<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1996
REGISTRATION NO. 33-65085
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MERCURY AIR GROUP, INC.
(Each Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
NEW YORK 5172 11-1800515
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
5456 MCCONNELL AVENUE
LOS ANGELES, CALIFORNIA 90066
(310) 827-2737
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
SEYMOUR KAHN
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
MERCURY AIR GROUP, INC.
5456 MCCONNELL AVENUE
LOS ANGELES, CALIFORNIA 90066
(310) 827-2737
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
PLEASE SEND COPIES OF ALL CORRESPONDENCE TO:
<TABLE>
<S> <C>
FREDERICK H. KOPKO, JR., ESQ. MARK R. LEVIE, ESQ.
McBreen, McBreen & Kopko Orrick, Herrington & Sutcliffe
20 North Wacker Drive Old Federal Reserve Bank Building
Suite 2520 400 Sansome Street
Chicago, Illinois 60606 San Francisco, California 94111-3143
(312) 332-6405 (415) 773-5955
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERCURY AIR GROUP, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-1 ITEM AND CAPTION LOCATION IN PROSPECTUS
- ----------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Facing Page; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Not Applicable
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Underwriting
9. Description of Securities to be Registered........... Description of Debentures; Rating of Debentures
10. Interests of Named Experts and Counsel............... Legal Matters
11. Information With Respect to the Registrant........... Prospectus Summary; Risk Factors; Use of Proceeds;
Capitalization; Price Range of Common Stock and
Dividend Policy; Selected Consolidated Financial
Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal Shareholders; Description of Capital
Stock; Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED JANUARY 30, 1996
$25,000,000
MERCURY AIR GROUP, INC.
% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006
Interest Payable August and February
The % Convertible Subordinated Debentures due 2006 (the "Debentures") are
convertible into shares of the common stock, par value $.01 per share (the
"Common Stock"), of Mercury Air Group, Inc. ("Mercury" or the "Company") at any
time prior to maturity, unless previously redeemed or repurchased, at a
conversion rate of shares per $1,000 principal amount of Debentures
(equivalent to a conversion price of approximately $ per share), subject to
adjustment in certain circumstances. See "Description of Debentures." The Common
Stock is traded on the American Stock Exchange (the "AMEX") under the symbol
MAX. On January 10, 1996, the last reported sale price for the Common Stock on
the AMEX was $8.00 per share. See "Price Range of Common Stock and Dividend
Policy."
Interest on the Debentures is payable semi-annually on August and February
of each year, commencing August , 1996. On or after February , 1999, the
Debentures will be redeemable, in whole or in part, at any time, at the option
of Mercury, at the declining redemption prices set forth herein plus accrued and
unpaid interest to the date of redemption. Mercury may also redeem the
Debentures between February , 1998 and February , 1999, in whole or in part,
at the redemption prices set forth herein plus accrued and unpaid interest to
the date of redemption, if the closing price of the Common Stock has been at
least 140% of the conversion price for at least 20 trading days within a period
of 30 consecutive trading days ending not more than five trading days prior to
the notice of redemption. Subject to certain limitations, Mercury will redeem,
in whole or in part, at any time, at 100% of the principal amount thereof plus
accrued and unpaid interest to the date of redemption, Debentures properly
tendered in respect of a deceased holder. In addition, upon a Change of Control
and a Rating Downgrade (as such terms are defined herein), each holder of
Debentures has the right, subject to certain restrictions and conditions, to
require Mercury to repurchase all or a part of such holder's Debentures at 100%
of the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. See "Description of Debentures."
The Debentures are unsecured obligations and are subordinated in the right
of payment to all existing and future Senior Indebtedness (as defined herein) of
Mercury. See "Description of Debentures."
The Debentures will be initially issued only in fully registered book-entry
form. The Debentures will not initially be issuable in definitive certificated
form to any person other than the Depositary (as defined herein) or its
nominees. See "Description of Debentures -- Book-Entry System." The minimum
principal amount of Debentures which may be purchased is $1,000. The Debentures
have been approved for listing on the AMEX under the symbol "MAX.A." Application
has also been made to list the Debentures on the Pacific Stock Exchange
Incorporated (the "PSE"). The Company has been advised by the Underwriters that
they intend to make a market in the Debentures; however, no assurance can be
made that an active trading market for the Debentures will develop.
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE DEBENTURES OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNT PROCEEDS TO
PUBLIC AND COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Debenture............................ % % %
Total (3)................................ $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by Mercury which are estimated at
$300,000.
(3) Mercury has granted the Underwriters an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to $3,750,000 additional
aggregate principal amount of the Debentures at the Price to Public, less
the Underwriting Discount and Commissions, solely to cover over-allotments,
if any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
The Debentures are offered by the Underwriters named herein when, as and if
delivered and accepted by the Underwriters and subject to prior sale, withdrawal
or cancellation of the offer without notice and subject to the right of the
Underwriters to reject any order in whole or in part. It is expected that the
Debentures will be available for delivery on or about , 1996.
EVEREN SECURITIES, INC. CROWELL, WEEDON & CO.
, 1996
<PAGE>
AVAILABLE INFORMATION
Mercury is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy materials and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
materials and other information concerning Mercury and the Registration
Statement (as defined below) can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024 Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the public reference facilities
maintained by the Commission at its regional offices located at The Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and at Seven World Trade Center, Suite 1300, New York, New York
10048. Copies can be obtained by mail from the Commission at prescribed rates
from the Public Reference Section of the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Mercury's
Common Stock is listed on the American Stock Exchange and copies of reports and
other material concerning Mercury can be inspected at the American Stock
Exchange, 86 Trinity Place, New York, New York 10006.
Mercury has filed with the Commission a registration statement on Form S-1
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), of which this Prospectus is a part. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement, including the exhibits filed as a part thereof.
Statements made in this Prospectus as to the contents of any documents referred
to are not necessarily complete, and in each instance reference is made to such
exhibits for a more complete description and each such statement is qualified in
its entirety by such reference. Copies of such materials may be obtained from
the Public Reference Section of the Commission at the address set forth above at
prescribed rates.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES OR
THE COMMON STOCK, OR BOTH, AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK
EXCHANGE, ON THE PACIFIC STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE AND SHOULD BE READ IN
CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO
READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE INDICATED, ALL
INFORMATION HEREIN ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT
EXERCISED. ALL PER SHARE AND OTHER SHAREHOLDER INFORMATION HAS BEEN ADJUSTED TO
REFLECT THE EFFECT OF A JUNE 16, 1995 TEN PERCENT STOCK DIVIDEND.
EXCEPT AS OTHERWISE NOTED, REFERENCES IN THIS PROSPECTUS TO "MERCURY" OR THE
"COMPANY" REFER TO MERCURY AIR GROUP, INC. AND ITS SUBSIDIARIES. THE DEBENTURES
OFFERED HEREBY ARE OBLIGATIONS OF MERCURY AIR GROUP, INC., THE PARENT HOLDING
COMPANY, AND NOT ITS SUBSIDIARIES, AND REFERENCES TO "MERCURY" OR THE "COMPANY"
RELATING TO THE DEBENTURES REFER ONLY TO THE PARENT HOLDING COMPANY.
THE COMPANY
Mercury provides a broad range of services to the aviation industry. These
services include fuel sales and fuel delivery to commercial, private and
military aircraft (collectively, "fuel sales and services"); cargo handling,
space brokerage and general cargo sales agent services (collectively, "cargo
operations"); fixed base operations for commercial, private and other aircraft,
including fuel sales, fuel delivery services ("into-plane services"), ground
support services and tie-down facilities (collectively, "FBOs"); and the
operation of government-owned fuel depots and the performance of aircraft and
other services at U.S. military bases (collectively, "government contract
services"). Mercury's customers in one or more of these categories include
domestic and international airlines; regional and commuter air carriers;
operators of cargo, corporate and private aircraft; and the U.S. government.
FUEL SALES AND SERVICES. Mercury's fuel sales and services consist
primarily of aviation fuel sales; comprehensive fuel management services, which
allow customers to reduce administrative expenses; into-plane services; and the
brokering of non-aviation fuel. Through its extensive network of third-party
delivery and supply relationships, Mercury conducts its fuel sales business at
over 100 airports primarily in the United States, as well as throughout the
world. At most of these locations, Mercury contracts with third parties for
into-plane services, thereby minimizing its fixed costs and capital
requirements. Mercury believes that its status as a volume purchaser and its
creditworthiness enable it to purchase fuel on more favorable pricing and credit
terms than most of its customers could obtain independently. Mercury's fuel
sales and services strategy is to expand its business with existing customers
and attract new customers by further enhancing its customer services and by
continuing to offer favorable credit terms and competitive fuel prices.
CARGO OPERATIONS. Mercury's cargo operations are conducted primarily at Los
Angeles International Airport ("LAX") where it maintains approximately 90,000
square feet of warehouse facilities. Mercury also leases a 45,000 square foot
warehouse facility near the San Francisco International Airport which it uses
for cargo handling operations. In September 1995, Mercury acquired the operating
and other assets of certain providers of cargo handling services at airport
facilities in Toronto and Montreal, Canada. See "Business -- Recent Developments
- -- Excel Cargo." Mercury's strategy is to continue to expand its cargo handling
operations by securing additional warehouse facilities on favorable economic
terms and to obtain additional customers to fully utilize existing warehouse
facilities. Space brokerage, a significant part of Mercury's cargo operations,
consists of contracting with domestic and international airlines for cargo space
and reselling the cargo space to customers with shipping needs. This allows
airlines to increase cargo capacity utilization by using Mercury's marketing
capabilities. Mercury's strategy is to expand its space brokerage operations by
establishing relationships with additional shipping agents and by contracting
for additional cargo space. In conducting its general cargo sales agent
services, another important component of Mercury's cargo operations, Mercury
acts as an agent for airlines in the Far East, Mexico, Central and South America
and the United States. In this capacity, Mercury earns a commission from the
airlines for
3
<PAGE>
selling air cargo space. Mercury's strategy is to expand its revenues and
operating income from general cargo sales agent services by obtaining new sales
territories for airlines with which it has an existing relationship and by
entering into arrangements with additional airlines.
FBOS. Mercury's FBO services are performed at leased facilities located at
LAX and at airports in Reno, Nevada; Bakersfield, California; Burbank,
California; and Santa Barbara, California. At each FBO, Mercury maintains
administrative offices, conducts fuel sales and refueling operations, provides
catering and other ground support services and provides tie-down space for its
customers. Mercury's strategy is to acquire additional FBOs on favorable
economic terms and to expand its business at existing FBOs.
GOVERNMENT CONTRACT SERVICES. Mercury conducts its government contract
services at 14 military bases throughout the United States and at three military
bases outside the United States, one in Greece and two in Japan. The majority of
these contracts entail providing equipment and manpower to fuel aircraft, but do
not include the sale of fuel, the procurement of which is handled by the
military. The Company's government contracts have terms of one to four years.
Mercury has recently lost several government contracts due to base closures and
other reasons. Mercury's strategy in the government contract services area is to
retain existing contracts and cost effectively bid for new refueling contracts.
Mercury also intends to expand the types of outsourcing services provided to the
U.S. government beyond the Company's core military refueling business. Potential
areas of expansion include engineering services, base operating services and
maintenance and operations services. Mercury believes its expansion efforts in
this area will be facilitated by its familiarity with military base operations
and government contract requirements.
Mercury's principal executive offices are located at 5456 McConnell Avenue,
Los Angeles, California 90066, and its telephone number is (310) 827-2737. The
Company was incorporated in New York in April 1956.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................. $25,000,000 aggregate principal amount of %
Convertible Subordinated Debentures due 2006.
Maturity Date...................... February , 2006.
Interest Payment Dates............. Interest payable semi-annually on August and
February of each year, commencing August , 1996.
The first interest payment will represent interest
from the date of original issuance to and including
August , 1996.
Denominations...................... $1,000 and any integral multiple thereof.
Conversion Rights.................. The Debentures are convertible at the option of the
holder at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion
rate of shares of Common Stock per $1,000
principal amount of Debentures (equivalent to a
conversion price of approximately $ per share),
subject to adjustment in certain circumstances as
described herein. No accrued interest will be paid
upon conversion, except that Debentures called for
redemption which are held on a record date respecting
any interest payment date shall be paid accrued
interest to the earlier of the date of conversion or
through the end of the related semi-annual interest
payment period. See "Description of Debentures --
Conversion Rights."
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Optional Redemption................ The Debentures are redeemable on or after February ,
1999, in whole or in part, at any time, at the option
of Mercury, at the declining redemption prices set
forth herein plus accrued and unpaid interest to the
date of redemption. In addition, Mercury may redeem
the Debentures between February , 1998 and February
, 1999, if the closing price of the Common Stock has
been at least 140% of the Conversion Price (as defined
herein) for at least 20 trading days within a period
of 30 consecutive trading days ending not more than
five trading days prior to the date of the redemption
notice. See "Description of Debentures -- Optional
Redemption."
Sinking Fund....................... None.
Redemption Option Upon
Death of Holder.................. Debentures tendered by an authorized representative or
the surviving joint tenant, tenant by the entirety or
tenant in common of a deceased holder will be
redeemable, in whole or in part, within 60 days of
tender, at 100% of the principal amount plus accrued
and unpaid interest to and including the date of
redemption, subject to a maximum principal amount of
$100,000 per deceased holder and a maximum aggregate
principal amount for all deceased holders of $500,000
during each calendar year. See "Description of
Debentures -- Repurchase of Debentures Upon Death of
Holder."
Repurchase at Option of Holder
After Certain Changes of
Control.......................... After a Change of Control and a Rating Downgrade, each
holder will have the right, subject to certain
conditions, to require Mercury to repurchase all or
part of such holder's Debentures at 100% of the
principal amount thereof, plus accrued and unpaid
interest to the date of repurchase. See "Risk Factors
-- Limitations on Repurchase of Debentures" and
"Description of Debentures -- Repurchase of Debentures
at the Option of the Holder After Certain Changes of
Control."
Subordination...................... The Debentures are unsecured obligations of Mercury
and are subordinated in the right of payment to all
existing and future Senior Indebtedness (as defined
herein) of Mercury. As of September 30, 1995, assuming
application of the net proceeds of this offering in
the manner described herein, Senior Indebtedness would
have been approximately $10.9 million. The Indenture
does not restrict the incurrence of additional Senior
Indebtedness or other indebtedness by Mercury or any
subsidiary. See "Risk Factors -- Subordination" and
"Description of Debentures -- Subordination."
Rating............................. The Debentures are rated "B-" by Standard & Poor's
Corporation. See "Rating of Debentures."
Listing............................ The Debentures have been approved for listing on the
AMEX under the symbol MAX.A. Application has also been
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
made to list the Debentures on the PSE. The Common
Stock is listed on the AMEX and traded under the
symbol "MAX." See "Price Range of Common Stock and
Dividend Policy."
Use of Proceeds.................... Mercury intends to use the net proceeds of this
offering to repay the outstanding balance under the
Revolver (as defined herein); to fund expansion and
growth, both internally and through acquisitions; and
for general corporate purposes. See "Use of Proceeds."
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1994 1995
---------- ---------- ----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales and revenues.................... $ 73,498 $ 71,746 $ 84,543 $ 103,069 $ 183,000 $ 35,554 $ 51,880
Operating income...................... 7,909 6,492 8,903 12,665 16,573 3,851 4,597
Income before income taxes............ 1,634 616 3,363(1) 5,169 7,312 1,724 2,076
Net income............................ 944 359 1,950 2,995 4,307 1,002 1,232
PER SHARE DATA: (2)
Net income per common share on a fully
diluted basis....................... $ 0.38 $ 0.01 $ 0.39 $ 0.59 $ 0.76 $ 0.18 $ 0.22
Weighted average common shares
outstanding......................... 2,377,821 2,394,151 2,431,549 3,719,884 5,420,158 5,354,000 5,415,000
SUPPLEMENTAL DATA:
EBITDA (3)............................ $ 4,474 $ 2,761 $ 5,024 $ 8,404 $ 11,210 $ 2,661 $ 3,124
Ratio of earnings to fixed charges
(4)................................. 1.82x 1.36x 2.73 x 3.82x 4.16x 4.34x 4.11x
Dividends per share (5)............... -- -- -- -- $ 0.02 -- $ 0.01
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
--------------------------
ACTUAL AS ADJUSTED (6)
--------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................................................... $ 20,488 $ 31,991
Total assets............................................................................ 59,491 72,544
Long-term debt (net of current maturities).............................................. 20,011 33,064
Total liabilities....................................................................... 40,756 53,809
Shareholders' equity.................................................................... 18,735 18,735
</TABLE>
- ---------------
(1) Includes a pre-tax gain from a legal judgment in the amount of $1,060,000.
(2) Shares outstanding and earnings per share have been adjusted retroactively
to reflect the payment of a ten percent stock dividend on June 16, 1995.
(3) EBITDA as used herein means earnings before interest expense, interest
income, taxes, depreciation and amortization, and excludes minority
interest and the pre-tax gain from a legal judgment in fiscal 1993.
(4) For purposes of calculating this ratio, earnings consist of income before
income taxes and fixed charges. Fixed charges consist of interest expense
and one-third of rental expense, representative of that portion of the
rental expense attributable to interest. The pro forma ratio, adjusted to
reflect the issuance of the Debentures offered hereby and the application
of the net proceeds therefrom to repay the Revolver, with the balance
invested at short-term market rates, would be 2.70x and 2.96x for the year
ended June 30, 1995 and the three months ended September 30, 1995,
respectively.
(5) In December 1994, Mercury's Board of Directors adopted a quarterly dividend
plan of $.01 per share of common stock. Dividends in the aggregate amounts
of $50,000, $50,000, $55,000 and $54,000 were paid on February 1, 1995, May
1, 1995, September 1, 1995 and November 1, 1995, respectively.
(6) Adjusted to reflect the issuance of the Debentures offered hereby and the
application of a portion of the net proceeds therefrom to repay the
Revolver in full. As of December 31, 1995, the amount of the Revolver was
$13.2 million. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
THE DEBENTURES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. IN ADDITION TO
THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISKS INHERENT IN AN INVESTMENT IN THE DEBENTURES.
SUBSTANTIAL LEVERAGE
The Company's leverage will increase following the issuance of the
Debentures. As of September 30, 1995, the Company's actual leverage, as measured
by its long-term debt to capitalization ratio, was 51.6%; assuming the issuance
of the Debentures and the application of the net proceeds therefrom, the
Company's leverage would have been 63.8%. The degree to which the Company is
leveraged could have important consequences to holders of the Debentures,
including the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired; (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of the principal of and interest on the Debentures and existing
indebtedness; and (iii) the Company's substantial degree of leverage may make it
more vulnerable to a downturn in the aviation services industry, which
historically has been sensitive to changes in general economic conditions.
Although the Company presently anticipates that it will be able to pay its debt
service and other obligations, there can be no assurance that the Company will
possess sufficient income and liquidity to meet all of its long-term debt
service requirements and other obligations. See "Use of Proceeds" and
"Capitalization."
CONSENT OF LENDER TO ADDITIONAL INDEBTEDNESS
Under the terms of its Credit Facility (as defined herein), Mercury's
principal lender must consent to the incurrence of any additional indebtedness.
There can be no assurance that Mercury will not require additional funds to
repay the Debentures, that such additional funds could be obtained, or that the
lender would consent to Mercury incurring additional indebtedness. Moreover,
Mercury may in the future enter into financing arrangements which could require
additional consents to repay the Debentures and/or contain terms limiting its
ability to incur additional indebtedness. There can be no assurance that such
additional consents could be obtained, or that the lender under such additional
financing arrangements would allow Mercury to enter into further indebtedness.
CREDIT QUALITY OF RECEIVABLES
Mercury frequently sells aviation fuel on an unsecured basis with extended
credit terms. In addition, a substantial portion of Mercury's accounts
receivable are due from smaller and generally less well-established or
well-capitalized airlines, including certain foreign, regional, commuter and
start-up airlines, which may be less creditworthy than larger, well-established
and well-capitalized airlines. Mercury has incurred in the past and is likely to
continue to incur losses as the result of the business failure of a customer.
The failure of a relatively large customer or a number of smaller customers
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments" and
"Business -- Fuel Sales and Services."
FOREIGN CUSTOMERS
Approximately 39% of Mercury's consolidated revenues for fiscal 1995 were
generated from foreign-based customers headquartered in Asia, Europe, Latin
America and the Caribbean. Mercury frequently grants foreign customers extended
credit terms, which may result in proportionately larger receivable balances for
a given quantity of fuel sales. To the extent such customers are also large fuel
purchasers, Mercury's credit exposure to a single customer may be relatively
large. Although invoices are usually denominated in U.S. dollars, foreign
customers may have difficulty in paying such invoices in the event of the
devaluation of their national currency. In addition, if a foreign customer fails
to abide by its contractual commitments, Mercury's legal remedies may not be as
effective as they would be in collecting from domestic customers.
7
<PAGE>
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Although during fiscal 1995 no single customer accounted for over 10% of
Mercury's consolidated revenues, at times certain key customers have accounted
for a significant portion of Mercury's consolidated revenues and/or operating
income. Furthermore, at times certain key customers have accounted for a
significant portion of the revenues and/or operating income of one or more of
Mercury's operating units. The loss of one or more key customers in any of
Mercury's operating units could substantially impair the operating results of
such operating unit and could have a material adverse effect on Mercury's
business, operating results and financial condition.
NATURE OF CONTRACTS
A large portion of Mercury's business with its customers is based on verbal
agreements, invoice terms or short-term contracts terminable by either party
upon limited notice. While Mercury has operated pursuant to such contracts for
some time, there can be no assurance that such contracts, agreements or
arrangements will not be terminated. The termination of a large portion of those
arrangements could have a material adverse effect on Mercury's business,
operating results and financial condition.
COMPETITION
Each of the markets in which Mercury operates is highly competitive. In the
aviation fuel sales and services market, Mercury is in direct competition with
major oil companies, major airlines and other aircraft support companies. In the
cargo services market, Mercury competes with major airlines, specialized freight
transporters and other cargo service firms. In the FBO market, Mercury competes
against other FBOs at each of the airports at which it currently operates. In
the military services market, Mercury competes with other military service
contractors as well as government provided services. Competition for customers
between Mercury and its competitors is principally on the basis of price and
quality of service. Substantially all of the Company's services are subject to
competitive bidding. Many of the Company's competitors have greater financial,
technical and marketing resources than Mercury. There can be no assurance that
the Company will be able to compete successfully with existing or new
competitors. See "Business -- Competition."
GENERAL ECONOMIC CONDITIONS
The air transportation industry is highly sensitive to general economic
conditions. Mercury's fuel sales and services business, air cargo operations and
FBOs could be adversely affected by a sustained economic recession either in the
United States or globally. A substantial reduction in air traffic, particularly
at LAX, or financial problems incurred by Mercury's commercial customers could
have a material adverse effect on Mercury's business, operating results and
financial condition. Furthermore, Mercury's business with foreign air carriers,
its fuel sales and its cargo operations could be adversely affected by political
or military disputes involving the United States and/or certain foreign
countries.
AVIATION FUEL AVAILABILITY
Mercury's fuel sales business could be materially adversely affected by a
significant decrease in the availability, or increase in the price, of aviation
fuel. Fuel sales and services represented approximately 77.5% and 62.5% of total
revenues in fiscal 1995 and fiscal 1994, respectively. For the last five years,
with the exception of a short-term market dislocation surrounding the Gulf War
in 1990-1991, aviation fuel prices have remained in a relatively predictable
range. However, there can be no assurance that such prices will remain within
such range in the future. Moreover, 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 in the past
resulted and could in the future result in spot shortages or rapid increases in
fuel costs. If aviation fuel prices were to materially increase for a sustained
period, or if aviation fuel supplies were for any reason to become unavailable
to Mercury, Mercury's business, operating results and financial condition could
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Fuel Sales and Services."
8
<PAGE>
IMPACT OF FUEL SALES ON WORKING CAPITAL
The Company uses substantial working capital to finance accounts receivable
generated from its fuel sales operations. The amount of working capital consumed
by these accounts receivable depends primarily on the quantity of fuel sold, the
price of the fuel, the Company's extension of credit and customer compliance
with credit terms. Any increase in such quantity or price, any increase in
credit extended, or any substantial customer noncompliance with credit terms
will result in a corresponding increase in the aggregate accounts receivable
balance, thereby requiring Mercury to employ additional working capital. While
the quantity of fuel sold by Mercury has increased substantially in the last
several years, Mercury has been able to finance the related growth in accounts
receivable by increasing the Credit Facility and through internally generated
funds. However, at the current level of fuel sales, if the price of aviation
fuel were to materially increase for a sustained period, Mercury might have to
reallocate funds from business expansion to meet working capital demand, or
alternatively, Mercury could be forced to curtail fuel sales or change the
credit terms granted to its customers, which could adversely affect earnings and
jeopardize established customer relationships. See "Business -- Fuel Sales and
Services."
EFFECT OF AVIATION FUEL AVAILABILITY ON CUSTOMERS
A material rise in the price or material decrease in the availability of
aviation fuel would adversely impact Mercury's customers. To the extent that
Mercury's airline customers were not able to immediately adjust their business
operations to reflect increased operating costs, they could take relatively
longer to pay Mercury's accounts receivable. Such payment delays would further
increase Mercury's working capital demands. In some cases, the impact of a fuel
price increase could materially impair the financial stability of an airline
customer such that it would be unable to pay amounts owed to Mercury and could
result in such airline customer filing for bankruptcy protection. In that event,
Mercury could incur significant losses related to the uncollectability of the
receivable. See "Business -- Fuel Sales and Services."
MANAGEMENT OF GROWTH
Mercury has experienced rapid growth of its business. Management's ability
to support and manage this growth is dependent upon, among other things, the
ability to hire, train, motivate and retain personnel, and the quality and
flexibility of its internal controls and automated systems. If Mercury's
management is unable to manage growth effectively, Mercury's business, operating
results and financial condition could be adversely affected.
DEPENDENCE UPON KEY PERSONNEL
Mercury's success depends in large part on its ability to retain and develop
its management team. To date, Mercury has been heavily dependent upon Seymour
Kahn, its Chairman of the Board and Chief Executive Officer, who maintains
significant personal relationships with many of Mercury's major customers. Mr.
Kahn is 68 years old and his employment agreement with Mercury expires in
December 1998. Although Mercury has a key man life insurance policy on the life
of Mr. Kahn, Mercury's operations could be adversely affected if, for any
reason, Mr. Kahn does not continue to be active in Mercury's management. The
future success of Mercury also depends on its ability to identify, attract and
retain additional qualified management personnel. There can be no assurance that
employees will not leave Mercury or compete against Mercury. Mercury's failure
to attract additional qualified employees or to retain the services of key
personnel could materially adversely affect the Company's business, operating
results and financial condition. See "Business -- Employees" and "Management."
EXPANSION BY ACQUISITION
Mercury's strategy is to expand its operations through internal growth as
well as through selected acquisitions of aviation businesses which may be
integrated into or complement Mercury's existing businesses. Although Mercury
regularly reviews possible acquisition candidates, there can be no assurance
that suitable acquisition candidates will be identified or that acquisitions can
be consummated on acceptable terms. Under the Credit Facility, the consent of
Mercury's principal lender may
9
<PAGE>
be required for an acquisition. Failure to accomplish future acquisitions could
limit Mercury's revenue and earnings growth potential. In addition, acquisitions
involve a number of risks that could adversely affect Mercury's business,
operating results and financial condition, including the diversion of
management's attention, the assimilation of the operations and personnel of the
acquired companies, the amortization of acquired intangible assets and the
potential loss of key employees. There can be no assurance that any acquisition
by Mercury will not materially adversely affect Mercury's business, operating
results and financial condition or that any such acquisition will enhance
Mercury's business, operating results or financial condition. See "Business --
Recent Developments."
GOVERNMENT CONTRACT SERVICES OUTLOOK
Mercury's government contract 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 U.S. military. Since June 30, 1994, ten contracts held by Mercury have been
terminated for such reasons, five of which were terminated in fiscal 1995, four
of which have been terminated or are scheduled for termination during fiscal
1996, and one of which is scheduled for termination in fiscal 1997. Since June
30, 1994, Mercury renewed two four-year contracts and added two contracts.
Growth of the Company's government contract services business is dependent on
obtaining additional contracts and renewing existing contracts through the
process of competitive bids, and on expanding the types of outsourcing services
provided to the U.S. government. There can be no assurance that the Company will
be able to obtain additional government contracts, renew existing government
contracts, or expand the types of outsourcing services provided to the U.S.
government. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations" and "Business -- Government
Contract Services."
CAPACITY CONSTRAINTS IN CARGO OPERATIONS
Growth prospects for Mercury's cargo handling operations are limited by the
availability of additional strategically located warehouse facilities. Mercury's
cargo handling operations currently occur principally at LAX. Mercury also
leases a warehouse facility which it uses for cargo handling in San Francisco,
California. In addition, Mercury recently acquired certain operating and other
assets used for cargo handling services at airport facilities in Toronto and
Montreal. At LAX, a portion of Mercury's cargo handling operations are conducted
in a facility subject to a month-to-month agreement. Continuous long-term growth
in Mercury's cargo handling operations can be realized only by maintaining and
expanding current warehouse facilities or by obtaining additional warehouse
facilities at existing or new locations. There can be no assurance that the
Company will be able to maintain or expand its existing warehouse facilities or
continue to obtain additional warehouse facilities. See "Business -- Cargo
Operations" and "Business -- Recent Developments."
GROWTH POTENTIAL FOR FBOS
Growth within Mercury's FBOs is not likely to be substantial, and may not
occur at all, without the acquisition of additional FBO locations. There can be
no assurance that Mercury will be able to obtain additional FBO facilities to
support continued, long-term growth in this unit. Even if such facilities are
available, the cost of the acquisition or the capital expenditure requirements
thereof may be prohibitive or render the operation of such facilities
unprofitable. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations" and "Business -- Fixed Base
Operations."
AVIATION FUEL INVENTORY
Due to the nature of Mercury's business, the volume of its aviation fuel
inventories has increased and may continue to increase. Depending upon the price
and price movement of aviation fuel, such inventories may subject Mercury to a
risk of financial loss. Mercury's fuel inventories are partially hedged pursuant
to pricing terms with its customers and to transactions in heating oil futures.
There can be no assurance that such hedges will adequately protect Mercury in
the event of a substantial downward movement in the price of aviation fuel. See
"Business -- Fuel Sales and Services."
10
<PAGE>
ENVIRONMENTAL MATTERS
Mercury owns and leases underground fuel storage tanks and operates fuel
tank trucks. Leaks or spills from such fuel containers could expose Mercury to
substantial remediation costs or capital expenditures to repair or replace fuel
containers. Mercury's fuel tanks, fuel trucks and other operations are subject
to numerous federal, state and local environmental laws and regulations that
impose limitations on the discharge of pollutants into the air and water and
establish standards for the treatment, storage and transporting of fuel and
related materials. Mercury believes that it has installed the necessary
safeguards and procedures required for full compliance with all such applicable
environmental laws and regulations regarding its fuel facilities. There can be
no assurance that changes to applicable laws and regulations will not in the
future occur which might require substantial additional expenditures. See
"Business -- Environmental Matters."
EMPLOYEE RELATIONS
Many workers in the aviation services industry are represented by labor
unions. If unionization of Mercury's employees were to occur, changes to
effective labor costs and employee utilization could result in an increase in
costs which could adversely affect Mercury's business, operating results and
financial condition. See "Business -- Employees."
CONTROL OF MERCURY
As of December 31, 1995, Mr. Kahn beneficially owned approximately 25.5% of
the Company's outstanding voting securities. As a principal shareholder, Mr.
Kahn is able to exert greater influence than other shareholders of Mercury in
the election of the members of Mercury's Board of Directors and in business
transactions such as mergers or other business combinations, the acquisition or
disposition of assets, the incurrence of indebtedness, the issuance of
additional Common Stock or other equity securities and the payment of dividends.
See "Principal Shareholders" and "Management -- Certain Transactions."
POSSIBLE NEGATIVE EFFECTS OF PREFERRED STOCK AND LOAN PROVISIONS
Mercury's Articles of Incorporation authorize the issuance of up to
3,000,000 shares of preferred stock with such rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors may, without shareholder approval, issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the rights, value and liquidity of the Common Stock. The issuance of
shares of preferred stock may also have the effect of rendering more difficult
an acquisition or a change in control of Mercury. Moreover, such issuance may
constitute a Change of Control, which, in certain instances, may require Mercury
to repurchase the Debentures. Mercury has no present plans to issue shares of
preferred stock. See "Description of Debentures -- Repurchase of Debentures at
the Option of the Holder After Certain Changes of Control" and "Description of
Capital Stock -- Preferred Stock."
LIMITATIONS ON REPURCHASE OF DEBENTURES
After a Change of Control and a Rating Downgrade, a holder of Debentures,
may have the right, at the holder's option, to require the Company to repurchase
all or a portion of such holder's Debentures. Repurchase rights may also apply
following the death of a holder of Debentures. If either event was to occur,
there can be no assurance that the Company would have sufficient funds to
repurchase the Debentures. In addition, the Company's repurchase of Debentures
may be limited by, or create an event of default under, its Credit Facility or
under additional agreements relating to borrowings which the Company may enter
into from time to time. See "Description of Debentures -- Repurchase of
Debentures at the Option of the Holder After Certain Changes of Control" and
"Description of Debentures -- Repurchase of Debentures Upon Death of Holder."
ABSENCE OF SECURITY FOR PAYMENT; LIMITED COVENANTS IN THE INDENTURE
The Debentures are unsecured obligations of Mercury and do not have the
benefit of a sinking fund or other similar provision for payment at maturity.
Furthermore, the Indenture contains only limited covenants, none of which are
designed to protect holders of the Debentures in the event of a
11
<PAGE>
material adverse change in Mercury's business, operating results or financial
condition. Moreover, the Indenture does not restrict the incurrence of
additional Senior Indebtedness or other Indebtedness (as defined in the
Indenture) by Mercury or any subsidiary. Consequently, Mercury could become more
highly leveraged, resulting in an increase in debt service that could adversely
affect Mercury's ability to service the Debentures. During the continuance
beyond any applicable grace period of any default in the payment of principal,
premium, interest or any other payment due on any Senior Indebtedness, no
payment of principal, premium, if any, or interest on the Debentures (including
the redemption of any Debentures) may be made by the Company. See "Description
of Debentures."
SOURCES OF PAYMENTS ON THE DEBENTURES
The Debentures are obligations exclusively of the Company and not of any of
its subsidiaries. The Company's cash flow and its ability to service debt,
including the Debentures, are partially dependent upon the earnings of its
subsidiaries and the distribution of those earnings to the Company, or upon
other payments of funds by the subsidiaries to the Company. During fiscal 1995,
42.2% of the Company's operating income and 13.9% of its revenues were derived
from two of its subsidiaries, Mercury Air Cargo, Inc. ("MAC") and Maytag
Aircraft Corporation ("Maytag"). The Company's subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amounts due pursuant to the Debentures or to make any funds available
therefor, whether by dividends, loans or other payments. In addition, MAC and
Maytag are direct obligors under the Credit Facility. The payment of dividends
and the making of loans and advances to the Company by its subsidiaries may be
subject to additional contractual restrictions or to statutory or other
restrictions, are dependent upon the earnings of those subsidiaries and are
subject to various business considerations. See "Description of Debentures --
Subordination."
SUBORDINATION
The Debentures are subordinated in the right of payment to all existing and
future Senior Indebtedness of Mercury. As of September 30, 1995, after giving
effect to this offering and the application of the net proceeds therefrom,
Senior Indebtedness would have been approximately $10.9 million. The Company's
Credit Facility and certain other Senior Indebtedness are secured by
substantially all of Mercury's assets. Therefore, in the event of a liquidation,
dissolution, reorganization or similar proceeding involving Mercury, the assets
of Mercury will be available to pay obligations on the Debentures (and any other
obligations ranking PARI PASSU with the Debentures) only after all Senior
Indebtedness has been paid in full, and there may not be sufficient assets to
pay any or all amounts due on the Debentures. If Mercury becomes insolvent or is
liquidated, or if payment of the Senior Indebtedness is accelerated, the holders
of the Senior Indebtedness would be entitled to exercise the remedies available
to secured lenders under applicable law and pursuant to the terms of the Senior
Indebtedness. See "Description of Debentures -- Subordination."
LIMITED MARKET FOR DEBENTURES
There is no existing market for the Debentures. The Company has been advised
by the Underwriters that they intend to make a market in the Debentures;
however, there can be no assurance that an active trading market in the
Debentures will develop. If a market were to develop, the Debentures could trade
at prices higher or lower than the initial offering price thereof depending on
many factors, including but not limited to prevailing interest rates, Mercury's
operating results, the market price for the Common Stock and the market for
similar securities. If the Underwriters cease making a market in the Debentures,
the price of the Debentures may be adversely affected and holders may be unable
to sell the Debentures.
RULE 144 SALES
The prevailing market price of Common Stock after this offering could be
adversely affected by future sales of Common Stock by existing shareholders and
option holders. Of the 5,380,087 shares of Common Stock outstanding as of
December 31, 1995, 1,595,790 shares were held by affiliates of Mercury and were
not freely tradable except in compliance with Rule 144 ("Rule 144") promulgated
by the Commission under the Securities Act. Subject to the satisfaction of
certain conditions, Rule 144
12
<PAGE>
permits aggregate sales by any affiliate in a three-month period of no more than
the greater of 1% of the outstanding shares (53,800 shares as of December 31,
1995) or the average of the weekly trading volume for the shares for the four
weeks preceding the sale.
USE OF PROCEEDS
The net proceeds of this offering, after deducting the underwriting discount
and commissions and estimated expenses of the offering, are estimated to be
$23,450,000 ($27,012,500 if the Underwriters' over-allotment option is exercised
in full). Mercury's credit facility with its senior lender (the "Credit
Facility") consists of a revolving portion (the "Revolver") and a term portion
(the "Term Loan"). Mercury intends to use the net proceeds to repay its
outstanding balance under the Revolver; for expansion and growth of its
business, both internally and through acquisitions; and for general corporate
purposes. As of December 31, 1995, outstanding advances under the Revolver were
$13.2 million, accruing interest at an effective rate of approximately 8% per
annum.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Mercury on a
consolidated basis at September 30, 1995, and as adjusted to reflect the sale of
the Debentures offered hereby and the application of the net proceeds therefrom.
See "Use of Proceeds." This table should be read in conjunction with Mercury's
consolidated financial statements and the accompanying notes contained elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Revolver (2)(4)..................................................................... $ 11,947 $ --
Other long-term debt (3)(4)......................................................... 8,064 8,064
% Convertible Subordinated Debentures due 2006................................... -- 25,000
--------- --------------
Total long-term debt.............................................................. 20,011 33,064
Shareholders' equity:
Preferred Stock, par value $.01 per share, 3,000,000 shares authorized; no shares
outstanding....................................................................... -- --
Common Stock, par value $.01 per share, 9,000,000 shares authorized; 5,371,087
shares outstanding (5)............................................................ 54 54
Additional paid-in capital.......................................................... 14,611 14,611
Retained earnings................................................................... 4,225 4,225
Common Stock in treasury (35,200 shares)............................................ (155) (155)
--------- --------------
Total shareholders' equity........................................................ 18,735 18,735
--------- --------------
Total capitalization.................................................................. $ 38,746 $ 51,799
--------- --------------
--------- --------------
</TABLE>
- ------------
(1) Adjusted to reflect the sale of the Debentures (assuming the Underwriters'
over-allotment option is not exercised) and the application of $11,947,000
of the net proceeds to repay the Revolver in full.
(2) Advances to Mercury under the Revolver bear interest at a fluctuating per
annum rate equal to either the lender's announced prime rate ("Prime Rate")
plus 1/2%, or the London Interbank Offered Rate ("LIBOR") plus 2%, at the
Company's option.
(3) Includes the outstanding balance on the Term Loan of $4,378,000. The Term
Loan bears interest at the Prime Rate plus 3/4%, provided no change in the
interest rate shall be made for any decrease in the Prime Rate below 5%, or
LIBOR plus 2 1/4%. Principal under the Term Loan is repayable in monthly
installments of $125,000. Upon an event of default which remains uncured,
interest will accrue and compound monthly at the applicable interest rate
described above plus 2%.
(4) The Credit Facility requires Mercury to maintain certain levels of financial
performance, including specified minimum levels of tangible net worth, as
defined, working capital and ratios related to working capital and debt to
net worth. The Credit Facility also limits Mercury's annual capital
expenditures and limits the payment of dividends on shares of Common Stock
to $250,000 annually. For the fiscal years ended June 30, 1994 and June 30,
1995, Mercury was, and Mercury currently is, in compliance with each of the
financial covenants contained in the Credit Facility.
(5) Excludes shares of Common Stock reserved for issuance upon
conversion of the Debentures offered hereby, 284,250 shares of Common Stock
reserved for issuance upon the exercise of options granted or to be granted
under the Company's 1990 Directors Stock Option Plan, 242,800 shares of
Common Stock reserved for issuance upon the exercise of options granted or
to be granted under the Company's 1990 Long-Term Incentive Stock Plan,
110,000 shares of Common Stock reserved for issuance upon the exercise of a
Non-Qualified Stock Option dated
14
<PAGE>
January 31, 1993, 18,335 shares of Common Stock reserved for issuance upon
the exercise of a certain underwriter warrant dated June 18, 1991, and
167,970 shares of Common Stock reserved for issuance upon conversion of the
debenture issued in connection with the Excel Transaction (as defined
herein). See "Business -- Recent Developments -- Excel Cargo," "Management
-- Compensation of Directors" and Note 11 of Notes to Consolidated Financial
Statements.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Mercury's Common Stock is listed and traded on the AMEX under the symbol
"MAX", and application has been made to list Mercury's Common Stock on the PSE.
The table below sets forth, for the quarterly periods indicated, the high and
low daily closing sale prices on the AMEX for the Company's Common Stock. All
per share stock price information has been adjusted to reflect the June 16, 1995
ten percent stock dividend.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1994:
Quarter ended September 30, 1993............................................................. $ 3.13 $ 2.50
Quarter ended December 31, 1993.............................................................. 3.64 2.84
Quarter ended March 31, 1994................................................................. 5.68 3.30
Quarter ended June 30, 1994.................................................................. 5.45 4.09
FISCAL 1995:
Quarter ended September 30, 1994............................................................. $ 6.14 $ 4.89
Quarter ended December 31, 1994.............................................................. 7.05 5.11
Quarter ended March 31, 1995................................................................. 8.64 6.25
Quarter ended June 30, 1995.................................................................. 9.00 7.27
FISCAL 1996:
Quarter ended September 30, 1995............................................................. $ 9.00 $ 7.75
Quarter ended December 31, 1995.............................................................. 10.75 8.13
Quarter ending March 31, 1996 (through January 25, 1996)..................................... 8.63 8.00
</TABLE>
On January 25, 1996, the closing sale price of the Common Stock as reported
on the AMEX was $8.50. As of January 9, 1996, there were approximately 479
holders of record.
In December 1994, Mercury's Board of Directors adopted a quarterly dividend
plan of $.01 per common share. The first such dividend was paid on February 1,
1995. Based upon the current number of shares of Common Stock outstanding and
assuming the quarterly amount of $.01 per share remains in effect, annual
dividend requirements will amount to approximately $215,000. Mercury intends to
review its dividend policy from time to time in light of its earnings, financial
condition and other relevant factors, including applicable covenants in debt and
other agreements. In this regard, as discussed in Note 9 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.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of income data set forth below with respect to
the years ended June 30, 1993, 1994 and 1995 and the consolidated balance sheet
data at June 30, 1994 and 1995 are derived from, and are qualified by reference
to, the audited consolidated financial statements included elsewhere in this
Prospectus. The consolidated statement of income data set forth below with
respect to the years ended June 30, 1991 and 1992 and the consolidated balance
sheet data at June 30, 1991, 1992, and 1993 are derived from audited financial
statements of Mercury not included in this Prospectus. The selected consolidated
financial data presented below as of September 30, 1994 and September 30, 1995,
and for the three-month periods then ended, have been derived from the unaudited
consolidated financial statements of Mercury and reflect all normal recurring
accruals and adjustments which, in the opinion of Mercury's management, are
necessary for a fair presentation of the unaudited results. The information
presented below should be read in conjunction with the consolidated financial
statements and notes thereto presented elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales and revenues...................... $ 73,498 $ 71,746 $ 84,543 $ 103,069 $ 183,000 $ 35,554 $ 51,880
Operating income........................ 7,909 6,492 8,903 12,665 16,573 3,851 4,597
Income before income taxes.............. 1,634 616 3,363 (1) 5,169 7,312 1,724 2,076
Net income.............................. 944 359 1,950 2,995 4,307 1,002 1,232
PER SHARE DATA: (2)
Net income per common share on a fully
diluted basis......................... $ 0.38 $ 0.01 $ 0.39 $ 0.59 $ 0.76 $ 0.18 $ 0.22
Weighted average common shares
outstanding........................... 2,377,821 2,394,151 2,431,549 3,719,884 5,420,158 5,354,000 5,415,000
SUPPLEMENTAL DATA:
EBITDA (3).............................. $ 4,474 $ 2,761 $ 5,024 $ 8,404 $ 11,210 $ 2,661 $ 3,124
Ratio of earnings to fixed charges
(4)................................... 1.82x 1.36x 2.73 x 3.82x 4.16x 4.34x 4.11x
Dividends per share (5)................. -- -- -- -- $ 0.02 -- $ 0.01
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AT SEPTEMBER 30,
------------------------------------------- ----------------
1991 1992 1993 1994 1995 1994 1995
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (IN THOUSANDS)
Working capital......................... $ 5,482 $ 6,182 $ 8,409 $ 9,353 $20,528 $12,339 $20,488
Total assets............................ 22,370 26,090 31,800 35,442 54,210 40,822 59,491
Long-term debt (net of current
maturities)........................... 4,941 7,299 9,821 8,650 17,104 10,711 20,011
Total liabilities....................... 14,966 18,001 22,264 21,806 35,839 26,713 40,756
Shareholders' equity.................... 7,404 8,089 9,536 13,636 18,371 14,109 18,735
</TABLE>
- ---------------
(1) Includes a pre-tax gain from a legal judgment in the amount of $1,060,000.
(2) Shares outstanding and earnings per share have been adjusted retroactively
to reflect the payment of a ten percent stock dividend on June 16, 1995.
(3) EBITDA as used herein means earnings before interest expense, interest
income, taxes, depreciation and amortization, and excludes minority
interest and the pretax gain from a legal judgment in 1993.
(4) For purposes of calculating this ratio, earnings consist of income before
income taxes and fixed charges. Fixed charges consist of interest expense
and one-third of rental expense, representative of that portion of the
rental expense attributable to interest. The pro forma ratio, adjusted to
reflect the issuance of the Debentures offered hereby and the application
of the net proceeds therefrom to repay the Revolver, with the balance
invested at short-term market rates, would be 2.70x and 2.96x for the
fiscal year ended June 30, 1995 and the three months ended September 30,
1995, respectively.
(5) In December 1994, Mercury's Board of Directors adopted a quarterly dividend
plan of $.01 per share of common stock. Dividends in the aggregate amounts
of $50,000, $50,000, $55,000 and $54,000 were paid on February 1, 1995, May
1, 1995, September 1, 1995 and November 1, 1995, respectively.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
Revenues in the three months ended December 31, 1995 increased 12.7% to
$55.4 million from $49.2 million in the same period of the prior year. Net
income in the three months ended December 31, 1995 increased 15.5% to $1.4
million from $1.2 million in the same period of the prior year.
Revenues in the six months ended December 31, 1995 increased 26.6% to $107.3
million from $84.7 million in the same period of the prior year. Net income in
the six months ended December 31, 1995 increased 18.9% to $2.6 million from $2.2
million in the same period of the prior year.
On January 22, 1996, a petition for reorganization under Chapter 11 of the
Federal Bankruptcy Code was filed against Business Express, Inc. ("Business
Express"), a fuel customer of Mercury. Subsequent to the filing, the Company
placed Business Express on a prepaid basis for future fuel purchases. The
Company's reserves and collateral are adequate to cover any losses incurred on
the receivables from Business Express. On an ongoing basis, the Company believes
that the filing will have no material adverse impact on the Company's business,
operating results or financial condition.
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1994
The following table sets forth, for the periods indicated, the revenues and
operating income of each of the Company's four operating units, as well as
certain other financial data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1994 1995
------------------- -------------------
% OF TOTAL % OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES
------ ---------- ------ ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revenues:
Fuel sales and services..................................... $25.1 70.6% $41.1 79.3%
Cargo operations............................................ 2.1 5.8 2.9 5.6
Government contract services................................ 4.2 11.8 3.6 6.8
FBOs........................................................ 4.2 11.8 4.3 8.3
------ ----- ------ -----
Total revenues............................................ $35.6 100.0% $51.9 100.0%
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
<TABLE>
<CAPTION>
% OF UNIT % OF UNIT
AMOUNT REVENUES AMOUNT REVENUES
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Operating income:
Fuel sales and services..................................... $1.4 5.5% $2.0 4.7%
Cargo operations............................................ 0.5 25.9 0.9 32.1
Government contract services................................ 1.0 24.3 0.9 24.7
FBOs........................................................ 0.9 21.6 0.8 19.5
------ --- ------ ---
Total operating income.................................... $3.8 10.8% $4.6 8.9%
------ --- ------ ---
------ --- ------ ---
</TABLE>
<TABLE>
<CAPTION>
% OF TOTAL % OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Expenses:
Selling, general and administrative......................... $ 1.2 3.3% $ 1.5 2.8%
Depreciation and amortization............................... 0.6 1.7 0.6 1.2
Interest and other.......................................... 0.3 1.0 0.4 0.9
------ ----- ------ -----
Income before income taxes.................................. 1.7 4.8 2.1 4.0
Provision for income taxes.................................. 0.7 2.0 0.9 1.6
------ ----- ------ -----
Net income................................................ $ 1.0 2.8% $ 1.2 2.4%
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
17
<PAGE>
Revenues in the three months ended September 30, 1995 increased 45.9% to
$51.9 million from $35.6 million in the same period of the prior year. Operating
income in the three months ended September 30, 1995 increased 19.4% to $4.6
million from $3.8 million in the same period of the prior year.
Revenues from fuel sales and services include all revenues from Mercury's
contract fueling business, as well as revenues from a number of other commercial
activities which are headquartered at LAX as part of Mercury's 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 industrial and commercial customers, the provision of air frame
and power plant mechanics to commercial airlines and the provision of cargo
warehouse manpower to a commercial airline. Revenues from the sale of fuel by
Mercury's FBOs are included in the amounts for FBOs, and not in fuel sales and
services.
Revenues from fuel sales and services represented 79.3% of total revenues in
the three months ended September 30, 1995 compared to 70.6% of total revenues in
the same period of the prior year. Revenues from fuel sales and services in the
three months ended September 30, 1995 increased 64.0% to $41.1 million from
$25.1 million in the same period of the prior year. 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
subsequent to September 30, 1994. Average fuel prices were marginally higher in
the three months ended September 30, 1995 compared to the same period of the
prior year. Operating income from fuel sales and services in the three months
ended September 30, 1995 increased 40.5% to $2.0 million from $1.4 million in
the same period of the prior year. The increase was attributable primarily to an
increase in fuel sales, and to a lesser extent, a slight improvement in per
gallon margins. Due to sales to the new accounts subsequent to September 30,
1994 which were included in the results of the second fiscal quarter of 1995,
the comparative rate of growth in fuel sales and services revenues and operating
income in the second fiscal quarter of 1996 is expected to be lower than that
experienced in the three months ended September 30, 1995.
Revenues from cargo operations in the three months ended September 30, 1995
increased 39.7% to $2.9 million from $2.1 million in the same period of the
prior year. This increase was primarily due to a general increase in the volume
of business from existing accounts. Operating income from cargo operations in
the three months ended September 30, 1995 increased 72.7% to $931,000 from
$539,000 in the same period of the prior year.
Revenues from government contract services in the three months ended
September 30, 1995 decreased 15.8% to $3.6 million from $4.2 million in the same
period of the prior year. The decrease was primarily due to five contract
terminations during fiscal 1995, which terminations were only partially offset
by a new contract received in November 1994. Operating income from government
contract services in the three months ended September 30, 1995 decreased 14.5%
to $873,000 from $1.0 million in the same period of the prior year due to lower
revenues. Subsequent to September 30, 1995, four government contracts have been
terminated or are scheduled for termination in fiscal 1996, and one government
contract is scheduled for termination in fiscal 1997.
Revenues from FBOs in the three months ended September 30, 1995 increased
2.9% to $4.3 million from $4.2 million in the same period of the prior year in
part due to an increase in fuel sales and to higher service revenues. Operating
income in the three months ended September 30, 1995 decreased 6.8% to $841,000
from $902,000 in the same period of the prior year. The decrease was primarily
attributable to lower per gallon margins and higher operating expenses.
Selling, general and administrative expenses in the three months ended
September 30, 1995 increased 23.8% to $1.5 million from $1.2 million in the same
period of the prior year. The increase was primarily due to higher compensation
expense and, to a lesser extent, higher professional fees and facility expenses.
18
<PAGE>
Depreciation and amortization expense in the three months ended September
30, 1995 increased 2.8% to $623,000 from $606,000 in the same period of the
prior year.
Interest expense in the three months ended September 30, 1995 increased
44.7% to $437,000 from $302,000 in the same period of the prior year. The
increase was due to significantly higher average borrowings under the Revolver.
Charges for minority interest were eliminated in the three months ended
September 30, 1995 as compared to $42,000 in the same period of the prior year.
The elimination was due to the acquisition of the remaining minority interest's
share of MAC in November 1994. See Note 4 of Notes to Consolidated Financial
Statements.
Income tax expense in the three months ended September 30, 1995 approximated
40.7% of pre-tax income and 41.9% in the same period of the prior year,
reflecting the expected effective annual tax rate.
FISCAL 1993, 1994, AND 1995
The following table sets forth, for the periods indicated, the revenues and
operating income for each of the Company's four operating units, as well as
certain other financial data.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1993 1994 1995
------------------- ------------------ ------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ ---------- ------ ---------- ------ ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Fuel sales and services..................................... $52.9 62.5% $ 64.4 62.5% $141.8 77.5%
Cargo operations............................................ 4.8 5.7 7.0 6.8 9.9 5.4
Government contract services................................ 12.4 14.7 16.0 15.5 15.6 8.5
FBOs........................................................ 14.4 17.1 15.7 15.2 15.7 8.6
------ ----- ------ ----- ------ -----
Total revenues............................................ $84.5 100.0% $103.1 100.0% $183.0 100.0%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
</TABLE>
<TABLE>
<CAPTION>
% OF UNIT % OF UNIT % OF UNIT
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Operating income:
Fuel sales and services..................................... $2.2 4.3% $ 3.0 4.7% $ 6.9 4.9%
Cargo operations............................................ 1.6 33.1 2.7 38.4 2.8 28.5
Government contract services................................ 3.2 25.8 4.0 25.0 4.2 26.7
FBOs........................................................ 1.9 12.8 3.0 18.9 2.7 17.1
------ --- ------ --- ------ ---
Total operating income.................................... $8.9 10.5% $12.7 12.3% $16.6 9.1%
------ --- ------ --- ------ ---
------ --- ------ --- ------ ---
</TABLE>
<TABLE>
<CAPTION>
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Expenses:
Selling, general and administrative......................... $ 3.9 4.6% $ 4.3 4.1% $ 5.4 2.9%
Depreciation and amortization............................... 1.7 2.0 2.0 2.0 2.4 1.3
Interest and other.......................................... -- -- 1.2 1.2 1.5 0.8
------ ----- ------ ----- ------ -----
Income before income taxes.................................. 3.4 4.0 5.2 5.0 7.3 4.0
Provision for income taxes.................................. 1.4 1.7 2.2 2.1 3.0 1.6
------ ----- ------ ----- ------ -----
Net income................................................ $ 2.0 2.3% $ 3.0 2.9% $ 4.3 2.4%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
Revenues in fiscal 1995 increased 77.6% to $183.0 million from $103.1
million in fiscal 1994. Operating income in fiscal 1995 increased 30.9% to $16.6
million from $12.7 million in fiscal 1994.
19
<PAGE>
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 120.1% 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 also marginally
higher in fiscal 1995 compared to fiscal 1994. Operating income from fuel sales
and services in fiscal 1995 increased 127.9% to $6.9 million from $3.0 million
in fiscal 1994. The increase was attributable primarily to an increase in fuel
sales and, to a 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. Operating income from cargo operations
in fiscal 1995 increased 5.5% to $2.8 million from $2.7 million in fiscal 1994.
The increase in operating income 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 decreased 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 have been or
are scheduled for termination during fiscal 1996. The decrease in revenues from
government contract services in fiscal 1995 compared to fiscal 1994 was
primarily due to the contract terminations during fiscal 1995, which
terminations were only partially offset by a new contract received in November
1994. Operating income from government contract services in fiscal 1995
increased 4.1% to $4.2 million from $4.0 million in fiscal 1994 due to lower
operating expenses. Operating income from government contract services in fiscal
1995 included $1.4 million from the ten contracts described above which have or
will be terminated. Mercury does not anticipate significant charge-offs
associated with the contract terminations described above.
Revenues from FBOs remained relatively constant in fiscal 1994 and 1995 at
$15.7 million, but operating income decreased 9.0% from $3.0 million in fiscal
1994 to $2.7 million in fiscal 1995. The decrease 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 in fiscal
1995 increased to $905,000 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 the 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 borrowings on the Revolver in fiscal 1995 compared
to fiscal 1994. Interest income in fiscal 1995 decreased 40.0% to $84,000 from
$140,000 in fiscal 1994 due to the declining principal balance of outstanding
notes receivable.
20
<PAGE>
Charges for minority interest in fiscal 1995 decreased 61.4% to $95,000 from
$246,000 in fiscal 1994. The decrease was due to the acquisition of the
remaining minority interest's share of MAC in November 1994. See Note 4 of Notes
to Consolidated Financial Statements.
Income tax expense for fiscal 1995 approximated 41.1% of pre-tax income and
42.1% for fiscal 1994, reflecting the expected effective annual tax rate.
FISCAL YEAR ENDED JUNE 30, 1994 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1993
Revenues in fiscal 1994 increased 21.9% to $103.1 million from $84.5 million
in fiscal 1993. Operating income in fiscal 1994 increased 42.3% to $12.7 million
from $8.9 million in fiscal 1993.
Revenues from fuel sales and services represented 62.5% of total revenues in
both fiscal 1994 and fiscal 1993. Revenues from fuel sales and services in
fiscal 1994 increased 21.8% to $64.4 million from $52.9 million in fiscal 1993.
The increase in revenues from fuel sales and services was primarily due to an
increase in the number of gallons sold. On average, fuel prices were
approximately 13% lower in fiscal 1994 than during fiscal 1993. Operating income
from fuel sales and services in fiscal 1994 increased 34.4% to $3.0 million from
$2.2 million in fiscal 1993. The increase in operating income was principally
attributable to the increase in fuel sales.
Revenues from cargo operations in fiscal 1994 increased 46.3% to $7.0
million from $4.8 million in fiscal 1993. This increase was primarily due to a
general increase in the volume of business from existing accounts and the
addition of one cargo handling account. Operating income from cargo operations
in fiscal 1994 increased 69.4% to $2.7 million from $1.6 million in fiscal 1993.
The increase in operating income was attributable to higher revenues.
Revenues from government contract services in fiscal 1994 increased 28.7% to
$16.0 million from $12.4 million in fiscal 1993 due in part to the addition of
two contracts, one in October 1992 and one in September 1993, and in part due to
increased add-ons to existing contracts. Operating income from government
contract services in fiscal 1994 increased 24.4% to $4.0 million from $3.2
million in fiscal 1993 primarily due to higher revenues.
Revenues from FBOs in fiscal 1994 increased 8.3% to $15.7 million from $14.4
million in fiscal 1993 due to an increase in fuel sales and service revenues.
Operating income from FBOs increased by 59.6% to $3.0 million in fiscal 1994
from $1.9 million in fiscal 1993. The increase was primarily attributable to
higher margins from fuel sales and, to a lesser extent, a greater volume of fuel
sold.
Selling, general and administrative expenses in fiscal 1994 increased 9.8%
to $4.3 million from $3.9 million in fiscal 1993. Excluding the provision for
bad debts, selling, general and administrative expenses in fiscal 1994 increased
13.6% to $3.9 million from $3.5 million in fiscal 1993, primarily due to higher
compensation expense. Included in selling, general and administrative expenses
in fiscal 1994 was a $324,000 provision for bad debts compared to a $414,000
provision in fiscal 1993.
Depreciation and amortization expense in fiscal 1994 increased 22.0% to $2.0
million from $1.7 million in fiscal 1993. The increase was primarily due to $5.0
million of capital expenditures in fiscal 1994 and $4.0 million of capital
expenditures in fiscal 1993.
Interest expense remained relatively constant in fiscal 1994 and fiscal 1993
at $1.1 million. Interest income in fiscal 1994 decreased 18.1% to $140,000 from
$171,000 in fiscal 1993 due to the declining principal balance of outstanding
notes receivable.
Charges for minority interest in fiscal 1994 increased 92.2% to $246,000
from $128,000 in fiscal 1993. The increase was due to significantly higher
income generated by MAC, 20% of which was owned by a minority shareholder.
Income tax expense for fiscal 1994 approximated 42.1% of pre-tax income and
42.0% for fiscal 1993, reflecting the expected effective annual tax rate.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Mercury has historically financed its operations through operating cash flow
and borrowings under the Revolver. Mercury's cash balance as of September 30,
1995 totaled $529,000.
Net cash provided by operating activities totaled $1,336,000 during the
three months ended September 30, 1995. During this period, the primary sources
of cash from operations were net income plus depreciation and amortization
totaling $1,855,000, an increase in accounts payable of $1,721,000 and an
increase in income taxes payable of $732,000. The primary uses of such cash were
an increase in accounts receivable of $2,377,000 and a decrease in accrued
expenses and other current liabilities of $1,095,000.
Net cash used in operating activities totaled $5,581,000 during fiscal 1995.
During this period, the primary sources of cash from operations were net income
plus depreciation and amortization totaling $6,716,000 and an increase in
accounts payable of $6,078,000. The primary uses of such cash were an increase
in accounts receivable of $16,105,000 and an increase in inventories of
$2,332,000.
Net cash used in investing activities totaled $1,272,000 during the three
months ended September 30, 1995. The primary uses of cash for investing
activities included additions to other assets of $640,000, which includes
goodwill from the Excel Transaction of $750,000, and additions to property,
equipment and leaseholds of $561,000.
Net cash used in investing activities totaled $2,021,000 during fiscal 1995.
The primary uses of cash for investing activities included additions to
property, equipment and leaseholds of $1,574,000 and additions to other assets
of $632,000.
Net cash used in financing activities totaled $366,000 during the three
months ended September 30, 1995. The primary source of such cash was borrowings
under the Revolver of $1,829,000. The primary uses of such cash were the
reduction in long-term debt of $1,327,000 and repurchases of Common Stock
totaling approximately $820,000.
Net cash provided by financing activities totaled $6,663,000 during fiscal
1995. The primary source of such cash was borrowings under the Revolver of
$10,118,000. The primary uses of such cash were the reduction in long-term debt
of $2,443,000 and repurchases of Common Stock, including redemption by a
subsidiary of a portion of a minority shareholder's interest, totaling
$1,925,000.
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 $4,128,000
was outstanding as of November 30, 1995. 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. The
Revolver was established in December 1989 and has been renewed and expanded
several times. The current agreement matures in October 1997, subject to renewal
by the parties. At November 30, 1995, Mercury had approximately $12,045,000 of
borrowings under the Revolver and had approximately $3,000,000 of additional
borrowing availability based on the 85% of eligible receivables test.
On September 30, 1995, the Company issued convertible debentures with a face
amount of $2,016,000 in connection with the Excel Transaction. See "Business --
Recent Developments -- Excel Cargo" and Note 16 of Notes to Consolidated
Financial Statements.
During fiscal 1995, Mercury repurchased 236,300 shares of Common Stock at a
total cost of approximately $1,474,000. During fiscal 1995, Mercury received
approximately $379,000 from the exercise of certain underwriter warrants and
stock options which resulted in the issuance of 128,532 shares of Common Stock.
During the three months ended September 30, 1995, the Company repurchased an
additional 155,420 shares of Common Stock at a cost of approximately $820,000.
Management is currently authorized by the Company's Board of Directors to
repurchase up to approximately an additional $240,000 in Common Stock.
22
<PAGE>
Historically, the Company's capital expenditure requirements have been
related to refueling and ground handling equipment for both commercial and
government contract services operations. 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 contract
services headquarters. The Company also invested nearly $700,000 to remodel and
furnish its Los Angeles headquarters building and to purchase computer
equipment. In addition, the Company spent approximately $700,000 to purchase
refueling and ground equipment for its commercial, FBO and government contract
service operations.
The Company's accounts receivable increased from $17,164,000 at June 30,
1994 to $33,269,000 at June 30, 1995, an increase of $16,105,000 with an
increase in accounts payable during the same period of only $6,078,000 to
$12,998,000 at June 30, 1995 from $6,920,000 at June 30, 1994. Accounts
receivable days outstanding for the quarter ended June 30, 1994 were 64 days
compared to 61 days for the quarter ended June 30, 1995 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 $610,000 at June 30, 1995
from $508,000 at June 30, 1994.
The Company's accounts receivable increased from $33,269,000 at June 30,
1995 to $35,992,000 at September 30, 1995, an increase of $2,723,000, with an
increase in accounts payable during the same period of $2,189,000 to $15,187,000
at September 30, 1995 from $12,998,000 at June 30, 1995. Accounts receivable
days outstanding for each of the quarters ended September 30, 1995 and June 30,
1995 were unchanged at 61 days based upon total revenue for each period.
Allowance for doubtful accounts increased to $810,000 at September 30, 1995 from
$610,000 at June 30, 1995.
Absent a major prolonged surge in oil prices or a capital intensive
acquisition, the Company believes that the proceeds from this offering, along
with operating cash flow, the Revolver and vendor credit, 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 Credit Facility.
SEASONAL NATURE OF BUSINESS
Mercury's commercial fuel sales, FBOs and aircraft support operations are
seasonal in nature. Mercury's fuel sales and services business and FBOs are
relatively stronger during the months of April through September than during the
months of October through March. Commercial air traffic and traffic at the
Company's FBOs are 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.
CURRENCY FLUCTUATIONS AND INFLATION
Mercury is only minimally subject to the risk of currency fluctuations, as
most of its invoices for payment are denominated in U.S. dollars. The effects of
inflation are experienced by Mercury through increases in the cost of labor and
aviation fuel, the latter of which can usually be offset and/or anticipated
through resale price increases.
23
<PAGE>
BUSINESS
GENERAL
Mercury provides a broad range of services to the aviation industry through
four principal operating units: fuel sales and services, cargo operations, FBOs
and government contract services. Fuel sales and services include the sale of
fuel and delivery of fuel primarily to commercial airlines and air freight
companies. Cargo operations consist of cargo handling, space brokerage
operations and general cargo sales agent services. FBOs include fuel sales,
into-plane services, ground support services and aircraft hangar facilities 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.
CURRENT BUSINESS ENVIRONMENT
According to the Air Transport Association of America (the "ATA") and the
LAX 1994 annual report, the amount of passenger traffic and air cargo shipments
in the entire United States and at LAX has increased significantly in recent
years. Domestic passenger miles on U.S. carriers have increased from 243.7
billion in 1984 to 378.8 billion in 1994, an increase of 55.4%, equivalent to
4.5% compounded annually, while international passenger miles have increased
from 61.4 billion to 140.3 billion, an increase of 128.5%, equivalent to 8.6%
compounded annually, in the same period. At LAX, where Mercury's fuel sales and
services operations are headquartered, the number of passengers increased from
33.3 million in 1984 to 48.9 million in 1994, an increase of 46.9%, equivalent
to 3.9% compounded annually, while the number of international passengers
increased from 5.1 million to 12.2 million, an increase of 139.2%, equivalent to
9.1% compounded annually, in the same period.
The market for cargo operations has also greatly expanded in recent years.
Among U.S. airlines, domestic cargo has increased from 3.6 billion ton miles in
1984 to 5.9 billion ton miles in 1994, an increase of 63.9%, equivalent to 5.1%
compounded annually, while international ton miles has increased from 3.0
billion to 7.8 billion, an increase of 160.0%, equivalent to 10.0% compounded
annually, in the same period. At LAX, where Mercury's cargo operations are
headquartered, total cargo has increased from 949,178 tons in 1984 to 1,570,417
tons in 1994, an increase of 65.5%, equivalent to 5.2% compounded annually,
while international cargo has increased from 295,277 tons to 619,237 tons, an
increase of 109.7%, equivalent to 7.7% compounded annually, in the same period.
Not only do increases in the amount of passenger and cargo traffic
positively impact Mercury's operations, but management also believes that
Mercury is well-positioned to take advantage of the airlines' increased emphasis
on cost-containment. For example, an airline can outsource with Mercury to
perform services, such as refueling, on an "as needed" basis, rather than
investing in capital-intensive refueling equipment. Moreover, in many instances,
Mercury is able to realize economies of scale and to obtain better pricing.
Mercury's presence at certain locations may allow it to present itself as a
cost-saving alternative for larger customers who do not have, and do not wish to
invest in, their own equipment or facilities at such locations.
Mercury's strategy is to take advantage of the increase in passenger and
cargo traffic while positioning itself as a cost-saving alternative for airlines
increasingly focused on profitability concerns.
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 its own
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 conducting its fuel sales business at over 100 airports primarily in
the United States, as well as throughout the world.
24
<PAGE>
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 for or prepay
fuel purchases. These supply requirements can absorb a substantial portion of an
airline's working capital.
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 basis to customers which may be less creditworthy 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 profitability of the account 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 management believes are adequate to absorb potential
credit problems inherent in the portfolio. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments" and "Risk Factors -- Credit Quality of Receivables."
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 locations. 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 fuel sales and services could be materially adversely affected by
a significant decrease in the availability, or increase in the price, of
aviation fuel. Fuel sales and services of $141.8 million in fiscal 1995 and
$64.4 million in fiscal 1994 represented approximately 77.5% and 62.5% of total
revenues in fiscal 1995 and fiscal 1994, 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
25
<PAGE>
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 "Risk Factors -- Aviation
Fuel Availability."
In addition to contract fueling, Mercury considers a number of other
commercial activities which are headquartered at 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 marketplace, 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 operations.
CARGO OPERATIONS
The Company's cargo operations are conducted through 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 two non-airline
providers of contractual cargo containerization and palletization for
international carriers and cargo shippers at LAX. MAC specializes in
consolidating smaller parcels into air cargo pallets and breaking down shipping
containers for sea-to-air and air-to-air transfers. In addition, MAC receives
cargo and loads pallets for shipping.
As an example of its cargo handling services, a large quantity of goods
manufactured in the Far East might be shipped by sea to the port of Los Angeles.
The shipment will be delivered by truck to MAC's LAX warehouse where the goods
may be temporarily stored while waiting to be broken down and redistributed to a
number of cities throughout the United States. Later, MAC's warehouse personnel
will combine that portion of the Far East shipment intended for any particular
destination, for example, Chicago, with other unrelated merchandise destined for
Chicago, onto pallets specifically sized to fit efficiently in airplane cargo
holds. This process is called palletization. MAC personnel will then deliver the
configured pallet to an air carrier who will transport it to Chicago. MAC's fee
for this service is typically based on the weight of the cargo handled.
MAC's cargo handling operations occur primarily at LAX. In May 1994, MAC
expanded its cargo handling operations by opening an off-airport warehouse in
San Francisco, California. In July 1994, MAC opened a cargo handling facility in
Miami, Florida in conjunction with the hiring of a key employee. Upon the
departure of the key employee in March 1995, the Miami facility was closed at
minimal expense.
In September 1995, Mercury acquired, as a result of the Excel Transaction,
the operating and other assets of certain providers of cargo handling service
facilities in Montreal and Toronto. This acquisition provides Mercury with an
approximately 50,000 square foot cargo handling facility in Montreal and an
approximately 12,000 square foot cargo handling facility in Toronto.
MAC is able to compete in the cargo handling business by offering quality
service from its strategically located LAX and San Francisco warehouse
facilities. At LAX, a portion of Mercury's cargo handling operations are
conducted in a facility subject to a month-to-month agreement. 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 or new locations.
SPACE BROKERAGE. MAC brokers cargo space on international flights to 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
26
<PAGE>
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. 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 resold.
MAC believes it can expand its space brokerage business by establishing
relationships with additional shipping agents, by negotiating for additional
space on airlines with which it currently ships goods, and by purchasing space
from airlines with which it does not currently ship goods. MAC believes that its
knowledge of worldwide shipping patterns can help it to achieve growth in this
area.
GENERAL CARGO 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 additional
capital investments. MAC believes that it can further develop its general cargo
sales agent business by adding sales territories from existing airline general
cargo sales agent customers and by entering into arrangements with additional
airline customers.
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; and Santa Barbara
Municipal Airport in Santa Barbara, California. 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 and, except at LAX, for
hangar 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 generally leased from the
respective airport authorities. See "-- Properties."
Mercury competes with other FBOs by offering favorable pricing and quality
service to its customers. Mercury's long-term strategy for increasing revenues
and operating income of its FBOs is to acquire additional FBOs on favorable
economic terms and to increase its business at existing FBOs. In considering
potential acquisitions, Mercury analyzes factors such as capital requirements,
the terms and conditions of the lease for the FBO facility, the condition and
nature of the physical facilities and the size and competitive conditions of the
airport. Although Mercury is in the process of evaluating several FBOs for
possible acquisition, Mercury has not entered into any binding commitments to
purchase any additional FBOs.
GOVERNMENT CONTRACT SERVICES
Mercury conducts its government contract services business through Maytag.
Headquartered in Colorado Springs, Colorado, Maytag provides services at 17 U.S.
military bases, primarily for the U.S. Navy, including 14 located in the United
States and three additional bases located in Greece and Japan. Maytag provides
services to the government pursuant to contracts for each base which run for one
to four years. Under these contracts, Maytag principally operates
government-owned fuel depots and services a variety of aircraft for the
military. Under the terms of its contracts, Maytag supplies all
27
<PAGE>
necessary personnel and equipment to provide 24-hour refueling capability. All
fuel handled in these operations is government owned. Maytag owns and operates a
fleet of refueling trucks and other support vehicles to support its government
contract services business.
The following table lists the bases at which Maytag provides services, as of
December 31, 1995, and the expiration date of each contract for each base.
Generally, these contracts provide for fueling services, unless otherwise noted.
<TABLE>
<CAPTION>
EXPIRATION DATE OF
LOCATION CONTRACT
- ------------------------ -------------------------
<S> <C>
Cherry Point, NC January 1996
Washington, DC April 1996
Willow Grove, PA August 1996
Memphis, TN September 1996
Bangor, WA September 1996 (1)
Fukuoka, Japan September 1996 (2)
Lakehurst, NJ September 1996
Souda Bay, Crete September 1996
Yokota, Japan September 1996 (3)
Brunswick, ME October 1996
Pensacola, FL August 1997
Whidbey Island, WA August 1997
Fallon, NV September 1997
Whiting Field, FL September 1997
Yuma, AZ July 1998
Point Mugu, CA April 1999
El Centro, CA September 1999
</TABLE>
- ------------
(1) Contract to provide library services.
(2) Contract to provide air terminal services.
(3) Contract to provide housing maintenance services.
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 U.S. government in whole or in part. Termination of a
contract may occur if the U.S. 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 contract 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 U.S. military. Since June 30, 1994, ten contracts held by Maytag have been
terminated or are scheduled to be terminated, five of which were terminated in
fiscal 1995, four of which were terminated or are scheduled for termination
during fiscal 1996 and one of which is scheduled for termination during fiscal
1997. Former base contracts terminated in fiscal 1996 were North Island, CA,
Peterson, CO, and Bermuda. Maytag lost a bid to renew its refueling contract at
North Island which contract expired in December 1995. In addition, the refueling
contract at Cherry Point, which will expire in January 1996, has not been
renewed due to the government's decision to perform the services with military
personnel. The contract at Peterson has been set aside for small business
effective January 1996. The Bermuda base was closed in September 1995, and the
Memphis base is scheduled to close in September 1996, both under federal base
closure and realignment legislation. The Washington D.C. base contract is
expected to be renewed for an additional four-year term, effective May 1, 1996.
Based upon the July 13, 1995 presidential approval of the Defense Base
28
<PAGE>
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 U.S. government to
close bases.
Operating income from government contract services in fiscal 1995 included
$1.4 million from the ten contracts which have been terminated or are scheduled
for termination.
Since June 30, 1994, Maytag successfully renewed four-year contracts at
Point Mugu and El Centro. Mercury also acquired new contracts at Fukuoka, Japan,
to provide air terminal services, and at Yokota, Japan, to provide housing
maintenance services, effective November 1994 and October 1995, respectively.
Mercury's strategy in the government contract services area is to capture
new refueling contracts, to retain existing refueling contracts by utilizing
cost advantages based on the availability of excess capital equipment which has
been fully amortized, and to expand the types of outsourcing services provided
to the U.S. government. Potential areas of expansion include engineering
services, base operating services and maintenance and operations services.
Mercury believes expansion beyond its core military refueling business is
feasible due to Mercury's familiarity with military base operations and
government contract requirements in general.
RECENT DEVELOPMENTS
EXCEL CARGO
On September 30, 1995, Mercury closed the acquisition of certain operating
and other assets of Excel Cargo Inc., Excel Handling Inc. and 3087-1966 (Quebec)
Inc. (the "Excel Parties"), providers of cargo handling services at airport
facilities in Toronto and Montreal (the "Excel Transaction"). The consideration
paid for the assets was $2,766,000 (U.S. dollars). In addition, Mercury assumed
certain liabilities in connection with the transaction, including notes which
totaled approximately $573,000, along with accounts payable and accrued
expenses. Total liabilities assumed totaled approximately $1,041,000. Mercury
paid the notes at the closing of the Excel Transaction.
Mercury acquired the assets through the issuance, by a wholly-owned
subsidiary, of a convertible debenture, guaranteed by Mercury. The convertible
debenture bears interest at the rate of 8.5%, is payable over eight years in
equal monthly installments of principal and interest, and is convertible into
Common Stock at a conversion price of $12.00 per share, subject to adjustment
upon certain events. In addition, the face amount of the convertible debenture
is adjustable downward in the event the pre-tax earnings generated during the
three years following the acquisition is less than a certain amount.
The transaction provides for the employment of the former President of each
of the Excel Parties for three years, at $100,000 per year, plus bonus. In
addition, the Excel Parties and their affiliates have agreed not to compete with
Mercury or any of its affiliates in the cargo handling business in Canada until
February 1, 2000. In addition to the purchase price, Mercury agreed to pay
$60,000 to a third party as a finder's fee.
LAX CARGO FACILITY
In August 1995, MAC expanded its cargo handling operations at LAX by
leasing, on a month-to-month basis, an additional 30,000 square foot hangar. See
"-- Properties."
FLORACOOL INCORPORATED OF FLORIDA
On November 20, 1995, a letter of intent was executed between Mercury and
Floracool Incorporated of Florida ("Floracool"). The letter of intent provides
for Mercury to acquire all of the outstanding common stock of Floracool for
$250,000, subject to adjustment, and to employ the former President of Floracool
under a consulting agreement for five years, at $70,000 per year. It is
anticipated that this transaction will close during the third quarter of fiscal
1996. Floracool is engaged in the air cargo business in Miami.
29
<PAGE>
CARNIVAL AIR LINES, INC.
On October 18, 1995, Mercury announced the signing of a letter of intent
under which Carnival Air Lines, Inc., a privately owned airline, would be merged
with and into the Company. On November 29, 1995, Mercury announced the
termination of the transaction due to the inability of the parties to agree upon
certain material terms and closing conditions.
MAJOR CUSTOMERS
During fiscal 1995, no customers accounted for over 10% of Mercury's total
revenues. See "Risk Factors -- Dependence on Significant Customers."
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 oil 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 one non-airline entity with
respect to air cargo handling. Each FBO has a minimum of one competitor at each
airport. Mercury has many principal competitors in the government contract
services business, including certain small disadvantaged businesses which
receive a ten percent cost advantage with respect to certain bids and set asides
of certain contracts. Substantially all of Mercury's services are subject to
competitive bidding. Mercury competes on the basis of price and quality of
service. See "Risk Factors -- Competition."
ENVIRONMENTAL MATTERS
Mercury must continuously comply with federal, state and local environmental
statutes and regulations associated, in part, 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 inventory systems for its
underground storage tanks and has placed sensors underground to 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 government 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 government agency. See "Risk Factors -- Environmental
Matters."
EMPLOYEES
As of December 31, 1995, Mercury employed 1,047 persons in the following
units: fuel sales and services, 198 persons; cargo handling, 298 persons; FBOs,
178 persons; government contract services, 329 persons; and administration, 44
persons. Mercury is in the process of negotiating collective bargaining
agreements for its military refueling operations at Brunswick, Maine and 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. See "Risk
Factors -- Dependence Upon Key Personnel" and "Risk Factors -- Employee
Relations."
30
<PAGE>
PROPERTIES
Mercury owns its executive offices, which consist of approximately 20,000
square feet, located at 5456 McConnell Avenue, Los Angeles, California. Mercury
also owns a hangar and administrative facility located at Cannon International
Airport in Reno, Nevada, which consists of approximately 33,000 square feet, an
aircraft facility located at Burbank-Glendale-Pasadena Airport in Burbank,
California, which consists of approximately 106,000 square feet, and an aircraft
facility located at Meadows Field Airport in Bakersfield, California, which
consists of approximately 118,000 square feet. Mercury leases the land on which
such buildings are situated. Mercury also leases various airport and off-airport
facilities at locations throughout the western United States, including the
following: (i) an approximately 10,000 square foot office and approximately
90,000 square feet of cargo hangar facilities at LAX, (ii) an approximately
43,000 square foot aircraft facility and an approximately 5,200 square foot
hangar facility at Burbank-Glendale Pasadena Airport in Burbank, California,
(iii) an approximately 45,000 square foot cargo hangar facility in San
Francisco, California, (iv) an approximately 50,000 square foot cargo hangar
facility in Montreal, and (v) an approximately 12,000 square foot cargo handling
facility in Toronto.
At commercial airports where Mercury operates FBOs, Mercury maintains its
own fuel storage capabilities which are principally located underground as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
CAPACITY
LOCATION (GALLONS)
- ----------------- ------------
<S> <C>
LAX 311,000
Bakersfield 105,000
Burbank 119,000
Santa Barbara 42,000
Reno 100,000
</TABLE>
Management believes that Mercury's property and equipment are adequate for
its present business needs.
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.
31
<PAGE>
MANAGEMENT
Set forth in the table below is certain information with respect to the
executive officers and directors of Mercury and certain of its subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- -------------------------------- --- ------------------------------------------
<S> <C> <C>
Seymour Kahn 68 Chairman of the Board and Chief Executive
Officer of Mercury
Joseph A. Czyzyk 48 President, Chief Operating Officer and
Director of Mercury and President of
Mercury Air Cargo, Inc. ("MAC")
Randolph E. Ajer 42 Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of
Mercury
William L. Silva 45 Executive Vice President of Mercury and
Executive Vice President of Maytag
Aircraft Corporation ("Maytag")
Kevin J. Walsh 45 Executive Vice President and Senior Vice
President of Maytag
Philip J. Fagan, Jr., M.D.(1) 51 Director
Frederick H. Kopko, Jr.(1) 40 Director
William G. Langton 49 Director
Robert L. List(1) 59 Director
</TABLE>
- ------------
(1) Member of Audit and Compensation Committees
Except for Messrs. Kahn and Czyzyk, the executive officers of Mercury, who
are appointed by the Board of Directors, hold office for one-year terms or until
their respective successors have been duly elected and have qualified. See "--
Employment Agreements." The executive officers of Mercury's subsidiaries, who
are appointed by such subsidiaries' Boards of Directors, also hold office for
one-year terms or until their respective successors have been duly elected and
have qualified.
SEYMOUR KAHN served as President of Mercury from 1969 until 1989 and has
served as Chief Executive Officer and Chairman of the Board of Directors of
Mercury since 1974.
JOSEPH A. CZYZYK has been President, Chief Operating Officer and a director
of Mercury since November 1994 and President of MAC since August 1988. Mr.
Czyzyk also served as President of Mercury Service, a division of Mercury which
sells aviation fuel and provides refueling services for commercial aircraft,
from August 1985 until August 1988. Mr. Czyzyk served as an Executive Vice
President of Mercury in November 1990. Pursuant to his employment agreement, the
Board of Directors will continue to nominate Mr. Czyzyk as a candidate for
election to the Board of Directors while Mr. Czyzyk remains employed by Mercury.
See "-- Employment Agreements."
RANDOLPH E. AJER has been Chief Financial Officer of Mercury since 1987 and
Secretary and Treasurer since May 1985. Mr. Ajer served as a director of Mercury
from September 1989 until December 1990. He was appointed an Executive Vice
President of Mercury in November 1990.
WILLIAM L. SILVA served as Director of Operations of Maytag from October
1982 to October 1987 and was appointed Vice President of Maytag in November
1987. Since June 1992, Mr. Silva has been an Executive Vice President of Maytag.
In August 1993, Mr. Silva became an Executive Vice President of Mercury.
KEVIN J. WALSH served as Vice President of Maytag from 1987 to June 1992
when he was appointed Senior Vice President of Maytag. Since January 1992, Mr.
Walsh has been managing the Mercury Service division. Mr. Walsh was appointed an
Executive Vice President of Mercury in November 1990. Mr. Walsh has been
employed by Mercury in various capacities since 1972.
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<PAGE>
PHILIP J. FAGAN, JR., M.D. has been a director of Mercury since September
1989. Dr. Fagan has been the Chief Executive Officer and President of the
Emergency Department Physicians Medical Group, Inc. since its inception in 1978.
Dr. Fagan has also been President of Fagan Emergency Room Medical Group since
its inception in 1989. Both companies are currently located in Burbank,
California.
FREDERICK H. KOPKO, JR. has been a director of Mercury since October 1992.
Mr. Kopko has been a partner in the law firm of McBreen, McBreen & Kopko since
January 1990. Previously, Mr. Kopko served as managing partner of the law firm
of D'Ancona & Pflaum, a firm which he was associated with from August 1983
through December 1989. Mr. Kopko presently serves on the board of directors of
Butler International, Inc.
WILLIAM G. LANGTON has been a director of Mercury since August 1993. Mr.
Langton has been President and Chief Operating Officer of Southern Air
Transport, a provider of a wide range of commercial and supplemental aviation
services, for over ten years.
ROBERT L. LIST has been a director of Mercury since 1990. Mr. List is
presently an independent financial consultant. From December 1989 to August
1992, Mr. List was President of Yellowstone Environmental Services, Inc. of
Phoenix, Arizona, an environmental/engineering consulting firm. Prior to that,
Mr. List owned and operated Cimarron Research, an investment consulting firm,
based in Durango, Colorado and Dallas, Texas since 1977. Mr. List serves on the
board of directors of Pancho's Mexican Buffet, Inc.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mercury's Compensation Committee consists of Messrs. List and Kopko and Dr.
Fagan. During fiscal 1995 and the six months ended December 31, 1995, Mercury
paid to the law firm of McBreen, McBreen & Kopko, of which Mr. Kopko is a
partner, $5,534 and $10,351, respectively, for legal services.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or accrued by
Mercury for the Chairman of the Board and Chief Executive Officer and for each
of the four other most highly compensated officers (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ----------- -------------
------------------------ SECURITIES LONG-TERM ALL OTHER
FISCAL UNDERLYING COMPENSATION COMPENSATION(1)
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) PAYOUTS ($) ($)
- ----------------------------------- ----------- ----------- ----------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Seymour Kahn 1995 300,000 408,000 -0- -0- 14,362(2)
Chairman of the Board and 1994 230,000 301,500 -0- -0- 2,536
Chief Executive Officer 1993 230,000 196,433 100,000 -0- 2,436
Joseph A. Czyzyk 1995 271,000 136,000 -0- -0- 56,030(3)
President and 1994 271,000 -0- -0- -0- 54,388
Chief Operating Officer 1993 271,000 -0- 25,000 -0- 288
Randolph E. Ajer 1995 130,000 258,000 -0- -0- 55,382(4)
Executive Vice President and 1994 126,500 198,500 -0- -0- 54,388
Chief Financial Officer 1993 126,500 71,092 -0- -0- 288
Kevin J. Walsh 1995 156,000 40,000 -0- -0- 55,463(5)
Executive Vice 1994 144,375 75,000 -0- -0- 54,188
President 1993 137,500 10,000 -0- -0- 188
William L. Silva 1995 102,917 37,000 -0- -0- 410(6)
Executive Vice 1994 100,000 50,000 -0- -0- 200
President 1993 80,000 33,738 -0- -0- 100
</TABLE>
- ------------
(1) Amounts reflected include Mercury's contributions to a 401(k) Plan
maintained for the benefit of all employees, premiums paid for life
insurance policies to the extent such policies are for the benefit of an
executive officer's designated beneficiary and loan forgiveness with respect
to Mercury financed purchases of Common Stock. See "Certain Transactions."
33
<PAGE>
(2) Consists of 401(k) contributions and life insurance premiums in the amounts
of $200 and $14,162, respectively.
(3) Consists of 401(k) contributions, life insurance premiums and loan
forgiveness in the amounts of $200, $1,830 and $54,000, respectively.
(4) Consists of 401(k) contributions, life insurance premiums and loan
forgiveness in the amounts of $200, $1,182 and $54,000, respectively.
(5) Consists of life insurance premiums and loan forgiveness in the amounts of
$1,463 and $54,000, respectively.
(6) Consists of 401(k) contributions and life insurance premiums in the amounts
of $200 and $210, respectively.
EMPLOYMENT AGREEMENTS
Mr. Kahn has an employment agreement with Mercury dated as of December 10,
1993 pursuant to which Mercury will employ him as Chairman of the Board and
Chief Executive Officer for a three-year period with automatic one-year
extensions at the end of each year unless either party terminates the agreement
in writing prior to such renewal. Under the employment agreement, Mr. Kahn's
annual compensation was $230,000 from December 1, 1993 to December 1, 1994.
Since December 1, 1994, Mr. Kahn has been paid compensation at the rate of
$350,000 per year.
If Mr. Kahn is disabled for more than six weeks while employed, his
compensation will be reduced by 50%. If Mr. Kahn is disabled for more than
twelve months, Mercury may terminate his employment with a severance payment
equal to his salary for the lesser of one year or the remaining term of the
employment agreement. If Mr. Kahn's employment is terminated without cause,
Mercury will be obligated to pay him all amounts which would otherwise be paid
to him over the remaining term of the employment agreement. Mr. Kahn may
voluntarily terminate the employment agreement and receive all amounts which
would otherwise be paid to him over the remaining term of the employment
agreement if any of the following events occurs without Mr. Kahn's written
consent, including: (i) any person gains sufficient control over the voting
stock of Mercury so as to control Mercury or the election of a majority of the
Board of Directors, (ii) Mercury is acquired by another entity, either through
the purchase of Mercury's assets or stock or a combination thereof, or (iii)
Mercury is merged or consolidated with another entity or reorganized, in a
manner in which Mercury's present status, business or methods are changed. If
Mr. Kahn dies during the term of the employment agreement, Mercury will pay to
Mr. Kahn's estate the compensation which would otherwise be paid to Mr. Kahn
through the end of the month in which he dies. In addition, Mercury will pay Mr.
Kahn's estate or other designated beneficiary $2,250,000 upon his death.
Relating to this obligation, Mercury has obtained a life insurance policy on Mr.
Kahn's life in the amount of $2,025,000 which designates Mr. Kahn's wife as
beneficiary.
Mr. Kahn has agreed not to compete with Mercury within a radius of 300 miles
from Mercury's present place of business for five years after the termination of
the employment agreement. Mercury must make the severance payments required by
the employment agreement for this non-competition agreement to be effective.
A cash bonus plan for Mr. Kahn was approved by the Board of Directors in
November 1990 (commencing fiscal 1991). The Compensation Committee continued the
bonus plan during fiscal 1995 and will continue the bonus plan during fiscal
1996. The two-part bonus plan is based on earnings before interest and taxes
(EBIT) of the Company for the year in which the bonus is calculated. Under Part
I of the Bonus Plan, if the bonus year's EBIT meets or exceeds the trailing
three-year EBIT average, Mr. Kahn is entitled to a bonus equal to 25% of his
salary. For years where EBIT falls below the trailing three-year average, any
bonus paid to Mr. Kahn is solely at the discretion of the Compensation
Committee. Under Part II of the Bonus Plan, an additional bonus is paid to Mr.
Kahn in an amount equal to 6.67% of any increase in the bonus year's EBIT level
over the trailing three-year average EBIT level.
34
<PAGE>
Mr. Czyzyk has an employment agreement with Mercury, dated as of November
15, 1994, pursuant to which Mercury will employ him as its President and Chief
Operating Officer and as the president of MAC for a term ending on November 15,
1997, subject to automatic one-year extensions each successive November 15,
unless either party gives 30 days' notice of non-renewal. The agreement provides
that Mr. Czyzyk's tenure as President and Chief Operating Officer shall serve as
a period of training and evaluation for appointment as Chief Executive Officer
of Mercury, when and as such position may be vacated by Mr. Kahn, subject to the
sole discretion and judgment of the Board of Directors. The agreement further
provides for the continued nomination of Mr. Czyzyk to the Board of Directors of
Mercury, so long as Mr. Czyzyk continues to serve as President and Chief
Operating Officer.
Mr. Czyzyk will receive an annual salary of $270,000 plus a bonus at the end
of each fiscal year based on the following: (i) for fiscal 1996, in the event
that Mercury's consolidated operating income less sales, general and
administrative expenses and depreciation (EBIT) for that year exceeds the
average EBIT of fiscal 1994 and fiscal 1995, then Mr. Czyzyk shall be paid a
bonus of 25% of his base compensation under Part I of the Bonus Plan and 2 1/2%
of the amount by which fiscal 1996 EBIT exceeds the average EBIT of fiscal 1994
and fiscal 1995 under Part II of the Bonus Plan; and (ii) for fiscal years
subsequent to fiscal 1996, Part I and Part II of the Bonus Plan remain in effect
except that the threshold EBIT is based on a trailing average of EBIT for the
prior three fiscal years.
In the event Mr. Czyzyk's employment is terminated for cause, Mr. Czyzyk
will not be entitled to receive or be paid a bonus. In the event Mr. Czyzyk's
employment is terminated without cause, Mercury will be obligated to pay Mr.
Czyzyk the lesser of one year's base compensation or the base compensation that
would otherwise be paid to him over the remaining term of the agreement, and a
bonus for the fiscal year of termination in an amount which would otherwise be
paid to him prorated over the days Mr. Czyzyk was employed by Mercury during the
fiscal year of termination. "Cause" is defined in the employment agreement as
misappropriation of corporate funds, negligence, Mr. Czyzyk's voluntary
abandonment of his job (other than following a change in control, as defined in
his employment agreement) or a material breach of the employment agreement. In
the event of Mr. Czyzyk's death, Mr. Czyzyk's estate or beneficiary will be
entitled to receive the death benefits of a $1,000,000 insurance policy, but all
other obligations under his employment agreement will terminate and Mercury's
only obligation will be to pay Mr. Czyzyk's estate all accrued salary through
the end of the month of his death. In the event of Mr. Czyzyk's disability (as
determined by the Chief Executive Officer of Mercury), Mr. Czyzyk's base salary
will be reduced by 50% during the period of disability. If Mr. Czyzyk is
disabled for a period of more than 12 months (as determined by the Chief
Executive Officer of Mercury), Mercury will be obligated to pay Mr. Czyzyk the
same amount that would have been paid to Mr. Czyzyk if his employment was
terminated without cause, except that all amounts paid to Mr. Czyzyk under any
long-term disability insurance policy maintained by Mercury will be credited as
if paid by Mercury to Mr. Czyzyk and after giving effect to any federal or state
income tax savings resulting from the payment under a disability policy (as
opposed to taxable salary). The employment agreement further provides that Mr.
Czyzyk may terminate his employment following such a change in control, in which
event Mr. Czyzyk will be entitled to be paid the lesser of one year's base
compensation or the entire balance of his base compensation remaining to be paid
to Mr. Czyzyk over the remaining term of the agreement.
Mr. Czyzyk also received a signing bonus in the amount of $100,000 upon the
execution of the employment agreement. The agreement includes a five-year
post-employment, non-competition covenant.
COMPENSATION OF DIRECTORS
Commencing July 1994, Mercury paid each non-employee director $1,000 per
meeting with an annual minimum of $7,500 in fees paid in advance on the annual
meeting date. Directors are also reimbursed for their travel, meals, lodging and
out-of-pocket expenses incurred in connection with
35
<PAGE>
attending Board meetings. In addition, during fiscal 1995 and continuing through
fiscal 1996, the law firm of McBreen, McBreen & Kopko has been providing legal
services to Mercury at its standard billing rates.
Under the 1990 Directors Stock Option Plan (the "1990 Directors Plan"), each
individual who was a non-employee director on March 9, 1990 received an option
to purchase 11,000 shares of Common Stock. As of the date of each annual meeting
of shareholders ("Annual Meeting Date") occurring after March 9, 1990, each
individual who was a non-employee director at any time since the end of the next
preceding Annual Meeting Date was, and will continue to be, awarded options to
purchase 11,000 shares of Common Stock.
The purchase price of a share of Common Stock under an option is equal to
the greater of 100% of the fair market value of a share of Common Stock as of
the date the option is granted or the par value of a share of such Common Stock
on such date. The options vest one year after the date of grant except following
a "change in control", as defined, in which event the options vest immediately.
Each option expires ten years after the date of grant.
Under the 1990 Directors Plan, each of the current directors who are not
employees of Mercury were granted non-qualified stock options at exercise prices
equal to the fair market value of the Common Stock on the date of grants, as
follows: Philip Fagan, Jr., M.D., options to purchase 66,000 shares, all
currently outstanding, exercisable at prices between $1.70 and $6.36 per share;
Frederick H. Kopko, Jr., options to purchase 33,000 shares, all currently
outstanding, exercisable at prices between $1.93 and $6.36 per share; Robert L.
List, options to purchase 66,000 shares, 55,000 exercised, 11,000 currently
outstanding, exercisable at $6.36 per share; and William Langton, options to
purchase 22,000 shares, all currently outstanding, exercisable at $3.35 to $6.36
per share. Mr. Langton was also granted a non-qualified stock option outside the
1990 Directors Plan on August 9, 1993, exercisable to purchase 11,000 shares at
$2.84 per share, the fair market value on the date of grant. This option was
exercised in March 1995.
STOCK OPTIONS
The following table sets forth information regarding option exercises during
fiscal 1995, as well as the number and total of in-the-money options at June 30,
1995, for each of the Named Executive Officers. No Named Executive Officers were
granted options during fiscal 1995.
36
<PAGE>
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES (1)
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL AT FISCAL
YEAR-END (#) YEAR-END ($)(4)
SHARES ------------------- --------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($)(2)(3) UNEXERCISABLE UNEXERCISABLE
- -------------------------------------- ------------- ---------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Seymour Kahn.......................... -0- -0- 110,000/-0- 688,050/-0-
Joseph A. Czyzyk...................... 4,620 31,500 22,800/-0- 146,946/-0-
Randolph E. Ajer...................... 5,500 30,875 22,000/-0- 139,150/-0-
Kevin J. Walsh........................ 5,500 32,500 22,000/-0- 139,150/-0-
William L. Silva...................... -0- -0- 27,500/-0- 153,807/-0-
</TABLE>
- ------------
(1) As adjusted for the ten percent stock dividend, effective June 16, 1995.
(2) In accordance with the rules of the Commission, the amounts set forth in the
"Value Realized" column of this table are calculated by subtracting the
exercise price from the fair market value of the underlying Common Stock on
the exercise date. The amounts reported thus reflect the increase in the
price of Mercury's common stock from the option grant date to the option
exercise date, but do not necessarily reflect actual proceeds received upon
option exercises.
(3) For purposes of this table, fair market value is deemed to be the average of
the high and low Common Stock price reported by the American Stock Exchange
Composite Transactions on the date indicated.
(4) Based upon a fair market value of $8.375 per share at June 30, 1995.
CERTAIN TRANSACTIONS
In November 1994, Mercury acquired from Mr. Czyzyk the outstanding minority
interest in Mercury's 80% owned subsidiary, MAC. The transaction included a
redemption of 5% of the capital stock of MAC held by Mr. Czyzyk in exchange for
$450,000 in cash and acquisition of the remaining 15% of the capital stock of
MAC held by Mr. Czyzyk through the issuance of 225,000 shares of Common Stock
valued at $1,406,000 ($6.25 per share, the closing price of the Common Stock on
the AMEX on the date the Board approved the transaction) for a total
consideration of $1,856,000. In addition, concurrent with the acquisition,
Mercury entered into an employment agreement with Mr. Czyzyk. See "Management --
Employment Agreements."
Pursuant to a Stock Purchase Agreement (the "First Stock Purchase
Agreement") dated December 10, 1990 between Mercury, SK Acquisition, Inc., a
Delaware corporation wholly-owned by Mr. Kahn ("SKAI"), Randolph E. Ajer, Kevin
J. Walsh, Grant G. Murray and Joseph A. Czyzyk (the "First Purchasers"), all
full-time employees and Executive Vice Presidents of Mercury, SKAI sold 110,000
shares of Common Stock to each of Messrs. Ajer, Walsh, Murray and Czyzyk, at the
price of $2.73 per share, with each purchaser paying a purchase price of
$300,000, or an aggregate of $1,200,000. On December 10, 1990, the closing price
of the Common Stock on the AMEX was $2.73 per share. Pursuant to a Stock
Purchase Agreement (the "Second Stock Purchase Agreement", collectively, the
First and Second Stock Purchase Agreements are hereinafter referred to as the
"Stock Purchase Agreement") dated August 9, 1993 between Mercury, SKAI and
William L. Silva, a full-time employee and Executive Vice President of Mercury,
SKAI sold 110,000 shares of Common Stock to Mr. Silva at a price of $2.73 per
share, with Mr. Silva paying a total purchase price of $300,000. On August 9,
1993, the closing price of the Common Stock on the AMEX was $2.84 per share.
Each of the First Purchasers and Mr. Silva (collectively, the "Purchasers") paid
$30,000 cash at the closing of his purchase, or an aggregate of $150,000, and
agreed to pay the remaining $270,000, or an aggregate of $1,350,000, over a
period of five years from the date of purchase, together with interest at the
rate of
37
<PAGE>
10% per annum on the outstanding balance. The purchase price owed to SKAI is
secured by a first security interest in the Common Stock sold to each Purchaser
and each such loan is non-recourse. Each Purchaser has given SKAI an irrevocable
proxy to vote the Common Stock purchased by him for all purposes until the
purchase price for his Common Stock has been paid in full.
As part of the Stock Purchase Agreement, Mercury has agreed to loan the
principal balance of the unpaid purchase price to each of the Purchasers during
the five-year payment period as each payment is required to be made on March 1,
June 1, September 1 and December 1 of each year until the principal amount owed
by each Purchaser is paid in full, which will occur by the end of 1995 with
respect to the First Purchasers and the end of 1998 with respect to Mr. Silva.
Such loans are non-recourse, bear no interest, and are secured by a second
security interest in the purchased stock. The Purchasers have each agreed to pay
their own interest on the balance of the purchase price due SKAI from personal
funds. Commencing March 1, 1994, and annually thereafter, for each of the First
Purchasers who remain employed by Mercury, one-fifth of his loan will be
forgiven. For each First Purchaser who remains employed by Mercury through March
1, 1998, his loan will be forgiven in full, his shares of Common Stock will be
owned without any further lien in favor of Mercury or SKAI and the proxy granted
to SKAI will expire by its terms. Commencing January 1, 1997, and annually
thereafter, one-fifth of Mr. Silva's loan will be forgiven if he remains
employed by Mercury. If Mr. Silva remains employed by Mercury through January 1,
2001, his loans will be forgiven in full, his shares of Common Stock will be
owned without any further lien in favor of Mercury or SKAI and the proxy granted
to SKAI will expire by its terms. See Note 6 of Notes to Consolidated Financial
Statements.
During fiscal 1995, Mercury loaned an aggregate of $337,500 to the First
Purchasers and Mr. Silva which was used to make the June 1, 1994 through June 1,
1995 payments to SKAI. Amounts outstanding on the loans made by the Company as
of June 30, 1995 and September 30, 1995, respectively, were as follows: Mr. Ajer
$121,500 and $135,000, Mr. Walsh $121,500 and $135,000, Mr. Murray $121,500 and
$0, Mr. Czyzyk $121,500 and $135,000 and Mr. Silva $94,500 and $108,000. The
maximum amounts outstanding on the loans made by the Company during fiscal 1995
were as follows: Mr. Ajer $162,000, Mr. Walsh $162,000, Mr. Murray $162,000, Mr.
Czyzyk $162,000 and Mr. Silva $94,500.
The First and Second Stock Purchase Agreements were designed to provide the
officers of the Company who purchased shares in such transactions with a strong
incentive to continue their association with the Company, to enhance the value
of the Company's equity securities in the long-term, to ensure an orderly
transition in control of the Company, to avoid excessive dilution and to
maintain internal comparability in officer compensation. The Company financed
the purchases to facilitate these transactions.
During March 1994 and March 1995, Mercury loaned Mr. Ajer $19,274, Mr. Walsh
$19,143 and Mr. Murray $22,491, which was used to pay withholding taxes
associated with the loan forgiveness under the First Stock Purchase Agreement.
Such loans bore or bear no interest and were or are being repaid through ratable
payroll deductions over a one-year period.
In September 1994, Mercury loaned Mr. Czyzyk $130,000, which Mr. Czyzyk
repaid in November 1994.
On August 1, 1995, Grant G. Murray and Mercury entered into an agreement
("Agreement") in connection with the termination of Mr. Murray's employment. The
Agreement provides for the payment to Mr. Murray by Mercury of the sum of
$275,000, payable $75,000 upon execution of the Agreement followed by quarterly
payments of $50,000 on November 1, 1995, February 1, 1996, May 1, 1996 and
August 1, 1996.
In consideration for the payment of $275,000, Mr. Murray transferred to
Mercury 110,000 shares acquired by him pursuant to the First Stock Purchase
Agreement and returned all stock options held by him. The Agreement also
provides (i) for the forgiveness of all debts or loans, aggregating $178,000,
owed by Mr. Murray to Mercury; (ii) for Mr. Murray to procure new business for
Mercury and to receive as compensation a percentage of net margins realized on
such new business; (iii) for Mr. Murray not to compete with Mercury or its
affiliates until August 1, 1996; (iv) for the continuation of medical insurance
for Mr. Murray through December 1995; (v) for a release by Mr. Murray of all
claims against Mercury, including his claim with respect to an accrued bonus of
$60,000; and (vi) for a
38
<PAGE>
release by Mercury of all claims against Mr. Murray. In consideration for SKAI's
facilitating the stock repurchase transaction by waiving its right to restrict
the transfer of Mr. Murray's shares, and as payment in full of all interest and
remaining amounts due to SKAI in connection with the purchase transaction,
Mercury agreed to pay SKAI the amount of $100,000 in the form of options to
purchase 30,000 shares of the Common Stock. Such options are to be granted at
$3.33 below the closing price of the Common Stock on the AMEX as of August 24,
1995 (the date the Board approved the transaction), and will, subject to
continued employment, vest and become exercisable six months from the date of
grant. Such options will be granted subject to: (1) an increase in the
authorized shares of Mercury at the next annual meeting of shareholders; and (2)
acceptance of the shares underlying such options for listing on the AMEX. If the
conditions for the issuance of the options are not met, Mercury will reconsider
the form of payment of the $100,000 to SKAI. Based on the consideration paid by
Mercury to Mr. Murray, the effective per share price paid by Mercury for the
110,000 shares acquired from Mr. Murray was approximately $4.12. The per share
price paid by Mercury will be increased by an additional $.91 per share when the
$100,000 amount becomes payable to SKAI, in options or otherwise.
During fiscal 1995, Mercury sold approximately $211,000 in fuel to
Millionaire of Long Beach, a company owned by Mr. Murray. The sales prices for
such fuel were based on cost plus a normal competitive mark-up, but the level of
credit extended may have been greater than what would have been available from
an unaffiliated party. Mercury has been paid in full for the fuel purchases.
Mercury has Indemnity Agreements with each of its directors and executive
officers which require Mercury, among other things, to indemnify them against
certain liabilities that may arise by reason of their status or service as
directors, officers, employees or agents of Mercury, and, under certain
circumstances, to advance their expenses incurred as a result of proceedings
brought against them. In order to be entitled to indemnification, the executive
officer or director must have acted in a manner reasonably believed to be in, or
not opposed to, the best interests of Mercury and, with respect to a criminal
matter, in a manner which he had no reason to believe was illegal.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of December 31, 1995 by (i) each person (or group
of affiliated persons) known to Mercury to be the beneficial owner of more than
five percent of Common Stock, (ii) each director of Mercury, (iii) each Named
Executive Officer and (iv) all executive officers and directors of Mercury as a
group. As of December 31, 1995, there were 5,380,087 shares of Common Stock
outstanding. Unless otherwise indicated below, to the knowledge of Mercury, all
persons listed below have sole voting and investment power with respect to their
shares of Common Stock, except to the extent such power is shared by spouses
under applicable law.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME AND ADDRESS OWNED PERCENT
- --------------------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
Seymour Kahn (1)........................................................... 1,398,140(2) 25.5%
Joseph A. Czyzyk (1)....................................................... 396,450(3) 7.3%
Randolph E. Ajer........................................................... 143,000(4) 2.6%
Kevin J. Walsh............................................................. 132,000(5) 2.4%
William L. Silva........................................................... 137,500(6) 2.5%
Philip J. Fagan, Jr., M.D.................................................. 99,000(7) 1.8%
Frederick H. Kopko, Jr..................................................... 33,000(8) *
William G. Langton......................................................... 22,000(9) *
Robert L. List............................................................. 11,000(10) *
Kennedy Capital Management, Inc.
425 N. New Ballas Road, #181
St. Louis, Missouri 63141-6821........................................... 395,000(11) 7.3%
All directors and executive officers as a group (9 persons)................ 1,932,090(12) 33.8%
</TABLE>
- ------------
* Less than one percent.
(1)The address for each of Messrs. Kahn and Czyzyk is 5456 McConnell Avenue,
Suite 100, Los Angeles, California 90066.
39
<PAGE>
(2)Includes 829,660 shares held of record by SKAI. Also includes 440,000 shares
owned by four executive officers of Mercury which SKAI holds a proxy to vote
and which are subject to a security interest held by SKAI. See "Certain
Transactions." Includes 110,000 shares issuable upon the exercise of options
exercisable within 60 days from December 31, 1995. Also includes 8,800
shares held of record by Mr. Kahn's wife, as to which Mr. Kahn disclaims
beneficial ownership.
(3)Includes 22,800 shares issuable upon exercise of options exercisable within
60 days from December 31, 1995. Includes 110,000 shares beneficially owned
by Mr. Czyzyk for which Mr. Czyzyk has granted a proxy to SKAI and which are
subject to pledges. See "Certain Transactions." Includes 3,850 shares held
by Mr. Czyzyk, as custodian for his children, and 1,100 shares held by Mr.
Czyzyk's spouse's IRA account with respect to which Mr. Czyzyk disclaims
beneficial ownership.
(4)Includes 22,000 shares issuable upon exercise of options exercisable within
60 days from December 31, 1995. Includes 110,000 shares beneficially owned
by Mr. Ajer for which Mr. Ajer has granted a proxy to SKAI and which are
subject to pledges. See "Certain Transactions."
(5)Includes 22,000 shares issuable upon exercise of options exercisable within
60 days from December 31, 1995. Includes 110,000 shares beneficially owned
by Mr. Walsh for which Mr. Walsh has granted a proxy to SKAI and which are
subjected to pledges. See "Certain Transactions."
(6)Includes 27,500 shares issuable upon exercise of options exercisable within
60 days from December 31, 1995. Includes 110,000 shares beneficially owned
by Mr. Silva which Mr. Silva has granted a proxy to SKAI and which are
subject to pledges. See "Certain Transactions."
(7) Includes 66,000 shares issuable upon exercise of options exercisable within
60 days from December 31, 1995.
(8) Consists of 33,000 shares issuable upon exercise of options exercisable
within 60 days from December 31, 1995.
(9) Consists of 22,000 shares issuable upon exercise of options exercisable
within 60 days from December 31, 1995.
(10) Consists of 11,000 shares issuable upon exercise of options exercisable
within 60 days from December 31, 1995.
(11) Information is as disclosed in a Schedule 13G dated February 15, 1995 filed
by Gerald T. Kennedy for Kennedy Capital Management pursuant to the rules
and regulations of the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
(12) Includes 336,300 shares issuable upon exercise of options exercisable
within 60 days from December 31, 1995.
40
<PAGE>
DESCRIPTION OF DEBENTURES
THE DEBENTURES ARE BEING ISSUED PURSUANT TO AN INDENTURE (THE "INDENTURE")
TO BE DATED AS OF JANUARY , 1996 BETWEEN MERCURY AND IBJ SCHRODER BANK & TRUST
COMPANY, AS TRUSTEE (THE "TRUSTEE"). THE FOLLOWING IS A SUMMARY OF THE MATERIAL
TERMS AND PROVISIONS OF THE DEBENTURES. THE TERMS OF THE DEBENTURES INCLUDE
THOSE SET FORTH IN THE INDENTURE AND THOSE MADE PART OF THE INDENTURE BY
REFERENCE TO THE TRUST INDENTURE ACT OF 1939, AS AMENDED (THE "TRUST INDENTURE
ACT"). THE DEBENTURES ARE SUBJECT TO ALL SUCH TERMS, AND PROSPECTIVE PURCHASERS
OF THE DEBENTURES ARE REFERRED TO THE INDENTURE AND THE TRUST INDENTURE ACT FOR
A STATEMENT THEREOF. THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF THE DEBENTURES AND IS SUBJECT TO THE DETAILED PROVISIONS OF, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE FORM OF INDENTURE (INCLUDING
THE FORM OF DEBENTURE) THAT HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART. ALL SECTION REFERENCES APPEARING
IN THIS "DESCRIPTION OF DEBENTURES" ARE TO SECTIONS OF THE INDENTURE, AND
CAPITALIZED TERMS USED BUT NOT DEFINED HEREIN SHALL HAVE THE MEANINGS ASSIGNED
TO THEM IN THE INDENTURE. AS USED IN THIS "DESCRIPTION OF DEBENTURES," THE TERM
"COMPANY" MEANS MERCURY AIR GROUP, INC. AND DOES NOT INCLUDE ITS SUBSIDIARIES.
GENERAL
The Debentures will be unsecured obligations of Mercury, will be limited to
$25,000,000 in aggregate principal amount (up to $28,750,000 if the
Underwriters' over-allotment option is exercised in full) and will mature on
February , 2006. The Debentures will bear interest at the rate per annum shown
on the cover of this Prospectus from and including the date of the initial
issuance of the Debentures under the Indenture or from and including the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semi-annually on August and February
of each year, commencing August , 1996, to the Person in whose name the
Debenture (or any predecessor Debenture) is registered at the close of business
on the preceding July or January , as the case may be. Interest on the
Debentures will be paid on the basis of a 360-day year of twelve 30-day months.
Debentures issued pursuant to the over-allotment option, if any, shall accrue
interest from the date of issuance of the initial $25,000,000 aggregate
principal amount of Debentures. (Sections 2.1, 2.2 and 4.1).
Principal of, premium, if any, and interest on, the Debentures will be
payable at the office or agency of Mercury or the Trustee maintained for that
purpose in New York, New York and at any other office or agency maintained by
Mercury or the Trustee for such purpose, all as provided in the Indenture.
(Sections 2.1 and 4.2).
The Debentures will be initially issued only in fully registered book-entry
form with The Depository Trust Company, as the book-entry depositary (the
"Depositary"). (Section 2.1). Except as described in this Prospectus or in the
Indenture, the Debentures will not be issuable in definitive certificated form
to any person other than the Depositary or its nominees. See "-- Book-Entry
System." No service charge will be made for any transfer or exchange of the
Debentures, but Mercury may require payment of a sum sufficient to cover any
related tax or other governmental charge.
All moneys paid by Mercury to the Trustee or any Paying Agent for the
payment of principal of, and premium, if any, and interest on, any Debenture
which remain unclaimed for two years after such principal, premium or interest
becomes due and payable may be repaid to Mercury. Thereafter, the Holder of such
Debenture shall, as an unsecured general creditor, look only to Mercury for
payment thereof. (Section 8.5).
The Debentures have been approved for listing on the AMEX, and application
has been made to list the Debentures on the PSE. When issued, the Debentures
will be a new issue of securities with no established trading market. No
assurance can be given as to the liquidity of the trading market for the
Debentures. Because the Debentures are convertible into Common Stock, the prices
at which the Debentures trade in the market will likely be affected by the price
of Mercury's Common Stock.
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The Indenture will not restrict Mercury's ability to incur indebtedness,
create or grant liens, pay dividends or make other distributions on its capital
stock (other than to the extent the conversion price may thereafter be required
to be adjusted) or make investments, acquisitions or dispositions and will not
require Mercury to meet any financial tests.
The Indenture does not contain any provisions that would provide protection
to Holders of the Debentures against a sudden and dramatic decline in credit
quality of Mercury resulting from any takeover, recapitalization or similar
restructuring, except as described under "-- Repurchase of Debentures by Mercury
at the Option of the Holder After Certain Changes of Control."
BOOK-ENTRY SYSTEM
The Debentures will be represented by a single global security (a "Global
Note"). The Global Note will be deposited with, or on behalf of, the Depositary
and registered in the name of the Depositary's nominee. Except as set forth
below, the Global Note may be transferred, in whole and not in part, only to the
Depositary or another nominee of the Depositary or to a successor depositary or
nominee of such successor. Except as set forth below, book-entry beneficial
owners of the Debentures will not be entitled to have such book-entry beneficial
ownership registered in their names on the Security Register, will not receive
or be entitled to receive physical delivery of the Debentures beneficially owned
by book-entry registration, and will not be deemed to be the registered Holders
of the Debentures under the Indenture.
Settlement of Debentures deposited with the Depositary will be made in the
Depositary's Same-Day Funds Settlement System. The Debentures will trade in such
system until maturity or until the Debentures are repurchased or redeemed in
full, and secondary market trading activity for the Debentures will therefore
settle in immediately available funds. All payments of principal and interest
will be made in immediately available funds. No assurance can be given as to the
effect, if any, of settlement in immediately available funds on trading activity
in the Debentures.
The Depositary has advised as follows: It is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Depositary holds securities that its participants ("Participants") deposit with
the Depositary. The Depositary also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. "Direct Participants" include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations. The Depositary is owned by a number of its Direct Participants
and by the New York Stock Exchange, Inc., AMEX and the National Association of
Securities Dealers, Inc. Access to the Depositary's system is also available to
others such as securities brokers and dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the Securities and Exchange
Commission.
Purchases of interests in the Global Note under the Depositary's system must
be made by or through Direct Participants, which will receive a credit for such
interests on the Depositary's records. The ownership interest of each actual
purchaser of interests in the Global Note ("Beneficial Owner") is in turn to be
recorded on the Direct and Indirect Participants' records. Beneficial Owners
will not receive written confirmation from the Depositary of their purchase, but
Beneficial Owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their holdings,
from the Direct or Indirect Participant through which the Beneficial Owner
entered into the transaction. Transfers of ownership interests in the Global
Note are to be accomplished by entries made on the books of Participants acting
on behalf of Beneficial Owners.
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To facilitate subsequent transfers, all Global Notes deposited by
Participants with the Depositary are registered in the name of the Depositary's
partnership nominee, Cede & Co. The deposit of Global Notes with the Depositary
and their registration in the name of Cede & Co. effect no change in beneficial
ownership. The Depositary has no knowledge of the actual Beneficial Owners of
the interests in the Global Notes; the Depositary's records reflect only the
identity of the Direct Participants to whose accounts interests in the Global
Notes are credited, which may or may not be the Beneficial Owners. The
Participants will remain responsible for keeping account of their holdings on
behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
the Global Note. Under its usual procedures, the Depositary mails an Omnibus
Proxy to the issuer as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts interests in the Global Note are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Principal and interest payments on the Global Note will be made to the
Depositary. The Depositary's practice is to credit Direct Participants' accounts
on the payment date in accordance with their respective holdings shown on the
Depositary's records unless the Depositary has reason to believe that it will
not receive payment on the payment date. Payments by Participants to Beneficial
Owners will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such Participant
and not the Depositary, the Paying Agent or Mercury, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal and interest to the Depositary is the responsibility of Mercury or the
Paying Agent, disbursement of such payments to Direct Participants shall be the
responsibility of the Depositary and disbursement of such payments to the
Beneficial Owners shall be the responsibility of Direct and Indirect
Participants. None of Mercury, the Trustee, or any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in any Global Note,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Global Note representing all but not part of the Debentures is
exchangeable for Debentures in definitive form of like tenor and terms if (i)
the Depositary is at any time unwilling, unable or ineligible to continue as
Depositary for such Global Notes and a successor Depositary is not appointed by
the Company within 60 days of the date the Company is so informed in writing;
(ii) the Company executes and delivers to the Trustee a Company Order to the
effect that such Global Note shall be so exchangeable; or (iii) an Event of
Default or an event which, with the giving of notice or lapse of time, or both,
would constitute an Event of Default with respect to the Debentures, has
occurred and is continuing. A Global Note that is exchangeable pursuant to the
preceding sentence shall be exchangeable for Debentures issuable in
denominations of $1,000 and any integral multiple thereof and registered in such
names as the Depositary holding such Global Note shall direct. Subject to the
foregoing, a Global Note shall not be exchangeable, except for a Global Note of
like denomination to be registered in the name of such Depositary or its
nominee.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that Mercury
believes to be reliable, but Mercury takes no responsibility for the accuracy
thereof.
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CONVERSION RIGHTS
The Debentures will be convertible into Common Stock at any time prior to
redemption or Stated Maturity, initially at the conversion price set forth on
the cover of this Prospectus. The conversion price will be subject to adjustment
upon the occurrence of any of the following events: (i) the payment, dividend or
other distribution on any class of capital stock of Mercury in shares of Common
Stock or any class of capital stock of Mercury; (ii) the issuance of rights,
options or warrants to all or substantially all holders of Common Stock
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the then current market price per share (as defined in the
Indenture); (iii) the subdivision, combination or reclassification of
outstanding shares of Common Stock; and (iv) the distribution to all or
substantially all holders of Common Stock of evidences of indebtedness or assets
of Mercury or rights or warrants to acquire such evidences of indebtedness or
assets (including securities, but excluding (a) rights, options or warrants
referred to in clause (ii) above, and (b) dividends or distributions referred to
in clause (i) above). No adjustment of the conversion price will be required to
be made until cumulative adjustments amount to at least $0.125. Any adjustments
which by reason of the foregoing are not required to be made will be carried
forward and taken into account in any subsequent adjustment. In addition to the
foregoing adjustments, Mercury will be permitted to reduce the conversion price
at its discretion. (Section 13.4).
Subject to the rights of Holders to require Mercury to repurchase their
Debentures upon the occurrence of a Change of Control and a Rating Downgrade
(see "-- Repurchase of Debentures at the Option of the Holder After Certain
Changes of Control"), in the case of any consolidation or merger of Mercury with
any other corporation or trust, or in case of any merger of another corporation
or trust into Mercury (other than one in which no change is made in the Common
Stock), or in case of any sale, transfer or other disposition of all or
substantially all of the assets of Mercury, the Holder of any Debentures shall,
after such sale, transfer or other disposition, have the right to convert such
Debenture only into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by a Holder of the
number of shares of Common Stock into which such Debenture might have been
converted immediately prior to such consolidation, merger, sale or transfer; and
adjustments will be provided for events subsequent thereto that are as nearly
equivalent as practical to the conversion price adjustments described above.
(Section 13.10).
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, Mercury will pay a cash adjustment based upon the Current
Market Price on the day of conversion. (Section 13.8).
Except as provided below, no adjustment will be made on conversion of a
Debenture for interest accrued thereon. If a Debenture is surrendered for
conversion after the close of business on any regular record date for payment of
interest and before the opening of business on the corresponding interest
payment date, then, notwithstanding such conversion, the interest payable on
such interest payment date will be paid in cash to the person in whose name the
Debenture is registered at the close of business on such record date and (other
than a Debenture or a portion of a Debenture called for redemption on a
redemption date occurring after such record date and on or prior to the fifth
calendar day following such interest payment date) when so surrendered for
conversion, the Debenture must be accompanied by payment of an amount equal to
the interest payable on such interest payment date.
With respect to Debentures called for redemption, the conversion right will
expire at the close of business on the fifth calendar day preceding the date
fixed for redemption. (Section 13.1). The interest payment with respect to a
Debenture (or portion of a Debenture) called for redemption on a redemption date
occurring on a date during the period from the close of business on any regular
record date next preceding any interest payment date to the close of business on
the fifth calendar day following such interest payment date will be payable on
such interest payment date to the Holder of such Debenture at the close of
business on such regular record date notwithstanding the conversion of such
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Debenture after such regular date and on or prior to such interest payment date,
and the Holder converting such Debenture will not be required to pay an amount
equal to the interest payable on such interest payment date upon surrender of
such Debenture for conversion.
SUBORDINATION
The indebtedness evidenced by the Debentures is subordinate to all Senior
Indebtedness of Mercury. To the extent and in the manner provided in the
Indenture, Senior Indebtedness must be paid before any payment may be made to
any Holders of Debentures. No payment shall be made by Mercury on account of
principal of, premium, if any, or interest on the Debentures or on account of
the redemption, repurchase, acceleration or other acquisition of Debentures of
Mercury, if there shall have occurred and be continuing any default or event of
default with respect to any Senior Indebtedness (a "Senior Indebtedness
Default") until such Senior Indebtedness Default shall have been cured or waived
or shall have ceased to exist, or if such payment shall cause a Senior
Indebtedness Default.
No enforcement action shall be taken against Mercury or any of its assets to
collect the Debentures until the expiration of one hundred eighty (180) days
after the date on which the Trustee gives written notice to the holders of all
Senior Indebtedness of an Event of Default, and during such one hundred eighty
(180) day period, each holder of any Senior Indebtedness shall have the right
(but not the obligation) to cure, or to cause Mercury to cure, such Event of
Default. Any and all liens and security interests now or hereafter held on
account of the Debentures shall be subordinate and subject to any and all liens
and security interests now or hereafter held on account of any Senior
Indebtedness. Upon any acceleration of the principal of the Debentures or any
distribution of assets of Mercury upon any dissolution, winding up, total or
partial liquidation or reorganization of Mercury, whether voluntary or
involuntary, in bankruptcy, insolvency, receivership or similar proceeding or
upon assignment for the benefit of creditors, all amounts due or to become due
upon all Senior Indebtedness must be paid in full before the Holders of the
Debentures are entitled to receive or retain any assets so distributed in
respect of the Debentures. (Section 11.3). By reason of this provision, in the
event of insolvency of Mercury, Holders of the Debentures may recover less,
ratably, than holders of Senior Indebtedness and the general creditors of
Mercury.
"Senior Indebtedness" is defined to mean the principal of, premium, if any,
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to Mercury whether or not
a claim for post-filing interest is allowed in such proceeding), fees, charges,
expenses, reimbursement and indemnification obligations, and all other amounts
payable under or in respect of Indebtedness (as defined) of Mercury, whether any
such Indebtedness exists as of the date of the Indenture or is created,
incurred, assumed or guaranteed after such date, other than (i) Indebtedness
that by its terms or by operation of law is subordinated to or on a parity with
the Debentures and (ii) Indebtedness of Mercury owed to a subsidiary of Mercury.
(Section 1.1).
"Indebtedness" with respect to any Person is defined to mean:
(i) any debt (a) for money borrowed (other than the Debentures), or (b)
evidenced by a bond, note, debenture or similar instrument (including
purchase money obligations) given in connection with the acquisition of any
business, property or assets, whether by purchase, merger, consolidation or
otherwise, but shall not include any account payable or other obligation
created or assumed by a Person in the ordinary course of business in
connection with the obtaining of materials or services, or (c) which is a
direct or indirect obligation which arises as a result of banker's
acceptances or bank letters of credit issued to secure obligations of such
Person, or to secure the payment of revenue bonds issued for the benefit of
such Person, whether contingent or otherwise;
(ii) any debt of others described in the preceding clause (i) which such
Person has guaranteed or for which it is otherwise liable;
(iii) the obligation of such Person as lessee under any lease of property
which is reflected on such Person's balance sheet as a capitalized lease;
and
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(iv) any deferral, amendment, renewal, extension, supplement or refunding
of any liability of the kind described in any of the preceding clauses (i),
(ii) and (iii). (Section 1.1).
The Indenture does not limit or prohibit the incurrence of Senior
Indebtedness by Mercury or of other Indebtedness or liabilities by Mercury or
any of its subsidiaries. Certain of Mercury's operations are conducted through
subsidiaries, which are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay any amounts due pursuant to the
Debentures or to make any funds available therefore, whether by dividends, loans
or other payments. The Debentures will be structurally subordinated to all
Indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of Mercury's subsidiaries. Any right of Mercury to receive
assets of any such subsidiary upon the liquidation or reorganization of any such
subsidiary (and the consequent right of the Holders of the Debentures to
participate in those assets) will be structurally subordinated to the claims of
that subsidiary's creditors.
OPTIONAL REDEMPTION
The Debentures will be redeemable, at Mercury's option, in whole or from
time to time in part, at any time on or after February , 1999, upon not less
than 30 nor more than 60 days' notice at the following Redemption Prices
(expressed as percentages of principal amounts) plus accrued and unpaid interest
to the Redemption Date (subject to the right of Holders of record on the
relevant Record Date to receive interest due on an Interest Payment Date that is
prior to the Redemption Date). (Sections 3.1 and 3.4).
If redeemed during the period indicated below, the Redemption Price shall
be:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------------------------------------------------------------- ---------------
<S> <C>
February , 1999 - February , 2000........................ 104%
February , 2000 - February , 2001........................ 103%
February , 2001 - February , 2002........................ 102%
February , 2002 - February , 2003........................ 101%
</TABLE>
and thereafter at 100% of the principal amount thereof.
In addition, the Debentures may be redeemed at the election of the Company,
in whole or in part, at any time on or after February , 1998 and before
February , 1999, at a Redemption Price of 105% of the principal amount of the
Debentures plus accrued and unpaid interest to the Redemption Date if the
Closing Price of the Common Stock has been at least 140% of the conversion price
for at least 20 trading days within a period of 30 consecutive trading days
ending not more than five trading days prior to the date of the redemption
notice. The redemption amounts will be paid with interest accrued to the date
fixed for redemption, subject to the right of the registered holder on the
Record Date for an interest payment to receive such interest. If Mercury elects
to redeem less than all the Debentures, the Trustee will select which Debentures
to redeem using such method as it deems fair and appropriate (including the
selection for redemption of a portion of the principal amount of any Debenture,
but not less than $1,000). On and after the redemption date, interest ceases to
accrue on the Debentures or portion of the Debentures called for redemption.
(Section 3.1).
Mercury may at any time buy Debentures on the open market at prices which
may be greater or less than the Redemption Prices listed above.
No sinking fund is provided for the Debentures.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that Mercury may, without the consent of the Holders
of the Debentures, consolidate with or merge into any other corporation, or
convey, transfer or lease its properties and assets substantially as an entirety
to any person, provided that in any such case (a) the successor corporation
shall be a domestic corporation and such corporation shall assume by a
supplemental indenture Mercury's obligations under the Indenture and (b)
immediately after giving effect to such
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transaction, no default shall have occurred and be continuing. Upon compliance
with these provisions by a successor corporation, Mercury would be relieved of
its obligations under the Indenture and the Debentures. (Section 5.1).
REPURCHASE OF DEBENTURES AT THE OPTION OF THE HOLDER AFTER CERTAIN CHANGES OF
CONTROL
In the event of any Change of Control and a Rating Downgrade, occurring
after the date of issuance of the Debentures and on or prior to Stated Maturity,
each Holder of Debentures will have the right, at the Holder's option, to
require Mercury to repurchase all (or any portion with a principal amount equal
to $1,000 or an integral multiple thereof) of the Holder's Debentures on or
promptly following the date (the "Repurchase Date") that is 45 calendar days
after the date Mercury gives notice of the Change of Control and the Rating
Downgrade as described below, at a price (the "Repurchase Price") equal to 100%
of the principal amount thereof, together with accrued and unpaid interest to
the Repurchase Date. (Section 12.1).
The right to require Mercury to repurchase Debentures as a result of the
occurrence of a Change of Control and a Rating Downgrade could create an event
of default under Senior Indebtedness as a result of which any repurchase could,
absent a waiver, be blocked by the subordination provisions of the Debentures.
See "-- Subordination." However, failure by Mercury to repurchase the Debentures
when required under the preceding paragraph will result in an Event of Default
under the Indenture whether or not such repurchase is permitted by the
subordination provisions of the Indenture. (Section 6.1).
Within 30 calendar days after the occurrence of a Change of Control and a
Rating Downgrade, Mercury is obligated to mail to all Holders of Debentures a
notice of the occurrence of such Change of Control and Rating Downgrade, the
Repurchase Date, the Repurchase Price, the procedures which the Holder must
follow to exercise the repurchase right and other information with respect to
the repurchase of the Debentures. To exercise the repurchase right, the Holder
of a Debenture must deliver, on or before the close of business on the tenth
Business Day immediately preceding the Repurchase Date, written notice to the
Trustee of the Holder's exercise of such right. (Section 12.3).
As used in the Indenture, (a) a "Change of Control" shall be deemed to have
occurred at such time as, whether or not approved by the Board of Directors of
Mercury, any person (i) is or becomes the beneficial owner, directly or
indirectly, of securities representing more than 50% of the total number of
votes that may be cast for the election of the directors of Mercury or (ii)
acquires from Mercury more than 50% of the assets or earning power of Mercury
and its subsidiaries, (b) "person" means a person or group (within the meaning
of Sections 13(d) and 14(d) of the Exchange Act), together with any affiliates
or associates thereof, but does not include Seymour Kahn or any subsidiary of
Mercury, (c) "beneficial ownership" shall be determined pursuant to the
provisions of Rule 13d-3 and 13d-5 under the Exchange Act, except that a person
shall have "beneficial ownership" of all shares that any such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time and (d) "Rating Downgrade" means a decrease by one or more
gradations (including gradations within rating categories as well as between
rating categories) of the investment rating assigned to the Debentures by any
nationally recognized statistical rating organization, provided that such
downgrade occurs on, or within 90 days after, the earlier to occur of (i) the
occurrence of a Change of Control or (ii) public notice of the occurrence of a
Change of Control or the intention by Mercury to effect a Change of Control
(which period shall be extended so long as the rating of the Debentures is under
publicly announced consideration for possible downgrade by any nationally
recognized statistical rating organization). (Section 1.1).
If a Change of Control and a Rating Downgrade were to occur, no assurance
can be given that Mercury would have sufficient funds to repurchase all
Debentures tendered by the Holders thereof or to make any principal or interest
payment otherwise required by the Debentures.
The foregoing provisions would not necessarily afford Holders of the
Debentures protection in the event of highly leveraged or other transactions
involving Mercury that may adversely affect Holders.
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In addition, the foregoing provisions may discourage open market purchases of
the Common Stock or a non-negotiated tender or exchange offer for such stock
and, accordingly, may limit a shareholder's ability to realize a premium over
the market price of the Common Stock in connection with any such transaction.
In the event a Change of Control and a Rating Downgrade occurs and the
Holders exercise their rights to require Mercury to repurchase Debentures,
Mercury intends to comply with applicable tender offer rules under the Exchange
Act, including Rules 13e-4 and 14e-1, as then in effect, with respect to any
such purchase.
REPURCHASE OF DEBENTURES UPON DEATH OF HOLDER
Mercury will repurchase Debentures tendered by the personal representative
or surviving co-owner of a deceased Debenture Holder within 60 days of tender at
a price equal to 100% of the principal amount plus accrued and unpaid interest
to the date of payment, subject to the limitations hereinafter described.
(Section 12.2). Under the terms of the Indenture, Mercury is obligated to
repurchase up to an annual maximum principal amount of $100,000 per Debenture
Holder, subject to an annual maximum principal amount of $500,000 with respect
to Debentures tendered on behalf of all deceased Debenture Holders. In the case
of Debentures registered in the name of banks, trust companies or broker-dealers
who are members of a national securities exchange or the National Association of
Securities Dealers, Inc. ("Qualified Institutions"), the individual $100,000
annual limitation applies to each beneficial owner of Debentures held by any
Qualified Institution. (Section 12.2).
A Debenture held in tenancy by the entirety, joint tenancy or tenancy in
common will be deemed to be held by a single Holder, and the death of any such
co-owner will be deemed the death of a Holder, regardless of the name in which
the Debenture is registered, provided that the co-owner establishes his or her
beneficial interest in the Debenture to the satisfaction of the Trustee. Such
beneficial ownership will normally be deemed to exist in typical cases of street
name or nominee ownership, ownership by a custodian for the benefit of a minor
under the Uniform Gifts to Minors Act, community property or other joint
ownership arrangements between a husband and wife and certain other arrangements
whereby a person has substantially all of the beneficial ownership interests in
the Debentures during his or her lifetime.
Except for Qualified Institutions, no particular form of request for
repurchase or authority to request the repurchase is necessary. However, in
order for Debentures to be validly tendered for repurchase, the Trustee must
receive: (i) a written request for repurchase signed by the personal
representative or surviving co-owner, (ii) evidence satisfactory to Mercury and
the Trustee that the deceased Holder held a book-entry beneficial interest in
the Debentures or, if applicable, the certificates representing the Debentures
to be repurchased, free and clear of liens and encumbrances; (iii) appropriate
evidence of death and, if made by a representative of a deceased Debenture
Holder, appropriate evidence of authority to make such request; and (iv) such
other additional documents as the Trustee shall require, including inheritance
or estate tax waivers and evidence of authority of the personal representative.
Debentures not repurchased because of the annual individual Holder or aggregate
limitations will be held for repurchase in order of receipt, subject to the same
per Holder and aggregate limitations, within 60 days following the commencement
of the next Repurchase Period until paid, unless sooner withdrawn by the
personal representative of the deceased Debenture Holder or surviving co-owner
of the Debenture.
In the case of Debentures held by Qualified Institutions on behalf of
beneficial owners, the $100,000 principal amount per Repurchase Period
limitation shall apply to each such beneficial owner. Such Qualified Institution
in its request for prepayment on behalf of such beneficial owner must certify
that it holds Debentures on behalf of the beneficial owner and that the
aggregate requests for repayment tendered by the Qualified Institution on behalf
of the beneficial owner during the calendar
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year does not exceed $100,000. In addition, any request for repurchase made by a
Qualified Institution on behalf of a beneficial owner must be delivered to the
Trustee by registered mail, return receipt requested.
Although Mercury is obligated to repurchase in any Repurchase Period up to
$500,000 principal amount of the Debentures issued under the Indenture, it is
not required to establish a sinking fund or otherwise set aside funds for that
purpose. Mercury intends to repay Debentures tendered out of its internally
generated funds or, if necessary, short-term or other long-term borrowings. The
obligation to repurchase the Debentures, however, is an unsecured obligation of
Mercury.
Nothing in the Indenture prohibits Mercury from repurchasing, in acceptance
of tenders made pursuant to the Indenture, Debentures in excess of the principal
amount that Mercury is obligated to repurchase, nor does anything in the
Indenture prohibit Mercury from purchasing any Debentures on the open market.
EVENTS OF DEFAULT
An "Event of Default" is defined in the Indenture as (i) failure by Mercury
to pay interest on any of the Debentures when it becomes due and payable and the
continuance of any such failure for 30 days; (ii) failure by Mercury to pay all
or any part of the principal of, or premium, if any, on the Debentures when it
becomes due and payable, whether at Stated Maturity, upon redemption, upon
acceleration or otherwise, including payment of the Repurchase Price; (iii)
failure by Mercury to comply with the provisions described under "Consolidation,
Merger and Sale of Assets" above; (iv) failure of Mercury to provide notice of a
Change of Control and a Rating Downgrade as provided in the Indenture; (v)
failure by Mercury to comply with any other covenant in the Indenture and
continuance of such failure for 60 days after notice of such failure has been
given to Mercury by the Trustee or by the Holders of at least 25% of the
aggregate principal amount of the Debentures then outstanding; (vi) any
acceleration of the maturity of Indebtedness of Mercury or any of its
subsidiaries having an outstanding principal amount of at least $5,000,000 or a
failure to pay such Indebtedness at its stated maturity after demand therefor,
if acceleration is not annulled within ten days after written notice; (vii) a
final judgment or final judgments that exceed $5,000,000 for the payment of
money have been entered by a court or courts of competent jurisdiction against
Mercury and/or any subsidiary of Mercury and such judgment or judgments have not
been discharged with 30 days after all rights to appeal have been exhausted; and
(viii) certain events of bankruptcy, insolvency or reorganization involving
Mercury or any subsidiary of Mercury. (Section 6.1).
Subject to certain restrictions on the ability to accelerate contained in
the subordination provisions as described above under "-- Subordination," if (i)
an Event of Default with respect to the Debentures shall occur and be continuing
(except for an Event of Default referred to in clause (viii) above), the Trustee
or the Holders of not less than 25% in aggregate principal amount of the
Debentures then outstanding may declare the principal of all such Debentures,
including interest thereon, to be due and payable or (ii) an Event of Default
referred to in clause (viii) occurs, all principal of, premium, if any, and
accrued and unpaid interest on the Debentures shall be immediately due and
payable without any declaration by the Trustee or Holders. (Section 6.2).
Mercury is required to furnish to the Trustee, within 45 days after the end of
each financial quarter, a statement as to the performance by Mercury of its
obligations under the Indenture and as to any default in such performance.
(Section 4.6) Under certain circumstances, any declaration of acceleration with
respect to the Debentures may be rescinded and past defaults may be waived by
the Holders of a majority of the aggregate principal amount of the Debentures
then outstanding. (Sections 6.2 and 6.12).
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the Holders, unless such
Holders shall have offered to the Trustee reasonable indemnity. (Section 7.2)
The Holders of a majority in aggregate principal amount of the Debentures then
outstanding will have the right to
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direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee (subject to certain exceptions). (Section 6.11).
No Holder of any Debenture will have the right to institute any proceeding
with respect to the Indenture or for any remedy thereunder unless such Holder
shall have previously given to the Trustee written notice of a continuing Event
of Default and unless the Holders of at least 25% in aggregate principal amount
of the Debentures then outstanding shall also have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
Trustee, and the Trustee shall not have received with 60 days after its receipt
of such notice from the Holders of a majority in aggregate principal amount of
the Debentures then outstanding a direction inconsistent with such request and
the Trustee shall have failed to institute such proceeding with 60 days.
(Section 6.7).
AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by Mercury and the
Trustee with the consent of the Holders of not less than a majority in aggregate
principal amount of the Debentures then outstanding; provided, however, that no
such modification or amendment may, without the consent of the Holder of each
outstanding Debenture affected thereby, (i) reduce the percentage of principal
amount of Debentures whose Holders must consent to an amendment, supplement or
waiver of any provisions of the Indenture or Debentures; (ii) reduce the rate or
extend the time for payment of interest on any Debenture; (iii) reduce the
principal amount of any Debenture, or reduce the Repurchase Price or the
Redemption Price; (iv) change the Stated Maturity of any Debenture or change the
Repurchase Date of any Debenture; (v) alter in a manner adverse to any Holder
(a) the redemption provisions in the Indenture, (b) the repurchase provisions in
the Indenture or (c) the conversion provisions in the Indenture; (vi) change the
provisions concerning waivers of Defaults or Events of Default by Holders of the
Debentures (except to increase any required percentage or to provide that
certain other provisions hereof cannot be modified or waived without the consent
of the Holders of each outstanding Debenture affected thereby) or the rights of
Holders to recover the principal of, premium, if any, interest on, or redemption
or repurchase payment with respect to, any Debenture; and (vii) make the
principal of, premium, if any, or the interest on, any Debenture payable with
anything or in any manner other than as provided for in the Indenture. (Sections
9.1 and 9.2).
The Holders of not less than a majority in aggregate principal amount of the
Debentures then outstanding may, on behalf of all Holders of Debentures, waive
any past default under the Indenture with respect to the Debentures, except a
default in the payment of principal of, premium, if any, or interest, or in
respect of a provision which under the Indenture cannot be modified or amended
without consent of the Holder of each outstanding Debenture affected. (Section
6.12).
RATING OF DEBENTURES
The Debentures are rated "B-" by Standard & Poor's Corporation ("S & P"). S
& P states that debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
According to S & P, adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"+" and "-" signs are used by S & P to show relative standing within a
particular rating category. Ratings are not a recommendation to purchase, hold
or sell the Debentures and are not intended to provide any guidance concerning
the relative value of an investment. The rating is based on current information
furnished to S & P by the Company and obtained from other sources. The rating
may be changed, suspended or withdrawn at any time as a result of changes in, or
unavailability of, such information.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS
The following discussion is a summary of the material federal income tax
consequences of holding and disposing of the Debentures by U.S. Holders (as
defined below). This summary is based upon laws,
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regulations, rulings and judicial decisions now in effect, all of which are
subject to change (possibly on a retroactive basis). This summary assumes that
the Debentures and Common Stock of the Company will be held as capital assets
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). Further, this summary does not discuss all aspects of
federal income taxation that may be relevant to investors in light of their
personal circumstances or to certain types of purchasers subject to special
treatment under the federal income tax laws (for example, dealers in securities,
holders of securities held as part of a "straddle," "hedge" or "conversion
transaction," tax-exempt organizations, insurance companies, financial
institutions and foreign persons), and does not discuss the consequences to a
holder under state, local or foreign tax laws. Prospective investors are advised
to consult their own tax advisors regarding the federal, state, local and other
tax considerations of holding and disposing of the Debentures.
For purposes hereof, a "U.S. Holder" is (i) a citizen or resident of the
United States, (ii) a corporation or partnership created or organized in the
United States or under the laws of the United States or of any state, or (iii)
an estate or trust the income of which is includible in gross income for United
States federal income tax purposes regardless of its source.
GENERAL
A U.S. Holder of a Debenture will be required to report as ordinary income
for federal income tax purposes interest earned on a Debenture in accordance
with the holder's method of tax accounting. Generally, principal payments on a
Debenture will be treated as a return of capital to the extent of a holder's
basis therein.
The Company anticipates that the Debentures will not be issued with original
issue discount within the meaning of the Code, and the Company does not intend
to take any original issue discount deductions with respect to the Debentures.
CONVERSION OF DEBENTURES
A U.S. Holder of a Debenture will not recognize any gain or loss upon the
conversion of a Debenture into Common Stock except with respect to cash (if any)
received in lieu of fractional shares. A holder receiving cash in lieu of a
fractional share will recognize capital gain or loss (subject to the discussion
of market discount set forth below) in an amount equal to the difference between
the amount of cash and the amount of the basis in the converted Debenture that
is allocable to the fractional share. Such gain or loss will be long-term
capital gain or loss provided the Debenture has been held for more than one year
at the time of conversion. A holder's aggregate tax basis in the Common Stock
received upon conversion will be equal to the holder's tax basis of the
Debenture converted, reduced by any amount allocable to fractional share
interests. A holder's holding period for the Common Stock received upon
conversion of a Debenture will include the holder's holding period for such
Debenture.
CONVERSION PRICE ADJUSTMENT
The conversion price of the Debentures will be adjusted if the Company makes
certain distributions to holders of Common Stock or in the event of certain
subdivisions, combinations or reclassifications of Common Stock. Such an
adjustment under certain circumstances could be treated as a constructive
distribution that is taxable to a U.S. Holder of a Debenture at the time of
adjustment under Sections 301 and 305 of the Code.
DISPOSITION OF DEBENTURES OR COMMON STOCK
In general, a U.S. Holder of a Debenture or the Common Stock into which a
Debenture was converted will recognize gain or loss upon the sale, exchange or
retirement (including redemptions but excluding conversion) of a Debenture or
Common Stock in an amount equal to the difference between the amount of cash and
the fair market value of any property received (other than in respect of accrued
and unpaid interest) and such holder's adjusted tax basis in the Debenture or
Common Stock (including any market discount previously included in income by the
holder thereof). Such gain or loss
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will be capital gain or loss except to the extent of any accrued market discount
(see "Market Discount" below), and will be long-term capital gain or loss if the
Debenture or Common Stock has been held for more than one year at the time of
sale, exchange or retirement.
MARKET DISCOUNT
"Market discount" is defined generally as the excess of the stated
redemption price at maturity of a debt instrument over the tax basis of the debt
instrument in the hands of the holder immediately after its acquisition. In
general, a Debenture in the hands of an original holder or a Debenture that is
purchased at its stated principal amount is not a market discount bond. In
addition, under a de minimis exception, there is no market discount if the
excess of the stated redemption price at maturity of a Debenture over the
holder's tax basis therein is less than 0.25% of the stated redemption price at
maturity of the Debenture multiplied by the number of complete years remaining
to maturity (after the holder acquired the Debenture). Market discount generally
will accrue ratably during the period from the date of acquisition to the
maturity date of the Debenture unless the holder elects to accrue such discount
on the basis of a constant interest method.
A U.S. Holder in whose hands a Debenture is a market discount bond generally
will be required to treat as ordinary income any gain recognized on the sale,
exchange, redemption or other disposition of the Debenture (excluding conversion
thereof) to the extent of accrued market discount not previously included in
taxable income. It is anticipated that regulations will be issued that will
provide that any accrued market discount on a Debenture that is converted into
Common Stock pursuant to the conversion feature would be carried over into the
Common Stock received and treated as ordinary income of the holder upon
disposition of the Common Stock. A U.S. Holder of a Debenture acquired at market
discount also may be required to defer the deduction of all or a portion of the
interest on any indebtedness incurred or maintained to purchase or carry the
Debenture until such market discount is included in taxable income.
A U.S. Holder of a Debenture acquired at a market discount may elect to
include market discount in income as it accrues. This election would apply to
all market discount bonds acquired by the electing holder on or after the first
day of the first taxable year to which the election applies. The election may
not be revoked without the consent of the Internal Revenue Service (the "IRS").
BACKUP WITHHOLDING
Under federal income tax law, certain U.S. Holders of Debentures or Common
Stock are required to provide the Company with such holder's correct taxpayer
identification number ("TIN"). If the holder is an individual, the TIN is his or
her social security number. If the Company is not provided with the correct TIN,
the holder may be subject to a $50 penalty imposed by the IRS. In addition,
payments that are made to such holder (such as interest on a Debenture) may be
subject to backup withholding. Certain U.S. Holders (including, among others,
corporations) are not subject to these backup withholding and reporting
requirements. The backup withholding rules will apply only if the U.S. Holder
(i) fails to furnish its Taxpayer Identification Number ("TIN") which, for an
individual, would be his or her Social Security Number, (ii) furnishes an
incorrect TIN, (iii) fails to report properly interest or dividends, or (iv)
under certain circumstances, fails to certify, under penalty of perjury, that it
has both furnished the correct TIN and has not been notified by the Internal
Revenue Service that it is subject to backup withholding for failure to report
interest and dividend payments. If backup withholding applies, the Company is
required to withhold 31% of any payment made to the holder. Backup withholding
is not an additional federal income tax. Rather, the federal income tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If backup withholding results in an overpayment of federal
income taxes, a refund may be obtained from the IRS provided the required
information is furnished. U.S. Holders of Debentures and Common Stock should
consult their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption.
CERTAIN UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S.
HOLDERS
The following is a summary of certain United States federal income and
estate tax consequences of the ownership and disposition of Debentures by
holders who are Non-U.S. Holders (as defined
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below). This summary discusses only Debentures held as "capital assets" (as
defined in the Code) by the holders thereof. This summary does not discuss all
aspects of United States federal income and estate taxation that may be relevant
to a particular Non-U.S. Holder of Debentures in light of its individual
investment circumstances. This discussion does not address the tax consequences
to shareholders, partners or beneficiaries of a Non-U.S. Holder. Further, it
does not consider Non-U.S. Holders subject to special tax treatment under the
federal income tax laws (including dealers in securities, holders of securities
held as part of a "straddle," hedge or "conversion transaction," or situations
in which the "functional currency" within the meaning of Section 985(b) of the
Code of a holder is not the United States dollar).
The following discussion is based upon the Code, the applicable Treasury
regulations promulgated and proposed thereunder, judicial authority and current
administrative rulings and practices. All of the foregoing are subject to change
(possibly on a retroactive basis) and any such change could affect the
continuing validity of this discussion.
For purposes hereof, a "Non-U.S. Holder" means any person other than: (i) a
citizen or resident of the United States; (ii) a corporation or partnership
created or organized in the United States or under the laws of the United States
or of any state; or (iii) any estate or trust whose income is includible in
gross income for United States federal income tax purposes regardless of its
source. For purposes of the withholding tax on interest discussed below, a
non-resident alien or other non-resident fiduciary of an estate or trust will be
considered a Non-U.S. Holder.
For purposes of the following discussion, interest income and gain or the
sale, exchange or retirement of a Debenture will be "United States trade or
business income" if such income or gain is (i) effectively connected with a
trade or business carried on by the Non-U.S. Holder within the United States and
(ii) if a tax treaty applies, attributable to a permanent establishment (or in
the case of an individual, a fixed place of business) in the United States.
United States trade or business income would be taxed at regular United States
federal income tax rates. See, generally, "Certain United States Federal Income
Tax Considerations for U.S. Holders" above. In the case of a Non-U.S. Holder
that is a corporation, such United States trade or business income may also be
subject to the branch profits tax (which is generally imposed on a foreign
corporation on the actual or deemed repatriation from the United States of
earnings and profits attributable to United States trade or business income) at
a 30% rate. The branch profits tax may not apply (or may apply at a reduced
rate) if the recipient is a qualified resident of certain countries with which
the United States has an income tax treaty.
CONVERSION OF DEBENTURES
A Non-U.S. Holder of a Debenture will be treated substantially the same as a
U.S. Holder upon the conversion of the Debenture into Common Stock. See "--
Conversion of Debentures" and
"-- Disposition of Debentures or Common Stock" above.
CERTAIN FIRPTA CONSIDERATIONS
The foregoing discussion for Non-U.S. Holders under "Disposition of
Debentures or Common Stock" and "Conversion of Debentures" assumes that the
Company is not considered a United States real property holding corporation
("USRPHC") within the meaning of Section 897(c) of the Code. In general, if the
Company is determined to be a USRPHC then certain Non-U.S. Holders may be
subject to United States income tax on the sale, exchange, retirement or other
disposition of a Debenture (possibly on the conversion of a Debenture into
Common Stock) or the converted Common Stock, and to withholding at a rate of 10%
on any such disposition. However, a Non-U.S. Holder will not be subject to these
special rules even if the Company is determined to be a USRPHC provided that
such holder did not during a specified five-year period actually or
constructively own more than 5% of the Common Stock of the Company (including
any Common Stock that may be received in exchange for a Debenture).
Although the Company believes that it is not presently a USRPHC, there can
be no assurance that it will not become a USRPHC in the future.
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INTEREST
Payments of interest to a Non-U.S. Holder that do not qualify for the
portfolio interest exception discussed below and which are not United States
trade or business income will be subject to withholding of United States federal
income tax at a rate of 30% unless a United States income tax treaty applies to
reduce the rate of withholding. To claim a treaty reduced rate or an exemption
from withholding because the interest is United States trade or business income,
the Non-U.S. Holder must provide a properly executed Form 1001 or Form 4224,
respectively, as applicable. The same rules apply to dividends paid on Common
Stock received upon conversion of the Debentures.
Generally, however, interest that is paid to a Non-U.S. Holder on a
Debenture that is not United States trade or business income will not be subject
to United States tax if the interest qualifies as "portfolio interest."
Generally, interest on the Debentures that is paid by the Company will qualify
as portfolio interest if (i) the Non-U.S. Holder does not own, actually or
constructively, 10% or more of the total combined voting power of all classes of
stock of the Company entitled to vote and is not a controlled foreign
corporation that is related to the Company through stock ownership for United
States federal income tax purposes; (ii) the Non-U.S. Holder is not a bank that
is receiving the interest on a loan made in the ordinary course of its trade or
business; and (iii) the Company, or its paying agent, received a properly
executed certification signed under penalties of perjury that the beneficial
owner is not a "U.S. person" for U.S. federal income tax purposes and which
provides the beneficial owner's name and address.
SALE, EXCHANGE OR RETIREMENT OF DEBENTURES
Except as described below, any gain realized by a Non-U.S. Holder on the
sale, exchange or retirement of Debentures, generally will not be subject to
United States federal income tax provided that (i) such gain is not United
States trade or business income; (ii) the Non-U.S. Holder is not an individual
who is present in the United States for 183 days or more in the taxable year of
the disposition, and meets certain other requirements; and (iii) the Non-U.S.
Holder is not subject to tax pursuant to the provisions of United States tax law
applicable to certain United States expatriates. For the treatment of amounts
received in respect of accrued and unpaid interest, see "-- Interest."
FEDERAL ESTATE TAX
Debentures held (or treated as held) by an individual who is a Non-U.S.
Holder at the time of his or her death (or theretofore transferred subject to
certain retained rights or powers) will not be subject to United States federal
estate tax provided that any interest thereon would be exempt as portfolio
interest if such interest were received by the Non-U.S. Holder at the time of
his or her death. However, shares of Common Stock into which a Debenture was
converted, held by an individual at the time of his or her death, will be
included in such holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company generally must report annually to the IRS and to each Non-U.S.
Holder the amount of interest paid to, and the tax withheld, if any, with
respect to, each Non-U.S. Holder. These reporting requirements apply whether or
not withholding is reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
Non-U.S. Holder resides. Payments of principal to a Non-U.S. Holder will not be
subject to information reporting if the holder has provided certification of its
Non-U.S. Holder status.
The United States backup withholding tax (in general, a tax imposed at the
rate of 31% on payments to persons that fail to furnish the information required
under the United States information reporting requirements) will generally not
apply to payments of interest that qualify as portfolio interest as described
above (provided that the Company has no actual knowledge that the holder is a
U.S. person).
Payments of the proceeds of the sale of Debentures to or through a foreign
office of a "broker" (as defined in the pertinent regulations) will not be
subject to information reporting if the broker is a U.S.
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person, a controlled foreign corporation for United States federal income tax
purposes, or a foreign person 50% or more of whose gross income is from a United
States trade or business for a specified three-year period, unless the broker
has in its records documentary evidence that the holder is not a U.S. person and
certain conditions are met (including that the broker has no actual knowledge
that the holder is a U.S. person) or the holder otherwise establishes an
exemption. The United States Treasury Department has indicated that it is
studying the possible application of backup withholding in the case of foreign
offices of United States and United States-related brokers. Payment of the
proceeds of a sale to or through the United States office of a broker is subject
to backup withholding and information reporting, unless the holder certifies
that it is a Non-U.S. Holder under penalties of perjury or otherwise establishes
an exemption.
Any amount withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a credit against, or refund of, such holder's
regular federal income tax liability, provided that certain information is
provided to the IRS.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Mercury consists of 9,000,000 shares of
Common Stock, par value $.01 per share, and 3,000,000 shares of preferred stock,
par value $.01 per share ("Preferred Stock"), As of December 31, 1995 there were
5,380,087 outstanding shares of Common Stock. There are no shares of Preferred
Stock of any designation issued or outstanding.
As of December 31, 1995 Mercury had reserved 549,385 shares of Common Stock
for issuance pursuant to outstanding options, warrants and a convertible
debenture.
COMMON STOCK
All shares of Common Stock have equal voting, dividend and liquidation
rights. Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders, and holders are not
entitled to cumulative voting in the election of directors. Holders of Common
Stock are entitled to such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of Mercury, the holders of Common Stock are entitled
to receive all assets remaining after payment of liabilities and after payment
of any preference to holders of preferred stock. Holders of shares of Common
Stock have no conversion, preemptive or other rights to subscribe for additional
shares and the shares are not subject to redemption. All of the outstanding
shares of Common Stock are legally and validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Mercury's Articles of Incorporation authorize the issuance of up to
3,000,000 shares of preferred stock with such rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors may, without shareholder approval, issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the rights, value and liquidity of the Common Stock. In addition, the
issuance of shares of preferred stock may have the effect of rendering more
difficult an acquisition of Mercury or a change in control of Mercury. There are
no shares of preferred stock of any designation issued or outstanding, and
Mercury has no present plans to issue shares of preferred stock.
REGISTRATION RIGHTS
Mercury has reserved 18,335 shares of Common Stock for issuance upon
exercise of outstanding underwriter warrants which have an exercise price of
$3.82 and an expiration date of June 1996. The holder of the underwriter warrant
has the right to require Mercury to register such shares.
TRANSFER AGENT AND REGISTRAR
The American Stock Transfer & Trust Company is the transfer agent and
registrar for the Common Stock.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
between Mercury and each of the Underwriters named below (the "Underwriters"),
for whom EVEREN Securities, Inc. and Crowell, Weedon & Co. are acting as
representatives (the "Representatives"), the Company has agreed to sell to each
such Underwriter, and each of such Underwriters has severally agreed to purchase
from the Company, the aggregate principal amount of the Debentures set forth
opposite each Underwriter's name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF DEBENTURES
- ---------------------------------------------------------------------------- ----------------
<S> <C>
EVEREN Securities, Inc......................................................
Crowell, Weedon & Co........................................................
----------------
Total................................................................... $ 25,000,000
----------------
----------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are obligated severally to purchase all of the Debentures offered
hereby (other than those covered by the over-allotment option described below)
if any Debentures are purchased.
The Underwriters have advised Mercury that they propose to offer the
Debentures to the public at the price to public set forth on the cover page of
this Prospectus and that the Underwriters may allow certain dealers a concession
not to exceed % of the principal amount of the Debentures, of which such
dealers may reallow a concession not to exceed % of the principal amount of
the Debentures to certain other dealers. After the Debentures are released for
sale to the public, the public offering price and the other selling terms may be
changed by the Representatives.
Mercury has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus, to purchase up to $3,750,000 aggregate
principal amount of Debentures at the price to public set forth on the cover
page of this Prospectus less the underwriters discount and commissions solely to
cover over-allotments. Such option may be exercised at any time until 30 days
after the date of this Prospectus. To the extent that the Underwriters exercise
such option, each of the Underwriters will be committed, subject to certain
conditions, to purchase a number of Debentures proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
Mercury has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Prior to this offering, there has been no established trading market for the
Debentures. The initial price to public for the Debentures offered hereby will
be determined by negotiation among the Company and the Representatives. There
can be no assurance, however, that the prices at which the Debentures will sell
in the public market after this offering will not be lower than the price at
which the Debentures are sold to the public by the Underwriters. See "Risk
Factors --Limited Market for Debentures."
EXPERTS
The consolidated financial statements of Mercury as of June 30, 1995 and
1994, and for each of the three years in the period ended June 30, 1995,
included in this Prospectus and the related financial statement schedule
included elsewhere in the Registration Statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the Registration Statement and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
56
<PAGE>
LEGAL MATTERS
The validity of the Debentures offered hereby and the Common Stock issuable
upon conversion thereof and certain other matters will be passed upon for
Mercury by McBreen, McBreen & Kopko, Chicago, Illinois. Frederick H. Kopko, Jr.
is a member of that firm, a director of Mercury and beneficially owns an option
to acquire 33,000 shares of Mercury's Common Stock. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by Orrick,
Herrington & Sutcliffe, San Francisco, California.
57
<PAGE>
MERCURY AIR GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets at June 30, 1994 and 1995 and September 30, 1995......... F-3
Consolidated Statements of Income for the Years Ended June 30, 1993, 1994 and 1995
and the Three Months Ended September 30, 1994 and 1995.............................. F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1993, 1994 and
1995 and the Three Months Ended September 30, 1994 and 1995......................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1993,
1994 and 1995 and the Three Months Ended September 30, 1995......................... F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements.
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, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
September 15, 1995
F-2
<PAGE>
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------ SEPTEMBER 30,
1994 1995 1995
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 1,770,000 $ 831,000 $ 529,000
Trade accounts receivable, net of allowance for doubtful accounts of
$508,000 at 6/30/94, $610,000 at 6/30/95 and $810,000 at 9/30/95
(Note 9).......................................................... 17,164,000 33,269,000 35,992,000
Notes receivable -- current portion................................. 185,000 50,000 60,000
Inventories (Notes 3 and 9)......................................... 951,000 3,283,000 3,071,000
Prepaid expenses and other current assets........................... 1,297,000 1,822,000 1,573,000
----------- ----------- -------------
Total current assets.............................................. 21,367,000 39,255,000 41,225,000
PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated depreciation
and amortization of $18,277,000 at 6/30/94, $20,391,000 at 6/30/95
and $20,995,000 at 9/30/95 (Notes 5, 9 and 16)...................... 12,570,000 12,219,000 14,883,000
NOTES RECEIVABLE, net of current portion.............................. 186,000 136,000 197,000
OTHER ASSETS (Notes 6 and 16)......................................... 1,319,000 2,600,000 3,186,000
----------- ----------- -------------
$35,442,000 $54,210,000 $59,491,000
----------- ----------- -------------
----------- ----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 6,920,000 $12,998,000 $15,187,000
Accrued expenses and other current liabilities (Note 7)............. 2,078,000 3,008,000 1,913,000
Income taxes payable (Note 8)....................................... 699,000 114,000 846,000
Current portion of long-term debt (Note 9).......................... 2,317,000 2,607,000 2,791,000
----------- ----------- -------------
Total current liabilities......................................... 12,014,000 18,727,000 20,737,000
LONG-TERM DEBT (Note 9)............................................... 8,650,000 17,104,000 20,011,000
DEFERRED INCOME TAXES (Note 8)........................................ 218,000 8,000 8,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY (Note 4)................. 924,000
----------- ----------- -------------
Total liabilities................................................. 21,806,000 35,839,000 40,756,000
----------- ----------- -------------
COMMITMENTS AND CONTINGENCIES (Note 12)...............................
STOCKHOLDERS' EQUITY (Notes 9, 10 and 11):
Preferred Stock -- $.01 par value; authorized 3,000,000 shares; no
shares outstanding
Common Stock -- $ .01 par value; authorized 9,000,000 shares;
outstanding 4,905,779 shares at 6/30/94, 5,524,257 shares at
6/30/95; and 5,371,087 shares at 9/30/95.......................... 49,000 55,000 54,000
Additional Paid-in Capital.......................................... 9,187,000 14,992,000 14,611,000
Retained Earnings................................................... 4,555,000 3,479,000 4,225,000
Treasury Stock -- 32,000 shares of common stock at 6/30/94; 35,200
shares of common stock at 6/30/95 and 9/30/95..................... (155,000) (155,000) (155,000)
----------- ----------- -------------
Total stockholders' equity........................................ 13,636,000 18,371,000 18,735,000
----------- ----------- -------------
$35,442,000 $54,210,000 $59,491,000
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
--------------------------------------- --------------------------
1993 1994 1995 1994 1995
----------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales and Revenues (Note 13):
Sales..................................................... $57,186,000 $ 68,991,000 $145,166,000 $ 26,155,000 $ 42,214,000
Service revenues.......................................... 27,357,000 34,078,000 37,834,000 9,399,000 9,666,000
----------- ------------ ------------ ------------ ------------
84,543,000 103,069,000 183,000,000 35,554,000 51,880,000
----------- ------------ ------------ ------------ ------------
Costs and Expenses:
Cost of sales............................................. 50,804,000 61,060,000 132,838,000 23,666,000 38,747,000
Operating expenses........................................ 24,836,000 29,344,000 33,589,000 8,037,000 8,536,000
----------- ------------ ------------ ------------ ------------
75,640,000 90,404,000 166,427,000 31,703,000 47,283,000
----------- ------------ ------------ ------------ ------------
Operating Income........................................ 8,903,000 12,665,000 16,573,000 3,851,000 4,597,000
----------- ------------ ------------ ------------ ------------
Other Expenses (Income):
Selling, general and administrative (Note 6).............. 3,879,000 4,261,000 5,363,000 1,190,000 1,473,000
Depreciation and amortization............................. 1,680,000 2,049,000 2,409,000 606,000 623,000
Interest expense.......................................... 1,084,000 1,080,000 1,478,000 302,000 437,000
Interest income........................................... (171,000) (140,000) (84,000) (13,000) (12,000)
Minority interest (Note 4)................................ 128,000 246,000 95,000 42,000
Gain-legal judgement (Note 2)............................. (1,060,000)
----------- ------------ ------------ ------------ ------------
5,540,000 7,496,000 9,261,000 2,127,000 2,521,000
----------- ------------ ------------ ------------ ------------
Income Before Income Taxes.................................. 3,363,000 5,169,000 7,312,000 1,724,000 2,076,000
Provision for Income Taxes (Note 8)......................... 1,413,000 2,174,000 3,005,000 722,000 844,000
----------- ------------ ------------ ------------ ------------
Net Income.................................................. $ 1,950,000 $ 2,995,000 $ 4,307,000 $ 1,002,000 $ 1,232,000
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
Net Income applicable to Common Stock....................... $ 1,496,000 $ 2,920,000 $ 4,307,000 $ 1,002,000 $ 1,232,000
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
Net Income Per Common Share and Common Equivalent Share
(Primary) (Note 14)....................................... $ 0.62 $ 0.75 $ 0.76 $ 0.18 $ 0.22
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
Net Income Per Common Share-Assuming Full Dilution (Note
14)....................................................... $ 0.39 $ 0.59 $ 0.76 $ 0.18 $ 0.22
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
Weighted Average Number of Shares of Common Stock (Note
14)....................................................... 2,431,549 3,719,884 5,420,158 5,354,000 5,415,000
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------------- ------------------------
1993 1994 1995 1994 1995
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 1,950,000 $ 2,995,000 $ 4,307,000 $ 1,002,000 $ 1,232,000
Adjustments to derive cash flow from operating
activities:
Depreciation and amortization.................. 1,680,000 2,049,000 2,409,000 606,000 623,000
Minority interest.............................. 128,000 246,000 95,000 42,000
Amortization of officers' loans................ 154,000 154,000 140,000 39,000 39,000
Increase (decrease) in deferred income taxes... 229,000 (651,000) (210,000)
Changes in operating assets and liabilities:
Trade and other accounts receivable............ (3,929,000) (474,000) (16,105,000) (6,461,000) (2,377,000)
Inventories.................................... 84,000 (103,000) (2,332,000) (606,000) 212,000
Prepaid expenses and other current assets...... 398,000 (304,000) (525,000) 207,000 249,000
Accounts payable............................... 459,000 150,000 6,078,000 3,470,000 1,721,000
Income taxes payable........................... 351,000 348,000 (368,000) 181,000 732,000
Accrued expenses and other current
liabilities.................................. 162,000 (43,000) 930,000 (917,000) (1,095,000)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) operating
activities................................. 1,666,000 4,367,000 (5,581,000) (2,437,000) 1,336,000
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment................. 300,000
Decrease in notes receivable..................... 261,000 677,000 185,000 15,000 (71,000)
Addition to other assets......................... (265,000) (259,000) (632,000) (78,000) (640,000)
Additions to property, equipment and
leaseholds..................................... (2,538,000) (1,933,000) (1,574,000) (167,000) (561,000)
----------- ----------- ------------ ----------- -----------
Net cash used in investing activities........ (2,542,000) (1,215,000) (2,021,000) (230,000) (1,272,000)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividend on common stock.............. (100,000) (55,000)
Proceeds from long-term debt..................... 3,461,000 2,876,000 10,752,000 2,720,000 1,829,000
Reduction of long-term debt...................... (1,952,000) (5,902,000) (2,443,000) (589,000) (1,327,000)
Payment of dividend on preferred stock........... (454,000) (75,000)
Issuance of common stock......................... 3,097,000 379,000 13,000 7,000
Repurchase and retire preferred and common stock
and warrants................................... (50,000) (1,917,000) (1,475,000) (542,000) (820,000)
Redemption by subsidiary of common stock owned by
minority shareholder........................... (450,000)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities................................. 1,005,000 (1,921,000) 6,663,000 1,602,000 (366,000)
----------- ----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 129,000 1,231,000 (939,000) (1,065,000) (302,000)
CASH AND CASH EQUIVALENTS, beginning of period..... 410,000 539,000 1,770,000 1,770,000 831,000
----------- ----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of period........... $ 539,000 $ 1,770,000 $ 831,000 $ 705,000 $ 529,000
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
CASH PAID DURING THE PERIOD:
Interest......................................... $ 1,084,000 $ 1,080,000 $ 1,478,000 $ 302,000 $ 437,000
Income taxes..................................... $ 645,000 $ 2,477,000 $ 3,607,000 $ 542,000 $ 112,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Direct financing for purchase of equipment and
property....................................... $ 1,425,000 $ 2,518,000 $ 435,000
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 (Note 16)............................... $ 2,016,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A COMMON STOCK
PREFERRED STOCK COMMON STOCK IN TREASURY
------------------- ------------------ ADDITIONAL ---------------------
NUMBER OF NUMBER OF PAID-IN RETAINED NUMBER OF
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
--------- ------- --------- ------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1992.................. 575,000 $6,000 2,206,191 $22,000 $ 7,049,000 $ 1,167,000 32,000 $(155,000)
Net income............................ 1,950,000
Series A Preferred Stock converted
into Common Stock................... (12,002) 48,008
Cash Dividend on Series A Preferred
Stock............................... (454,000)
Repurchase and retire Preferred
Stock............................... (4,000) (32,000) (17,000)
--------- ------- --------- ------- ----------- ----------- --------- ---------
BALANCE, June 30, 1993.................. 558,998 6,000 2,254,199 22,000 7,017,000 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............................... (80,256) (1,000 ) (640,000) (475,000)
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) (536,000)
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 4,555,000 32,000 (155,000)
Net income............................ 4,307,000
Cash Dividend on Common Stock......... (100,000)
Repurchase and retire Common Stock.... (236,300 ) (2,000) (450,000) (1,022,000)
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 (4,261,000) 3,200
--------- ------- --------- ------- ----------- ----------- --------- ---------
BALANCE, June 30, 1995.................. 0 0 5,524,257 55,000 14,992,000 3,479,000 35,200 (155,000)
Net income............................ 1,232,000
Repurchase and retire Common Stock.... (155,420 ) (2,000) (387,000) (431,000)
Common Stock issued on exercise of
options............................. 2,250 1,000 6,000
Cash dividend on Common Stock......... (55,000)
--------- ------- --------- ------- ----------- ----------- --------- ---------
BALANCE, September 30, 1995
(unaudited)........................... 0 $ 0 5,371,087 $54,000 $14,611,000 $ 4,225,000 35,200 $(155,000)
--------- ------- --------- ------- ----------- ----------- --------- ---------
--------- ------- --------- ------- ----------- ----------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and Excel Cargo, Inc. in September
1995. Such costs are being amortized on the straight-line method over 40 years
with respect to Maytag Aircraft Corporation and Mercury Air Cargo, Inc. and 15
years with respect to Excel Cargo, Inc. The Company assesses recoverability on a
periodic basis. Factors included in evaluating recoverability include historical
earnings and projected future earnings of the operations.
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.
F-7
<PAGE>
INTERIM REPORTING
The accompanying unaudited financial statements reflect all adjustments
(consisting of normal, recurring accruals only) which are necessary to fairly
present the results for the interim periods. The results of operations for the
three months ended September 30, 1995 are not necessarily indicative of results
for the full year.
NOTE 2 -- GAIN-LEGAL JUDGMENT:
The Company recorded a pretax gain of $1,060,000 in fiscal 1993 related to a
recovery obtained from a legal judgment which arose following the bankruptcy of
a former significant customer.
NOTE 3 -- INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- SEPTEMBER 30,
1994 1995 1995
----------- ------------- -------------
<S> <C> <C> <C>
Aviation fuel................................................ $ 757,000 $ 3,166,000 $ 2,955,000
Supplies and parts........................................... 194,000 117,000 116,000
----------- ------------- -------------
$ 951,000 $ 3,283,000 $ 3,071,000
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
NOTE 4 -- 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), $246,000 (1994) and
$128,000 (1993). 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 247,500 common shares (after adjustment for the 10% stock
dividend) valued at $1,406,000 ($5.68 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, 1995 (See note 6).
NOTE 5 -- PROPERTY, EQUIPMENT AND LEASEHOLDS:
Property, equipment and leaseholds consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1994 1995
-------------- ---------------
<S> <C> <C>
Land, buildings and leasehold improvements............................ $ 15,230,000 $ 16,187,000
Equipment, furniture and fixtures..................................... 15,509,000 16,391,000
Construction in progress.............................................. 108,000 32,000
-------------- ---------------
30,847,000 32,610,000
Less accumulated depreciation and amortization........................ (18,277,000) (20,391,000)
-------------- ---------------
$ 12,570,000 $ 12,219,000
-------------- ---------------
-------------- ---------------
</TABLE>
F-8
<PAGE>
NOTE 6 -- OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Cost in excess of net assets acquired............. $ 665,000 $1,466,000
Deferred lease cost............................... 38,000 26,000
Other assets...................................... 404,000 698,000
Loans to officers................................. 212,000 410,000
---------- ----------
$1,319,000 $2,600,000
---------- ----------
---------- ----------
</TABLE>
Cost in excess of net assets acquired includes $823,000 which arose from the
Company's acquisition of the outstanding minority interest in MAC in November
1994. (See note 4)
In 1991, four executive officers of the Company each agreed to purchase
110,000 (after adjustment for the 10% stock dividend) shares of the Company's
stock from a company owned by the Chairman and Chief Executive Officer at $2.73
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.
In 1994, a fifth executive officer of the Company purchased 110,000 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 $2.73 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 through fiscal 1994 and $140,000 in 1995. 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 7 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Salaries and wages................................ $1,393,000 $1,918,000
Other............................................. 685,000 1,090,000
---------- ----------
$2,078,000 $3,008,000
---------- ----------
---------- ----------
</TABLE>
F-9
<PAGE>
NOTE 8 -- INCOME TAXES:
The provision for taxes on income from continuing operations consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Federal, current........................ $ 944,000 $2,262,000 $2,565,000
State, current.......................... 240,000 563,000 650,000
---------- ---------- ----------
1,184,000 2,825,000 3,215,000
Deferred, primarily federal............. 229,000 (651,000) (210,000)
---------- ---------- ----------
Net provision......................... $1,413,000 $2,174,000 $3,005,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Depreciation/amortization............... $ 337,000 $ 150,000
Deferred and prepaid expenses........... 258,000 275,000
State income taxes...................... (191,000) (209,000)
Allowance for doubtful accounts......... (186,000) (244,000)
Miscellaneous........................... 36,000
--------- ---------
$ 218,000 $ 8,000
--------- ---------
--------- ---------
</TABLE>
The components of the deferred tax provision prior to the adoption of SFAS
109 consisted of:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1993
-----------
<S> <C>
Excess of book over tax depreciation.... $ (57,000)
Allowance for bad debts................. 96,000
Deferred expenses....................... (79,000)
Amortization of officers loans.......... (62,000)
Gain -- legal judgement................. 445,000
State income taxes and miscellaneous.... (114,000)
-----------
$ 229,000
-----------
-----------
</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,
--------------------
1993 1994 1995
----- ----- ----
<S> <C> <C> <C>
Computed "expected" tax rate............ 34% 34% 34%
State income taxes, net of federal
income tax benefit.................... 6 6 6
Other................................... 2 2 1
----- ----- ----
Effective rate.......................... 42% 42% 41%
----- ----- ----
----- ----- ----
</TABLE>
F-10
<PAGE>
NOTE 9 -- LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER
------------------------ 30,
1994 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
Notes payable to banks...................................... $ 6,251,000 $14,870,000 $16,325,000
Installment notes, payable to financial institutions in
monthly installments aggregating approximately $70,000 at
June 30, 1995 including interest from 7.23% to 11.85%,
collateralized by certain assets of the Company and
maturing from 1995 through 1999........................... 2,288,000 2,075,000 1,911,000
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................................................ 1,151,000 1,034,000 1,004,000
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...................................................... 434,000 431,000
Note payable to seller of assets and leasehold at
Bakersfield, California due in December 2004, interest at
prime (9.00% at June 30, 1995), collateralized by property
acquired, which is principally a leasehold................ 1,093,000 1,017,000 1,000,000
Note payable to seller of assets and leasehold at
Bakersfield, California due in November 1997, interest at
10%....................................................... 169,000 126,000 115,000
Debenture payable to Seller of Excel assets due in September
2003, interest at 8.5% per annum, collateralized by
property acquired......................................... 2,016,000
Other....................................................... 15,000 155,000
----------- ----------- -----------
10,967,000 19,711,000 22,802,000
Less current portion........................................ 2,317,000 2,607,000 2,791,000
----------- ----------- -----------
$ 8,650,000 $17,104,000 $20,011,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Notes payable to banks at June 30, 1995 consists of a term loan in the
amount of $4,752,000, 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, 1995 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, 1995, there was approximately $10,118,000 in outstanding
borrowings. At September 30, 1995, amounts outstanding under the term loan and
revolving credit line were $4,378,000 and $11,947,000, respectively. The term
loan and line of credit are collateralized by substantially all of the Company's
assets.
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
$250,000 annually, annual capital expenditures and payments under operating
leases.
F-11
<PAGE>
Long-term debt payable subsequent to June 30, 1995 is as follows:
<TABLE>
<S> <C>
1996.................................................. $ 2,607,000
1997.................................................. 2,489,000
1998.................................................. 12,277,000
1999.................................................. 709,000
2000.................................................. 249,000
Thereafter............................................ 1,380,000
-----------
$19,711,000
-----------
-----------
</TABLE>
NOTE 10 -- SERIES A PREFERRED STOCK:
During fiscal 1994, 478,742 shares of Series A Preferred Stock were
converted into 1,914,968 shares of Common Stock. Also in fiscal 1994, the
Company repurchased and/or redeemed 80,256 shares of Series A Preferred Stock at
a cost of $1,115,000. In addition, 660,320 Series A and Series B Warrants were
exercised resulting in proceeds of $2,400,000 and the remaining 18,680 Series A
and Series B Warrants were redeemed at a cost of $.10 per Warrant. As a result
of these transactions, there are no remaining outstanding shares of Series A
Preferred Stock or Series A and Series B Warrants as of June 30, 1994.
NOTE 11 -- COMMON STOCK:
The Company has 9,000,000 authorized shares of common stock having a par
value of $0.01 per share.
The Company has reserved 639,300 shares of common stock of which 242,800
shares relate to the 1990 Long-Term Incentive Plan; 286,500 shares relate to the
1990 Directors Stock Option Plan and 110,000 shares relate to a special option
grant made outside the Company's option plans.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
LONG-TERM DIRECTORS
INCENTIVE STOCK OPTION
OPTION PRICES PLAN OPTION PRICES PLAN
----------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Outstanding July 1, 1992.............. $ 2.25 - 3.38 135,000 $ 1.875 - 3.00 60,000
Granted............................... 2.125 135,000 2.125 30,000
Cancelled............................. 2.25 - 3.38 (95,000)
------------- ------------
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 (30,000)
------------- ------------
$ 2.125 - 3.688 112,800 $ 1.875 - 7.00 127,000
10% Stock Dividend.................... 11,280 13,250
------------- ------------
Outstanding June 30, 1995............. $ 1.93 - 3.35 124,080 $ 1.70 - 6.36 140,250
------------- ------------
------------- ------------
</TABLE>
F-12
<PAGE>
At June 30, 1995, options to purchase 95,150 shares at prices ranging from
$1.70 to $3.35 are exercisable under the Director's 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 110,000 shares at $2.12 was
made and is exercisable at June 30, 1995. 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.
The Company has also reserved 18,335 shares of common stock for issuance
upon exercise of outstanding underwriter warrants which have an exercise price
of $3.82 per share and an expiration date of June 1996. During fiscal 1995,
33,332 warrants were exercised.
All amounts have been restated to include the 10% stock dividend paid on
June 16, 1995.
NOTE 12 -- 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 1995, 1994 and 1993 was approximately $2,502,000, $2,265,000
and $2,596,000, 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, 1995 are as follows:
<TABLE>
<S> <C>
1996................................................... $1,836,000
1997................................................... 1,836,000
1998................................................... 1,815,000
1999................................................... 1,686,000
2000................................................... 707,000
Thereafter............................................. 1,198,000
----------
Total minimum payments required...................... $9,078,000
----------
----------
</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 on the financial statements.
NOTE 13 -- MAJOR CUSTOMERS AND FOREIGN CUSTOMERS:
Revenues from the United States government amounted to approximately 9%, 16%
and 15% for fiscal 1995, 1994 and 1993, 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 39%, 45% and 40% of consolidated
revenues for the years ended June 30, 1995, 1994 and 1993, respectively.
NOTE 14 -- 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 373,230 shares of common stock under the Company's Long-
F-13
<PAGE>
Term Incentive Plan and Directors' Stock Option Plan at exercise prices ranging
from $1.70 to $6.36 were included as common stock equivalents in fiscal 1995 for
purposes of computing earnings per share.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1995 SEPTEMBER 30, 1995
------------- -------------------
<S> <C> <C>
Weighted average number of common shares outstanding during the
period............................................................ 5,420,000 5,415,000
Common stock equivalents resulting from the assumed exercise of
stock options..................................................... 236,000 241,000
------------- ----------
Weighted average number of common and common equivalent shares
outstanding during the period..................................... 5,656,000 5,656,000
------------- ----------
------------- ----------
</TABLE>
Weighted average outstanding shares and earnings per share have been
retroactively restated to include the 10% stock dividend paid on June 16, 1995
which amounted to the issuance of 501,246 shares.
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
GROSS PROFIT EARNINGS PER SHARE
SALES AND (OPERATING --------------------------
REVENUES INCOME) NET INCOME PRIMARY FULLY DILUTED
---------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995
First Quarter......................... $35,554,000 $3,851,000 $1,002,000 $0.18 $0.18
Second Quarter........................ 49,165,000 4,444,000 1,200,000 0.21 0.21
Third Quarter......................... 50,002,000 4,038,000 1,003,000 0.18 0.18
Fourth Quarter........................ 48,279,000 4,240,000 1,102,000 0.19 0.19
---------------- -------------- ------------- ----- -----
YEAR ENDED JUNE 30, 1995................ $183,000,000 $16,573,000 $4,307,000 $0.76 $0.76
---------------- -------------- ------------- ----- -----
---------------- -------------- ------------- ----- -----
YEAR ENDED JUNE 30, 1994
First Quarter......................... $24,982,000 $2,715,000 $597,000 $0.19 $0.12
Second Quarter........................ 26,668,000 3,165,000 817,000 0.31 0.17
Third Quarter......................... 26,613,000 3,349,000 819,000 0.14 0.15
Fourth Quarter........................ 24,806,000 3,436,000 762,000 0.11 0.15
---------------- -------------- ------------- ----- -----
YEAR ENDED JUNE 30, 1994................ $103,069,000 $12,665,000 $2,995,000 $0.75 $0.59
---------------- -------------- ------------- ----- -----
---------------- -------------- ------------- ----- -----
</TABLE>
NOTE 16 -- ACQUISITION OF EXCEL CARGO, INC. (UNAUDITED):
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 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 leaseholds............................. 2,711,000
Goodwill....................................................... 750,000
Notes payable.................................................. (573,000)
Accounts payable and other current liabilities................. (468,000)
----------
Purchase price................................................. $2,766,000
----------
----------
</TABLE>
F-14
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
IN THE FACTS SET FORTH IN THIS PROSPECTUS SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use Of Proceeds................................ 13
Capitalization................................. 14
Price Range of Common Stock and Dividend
Policy........................................ 15
Selected Consolidated Financial Data........... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business....................................... 24
Management..................................... 32
Certain Transactions........................... 37
Principal Shareholders......................... 39
Description of Debentures...................... 41
Rating of Debentures........................... 50
Certain Federal Income Tax Consequences........ 50
Description of Capital Stock................... 55
Underwriting................................... 56
Experts........................................ 56
Legal Matters.................................. 57
Index to Financial Statements.................. F-1
</TABLE>
$25,000,000
MERCURY AIR GROUP, INC.
% CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2006
-------------------
P R O S P E C T U S
-------------------
EVEREN SECURITIES, INC.
CROWELL, WEEDON & CO.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the offering of the Debentures being registered hereby. All
amounts shown are estimates except the SEC Commission registration fee and the
NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 9,914
NASD Filing Fee.................................................. 3,375
AMEX Stock Exchange Listing Application Fee...................... 10,000
Transfer Agent's and Registrar's Fees............................ 15,000
Printing Fees.................................................... 35,000
Legal Fees and Expenses.......................................... 125,000
Blue Sky Fees and Expenses....................................... 15,000
Accounting Fees and Expenses..................................... 50,000
Miscellaneous Expenses........................................... 36,711
---------
Total........................................................ $ 300,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 722 of the New York Business Corporation Law (the "NYBCL") provides
for indemnification by a corporation of its directors and officers against
amounts paid in settlement and reasonable expenses, including attorneys' fees,
actually and necessarily incurred by them in connection with the defense or
settlement of such action, or in connection with an appeal therein if such
director or officer acted in good faith for a purpose which they reasonably
believed to be in the best interests of the corporation. No indemnification will
be made, however, in respect of either (1) a threatened action, or a pending
action which is settled or otherwise disposed of, or (2) any claim, issue or
matter as to which any such officer or director is adjudged to be liable to the
corporation, unless and only to the extent that the court to which the action
was brought, or, if no action was brought, any court of competent jurisdiction,
determines upon application that in view of all the circumstances of the case,
the director or officer is fairly and reasonably entitled to indemnity for such
portion of the settlement amount and expenses as the court deems proper.
The NYBCL further provides that a New York corporation has the power to
purchase and maintain insurance in order to indemnify the corporation for any
obligation which it incurs as a result of the indemnification of directors and
officers pursuant to the provisions of the NYBCL, to indemnify directors and
officers in instances in which they may be indemnified by the corporation
pursuant to the provisions of the NYBCL, and to indemnify directors and officers
in instances in which they may not otherwise by indemnified by the corporation
pursuant to the provisions of the NYBCL, provided the contract of insurance
covering such directors and officers provides, in a manner acceptable to the
superintendent of insurance, for a retention amount and for co-insurance.
The Company's bylaws authorize it to indemnify its directors and officers
against any judgments, fines, amounts paid in settlement and reasonable
expenses, including attorneys' fees, if such director or officer acted in good
faith.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
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 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.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits, which are furnished with this Registration
Statement or incorporated herein by reference, are filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Underwriting Agreement (14)
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)
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, as Trustee,
under which the Debentures are to be issued, including the Form of Debenture attached as Exhibit A
thereto (14)
5.1 Opinion of McBreen, McBreen & Kopko*.................................................................
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 Agreement 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)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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)
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, 1994 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)
11.1 Computation of Earnings Per Share (3)
12.1 Statements Regarding Computation of Earnings to Fixed Charges (14)
21.1 Subsidiaries of Registrant (13)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Deloitte & Touche LLP*
23.2 Consent of McBreen, McBreen & Kopko (included in their opinion filed as Exhibit 5.1 to the
Registration Statement)
24.1 Power of Attorney (included on the signature page of the Registration Statement)
25.1 Form T-1 Statement of Eligibility and Qualification of IBJ Schroder Bank & Trust Company, as trustee
under the Indenture relating to the Debentures (14)
</TABLE>
- ------------
* Filed herewith.
(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 14 of Notes to Consolidated Financial
Statements included in the Annual Report on Form 10-K for the year ended
June 30, 1995, 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.
(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, 1994 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, 1994 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 hereby
incorporated by reference.
(14) Such document was previously filed as an Exhibit to this Registration
Statement.
II-4
<PAGE>
(b) The following schedules supporting the consolidated financial statements
are included herein:
Schedule II -- Valuation and Qualifying Accounts
17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, and State of California, on the 29th day of January, 1996.
MERCURY AIR GROUP, INC.
By /s/ SEYMOUR KAHN*
--------------------------------
Seymour Kahn, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons as
of the date indicated below.
SIGNATURES
- ----------------------------------------
Principal Executive Officer:
/s/ SEYMOUR KAHN* Dated: January 29, 1996
- ----------------------------------------
Seymour Kahn
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Principal Chief Operating Officer and Director:
/s/ JOSEPH CZYZYK* Dated: January 29, 1996
- ----------------------------------------
Joseph Czyzyk
CHIEF OPERATING OFFICER AND DIRECTOR
Principal Financial and Accounting Officer:
/s/ RANDOLPH E. AJER Dated: January 29, 1996
- ----------------------------------------
Randolph E. Ajer
EXECUTIVE VICE PRESIDENT,
SECRETARY AND TREASURER
II-6
<PAGE>
SIGNATURES
- ----------------------------------------
Additional Directors:
/s/ ROBERT LIST* Dated: January 29, 1996
- ----------------------------------------
Robert List
DIRECTOR
/s/ PHILIP J. FAGAN, JR., M.D.* Dated: January 29, 1996
- ----------------------------------------
Philip J. Fagan, Jr., M.D.
DIRECTOR
/s/ WILLIAM G. LANGTON* Dated: January 29, 1996
- ----------------------------------------
William G. Langton
DIRECTOR
/s/ FREDERICK H. KOPKO, JR.* Dated: January 29, 1996
- ----------------------------------------
Frederick H. Kopko, Jr.
DIRECTOR
*Signed by Randolph E. Ajer pursuant to Power of Attorney.
By /s/ RANDOLPH E.
AJER
- ---------------------------------------
Randolph E. Ajer
Attorney-in-fact
II-7
<PAGE>
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED JUNE 30, 1995
<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> <C>
1995
Allowance for doubtful accounts................... $ 508,000 $ 905,000(d) $ (803,000)(a) $ 610,000
---------- ---------- --------------- ---------- ---------
---------- ---------- --------------- ---------- ---------
1994
Allowance for doubtful accounts................... $ 83,000 $ 624,000(c) $ (199,000)(a) $ 508,000
---------- ---------- --------------- ---------- ---------
---------- ---------- --------------- ---------- ---------
1993
Allowance for doubtful accounts................... $ 294,000 $ 671,000(b) $ (882,000)(a) $ 83,000
---------- ---------- --------------- ---------- ---------
---------- ---------- --------------- ---------- ---------
</TABLE>
- ------------
(a) Accounts receivable write-off
(b) Included in the $671,000 is $414,000 charged to selling, general and
administrative expenses and $257,000 recorded as a reduction to revenues.
(c) Included in the $624,000 is $324,000 charged to selling, general and
administrative expenses and $300,000 recorded as a reduction to revenues.
(d) Amount charged to selling, general and administrative expense.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
1.1 Underwriting Agreement (14)
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)
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, as
Trustee, under which the Debentures are to be issued, including the Form of Debenture
attached as Exhibit A thereto (14)
5.1 Opinion of McBreen, McBreen & Kopko*..........................................................
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 Agreement 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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
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)
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, 1994 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)
11.1 Computation of Earnings Per Share (3)
12.1 Statements Regarding Computation of Earnings to Fixed Charges (14)
21.1 Subsidiaries of Registrant (13)
23.1 Consent of Deloitte & Touche LLP*
23.2 Consent of McBreen, McBreen & Kopko (included in their opinion filed as Exhibit 5.1 to the
Registration Statement)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
24.1 Power of Attorney (included on the signature page of the Registration Statement)
25.1 Form T-1 Statement of Eligibility and Qualification of IBJ Schroder Bank & Trust Company, as
trustee under the Indenture relating to the Debentures (14)
</TABLE>
- ------------
* Filed herewith.
(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 14 of Notes to Consolidated Financial
Statements included in the Annual Report on Form 10-K for the year ended
June 30, 1995, 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.
(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, 1994 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, 1994 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 hereby
incorporated by reference.
(14) Such document was previously filed as an Exhibit to this Registration
Statement.
<PAGE>
[MCBREEN, MCBREEN & KOPKO-LETTERHEAD]
January 26, 1996
Mercury Air Group
5456 McConnell Avenue
Los Angeles, California 90066
Re: Registration Statement on Form S-1
File No. 33-65085
------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Mercury Air Group, Inc., a New York
corporation (the "Company"), in connection with (i) the issuance by the
Company of up to $28,750,000 aggregate principal amount of ___ % Convertible
Subordinated Debentures due 2006 (the "Debentures"), and (ii) such number of
shares of Common Stock, par value $.01 per share, that may be issued upon
conversion of the Debentures (the "Shares"), pursuant to the above-referenced
Registration Statement (the "Registration Statement"), including the
prospectus contained therein (the "Prospectus"), under the Securities Act of
1933, as amended (the "Securities Act") filed by the Company with the
Securities and Exchange Commission.
We have examined copies of (i) the Restated Certificate of
Incorporation of the Company, certified by the Secretary of State of New
York, (ii) Bylaws of the Company, (iii) Trust Indenture between the Company
and IBJ Schroder Bank & Trust Company, as Trustee, (iv) form of the
Debentures, and (v) resolutions adopted by the Board of Directors of the
Company relating to the matters referred to herein. We have also examined
the Registration Statement (collectively, with the documents described in the
preceding sentence, referred to as the "Documents").
In expressing the opinions set forth below, we have assumed, and so
far as is known to us there are no facts inconsistent with, the following:
1. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents to
which such party is a signatory, and such party's obligations set forth therein
are legal, valid and binding and are enforceable in accordance with all stated
terms except as limited (a) by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other laws relating to or
<PAGE>
McBreen, McBreen, Kopko
Mercury Air Group, Inc.
January 26, 1996
Page 2
affecting the enforcement of creditors' rights, or (b) by general equitable
principles;
2. Each individual executing any Documents on behalf of a party
(other than the Company) is duly authorized to do so, and each individual
executing any of the Documents is legally competent to do so; and
3. All Documents submitted to us as originals are authentic; all
documents submitted to us as certified or photostatic copies conform to the
original documents; all signatures on all such Documents are genuine; all public
records reviewed or relied upon by us or on our behalf are true and complete;
and all statements and information contained in the Documents are true and
complete.
Based on the foregoing, it is our opinion that (i) the Debentures
have been duly and validly authorized and, upon completion of the offering
described in the Registration Statement and payment therefor by the
purchasers thereof in the manner described in the Registration Statement, the
Debentures will be valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, and (ii) The Shares have
been duly and validly authorized and, upon conversion of the Debentures upon
the terms set forth in the Registration Statement, will be legally issued,
fully paid and non-assessable.
The foregoing opinion is limited to the laws of the State of New
York and the United States and we do not express any opinion herein
concerning any other law. We assume no obligation to supplement this opinion
if any applicable law changes after the date hereof or if we become aware of
any fact that might change the opinion expressed herein after the date hereof.
It should be noted that Frederick H. KopKo, Jr., is a partner in
this firm and a director of the Company.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the use of the name of our firm therein.
In giving this opinion, we do not admit that we are within the category of
persons whose consent is required by Section 7 of the Securities Act of 1933.
Very truly yours,
McBreen, McBreen & Kopko
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement of
Mercury Air Group, Inc. on Form S-1 of our report dated September 15, 1995,
appearing in the Prospectus, which is a part of this Registration Statement, and
to the reference to us under the caption "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Mercury Air Group,
Inc., listed in Item 16(b). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Los Angeles, California
January 29, 1996
