Corporation will, except as contemplated by the Purchase Agreement, and will ensure that its subsidiaries: (i) operate the Aviation Services Business in the ordinary course and in a manner consistent with the manner in which it is being operated at the date of the Purchase Agreement; (ii) take all reasonable steps available to them to maintain the goodwill of the Aviation Services Business; (iii) maintain all their assets used in connection with the Aviation Services Business in good repair and condition, except to the extent of reasonable wear and use and damage by fire or other unavoidable casualty; (iv) not make any borrowings which will be obligations of Hudson LLC or its subsidiaries on the Closing Date, other than (a) borrowings under the Corporation's existing credit agreements (or any refinancings or replacements thereof), and (b) other indebtedness in an amount not to exceed 10% or more of the total assets which are at the time of the borrowing, or on the Closing Date will be, owned by Hudson LLC and its subsidiaries; (v) maintain their books of account and records in the usual manner, in accordance with GAAP, subject to normal adjustments and accruals; (vi) not sell, dispose of or encumber any property or assets which individually or in aggregate are material to the Aviation Services Business, except in each case in the ordinary course of business; (vii) not take any other steps which will cause the consolidated stockholders' equity of Hudson LLC and its subsidiaries on the Closing Date to be less than the pro forma stockholders' equity of Hudson LLC and its subsidiaries on December 31, 1995, unless caused by a loss incurred in the operations of the Aviation Services Business between January 1, 1996 and the Closing Date; and (viii) by the Closing Date, take all steps which are necessary so the distributions required by the LLC Agreement will not violate the Corporation's existing credit agreements (or any refinancings or replacements thereof). Covenants of LAGS: Standstill Provisions. Pursuant to the Purchase Agreement, from the date thereof until the later of (i) the third anniversary of the date of the Purchase Agreement, or (ii) the first anniversary of the date on which the LAGS and its affiliates, or the Corporation and its affiliates, cease to own any Units of Hudson LLC, LAGS will not, and it will cause its affiliates not to, among other things, directly or indirectly, without the prior written consent of the Board of Directors of the Corporation, specifically expressed in a resolution adopted by a majority of its directors: (a) acquire, or propose to acquire, any of the Corporation's voting securities, (b) engage in any solicitation of proxies from the Corporation's stockholders, or initiate stockholder proposals, (c) seek to engage in any type of business combination with the Corporation, (d) seek to control or influence the management, Board of Directors or policies of the Corporation (other than attempting to influence any matter related to Hudson LLC or its activities), (e) seek representation on the Board of Directors of the Corporation or the removal of any of its members, (f) make any publicly disclosed proposal or enter into any discussion regarding the foregoing, (g) act in a way inconsistent with the foregoing 24 32 restrictions, or make or disclose any request to amend, waive or terminate any of these standstill provisions, or (h) assist or encourage any other person in connection with any of the foregoing, or make any investment in or enter into any arrangement with, any other person that engages, or offers or proposes to engage, in any of the foregoing. Expenses. The Purchase Agreement provides that, except as described below under "Other Offers," LAGS and the Corporation will each pay its own expenses, and the Corporation will cause Hudson LLC to pay its own expenses in connection with the Proposed Transaction. OTHER OFFERS The Purchase Agreement provides that until the earlier of (i) the Closing Date or (ii) the date on which the Purchase Agreement terminates for any reason whatsoever, the Corporation will not (x) initiate or solicit any Aviation Services Acquisition Proposal (as defined below) or (y) subject to the fiduciary duties of the Corporation's Board of Directors, acting upon the advice of counsel, engage in negotiations with, or disclose non-public information relating to the Aviation Services Business to, anyone other than LAGS. For purposes of the Purchase Agreement, an "Aviation Services Acquisition Proposal" means a proposal to make, or other expression of serious interest in making, (A) an acquisition of the Aviation Services Business or any substantial part of it or (B) an acquisition of the Corporation or a significant interest in the Corporation which, to the knowledge of any of the Corporation's executive officers, is conditioned upon, or likely to result in, the Corporation not completing the Proposed Transaction. The Purchase Agreement further provides that before the Corporation can begin negotiations or discussions of substantive terms with a party making an Aviation Services Acquisition Proposal (the "Third Party"), the Corporation is required to give LAGS 24 hours prior notice, which notice shall identify the Third Party and the principal terms being proposed by the Third Party. The Corporation then has 30 days after the giving of such notice to conduct negotiations or discussions with the Third Party without LAGS being able to terminate the Purchase Agreement. At the end of such 30-day period, if the Corporation has not terminated all negotiations and discussions with the Third Party, LAGS has the right to terminate the Purchase Agreement until such time as the Corporation notifies LAGS that the Corporation has terminated all discussions and negotiations with the Third Party. If, subject to its fiduciary duties, acting upon the advice of counsel, the Corporation's Board of Directors withdraws its recommendation of the Proposed Transaction, then either the Corporation or LAGS has the right to terminate the Purchase Agreement as described under "Termination" below. The Purchase Agreement also provides that if until the earlier of (i) the Closing Date or (ii) the date on which the Purchase Agreement terminates for any reason whatsoever, the Corporation receives a proposal for an acquisition of the Corporation or a significant interest in the Corporation, then, upon notice to LAGS, the Corporation may without any restrictions solicit offers from other parties for an acquisition of the Corporation or a significant interest in the Corporation. If acquisition proposals are then received (from parties other than the original bidder) and the Corporation enters into negotiations or discussions with additional bidders, then LAGS can terminate the Purchase Agreement at any time while those negotiations or discussions are in progress. This termination right by LAGS does not apply, however, if the additional bidder conditions its bid on the Corporation's not completing the Proposed Transaction, in which case the 30-day provision referred to in the preceding paragraphs applies before LAGS has a right of termination of the Purchase Agreement. The Purchase Agreement provides that upon termination of the Purchase Agreement upon certain circumstances described above, LAGS will be entitled to reimbursement of its out-of-pocket expenses up to a maximum of $650,000. Pursuant to the Purchase Agreement, if the Corporation violates the non-solicitation provisions described above, LAGS potential damages are not limited in amount. CONDITIONS The obligations of the Corporation and LAGS to consummate the Proposed Transaction are subject to the satisfaction or waiver of the following conditions: (i) the representations and warranties of the other party being true and correct in all material respects at the Closing Date, but only if failure to be correct, individually 25 33 or in the aggregate, have, or could reasonably be expected to have, a material adverse effect on Hudson LLC or subject the non breaching party or its affiliates to significant liability; (ii) the other party having fulfilled in all material respects all its obligations; (iii) no order having been entered by any court or governmental authority and being in force which invalidates the Purchase Agreement or restrains LAGS, the Corporation or Hudson LLC from completing the Proposed Transaction; (iv) the Corporation, LAGS or any of their respective subsidiaries not having been told or otherwise been given substantial reason to believe that a specified number of customers or airport authorities will not consent to the transfer of contracts or authorizations to Hudson LLC; (v) the Corporation having obtained all consents, approvals and authorizations required to be obtained under certain agreements, but only if failure to obtain such consents, approvals and authorizations would have, or could reasonably be expected to have, a material adverse effect on Hudson LLC or subject the Corporation or its affiliates, or LAGS or its affiliates, as the case may be, to significant liability; and (vi) the Closing Date being not later than July 31, 1996. The Corporation's obligation to consummate the Proposed Transaction is also subject to the condition that the stockholders of the Corporation approve the Proposed Transaction. LAGS's obligation to consummate the Proposed Transaction is also subject to the condition that at December 31, 1995, Hudson LLC and its subsidiaries will have had a pro forma consolidated ratio of stockholders' equity to total assets of at least 27% after adding back capital contribution receivable of $7,838,000 (which is the sum of the Maximum Deferred Payments with respect to fiscal years 1996, 1997 and 1998) to pro forma stockholders' equity. TERMINATION The Purchase Agreement may be terminated prior to the Closing under the following circumstances: (i) by mutual consent of the Corporation and LAGS; (ii) by either the Corporation or LAGS, if, without fault of the terminating party, the Closing does not occur on or before July 31, 1996; (iii) by either the Corporation or LAGS if (a) the other party's representations and warranties were not correct in all material respects on the date of the Purchase Agreement or are not correct at the Closing, but only if failure to be correct, individually or in the aggregate, have, or could reasonably be expected to have, a material adverse effect on Hudson LLC or subject the non-breaching party or its affiliates to significant liability, or (b) any event occurs which makes it impossible for all the conditions to such party's obligations to be fulfilled; (iv) by either the Corporation or LAGS if the Corporation's Board of Directors, prior to the Special Meeting, withdraws or qualifies its unqualified recommendation that the Corporation's stockholders vote to approve the Proposed Transaction, (v) by either the Corporation or LAGS, if the Proposed Transaction is not approved by the requisite vote of the stockholders of the Corporation; or (vi) by either the Corporation or LAGS, if the Corporation notifies LAGS that the Trustee under the Indenture has informed the Corporation that it will not sign the First Supplemental Indenture. INDEMNIFICATION The Purchase Agreement provides that each party will indemnify the other party against, and hold the other harmless from, all losses, liabilities and expenses suffered or incurred by the other party (including reasonable fees and expenses of counsel in defending against claims asserted against the other party and excluding any fees and expenses of investigating potential claims by or against the other party) because any matter which is the subject of a representation or warranty contained in the Purchase Agreement is not as represented or warranted (except that indemnification because any matters are not as represented or warranted is limited to the aggregate amount by which the resulting losses, liabilities and expenses exceed in total $1,000,000, such $1,000,000 amount being deemed an "aggregate deductible" which will be borne by the other party). The Purchase Agreement provides that any claim for that indemnification, other than a claim by LAGS for indemnification because it has not received good title to the Class B Units, must be made not later than 45 days after Hudson LLC delivers to LAGS a copy of Hudson LLC's consolidated financial statements for the year ending June 30, 1997 in a written notification to the party from which indemnification is sought which 26 34 describes in reasonable detail the claim and the facts on which it is based. A claim by LAGS for indemnification because it has not received good title to the Class B Units must be made in a notification of the type described in the preceding sentence which is given to Hudson LLC not later than six months after Hudson LLC notifies LAGS of the facts which were not as represented or warranted in a notification which states that it is intended to start a six month period under the indemnification provision. Neither the Corporation nor LAGS will have any liability because any matter which is the subject of a representation or warranty contained in the Purchase Agreement is not as represented or warranted unless it is described in a notification given as described above. PAYMENT OF TAXES The Corporation has agreed to (i) pay all income, gains, franchise and similar taxes ("Income Taxes") related to the Aviation Services Business with regard to all periods ended on or before the Closing Date and (ii) indemnify and reimburse Hudson LLC, each of its subsidiaries and each holder of Units (a "Member") of Hudson LLC (other than the Corporation) for all Income Taxes payable by Hudson LLC, any of its subsidiaries or any of its Members (other than the Corporation) to the extent that the Income Taxes of such Member are payable as a result of taxable income attributable to the Aviation Services Business that accrued in any periods that ended on or before the Closing Date. The Corporation and LAGS have agreed to cause Hudson LLC and its subsidiaries to pay over to the Corporation all refunds that Hudson LLC or any subsidiary receives of Income Taxes relating to periods ended on or before the Closing Date (whether such Income Taxes were paid before, on, or after the Closing Date). The Purchase Agreement further provides that if there is an audit adjustment to any item reported on any income tax return pertaining to Income Taxes subject to indemnification under the Purchase Agreement, which adjustment results in an increase in the Income Taxes payable by the Corporation, and results in a corresponding adjustment to items reported on an income tax return of Hudson LLC, a Member or a subsidiary relating to a taxable period ending after the Closing Date with the result that Income Taxes payable by a Member (other than the Corporation), Hudson LLC, or any subsidiary are reduced, or a refund of Income Taxes to a Member (other than the Corporation), Hudson LLC or a subsidiary for a period ending after the Closing Date is increased, then, within 30 days after Hudson LLC, the Member or the subsidiary (a) files the income tax return or amended income tax return which reflects the reduced Income Taxes, or (b) receives the refund, Hudson LLC, the subsidiary, or the Member will pay the Corporation the amount by which its Income Taxes are reduced or the refunds of Income Taxes are increased. INDEMNIFICATION AGAINST RESULTS OF CERTAIN LITIGATION The Corporation has agreed to indemnify Hudson LLC, each subsidiary of Hudson LLC (including, but not limited to, Hudson Canada), LAGS and each affiliate of LAGS against, and agreed to hold each of them harmless from, all losses, liabilities and expenses suffered or incurred by any of them (including reasonable fees and expenses of counsel) with regard to the suit entitled Texaco Canada Inc. (now McColl-Frontenac Inc.) v. Petro-Canada Inc., Hudson General Aviation Services Inc. and Hudson General Corporation or with regard to any other claim relating to any of the occurrences, events or conditions which are the subject of that suit; provided, however, that the Corporation shall have no such indemnification obligation to the extent that amounts had been accrued and reserves established on the books of the Corporation or the Aviation Services Subsidiaries as of December 31, 1995. Any amounts received by Hudson LLC or its subsidiaries or by LAGS or its subsidiaries as a result of third party indemnifications in connection with such litigation shall be promptly remitted to the Corporation. See "BUSINESS INFORMATION CONCERNING THE CORPORATION -- Certain Legal Proceedings." AVIATION SERVICES COOPERATION Cooperation in Expanding Presence. The Purchase Agreement provides that LAGS and Hudson LLC will cooperate in their common efforts to expand their presence in the market for aviation ground services. 27 35 Steering Committee. LAGS and the Corporation have agreed that promptly after the Closing, LAGS and Hudson LLC will form a joint steering committee, which will meet regularly and will develop strategies and make recommendations to LAGS and Hudson LLC regarding their respective aviation ground services businesses. AGREEMENT NOT TO COMPETE Pursuant to the Purchase Agreement, neither LAGS nor Lufthansa nor any of their respective affiliates will, at any time when LAGS owns Units, nor within one year after LAGS ceases to own Units, engage directly or through ownership of equity of other entities (other than less than 2% of the shares of a publicly traded company acquired solely as an investment), in rendering aviation ground services (other than passenger handling services) in the United States or in Canada, except that nothing will prevent LAGS from rendering aviation ground services to Lufthansa German Airlines or airlines which are alliance partners of Lufthansa German Airlines. NO IMPEDIMENT TO SALE OF SHARES OF THE CORPORATION Except as described under "Other Offers" above, nothing in the Purchase Agreement or in the LLC Agreement will prohibit or limit the Corporation's right or ability to engage in any transaction or transactions relating to or involving any sale, exchange, transfer or other disposition of shares of the Corporation (whether or not those shares constitute a controlling interest in the Corporation), whether by sale, merger, other business combination or otherwise. 28 36 THE LLC AGREEMENT The following summary of the material terms of the LLC Agreement is not intended to be a complete description of the terms and conditions thereof and is qualified in its entirety by reference to the full text of the LLC Agreement which is incorporated herein by reference and a copy of the form of which is attached hereto as Annex B. The following summary is also qualified by the provisions of the Limited Liability Company Act of the State of Delaware. Capitalized terms not otherwise defined in this Proxy Statement shall have the meanings set forth in the LLC Agreement. GENERAL Hudson LLC is a Delaware limited liability company. The existence of Hudson LLC will continue in perpetuity unless it is dissolved in accordance with the terms of the LLC Agreement. THE UNITS General. The LLC Agreement provides that Hudson LLC will be authorized to issue up to 1,451 Units, of which not more than 740 Units (51%) may be Class A Units and not more than 711 Units (49%) may be Class B Units. Upon consummation of the Proposed Transaction, the Corporation will own 740 Class A Units and LAGS will own 260 Class B Units. Except as described below, each Class A Unit will be identical with each Class B Unit. Voting. Except as described below under "Board of Member Representatives," the owners of Units of Hudson LLC as shown on the books of Hudson LLC (the "Members") will vote together, regardless of the class of Units they own, as though the Units were of a single class. Each Member entitled to vote at a meeting will be entitled to one vote for each Unit of the class regarding which the Member is entitled to vote at the meeting registered in the Member's name on the books of Hudson LLC. The presence in person or by proxy of holders of a majority of the Units of each class entitled to vote at the meeting will be necessary, and will constitute a quorum, for the transaction of business at the meeting. The selection of Class A Representatives and Class B Representatives (both as defined below) will be determined by plurality vote. Except as otherwise described below, any other matter will be determined by the vote of a majority of the Units which are voted with regard to it. DISTRIBUTIONS, ALLOCATIONS AND CAPITAL ACCOUNTS Distributions. Pursuant to the LLC Agreement, Hudson LLC shall make distributions as follows: (a) With respect to each one-year period (or shorter period beginning on the date Hudson LLC is formed) ending on June 30 (each a "fiscal year"), distributions of Distributable Net Income (as defined below) accrued in that year will be made to each Member in proportion to the Units owned by such Member as of the last day of the fiscal year; provided, however, that holders of Class B Units will not be entitled to and will not receive any distributions of Net Income (as defined below) based on amounts of Pre-Tax Earnings (as such term is defined in the Purchase Agreement) in excess of Pre-Tax Earnings of $14,689,500 and $15,862,800, respectively, in the fiscal years ending June 30, 1997 and June 30, 1998. Any reduction in distributions otherwise payable to holders of Class B Units as described in this paragraph shall cause a corresponding increase to the distribution payable to the Corporation as holder of Class A Units for such fiscal year. Any decision to make distributions to holders of Units of any class with regard to a fiscal year which are less than the amount of Distributable Net Income for such fiscal year requires at least four affirmative votes of the Member Representatives (as defined below). (b) Before any distributions are made as described in the preceding paragraph, distributions will be made to the Corporation in an amount equal to the interest payments to be paid by LAGS to Hudson LLC relating to the Deferred Payments (see "THE PURCHASE AGREEMENT -- Consideration" above). (c) To the extent the Member Board (as defined below under "Board of Member Representatives") determines to make distributions for any fiscal year in excess of the amounts described in the 29 37 preceding two paragraphs, such distributions shall be in an amount determined by the Member Board in accordance with the following priority (subject, however, to the limitations on distributions to holders of Class B Units for the fiscal years ending June 30, 1997 and June 30, 1998, as set forth in paragraph (a) above): (i) first, Distributable Net Income accrued in prior fiscal years and not previously distributed to Members, starting with the earliest such fiscal year, will be distributed to Members who owned Units during such prior fiscal year, in proportion to the Units owned by such Members on the last day of such fiscal year; (ii) second, distributions will be made to the Corporation and LAGS in proportion to the Units owned by them immediately after Closing in an amount equal to the earnings of Hudson Canada not included in the Sum (as such term is defined in the Purchase Agreement and referred to under the caption "THE PURCHASE AGREEMENT -- Consideration" above), to the extent such amount has not previously been distributed; and (iii) third, distributions will be made out of Net Income (except that with respect to Hudson Canada, Net Income will be determined using cash taxes paid with respect to a fiscal year rather than book taxes provided) from prior fiscal years not previously distributed to Members, starting with the earliest such fiscal year, and will be distributed to Members who owned Units during such prior fiscal years, in proportion to the Units owned by such Members on the last day of such fiscal year. For purposes of the LLC Agreement, "Distributable Net Income" in a period means (i) 50% of the Net Income for that period minus (ii) any special reserves approved by the Member Board to ensure that Hudson LLC and its subsidiaries will have adequate funds (after taking account of borrowing availability under credit facilities) to enable them to meet their reasonably expected cash needs minus (iii) any interest income received pursuant to the Purchase Agreement; provided, however, that only 10% of the pre-tax earnings generated by Hudson Canada will be included in Distributable Net Income; and "Net Income" means the consolidated net income or net loss of Hudson LLC and its subsidiaries for a period calculated in accordance with GAAP. Allocations. Generally, allocations of income will be made in the same proportions that distributions of income are made. Capital Accounts. Hudson LLC will maintain capital accounts for its Members, which shall be adjusted for taxable income of Hudson LLC. BOARD OF MEMBER REPRESENTATIVES Management by Members. The powers of Hudson LLC will be exercised under the direction of the Members, as described below. The Member Board. The Members will act through a Board of Member Representatives (the "Member Board"), or through such Committees as the Member Board may establish. The Member Board will consist of three members selected by the holders of the Class A Units (the "Class A Representatives") and two members selected by the holders of the Class B Units (the "Class B Representatives," together with the Class A Representatives, the "Member Representatives"). Selection and Terms of Member Representatives. The Member Representatives of each class will be selected by the holders of the applicable class of Units at each annual meeting of those holders. Except as otherwise provided in the LLC Agreement, each Member Representative will serve at the pleasure of the class of Members that the Member Representative represents. Voting. The Class A Representatives, as a class, will be entitled to three votes, and the Class B Representatives, as a class, will be entitled to two votes, on all matters. If there is only one Member of a class, all the votes of the Member Representatives of that class will be cast in the same manner. If there is more than one Member of a given class, the Member Representatives of that class generally may decide among themselves whether to cast all the votes to which they, as a class, are entitled in the same manner or whether to allocate those votes among Member Representatives of the class. The action of at least one Member Representative in casting the votes of the class of Members that Member Representative represents will, unless there is more than one Member of the class and the other Member Representatives of that class object 30 38 at the time the vote is cast, constitute the vote of the Member Representatives of that class, even if the other Member Representatives of that class are not present when the votes are cast. Pursuant to the LLC Agreement, a majority of the votes cast with respect to a matter at a meeting at which a quorum is present will be the act of the Member Board, except for the following: (a) prior to October 1, 2000, and on and after October 1, 2000 while LAGS and Approved Airlines (as defined below) together own at least 38% of the outstanding Units, at least four affirmative votes of the Member Representatives (which will require the affirmative vote of one Class B Representative) will be required for any of the following actions: (i) any decision to make distributions to holders of Units of any class with regard to a fiscal year which are less than those contemplated by the LLC Agreement (as described under "Distributions, Allocations and Capital Accounts"), or to establish reserves which have the effect of reducing distributions; (ii) any amendment of the LLC Agreement which affects the special rights and preferences of either the Class A Units or the Class B Units; (iii) any change in the number or classes of Units Hudson LLC is authorized to issue, any issuance by Hudson LLC of Units of any class (other than the issuance of Units to the Corporation and to LAGS as contemplated by the Purchase Agreement), any issuance by Hudson LLC of options, rights or convertible or exchangeable securities which may entitle the holder to acquire Units of any class, or Hudson LLC's entering into any other type of agreement under which Hudson LLC is required to issue Units of any class; (iv) any merger or consolidation of Hudson LLC with any other corporation or business entity, or the purchase by Hudson LLC or any subsidiary of a 25% or greater equity interest in any corporation or other business entity for a purchase price of more than $1,500,000; (v) any sale of assets of Hudson LLC or any of its subsidiaries in a single transaction or a series of related transactions which constitute 15% or more of the total assets of Hudson LLC and its subsidiaries taken as a whole at the end of the most recently ended fiscal year, or which would result in Hudson LLC and its subsidiaries together no longer being able to engage in any aspect of the Aviation Services Business which accounted for more than 10% of the consolidated revenues of Hudson LLC and its subsidiaries in the most recently ended fiscal year, except in each case sales of products in the ordinary course of business; (vi) any decision by Hudson LLC to file a registration statement under the Securities Act of 1933, as amended; (vii) the approval or amendment of the budget included in a business plan if the Class B Units constitute 49% of the total Units and, under certain circumstances, if the Class B Units constitute less than 49% of the total Units; (viii) the entry by Hudson LLC or any subsidiary into any line of business other than the Aviation Services Business, or into any aspect of the Aviation Services Business in which Hudson LLC is not engaged at the date of the LLC Agreement, which in either case is reasonably anticipated to generate revenues in excess of 10% of the consolidated revenues of Hudson LLC and its subsidiaries taken as a whole in any of the following three fiscal years; (ix) the cessation by Hudson LLC and its subsidiaries taken as a whole (whether by sale of a business, termination of a business or otherwise) of all or substantially all their activities in any aspect of the Aviation Services Business which accounted for more than 10% of the consolidated revenues of Hudson LLC and its subsidiaries in the most recently ended fiscal year; (x) the dissolution of Hudson LLC; (xi) any filing by Hudson LLC or any of its subsidiaries for relief as a debtor under any bankruptcy, insolvency, reorganization or similar law, any application by Hudson LLC or any of its subsidiaries for the appointment of a receiver, trustee, custodian or similar fiduciary for a substantial portion of the consolidated assets of Hudson LLC and its subsidiaries, or the consent by Hudson LLC or any of its subsidiaries to any petition or application seeking similar relief which is filed against Hudson LLC or the subsidiary; and (xii) the borrowing by Hudson LLC or one or more of its subsidiaries in a single transaction or series of related transactions of a sum equal to 10% or more of the total assets of Hudson LLC and its subsidiaries at the time of the borrowing, and the entering into of any agreement providing for borrowings of that amount (other than borrowings of up to $18.3 million under credit agreements). (b) on and after October 1, 2000 while LAGS owns Class B Units, but those Class B Units together with the Class B Units owned by Approved Airlines constitute less than 38% of the outstanding Units, at least four affirmative votes of Member Representatives (which will require the affirmative vote of one Class B Representative) will be required for any of the actions described in subparagraphs (i) and (ii) of paragraph (a) above. 31 39 RESTRICTIONS ON TRANSFERS OF UNITS; RIGHTS OF FIRST REFUSAL The LLC Agreement contains the following restrictions on transfer of Units of Hudson LLC: (i) neither LAGS nor the Corporation may transfer their Units to anyone until the fifth anniversary of the date of the LLC Agreement, except for (a) transfers by LAGS or the Corporation to its directly or indirectly majority- owned subsidiaries (and, with respect to LAGS, to directly or indirectly majority-owned subsidiaries of Lufthansa), if (x) such subsidiary agrees in writing to be bound by all the provisions of the LLC Agreement applicable to LAGS or the Corporation, as the case may be, (y) LAGS or the Corporation, as the case may be, and such subsidiary agree in writing that if at any time LAGS or Lufthansa, or the Corporation, as the case may be, ceases to own directly or indirectly a majority in voting power of the outstanding equity of the subsidiary, before that occurs, the subsidiary will transfer the Units it owns back to LAGS or the Corporation, as the case may be, and (z) the other owners, if any, of such subsidiary do not provide aviation ground services to other persons; (b) transfers by the Corporation pursuant to the Option contained in the Purchase Agreement; (c) pledges of Units by the Corporation to secure any of its indebtedness or transfers of Units to the holders of the secured indebtedness; (ii) after the fifth anniversary of the date of the LLC Agreement, LAGS may transfer its Units to any airline approved by the Corporation (an "Approved Airline"), which approval the Corporation will not unreasonably withhold with regard to any airline which is a potential significant user of aviation ground services provided by Hudson LLC, by LAGS or by a joint venture in which LAGS has a greater than 25% ownership interest, if the Approved Airline agrees in writing to be bound by all the provisions of the LLC Agreement which are applicable to LAGS; provided, however that, after giving effect to any transfer permitted by this clause (ii), LAGS and Lufthansa and their majority-owned subsidiaries must collectively own at least a majority of the Class B Units and any other holder of Class B Units must hold at least 10% of the outstanding Class B Units; and (iii) no holder of Units will at any time transfer any Units to anyone who provides aviation ground services to other persons, unless Hudson LLC consents in writing to the transfer (which Hudson LLC will be under no obligation to do), provided that this will not prevent LAGS from transferring Units to an airline solely because the airline performs all or a portion of the aviation ground services for its own aircraft or passengers, if the airline does not provide aviation ground services to other persons. In addition, the LLC Agreement provides that if a holder of Units proposes to transfer Units (a "Transferring Holder"), Hudson LLC and LAGS (if the Corporation is the Transferring Holder or the Units to be transferred are Class B Units) or Hudson LLC and the Corporation (if LAGS is the Transferring Holder or the Units to be transferred are Class A Units) shall have an option to purchase all, but not less than all, the Units proposed to be transferred, at a price payable in cash equal to (i) if the proposed transfer is a sale for cash, the proposed sale price set forth in the notice that the Transferring Holder must send to the Hudson LLC and each of the other holders of Units before any transfer of Units to anyone or (ii) if the proposed transfer is a sale which includes consideration other than for cash, the fair market value of the non-cash consideration to be paid for the Units which are the subject of the option plus the amount of any cash included in the consideration, or (iii) if the transfer does not involve a sale, the Fair Market Price of those Units. For the purposes of the LLC Agreement, the fair market value of non-cash consideration, and the Fair Market Price of Units, will be as agreed upon by Hudson LLC and the Transferring Holder or, if they are unable to agree, as determined by an expert selected jointly by Hudson LLC and the Transferring Holder. The LLC Agreement further provides that the options of the Corporation or LAGS will not become exercisable unless Hudson LLC does not exercise its option. If Hudson LLC exercises its option, it may assign the right to purchase the Units subject to the Option to other persons who are eligible to become Members of Hudson LLC. OVERHEAD FEES The Corporation will charge Hudson LLC overhead fees which will be (i) for all periods through and including June 30, 1997, in an amount equal to the sum of (a) 3% of Total Revenues (as defined below) other than with regard to activities in Canada, plus (b) 1% of Total Revenues from activities in Canada, and (ii) for periods beginning after June 30, 1997, the amount determined as a result of good faith discussions between the Corporation and LAGS (or its successors), after taking into account Total Revenues and administrative costs 32 40 of the Corporation in relation to Total Revenues, or if the Corporation and LAGS (or its successor) are unable to agree upon an amount, the amount described in clause (i) above. It is currently anticipated that approximately $2.8 million of the Corporation's overhead will not be allocated to Hudson LLC on an annual basis. "Total Revenues" means consolidated revenues of Hudson LLC and its subsidiaries for a period calculated in the same manner in which they are calculated in determining Net Income. OFFICERS Hudson LLC will have a President (who will be the Chief Executive Officer of Hudson LLC), a Secretary and a Treasurer. The Member Board may also elect a Chairman of the Board, one or more Vice Presidents (one or more of whom may be designated an Executive Vice President or a Senior Vice President), one or more Assistant Secretaries or Assistant Treasurers, and such other officers as it may from time to time deem advisable. The same person may hold two or more offices. No officer except the Chairman of the Board, if there is one, need be a Member Representative. Each officer will be elected by the Member Board and will hold office for such term, if any, as the Member Board determines. Any officer may be removed at any time, either with or without cause, by the Member Board. Each officer will participate only in the day-to-day operations of the Aviation Services Business. No officer will, in such capacity, determine any management policy or make any management decision, all of which will be made by the Members. It is presently contemplated that the current officers of the Corporation will serve Hudson LLC in similar capacities. AGREEMENT NOT TO COMPETE Pursuant to the LLC Agreement, no Member will, at any time when such Member owns Units, nor within one year after the Member ceases to own Units, engage directly or through ownership of equity of other entities (other than less than 2% of the shares of a publicly traded company acquired solely as an investment) in rendering aviation ground services (other than, in the case of LAGS or its affiliates, passenger handling services) in the United States of America or Canada, except that nothing will prevent LAGS or its affiliates from rendering aviation ground services to Lufthansa German Airlines or airlines which are alliance partners of Lufthansa German Airlines. INDEMNIFICATION Generally, Hudson LLC will indemnify each Member, Member Representative, employee or agent of Hudson LLC against certain liabilities or expenses by reason of such entity or person having served as such. CONFIDENTIALITY Generally, each Member will hold all non-public information which it has received relating to Hudson LLC and its business in confidence. REGISTRATION RIGHTS The LLC Agreement provides that, if at any time Hudson LLC files a registration statement under the Securities Act of 1933, as amended (a "Registration Statement"), which includes Units being sold by holders of Units, Hudson LLC will offer to include in the Registration Statement, on a pro rata basis, Units owned by the other holders of Units. The rights of holders of Units to have their Units included in the Registration Statement are subject to certain customary limitations and conditions. Pursuant to the LLC Agreement, Hudson LLC will bear the cost of any such Registration Statement, except that each holder of Units will pay the underwriting discounts and commissions applicable to the Units being sold by it and will pay the costs of any separate counsel which it elects to use in connection with the offering subject to such Registration Statement. 33 41 CERTAIN INFORMATION CONCERNING HUDSON LLC AND LAGS Hudson LLC, a Delaware limited liability company, will acquire substantially all the assets and assume certain liabilities of the Aviation Services Business. See "THE PURCHASE AGREEMENT -- Business to be Transferred." The principal executive offices of Hudson LLC will be located at 111 Great Neck Road, Great Neck, New York 11021. LAGS, a German company, is an indirect wholly-owned subsidiary of Deutsche Lufthansa AG. LAGS engages in ground handling and airport services on a worldwide basis. The principal executive offices of LAGS are located at Lufthansa-Basis, Geb. 357, D-60546 Frankfurt am Main, Germany. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Pursuant to the Purchase Agreement, LAGS will acquire, for a price of approximately $23.8 million, a 26% interest in Hudson LLC, which will conduct the Aviation Services Business. Approximately $16.0 million of the purchase price will be paid in cash by LAGS at the Closing. The balance of the purchase price of approximately $7.8 million, which is subject to potential downward adjustment based on future earnings of the Aviation Services Business, is payable in cash in three annual installments expected to be paid in September 1996, 1997 and 1998. Transferred Assets and Assumed Liabilities of the Aviation Services Business will be transferred to or assumed by Hudson LLC, which will: (i) assume, as co-obligor with the Corporation, the approximately $29.0 million aggregate principal amount of Debentures; (ii) have a pro forma consolidated ratio of stockholders' equity to total assets of at least 27% after adding back capital contribution receivable of $7,838,000 to pro forma stockholders' equity; (iii) pay the Corporation overhead fees which for the period through and including June 30, 1997 will be in an amount equal to 3% of Total Revenues from U.S. operations, plus 1% of Total Revenues from Canadian operations; and (iv) conduct the Aviation Services Business. The following unaudited pro forma condensed consolidated balance sheets as of December 31, 1995 and the pro forma condensed consolidated statements of earnings for the year ended June 30, 1995 and the six months ended December 31, 1995 (collectively, the "Pro Forma Statements") were prepared to illustrate the estimated effects of the Proposed Transaction. The Pro Forma Statements assume that the transaction for which pro forma effects are shown was completed as of December 31, 1995 for the pro forma condensed consolidated balance sheets, and as of July 1, 1994 for the pro forma condensed consolidated statements of earnings. The Pro Forma Statements are for illustrative purposes only and are not necessarily indicative of what the Corporation's and Hudson LLC's results of operations or balance sheets would actually have been if the transaction had taken place as of the assumed dates, nor is it necessarily indicative of future financial performance or results of operations. The adjustments for the Pro Forma Statements are based on available information and upon certain assumptions which management believes are reasonable. The Pro Forma Statements and accompanying notes thereto should be read in conjunction with the Consolidated Financial Statements of the Corporation and notes thereto, and the other financial information, appearing elsewhere in this Proxy Statement. 34 42 HUDSON GENERAL CORPORATION PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 (UNAUDITED, AMOUNTS IN THOUSANDS)
TRANSFER TO PRO FORMA HISTORICAL HUDSON LLC(1) ADJUSTMENTS PRO FORMA ---------- ------------- ----------- --------- Assets Current Assets: Cash and cash equivalents.............. $ 10,541 (665) (1,500)(2) $ 8,376 Accounts and notes receivable -- net... 24,430 (18,979) 5,451 Deferred income taxes.................. 4,602 (1,300) 3,302 Prepaid expenses and other assets 2,717 (2,650) 67 ------- -------- ------- -------- Total current assets........... 42,290 (23,594) (1,500) 17,196 Property, equipment and leasehold rights -- net.......................... 36,691 (36,341) 350 Investment in Hawaii joint venture -- net......................... 16,316 0 16,316 Investment in Hudson LLC................. 0 0 7,885(3) 7,885 Other assets -- net...................... 3,833 (3,090) 743 ------- -------- ------- -------- $ 99,130 (63,025) 6,385 $42,490 ======= ======== ======= ======== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable....................... $ 16,937 (16,550) $ 387 Accrued expenses and other liabilities......................... 26,410 (21,925) 4,485 ------- -------- ------- -------- Total current liabilities...... 43,347 (38,475) 0 4,872 ------- -------- ------- -------- Long-term debt, subordinated............. 29,000 (29,000) 0 Deferred income taxes.................... 2,752 (895) 1,857 ------- -------- ------- -------- Total noncurrent liabilities... 31,752 (29,895) 0 1,857 ------- -------- ------- -------- Stockholders' Equity: Serial preferred stock................. 0 0 0 Common stock........................... 1,263 0 1,263 Paid in capital........................ 6,905 3,923 6,385(2)(3) 17,213 Retained earnings...................... 19,295 0 19,295 Equity adjustments from foreign currency translation............................ (1,422) 1,422 0 Treasury stock......................... (2,010) 0 (2,010) ------- -------- ------- -------- Total stockholders' equity..... 24,031 5,345 6,385 35,761 ------- -------- ------- -------- $ 99,130 (63,025) 6,385 $42,490 ======= ======== ======= ========
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements. 35 43 HUDSON LLC PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 (UNAUDITED, AMOUNTS IN THOUSANDS)
TRANSFER FROM PARENT PRO FORMA HISTORICAL COMPANY(1) ADJUSTMENTS PRO FORMA ---------- ------------- ----------- --------- Assets Current Assets: Cash and cash equivalents.................. $0 665 0(2) $ 665 Accounts and notes receivable -- net....... 0 18,979 18,979 Deferred income taxes...................... 0 1,300 1,300 Prepaid expenses and other assets.......... 0 2,650 2,650 -- -------- ------- -------- Total current assets............... 0 23,594 0 23,594 Property, equipment and leasehold rights -- net.............................. 0 36,341 36,341 Other assets -- net.......................... 0 3,090 3,090 -- -------- ------- -------- $0 63,025 0 $63,025 == ======== ======= ======== Liabilities and Equity Current Liabilities: Accounts payable........................... $0 16,550 $16,550 Accrued expenses and other liabilities..... 0 21,925 21,925 -- -------- ------- -------- Total current liabilities.......... 0 38,475 0 38,475 -- -------- ------- -------- Long-term debt, subordinated................. 0 29,000 (16,000)(2) 13,000 Deferred income taxes........................ 0 895 895 -- -------- ------- -------- Total noncurrent liabilities....... 0 29,895 (16,000) 13,895 -- -------- ------- -------- Equity: Contributed capital........................ 0 (3,923) 16,000(2) 12,077 Equity adjustments from foreign currency translation............................. 0 (1,422) (1,422) -- -------- ------- -------- Total equity....................... 0 (5,345) 16,000 10,655 -- -------- ------- -------- $0 63,025 0 $63,025 == ======== ======= ========
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements. 36 44 HUDSON GENERAL CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FISCAL YEAR ENDED JUNE 30, 1995 (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
TRANSFER TO PRO FORMA HISTORICAL HUDSON LLC(1) ADJUSTMENTS PRO FORMA ---------- ------------- ----------- --------- Revenues $ 135,453 (135,355) $ 98 -------- -------- ----- ------ Costs and expenses Operating................................ 106,070 (106,070) 0 Depreciation and amortization............ 7,528 (7,450) 78 Selling, general and administrative...... 14,306 (11,130) 3,176 Interest -- net............................ 559 (2,030) (1,471) -------- -------- ----- ------ Total costs and expenses 128,463 (126,680) 0 1,783 -------- -------- ----- ------ Earnings before equity in earnings (loss) of investees and provision (benefit) for income taxes............................. 6,990 (8,675) 0 (1,685) Equity in loss of joint venture............ (2,747) 0 (2,747) Equity in earnings of Hudson LLC........... 0 0 9,072(4) 9,072 -------- -------- ----- ------ Earnings before provision (benefit) for income taxes............................. 4,243 (8,675) 9,072 4,640 Provision (benefit) for income taxes....... (350) 1,300(5) 87(5) 1,037 -------- -------- ----- ------ Net earnings............................... $ 4,593 (9,975) 8,985 $ 3,603 ======== ======== ===== ====== Earnings per share, primary................ $ 3.69 $ 2.89 ======== ====== Earnings per share, fully diluted.......... $ 2.67 $ 2.39 ======== ====== Weighted average common and common equivalent shares outstanding: Primary.................................. 1,245 1,245 Fully diluted............................ 2,145 (488)(6) 1,657 ======== ===== ======
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements. 37 45 HUDSON LLC PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FISCAL YEAR ENDED JUNE 30, 1995 (UNAUDITED, AMOUNTS IN THOUSANDS)
TRANSFER FROM PARENT PRO FORMA HISTORICAL COMPANY(1) ADJUSTMENTS PRO FORMA ---------- ------------- ----------- --------- Revenues................................... $0 135,355 862(7) $ 136,217 Costs and expenses Operating................................ 0 106,070 106,070 Depreciation and amortization............ 0 7,450 7,450 Selling, general and administrative...... 0 11,130 11,130 Interest................................. 0 2,030 (1,120)(8) 910 -- ------- ------ -------- Total costs and expenses................... 0 126,680 (1,120) 125,560 -- ------- ------ -------- Earnings before benefit for income taxes... 0 8,675 1,982 10,657 Benefit for income taxes................... 0 (1,300)(5) (1,300) -- ------- ------ -------- Net earnings............................... $0 9,975 1,982 $ 11,957 == ======= ====== ========
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements. 38 46 HUDSON GENERAL CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
TRANSFER TO PRO FORMA HISTORICAL HUDSON LLC(1) ADJUSTMENTS PRO FORMA ---------- ------------- ----------- --------- Revenues................................. $ 75,245 (75,110) $ 135 ------- ------- ----- ------- Costs and expenses Operating.............................. 57,667 (57,667) 0 Depreciation and amortization.......... 3,580 (3,540) 40 Selling, general and administrative.... 7,612 (5,657) 1,955 Interest -- net........................ 217 (1,023) (806) ------- ------- ----- ------- Total costs and expenses................. 69,076 (67,887) 0 1,189 ------- ------- ----- ------- Earnings before equity in earnings (loss) of investees and provision for income taxes.................................. 6,169 (7,223) 0 (1,054) Equity in loss of joint venture.......... (1,391) 0 (1,391) Equity in earnings of Hudson LLC......... 0 0 5,489(4) 5,489 ------- ------- ----- ------- Earnings before provision for income taxes.................................. 4,778 (7,223) 5,489 3,044 Provision for income taxes............... 1,903 (897)(5) 50(5) 1,056 ------- ------- ----- ------- Net earnings............................. $ 2,875 (6,326) 5,439 $ 1,988 ======= ======= ===== ======= Earnings per share, primary......... $ 2.46 $ 1.70 ======= ======= Earnings per share, fully diluted... $ 1.67 $ 1.44 ======= ======= Weighted average common and common equivalent shares outstanding: Primary................................ 1,169 1,169 Fully diluted.......................... 2,065 (570)(6) 1,495 ======= ===== =======
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements. 39 47 HUDSON LLC PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED, AMOUNTS IN THOUSANDS)
TRANSFER FROM PARENT PRO FORMA HISTORICAL COMPANY(1) ADJUSTMENTS PRO FORMA ---------- ------------- ----------- --------- Revenues..................................... $0 75,110 359(7) $75,469 -- ------ ---- ------- Costs and expenses Operating.................................. 0 57,667 57,667 Depreciation and amortization.............. 0 3,540 3,540 Selling, general and administrative........ 0 5,657 5,657 Interest................................... 0 1,023 (606)(8) 417 -- ------ ---- ------- Total costs and expenses..................... 0 67,887 (606) 67,281 -- ------ ---- ------- Earnings before provision for income taxes... 0 7,223 965 8,188 Provision for income taxes................... 0 897(5) 897 -- ------ ---- ------- Net earnings................................. $0 6,326 965 $ 7,291 == ====== ==== =======
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements. 40 48 NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) To record and eliminate the estimated results of operations and certain assets and liabilities of the Aviation Services Business on Hudson LLC and the Corporation, respectively. Certain Aviation Services Business accounts receivable will be retained by the Corporation in connection with Hudson LLC's required equity to asset ratio. (2) To record estimated cash proceeds of $16,000,000 paid at closing, assumed $16,000,000 prepayment of the Debentures from such proceeds, capital contribution receivable of $7,838,000 for the unpaid balance of the purchase price and estimated transaction fees of $1,500,000 to be paid by the Corporation. (3) To record the Corporation's 74% interest in Hudson LLC under the equity method of accounting. (4) To record the Corporation's 74% share of Hudson LLC's estimated results including an amount equal to the interest payment due on the balance of the unpaid purchase price calculated at 11% per annum. (5) To record the U.S. tax effects of the pro forma adjustments at an estimated combined effective federal and state tax rate of 48% for the Corporation. Aviation services in Canada will be provided through a subsidiary of Hudson LLC which will be subject to Canadian income taxes. Accordingly, provision (benefit) for foreign income taxes is reflected in Hudson LLC's Pro Forma Condensed Consolidated Statements of Earnings. (6) Reflects estimated elimination of shares issuable on conversion of Debentures at a conversion price of $32.75 per share associated with the assumed prepayment(s) of the Debentures from proceeds of the Proposed Transaction. (7) To record interest income on the balance of the unpaid purchase price calculated at 11% per annum. (8) Reflects estimated elimination of interest expense associated with the assumed prepayment(s) of the Debentures from proceeds of the Proposed Transaction. 41 49 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 Revenues for the six months ended December 31, 1995 increased $10.7 million, or 16.6%, compared with the corresponding period of the prior year. The increase reflects higher: (i) ground handling service revenues of $7.9 million due primarily to expanded services to new and existing customers and higher sales volumes of de-icing fluid; (ii) domestic aircraft fueling revenues of $3.0 million resulting primarily from expanded intoplane fueling services and retail sales of fuel at existing locations; and (iii) snow removal revenues of $1.4 million. Partially offsetting the revenue increases were lower aircraft fueling and hangar rental revenues in Canada of $2.3 million as a result of the cessation of operations of the Corporation's Canadian fixed base operations (FBO's) on October 31, 1994. Costs and expenses for the six months ended December 31, 1995 increased $6.9 million, or 11.1%, compared with the corresponding period of the previous year. Operating costs for the six months ended December 31, 1995 increased $6.0 million, or 11.7%, compared with the corresponding period of the previous year. The increase was attributable to higher: (i) labor and related costs associated with expanded ground handling operations and domestic aircraft fueling services; (ii) cost of sales of de-icing fluid; (iii) fuel costs associated with higher volumes of retail fuel sales in the U.S.; and (iv) snow removal costs. Partially offsetting the increases were lower costs as a result of the cessation of operations of the Corporation's Canadian FBO's. Depreciation and amortization expenses for the six months ended December 31, 1995 increased $.3 million, or 8.6%, compared with the corresponding period of the previous year. The increase is due primarily to additions of ground handling equipment. Selling, general and administrative expenses for the six months ended December 31, 1995 increased $.7 million, or 10.1%, compared with the corresponding period of the previous year. The increase primarily reflects the recording of provisions relating to stock appreciation rights as a result of increases in the market price of the Corporation's common stock. Earnings before equity in loss of joint venture and provision for income taxes for the six months ended December 31, 1995, increased $3.8 million compared with the corresponding period of the previous year due primarily to improved results from ground handling (including higher sales volumes of de-icing fluid), domestic aircraft fueling and snow removal operations. Adding to the increase was the elimination of operating losses associated with the Corporation's Canadian FBO's. Partially offsetting the increases were higher selling, general and administrative expenses as described above and the loss of a ground handling contract at a domestic airport location as a result of a merger of two airlines. Results of the Corporation's aircraft ground handling operations fluctuate depending upon the flight activity and schedules of customers and the ability of the Corporation to deploy equipment and manpower in the most efficient manner to service such customers. The Corporation's 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 Corporation's 50% share of losses from the Kohala Joint Venture for the six months ended December 31, 1995 increased $.2 million from the corresponding period of the previous year. The increased loss is due primarily to higher interest -- net as interest expense increased due mainly to higher balances of partner advances payable. In addition, the Kohala Joint Venture's interest income decreased as a result of the reduction in mortgage receivables. As is usual for companies with land development operations, the contribution to future results from such operations will fluctuate depending upon land sales closed in each reported period. The Corporation's provision for income taxes for the six months ended December 31, 1995, increased $1.6 million compared with the corresponding period of the previous year. The increase primarily reflects: 42 50 (i) increased pre-tax earnings in the U.S. and Canada, and (ii) the Corporation's utilization during the six months ended December 31, 1994 of $.5 million of its Canadian depreciation differences to offset its provision for foreign income taxes. 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 begun to outsource services to independent aviation service companies. This trend, as well as the Open Skies Agreement between the United States and Canada, which provides increased access for airlines to fly between these bordering countries, has provided additional opportunities for the Corporation. The Corporation is unable, at this time, to evaluate the full impact of these factors. FISCAL YEARS ENDED JUNE 30, 1995 AND JUNE 30, 1994 Revenues for the fiscal year ended June 30, 1995 decreased to $135.5 from $142.1 million, a decrease of $6.6 million, or 4.7%, compared with the prior fiscal year. The decrease reflects lower: (i) snow removal revenues of $14.2 million due mainly to the mild winter weather during fiscal 1995; (ii) aircraft fueling and hangar rental revenues in Canada of $6.2 million due to lower volumes of retail fuel sales and the expiration on October 31, 1994 of the Corporation's subleases (see Note 4 to the Consolidated Financial Statements for the fiscal year ended June 30, 1995) at its Canadian fixed base operations ("FBO's"); and (iii) revenues due to the effect of fluctuation in the average rates of exchange used in translating Canadian revenues to their U.S. dollar equivalent. Partially offsetting the revenue decreases were higher: (i) ground handling service revenues (net of decreased sales volumes of de-icing fluid) of $7.1 million due primarily to expanded services to new and existing customers and to a new contract to provide various winter related aircraft ground handling services at Terminal 1 in Toronto's Lester B. Pearson International Airport; (ii) domestic aircraft fueling revenues of $5.2 million resulting primarily from expanded into plane fueling services at new and existing locations; (iii) ground transportation revenues of $1.6 million due mainly to expanded services to existing customers; and (iv) building maintenance revenues of $.8 million due primarily to expanded services to new and existing customers in the U.S. Costs and expenses were substantially unchanged at $128.5 million in fiscal 1995 as compared with $128.6 million in fiscal 1994. Operating costs decreased by $.4 million, or .3%. The decrease was attributable to lower: (i) snow removal costs due to the mild winter weather in the U.S.; (ii) fuel and facility rental costs related to the Corporation's Canadian FBO's (see Note 4 to the Consolidated Financial Statements for the fiscal year ended June 30, 1995); and (iii) the effect of fluctuation in the average rates of exchange used in translating Canadian costs to their U.S. dollar equivalent. Partially offsetting the decreases were higher: (i) domestic labor and related costs due primarily to expanded services to new and existing customers; (ii) equipment rental costs due mainly to expanded into plane fueling services; (iii) labor and related costs associated with ground handling operations in Canada due primarily to expanded services to new and existing customers; and (iv) domestic maintenance associated with expansion of the Corporation's fleet of equipment. Depreciation and amortization expenses increased from $7.0 to $7.5 million, an increase of $.5 million, or 6.9%. The increase was due primarily to the accelerated amortization of the remaining carrying value of leasehold improvements made to a hangar facility at a domestic airport location (see Note 3 to the Consolidated Financial Statements for the fiscal year ended June 30, 1995). Selling, general and administrative expenses increased from $13.8 to $14.3 million, an increase of $.5 million, or 3.6%, due mainly to higher facility, personnel and related costs associated with the Corporation's expanded operations as noted above. Interest expense decreased from $1.3 to $.6 million, a decrease of $.7 million or 56.4%, due mainly to lower average outstanding borrowings and the increase in the Corporation's capitalization of interest on its advances to the Kohala Joint Venture. Earnings before equity in loss of joint venture, provision (benefit) for income taxes, extraordinary item and cumulative effect of change in the method of accounting for income taxes decreased from $13.5 to $7.0 43 51 million, a decrease of $6.5 million, or 48.3%, due primarily to reduced results from snow removal operations and lower sales volumes of deicing fluid due mainly to the mild winter weather; the accelerated amortization of the remaining carrying value of leasehold improvements; and higher selling, general and administrative expenses as described above. Partially offsetting the decreases were improved results from domestic aircraft fueling and ground transportation operations and lower interest expense. The Corporation's 50% share of losses from the Kohala Joint Venture increased from $1.8 to $2.7 million, an increase of $.9 million, or 52.5%. The increase in the Kohala Joint Venture's losses is due mainly to the cessation of interest capitalization by the Kohala Joint Venture on Phase IV of the Project as of July 1, 1994. The Corporation's provision (benefit) for income taxes decreased from a provision of $4.4 million to a benefit of $.4 million, a decrease of $4.8 million. The decrease reflects lower federal and state tax provisions totaling $3.5 million due to decreased pre-tax earnings in the U.S., and the recognition in fiscal 1995 of $1.3 million of deferred tax assets resulting from a reevaluation of the operating results of the Corporation's Canadian subsidiary (see Note 7 to the Consolidated Financial Statements for the fiscal year ended June 30, 1995). 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 capital expenditures or results of operations for fiscal 1995, 1994 and 1993, or competitive position. However, the federal government and many state and local governments have enacted or proposed legislation and regulations with respect to storage facilities for fuel, petroleum-based products and chemicals, the disposal of hazardous waste materials, storm water discharges, and financial responsibility for possible liability exposures relating to fuel storage facilities. Compliance with such legislation and regulations has resulted in expenditures by the Corporation, including expenditures for the testing, decommissioning and/or replacement of certain of its fuel and de-icing fluid storage facilities, and the clean-up of fuel spills. The Corporation is presently engaged in several such decommissioning, replacement and clean-up projects, and it is anticipated that additional such expenditures, the amount of which is presently not expected to be material, will be required. In addition, airport authorities are coming under increasing pressure to 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 may be required to pay in connection with such airport authority initiatives. FISCAL YEARS ENDED JUNE 30, 1994 AND JUNE 30, 1993 Revenues for the fiscal year ended June 30, 1994 increased from $132.2 to $142.1 million, an increase of $9.9 million, or 7.5%, as compared with the prior fiscal year. The increase reflects higher: (i) snow removal revenues of $8.9 million due mainly to the severe winter weather in the United States in fiscal 1994; (ii) ground handling service revenues of $2.8 million due primarily to expanded services to new and existing customers in the U.S.; (iii) ground transportation revenues aggregating $1.6 million due mainly to expanded services to existing customers; and (iv) building maintenance revenues of $1.0 million due primarily to expanded services to new and existing customers in the U.S. Partially offsetting the revenue increases were lower: (i) aircraft fueling revenues of $1.4 million resulting primarily from lower volumes of retail fuel sales at the Corporation's Canadian FBO's and the cessation of operations at Long Island MacArthur Airport, net of increases in domestic intoplane fueling revenues; and (ii) revenues due to the effect of fluctuation in the average rates of exchange used in translating Canadian revenues to their U.S. dollar equivalent. Costs and expenses decreased from $129.7 to $128.6 million, a decrease of $1.2 million, or .9%. The principal reason for this decrease was that fiscal 1993 costs and expenses included accelerated amortization of the remaining carrying value of leasehold rights related to the Corporation's Canadian FBO's in the amount of $4.3 million (the "FBO Accelerated Amortization"). Operating costs increased from $103.2 to $106.4 million, an increase of $3.3 million, or 3.2%. The increase was attributable to higher: (i) snow removal costs; (ii) domestic labor and related costs due primarily to expanded services to new and existing customers; (iii) equipment rental costs due mainly to expanded intoplane fueling and ground transportation services; and (iv) maintenance costs associated with expansion of the Corporation's fleet of equipment and increased use in 44 52 snow removal operations. Partially offsetting the increases were lower: (i) labor and related costs associated with ground handling operations in Canada due mainly to a reduction in employees associated with improved manpower utilization resulting from favorable changes to the flight activity and schedules of the Corporation's airline customers; (ii) fuel costs due primarily to lower volumes of retail fuel sales at the Corporation's Canadian FBO's; and (iii) the effect of fluctuation in the average rates of exchange used in translating Canadian costs to their U.S dollar equivalent. Depreciation and amortization expenses decreased from $7.2 to $7.0 million, a decrease of $.2 million, or 2.2%. The decrease reflects the absence of amortization of leasehold rights related to the Corporation's Canadian FBO's as such rights were fully amortized as of June 30, 1993 due to the FBO Accelerated Amortization. Selling, general and administrative expenses increased from $13.3 to $13.8 million, an increase of $.5 million, or 4.0%, due to higher administrative and related costs mainly attributable to higher bonus provisions under the Corporation's Executive Incentive Program, which were partially offset by a decrease of $.7 million in the provision for bad debts. Interest expense decreased from $1.8 to $1.3 million, a decrease of $.5 million, or 27.8%, due to: (i) the prepayment in fiscal 1993 of the remaining balance of the Corporation's privately held 14% subordinated notes; (ii) lower average outstanding borrowings; and (iii) the payment of the remaining balance of the Corporation's 11% debentures in fiscal 1993. Earnings before equity in loss of joint venture, provision (benefit) for income taxes, extraordinary item and cumulative effect of change in the method of accounting for income taxes increased from $2.5 to $13.5 million, an increase of $11.0 million, due mainly to: (i) the absence in fiscal 1994 of the FBO Accelerated Amortization; (ii) improved results from snow removal operations; (iii) improved margins from ground handling operations; (iv) improved results from ground transportation operations; and (v) lower interest expense. Partially offsetting the increase were: (i) reduced results from the Corporation's Canadian FBO's; and (ii) higher selling, general and administrative expenses as described above. The Corporation's 50% share of losses from the Kohala Joint Venture decreased from $2.8 to $1.8 million, a decrease of $1.0 million, due mainly to reduced provisions during fiscal 1994 for a Hawaii excise tax and doubtful mortgage receivables. The Kohala Joint Venture's losses resulted mainly from a lack of sales of its land parcels, which sales were negatively impacted by general economic conditions. Effective July 1, 1993, the Corporation and its Kohala Joint Venture partner (the "Partners") reduced the interest rate that the Kohala Joint Venture must pay for advances made to it by the Partners from 1% over prime to 1% below prime to reflect lower incremental borrowing costs of the Partners. This change resulted in a reduction of interest expense to the Kohala Joint Venture of $.3 million for fiscal 1994 compared with fiscal 1993 net of lower interest income on mortgage receivables. Effective July 1, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 109 ("FAS 109"), Accounting for Income Taxes, and reported a benefit of $450,000 as the cumulative effect of the change in the method of accounting for income taxes. Such benefit was reported inclusive of the effect of the Canadian net operating loss carryforwards referred to in the next paragraph, net of the related valuation allowance, in the consolidated statements of operations. The Corporation's provision for income taxes increased from $1.7 to $4.4 million, an increase of $2.7 million, due to higher provisions for federal and state income taxes associated with increased pre-tax earnings in the U.S. Pursuant to FAS 109, the Corporation utilized in full its Canadian net operating loss carryforwards and a portion of its depreciation differences to offset its provision for foreign income taxes in the amount of $.8 million. LIQUIDITY AND CAPITAL EXPENDITURES AND COMMITMENTS The Corporation's recurring sources of liquidity are funds provided from operations and bank lines of credit. The Corporation has a Revolving Credit Agreement (the "Credit Agreement") with a group of banks which provides for a revolving credit facility. Pursuant to the Credit Agreement, the Corporation may borrow 45 53 funds (including outstanding letters of credit), up to a limit of $18.3 million (the "Limit") until March 31, 1997. At such time, and at the end of each subsequent quarter, the Limit will be reduced by one-sixteenth of the Limit that was in effect on December 31, 1996 until December 31, 2000, at which time the Credit Agreement terminates. As of December 31, 1995, there were no direct borrowings and $3.0 million of letters of credit were outstanding under the Credit Agreement. During the six months ended December 31, 1995 and 1994, and for the fiscal years ended June 30, 1995 and 1994, net cash provided by operating activities was $5.3 and $3.1 million, and $19.7 and $16.4 million, respectively. Net cash used by advances to the Hawaii joint venture was $.8 and $.4 million, and $1.7 and $.9 million, for the six months ended December 31, 1995 and 1994, and for the fiscal years ended June 30, 1995 and 1994, respectively. Capital expenditures, net of proceeds from the sale of property and equipment, were $6.3 and $5.1 million, and $9.9 and $9.2 million, for the six months ended December 31, 1995 and 1994, and for the fiscal years ended June 30, 1995 and 1994, respectively. At December 31, 1995 cash and cash equivalents were $10.5 compared with $12.6 million at June 30, 1995. The increases at December 31, 1995 in accounts receivable, accounts payable and accrued expenses and other current liabilities are primarily attributable to the Corporation's snow removal and aircraft de-icing services, which are seasonal in nature. At December 31, 1995 the Corporation had commitments to fund approximately $2.2 million for operating equipment, the majority of which is expected to be expended during the third quarter of fiscal 1996. Capital expenditures are primarily for equipment and facilities used in the Corporation's operations. The Corporation 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 the Corporation's ability to successfully obtain additional contracts. During fiscal 1995, the Board of Directors approved the repurchase of up to 150,000 shares of Common Stock from time to time in either open market or privately negotiated transactions. As of December 31, 1995, the Corporation had repurchased 114,300 shares of Common Stock in the open market for an aggregate purchase price of approximately $2.0 million pursuant to this authorization. At December 31, 1995, the Kohala Joint Venture had commitments aggregating $2.9 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, 1996. The Kohala Joint Venture has begun the process to extend the date by which this expenditure need be made. It is expected that funds for most of the Kohala Joint Venture's other commitments will be expended subsequent to fiscal 1996. As of December 31, 1995, the Kohala Joint Venture was obligated to repurchase $.3 million of mortgage receivables that were previously sold to a bank. In addition, the Kohala Joint Venture is obligated to repurchase on February 11 and September 27, 1996 the unpaid balance of certain mortgage receivables that were previously sold to another bank. As of December 31, 1995, the unpaid balance in respect of such mortgage receivables was $.9 and $.5 million, respectively. The Kohala Joint Venture is engaged in discussions to extend or refinance such obligations. At December 31, 1995, the Kohala Joint Venture had $.6 million of cash available for its requirements. During fiscal 1992, the County of Hawaii passed an ordinance pursuant to which the Kohala Joint 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 Kohala Joint Venture is required to expend (in addition to the commitments noted above) approximately $2.3 million for improvements and in lieu payments. Shortly after passage of the ordinance, a lawsuit against the County of Hawaii was filed by two local residents of Hawaii ("Plaintiffs") seeking to invalidate such ordinance on various grounds including that the ordinance was adopted without following State of Hawaii procedure relating to the preparation of an Environmental Impact Statement. During fiscal 1993, the Judge in this action granted Plaintiffs' motion for partial summary judgment without indicating any effect on Phase IV zoning. The County and the Kohala Joint Venture have appealed this ruling. The appeal was heard before the Hawaii Supreme Court in March 1994, and the Court has taken the matter under advisement. The Kohala Joint Venture cannot, at this time, determine the impact of the Court's ruling on the timing of development of Phase IV or the expenditures related thereto. The Joint Venture Agreement provides that the Corporation and its partner in the Kohala Joint Venture, Oxford Kohala, Inc. (the "Partner"), are obligated to make equal advances of any of the Kohala Joint 46 54 Venture's required fundings. It is anticipated that the Kohala Joint Venture's commitments, including any repurchase of mortgage receivables previously sold to two banks, will be funded by cash flow from its operations and advances from the Corporation and the Partner. It is expected that any advances which the Corporation may be required to make to the Kohala Joint 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 Kohala Joint Venture in any fiscal year or up to $4.0 million during the term of the Credit Agreement, net of any distributions received from the Kohala Joint Venture by the Corporation during such periods. Since the inception of the Credit Agreement and after giving effect to the repayment by the Partner in January 1996 of Additional Advances as discussed below, the Corporation has increased its net advances to the Kohala Joint Venture by $2.9 million. Distributions, if any, received by the Corporation with respect to the Kohala Joint Venture, net of advances made by the Corporation during the applicable period, in excess of $4.0 million in any four consecutive quarters, or in excess of $2.0 million in any fiscal year, reduce the Limit. At present, it is anticipated that the advances required to meet the obligations of the Kohala Joint Venture will not exceed the limits set forth in the Credit Agreement or that the Credit Agreement will be amended to allow for any excess. The Partner is a subsidiary of Oxford First Corporation ("Oxford First"). On October 13, 1994, Oxford First filed for reorganization under Chapter 11 of the Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, Oxford First (through its subsidiary, The Oxford Finance Companies, Inc.) was permitted to transfer certain amounts to the Partner. The amounts so authorized were not sufficient to allow the Partner to make its full share of required advances. The Corporation opted to make additional advances (the "Additional Advances") to cover the Partner's funding deficiency. During November 1995, the Partner resumed making advances and, in January 1996, the Partner repaid to the Corporation $.7 million, which was the entire amount of Additional Advances. In addition, pursuant to an amended reorganization plan which was approved by the Bankruptcy Court on September 7, 1995, Oxford First is permitted to transfer funds to the Partner in an aggregate amount not to exceed $750,000 in each of the calendar years 1996 and 1997. The Corporation, at present, is unable to determine whether such permitted transfers will be sufficient in order for the Partner to make its share of future advances to the Kohala Joint Venture. Should the Partner be unable to make its share of future advances to the Kohala Joint Venture, the Corporation has the option to make further advances on behalf of the Partner (subject to its right of reimbursement) necessary up to the limits set forth in the Credit Agreement. The Partner did not file for reorganization under Chapter 11 of the Bankruptcy Code. During the three months ended December 31, 1995, the Corporation advanced $.5 million to the Kohala Joint Venture constituting its 50% share of the Kohala Joint Venture's required fundings. During the six months ended December 31, 1995, the Corporation advanced $.8 million to the Kohala Joint Venture, including Additional Advances that were repaid in January 1996. The extent to which advances by the Corporation to the Kohala Joint 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 Kohala Joint Venture, the terms upon which parcels are sold, expenses incurred in the planning and development of future phases of the project and the ability of the Partner to fund its obligations under the Joint Venture Agreement. The general economic climate has negatively impacted the sale of the Kohala Joint Venture's land parcels. 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. 47 55 BUSINESS INFORMATION CONCERNING THE CORPORATION The following is a description of the business of the Corporation as conducted on the date of this Proxy Statement, without taking into account any effect of the Proposed Transaction. If the Proposed Transaction is consummated, the operations relating to the Aviation Services Business will be transferred to Hudson LLC subject to and in accordance with the terms and conditions of the Purchase Agreement and the LLC Agreement. See "THE PROPOSED TRANSACTION," "THE PURCHASE AGREEMENT" and "THE LLC AGREEMENT." GENERAL Hudson General Corporation was organized in 1961. The Corporation is principally engaged in providing a broad range of services to the aviation industry in the United States and Canada. The services, which are conducted by the Corporation and its subsidiaries, include aircraft ground handling; aircraft de-icing; aircraft fueling; ground transportation services; snow removal; fuel management; cargo warehousing; ramp sweeping and glycol recovery; the sale, leasing and maintenance of ground support equipment; specialized maintenance services; and the leasing of hangar, office and tie-down space to private aircraft owners. On October 31, 1994, the Corporation ceased its fixed base operations in Canada (see Note 4 to the Consolidated Financial Statements for the fiscal year ended June 30, 1995). In addition to its aviation services, the Corporation is a 50% partner with Oxford First Corporation in the Kohala Joint Venture (see Note 6 to the Consolidated Financial Statements for the fiscal year ended June 30, 1995). The Corporation's 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. Aircraft ground handling services are provided to domestic and international airlines, and include: aircraft marshaling; loading and off-loading of baggage, freight and commissary items; passenger ticketing; porter and wheelchair services; aircraft cleaning; de-icing; ramp sweeping and glycol recovery; water and lavatory service; maintenance and service checks; weight and balance; cargo and mail transferring; aircraft pushbacks; ground power; and air-conditioning. Ground transportation services are provided for airline passengers and airport employees through airport shuttle bus systems operated by the Corporation. These operations also include operation and maintenance of passenger boarding bridges and specialized airfield passenger transport vehicles. Besides its airport-related transportation services, the Corporation provides transportation management services for various governmental agencies and authorities. Aircraft fueling services are offered through contract fueling, fuel management and retail sales of fuel. Contract fueling services are provided to airlines and fuel suppliers by delivery of fuel from airport storage facilities into commercial aircraft. Fuel management services consist of acting as an agent, managing the purchase, supply and distribution of fuel both domestically and internationally for regional scheduled and international cargo carriers, as well as charter passenger airlines. The Corporation also operates one of the newest perishables centers at any airport in the United States for cargo requiring a climate-controlled environment. Snow removal services are performed at airports in the northeastern and midwestern United States under contracts with airport operators and airlines serving these airports. Snow removal services are also performed at various seaport facilities. Maintenance services are provided for ground support, cargo handling, ground transportation and other airport related equipment. In addition, building maintenance services are provided at both terminal and hangar facilities. In Salt Lake City, hangar facilities and tie-down services are offered to the general aviation community including corporate and private aircraft owners. The Corporation does not spend a material amount for research or development activities. 48 56 During the fiscal years ended June 30, 1995, 1994, and 1993, sources of the Corporation's revenues which exceeded 10% of consolidated revenues in any year were: aircraft ground handling services (including de-icing) with revenues of $74,334,000, $68,291,000 and $67,811,000, respectively; aircraft fueling services (including fixed base operations) with revenues of $22,923,000, $21,936,000 and $23,586,000, respectively; ground transportation services with revenues of $23,802,000, $22,171,000 and $20,567,000, respectively; and snow removal services with revenues of $3,706,000, $17,871,000 and $8,933,000, respectively. Foreign revenues included above are translated at the average rates of exchange in their respective fiscal years. No customer of the Corporation accounted for more than 10% of consolidated revenues during fiscal 1995. The Corporation's services are generally subject to competitive bidding, and the Corporation competes principally with airlines and other aviation services companies, some of which are larger and have resources greater than the Corporation. The major bases of competition are the prices at which services are offered and the quality and efficiency in the performance of services. The compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment has not to date had a material effect upon the Corporation's capital expenditures, results of operations or competitive position. However, the federal government and many state and local governments have enacted or proposed legislation and regulations with respect to storage facilities for fuel, petroleum-based products and chemicals, the disposal of hazardous waste materials, storm water discharges, and financial responsibility for possible liability exposures relating to fuel storage facilities. Compliance with such legislation and regulations has resulted in expenditures by the Corporation, including expenditures for the testing, decommissioning and/or replacement of certain of its fuel and de-icing fluid storage facilities, and the clean-up of fuel spills. The Corporation is presently engaged in several such decommissioning, replacement and clean-up projects, and it is anticipated that additional such expenditures, the amount of which is presently not expected to be material, will be required. In addition, airport authorities are coming under increasing pressure to 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 may be required to pay in connection with such airport authority initiatives. The Corporation currently employs an aggregate of approximately 3,900 persons. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Corporation operates in only one industry segment. For information as to foreign operations, see Note 4 to the Consolidated Financial Statements for the fiscal year ended June 30, 1995. For information relating to the Corporation's investment in the Kohala Joint Venture, see Note 6 to the Consolidated Financial Statements for the fiscal year ended June 30, 1995. PROPERTIES The Corporation's executive offices at 111 Great Neck Road, Great Neck, New York contain approximately 13,000 square feet and are under lease through December 31, 2002. The Corporation also leases office, warehouse, hangar and maintenance shop space as well as fuel storage facilities at various airport locations in the United States and Canada. These leases expire at various dates through 2005 and contain various renewal options through 2020. A portion of this leased space has been sublet to non-affiliated sublessees. The properties owned and leased by the Corporation are suitable and adequate to conduct its business. The Corporation is a 50% partner in the Kohala Joint Venture to develop approximately 4,000 contiguous acres of land situated in the North Kohala District on the Island of Hawaii. The project is being developed in four successive phases. Substantially all of the parcels in Phases I and II, which comprise approximately 2,100 acres of the project, have been sold. Phase III consists of 100 five acre parcels, with 85 parcels remaining 49 57 available for sale. During fiscal 1992, the County of Hawaii passed an ordinance pursuant to which, after the obtaining of subdivisions approvals, Phase IV could be developed into 1,490 units. The validity of this ordinance has been challenged in a lawsuit brought by two local residents of Hawaii, and development of Phase IV must await the ultimate outcome of this litigation. See Note 6 to the Consolidated Financial Statements for the fiscal year ended June 30, 1995. CERTAIN LEGAL PROCEEDINGS Texaco Canada, Inc. (now McColl-Frontenac Inc.) v. Petro-Canada Inc., Hudson General Aviation Services Inc. and Hudson General Corporation. In 1988, Texaco Canada, Inc. (Texaco) (now McColl-Frontenac Inc.) instituted a suit in the Supreme Court of Ontario, Canada against the Corporation and Petro-Canada, Inc., the corporation which supplied aviation fuel for the Corporation's Canadian fixed base operations. The suit's allegations, as amended in 1992, are that the defendants interfered with contractual and fiduciary relations 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 suit seeks compensatory and punitive damages totaling $110,000,000 (Canadian) (approximately $80,000,000 (U.S.)) plus all profits earned by the defendants subsequent to the alleged breach. A trial date has been set for May 1996. Innotech (which due to a name change is now called Aerospace Realties (1986) Limited ("Aerospace")) had agreed to defend and indemnify the Corporation against claims of whatever nature asserted in connection with, arising out of or resulting from the fuel supply agreement with Texaco. By a letter dated February 15, 1996, the Corporation was notified by Aerospace that Aerospace has entered into a liquidation phase and can no longer defray the cost of defending this lawsuit or pay for any damages resulting therefrom. Management of the Corporation believes, and counsel for the Corporation has advised based on available facts, that the Corporation will successfully defend this action. Joseph Sladick v. Hudson General Corporation and Bryant Washington. In March 1994 a jury in New York State Supreme Court in Manhattan, New York rendered a verdict against the Corporation in a civil lawsuit for personal injuries and awarded the plaintiff a total of $21,436,000 in damages, of which $19,186,000 is covered by insurance. The suit arose from an accident involving a collision between a vehicle operated by the Corporation and another vehicle at JFK International Airport in New York. At March 31, 1994, the Corporation accrued a provision for the entire uninsured punitive damage amount of $2,250,000 in the Corporation's consolidated statements of operations. In June 1994, as a result of a ruling by the judge in the case vacating the uninsured punitive damage award against the Corporation, the Corporation reversed the $2,250,000 provision which it had previously accrued. The judge also ruled that the jury's award of compensatory damages was excessive in several respects, and held that this award should be reduced to $9,600,000. The compensatory damages are fully covered by insurance. The Corporation's insurance carrier appealed the judge's ruling, seeking to further reduce the jury's award. The plaintiff cross-appealed the judge's ruling which vacated a jury award of $2,250,000 in punitive damages (which are not covered by insurance) against the Corporation. However, in such cross-appeal, the plaintiff sought to reinstate only $750,000 of such damages. On April 23, 1996, the Appellate Division affirmed the judge's decision, including the judge's decision to vacate the punitive damage award against the Corporation. 50 58 MARKET PRICE DATA AND DIVIDENDS The Common Stock is listed on the AMEX. The following table sets forth, for the quarters indicated, the high and low closing prices per share of the Common Stock on the AMEX based on published financial sources.
HIGH LOW ---- --- FISCAL 1994 First Quarter........................................... $12 3/8 10 3/4 Second Quarter.......................................... 15 1/8 11 1/8 Third Quarter........................................... 16 7/8 13 1/2 Fourth Quarter.......................................... 16 3/4 15 1/8 FISCAL 1995 First Quarter........................................... $ 20 15 1/8 Second Quarter.......................................... 18 3/8 15 7/8 Third Quarter........................................... 16 3/4 15 3/4 Fourth Quarter.......................................... 20 1/2 16 FISCAL 1996 First Quarter........................................... $ 24 20 Second Quarter.......................................... 34 1/4 23 5/8 Third Quarter........................................... 43 3/8 33 Fourth Quarter (through April 23, 1996)................. 43 3/8 41 1/2
On December 5, 1995, which was the last day on which shares of Common Stock were traded on the AMEX prior to the public announcement on December 7, 1995 of the negotiations between LAGS and the Corporation regarding the Proposed Transaction, the high, low and closing sale prices per share of Common Stock on the AMEX were $32 1/4, $31 3/4 and $31 3/4, respectively. No shares of Common Stock traded on the AMEX on December 6, 1995. On February 27, 1996, the last trading day prior to the public announcement of the execution of the Purchase Agreement, the closing price per share of Common Stock on the AMEX was $38 7/8. On April 23, 1996, the most recent practicable date prior to the printing of this Proxy Statement, the closing price per share of Common Stock on the AMEX was $42 1/4. The Corporation's Credit Agreement contains certain limitations on the payment of dividends (see Note 5 to the Consolidated Financial Statements for the fiscal year ended June 30, 1995) including limiting the payment of dividends (other than stock dividends) and the purchase, redemption or retirement by the Corporation of Common Stock to an annual amount not to exceed the lesser of (i) $1,200,000 or (ii) 50% of consolidated net income, as defined, for the most recently ended fiscal year. In addition, the Corporation is restricted from paying cash dividends or purchasing, redeeming or retiring Common Stock unless consolidated tangible net worth ("TNW"), as defined, is greater than $16,500,000 both immediately before and after giving effect to such dividend, purchase, redemption or retirement. At December 31, 1995 TNW was $24,670,000. During fiscal 1995, the Board of Directors approved the resumption of the payment of a regular semi-annual dividend and declared two such dividends of 25 cents per share of Common Stock. The dividend had been discontinued after July 1989, at which time the semi-annual rate was 20 cents per share. The Corporation anticipates that cash distributions from Hudson LLC will be sufficient to permit the Corporation to maintain its current dividend policy. Any future determination to pay dividends will be at the discretion of the Board of Directors and will be dependent upon the Corporation's and Hudson LLC's results of operations, financial condition and contractual restrictions (including, without limitation, those in the Credit Agreement) and other factors deemed relevant by the Board of Directors. Consequently, no assurances can be given that the Corporation's current dividend policy will be maintained. 51 59 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT FIVE PERCENT STOCKHOLDERS The following table sets forth, as of March 31, 1996 (except as otherwise indicated in notes (d) and (g) to the table), the stockholdings of the only stockholders of the Corporation owning of record or known by the Corporation to own beneficially more than 5% of the Corporation's Common Stock:
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP --------------------------------- SOLE VOTING SHARED VOTING AND AND PERCENTAGE OF NAME AND ADDRESS OF INVESTMENT INVESTMENT OUTSTANDING BENEFICIAL OWNER POWER POWER SHARES - ------------------------------------------------- ------------ -------------- -------------- Jay B. Langner................................... 120,084(a)(b) -- 10.3%(a) 111 Great Neck Road Great Neck, New York 11021 Richard D. Segal................................. 33,622 97,650(c) 11.4% 707 Westchester Avenue White Plains, New York 10604 GAMCO Investors, Inc./ Gabelli Funds, Inc./ Gabelli International Limited/ Gabelli International II Limited/ Gabelli Performance Partnership L.P./ Gabelli Asset Management Company International Advisory Services Ltd./ Mario J. Gabelli(d)............................ 544,900(e)(f) -- 47.3%(f) One Corporate Center Rye, New York 10580 Dimensional Fund Advisors Inc.(g)................ 69,400 -- 6.0% 1299 Ocean Avenue 11th Floor Santa Monica, California 90401 Revocable Living Trust of Milton H. Dresner...... 69,000 -- 6.0% 28777 Northwestern Highway Suite 100 Southfield, Michigan 48034
- --------------- (a) Includes 10,000 shares issuable upon the exercise of presently exercisable options. The percentage of outstanding shares has been calculated as though such options had been exercised. (b) In addition to shares of Common Stock, Mr. Langner owns $366,000 principal amount of Debentures, which are convertible into 11,175 shares of the Corporation's Common Stock, or 1.0% of the shares that would be outstanding assuming no Debentures held by any other party were converted. (c) Consists of (i) 37,000 shares owned by a partnership of which Mr. Segal is the managing partner, (ii) 36,650 shares owned by a partnership of which Mr. Segal is a co-trustee of certain of the partners thereof, (iii) 14,400 shares owned by members of Mr. Segal's family, as to which he is one of two attorneys in fact, and (iv) 9,600 shares owned by a trust of which he is a co-trustee. In addition, the partnership referred to in clause (ii) above owns $60,000 principal amount of Debentures, which are convertible into 1,832 shares of the Corporation's Common Stock, or .2% of the shares that would be outstanding assuming no Debentures held by any other party were converted. Mr. Segal disclaims beneficial ownership, for purposes of Section 13(d) and 13(g) of the Securities Exchange Act of 1934, of all shares discussed in this footnote. (d) The holdings listed are as set forth in the amendment to the Schedule 13D filed jointly by GAMCO Investors, Inc. ("GAMCO")/Gabelli Funds, Inc. ("GFI")/Gabelli International Limited ("GIL")/Gabelli International II Limited ("GIL-II")/Gabelli Performance Partnership L.P. 52 60 ("GPP")/Gabelli Asset Management Company International Advisory Services Ltd. ("GIASL")/Mario J. Gabelli dated March 12, 1996. (e) Voting power is shared as to 109,700 of these shares. Also, GAMCO does not have authority to vote 43,500 of the shares held by it. (f) In addition to shares of Common Stock, GAMCO, GIL, GIL-II, GPP and Mario J. Gabelli each hold Debentures as to which each has sole voting and investment power, and GFI holds Debentures as to which it has shared voting and sole investment power. Such Debentures are convertible into a total of 361,689 shares of the Corporation's Common Stock. If all such Debentures were to be converted, the listed entities and Mario J. Gabelli would hold a total of 906,589 shares of the Corporation's Common Stock, or 59.8% of the shares that would be outstanding assuming no Debentures held by any other party were converted. (g) The holdings listed are as of December 31, 1994 as set forth in the amendment to the Schedule 13G of Dimensional Fund Advisors Inc. ("Dimensional") dated January 31, 1995. Dimensional has advised the Corporation that it is a registered investment advisor and that all of such shares of the Corporation's Common Stock are held in portfolios of DFA Investment Dimensions Group Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, for all of which Dimensional serves as investment manager. Dimensional disclaims beneficial ownership of all such shares. DIRECTORS AND MANAGEMENT The following table sets forth information regarding the shares of the Corporation's Common Stock owned beneficially, directly or indirectly, as of March 31, 1996, by the directors of the Corporation, the Corporation's Chief Executive Officer and the four other most highly compensated executive officers of the Corporation, and all directors and executive officers as a group. Except as otherwise indicated in the notes to the table, the persons listed below have sole voting and investment power with respect to such shares.
PERCENTAGE OF SHARES OF OUTSTANDING NAME COMMON STOCK SHARES --------------------------------------------- ------------ -------------- Milton H. Dresner............................ 69,000(1) 6.0% Jay B. Langner............................... 120,084(2)(3) 10.3% Edward J. Rosenthal.......................... 7,200(4) .6% Hans H. Sammer............................... 1,000 .1% Richard D. Segal............................. 131,272(5) 11.4% Stanley S. Shuman............................ -- -- Paul R. Pollack.............................. 12,640(2) 1.1% Michael Rubin................................ 8,430(2) .7% Raymond J. Rieder............................ 7,400(2) .6% Fernando DiBenedetto......................... 3,010(2) .3% Directors and executive officers as a group (12 persons)............................... 365,236(2) 30.5%
- --------------- (1) These shares are held by a revocable living trust established by Mr. Dresner of which he is also the trustee. (2) Includes shares issuable upon the exercise of the stock options and stock appreciation rights ("SAR's") held by such individual(s), all of which are presently exercisable, as follows: Mr. Langner 10,000; Mr. Pollack 10,700; Mr. Rubin 8,200; Mr. Rieder 7,400; Mr. DiBenedetto 3,000; and all directors and executive officers as a group 44,500. The percentage of outstanding shares (i) for each individual has been calculated as though only such options and SAR's held by the individual had been exercised, and (ii) for the group has been calculated as though all such options and SAR's had been exercised. 53 61 (3) Mr. Langner also owns $366,000 principal amount of Debentures. See "Five Percent Stockholders." (4) Consists of 4,200 shares owned by a partnership of which Mr. Rosenthal is a partner and 3,000 shares owned by a corporation controlled by Mr. Rosenthal. Mr. Rosenthal has shared voting and investment power with respect to all such shares. (5) Includes 97,650 shares as to which Mr. Segal disclaims beneficial ownership. In addition, Mr. Segal is a co-trustee of certain of the partners of a partnership which owns $60,000 principal amount of Debentures as to which Mr. Segal also disclaims beneficial ownership. See "Five Percent Stockholders." INDEPENDENT AUDITORS The consolidated financial statements of the Corporation as of June 30, 1994 and June 30, 1995 and for each of the years in the three-year period ended June 30, 1995 included in this Proxy Statement were audited by KPMG Peat Marwick LLP, independent auditors. Representatives of KPMG Peat Marwick LLP are expected to be present at the Special Meeting, at which time they will be available to respond to appropriate questions from stockholders and will be given the opportunity to make a statement if they desire to do so. STOCKHOLDER PROPOSALS As described in the Corporation's proxy statement relating to its 1995 Annual Meeting of Stockholders, any proposal which a stockholder intends to present at the 1996 Annual Meeting of Stockholders is required to be received by the Corporation not later than June 8, 1996 in order to be considered for inclusion in the Corporation's proxy statement and form of proxy relating to the 1996 Annual Meeting of Stockholders. OTHER MATTERS No business other than to consider and vote upon the Proposed Transaction will be transacted at the Special Meeting, except for possible adjournments or postponements thereof. If any matters other than a vote on the Proposed Transaction should properly come before the Special Meeting, it is the intention of the persons named in the accompanying proxy to vote such proxies in accordance with their best judgment. By Order of the Board of Directors, NOAH E. ROCKOWITZ Vice President and Secretary April 25, 1996 PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY 54 62 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- YEAR ENDED JUNE 30, 1995 Consolidated Statements of Operations for the Years Ended June 30, 1995, 1994 and 1993................................................................................ F-2 Consolidated Balance Sheets at June 30, 1995 and 1994................................. F-3 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1995, 1994 and 1993....................................................................... F-4 Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, 1994 and 1993................................................................................ F-5 Notes to Consolidated Financial Statements............................................ F-6 Independent Auditors' Report.......................................................... F-18 Computation of Earnings (Loss) per Share Information.................................. F-19 SIX MONTHS ENDED DECEMBER 31, 1995 Consolidated Statements of Earnings for the Six Months Ended December 31, 1995 and 1994................................................................................ F-23 Consolidated Balance Sheets at December 31, 1995 and June 30, 1995.................... F-24 Consolidated Statement of Cash Flows for the Six Months Ended December 31, 1995 and 1994................................................................................ F-25 Notes to Consolidated Financial Statements............................................ F-26 Computation of Earnings per Share Information......................................... F-28
F-1 63 HUDSON GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, ---------------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues................................................... $135,453 $142,075 $132,186 -------- -------- -------- Costs and expenses: Operating................................................ 106,070 106,424 103,160 Depreciation and amortization............................ 7,528 7,042 7,202 Selling, general and administrative...................... 14,306 13,806 13,280 Interest................................................. 559 1,283 1,776 Accelerated amortization of leasehold rights............. -- -- 4,287 -------- -------- -------- Total costs and expenses......................... 128,463 128,555 129,705 -------- -------- -------- Earnings before equity in loss of joint venture, provision (benefit) for income taxes, extraordinary item and cumulative effect of change in the method of accounting for income taxes......................................... 6,990 13,520 2,481 Equity in loss of joint venture............................ (2,747) (1,801) (2,788) -------- -------- -------- Earnings (loss) before provision (benefit) for income taxes, extraordinary item and cumulative effect of change in the method of accounting for income taxes............. 4,243 11,719 (307) Provision (benefit) for income taxes....................... (350) 4,409 1,738 -------- -------- -------- Earnings (loss) before extraordinary item and cumulative effect of change in the method of accounting for income taxes.................................................... 4,593 7,310 (2,045) Extraordinary loss on repurchase of debt (net of applicable income taxes)............................................ -- -- (135) Cumulative effect of change in the method of accounting for income taxes............................................. -- 450 -- -------- -------- -------- Net earnings (loss)........................................ $ 4,593 $ 7,760 $ (2,180) ======== ======== ======== Earnings (loss) per share, primary: Earnings (loss) before extraordinary item and cumulative effect of change in the method of accounting for income taxes.......................................... $ 3.69 $ 5.86 $ (1.65) Extraordinary item....................................... -- -- (.11) Cumulative effect of change in the method of accounting for income taxes...................................... -- .36 -- -------- -------- -------- Net earnings (loss)...................................... $ 3.69 $ 6.22 $ (1.75) ======== ======== ======== Earnings (loss) per share, fully diluted: Earnings (loss) before extraordinary item and cumulative effect of change in the method of accounting for income taxes.......................................... $ 2.67 $ 3.96 $ (1.65) Extraordinary item....................................... -- -- (.11) Cumulative effect of change in the method of accounting for income taxes...................................... -- .21 -- -------- -------- -------- Net earnings (loss)...................................... $ 2.67 $ 4.17 $ (1.75) ======== ======== ========
See accompanying notes to consolidated financial statements. F-2 64 HUDSON GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
JUNE 30, ------------------- 1995 1994 ------- ------- (IN THOUSANDS) Current assets: Cash and cash equivalents.............................................. $12,613 $ 6,727 Accounts and notes receivable -- net................................... 14,457 14,628 Inventory.............................................................. 936 904 Prepaid expenses and other assets...................................... 876 1,090 Deferred income taxes.................................................. 4,602 2,946 ------- ------- Total current assets........................................... 33,484 26,295 Property, equipment and leasehold rights at cost, less accumulated depreciation and amortization.......................................... 33,864 31,047 Investment in Hawaii joint venture -- net................................ 16,065 15,621 Long-term receivables -- net............................................. 2,585 3,138 Other assets -- net...................................................... 770 862 Excess cost over fair value of net assets acquired....................... 800 926 ------- ------- $87,568 $77,889 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable....................................................... $12,305 $ 8,652 Income taxes payable................................................... 1,557 1,224 Accrued expenses and other liabilities................................. 21,233 18,079 ------- ------- Total current liabilities...................................... 35,095 27,955 ------- ------- Long-term debt, subordinated............................................. 29,000 29,000 Deferred income taxes.................................................... 1,857 1,711 ------- ------- Total noncurrent liabilities................................... 30,857 30,711 ------- ------- Stockholders' Equity: Serial preferred stock (authorized 100,000 shares of $1 par value) -- none outstanding.................................................... -- -- Common stock (authorized 7,000,000 shares of $1 par value) -- issued 1,253,802 and 1,250,802 shares...................................... 1,254 1,251 Paid in capital........................................................ 6,759 6,717 Retained earnings...................................................... 16,707 12,716 Equity adjustments from foreign currency translation................... (1,483) (1,461) Treasury stock, at cost, 96,600 shares................................. (1,621) -- ------- ------- Total stockholders' equity..................................... 21,616 19,223 ------- ------- $87,568 $77,889 ======= =======
See accompanying notes to consolidated financial statements. F-3 65 HUDSON GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
EQUITY ADJUSTMENTS COMMON STOCK ISSUED FROM FOREIGN --------------------- PAID IN RETAINED CURRENCY TREASURY STOCKHOLDERS' SHARES AMOUNTS CAPITAL EARNINGS TRANSLATION STOCK EQUITY --------- ------- ------- -------- ------------ -------- ------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Balance, June 30, 1992.......... 1,242,802 $1,243 $6,607 $ 7,136 $ 80 -- $15,066 Equity adjustment from foreign currency translation........ -- -- -- -- (745) -- (745) Net loss...................... -- -- -- (2,180 ) -- -- (2,180) --------- ------ ------ ------- ------- ------- ------- Balance, June 30, 1993.......... 1,242,802 1,243 6,607 4,956 (665) -- 12,141 Common stock issued in connection with exercise of stock options............... 8,000 8 110 -- -- -- 118 Equity adjustment from foreign currency translation........ -- -- -- -- (796) -- (796) Net earnings.................. -- -- -- 7,760 -- -- 7,760 --------- ------ ------ ------- ------- ------- ------- Balance, June 30, 1994.......... 1,250,802 1,251 6,717 12,716 (1,461) -- 19,223 Common stock issued in connection with exercise of stock options............... 3,000 3 42 -- -- -- 45 Dividends ($.50 per share).... -- -- -- (602 ) -- -- (602) Equity adjustment from foreign currency translation........ -- -- -- -- (22) -- (22) Purchase of treasury stock.... -- -- -- -- -- (1,621 ) (1,621) Net earnings.................. -- -- -- 4,593 -- -- 4,593 --------- ------ ------ ------- ------- ------- ------- Balance, June 30, 1995.......... 1,253,802 $1,254 $6,759 $16,707 $ (1,483) $(1,621 ) $21,616 ========= ====== ====== ======= ======= ======= =======
See accompanying notes to consolidated financial statements. F-4 66 HUDSON GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, ---------------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Cash flows from operating activities: Earnings (loss) before extraordinary item and cumulative effect of change in the method of accounting for income taxes.......................................... $ 4,593 $ 7,310 $ (2,045) Adjustments to reconcile earnings (loss) before extraordinary item and cumulative effect of change in the method of accounting for income taxes to net cash provided by operating activities: Depreciation and amortization......................... 7,528 7,042 7,202 Provision for losses on accounts receivable -- net.... 178 160 878 Accelerated amortization of leasehold rights.......... -- -- 4,287 Loss on repurchase of debt............................ -- -- (135) Increase (decrease) in deferred income taxes excluding cumulative effect of change in the method of accounting for income taxes......................... 149 178 (408) Equity in loss of joint venture....................... 2,747 1,801 2,788 Capitalization of interest cost on Hawaii joint venture advances.................................... (1,471) (947) (1,035) Gain on sale of equipment............................. (454) (133) (238) Change in other current assets and liabilities: Accounts and notes receivables...................... 5 (2,797) (479) Inventory -- net.................................... (31) (121) 216 Prepaid expenses and other assets................... 215 129 (316) Deferred income taxes............................... (1,656) (1,489) 82 Accounts payable.................................... 3,650 1,261 2,150 Income taxes payable................................ 333 575 186 Accrued expenses and other liabilities.............. 3,136 3,123 (2,594) Decrease (increase) in other assets................... 92 155 (12) Decrease in long-term receivables -- net.............. 553 23 115 Other -- net.......................................... 127 130 145 -------- -------- -------- Net cash provided by operating activities........ 19,694 16,400 10,787 -------- -------- -------- Cash flows from investing activities: Purchases of property, equipment and leasehold rights.... (10,806) (9,815) (5,786) Proceeds from sale of property and equipment............. 935 648 270 Advances to Hawaii joint venture -- net.................. (1,720) (870) (206) -------- -------- -------- Net cash used by investing activities............ (11,591) (10,037) (5,722) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock................... 45 118 -- Cash dividends paid...................................... (602) -- -- Purchase of treasury stock............................... (1,621) -- -- Proceeds from borrowings................................. -- 500 15,580 Principal repayments of borrowings....................... -- (6,333) (18,147) -------- -------- -------- Net cash used by financing activities............ (2,178) (5,715) (2,567) -------- -------- -------- Effect of exchange rate changes on cash.................... (39) (297) (66) -------- -------- -------- Net increase in cash and cash equivalents.................. 5,886 351 2,432 -------- -------- -------- Cash and cash equivalents at beginning of year............. 6,727 6,376 3,944 -------- -------- -------- Cash and cash equivalents at end of year................... $ 12,613 $ 6,727 $ 6,376 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 67 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation: The consolidated financial statements include the accounts of Hudson General Corporation and its subsidiaries (the Company). A land development venture in which the Company has a 50% interest (the Venture) is accounted for under the equity method of accounting (see Note 6). All material intercompany accounts and transactions have been eliminated in consolidation. Inventories: Inventories are carried at the lower of average cost or market. Depreciation and Amortization: Depreciation of property and equipment is provided on the straight-line method over their estimated useful lives. Leasehold rights are being amortized over the original and anticipated renewal terms of the underlying leases. Excess Cost over Fair Value of Net Assets Acquired: The excess cost over fair value of net assets acquired, net of accumulated amortization of $1,188,000 and $1,060,000 at June 30, 1995 and 1994, respectively, is amortized on a straight-line basis over periods not to exceed forty years. Income Taxes: Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes", which requires the use of the liability method of accounting for deferred income taxes (see Note 7). Foreign Currency Translation: The financial position and results of operations of the Company's Canadian operations are measured using local currency as the functional currency. Assets and liabilities are translated into U.S. dollars at year-end rates of exchange, and revenues and expenses are translated at the average rates of exchange for the year. Gains or losses resulting from translating foreign currency financial statements are accumulated as a separate component of stockholders' equity. Statements of Cash Flows: For purposes of the consolidated statements of cash flows, the Company considers all securities with an original maturity of three months or less at the date of acquisition to be cash equivalents. In fiscal 1995, 1994 and 1993 income taxes (net of refunds) of $362,000, $4,677,000 and $2,515,000, respectively, were paid. Interest of $2,030,000, $2,241,000 and $2,786,000 was paid in fiscal 1995, 1994 and 1993, respectively. Earnings (Loss) Per Share: Primary earnings (loss) per common and common equivalent share have been computed based upon the weighted average number of shares of common stock outstanding and dilutive common stock equivalents assumed outstanding during the respective years. The weighted average number of shares used in computing primary earnings (loss) per common and common equivalent share was 1,245,122, 1,246,889 and 1,242,802 in fiscal 1995, 1994 and 1993, respectively. Fully diluted earnings (loss) per common and common equivalent share have been computed based upon the assumption that the Company's convertible debentures are converted into common shares at the beginning of each period in which their effect is dilutive (such debentures were dilutive only as to fiscal 1995 and 1994 results) and that the related interest expense that would not have been incurred had conversion taken place, net of applicable taxes, is added back to net earnings (loss). The weighted average number of common and common equivalent shares used in computing fully diluted earnings (loss) per share in fiscal 1995 and 1994 was 2,145,175 and 2,134,789, respectively. Reclassifications: Certain reclassifications of fiscal 1994 and 1993 balances have been made to conform with the fiscal 1995 presentation. F-6 68 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION Accounts, notes and long-term receivables -- net at June 30, 1995 and 1994 consisted of the following:
1995 1994 ------- ------- (IN THOUSANDS) Rental and service fees receivable............................... $13,905 $13,997 Note receivable (a).............................................. 2,941 3,553 Equipment rental contracts and other notes receivable (less unearned finance income of $59,000 and $84,000)................ 196 216 ------- ------- 17,042 17,766 Less: current portion (net of allowance for doubtful accounts of $1,579,000 and $1,631,000)..................................... 14,457 14,628 ------- ------- Long-term portion................................................ $ 2,585 $ 3,138 ======= =======
(a) On January 6, 1994, the Company assigned its leases and ceased operations at Long Island MacArthur Airport in Islip, New York (LIMA) where the Company had provided ground handling and fueling services to commercial airlines and related fixed base operation services to general aviation aircraft. At the closing, the Company was paid $150,000 in cash and received a promissory note from the purchaser of its leases in the amount of $3,750,000, payable over seven years with interest at the rate of 7%. The outstanding balance of the note receivable at June 30, 1995 and 1994 was $2,941,000 and $3,553,000, respectively. The promissory note is secured by the assigned leases and other assets located at LIMA. This transaction did not have a material effect on the Company's consolidated financial position or results of operations. The Company provides various services at airports throughout the United States and Canada. The Company grants credit to customers based upon an analysis of its customers' financial position and then-existing conditions in the aviation industry. Six of the Company's customers had individual balances outstanding greater than 5%, and aggregating 48%, of accounts receivable-net at June 30, 1995. During the three fiscal years ended June 30, 1995 certain airline customers of the Company filed for protection under the bankruptcy laws or ceased operations. Bad debt expenses were $178,000, $160,000 and $878,000 for fiscal 1995, 1994 and 1993, respectively. Accrued expenses and other liabilities at June 30, 1995 and 1994 consisted of the following:
1995 1994 ------- ------- (IN THOUSANDS) Salaries and wages............................................... $ 5,353 $ 5,137 Interest......................................................... 956 956 Insurance........................................................ 6,022 3,607 Operating expenses payable....................................... 3,176 2,748 Customer advances and deposits................................... 1,739 614 Other............................................................ 3,987 5,017 ------- ------- $21,233 $18,079 ======= =======
Maintenance and repair expenses were $7,400,000, $6,540,000 and $5,930,000 for fiscal 1995, 1994 and 1993, respectively. Interest income included in revenues was $615,000, $374,000 and $337,000 for fiscal 1995, 1994 and 1993, respectively. F-7 69 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY, EQUIPMENT AND LEASEHOLD RIGHTS The number of years over which major classes of assets are being depreciated and amortized, and the costs and the related accumulated depreciation and amortization thereof at June 30, 1995 and 1994 are set forth below.
ESTIMATED USEFUL LIVES 1995 1994 ------------ -------- -------- (IN THOUSANDS) Operating equipment............................... 3 - 12 $ 70,232 $ 63,760 Leasehold rights.................................. 25 2,400 9,030 Buildings......................................... 14 - 20 1,458 1,454 Office furnishings and equipment.................. 3 - 10 3,193 3,184 Leasehold improvements............................ 2 - 28 5,829 7,356 -------- -------- 83,112 84,784 Accumulated depreciation and amortization......... (49,248) (53,737) -------- -------- $ 33,864 $ 31,047 ======== ========
Due to an early lease termination, at March 31, 1995, the Company accelerated the amortization of the remaining carrying value of its leasehold improvements made to a hangar facility at a domestic airport location in the amount of $744,000. Such amount is included in depreciation and amortization in the accompanying consolidated statements of operations. Leasehold rights at June 30, 1994 include $6,630,000 related to the Company's Canadian FBO's (see Note 4). 4. CANADIAN OPERATIONS The consolidated financial statements include: assets of $12,301,000, $14,895,000 and $15,672,000; net assets of $7,655,000, $8,866,000 and $8,145,000; and revenues of $34,376,000, $40,144,000 and $48,576,000 in fiscal 1995, 1994 and 1993, respectively; and earnings of $3,352,000 and $1,717,000 in fiscal 1995 and 1994, respectively, and a loss of $3,901,000 in fiscal 1993, related to the Company's Canadian operations. In fiscal 1995 and 1993, the Company's Canadian subsidiary redeemed for cash preferred shares held by the Company for $4,500,000 and $4,100,000, respectively. The Company did not renew the subleases (Subleases) covering its fixed base operation (FBO) locations at several Canadian airports beyond their October 31, 1994 expiration dates and as a result ceased operating the FBO's on such date. At June 30, 1993 the Company accelerated the amortization of the remaining carrying value of its sublease rights in the amount of $4,287,000. 5. LONG-TERM DEBT (a) Pursuant to a Revolving Credit Agreement with a group of banks dated November 25, 1992, as amended (the Credit Agreement), the Company may borrow funds (including outstanding letters of credit) up to a limit of $18,300,000 (the Limit) until March 31, 1997. At such time, and at the end of each subsequent quarter, the Limit will be reduced by one-sixteenth of the Limit that was in effect on December 31, 1996 until December 31, 2000, at which time the Credit Agreement terminates. The Limit may also be reduced by asset sales in excess of certain amounts and by any distributions to the Company from the Venture, net of advances made by the Company during the applicable period, in excess of $4,000,000 in any four consecutive quarters, or in excess of $2,000,000 in any fiscal year. There were no direct borrowings outstanding at June 30, 1995 and 1994. At June 30, 1995 and 1994 there were $3,655,000 and $4,451,000, F-8 70 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) respectively, of outstanding letters of credit. The Credit Agreement provides the Company 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 contains various restrictions, among which are provisions restricting the Company from paying cash dividends or purchasing, redeeming or retiring its stock unless consolidated tangible net worth (TNW), as defined, is greater than $16,500,000 both immediately before and after giving effect to such dividend, purchase, redemption or retirement. At June 30, 1995, the Company's TNW was $22,298,000. Furthermore, any such payments are limited to an annual amount not to exceed the lesser of (i) $1,200,000 or (ii) 50% of consolidated net income, as defined, for the most recently ended fiscal year. In addition, the Company may, until March 31, 1996, expend up to an additional $3,000,000 to repurchase shares of its common stock so long as no proceeds from borrowings under the Credit Agreement are utilized for such purpose. Pursuant to the Credit Agreement, the Company may advance up to $2,000,000 to the Venture in any fiscal year or up to $4,000,000 during the term of the Credit Agreement, net of any distributions received from the Venture by the Company during such periods. Since the inception of the Credit Agreement the Company has increased its net advances to the Venture by $2,805,000. Additionally, the Credit Agreement requires that the Company maintain certain minimum effective net worth requirements, as defined, which are subject to incremental annual increases and further stipulates that the Company not incur a consolidated net loss for any fiscal year. The Credit Agreement also requires that the Company meet certain other customary financial covenants and permits the Company, with certain limitations, to prepay or otherwise purchase subordinated debt. The Company has granted the banks a security interest in substantially all of its domestic equipment and accounts receivable and certain of its other assets. The Company's obligations under the Credit Agreement are guaranteed by the Company's domestic subsidiaries, and the guarantees of those subsidiaries with material operations are similarly secured. The Company also has an agreement with Canadian affiliates of the same group of banks to provide a credit facility for its Canadian subsidiary (the Canadian Agreement) in the amount of $5,000,000 (Cdn). Any borrowings made pursuant to the Canadian Agreement reduce the availability under the Credit Agreement. The $5,000,000 (Cdn) borrowing limit will be reduced commencing March 31, 1997 on the same basis as the Limit. The Canadian Agreement provides the Company with the option of selecting a rate of interest at either 1/2% above the prime rate or 1 5/8% above the cost of funds rate, as defined. In connection with the Canadian Agreement, the Company has guaranteed the obligations of its Canadian subsidiary and granted the banks a security interest in substantially all of its Canadian accounts receivable and certain of its other assets, including inter-company debt from its Canadian subsidiary. The guarantees of the Company's domestic subsidiaries referred to above extend to the Company's obligations as a guarantor under the Canadian Agreement. (b) In July 1986 the Company issued $30,000,000 of 7% convertible subordinated debentures due 2011 (the Debentures), which are convertible at any time prior to maturity, unless previously redeemed, into shares of the Company's common stock at a conversion price of $32.75 per share (see Note 8), subject to adjustment in certain events. Interest on the Debentures is payable semi-annually in January and July. The Debentures are redeemable at any time at the option of the Company, in whole or in part, at declining premiums (101.4% of the principal amount at June 30, 1995), subject to certain conditions. The Debentures are subject to a mandatory sinking fund, beginning in July 1997, in annual installments of $1,500,000, which will retire 70% of the Debentures prior to maturity. The Company previously repurchased $1,000,000 of the Debentures. Such repurchased amount may, at the Company's discretion, be used to meet sinking fund obligations. The Debentures are subordinate to all superior debt as defined in the indenture. At June 30, 1995 and 1994 there was $29,000,000 of the Debentures outstanding. F-9 71 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Maturities of long-term debt for the next five fiscal years are: none in 1996 and 1997; $500,000 in 1998 (assuming application of the $1,000,000 of repurchased Debentures to the sinking fund); $1,500,000 in 1999; $1,500,000 in 2000; and $25,500,000 thereafter. 6. INVESTMENT IN HAWAII JOINT VENTURE The Venture was formed to acquire, develop and sell approximately 4,000 contiguous acres of land in Hawaii (the Project). The Project is being developed in four successive phases. The first two phases, containing approximately 2,100 acres, have been developed and substantially sold. The third phase, containing approximately 550 acres, has also been developed and has 86 parcels available for sale. The fourth phase has yet to be developed, except to the extent common improvements (main roadway, water wells, etc.) have been completed. During fiscal 1992, the County of Hawaii passed an ordinance pursuant to which the Venture, after subdivision approvals are obtained, would be able to develop Phase IV into 1,490 units. Shortly after passage of the ordinance, a lawsuit against the County of Hawaii was filed by two local residents of Hawaii (Plaintiffs) seeking to invalidate such ordinance on various grounds including that the ordinance was adopted without following State of Hawaii procedure relating to the preparation of an Environmental Impact Statement. During fiscal 1993, the Judge in this action granted Plaintiffs' motion for partial summary judgment without indicating any effect on Phase IV zoning. The County and the Venture have appealed this ruling. The appeal was heard before the Hawaii Supreme Court in March 1994, and the Court has taken the matter under advisement. The Venture cannot, at this time, determine the impact of the Court's ruling on the timing of development of Phase IV or the expenditures related thereto. The Company'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. The Company's total advances (including accrued interest) at June 30, 1995 (including Additional Advances referred to in the next paragraph) and 1994 were $22,565,000 and $19,333,000, respectively. On October 13, 1994, Oxford First filed for reorganization under Chapter 11 of the Bankruptcy Code. Pursuant to an order of the Bankruptcy Court dated November 28, 1994, Oxford First (through its subsidiary, The Oxford Finance Companies, Inc.) was permitted to transfer funds to the Partner in an aggregate amount not to exceed $376,000 with respect to the period October 1, 1994 through March 31, 1995, which amounts were intended to enable the Partner to make its share of advances required by the Venture. The amount so authorized by the Bankruptcy Court was not sufficient to allow the Partner to make its full share of required advances. To date, the Company has opted to make additional advances (the Additional Advances) to cover the Partner's funding deficiency. The Company has filed a claim with the Bankruptcy Court in an amount equal to the Additional Advances. In addition, Oxford First has filed an amended reorganization plan with the Bankruptcy Court contemplating Oxford First's transfer of funds to the Partner in amounts set forth in the plan covering periods through December 31, 1997. The Company, at present, is unable to determine whether the Bankruptcy Court will confirm Oxford First's reorganization plan so as to enable Oxford First to transfer additional funds to the Partner or whether any transfers authorized by the Bankruptcy Court will be sufficient in order for the Partner to make its share of future advances to the Venture. Should the Partner be unable to make its share of future advances to the Venture, the Company has the option to make Additional Advances (subject to its right of reimbursement) necessary up to the limits set forth in the Credit Agreement (see Note 5). The Partner did not file for reorganization under Chapter 11 of the Bankruptcy Code. During fiscal 1995, the Company advanced $1,720,000 including $548,000 of Additional Advances to the Venture. During fiscal 1991, the Venture entered into agreements with banks pursuant to which $8,797,000 of the Venture's mortgage receivables were sold. An additional sale of $3,148,000 of mortgage receivables to a bank was completed during fiscal 1992. Since the Venture has accounted for these transactions as financing F-10 72 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) arrangements, the unpaid balances of the mortgage receivables in the amount of $2,826,000 and $4,759,000 are shown as "Notes payable" in the consolidated balance sheets of the Venture at June 30, 1995 and 1994, respectively. The agreements with the banks require that all payments received in connection with the underlying mortgage receivables be remitted to the banks until fiscal 1996 under the fiscal 1991 sales and until fiscal 1997 under the fiscal 1992 sale, when any unpaid balance due to the banks is to be repaid by the Venture. In addition, the Venture is required to make additional payments to the banks should the yield to the banks be less than 11 3/4% for the fiscal 1991 sales, or less than 2% over the prime rate (as defined) for the fiscal 1992 sale. The Venture remitted $97,000 and $129,000 during fiscal 1995 and 1994, respectively, for such purpose. The Company defers recognition of interest income on its advances to the Venture and capitalizes interest costs at its weighted average cost of funds on such advances. At June 30, 1995 and 1994, the amount of deferred interest income was $1,859,000 and $1,819,000, respectively. The Company will recognize deferred interest income as the balance of the notes payable to the banks is reduced and when additional distributions or payments related to the Venture, if any, are made to the Company. Interest costs capitalized by the Company for fiscal 1995 and 1994 were $1,471,000 and $947,000, respectively. The summary consolidated balance sheets for the Venture as of June 30, 1995 and 1994 are as follows:
1995 1994 ------- ------- (IN THOUSANDS) Cash and equivalents............................................. $ 89 $ 121 Land and development costs (including capitalized interest of $6,706,000 and $6,736,000...................................... 26,863 26,255 Mortgages, accounts and notes receivable......................... 7,732 10,197 Foreclosed real estate -- net.................................... 2,395 2,138 Other assets -- net.............................................. 2,461 2,640 ------- ------- $39,540 $41,351 ======= ======= Notes payable.................................................... $ 3,402 4,759 Partner advances and accrued interest payable.................... 44,048 38,664 Accounts payable and accrued expenses............................ 1,422 1,765 Partners' deficit................................................ (9,332) (3,837) ------- ------- $39,540 $41,351 ======= =======
Summary results of operations for the Venture are as follows for the fiscal years ended June 30, 1995, 1994 and 1993 as follows:
YEAR ENDED JUNE 30, ------------------------------- 1995 1994 1993 ------- ------- ------- (IN THOUSANDS) Net sales............................................. $ 504 $ 536 $ 398 ------- ------- ------- Cost of sales......................................... 191 163 182 Selling, general and administrative costs............. 2,852 2,797 4,336 Interest-net.......................................... 2,956 1,178 1,456 ------- ------- ------- Net loss.............................................. $(5,495) $(3,602) $(5,576) ======= ======= =======
As a partnership, the Venture is not subject to federal or state income taxes. The Company's portion of the Venture's results is shown as "Equity in loss of joint venture" in the accompanying consolidated statements of operations. F-11 73 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES Provision (benefit) for income taxes consisted of the following for the years ended June 30, 1995, 1994 and 1993:
1995 1994 1993 ------- ------ ------ (IN THOUSANDS) Federal: Current............................................... $ 847 $3,855 $1,807 Deferred.............................................. (137) (946) (719) Foreign: Current............................................... -- -- -- Deferred.............................................. (1,300) -- -- State: Current............................................... 313 1,791 645 Deferred.............................................. (73) (291) 5 ------- ------ ------ $ (350) $4,409 $1,738 ======= ====== ======
A reconciliation of the provision (benefit) for income taxes to the amount computed by applying the statutory federal income tax rate to earnings (loss) before provision (benefit) for income taxes, extraordinary item and cumulative effect of change in the method of accounting for income taxes for the years ended June 30, 1995, 1994, and 1993 follows:
1995 1994 1993 ------ ------ ------ (IN THOUSANDS) Computed "expected" tax provision (benefit).............. $1,442 $3,984 $ (104) Increase (decrease) in income taxes resulting from: Reevaluation of valuation allowance.................... (1,300) -- -- Utilization of foreign net operating loss carryforwards and depreciation differences........................ (804) (752) -- Foreign tax differential............................... 204 168 -- State income taxes, net of Federal income tax effect... 158 990 429 Losses for which no tax benefit was recorded........... -- -- 1,326 Other -- net........................................... (50) 19 87 ------ ------ ------ Provision (benefit) for income taxes..................... $ (350) $4,409 $1,738 ====== ====== ======
F-12 74 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Major components of deferred tax expense (income) are as follows for the years ended June 30, 1995, 1994 and 1993:
1995 1994 1993 ------- ------- ------ (IN THOUSANDS) Differences in tax and book depreciation............... $ 850 $ 284 $1,646 Interest capitalized in financial statements........... 28 73 32 Reserves for doubtful accounts, disputed claims, losses on assets and contracts, etc......................... 32 (712) (1,787) Retirement plans....................................... 59 (82) (132) Accrued insurance...................................... (472) (841) (328) State taxes............................................ 269 (125) 3 Difference in Hawaii joint venture's book and tax year-end............................................. (226) 175 (223) Reevaluation of valuation allowance.................... (1,300) -- -- Utilization of foreign net operating loss carryforwards and depreciation differences......................... (804) -- -- Other.................................................. 54 (9) 75 ------- ------- ----- Total.................................................. $(1,510) $(1,237) $ (714) ======= ======= =====
Deferred tax assets (liabilities) are comprised of the following as of June 30, 1995 and 1994:
1995 1994 ------- ------- (IN THOUSANDS) Deferred tax assets: Reserves for doubtful accounts, claims, etc.................... $ 860 $ 892 Retirement plans............................................... 368 427 Property, equipment and leasehold rights, principally depreciation -- foreign..................................... 2,235 2,929 Accrued insurance.............................................. 2,099 1,627 ------- ------- Current deferred tax assets.................................... 5,562 5,875 ------- ------- State income taxes............................................. 618 887 Difference in Hawaii joint venture's book and tax year-end..... 545 319 Other.......................................................... -- 53 ------- ------- Noncurrent deferred tax assets................................. 1,163 1,259 ------- ------- 6,725 7,134 Valuation allowance.............................................. (960) (3,064) ------- ------- Net deferred tax assets........................................ 5,765 4,070 ------- ------- Deferred tax liabilities: Property, equipment and leasehold rights, principally depreciation -- domestic.................................... (2,463) (2,306) Interest capitalized on financial statements................... (557) (529) ------- ------- Noncurrent deferred tax liabilities............................ (3,020) (2,835) ------- ------- Deferred tax assets -- net....................................... $ 2,745 $ 1,235 ======= =======
Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, and has reported the cumulative effect of the change in the method of accounting for income taxes in the consolidated statement of operations for fiscal 1994, without restating prior period financial statements. F-13 75 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Statement 109 requires a change from the deferred method under APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Pursuant to the deferred method under APB Opinion 11, which was applied by the Company in fiscal 1993 and prior years, deferred income taxes were recognized for income and expense items that were reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year the timing difference arose. Under the deferred method, deferred taxes are not adjusted for subsequent changes in tax rates. Under Statement 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 Company 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 1995 and 1994 was a decrease of $2,104,000 and $1,211,000, respectively. The decrease reflects: (i) the tax effect resulting from utilization of a portion of the Company's Canadian depreciation differences to offset its provision for foreign income taxes in the amount of $804,000 and $1,211,000 for fiscal 1995 and 1994, respectively; and (ii) the recognition of $1,300,000 of deferred tax assets in fiscal 1995 resulting from a review of prior Canadian operating results and anticipation of future Canadian earnings, which together with cessation of operations of the Company's Canadian FBO's (See Note 4), made the realization of additional Canadian depreciation differences more likely than not. 8. COMMON STOCK (a) The Company'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 Company's common stock on the date of grant. Activity in Options during fiscal 1995 and 1994 was as follows: Outstanding June 30, 1993................................................... 79,600 Exercised ($14.79 per share)................................................ (8,000) ------ Outstanding June 30, 1994................................................... 71,600 Exercised ($14.79 per share)................................................ (3,000) Canceled ($14.79 per share)................................................. (6,500) Canceled ($19.07 per share)................................................. (600) ------ Outstanding June 30, 1995................................................... 61,500 ======
Limited Rights were also granted in conjunction with Options granted in May 1990 and June 1991 of which 55,000 ($14.79 per share) and 6,500 ($19.07 per share) were outstanding at June 30, 1995. At June 30, 1995 the aggregate Option price and quoted market value of Company stock subject to outstanding Options F-14 76 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) were $937,000 and $1,253,000, respectively. All outstanding Options and Rights were granted with a term of ten years and are currently exercisable. The Committee was also authorized to grant additional separate stock appreciation rights (Independent Rights), which are not connected with any Option. There were 18,000 Independent Rights outstanding ($17.32 per share) at June 30, 1995 and 1994. At June 30, 1995 the aggregate Independent Right price and quoted market value of outstanding Independent Rights were $312,000 and $367,000, respectively. (b) The Company'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 Company'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 1995 and 1994 was as follows: Outstanding June 30, 1994 and 1993.......................................... 51,900 Canceled ($17.00 per share)................................................. (2,000) Canceled ($19.88 per share)................................................. (1,100) ------ Outstanding June 30, 1995................................................... 48,800 ======
Rights and Limited Rights were also granted in conjunction with ISO's granted in May 1990 of which 36,000 ($17.00 per share) were outstanding at June 30, 1995. Limited Rights were also granted in conjunction with ISO's granted in June 1991 of which 12,800 ($19.88 per share) were outstanding at June 30, 1995. At June 30, 1995 the aggregate ISO (and Right) price and quoted market value of Company stock subject to outstanding ISO's (and the Rights) were $866,000 and $994,000, respectively. All outstanding ISO's and Rights were granted with a term of ten years and are currently exercisable. (c) In 1985, the Company sold $15,000,000 of subordinated notes due 1995 (the Notes). In connection with the sale of the Notes, the Company issued warrants entitling the holders to purchase an aggregate of 65,000 shares of common stock. During fiscal 1992, 1,300 warrants were surrendered in connection with the Company's repurchase of a portion of the Notes. The balance of the Notes was prepaid in fiscal 1993 and the remaining warrants expired on June 27, 1995. (d) Common Stock Reserved: Common shares were reserved for issuance at June 30, 1995 as follows: Conversion of convertible debentures...................................... 885,496 Exercise of incentive stock options -- 1981 Plan.......................... 48,800 Exercise of non-qualified stock options -- 1981 Plan...................... 79,500 Exercise of stock appreciation rights..................................... 161,004 --------- Total........................................................... 1,174,800 =========
(e) In April 1995, the Board of Directors approved the repurchase of up to 150,000 shares of the Company's common stock from time to time in either open market or privately negotiated transactions. As of F-15 77 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1995 the Company had repurchased 96,600 shares in the open market for an aggregate purchase price of $1,621,000 pursuant to this authorization. 9. RETIREMENT PLANS The Company maintains a 401(k) Profit Sharing Plan (the Plan) covering substantially all of its domestic employees not subject to collective bargaining agreements. Under the Plan the Company contributes a discretionary contribution and makes a matching contribution equal to 25% of the Compensation (as defined in the Plan) that each participant elects to defer (up to 5% of the participant's Compensation) and contribute to the Plan. During fiscal 1995 and 1994, the Company contributed $845,000 and $635,000, respectively, to the Plan representing employer matching and discretionary contributions. During fiscal 1995, the Company established a Group Registered Retirement Savings Plan (RRSP) covering substantially all of its Canadian employees not subject to collective bargaining agreements. Under the RRSP the Company contributes a discretionary contribution. During fiscal 1995, the Company contributed $61,000 to the RRSP. Net expense related to the Company's retirement plans was $701,000, $844,000 and $745,000 for fiscal 1995, 1994 and 1993, respectively. 10. COMMITMENTS AND CONTINGENCIES (a) Leases Minimum rental payments for future fiscal years under non-cancelable operating leases (after deducting $493,000 to be received subsequent to June 30, 1995 under non-cancelable subleases) are: $3,992,000 in 1996; $3,608,000 in 1997; $3,310,000 in 1998; $2,991,000 in 1999; $2,514,000 in 2000; and $8,154,000 thereafter. Total rental expense incurred amounted to $6,592,000, $7,237,000 and $7,179,000 for fiscal 1995, 1994 and 1993 (excluding sublease income amounting to $1,337,000, $3,411,000 and $4,156,000 in fiscal 1995, 1994 and 1993), respectively. (b) Capital Commitments At June 30, 1995 the Company had commitments to fund $5,084,000 for operating equipment and facility improvements. (c) Litigation In 1988, Texaco Canada Inc. (Texaco) (now known as McColl-Frontenac Inc.) instituted a suit in the Supreme Court of Ontario, Canada against the Company and Petro-Canada Inc., the corporation which supplied aviation fuel for the Company's Canadian fixed base operations. The suit's allegations, as amended in 1992, are that the defendants interfered with contractual and fiduciary relations and induced the breach of a fuel supply agreement between Texaco and Innotech Aviation Limited (Innotech) in connection with the purchase by the Company from Innotech in 1984 of certain assets of Innotech's airport ground services business. The suit seeks compensatory and punitive damages totaling $110,000,000 (Canadian) (approximately $80,000,000 (U.S.)) plus all profits earned by the defendants subsequent to the alleged breach. A trial date has been set for May 1996. Innotech (which due to a name change is now called Aerospace Realties (1986) Limited) has agreed to defend and indemnify the Company against claims of whatever nature asserted in connection with, arising out of or resulting from the fuel supply agreement with Texaco, and is defending the Company in the suit by Texaco. F-16 78 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company management believes, and counsel for the Company has advised based on available facts, that the Company will successfully defend this action. 11. RELATED PARTY TRANSACTION In February 1988, the Company engaged an investment banking firm of which a director of the Company is affiliated to render certain investment banking services and paid a retainer fee relating to such services in the amount of $125,000. During fiscal 1993, the Company paid such firm an additional $50,000 for additional investment banking services. 12. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth unaudited quarterly financial information for fiscal 1995 and 1994:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 Revenues............................................ $31,348 $33,177 $37,953 $32,975 Gross profit........................................ 4,446 5,296 7,008 5,397 Net earnings........................................ 235 633 3,474(a) 251 Earnings per share, primary: Net earnings...................................... $ .19 $ .50 $ 2.76 $ .21 ======= ======= ======= ======= Earnings per share, fully diluted: Net earnings...................................... $ .19 $ .43 $ 1.75 $ .21 ======= ======= ======= ======= 1994 Revenues............................................ $28,818 $30,715 $50,910 $31,632 Gross profit........................................ 4,601 4,800 14,537(b) 4,974(b) Net earnings........................................ 1,136(c) 393 4,242(b) 1,989(b) Earnings per share, primary: Net earnings...................................... $ .91(c) $ .32 $ 3.40 $ 1.59 ======= ======= ======= ======= Earnings per share, fully diluted: Net earnings...................................... $ .67(c) $ .32 $ 2.12 $ 1.06 ======= ======= ======= =======
- --------------- (a) Includes the recognition of $1,300 of deferred tax assets (See note 7) (b) In March 1994 a jury in Manhattan, New York rendered a verdict against the Company in a civil lawsuit for personal injuries and awarded the plaintiff a total of $21,436 in damages, of which $19,186 is covered by insurance. At March 31, 1994, the Company accrued a provision for the entire uninsured punitive damage amount of $2,250 in the Company's consolidated statements of operations. In June 1994, as a result of a ruling by the judge in the case vacating the uninsured punitive damage award against the Company, the Company reversed the $2,250 provision which it had previously accrued. (c) Earnings before cumulative effect of change in the method of accounting for income taxes were $686 in the first quarter of fiscal 1994. Earnings per share, primary and fully diluted, before cumulative effect of change in the method of accounting for income taxes were $.55 and $.46, respectively, in the first quarter of fiscal 1994. F-17 79 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, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended June 30, 1995. These consolidated financial statements are the responsibility of the Company'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, 1995 and 1994 and the results of their operations and their cash flows for each of the years in the three year period ended June 30, 1995, in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," on a prospective basis in fiscal 1994. KPMG PEAT MARWICK LLP Jericho, New York August 16, 1995 F-18 80 HUDSON GENERAL CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE INFORMATION PRIMARY -- EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN THE METHOD OF ACCOUNTING FOR INCOME TAXES
YEAR ENDED JUNE 30, ----------------------------- 1995 1994 1993 ------ ------ ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings (loss) before extraordinary item and cumulative effect of change in the method of accounting for income taxes for computing earnings (loss) per share -- primary................ $4,593 $7,310 $(2,045) ====== ====== ======= Weighted average number of common and common equivalent shares outstanding................................................... 1,245 1,247 1,243 ====== ====== ======= Earnings (loss) before extraordinary item and cumulative effect of change in the method of accounting for income taxes per common and common equivalent share -- primary................. $ 3.69 $ 5.86 $ (1.65) ====== ====== =======
F-19 81 HUDSON GENERAL CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE INFORMATION PRIMARY -- NET EARNINGS (LOSS)
YEAR ENDED JUNE 30, ----------------------------- 1995 1994 1993 ------ ------ ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings (loss) for computing earnings (loss) per share -- primary.............................................. $4,593 $7,760 $(2,180) ====== ====== ======= Weighted average number of common and common equivalent shares outstanding................................................... 1,245 1,247 1,243 ====== ====== ======= Net earnings (loss) per common and common equivalent share -- primary.............................................. $ 3.69 $ 6.22 $ (1.75) ====== ====== =======
F-20 82 HUDSON GENERAL CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE INFORMATION FULLY DILUTED -- EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN THE METHOD OF ACCOUNTING FOR INCOME TAXES
YEAR ENDED JUNE 30, ----------------------------- 1995 1994 1993 ------ ------ ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings (loss) before extraordinary item and cumulative effect of change in the method of accounting for income taxes for computing earnings (loss) per share -- primary................ $4,593 $7,310 $(2,045) Reduction of interest expense less applicable income taxes assuming conversion of 7% convertible subordinated debentures due 2011...................................................... 1,137 1,137 --* ------ ------ ------- Earnings (loss) before extraordinary item and cumulative effect of change in the method of accounting for income taxes for computing earnings (loss) per share -- fully diluted.......... $5,730 $8,447 $(2,045) ====== ====== ======= Weighted average number of common and common equivalent shares outstanding................................................... 1,260 1,249 1,243 Addition from assumed conversion as of the beginning of each period of the 7% convertible subordinated debentures outstanding at the end of each period......................... 885 886 --* ------ ------ ------- Weighted average number of common and common equivalent shares outstanding on a fully diluted basis.......................... 2,145 2,135 1,243 ------ ------ ------- Earnings (loss) before extraordinary item and cumulative effect of change in the method of accounting for income taxes per common and common equivalent share -- fully diluted........... $ 2.67 $ 3.96 $ (1.65) ====== ====== =======
- --------------- * Assumed conversion is antidilutive, and accordingly, the debentures are excluded from the computation. F-21 83 HUDSON GENERAL CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE INFORMATION FULLY DILUTED -- NET EARNINGS (LOSS)
YEAR ENDED JUNE 30, ----------------------------- 1995 1994 1993 ------ ------ ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings (loss) for computing earnings (loss) per share -- primary.............................................. $4,593 $7,760 $(2,180) Reduction of interest expense less applicable income taxes assuming conversion of 7% convertible subordinated debentures due 2011...................................................... 1,137 1,137 --* ------ ------ ------- Net earnings (loss) for computing earnings (loss) per share -- fully diluted........................................ $5,730 $8,897 $(2,180) ====== ====== ======= Weighted average number of common and common equivalent shares outstanding................................................... 1,260 1,249 1,243 Addition from assumed conversion as of the beginning of each period of the 7% convertible subordinated debentures outstanding at the end of each period......................... 885 886 --* ------ ------ ------- Weighted average number of common and common equivalent shares outstanding on a fully diluted basis.......................... 2,145 2,135 1,243 ====== ====== ======= Net earnings (loss) per common and common equivalent share -- fully diluted........................................ $ 2.67 $ 4.17 $ (1.75) ====== ====== =======
- --------------- * Assumed conversion is antidilutive, and accordingly, the debentures are excluded from the computation. F-22 84 HUDSON GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
SIX MONTHS ENDED DECEMBER 31, --------------------------- 1995 1994 ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues.......................................................... $75,245,000 $64,525,000 ----------- ----------- Costs and expenses: Operating....................................................... 57,667,000 51,628,000 Depreciation and amortization................................... 3,580,000 3,296,000 Selling, general & administrative............................... 7,612,000 6,916,000 Interest........................................................ 217,000 351,000 ----------- ----------- Total costs and expenses................................ 69,076,000 62,191,000 ----------- ----------- Earnings before equity in loss of joint venture and provision for income taxes.................................................... 6,169,000 2,334,000 Equity in loss of joint venture................................... (1,391,000) (1,145,000) ----------- ----------- Earnings before provision for income taxes........................ 4,778,000 1,189,000 Provision for income taxes........................................ 1,903,000 321,000 ----------- ----------- Net earnings...................................................... $ 2,875,000 $ 868,000 =========== =========== Earnings per share, primary....................................... $ 2.46 $ .69 =========== =========== Earnings per share, fully diluted................................. $ 1.67 $ .67 =========== =========== Cash dividends per common share................................... $ .25 $ .25 =========== =========== Weighted average common and common equivalent shares outstanding: Primary......................................................... 1,169,000 1,262,000 =========== =========== Fully diluted................................................... 2,065,000 2,151,000 =========== ===========
See accompanying notes to consolidated financial statements. F-23 85 HUDSON GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 DECEMBER 31, ----------- 1995 ------------ (UNAUDITED) Assets Current assets: Cash and cash equivalents....................................... $ 10,541,000 $12,613,000 Accounts and notes receivable -- net............................ 24,430,000 14,457,000 Inventory....................................................... 1,224,000 936,000 Prepaid expenses and other assets............................... 1,493,000 876,000 Deferred income taxes........................................... 4,602,000 4,602,000 ----------- ----------- Total current assets.................................... 42,290,000 33,484,000 Property, equipment and leasehold rights at cost, less accumulated depreciation and amortization................................... 36,691,000 33,864,000 Investment in Hawaii joint venture -- net......................... 16,316,000 16,065,000 Long-term receivables -- net...................................... 2,307,000 2,585,000 Other assets -- net............................................... 743,000 770,000 Excess cost over fair value of net assets acquired................ 783,000 800,000 ----------- ----------- $ 99,130,000 $87,568,000 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable................................................ $ 16,937,000 $12,305,000 Income taxes payable............................................ 1,745,000 1,557,000 Accrued expenses and other liabilities.......................... 24,665,000 21,233,000 ----------- ----------- Total current liabilities............................... 43,347,000 35,095,000 ----------- ----------- Long-term debt, subordinated...................................... 29,000,000 29,000,000 Deferred income taxes............................................. 2,752,000 1,857,000 ----------- ----------- Total noncurrent liabilities............................ 31,752,000 30,857,000 ----------- ----------- 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 and outstanding 1,263,202 and 1,253,802 shares....................................................... 1,263,000 1,254,000 Paid in capital................................................. 6,905,000 6,759,000 Retained earnings............................................... 19,295,000 16,707,000 Equity adjustments from foreign currency translation............ (1,422,000) (1,483,000) Treasury stock, at cost, 114,300 and 96,600 shares.............. (2,010,000) (1,621,000) ----------- ----------- Total stockholders' equity.............................. 24,031,000 21,616,000 ----------- ----------- $ 99,130,000 $87,568,000 =========== ===========
See accompanying notes to consolidated financial statements. F-24 86 HUDSON GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, --------------------------- 1995 1994 ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net earnings.................................................... $ 2,875,000 $ 868,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................................ 3,580,000 3,296,000 Increase (decrease) in deferred income tax liabilities....... 908,000 (70,000) Equity in loss of joint venture.............................. 1,391,000 1,145,000 Capitalization of interest costs on Hawaii joint venture advances.................................................... (806,000) (672,000) Gain on sale or disposal of equipment........................ (36,000) (192,000) Change in other current assets and liabilities: Accounts and notes receivables -- net...................... (9,954,000) (3,060,000) Inventory -- net........................................... (285,000) (78,000) Prepaid expenses and other assets.......................... (615,000) 249,000 Accounts payable........................................... 4,623,000 988,000 Income taxes payable....................................... (188,000) (260,000) Accrued expenses and other liabilities..................... 3,102,000 441,000 Decrease in other assets..................................... 27,000 65,000 Decrease in long-term receivables............................ 278,000 277,000 Other -- net................................................. 20,000 65,000 ----------- ----------- Net cash provided by operating activities............... 5,296,000 3,062,000 ----------- ----------- Cash flows from investing activities: Purchases of property, equipment and leasehold rights........... (6,425,000) (5,535,000) Proceeds from sale of property and equipment.................... 121,000 420,000 Advances to Hawaii joint venture................................ (836,000) (429,000) ----------- ----------- Net cash used by investing activities................... (7,140,000) (5,544,000) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock.......................... 155,000 30,000 Purchase of treasury stock...................................... (389,000) -- ----------- ----------- Net cash provided (used) by financing activities........ (234,000) 30,000 ----------- ----------- Effect of exchange rate changes on cash........................... 6,000 (73,000) ----------- ----------- Net decrease in cash and cash equivalents......................... (2,072,000) (2,525,000) Cash and cash equivalents at beginning of period.................. 12,613,000 6,727,000 ----------- ----------- Cash and cash equivalents at end of period........................ $10,541,000 $ 4,202,000 =========== ===========
See accompanying notes to consolidated financial statements. F-25 87 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Company) as of December 31, 1995 and June 30, 1995, and the results of operations and cash flows for the six months ended December 31, 1995 and 1994. In the opinion of management, all necessary adjustments that were made are of a normal recurring nature. The accounting policies followed by the Company are stated in Note 1 to the Company's consolidated financial statements for the Company's fiscal year ended June 30, 1995. 2. The Company is a partner in a joint venture (the Venture) which was formed to acquire, develop and sell approximately 4,000 contiguous acres of land in Hawaii. The Company accounts for its investment in the Venture under the equity method of accounting. The summary balance sheets for the Venture are as follows:
JUNE 30 1995 DECEMBER 31 ----------- 1995 ------------ (UNAUDITED) Cash and equivalents..................................... $ 594,000 $ 89,000 Land and development costs............................... 26,870,000 26,863,000 Mortgages, accounts and notes receivable................. 6,221,000 7,732,000 Foreclosed real estate -- net............................ 2,285,000 2,395,000 Other assets -- net...................................... 2,363,000 2,461,000 ------------ ----------- $ 38,333,000 $39,540,000 ============ =========== Notes payable............................................ $ 2,298,000 $ 3,402,000 Partner advances and accrued interest payable............ 47,187,000 44,048,000 Accounts payable and accrued expenses.................... 963,000 1,422,000 Partners' deficit........................................ (12,115,000) (9,332,000) ------------ ----------- $ 38,333,000 $39,540,000 ============ ===========
Summary results of operations for the Venture are as follows:
SIX MONTHS ENDED DECEMBER 31 --------------------------- 1995 1994 ----------- ----------- (UNAUDITED) (UNAUDITED) Sales (net of discounts).................................. $ 256,000 $ 159,000 ----------- ----------- Cost of sales............................................. 105,000 -- Selling, general and administrative....................... 1,200,000 1,128,000 Interest -- net........................................... 1,734,000 1,321,000 ----------- ----------- Total costs............................................... 3,039,000 2,449,000 ----------- ----------- Loss...................................................... $(2,783,000) $(2,290,000) =========== ===========
The Company's 50% share of the Venture's results were losses of $1,391,000 and $1,145,000 for the six months ended December 31, 1995 and 1994, respectively, and have been included in "Equity in loss of joint venture" in the accompanying consolidated statements of earnings. The Company'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. The Company's total advances (including accrued interest) at December 31, 1995 (including Additional Advances referred to in the next paragraph) were $24,301,000. F-26 88 HUDSON GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On October 13, 1994, Oxford First filed for reorganization under Chapter 11 of the Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, Oxford First (through its subsidiary, The Oxford Finance Companies, Inc.) was permitted to transfer certain amounts to the Partner. The amounts so authorized were not sufficient to allow the Partner to make its full share of required advances. The Company opted to make additional advances (the Additional Advances) to cover the Partner's funding deficiency. During November 1995, the Partner resumed making advances, and in January 1996, the Partner repaid to the Company $702,000, which was the entire amount of Additional Advances. In addition, pursuant to an amended reorganization plan which was approved by the Bankruptcy Court on September 7, 1995, Oxford First is permitted to transfer funds to the Partner in an aggregate amount not to exceed $750,000 in each of the calendar years 1996 and 1997. The Company, at present, is unable to determine whether such permitted transfers will be sufficient in order for the Partner to make its share of future advances to the Venture. Should the Partner be unable to make its share of future advances to the Venture, the Company has the option to make further advances on behalf of the Partner (subject to its rights of reimbursement) necessary up to the limits set forth in its Revolving Credit Agreement (the Credit Agreement) with a group of banks (see Note 4). The Partner did not file for reorganization under Chapter 11 of the Bankruptcy Code. During the six months ended December 31, 1995, the Company advanced $836,000 to the Venture, including Additional Advances that were repaid in January 1996. 3. Accrued expenses and other liabilities consisted of the following:
JUNE 30 1995 DECEMBER 31 ----------- 1995 ----------- (UNAUDITED) Salaries and wages........................................ $ 4,649,000 $ 5,353,000 Interest.................................................. 965,000 956,000 Insurance................................................. 6,508,000 6,022,000 Operating expenses payable................................ 4,085,000 3,176,000 Customer advances and deposits............................ 3,419,000 1,739,000 Other..................................................... 5,039,000 3,987,000 ----------- ----------- $24,665,000 $21,233,000 =========== ===========
4. The Credit Agreement contains various restrictions, among which are provisions restricting the Company from paying cash dividends or purchasing, redeeming or retiring its stock unless consolidated tangible net worth (TNW), as defined, is greater than $16,500,000 both immediately before and after giving effect to such dividend, purchase, redemption or retirement. At December 31, 1995, the Company's TNW was $24,670,000. Furthermore, any such payments are limited to an annual amount not to exceed the lesser of (i) $1,200,000 or (ii) 50% of consolidated net income, as defined, for the most recently ended fiscal year. In addition, the Company may, until March 31, 1996, expend up to an additional $3,000,000 to repurchase shares of its common stock so long as no proceeds from borrowings under the Credit Agreement are utilized for such purpose. During fiscal 1995, the Board of Directors approved the repurchase of up to 150,000 shares of the Company's common stock from time to time in either open market or privately negotiated transactions. As of December 31, 1995, the Company had repurchased 114,300 shares of its common stock in the open market for an aggregate purchase price of $2,010,000 pursuant to this authorization. Pursuant to the Credit Agreement, the Company may advance up to $2,000,000 to the Venture in any fiscal year or up to $4,000,000 during the term of the Credit Agreement, net of any distributions received from the Venture by the Company during such periods. From the inception of the Credit Agreement through December 31, 1995 the Company had increased its net advances to the Venture by $3,642,000. As a result of the $702,000 repayment made by the Partner referred to in Note 2 above, the net advances by the Company as of January 31, 1996 were $2,940,000. F-27 89 HUDSON GENERAL CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE INFORMATION PRIMARY -- NET EARNINGS
SIX MONTHS ENDED DECEMBER 31, ----------------- 1995 1994 ------ ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings for computing earnings per share -- primary................... $2,875 $ 868 ====== ====== Weighted average number of common and common equivalent shares outstanding.............................................................. 1,169 1,262 ====== ====== Net earnings per common and common equivalent share -- primary............. $ 2.46 $ .69 ====== ======
F-28 90 HUDSON GENERAL CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE INFORMATION FULLY DILUTED -- NET EARNINGS
SIX MONTHS ENDED DECEMBER 31, ----------------- 1995 1994 ------ ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings for computing earnings per share -- primary................... $2,875 $ 868 Reduction of interest expense less applicable income taxes assuming conversion of 7% convertible subordinated debentures due 2011............ 573 573 ------ ------ Net earnings for computing earnings per share -- fully diluted............. $3,448 $1,441 ====== ====== Weighted average number of common and common equivalent shares outstanding.............................................................. 1,180 1,266 Addition from assumed conversion as of the beginning of each period of the 7% convertible subordinated debentures outstanding at the end of each period................................................................... 885 885 ------ ------ Weighted average number of common and common equivalent shares outstanding on a fully diluted basis................................................. 2,065 2,151 ====== ====== Net earnings per common and common equivalent share -- fully diluted....... $ 1.67 $ .67 ====== ======
F-29 91 ANNEX A UNIT PURCHASE AND OPTION AGREEMENT DATED FEBRUARY 27, 1996 BETWEEN LUFTHANSA AIRPORT AND GROUND SERVICES GMBH AND HUDSON GENERAL CORPORATION RELATING TO UNITS OF HUDSON GENERAL LLC 92 TABLE OF CONTENTS
PAGE ---- ARTICLE I PURCHASE OF UNITS 1.1 Purchase of Purchased Units.................................................... A-1 1.2 Purchase Price................................................................. A-1 1.3 Payment and Adjustment of Purchase Price....................................... A-1 ARTICLE II THE CLOSING 2.1 Time and Place of Closing...................................................... A-4 2.2 Hudson's Actions at Closing.................................................... A-4 2.3 Buyer's Actions at Closing..................................................... A-4
ARTICLE III PURCHASE OPTION 3.1 The Option..................................................................... A-4 3.2 Manner of Exercise............................................................. A-4 3.3 Exercise Price................................................................. A-5 3.4 Effect of Option Exercise...................................................... A-5 3.5 Transfer of Sale Obligation to the Company..................................... A-5 3.6 Closings of Option Sales....................................................... A-6 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Hudson's Representations and Warranties........................................ A-6 4.2 Buyer's Representations and Warranties......................................... A-10 4.3 Changes Prior to Closing Date.................................................. A-11 4.4 Remedy for Breaches of Representations and Warranties.......................... A-11 ARTICLE V ACTIONS PRIOR TO THE CLOSING 5.1 Activities Until Closing Date.................................................. A-11 5.2 Formation of Company and Transfer of Assets.................................... A-12 5.3 Hudson Stockholders Meeting.................................................... A-12 5.4 HSR Act Filings................................................................ A-13 5.5 Hudson's Efforts to Fulfill Conditions......................................... A-13 5.6 Buyer's Efforts to Fulfill Conditions.......................................... A-13 5.7 Communications with Regard to Consents to Assignment........................... A-13 ARTICLE VI CONDITIONS PRECEDENT TO CLOSING 6.1 Conditions to Buyer's Obligations.............................................. A-13 6.2 Conditions to Hudson's Obligations............................................. A-14 ARTICLE VII TERMINATION 7.1 Right to Terminate............................................................. A-15 7.2 Effect of Termination.......................................................... A-15
A-i 93
PAGE ---- ARTICLE VIII INDEMNIFICATION 8.1 Indemnification Against Loss Due to Inaccuracies in Hudson's Representations and Warranties................................................................. A-16 8.2 Indemnification Against Loss Due to Inaccuracies in Buyer's Representations and Warranties..................................................................... A-16 8.3 Limit on Claims Regarding Representations and Warranties....................... A-16 8.4 Payment of Taxes............................................................... A-16 8.5 Indemnification Against Results of Certain Litigation.......................... A-17 ARTICLE IX ACQUISITION PROPOSALS 9.1 Other Offers................................................................... A-17 ARTICLE X AVIATION SERVICES COOPERATION 10.1 Cooperation In Expanding Presence.............................................. A-19 10.2 Steering Committee............................................................. A-19 10.3 Option if the Buyer Creates a Passenger Handling Services Subsidiary........... A-19 ARTICLE XI AGREEMENT NOT TO COMPETE 11.1 Agreement by the Buyer not to Compete.......................................... A-20 ARTICLE XII ABSENCE OF BROKERS 12.1 Representations and Warranties Regarding Brokers and Others.................... A-20 ARTICLE XIII CERTAIN COVENANTS OF BUYER 13.1 Restrictions on Buyer's Activities Regarding Hudson and Its Stock.............. A-20 ARTICLE XIV GENERAL 14.1 Expenses....................................................................... A-21 14.2 Access to Properties, Books and Records........................................ A-21 14.3 Press Releases................................................................. A-22 14.4 No Impediment to Sales of Hudson Shares........................................ A-22 14.5 Entire Agreement............................................................... A-22 14.6 Effect of Disclosures.......................................................... A-23 14.7 Captions....................................................................... A-23 14.8 Assignments.................................................................... A-23 14.9 Notices and Other Communications............................................... A-23 14.10 Governing Law; Jurisdiction.................................................... A-24 14.11 Amendments..................................................................... A-24 14.12 Counterparts................................................................... A-24
A-ii 94 UNIT PURCHASE AND OPTION AGREEMENT This is an agreement dated February 27, 1996, effective as of January 1, 1996, between Lufthansa Airport and Ground Services GmbH (the "Buyer"), a German corporation, and Hudson General Corporation ("Hudson"), a Delaware corporation, relating to the purchase by the Buyer from Hudson General LLC (the "Company"), a Delaware limited liability company to be formed, of 260 Class B Units (the "Purchased Units") of the Company, and the grant to the Buyer of an option to purchase additional Class B Units from Hudson (or, at Hudson's election, from the Company), which agreement is as follows: ARTICLE I PURCHASE OF UNITS 1.1 Purchase of Purchased Units. At the Closing described in Paragraph 2.1, the Buyer will purchase the Purchased Units from the Company and the Company will sell the Purchased Units to the Buyer. 1.2 Purchase Price. The purchase price to be paid by the Buyer for all the Purchased Units will be $24,538,000, to be paid, and subject to adjustment, as provided in Paragraph 1.3. 1.3 Payment and Adjustment of Purchase Price. (a) The purchase price for the Purchased Units will be paid as follows: (i) At the Closing described in Paragraph 2.1, (x) $16,700,000 minus (y) a sum (the "Sum") equal to 26% of (A) the pro forma net income (before all income taxes) of the Company and its subsidiaries for the six-month period commencing on January 1, 1996 and ending on June 30, 1996 (calculated as if the transactions contemplated by this Agreement closed as of January 1, 1996), but in no event shall such amount exceed $7,405,000, minus (B) provision for United States federal, state and local income taxes at a rate of 48%, and minus (C) any income (before all income taxes) of Hudson General Aviation Services, Inc., Hudson's Canadian subsidiary ("Hudson Canada"), except to the extent of dividends paid to Hudson from January 1, 1996 until June 30, 1996. An estimate of the Sum will be made based upon actual results for the period commencing on January 1, 1996 and ending on May 31, 1996, with any adjustment (plus or minus) being added to, or subtracted from, the payment contemplated in Paragraph 1.3(a)(ii). The pro forma net income of the Company and its subsidiaries for the six month period commencing on January 1, 1996 and ending on June 30, 1996 will be calculated on the same basis as the pro forma net income was calculated in preparing the Pro Forma Financial Statements (defined below), except that (I) no principal reduction of Hudson's 7% Convertible Subordinated Debentures due 2011 ("Convertible Debentures") will be deemed to have been made as of the beginning of or during such period, (II) any interest income earned on the deferred purchase price contemplated by subparagraphs (ii) through (iv), or interest expense incurred as contemplated by subparagraph (v), of this Paragraph 1.3(a) will be excluded, and (III) if any advances are made during such period from Hudson to, or to Hudson from, the Aviation Services Business (defined below), those advances will be deemed to bear interest at a rate of 7% per annum based on the month end balance thereof. If any portion of the Sum shall arise from earnings generated by Hudson Canada, and such earnings are not distributed to Hudson by Hudson Canada, the amount of such earnings will not be included in the Sum, but will be distributed to Buyer at the time that Hudson receives its portion of such distribution from Hudson Canada. If the Closing occurs after July 1, 1996, the Purchase Price will be increased by $3,836 for each day starting July 2, 1996 through and including the Closing Date (defined below). (ii) On or before the tenth day after the day on which the Company delivers to the Buyer consolidated financial statements of the Company and its subsidiaries for the fiscal year ending June 30, 1996, (x) $2,650,000, or (y) if the Pre-Tax Earnings (defined below) for the fiscal year ending June 30, 1996 are less than $9,070,000, the sum equal to (A) $530,000, plus (B) the same percentage of $2,650,000 that the Pre-Tax Earnings for the fiscal year ending June 30, 1996 are of A-1 95 $11,337,500 (but not less than zero), minus (C) if the Pre-Tax Earnings for the fiscal year ending June 30, 1996 are negative (i.e., there is a pre-tax loss), the sum which is the same percentage of $2,650,000 that the negative Pre-Tax Earnings are (i.e., the pre-tax loss is) of $11,337,500, up to a maximum of $530,000, plus (z) interest on the sum described in the applicable one of clause (x) or (y) from January 1, 1996 to the date the payment is made at 11% per annum, compounded annually on each January 1. (iii) On or before the tenth day after the day on which the Company delivers to the Buyer consolidated financial statements of the Company and its subsidiaries for the fiscal year ending June 30, 1997, (x) $2,650,000, or (y) if the Pre-Tax Earnings for the fiscal year ending June 30, 1997 are less than $9,793,000, the sum which is (A) $530,000, plus (B) the same percentage of $2,650,000 that the Pre-Tax Earnings for the fiscal year ending June 30, 1997 are of $12,241,250 (but not less than zero), minus (C) if the Pre-Tax Earnings for the fiscal year ending June 30, 1997 are negative, the sum which is the same percentage of $2,650,000 that the negative Pre-Tax Earnings are of $12,241,250, up to a maximum of $530,000, plus (z) interest on the sum described in the applicable one of clause (x) or (y) from January 1, 1996 to the date the payment is made at 11% per annum, compounded annually on each January 1. (iv) On or before the tenth day after the day on which the Company delivers to the Buyer (x) consolidated financial statements of the Company and its subsidiaries for the fiscal year ending June 30, 1998, and (y) a schedule showing the total Pre-Tax Earnings for the three fiscal year period ending June 30, 1998, at the election of Hudson (made in writing when the Company delivers to the Buyer the consolidated financial statements for the fiscal year ending June 30, 1998 and the schedule showing the total Pre-Tax Earnings for the three fiscal year period ending June 30, 1998) either the sum described in subparagraph (A) or the sum described in subparagraph (B), those sums being: (A) (I) $2,538,000 or (II) if the Pre-Tax Earnings for the fiscal year ending June 30, 1998 are less than $10,575,200, the sum which is (X) $507,600, plus (Y) the same percentage of $2,538,000 that the Pre-Tax Earnings for the fiscal year ending June 30, 1998 are of $13,219,000 (but not less than zero), minus (Z) if the Pre-Tax Earnings for the fiscal year ending June 30, 1998 are negative, the same percentage of $2,538,000 that the negative Pre-Tax Earnings are of $13,219,000, up to a maximum of $507,600, plus (III) interest on the sum described in the applicable one of clause (I) or (II) from January 1, 1996 to the date the payment is made at 11% per annum, compounded annually on each January 1, or (B) (I) $7,838,000 or (II) if the cumulative Pre-Tax Earnings for the three fiscal year period ending June 30, 1998 are less than $29,438,200, the sum which is (X) $1,567,600, plus (Y) the same percentage of $7,838,000 that the cumulative Pre-Tax Earnings for the three fiscal year period ending June 30, 1998 are of $36,797,750 (but not less than zero), minus (Z) if the cumulative Pre-Tax Earnings for the three fiscal year period ending June 30, 1998 are negative, the sum which is the same percentage of $7,838,000 that the negative Pre-Tax Earnings are of $36,797,750, up to a maximum of $1,567,600, minus (III) the sums paid under clause (x) or (y) of subparagraphs (ii) and (iii) of this Paragraph 1.3(a), plus (IV) interest on the excess of the sum described in the applicable one of clause (I) or (II), over the sum described in clause (III), from January 1, 1996 to the date the payment is made at 11% per annum, compounded annually on each January 1. (v) If (i) the cumulative Pre-Tax Earnings for the three fiscal year period ending June 30, 1998 are less than $29,438,200, (ii) Hudson elects to use the computation in subparagraph (iv)(B) of this paragraph and (iii) the sum described in clause (II) of subparagraph (iv)(B) of this paragraph minus the sum described in clause (III) of that subparagraph is a negative number, on the date specified in that subparagraph, the Company will pay to the Buyer the sum equal to that negative number plus interest on that sum from January 1, 1996 to the date the payment is made at 11% per annum, compounded annually on each January 1. A-2 96 (b) For the purposes of this Agreement, the term "Pre-Tax Earnings" means the consolidated net income of the Company and its subsidiaries before provision for income taxes and the cumulative effect of any changes in accounting principles, computed in accordance with United States generally accepted accounting principles ("GAAP") (and, if Hudson files reports with the Securities and Exchange Commission ("SEC"), applied in the same manner they are applied in preparing the financial statements included in those filings), except that Pre-Tax Earnings will not include (i) any income as a result of interest received under this Agreement, (ii) any charge for interest with regard to a principal amount of Convertible Debentures equal to the amount of the purchase price for the Purchased Units which is deferred as contemplated by Paragraph 1.3(a), (iii) any charge for interest on indebtedness to Hudson resulting from conversion of Convertible Debentures, or (iv) any charge for expenses of forming the Company or issuing Units as contemplated by this Agreement. Notwithstanding the foregoing, if (x) any agreements between Hudson and a customer (including an Airport Authority (defined below) in its capacity as a purchaser of Aviation Services) are terminated because the customer will not consent to the transfer or assignment of the agreements from Hudson to the Company, (y) the Company is not able to render to a customer services which Hudson is rendering at the date of this Agreement because governmental or quasigovernmental authorities ("Airport Authorities") which have issued to Hudson licenses, permits, facilities leases or other authorizations to render services at airports ("Airport Authorizations") fail to consent to Hudson's transferring those Airport Authorizations to the Company or to issue similar Airport Authorizations to the Company, or (z) any customer ceases using services of Hudson (or after the Closing, the Company) and Hudson can demonstrate to the reasonable satisfaction of the Buyer that the customer did so because of the transactions which are the subject of this Agreement, then, in calculating Pre-Tax Earnings for purposes of Paragraph 1.3(a) or 3.3(b) for any fiscal year, Pre-Tax Earnings for that fiscal year will be increased by an amount equal to 50% of the pre-tax operating earnings from such customer during the four full fiscal quarters preceding the later of (A) July 1, 1996 or (B) the date on which the Company is informed that the customer will cease doing business with it, but not to exceed 50% of the operating earnings the Company would have received during that fiscal year (based upon those historical operating earnings for four fiscal quarter periods) if the agreements between Hudson and the customer in effect at the date of this Agreement had terminated at the expiration of their terms. The consolidated financial statements of the Company and its subsidiaries referred to in subparagraphs (ii), (iii) and (iv) of Paragraph 1.3(a) may be unaudited, except that, if not later than April 30 of a year, the Buyer agrees in writing to pay the amount by which the cost of auditing the financial statements of Hudson and its subsidiaries for the fiscal year ending on the following June 30 will be increased if it includes providing audited consolidated financial statements of the Company and its subsidiaries, the consolidated financial statements of the Company and its subsidiaries for that fiscal year referred to in subparagraph (ii), (iii) or (iv) of Paragraph 1.3(a) must be audited. If consolidated financial statements of the Company and its subsidiaries delivered to the Buyer in accordance with subparagraph (ii), (iii) or (iv) of Paragraph 1.3(a) are not audited, those financial statements will be accompanied by audited consolidated financial statements of Hudson and its subsidiaries. (c) If the total sum (other than interest) required to be paid under Paragraph 1.3(a) is more or less than $24,538,000, the purchase price of the Purchased Units will be deemed to be that total sum. (d) The Buyer may at any time after the Closing Date prepay the entire balance of the purchase price of the Purchased Units by paying (i) $7,838,000, minus (ii) any amounts previously paid under clause (x) or (y) of subparagraphs (ii) and (iii) of Paragraph 1.3(a), plus interest on the sum being prepaid from January 1, 1996 to the date of the prepayment at 11% per annum, compounded annually on each January 1. If the Buyer prepays the entire balance of the purchase price of the Purchased Units, there will be no reduction of that purchase price regardless of the Pre-Tax Earnings during the three fiscal year period ending June 30, 1998 or any fiscal year during that period. A-3 97 ARTICLE II THE CLOSING 2.1 Time and Place of Closing. The closing (the "Closing") of the purchase of the Purchased Units will take place at the offices of Rogers & Wells, 200 Park Avenue, New York, New York, at 10:00 a.m. New York City time, on the day (the "Closing Date") which is the later of (i) July 1, 1996 or (ii) the third business day after the day on which all the conditions in Paragraphs 6.1 and 6.2 have been fulfilled or waived in writing, or at such other time and place as may be agreed upon by the Buyer and Hudson. 2.2 Hudson's Actions at Closing. At the Closing, Hudson will, or will cause the Company to, deliver to the Buyer the following: (a) Evidence that, effective upon the Closing, all the Purchased Units have been issued to, and are registered in the name of, the Buyer. If Units are represented by certificates, this evidence will be certificates representing all the Purchased Units, registered in the name of the Buyer. Those certificates will bear a legend to the effect that the Units represented by them (i) have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or registered or qualified under any state securities laws and may only be sold or transferred in a transaction which, in the opinion of counsel to the holder provided, and in form reasonably satisfactory, to the Company, is registered under the Securities Act or is exempt from the registration requirements of the Securities Act and is registered or qualified under, or exempt from the registration or qualification requirements of, any applicable state securities laws, and (ii) are subject to restrictions on sale or transfer, and to a purchase option, under the LLC Agreement (defined below). (b) A copy, executed by the Company and by Hudson, of a Limited Liability Company Agreement (the "LLC Agreement") substantially in the form of Exhibit 2.2-B. 2.3 Buyer's Actions at Closing. At the Closing, the Buyer will deliver to the Company the following: (a) A certified or bank cashier's check, or, if Hudson so elects, evidence of a wire transfer of immediately available funds to a Company account specified by Hudson at least 24 hours before the Closing, in the amount described in Paragraph 1.3(a)(i). (b) A letter in form and substance reasonably satisfactory to Hudson acknowledging that the Buyer will be acquiring the Purchased Units for investment, and not with a view to their resale or distribution. (c) A copy, executed by the Buyer, of the LLC Agreement. ARTICLE III PURCHASE OPTION 3.1 The Option. The Buyer will have the option (the "Option"), exercisable on October 1, 1996, 1997, 1998, 1999 and 2000 (each of those being an "Option Date"), to purchase from Hudson (or, as provided in Paragraph 3.5, to purchase from the Company) Class B Units ("Option Units") which will increase the total outstanding Class B Units to up to 49% of all the Class A Units and Class B Units (together, "Units") of the Company which are outstanding on the Option Date on which the Option is exercised (each Option Date on which the Option is exercised being an "Exercise Date"). The Option may be exercised on no more than two occasions, but the first exercise must be with regard to Class B Units which will increase the total outstanding Class B Units to at least 38% of the Units which are outstanding on the Exercise Date, and the second exercise must be with regard to Class B Units which will increase the total outstanding Class B Units to 49% of the Units which are outstanding on the Exercise Date. For the purposes of this Paragraph and Paragraphs 3.2 and 3.3, the Units which are or will be outstanding on a day will include (x) all the Units which are actually outstanding on that day and (y) the Option Units as to which the Option is being exercised on that day. 3.2 Manner of Exercise. In order to exercise the Option, the Buyer will deliver to Hudson on or before the Option Date on which the Option is being exercised (i.e., the Exercise Date) a notice of exercise (the A-4 98 "Notice of Exercise"), which will state the percentage of all the outstanding Units which the Class B Units will constitute after the exercise of the Option and the date on which that purchase will take place, which date will be not less than twenty nor more than forty days after the Exercise Date. When the Buyer delivers a Notice of Exercise, the Buyer will become irrevocably obligated to purchase from Hudson or the Company, and Hudson or, as provided in Paragraph 3.5, the Company, will become irrevocably obligated to sell to the Buyer, the Option Units described in the Notice of Exercise for the price determined as provided in Paragraph 3.3. 3.3 Exercise Price. (a) The exercise price of the Option on an Option Date will be the amount which is equal to (i) the percentage which the Option Units as to which the Option is being exercised will be on the Option Date of all the outstanding Units of the Company on the Option Date (computed as described in Paragraph 3.1), multiplied by (ii) the greater of (x) the Computed Value of the Company on the Option Date or (y) $73,348,000 if the Option Date is October 1, 1996, $77,932,250 if the Option Date is October 1, 1997, $82,516,500 if the Option Date is October 1, 1998, $87,100,750 if the Option Date is October 1, 1999 and $91,685,000 if the Option Date is October 1, 2000, but in no event more than (z) $102,687,000 if the Option Date is October 1, 1996, $115,010,000 if the Option Date is October 1, 1997, $128,811,000 if the Option Date is October 1, 1998, $144,268,000 if the Option Date is October 1, 1999, and $161,580,000 if the Option date is October 1, 2000. (b) The "Computed Value" of the Company on an Option Date will be (i) (x) the average of the Pre-Tax Earnings (after allocations of interest and other indirect expenses) of the Company and its subsidiaries during each of the four fiscal years prior to the fiscal year in which the Option Date falls from all aspects of its Aviation Services Business (defined below), other than snow removal services, divided by (y) 0.12, plus (ii) (A) the average of the Pre-Tax Earnings (after allocations of interest and other indirect expenses) of the Company and its subsidiaries during each of the four fiscal years prior to the fiscal year in which the Option Date falls from snow removal services, divided by (B) 0.135. As an example of how the Computed Value would be computed, if (I) during the four fiscal years prior to the fiscal year in which an Option Date falls, the Company and its subsidiaries had Pre-Tax Earnings (after allocations of interest and other indirect expenses) from Aviation Services Business activities other than snow removal services of $4,918,000, $8,067,000, $12,551,000 and $10,631,000, and had Pre-Tax Earnings (after allocations of interest and other indirect expenses) from snow removal services of $651,000, $2,650,000 and $5,845,000 and a loss of $324,000, the Computed Value of the Company on that Option Date would be $9,041,750 (the average of $4,918,000, $8,067,000, $12,551,000 and $10,631,000) divided by 0.12, plus $2,205,500 (the average of $651,000, $2,650,000 and $5,845,000 and a loss of $324,000) divided by 0.135, and therefore would be $91,684,954. If on that Option Date, the Buyer exercised the Option to purchase Option Units which would constitute 15% of the outstanding Units, the exercise price for those Option Units would be $13,752,743. For the purposes of this Paragraph 3.3(b), (A) in determining the Pre-Tax Earnings from the various aspects of the Aviation Services Business, interest and other indirect expenses of the Aviation Services Business will be allocated among the aspects of the Aviation Services Business based upon the respective percentages of the Aviation Services Business revenues generated by each of them, and (B) it is stipulated that the Pre-Tax Earnings (after allocations of interest and other indirect expenses) from all aspects of the Aviation Services Business other than snow removal services during the fiscal years ended June 30, 1992, 1993, 1994 and 1995 were $4,918,000, $8,067,000, $12,551,000 and $10,631,000, respectively, and the Pre-Tax Earnings (after allocations of interest and other indirect expenses) from snow removal services during those years were $651,000, $2,650,000, $5,845,000 and a loss of $324,000, respectively. 3.4 Effect of Option Exercise. Each purchase of Option Units will be effective as of the July 1 immediately preceding the Option Date on which the Option is exercised with regard to those Option Units and the Buyer will be entitled to all earnings, gains, losses and other financial incidents allocable to those Option Units as though they had been issued on that July 1. 3.5 Transfer of Sale Obligation to the Company. In each instance in which the Buyer exercises the Option, Hudson may, at its election, either (i) sell to the Buyer the Option Units as to which the Option is A-5 99 being exercised or (ii) cause the Company to sell those Option Units to the Buyer, in which case (x) the number of Option Units will be computed on the basis of a sale of Units from the Company instead of a sale of Units from Hudson, (y) the Company will be irrevocably obligated to sell those Option Units to the Buyer, and (z) the proceeds of the sale will be paid to the Company instead of to Hudson. The Buyer will cooperate with Hudson to maximize Hudson's economic benefit from the exercise of the Option so long as there is no economic impact or cost to the Buyer from doing so. 3.6 Closings of Option Sales. (a) The closing of each sale of Option Units (an "Option Closing") to the Buyer will take place at the principal office of the Company at 10:00 a.m. New York City time on the latest of (i) the date specified in the Notice of Exercise or (ii) if filings are required under the Hart-Scott-Rodino Antitrust Act of 1976 ("HSR Act"), the third business day after the day on which the waiting periods under the HSR Act expire or are terminated. (b) At each Option Closing, the Buyer will deliver to Hudson or to the Company, as the case may be, the following: (i) A certified or bank cashier's check or, if Hudson (or, if applicable, the Company) so elects, evidence of a wire transfer of immediately available funds to an account specified by Hudson or the Company, as the case may be, at least twenty-four hours before the Option Closing, in the amount of (x) the exercise price of the Option plus (y) interest on the exercise price of the Option at the rate of 11% per annum from the July 1 next preceding the date of the Option Closing to the date of the Option Closing. (ii) A letter, in form and substance reasonably satisfactory to Hudson, acknowledging that the Buyer will be acquiring the Option Units for investment, and not with a view to their resale or distribution. (c) At each Option Closing, Hudson or the Company, as the case may be, will deliver to the Buyer evidence that, effective upon the Option Closing, all the Option Units being purchased by the Buyer have been transferred or issued to, and (except with regard to certificated Units being sold by Hudson) registered in the name of, the Buyer, which evidence will be, if Units are represented by certificates, certificates representing the Option Units being purchased by the Buyer, (A) if they are being sold by Hudson, endorsed or accompanied by documents of assignment which comply with the requirements of Section 8-401 of the Uniform Commercial Code as in effect in the State of New York, or (B) if they are being sold by the Company, registered in the name of the Buyer. If Unit certificates are delivered to the Buyer by the Company, those certificates will bear a legend to the effect that the Units represented by them (i) have not been registered under the Securities Act or registered or qualified under any state securities laws and may only be sold or transferred in a transaction which, in the opinion of counsel to the holder provided, and in form reasonably satisfactory, to the Company, is registered under the Securities Act or is exempt from the registration requirements of the Securities Act and is registered or qualified under, or exempt from the registration or qualification requirements of, any applicable state securities laws and (ii) are subject to restrictions on sale or transfer, and to a purchase option, under the LLC Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Hudson's Representations and Warranties. Hudson represents and warrants to the Buyer as follows: (a) Hudson is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Hudson has all corporate power and authority necessary to enable it to enter into this Agreement and carry out the transactions contemplated by this Agreement. All corporate actions, other than the stockholder approval referred to in Paragraph 6.2(e), necessary to authorize Hudson to enter into this Agreement and the LLC Agreement and carry out the transactions contemplated by each A-6 100 of them have been taken. This Agreement has been duly executed by Hudson and is a valid and binding agreement of Hudson, enforceable against Hudson in accordance with its terms. When executed and delivered as contemplated by this Agreement, the LLC Agreement will be a valid and binding agreement of Hudson, enforceable against Hudson in accordance with its terms. (b) Except with regard to Customer Consents (defined below) and Airport Consents (defined below) (it being expressly understood and agreed that Hudson makes no representation, warranty or covenant as to its ability to obtain Customer Consents or Airport Consents and that if Hudson uses reasonable efforts to obtain such consents (which reasonable efforts shall not be required to include modification of current or future terms of agreements or offering or agreeing to any economic considerations), Hudson's failure to obtain Customer Consents or Airport Consents will not constitute a violation or breach of any representation, warranty or covenant), and except as set forth on Exhibit 4.1-B, neither the execution or delivery of this Agreement, the LLC Agreement or any other document required to be delivered in accordance with this Agreement nor the consummation of the transactions contemplated by this Agreement or by the LLC Agreement will violate, result in a breach of, or constitute a default (or an event which, with notice or lapse of time or both would constitute a default) under, the Certificate of Incorporation or by-laws of Hudson, any agreement or instrument to which Hudson or any subsidiary of Hudson is a party or by which any of them is bound, any law, or any order, rule or regulation of any court or governmental agency or other regulatory organization having jurisdiction over Hudson or any of its subsidiaries, except for violations, breaches or defaults which would not individually or in aggregate have a Material Adverse Effect. As used in this Agreement, the term "Material Adverse Effect" means a material adverse effect, upon (i) the consolidated financial position of the Company and its subsidiaries taken as a whole, (ii) the consolidated results of operations of the Company and its subsidiaries taken as a whole, (iii) the ability of the Company and its subsidiaries to carry on the Aviation Services Business substantially in the manner in which it is being conducted at the date of this Agreement or (iv) the transactions which are the subject of this Agreement. As used in this Agreement, the term "Customer Consent" means any consent (other than an Airport Consent) from any customer of Hudson (including an Airport Authority in its capacity as a purchaser of Aviation Services) to Hudson's transfer or assignment to the Company of an agreement relating to its business with Hudson in connection with the transactions contemplated by this Agreement. As used in this Agreement, the term "Airport Consent" means any consent from any Airport Authority that has granted to Hudson an Airport Authorization to Hudson's transfer or assignment to the Company of that Airport Authorization (which may be in the form of a transfer or assignment of the Airport Authorization or may be in the form of an issuance of a similar Airport Authorization to the Company or a subsidiary) in connection with the transactions contemplated by this Agreement. (c) On the Closing Date, Hudson will own 740 Class A Units (the "Hudson Units"). If the stockholders of Hudson approve the transactions contemplated by this Agreement, Hudson will have full authority to grant the Option and to sell upon exercise of the Option all the Option Units it may be required to sell, as contemplated by this Agreement, and all action necessary to enable Hudson to grant the Option and to sell upon exercise of the Option all the Option Units it may be required to sell, as contemplated by this Agreement, will have been taken. If Hudson sells Option Units to the Buyer, at the time of that sale Hudson will own and have the right to sell to the Buyer all the Option Units it is selling to the Buyer. Hudson has not granted any option or right, and is not a party to any other agreement (except this Agreement and the LLC Agreement), which requires, or upon the passage of time, the payment of money, or the occurrence of any other event, may require Hudson to transfer any Units to anyone other than the Buyer. (d) When the Buyer acquires Purchased Units or Option Units as contemplated by this Agreement, the Buyer will receive them free and clear of any liens, encumbrances or claims of other persons, except (i) any which may arise under this Agreement or the LLC Agreement, (ii) any which may result from acts of the Buyer or any affiliate of the Buyer (as the term "affiliate" is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) or (iii) any restrictions on transfer which may arise under applicable securities laws. A-7 101 (e) On the Closing Date, the Company will be a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. On the Closing Date, the Certificate of Formation of the Company will be in the form of Exhibit 4.1-E and the LLC Agreement will be in the form of Exhibit 2.2-B. On the Closing Date, the Company will have all power and authority necessary to enable it to carry out the transactions contemplated by this Agreement. By the Closing Date, the Company will have taken all actions necessary to enable the Company to carry out the transactions contemplated by this Agreement insofar as they must be taken by the Company. (f) On the Closing Date, each subsidiary of the Company will be a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. On the Closing Date, the Company and each of its subsidiaries will be qualified to do business as a foreign limited liability company or a foreign corporation in each state in which it is required to be qualified, except states in which the failure to qualify, in the aggregate, would not have a Material Adverse Effect. For the purposes of this Agreement, a "subsidiary" of an entity means any corporation, limited liability company, partnership, association, joint stock company, business trust or other similar organization of whose voting stock or voting interests the entity owns or controls, directly or indirectly, more than 50% (except that when the term "subsidiary" is used with regard to consolidated financial statements or consolidated financial information, it means entities the individual financial statements of which are, in accordance with GAAP, included, subject to consolidating adjustments, in the applicable consolidated financial statements). (g) On the Closing Date, the only outstanding Units will be the 260 Purchased Units and the 740 Hudson Units. On the Closing Date, each of the Purchased Units and each of the Hudson Units will be, and if the Company issues Option Units upon exercise of the Option, when they are issued those Option Units will be, duly authorized and issued, fully paid and nonassessable. On the Closing Date, the Company will not have issued any options, warrants or convertible or exchangeable securities, and will not be a party to any other agreements (except the LLC Agreement), which require, or upon the passage of time, the payment of money or the occurrence of any other event may require, the Company to sell or issue any Units of any class. (h) Other than (i) the termination or expiration of waiting periods under the HSR Act, if filings under the HSR Act are required, (ii) filings under the Exchange Act, and the rules and regulations under the Exchange Act, (iii) as may be necessary to obtain Customer Consents, and (iv) as may be necessary to obtain Airport Consents, no governmental filings, authorizations, approvals, or consents, or other governmental action, are required to permit Hudson to fulfill all its obligations under this Agreement, except where failure to make or obtain any such filings, authorizations, approvals, consents or other governmental action would not individually or in aggregate (x) have a Material Adverse Effect, or (y) prevent the consummation of the transactions contemplated by this Agreement. (i) Hudson's Report on Form 10-K for the year ended June 30, 1995 (the "1995 10-K"), Report on Form 10-Q for the period ended September 30, 1995 (the "September 30 10-Q") and definitive proxy statement used in connection with its annual meeting of stockholders held on November 17, 1995 (the "Proxy Statement") as filed with the SEC (the 1995 10-K, the September 30 10-Q and the Proxy Statement as filed with the SEC, including all documents or portions of documents incorporated by reference in each of them, being, together, the "SEC Filings") each complied in all material respects with the requirements of the SEC form on which it was filed and none of the SEC Filings, when it was filed, contained a misstatement of a material fact or omitted to state a material fact necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (j) All the audited financial statements in, or incorporated by reference into, the 1995 10-K, and all the unaudited financial statements from which financial information in the September 30 10-Q was derived, were prepared in accordance with GAAP (except as indicated in the notes thereto and, in the case of unaudited financial statements, as permitted by Form 10-Q) and fairly present (subject, in the case of the unaudited financial statements, to normal, recurring adjustments) the financial condition and A-8 102 results of operations of Hudson and its subsidiaries, or of the Kohala Joint Venture and its subsidiary, at the dates, and for the periods, to which they relate. (k) The only business in which the Company or any of its subsidiaries will be actively engaged at the Closing Date will be rendering the services described on pages 3 through 7 of Hudson's 1995 Annual Report to Shareholders which was filed as Exhibit 13 to the 1995 10-K (the "Aviation Services Business"). Substantially all the assets, revenues and income of Hudson and its subsidiaries reflected in the consolidated financial statements of Hudson and its subsidiaries incorporated by reference in the 1995 10-K and the September 30 10-Q were (i) assets used in connection with, and revenues and income derived from, the Aviation Services Business, (ii) the interest of Hudson Kohala, Inc. ("Hudson Kohala"), a wholly owned subsidiary of Hudson, in Kohala Joint Venture, a joint venture between Hudson and a subsidiary of Oxford First Corporation, and in the income of the Kohala Joint Venture, accounted for by the equity method, and (iii) cash, cash equivalents, accounts receivable and similar current items. (l) The assets Hudson will transfer to the Company as contemplated by Paragraph 5.2, directly or by transferring to the Company stock of subsidiaries, will be all the assets (other than cash, cash equivalents, accounts receivable and similar current items) used by Hudson and its subsidiaries at the date of the transfer in connection with the Aviation Services Business (it being understood that as to certain items leased by Hudson to subsidiaries, the leasehold interests may be transferred to the Company in lieu of the ownership interests). (m) On the Closing Date, the Company and its subsidiaries will have, or have access to, everything they need to be able to conduct the Aviation Services Business substantially as it was being conducted by Hudson and its subsidiaries before the transfer of assets contemplated by Paragraph 5.2. (n) On the Closing Date, the Company will not have assumed or otherwise become obligated with regard to any indebtedness of Hudson other than (i) trade accounts payable, accrued expenses or other liabilities incurred by Hudson in the ordinary course of conducting the Aviation Services Business, (ii) deferred taxes related to the Aviation Services Business, (iii) borrowings or letters of credit under the Revolving Credit and Term Loan Agreement among Hudson, the various banks referred to therein, and First National Bank of Boston, as agent, dated as of November 25, 1992, as amended, or the Revolving Credit Agreement among Hudson General Aviation Services Inc., the various banks referred to therein, and Bank of Boston Canada (succeeded by Chase Manhattan Bank of Canada), as agent, dated as of November 25, 1992, as amended (such credit agreements, together with any amendments, restatements, replacements, refinancings or extensions thereof, being hereinafter referred to as the "Hudson Revolving Credit Agreements"), and (iv) not more than $29,000,000 principal amount of Convertible Debentures. (o) Exhibit 4.1-O is a complete list of all the subsidiaries of Hudson which are actively engaged in the Aviation Services Business (the "Aviation Services Subsidiaries"). None of the Aviation Services Subsidiaries is engaged in any activities other than the Aviation Services Business. Except as shown on Exhibit 4.1-O, Hudson owns all the outstanding shares of, or other equity interests in, each of the Aviation Services Subsidiaries. On the Closing Date, the Company will own all the shares of, or other equity interests in, the Aviation Services Subsidiaries which are owned by Hudson at the date of this Agreement (other than Aviation Services Subsidiaries which have been liquidated or the assets of which otherwise have been transferred to the Company, except as otherwise contemplated by Paragraph 4.1(l)) and none of Hudson, the Company or any of the Aviation Services Subsidiaries of which the Company owns shares will have issued any options, warrants or convertible or exchangeable securities, or will be a party to any other agreements, which require, or upon the passage of time, the payment of money or the occurrence of any other event may require, Hudson, the Company or any of those Aviation Services Subsidiaries to transfer to anyone or issue any stock of, or other equity interest in, any of those Aviation Services Subsidiaries (other than this Agreement and the LLC Agreement). On the Closing Date, the Company will not own any stock of, or other equity interests in, any companies other than the Aviation Services Subsidiaries. A-9 103 (p) The pro forma consolidated financial statements of the Company and the Aviation Services Subsidiaries for the fiscal year ended June 30, 1995, and at December 31, 1995, and for the six month period ended on that date, (together, the "Pro Forma Financial Statements") copies of which are included in Exhibit 4.1-P, were prepared on the basis described in the notes to them, were prepared in accordance with GAAP and present fairly the pro forma consolidated assets and liabilities of the Company and the Aviation Services Subsidiaries and the consolidated results of operations of the Company and the Aviation Services Subsidiaries, at the dates, and for the periods, to which they relate. All the financial information in the Pro Forma Financial Statements is consistent (taking account of the pro forma adjustments described in the Pro Forma Financial Statements) with the financial statements or financial information at the same dates and for the same periods which were included in the SEC Filings. (q) Since December 31, 1995, there has not been any material adverse change in the Aviation Services Business or the consolidated financial condition or results of operations of the Aviation Services Business taken as a whole. (r) Hudson and the Aviation Services Subsidiaries have, and on the Closing Date, the Company and its subsidiaries will have (except to the extent they have not received Customer Consents, Airport Consents or Airport Authorizations), all licenses and permits from all governmental authorities which are necessary or useful to permit the Company and its subsidiaries to conduct the Aviation Services Business as that business is being conducted at the date of this Agreement, other than licenses and permits from governmental authorities the lack of which would not in aggregate have a Material Adverse Effect insofar as the executive officers of Hudson are aware. Except as stated on Exhibit 4.1-R, insofar as the executive officers of Hudson are aware, Hudson and the Aviation Services Subsidiaries are, and on the Closing Date, the Company and its subsidiaries will be, operating the Aviation Services Business in accordance with applicable law in all respects which are material to the Aviation Services Business or to the financial condition of the Company and its subsidiaries taken as a whole. (s) Except as shown on Exhibit 4.1-S, neither Hudson nor any subsidiary is, and on the Closing Date, neither the Company nor any of its subsidiaries will be, a party to any suit or proceeding in any court, or by or before any governmental agency, nor has any executive officer of Hudson been notified that any suit or proceeding is threatened against any of those entities, which if decided adversely to Hudson (or the Company) or the Aviation Services Subsidiaries, could reasonably be expected to have a Material Adverse Effect, after taking into account applicable insurance coverage. 4.2 Buyer's Representations and Warranties. The Buyer represents and warrants to Hudson as follows: (a) The Buyer is a GmbH duly organized and validly existing under the laws of the Federal Republic of Germany. (b) The Buyer has all corporate power and authority necessary to enable it to enter into this Agreement and carry out the transactions contemplated by this Agreement. All corporate actions necessary to authorize the Buyer to enter into this Agreement and the LLC Agreement and carry out the transactions contemplated by each of them have been taken. This Agreement has been duly executed by the Buyer and is a valid and binding agreement of the Buyer, enforceable against the Buyer in accordance with its terms. When executed and delivered as contemplated by this Agreement, the LLC Agreement will be a valid and binding agreement of the Buyer, enforceable against the Buyer in accordance with its terms. (c) Neither the execution and delivery of this Agreement, the LLC Agreement or any other document required to be delivered in accordance with this Agreement nor the consummation of the transactions contemplated by this Agreement or the LLC Agreement will violate, result in a breach of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, the Articles of Association or by-laws of the Buyer, any agreement or instrument to which the Buyer or any subsidiary of the Buyer is a party or by which any of them is bound, any law, or any order, rule or regulation of any court or governmental agency or other regulatory organization having jurisdiction over the Buyer or any of its subsidiaries. A-10 104 (d) No governmental filings, authorizations, approvals or consents, or other governmental action, are required to enable the Buyer to fulfill all its obligations under this Agreement. (e) The Buyer is acquiring the Purchased Units for its own account for investment purposes only and not with a view to, or with any present intention of, resale, distribution or other disposition thereof. (f) The Buyer has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Purchased Units and any future investment in the Option Units, and the Buyer is capable of bearing the economic risks of such investment, including a complete loss of its investment. (g) Neither the Buyer nor any of its affiliates owns an interest in any entity which is engaged in a business competitive with the Aviation Services Business in the United States of America or Canada, except interests in consortiums which operate airport terminal facilities. 4.3 Changes Prior to Closing Date. If (i) as a result of occurrences after the date of this Agreement any facts which are as represented or warranted in Paragraph 4.1 or 4.2 on the date of this Agreement cease by the Closing Date to be as represented or warranted, or any state of facts which is represented or warranted in Paragraph 4.1 or 4.2 to exist at the Closing Date does not exist at the Closing Date and (ii) the facts as they exist on the Closing Date are correctly set forth in the certificate delivered by Hudson as contemplated by Paragraph 6.1(a) or the certificate delivered by the Buyer as contemplated by Paragraph 6.2(a), as the case may be, then, whether or not the other of Hudson or the Buyer, as the case may be, completes the transactions which are to take place at the Closing even though the facts described in the certificate differ from those represented or warranted in Paragraph 4.1 or 4.2, as the case may be, the representations and warranties in Paragraph 4.1 or 4.2 will be deemed modified to be as set forth in the certificate delivered as contemplated by Paragraph 6.1(a) or 6.2(a), as the case may be, and whichever of Hudson or the Buyer made the representations or warranties as to which facts changed, or were not as contemplated in Paragraph 4.1 or 4.2, as described in the certificate will have no liability under Paragraph 8.1 or 8.2, or otherwise, because the facts were as described in the certificate, and not as represented and warranted in, or contemplated by, Paragraph 4.1 or 4.2. This Paragraph 4.3 will not relieve Hudson or the Buyer from liability because it failed to fulfill an obligation under Article V or under any other provision of this Agreement, except liability for breach of a representation or warranty contained in Paragraph 4.1 or 4.2 or a related obligation to indemnify under Paragraph 8.1 or 8.2. 4.4 Remedy for Breaches of Representations and Warranties. The indemnification in Article VIII will be the only remedy available to the Buyer, Hudson or the Company for breaches of representations or warranties contained in Paragraph 4.1 or 4.2. Any claim for that indemnification must be made as provided in Paragraph 8.3. ARTICLE V ACTIONS PRIOR TO THE CLOSING 5.1 Activities Until Closing Date. From the date of this Agreement to the Closing Date, Hudson will, except as contemplated by Paragraph 5.2 or other provisions of this Agreement, and will ensure that the Company (after it is formed), the Aviation Services Subsidiaries and any other subsidiaries of Hudson or the Company will, except with the written consent of the Buyer: (a) Operate the Aviation Services Business (including making contractual commitments involving capital expenditures, loans or advances, and including voluntarily incurring contingent liabilities, which will become commitments or contingent liabilities of the Company or its subsidiaries) in, and only in, the ordinary course and in, and only in, a manner consistent with the manner in which they are being operated at the date of this Agreement. (b) Take all reasonable steps available to them to maintain the goodwill of the Aviation Services Business. A-11 105 (c) Maintain all their assets used in connection with the Aviation Services Business in good repair and condition, except to the extent of reasonable wear and use and damage by fire or other unavoidable casualty. (d) Not make any borrowings which will be obligations of the Company or its subsidiaries on the Closing Date, other than borrowings (i) not under the Hudson Revolving Credit Agreements in a single transaction or series of related transactions of a sum equal to 10% or more of the total assets which are at the time of the borrowing, or on the Closing Date will be, owned by the Company and its subsidiaries, or (ii) under the Hudson Revolving Credit Agreements. (e) Maintain their books of account and records in the usual manner, in accordance with GAAP, subject to normal adjustments and accruals. (f) Not sell, dispose of or encumber any property or assets which individually or in aggregate are material to the Aviation Services Business, except in each case in the ordinary course of business. (g) Not declare any dividends or take any other steps which will cause the consolidated stockholders equity of the Company and its subsidiaries on the Closing Date to be less than the pro forma stockholders equity of the Company and its subsidiaries on December 31, 1995, which is described in Paragraph 6.1(e), unless caused by a loss incurred in the operations of the Aviation Services Business between January 1, 1996 and the Closing Date. (h) By the Closing Date, take all steps which are necessary (including, if necessary, amending or terminating applicable agreements) so the distributions required by the LLC Agreement will not violate the Hudson Revolving Credit Agreements. 5.2 Formation of Company and Transfer of Assets. Hudson will, at or before the time of the Closing, (a) cause the Company to be formed, (b) cause the Company to execute the LLC Agreement, (c) transfer to the Company directly or by transferring to the Company stock of the Aviation Services Subsidiaries, all the assets (other than cash, cash equivalents, accounts receivable and similar current items or as contemplated by Paragraph 4.1(l)) used by Hudson or its subsidiaries in connection with the Aviation Services Business, in exchange for (i) the Hudson Units and (ii) the assumption by the Company, as a co-obligor, of the obligations of Hudson with regard to the Convertible Debentures, (d) cause the Company to sell the Purchased Units to the Buyer as contemplated by this Agreement, and (e) do all other things so the representations and warranties regarding the Company and its subsidiaries in Paragraphs 4.1(d), (e), (g), (m) and the first sentence of Paragraph 4.1(k) will be true and correct in all material respects on the Closing Date. 5.3 Hudson Stockholders Meeting. Hudson will, as promptly as practicable, hold a meeting of its stockholders for the purpose of voting upon a proposal to approve the transactions which are the subject of this Agreement (the "Stockholders Meeting"). In connection with that meeting, Hudson will do the following: (a) File with the SEC a preliminary proxy statement and a definitive proxy statement (the latter being the "Transaction Proxy Statement") relating to the Stockholders Meeting, and a related form of proxy (together, the "Soliciting Materials"). (b) Subject to the fiduciary duties of Hudson's Board of Directors, acting upon the advice of counsel, recommend in the Transaction Proxy Statement that the stockholders of Hudson approve the transactions which are the subject of this Agreement. (c) Respond to all comments by the staff of the SEC regarding the Soliciting Materials. (d) Cause the Stockholders Meeting to be held not later than forty days after the day on which Hudson is permitted to mail the Soliciting Materials to its stockholders. (e) Use all reasonable efforts to solicit proxies from its stockholders in support of the transactions which are the subject of this Agreement. A-12 106 5.4 HSR Act Filings. If at any time Hudson or the Buyer is informed by its counsel that a filing under the HSR Act is required in connection with the Buyer's purchase of the Purchased Units or of Option Units, Hudson and the Buyer each will, and if applicable will cause the Company to, make as promptly as practicable the filing it is required to make under the HSR Act with regard to the applicable transaction and each of them will take all reasonable steps within its control (including providing information to the Federal Trade Commission and the Department of Justice) to cause the waiting periods required by the HSR Act to be terminated or to expire as promptly as practicable. Hudson and the Buyer each will, and will cause the Company to, provide information and cooperate in all other respects to assist the other of them in making its filing under the HSR Act. 5.5 Hudson's Efforts to Fulfill Conditions. Hudson will use its best efforts (which best efforts shall not be required to include modification of current or future terms of agreements or offering or agreeing to any economic consideration) to cause all the conditions set forth in Paragraphs 6.1 (a), (b), (c), (e), (f) and (g) and 6.2(f) to be fulfilled prior to or at the Closing. 5.6 Buyer's Efforts to Fulfill Conditions. The Buyer will use its best efforts (which best efforts shall not be required to include modification of current or future terms of agreements or offering or agreeing to any economic consideration) to cause all the conditions contained in Paragraphs 6.2 (a), (b), (c), (f) and (g) to be fulfilled prior to or at the Closing. 5.7 Communications with Regard to Consents to Assignment. Hudson and the Buyer will each keep the other of them fully informed of all communications it or any of its subsidiaries (including, after it is formed, the Company as a subsidiary of Hudson) has with parties from whom Customer Consents or Airport Consents are being sought, regarding whether those parties or issuers will grant Customer Consents or Airport Consents. If Hudson or the Buyer notifies the other of them that it appears that the number of parties specified on Exhibit 6.1-D will not grant Customer Consents or Airport Consents, Hudson and the Buyer will consult with each other about whether (i) there are further steps which are reasonably acceptable to both of them which should be taken in an effort to obtain Customer Consents or Airport Consents from at least some of the parties which it appears will not grant Customer Consents or Airport Consents, or (ii) the Buyer and Hudson should waive the conditions in Paragraphs 6.1(d) and 6.2(d) (it being understood and agreed that Buyer shall have no obligation to waive the condition in Paragraph 6.1(d) and that Hudson shall have no obligation to waive the condition in Paragraph 6.2(d)). If the Closing Date was scheduled to have occurred within 15 days after the day on which the notice described in the previous sentence is given, then unless the conditions in Paragraphs 6.1(d) and 6.2(d) will be satisfied or waived at the Closing, the Closing Date will be postponed until the 15th day after the day on which that notice is given (or, if that 15th day is not a day on which banks are required to be open for banking business in New York City and Frankfurt am Main, until the next following day on which banks are required to be open for banking business in both those cities). ARTICLE VI CONDITIONS PRECEDENT TO CLOSING 6.1 Conditions to Buyer's Obligations. The obligations of the Buyer at the Closing are subject to satisfaction of the following conditions (any or all of which may be waived in writing by the Buyer): (a) The representations and warranties of Hudson contained in this Agreement will, except as contemplated by this Agreement, be true and correct in all material respects at the Closing Date with the same effect as though made on that date (except where the failure of such representations or warranties to be true and correct, individually and in the aggregate, do not have and could not reasonably be expected to have a Material Adverse Effect or to subject the Buyer or any of its affiliates to significant liability), and Hudson will have delivered to the Buyer a certificate dated that date and signed by the President or a Vice President of Hudson to that effect. (b) Hudson will have fulfilled in all material respects all its obligations under this Agreement required to have been fulfilled prior to or at the Closing. A-13 107 (c) No order will have been entered by any court or governmental authority and be in force which invalidates this Agreement or restrains the Buyer, Hudson or the Company from completing the transactions which are the subject of this Agreement. (d) Hudson, the Buyer or any of their respective subsidiaries (including, after it is formed, the Company as a subsidiary of Hudson) will not have been told or otherwise been given substantial reason to believe that a specified number of parties to contracts, or Airport Authorities, as set forth on Exhibit 6.1-D will not grant Customer Consents or Airport Consents. (e) At December 31, 1995, the Company and its subsidiaries will have had a pro forma (on the pro forma basis reflected in the Pro-Forma Financial Statements) consolidated ratio of stockholders equity to total assets of at least 27% after adjusting pro forma stockholders equity by adding back subscriptions receivable of $7,838,000 to pro forma stockholders equity. (f) Hudson will have obtained all consents, approvals and authorizations required to be obtained under the agreements set forth in Exhibit 4.1-B, except for the items identified in paragraphs 1 and 2 thereof and except for such consents, approvals and authorizations, the failure of which to obtain would not and could not reasonably be expected to have a Material Adverse Effect or to subject the Buyer or any of its affiliates to significant liability. (g) The Closing Date will be not later than July 31, 1996. 6.2 Conditions to Hudson's Obligations. The obligations of Hudson at the Closing are subject to satisfaction of the following conditions (any or all of which may be waived in writing by Hudson): (a) The representations and warranties of the Buyer contained in this Agreement will, except as contemplated by this Agreement, be true and correct in all material respects at the Closing Date with the same effect as though made on that date (except where the failure of such representations or warranties to be true and correct, individually and in the aggregate, do not have and could not reasonably be expected to have a material adverse effect on the Company or on the Buyer's ability to consummate the transactions contemplated hereby or to subject Hudson or any of its affiliates to significant liability), and the Buyer will have delivered to Hudson a certificate dated that date and signed by the Managing Director of the Buyer or his authorized designee to that effect. (b) The Buyer will have fulfilled in all material respects all its obligations under this Agreement required to have been fulfilled prior to or at the Closing. (c) No order will have been entered by any court or governmental authority and be in force which invalidates this Agreement or restrains Hudson, the Company or the Buyer from completing the transactions which are the subject of this Agreement. (d) Hudson, the Buyer or any of their respective subsidiaries (including, after it is formed, the Company as a subsidiary of Hudson) will not have been told or otherwise been given substantial reason to believe that a specified number of parties to contracts, or Airport Authorities, as set forth on Exhibit 6.1-D will not grant Customer Consents or Airport Consents. (e) The stockholders of Hudson will have approved the transactions which are the subject of this Agreement. (f) Hudson will have obtained all consents, approvals and authorizations required to be obtained under the agreements set forth in Exhibit 4.1-B, except for the items identified in paragraphs 1 and 2 thereof and except for such consents, approvals and authorizations the failure of which to obtain would not and could not reasonably be expected to have a Material Adverse Effect or to subject Hudson or any of its affiliates to significant liability. (g) The Closing Date will be not later than July 31, 1996. A-14 108 ARTICLE VII TERMINATION 7.1 Right to Terminate. This Agreement may be terminated at any time prior to the Closing: (a) By mutual consent of the Buyer and Hudson. (b) By either the Buyer or Hudson if, without fault of the terminating party, the Closing does not occur on or before July 31, 1996. (c) By the Buyer if (i) it is determined that any of the representations or warranties of Hudson contained in this Agreement was not complete and accurate in all material respects on the date of this Agreement (except where the failure of such representations or warranties to be true and correct, individually and in the aggregate, do not have and could not reasonably be expected to have a Material Adverse Effect or to subject the Buyer or any of its affiliates to significant liability), or (ii) any event occurs which makes it impossible for all the conditions in Paragraph 6.1 to be fulfilled. (d) By Hudson if (i) it is determined that any of the representations or warranties of the Buyer contained in this Agreement was not complete and accurate in all material respects on the date of this Agreement (except where the failure of such representations or warranties to be true and correct, individually and in the aggregate, do not have and could not reasonably be expected to have a material adverse effect on the Company or on the Buyer's ability to consummate the transactions contemplated hereby or to subject Hudson or any of its affiliates to significant liability) or (ii) any event occurs which makes it impossible for all the conditions in Paragraph 6.2 to be fulfilled. (e) By either the Buyer or Hudson if (i) Hudson's Board of Directors fails to include in the Transaction Proxy Statement an unqualified recommendation that Hudson's stockholders vote to approve the transactions which are the subject of this Agreement, or (ii) that recommendation is withdrawn or qualified prior to the Stockholders Meeting. (f) By Hudson, within three business days after the date of the certification of the vote taken at the Stockholders Meeting (which certification Hudson will cause to occur as soon as possible after the Stockholders Meetings), or by the Buyer within 15 days after the date on which Hudson notifies the Buyer of the results of the voting at the Stockholders Meeting, if the transactions which are the subject of this Agreement and which are being voted upon at the Stockholders Meeting are not approved by the holders of a majority of the outstanding stock of Hudson entitled to vote thereon. (g) By either the Buyer or Hudson, if Hudson notifies the Buyer that Chemical Bank Delaware (the "Trustee"), as trustee under the Indenture dated as of July 1, 1986, relating to the Convertible Debentures (the "Indenture"), has informed Hudson that the Trustee will not sign a supplemental indenture substantially in the form of Exhibit 7.1-G. (h) By either the Buyer or Hudson, by a notice given to the other of them not later than April 10, 1996, if on or before April 1, 1996, Hudson notifies the Buyer that Hudson has received adverse reactions to the transactions contemplated by this Agreement from customers of the Aviation Services Business or from issuers of Airport Authorizations which lead Hudson to have a good faith belief that the transactions contemplated by this Agreement would negatively affect the Aviation Services Business in a significant manner. 7.2 Effect of Termination. If this Agreement is terminated pursuant to Paragraph 7.1, after this Agreement is terminated, neither party will have any further rights, obligations or liabilities under this Agreement or otherwise, except that Paragraphs 14.1, 14.2, 14.9 and 14.10 will remain in effect after the termination of this Agreement. Nothing contained in this Paragraph will relieve either party of liability for any intentional breach of this Agreement which occurs before this Agreement is terminated. However, the only sum for which Hudson or the Buyer will be liable to the other of them for any breach of this Agreement (other than a breach of Paragraph 9.1) which takes place before the Closing will be the out-of-pocket costs A-15 109 (including costs incurred by, but not charges for time of, employees and with legal fees billed at not more than counsels standard hourly billing rates) incurred by the non-breaching party, up to a maximum of $650,000. ARTICLE VIII INDEMNIFICATION 8.1 Indemnification Against Loss Due to Inaccuracies in Hudson's Representations and Warranties. Hudson indemnifies the Buyer against, and agrees to hold the Buyer harmless from, all losses, liabilities and expenses suffered or incurred by the Buyer (including, but not limited to, reasonable fees and expenses of counsel in defending against claims asserted against the Buyer and excluding any fees and expenses of investigating potential claims by or against the Buyer) because any matter which is the subject of a representation or warranty contained in Paragraph 4.1 is not as represented or warranted (except as provided in Paragraph 4.3 and except that indemnification because any matters are not as represented or warranted is limited to the aggregate amount by which the resulting losses, liabilities and expenses exceed in total $1,000,000, such $1,000,000 amount being deemed an "aggregate deductible" which will be borne by the Buyer). 8.2 Indemnification Against Loss Due to Inaccuracies in Buyer's Representations and Warranties. The Buyer indemnifies Hudson against, and agrees to hold Hudson harmless from, all losses, liabilities and expenses suffered or incurred by Hudson (including, but not limited to, reasonable fees and expenses of counsel in defending against claims asserted against Hudson and excluding any fees and expenses of investigating potential claims by or against Hudson) because any matter which is the subject of a representation or warranty contained in Paragraph 4.2 is not as represented or warranted (except as provided in Paragraph 4.3 and except that indemnification because any matters are not as represented or warranted is limited to the aggregate amount by which the resulting losses, liabilities and expenses exceed in total $1,000,000, such $1,000,000 amount being deemed an "aggregate deductible" which will be borne by Hudson). 8.3 Limit on Claims Regarding Representations and Warranties. The indemnification in Paragraph 8.1 or 8.2, as the case may be, will be the sole remedy of the Buyer or Hudson because any matter which is the subject of a representation or warranty contained in Paragraph 4.1 or 4.2 is not as represented or warranted. Any claim for that indemnification, other than a claim by the Buyer for indemnification because a matter which is the subject of a representation or warranty in Paragraph 4.1(d) is not correct, must be made not later than 45 days after the Company delivers to the Buyer a copy of the Company's consolidated financial statements for the year ending June 30, 1997 (which, under the circumstances described in Paragraph 1.3(b) and at Buyer's expense as provided in Paragraph 1.3(b), will be audited financial statements) in a written notification to the party from which indemnification is sought which describes in reasonable detail the claim and the facts on which it is based. A claim by the Buyer for indemnification because a matter which is the subject of a representation or warranty in Paragraph 4.1(d) is not correct must be made in a notification of the type described in the preceding sentence which is given to the Company not later than six months after the Company notifies the Buyer of the facts which were not as represented or warranted in a notification which states that it is intended to start a six month period under this Paragraph. Neither Hudson nor the Buyer will have any liability because any matter which is the subject of a representation or warranty contained in Paragraph 4.1 or 4.2 is not as represented or warranted unless it is described in a notification given as provided in this Paragraph. 8.4 Payment of Taxes. (a) Hudson will (i) pay all Income Taxes related to the Aviation Services Business with regard to all periods ended on or before the Closing Date and (ii) indemnify and reimburse the Company, each of the Company's subsidiaries and each holder of Units (a "Member") of the Company (other than Hudson) for all Income Taxes payable by the Company, any of its subsidiaries or any of its Members (other than Hudson) to the extent, but only to the extent, that the Income Taxes of such Member are payable as a result of taxable income attributable to the Aviation Services Business that accrued in any periods that ended on or before the A-16 110 Closing Date. As used in this Agreement, the term "Income Taxes" means all income, gains, franchise and similar taxes measured by income or gains of an entity and all interest and penalties computed on the basis of the amount of such taxes, and the term "Income Tax Return" means a form that (1) is required to be filed with a taxing authority and (2) contains a computation of the liability for Income Taxes of the entity that is required to file the form (or, in the case of an Income Tax Return filed by a passthrough entity, the liability for Income Taxes of the partners, shareholders, or other owners of such entity). Hudson and the Buyer will cause the Company and its subsidiaries to pay over to Hudson all refunds that the Company or any subsidiary receives of Income Taxes relating to periods ended on or before the Closing Date (whether such Income Taxes were paid before, on, or after the Closing Date). (b) If there is an audit adjustment to any item reported on any Income Tax Return pertaining to Income Taxes subject to indemnification under Section 8.4(a) of this Agreement, which adjustment results in an increase in the Income Taxes payable by Hudson, and results in a corresponding adjustment to items reported on an Income Tax Return of the Company, a Member or a subsidiary relating to a taxable period ending after the Closing Date with the result that Income Taxes payable by a Member (other than Hudson), the Company, or any subsidiary are reduced, or a refund of Income Taxes to a Member (other than Hudson), the Company or a subsidiary for a period ending after the Closing Date is increased, then, within 30 days after the Company, the Member or the subsidiary (a) files the income tax return or amended income tax return which reflects the reduced Income Taxes, or (b) receives the refund, the Company, the subsidiary, or the Member will pay Hudson the amount by which its Income Taxes are reduced or the refunds of Income Taxes are increased. 8.5 Indemnification Against Results of Certain Litigation (a) Hudson indemnifies the Company, each subsidiary of the Company (including, but not limited to, Hudson Canada), the Buyer and each affiliate of the Buyer against, and agrees to hold each of them harmless from, all losses, liabilities and expenses suffered or incurred by any of them (including, but not limited to, reasonable fees and expenses of counsel) with regard to the suit entitled Texaco Canada Inc. (now McColl-Frontenac Inc.) v. Petrocanada Inc., Hudson General Aviation Services Inc. and Hudson General Corporation or with regard to any other claim relating to any of the occurrences, events or conditions which are the subject of that suit; provided, however, upon payment by Hudson of the indemnification amounts to the Company and its subsidiaries which may be required by this Paragraph 8.5, the Buyer and its affiliates shall not be deemed to have suffered any losses or liabilities, and shall not have any claim against Hudson, by reason of losses or liabilities suffered by the Company or its subsidiaries; and further provided, however, that Hudson shall have no obligation to indemnify the Company or its subsidiaries to the extent that amounts had been accrued and reserves established on the books of Hudson or the Aviation Services Subsidiaries as of December 31, 1995. Any amounts received by the Company or its subsidiaries or by the Buyer or its affiliates as a result of third party indemnifications in connection with such litigation shall be promptly remitted to Hudson. ARTICLE IX ACQUISITION PROPOSALS 9.1 Other Offers. (a) From the date of execution of this Agreement until the earlier of (x) the Closing Date or (y) the date on which this Agreement terminates for any reason whatsoever (whether in accordance with Article VII hereof or otherwise), neither Hudson nor any of its subsidiaries (including the Company after it is formed) will, and Hudson will use its best efforts to cause its directors, officers, employees or other agents (including, but not limited to, investment bankers) not to, (i) initiate or solicit any Aviation Services Acquisition Proposal or (ii) subject to the fiduciary duties of Hudson's Board of Directors, acting upon the advice of counsel, engage in negotiations with, or disclose non-public information relating to the Aviation Services Business to, anyone other than the Buyer (a "Third Party"), that may be considering making, or has made, any Aviation Services Acquisition Proposal. Hudson will promptly notify the Buyer after its receipt of any Aviation Services Acquisition Proposal or any indication that any Third Party is considering making an A-17 111 Aviation Services Acquisition Proposal. For purposes of this Agreement, (i) "Aviation Services Acquisition" means (x) an acquisition of the Aviation Services Business or any substantial part of it or (y) an acquisition of Hudson or a significant interest in Hudson which, to the knowledge of any of Hudson's executive officers, is conditioned upon, or likely to result in, Hudson's not completing the transactions which are the subject of this Agreement, and (ii) "Aviation Services Acquisition Proposal" means a proposal to make, or other expression of serious interest in making, an Aviation Services Acquisition. (b) From the date of execution of this Agreement until the earlier of (x) the Closing Date or (y) the date on which this Agreement terminates for any reason whatsoever (whether in accordance with Article VII or otherwise), neither Hudson nor any of its subsidiaries (including the Company after it is formed) will, and Hudson will use its best efforts to cause its directors, officers, employees or other agents (including, but not limited to, investment bankers) not to, engage in any negotiations or discussions of substantive terms with any Third Party regarding a possible Aviation Services Acquisition until at least twenty-four hours after Hudson has given the Buyer a notice (a "Negotiation Notice") that Hudson intends to begin negotiations or discussions of substantive terms with that Third Party (who will be named in the Negotiation Notice) regarding a possible Aviation Services Acquisition (the principal proposed terms of which, including price, will be described in the Negotiation Notice). (c) Unless within 30 days after Hudson gives a Negotiation Notice to the Buyer, Hudson gives the Buyer a notice (a "Termination of Negotiation Notice") that Hudson has terminated all negotiations and discussions with the Third Party named in the Negotiation Notice regarding a possible Aviation Services Acquisition, at any time during the period beginning on the thirty-first day after the day on which the Negotiation Notice was given and ending on the day on which a Termination of Negotiation Notice relating to that Negotiation Notice is given to the Buyer, the Buyer may, by a notice to Hudson, terminate this Agreement with the same effect as a termination under Article VII. (d) Notwithstanding what is said in Paragraph 9.1(a) or (c), if between the date this Agreement is executed and the earlier of (x) the Closing Date or (y) the date on which this Agreement terminates for any reason whatsoever (whether in accordance with Article VII of this Agreement or otherwise), Hudson receives a proposal for an acquisition of Hudson or a significant interest in Hudson (the "Initial Proposal"), after Hudson gives the Buyer a notice of its intention to do so (a "Competing Bid Solicitation Notice"), Hudson may, and may cause its directors, officers, employees and other agents (including, but not limited to, investment bankers) to, solicit proposals from other parties for an acquisition of Hudson or a significant interest in Hudson. The Initial Proposal and any amendments or revisions to, or modifications of, the Initial Proposal from the party who made the Initial Proposal at all times shall be subject to the provisions of paragraphs (a),(b) and (c) of this Section 9.1 and shall not be subject to this paragraph (d). After Hudson gives the Buyer a Competing Bid Solicitation Notice, (i) any proposal Hudson receives for an acquisition of Hudson or a significant interest in Hudson will be an Aviation Services Acquisition Proposal and the transaction which is the subject of that proposal will be an Aviation Services Acquisition, even if neither the proposal nor the transaction is conditioned upon, or is likely to result in, Hudson's not completing the transactions which are the subject of this Agreement, and (ii) if Hudson gives the Buyer a Negotiation Notice regarding a possible acquisition of Hudson or a substantial interest in Hudson, the Buyer may at any time during the period beginning on the day that a Negotiation Notice is given to the Buyer and ending on the day on which a Termination of Negotiation Notice relating to that Negotiation Notice is given to the Buyer, terminate this Agreement with the same effect as a termination under Article VII; unless, however, such acquisition is conditioned upon Hudson's not completing the transactions which are the subject of this Agreement, in which event the provisions of Paragraphs (a), (b) and (c) of this Section 9.1 shall govern. (e) If either (i) Hudson or the Buyer terminates this Agreement under Paragraph 7.1(e) or (ii) the Buyer terminates this Agreement under Paragraph 9.1(c), within ten days after demand from the Buyer accompanied by a reasonably detailed statement of the out-of-pocket costs the Buyer has incurred (with legal fees billed at not more than its counsel's standard hourly billing rates) in connection with its efforts to enter into the transactions which are the subject of this Agreement (including reasonable estimates of out-of-pocket costs for which the Buyer has not yet been billed), accompanied by reasonable documentation of those costs, Hudson will reimburse the Buyer for those costs, up to a maximum of $650,000. A-18 112 ARTICLE X AVIATION SERVICES COOPERATION 10.1 Cooperation In Expanding Presence. The Buyer and the Company will cooperate in their common efforts to expand their presence in the market for services of the type included in the Aviation Services Business ("Aviation Ground Services") in North America and internationally. To accomplish this, they will work together to develop a common international marketing concept for their respective Aviation Ground Services, including, possibly, providing Aviation Ground Services under a common international brand. If they do this, they will consider changing the name of the Company to reflect that international brand. In addition, the Buyer and the Company will attempt to agree upon a common strategy in the fields of equipment purchasing, ground handling, equipment maintenance, passenger services training, electronic data processing, fuel purchasing and other elements of providing Aviation Ground Services with a view to improving the quality, and reducing the cost, of Aviation Ground Services offered to customers of each of them. Except as described in Paragraph 10.3, the cooperation will not include passenger handling services. 10.2 Steering Committee. Promptly after the Closing, the Buyer and the Company will form a joint steering committee (the "Steering Committee"), which will include the chief executive officer of Hudson and the managing director of the Buyer, will meet regularly, and in any event at least once each quarter, and will develop strategies and make recommendations to the Buyer and the Company regarding expansion of Aviation Ground Services activities in the United States and Canada, international Aviation Ground Services business development strategies (including entering into local partnerships), Aviation Ground Services customer service, Aviation Ground Services general marketing activities and other significant issues relating to the management and marketing of their respective Aviation Ground Services activities. The Buyer and the Company will keep each other informed of the efforts each of them is making to carry out the strategies developed and recommendations made by the Steering Committee. 10.3 Option if the Buyer Creates a Passenger Handling Services Subsidiary. (a) If at any time when the Buyer owns at least 15% of the outstanding Units, or within one year after the day on which the Buyer and its affiliates, or Hudson and its affiliates, cease to own at least 15% of the outstanding Units, a direct or indirect subsidiary of the Buyer or Deutsche Lufthansa AG ("Lufthansa") begins rendering passenger handling services (i.e., ticketing, check-ins, passenger loading and other passenger related airport services) in North America to airlines other than Lufthansa German Airlines or airlines majority owned by, or majority commonly owned with, Lufthansa, promptly after the subsidiary begins rendering those services, the Buyer will (a) notify Hudson that the subsidiary is rendering those services, and (b) offer Hudson the option, which must be exercised within six months after the date of the notice to Hudson, to purchase 26% of the outstanding equity securities of the subsidiary on terms substantially the same as those on which the Buyer is purchasing the Purchased Units, with the price of the 26% interest in the passenger handling services subsidiary being based upon (i) the estimated average earnings of the passenger handling services subsidiary during the fiscal year (based on the Buyer's fiscal year) in which Hudson purchases the 26% interest and the following three fiscal years, as estimated by the Buyer, divided by (ii) 0.12. For the purposes of this Paragraph, rendering interline services relating to passengers who use an airline which is an alliance party with Lufthansa German Airlines, for a portion of a trip which includes travel on Lufthansa German Airlines (whether under a code sharing arrangement or otherwise), will not constitute rendering passenger handling services to an airline other than Lufthansa German Airlines or an airline majority owned by, or majority commonly owned with, Lufthansa German Airlines. (b) If Hudson exercises the option described in Paragraph 10.3(a) and purchases a 26% interest in the passenger handling services subsidiary, Hudson will have the further option to purchase equity securities of that subsidiary which will increase Hudson's ownership to up to 49%, which further option will be on substantially the same terms as the Option, with the exercise price based upon (i) the average pre-tax earnings of the passenger handling services subsidiary during the four fiscal years (based on the Buyer's fiscal year) preceding the fiscal year in which the further option is exercised (or, to the extent the further option is exercised before the passenger handling services subsidiary has been rendering passenger handling services for four full fiscal years, the average of the actual pre-tax earnings of the passenger handling services subsidiary A-19 113 during the full fiscal years it has been rendering passenger handling services and the estimated pre-tax earnings of the passenger handling services subsidiary during a number of subsequent years such that the average will be of actual or estimated pre-tax earnings for a total of four years), divided by (ii) 0.12. (c) If the Buyer is required to give Hudson an option under Paragraph 10.3(a) or (b), the Buyer and Hudson will cooperate to agree upon complete terms of that option, consistent with those set forth in Paragraphs 10.3(a) and (b). ARTICLE XI AGREEMENT NOT TO COMPETE 11.1 Agreement by the Buyer not to Compete. Neither the Buyer nor Lufthansa nor any of their respective affiliates will, at any time when the Buyer owns Units, nor within one year after the Buyer ceases to own Units, engage directly or through ownership of equity of other entities (other than less than 2% of the shares of a publicly traded company acquired solely as an investment), in rendering Aviation Ground Services (other than passenger handling services) in the United States of America or in Canada, except that nothing will prevent the Buyer from rendering Aviation Ground Services to Lufthansa German Airlines or airlines which are alliance partners of Lufthansa German Airlines. ARTICLE XII ABSENCE OF BROKERS 12.1 Representations and Warranties Regarding Brokers and Others. The Buyer and Hudson each represents and warrants to the other of them that nobody acted as a broker, a finder or in any similar capacity in connection with the transactions which are the subject of this Agreement, except that Allen & Company, Incorporated acted as a financial adviser to Hudson. Hudson will pay all sums due to Allen & Company, Incorporated. The Buyer and Hudson each indemnifies the other of them against, and agrees to hold the other of them harmless from, all losses, liabilities and expenses (including, but not limited to, reasonable fees and expenses of counsel and costs of investigation) incurred because of any claim by anyone for compensation as a broker, a finder or in any similar capacity by reason of services allegedly rendered to the indemnifying party in connection with the transactions which are the subject of this Agreement. ARTICLE XIII CERTAIN COVENANTS OF BUYER 13.1 Restrictions on Buyer's Activities Regarding Hudson and Its Stock. The Buyer agrees that from the date of this Agreement until the later of (i) the third anniversary of the date of this Agreement, or (ii) the first anniversary of the date on which the Buyer and its affiliates, or Hudson and its affiliates, cease to own any Units of the Company, without the prior written consent of the Board of Directors of Hudson, specifically expressed in a resolution adopted by a majority of the directors of Hudson, the Buyer will not, and the Buyer will cause each of its affiliates not to, directly or indirectly: (a) acquire, offer or propose to acquire, or agree to acquire, directly or indirectly, whether by purchase, tender or exchange offer, through the acquisition of control of another Person (as defined below), by joining a partnership, limited partnership, syndicate or other "group" (within the meaning of Section 13(d)(3) of the Exchange Act) or otherwise, any shares of common stock or any other securities of Hudson entitled to vote generally in the election of directors or any other securities (including, without limitation, rights and options) convertible into, exchangeable for or exercisable for, any of the foregoing (whether or not presently convertible, exchangeable or exercisable) (any such securities being "Voting Securities"); (b) make, or in any way participate, directly or indirectly, in any "solicitation" (as such term is used in the proxy rules of the Securities and Exchange Commission as in effect on the date hereof) of proxies A-20 114 or consents (whether or not relating to the election or removal of directors), or otherwise communicate with Hudson's shareholders pursuant to Rule 14a-1(l)(2)(iv) under the Exchange Act, seek to advise, encourage or influence any individual, group, corporation, partnership, firm, government or agency or political subdivision thereof, or other entity of whatever nature (each a "Person") with respect to the voting of any Voting Securities, initiate, propose or otherwise "solicit" (as such term is used in the proxy rules of the Securities and Exchange Commission as in effect on the date hereof) shareholders of Hudson for the approval of shareholder proposals whether made pursuant to Rule 14a-8 under the Exchange Act or otherwise, or induce or attempt to induce any other Person to initiate any such shareholder proposal; (c) seek, propose, or make any statement with respect to, any merger, consolidation, business combination, tender or exchange offer, sale or purchase of assets, sale or purchase of securities, dissolution, liquidation, restructuring, recapitalization or similar transaction of or involving the Company or any of its affiliates or "associates" (as defined in Rule 12b-2 under the Exchange Act as in effect on the date hereof) of Hudson and its affiliates; (d) form, join or in any way participate in a "group" (as defined in Section 12(d)(3) of the Exchange Act) with respect to any Voting Securities; (e) deposit any Voting Securities in any voting trust or subject any Voting Securities to any arrangement or agreement with respect to the voting of any Voting Securities; (f) execute any written consent with respect to Hudson or its Voting Securities; (g) otherwise, act, alone or in concert with others, to control or seek to control or influence or seek to influence the management, Board of Directors or policies of Hudson (except that nothing in this Agreement will prevent the Buyer or any affiliate of the Buyer from attempting to influence any matter related to the Company or its activities); (h) seek, alone or in concert with others, representation on the Board of Directors of Hudson, or seek the removal of any member of the Board of Directors of Hudson; (i) make any publicly disclosed proposal or enter into any discussion regarding the foregoing; (j) make any proposal, statement or inquiry, or disclose any intention, plan or arrangement (whether written or oral) inconsistent with the foregoing, or make or disclose any request to amend, waive or terminate any provisions of this Paragraph 13.1; or (k) have any discussions or communications, or enter into any arrangements, understandings or agreements (whether written or oral) with, or advise, finance, assist or encourage, any other Person in connection with any of the foregoing, or make any investment in or enter into any arrangement with, any other Person that engages, or offers or proposes to engage, in any of the foregoing. ARTICLE XIV GENERAL 14.1 Expenses. The Buyer and Hudson will each pay its own expenses, and Hudson will cause the Company to pay the Company's expenses, in connection with the transactions which are the subject of this Agreement, including legal fees. 14.2 Access to Properties, Books and Records. (a) From the date of this Agreement until the Closing Date, Hudson will, and will cause each of the Aviation Services Subsidiaries, the Company and each of the Company's subsidiaries to, give representatives of the Buyer full access during normal business hours to all of their respective properties, books and records. The Buyer will, and will cause its representatives to, hold all information it receives as a result of its access to the properties, books and records of Hudson, the Company or their subsidiaries in confidence, except to the extent that information (i) is or becomes available to the public (other than through a breach of this Agreement), (ii) becomes available to the Buyer from a third party which, A-21 115 insofar as the Buyer is aware, is not under an obligation to Hudson, to the Company or to a subsidiary to keep the information confidential, (iii) was known to the Buyer before it was made available to the Buyer or its representative by Hudson, the Company or a subsidiary, or (iv) otherwise is independently developed by the Buyer. If this Agreement is terminated without the Buyer's acquiring the Purchased Units, the Buyer will, at Hudson's request, deliver to Hudson all documents and other material obtained by the Buyer from Hudson, the Company or a subsidiary in connection with the transactions which are the subject of this Agreement or evidence that material has been destroyed by the Buyer. (b) In addition to (and not in limitation of) the provisions of Paragraph 14.2(a), the Buyer and Hudson expressly recognize and acknowledge that (x) the customers and airport authorities served by Hudson (and which, after the Closing Date, will be served by the Company) engage and will engage in discussions and negotiations with Hudson (and, after the Closing Date, with the Company) that are proprietary and confidential in nature, and (y) that many of such customers and airport authorities compete for business with Lufthansa, and accordingly are and will be desirous of restricting the access of Lufthansa to information concerning their business relationships with Hudson (and, after the Closing Date, with the Company). Accordingly, the Buyer will not request, nor shall Hudson or the Company be required to provide to Lufthansa or any of its representatives or agents (except those employees of Lufthansa who have responsibility for overseeing the performance of the Company or the Buyer's relationship with the Company and who are not engaged in its airline business in a capacity which might lead them to be directly or indirectly (or, as to a Representative (as defined in the LLC Agreement) who is not engaged in its airline business in a capacity which might lead the Representative to be directly) engaged in procuring for Lufthansa services in North America which are rendered by the Company or its subsidiaries, or are competitive with services rendered by the Company or its subsidiaries, as part of the Aviation Services Business) copies of any proprietary or confidential agreements or other documentation including, but not limited to, proposals, notes, contracts, annexes, exhibits, cost analyses or pricing information of any nature and in any form pertaining to customers or airport authorities served by Hudson (and, after the Closing Date, served by the Company.) In addition, the Buyer and Hudson will instruct and cause their employees not to provide to or discuss with any employees of Lufthansa, other than those excepted in the preceding sentence, any proprietary or confidential information (whether relating to negotiations, discussions or otherwise) pertaining to customers or airport authorities with which Hudson (and, after the Closing Date, the Company) has a business relationship. The Company will only engage in business transactions with Lufthansa that provide for normal pricing, terms and conditions in the ordinary course of business and consistent with past practice. 14.3 Press Releases. The Buyer and Hudson will consult with each other before issuing any press releases with respect to this Agreement, except that nothing in this Paragraph will prevent either party from making any statement when and as required by law or by the rules of any securities exchange or securities trading system on which securities of that party or an affiliate are traded. 14.4 No Impediment to Sales of Hudson Shares. Except as expressly stated in Paragraph 9.1, nothing in this Agreement or in the LLC Agreement will prohibit or limit Hudson's right or ability to engage in any transaction or transactions relating to or involving any sale, exchange, transfer or other disposition of shares of Hudson (whether or not those shares constitute a controlling interest in Hudson), whether by sale, merger, other business combination or otherwise. 14.5 Entire Agreement. This Agreement, the LLC Agreement and the documents and certificates required to be delivered, or the delivery of which is a condition to obligations, at the Closing (the "Closing Documents") contain the entire agreement between Hudson and the Buyer relating to the transactions which are the subject of this Agreement. All prior negotiations, understandings and agreements between Hudson and the Buyer are superseded by this Agreement, the LLC Agreement and the Closing Documents, and there are no representations, warranties, understandings or agreements concerning the transactions which are the subject of this Agreement other than those expressly set forth in this Agreement, the LLC Agreement and the Closing Documents. Without limiting what is said in the preceding sentence, Hudson and the Buyer each (i) acknowledges that, other than as expressly set forth herein, none of the other party, its subsidiaries or any of their respective officers, directors, agents, representatives, employees or affiliates makes or has made any A-22 116 representation or warranty, either express or implied, as to the accuracy or completeness of any of the information provided or made available to Hudson or the Buyer, as the case may be, or its agents or representatives, and (ii) agrees that none of the other party's, directors, agents, representatives, employees or affiliates shall have any liability or responsibility whatsoever to Hudson or the Buyer, as the case may be, or any of its agents or representatives on any basis (including, without limitation, in contract, under Federal or state securities laws or otherwise) based upon any information made available or statements made to Hudson or the Buyer, as the case may be, or its agents or representatives (or any omissions therefrom), excepting those representations, warranties, covenants and agreements of Hudson or the Buyer set forth in this Agreement, the LLC Agreement or the Closing Documents and subject to the limitations and restrictions contained herein or therein. 14.6 Effect of Disclosures. Any information disclosed by a party in connection with any representation or warranty contained in this Agreement (including exhibits to this Agreement) will be treated as having been disclosed in connection with each representation and warranty made by that party in this Agreement. 14.7 Captions. The captions of the articles and paragraphs of this Agreement are for reference only, and do not affect the meaning or interpretation of this Agreement. 14.8 Assignments. Neither this Agreement nor any right of any party under it may be assigned, except that the Buyer may assign its rights and obligations under this Agreement to a corporation which is wholly owned by the Buyer or by persons or entities which directly or indirectly own all the outstanding stock of the Buyer, in each case if the corporation agrees in writing to make the representations and warranties set forth in Paragraph 4.2 (with such changes as are appropriate to reflect differences between the Buyer and its assignee) and to be bound by the other obligations of the Buyer contained in this Agreement; provided, however, that no such assignment will release the Buyer from the representations and warranties set forth in Paragraph 4.2 or its other obligations contained in this Agreement. 14.9 Notices and Other Communications. Any notice or other communication under this Agreement must be in writing and will be deemed given when delivered in person or sent by facsimile (with proof of receipt at the number to which it is required to be sent), or on the third business day after the day on which mailed by certified mail return receipt requested from within the United States of America, to the following addresses (or such other address as may be specified after the date of this Agreement by the party to which the notice or communication is sent): If to Hudson: Hudson General Corporation 111 Great Neck Road Great Neck, New York 11021 Attention: Chief Executive Officer Facsimile No.: 1-516-487-4855 with a copy to: Skadden Arps Slate Meagher & Flom 919 Third Avenue New York, New York 10022 Attention: Daniel Stoller, Esq. Facsimile No.: 1-212-735-2000 A-23 117 If to the Buyer: Lufthansa Airport and Ground Services GmbH Lufthansa-Basis, Geb. 357 D-60546 Frankfurt am Main Germany Attention: Managing Director Facsimile No.: 49-69-696-6883 with copies to: Lufthansa German Airlines 1640 Hempstead Turnpike East Meadow, L.I., New York 11554 Attention: General Counsel North America Facsimile No.: 1-516-296-9399 and Rogers & Wells 200 Park Avenue New York, New York 10166 Attention: David W. Bernstein Facsimile No.: 1-212-878-8375 14.10 Governing Law; Jurisdiction. This Agreement will be governed by, and construed under, the laws of the State of New York in the United States of America relating to contracts made and to be performed in that state. Any action or proceeding relating to this Agreement or any matters arising out of or in connection with this Agreement, and any action for enforcement of any judgment in respect thereof, shall be brought exclusively in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, Hudson and the Buyer each hereby accepts for itself and in respect of its property, generally and unconditionally, the exclusive jurisdiction of the aforesaid courts and appellate courts thereof. Hudson and the Buyer each irrevocably consents to service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, or by recognized international express carrier or delivery service, to Hudson or the Buyer at their respective addresses referred to in Paragraph 14.9. In addition, the Buyer hereby designates its General Counsel North America, 1640 Hempstead Turnpike, East Meadow, New York 11554, or with respect to any time when there is no person in that capacity, the Buyer hereby designates the Vice President USA of Deutsche Lufthansa AG, at that address, as its agent for service of process, and service upon the Buyer shall be deemed to be effective upon service of its agent as aforesaid or of its successor designated in accordance with the following sentence. The Buyer may designate another corporate agent or law firm reasonably acceptable to Hudson and located in the Borough of Manhattan, in the City of New York, as successor agent for service of process upon 30-days prior written notice to Hudson. Hudson and the Buyer each hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement, or for enforcement of a judgment in respect thereof, in the courts referred to above and hereby further irrevocably waives and agrees, to the extent permitted by applicable law, not to plead or claim that such an action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of any party hereto to serve process in any other manner permitted by law. 14.11 Amendments. This Agreement may be amended only by a document in writing signed by both the Buyer and Hudson. 14.12 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same agreement. A-24 118 IN WITNESS WHEREOF, the Buyer and Hudson have executed this Agreement, intending to be legally bound by it, on the day shown on the first page of this Agreement. HUDSON GENERAL CORPORATION By: /s/ JAY B. LANGNER ------------------------------------ Title: President LUFTHANSA AIRPORT AND GROUND SERVICES GmbH By: /s/ PETER BLUTH ------------------------------------ Title: Managing Director By: /s/ ANDREAS VETTER ------------------------------------ Title: Authorized Signatory A-25 119 ANNEX B FORM OF LIMITED LIABILITY COMPANY AGREEMENT OF HUDSON GENERAL LLC This is a Limited Liability Company Agreement dated as of July 1, 1996 among Hudson General Corporation ("Hudson"), a Delaware corporation, Lufthansa Airport and Ground Services GmbH ("LAGS"), a German corporation, and Hudson General LLC (the "Company"), a Delaware limited liability company. ARTICLE I DEFINITIONS 1.1 For the purposes of this Agreement: "Act" means the Delaware Limited Liability Company Act, as in effect from time to time, or any successor. "Adjustment" has the meaning set forth in Paragraph 3.8(g). "Adjustment Date" has the meaning set forth in Paragraph 3.8(h). "Agreement" means this Limited Liability Company Agreement, as it may be amended from time to time. "Approved Airline" has the meaning set forth in Paragraph 8.1. "Aviation Services" means the services described on pages 3 through 7 of Hudson's 1995 Annual Report to Shareholders which was filed as Exhibit 13 to Hudson's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, including, but not limited to, aircraft ground handling services (including, but not limited to, aircraft marshalling, loading and off-loading of aircraft baggage, freight and commissary items, passenger ticketing, airport porter and wheelchair services, aircraft cleaning, aircraft de-icing, ramp sweeping, glycol recovery, water and lavatory service, maintenance and service checks, weight and balance, cargo and mail transferring, aircraft pushbacks, and ground power and air conditioning), airport ground transportation services, aircraft fueling services (including, but not limited to, contract fueling, fuel management and retail sales of fuel), warehousing airline cargo, airport snow removal services, selling, leasing and maintaining aircraft ground support equipment and providing specialized aircraft maintenance services. "Aviation Services Business" means the business of the Company and its subsidiaries of rendering Aviation Services. "Business Plan" has the meaning set forth in Paragraph 7.1. "Capital Account" means the capital account of a Member maintained as required by Paragraph 3.8. "Capital Contribution" means cash or other property transferred to the Company in payment for Units or as a capital contribution without purchasing Units. "Class A Member" means a Member who holds Class A Units (only in the Member's capacity as a holder of those Units). "Class B Member" means a Member who holds Class B Units (only in the Member's capacity as a holder of those Units). B-1 120 "Class A Representative" means a member of the Member Board selected by the holders of the Class A Units. "Class B Representative" means a member of the Member Board selected by the holders of the Class B Units. "Class A Unit" means a Unit having the special rights and preferences provided in this Agreement. Initially, there are 740 Class A Units, each of which is held by Hudson. "Class B Unit" means a Unit having the special rights and preferences provided in this Agreement. Initially, there are 260 Class B Units, each of which is held by LAGS. "Code" means the Internal Revenue Code of 1986, as amended, and any successor law. "Company" means Hudson General LLC. "Company Property" has the meaning set forth in Paragraph 3.8(g). "Company Purchase Option" has the meaning set forth in Paragraph 8.4(a). "Debentures" has the meaning set forth in Paragraph 5.5(e). "Dissolution Events" has the meaning set forth in Paragraph 13.1. "Distributable Net Income" in a period means (i) 50% of the Net Income for that period, minus (ii) any special reserves approved by the Member Board to ensure that the Company and its subsidiaries will have adequate funds (after taking account of borrowing availability under credit facilities) to enable them to meet their reasonably expected cash needs, minus (iii) any interest income received pursuant to Paragraph 1.3 of the Unit Purchase Agreement (defined below); provided, however, that only 10% of the pre-tax earnings generated by Hudson General Aviation Services, Inc. ("Hudson Canada") will be included in Distributable Net Income. "Fiscal Quarter" means the first, second, third or fourth three-month period in a Fiscal Year. "Fiscal Year" means, until the Board determines otherwise, the one-year period (or shorter period beginning on the date the Company is formed) ending on a June 30. "GAAP" means generally accepted United States accounting principles as in effect from time to time. "Holder Purchase Option" has the meaning set forth in Paragraph 8.4(a). "Hudson" means Hudson General Corporation, a Delaware corporation. "Initial Capital Contribution" means the cash paid or property transferred to the Company by a Member as the consideration for the Member's initial purchase of Units. The amount of the Initial Capital Contribution for each Member will be as set forth on Schedule I hereto. "LAGS" means Lufthansa Airport and Ground Services GmbH, a German corporation. "Lufthansa" has the meaning set forth in Paragraph 5.8(b). "Member" means a person who becomes a member of the Company as provided in Paragraph 11.1. "Member Board" means the Board of Member Representatives described in Article V. "Net Income" and "Net Loss" means the consolidated net income or net loss of the Company and its subsidiaries for a period calculated in accordance with GAAP. "Notice of Exercise" has the meaning set forth in Paragraph 8.4(b). "Officer" means the President, any Vice President, the Secretary, and the Treasurer of the Company, and any other officer of the Company elected as provided in Article VI. B-2 121 "Pre-Tax Income" means the consolidated net income (loss) of the Company and its subsidiaries before provision (benefit) for income taxes and the cumulative effect of changes in accounting principles for a period calculated in accordance with GAAP. "Prior Year" has the meaning set forth in Paragraph 7.1. "Proposed Transfer Notice" has the meaning set forth in Paragraph 8.4(a). "Purchase Option" has the meaning set forth in Paragraph 8.4(a). "Registration Statement" has the meaning set forth in Paragraph 5.5(c) "Regulations" means the income tax regulations promulgated under the Code, as those regulations may be amended from time to time (including temporary Regulations). "Representative" means a Class A Representative or a Class B Representative. "Taxable Income" or "Tax Loss" means for a Fiscal Year, a Fiscal Quarter or another period, an amount equal to the income or loss of the Company for that Fiscal Year, Fiscal Quarter or other period, determined in the manner in which income or loss is determined for Federal income tax purposes, including Section 703(a) of the Code (for this purpose all items of income, gain, loss or deduction required under Section 703(a)(1) of the Code to be stated separately will be included in Taxable Income or Tax Loss). "Tax Matters Member" has the meaning set forth in Paragraph 12.2. "Tangible Asset" means an asset that is not described in Section 197(d) of the Code. "Total Revenues" means consolidated revenues of the Company and its subsidiaries for a period calculated in the same manner in which they are calculated in determining Net Income for that period. "Transferring Holder" has the meaning set forth in Paragraph 8.4(a). "Unit" means a Class A Unit or a Class B Unit, or a unit of any other class which the Company may at any time be authorized by this Agreement to issue. "Unit Purchase Agreement" means the Unit Purchase and Option Agreement dated February 27, 1996 (effective as of January 1, 1996) between LAGS and Hudson. "Upcoming Year" has the meaning set forth in Paragraph 7.1. Other terms which are defined in this Agreement will have the meanings given to them where they are defined. Accounting terms which are defined under GAAP will, unless they are specifically defined in another manner in this Agreement, have the meanings given to them under GAAP from time to time. ARTICLE II ORGANIZATION 2.1 Name of the Company. The name of the Company is "Hudson General LLC". 2.2 Registered Office and Agent. The registered office of the Company in the State of Delaware, and its registered agent for service of process in that State, will be as set forth in the Certificate of Formation of the Company, as it is initially filed with the Secretary of State of Delaware, and as it may be amended from time to time. 2.3 Offices. The Company may have offices and places of business at such locations, whether within or outside of the State of Delaware, as the Member Board may from time to time determine or the business of the Company may require. 2.4 Purposes. The purpose of the Company will be to engage in any lawful act or activity for which limited liability companies may be organized under the Act. Without limiting what is stated in the preceding B-3 122 sentence, the initial principal purpose of the Company will be to engage in the business of rendering Aviation Services. 2.5 Term. The existence of the Company will continue in perpetuity until it is dissolved as provided in Article XIII. ARTICLE III UNITS 3.1 Authorization to Issue Units. The Company will be authorized to issue up to 1,451 Units, of which not more than 740 Units may be Class A Units and not more than 711 Units may be Class B Units. 3.2 Sales of Units. The Company may sell Units for such consideration as is approved by the Member Board in particular instances. The consideration may be cash, non-cash assets, services or any other form of consideration which would be lawful consideration for the issuance of stock by a corporation incorporated in Delaware. The consideration paid by a Member to the Company for Units will constitute a Capital Contribution by the Member to the Company. 3.3 Rights and Preferences of Units. Each Unit of a given class will be identical in all respects (including, but not limited to, with regard to the rights of Members to vote, to receive distributions from time to time, to convert Units of the class into Units of another class and to receive distributions on liquidation of the Company) with each other Unit of the same class. Except as expressly provided in this Agreement, each Class A Unit will be identical with each Class B Unit. 3.4 Meetings. (a) An annual meeting of Members of each class will be held on the first Monday of November in each year, or if that is a legal holiday in the place where the Company has its principal office, on the next following business day in that place. If, pursuant to Paragraph 3.5, the Members of two or more classes vote as a single class with regard to any matters brought before their annual meetings, the annual meetings in that year of the holders of those classes of Units will be combined into a single meeting (but with separate voting with regard to any matters as to which they vote as separate classes). (b) Special meetings of Members of a class may be called at any time for any purpose by a majority of the Members of that class, or by the Members holding a majority of the Units of that class, or by the President or the Secretary of the Company. (c) Notice of each meeting of the Members of any class, stating the date, time and place of the meeting and the matters to be voted upon at it, must be given not less than ten nor more than sixty days before the date of the meeting to each Member entitled to vote at the meeting. 3.5 Voting. (a) Except as provided in Article V, the Members of all classes will vote together as though the Units were of a single class. At any meeting of Members, each Member having the right to vote may vote at that meeting in person or by proxy. Each Member entitled to vote at a meeting will be entitled to one vote for each Unit of the class regarding which the Member is entitled to vote at the meeting registered in the Member's name on the books of the Company. (b) The presence in person or by proxy of holders of a majority of the Units of each class entitled to vote at the meeting will be necessary, and will constitute a quorum, for the transaction of business at the meeting. (c) The selection of Class A Representatives and Class B Representatives will be determined by plurality vote. Except as otherwise provided in this Agreement, any other matter will be determined by the vote of a majority of the Units which are voted with regard to it. (d) Whenever the vote of Members at a meeting is required or permitted in connection with any action by the Company, the meeting and vote may be dispensed with if the action is consented to in writing by B-4 123 Members having at least the minimum number of votes required to authorize the action at a meeting at which the holders of all Units entitled to vote are present and voted. 3.6 Hudson's Right to Convert Class A Units. Hudson may at any time convert any number of Class A Units into the same number of Class B Units for the purpose of selling the Class B Units to LAGS as a result of an exercise by LAGS of the Option contained in the Unit Purchase Agreement, but not otherwise. In order to convert Class A Units into Class B Units, Hudson will (i) if Units are not represented by certificates, send the Company a notice directing the Company to reduce the number of Class A Units, and increase the number of Class B Units, registered in Hudson's name by the number of Units being converted from Class A Units to Class B Units or (ii) if Units are represented by certificates, send the Company the certificates representing the Class A Units which are to be converted accompanied by a written instruction to convert them into Class B Units, in either case (iii) accompanied by (x) a copy of the notice of exercise of the Option with regard to the Class B Units to be issued as a result of the conversion, and (y) a certification by Hudson that it has not elected, and will not elect, to have the Company sell the Units as to which the Option has been exercised. 3.7 Unit Register. The Company will maintain a Unit register in which it will record the names, addresses and taxpayer identification numbers of the owners of Units and the number of Units of each class owned by each of them. Upon notification that Units have been transferred (or, if Units are represented by certificates, upon receipt of certificates representing Units with appropriate documents of assignment attached) and evidence satisfactory to the Company that the transfer was permitted by Article VIII, the Company will record the transfer in the Unit register. The Company may for all purposes treat the person shown in the Unit register as the owner of the Units shown in the Unit register, even if the Company has notice that the Units have been transferred to another person. Any reference in this Agreement to information about Units or holders or owners of Units shown on the books of the Company will refer to information shown in the Unit register. 3.8 Capital Accounts. (a) The Company will maintain on its books a Capital Account for each Member in accordance with the terms of this Paragraph 3.8. Notwithstanding any other provision of this Agreement, Capital Accounts will be maintained in accordance with Regulations implementing Code Section 704(b). (b) A Member's Capital Account will be increased by: (i) the Member's Initial Capital Contribution and any additional Capital Contributions the Member may make from time to time; (ii) the Net Income allocated to the Member in accordance with Paragraph 3.9; and (iii) other amounts, to the extent required under Regulations Section 1.704-1(b)(2)(iv)(b). (c) A Member's Capital Account will be decreased by: (i) the amount of all distributions made with respect to Units shown on the books of the Company to be held by the Member; (ii) the Net Losses allocated to the Member in accordance with Paragraph 3.9; and (iii) other amounts, to the extent required under Regulations Section 1.704-1(b)(2)(iv)(b). (d) In the event of a contribution of Tangible Assets other than cash, the value of each such Tangible Asset shall be deemed to be equal to its fair market value (net of any liabilities secured by such Tangible Asset that the Company is considered to assume or take subject to under Section 752 of the Code). (e) (i) For purposes of this Agreement, the fair market value of each Tangible Asset (other than cash) contributed by Hudson as a part of its Initial Capital Contribution is the net book value of such Tangible Asset on the books of Hudson. B-5 124 (ii) After the fair market value of each Tangible Asset (other than cash) contributed by Hudson as part of its Initial Capital Contribution has been determined in the manner set forth in Paragraph 3.8(e)(i), (w) the fair market value determined with respect to each such Tangible Asset shall be reduced by the amount of liabilities secured by such Tangible Asset which the Company is considered to assume or take subject to under Section 752 of the Code, (x) the values (net of the liabilities described in clause (e)(ii)(w)) for all such Tangible Assets shall be added to the amount of cash that Hudson contributed as part of its Initial Capital Contribution, (y) the amount determined in clause (e) (ii)(x) shall be subtracted from Hudson's Initial Capital Contribution, and (z) the resulting amount shall be allocated as determined by the Company among the Company's goodwill, going concern value, and other assets described in Section 197(d) of the Code. (f) In the event of a distribution of property other than cash, the value of such property shall be deemed to be equal to its fair market value (net of any liabilities secured by such distributed property that the recipient Members are considered to assume or take subject to under Section 752 of the Code). Any gain or loss associated with such property shall be allocated to the Members' Capital Accounts in accordance with Paragraph 3.9, and adjustments to Capital Accounts in respect of distributions of such property shall reflect its fair market value (net of any liabilities secured by such distributed property that the recipient Members are considered to assume or take subject to under Section 752 of the Code). (g) If money or other property (other than a de minimis amount) is contributed to the Company by a new or existing Member as consideration for Units, or if the Company is liquidated or distributes money or other property (other than a de minimis amount) to a retiring or continuing Member as consideration for Units, then the Capital Accounts of the Members shall be increased or decreased to reflect the value of the Company's property, including goodwill and other intangible assets, at the time of the contribution or distribution ("Company Property"). Such increase or decrease (each, an "Adjustment") shall be made in accordance with the provisions of this Paragraph 3.8. (h) Each Adjustment shall be based on the fair market value of the Company Property on the date of the Adjustment (the "Adjustment Date"); provided, however, that no item of Company Property shall have a fair market value that is less than the amount of any nonrecourse indebtedness to which such Company Property is subject. (i) Each Adjustment shall reflect the manner in which the unrealized income, gain, loss, or deduction inherent in Company Property (that has not been reflected in the Capital Accounts previously) would be allocated among the Members as if there were a taxable disposition of that Company Property for its fair market value on the Adjustment Date and any resulting income, gain, loss or deduction were allocated in accordance with Paragraph 3.9. (j) The Capital Accounts shall be adjusted in accordance with Treas. Reg. sec. 1.704-1(b)(2)(iv)(g) (or a successor provision) for allocations to the Members of depreciation, depletion, amortization, and gain or loss, as computed for book purposes, with respect to the Company Property. (k) The Members' distributive shares of depreciation, depletion, amortization, and gain or loss, as computed for tax purposes, with respect to the Company Property shall be determined so as to take account of the variation between the adjusted tax basis and book value of such Company Property in the same manner as under Section 704(c) of the Code. (l) The amount of book depreciation, depletion, or amortization for a period with respect to an item of Company Property is the amount that bears the same relationship to the book value of such property as the depreciation (or cost recovery deduction), depletion, or amortization computed for tax purposes with respect to such property bears to the adjusted tax basis of such property. If any Company Property has a zero adjusted tax basis, then the book depreciation, depletion, or amortization may be determined under any reasonable method selected by the Company. B-6 125 3.9 Allocations. (a) Except as set forth in Paragraphs 3.9(b), (c), (d), and (e), Taxable Income or Tax Loss for each Fiscal Year will be allocated among the holders of Units in proportion to the respective numbers of the Units held by them. (b) If with regard to any Fiscal Year, the per Unit distributions to the holders of one class of Units are larger than the per Unit distributions to the holders of one or more other classes of Units, then the Taxable Income or Tax Loss (and each item of income, gain, deduction or loss required to be stated separately) in that Fiscal Year will be allocated to the holders of the respective classes of Units in the same proportions per Unit as the per Unit distributions in that Fiscal Year; provided, however, that for purposes of this Paragraph 3.9(b), any distribution made pursuant to Paragraph 4.2(c) in respect of which Taxable Income or Tax Loss has been allocated in a prior Fiscal Year shall not be taken into account in determining the allocation of Taxable Income or Tax Loss under this Paragraph 3.9(b). (c) A Member who unexpectedly receives an adjustment, allocation or distribution described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5), and (6) will be allocated items of income and gain (consisting of a pro rata portion of each item of the Company's income, including gross income, and gain for such year) in an amount and manner sufficient to eliminate a deficit balance in such Member's Capital Account as quickly as possible. Any allocation made pursuant to this Paragraph 3.9 will be subject to any adjustment required to comply with Regulations Section 1.704-1(b), including, without limitation, any nonrecourse deduction or minimum gain chargeback within the meaning of Regulation Section 1.704-2. Any allocations made pursuant to this Paragraph 3.9(c) will be taken into account, to the extent permitted by the Regulations, in computing subsequent allocations of income, gain, loss or deduction, so that the net amount of any items so allocated and all other items allocated to each Member will, to the extent possible, be equal to the amount that would have been allocated to the Member without regard to this Paragraph 3.9(c). (d) In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the Company will, solely for Federal income tax purposes, be allocated among the Members so as to take account of any variation between the adjusted tax basis of the property to the Company for Federal income tax purposes and its fair market value upon contribution to the Company. (e) If, for any taxable period of the Company, the Company is deemed to have a net increase (or decrease) in income for tax purposes as a result of a redetermination by a tax authority resulting from transactions between the Company and any Member or affiliate of any Member, such increase (or decrease) in income will be allocated to the Member that was (or the affiliate of which was) a party to the transaction and the Capital Accounts of the Members shall reflect such allocations. 3.10 Capital Account Balances in the Case of Transferred Interests. (a) In the event of a transfer of Units by Hudson to LAGS pursuant to Article III of the Unit Purchase Agreement, Hudson's Capital Account shall be charged, and LAGS' Capital Account shall be credited, with the amount determined to be attributable to the transferred Units, as determined pursuant to Paragraph 3.10(b). (b) The amount determined under this Paragraph 3.10(b) shall be an amount equal to (i) Hudson's Initial Capital Contribution multiplied by (ii) a fraction, the numerator of which is equal to the number of Units being transferred to LAGS and the denominator of which is equal to the number of Units owned by Hudson immediately following the Closing (as such term is defined in the Unit Purchase Agreement). ARTICLE IV DISTRIBUTIONS 4.1 General Rule for Distributions. The Company shall not make any distributions to holders of Units other than as determined by the Members. The foregoing shall not affect the repayment of any indebtedness B-7 126 owed by the Company to a Member in accordance with the terms and conditions under which such indebtedness was incurred. 4.2 Manner of Distributions. (a) With respect to each Fiscal Year, distributions of Distributable Net Income accrued in that year will be made to each Member in proportion to the Units owned by such Member as of the last day of the Fiscal Year; provided, however, that holders of Class B Units will not be entitled to and will not receive (under any subparagraph of this Paragraph 4.2) any distributions of Net Income based on amounts of Pre-Tax Earnings, as such term is defined in Paragraph 1.3(b) of the Unit Purchase Agreement, in the Fiscal Years ending June 30, 1997 and 1998 in excess of (i) in the Fiscal Year ending June 30, 1997, $14,689,500, minus any earnings of Hudson Canada in that Fiscal Year, except to the extent those earnings are at any time distributed to the Company by Hudson Canada, and (ii) in the Fiscal Year ending June 30, 1998, $15,862,800, minus any earnings of Hudson Canada in that Fiscal Year, except to the extent those earnings are at any time distributed to the Company by Hudson Canada. Any reduction in distributions otherwise payable to holders of Class B Units by virtue of this Paragraph shall cause a corresponding increase to the distribution payable to Hudson for each Fiscal Year. (b) Before any distributions are made in accordance with Paragraph 4.2(a), distributions will be made to Hudson in an amount equal to the interest payments contemplated by Paragraph 1.3(a)(ii) through Paragraph 1.3(a)(iv) of the Unit Purchase Agreement. (c) To the extent the Member Board determines to make distributions for any Fiscal Year in excess of the amounts described in Paragraphs 4.2(a) and (b), such distributions shall be in an amount determined by the Member Board in accordance with the following priority (subject, however, to the limitations on distributions to holders of Class B Units for the Fiscal Years ending June 30, 1997 and June 30, 1998, as set forth in Paragraph 4.2(a)): (i) First, Distributable Net Income accrued in prior Fiscal Years and not previously distributed to Members, starting with the earliest such Fiscal Year, will be distributed to Members who owned Units during such prior Fiscal Year, in proportion to the Units owned by such Members on the last day of such Fiscal Year; (ii) Second, distributions shall be made to Hudson and LAGS in proportion to the Units owned by them immediately after Closing (as such term is defined in the Unit Purchase Agreement) in an amount equal to the earnings of Hudson Canada not included in the Sum (as such term is defined in the Unit Purchase Agreement), to the extent such amount has not previously been distributed; and (iii) Third, distributions shall be made out of Net Income (except that with respect to Hudson Canada, Net Income will be determined using cash taxes paid with respect to a Fiscal Year rather than book taxes provided) from prior Fiscal Years not previously distributed to Members, starting with the earliest such Fiscal Year, and will be distributed to Members who owned Units during such prior Fiscal Year, in proportion to the Units owned by such Members on the last day of such Fiscal Year. ARTICLE V BOARD OF MEMBER REPRESENTATIVES 5.1 Management by Members. The management of the Company is fully reserved to the Members, and the Company will not have "managers," as that term is used in the Act. The powers of the Company will be exercised by or under the authority of, and the business and affairs of the Company will be managed under the direction of, the Members, who will make all decisions and take all actions for the Company, as described in this Article V. 5.2 The Member Board. In managing the Company, the Members will act through the Member Board, or through such Committees as the Member Board may establish. The Member Board will consist of three Class A Representatives and two Class B Representatives. Each Class A Representative will be a Class A B-8 127 Member (if the Class A Member is an individual) or an officer, director or employee of a Class A Member (or of its parent company) and each Class B Representative will be a Class B Member (if the Class B Member is an individual) or an officer, director, or employee of a Class B Member (or of its parent company). Except as otherwise expressly provided in this Agreement, any act (including any vote or consent) of the Class A Representatives will be the act of all the holders of Class A Units and any act (including any vote or consent) of the Class B Representatives will be the act of all the holders of Class B Units. 5.3 Selection and Terms of Representatives. The Representatives of each class will be selected by the holders of the applicable class of Units at each annual meeting of those holders. Except as otherwise provided in this Agreement, each Representative will serve at the pleasure of the class of Members that the Representative represents. 5.4 Meetings. (a) Meetings of the Member Board may be called by any Representative on at least five days' notice to each other Representative. (b) One Representative of each class will constitute a quorum at a meeting of the Member Board (except that if a meeting cannot be held because no Representative of a particular class was present, an adjourned meeting may be held on at least five days' notice to each Representative of that class which specifies each matter to be voted upon at the meeting, even though no Representative of that class is present). (c) A Representative participating in a meeting by conference telephone or similar communications equipment by which all persons present at the meeting can hear each other will be deemed present at the meeting and all acts taken by the Representative during his or her participation will be deemed taken at the meeting. 5.5 Voting. (a) The Class A Representatives, as a class, will be entitled to three votes, and the Class B Representatives, as a class, will be entitled to two votes, on all matters. If there is only one Member of a Class, or if the provisions of Paragraph 5.8 are applicable and therefore all the Units of that Class are voted by a single Member, all the votes of the Representatives of that Class will be cast in the same manner. If there is more than one Member of a given Class and the provisions of Paragraph 5.8 are not applicable, the Representatives of that Class may decide among themselves whether to cast all the votes to which they, as a class, are entitled in the same manner or whether to allocate those votes among Representatives of the class. The action of at least one Representative in casting the votes of the class of Members that Representative represents will, unless there is more than one Member of the class and the other Representatives of that class object at the time the vote is cast, constitute the vote of the Representatives of that class, even if the other Representatives of that class are not present when the votes are cast. (b) Except as provided in Paragraphs 5.5(c) through (g), a majority of the votes cast with respect to a matter at a meeting at which a quorum is present will be the act of the Member Board. (c) At all times prior to October 1, 2000, and at all times on and after October 1, 2000 while LAGS and Approved Airlines (defined below) together own at least 38% of the outstanding Units, at least four affirmative votes of the Representatives will be required for any of the following actions: (i) Any decision to make distributions to holders of Units of any class with regard to a Fiscal Year which are less than those contemplated by Paragraph 4.2, or to establish reserves which have the effect of reducing distributions. (ii) Any amendment of this Agreement which affects the special rights and preferences of either the Class A Units or the Class B Units. (iii) Any change in the number or classes of Units the Company is authorized to issue, any issuance by the Company of Units of any class (other than the issuance of Units to Hudson and to LAGS as contemplated by the Unit Purchase Agreement, including if applicable, on exercise of the Option contained in the Unit Purchase Agreement), any issuance by the Company of options, rights or B-9 128 convertible or exchangeable securities which may entitle the holder to acquire Units of any class, or the Company's entering into any other type of agreement under which the Company is, or upon the passage of time, the payment of money or the occurrence of any other event may become, required to issue Units of any class. (iv) Any merger or consolidation of the Company with any other corporation or business entity, or the purchase by the Company or any subsidiary of a 25% or greater equity interest in any corporation or other business entity for a purchase price of more than $1,500,000. (v) Any sale of assets of the Company or any subsidiary in a single transaction or a series of related transactions which constitute 15% or more of the total assets of the Company and its subsidiaries taken as a whole at the end of the most recently ended Fiscal Year, or which would result in the Company and its subsidiaries together no longer being able to engage in any aspect of the Aviation Services Business which accounted for more than 10% of their Total Revenues in the most recently ended Fiscal Year, except in each case sales of products in the ordinary course of business. (vi) Any decision by the Company to file a registration statement under the Securities Act of 1933, as amended (a "Registration Statement"). (vii) The approval or amendment of the budget included in a Business Plan (as that term is defined in Paragraph 7.1), to the extent provided in Paragraph 7.1. (viii) The entry by the Company or any subsidiary into any line of business other than the Aviation Services Business, or into any aspect of the Aviation Services Business in which the Company is not engaged at the date of this Agreement, which in either case is reasonably anticipated to generate revenues in excess of 10% of the consolidated revenues of the Company and its subsidiaries taken as a whole in any of the following three Fiscal Years. (ix) The cessation by the Company and its subsidiaries taken as a whole (whether by sale of a business, termination of a business or otherwise) of all or substantially all their activities in any aspect of the Aviation Services Business which accounted for more than 10% of their Total Revenues in the most recently ended Fiscal Year. (x) The dissolution of the Company in accordance with Paragraph 13.1. (xi) Any filing by the Company or a subsidiary for relief as a debtor under any bankruptcy, insolvency, reorganization or similar law, any application by the Company or a subsidiary for the appointment of a receiver, trustee, custodian or similar fiduciary for a substantial portion of the consolidated assets of the Company and its subsidiaries, or the consent by the Company or a subsidiary to any petition or application seeking similar relief which is filed against the Company or the subsidiary. (xii) The borrowing by the Company or one or more subsidiaries in a single transaction or series of related transactions of a sum equal to 10% or more of the total assets of the Company and its subsidiaries at the time of the borrowing, or the entering into of any agreement providing for borrowings of that amount (except that (x) if an agreement providing for borrowings is approved in accordance with this Paragraph 5.5(c), the borrowings themselves need not be approved by the vote required by this Paragraph and (y) the requirements of this subparagraph (xii) will not apply to borrowings of up to $18.3 million aggregate principal amount of indebtedness under credit agreements). (d) At all times on and after October 1, 2000 while LAGS owns Class B Units, but those Class B Units together with the Class B Units owned by Approved Airlines constitute less than 38% of the outstanding Units, at least four votes will be required for any of the actions described in subparagraphs (i) and (ii) of Paragraph 5.5(c), but not for the actions described in any other subparagraph of that Paragraph. (e) Notwithstanding anything to the contrary in Paragraph 5.5(c) or (d), four affirmative votes of the Representatives shall not be required for the Company to (i) call any of the 7% Convertible Subordinated Debentures Due 2011 issued by Hudson (the "Debentures") for redemption and make any redemption payments with respect thereto, (ii) make any payments to Hudson in accordance with the terms of an B-10 129 agreement dated the same date as this agreement between the Company and Hudson or (iii) indemnify Hudson if Hudson remains liable, or guarantees obligations, under any contract or other agreement relating to the Aviation Services Business which Hudson is required to transfer to the Company under the Unit Purchase Agreement. (f) Notwithstanding anything to the contrary in Paragraph 5.5(c) or (d), four affirmative votes of the Representatives shall not be required for Hudson to charge to the Company the home office overhead fees referred to in Paragraph 15.1. (g) Any decision by the Company to exercise, or not to exercise, a Company Purchase Option granted under Paragraph 8.4 with regard to Units of a class will be made solely by the Representatives of the Members who hold the other class of Units. 5.6 Action by Written Consent. Any action of the Member Board may be taken without a meeting if written consent to the action is signed by all the Class A Representatives and all the Class B Representatives (or, with regard to a decision to which Paragraph 5.5(g) applies, all the class of Representatives which makes the decision). 5.7 Committees. The Member Board may designate from among its members an Executive Committee and other committees, each consisting of at least one Class A Representative and one Class B Representative. The Executive Committee will have all the authority of the Member Board, except (i) as the Member Board otherwise provides, and (ii) that the Executive Committee may not take any action which, under Paragraph 5.5(c) or (d), must receive at least four votes. Other committees will have such authority as the Member Board grants them. The Member Board will have the right at any time to remove and replace members of committees, to change the size of committees and to change the membership of committees (subject to the requirement in the first sentence of this Paragraph). At any meeting of any committee, the Class A Representatives on the committee, as a class, will be entitled to three votes, and the Class B Representatives on the Committee, as a class, will be entitled to two votes, unless the Member Board determines that the Class A Representatives on the committee or the Class B Representatives on the Committee, as a class, will be entitled to a different number of votes. 5.8 Voting Restrictions. (a) Notwithstanding any other provision herein, Hudson agrees that if it transfers any portion of its Class A Units to a directly or indirectly majority owned subsidiary as permitted by Paragraph 8.1, Hudson will, pursuant to a contract to be entered into with the transferee, either (1) retain all of the voting power of the transferred Units or (2) transfer to the transferee all of the voting power of the transferred Units. Following such a transfer of Units, the entity that exercises the voting power of the transferred Units will be deemed to do so for all purposes of this Agreement, and the entity that does not exercise the voting power of the transferred Units shall be deemed not to be a Member strictly for the purpose of voting the Transferred Units. The holder of Class A Units that votes such Class A Units following a transfer described in this Paragraph 5.8 will vote such Units on its own behalf, and will have no duty to represent the interests of the other party to such transfer (Hudson or the transferee, as the case may be), except to the extent required by law. (b) Notwithstanding any other provision herein, LAGS agrees that if it transfers any portion of its Class B Units to a directly or indirectly majority owned subsidiary of LAGS or of Deutsche Lufthansa AG ("Lufthansa") as permitted by Paragraph 8.1, LAGS will, pursuant to a contract to be entered into with the transferee, either (1) retain all of the voting power of the transferred Units or (2) transfer to the transferee all of the voting power of the transferred Units. Following the transfer of Units described in this Paragraph 5.8, the entity that exercises the voting power of the transferred Units will be deemed to do so for all purposes of this Agreement, and the entity that does not exercise the voting power of the transferred Units will be deemed not to be a Member strictly for the purpose of voting the transferred Units. The holder of Class B Units that votes such Class B Units following a transfer described in to this Paragraph 5.8 will vote such Units on its own behalf, and will have no duty to represent the interests of the other party to such transfer (LAGS or the transferee, as the case may be), except to the extent required by law. B-11 130 ARTICLE VI OFFICERS 6.1 Required and Permitted Officers. The Company will have a President, a Secretary and a Treasurer. The Member Board may also elect a Chairman of the Board, one or more Vice Presidents (one or more of whom may be designated an Executive Vice President or a Senior Vice President), one or more Assistant Secretaries or Assistant Treasurers, and such other officers as it may from time to time deem advisable. The same person may hold two or more offices. No officer except the Chairman of the Board, if there is one, need be a Representative. 6.2 Election and Terms of Office. Each officer will be elected by the Member Board and will hold office for such term, if any, as the Member Board determines. Any officer may be removed at any time, either with or without cause, by the Member Board. 6.3 Duties of Officers. (a) The Chairman of the Board, if any, will preside at all meetings of the Member Board and will have any other duties which from time to time may be prescribed by the Member Board. (b) The President will be the Chief Executive Officer of the Company, will report to the Member Board and will see to it that all directives of the Member Board are carried into effect. The President will preside at any meeting of the Member Board at which the Chairman of the Board is not present. (c) The officers, other than the Chairman of the Board and the President, will have such powers and perform such duties, in each case subject to the control of the Member Board and the President, as generally pertain to their respective offices, as well as such powers and duties as from time to time may be prescribed by the Member Board. (d) Notwithstanding any other provision of this Agreement, each officer will participate only in the day-to-day operations of the Aviation Services Business. No officer will, in such capacity, determine any management policy or make any management decision, all of which will be made by the Members, as provided in Article V. ARTICLE VII BUSINESS PLANS 7.1 Approval and Effect of Business Plans. (a) Hudson and LAGS have given their general approval to a plan relating to the operations, marketing, financing and certain other activities, including a budget, of the Company and its subsidiaries (a "Business Plan") with respect to the Fiscal Years of the Company ending June 30, 1996, 1997 and 1998. (b) Not later than June 30 of each year after 1995, the Company will present to the Member Board a proposed Business Plan for the Fiscal Year (the "Upcoming Year"), and for the three Fiscal Years, following the Fiscal Year in which the Business Plan is presented to the Member Board. (c) If at the time a Business Plan for an Upcoming Year is presented to the Member Board, the outstanding Class B Units constitute less than 49% of the sum of all outstanding Class A Units and Class B Units, then the supermajority voting provisions of Paragraph 5.5(c)(vii) relating to the budget in the Business Plan will be applicable if, but only if, the events described in all of clauses (1), (2) and (3) below shall have occurred: (1) a majority of the Class B Representatives voted against approval of the budget for the Fiscal Year immediately preceding the Upcoming Year (the "Prior Year"); (2) the actual Pre-Tax Income for the Prior Year was less than 4.5% of Total Revenues for such Prior Year; and (3) either (x) the budget with regard to the Upcoming Year contemplates that Pre-Tax Income for the Upcoming Year will be less than 4.5% of Total Revenues for the Upcoming Year or (y) notwithstanding the fact that the budget for the Upcoming Year contemplates that Pre-Tax Income for the Upcoming Year will be equal to or greater than 4.5% of the Total Revenues for such Upcoming Year, a majority of the Class B Representatives provide the B-12 131 Member Board with a written statement setting forth their reasonable belief (and the reasonable bases for such belief) that Pre-Tax Income for the Upcoming Year will be less than 4.5% of the Total Revenues for such Upcoming Year. (d) If at the time a Business Plan for an Upcoming Year is presented to the Member Board, the outstanding Class B Units constitute at least 49% of the sum of all outstanding Class A Units and Class B Units, then the supermajority voting provisions of Paragraph 5.5(c)(vii) relating to the budget in the Business Plan will be applicable under all circumstances, but the Class B Members will not act unreasonably in requiring that the Representatives of that class vote against the budget. (e) Notwithstanding any provision to the contrary, the supermajority voting provisions of Paragraph 5.5(c)(vii) relating to the budget in the Business Plan will not be applicable to the budget for the Fiscal Year ending June 30, 1997. (f) Commencing with the Fiscal Year ending June 30, 1997, the Company will conduct its business and affairs substantially in accordance with the applicable Business Plan approved by the Member Board. If the Member Board does not approve a proposed Business Plan, the Company will endeavor to revise the proposed Business Plan in order to obtain Member Board approval. Until such time as Member Board approval is obtained with respect to a Business Plan or in the event that Member Board approval of a Business Plan is not obtained, the Company will continue to conduct its business and affairs substantially in accordance with the most recently approved Business Plan relating to such period, or, if there is no such previously approved Business Plan relating to such period, substantially in accordance with the three-year Business Plan included in the most recently approved Business Plan for the most recent prior period. If an approved Business Plan differs from a prior Business Plan relating in part to the same period, the later Business Plan will be deemed an amendment of the prior Business Plan. ARTICLE VIII RESTRICTIONS ON TRANSFER OF UNITS 8.1 Subject to Paragraph 8.3, no holder of Units will transfer, sell, assign, pledge, hypothecate, mortgage, encumber, grant any other form of security interest in, or otherwise dispose of (together "transfer") any Units other than in accordance with this Article VIII, except that nothing in this Article VIII will (a) prevent LAGS from transferring Units to a directly or indirectly majority owned subsidiary of LAGS or of Lufthansa, or prevent Hudson from transferring Units to a directly or indirectly majority owned subsidiary, if (i) the subsidiary of LAGS, Lufthansa or Hudson, as the case may be, agrees in writing to be bound by all the provisions of this Agreement which are applicable to LAGS or Hudson, as the case may be, (ii) LAGS or Hudson, as the case may be, and the subsidiary agree in writing that if at any time LAGS or Lufthansa, or Hudson, as the case may be, ceases to own directly or indirectly a majority in voting power of the outstanding equity of the subsidiary, before that occurs, the subsidiary will transfer the Units it owns back to LAGS or Hudson, as the case may be, and (iii) the other owners of any such majority owned subsidiary would not be prohibited from holding Units pursuant to Paragraph 8.3, (b) prevent Hudson from selling Class B Units to LAGS upon exercise of the Option contained in the Unit Purchase Agreement, (c) prevent LAGS from selling or otherwise transferring Units after the fifth anniversary of the date of this Agreement to any airline approved by Hudson (an "Approved Airline"), which approval Hudson will not unreasonably withhold with regard to any airline which is a potential significant user of Aviation Services provided by the Company, by LAGS or by a joint venture in which LAGS has a greater than 25% ownership interest, if the Approved Airline agrees in writing to be bound by all the provisions of this Agreement which are applicable to LAGS; provided, however that, after giving effect to any transfer permitted by this clause (c), LAGS and Lufthansa and their majority owned subsidiaries must collectively own at least a majority of the outstanding Class B Units and any other holder of Class B Units must hold at least 10% of the outstanding Class B Units or (d) prevent Hudson from pledging, hypothecating or mortgaging its Units to secure any of its indebtedness or from transferring Units to the holders of the secured indebtedness (or their designee(s)) upon foreclosure of the pledge, hypothecation or mortgage; provided, however that Hudson will use all reasonable efforts (which reasonable efforts shall not be required to include modification of current or future terms of agreements or B-13 132 offering or agreeing to any economic consideration) to cause the pledge, hypothecation or mortgage, and the transfer of Units upon foreclosure, to be subject to, and otherwise not interfere with, the Purchase Option (defined below), and the right of anyone to exercise the Purchase Option and to receive Units on exercise of the Purchase Option free and clear of all liens and encumbrances. 8.2 Five Year Prohibition Against Transfer. Until the fifth anniversary of the date of this Agreement, neither LAGS nor Hudson will, except as expressly permitted by Paragraph 8.1, transfer any Units to anyone. 8.3 Prohibition Against Transfers to Competitors. Notwithstanding anything in this Agreement to the contrary, no holder of Units will at any time transfer any Units to anyone who provides Aviation Services to other persons, unless the Company consents in writing to the transfer (which the Company will be under no obligation to do). This Paragraph will not prevent LAGS from transferring Units to an airline solely because the airline performs all or a portion of the Aviation Services for its own aircraft or passengers, if the airline does not provide Aviation Services to other persons. 8.4 Rights of First Refusal. (a) Before any holder transfers any Units to anyone, other than under the circumstances described in Paragraph 8.1, the holder of Units which proposes to transfer Units (a "Transferring Holder") will give the Company and each of the other holders of Units a notice (a "Proposed Transfer Notice") which (i) describes in reasonable detail the proposed transfer, including the number of Units the Transferring Holder proposes to transfer, and including, if the proposed transfer involves a sale, the proposed sale price and the other principal terms of the sale, (ii) identifies the person or persons to whom the Units are proposed to be transferred and (iii) grants the Company an option (a "Company Purchase Option"), and grants to LAGS (if Hudson is the Transferring Holder or the Units the Transferring Holder proposes to transfer are Class B Units) or to Hudson (if LAGS is the Transferring Holder or the Units the Transferring Holder proposes to transfer are Class A Units), but not to any other holder of Units, an option (a "Holder Purchase Option" and together with the related Company Purchase Option, a "Purchase Option") to purchase all, but not less than all, the Units which are the subject of the Proposed Transfer Notice on the terms provided in Paragraph 8.4(b). (b) Each Company Purchase Option granted in accordance with Paragraph 8.4(a) will be on the following terms: (1) The term of the Company Purchase Option will be 90 days after the day the Proposed Transfer Notice is given to the Company, except that if it is necessary that an expert determine the fair market value of non-cash consideration or the Fair Market Price of the Units which are the subject of the Proposed Transfer Notice in order to determine the exercise price of the Company Purchase Option, the term of the Company Purchase Option will be the later of (i) the 20th day after the day on which a copy of the determination is delivered to the Company and to all the Members or (ii) the 90th day after the day the Proposed Transfer Notice is given to the Company. (2) The exercise price of the Company Purchase Option will be (A) if the proposed transfer or grant of a beneficial interest is a sale for cash, the proposed sale price set forth in the Proposed Transfer Notice or (B) if the proposed transfer is a sale which includes consideration other than cash, the fair market value of the non-cash consideration to be paid for the Units which are the subject of the Company Purchase Option plus the amount of any cash included in the consideration, or (C) if the transfer does not involve a sale, the Fair Market Price of those Units. For the purposes of this Agreement, the fair market value of non-cash consideration, and the Fair Market Price of Units, will be as agreed upon by the Company and the Transferring Holder or, if they are unable to agree, as determined by an expert selected jointly by the Company and the Transferring Holder. The fees and expenses of such expert will be borne equally by the Company and the Transferring Holder. (3) The exercise price of the Company Purchase Option will be payable in cash. (4) The Company Purchase Option will be exercised by a notice of exercise (a "Notice of Exercise") delivered to the Transferring Holder before 5:00 p.m., New York City time, on the day the Company Purchase Option expires. B-14 133 (5) If the Company exercises a Company Purchase Option, it may assign the right to purchase the Units as to which the Company Purchase Option was exercised to another person or persons who is or are eligible to become a Member or Members, provided that an assignment of the right to purchase Units as to which a Company Purchase Option is exercised will not relieve the Company from liability if the purchase of those Units is not completed as provided in Paragraph 8.4(d). (c) Each Holder Purchase Option granted in accordance with Paragraph 8.4(a) will be on the following terms: (1) The Holder Purchase Option will not become exercisable unless the related Company Purchase Option is not exercised. (2) The term of the Holder Purchase Option will be 45 days after the day on which the related Company Purchase Option expires without being exercised. (3) The exercise price of the Holder Purchase Option will be the same as the exercise price of the related Company Purchase Option. (4) The exercise price of the Holder Purchase Option will be payable in cash. (5) The Holder Purchase Option will not be assignable except to an Approved Airline. (6) The Holder Purchase Option will be exercised by LAGS or Hudson, as the case may be, by a Notice of Exercise delivered by the exercising holder to the Transferring Holder before 5:00 p.m., New York City time, on the day the Holder Purchase Option expires. (7) If the Holder Purchase Option is exercised, it must be exercised as to all the Units to which it relates. (d) If a Purchase Option is exercised, the purchase of the Units which are the subject of the Purchase Option will take place at the principal office of the Company at 10:00 a.m., New York City time, on a date specified in the Notice of Exercise, which is not less than 10 nor more than 60 days after the Notice of Exercise is given, or at such other time and place as may be agreed upon between the Company (as to a Company Purchase Option) or the applicable one of LAGS or Hudson (as to a Holder Purchase Option) and the Transferring Holder. (e) If a Proposed Transfer Notice is given and neither the Company Purchase Option nor the Holder Purchase Option granted in the Proposed Transfer Notice is exercised, or the Company or LAGS or Hudson, as the case may be, exercises a Purchase Option but fails to pay for the Units which are the subject of the Purchase Option on the date for the purchase specified in the Notice of Exercise, the Transferring Holder may sell or otherwise transfer the Units which were the subject of the Proposed Transfer Notice (i) within 120 days after the Purchase Option expires, or if the Purchase Option was exercised but the applicable one of the Company, LAGS or Hudson failed to pay for the Units which were the subject of the Purchase Option, within 90 days after the date for the purchase specified in the Notice of Exercise, (ii) to the person or persons specified in the Proposed Transfer Notice, and (iii) for consideration and on terms which are not more favorable to the purchaser than those set forth in the Proposed Transfer Notice. Nothing in this subparagraph will relieve the Company or LAGS or Hudson, as the case may be, from any liability it may have because of its failure to pay for Units as to which it has given a Notice of Exercise. ARTICLE IX REGISTRATION RIGHTS 9.1 Registration of Shares. (a) If at any time the Company files a Registration Statement which includes in the securities which are the subject of the Registration Statement Units of any class being sold by holders of Units, the Company will offer to include in the securities which are the subject of the Registration Statement Units owned by all the B-15 134 holders such that the Units owned by each holder which are included in the Registration Statement will be in the same proportion as the total Units owned by each holder whose Units are included in the Registration Statement (except to the extent a holder of Units requests that a lesser number of that holder's Units be included in the Registration Statement). The terms on which Units being sold by holders which are included in a Registration Statement will be sold will be the same, including, if the Registration Statement relates to an underwritten offering which includes Units being sold by any holders, inclusion in the underwritten offering of all Units (or the same portion of all Units) to which the Registration Statement relates which are being sold by each holder. (b) In order to take advantage of the right to have Units included in a Registration Statement as provided in this Paragraph, a holder must decide to include Units in the Registration Statement within 20 days after the offer is made and must cooperate in all reasonable ways, including entering into an underwriting agreement with customary terms if Units are to be sold in an underwritten offering, with the efforts to file the Registration Statement and cause it to become effective and with the reasonable requirements of the underwriters in connection with the offering and sale of the Units. (c) The Company will bear the cost of any Registration Statements filed in accordance with this Paragraph 9.1, except that each holder of Units will pay the underwriting discounts and commissions applicable to the Units being sold by it and will pay the costs of any separate counsel which it elects to use in connection with the offering which is the subject of the Registration Statement. ARTICLE X INFORMATION ABOUT THE COMPANY 10.1 Right to Information. Subject to Paragraph 10.2, any Member will be entitled at any time during normal business hours to have access to the properties, books and records of the Company and its subsidiaries. 10.2 Confidentiality. (a) Each Member will, and will cause its representatives to, hold all information it receives as a result of its access to the properties, books and records of the Company or its subsidiaries in confidence, except to the extent that information (i) is or becomes available to the public (other than through a breach of this Agreement), (ii) becomes available to the Member from a third party which, insofar as the Member is aware, is not under an obligation to the Company or to a subsidiary to keep the information confidential, (iii) was known to the Member before it was made available to the Member or its representative by the Company or a subsidiary, or (iv) otherwise is independently developed by the Member. (b) In addition to (and not in limitation of) the provisions of Paragraph 10.2(a), LAGS and Hudson expressly recognize and acknowledge that (x) the customers and airport authorities served by the Company engage and will engage in discussions and negotiations with the Company that are proprietary and confidential in nature, and (y) that many of such customers and airport authorities compete for business with Lufthansa, and accordingly are and will be desirous of restricting the access of Lufthansa to information concerning their business relationships with the Company. Accordingly, LAGS will not request that the Company provide, nor shall the Company be required to provide, to Lufthansa or any of its representatives or agents (except those employees of Lufthansa who have responsibility for overseeing the performance of the Company or the Buyer's relationship with the Company and are not engaged in its airline business in a capacity which might lead them to be directly or indirectly (or, as to a Representative, who is not engaged in its airline business in a capacity which might lead the Representative to be directly) engaged in procuring for Lufthansa services in North America which are rendered by the Company or its subsidiaries, or are competitive with services rendered by the Company or its subsidiaries) copies of any proprietary or confidential agreements or other documentation including, but not limited to, proposals, notes, contracts, annexes, exhibits, cost analyses or pricing information of any nature and in any form pertaining to customers or airport authorities served by the Company. In addition, LAGS and the Company will instruct and cause their employees not to provide to or discuss with any employees of Lufthansa, other than those excepted in the preceding sentence, any proprietary or confidential information (whether relating to negotiations, discussions or otherwise) pertaining to customers or airport authorities with which the Company has a business relationship. The Company will only engage B-16 135 in business transactions with Lufthansa that provide for normal pricing, terms and conditions in the ordinary course of business and consistent with past practice. The provisions of this Paragraph 10.2(b) relating to Lufthansa and LAGS will be binding upon any transferee of LAGS (and the affiliates of such transferee) that owns, or is affiliated with a person who owns, an airline. ARTICLE XI MEMBERS 11.1 Admission to Membership. No person will become a Member unless that person is shown as an owner of Units on the books of the Company. No person may resign as a Member of a class while that Member holds Units of that class. A person which acquires Units from the Company will become a Member when the person acquires those Units and executes a copy of this Agreement. A person will cease being a Member when that person disposes of all the Units owned by the person and the disposition of those Units is registered on the books of the Company. No person to whom Units are transferred by a Member will become a Member (i) unless the transfer was made as permitted by Article VIII, (ii) until the transfer is recorded on the books of the Company, and (iii) until the person to whom the Units are transferred agrees to be bound by all the provisions of this Agreement which were applicable to such person's transferor and either executes a copy of this Agreement or executes and delivers to the Company a separate document in which the person agrees to be bound by all those provisions of this Agreement to the same extent as though the person had executed this Agreement. 11.2 Voting Limited to Members. Notwithstanding anything in Article III, (i) Units shown on the books of the Company as being owned by a person which is not a Member may not be voted unless and until the registered owner becomes a Member as provided in Paragraph 11.1 or the Units are transferred to a Member or to a person who becomes a Member as provided in Paragraph 11.1 and (ii) in determining the number of outstanding Units of a class for the purpose of determining whether matters voted upon by the holders of Units have been approved, Units shown on the books of the Company as being owned by persons who are not Members will not be treated as being outstanding. ARTICLE XII TAX MATTERS 12.1 Tax Information. Within 120 days after the original due date of the Company's Federal income tax return for a Fiscal Year, the Company will provide to each person shown on its books as being an owner of Units a copy of the Company's return and a statement on Form K-1 or another applicable form of that person's distributive share of income, gains, losses, deductions and credits for that Fiscal Year. The Company also will provide any other information reasonably requested by a holder of Units to enable the holder to complete the holder's tax returns. 12.2 Tax Matters Member. Hudson is designated as the Tax Matters Member (and the "tax matters partner" as defined in Section 6231(a)(7) of the Code) with respect to the Company. If at any time Hudson ceases to be a Member, the Member which holds the largest number of Units will become the Tax Matters Member. The Tax Matters Member will (i) cause to be prepared and sign all tax returns of the Company and (ii) manage all administrative tax proceedings conducted at the Company level by the Internal Revenue Service or any state, local or foreign taxing authority with respect to the Company. Any Member has the right to participate in administrative tax proceedings related to the determination of tax items at the Company level. Expenses of administrative tax proceedings undertaken by the Tax Matters Member will be paid for by the Company. Any Member which elects to participate in those proceedings will be responsible for any expenses it may incur. After consultation with LAGS and after taking into account the respective interests and tax status of Hudson, LAGS and the Company, the Tax Matters Member (i) may make, or refrain from making, any income or other tax elections for the Company which it deems necessary or advisable, including an election pursuant to Section 754 of the Code and (ii) shall take all other action contemplated to be taken by it pursuant to Code Sections 6221 and through 6231. Notwithstanding the foregoing, the Tax Matters Member B-17 136 will not make any income or other tax elections or take any actions that (or fail to make such elections or to take such actions, the failure of which) would jeopardize the treatment of the Company as an entity which is not taxed as a corporation. 12.3 Election to be Treated as a Partnership for Tax Purposes. If under Regulations or other administrative rules the Company is permitted to elect to be treated as a partnership, the Tax Matters Member will make the permitted election for the Company to be, or to continue to be, treated as a partnership for Federal income tax purposes. Each Member consents to any election by the Tax Matters Member for the Company to be treated as a partnership for Federal income tax purposes and each Member will take any actions reasonably requested by the Company to satisfy the requirements of any applicable Regulations or rules. 12.4 Unit Purchase Agreement. The Company and each Member agree that the Company will be bound by, and will adhere to the provisions of Paragraph 8.4 (Payment of Taxes) of the Unit Purchase Agreement as though the Company were a signatory to the Unit Purchase Agreement. 12.5 Withholding. The Company shall comply with all applicable withholding requirements imposed under the Code and the Regulations, and any withholding taxes paid by the Company shall be deemed to be cash distributions made to the Member with respect to whom the withholding taxes were paid. ARTICLE XIII TERMINATION 13.1 Events of Dissolution. The Company will be dissolved upon the occurrence of any of the following events ("Dissolution Events"): (a) the Members vote for dissolution in accordance with Paragraph 5.5(c)(x); (b) the death, insanity, retirement, resignation, expulsion, bankruptcy or dissolution of a Member, or the occurrence of any event (other than a transfer of Units permitted by Article VIII) that terminates the continued membership of a Member of the Company (a "Membership Termination Event"), without any further action by the Members, except that upon bankruptcy, including filing for reorganization or dissolution of any of its Members, the Company will not be dissolved and there will not be a Dissolution Event if the Company is continued by the consent of holders of a majority of the Units held by Members, other than the Member which triggered the Membership Termination Event, given within 90 days after the Membership Termination Event; or (c) the entry of a decree of judicial dissolution under Section 18-802 of the Act or any other event causing dissolution of a Limited Liability Company under the laws of the State of Delaware. 13.2 Liquidation. Upon the occurrence of a Dissolution Event, the Company shall be liquidated and its affairs shall be wound up. All proceeds from such liquidation shall be distributed as follows (except as otherwise required by Section 18-804 of the Act): (a) First, to the payment of debts and liabilities of the Company and the expenses of liquidation. (b) Second, to the establishment of any reserves which the Member Board deems reasonably necessary with regard to contingent or unmatured liabilities or obligations of the Company. That reserve may be paid to a liquidating agent to be applied to the payment of those obligations and liabilities and, to the extent not required for that purpose, to be distributed to the Members. (c) Third, in accordance with the manner in which distributions are made pursuant to Paragraph 4.2. (d) Fourth, in accordance with the positive Capital Account balance of all Members, as determined after taking into account all capital account adjustments for the Fiscal Year during which such liquidation occurs. All distributions required by this Paragraph 13.2(d) shall be made by the end of such Fiscal Year, or, if later, within 90 days after the date of such liquidation. A particular Member's interest B-18 137 in the Company may be liquidated if, and only if, the Company and all of the Members agree to such liquidation. Any liquidating distributions made to a Member in accordance with the previous sentence shall be made in accordance with the positive Capital Account balance of such Member, as described in this Paragraph 13.2(d). For purposes of this Paragraph, no transfer of Units pursuant to a Purchase Option will be deemed to constitute a liquidation of a Member's interest in the Company. 13.3 Final Accounting. In the event of the dissolution of the Company, prior to any liquidation, a proper accounting shall be made to the Members from the date of the last previous accounting to the date of dissolution. 13.4 Certificate of Cancellation. Upon the completion of the distribution of the Company's assets, the Company will be terminated, all Units will be cancelled, and the Members shall cause the Company to execute and file a Certificate of Cancellation in accordance with Section 18-203 of the Act. 13.5 No Liability for Return of Capital Contributions. No Member will be personally liable for the return of the Capital Contribution of any other Member. The only right of a Member upon dissolution of the Company will be to receive distributions under this Article XIII. ARTICLE XIV INDEMNIFICATION 14.1 Indemnity. Subject to the provisions of Paragraph 14.4, the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the Company, by reason of the fact that the person is or was a Member, a Representative, an employee or an agent of the Company, or is or was serving at the request of the Company as a Director on the Board of Directors, an executive, officer, employee or agent of another enterprise, against expenses including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding if the person acted in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to a criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person's conduct was unlawful. 14.2 Indemnity for Actions By or In the Right of the Company. Subject to the provisions of Paragraph 14.4, the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the rights of the Company to procure a judgment in its favor by reason of the fact that the person is or was a Member, a Representative, an employee or an agent of the Company, or is or was serving at the request of the Company as a Director on the Board of Directors, an executive, officer, employee or agent of another enterprise, against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by the person in connection with the defense or settlement of the actions or suit if the person acted in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Company. Indemnification may not be made for any claim, issue or matter as to which such person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the Company or for amounts paid in settlement to the Company, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. 14.3 Indemnity if Successful. The Company shall indemnify a Member, a Representative, an employee or an agent of the Company against expenses, including attorneys' fees, actually and reasonably incurred by the person in connection with the defense of any action, suit or proceeding referred to in Paragraphs 14.1 and B-19 138 14.2 or in defense of any claim, issue or matter therein, to the extent that such person or entity has been successful on the merits. 14.4 Expenses. Any indemnification under Paragraphs 14.1 and 14.2, as well as the advance payment of expenses permitted under Paragraph 14.5, unless ordered by a court or advanced pursuant to Paragraph 14.5 below, must be made by the Company only as authorized in the specific case upon a determination that indemnification of the Member, the Representative, the employee or the agent is proper in the circumstances under this Article XIV. The determination must be made: (a) by the vote of the Member Board excluding Representatives who are parties to the action, suit or proceeding and constituting a quorum; (b) if a quorum of the Member Board is not obtainable, by independent legal counsel in a written opinion; or (c) by the Members who were not parties to the action, suit or proceeding. 14.5 Advance Payment of Expenses. The expenses of Members, Representatives, employees or agents incurred in defending a civil or criminal action, suit or proceeding may be paid by the Company as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the Member, Representative, employee or agent to repay the amount if it is ultimately determined by a court of competent jurisdiction that the person is not entitled to be indemnified by the Company. The provisions of this subsection do not affect any rights to advancement of expenses to which personnel other than Members or Representatives may be entitled under any contract or otherwise by law. 14.6 Other Arrangements Not Excluded. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this Article XIV: (a) does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any agreement, vote of Members, Representatives or otherwise, for either an action in the person's official capacity or an action in another capacity while holding the person's office, except that indemnification, unless ordered by a court, may not be made to or on behalf of any Member, Representative, employee or agent if a final adjudication established that the person's acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action; and (b) continues for a person who has ceased to be a Member, Representative, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person; and (c) does not preclude the Member Board from advancing expenses to employees of the Company in its sole discretion. 14.7 Representatives' Liability. No Representative shall have any personal liability to the Company or the Members for monetary damages for breach of fiduciary duty as a Representative, provided that this Paragraph 14.7 will not eliminate the liability of a Representative (i) for any breach of the Representative's duty of loyalty to the Company or a class of its Members, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the Representative derived an improper personal benefit. No Member or Representative shall have any liability under the "corporate opportunity" doctrine for any activity of the Member or its affiliates, which activity is outside the scope of the Aviation Services Business in the United States or Canada. ARTICLE XV GENERAL 15.1 Home Office Overhead Fees. Hudson will charge the Company, and the Company will pay Hudson, home office overhead fees which will be (a) for all periods through and including June 30, 1997, in an amount equal to the sum of (i) 3% of Total Revenues, other than with regard to activities in Canada, plus B-20 139 (ii) 1% of Total Revenues from activities in Canada, and (b) for periods beginning after June 30, 1997, the amount determined as a result of good faith discussions between Hudson and LAGS (or its successor as owner of a majority of the outstanding Class B Units), after taking into account Total Revenues and administrative costs of Hudson in relation to Total Revenues, or if Hudson and LAGS (or its successor as owner of a majority of the outstanding Class B Units) are unable to agree upon an amount despite good faith efforts to do so, the amount described in clause (a). 15.2 Amendments. This Agreement may only be amended by both (i) the vote of the Member Board which, if applicable, will be the vote required by paragraph 5.5(c), and (ii) the vote of holders of a majority of the outstanding Units, voting as though all Units were of a single class. 15.3 Notices. Any notice or other communication required or permitted to be given under this Agreement must be in writing and will be deemed given when delivered in person or sent by facsimile (with proof of receipt at the number to which it is required to be sent), or on the third business day after the day on which mailed by certified mail return receipt requested from within the United States of America, if to the Company, addressed to the principal office of the Company, and if to a holder of Units, addressed to that holder at the address shown on the Unit register maintained by the Company. 15.4 Captions. The captions of the articles and paragraphs of this Agreement are for convenience only and do not affect the meaning or interpretation of this Agreement. 15.5 Governing Law. This Agreement will be governed by, and construed under, the laws of the State of Delaware. 15.6 Jurisdiction. Any action or proceeding relating to this Agreement or any matters arising out of or in connection with this Agreement, and any action for enforcement of any judgment in respect thereof, shall be brought exclusively in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, Hudson and LAGS and each other Member each hereby accepts for itself and in respect of its property, generally and unconditionally, the exclusive jurisdiction of the aforesaid courts and appellate courts thereof. Hudson and LAGS and each other Member each irrevocably consents to service of process out of any of the aforementioned courts in any such action or proceeding by notice given in accordance with Paragraph 15.3. In addition, LAGS hereby designates its General Counsel North America, 1640 Hempstead Turnpike, East Meadow, New York 11554, or with respect to any time when there is not a person in that capacity, LAGS hereby designates the Vice President USA of Deutsche Lufthansa AG, at that address, as its agent for service of process, and service upon LAGS shall be deemed to be effective upon service upon its agent as aforesaid or of its successor designated in accordance with the following sentence. LAGS may designate another corporate agent or law firm reasonably acceptable to Hudson and located in the Borough of Manhattan, in the City of New York, as successor agent for service of process upon 30-days prior written notice to Hudson. Each other Member that is owned by non-United States interests will also designate a corporate agent or law firm reasonably acceptable to Hudson and located in the Borough of Manhattan, in the City of New York, as agent for service of process (which, in the case of any agent which is not the initial agent, must be upon 30-days prior written notice to Hudson). Hudson and LAGS and each other Member each hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceeding arising out of or in connection with this Agreement, and for enforcement of a judgment in respect thereof, in the courts referred to above and hereby further irrevocably waives and agrees, to the extent permitted by applicable law, not to plead or claim that such an action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of any party hereto to serve process in any other manner permitted by law. 15.7 Agreement Not to Compete. No Member will, at any time when such Member owns Units, nor within one year after the Member ceases to own Units, engage directly or through ownership of equity of other entities (other than less than 2% of the shares of a publicly traded company acquired solely as an investment), in rendering Aviation Services (other than, in the case of LAGS or its affiliates, passenger handling services) in the United States of America or Canada, except that nothing will prevent LAGS or its affiliates from B-21 140 rendering Aviation Services to Lufthansa German Airlines or airlines which are alliance partners of Lufthansa German Airlines. 15.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the undersigned have executed this Limited Liability Company Agreement as of the day shown on the first page. HUDSON GENERAL LLC By: Title: HUDSON GENERAL CORPORATION By: Title: LUFTHANSA AIRPORT AND GROUND SERVICES GmbH By: Title: By: Title: B-22 141 SCHEDULE I TO LIMITED LIABILITY COMPANY AGREEMENT HUDSON GENERAL LLC
NUMBER/CLASS MEMBER INITIAL CAPITAL CONTRIBUTION OF UNITS - ----------------- ----------------------------------------------------- ------------------- Hudson General An amount equal to 284.62% of the purchase price set 740 Class A Units Corporation forth in Paragraph 1.2 of the Unit Purchase Agreement (as such purchase price may be adjusted pursuant to Paragraph 1.3 of the Unit Purchase Agreement) Lufthansa An amount equal to the purchase price set forth in 260 Class B Units Airport and Paragraph 1.2 of the Unit Purchase Agreement (as such Ground Services purchase price may be adjusted pursuant to Paragraph GmbH 1.3 of the Unit Purchase Agreement)
B-23 142 ANNEX C LOGO February 27, 1996 Board of Directors Hudson General Corporation 111 Great Neck Road Great Neck, NY 11021 Gentlemen: We understand that Hudson General Corporation ("Hudson") and Lufthansa Airport and Ground Services GmbH ("LAGS") have entered into a Unit Purchase and Option Agreement dated February 27, 1996 (the "Purchase Agreement") and, together with Hudson General LLC ("Hudson LLC"), a company to be formed, propose to enter into a Limited Liability Company Agreement in the form of Exhibit 2.2-B to the Purchase Agreement (the "LLC Agreement") proposing to effect a transaction as described in the Purchase Agreement, the LLC Agreement and related documentation (the "Transaction"). Pursuant to an engagement letter dated February 16, 1988, as amended, you have asked us to render our opinion as to the fairness of the Transaction from a financial point of view to Hudson. Allen & Company Incorporated ("Allen"), as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, private placements and related financings, bankruptcy reorganizations and similar recapitalizations, negotiated underwritings, secondary distributions of listed and unlisted securities, and valuations for corporate and other purposes. As you know, Allen has been engaged by Hudson since February 16, 1988, to render certain financial advisory services. In connection with such engagement, Allen will receive a fee upon consummation of the Transaction. As you are also aware, a managing director of Allen is a director of Hudson. Our opinion as expressed herein reflects and gives effect to our general familiarity with Hudson over a period of time, as well as information concerning Hudson which we acquired during the course of this assignment, including information provided by senior management in the course of a number of discussions. We have not, however, conducted an independent appraisal of Hudson's assets, or independently verified the information concerning Hudson's operations or other data which we have considered in our review, and for the purpose of expressing our opinion set forth herein, we have assumed that all such information is accurate, complete and current. In arriving at our opinion, we were not authorized to solicit, and did not solicit, interest from any third party with respect to Hudson or any of its assets. In arriving at our conclusion, we have considered, among other factors we deemed relevant, (i) the terms of the Purchase Agreement, LLC Agreement and related documentation; (ii) the nature of the operations and financial history of Hudson, including discussions with senior management of Hudson of the business and prospects of Hudson relating to, among other things, Hudson's operating budget and financial projections; (iii) Hudson's filings with the Securities and Exchange Commission, including audited and unaudited financial statements for Hudson; (iv) an analysis of the capital structure of Hudson, including the potential C-1 143 impact of the Transaction consideration under alternative use of proceeds scenarios; (v) the historical price ranges for the common stock of Hudson; (vi) the impact the Transaction would have on the earnings and cash flows of Hudson; and (vii) certain financial and stock market information for certain other companies in businesses related to those of Hudson's. In addition to our review and analyses of the specific information set forth above, our opinion herein reflects and gives effect to our assessment of general economic, monetary and market conditions existing as of the date hereof as they may affect the business and prospects of Hudson. This opinion has been prepared at your request for the benefit of the Board of Directors of Hudson. The opinion rendered herein does not constitute a recommendation to stockholders of Hudson in connection with their vote concerning the Transaction. Based upon and subject to the foregoing, it is our opinion as of the date hereof that the Transaction is fair, from a financial point of view, to Hudson. Very truly yours, ALLEN & COMPANY INCORPORATED By /s/ ERAN S. ASHANY ------------------------------------ Vice President C-2 144 LOGO HUDSON GENERAL CORPORATION 111 GREAT NECK ROAD GREAT NECK, NEW YORK 11021 145 PROXY HUDSON GENERAL CORPORATION THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned stockholder of HUDSON GENERAL CORPORATION, a Delaware corporation (the "Corporation"), hereby appoints PAUL R. POLLACK and MICHAEL RUBIN, and each of them, attorneys-in-fact, agents and proxies, with full power of substitution to each, for and in the name of the undersigned and with all the powers the undersigned would possess if personally present, to vote all the shares of Common Stock of the Corporation which the undersigned is entitled to vote at the Special Meeting of Stockholders of the Corporation, to be held at the offices of the Corporation, 111 Great Neck Road, Great Neck, New York, on May 23, 1996 at 2:30 P.M. and at all adjournments or postponements thereof (the "Special Meeting"), hereby revoking any proxy heretofore given. (Continued and to be dated and signed on reverse side) 146 Please mark votes as in this example [X] The Board of Directors recommends a vote FOR the following proposal: FOR AGAINST ABSTAIN Approval of the Unit Purchase and Option Agreement (the [ ] [ ] [ ] "Purchase Agreement") dated February 27, 1996, between the Corporation and Lufthansa Airport and Ground Services GmbH and the transactions contemplated thereby. The proxies are hereby authorized to vote in their discretion upon all other business as may properly come before the Special Meeting. This Proxy will be voted as directed, but if no direction is indicated, it will be voted FOR the approval of the Purchase Agreement and the transactions contemplated thereby. Receipt is acknowledged of the Notice of Special Meeting of Stockholders and accompanying Proxy Statement. PLEASE SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED ENVELOPE - --------------------------------------------------------------------------- Date - --------------------------------------------------------------------------- Signature: - --------------------------------------------------------------------------- Signature: Note: Please sign exactly as your name appears on this Proxy. If signing as attorney, executor, trustee or in other representative capacity, sign name and indicate title. -----END PRIVACY-ENHANCED MESSAGE-----