<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year ended June 30, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number: 1-7134
MERCURY AIR GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-1800515
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
5456 McConnell Avenue, Los Angeles, California 90066
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (310) 827-2737
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------- -------------------------
<S> <C>
Common Stock - Par Value $.01 American Stock Exchange
Pacific Stock exchange
</TABLE>
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
<PAGE> 2
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
As of August 16, 1996, 6,048,721 shares of the Registrant's Common
Stock were outstanding. Of these shares, 1,726,479 shares were held by persons
who may be deemed to be affiliates. The 4,322,242 shares held by nonaffiliates
as of August 16, 1996 had an aggregate market value (based on the closing price
of these shares on the American Stock Exchange of $7.75 a share) of $
33,497,375.50.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement which is to be distributed in
connection with the Annual Meeting of Shareholders to be held on December 5,
1996 are incorporated by reference into Part III of this Form 10-K.
<PAGE> 3
PART I
ITEM 1. BUSINESS.
Mercury Air Group, Inc., a New York corporation, provides a broad
range of services to the aviation industry through four principal operating
units: fuel sales and services, cargo operations, fixed base operations and
government contract services. Fuel sales and services include the sale of fuel
and delivery of fuel primarily to commercial airlines and air freight carriers.
Cargo operations consist of cargo handling, space brokerage operations and
general cargo sales agent services. Fixed base operations ("FBOs") include
fuel sales, into-plane services, ground support services and aircraft hangar
and tie-down facilities for commercial, private and other aircraft.
Government contract services principally consist of operating government-owned
fuel depots and refueling aircraft for the military. As used in this Annual
Report, the term "Company" or "Mercury" refers to Mercury Air Group, Inc. and,
unless the context otherwise requires, its subsidiaries. The Company's
principal executive offices are located at 5456 McConnell Avenue, Los Angeles,
California 90066 and its telephone number is (310) 827-2737.
A. NARRATIVE DESCRIPTION OF THE BUSINESS.
FUEL SALES AND SERVICES
Mercury's fuel sales consist of contract fueling and related fuel
management services. Sales of aviation fuel are made primarily to domestic and
international airline customers.
Contract fuel sales are generally made pursuant to verbal or
short-term contracts whereby Mercury provides fuel supply and, in most cases,
delivery to meet all or a portion of a customer's fuel supply requirements. To
facilitate its fuel sales business at locations where Mercury does not have
facilities, Mercury has developed an extensive network of third party delivery
and supply relationships which enable it to provide fuel to customers, on a
scheduled or ad hoc basis. Through these third party relationships, Mercury is
currently supplying fuel to customers at over 100 airports in the United States
and, to a lesser extent, internationally.
Mercury believes that it adds value for its customers and is able to
attract business by providing high quality service and by offering a
combination of favorable pricing and credit terms. Mercury provides 24-hour,
single source, coordinated supply and delivery on a national and international
basis and provides related support services. Mercury believes its scale of
operations and creditworthiness allow the purchase of fuel on more favorable
price and credit terms than would be available to most of its customers on an
individual basis.
In general, the aviation industry is capital intensive and highly
leveraged. Recognizing the financial risks of the airline industry, major oil
companies often restrict or prohibit the extension of credit to smaller or less
well-capitalized airlines. Consequently, in order to obtain fuel from a major
oil company, many carriers must either post a letter of credit or prepay for
fuel purchases. These supply requirements can absorb a substantial portion of
an airline's working capital.
2
<PAGE> 4
Mercury believes that the extension of credit to smaller or less
well-capitalized airlines represents a risk, but also is a contributing factor
in attracting and retaining customers. Accordingly, Mercury frequently extends
credit on an unsecured or partially secured basis to customers which may
exhibit a higher credit risk profile and who may otherwise be required to
prepay or post letters of credit for fuel purchases. The amount of credit
extended to any particular customer is a subjective decision. Factors
considered in credit decisions include the customer's financial strength and
payment history, competitive conditions in the market, the expected
productivity of the account, collateral provided (if any) and, with respect to
domestic accounts, the availability of credit insurance. Mercury considers its
existing credit portfolio to be of acceptable quality and, on an ongoing basis,
establishes allowances that in management's judgment are adequate to absorb
potential credit problems inherent in the portfolio.
Mercury purchases fuel at current market prices from a number of
independent and major oil companies based on the expected requirements of its
customers. Mercury's terms of payment range from ten to thirty days for most
of its fuel purchases except for bulk pipeline purchases which generally are
payable two days from invoice receipt. Mercury has agreements with certain
suppliers under which Mercury purchases a minimum amount of fuel each month at
prices which approximate current market prices. Mercury makes occasional spot
purchases of fuel to take advantage of market differentials. In order to meet
customer supply requirements, Mercury carries limited inventories at numerous
locations and two to three weeks inventory requirements at a few key pipeline
terminals. Due to the nature of Mercury's business, the volume of Mercury's
aviation fuel inventories will occasionally fluctuate. Depending upon the
price and price movement of aviation fuel, such inventories may subject Mercury
to a risk of financial loss.
Mercury's fuel supply contracts may generally be canceled by either
party with no further obligations. In some cases, Mercury has monthly
purchase requirements which are established based on historical volumes of fuel
purchased by Mercury. Such fuel purchase history may result in the seller
agreeing to provide a monthly allocation to Mercury such that the seller agrees
to dedicate a portion of its available fuel for Mercury's requirements.
Mercury benefits from such an allocation because, during periods of short fuel
supply, reductions in supply are generally made first to those buyers who have
not been given any allocations. To maintain dedicated allocations of fuel,
Mercury usually purchases fuel at levels approximating the allocated amount.
However, Mercury is not obligated to purchase any fuel under an allocation.
Currently, the monthly allocations from Mercury's fuel suppliers represent only
a small portion of Mercury's total monthly supply requirements.
Mercury's consolidated fuel sales could be materially adversely
affected by a significant decrease in the availability, or increase in the
price of, aviation fuel. Consolidated fuel sales of $182.7 million in fiscal
1996 and $145.2 million in fiscal 1995 represented approximately 81% and 79% of
consolidated revenues in fiscal 1996 and fiscal 1995, respectively. Although
Mercury believes that there are currently adequate aviation fuel supplies and
that aviation fuel supplies will generally remain available, events outside
Mercury's control have resulted and could result in spot shortages or rapid
increases in fuel costs. Although Mercury is generally able to pass through
rising fuel costs to its customers, extended periods of high fuel costs could
adversely affect Mercury's ability to purchase fuel in sufficient quantities
because of credit limits placed on Mercury by its fuel suppliers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
3
<PAGE> 5
In addition to contract fueling, Mercury considers a number of other
commercial activities which are headquartered at Los Angeles International
Airport ("LAX") as part of its fuel sales and services operations. These
activities include refueling services at LAX and John Wayne International
Airport in Santa Ana, California, the brokering of non-aviation fuel to the
industrial and commercial market place, the provision of air frame and power
plant mechanics to commercial airlines and the provision of cargo warehouse
manpower to a commercial airline. Refueling services at LAX and John Wayne
International Airport consist of the delivery of fuel by Company owned trucks
or hydrant carts for a fee. Mercury also maintains fuel tanks at LAX to
support its fuel sales and refueling services.
CARGO OPERATIONS
The Company's cargo operations are conducted through its wholly owned
subsidiary, Mercury Air Cargo, Inc. ("MAC"), which provides the following
services: cargo handling, space brokerage and general cargo sales agent
services.
Cargo Handling. MAC provides domestic and international air cargo handling,
air mail handling and bonded warehousing. MAC is one of only three non-airline
providers of contractual cargo containerization and palletization for
international carriers and airfreight forwarders at LAX. In addition, MAC
receives cargo and loads pallets for air transportation.
MAC's cargo handling operations occur primarily at LAX. In February
1996, MAC acquired the stock of Floracool, Inc. a cargo handling company in
Miami, Florida. See "Recent Developments". In September 1995, MAC expanded
its cargo handling operations by acquiring the assets of Excel Cargo, Inc.,
located in Montreal and Toronto, Canada. In May 1994, MAC expanded its cargo
handling operations by opening an off- airport warehouse in San Francisco,
California. See "Properties".
MAC is able to compete in the cargo handling business by offering
quality service from its strategically located LAX, San Francisco, Montreal,
Toronto and Miami warehouse facilities. At LAX, a portion of Mercury's cargo
handling operations are conducted in a facility subject to a month-to-month
lease. Continuous long-term growth in MAC's cargo handling operations can only
be realized by maintaining and expanding current warehouse facilities or by
obtaining additional warehouse facilities at LAX and new locations.
Space Brokerage. MAC brokers cargo space on international flights to and from
Europe, the Middle East, Mexico and Central and South America. Space brokerage
involves contracting for cargo space on airlines and subsequently, on MAC's own
airway bill, selling that space to customers with shipping needs. MAC has
established a network of shipping agents who assist in obtaining cargo for
shipment on space purchased from airlines, and who facilitate the delivery and
collection of freight charges for cargo shipped on MAC's airway bills.
Unlike an air cargo company which operates its own aircraft, MAC's
space brokerage business utilizes otherwise unfilled cargo space on scheduled
airline flights. Accordingly, MAC is able to profit from the sale of cargo
transportation space worldwide without the fixed overhead expense of
maintaining aircraft.
4
<PAGE> 6
MAC purchases cargo space from a number of airlines worldwide. As a result of
its large volume of cargo space purchases and its ability to negotiate among
airlines, MAC adds value for its customers and is able to attract business by
offering favorable pricing. MAC's revenues are the difference between the cost
of the space and the amount at which the space is sold.
General Sales Agent Services. MAC also serves as general cargo sales agent for
airlines in the Far East, Mexico, Central and South America and in the United
States. In this capacity, MAC sells the transportation of cargo on client
airlines' flights, using the client airlines' own airway bills. MAC earns
commissions from the airlines for selling air cargo space. As with its space
brokerage operations, the growth potential for MAC'S general cargo sales agent
business is not limited by requirements for physical facilities or by
requirements for additional capital investments.
FIXED BASE OPERATIONS
Mercury currently provides FBO services at LAX; Cannon International
Airport in Reno, Nevada; Meadows Field Airport in Bakersfield, California;
Burbank-Glendale-Pasadena Airport in Burbank, California; Santa Barbara
Municipal Airport in Santa Barbara, California; Ontario International Airport
in Ontario, California; Hartsfield International Airport in Atlanta, Georgia;
Peachtree-DeKalb Airport in Atlanta, Georgia; Corpus Christi International
Airport in Corpus Christi, Texas; and Addison Airport in Dallas, Texas. See
"Properties." At each FBO, Mercury maintains administrative offices; conducts
retail fuel sales and refueling operations which service principally corporate
and private aircraft ("general aviation") and to some extent commercial
airlines; and acts as a landlord for office and aircraft tie-down space
tenants. In addition, at Cannon International Airport, Mercury provides ground
handling services for commercial airlines.
Each FBO operates refueling vehicles and maintains fuel storage tanks
to support its into-plane and fuel sales activities. The FBO facilities and
the property on which their operations are conducted are leased from the
respective airport authorities. See "Properties."
In August 1996, the Company acquired certain assets of five FBOs from
Raytheon Aircraft Services, Inc. See "Recent Developments". During fiscal
1993, the Company acquired certain assets including equipment and leasehold
interests of two competing FBOs at Meadows Field Airport to complement its
existing FBO operation at that airport.
GOVERNMENT CONTRACT SERVICES
Mercury conducts its government contract services business through its
subsidiary, Maytag Aircraft Corporation ("Maytag"). Headquartered in Colorado
Springs, Colorado, Maytag provides services at fifteen U.S. military bases,
primarily for the U.S. Navy, including twelve in the United States, one in
Greece and two in Japan. Maytag provides services to the government pursuant to
contracts for each base which run for one to four years. Under most of these
contracts, Maytag operates government-owned fuel depots and services a variety
of aircraft for the military. Under the terms of its contracts, Maytag supplies
all necessary personnel and equipment to provide 24-hour refueling capability.
All fuel handled in these
5
<PAGE> 7
operations is government owned. In connection with its government contract
services business, Maytag owns and operates a fleet of refueling trucks and
other support vehicles.
The following table lists the bases which Maytag services, as of
September 15, 1996, and the expiration of each contract for each base.
<TABLE>
<CAPTION>
Location Expiration Date of Contract
-------- ---------------------------
<S> <C>
Bangor, WA September 1996 *
Willow Grove, PA September 1996
Brunswick, ME October 2000
Yokota, Japan March 1997***
Pensacola, FL August 1997
Whidbey Island, WA August 1997
Fallon, NV September 1997
Fukuoka, Japan September 1997**
Whiting Field, FL October 1997
Yuma, AZ July 1998
Point Mugu, CA April 1999
El Centro, CA September 1999
Washington, DC July 2000
Lakehurst, NJ September 2000
Souda Bay, Crete October 2000
</TABLE>
* Contract to provide library services .
** Contract to provide air terminal services .
*** Contract to provide base housing maintenance.
Maytag's government contracts are subject to competitive bidding, are
generally awarded on a firm fixed-price basis and are subject to termination at
the discretion of the United States Government in whole or in part.
Termination of a contract may occur if the United States Government determines
that it is in its best interest to discontinue the contract, in which case
closure costs will be paid to Maytag. Termination may also occur if Maytag
defaults under a contract. Maytag has never experienced any such default
termination.
Maytag's government services business has been negatively impacted by
contract losses due to base closures, the loss of competitive bids, small
business contract set asides and internalization of the refueling function by
the United States military. Since June 30, 1994, twelve contracts held by
Maytag have been terminated, five each in fiscal 1995 and fiscal 1996 and two
in September 1996. However, during fiscal 1996, Maytag was successful in its
bid to renew a four-year contract at Washington, D.C. and acquired a new
contract at Yokota, Japan, which began in October 1995, to provide base housing
maintenance. Based upon the July 13, 1995 presidential approval of the Defense
Base Closure and Realignment Commission recommendation, no additional bases
served by Maytag were selected for closure under the last round of federally
mandated base closures. The Company knows of no additional plans by the United
States Government to close bases.
6
<PAGE> 8
Gross margin from government services in fiscal 1996 included
$420,000 from the five contracts which were terminated in fiscal 1996 and
$208,000 from two contracts which are scheduled to terminate in fiscal 1997.
RECENT DEVELOPMENTS
FBO- ACQUISITION OF ASSETS
On August 28, 1996, pursuant to an Asset Purchase Agreement dated
April 8, 1996, Mercury completed the acquisition from Raytheon Aircraft
Services, Inc. (RAYTHEON AIRCRAFT SERVICES, INC.) of certain assets of five
FBOs located in Ontario, California (Ontario International Airport); Atlanta,
Georgia (Hartsfield International Airport); Atlanta, Georgia (Peachtree-DeKalb
Airport); Corpus Christi, Texas (Corpus Christi International Airport) and
Dallas, Texas (Addison Airport). See "Properties". The purchase price for the
assets was $8,250,000, which consisted of $4,350,000 in cash and a promissory
note in the principal amount of $3,900,000. The promissory note bears interest
at the prime rate and is payable over eight years in equal quarterly
installments of principal and interest. The Company retains the right through
October 31, 1996 to acquire a sixth location at Hanscom Field Airport in
Bedford, Massachusetts for $750,000, which would be added to the promissory
note.
FLORACOOL, INC.
Pursuant to a Stock Purchase agreement dated February 27, 1996, the
Company, through its wholly-owned subsidiary Mercury Air Cargo, Inc., acquired
all of the issued and outstanding shares of stock of Floracool, Inc. for
$250,000 in cash. Floracool is engaged in the cargo handling business and owns
certain assets located at Miami International Airport including a lease and
permit issued by Dade County Department of Transportation. See "Properties."
LAX CARGO HANGAR
On June 18, 1996, the Company entered into a five year lease with the
Los Angeles Department of Airports ("DOA") for a 174,000 square foot cargo
warehouse. Subsequent to entering into this lease, the Company entered into a
contract to remodel and reconstruct portions of this cargo facility at a cost
not to exceed $6,000,000 including finance charges. The construction period
will be eighteen months during which time the Company will pay $50,000 annually
in rent. After eighteen months, rent will increase to $174,000 per month.
Commencing with the nineteenth month, the DOA will reimburse the Company's
construction costs, including finance charges, up to $6,000,000 in the form of
monthly rent credits at the rate of up to $120,000 per month. If the lease is
not renewed after sixty months, the unreimbursed portion of construction costs
will be paid by the DOA to Mercury.
MAJOR CUSTOMERS
During fiscal 1996, no customer accounted for over 10% of Mercury's
consolidated revenues.
7
<PAGE> 9
SEASONAL NATURE OF BUSINESS
Mercury's commercial fuel sales, FBOs and aircraft support operations
are seasonal in nature, being relatively stronger during the months of April
through September in its fueling operations and FBOs than during the months of
October through March. Commercial air traffic and traffic at the FBOs is
reduced during the winter months due in part to weather conditions and
increased during the summer months due in part to additional commercial flights
and more recreational flying. Mercury's cargo business is relatively stronger
during the months of October through March than during the months of April
through September. The cargo business is affected by the patterns for
commercial and retail inventory build-ups in international trade. Operations
at military facilities are not seasonal.
POTENTIAL LIABILITY AND INSURANCE
Mercury's business activities subject it to risk of significant
potential liability under federal and state statutes, common law and
contractual indemnification agreements. Mercury reviews the adequacy of its
insurance on an on going basis. Mercury believes it follows generally accepted
standards for its lines of business with respect to the purchase of business
insurance and risk management practices. The Company purchases airport
liability and general and auto liability in amounts which the Company believes
are adequate for the risks of its business.
COMPETITION
Mercury competes with major companies which maintain their own source
of aviation fuel and with other aircraft support companies whose total sales
and financial resources far exceed those of Mercury. In addition, certain
airlines provide cargo and fueling services comparable to those furnished by
Mercury. At LAX, Mercury competes with, in addition to the airlines, three
independent fuel delivery services providers and primarily with two non-airline
entities with respect to air cargo handling. Each FBO has a minimum of one
competitor at each airport. Mercury has many principal competitors with
respect to government contracting services including certain small
disadvantaged businesses which receive a ten percent (10%) cost advantage with
respect to certain bids and set asides of certain contracts. Substantially all
Mercury's services are subject to competitive bidding. Mercury competes on the
basis of price and quality of service.
ENVIRONMENTAL MATTERS
Mercury must continuously comply with federal, state and local
environmental statutes and regulations associated with its numerous underground
fuel storage tanks. These requirements include, among other things, tank and
pipe testing for tightness, soil sampling for evidence of leaking and
remediation of detected leaks and spills. Mercury has installed stringent
inventory systems for its underground storage tanks and has placed sensors
underground which detect leaking. Mercury's operations are subject to frequent
inspection by federal and local environmental agencies and local fire and
airline quality control departments. To date, there have been no material
capital expenditures nor has there been a material negative impact on Mercury's
earnings or competitive position in performing such compliance and related
remediation work. To date, Mercury has not received any notice of violation or
been subject to any cease and abatement proceeding by any governmental agency
as a result of failure to comply with applicable environmental laws and
regulations. Based on tests performed to date, Mercury knows of no basis for
any notice of violation or cease and abatement proceeding by any governmental
agency.
8
<PAGE> 10
EMPLOYEES
As of August 31, 1996 Mercury employed 1152 persons in its following
operating units: fuel sales and services, 216 persons; cargo handling, 342
persons; FBOs, 314 persons; and government contract service, 280 persons.
Mercury is in the process of discussing collective bargaining agreements for
its government refueling operation at Point Mugu, California. Management
believes that, in general, wages, hours, fringe benefits and other conditions
of employment offered throughout Mercury's operations are at least equivalent
to those found elsewhere in its industry and that its general relationship with
its employees is satisfactory.
ITEM 2. PROPERTIES
Mercury owns its executive offices, which consists of approximately
20,000 square feet, located at 5456 McConnell Avenue, Los Angeles, California.
Listed below are the significant properties leased or owned by Mercury
as of September 15, 1996:
<TABLE>
<CAPTION>
Leased Expiration Activity
Location or Annual of Conducted
and Type Owned Rental Lease at Facility Size
-------- ----- ------ ---------- ----------- ----
<S> <C> <C> <C> <C> <C>
6851 and 6805 W. Leased $443,000 December Executive offices and 70,000 sq. ft. on
Imperial Highway, Los 1999 cargo hangar, with 5.5 acres
Angeles, California offices and executive
(Two story office offices rented to
building and customers
hanger)(1)
5456 McConnell Owned N/A N/A Executive offices 20,000 sq. ft.
Los Angeles, brick building
California (2)
700 World Way West, Leased $300,000 December Service and refueling 2,000 sq. ft. on
LAX (Executive 1998 of private aircraft 1.93 acres
terminal) (1)
2601 East Plumb Lane, Leased $21,000 June 1997 Service, maintenance 2,300 sq. ft.
Cannon International and refueling of executive terminal
Airport, Reno, Nevada commercial and private and 85,000 sq. ft.
(Cement block aircraft and sublessor of hangar
building and of building and hangar facilities
hangars)(1) space
655 So. Rock Blvd., Building $12,000 June 2017 Service, maintenance 23.7 acres of
Cannon International owned, and refueling of land; hangar and
Airport, Reno, land commercial and private administrative
Nevada(1) rented aircraft and sublessor building
of building and hangar consisting of
space 33,000 sq. ft.
</TABLE>
9
<PAGE> 11
<TABLE>
<S> <C> <C> <C> <C> <C>
1601 Skyway Drive and Leased $22,000 February Offices and refueling 2,000 sq. ft.
Meadows Field Fuel 2008 of commercial and facility on 5
Parcels No. 9 and 10, private aircraft acres
Meadows Field
Airport, Bakersfield,
California (1)
Meadows Field, Leased $44,000 February Landlord, service and 49,200 sq. ft.
Parcels 1-5 Meadows 2008 refueling of commercial building on 17.2
Field Airport, and private aircraft acres
Bakersfield,
California (3
buildings) (1)
Meadows Field, Hangar Leased $46,000 June 2001 Landlord, service and 30,000 sq. ft.
6 and Parcel A refueling of commercial hangar on 2.7
Meadows Field and private aircraft acres
Airport, Bakersfield,
California (4)
Meadows Field, Leased $21,000 Month-to- Landlord, service and 1,200 sq. ft.
Parcels 1 and 2 and Month refueling of commercial building on 10.86
Lease site 4 and 6 and private aircraft acres
Meadows Field
Airport, Bakersfield,
California
Meadows Field, Lease Leased $25,000 March 2015 Landlord, service and 35,940 sq. ft.
site 2 Meadows Field refueling of commercial executive terminal
Airport, Bakersfield, and private aircraft and hangar on 6.14
California (4) acres
Burbank-Glendale- Leased $158,000 July 2000 Landlord, service and 45,000 sq. ft.
Pasadena Airport, refueling of commercial
Burbank, California and private aircraft
(Aircraft facility)
Burbank-Glendale- Building $465,000 August Landlord, service and 106,000 sq. ft.
Pasadena Airport, owned, 1999 refueling of commercial
Burbank, California land and private aircraft
(Aircraft facility) leased
Burbank-Glendale- Leased $187,000 November Hangar Facility 5,200 sq. ft.
Pasadena Airport, 1999
Burbank, California
(Hangar)
Santa Barbara Leased $101,000 Month-to- Service, maintenance, 2,000 sq. ft.
Municipal Airport, Month and refueling of terminal; 2
Santa Barbara, commercial and private hangars totaling
California (Tie-down aircraft 13,120 sq. ft.
space and 3
buildings) (1)
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C> <C>
6145 Lehman Drive, Owned N/A N/A Executive and support 8,000 sq. ft.
Suite 300, Colorado personnel offices;
Springs, Colorado landlord
(Brick block building
with furnished
offices) (3)
526 Forbes Blvd., San Leased $162,000 April 1999 Cargo handling with 45,403 sq. ft.
Francisco, California offices building
LAX (B-4 Hangar) 6401 Leased $360,000 Month-to- Cargo handling with 45,000 sq. ft.
West Imperial Hwy., month offices hangar
Los Angeles,
California
12005, Rue Cargo A-3, Leased $312,000 November Cargo handling with 50,000 sq.ft
Suite 102 2005 offices warehouse
Aeroport
International De
Montreal
6500 N.W. 20th St. Leased $350,000 Month-to- Cargo handling with 66,240 sq.ft.
Building 2141, Door Month offices cargo hangar
11
Miami, Fl 33152
2261 N.W. 66th Ave. Leased $726,000 September Cargo handling with 50,000 sq. ft.
Miami, Fl 33126 2001 offices cargo hangar
Wm. B. Hartsfield Leased $107,000 March 2002 Service, maintenance 428,656 sq. ft.
International Airport and refueling of office and hangar
1200 Hartsfield Dr. commercial and private on 9.84 acres
Atlanta, Ga 30320 aircraft and sublessor
(5) of building and hangar
space
4400 Glenn Curtiss Leased $298,000 September Service, maintenance 49,472 sq. ft.
Dr. 2021 and refueling of 2.80 acres
Hangar #1. commercial and private
Dallas, Tx 75248 (5) aircraft and sublessor
of building and hangar
space
4400 Glenn Curtiss Leased $51,000 June Service, maintenance 57,949 sq. ft.
Dr. 2022 and refueling of Office and hangar
Hangar #2 and #3 commercial and private on 6.28 acres
Dallas, TX 75248 (5) aircraft and sublessor
of building and hangar
space
4400 Glenn Curtiss Leased $8,000 July Service, mintenance and 12,600 sq. ft.
Dr. 2021 refueling of commercial Office and hangar
Hangar #4 and private aircraft
Dallas, Tx 75248 (5) and sublessor of
building and hangar
space
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C> <C>
4400 Glenn Curtis Dr. Leased $28,000 December
Fuel Farm 2000
Dallas, Tx 75248 (5)
355 Pinson Drive Leased $19,000 October Service, maintenance 66,096 sq. ft
Corpus Christi, Tx 1997 and refueling of office and hangar
78469 commercial and private on 6.69 acres
aircraft and sublessor
of building and hangar
space
2161 East Avion St. Leased $226,000 April Service, maintenance 54,650 sq. ft.
Ontario, CA 91761 2007 and refueling of Office and hangar
Ontario Intl Airport commercial and private on 15.11 acres
aircraft and sublessor
of building and hangar
space
1951 Airport Road Leased $191,000 November Service, maintenance 164,288 sq. ft.
Atlanta, GA 30341 2006 and refueling of office and hangar
Peachtree-Dekalb commercial and private on 22.46 acres
Airport aircraft and sublessor
of building and hangar
space
6060 Avion Drive Leased $50,000 June Cargo hangar 174, 000 sq.ft.
Los Angeles, 2001 with office Cargo facility
International Airport
(6)
Lester B. Person Leased $128,000 July Cargo handling 13,942 sq.ft.
International Airport 1997 with office
Toronto
</TABLE>
(1) The leasehold interest is subject to a security interest granted to
Mercury's secured lender under its loan agreements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
(2) This property was purchased in April 1994 for $1,800,000 and is
subject to a first mortgage in the sum of $916,500 at June 30, 1996
repayable in equal monthly installments of principal of $9,750, plus
interest at 7.5% per annum, the last payment due in April 2004.
(3) This property is subject to a first mortgage in the sum of $419,680 at
June 30, 1996 repayable with interest at 9% in equal monthly
installments of approximately $4,450, the last payment due May 2010.
(4) This property is subject to a first mortgage in the sum of $956,339 at
June 30, 1996 repayable with interest at prime in equal monthly
installments, the last payment due in December 2004.
(5) The leasehold interest is subject to a security interest granted to
Raytheon Aircraft Services, Inc.
(6) See "Recent Developments" for additional lease terms and construction
plans.
12
<PAGE> 14
At each of the locations where Mercury conducts its refueling
business, including eleven commercial locations and fifteen military locations,
Mercury's operations are dependent on a fleet of refueling vehicles. All
locations utilize refueling trucks for transporting and pumping fuel. At LAX,
in addition to refueling trucks, hydrant trucks are also maintained which pump
fuel from hydrant lines directly into the aircraft. Mercury's owned equipment
is subject to a lien in favor of its secured lender. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
At commercial airports where Mercury operates FBOs, Mercury maintains
its own above and below ground fuel storage capabilities, as follows:
<TABLE>
<CAPTION>
Approximate
Capacity
Location (gallons)
-------- -----------
<S> <C>
LAX 312,000
Bakersfield 105,000
Burbank 119,000
Santa Barbara 35,000
Reno 100,000
Ontario, California 88,000
Dallas, Texas 57,000
Corpus Christi, Texas -
Atlanta, Georgia (Hartsfield) 48,000
Atlanta, Georgia(Peachtree) 48,000
</TABLE>
Management believes that Mercury's property and equipment are adequate
for its present business needs. Mercury fully utilizes the real properties it
owns or leases for its business.
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incident to Mercury's business, Mercury
knows of no material litigation or administrative proceedings pending against
Mercury to which Mercury or any of its subsidiaries is a party or to which any
of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
13
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Mercury's Common Stock is listed and traded on the AMEX under the
Symbol "MAX". The table below sets forth, for the quarterly periods indicated,
the high and low closing sale prices per share of Common Stock. All per share
stock price information has been adjusted to reflect the June 16, 1995 ten
percent stock dividend and May 1, 1996 ten percent stock dividend.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
FISCAL 1996:
Quarter ended September 30, 1995................................. $ 8.41 $6.94
Quarter ended December 31, 1995.................................. 10.00 7.39
Quarter ended March 31, 1996..................................... 9.31 7.27
Quarter ended June 30, 1996...................................... 10.38 7.88
FISCAL 1995:
Quarter ended September 30, 1994.................................. $ 5.78 $4.35
Quarter ended December 31, 1994................................... 6.41 4.95
Quarter ended March 31, 1995...................................... 8.17 5.69
Quarter ended June 30, 1995....................................... 8.23 6.50
</TABLE>
As of September 24, 1996, there were approximately 487 holders of record.
In December 1994, Mercury's Board of Directors adopted a quarterly dividend
plan of $.01 per common share in cash. The first such dividend was paid on
February 1, 1995. In May 1996, Mercury's Board of Directors increased the
quarterly dividend to $.0125 per share. Based upon the current number of
shares of Common Stock outstanding and assuming the quarterly amount of $.0125
per share remains in effect, annual dividend requirements will amount to
approximately $303,000. Mercury intends to review its dividend policy from
time to time in light of Mercury's earnings, financial condition and other
relevant factors, including applicable covenants in debt and other agreements.
In this regard, as discussed in Note 7 of Notes to Consolidated Financial
Statements, certain of Mercury's loan agreements provide for the maintenance of
specified levels of working capital as well as limitations on cash dividends.
14
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the five years
ended June 30 have been derived from the audited consolidated financial
statements of Mercury. The information set forth below should be read in
conjunction with the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA
--------------
REVENUES (1) $225,374 $183,000 $103,069 $84,543 $71,746
COSTS AND EXPENSES 206,960 166,427 90,404 75,640 65,254
GROSS MARGIN 18,414 16,573 12,665 8,903 6,492
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,818 2,409 2,049 1,680 1,349
DEPRECIATION AND AMORTIZATION
INTEREST EXPENSE 2,375 1,478 1,080 1,084 898
OTHER EXPENSE (INCOME) (2) (596) 11 106 (1,103) (102)
INCOME BEFORE INCOME TAXES 7,766 7,312 5,169 3,363 616
PROVISION FOR INCOME TAXES 3,086 3,005 2,174 1,413 257
NET INCOME 4,680 4,307 2,995 1,950 359
NET INCOME PER COMMON SHARE
ON A FULLY DILUTED BASIS(3) 0.70 0.69 0.54 0.35 0.01
WEIGHTED AVERAGE COMMON
OUTSTANDING SHARES(3) 5,963,954 5,962,174 4,091,872 2,674,704 2,633,566
BALANCE SHEET DATA AT JUNE 30,
------------------ -------------------------------------------------------------------------
TOTAL ASSETS $ 79,123 $54,210 $35,442 $31,800 $26,090
SHORT-TERM DEBT (INCLUDING
CURRENT PORTION OF
LONG-TERM DEBT) 2,555 2,607 2,317 1,654 1,242
LONG-TERM DEBT AND REDEEMABLE
PREFERRED STOCK AND
CONVERTIBLE DEBENTURES 35,008 17,104 8,650 9,821 7,299
DIVIDENDS PER COMMON SHARE .0425 0.02 0.00 0.00 0.00
</TABLE>
(1) Revenue consists of consolidated sales and revenues.
(2) Fiscal 1993 includes a pretax gain from legal judgment in the amount of
$1,060,000
(3) Shares outstanding and earnings per share have been adjusted retroactively
to reflect the payment of ten percent stock dividends on June 16, 1995 and
May 1, 1996.
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FISCAL 1996, 1995 AND 1994.
The following tables set forth, for the periods indicated, the revenues and
gross margin for each of the Company's four operating units, as well as
selected other financial statement data.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------
($ in millions) 1996 1995 1994
% of Total % of Total % of Total
Amount Revenues Amount Revenues Amount Revenues
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Fuel Sales and Services $178.6 79.3% $141.8 77.5% $64.4 62.5%
Cargo Operations 15.5 6.9% 9.9 5.4% 7.0 6.8%
Government Contract Services 13.8 6.1% 15.6 8.5% 16.0 15.5%
FBOs 17.4 7.7% 15.7 8.6% 15.7 15.2%
---- ---- -------- -------- -------- -------
Total Revenues $225.4 100.0% $183.0 100.0% $103.1 100.0%
====== ====== ====== ====== ====== ======
% of Unit % of Unit % of Unit
Amount Revenues Amount Revenues Amount Revenues
---------------------------------------------------------------------------------
Gross Margin (1):
Fuel Sales and Services $7.9 4.4% $6.9 4.9% $3.0 4.7%
Cargo Operations 4.7 30.5% 2.8 28.5% 2.7 38.4%
Government Contract Services 3.0 21.7% 4.2 26.7% 4.0 25.0%
FBOs 2.8 16.0% 2.7 17.1% 3.0 18.9%
--- ----- ------- ----- ------- -----
Total Gross Margin $18.4 8.2% $16.6 9.1% $12.7 12.3%
----- ---- ===== ==== ===== =====
% of Unit % of Unit % of Unit
Amount Revenues Amount Revenues Amount Revenues
---------------------------------------------------------------------------------
Selling, General and Administrative $6.0 2.7% $5.4 2.9% $4.3 4.1%
Depreciation and Amortization 2.8 1.3% 2.4 1.3% 2.0 2.0%
Interest Expense and Other 1.8 0.8% 1.5 0.8% 1.2 1.2%
--- ---- --------- -------- -------- --------
Income before Income Taxes 7.8 3.4% 7.3 4.0% 5.2 5.0%
Provision for Income Taxes 3.1 1.4% 3.0 1.6% 2.2 2.1%
--- ---- ------- -------- -------- --------
Net Income $4.7 2.1% $4.3 2.4% $3.0 2.9%
==== ==== ===== ===== ===== =====
</TABLE>
(1) Gross Margin as used here and throughout Management's discussion excludes
depreciation and amortization and selling, general and administrative
expenses.
16
<PAGE> 18
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Revenue increased 23.2% to $225.4 million in fiscal 1996 from $183.0
million in fiscal 1995. Gross margin increased 11.1% to $18.4 million in
fiscal 1996 from $16.6 million in fiscal 1995.
Revenues from fuel sales and services represented 79.3% of total revenues
in fiscal 1996 compared to 77.5% of total revenues in fiscal 1995. Revenues
from fuel sales and services in fiscal 1996 increased 26% to $178.6 million
from $141.8 million in fiscal 1995. The increase in revenues from fuel sales
and services was primarily due to an increase in the number of gallons sold to
new and existing accounts and, to a lesser extent, due to an increase in
average fuel prices. Average fuel prices increased approximately 6% in fiscal
1996 compared to fiscal 1995. Gross margin from fuel sales and services in
fiscal 1996 increased 14.6% to $7.9 million from $6.9 million in fiscal 1995.
The increase in gross margin from fuel sales and services in fiscal 1996
compared to fiscal 1995 was attributable to an increase in fuel sales.
Revenues and gross margins from fuel sales and services include the activities
of Mercury's contract fueling business, as well as activities from a number of
other commercial services including the provision of certain refueling
services, non-aviation fuel brokerage and other services managed at LAX as part
of Mercury's fuel sales and services operations.
Revenues from cargo operations in fiscal 1996 increased 56.8% to $15.5
million from $9.9 million in fiscal 1995. This increase was primarily due to a
general increase in the volume of business from existing accounts and to the
additions of Excel Cargo and Floracool in fiscal 1996. Excel Cargo was acquired
on September 30, 1995 and operates in Montreal and Toronto in Canada.
Floracool was acquired in January 1996 and operates in Miami. Gross margin
from cargo operations in fiscal 1996 increased 67.7% to $4.7 million from $2.8
million in fiscal 1995. This increase in gross margin from cargo operations in
fiscal 1996 compared to fiscal 1995 was primarily attributable to an increase
in cargo revenues.
Revenues from government contract services in fiscal 1996 declined 11.5%
to $13.8 million from $15.6 million in fiscal 1995. Revenues from government
contract services in fiscal 1996 included $1.8 million from five contracts
which were terminated in fiscal 1996 and $.8 from two contracts which are
scheduled to terminate in fiscal 1997. The decrease in revenues from
government contract services in fiscal 1996 compared to fiscal 1995 was due to
contract terminations in fiscal 1995 and fiscal 1996, which terminations were
only partially offset by new contracts received in November 1994 and October
1995. Gross margin from government contract services in fiscal 1996 declined
28.1% to $3.0 million from $4.2 million in fiscal 1995 due to lower revenues
and lower margins. Gross margin from government contract services in fiscal
1996 included $.4 million from the five contracts which were terminated in
fiscal 1996 and $.2 from two contracts which are scheduled to terminate in
fiscal 1997.
Revenues from FBOs in fiscal 1996 increased 10.7% to $17.4 million from
$15.7 million in fiscal 1995. The increase in revenues from FBOs was due to an
increase in fuel sales and services revenues. Gross margin from FBOs in fiscal
1996 increased 3.6% to $2.8 million from $2.7 million in fiscal 1995. The
increase in gross margin from FBOs in fiscal 1996 compared to fiscal 1995 was
attributable primarily to an increase in revenues.
Selling, general and administrative expenses in fiscal 1996 increased
12.8% to $6.0 million from $5.4 million in fiscal 1995. The increase was
primarily due to higher professional fees and higher compensation expenses.
Selling, general and administrative expense includes provision for bad debts
which totaled $945,000 in fiscal 1996 compared to $905,000 in fiscal 1995.
17
<PAGE> 19
Depreciation and amortization expenses in fiscal 1996 increased 17.0% to
$2.8 million from $2.4 million in fiscal 1995. The increase was primarily due
to the acquisition of Excel Cargo, Inc. in fiscal 1996 and, to a lesser extent,
capital expenditures of $2.3 million in fiscal 1996.
Interest expense in fiscal 1996 increased 60.7% to $2.4 million from $1.5
million in fiscal 1995. The increase was due to significantly higher average
outstanding long-term debt in fiscal 1996 compared to fiscal 1995. Interest
income increased in fiscal 1996 to $322,000 from $84,000 in fiscal 1995
primarily due to excess cash balances subsequent to the Debenture Offering in
February 1996 which were invested in short term cash equivalents. See Note 7
of Notes to Consolidated Financial Statements.
Charges for minority interest in fiscal 1996 were eliminated compared to
$95,000 in fiscal 1995. Minority interest was eliminated due to the
acquisition of the remaining minority interest's share of Mercury Air Cargo in
November 1994. See Note 2 of Notes to Consolidated Financial Statements.
Income tax expense approximated 40% of pre-tax income for fiscal 1996 and
41% for fiscal 1995, reflecting the effective annual tax rate.
Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1994
Revenue increased 77.6% to $183.0 million in fiscal 1995 from $103.1
million in fiscal 1994. Gross margin increased 30.9% to $16.6 million in
fiscal 1995 from $12.7 million in fiscal 1994.
Revenues from fuel sales and services represented 77.5% of total
revenues in fiscal 1995 compared to 62.5% of total revenues in fiscal 1994.
Revenues from fuel sales and services in fiscal 1995 increased 120% to $141.8
million from $64.4 million in fiscal 1994. The increase in revenues from fuel
sales and services was primarily due to an increase in the number of gallons
sold as a result of the addition of a significant number of new accounts in
fiscal 1995. These new accounts were attributable in part to the opening of
sales offices in Houston and Miami in October 1994. Average fuel prices were
marginally higher in fiscal 1995 compared with fiscal 1994. Gross margin from
fuel sales and services in fiscal 1995 increased 127.9% to $6.9 million from
$3.0 million in fiscal 1994. The increase in gross margin from fuel sales and
services in fiscal 1995 compared to fiscal 1994 was attributable primarily to
an increase in fuel sales and, to a much lesser extent, a slight improvement in
per gallon margins.
Revenues from cargo operations in fiscal 1995 increased 41.8% to $9.9
million from $7.0 million in fiscal 1994. This increase was primarily due to a
general increase in the volume of business from existing accounts and the
addition of a new location in San Francisco. During fiscal 1995 Mercury opened
a cargo operation in Miami; however, in March 1995, the operation was closed as
a result of the loss of a key employee. Gross margin from cargo operations in
fiscal 1995 increased 5.5% to $2.8 million from $2.7 million in fiscal 1994.
The increase in gross margin was significantly lower than the corresponding
revenue increase due to operating losses at the San Francisco and Miami
locations in fiscal 1995 and higher labor and other operating costs at LAX in
fiscal 1995 compared to fiscal 1994.
Revenues from government contract services in fiscal 1995 declined
2.6% to $15.6 million from $16.0 million in fiscal 1994. Revenues from
government contract services in fiscal 1995 included $5.3 million from ten
contracts, five of which were terminated in fiscal 1995 and the balance of
which were terminated at the end of the first quarter or during the second
quarter of fiscal 1996. The decrease in revenues from government contract
services in fiscal 1995 compared to fiscal 1994 was primarily due to the
18
<PAGE> 20
contract terminations during fiscal 1995, which terminations were only
partially offset by a new contract received in November 1994. Gross margin
from government services in fiscal 1995 increased 4.1% to $4.2 million from
$4.0 million in fiscal 1994 due to lower operating expenses. Gross margin
from government services in fiscal 1995 included $1.4 million from the ten
contracts described above which have been terminated. Mercury did not
experience significant charge-offs associated with the contract terminations
described above.
Revenues from FBOs remained relatively constant in fiscal 1995 at
$15.7 million compared to fiscal 1994, but gross margin declined 9.0% from
$3.0 million in fiscal 1994 to $2.7 million in fiscal 1995. The decline was
primarily attributable to a reduction in the volume of fuel sold, as well as
lower per gallon margins.
Selling, general and administrative expenses in fiscal 1995 increased
25.9% to $5.4 million from $4.3 million in fiscal 1994. The increase was
primarily due to an increase in the provision for bad debts. Provision for bad
debts increased to $905,000 in fiscal 1995 from $324,000 in fiscal 1994 due to
a significant increase in sales and accounts receivable. Excluding the
provision for bad debts, selling, general and administrative expenses in fiscal
1995 increased 13.2% to $4.5 million from $3.9 million in fiscal 1994,
primarily due to higher compensation expenses related to expansion of Mercury's
business.
Depreciation and amortization expense in fiscal 1995 increased 17.6%
to $2.4 million from $2.0 million in fiscal 1994. The increase was primarily
due to $2.0 million of capital expenditures in fiscal 1995 and $5.0 million of
capital expenditures in fiscal 1994.
Interest expense in fiscal 1995 increased 36.9% to $1.5 million from
$1.1 million in fiscal 1994. The increase was due to higher interest rates and
significantly higher average outstanding bank borrowing in fiscal 1995 compared
to fiscal 1994. Interest income decreased in fiscal 1995 to $84,000 from
$140,000 in fiscal 1994 due to the declining principal balance of Mercury's
outstanding notes receivable.
Charges for minority interest in fiscal 1995 decreased to $95,000 from
$246,000 in fiscal 1994. The decrease was due to the acquisition of the
remaining minority interest's share of Mercury Air Cargo in November 1994. See
Note 2 of Notes to Consolidated Financial Statements.
Income tax expense approximated 41% of pre-tax income for fiscal 1995
and 42% for fiscal 1994, reflecting the effective annual tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Until issuance of the convertible subordinated debentures in February
1996, Mercury had historically financed its operations primarily through
operating cash flow and borrowings under its revolving line of credit (the
"Revolver"). Mercury's cash and cash equivalents balance at June 30, 1996
totaled $11,820,000.
Net cash provided by operating activities totaled $2,951,000 during
fiscal 1996. During this period, the primary source of net cash provided by
operating activities was net income plus depreciation and amortization totaling
$7,498,000 and an increase in accounts payable of $1,614,000. The primary use
of cash for operating activities in fiscal 1996 was an increase in accounts
receivable of $7,762,000.
19
<PAGE> 21
Net cash provided by financing activities totaled $12,581,000 during
fiscal 1996. The primary source of cash from financing activities during this
period was net proceeds from the convertible debentures of $26,280,000. The
primary use of cash in financing activities was the reduction in long-term debt
of $13,316,000.
Mercury's Credit Facility consists of the Revolver and the Term Loan.
The Credit Facility is secured by substantially all of Mercury's assets. The
original principal balance of the Term Loan was $7,500,000, of which $3,384,000
was outstanding as of June 30, 1996. The Term Loan is amortized and paid on a
monthly basis and matures in August 1998. Pursuant to the Revolver, funds may
be obtained in an amount equal to the value of up to 85% of Mercury's eligible
receivables, as determined by the lender, up to an aggregate of $16,000,000
with an initial term maturing in October 1997, subject to renewal by the
parties. At June 30, 1996, Mercury had approximately $6,000 of borrowing under
the Revolver and had approximately $15,000,000 of additional borrowing
availability based on the 85% of eligible receivables test. See Note 7 of
Notes to Consolidated Financial Statements.
In February 1996, the Company received net proceeds of $26,280,000
from the public offering of $28,115,000 principal amount of 7.75% convertible
subordinated debentures due February 1, 2006. See Note 7 of Notes to
Consolidated Financial Statements.
During fiscal 1996, Mercury repurchased 155,420 shares of Common Stock
at a total cost of approximately $820,000. Management is currently authorized
by Mercury's board of directors and under Mercury's loan agreements to
repurchase up to an additional approximately $2,000,000 in Common Stock.
During fiscal 1996, Mercury received approximately $126,000 from the exercise
of stock options which resulted in the issuance of 35,350 shares of Common
Stock.
Historically, the Company's capital expenditure requirements have been
related to refueling and ground handling equipment for both commercial and
government service operations and the acquisition of new operating facilities.
In fiscal 1994, the Company spent approximately $2,400,000 for equipment
requirements related to new and existing contracts and to purchase equipment
previously held under noncancelable operating leases. During fiscal 1994, the
Company also acquired a 20,000 square foot building for its headquarters at a
cost of approximately $1,800,000. In addition, the Company invested nearly
$800,000 to acquire a leasehold interest at its Bakersfield FBO. In fiscal
1995, the Company purchased a building in Colorado Springs at a cost of
$500,000 to relocate its government services headquarters. The Company also
invested nearly $700,000 for computer equipment and to remodel and furnish its
Los Angeles headquarters building. In addition, the Company spent
approximately $700,000 to purchase refueling and ground equipment for its
commercial, FBO and government service operations. In fiscal 1996 the Company
spent approximately $2,700,000 for property and equipment in the acquisition of
Excel Cargo, Inc. In addition, the Company invested approximately $2,300,000
primarily to purchase refueling and ground equipment for its commercial
operations. In August 1996, the Company acquired certain assets of five FBOs
from RAS for $8,250,000, which consisted of $4,350,000 cash and a promissory
note in the principal amount of $3,900,000. The Company has committed to spend
$6,000,000 remodeling and reconstructing a cargo facility at LAX, is seeking
financing for this project and is entitled to receive related rent credits.
See "Recent Developments".
The Company's accounts receivable grew from $33,269,000 at June 30,
1995 to $41,377,000 at June 30, 1996, an increase of $8,108,000, with an
increase in accounts payable during the same period of only $2,082,000 to
$15,080,000 at June 30, 1996 from $12,998,000 at June 30, 1995. Accounts
receivable days outstanding was 62 days for both the quarter ended June 30,
1995 and for the quarter ended June 30, 1996
20
<PAGE> 22
based upon consolidated revenue for each period. Accounts receivable days
outstanding are impacted by a high volume of fuel brokerage which is reported
in revenues on a net margin basis and a high concentration of fuel sales to
customers with extended payment terms. Allowance for doubtful accounts
increased to $809,000 at June 30, 1996 from $610,000 at June 30, 1995.
Absent a major prolonged surge in oil prices or a capital intensive
acquisition, the Company believes its operating cash flow, Revolver, vendor
credit and cash balance will provide it with sufficient liquidity during the
next twelve months. In the event that fuel prices increase significantly for
an extended period of time, the Company's liquidity could be adversely affected
unless the Company is able to increase vendor credit or increase lending limits
under its revolving credit facility. The Company believes, however, its
Revolver and vendor credit should provide it with sufficient liquidity in the
event of a major temporary surge in oil prices.
Inflation
The Company believes that inflation has not had a significant effect
on its results of operations during the past three fiscal years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Part IV, Item 14, pages F1 through F17 immediately following.
ITEM 9. ACCOUNTING AND FINANCIAL DISCLOSURE DISPUTES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the information set forth under the caption
"Election of Directors" of the Company's Proxy Statement for the annual meeting
scheduled for December 5, 1996 (the "Proxy Statement") for a description of the
directors and executive officers of the Company, which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the information set forth under the caption
"Executive Compensation" of the Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the table, including the footnotes thereto, set
forth under the caption "Election of Directors" of the Proxy Statement, for
certain information respecting ownership of stock of the Company by management
and certain shareholders, which table and footnotes are incorporated herein by
reference.
21
<PAGE> 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the information set forth under the caption
"Certain Transactions" of the Proxy Statement for certain information with
respect to relationships and related transactions, which information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
<TABLE>
<S> <C>
(a) (1) Financial Statements
Independent Auditors' Report.........................................................................F-1
Consolidated Balance Sheets as of June 30, 1996 and 1995.............................................F-2
Consolidated Statements of Income for each of the three
years in the period ended June 30, 1996..........................................................F-3
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1996..........................................................F-4
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 30, 1996.............................................F-5
Notes to Consolidated Financial Statements for the three
years ended June 30, 1996.................................................................F-6 to F-19
(a) (2) Supplemental Schedule for each of the three years in the period ended June 30, 1996:
Schedule II - Valuation and Qualifying Accounts......................................................F-20
</TABLE>
All other items are not included in this Form 10-K for the reason that
they are not applicable or are included in the information as set forth in the
Consolidated Financial Statements or in the Notes to Consolidated Financial
Statements. (a) (3) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
<S> <C>
3.1 Restated Certificate of Incorporation (4)
3.2 Form of Amendment to Restated Certificate of Incorporation creating the
Series A 8% Convertible Cumulative Redeemable Preferred Stock (4)
3.3 Form of Amendment to Restated Certificate of Incorporation declaring
the Separation Date for the Series A 8% Convertible Redeemable
Preferred Stock (6)
3.4 Bylaws of the Company (4)
</TABLE>
22
<PAGE> 24
<TABLE>
<S> <C>
3.5 Amendment to Bylaws of the Company (13)
4.1 Form of Indenture between Mercury Air Group, Inc. and IBJ Schroder
Bank & Trust Company. (14)
4.2 Negotiable Promissory Note, dated as of June 21, 1996, from Mercury
Air Group, Inc. to Raytheon Aircraft Services, Inc. (15)
4.3 Legend Agreement, dated as of August 29, 1996 between Mercury Air
Group, Inc. and Raytheon Aircraft Services, Inc. (15)
10.1 Underwriter's Unit Warrant dated June 18, 1991 issued to Emanuel
and Company by the Company (4)
10.2 Employment Agreement dated December 10, 1993 between the Company and
Seymour Kahn (10)
10.3 Loan and Security Agreements among the Company, Maytag Aircraft
Corporation and Marine Midland Business Loans, Inc. dated December 6,
1989 (2)
10.4 Stock Purchase Agreement between the Company, SK Acquisition, Inc.,
Randolph E. Ajer, Kevin J. Walsh, Grant Murray and Joseph Czyzyk (2)
10.5 Company's 1990 Long-Term Incentive Plan (7)
10.6 Company's 1990 Directors Stock Option Plan (1)
10.7 Lease for 6851 West Imperial Highway, Los Angeles, California (4)
10.8 Amendment to Loan Agreement and Security Agreement among the Company,
Maytag Aircraft Corporation and Marine Midland Business Loans,
Inc. dated October 2, 1990 (4)
10.9 Second Amendment to Loan and Security Agreement among the Company,
Maytag Aircraft Corporation and Marine Midland Business Loans, Inc.
dated April 18, 1991 (4)
10.10 Third Amendment to Loan and Security Agreement among the Company,
Maytag Aircraft Corporation and Marine Midland Business Loans, Inc.
dated June 1991 (5)
10.11 Amendment to Loan and Security Agreements and Term Notes dated as of
April 1, 1992 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. dated April 1, 1992 (6)
10.12 Amendment to Loan and Security Agreements and Term Notes dated as of
April 1, 1992 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. (8)
10.13 Amendment to Loan and Security Agreements and Term Notes dated as of
December 21, 1992 among the Company, Maytag Aircraft Corporation
and Marine Midland Business Loans, Inc. (9)
10.14 Amendment to Loan and Security Agreements and Term Notes dated as of
August 30, 1993 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. (9)
10.15 Memorandum Dated September 15, 1995 regarding Summary of Officer Life
Insurance Policies with Benefits Payable to Officers or Their
Designated Beneficiaries (13)
10.16 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans
for Seymour Kahn, Joseph Czyzyk and Randolph E. Ajer (13)
10.17 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans
for Kevin Walsh and William Silva (13)
</TABLE>
23
<PAGE> 25
<TABLE>
<S> <C>
10.18 The Company's 401(k) Plan consisting of LCI Actuaries, Inc. Regional
Prototype Defined Contribution Plan and Trust and Adoption
Agreement (9)
10.19 Amendment to Loan and Security Agreements and Term Notes dated as of
September 21, 1993 among the Company, Maytag Aircraft Corporation
and Marine Midland Business Loans, Inc. (9)
10.20 Non-Qualified Stock Option Agreement by and between the Company and
Seymour Kahn dated January 21, 1993 (9)
10.21 Non-Qualified Stock Option Agreement by and between the Company and
William G. Langton dated August 9, 1993 (9)
10.22 Stock Purchase Agreement among the Company, SK Acquisition, Inc. and
William L. Silva dated as of August 9, 1993 (10)
10.23 Amendment to Loan and Security Agreements and Term Notes dated as of
September 21, 1993 among the Company, Maytag Aircraft Corporation
and Marine Midland Business Loans, Inc. (10)
10.24 Amendment to Loan and Security Agreements and Term Notes dated as of
April 1, 1994 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. (10)
10.25 Stock Exchange Agreement dated as of November 15, 1994 between
Joseph Czyzyk and the Company (11)
10.26 Employment Agreement dated November 15, 1995 between the Company and
Joseph Czyzyk (12)
10.27 Amendment to Loan and Security Agreements and Term Notes dated as of
December 20, 1994 among the Company, Maytag Aircraft
Corporation and Marine Midland Business Loans, Inc. (12)
10.28 Amendment to Loan and Security Agreements and Term Notes dated as of
December 17, 1994 among the Company, Maytag Aircraft
Corporation and Marine Midland Business Loans, Inc. (12)
10.29 Amendment to Loan and Security Agreements and Term Notes dated as of
June 12, 1995 among the Company, Maytag Aircraft
Corporation and Marine Midland Business Loans, Inc. (13)
10.30 Loan and Security Agreement dated as of June 12, 1995 between Mercury
Air Cargo, Inc. and Marine Midland Business Loans, Inc. (13)
10.31 Agreement dated August 1, 1995 between Mercury Air Group, Inc. and
Grant Murray (13)
10.32 Amendment to Loan and Security Agreements dated as of September 24,
1996 among the Company, Maytag Aircraft Corporation, Mercury Air
Cargo, Inc. and Marine Midland Business Loans, Inc.
10.33 Underwriting Agreement for the Company's $25,000,000 7-3/4%
Convertible Subordinated Debentures due February 1, 2006 (14)
10.34 Asset Purchase Agreement, dated as of April 8, 1996, by and between
Raytheon Aircraft Services, Inc. and Mercury Air Group, Inc. (15)
10.35 Amendment Letter to Asset Purchase Agreement, dated as of August 29,
1996, by and between Raytheon Aircraft Services, Inc. and Mercury
Air Group, Inc. (15)
</TABLE>
24
<PAGE> 26
<TABLE>
<S> <C>
11.1 Computation of Earnings Per Share (3)
22.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP with respect to incorporation of
their report on the audited financial statements contained in this
Annual Report on Form 10-K and the Company's Registration Statement
on Form S-8 (Registration Statement No. 33-69414)
</TABLE>
_________________________________
(1) Such document was previously filed as Appendix A to the Company's
Proxy Statement for the December 10, 1993 Annual Meeting of
Shareholders and is incorporated herein by reference.
(2) Such document was previously filed as an Exhibit to the Company's
Current Report on Form 8-K dated December 6, 1989 and is incorporated
herein by reference.
(3) Such statement is included in Note 12 of Notes to Consolidated
Financial Statements included in this Annual Report on Form 10-K and
is incorporated herein by reference.
(4) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-39044 on Form S-2 and are incorporated
herein by reference.
(5) Such document was previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1991 and is
incorporated herein by reference.
(6) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and
are incorporated herein by reference.
(7) Such document was previously filed as Appendix A to the Company's
Proxy Statement for the December 2, 1992 Annual Meeting of
Shareholders.
(8) Such document was previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1992 and is
incorporated herein by reference.
(9) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993 and are
incorporated herein by reference.
25
<PAGE> 27
(10) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994 and are
incorporated herein by reference.
(11) Such document was previously filed as an Exhibit to the Company's
Current Report on Form 8-K dated November 15, 1995 and is incorporated
herein by reference.
(12) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1995
and are incorporated herein by reference.
(13) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995 and are
incorporated herein by reference.
(14) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-65085 on Form S-1 and are incorporated
herein by reference.
(15) All such documents were previously filed as Exhibits to the Company's
Report on Form 8-K filed September 13, 1996 and are incorporated
herein by reference.
(b) Reports on Form 8-K:
Report on Form 8-K filed September 13, 1996 with respect to the
acquisition of assets of fixed base operations.
(c) Identification of management contracts and compensatory plans and
arrangements:
Exhibits 10.2, 10.4, 10.5, 10.6, 10.15, 10.16, 10.17, 10.18, 10.20,
10.21, 10.22, 10.26 and 10.31 constitute the management contracts and
compensatory plans and arrangements required to be filed as exhibits to this
Annual Report on Form 10-K. Such documents are either filed as exhibits to
this Annual Report on Form 10-K or were previously filed as exhibits to the
filings indicated in the notes to Item 14(a) and are incorporated herein by
reference.
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of Los
Angeles, State of California, on the 27th day of September 1996.
MERCURY AIR GROUP, INC.
By: /s/ SEYMOUR KAHN
-------------------------------
Seymour Kahn
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated:
Signatures
Principal Executive Officer:
<TABLE>
<S> <C> <C>
/s/ SEYMOUR KAHN Dated: September 27, 1996
- --------------------
Seymour Kahn
Chief Executive Officer and Director
Principal Chief Operating Officer and Director:
/s/ JOSEPH CZYZYK Dated: September 27, 1996
- -------------------
Joseph Czyzyk
Chief Operating Officer and Director
Principal Financial and Accounting Officer:
/s/ RANDOLPH E. AJER Dated: September 27, 1996
- --------------------
Randolph E. Ajer
Executive Vice President,
Secretary and Treasurer
Additional Directors:
/s/ ROBERT L. LIST Dated: September 27, 1996
- -------------------
Robert L. List
Director
/s/ PHILIP J. FAGAN, JR., M.D. Dated: September 27, 1996
- ------------------------------
Philip J. Fagan, Jr., M.D.
Director
/s/ WILLIAM G. LANGTON Dated: September 27, 1996
- ----------------------
William G. Langton
Director
/s/ FREDERICK H. KOPKO, JR. Dated: September 27, 1996
- ---------------------------
Frederick H. Kopko, Jr.
Director
</TABLE>
27
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Mercury Air Group, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Mercury Air
Group, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1996. Our audits also included
the financial statement schedule listed in the Index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mercury Air Group, Inc. and
subsidiaries as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
September 19, 1996
<PAGE> 30
PART I - FINANCIAL INFORMATION
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 30 JUNE 30
1996 1995
--------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $11,820,000 $831,000
Trade accounts receivable, net of allowance for doubtful
accounts of $809,000 at 6/30/96 and $610,000 at 6/30/95 (Note 7) 41,377,000 33,269,000
Notes receivable - current portion 560,000 50,000
Inventories, principally aviation fuel 2,623,000 3,283,000
Prepaid expenses and other current assets 2,154,000 1,822,000
--------------- --------------
Total current assets 58,534,000 39,255,000
PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated
depreciation and amortization of $22,491,000 at 6/30/96 and
$20,391,000 at 6/30/95 (Notes 3 and 7 ) 14,703,000 12,219,000
NOTES RECEIVABLE, net of current portion 158,000 136,000
OTHER ASSETS (Note 4) 5,728,000 2,600,000
--------------- --------------
$79,123,000 $54,210,000
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $15,080,000 $12,998,000
Accrued expenses and other current liabilities (Note 5) 3,794,000 3,008,000
Income taxes payable (Note 6) 198,000 114,000
Current portion of long-term debt (Note 7) 2,555,000 2,607,000
--------------- --------------
Total current liabilities 21,627,000 18,727,000
LONG-TERM DEBT (Note 7) 35,008,000 17,104,000
DEFERRED INCOME TAXES (Note 6) 256,000 8,000
--------------- --------------
Total liabilities 56,891,000 35,839,000
--------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 13)
STOCKHOLDERS' EQUITY (Notes 7 and 8 ):
Preferred Stock - $.01 par value; authorized 3,000,000 shares;
no shares outstanding
Common Stock - $ .01 par value; authorized 18,000,000 shares;
outstanding 6,053,321 shares 6/30/96;
outstanding 5,524,257 shares 6/30/95 60,000 55,000
Additional paid-in capital 20,910,000 14,992,000
Retained earnings 2,040,000 3,479,000
Treasury stock - 35,200 shares of common stock 6/30/95 (155,000)
Cumulative translation adjustment (46,000)
Notes receivable from sale of stock (Note 8) (732,000)
--------------- --------------
Total stockholders' equity 22,232,000 18,371,000
--------------- --------------
$79,123,000 $54,210,000
=============== ==============
</TABLE>
F-2
See accompanying notes to consolidated financial statements.
<PAGE> 31
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30
-------------------------------------------
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
Sales and Revenues (Note 11):
Sales $182,674,000 $145,166,000 $68,991,000
Service revenues 42,700,000 37,834,000 34,078,000
-------------- ------------- --------------
225,374,000 183,000,000 103,069,000
-------------- ------------- --------------
Costs and Expenses:
Cost of sales 169,015,000 132,838,000 61,060,000
Operating expenses 37,945,000 33,589,000 29,344,000
-------------- ------------- --------------
206,960,000 166,427,000 90,404,000
-------------- ------------- --------------
Gross Margin (Excluding depreciation and amortization) 18,414,000 16,573,000 12,665,000
-------------- ------------- --------------
Other Expenses (Income):
Selling, general and administrative (Note 4) 6,051,000 5,363,000 4,261,000
Depreciation and amortization 2,818,000 2,409,000 2,049,000
Interest expense 2,375,000 1,478,000 1,080,000
Interest income (322,000) (84,000) (140,000)
Minority interest (Note 2) 95,000 246,000
Other income (274,000)
-------------- ------------- --------------
10,648,000 9,261,000 7,496,000
-------------- ------------- --------------
Income Before Income Taxes 7,766,000 7,312,000 5,169,000
Provision for Income Taxes (Note 6) 3,086,000 3,005,000 2,174,000
-------------- ------------- --------------
Net Income $4,680,000 $4,307,000 $2,995,000
============== ============= ==============
Net Income applicable to Common Stock $4,680,000 $4,307,000 $2,920,000
============== ============= ==============
Net Income Per Common Share and
Common Equivalent Share (Primary) (Note 12) $0.75 $0.69 $0.68
============== ============= ==============
Net Income Per Common Share-Assuming
Full Dilution (Note 12) $0.70 $0.69 $0.54
============== ============= ==============
Weighted Average Number of Shares of
Common Stock (Note 12) 5,963,954 5,962,174 4,091,872
============== ============= ==============
</TABLE>
F-3
See accompanying notes to consolidated financial statements.
<PAGE> 32
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30
------------------------------------------
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,680,000 $4,307,000 $2,995,000
Adjustments to derive cash flow from
operating activities:
Depreciation and amortization 2,818,000 2,409,000 2,049,000
Minority interest 95,000 246,000
Amortization of officers' loans 154,000 140,000 154,000
Increase (decrease) in deferred income taxes 248,000 (210,000) (651,000)
Changes in operating assets and liabilities:
Trade and other accounts receivable (7,762,000) (16,105,000) (474,000)
Inventories 661,000 (2,332,000) (103,000)
Prepaid expenses and other current assets (332,000) (525,000) (304,000)
Accounts payable 1,614,000 6,078,000 150,000
Income taxes payable 84,000 (368,000) 348,000
Accrued expenses and other current liabilities 786,000 930,000 (43,000)
-------------- ------------- -------------
Net cash provided by (used in) operating activities 2,951,000 (5,581,000) 4,367,000
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment 300,000
(Increase) decrease in notes receivable (532,000) 185,000 677,000
Addition to other assets (535,000) (632,000) (259,000)
Acquisition of businesses, net of cash acquired (960,000)
Additions to property, equipment and leaseholds (2,516,000) (1,574,000) (1,933,000)
-------------- ------------- -------------
Net cash used in investing activities (4,543,000) (2,021,000) (1,215,000)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM CONVERTIBLE DEBENTURES 26,280,000
Payment of dividend on common stock (233,000) (100,000)
Proceeds from long-term debt 464,000 10,752,000 2,876,000
Reduction of long-term debt (13,316,000) (2,443,000) (5,902,000)
Payment of dividend on preferred stock (75,000)
Issuance of common stock 206,000 379,000 3,097,000
Repurchase and retire preferred and common stock and warrants (820,000) (1,475,000) (1,917,000)
Redemption by subsidiary of common stock
owned by minority shareholder (450,000)
-------------- ------------- -------------
Net cash provided by (used in) financing activities 12,581,000 6,663,000 (1,921,000)
-------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 10,989,000 (939,000) 1,231,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 831,000 1,770,000 539,000
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $11,820,000 $831,000 $1,770,000
============== ============= =============
CASH PAID DURING THE YEAR:
Interest $1,515,000 $1,478,000 $1,080,000
Income taxes $2,671,000 $3,607,000 $2,477,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Direct financing for purchase of equipment and property $435,000 $2,518,000
Cancellation of a note receivable and other assets as
consideration for the purchase of leasehold property $540,000
Issuance of 225,000 common shares in exchange for
the remaining minority interest of Mercury Air Cargo, Inc. $1,406,000
Issuance of Notes Payable for the acquisition of assets $2,016,000
Issuance of 110,000 common shares in exchange for notes receivable 732,000
</TABLE>
F-4
See accompanying notes to consolidated financial statements.
<PAGE> 33
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
----------------------- --------------------- Additional
Number of Number of Paid-in
shares Amount shares Amount Capital
---------- -------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993 558,998 6,000 2,254,199 22,000 7,017,000
Net income
Cash Dividend on Series A Preferred Stock
Repurchase and retire Preferred Stock (80,256) (1,000) (640,000)
Series A Preferred Stock converted into
Common Stock (478,742) (5,000) 1,914,968 19,000 (14,000)
Repurchase and retire Common Stock (169,200) (1,000) (264,000)
Common Stock issued on exercise of
warrants and options 905,812 9,000 3,088,000
--------- ------- --------- ------- -----------
BALANCE, June 30, 1994 0 0 4,905,779 49,000 9,187,000
Net income
Cash Dividend on Common Stock
Repurchase and retire Common Stock (236,300) (2,000) (450,000)
Common Stock issued on exercise of
warrants and options 128,532 1,000 378,000
Tax benefit from exercise of stock options 217,000
Common stock issued in exchange
for the remaining minority interest of
Mercury Air Cargo, Inc. 225,000 2,000 1,404,000
Issue 10% stock dividend 501,246 5,000 4,256,000
--------- ------- --------- ------- -----------
BALANCE, June 30, 1995 0 $0 5,524,257 $55,000 $14,992,000
--------- ------- --------- ------- -----------
Net income
Cash Dividend on Common Stock
Repurchase and retire Common Stock (155,420) (2,000) (387,000)
Common Stock issued on exercise of
warrants and options 35,350 1,000 125,000
Tax benefit from exercise of stock options 74,000
Issue 10% Stock dividend 549,134 5,000 5,417,000
Retire treasury stock (123,000)
Common Stock sold to officers 100,000 1,000 812,000
Foreign currency adjustment
--------- ----- --------- ------- -----------
Balance, June 30, 1996 0 $0.00 6,053,321 $60,000 $20,910,000
--------- ----- --------- ------- -----------
Common Stock
in Treasury
-------------------- Cummulative Notes
Retained Number of translation receivable
Earnings shares Amount adjustment officers
---------- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993 2,646,000 32,000 (155,000)
Net income 2,995,000
Cash Dividend on Series A Preferred Stock (75,000)
Repurchase and retire Preferred Stock (475,000)
Series A Preferred Stock converted into
Common Stock
Repurchase and retire Common Stock (536,000)
Common Stock issued on exercise of
warrants and options
---------- ------- ---------
BALANCE, June 30, 1994 4,555,000 32,000 (155,000)
Net income 4,307,000
Cash Dividend on Common Stock (100,000)
Repurchase and retire Common Stock (1,022,000)
Common Stock issued on exercise of
warrants and options
Tax benefit from exercise of stock options
Common stock issued in exchange
for the remaining minority interest of
Mercury Air Cargo, Inc.
Issue 10% stock dividend (4,261,000) 3,200
---------- ------- ---------
BALANCE, June 30, 1995 $3,479,000 35,200 (155,000)
---------- ------- ---------
Net income 4,680,000
Cash Dividend on Common Stock (233,000)
Repurchase and retire Common Stock (431,000)
Common Stock issued on exercise of
warrants and options
Tax benefit from exercise of stock options
Issue 10% Stock dividend (5,423,000)
Retire treasury stock (32,000) (35,200) 155,000
Common Stock sold to officers (732,000)
Foreign currency adjustment (46,000)
---------- ------- -------- -------- ---------
Balance, June 30, 1996 $2,040,000 0 $0 ($46,000) ($732,000)
========== ======= ======== ======== =========
</TABLE>
F-5
See accompanying notes to consolidated financial statements.
<PAGE> 34
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1996
Note 1 - Summary of Significant Accounting Policies:
Business
Mercury Air Group, Inc. and subsidiaries (the "Company") are
principally engaged in the conduct of cargo handling, cargo general
sales agency and air cargo space brokerage, and the sale and delivery
of aviation fuels to commercial, air courier and commuter airlines,
and to general aviation aircraft. The Company also provides ground
support services to U.S. military aircraft.
Principles of Consolidation
The consolidated financial statements include the accounts of Mercury
Air Group, Inc.,and its subsidiaries. All material intercompany
transactions and balances have been eliminated.
Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments that
are readily convertible into cash and were purchased with maturities
of three months or less.
Inventories
Inventory amounts are stated at the lower of aggregate cost (first-in,
first-out method) or market.
Property, Equipment and Leaseholds
Property, equipment and leaseholds are recorded at cost. Depreciation
is computed using the straight-line method over the estimated useful
life of the asset (3-25 years) and over the lease life or useful life
for leasehold improvements, whichever is less.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired arose in the acquisitions of
Maytag Aircraft Corporation, a wholly-owned subsidiary, in 1984, the
minority interest in Mercury Air Cargo, Inc. in November 1994, Excel
Cargo, Inc. in September 1995 and Floracool, Inc. in 1996. Such costs
are being amortized on the straight-line method over 15- 40 years.
The
F-6
<PAGE> 35
Company assesses recoverability on a periodic basis. Factors included
in evaluating recoverability include historical earnings and projected
future earnings of the operations.
Foreign Currency Translation.
Assets and liabilities of the Company's foreign subsidiary are
translated into U.S. dollars at the exchange rate prevailing at the
balance sheet date and, where appropriate, at historical rates of
exchange. Income and expense accounts are translated at the weighted
average rate in effect during the year. The aggregate effect of
translating the financial statements of the foreign subsidiary is
included as a separate component of stockholders' equity. Foreign
exchange gains (losses) were not significant during the year ended
June 30, 1996.
Revenue Recognition
Revenues are recognized upon delivery of product or completion of the
service. The Company's contracts with the U.S. Government are
subject to profit renegotiation. The Company has not been required to
adjust profits arising out of U.S. Government contracts to date.
Income Taxes
Deferred tax assets and liabilities are recognized based on
differences between financial statement and tax basis of assets and
liabilities using presently enacted tax rates.
Income Per Share
Per share data is based on the weighted average number of shares
outstanding, after giving effect to the cumulative dividend on
cumulative preferred stock, and common stock equivalents, excluding
those common stock equivalents that would increase the income per
share.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash,
accounts receivable and payable, and debt instruments. The book
values of all financial instruments, other than debt instruments, are
representative of their fair values due to their short-term maturity.
The book values of the Company's debt instruments are considered to
approximate their fair values because the interest rates of these
instruments are based on current rates offered to the Company.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the
F-7
<PAGE> 36
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ from those estimates.
New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, " requires that certain long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. The Company adopted SFAS
No. 121 in 1996, the effect of which was not significant.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," effective for
transactions entered into in fiscal years beginning after December 15,
1995. The Company plans to continue accounting for stock- based
compensation under Accounting Principles Board Opinion No. 25,"
Accounting for Stock Issued to Employees," and related interpretations
as permitted by SFAS No.123. Beginning in 1997, under SFAS No. 123,
the Company will disclose pro forma net income and earnings per share
as if the fair value method of accounting for stock-based compensation
had been elected, for all awards granted in fiscal years 1996 and 1997.
Note 2 - Related Party Transactions:
Twenty percent of Mercury Air Cargo, Inc. ("MAC"), a subsidiary of the
Company, was owned by a company which is wholly-owned by an executive
officer of Mercury Air Group, Inc. The minority interest share in the
net income of MAC resulting from this ownership amounted to $95,000
(1995) and $246,000 (1994). In November 1994, the Company acquired
the remaining minority interest from the executive officer. The
transaction included a redemption of 5% in exchange for $450,000 in
cash and acquisition of the remaining 15% through the issuance of
272,250 common shares (after adjustment for two 10% stock dividends)
valued at $1,406,000 ($5.16 per share) for a total consideration of
$1,856,000. The acquisition of the minority interest has been
accounted for as a purchase and, accordingly, the excess of the cost
over the book value ($1,019,000) of the shares acquired is included in
other assets in the accompanying consolidated balance sheet at June
30, 1996. (See Note 4).
.
F-8
<PAGE> 37
Note 3 - Property, Equipment and Leaseholds:
Property, equipment and leaseholds consist of the following:
<TABLE>
<CAPTION>
June 30
-------
1996 1995
---- ----
<S> <C> <C>
Land, buildings and leasehold improvements $ 17,813,000 $ 16,187,000
Equipment, furniture and fixtures 19,248,000 16,391,000
Construction in progress 133,000 32,000
------------ ------------
37,194,000 32,610,000
Less accumulated depreciation and amortization (22,491,000) (20,391,000)
------------ ------------
$ 14,703,000 $ 12,219,000
============ ============
</TABLE>
Note 4 - Other Assets:
Other assets consist of the following:
<TABLE>
<CAPTION>
June 30
-------
1996 1995
---- ----
<S> <C> <C>
Cost in excess of net assets acquired $ 2,341,000 $1,466,000
Capitalized loan fees (Note 7) 1,777,000
Deferred lease cost 13,000 26,000
Other assets 1,300,000 698,000
Loans to officers 297,000 410,000
----------- ----------
$ 5,728,000 $2,600,000
=========== ==========
</TABLE>
Cost in excess of net assets acquired includes $802,000 which arose
from the Company's acquisition of the outstanding minority interest in
MAC in November 1994 (See Note 2), $768,000 from the Company's
acquisition of Excel Cargo, Inc. in September 1995 (See Note 9) and
$150,000 from the Company's acquisition of Floracool, Inc. in January
1996. (See Note 9).
In 1991, four executive officers of the Company each agreed to
purchase 121,000 (after adjustment for the 10% stock dividends) shares
of the Company's stock from a company owned by the Chairman and Chief
Executive Officer at $2.48 per share pursuant to a Stock Purchase
Agreement ("Agreement"). The officers each paid $30,000 in cash, or
$120,000, with the remaining aggregate purchase price of $1,080,000 to
be paid over a five year period ending in 1996. As part of the
Agreement to purchase the stock, the Company agreed to loan the
executives the $1,080,000 in quarterly installments. Beginning in
1994, one fifth of the amount ultimately to be loaned will be forgiven
each year over a five year period ending in 1998 provided each of the
officers remains in the employ of the Company.
F-9
<PAGE> 38
In 1994, a fifth executive officer of the Company purchased 121,000
shares (after adjustment for the 10% stock dividend) of the Company's
stock from a company owned by the Chairman and Chief Executive Officer
at $2.48 per share pursuant to a Stock Purchase Agreement similar to
the agreements above. The officer paid $30,000 in cash with the
remaining purchase price of $270,000 to be paid over a five year
period ending in 1998. The Company agreed to loan the executive the
$270,000 in quarterly installments. Beginning in 1996, one fifth of
the amount to be loaned, or $54,000, will be forgiven each year over a
five year period ending in 2000 provided the officer remains in the
employ of the Company.
For accounting purposes, the amounts subject to forgiveness of
$1,080,000 and $270,000 are being treated as additional compensation
over the seven year period from the date of the Agreements through
1998 and 2000, respectively. The loans to officers are increased by
actual amounts advanced by the Company and are decreased annually, by
one-seventh of the amount to be forgiven, or approximately $154,000 in
fiscal 1994, $140,000 in 1995, and $154,000 in fiscal 1996. In July
1995, one of the executive officers resigned resulting in the
elimination of any future forgiveness with respect to that officer's
loan. In August 1995, the Company repurchased this officer's stock
for $453,000, less the balance outstanding on the loan.
Note 5 - Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities consist of the
following:
<TABLE>
<CAPTION>
June 30
-------
1996 1995
---- ----
<S> <C> <C>
Salaries and wages $ 1,633,000 $ 1,918,000
Other 2,161,000 1,090,000
----------- -----------
$ 3,794,000 $ 3,008,000
=========== ===========
</TABLE>
Note 6 - Income Taxes:
The provision for taxes on income consists of the following:
<TABLE>
<CAPTION>
Year ended June 30
------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal, current $ 2,160,000 $2,565,000 $ 2,262,000
State, current 678,000 650,000 563,000
----------- ---------- -----------
2,838,000 3,215,000 2,825,000
Deferred, primarily federal 248,000 (210,000) (651,000)
----------- ----------- -----------
Net provision $ 3,086,000 $3,005,000 $ 2,174,000
=========== ========== ===========
</TABLE>
F-10
<PAGE> 39
Deferred taxes arise from the recognition of certain items of revenue
and expense for tax purposes in years different from those in which
they are recognized in the financial statements.
Major components of deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
June 30
-------
1996 1995
---- ----
<S> <C> <C>
Depreciation/amortization $ 120,000 $ 150,000
Deferred and prepaid expenses 578,000 275,000
State income taxes (230,000) (209,000)
Allowance for doubtful accounts (324,000) (244,000)
Miscellaneous 112,000 36,000
--------- ---------
$ 256,000 $ 8,000
========= =========
</TABLE>
The reconciliation of the federal statutory rate to the Company's
effective tax rate on income is summarized as follows:
<TABLE>
<CAPTION>
Year ended June 30
------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax rate 34% 34% 34%
State income taxes, net of
federal income tax benefit 6 6 6
Other - 1 2
--- --- ---
Effective rate 40% 41% 42%
=== === ===
</TABLE>
F-11
<PAGE> 40
Note 7 - Long-term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30
-------
1996 1995
---- ----
<S> <C> <C>
Notes payable to banks $ 3,390,000 $14,870,000
Convertible subordinated debentures, interest
only at 7.75%, due February 2006 28,115,000
Installment notes, payable to financial
institutions in monthly installments
aggregating approximately $78,000 at
June 30, 1996 including interest from
7.23% to 11.85%, collateralized by
certain assets of the Company and
maturing from 1996 through 2002. 1,791,000 2,075,000
Convertible subordinated debentures to seller
of Excel Cargo in monthly installments of
$29,009 including interest at 8.5%, collateralized
by property acquired, maturing in September 2003 1,895,000
Mortgage payable to financial institution
in monthly principal installments of
$9,750 plus interest at 7.5% per annum,
collateralized by land and building,
maturing in April 2004. 917,000 1,034,000
Mortgage payable to financial institution in
monthly installments of $4,447 including
interest at 9% per annum, collateralized by
land and building, maturing in May 2010. 420,000 434,000
Note payable to seller of assets and
leasehold at Bakersfield, California
due in December 2004, interest at prime
(8.25% at June 30, 1996), collateralized
by property acquired, which is principally
a leasehold. 956,000 1,017,000
Note payable to seller of assets and
leasehold at Bakersfield, California
due in November 1997, interest at 10%. 79,000 126,000
Other 155,000
----------- -----------
37,563,000 19,711,000
Less current portion 2,555,000 2,607,000
----------- -----------
$35,008,000 $17,104,000
=========== ===========
</TABLE>
F-12
<PAGE> 41
Notes payable to banks at June 30, 1996 consists principally of a term
loan in the amount of $3,384,000, which is payable in monthly payments
of approximately $125,000 plus interest at prime plus 3/4% or LIBOR +
2 1/4% and is scheduled to mature in August 1998. At June 30, 1996
the Company also has a revolving credit line that matures in October
1997, bears interest at prime plus 1/2% or LIBOR + 2% and permits
borrowing of up to $16,000,000 subject to available eligible
collateral. At June 30, 1996, there was $6,000 in outstanding
borrowings under the credit line. The term loan and line of credit are
collateralized by substantially all of the Company's assets.
On January 31, 1996, pursuant to a public offering, the Company issued
$28,115,000 principal amount of 7 3/4% convertible subordinated
debentures due February 1, 2006. The debentures are convertible into
shares of the Company's common stock at a price of $9.1182 per share
(adjusted for the 10% stock dividend paid on May 1, 1996). Costs and
fees, including underwriting discount and commissions, totaled
approximately $1,835,000 and are included in other assets (See Note
4). Capitalized loan fees are being amortized over the life of the
debentures.
Certain debt agreements contain provisions that require: the
maintenance of certain financial ratios, minimum tangible net worth
(as defined ) and minimum working capital levels and limit payments of
dividends on common stock to $350,000 annually, annual capital
expenditures and payments under operating leases.
Long-term debt payable subsequent to June 30, 1996 is as follows:
<TABLE>
<S> <C>
1997 $2,555,000
1998 2,245,000
1999 1,544,000
2000 582,000
2001 582,000
Thereafter 30,055,000
-----------
$37,563,000
===========
</TABLE>
F-13
<PAGE> 42
Note 8 - Common Stock:
The Company has 18,000,000 authorized shares of common stock having a
par value of $0.01 per share.
The Company has reserved 3,939,389 shares of common stock of which
237,218 shares relate to the 1990 Long-Term Incentive Plan; 282,300
shares relate to the 1990 Directors' Stock Option Plan, 162,800 shares
relate to special option grants made outside the Company's option
plans and 3,257,071 shares relate to convertible debentures.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Option Prices Long-Term Option Prices Directors' Stock
Incentive Plan Option Plan
<S> <C> <C> <C> <C>
Outstanding June 30, 1993 2.125- 3.38 175,000 1.875 - 3.00 90,000
Granted 3.688 25,000 3.688 40,000
Exercised 2.125- 2.25 (32,500) 1.875 - 2.25 (13,000)
------- -------
Outstanding June 30, 1994 2.13-3.688 167,500 1.875 - 3.69 117,000
Granted 7.00 40,000
Exercised 2.125- 2.25 (54,700) 2.125 - 3.00 (30,500)
------- -------
2.125-3.688 112,800 1.875 - 7.00 126,500
10% Stock Dividend 11,280 12,650
------- -------
Outstanding June 30, 1995 1.93- 3.35 124,080 1.70 - 6.36 139,150
Granted 7.613-8.977 76,000 8.977 44,400
Cancelled 3.35 (11,000)
Exercised 1.93 (3,000) 1.93-6.36 (21,250)
------- -------
1.93- 9.97 186,080 1.70-9.97 162,300
10% Stock Dividend 18,608 16,230
Exercised (5,200) (5,900)
------- -------
Outstanding June 30, 1996 1.754-8.977 199,488 1.545-8.977 172,630
======= =======
</TABLE>
F-14
<PAGE> 43
At June 30, 1996, options to purchase 125,000 shares at prices ranging
from $1.55 to $5.78 are exercisable under the Directors' Stock Option
Plan. All of the options outstanding under the Long-Term Incentive
Plan are exercisable.
On January 21, 1993, a special option grant for 121,000 shares at
$1.93 was made and is exercisable at June 30, 1996. On August 9, 1993
a special option grant for 11,000 shares at $2.84 was made and such
option was exercised in March, 1995.
During fiscal 1996, the Company sold 110,000 shares of its common
stock to two officers for $812, 500. The officers each paid $40,000
in cash and issued promissory notes for the balance of the purchase
price which totalled $732,500. The notes are payable over ten years
and due in 2006.
All amounts have been restated to include the 10% stock dividend paid
on May 1, 1996.
Note 9- Acquisitions:
On September 30, 1995, the Company acquired the assets of Excel Cargo,
Inc., a cargo handling company located in Montreal, Canada, for
approximately $2,766,000. The purchase price consisted of an eight
year 8.5% debenture in the amount of $2,016,000, payable in equal
monthly installments over eight years, and $750,000 cash. In
addition, the Company paid off outstanding bank notes totaling
$573,000 at the closing. The purchase price has been allocated to
assets and liabilities as follows:
<TABLE>
<S> <C>
Accounts receivable $ 346,000
Property, equipment and leasehold 2,711,000
Goodwill 750,000
Notes payable (573,000)
Accounts payable and other current liabilities (468,000)
----------
Purchase price $2,766,000
==========
</TABLE>
In February 1996, the Company acquired all of the issued and
outstanding stock of Floracool, Inc., a cargo handling company in
Florida, for $250,000 cash, which included goodwill of $150,000.
F-15
<PAGE> 44
Note 10- Commitments and Contingencies:
Leases
The Company is obligated under noncancellable operating leases.
Certain leases include renewal clauses and require payment of real
estate taxes, insurance and other operating costs. Total rental
expense on all such leases for the fiscal years 1996, 1995 and 1994
was approximately $3,477,000, $2,502,000 and $2,265,000, respectively,
net of sublease income of approximately $230,000 annually. The
minimum annual rentals on all noncancellable operating leases having a
term of more than one year at June 30, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 2,116,000
1998 3,135,000
1999 4,032,000
2000 3,306,000
2001 2,601,000
Thereafter 2,383,000
-----------
Total minimum payments required $17,573,000
===========
</TABLE>
Subsequent to June 30,1996, the Company entered into noncellable
operating leases at five additional locations (See Note 13). The
minimum annual rentals associated with these operating leases are:
<TABLE>
<S> <C>
1997 $ 795,000
1998 955,000
1999 955,000
2000 942,000
2001 914,000
Thereafter 9,820,000
-----------
Total minimum payments required $14,381,000
===========
</TABLE>
Litigation
The Company is also a defendant in certain litigation arising in the
normal course of business. In the opinion of management, the ultimate
resolution of such litigation will not have a significant effect of
the financial statements.
F-16
<PAGE> 45
Note 11 - Major Customers and Foreign Customers:
Revenues from the United States government amounted to approximately
6%, 9% and 16% for fiscal 1996, 1995 and 1994, respectively.
The Company does business with a number of foreign airlines,
principally in the sale of aviation fuels. For the most part, such
sales are made within the United States and utilize the same assets
and generally the same personnel as are utilized in the Company's
domestic business. Revenues related to these foreign airlines
amounted to approximately 37%, 39% and 45% of consolidated revenues
for the years ended June 30, 1996, 1995 and 1994, respectively.
Note 12 - Earnings Per Share:
Primary earnings per common share is computed by dividing net income
available to common stockholders, which gives effect to the cash
portion of the cumulative dividend on preferred stock, by the weighted
average number of common stock and common stock equivalents
outstanding during the period. Options granted to purchase 494,218
shares of common stock under the Company's Long-Term Incentive Plan
and Directors' Stock Option Plan at exercise prices ranging from
$1.55 to $ 8.98 were included as common stock equivalents in fiscal
1996 for purposes of computing primary earnings per share.
<TABLE>
<CAPTION>
Fully Diluted Primary
------------- ---------
<S> <C> <C>
Weighted average number of common shares
outstanding during the period 5,963,954 5,963,954
Common stock equivalents resulting from the
assumed exercise of stock options 254,603 254,603
--------- ---------
Weighted average number of common and
common equivalent shares outstanding
during the period 6,218,557 6,218,557
--------- =========
Common shares resulting from the assumed
conversion of debentures 1,331,952
---------
7,550,509
=========
</TABLE>
Weighted average outstanding shares and earnings per share have been
retroactively restated to reflect the 10% stock dividend paid on
May 1, 1996 which amounted to the issuance of 549,134 shares.
F-17
<PAGE> 46
Interest expense on the convertible debentures of $581,000, net of
income tax, has been added back to net income for purposes of
computing fully diluted earnings per share for the year ended June 30,
1996.
Note 13 - Subsequent Event
On August 28, 1996 the Company completed the acquisition of certain
assets of five FBOs. The purchase price for the assets was $8,250,000
which consisted of $4,350,000 in cash and a promissory note in the
principal amount of $3,900,000, bearing interest at the prime rate and
payable over eight years.
F-18
<PAGE> 47
Note 14 - Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
EARNINGS PER SHARE
--------------------
SALES AND FULLY
REVENUES GROSS MARGIN NET INCOME PRIMARY DILUTED
-------------- ------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR JUNE 30, 1996
- --------------------------
FIRST QUARTER $51,880,000 $4,597,000 $1,232,000 $0.20 $0.20
SECOND QUARTER 55,396,000 4,861,000 1,386,000 0.21 0.21
THIRD QUARTER 57,255,000 4,263,000 877,000 0.14 0.13
FOURTH QUARTER 60,843,000 4,693,000 1,185,000 0.19 0.16
------------ ----------- ---------- ----- -----
FISCAL YEAR JUNE 30, 1996 $225,374,000 $18,414,000 $4,680,000 $0.75 $0.70
============ =========== ========== ===== =====
FISCAL YEAR JUNE 30, 1995
- --------------------------
FIRST QUARTER $35,554,000 $3,851,000 $1,002,000 $0.16 $0.16
SECOND QUARTER 49,165,000 4,444,000 1,200,000 0.19 0.19
THIRD QUARTER 50,002,000 4,038,000 1,003,000 0.16 0.16
FOURTH QUARTER 48,279,000 4,240,000 1,102,000 0.17 0.17
------------ ----------- ---------- ----- -----
FISCAL YEAR JUNE 30, 1995 $183,000,000 $16,573,000 $4,307,000 $0.69 $0.69
============ =========== ========== ===== =====
</TABLE>
F-19
<PAGE> 48
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Additions
-----------------------------
(1) (2)
Balance at charged to charged to Balance
beginning costs and other accounts- at end
Classification of period expenses describe Deductions of period
- ------------------------------------ -------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
1996
- ------
Allowance for doubtful accounts $610,000 $945,000 (C) ($746,000)(a) $809,000
============= =========== =========== ============ ==========
1995
- ------
Allowance for doubtful accounts $508,000 $905,000 (C) ($803,000)(a) $610,000
============= =========== =========== ============ ==========
1994
- ------
Allowance for doubtful accounts $83,000 $624,000 (b) ($199,000)(a) $508,000
============= =========== =========== ============ ==========
</TABLE>
(a) Accounts receivable write-off
(b) Included in the $624,000 is $324,000 charged to selling, general and
administrative expenses and $300,000 recorded as a reduction to
revenues.
(c) Amount charged to selling, general and administrative expense.
F-20
<PAGE> 1
Exhibit 10.32
AMENDMENT TO
LOAN AND SECURITY AGREEMENTS
THIS AMENDMENT (this "Amendment") dated as of September 24,
1996 is entered into by and among MARINE MIDLAND BUSINESS LOANS, INC., a
Delaware corporation ("Lender"), and MERCURY AIR GROUP, INC., a New York
corporation formerly known as IPM Technology, Inc. ("Mercury"), MAYTAG
AIRCRAFT CORPORATION, a Colorado corporation ("Maytag") and MERCURY AIR CARGO,
INC., a California corporation ("Cargo"). Mercury, Maytag and Cargo shall
collectively be referred to herein as "Borrowers".
RECITALS
A. Lender and the respective Borrowers are parties to
those three (3) certain Loan and Security Agreements dated as of December 6,
1989 or June 12, 1995, as amended (singly, the "Agreement," and collectively,
the "Agreements").
B. Lender and Borrowers desire to amend the Agreements
in certain respects, but subject to the terms and conditions set forth below.
AGREEMENT
In consideration of the above recitals and of the mutual
covenants contained herein, Lender and Borrowers agree as follows:
1. Defined Terms. Each of the terms defined in the
Agreements which are used herein shall have the same meaning as set forth in
the Agreements, unless otherwise specified herein.
2. Dividends. With respect to Section 11.8 of the
Mercury Agreement, Mercury may pay cash dividends on its common stock in an
aggregate amount not to exceed $350,000 during any fiscal year, so long as no
Default has occurred and is continuing and no Default would result from such
payment.
3. Investments and Advances. With respect to Sections
11.9 of the Mercury and Maytag Agreements and Section 10.8 of the Cargo
Agreement, Borrowers may make investments in, and/or advances to, other
persons, firms or corporations, so long as (a) the aggregate outstanding amount
of such investments and advances (excluding the existing investments in Sun Jet
Holdings, Inc. of approximately $500,000, Jet USA Airlines, Inc. of
approximately $500,000, and Western Pacific Airlines of approximately $400,000,
and excluding the Mercury employee loans previously agreed to by Lender) do not
exceed $1,500,000, and (b) no Default has occurred and is continuing and no
Default would result from such investments and advances.
<PAGE> 2
4. Guaranties. With respect to Section 11.10 of the
Mercury Agreement, Lender consents to the Guaranty dated as of August 27, 1996
executed by Mercury with respect to certain indebtedness owed by Empresa de
Transporte Aereo del Peru S.A. to Compass Bank-Texas in the principal amount
of $1,000,000.
5. Locations. Schedules 5.7 to the Mercury and Maytag
Agreements and Schedule 1 to the Cargo Agreement are hereby deleted in their
entirety and replaced with Schedule 5.7 attached hereto and incorporated herein
by reference.
6. Continuing Effect of Loan Documents.
(a) Except as specifically amended as set forth
above, the Agreements and all other Loan Documents shall remain in full force
and effect and are hereby ratified and confirmed; and
(b) Upon the effectiveness of this Amendment,
each reference in the Loan Documents to the Agreements shall mean and be a
reference to the Agreements as amended hereby.
7. Borrowers' Representations and Warranties. Borrowers
represent and warrant as follows:
(a) Each of the representations and warranties
contained in the Agreements is hereby reaffirmed as of the date hereof, each as
if set forth herein;
(b) The execution, delivery and performance of
this Amendment are within Borrowers' powers, have been duly authorized by all
necessary action, have received all necessary approvals, if any, and do not
contravene any law or any contractual restrictions binding on Borrowers;
(c) This Amendment is the legal, valid and
binding obligation of Borrowers, enforceable against Borrowers in accordance
with its terms; and
(d) No event has occurred and is continuing which
constitutes an Event of Default under the Agreements after giving effect to
this Amendment.
8. Conditions Precedent. This Amendment shall become
effective when, and only when, Lender shall have received all of the following,
in form and substance satisfactory to Lender:
(a) A counterpart of this Amendment duly executed
by Borrowers and acknowledged by the guarantor indicated hereinbelow; and
(b) Such other documents, instruments or
agreements as Lender may reasonably request.
2
<PAGE> 3
9. Governing Law. This Amendment shall be deemed to be
a contract under and subject to, and shall be construed for all purposes and in
accordance with, the internal laws of the State of California.
10. Counterparts. This Amendment may be executed in two
or more counterparts, each of which shall be deemed an original and all of
which together shall constitute one and the same instrument.
WITNESS the due execution hereof as of the date first above
written.
MARINE MIDLAND BUSINESS LOANS, INC.
By:
--------------------------------
Title:
----------------------------
MERCURY AIR GROUP, INC.
By:
-------------------------------
Title:
-----------------------------
MAYTAG AIRCRAFT CORPORATION
By:
-------------------------------
Title:
-----------------------------
MERCURY AIR CARGO, INC.
By:
-------------------------------
Title:
-----------------------------
3
<PAGE> 4
CONSENT AND REAFFIRMATION OF GUARANTORS
The undersigned, as guarantor under the Guaranty dated April
1, 1992, hereby consents to the foregoing Amendment and acknowledges and
reaffirms its obligations and liabilities under such Guaranty, which shall
remain in full force and effect.
Dated: As of September 24, 1995
HERMES AVIATION, INC.,
a California corporation
By:
-------------------------------
Title:
-----------------------------
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARY LIST
1. AEG Finance Corp, a Delaware corporation, wholly-owned by Maytag
Aircraft Corporation
2. Mercury Environmental and Scientific Services, Inc., a California
corporation, wholly-owned by Mercury Air Group, Inc.
3. Maytag Aircraft Corporation, a Colorado corporation, wholly-owned by
Mercury Air Group, Inc.
4. Mercury Air Cargo, Inc., a California corporation, wholly-owned by
Mercury Air Group, Inc.
5. Hermes Aviation, Inc., a California corporation, wholly-owned by
Mercury Air Cargo, Inc.
6. Pegasus de Mexico S.A. de C.V., a Mexican corporation, owned 99% by
Mercury Air Cargo, Inc. and 1% by Hermes Aviation, Inc.
7. Excel Cargo, Inc., a California corporation, wholly-owned by Mercury
Air Group, Inc.
8. Floracool, Inc., a Florida corporation, wholly-owned by Mercury Air
Cargo, Inc.
9. Vulcan Aviation, Inc., a California corporation, wholly-owned by
Mercury Air Cargo, Inc.
10. Maytag Aircraft Corporation, a Cayman corporation, wholly-owned by
Maytag Aircraft Corporation.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-69414 of Mercury Air Group, Inc. on Form S-8 of our report dated September
19, 1996 appearing in the Annual Report on Form 10-K of Mercury Air Group, Inc.
for the year ended June 30, 1996.
DELOITTE & TOUCHE LLP
Los Angeles, California
September 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996 AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30,
1996
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1,000
<CASH> 11,820
<SECURITIES> 0
<RECEIVABLES> 42,746
<ALLOWANCES> 809
<INVENTORY> 2,623
<CURRENT-ASSETS> 58,534
<PP&E> 37,194
<DEPRECIATION> 22,491
<TOTAL-ASSETS> 79,123
<CURRENT-LIABILITIES> 21,627
<BONDS> 35,008
0
0
<COMMON> 60
<OTHER-SE> 22,172
<TOTAL-LIABILITY-AND-EQUITY> 79,123
<SALES> 182,674
<TOTAL-REVENUES> 225,374
<CGS> 169,015
<TOTAL-COSTS> 206,960
<OTHER-EXPENSES> 10,648
<LOSS-PROVISION> 945
<INTEREST-EXPENSE> 2,375
<INCOME-PRETAX> 7,766
<INCOME-TAX> 3,086
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,680
<EPS-PRIMARY> $0.75
<EPS-DILUTED> $0.70
</TABLE>
