<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year ended June 30, 1999
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ______________
Commission file number: 1-7134
MERCURY AIR GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-1800515
------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
5456 McConnell Avenue, Los Angeles, California 90066
----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (310) 827-2737
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------- ------------------------
<S> <C>
Common Stock - Par Value $.01 American Stock Exchange
Pacific Stock Exchange
</TABLE>
<PAGE> 2
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of September 20, 1999, 6,684,765 shares of the Registrant's Common
Stock were outstanding. Of these shares, 2,087,975 shares were held by persons
who may be deemed to be affiliates. The 4,596,790 shares held by non-affiliates
as of September 10, 1999 had an aggregate market value (based on the closing
price of these shares on the American Stock Exchange of $7.25 a share) of
$33,326,728. As of September 10, 1999, there were no non-voting shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement which is to be distributed in
connection with the Annual Meeting of Shareholders to be held on December 2,
1999 are incorporated by reference into Part III of this Form 10-K.
- --------------------------------------------------------------------------------
(The Exhibit Index May Be Found at Page 31)
<PAGE> 3
PART I
ITEM 1. BUSINESS
Mercury Air Group, Inc., a New York corporation since 1956, provides a
broad range of services to the aviation industry through four (4) principal
operating units: fuel sales and services, cargo operations, fixed base
operations, and U.S. government contract services. Fuel sales and services
include the sale of fuel and delivery of fuel primarily to domestic and
international commercial airlines and air freight airlines as well as airline
revenue accounting and management information software consisting of proprietary
software programs developed by the Company's subsidiary, RPA Airline Automation
Services, Inc. ("RPA"), which are marketed to foreign and domestic airlines.
Cargo operations consist of cargo handling, space logistics operations and
general cargo sales agent services. Fixed base operations ("FBOs") include fuel
sales, into-plane services, ground support services and aircraft hangar and
tie-down facilities for commercial, private, general aviation and military
aircraft. Government contract services consist of aircraft refueling and fuel
storage operations, base housing maintenance, air terminal operations, weather
observation and forecasting, and air traffic control services performed
principally for agencies of the United States federal government. As used in
this Annual Report, the term "Company" or "Mercury" refers to Mercury Air Group,
Inc. and, unless the context otherwise requires, its subsidiaries. The Company's
principal executive offices are located at 5456 McConnell Avenue, Los Angeles,
California 90066 and its telephone number is (310) 827-2737.
NARRATIVE DESCRIPTION OF THE BUSINESS
FUEL SALES AND SERVICES
Mercury's fuel sales consist of contract fueling and related fuel
management services. Sales of aviation fuel are made primarily to domestic and
international airlines and airfreight companies. Mercury also provides fuel to
large corporate aircraft operators through third parties. As a result of factors
such as: management's decisions to shift focus to higher margin and somewhat
less risky corporate fuel business; the loss in February 1998 of a major
customer (Western Pacific Airlines); and lower fuel prices. Mercury's revenue
from fuel sales and services as a percentage of revenue decreased to 55.1% of
total Company revenue in fiscal 1999 from 65.2% in fiscal 1998.
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 at one or more
locations. To facilitate its fuel sales business at locations where Mercury does
not have facilities, Mercury has developed an extensive network of third party
supply and delivery relationships which enable it to provide fuel to customers
on a scheduled or ad hoc basis. Through these third party relationships, Mercury
is currently supplying fuel to customers at airports throughout the United
States and internationally.
2
<PAGE> 4
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 as well as
providing related support services. Further, 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.
Accordingly, Mercury frequently extends credit on an unsecured basis to
customers which may exhibit a higher credit risk profile and who may otherwise
be required to prepay or post letters of credit for fuel purchases. The amount
of credit extended to any particular customer is a subjective decision. Customer
credit terms range from prepayment to up to more than 60 days with certain
accounts also subject to maximum credit line limitation. In certain instances,
the Company will permit a customer to further defer payment on its account
through an agreed upon payment schedule or execution of a promissory note with
terms negotiated on a case-by-case basis. Factors considered in credit decisions
include the customer's financial strength and payment history, competitive
conditions in the market, the expected productivity of the account, the
availability of credit insurance and collateral or guarantees given to secure
the credit.
Mercury provides fuel support operations for corporate and fractional
ownership aircraft at numerous locations from its Houston facilities. This
operation allows selected customers to purchase fuel at advantageous prices from
a single source. This operation has grown and developed into a network of
approximately 80 third-party locations in the United States where Mercury can
provide fuel. The Company is in the process of automating this system to provide
on-line ordering capability under the domain name mercfuel.com, which is
expected to be on line in fiscal 2000. The automated system will be accessible
only to customers who have executed an Internet sales agreement and have been
pre-approved for credit.
Mercury has in the past and may in the future occasionally purchase
equity positions in, make loans to or enter into other financial transactions
with certain airlines, particularly start-up and foreign airlines, in order to
initiate new or expand existing customer relationships. The extent of the equity
position, amount loaned or other financial commitment undertaken is a subjective
decision based upon management's assessment of the future prospects of such
airline and the potential business opportunities with such airline for Mercury.
This year the Company invested $300,000 in National Airlines, a start-up airline
based in Las Vegas, Nevada, which began operations on May 27, 1999. The Company
has also entered into a fuel management contract with National.
Mercury purchases fuel at current market prices from a number of major
oil companies and certain independent and state owned oil companies based on the
expected requirements of its customers. From time-to-time, Mercury will commit
to purchase a fixed volume of fuel, at a fixed price, over a fixed period of
time, at agreed locations based on selected customers'
3
<PAGE> 5
corresponding purchase commitments. Mercury's terms of payment generally 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. Due to the nature of Mercury's
business, the volume of Mercury's aviation fuel inventories will fluctuate.
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
allocation. 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 such an allocation. Currently, the monthly
allocations from Mercury's fuel suppliers represent only a small portion of
Mercury's total monthly supply requirements.
Mercury's consolidated fuel sales could be materially adversely
affected by a significant decrease in the availability, or increase in the price
of, aviation fuel. Although Mercury believes that there are currently adequate
aviation fuel supplies and that aviation fuel supplies will generally remain
available, events outside Mercury's control have resulted and could result in
spot shortages or rapid increases in fuel costs. Although Mercury is generally
able to pass through rising fuel costs to its customers, extended periods of
high fuel costs could adversely affect Mercury's ability to purchase fuel in
sufficient quantities because of credit limits placed on Mercury by its fuel
suppliers. Various factors including the price of fuel, the volatility of the
price of fuel, over-all business mix, customer profiles and specific major
accounts which are attracted, retained or lost during a given period affect
gross margin as a percentage of revenue for Mercury's fuel sales and services
business.
In addition to contract fueling, Mercury conducts a number of other
commercial activities, which are headquartered at Los Angeles World Airports
("LAX"), as part of its fuel sales and services operations. These activities
include refueling services at LAX; the brokering of non-aviation fuel to the
industrial and commercial market place; and the provision of air frame and power
plant maintenance to commercial airlines. Refueling services at LAX consist of
the delivery of fuel by Company owned trucks or hydrant carts for a fee. Mercury
also maintains underground fuel tanks at LAX to support its fuel sales and
refueling services. At the present time Mercury is in full compliance with all
known environmental regulations regarding fueling (See "Environmental Matters").
4
<PAGE> 6
FIXED BASE OPERATIONS
Mercury currently provides FBO services at fifteen (15) airports
throughout the United States. For the year ended June 30, 1999 FBO operations
comprised 21.3 % of the total Company revenue. 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,
aircraft tie-down and hangar space tenants. The FBOs operate refueling vehicles
and maintain fuel storage tanks as required to support into-plane and fuel sales
activities. The FBO facilities and the property on which operations are
conducted are leased from the respective airport authorities. Fourteen of
Mercury's FBOs are currently directly owned by the Company, the remaining FBO is
owned by Mercury Air Centers, Inc. ("Air Centers") which is a wholly owned
subsidiary of the Company. The Company presently plans to transfer the assets,
but not the leases of the other 14 FBOs to Air Centers in the current fiscal
year.
The Company's FBO operations have grown principally as a result of the
acquisition of additional operations or locations as well as facilities
enhancements at existing locations. In November 1998, the Company acquired
certain assets of an FBO located in Jackson, Mississippi. In October 1997, the
Company entered into a new lease for its Burbank FBO pursuant to which it has
constructed 3 new hangars and is in the process of building an executive
terminal and refurbishing certain existing facilities. In July 1997, the Company
acquired certain assets of an FBO located in Nashville, Tennessee. In June 1997,
the Company entered into an agreement to operate an FBO, which opened in
November 1998, in Charleston, South Carolina. In December 1996, the Company
acquired an FBO located in Fresno, California. In August and November 1996, the
Company acquired certain assets of six FBOs from Raytheon Aircraft Services,
Inc. In addition, the Company is in the process of performing due diligence
under letters of intent for the purchase of two additional FBOs for a total
purchase price of approximately $6.9 million, which the Company expects to fund
under its existing senior credit facilities. Each is expected to close in the
second quarter of fiscal 2000. Management intends to continue pursuing FBO
acquisitions and facility enhancements but no assurance can be given that
acquisition or enhancement opportunities will be available at prices which will
maintain existing levels of profitability.
CARGO OPERATIONS
The Company's cargo operations are conducted through its wholly-owned
subsidiary, Mercury Air Cargo, Inc. ("MAC"), which provides the following
services: cargo handling, space logistics and general cargo sales agent
services. Cargo operations comprised 12.3% of total Company revenue for the year
ended June 30, 1999. Each of MAC's services facilitates the movement of domestic
and international cargo. Accordingly, results for MAC's operations depend, in
part, on certain economic factors which affect the volume of cargo transported
throughout the world.
5
<PAGE> 7
Cargo Handling
MAC provides domestic and international air cargo handling, air mail
handling and bonded warehousing. MAC is one of only four (4) non-airline
providers of contractual cargo containerization and palletization for domestic
and international airlines and cargo airlines 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.
MAC handles cargo at LAX, William B. Hartsfield International Airport
(ATL), and Dorval International Airport (YUL), Mirabel International Airport
(YMX) and Lester B. Pearson International Airport (YYZ) in Canada. In March
1998, MAC expanded its cargo handling operations by acquiring the assets of
Intermodal Services, Inc. located in Atlanta, Georgia. In April 1998, MAC
completed construction and commenced operation of a 174,000 square foot
warehouse at LAX under a five year lease and is currently negotiating an
extension. MAC is currently the largest independent cargo handling company at
LAX. In February 1999, MAC sold its unprofitable subsidiary Floracool, Inc.
thereby ceasing cargo handling operations at Miami International Airport. MAC
competes in the cargo handling business based on quality and price of service.
Long term growth in MAC's cargo handling operations can only be realized by
maintaining existing and obtaining new locations or expanding current
facilities.
Space Logistics
MAC brokers cargo space on transcontinental flights within the United
States and on international flights to Europe, Asia, the Middle East, Australia,
Mexico and Central and South America. Space logistics involves contracting for
bulk cargo space on airlines and selling that space to customers with shipping
needs. MAC has established a network of shipping agents who assist in obtaining
cargo for shipment on space purchased from airlines, and who facilitate the
delivery and collection of freight charges for cargo shipped by MAC.
MAC has a contract with Tower Airlines (Tower) whereby MAC receives
substantial space on Tower's domestic routes and internationally from New York
to Paris. MAC had previously operated under a one year contract with Tower and
is now on a month to month basis. As of June 1, 1999, MAC entered into a one
year contract to purchase all of South African Airlines ("SAA") cargo capacity
on its passenger flights from the United States and Canada to South Africa.
MAC's one year commitment for these routes is in excess of $7 million.
Unlike an air cargo airline which operates its own aircraft, MAC's
space logistics business purchases committed cargo space on scheduled airline
flights or supplemental flights at a discount. MAC is thereby able to profit
from the sale of cargo transportation space worldwide without the fixed overhead
expense of operating aircraft. In addition to the relationships listed above,
MAC purchases belly cargo space from a number of major airlines worldwide. In
some instances, MAC enters into fixed minimum commitments for cargo space, in
order to obtain exclusive or preferred rights to broker desirable cargo space
profitably. With 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 to the domestic and international
freight forwarding community. MAC records revenue as the difference between the
cost of the space and the amount at which the space is resold.
General Sales Agent Services
MAC also serves as general cargo sales agent directly and through its
subsidiaries, Hermes
6
<PAGE> 8
Aviation, Inc., Hermes Aviacion de Mexico, S.A. de C.V. and Aero Freightways,
Inc. of Canada for airlines in the Far East, Canada, 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 air
waybills. MAC earns commissions from the airlines for selling their cargo space.
As with its space logistics operations, the growth potential for MAC's general
cargo sales agent business is not limited by requirements for physical
facilities or by requirements for additional capital investments.
GOVERNMENT CONTRACT SERVICES
Mercury conducts its government contract services through its wholly
owned subsidiary, Maytag Aircraft Corporation ("Maytag"), which is headquartered
in Colorado Springs, Colorado.
Maytag provides aircraft refueling and related services at twelve
United States military bases, including eleven in the United States and one in
Greece. Maytag's refueling contracts generally have a term of four years, with
expiration dates for current contracts ranging from September 1999 to November
2002. Refueling contracts provide a firm-fixed price for specified services.
Under the terms of its refueling contracts, Maytag supplies all necessary
personnel and equipment to operate government-owned fuel storage facilities and
to provide 24-hour refueling services for a variety of aircraft for the
military. All fuel handled in these operations is government owned. In
connection with its government contract refueling business, Maytag owns and
operates a fleet of refueling trucks and other support vehicles.
In addition, Maytag provides air terminal and ground handling services
to the United States Government at nineteen locations under eight contracts.
Seven contracts cover three U.S. military bases in Alaska, Japan, and Korea,
three international airports in Japan, Korea, and Panama, and one on a
contingency basis at Atlanta's Hartsfield International Airport. Maytag also has
one contract servicing twelve international airports in Latin America. Air
terminal services contracts are generally for a base period of up to one year,
with government options for multiple one-year extension periods. With the
exception of Panama, all air terminal contracts have been extended to September
30, 2000. Panama, which expires October 31, 1999, is subject to competitive
bidding. Air terminal contracts provide a firm-fixed price for specified
services. Discretionary performance-based awards are also available at the five
Pacific Rim locations. Air terminal and ground handling services include the
loading and unloading of passengers and cargo, transient alert, and flight
planning services. At this time, Maytag is the largest single provider of these
services for the Air Mobility Command of the U.S. Air Force.
Maytag also provides base housing maintenance services at one United
States military base in Japan under a contract which expires in September 2000.
The base housing maintenance contract provides for "indefinite quantity pricing"
and fixed prices for specified services, with the actual quantities of each item
determined by seasonally varying government delivery orders. Base housing
maintenance services consist of change of occupancy maintenance for
government-provided quarters, including basic interior maintenance, repair,
painting, and cleaning.
Maytag also provides base operating support services at Niagara Falls
International Airport for the Air Reserve Station on a subcontracted basis.
Under the terms of the subcontract, Maytag provides, at a firm-fixed price, fuel
management, traffic management, airfield management, and meteorological
7
<PAGE> 9
services through September 1999 with four pre-priced one year options. It is
anticipated that the first one year option will be exercised.
Weather Data
Effective August 1, 1998, Maytag acquired the government contracts and
related assets of Weather Data Service. Inc. ("Weather Data") The Weather Data
business consists of weather observation, weather forecasting, and air traffic
control services performed in various combinations at fifty-five locations
throughout the United States pursuant to thirty eight contracts with the United
States Government and certain local governmental agencies. The Weather Data
contracts are generally for a base period of up to one year, with multiple one
year extension options at the government's election. Substantially all of
Weather Data's existing contracts were extended for a one year period ending
September 30, 1999, with remaining extension options ranging up to three periods
on a majority of the contracts. The Weather Data contracts provide firm fixed
prices for specified services.
All of Maytag's government contracts are subject to competitive
bidding. Refueling, base housing maintenance and air terminal contracts are
generally awarded to the offeror with the proposal which represents the "best
value" to the government. Weather Data contracts have historically been awarded
to the offeror with the lowest priced technically acceptable proposal. Maytag
anticipates that Weather Data contracts will be awarded to some extent in the
future on the basis of "best value." In a "best value" competition, the
proposals are evaluated on the basis of price, past performance history of the
offeror, and the merit of the technical proposal, creating a more subjective
process.
Maytag's contracts are all subject to termination at the discretion of
the United States Government, in whole or in part. Termination of a contract may
occur if the United States Government determines that it is in its best interest
to discontinue the contract, in which case closure costs will be paid to Maytag.
Termination may also occur if Maytag defaults under a contract. Maytag has never
experienced any such default termination.
ACQUISITIONS
JACKSON, MS FBO
Effective November 30, 1998, the Company acquired substantially all the
assets of Jackson Air Center, an FBO located in Jackson Mississippi for
$4,500,000 in cash. The Company borrowed $2.8 million in term debt and $1.7
million in revolving debt under its former senior credit facility to fund the
transaction.
WEATHER DATA SERVICES, INC.
On August 1, 1998, Mercury acquired thirty-eight government contracts
and related assets to perform a combination of weather observation, weather
forecasting and air traffic control services at sixty-two locations from Weather
Data Services, Inc., an Iowa Corporation ("Weather Data"), for $3,500,000,
including $2,500,000 in cash and approximately 124,000 shares of the Company's
Common Stock, valued at $1,000,000.
8
<PAGE> 10
MAJOR CUSTOMERS
During fiscal 1999, EVA Airways Corporation accounted for approximately
12% of cargo operations revenue and Tower Air, Inc. represented approximately
13% of fuel sales and services revenue. During fiscal 1999, government contract
services consisted entirely of revenues from agencies of the United States
Government. No other customers accounted for over 10% of Mercury's consolidated
revenue or 10% of revenues for any of the four (4) reporting units
SEASONAL NATURE OF BUSINESS
Mercury's commercial fuel sales, FBOs and aircraft support operations
are seasonal in nature, being relatively stronger during the months of April
through December in its fueling operations and FBOs than during the winter
months due in part to weather conditions, and increased during summer months due
in part to additional commercial flights and charter flights. MAC's cargo
business is lower during the months of January and February and increases March
through December. The cargo business is affected by the patterns of
international trade. Operations at military facilities are not seasonal.
POTENTIAL LIABILITY AND INSURANCE
Mercury's business activities subject it to risk of significant
potential liability under federal and state statutes, common law and contractual
indemnification agreements. Mercury reviews the adequacy of its insurance on an
on-going basis. Mercury believes it follows generally accepted standards for its
lines of business with respect to the purchase of business insurance and risk
management practices. The Company purchases airport liability and general and
auto liability in amounts which the Company believes are adequate for the risks
of its business.
COMPETITION
Mercury competes with major companies which maintain their own source
of aviation fuel and with other aircraft support companies whose total sales and
financial resources far exceed those of Mercury. In addition, certain airlines
provide cargo and fueling services comparable to those furnished by Mercury. At
LAX Mercury competes with, in addition to the airlines, three (3) fuel delivery
providers and with three (3) non-airline entities with respect to air cargo
handling business. Generally, FBOs have a minimum of one competitor at each
airport as well as national multi-location chains. Mercury has many principal
competitors with respect to government contracting services including certain
small disadvantaged businesses which receive a ten percent (10%) cost advantage
with respect to certain bids and set asides of certain contracts. Recently the
FBO market has seen the emergence of increased competition among several
national FBO chains owned by major corporations whose total sales and financial
resources exceed those of Mercury. Substantially all of Mercury's services are
subject to competitive bidding. Mercury competes on the basis of price and
quality of service.
9
<PAGE> 11
ENVIRONMENTAL MATTERS
Mercury must continuously comply with federal, state and local
environmental statutes and regulations associated with its numerous underground
fuel storage tanks. These requirements include, among other things, tank and
pipe testing for integrity, soil sampling for evidence of leaking and
remediation of detected leaks and spills. Other than the $3.4 million spent
during the 1999 fiscal year to comply with certain federal mandates regarding
below ground fuel tanks (See Item 2 "Properties"), 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. In late 1998, Mercury, and many other companies operating on
Southern California airports received notice of potential violations of
California Environmental Protection Agency - Air Resources Board regulations.
This notice alleged that such companies had violated the act by fueling airport
service vehicles with Jet A fuel. While Mercury has not admitted any liability
it immediately brought all of its operations into full compliance with all
applicable regulations. In addition, it has undertaken a review of federal and
state regulations to insure future compliance. The Company believes that, while
no assurances can be given, a state legislative solution to the fueling issue
will be reached without resulting in significant fines to Mercury. Mercury knows
of no other basis for any notice of violation or cease and abatement proceeding
by any governmental agency as a result of failure to comply with applicable
environmental laws and regulations.
EMPLOYEES
As of August 31, 1999, Mercury employed 1,221 full-time and 473
part-time persons in its following operating units: fuel sales and services, 76
full-time and 2 part-time persons; cargo handling, 375 full-time and 4 part-time
persons; FBOs, 502 full-time and 43 part-time persons; and government contract
services, 268 full-time and 424 part-time persons. Mercury is in the process of
negotiating a collective bargaining agreement for its government refueling
operation at Point Mugu, California. Maytag has collective bargaining agreements
which affect approximately 109 employees in its Weather Data operation.
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.
10
<PAGE> 12
ITEM 2. PROPERTIES.
Listed below are the significant properties leased or owned by Mercury
as of September 15, 1999:
<TABLE>
<CAPTION>
LEASED
OR ANNUAL EXPIRATION OF
LOCATION OWNED RENTAL LEASE ACTIVITY AT FACILITY FACILITY DESCRIPTION
-------- ------- ------ -------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
CORPORATE HEADQUARTERS
5456 McConnell Owned N/A N/A Landlord, executive 20,000 sq.ft. building
Los Angeles, California(1) and support personnel
offices
MAYTAG OPERATIONS
6145 Lehman Drive, Owned N/A N/A Landlord, executive 8,000 sq.ft. offices
Suite 300 and support personnel
Colorado Springs, CO(2) offices
RPA BUILDINGS
129 S.W. 36th Court Owned N/A N/A Land 10,846 sq. ft.
Miami, FL(5)
101 S.W. 36th Court Owned N/A N/A Land 7,210 sq. ft.
Miami, FL(5)
119 S.W. 36th Court Owned N/A N/A Office Building 1,401 sq. ft.
Miami, FL(5)
115 S.W. 36th Court Owned N/A N/A Office Building 3,865 sq. ft.
Miami, FL(5)
2000 N.W. 89th PL Owned N/A N/A Office Building Office Building
Miami, FL 22,400 sq. ft.
HARTSFIELD ATLANTA INT'S
AIRPORT
996 Toffie Terrace Leased $550,100 May 2000 Cargo handling 71,100 sq. ft. of cargo
Atlanta, GA(3) warehouse with warehouse facility with
offices 3,350 sq. ft. of
offices on 5.3 acres
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C> <C>
LOS ANGELES INT'L
AIRPORT
6851 W. Imperial Leased $ 469,000 December 1999 Cargo hangar, with 60,000 sq.ft. of
Highway, offices and executive offices and cargo
Los Angeles, CA offices rented to warehouse facility
customers on 5.5 acres.
6060 Avion Drive Leased $2,088,000 June 2001 Cargo handling 174,000 sq.ft.
Los Angeles, CA warehouse with offices offices and cargo
warehouse facility
LESTER B. PEARSON
INT'L AIRPORT
Building D Leased $ 219,300 July 2000 Cargo handling 28,445 sq.ft.
Toronto, AMF warehouse with offices warehouse space
Ontario and 5,721 sq. ft. of
offices
DORVAL INT'L AIRPORT
800 Stuart Graham Leased $ 474,000 November 2007 Cargo handling 51,000 sq.ft.
Blvd. South warehouse with offices warehouse and
Dorval, Quebec(6) 2,432 sq.ft. of
office space
MIRABEL INT'L AIRPORT
12005, Rue Cargo Leased $ 50,400 November 2005 Cargo handling 12,500 sq.ft.
A-3, Suite 102 warehouse with offices warehouse
Mirabel, Quebec
LOS ANGELES INT'L
AIRPORT
7000 World Way West Leased $ 305,000 Month-to-Month Service and refueling of 2,000 sq.ft. of
Los Angeles, CA private aircraft executive terminal
on 1.93 acres
ONTARIO INT'L AIRPORT
2161 East Avion St. Leased $ 226,000 April 2008 Landlord, service and 60,000 sq.ft. of
Ontario, CA refueling of commercial offices and hangars
and private aircraft on 15.4 acres
BAKERSFIELD AIRPORT
1601 Skyway Drive Leased $ 23,000 February 2008 Offices and refueling of 2,000 sq. ft.
Bakersfield, CA commercial and private building on 5.0
aircraft acres
1801 Skyway Drive Leased $ 44,000 February 2008 Landlord, service and Three buildings
Bakersfield, CA refueling of commercial totaling 49,200 sq.
and private aircraft ft. on 17.2 acres
1201 Skyway Drive Leased $ 46,000 June 2001 Landlord, service and 30,000 sq. ft.
Bakersfield, CA refueling of commercial hangar on 2.7 acres
and private aircraft
1301 Skyway Drive Leased $ 21,000 Month-to-Month Landlord, service and 1,200 sq. ft.
Bakersfield, CA refueling of commercial building on 10.86
and private aircraft acres
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C> <C>
1550 Skyway Drive Leased $ 25,000 March 2015 Landlord, service and 35,940 sq. ft.
Bakersfield, CA refueling of commercial executive offices
and private aircraft and terminal and
hangars on 6.14
acres
BURBANK-GLENDALE-
PASADENA AIRPORT
4301/4405/4407/4409/ Leased $1,572,000 April 2025 Landlord, service and 156,200 sq. ft. of
4411/4531 Empire refueling of commercial offices, hangars,
Avenue and private aircraft and shop facilities
10660/10670/10700/
10750/10760/10800/ 74,612 sq. ft. of
10820 Sherman Way, offices, hangars and
Burbank, CA(4) shop facilities on
16.3 acres
6920 Vineland Ave. Leased $ 187,000 November 1999 Landlord, service and 5,200 sq. ft. of
No. Hollywood, CA refueling of commercial offices, hangars and
and private aircraft shop facilities
CHARLESTON
INTERNATIONAL AIRPORT
6060 S Aviation Wy. Leased $ 161,160 August 2007 Terminal, office, and 9,000 sq. ft.
N. Charleston, SC hanger officer Building
35,000 sq. ft.
Aircraft Hanger
59,000 sq. ft.
parking lot
SANTA BARBARA
MUNICIPAL AIRPORT
404 Moffet Road Leased $ 53,400 Month-to-Month Landlord, service, 8T-Hangars
Goleta, CA maintenance, and totaling 28,413
(Building 124 & 126) refueling of commercial sq. ft.; 9,320 sq. ft
and private aircraft of building space
404 Moffet Road Leased $ 27,840 Month-to-Month Building space and 10,370 sq. ft. office
Goleta, CA parking spaces space and 10
(Building 121) parking spaces
404 Moffet Road Landlord service and
Goleta, CA refueling of commercial 3,120 sq. ft. office
(Building 122) Leased $ 37,000 Month-to-Month and private aircraft space
FRESNO YOSEMITE INT'L
AIRPORT
5045 E. Anderson Leased $ 74,000 April 2020 Landlord, service and 8.47 acres.
Avenue refueling of commercial
Fresno, CA and private aircraft
5045 E. Anderson Leased $ 3,000 February 2001 Landlord, service and 250 sq. ft. of
Avenue refueling of commercial general
Fresno, CA and private aircraft office/storage
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C> <C> <C> <C> <C>
5045 E. Anderson Leased $ 67,000 August 2006 Terminal, office and Hangars and offices
Avenue hangar facility on 2.16 acres
Fresno, CA
5045 E. Anderson Leased $ 6,000 October 2000 Refueling of private and 12,320 sq.ft. fuel
Avenue commercial aircraft farm
Fresno, CA
5045 E. Anderson Leased $115,000 May 2005 Hangar and commercial 22,000 sq.ft. office
Avenue office space space on 19.26
Fresno, CA acres
DEKALB-PEACHTREE
AIRPORT
1951 Airport Road Leased $210,000 November 2006 Landlord, service and 164,288 sq. ft. of
Atlanta, GA refueling of commercial offices and hangars
and private aircraft on 22.46 acres
WM. B. HARTSFIELD
INT'L AIRPORT
1200 Toffie Terrace Leased $107,000 March 2002 Landlord, service and 4,800 sq.ft. of
Atlanta, GA refueling of commercial offices and ramp
and private aircraft area on 11.2 acres
L.G. HANSCOM FIELD
AIRPORT
180 Hamscom Drive Leased $191,000 May 2012 Landlord, service, 5,000 sq. ft.
Bedford, MA (6) maintenance and terminal and 2
refueling of commercial hangars
and private aircraft totaling 36,000 sq.
ft. on 22.86 acres
RENO CANNON INT'L
AIRPORT
655 So. Rock Blvd. Building $ 13,000 June 2017 Landlord, service and 33,000 sq.ft. of
Reno, NV owned, refueling of commercial, hangars and
land private and military administrative
rented aircraft building on 23.7
acres of land
ADDISON AIRPORT
4400 Glenn Curtiss Dr. Leased $314,000 September 2021 Landlord, service and 49,472 sq. ft. of
Dallas, TX (6) refueling of commercial offices and hangars
and private aircraft on 2.80 acres
4400 Glenn Curtiss Dr. Leased $ 52,000 June 2022 Landlord, service and 57,949 sq.ft. of
Dallas, TX(6) refueling of commercial offices and hangar
and private aircraft space on 6.28 acres
4400 Glenn Curtiss Dr. Leased $ 8,000 July 2021 Landlord, service and 12,600 sq.ft. of
Dallas, TX(6) refueling of commercial offices and hangar
and private aircraft space
4400 Glenn Curtis Dr. Leased $ 28,000 December 2000 Fuel farm
Dallas, TX(6)
</TABLE>
14
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C> <C>
CORPUS CHRISTI
355 Pinson Drive Leased $ 19,000 October 2009 Landlord, service and 66,096 sq.ft. of
Corpus Christi, TX refueling of commercial offices and hangars
and private aircraft on 6.69 acres
NASHVILLE INT'L
AIRPORT
635 Hangar Lane Leased $222,000 June 2012 Landlord, service and Office and hangars
Nashville, TN refueling of commercial on 38.69 acres
and private aircraft
JACKSON INT'L AIRPORT
110 S. Hangar Drive Leased $ 85,000 February 2006 Landlord, service and Office and hangars
Jackson, MS refueling of commercial on 7 acres
and private aircraft
</TABLE>
(1) This property was purchased in April 1994 for $1,800,000 and is subject to
a first mortgage to Sanwa Bank in the sum on $566,000 at June 30, 1999
repayable in equal monthly installments of principal of $9,750, plus
interest at 7.5% per annum, the last payment due in April 2004.
(2) This property was purchased in May 19, 1995 for $515,000 and is subject to
a first mortgage to U.S. Bank in the sum of $368,000 at June 30, 1999
repayable with interest at 9% in equal monthly installments of
approximately $4,450, the last payment due May 2010.
(3) This lease is subject to the right of Delta to exercise an option to
acquire the property upon a two year notice.
(4) This lease is subject to an automatic extension of the initial term upon
substantial completion of construction. The automatic extension will extend
the term until April 2025.
(5) Leased to R&M Investment Corporation under a lease dated July 2, 1999 with
an option to purchase.
(6) The leasehold interest is subject to security interest granted to Bank
Boston.
15
<PAGE> 17
At most commercial airports where Mercury operates FBOs, Mercury
maintains its own fuel storage capabilities. On or before January 1, 1999,
Mercury was required to replace, retrofit or close most of its existing
underground fuel storage facilities in order to comply with applicable federal
regulations. See "Business--Environmental Matters" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." The following table summarizes Mercury's existing fuel
storage facilities.
<TABLE>
<CAPTION>
Approximate
Capacity
Location (gallons)
- -------- ----------------------------
<S> <C>
Los Angeles, California 311,000(UG)(1)
Bakersfield, California 98,000(62,000 AG; 36,000 UG)
Burbank, California ---(2)
Santa Barbara, California ---(3)
Reno, Nevada 99,000(AG)(4)
Ontario, California 88,000(UG)(1)
Dallas, Texas 57,000(UG)(5)
Corpus Christi, Texas 25,000(AG)(4)
Atlanta, Georgia (Hartsfield) 48,000(AG)(4)
Atlanta, Georgia (Peachtree) 48,000(AG)(4)
Fresno, California 73,000(AG)
Bedford, Massachusetts 30,000(AG)(4)
Nashville, Tennessee 37,000(AG)
Charleston, South Carolina 38,000(AG)
Jackson, Mississippi 13,000(AG)(6)
</TABLE>
(AG) = Above-ground fuel storage
(UG) = Under-ground fuel storage
(1) Retrofit of existing system.
(2) System closed with consortium fuel farm used as an alternative.
(3) Interim operations without a fuel farm pending determination of long-term
status of the location.
(4) No modification required.
(5) Facility owned by a third-party who will perform required modification, if
any.
(6) One twelve thousand gallon tank in process of installation. Presently use a
third party tank form consortium.
Management believes that Mercury's property and equipment are adequate
for its present business needs. Mercury fully utilizes the real properties it
owns or leases for its business. Mercury's operating profits are substantially
dependent on a number of its leased facilities which enjoy strategic airport
locations and could be adversely affected by a failure to obtain alternative
facilities or renew a lease at expiration.
ITEM 3. LEGAL PROCEEDINGS.
In connection with the Chapter 7 bankruptcy filing for WPAI, the
Company received a letter, dated August 25, 1999, from the bankruptcy trustee's
attorneys making a formal demand for recovery of alleged preference payments of
approximately $11.4 million. This amount represents cash received for payment of
16
<PAGE> 18
fuel and sales during the 90 days prior to WPAI's initial bankruptcy filing. The
Company believes this claim is without merit and the entire amount is defensible
based on the transaction 1) having been a substantially contemporaneous exchange
for value, 2) being made in the ordinary course of business, and 3) involving an
exchange for new value. Accordingly, the Company believes no provision is
required.
Other than the above mentioned claim and routine litigation incident to
Mercury's business, Mercury knows of no material litigation or administrative
proceedings pending again Mercury to which Mercury or any of its subsidiaries is
a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Mercury's Common Stock is listed and traded on the AMEX under the
Symbol "MAX". The table below sets forth, for the quarterly periods indicated,
the high and low closing sale prices per share of Common Stock
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
FISCAL 1999:
Quarter ended September 30, 1998 ......... $ 8.19 $ 6.38
Quarter ended December 31, 1998 .......... 8.63 6.44
Quarter ended March 31,1999 .............. 8.69 6.13
Quarter ended June 30, 1999 .............. 6.88 6.25
FISCAL 1998:
Quarter ended September 30, 1997 ......... $ 7.38 $ 5.94
Quarter ended December 31, 1997 .......... 7.50 5.38
Quarter ended March 31, 1998 ............. 9.00 5.81
Quarter ended June 30, 1998 .............. 8.19 7.13
</TABLE>
As of September 17, 1999, there were approximately 367 holders of
record.
During Fiscal 1997, Mercury paid approximately $321,000, at the rate of
$.0125 per share, in quarterly dividends on its Common Stock and during fiscal
1998, Mercury paid approximately $94,000 representing one quarterly dividend at
the rate of $.0125 per share. In September 1997, the Company's Board of
Directors terminated the quarterly dividend plan in favor of allocating these
funds towards repurchasing Company common shares in the open market. Mercury
intends to review its dividend policy from time to time in light of Mercury's
earnings, financial condition and other relevant factors, including applicable
covenants in debt and other agreements. In this regard, Mercury's loan agreement
with its lenders prohibits the payment of cash dividends in excess of $400,000
per year.
17
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years ended June 30 have been derived from the audited consolidated financial
statements of Mercury. The information set forth below should be read in
conjunction with the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K.
YEAR ENDED JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Sales and Revenues $ 224,675 $ 240,111 $ 279,380 $ 225,374 $ 183,000
Costs and Expenses 192,652 211,981 256,310 206,960 166,427
--------- --------- --------- --------- ---------
Gross Margin 32,023 28,130 23,070 18,414 16,573
Selling, General and Administrative Expenses 7,157 6,161 6,296 5,106 4,458
Provision for Bad Debts 1,721 1,971 1,810 945 905
Depreciation and Amortization 8,460 5,040 3,953 2,818 2,409
Loss Resulting from Bankruptcy of a Customer -- 7,050 -- -- --
Interest Expense 4,380 3,542 3,393 2,375 1,478
Other Expense (Income) (222) (595) 370 (596) 11
--------- --------- --------- --------- ---------
Income before Income Taxes 10,527 4,961 7,248 7,766 7,312
Provision for Income Taxes 4,105 1,934 2,869 3,086 3,005
--------- --------- --------- --------- ---------
Net Income Before Extraordinary Items 6,422 3,027 4,379 4,680 4,307
--------- --------- --------- --------- ---------
Extraordinary Item (483) -- -- -- --
--------- --------- --------- --------- ---------
Net Income $ 5,939 $ 3,027 $ 4,379 $ 4,680 $ 4,307
========= ========= ========= ========= =========
Net Income Per Share:
Basic:
Before extraordinary item $ 0.96 $ 0.42 $ 0.58 $ 0.63 $ 0.58
Extraordinary item (.07) -- -- -- --
--------- --------- --------- --------- ---------
Net income $ 0.89 $ 0.42 $ 0.58 $ 0.63 $ 0.58
========= ========= ========= ========= =========
Diluted:
Before extraordinary item $ 0.73 $ 0.38 $ 0.49 $ 0.56 $ 0.55
Extraordinary item (.05) -- -- -- --
--------- --------- --------- --------- ---------
Net income $ 0.68 $ 0.38 $ 0.49 $ 0.56 $ 0.55
========= ========= ========= ========= =========
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total Assets $ 127,302 $ 111,741 $ 92,637 $ 79,123 $ 54,210
Short-Term Debt
(including current portion of long-term debt) 6,806 3,732 1,878 2,555 2,607
Long-Term Debt 44,285 30,619 15,195 6,893 17,104
Convertible Subordinated Debentures 19,852 28,090 28,115 28,115 --
Dividends per Common Share -- .013 .0425 .0425 .02
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS - FISCAL 1999, 1998 AND 1997
The following tables set forth, for the periods indicated, the revenue
and gross margin for each of the Company's four operating units, as well as
selected other financial statement data.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------------
($ in millions)
-------------------------------------------------------------------------------------
1999 1998 1997
% of Total % of Total % of Total
Amount Revenues Amount Revenues Amount Revenues
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Fuel Sales and Services $123.7 55.1% $156.5 65.2% $207.8 74.4%
FBOs 47.9 21.3 45.1 18.8 36.5 13.1
Cargo Operations 27.7 12.3 21.5 8.9 18.8 6.7
Government Contract Services 25.4 11.3 17.0 7.1 16.3 5.8
------ ------ ------ ------ ------ ------
Total Revenues $224.7 100% $240.1 100% $279.4 100%
====== ====== ====== ====== ====== ======
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
% of Unit % of Unit % of Unit
Amount Revenues Amount Revenues Amount Revenues
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Gross Margin(1):
Fuel Sales and Services $ 10.8 8.8% $ 8.6 5.5% $ 8.6 4.1%
FBOs 10.1 21.2 9.7 21.5 6.2 16.8
Cargo Operations 5.8 20.7 5.3 24.8 5.0 26.9
Government Contract Services 5.3 20.8 4.5 26.7 3.3 20.5
------ ------ ------ ------ ------ ------
Total Gross Margin $ 32.0 14.3% $ 28.1 11.7% $ 23.1 8.3%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
% of Total % of Total % of Total
Amount Revenues Amount Revenues Amount Revenues
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Selling, General and
Administrative $ 7.2 3.2% $ 6.2 2.6% $ 6.3 2.3%
Provision for Bad Debts 1.7 .8 2.0 .8 1.8 .6
Depreciation and Amortization 8.5 3.8 5.0 2.1 4.0 1.4
Loss Resulting from
Bankruptcy of a Customer -- -- 7.1 2.9 -- --
Interest Expense and Other 4.2 1.9 2.9 1.3 3.8 1.3
Income before Income Taxes 10.5 4.7 4.9 2.1 7.2 2.6
Provision for Income Taxes 4.1 1.9 1.9 .8 2.9 1.0
Net Income before
Extraordinary Item 6.4 2.9 3.0 1.3 4.4 1.6
Extraordinary Items .5 .2
------ ------ ------ ------ ------ ------
Net Income $ 5.9 2.6% $ 3.0 1.3% $ 4.4 1.6%
====== ====== ====== ====== ====== ======
</TABLE>
(1) Gross Margin as used here and throughout Management's discussion excludes
depreciation and amortization and selling, general and administrative expenses.
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Revenue decreased 6.4% to $224.7 million in fiscal 1999 from $240.1
million in fiscal 1998, primarily due to lower fuel prices and lower fuel
volume. However, gross margin increased 13.8% to $32.0 million in fiscal 1999
from $28.1 million in fiscal 1998.
Revenue from fuel sales and services represented 55.1 % of total
revenue in fiscal 1999 compared to 65.2% of total revenue in fiscal 1998.
Revenue from fuel sales and services in fiscal 1999 decreased 21% to $123.7
million from $156.5 million in fiscal 1998. The decrease in revenue from fuel
sales and services was due to a decrease in both the price of fuel and volume of
fuel sold. Volume declined approximately 32 million gallons all of which was
related to Western Pacific Airline, Inc. (WPAI). The loss of WPAI's
20
<PAGE> 22
business occurred in February 1998 when the carrier ceased operations. Average
fuel prices decreased approximately 12% in fiscal 1999 as compared to fiscal
1998. Gross margin from fuel sales and services was $10.8 million in fiscal 1999
compared to $8.6 million in fiscal 1998 or, as a percentage of revenue, 8.8% in
fiscal 1999 and 5.5% in fiscal 1998. Higher per gallon fuel margins and lower
fuel prices increased gross margin as a percentage of revenue in fiscal 1999 as
compared to fiscal 1998. Revenue and gross margin from fuel sales and services
included the activities of Mercury's contract fueling business as well as
activities from a number of other commercial activities including the provision
of certain refueling services, non- aviation fuel brokerage and other services
managed at LAX as part of Mercury's fuel sales and services operations. In
addition, fuel sales and services include the activities of Mercury's wholly
owned subsidiary, RPA, a developer and installer of proprietary airline revenue
accounting and related software, subsequent to its acquisition in February 1998.
Revenue from RPA in fiscal 1999 was approximately $6.4 million compared with
$1.6 million for the four month fiscal 1998 period. Gross margin from RPA was
$0.8 million in fiscal 1999 compared to and $0.2 million in the four month
period in fiscal 1998. The continued success of RPA depends upon RPA continuing
to develop customers and products.
Revenue from FBOs in fiscal 1999 increased 6.2% to $47.9 million from
$45.1 million in fiscal 1998. The increase in revenue from FBOs was primarily
due to the addition of an FBO in Charleston, South Carolina in October 1998 and
an FBO in Jackson, Mississippi in December 1998. Gross Margin from FBOs in
fiscal 1999 increased 4.6% to $10.1 million from $9.7 million in fiscal 1998 due
to higher per gallon fuel margins.
Revenue from cargo operations in fiscal 1999 increased 28.9% to $27.7
million from $21.5 million in fiscal 1998. The increase was primarily
attributable to higher cargo handling revenue at LAX due to the expansion of
facilities which occurred during the fourth quarter or fiscal 1998, and the
addition of the Atlanta facility, which was acquired in April 1998. Gross margin
from cargo operations in fiscal 1999 increased 7.7% to $5.8 million from $5.3
million in fiscal 1998 primarily due to higher handling revenue partially offset
by increased losses at Floracool in Miami and lower space brokerage revenue. In
March 1999, the Company disposed of its Miami cargo operations. Gross margin as
a percentage of revenue in fiscal 1999 decreased to 20.7% from 24.8% in fiscal
1998 primarily due to higher losses in the Miami operations and lower space
brokerage activity.
Revenue from government contract services in fiscal 1999 increased 50%
to $25.4 million from $17.0 million in fiscal 1998. The increase in revenue was
due to the acquisition of Weather Data which was acquired on August 1, 1998.
Gross margin from government contract services in fiscal 1999 increased 17% to
$5.3 million from $4.5 million in fiscal 1998 primarily due to the addition of
the Weather Data contracts. Gross margin as a percentage of revenue in fiscal
1999 declined to 20.8% from 26.7% in fiscal 1998 primarily due to the Weather
Data contracts which operate at a lower margin.
Selling, general and administrative expenses in fiscal 1999 increased
16.2% to $7.2 million from $6.2 million in fiscal 1998 primarily due to higher
compensation expense.
Provision for bad debts in fiscal 1999 declined 12.7% to $1.7 million
from $2.0 million in fiscal 1998 reflecting lower bad debt allowance
requirements attributable in part to lower fuel sales.
21
<PAGE> 23
Depreciation and amortization expense in fiscal 1999 increased 67.9% to
$8.5 million from $5.0 million in fiscal 1998. The increase in the current
period is related primarily to the LAX cargo warehouse added in April 1998, the
Burbank FBO expansion substantially completed in February 1999 and acquisitions
during the current fiscal year.
Interest expense in fiscal 1999 increased 23.7% to $4.4 million from
$3.5 million in fiscal 1998 primarily due to higher average outstanding
borrowings in the current period. Interest income in fiscal 1999 decreased 62.7%
to $0.2 million from $0.6 million in fiscal 1998 due to lower average notes
receivable balances and lower balances of invested cash.
Loss resulting from bankruptcy of customer of $7,050,000 in fiscal 1998
was due to WPAI's bankruptcy on October 5, 1997.
Income tax expense approximated 39% of pretax income for both fiscal
1999 and fiscal 1998, reflecting the Company's effective income tax rate.
Extraordinary item of $483,000 in fiscal 1999 consists of a charge of
$792,000, primarily related to the cost of repurchasing and retiring convertible
subordinated debentures in excess of par value plus the write off of related
bond issuance costs, net of related income tax benefit of $309,000.
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Revenue decreased 14.1% to $240.1 million in fiscal 1998 from $279.4
million in fiscal 1997. Gross margin increased 21.9% to $28.1 million in fiscal
1998 from $23.1 million in fiscal 1997.
Revenue from fuel sales and services represented 65.2% of total revenue
in fiscal 1998 compared to 74.4% of total revenue in fiscal 1997. Revenue from
fuel sales and services in fiscal 1998 decreased 24.7% to $156.5 million from
$207.8 million in fiscal 1997. The decrease in revenue from fuel sales and
services was due to a decrease in both the price of fuel and volume of fuel
sold. The volume of fuel sold declined as a result of the loss of WPAI's
business, which constituted 15% of fuel sales and services revenue in both
periods, in February 1998 when the carrier ceased operations, and the additional
failures of certain other airlines. Average fuel prices decreased approximately
14% in fiscal 1998 as compared to fiscal 1997. Gross Margin from fuel sales and
services was $8.6 million in fiscal 1998 and fiscal 1997. Gross margin as a
percentage of revenue increased in fiscal 1998 to 5.5% from 4.1% in fiscal 1997.
Because the Company prices its fuel on a per gallon basis, gross margin as a
percentage of revenue was enhanced as a result of the lower per gallon price of
fuel in fiscal 1998 as compared to fiscal 1997 and due to an absolute increase
in average per gallon margins. Revenue and gross margin from fuel sales and
services include the activities of Mercury's contract fueling business as well
as activities from a number of other commercial services including the provision
of certain refueling services, non-aviation fuel brokerage and other services
managed at LAX as part of Mercury's fuel sales and services operations. In
addition, fuel sales and services include the activities of Mercury's wholly
owned subsidiary, RPA, a developer and installer of proprietary airline revenue
accounting and related software, subsequent to its acquisition in February 1998.
Revenue from RPA in fiscal 1998 was approximately $1.6 million.
Revenue from FBOs in fiscal 1998 increased 23.5% to $45.1 million from
$36.5 million in fiscal 1997 and increased as a percentage of total revenue to
18.8% in fiscal 1998 from 13.1% in fiscal 1997. The increase in revenue for FBOs
was due to partial periods of revenue, as five FBOs were acquired in August
22
<PAGE> 24
1996, one FBO was acquired in November 1996, one FBO was acquired in January
1997 and another FBO was acquired effective the beginning of fiscal 1998.
Revenue from these FBOs were included for all of fiscal 1998. The increase in
FBO revenue is consistent with the Company's goal of increasing the service
sectors of its business as a percentage of total revenue. Gross margin from FBOs
in fiscal 1998 increased 57.6% to $9.7 million from $6.2 million in fiscal 1997
due to higher revenues, higher per gallon fuel margins and lower fuel costs.
Revenue from Cargo operations in fiscal 1998 increased 14.4% to $21.5
million from $18.8 million in fiscal 1997. The increase was primarily
attributable to higher space brokerage activity. Gross margin from cargo
operations in fiscal 1998 increased 5.7% to $5.3 million from $5.0 million in
fiscal 1997. Gross margin decreased to 24.8% of revenue in fiscal 1998 from
26.9% in fiscal 1997 due to higher operating costs in the warehouse operations,
partially due to the expansion of facilities in fiscal 1998 at LAX and in
Montreal. At LAX, warehouse operating costs increased approximately 47% in the
fourth quarter of fiscal 1998 as compared with the fourth quarter of fiscal
1997, while revenue rose only 18% in the same comparable periods. Growth of
warehouse revenue at LAX will depend upon adding new customers and increasing
revenue from current customers some of whom have experienced a reduction in the
volume of cargo transported as a result of the worldwide economic slow down.
Revenue from government contract services in fiscal 1998 increased 4.3%
to $17.0 million from $16.3 million in fiscal 1997. The increase in revenue was
due to the Central and South American air terminal contract added in June 1997
and the Pacific Rim air terminal contracts added in January 1998, offset
partially by the loss of contracts at Fallon, Nevada and Monterey, California
during fiscal 1998. Gross margin from government contract services in fiscal
1998 increased 35.9% to $4.5 million from $3.3 million in fiscal 1997 primarily
as a result of the addition of higher margin air terminal business contracts for
Central and South America and the Pacific Rim which replaced the two lower
margin refueling and base housing maintenance contracts which were lost to
competitors.
Selling, general and administrative expenses in fiscal 1998 decreased
2.1% to $6.2 million from $6.3 million in fiscal 1997 due to lower compensation
expense.
Provision for bad debts in fiscal 1998 increased 8.9% to $1.97 million
from $1.81 million in fiscal 1997 reflecting a higher reserve rate based on
experience. This excludes the impact in fiscal 1998 of losses stemming from the
bankruptcy of WPAI.
Depreciation and amortization expense in fiscal 1998 increased 27.5% to
$5.0 million from $4.0 million in fiscal 1997 principally due to the acquisition
of eight FBO locations since August 1996.
On October 5, 1997, WPAI filed bankruptcy, resulting in a $7,050,000
loss in fiscal 1998. The charge included a $5 million reduction in restricted
cash and approximately $2,050,000 write off of WPAI's account receivable. The
restricted cash consisted of pledged certificates of deposits which guaranteed
bank loans to WPAI.
Income tax expense approximated 39.0% of pretax income for fiscal 1998
and 39.6% for fiscal 1997, reflecting the Company's effective income tax rate.
23
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
Mercury has historically financed its operations primarily through
operating cash flow, bank debt and various public and private placement of bonds
and subordinated debt. Mercury's cash balance at June 30, 1999 was $4,797,000
Net cash provided by operating activities was $7,065,000 during fiscal
1999. The primary source of net cash provided by operating activities was net
income plus depreciation and amortization totaling $14,399,000, and an increase
in accounts payable of $4,989,000. The primary use of cash from operating
activities was an increase in trade and other accounts receivable of
$13,468,000.
Net cash used in investing activities was $14,119,000 during fiscal
1999. The primary uses of cash from investing activities included $15,245,000 in
additions to property, equipment and leaseholds and $7,000,000 in acquisitions
of businesses, net of cash acquired. The primary source of cash provided by
investing activities was a reduction of $8,376,000 in restricted cash related to
the tax exempt bonds.
Net cash provided by financing activities was $4,015,000 during fiscal
1999. The primary source of cash from financing activities during this period
was proceeds from long-term debt of $34,050,000. The primary use of cash from
financing activities was the reduction in long-term debt of $17,310,000, the
reduction of convertible subordinated debentures of $8,188,000 and the
repurchase and retirement of common stock of $4,682,000.
On March 2, 1999, the Company entered into an $80,000,000 senior
secured credit facility with a consortium of four banks. This facility includes
up to $40,000,000 Revolving Credit ("Revolving Credit"), a term loan of up to
$25,000,000 ("Term Loan") and an acquisition facility of up to $15,000,000
("Acquisition Facility"). These facilities mature in March 2004. The Term Loan
is payable over five years in quarterly installments of principal of $1,000,000
in year one with quarterly installments increasing each year thereafter by
$125,000 with a final installment in March 2004. Balances outstanding under the
Revolving Credit and Acquisition Facility will be due in March 2004. Interest
rates may vary depending upon the Company's leverage ratio, however, the cost
will initially be Eurodollar rate plus 1.75% or the Banks base rate (equivalent
to the prime rate). Amounts funded at the closing date were $24,000,000 under
the Term Loan, which was used to repay outstanding principal of approximately
$16,833,000 under the old senior credit facility; repay principal under various
other notes of approximately $6,474,000; pay accrued interest, letter of credit
fees and closing fees totaling approximately $466,000; and the balance of
$227,000 received in cash. At June 30, 1999 current portion of long-term debt
pertaining to this facility is $5,125,000 and long-term debt includes
$19,875,000 of the Term Loan and $6,000,000 of Revolving Credit.
On April 2, 1998, the Company raised $19 million from a tax exempt bond
financing pursuant to a loan agreement between the Company and the California
Economic Development Financing Authority, ("CEDFA"). These funds were obtained
to finance the Company's LAX Cargo warehouse expansion and expansion of its
Burbank FBO. At June 30, 1999, the Company borrowed $18,215,000 of the bond
proceeds related to costs incurred to date. The loan carries a variable rate
which is based on a weekly remarketing of the tax exempt bonds issued by CEDFA.
Since the issuance of the bond, the per annum interest rate has averaged 3.04%
through June 30, 1999. The Company's senior bank group has issued a one-year,
renewable letter of credit in the amount of approximately $19.3 million to
secure the Company's obligations under the loan agreement. The loan will be
repaid at the rate of $500,000 every six months with a redemption of $4 million
at the end of the fifteenth year. At June 30, 1999, the balance was $18 million.
24
<PAGE> 26
In February 1996, the Company issued $28,115,000 principal amount of
7.75% convertible subordinated debentures due February 1, 2006. The debentures
are convertible into shares of the Company's common stock at a price of
$7.29456. The outstanding balance at June 30, 1999 was $19,852,000. Subsequent
to June 30, 1999, the Company redeemed the outstanding balance of these
debentures (See Note 13 in the accompanying financial statements).
The Company's accounts receivable balance was $50,134,000 at June 30,
1999 and $38,387,000 at June 30, 1998. The accounts receivable balance increased
principally due to an increase in fourth quarter fiscal 1999 revenue compared
with fourth quarter fiscal 1998 revenue. A note receivable of approximately
$961,000 at June 30, 1999 is due from an airline customer of the Company for the
purchase of fuel. The note bears interest at 9% per annum and is due in monthly
installments of principal and interest through July 1, 2001. Accounts receivable
days outstanding for the quarters ended June 30, 1999 and 1998 were 74 as
compared to 70 days based upon consolidated revenue for each period. Accounts
receivable days outstanding increased primarily due to fuel sales and services
revenue declining to 55.1% of total revenue in fiscal 1999 from 65.2% in the
year ago 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 $1,953,000 at June 30, 1999 from
$1,686,000 at June 30, 1998.
The Company's recurring capital expenditure requirements have been
related to the acquisition of refueling and ground handling equipment for both
commercial and government contract services operations. During fiscal 1997, 1998
and 1999, respectively, the Company spent approximately $1,800,000, $3,000,000
and $2,100,000 to purchase refueling and ground handling equipment for its
commercial and government contract services operations. During the last three
fiscal years, the Company has also made substantial expenditures to acquire and
construct facilities and businesses to expand its operations. In fiscal 1997,
the Company acquired certain assets of six FBOs for $9,000,000, which consisted
of $4,350,000 cash and a promissory note in the principal amount of $4,650,000.
In addition, in January 1997, the Company purchased an FBO in Fresno, California
for $2,800,000 cash. In July 1997, the Company acquired certain assets of an FBO
located in Nashville, Tennessee for $4,250,000 cash. To fund this acquisition,
the Company borrowed an additional $4,250,000 under its former credit
facilities. During fiscal 1998, the Company spent approximately $9,600,000 to
remodel and construct a cargo warehouse at LAX, $300,000 to pay for a portion of
the construction of an FBO in Charleston, South Carolina, $422,000 to acquire
the assets of a cargo handling operation at William B. Hartsfield International
Airport in Atlanta, Georgia, and $4,220,000 ($3,000,000 in cash and $1,220,000
worth of Mercury Common Stock) to acquire the outstanding stock of RPA. On
August 1, 1998, Maytag acquired thirty-eight government contracts and related
assets from Weather Data for $2,500,000 in cash and $1,000,000 in stock
(subsequently increased by 22,565 shares in September 1999 since the market
value of the shares originally issued was less then $1 million on August 1,
1999). On November 30, 1998, the Company acquired substantially all the assets
of an FBO in Jackson, Mississippi for $4,500,000 in cash.
During fiscal 1999, the Company built a new FBO operation in Burbank,
California at a cost of approximately $9.4 million, $7.2 million spent in fiscal
1999 and $2.2 million spent in fiscal 1998. The Company has also retrofitted or
replaced a number of fuel farms during fiscal 1999 at a cost of approximately
$3.4 million.
25
<PAGE> 27
Absent a major prolonged surge in oil prices or a capital intensive
acquisition, the Company believes its operating cash flow, senior credit
facility, vendor credit and cash balance will provide it with sufficient
liquidity during the next twelve months. In the event that fuel prices increase
significantly for an extended period of time, the Company's liquidity could be
adversely affected unless the Company is able to increase vendor credit or
increase lending limits under its revolving credit facility. The Company
believes, however, its Revolver and vendor credit should provide it with
sufficient liquidity in the event of a major temporary surge in oil prices.
Inflation
The Company believes that inflation has not had a significant effect on
its results of operations during the past three fiscal years.
Year 2000 Issue
The Company has established a year 2000 compliance plan that is
substantially complete. The compliance plan primarily involves information
technology, facilities and equipment and major suppliers. To date, the Company
has spent approximately $75,000 on reprogramming and software and hardware
upgrades relating to year 2000 remediation. Total costs related to year 2000
compliance are estimated at $100,000.
The Company's year 2000 compliance efforts include assessment of at
risk systems and technology as well as remediation and testing of affected
systems. Remediation of the Company's primary computer systems and other
critical systems was completed in December 1998. The final assessment of all
other technology used by the Company will be essentially complete by September
1999. The remediation of these areas is expected to be completed by November
1999. The Company does not believe that year 2000 issues affecting it facilities
and equipment are substantial. The Company, however, conducts most of its
business on airport properties and, as such, is dependent on various third
parties to complete aspects of year 2000 compliance which will ensure that
airport operations are not significantly impacted or interrupted. The Company's
major suppliers and third parties have been included in a year 2000 survey that
is still in process. While the Company has no reason to believe that year 2000
compliance by these third parties will not be substantially completed on time,
the Company can give no assurance to that effect. With respect to major
suppliers, the Company believes year 2000 compliance issues will not affect its
ability to continue purchasing jet fuel in sufficient quantities, given the
number of alternative sources.
Contingency plans are being developed as part of an overall disaster
recovery plan, which is in process. A majority of the Company's services are
dependent on human resources and commodities that are not technology driven;
therefore, contingencies relating to year 2000 issues will not have a large
bearing on operations. While not expected, any delays or failures resulting from
a year 2000 compliance problem would affect the Company's ability to bill
customers timely and process vendor payments. Because of uncertainties, the
actual effects of year 2000 issues on the Company may be different from its
current assessment.
Forward-Looking Statements
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-
26
<PAGE> 28
looking statements. In addition, Mercury, from time-to-time, makes
forward-looking statements concerning its expected future operations and
performance and other developments. Such forward-looking statements are
necessarily estimates reflecting Mercury's best judgment based upon current
information and involve a number of risks and uncertainties, and there can be no
assurance that other factors will not affect the accuracy of such
forward-looking statements. While it is impossible to identify all such factors,
factors which could cause actual results to differ materially from those
estimated by Mercury include, but are not limited to, risks associated with
acquisitions, the financial condition of customers, non-renewal of contracts,
government regulation, as well as operating risks, general conditions in the
economy and capital markets, and other factors which may be identified from
time-to-time in Mercury's Securities and Exchange Commission filings and other
public announcements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company currently utilizes no material derivative financial
instruments which expose the Company to significant market risk. However, the
Company's cash flow, earnings, and the fair value of its debt, may be adversely
effected due to changes in interest rates with respect to its long-term debt.
The table below presents principal cash flows and related weighted average
interest rates of the Company's long-term debt at June 30, 1999 by expected
maturity dates. Weighted average variable rates are based on rates in effect at
June 30, 1999. These rates should not be considered a predictor of actual future
interest rates.
Expected Maturity Date
<TABLE>
<CAPTION>
June-00 June-01 June-02 June-03 June-04 Thereafter
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate convertible Debenture 0 0 0 0 0 19,852,000
Average Interest Rate 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
Fixed Rate Other Debt 352,000 326,000 310,000 326,000 199,000 249,000
Average Interest Rate 8.25% 8.30% 8.39% 8.52% 8.83% 9.14%
Variable Rate Tax Exempt Bonds(1) 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 13,000,000
Average Interest Rate 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
Variable Rate Other Debt(2) 5,454,000 4,626,000 5,126,000 5,625,000 10,498,000
Average Interest Rate 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
<CAPTION>
Total Fair Value
<S> <C> <C>
Fixed Rate convertible Debenture 19,852,000 19,852,000
Average Interest Rate 7.75%
Fixed Rate Other Debt 1,762,000 1,762,000
Average Interest Rate 8.57%
Variable Rate Tax Exempt Bonds(1) 18,000,000 18,000,000
Average Interest Rate 3.00%
Variable Rate Other Debt(2) 31,329,000 31,329,000
Average Interest Rate 7.00%
</TABLE>
(1) The interest rate is based upon a weekly remarketing of the bonds.
(2) Consists of debt under which interest rates will fluctuate based upon
changes in the prime rate or LIBOR.
27
<PAGE> 29
In making its determination as to the balance of fixed and variable
rate debt, the Company considers the interest rate environment (including
interest rate trends), borrowing alternatives and relative pricing. The Company
periodically monitors the balance of fixed and variable rate debt, and can make
appropriate corrections either pursuant to the terms of debt agreements or
through the use of swaps and other financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Part IV, Item 14, pages F1 through F23 immediately following.
ITEM 9. ACCOUNTING AND FINANCIAL DISCLOSURE DISPUTES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the information set forth under the caption
"Election of Directors" of the Company's Proxy Statement for the annual meeting
scheduled for December 2, 1999 (the "Proxy Statement") for a description of the
directors and executive officers of the Company, which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the information set forth under the caption
"Executive Compensation" of the Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the table, including the footnotes thereto, set
forth under the caption "Election of Directors" of the Proxy Statement, for
certain information respecting ownership of stock of the Company by management
and certain shareholders, which table and footnotes are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the information set forth under the caption
"Certain Transactions" of the Proxy Statement for certain information with
respect to relationships and related transactions, which information is
incorporated herein by reference.
28
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
<TABLE>
<S> <C>
(a) (1) Financial Statements
Independent Auditors' Report .......................................................... F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998 .............................. F-2
Consolidated Statements of Income for each of the three
years in the period ended June 30, 1999 ......................................... F-3
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1999 ......................................... F-4
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 30, 1999 ............................ F-5
Notes to Consolidated Financial Statements for the three
years ended June 30, 1999 ....................................................... F-6-F-21
(a) (2) Supplemental Schedule for each of the three years in the period ended
June 30, 1999:
Schedule II - Valuation and Qualifying Accounts ....................................... F-22
</TABLE>
All other items are not included in this Form 10-K either because they
are not applicable or are included in the information as set forth in the
Consolidated Financial Statements or in the Notes to Consolidated Financial
Statements.
29
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of Los
Angeles, State of California, on September 27, 1999.
MERCURY AIR GROUP, INC.
By: /s/ Seymour Kahn
--------------------------------
Seymour Kahn
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<S> <C>
Signatures
Chairman of the Board:
/s/ Seymour Kahn Dated: September 27, 1999
- ----------------------------------------------
Seymour Kahn
Chairman of the Board
Principal Executive Officer & Director:
/s/ Joseph Czyzyk
- -------------------------------------------------
Joseph Czyzyk Dated: September 27, 1999
Chief Executive Officer and Director
Principal Financial and Accounting Officer:
/s/ Randolph E. Ajer
- -------------------------------------------------
Randolph E. Ajer Dated: September 27, 1999
Executive Vice President and Treasurer
Additional Directors:
/s/ Robert L. List
- -------------------------------------------------
Robert L. List Dated: September 27, 1999
Director
/s/ Philip J. Fagan, Jr., M.D.
- -------------------------------------------------
Philip J. Fagan, Jr., M.D. Dated: September 27, 1999
Director
/s/ William G. Langton
- -------------------------------------------------
William G. Langton Dated: September 27, 1999
Director
/s/ Frederick H. Kopko, Jr. Dated: September 27, 1999
- -------------------------------------------------
Frederick H. Kopko, Jr.
Director
</TABLE>
30
<PAGE> 32
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Mercury Air Group, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Mercury Air
Group, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1999. Our audits also include
the financial statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mercury Air Group, Inc. and
subsidiaries as of June 30 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30
1999 in conformity with generally accepted accounting principles. Also, in our
opinion such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Los Angeles, California
September 14, 1999
<PAGE> 33
PART I - FINANCIAL INFORMATION
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 4,797,000 $ 7,836,000
Trade accounts receivable, net of allowance for doubtful accounts
of $1,953,000 at 6/30/99 and $1,686,000 at 6/30/98 (Note 1) 50,134,000 38,387,000
Notes receivable - current portion 555,000 940,000
Inventories, principally aviation fuel (Note 1) 1,892,000 1,539,000
Prepaid expenses and other current assets 2,603,000 2,275,000
------------- -------------
Total current assets 59,981,000 50,977,000
CASH-RESTRICTED (Notes 1 and 15) 785,000 9,161,000
PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated depreciation
and amortization of $35,787,000 (6/30/99);
$29,006,000 (6/30/98) (Notes 1,3 and 7) 56,110,000 44,252,000
NOTES RECEIVABLE 454,000 56,000
OTHER ASSETS, net (Notes 1 and 4) 9,972,000 7,295,000
------------- -------------
$ 127,302,000 $ 111,741,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 21,312,000 $ 16,403,000
Accrued expenses and other current liabilities (Note 5) 6,241,000 5,242,000
Income taxes payable 1,409,000
Current portion of long-term debt (Note 7) 6,806,000 3,732,000
------------- -------------
Total current liabilities 34,359,000 26,786,000
LONG-TERM DEBT (Notes 4 and 7) 44,285,000 30,619,000
DEFERRED INCOME TAXES (Notes 1 and 6) 223,000 196,000
CONVERTIBLE SUBORDINATED DEBENTURES (Notes 7 and 13) 19,852,000 28,090,000
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Note 8):
Preferred Stock - $.01 par value; authorized 3,000,000 shares;
no shares outstanding
Common Stock - $ .01 par value; authorized 18,000,000 shares; outstanding
6,641,175 shares at 6/30/99;
outstanding 7,082,753 shares at 6/30/98 66,000 71,000
Additional paid-in capital 19,873,000 20,465,000
Retained earnings 9,543,000 6,415,000
Accumulated other comprehensive income (Note 1) (237,000) (239,000)
Notes receivable from sale of stock (Note 8) (662,000) (662,000)
------------- -------------
Total stockholders' equity 28,583,000 26,050,000
------------- -------------
$ 127,302,000 $ 111,741,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 34
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Sales and Revenues (Note 1 and 11):
Sales $ 144,972,000 $ 179,859,000 $ 225,093,000
Service revenues 79,703,000 60,252,000 54,287,000
------------- ------------- -------------
224,675,000 240,111,000 279,380,000
------------- ------------- -------------
Costs and Expenses:
Cost of sales 115,416,000 155,191,000 205,914,000
Operating expenses 77,236,000 56,790,000 50,396,000
------------- ------------- -------------
192,652,000 211,981,000 256,310,000
------------- ------------- -------------
Gross Margin (Excluding depreciation and amortization) 32,023,000 28,130,000 23,070,000
------------- ------------- -------------
Expenses (Income):
Selling, general and administrative (Note 4) 7,157,000 6,161,000 6,296,000
Provision for bad debts 1,721,000 1,971,000 1,810,000
Depreciation and amortization 8,460,000 5,040,000 3,953,000
Loss resulting from bankruptcy of customer (Note 2) 7,050,000
Interest expense 4,380,000 3,542,000 3,393,000
Interest income (222,000) (595,000) (380,000)
Loss on investments 750,000
------------- ------------- -------------
21,496,000 23,169,000 15,822,000
------------- ------------- -------------
Income Before Provision for Income Taxes 10,527,000 4,961,000 7,248,000
Provision for Income Taxes (Notes 1 and 6) 4,105,000 1,934,000 2,869,000
------------- ------------- -------------
Net Income Before Extraordinary Item 6,422,000 3,027,000 4,379,000
------------- ------------- -------------
Extraordinary Item (Note 7) Less applicable
income taxes of $309,000 (483,000)
------------- ------------- -------------
Net Income $ 5,939,000 $ 3,027,000 $ 4,379,000
============= ============= =============
Net Income Per Share (Note 12) :
Basic:
Before extraordinary item $ 0.96 $ 0.42 $ 0.58
Extraordinary item $ (0.07)
------------- ------------- -------------
Net income $ 0.89 $ 0.42 $ 0.58
============= ============= =============
Diluted:
Before extraordinary item $ 0.73 $ 0.38 $ 0.49
Extraordinary item $ (0.05)
------------- ------------- -------------
Net income $ 0.68 $ 0.38 $ 0.49
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 35
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,939,000 $ 3,027,000 $ 4,379,000
Extraordinary charge 566,000
------------ ------------ ------------
Income before extraordinary items $ 6,505,000 $ 3,027,000 $ 4,379,000
Adjustments to derive cash flows from
operating activities:
Depreciation and amortization 8,460,000 5,040,000 3,953,000
Provision for Bad debts 1,721,000 1,971,000 1,810,000
Loss resulting from bankruptcy of customer 7,050,000
Amortization of officers' loans 39,000 154,000 154,000
Deferred income taxes 27,000 (712,000) (588,000)
Changes in operating assets and liabilities:
Trade and other accounts receivable (13,468,000) 5,224,000 (4,357,000)
Inventories (353,000) 409,000 675,000
Prepaid expenses and other current assets (445,000) 495,000 (551,000)
Accounts payable 4,989,000 (860,000) 1,857,000
Income taxes payable (1,409,000) 1,148,000 (198,000)
Accrued expenses and other current liabilities 999,000 237,000 681,000
------------ ------------ ------------
Net cash provided by operating activities 7,065,000 23,183,000 7,815,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash-tax exempt bond 8,376,000 (9,161,000)
Restricted cash - pledged certificates of deposit 1,000,000 (7,000,000)
(Increase) decrease in notes receivable (13,000) 2,899,000 (2,177,000)
Increase to other assets (237,000) (906,000) (437,000)
Acquisition of businesses, net of cash acquired (Note 9) (7,000,000) (1,895,000) (7,150,000)
Additions to property, equipment and leaseholds (15,245,000) (16,784,000) (3,192,000)
------------ ------------ ------------
Net cash used in investing activities (14,119,000) (24,847,000) (19,956,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividend on common stock (94,000) (321,000)
Proceeds from long-term debt 34,050,000 19,942,000 9,239,000
Reduction of long-term debt (17,310,000) (9,182,000) (5,464,000)
Reduction of convertible subordinated debentures (8,188,000)
Notes receivable-officers 70,000
Issuance of common stock 145,000 162,000 42,000
Repurchase of common stock (4,682,000) (4,217,000) (356,000)
------------ ------------ ------------
Net cash provided by financing activities 4,015,000 6,611,000 3,210,000
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,039,000) 4,947,000 (8,931,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,836,000 2,889,000 11,820,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,797,000 $ 7,836,000 $ 2,889,000
============ ============ ============
CASH PAID DURING THE YEAR:
Interest $ 4,568,000 $ 3,542,000 $ 3,156,000
Income taxes $ 5,412,000 $ 1,069,000 $ 4,076,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Direct financing for purchase of equipment and property $ 1,600,000
Issuance of stock for the acquisition of RPA (Note 9) $ 1,220,000
Issuance of Note Payable for the acquisition of Aero Freightways Inc. $ 227,000
Issuance of Notes Payable for the acquisition of assets (Note 9) $ 4,250,000 $ 4,650,000
Issuance of 124,224 shares of common stock for the acquisition of assets
of Weather Data. (Note 9) $ 1,000,000
Reduction of debenture and property, equipment and leasehold due to
purchase price adjustment of Excel Cargo, Inc. (Note 9) $ 800,000
Note receivable assigned to the Company in exchange for the
Company's certificates of deposit which was used to guaranty a
customer's debt $ 1,000,000
Conversion of 25 debentures into 3,427 shares of common stock $ 25,000
Conversion of 50 debentures into 6,854 shares of common stock $ 50,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 36
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
JUNE 30, 1999
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL
NUMBER OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 7,566,651 $ 75,000 $ 20,895,000 $ 2,040,000
Net income 4,379,000
Cash dividend on common stock (321,000)
Repurchase of common stock (59,500) (165,000) (191,000)
Common stock issued on exercise of
warrants and options 17,500 42,000
Tax benefit from exercise of stock options 24,000
Foreign currency adjustment
Payment received from notes receivable-officers
--------- ------------ ------------ ------------
BALANCE, JUNE 30, 1997 7,524,651 $ 75,000 $ 20,796,000 $ 5,907,000
========= ============ ============ ============
Net income 3,027,000
Cash dividend on common stock (94,000)
Repurchase of common stock (639,325) (6,000) (1,786,000) (2,425,000)
Common stock issued on exercise of
warrants and options 34,000 -- 162,000
Common stock issued in acquisition 160,000 2,000 1,218,000
Common stock issued on conversion of debentures 3,427 -- 25,000
Tax benefit from exercises of stock options 50,000
Foreign currency adjustment
--------- ------------ ------------ ------------
BALANCE, JUNE 30, 1998 7,082,753 $ 71,000 $ 20,465,000 $ 6,415,000
========= ============ ============ ============
Net income 5,939,000
Repurchase of common stock (641,781) (6,000) (1,865,000) (2,811,000)
Common stock issued on exercise of
options 69,125 144,000
Common stock issued in acquisition 124,224 1,000 999,000
Common stock issued on conversion of debentures 6,854 50,000
Tax benefit from exercises of stock options 80,000
Foreign currency adjustment
--------- ------------ ------------ ------------
BALANCE, JUNE 30, 1999 6,641,175 $ 66,000 $ 19,873,000 $ 9,543,000
========= ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NOTES ACCUMULATED OTHER
RECEIVABLE COMPREHENSIVE COMPREHENSIVE
OFFICERS INCOME INCOME
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, JUNE 30, 1996 $ (732,000) $ (46,000)
Net income $ 4,379,000
Cash dividend on common stock
Repurchase of common stock
Common stock issued on exercise of
warrants and options
Tax benefit from exercise of stock options
Foreign currency adjustment (33,000) (33,000)
Payment received from notes receivable-officers 70,000
------------ ------------ ------------
BALANCE, JUNE 30, 1997 $ (662,000) $ (79,000) $ 4,346,000
============ ============ ============
Net income 3,027,000
Cash dividend on common stock
Repurchase of common stock
Common stock issued on exercise of
warrants and options
Common stock issued in acquisition
Common stock issued on conversion of debentures
Tax benefit from exercises of stock options
Foreign currency adjustment (160,000) (160,000)
------------ ------------ ------------
BALANCE, JUNE 30, 1998 $ (662,000) $ (239,000) $ 2,867,000
============ ============ ============
Net income 5,939,000
Repurchase of common stock
Common stock issued on exercise of
options
Common stock issued in acquisition
Common stock issued on conversion of debentures
Tax benefit from exercises of stock options
Foreign currency adjustment 2,000 2,000
------------ ------------ ------------
BALANCE, JUNE 30, 1999 $ (662,000) $ (237,000) $ 5,941,000
============ ============ ============
</TABLE>
F-5
See accompanying notes to consolidated financial statements.
<PAGE> 37
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Mercury Air Group, Inc. and subsidiaries (the "Company") are principally
engaged in aviation services including: the conduct of cargo handling, cargo
general sales agency and air cargo space logistics; the sale and delivery of
aviation fuels to commercial, air courier and commuter airlines, and to general
aviation aircraft; the provision of ground support services to U.S. military
aircraft; Fixed Base Operations (FBO) services which includes fuel sales,
into-plane, ground support and aircraft hangar and tie-down facilities; and the
development and installation of aviation software.
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.
Restricted cash consists of cash held by the trustee in connection with
the CEDFA loan (See Note 15).
INVENTORIES
Inventory is 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
related asset (3-25 years) and over the lesser of the lease life or useful life
for leasehold improvements.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired are being amortized on the
straight-line method over estimated lives ranging from ten to forty years. The
Company assesses recoverability on a periodic basis. Factors included in
evaluating recoverability include historical earnings and projected future
earnings of the related operations.
F-6
<PAGE> 38
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at the exchange rate prevailing at the balance
sheet date and, where appropriate, at historical rates of exchange. Income and
expense accounts are translated at the weighted average rate in effect during
the year. The aggregate effect of translating the financial statements of the
foreign subsidiary is included in other comprehensive income. Foreign exchange
gains (losses) were not significant during the years presented.
REVENUE RECOGNITION
Revenues are recognized upon delivery of product or completion of
service. The Company's contracts with the U.S. Government are subject to profit
renegotiation. To date the Company has not been required to adjust profits
arising out of U.S. Government contracts.
INCOME TAXES
Deferred income tax assets and liabilities are recognized based on
differences between the financial statement and income tax basis of assets and
liabilities using presently enacted income tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, 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 or in the case of publicly traded debt, based upon
quoted market prices.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews for impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Measurement of
an impairment loss is based on the fair values of the asset.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the reporting
period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement will be effective July 1,
2000. The Company has not yet analyzed the impact of adopting this statement.
F-7
<PAGE> 39
RECLASSIFICATIONS
Certain reclassifications were made to prior year statements to conform
to the current year presentation.
ACCOUNTS RECEIVABLE
Accounts receivable is comprised primarily of trade receivables from
customers and is net of an allowance for doubtful accounts. The Company's credit
risk is based in part on, 1) primarily all receivables are related to one
industry, aviation, 2) there are significant balances owed by certain customers,
and 3) balances are owed by certain customers that are not adequately
capitalized. The Company assesses its credit portfolio on an ongoing basis and
establishes allowances which it believes are adequate to absorb potential credit
problems that can be reasonably anticipated.
NOTE 2 - LOSS RESULTING FROM BANKRUPTCY OF CUSTOMER:
On October 5, 1997, Western Pacific Airlines, Inc. (WPAI) filed for
bankruptcy protection under Chapter 11 and, as a result, the Company wrote off
$5,000,000 of certificates of deposit which were pledged to guarantee a bank
loan to WPAI. In addition, the Company wrote off $2,050,000 of accounts
receivable due from WPAI. Effective February 5, 1998 WPAI ceased operations.
NOTE 3 - PROPERTY, EQUIPMENT AND LEASEHOLDS:
Property, equipment and leaseholds consist of the following:
<TABLE>
<CAPTION>
JUNE, 30
--------
1999 1998
------------ ------------
<S> <C> <C>
Land, buildings and leasehold improvements $ 63,206,000 $ 44,766,000
Equipment furniture and fixtures 28,286,000 26,159,000
Construction in progress 405,000 2,333,000
------------ ------------
91,897,000 73,258,000
Less accumulated depreciation and amortization (35,787,000) (29,006,000)
------------ ------------
$ 56,110,000 $ 44,252,000
============ ============
</TABLE>
NOTE 4 - OTHER ASSETS:
Other assets consists of the following:
<TABLE>
<CAPTION>
JUNE, 30
--------
1999 1998
---------- ----------
<S> <C> <C>
Cost in excess of net assets acquired, net $6,672,000 $3,642,000
Capitalized loan fees - net (Note 7) 1,715,000 1,965,000
Covenant not to compete - net 250,000 350,000
Other assets 1,335,000 1,338,000
---------- ----------
$9,972,000 $7,295,000
========== ==========
</TABLE>
F-8
<PAGE> 40
Cost in excess of net assets acquired have resulted from various
acquisitions and are being amortized on a straight-line basis over periods
ranging from ten to forty years. Accumulated amortization was $1,142,000 and
$673,000 at June 30, 1999 and 1998, respectively. Capitalized loan fees
represent costs incurred in connection with outstanding debt and is being
amortized over the term of the debt.
In 1991, four executive officers of the Company each agreed to purchase
151,250 shares, an aggregate of 605,000 shares of the Company's stock, from a
company owned by the Chairman at $1.98 per share pursuant to a Stock Purchase
Agreement ("Agreement"). The officers each paid $30,000 in cash, or $120,000 in
the aggregate. The remaining purchase price of $1,080,000 was 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. Beginning in 1994, one
fifth of the amount loaned was forgiven annually over a five year period ending
in 1998.
In 1994, a fifth executive officer of the Company purchased 151,250
shares of the Company's stock from a company owned by the Chairman at $1.98 per
share pursuant to a Stock Purchase Agreement similar to the agreements above.
The officer paid $30,000 in cash and the remaining purchase price of $270,000
was 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 loaned, or $54,000, is being forgiven annually over a five year
period ending in 2000 provided the officer remains in the employ of the Company.
The amounts subject to forgiveness of $1,080,000 and $270,000 are being
treated as additional compensation expense over the seven year periods 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 $39,000 in fiscal 1999, $154,000 in fiscal 1998 and $154,000 in
fiscal 1997.
As of June 30, 1999 the covenant not to compete has accumulated
amortization of $250,000 and is being amortized on a straight-line basis over
five years.
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE, 30
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Salaries and wages $3,154,000 $1,808,000
Other 3,087,000 3,434,000
---------- ----------
$6,241,000 $5,242,000
========== ==========
</TABLE>
F-9
<PAGE> 41
NOTE 6 - INCOME TAXES:
The provision for taxes on income consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal, current $ 3,385,000 $ 1,849,000 $ 2,908,000
State, current 693,000 443,000 549,000
----------- ----------- -----------
4,078,000 2,292,000 3,457,000
Deferred, primarily federal 27,000 (358,000) (588,000)
----------- ----------- -----------
Provision, before extraordinary item 4,105,000 1,934,000 2,869,000
Extraordinary item (309,000)
----------- ----------- -----------
Net Provision $ 3,796,000 $ 1,934,000 $ 2,869,000
=========== =========== ===========
</TABLE>
Major components of deferred income tax (assets) and liabilities were as
follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Depreciation / amortization $ 200,000 $ (377,000)
Prepaid expenses 628,000 333,000
State income taxes (222,000) (202,000)
Allowance for doubtful accounts (764,000) (678,000)
Acquired from RPA-primarily
conversion from cash to accrual basis accounting 658,000 1,012,000
Other (277,000) 108,000
----------- -----------
$ 223,000 $ 196,000
=========== ===========
</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,
---------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax rate 34.0% 34.0% 34.0%
State income taxes, net of
Federal income tax benefit 5.0% 5.0% 5.6%
---- ---- ----
Effective rate 39.0% 39.0% 39.6%
==== ==== ====
</TABLE>
F-10
<PAGE> 42
NOTE 7 - LONG-TERM AND SUBORDINATED DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1999 1998
---- ----
<S> <C> <C>
Note payable to bank $31,000,000 $ 5,736,000
Installment notes, payable to financial
institutions in monthly installments aggregating
approximately $17,000 at June 30, 1999 including
interest from 7.28% to 8.63%, collateralized by
certain assets of the Company and maturing from
1999 through 2002. 229,000 2,366,000
Convertible subordinated debentures payable to
seller of Excel Cargo in monthly installments of
$13,810 including interest at 8.5%,
collateralized by property acquired,
maturing in September 2003. 599,000 708,000
Tax exempt bond pursuant to a loan agreement
between the Company and the California Economic
Development Financing Authority ("CEDFA").
Repayment terms consist of semi-annual principal
payments of $500,000 with a redemption of $4
million at the end of the fifteenth year (2013).
The loan carries a variable rate which is based
on a weekly remarketing of the bonds. Since
issuance, the per annum rate has averaged 3.03%
thru 6/30/99. 18,000,000 19,000,000
Note payable to seller of assets and leaseholds
of certain FBOs in quarterly installments of
$198,480 including interest at prime
collateralized by property acquired
which is principally leaseholds, due in July
2004. Note was prepaid in fiscal year 1999. -- 3,732,000
Mortgage payable to financial institution in
monthly principal installments of $13,333 plus
interest at LIBOR plus 2%, collateralized by
land and building, maturing in June 2008. Note
was prepaid in fiscal year 1999. -- 1,600,000
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. 566,000 682,000
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. 368,000 387,000
Other 329,000 140,000
----------- -----------
51,091,000 34,351,000
Less current portion 6,806,000 3,732,000
----------- -----------
$44,285,000 $30,619,000
=========== ===========
</TABLE>
F-11
<PAGE> 43
Notes Payable to banks at June 30, 1999 consists principally of a
$80,000,000 credit facility which the Company entered into in March 1999
including a term loan and a revolving line of credit. The term loan is in the
amount of $25,000,000 and is payable in quarterly payments of approximately
$1,000,000 in the first year. Quarterly installments increase $125,000 annually.
Interest accrues at LIBOR + 1.75%. The term loan is scheduled to mature in March
2004. The revolving credit line bears interest at prime or LIBOR + 1.75% and
permits borrowing of up to $40,000,000 and matures in March 2004. At June 30,
1999, there was $6,000,000 of outstanding borrowings under the revolving credit
line. In addition, this facility includes a $15,000,000 acquisition line which
has no outstanding borrowings.
Certain debt agreements contain provisions that require the maintenance
of certain financial ratios, minimum tangible net worth (as defined), minimum
profitability levels, maximum leverage and minimum debt service coverage and
quick ratios and limitations on annual capital expenditures. Additionally, the
Company is prohibited from paying dividends in excess of $400,000 per fiscal
year.
Long-term debt payable subsequent to June 30, 1999 is as follows:
<TABLE>
<S> <C>
2000 $6,806,000
2001 5,952,000
2002 6,436,000
2003 6,951,000
2004 11,699,000
Thereafter 13,247,000
-----------
$51,091,000
===========
</TABLE>
On January 31, 1996, pursuant to a public offering, the Company issued
$28,115,000 principal amount of 7 3/4% convertible subordinated debentures due
February 1, 2006. The debentures are convertible into shares of the Company's
common stock at a price of approximately $7.30 per share. Costs and fees,
including underwriting discount and commissions, were $1,835,000 and are
included in other assets (See Note 4). Capitalized loan fees are being amortized
over the life of the debentures. At June 30, 1999, the outstanding balance of
the Debenture was $19,852,000 and the unamortized balance of capitalized loan
fees was $846,000.
During fiscal year 1999 the Company repurchased 8,188 of these
debentures ($1,000 par value) in the open market. The excess of cost over par
value plus bond issuance costs was $675,000. On September 10, 1999 the Company
redeemed the remaining outstanding debentures (See Note 13). In addition, during
fiscal 1999 the Company terminated its prior credit facility resulting in the
write off of related deferred financing costs of $117,000. The aggregate charge
of $792,000, net of tax benefits of $309,000, has been classified as an
extraordinary item.
F-12
<PAGE> 44
NOTE 8 - EMPLOYEE STOCK OPTION PLANS:
The Company has the following stock option plans, the 1990 Long-Term
Incentive Plan ("1990 Incentive Plan") , the 1990 Directors Stock Option Plan
("1990 Directors Plan"), the 1998 Long-Term Incentive Plan ("1998 Incentive
Plan") and the 1998 Directors Stock Option Plan ("1998 Directors Plan"). The
Company has reserved 848,000 shares related to the Incentive Plans and 632,000
shares related to the Directors Plans. The Company has also reserved 152,000
shares for special option grants made outside the plans. Options granted
pursuant to the plans and special grants are generally made at the fair market
value of such shares on the date of grant and generally vest over twelve months.
The contractual lives of the options are generally ten years.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock issued to Employees". Had
compensation cost for stock options been calculated using the fair value
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
would have approximated the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income - as reported $ 5,939,000 $ 3,027,000 $ 4,379,000
Net income - pro forma $ 5,840,000 $ 2,937,000 $ 4,219,000
Basic earnings per share - as reported $ .89 $ .42 $ 0.58
Basic earnings per share - proforma $ .88 $ .41 $ 0.56
Diluted earnings per share - as reported $ .68 $ .38 $ 0.49
Diluted earnings per share - pro forma $ .67 $ .37 $ 0.47
</TABLE>
The weighted average fair value of each option granted in 1999, 1998 and
1997 is estimated as $3.00, $2.13 and $2.07, respectively, on the date of grant
using the Black-Scholes option pricing model using the following weighted
average assumptions.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected life 5 years 5 years 5 years
Expected volatility 34% 31% 28%
Risk free interest rate 5.78% 5.25% 6.07%
Dividend yield 0% 0% 1.0%
</TABLE>
F-13
<PAGE> 45
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
LONG-TERM DIRECTOR'S
INCENTIVE STOCK OPTION SPECIAL
OPTION PRICES PLANS OPTION PRICES PLANS OPTION PRICES OPTION GRANTS
<S> <C> <C> <C> <C> <C> <C>
Outstanding
June 30, 1996 1.403 - 7.182 233,647 1.403 - 7.182 201,625 1.542 - 7.182 203,500
Granted 5.60 - 5.70 53,125 5.70 75,625 -- --
Exercised 1.491 - 1.754 (12,500) 4.626 (5,000)
------- ------- -------
Outstanding
June 30, 1997 1.403 - 7.182 274,272 1.403 - 7.182 272,250 1.542 - 7.182 203,500
Granted 5.75 13,000 5.75 60,500 -- --
Exercised 1.491 - 7.182 (18,875) 5.70 (15,125) -- --
Cancelled 6.454 (5,500) -- --
------- ------- -------
Outstanding
June 30, 1998 1.403 - 7.182 262,897 1.236 - 7.182 317,625 1.542 - 7.182 203,500
Granted 6.3125 - 8.4375 138,361 -- -- -- --
Exercised 1.491 - 7.182 (17,125) -- -- 1.542 (52,000)
Cancelled 5.75 - 6.454 (14,000) -- --
Outstanding ------- ------- -------
June 30, 1999 1.403 - 8.4375 370,133 1.236 - 7.182 317,625 1.542 - 7.182 151.500
======= ======= =======
</TABLE>
F-14
<PAGE> 46
A summary of information about stock options issued and outstanding
pursuant to the Incentive Plan, Directors Plan and special option grants at June
30, 1999, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE SHARES AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE RANGE AT 6/30/99 REMAINING LIFE PRICE AT 6/30/99 PRICE
<S> <C> <C> <C> <C> <C>
$1.236 - 2.436 317,647 3.1 $1.65 317,647 $1.65
3.669 - 5.750 247,125 7.1 5.14 247,125 5.14
6.090 - 7.182 186,986 7.3 6.64 136,125 6.76
7.875 - 8.4375 87,500 9.4 8.29 22,500 7.88
------ ----- ------- -----
839,258 $4.48 723,397 $4.00
======= ===== ======= =====
</TABLE>
During fiscal 1996, the Company sold 137,500 shares of its common stock
to two officers for $812,500. The officers each paid $40,000 in cash and issued
promissory notes of $732,500 for the balance of the purchase price. The notes
are payable over ten years and due in fiscal year 2006. As of June 30, 1999,
$662,000 remained outstanding.
NOTE 9 - ACQUISITIONS:
Effective November 30, 1998 the Company acquired substantially all the
assets of Jackson Air Center in Mississippi for $4,500,000 in cash. The Company
borrowed $2.8 million in term debt under its senior credit facility and the
balance was funded from borrowings under its revolver. The transaction has been
accounted for under the purchase method of accounting and the purchase price has
been allocated primarily to Property, Equipment and Leaseholds ($4,195,000) with
the balance to inventory and accounts payable.
On August 1, 1998, the Company acquired the weather observation and
forecasting and air traffic control government contracts and related assets of
Weather Data Services, Inc. for $3,500,000, which consisted of $2,500,000 in
cash and $1,000,000 of the Company's stock. The transaction has been accounted
for under the purchase method of accounting and the purchase price has been
allocated to intangible assets.
F-15
<PAGE> 47
On February 27, 1998, the Company acquired all the outstanding stock of
Rene Perez and Associates, Inc. ("RPA"), a computer services company located in
Miami, Florida, for $4,220,000. The purchase price consisted of $3,000,000 in
cash and 160,000 shares of common stock valued at $1,220,000 based on a closing
price of $7.625 per share. The transaction has been accounted for under the
purchase method of accounting and the purchase price has been allocated to
assets and liabilities as follows:
<TABLE>
<S> <C>
Cash $ 1,490,000
Accounts receivable 3,702,000
Prepaid expenses and other current assets 59,000
Property, equipment and leaseholds 919,000
Intangibles 716,000
Accounts payable and other current liabilities (724,000)
Income taxes payable (261,000)
Deferred income taxes payable (1,240,000)
Notes payable (441,000)
-----------
Purchase price $ 4,220,000
===========
</TABLE>
On March 31, 1998, the Company acquired the assets of a cargo handling
company located at Hartsfield Atlanta International Airport in Georgia from
Corporate Express Delivery Leasing - Southeast, Inc. for $422,000 in cash. The
transaction has been accounted for under the purchase method of accounting and
the purchase price has been allocated to Property, Equipment and Leaseholds.
On January 16, 1998, the Company acquired all the outstanding stock of
Aero Freightways Inc., a general sales agency located in Ontario, Canada. The
transaction has been accounted for under the purchase method of accounting and
the purchase price consisted of a variable capital debenture with a face value
of $227,000 which is payable over three years.
On July 9, 1997 the Company acquired the assets of an FBO located in
Nashville, Tennessee. The transaction has been accounted for under the purchase
method of accounting and the purchase price of the assets was $4,250,000 paid in
cash and has been allocated to Property, Equipment and Leaseholds. The cash was
borrowed under the acquisition line from the Company's Banks.
In August 1996, the Company completed the acquisition of five FBO's from
Raytheon Aircraft Services and a sixth FBO on November 15, 1996. The purchase
price for the assets was $9,000,000, which consisted of $4,350,000 in cash and a
promissory note in the amount of $4,650,000. The transaction has been accounted
for under the purchase method of accounting and the purchase price of $9,000,000
was allocated to Property, Equipment and Leaseholds. The promissory note bears
interest at a bank's prime rate and is payable over eight years in equal
quarterly installments of principal and interest.
On December 30, 1996 the Company acquired all the outstanding stock of
Wofford Flying Services, an FBO located in Fresno, California for $2,800,000 in
cash. The transaction has been accounted for under the purchase method of
accounting and the purchase price has been allocated to Property, Equipment and
Leaseholds ($2,300,000) and a covenant not to compete ($500,000) which is
included in Other Assets.
F-16
<PAGE> 48
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
LEASES
The Company is obligated under noncancellable operating leases. Certain
leases include renewal clauses and require payment of real estate taxes,
insurance and other operating costs. Total rental expense on all such leases for
the fiscal years 1999, 1998 and 1997 was $8,037,000, $6,832,000 and $5,721,000
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, 1999 are as follows:
<TABLE>
<S> <C>
2000 $7,284,000
2001 6,247,000
2002 4,050,000
2003 3,970,000
2004 3,970,000
Thereafter 66,134,000
-----------
Total minimum payment required $91,655,000
===========
</TABLE>
In October 1997, the Company entered into a new lease for its Burbank
FBO with the Burbank-Glendale-Pasadena Airport Authority. Pursuant to the terms
of the lease, the Company will construct new hangar and executive terminal
facilities and will refurbish some of its existing facilities at a cost of
approximately $9.4 million. Upon completion of the construction, the Company's
lease will be extended through 2025. The Company completed the new hangars in
the spring of 1999 and anticipates completing the executive terminal in fiscal
2000.
LITIGATION
In connection with the Chapter 7 bankruptcy filing for WPAI (See Note
2), the Company received a letter, dated August 25, 1999, from the bankruptcy
trustee's attorneys making a formal demand for recovery of alleged preference
payments of approximately $11.4 million. This amount represents cash received
for payment of fuel and sales during the 90 days prior to WPAI's initial
bankruptcy filing. The Company believes this claim is without merit and the
entire amount is defensible based on the transaction 1) having been a
substantially contemporaneous exchange for value, 2) being made in the ordinary
course of business, and 3) involving an exchange for new value. Accordingly, the
Company believes no provision is required.
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.
F-17
<PAGE> 49
NOTE 11 - MAJOR CUSTOMERS AND FOREIGN CUSTOMERS:
Government contract services consists of revenues from agencies of the
United States government. Revenue from this segment represented 11.3%, 7.1% and
5.8% of the Company's consolidated revenues for fiscal 1999, 1998 and 1997,
respectively. No other customers accounted for over 10% of Mercury's
consolidated revenues.
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 27%, 31% and 32% of consolidated
revenues for the years ended June 30, 1999, 1998 and 1997, respectively.
NOTE 12 - EARNINGS PER SHARE:
Basic earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares and common stock equivalents. Common
stock equivalents include stock options and shares resulting from the assumed
conversion of subordinated debentures, when dilutive
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
DILUTED BASIC DILUTED BASIC DILUTED BASIC
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Weighted average number of
common shares outstanding
during the period 6,651,000 6,651,000 7,244,000 7,244,000 7,526,000 7,526,000
Common stock equivalents
resulting from the
assumed exercise of stock
options 356,000 348,000 319,000
Common shares resulting
from the assumed
conversion of debentures 3,391,000 3,932,000 3,947,000
----------- ----------- ----------- ----------- ----------- -----------
Weighted average number of
common and common
equivalent shares
outstanding during the
period 10,398,000 6,651,000 11,524,000 7,244,000 11,792,000 7,526,000
=========== =========== =========== =========== =========== ===========
Net income before
extraordinary item 6,422,000 6,422,000 3,027,000 3,027,000 4,379,000 4,379,000
----------- ----------- ----------- ----------- ----------- -----------
Add: Interest expense, net
of tax, on convertible
debentures 1,152,000 1,342,000 1,348,000
----------- ----------- ----------- ----------- ----------- -----------
Adjusted income before
extraordinary item 7,574,000 6,422,000 4,369,000 3,027,000 5,727,000 4,379,000
Extraordinary item (483,000) (483,000)
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
F-18
<PAGE> 50
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Adjusted income $ 7,091,000 $ 5,939,000 $ 4,369,000 $ 3,027,000 $ 5,727,000 $ 4,379,000
Common stock and common
share equivalents 10,398,000 6,651,000 11,524,000 7,244,000 11,792,000 7,526,000
Earnings (Loss) per share:
Before extraordinary item $ .73 $ .96 $ .38 $ .42 $ .49 $ .58
Extraordinary item (.05) (.07)
Net Income $ .68 $ .89 $ .38 $ .42 $ .49 $ .58
============== ============== ============== ============== ============== ==============
</TABLE>
NOTE 13 - SUBSEQUENT EVENTS:
On September 10, 1999, the Company redeemed the outstanding 7 3/4%
convertible subordinated debentures due February 1, 2006 at 104% of the
principal amount plus accrued and unpaid interest. The principal amount redeemed
was $19,509,000 and the balance of $318,000 was converted into 43,594 shares of
common stock. In connection with the redemption, in a private placement, the
Company issued $24,000,000 Senior Subordinated 12% Notes due 2006 with
detachable warrants to acquire 503,126 shares of the Company's common stock
exercisable at $6.50 per share for seven years. Issuance costs capitalized in
this transaction were approximately $1,770,000. Excess of cost over the
principal amount of the 7 3/4% convertible subordinated debentures plus write
off of remaining capitalized loan fees will result in an extraordinary charge of
approximately $977,000 net of tax in the quarter ending September 30, 1999.
F-19
<PAGE> 51
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
1999
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
<S> <C> <C> <C> <C>
Sales and Revenues $ 52,600,000 $ 56,665,000 $ 53,643,000 $ 61,767,000
Gross Margin 7,656,000 7,917,000 7,375,000 9,075,000
Net Income Before Extraordinary Item 1,659,000 1,827,000 1,144,000 1,792,000
Net Income 1,506,000 1,793,000 1,076,000 1,564,000
Net Income Per Share:
Basic:
Before Extraordinary Item 0.24 0.28 0.17 0.27
After Extraordinary Item 0.22 0.27 0.16 0.24
Diluted:
Before Extraordinary Item 0.18 0.21 0.14 0.20
After Extraordinary Item 0.17 0.20 0.13 0.18
</TABLE>
<TABLE>
<CAPTION>
1998
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
<S> <C> <C> <C> <C>
Sales and Revenues $ 69,165,000 $ 68,655,000 $ 52,720,000 $ 49,571,000
Gross Margin 7,024,000 7,353,000 6,595,000 7,158,000
Net Income (2,195,000) 2,027,000 1,416,000 1,779,000
Net Income Per Share:
Basic (0.29) 0.28 0.20 0.25
Diluted (0.29) 0.21 0.15 0.18
</TABLE>
NOTE 15 - CASH RESTRICTED:
Restricted cash of $785,000 at June 30, 1999 consists of tax exempt bond
proceeds pursuant to the CEDFA loan agreement in the amount of $19,000,000, less
amounts disbursed and net of interest earned. Funds are held by the Trustee and
invested in short term tax free mutual funds or investments until requisitioned
by the Company for reimbursement of construction costs pertaining to the LAX
cargo warehouse expansion and expansion of its Burbank FBO.
F-20
<PAGE> 52
NOTE 16 - SEGMENT REPORTING:
The Company operates and reports it's activities through four principal
units: 1) Fuel Sales and Services, which also includes RPA, 2) Fixed Based
operations, 3) Cargo Operations , and 4) Government contract services.
<TABLE>
<CAPTION>
Government
Fuel Sales Fixed Base Cargo Contract
(Dollars in Thousands) and Services Operations Operations Services Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 Revenues $123,574 $47,924 $27,741 $25,436 224,675
Gross Margin 10,829 10,146 5,751 5,297 32,023
Depreciation and Amortization 1,272 2,712 3,649 827 8,460
Capital expenditures 2,632 11,565 551 497 15,245
Segment Assets 66,455 19,774 24,293 16,780 127,302
- --------------------------------------------------------------------------------------------------
1998
Revenues 156,499 45,130 21,521 16,961 240,111
Gross Margin 8,565 9,696 5,342 4,527 28,130
Depreciation and Amortization 1,062 2,258 1,161 559 5,040
Capital expenditures 2,706 3,260 10,461 1,957 18,384
Segment Assets 55,545 17,925 22,660 15,611 111,741
- --------------------------------------------------------------------------------------------------
1997
Revenues 207,754 36,547 18,811 16,268 279,380
Gross Margin 8,541 6,151 5,047 3,331 23,070
Depreciation and Amortization 850 1,673 988 442 3,953
Capital expenditures 216 891 1,408 677 3,192
Segment Assets 43,161 12,617 21,952 14,907 92,637
</TABLE>
Gross margin is used as the measure of profit and loss for segment
reporting purposes as it viewed by key decision makers as the principal
operating indicator in measuring segment profitability.
F-21
<PAGE> 53
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED JUNE 30, 1999
ADDITIONS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
CLASSIFICATION PERIOD EXPENSES DEDUCTIONS END OF PERIOD
<S> <C> <C> <C> <C>
1999
Allowance for
doubtful accounts $1,686,000 $1,721,000 $ (1,454,000)(a) $1,953,000
========== ========== ================= ==========
1998
Allowance for
doubtful accounts $1,875,000 $1,971,000 $ (2,160,000)(a) $1,686,000
========== ========== ================= ==========
1997
Allowance for
doubtful accounts $ 809,000 $1,810,000 $ (744,000)(a) $1,875,000
========== ========== ================= ==========
</TABLE>
(a) Accounts receivable write-off
F-22
<PAGE> 54
Item 14. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
14 (a)
Exhibit
No. Description
- ------- -----------
<S> <C>
1.1 Underwriting Agreement for the Company's $25,000,000 7-3/4% Convertible
Subordinated Debentures due February 1, 2006.(11)
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(5)
3.4 Bylaws of the Company(4)
3.5 Amendment to Bylaws of the Company(10)
3.6 Amendment to Bylaws of the Company adopted on December 3, 1998
4.1 Form of Indenture between Mercury Air Group, Inc. and IBJ Schroder Bank
& Trust Company.(11)
4.2 Negotiable Promissory Note, dated as of June 21, 1996, from Mercury Air
Group, Inc. to Raytheon Aircraft Services, Inc.(13)
4.3 Legend Agreement, dated as of August 29, 1996 between Mercury Air Group,
Inc. and Raytheon Aircraft Services, Inc.(13)
10.1 Employment Agreement dated December 10, 1993 between the Company and
Seymour Kahn(8)
10.2 Stock Purchase Agreement between the Company, SK Acquisition, Inc.,
Randolph E. Ajer, Kevin J. Walsh, Grant Murray and Joseph Czyzyk(2)
10.3 Company's 1990 Long-Term Incentive Plan(6)
10.4 Company's 1990 Directors Stock Option Plan(1)
10.5 Lease for 6851 West Imperial Highway, Los Angeles, California(4)
10.6 Memorandum Dated September 15, 1997 regarding Summary of Officer Life
Insurance Policies with Benefits Payable to Officers or Their Designated
Beneficiaries(15)
10.7 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans for
Seymour Kahn, Joseph Czyzyk and Randolph E. Ajer(10)
10.8 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans for
Kevin Walsh and William Silva(10)
10.9 The Company's 401(k) Plan consisting of LCI Actuaries, Inc. Regional
Prototype Defined Contribution Plan and Trust and Adoption Agreement(7)
10.10 Non-Qualified Stock Option Agreement by and between the Company and
Seymour Kahn dated January 21, 1993(7)
10.11 Stock Purchase Agreement among the Company, SK Acquisition, Inc. and
William L. Silva dated as of August 9, 1993(8)
10.12 Stock Exchange Agreement dated as of November 15, 1994 between Joseph
Czyzyk and the Company(9)
10.13 Employment Agreement dated November 15, 1994 between the Company and
Joseph Czyzyk(16)
10.14 Non-Qualified Stock Option Agreement dated August 24, 1995, by and
between S.K. Acquisition and Mercury Air Group, Inc.(12)
10.15 Non-Qualified Stock Option Agreement dated March 21, 1996, by and
between Frederick H. Kopko and Mercury Air Group, Inc.(12)
10.16 Credit Agreement by and among Sanwa Bank California, Mellon Bank, N.A.,
The First National Bank of Boston and Mercury Air Group, Inc. dated
March 14, 1997.(14)
</TABLE>
<PAGE> 55
<TABLE>
<S> <C>
10.17 First Amendment to Credit Agreement and Related Loan Documents dated as
of November 1997, by and among Sanwa Bank California, Mellon Bank, N.A.,
BankBoston, N.A. and Mercury Air Group, Inc.(16)
10.18 First Amendment of 1998 to Credit Agreement and Other Loan Documents
dated as of April 1, 1998, by and among Sanwa Bank California, Mellon
Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.(3)
10.19 Second Amendment of 1998 to Credit Agreement and Other Loan Documents
dated as of April 1998, by and between Sanwa Bank California, Mellon
Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.(16)
10.20 Third Amendment of 1998 to Credit Agreement and Other Loan Documents
dated as of August 31, 1998, by and between Sanwa Bank California,
Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.(16)
10.21 Loan Agreement between California Economic Development Financing
Authority and Mercury Air Group, Inc. relating to $19,000,000 California
Economic Development Financing Authority Variable Rate Demand Airport
Facilities Revenue Bonds, Series 1998 (Mercury Air Group, Inc. Project)
dated as of April 1, 1998.(3)
10.22 Reimbursement Agreement dated as of April 1, 1998, by and among Sanwa
Bank California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air
Group, Inc.(3)
10.23 First Amendment to Reimbursement Agreement and Other L/C Documents as of
August 31, 1998, by and between Sanwa Bank California, Mellon Bank,
N.A., BankBoston, N.A. and Mercury Air Group, Inc.(16)
10.24 Fourth Amendment of 1998 to Credit Agreement and Other Loan Documents by
and between Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A.
and Mercury Air Group, Inc. dated September 15, 1998.(17)
10.25 Second Amendment to Reimbursement Agreement and Other L/C Documents by
and between Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A.
and Mercury Air Group, Inc. dated September 15, 1998.(17)
10.26 Company's 1998 Long-Term Incentive Plan(18)
10.27 Company's 1998 Directors Stock Option Plan(18)
10.28 Amendment to Employment Agreement by and between Mercury Air Group, Inc.
and Joseph A. Czyzyk dated October 15, 1998.(19)
10.29 Amendment No. 2 to Employment Agreement by and between Mercury Air
Group, Inc. and Joseph A. Czyzyk dated April 12, 1999.(19)
10.30 First Amendment of 1999 to Credit Agreement and Other Loan Documents
dated as of December 31, 1998 by and between Sanwa Bank California,
Mellon Bank, N.A. and BankBoston, N.A. and Mercury Air Group, Inc.(19)
10.31 Third Amendment to Reimbursement Agreement and Other L/C Documents dated
as of December 31, 1998 by and between Sanwa Bank California, Mellon
Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.(19)
10.32 Revolving Credit and Term Loan Agreement dated as of March 2, 1999 by
and among Mercury Air Group, Inc., The Banks listed on Schedule 1
thereto, and BankBoston, N.A., as Agent.(19)
10.33 Securities Purchase Agreement dated September 10, 1999 by and among
Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P.
22.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche, LLP with respect to incorporation if their
report on the audited financial statements contained in this Annual
Report on Form 10-K in the Company's Registration Statement on Form S-8
(Registration Statement No. 33-69414)
</TABLE>
- ----------
<PAGE> 56
(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) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and
are 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
Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and
is incorporated herein by reference.
(6) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 2, 1992 Annual Meeting of Shareholders.
(7) 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.
(8) 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.
(9) 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.
(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, 1995 and are
incorporated herein by reference.
(11) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-65085 on Form S-1 and are incorporated
herein by reference.
(12) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and
are incorporated herein by reference.
(13) All such documents were previously filed as Exhibits to the Company's
Report on Form 8-K filed September 13, 1996 and are incorporated herein
by reference
(14) Such document was previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and
is incorporated herein by reference.
(15) Such document was previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997 and is incorporated
herein by reference.
(16) All such documents were previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998 and is
incorporated herein by reference.
<PAGE> 57
(17) Such document was previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998
and is incorporated herein by reference.
(18) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 3, 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
(19) All such documents were previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
(b) Reports on Form 8-K:
None
<PAGE> 1
EXHIBIT 10.33
SECURITIES PURCHASE AGREEMENT
BY AND BETWEEN
MERCURY AIR GROUP, INC.,
AND
J. H. WHITNEY MEZZANINE FUND, L.P.
--------------------------------
DATED AS OF SEPTEMBER 10, 1999
--------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SECURITIES PURCHASE AGREEMENT
AGREEMENT, dated as of September 10, 1999, by and between MERCURY AIR
GROUP, INC. (the "COMPANY"), a New York corporation, and J. H. WHITNEY MEZZANINE
FUND, L.P. ("WMF"), a Delaware limited partnership. WMF is sometimes referred to
herein as the "PURCHASER."
W I T N E S S E T H:
WHEREAS, the Company wishes to sell to WMF, and WMF wishes to purchase
from the Company (i) a subordinated promissory note (the "WMF NOTE"), due
September 9, 2006, in the principal amount of $24,000,000, and (ii) a warrant
(the "WMF WARRANT") to purchase 503,126 shares of common stock, $ .01 par value
per share, of the Company (the "COMMON STOCK"), in each case upon the terms and
subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement, and unless the context
requires a different meaning, the following terms have the meanings indicated:
"AFFILIATE" shall mean any Person (a) directly or indirectly
controlling, controlled by, or under common control with, the Company, (b)
directly or indirectly owning or holding five percent (5%) or more of any equity
interest in the Company, or (c) five percent (5%) or more of whose voting stock
or other equity interest is directly or indirectly owned or held by the Company.
For purposes of this definition, "control" (including with correlative meanings,
the terms "controlling", "controlled by" and under "common control with") means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"AFFILIATED GROUP" shall have the meaning set forth in Section 1504(a)
of the Code.
"AGREEMENT" shall mean this Agreement, including the exhibits and
schedules attached hereto, as the same may be amended, supplemented or modified
in accordance with the terms hereof.
2
<PAGE> 3
"ASSET DISPOSITION" shall mean the disposition, whether by sale, lease,
transfer, loss, damage, destruction, condemnation or otherwise of any of the
following: (a) any of the stock of or equity interests in the Company or any of
its Subsidiaries or (b) any or all of the assets of the Company or any of its
Subsidiaries other than sales of inventory in the ordinary course of business.
"NET PROCEEDS" of any Asset Disposition means cash proceeds received by the
Company or any of its Subsidiaries from any Asset Disposition (including
insurance proceeds, awards of condemnation, and payments under notes or other
debt securities received in connection with any Asset Disposition), net of (x)
the costs of such sale, lease, transfer or other disposition (including Taxes
attributable to such sale, lease or transfer), and (y) amounts applied to
repayment of Indebtedness secured by a Lien on the asset or property disposed.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or other
day on which commercial banks in the City of New York are authorized or required
by law or executive order to close.
"BY-LAWS" shall mean, unless the context in which such term is used
otherwise requires, the Bylaws of the Company or any of its Subsidiaries as in
effect on the Closing Date.
"CAPITAL EXPENDITURES" shall be determined as set forth in Exhibit D.
"CAPITAL LEASE OBLIGATIONS" of any Person shall mean the obligations of
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP
consistently applied and, for the purposes of this Agreement, the amount of such
obligations at any time shall be the capitalized amount thereof at such time
determined in accordance with GAAP consistently applied. The determination of
Capital Lease Obligations at the relevant time of determination with respect to
the Company and its Subsidiaries shall be made on a consolidated basis in
accordance with GAAP consistently applied.
"CASH" shall mean the currency of the United States of America.
"CASH EQUIVALENTS" shall mean: (i) marketable direct obligations issued
or unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one (1) year from the date of acquisition thereof;
(ii) commercial paper maturing no more than one (1) year from the date issued
and, at the time of acquisition, having a rating of at least A-1 from Standard &
Poor's rating service or a least P-1 from Moody's Investors Service, Inc., (iii)
certificates of deposit or bankers' acceptances maturing within one (1) year
from the date of issuance thereof issued by, or overnight reverse repurchase
agreements from, any commercial bank organized under the laws of the
3
<PAGE> 4
United States of America or any state thereof or the District of Columbia having
combined capital and surplus of not less than $1,000,000,000; (iv) time deposits
maturing no more than thirty (30) days from the date of creation thereof with
commercial banks organized under the laws of the United States of America or any
state thereof or the District of Columbia having combined capital and surplus of
not less than $1,000,000,000; and (v) deposits or investments in mutual or
similar funds offered or sponsored by brokerage or other companies having
membership in the Securities Investor Protection Corporation in amounts not
exceeding the lesser of $100,000 or the maximum amount of insurance applicable
to the aggregate amount of the Company's and its Subsidiaries, deposits at such
institution.
"CERCLA" has the meaning set forth in the definition of "Environmental
Laws" below.
"CERTIFICATE OF INCORPORATION" shall mean, unless the context in which
it is used shall otherwise require, the Certificate of Incorporation of the
Company or any of its Subsidiaries as in effect on the Closing Date.
"CLOSING" shall have the meaning assigned to that term in Section 2.5.
"CLOSING DATE" shall have the meaning assigned to that term in Section
2.5.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, or any
successor statute thereto.
"COMMISSION" shall mean the Securities and Exchange Commission or any
similar agency then having jurisdiction to enforce the Securities Act.
"COMMON STOCK" shall have the meaning assigned to that term in the
second Whereas clause hereof, or any other capital stock of the Company into
which such stock is reclassified or reconstituted.
"COMPLIANCE CERTIFICATE" shall have the meaning given in Section 8.1(c).
"CONDITION OF THE COMPANY" shall mean the assets, business, properties,
prospects operations, or financial condition of the Company and its
Subsidiaries, taken as a whole.
"CONSOLIDATED NET WORTH" of a Person shall mean the consolidated
stockholders' equity of such Person calculated in accordance with GAAP
consistently applied.
"CONTINGENT OBLIGATION" as applied to any Person, shall mean any direct
or indirect liability, contingent or otherwise, of that Person: (i) with respect
to any indebtedness, lease, dividend or other obligation of another Person if
the primary purpose or intent of the Person incurring such liability, or the
primary effect thereof, is to provide assurance to the obligee of such liability
that such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto; (ii) with
respect to any letter of credit issued for the account of that Person or
4
<PAGE> 5
as to which that Person is otherwise liable for reimbursement of drawings; or
(iii) under any foreign exchange contract, currency swap agreement, interest
rate swap agreement or other similar agreement or arrangement designed to alter
the risks of that Person arising from fluctuations in currency values or
interest rates. Contingent Obligations shall include (a) the direct or indirect
guaranty, endorsement (other than for collection or deposit in the ordinary
course of business), co-making, discounting with recourse or sale with recourse
by such Person of the obligation of another, (b) the obligation to make
take-or-pay or similar payments if required regardless of nonperformance by any
other party or parties to an agreement, and (c) any liability of such Person for
the obligations of another through any agreement to purchase, repurchase or
otherwise acquire such obligation or any property constituting security
therefor, to provide funds for the payment or discharge of such obligation or to
maintain the solvency, financial condition or any balance sheet item or level of
income of another. The amount of any Contingent Obligation shall be equal to the
amount of the obligation so guaranteed or otherwise supported or, if not a fixed
and determined amount, the maximum amount so guaranteed.
"CONTRACTUAL OBLIGATIONS" shall mean as to any Person, any provision of
any security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument or arrangement (whether
in writing or otherwise) to which such Person is a party or by which it or any
of such Person's property is bound.
"CURRENT LIABILITIES" shall mean liabilities and other Indebtedness of a
Person maturing on demand or within one (1) year from the date as of which
Current Liabilities are to be determined, and such other liabilities as may
properly be classified as current liabilities in accordance with GAAP.
"DEBENTURES" shall mean the Company's 7 3/4 Convertible Subordinated
Debentures due February 1, 2006.
"DEFINED BENEFIT PLAN" shall mean a defined benefit plan within the
meaning of Section 3(35) of ERISA or Section 414(j) of the Code, whether funded
or unfunded, qualified or non-qualified (whether or not subject to ERISA or the
Code).
"EBITDA" shall be calculated as set forth in Exhibit D.
"ENVIRONMENTAL LAWS" shall mean any applicable past, present or future
federal, state, territorial, provincial, foreign or local law, common law
doctrine, rule, order, decree, judgment, injunction, license, permit or
regulation relating to environmental matters, including those pertaining to land
use, air, soil, surface water, ground water (including the protection, cleanup,
removal, remediation or damage thereof), public or employee health or safety or
any other environmental matter, together with any other laws (federal, state,
territorial, provincial, foreign or local) relating to emissions, discharges,
releases or threatened releases of any pollutant or contaminant including,
without limitation, medical, chemical, biological, biohazardous or radioactive
waste and materials, into ambient air, land, surface water, groundwater,
personal property or structures, or otherwise
5
<PAGE> 6
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transportation, discharge or handling of any contaminant, including,
without limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act (42 U.S.C. 9601 et seq.) ("CERCLA"), the Hazardous Material
Transportation Act (49 U.S.C. 1801 et seq.), the Resource Conservation and
Recovery Act (42 U.S.C. 6901 et seq.) ("RCRA"), the Federal Water Pollution
Control Act (33 U.S.C. 1251 et seq.), the Clean Air Act (42 U.S.C. 1251 et
seq.), the Toxic Substances Control Act (15 U.S.C. 2601 et seq.), and the
Occupational Safety and Health Act (29 U.S.C. 651 et seq.), as such laws have
been, or are, amended, modified or supplemented heretofore or from time to time
hereafter and any analogous future federal, or present or future state or local
laws, statutes and regulations promulgated thereunder.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended and the rules and regulations promulgated thereunder.
"ERISA AFFILIATE" shall mean a corporation that is or was a member of a
controlled group of corporations with the Company within the meaning of section
4001(a) or (b) of ERISA or section 414(b) of the Code, a trade or business
(including a sole proprietorship, partnership, trust, estate or corporation)
that is under common control with Company within the meaning of section 414(m)
of the Code, or a trade or business which together with Company is treated as a
single employer under section 414(o) of the Code.
"EVENT OF DEFAULT" shall have the meaning assigned to such term in the
Note.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.
"EXERCISABLE SHARES" shall have the meaning assigned to that term in
Section 8.5 hereof.
"FIXED CHARGE COVERAGE" shall be determined as set forth in Exhibit D.
"GAAP" shall mean generally accepted accounting principles in effect
within the United States, consistently applied.
"GOVERNMENTAL AUTHORITY" shall mean the government of any nation, state,
city, locality or other political subdivision of any thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, regulation or compliance, and any
corporation or other entity owned or controlled, through stock or capital
ownership or otherwise, by any of the foregoing.
"GUARANTOR" shall have the meaning assigned to that term in Section 3.5.
6
<PAGE> 7
"GUARANTY(IES)" shall mean the Guaranty(ies) substantially in the form
attached hereto as Exhibit C.
"HAZARDOUS MATERIALS" shall mean (i) any chemical pollutant,
contaminant, pesticide, petroleum or petroleum product or byproduct radioactive
substance, solid waste (hazardous or extremely hazardous), special, dangerous or
toxic waste, hazardous or toxic substance, chemical or material regulated,
listed, referred to, limited or prohibited under any Environmental Law,
including without limitation: (i) friable or damaged asbestos, asbestos-
containing material, polychlorinated biphenyls (PCBs), solvents and waste oil;
(ii) any "hazardous substance" as defined under CERCLA or any environmental law,
statute, regulation or rule; (iii) any hazardous waste defined under RCRA or any
Environmental Law; and (iv) even if not prohibited, listed, limited or regulated
by an Environmental Law, all pollutants, contaminants, hazardous, dangerous or
toxic chemical materials, wastes or any other substances, including without
limitation, any industrial process or pollution control waste (whether or not
hazardous within the meaning of RCRA) which could pose a hazard to the
environment, or the health and safety of any person or impair the use or value
of any portion of the Property of the Company.
"INDEBTEDNESS" shall mean as to any Person, without duplication, (a) all
obligations of such Person for borrowed money (including, without limitation,
reimbursement and all other obligations with respect to surety bonds, unfunded
credit commitments, letters of credit and bankers' acceptances, whether or not
matured), (b) all indebtedness, obligations or liability of such Person (whether
or not evidenced by notes, bonds, debentures or similar instruments) whether
matured or unmatured, liquidated or unliquidated, direct or indirect, absolute
or contingent, or joint or several, that should be classified as liabilities in
accordance with GAAP consistently applied, including, without limitation, any
items so classified on a balance sheet and any reimbursement obligations in
respect of letters of credit or obligations in respect of bankers acceptances,
(c) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable and accrued commercial or
trade liabilities arising in the ordinary course of business, (d) all interest
rate and currency swaps, caps, collars and similar agreements or hedging devices
under which payments are obligated to be made by such Person, whether
periodically or upon the happening of a contingency, (e) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (f) all obligations of
such Person under leases which have been or should be, in accordance with GAAP
consistently applied, recorded as capital leases, (g) all indebtedness secured
by any Lien (other than Liens in favor of lessors under leases other than leases
included in clause (f) above) on any property or asset owned or held by that
Person regardless of whether the indebtedness secured thereby shall have been
assumed by that Person or is non-recourse to the credit of that Person, and (h)
any Contingent Obligation of such Person. The determination of the amount of the
Indebtedness at the relevant time of determination with respect to the Company
and its Subsidiaries shall be made on a consolidated basis in accordance with
GAAP consistently applied.
7
<PAGE> 8
"INDENTURE" shall mean that certain Indenture dated as of January 30,
1996 by and between the Company and IBJ Schroder Bank & Trust Company.
"INTEREST COVERAGE" shall be determined as set forth in Exhibit D.
"INTEREST EXPENSE" shall mean, with respect to the Company and its
Subsidiaries on a consolidated basis for any period, the sum of (a) gross
interest expense of the Company and its Subsidiaries for such period determined
on a consolidated basis in accordance with GAAP consistently applied, including
(i) the amortization of debt discounts, (ii) the amortization of all fees
payable in connection with the incurrence of Indebtedness to the extent included
in interest expense, (iii) the portion of any payments or accruals with respect
to Capital Lease Obligations allocable to interest expense and (iv) all
commissions paid to factors during such period, and (b) any other capitalized
interest of the Company and its Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP consistently applied.
"INVESTMENT" shall mean (i) any direct or indirect purchase or other
acquisition by the Company or any of its Subsidiaries of any beneficial interest
in, including stock, partnership interest, membership interest or other equity
securities of, any other Person (other than a Person that prior to the relevant
purchase or acquisition was a Subsidiary of the Company) or (ii) any direct or
indirect loan, advance or capital contribution by the Company or any of its
Subsidiaries to any other Person (other than a Subsidiary of the Company),
including all Indebtedness and accounts receivable from that other Person that
are not current assets or did not arise from sales to that other Person in the
ordinary course of business. The amount of any Investment shall be the original
cost of such Investment plus the cost of all additions thereto, without any
adjustments for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such Investment.
"LIEN" shall mean any mortgage, deed of trust, pledge, hypothecation,
assignment, encumbrance, lien (statutory or other), charge, claim, restriction
or preference, priority, right or other security interest or preferential
arrangement of any kind or nature whatsoever (excluding preferred stock and
equity related preferences) including, without limitation, those created by,
arising under or evidenced by any conditional sale or other title retention
agreement, the interest of a lessor under a Capital Lease Obligation, or any
financing lease having substantially the same economic effect as any of the
foregoing.
"MULTIEMPLOYER PLAN" shall mean a multiemployer plan within the meaning
of Section 3(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code.
"NET INCOME" shall mean, for any period, the net income (or loss) of the
Company and its Subsidiaries on a consolidated basis for such period, as
determined in accordance with GAAP consistently applied, but excluding any
extraordinary gains or losses and any insurance proceeds received by the Company
or any of its Subsidiaries.
"NOTE" shall mean the WMF Note.
8
<PAGE> 9
"OPERATING CASH FLOW" shall be calculated as set forth in Exhibit D.
"OUTSTANDING BORROWINGS" shall mean all Indebtedness of the Company and
its Subsidiaries for money borrowed that is outstanding at the relevant time of
determination.
"PERMITTED ACQUISITION" The acquisition of any Person, business,
division, or specified group of assets by the Company or any of its
Subsidiaries, provided that each of the following conditions is met with respect
to any such acquisition:
(a) immediately prior to and after, and after giving effect to,
such acquisition, no Event of Default and no event which with the giving of
notice or the passage of time would constitute an Event of Default, shall then
exist;
(b) the aggregate consideration (including, without limitation,
assumption of Indebtedness permitted hereby and any amounts paid in respect of
covenants not to compete) paid or to be paid by the Company or any of its
Subsidiaries in connection with any one such acquisition shall not exceed
$7,500,000 and paid or to be paid in connection with all such acquisitions in
any period of twelve (12) consecutive months shall not exceed $10,000,000;
(c) the consideration for such acquisition shall not include the
assumption of indebtedness by the Company or any of its Subsidiaries, other than
Indebtedness (i) in existence prior to the date of such acquisition, (ii) which
was not incurred in connection with or in contemplation of, such acquisition,
(iii) in an aggregate amount for all such acquisitions not to exceed (together
with other Indebtedness outstanding which is permitted pursuant to Section
9.4(b)(iii) hereof) the amount of Indebtedness permitted pursuant to Section
9.4(b)(iii) hereof, and (iv) on terms and conditions satisfactory to the
Purchaser;
(d) such acquisition shall have been approved by the board of
directors and shareholders, if applicable, of the Person to be acquired; and
(e) either (i) such acquisition is the acquisition of assets
only (for use in substantially the same line of business as the line of business
of the Company, or (ii) such acquisition involves the purchase of the capital
stock or other equity interests of a Person and each of the following conditions
is met:
(A) such acquisition is the acquisition of one hundred
percent (100%) of the capital stock or other equity interest of such Person,
(B) such Person is in substantially the same line of
business as the Company, and
9
<PAGE> 10
(C) as soon as practicable but in any event not later
than thirty (30) days after the occurrence of such acquisition, the Borrower
shall (i) if such Person would have been required to execute a Guaranty at the
Closing Date, cause such Person to execute and deliver to the Purchaser a
Guaranty and (ii) cause such person to deliver to the Purchaser evidence of
proper corporate authorization and legal opinions with respect to each of the
matters and documents set forth in this clause (C), in each case in form and
substance satisfactory to the Purchaser.
"PERSON" shall mean any individual, firm, corporation, limited liability
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, Governmental Authority or other entity of any
kind, and shall include any successor (by merger or otherwise) of such entity.
"PLANS" shall have the meaning assigned to that term in Section 5.23 of
this Agreement.
"PREEMPTIVE RIGHTS AGREEMENT" shall mean the Preemptive Rights Agreement
substantially in the form attached hereto as Exhibit E.
"PRO FORMA BALANCE SHEET" shall mean the pro forma consolidated balance
sheet of the Company and its Subsidiaries delivered pursuant to Section 3.13.
"PURCHASER" shall have the meaning set forth in the first paragraph of
this Agreement.
"QUICK ASSETS" shall mean all of the assets of a person consisting of
(i) cash, (ii) Cash Equivalents, (iii) good and collectible accounts receivable
as determined by such Person in accordance with established practice
consistently applied if payable and outstanding not more than sixty (60) days
after the date of the shipment of goods or the other transaction out of which
any such account receivable arose, and (iv) inventory if and to the extent that
the same shall consist of saleable finished goods ready and available for
shipment to purchasers thereof; provided that accounts receivable shall be taken
at their face value less reserves determined to be sufficient in accordance with
GAAP.
"RCRA" has the meaning set forth in the definition of "Environmental
Laws."
"REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights
Agreement substantially in the form attached hereto as Exhibit F.
"REQUIREMENTS OF LAW" shall mean as to any Person, provisions of the
Certificate of Incorporation and By-laws or other organizational or governing
documents of such Person, or any law, treaty, code, rule, regulation, right,
privilege, qualification, license or franchise or determination of an arbitrator
or a court or other Governmental Authority, in each case applicable or binding
upon
10
<PAGE> 11
such Person or any of such Person's property or to which such Person or any of
such Person's property is subject or pertaining to any or all of the
transactions contemplated or referred to herein.
"RESTRICTED PAYMENT" shall mean: (i) any dividend or other distribution,
direct or indirect, on account of any shares of any class of stock, limited
liability company interest, or partnership interest of the Company or any of its
Subsidiaries now or hereafter outstanding, except a dividend payable solely in
shares of that class of stock, limited liability company interest, or
partnership interest to the holders of that class; (ii) any redemption,
conversion, exchange, retirement, sinking fund or similar payment, purchase or
other acquisition for value, direct or indirect, of any shares of any class of
stock, limited liability company interest or partnership interest of the Company
or any of its Subsidiaries now or hereafter outstanding; (iii) any payment or
prepayment of interest on, principal of, premium, if any, redemption,
conversion, exchange, purchase, retirement, defeasance, sinking fund or similar
payment with respect to, any Indebtedness subordinated to the Indebtedness
existing pursuant to the Note and this Agreement; (iv) any payment made to
retire, or to obtain the surrender of, any outstanding warrants, options or
other rights to acquire shares of any class of stock, limited liability company
interest, or partnership interest of the Company or any of its Subsidiaries now
or hereafter outstanding; (v) any payment under any noncompete agreement except
for noncompete agreements entered into in connection with any Permitted
Acquisition and noncompete agreements existing on the date hereof and listed on
Schedule 5.28.
"SEC REPORTS" with respect to any Person shall mean all forms, reports,
statements and other documents (including exhibits, annexes, supplements and
amendments to such documents) required to be filed by it, or sent or made
available by it to its security holders, under the Exchange Act, the Securities
Act, any national securities exchange or quotation system or comparable
Governmental Authority since July 1, 1995.
"SECURITIES" shall mean, collectively, the Note and the Warrant.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations thereunder as the
same shall be in effect at the time.
"SENIOR CREDIT AGREEMENT" shall mean the Revolving Credit and Term Loan
Agreement dated as of March 2, 1999 (as amended, modified, supplemented or
restated) by the Company, the Banks listed on Schedule 1 thereto and BankBoston,
N.A., as Agent.
"SENIOR CREDIT DOCUMENTS" shall mean the Senior Credit Agreement and the
other instruments and documents referred to therein or executed in connection
therewith by the Company, any Guarantor or any other Subsidiary of the Company.
"SENIOR INDEBTEDNESS" shall mean all Indebtedness of the Company and its
Subsidiaries currently outstanding or incurred in the future including without
limitation under the Senior Credit Documents pursuant to any borrowing by the
Company or any of its Subsidiaries from
11
<PAGE> 12
any bank or institutional lender having total assets (together with its
Affiliates) in excess of $500,000,000, which for purposes hereof shall not
include the California Economic Development Financing Authority.
"SOLVENT" shall mean, with respect to the Company and its Subsidiaries
considered as a whole, based on the Pro Forma Balance Sheet, that (i) the assets
and the property of the Company and its Subsidiaries, considered as a whole,
exceed the aggregate liabilities (including contingent and unliquidated
liabilities) of the Company and its Subsidiaries, considered as a whole, (ii)
after giving effect to the transactions contemplated by this Agreement and the
other Transaction Documents, the Company and its Subsidiaries, considered as a
whole, will not be left with unreasonably small capital, and (iii) after giving
effect to the transactions contemplated by this Agreement, the Company and its
Subsidiaries, considered as a whole, are able to both service and pay their
liabilities as they mature. In computing the amount of contingent or
unliquidated liabilities at any time, such liabilities will be computed as the
amount that, in light of all the facts and circumstances existing at such time,
represents the amount that is likely to become an actual or matured liability.
"SUBSIDIARY" shall mean, with respect to any Person, a corporation or
other entity of which more than 50% of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such Person.
Unless otherwise qualified, all references to a "Subsidiary" or to
"Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of
the Company.
"SUBORDINATION AGREEMENT" shall mean that Subordination Agreement
substantially in the form attached hereto as Exhibit H.
"TANGIBLE NET WORTH" of a Person shall be determined by subtracting from
Consolidated Net Worth of such Person the sum of (i) the book value of all
intangibles of such Person determined in accordance with GAAP, consistently
applied, to the extent included in determining Consolidated Net Worth of such
Person, including, without limitation, good will, intellectual property and the
stated value of treasury stock, and (ii) any write-up in the book value of
assets of such Person from that reflected in the financial statements of the
Company and its Subsidiaries as of and for the nine months ended March 31, 1999.
"TAX" shall mean any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code
Section59A), customs duties, capital stock, franchise profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on-minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"TAX RETURN" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
12
<PAGE> 13
"TOTAL CONSIDERATION" shall mean the total consideration paid with
respect to any acquisition, including without limitation (u) all payments made
in cash and property, (v) all payments made in stock, (w) the amounts paid or to
be paid pursuant to non-compete agreements and consulting agreements, (x) the
amount of liabilities assumed (and in the case of a stock acquisition, the
amount of liabilities of the Person to be acquired) (y) the amount of seller
subordinated indebtedness incurred in connection with such acquisition and (z)
the amount of all transaction fees.
"TOTAL DEBT SERVICE" shall mean with respect to any Person and for any
period, the sum of (i) Interest Expense for such period plus (ii) any and all
scheduled repayments of principal during such period in respect of Indebtedness
for borrowed money (including without limitation Indebtedness evidenced by notes
or bonds), the deferred purchase price of assets, or Capitalized Lease
Obligations.
"TOTAL FUNDED INDEBTEDNESS" shall be calculated as set forth in Exhibit
D.
"TRANSACTION DOCUMENTS" shall mean collectively, this Agreement, the
Note, the Warrant, the Registration Rights Agreement, the Stockholders'
Agreement, the Guaranties, the Certificate of Incorporation and the By-laws and
the Subordination Agreement.
"WARRANT" shall mean the WMF Warrant.
"WHITNEY" shall mean J. H. Whitney & Co.
"WMF NOTE" shall mean the subordinated promissory note in the principal
amount equal to $24,000,000 referred to in the Whereas clause hereof, which note
is substantially in the form attached hereto as Exhibit A.
"WMF WARRANT" shall mean the warrant to purchase the number of shares of
Common Stock of the Company equal to 503,126 shares referred to in the Whereas
clause hereof, which warrant is substantially in the form attached hereto as
Exhibit B.
1.2 ACCOUNTING TERMS: FINANCIAL STATEMENTS. All accounting terms used
herein and not expressly defined in this Agreement shall have the respective
meanings given to them in conformance with GAAP. Financial statements and other
information furnished after the date hereof pursuant to the Agreement or the
other Transaction Documents shall be prepared in accordance with GAAP as in
effect at the time of such preparation, provided, however, that no "Accounting
Changes" (as defined below) shall be taken into account in determining
compliance with the financial covenants, standards or terms in this Agreement.
The Company shall prepare footnotes to each Compliance Certificate and the
financial statements required to be delivered hereunder that show the
differences between the basis for calculating financial covenant compliance (the
calculation of financial covenant compliance shall not be based upon nor reflect
such Accounting Changes) and
13
<PAGE> 14
the financial statements delivered (which shall reflect such Accounting
Changes). "ACCOUNTING CHANGES" means: (a) changes in accounting principles
required by GAAP and implemented by the Company; (b) changes in accounting
principles recommended by the Company's certified public accountants and
implemented by the Company; and (c) changes in carrying value of the Company's
or any of its Subsidiaries' assets, liabilities or equity accounts resulting
from (i) the application of purchase accounting principles (A.P.B. 16 and/or 17
and EITF 88-16 and FASB 109) to the purchase and sale of the Securities or the
other transactions described in the Transaction Documents, or (ii) as the result
of any other adjustments that, in each case, were applicable to, but not
included in, the Pro Forma Balance Sheet. All such adjustments resulting from
expenditures made subsequent to the Closing Date (including, but not limited to,
capitalization of costs and expenses or payment of pre-Closing Date liabilities)
shall be treated as expenses in the period the expenditures are made.
1.3 KNOWLEDGE OF THE COMPANY. All references to the knowledge of the
Company or to facts known by the Company shall mean actual knowledge or notice
of the Chairman, Chief Executive Officer, President, Chief Financial Officer or
other executive officer of the Company, any of its Subsidiaries or any division
of the Company or any of its Subsidiaries or knowledge which such Person could
reasonably have acquired through the exercise of due inquiry.
ARTICLE 2
PURCHASE AND SALE OF THE SECURITIES
2.1 PURCHASE AND SALE OF THE WMF NOTE. Subject to the terms and
conditions herein set forth, the Company agrees that it will issue and sell to
WMF, and WMF agrees that it will acquire from the Company on the Closing Date,
the WMF Note substantially in the form attached hereto as Exhibit A,
appropriately completed in conformity herewith. The purchase price of the WMF
Note shall be $23,707,533.
2.2 PURCHASE AND SALE OF WMF WARRANT. Subject to the terms and
conditions herein set forth, the Company agrees that it will issue and sell to
WMF, and WMF agrees that it will acquire from the Company on the Closing Date,
the WMF Warrant substantially in the form attached hereto as Exhibit B,
appropriately completed in conformity herewith. The purchase price for the WMF
Warrant shall be $292,467.
2.3 FEES AT CLOSING; ANNUAL FEES. On the Closing Date, the Company shall
(a) pay to Whitney a placement fee equal to two percent (2%) of the principal
amount of the Note, and (b) reimburse all of Whitney's and the Purchaser's
reasonable out-of-pocket expenses (including, without limitation, fees, charges
and disbursements of counsel and consultants) incurred in connection with (i)
the negotiation and execution and delivery of this Agreement and the Transaction
Documents and Whitney's and the Purchaser's due diligence investigation, and
(ii) the transactions contemplated by this Agreement and the Transaction
Documents, which payments shall be made by wire transfer of immediately
available funds to an account or accounts designated by the Purchaser.
14
<PAGE> 15
2.4 CLOSING. The purchase and issuance of the Securities shall take
place at the closing (the "CLOSING") to be held at the offices of Morrison Cohen
Singer & Weinstein, LLP, 750 Lexington Avenue, New York, New York 10022 at 10:00
a.m., Local Time, on September 10, 1999 (the "CLOSING DATE"). At the Closing,
the Company shall deliver the WMF Note and the WMF Warrant to WMF against
delivery by WMF to the Company of the purchase price therefor. In each case,
payment of such purchase price shall be by wire transfer.
2.5 FINANCIAL ACCOUNTING POSITIONS; TAX REPORTING. Each of the parties
hereto agrees to take reporting and other positions with respect to the
Securities which are consistent with the purchase price of the Securities set
forth herein for all financial accounting purposes, unless otherwise required by
applicable GAAP or Commission rules (in which case the parties agree only to
take positions inconsistent with the purchase price of the Securities set forth
herein, provided that the Purchaser have consented thereto, which consent shall
not be unreasonably withheld). Each of the parties to this Agreement agrees to
take reporting and other positions with respect to the Securities which are
consistent with the purchase price of the Securities set forth herein for all
other purposes, including without limitation, for all federal, state and local
tax purposes.
[INTENTIONALLY LEFT BLANK]
15
<PAGE> 16
ARTICLE 3
CONDITIONS TO THE
OBLIGATIONS OF THE PURCHASER
TO PURCHASE THE SECURITIES
The obligation of the Purchaser to purchase the Note and the Warrant, to
pay the purchase prices therefor at the Closing and to perform any obligations
hereunder shall be subject to the satisfaction as determined by, or waived by,
the Purchaser of the following conditions on or before the Closing Date;
provided, however, that any waiver of a condition shall not be deemed a waiver
of any breach of any representation, warranty, agreement, term or covenant or of
any misrepresentation by the Company.
3.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company contained in Article 5 hereof shall be true and correct at and as
of the date hereof and the Closing Date as if made at and as of such date, and
the Purchaser shall have received at the Closing a certificate to the foregoing
effect, dated the Closing Date, and executed by the Chief Executive Officer,
President or a Vice President of the Company.
3.2 COMPLIANCE WITH THIS AGREEMENT. The Company shall have performed and
complied with all of its agreements and conditions set forth or contemplated
herein that are required to be performed or complied with by the Company on or
before the Closing Date, and the Purchaser shall have received at the Closing a
certificate to the foregoing effect, dated the Closing Date, and executed by the
Chief Executive Officer, President or a Vice President of the Company.
3.3 SECRETARY'S CERTIFICATES.
(a) The Purchaser shall have received a certificate from the
Company, dated the Closing Date and signed by the Secretary or an Assistant
Secretary of the Company, certifying (i) that the attached copies of the
Certificate of Incorporation and By-laws of the Company, and resolutions of the
Board of Directors of the Company approving the Transaction Documents to which
it is a party and the transactions contemplated hereby and thereby are all true,
complete and correct and remain unamended and in full force and effect, and (ii)
the incumbency and specimen signature of each officer of the Company executing
any Transaction Document to which it is a party or any other document delivered
in connection herewith and therewith on behalf of the Company.
(b) The Purchaser shall have received a certificate from each
Subsidiary of the Company that is a Guarantor, certifying (i) that the attached
copies of the Certificate of Incorporation and By-laws of such Subsidiary, and
the resolutions of the Board of Directors of such Subsidiary approving the
Guaranty and other Transaction Documents to which it is a party and the
transactions contemplated thereby are all true, complete and correct and remain
unamended and in
16
<PAGE> 17
full force and effect, and (ii) the incumbency and specimen signatures of each
officer of such Subsidiary executing the Guaranty and any other Transaction
Document to which it is a party or any other document delivered in connection
therewith on behalf of the Subsidiary.
3.4 DOCUMENTS. The Purchaser shall have received true, complete and
correct copies of (i) the SEC Reports of the Company and (ii) such agreements,
schedules, exhibits, certificates, documents, financial information and filings
as they may request in connection with or relating to the transactions
contemplated hereby, all in form and substance satisfactory to the Purchaser.
3.5 PURCHASE OF SECURITIES PERMITTED BY APPLICABLE LAWS. The acquisition
of and payment for the Securities to be acquired by the Purchaser hereunder and
the consummation of the transactions contemplated hereby and by the Transaction
Documents
(a) shall not be prohibited by any Requirement of Law,
(b) shall not subject the Purchaser to any penalty or other
onerous condition under or pursuant to any Requirement of Law, and
(c) shall be permitted by all Requirements of Law to which
Purchaser or the transactions contemplated by or referred to herein or in the
Transaction Documents are subject; and the Purchaser shall have received such
certificates or other evidence as it may reasonably request to establish
compliance with this condition.
3.6 OPINION OF COUNSEL. The Purchaser shall have received an opinion of
outside counsel to the Company and its Subsidiaries, dated as of the Opinion,
relating to the transactions contemplated by or referred to herein, in form and
substance acceptable to the Purchaser.
3.7 APPROVAL OF COUNSEL TO THE PURCHASER. All actions and proceedings
hereunder and all agreements, schedules, exhibits, certificates, financial
information, filings and other documents required to be delivered by the Company
and each of its Subsidiaries hereunder or in connection with the consummation of
the transactions contemplated hereby, and all other related matters, shall have
been in form and substance acceptable to Morrison Cohen Singer & Weinstein, LLP,
counsel to the Purchaser, in its reasonable judgment (including, without
limitation, the opinion of counsel referred to in Section 3.6 hereof).
3.8 CONSENTS AND APPROVALS. All consents, exemptions, authorizations, or
other actions by, or notices to, or filings with, Governmental Authorities and
other Persons in respect of all Requirements of Law and with respect to those
Contractual Obligations of the Company and each of its Subsidiaries necessary,
desirable, or required in connection with the execution, delivery or performance
(including, without limitation, the payment of interest on the Note and the
issuance of Common Stock upon the exercise of the Warrant) by the Company, or
enforcement against the Company, of the Transaction Documents to which it is a
party shall have been obtained and be in
17
<PAGE> 18
full force and effect, and the Purchaser shall have been furnished with
appropriate evidence thereof, and all waiting periods shall have lapsed without
extension or the imposition of any conditions or restrictions.
3.9 REGISTRATION RIGHTS AGREEMENT. The Company shall have duly executed
and delivered the Registration Rights Agreement.
3.10 PREEMPTIVE RIGHTS AGREEMENT. The Company shall have duly executed
and delivered the Preemptive Rights Agreement.
3.11 NO MATERIAL JUDGMENT OR ORDER. There shall not be on the Closing
Date any judgment or order of a court of competent jurisdiction or any ruling of
any Governmental Authority or any condition imposed under any Requirement of Law
which, in the judgment of the Purchaser, would prohibit the purchase of the
Securities hereunder or subject the Purchaser to any penalty or other onerous
condition under or pursuant to any Requirement of Law if the Securities were to
be purchased hereunder.
3.12 PRO FORMA BALANCE SHEET. The Company shall have delivered to the
Purchaser as of the Closing Date a pro forma consolidated balance sheet of the
Company and its Subsidiaries, certified by the chief financial officer of the
Company that it fairly presents the pro forma adjustments reflecting the
consummation of the transactions contemplated by the Transaction Documents,
including all material fees and expenses in connection therewith.
3.13 GOOD STANDING CERTIFICATES. The Company shall have delivered to the
Purchaser as of the Closing Date, good standing certificates for the Company and
each of its Subsidiaries for each of their respective jurisdictions of
incorporation and all other jurisdictions where they do business.
3.14 NO LITIGATION. No action, suit or proceeding before any court or
any Governmental Authority shall have been commenced or threatened, no
investigation by any Governmental Authority shall have been commenced and no
action, suit or proceeding by any Governmental Authority shall have been
threatened against the Purchaser, the Company or any Subsidiary (i) seeking to
restrain, prevent or change the transactions contemplated hereby or questioning
the validity or legality of any of such transactions, or (ii) which would, if
resolved adversely to the Purchaser, Company or any Subsidiary, severally or in
the aggregate, materially and adversely affect the Condition of the Company.
3.15 GUARANTIES. The Purchaser shall have received a Guaranty duly
executed and delivered by each Subsidiary of the Company organized under the
laws of any state or the District of Columbia of the United States of America as
identified on Schedule 5.18 (each, a "GUARANTOR").
18
<PAGE> 19
ARTICLE 4
CONDITIONS TO THE OBLIGATIONS
OF THE COMPANY TO ISSUE AND SELL THE SECURITIES
The obligations of the Company to issue and sell the Securities and to
perform its other obligations hereunder relating thereto shall be subject to the
satisfaction as determined by, or waived by, the Company of the following
conditions on or before the Closing Date:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Purchaser contained in Article 6 hereof shall be true and correct at and
as of the date hereof and the Closing Date as if made at and as of such date.
4.2 COMPLIANCE WITH THIS AGREEMENT. The Purchaser shall have performed
and complied with all of its agreements and conditions set forth or contemplated
herein that are required to be performed or complied with by the Purchaser on or
before the Closing Date.
4.3 SUBORDINATION AGREEMENT. The Subordination Agreement shall have been
executed and delivered by all parties thereto.
4.4 SALE OF SECURITIES PERMITTED BY APPLICABLE LAWS. The acquisition of
and payment for the Securities to be acquired by the Purchaser hereunder and the
consummation of the transactions contemplated hereby and by the Transaction
Documents (a) shall not be prohibited by any Requirement of Law, (b) shall not
subject the Company to any penalty or other onerous condition under or pursuant
to any Requirement of Law, and (c) shall be permitted by all Requirements of Law
to which the Company or the transactions contemplated by or referred to herein
or in the Transaction Documents are subject; and the Company shall have received
such certificates or other evidence as it may reasonably request to establish
compliance with this condition.
4.5 CONSENTS AND APPROVALS. All consents, exemptions and authorizations
under the Senor Credit Documents necessary, desirable, or required in connection
with the execution, delivery or performance (including, without limitation, the
payment of interest on the Note and the issuance of Common Stock upon the
exercise of the Warrant) by the Company or any Guarantor, or enforcement against
the Company and each Guarantor, of the Transaction Documents to which it is a
party shall be in full force and effect, each of such consents, exemptions and
authorizations having been obtained as of the date hereof.
4.6 NO MATERIAL JUDGMENT OR ORDER. There shall not be on the Closing
Date any judgment or order of a court of competent jurisdiction or any ruling of
any Governmental Authority or any condition imposed under any Requirement of Law
which, in the judgment of the Company, would prohibit the sale of the Securities
hereunder or subject the Company to any penalty
19
<PAGE> 20
or other onerous condition under or pursuant to any Requirement of Law if the
Securities were to be sold hereunder.
4.7 NO LITIGATION. No action, suit or proceeding before any court or any
Governmental Authority shall have been commenced or threatened, no investigation
by any Governmental Authority shall have been commenced and no action, suit or
proceeding by any Governmental Authority shall have been threatened against the
Purchaser, the Company or any Subsidiary (i) seeking to restrain, prevent or
change the transactions contemplated hereby or questioning the validity or
legality of any of such transactions, or (ii) which would, if resolved adversely
to the Purchaser, Company or any Subsidiary, severally or in the aggregate,
materially and adversely affect the Condition of the Company.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser as follows:
5.1 CORPORATE EXISTENCE AND POWER. The Company and each of its
Subsidiaries:
(a) is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation;
(b) has all requisite corporate power and authority to own and
operate its property, to lease the property it operates as lessee and to conduct
the business in which it is currently, or is currently proposed to be, engaged;
(c) is, duly qualified as a foreign entity, licensed and in good
standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such
qualification, except to the extent that the failure to so qualify would not
have a material adverse effect on the Condition of the Company; and
(d) has the corporate power and authority to execute, deliver
and perform its obligations under each Transaction Document to which it is or
will be a party and to borrow hereunder. Schedule 5.1 contains a true, complete
and correct list of the Company and each Subsidiary and each jurisdiction where
its ownership, lease or operation of property or the conduct of its business
would require it to be qualified to do business as a foreign entity.
5.2 CORPORATE AUTHORIZATION; NO CONTRAVENTION.
(a) The execution, delivery and performance by the Company of
this Agreement and each other Transaction Document to which it is or will be a
party and the
20
<PAGE> 21
consummation of the transactions contemplated hereby and thereby, including,
without limitation, the issuance of the Securities: (i) has been duly authorized
by all necessary corporate, and if required, stockholder action; (ii) do not and
will not contravene the terms of the Certificate of Incorporation or By-Laws of
the Company or any Subsidiary, or any amendment thereof; (iii) do not and will
not (A) conflict with, contravene, result in any violation or breach of or
default under (with or without the giving of notice or the lapse of time or
both), (B) create in any other Person a right or claim of termination or
amendment, or (C) require modification, acceleration or cancellation of, any
Contractual Obligation of the Company or any of its Subsidiaries; and (iv) do
not and will not result in the creation of any Lien (or obligation to create a
Lien) against any property, asset or business of the Company or any of its
Subsidiaries.
(b) The execution, delivery and performance by each Guarantor of
the Guaranty and each other Transaction Document to which it is or will be a
party and the consummation of the transactions contemplated thereby: (i) has
been duly authorized by all necessary corporate, and if required, stockholder
action; (ii) do not and will not contravene the terms of the Certificate of
Incorporation or By-Laws of such Subsidiary, or any amendment thereof; (iii) do
not and will not (A) conflict with, contravene, result in any violation or
breach of or default under (with or without the giving of notice or the lapse of
time or both), (B) create in any other Person a right or claim of termination or
amendment, or (C) require modification, acceleration or cancellation of, any
Contractual Obligation of such Subsidiary; and (iv) do not and will not result
in the creation of any Lien (or obligation to create a Lien) against any
property, asset or business of the such Subsidiary.
5.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. No approval,
consent, compliance, exemption, authorization, or other action by, or notice to,
or filing with, any Governmental Authority or any other Person in respect of any
Requirement of Law or Contractual Obligation, and no lapse of a waiting period
under a Requirement of Law or Contractual Obligation, is necessary or required
in connection with the execution, delivery or performance by (including, without
limitation, the payment of interest on the Note and the issuance of shares of
capital stock upon the exercise of the Warrant), or enforcement against, the
Company of the Transaction Documents to which it is a party or the consummation
of the transactions contemplated hereby or thereby, except for the consent of
the Majority Banks as defined in the Senior Credit Agreement, which consent has
been obtained and is in full force and effect.
5.4 BINDING EFFECT. This Agreement has been, and each of the Transaction
Documents to which the Company will be a party to will be, duly executed and
delivered by the Company, and this Agreement constitutes, and such Transaction
Documents will constitute, the legal, valid and binding obligation of the
Company enforceable against the Company in accordance with their respective
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally and by general principles of equity relating to enforceability.
21
<PAGE> 22
5.5 NO LEGAL BAR. Neither the execution, delivery and performance of the
Transaction Documents nor the issuance of or performance of the terms of the
Securities will violate any Requirement of Law or any Contractual Obligation of
the Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries has previously entered into any agreement which is currently in
effect or to which the Company or any of its Subsidiaries is currently bound,
granting any rights to any Person which are inconsistent with the rights to be
granted by the Company in the Transaction Documents.
5.6 LITIGATION. Except as set forth on Schedule 5.6, there are no legal
actions, suits, proceedings, claims or disputes pending or, to the knowledge of
the Company, threatened, at law, in equity, in arbitration or before any
Governmental Authority against or affecting the Company or any of its
Subsidiaries (or, as applicable, to the Company's knowledge, any of their
respective shareholders, directors, officers, employees or agents in their
representative capacities), which action, suit, proceeding, claim or dispute, if
determined adversely to the Company or such Subsidiary, could have a material
adverse effect on the Condition of the Company. No injunction, writ, temporary
restraining order, decree or any order of any nature has been issued by any
court or other Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of the Transaction Documents.
5.7 COMPLIANCE WITH LAWS. Except as set forth on Schedule 5.7, and
except where the failure to so comply would not, either singly or in the
aggregate, materially adversely affect the Condition of the Company, the Company
and each of its Subsidiaries are in compliance with all Requirements of Law.
5.8 NO DEFAULT OR BREACH. No event has occurred and is continuing or
would result from the incurring of obligations by the Company and its
Subsidiaries under the Transaction Documents which constitutes or, with the
giving of notice or lapse of time or both, would constitute an Event of Default.
Neither the Company nor any of its Subsidiaries is in default under or with
respect to any Contractual Obligation in any material respect.
5.9 TITLE TO PROPERTIES.
(a) Schedule 5.9(a) contains a true, complete and correct list
of all real property reflected on the Pro forma Balance Sheet or used in
connection with the respective businesses of the Company and each of its
Subsidiaries. The Company and/or its Subsidiaries have good and marketable title
in and to all real property reflected on the Pro Forma Balance Sheet or used in
connection with their respective businesses, free and clear of all Liens,
liabilities and rights except as provided on Schedule 5.9(a).
22
<PAGE> 23
(b) Schedule 5.9(b) contains a list of all real property leases
reflected on the Pro Forma Balance Sheet or used in connection with the
respective businesses of the Company and each of its Subsidiaries. The Company
and/or its Subsidiaries hold all of the right, title and interest of the tenant
under the leases reflected on the Pro Forma Balance Sheet or used in connection
with their respective businesses free and clear of all Liens, liabilities and
rights except as provided on Schedule 5.9(b).
5.10 USE OF REAL PROPERTY.
(a) Except as set forth on Schedule 5.10, the owned and leased
real properties reflected on the Pro Forma Balance Sheet or used in connection
with the respective businesses of the Company and its Subsidiaries, are used and
operated in compliance and conformity with all Contractual Obligations and
Requirements of Law, except to the extent that the failure so to comply would
not, in the aggregate, materially adversely affect the Condition of the Company;
neither the Company nor any of its Subsidiaries has received notice of violation
of any applicable zoning or building regulation, ordinance or other law, order,
regulation or other Requirements of Law relating to the operations of either the
Company or any of its Subsidiaries; and there is no such violation.
(b) Except as set forth on Schedule 5.10, all structures,
improvements and other buildings that are owned or covered by leases reflected
on the Pro Forma Balance Sheet or used in connection with the business of the
Company and its Subsidiaries, comply with all applicable ordinances, codes,
regulations and other Requirements of Law, except to extent that the failure so
to comply would not, in the aggregate, materially adversely affect the Condition
of the Company, have a valid and subsisting certificate of occupancy for their
present use, and neither the Company nor any Subsidiary thereof has received any
written notice from any Governmental Authority which is still outstanding of any
failure to obtain any certificate, permit, license or approval with respect to
the real property, or any intended revocation, modification or cancellation of
same, the failure of which to obtain or retain in its present form would have a
material adverse affect on the Condition of the Company, and no law or
regulation presently in effect or condition precludes or materially restricts
continuation of the present use of such properties.
(c) Except as set forth in Schedule 5.10, (i) each lease
relating to leased real property reflected on the Pro Forma Balance Sheet or
used in connection with the business of the Company or any of its Subsidiaries
is in full force and effect and the Company enjoys peaceful and undisturbed
possession thereunder, and (ii) there is no default on the part of the Company
or any of its Subsidiaries or event or condition which (with notice or lapse of
time, or both) would constitute a default on the part of the Company or any of
its Subsidiaries under any such lease.
(d) There are no service contracts, maintenance contracts, union
contracts, concession agreements, licenses, agency agreements or any other
Contractual Obligations affecting the real property or the leased property
reflected on the Pro Forma Balance Sheet or used in connection with the business
of the Company and its Subsidiaries, or the operation thereof, other
23
<PAGE> 24
than those listed on Schedule 5.10, except for Contractual Obligations which are
cancelable on no more than thirty (30) days' notice.
(e) Except as set forth a Schedule 5.10, (i) there are no
pending or, to the knowledge of the Company, threatened condemnation or eminent
domain proceedings that would affect any part of the real property or the leased
property reflected on the Pro Forma Balance Sheet or used in connection with the
business of the Company and its Subsidiaries, and (ii) there are no actions,
suits or proceedings pending or, to the knowledge of the Company, threatened
against the real property or the leased property on the Pro Forma Balance Sheet
or used in connection with the business of the Company and its Subsidiaries, at
law or in equity, before any federal, state, municipal or governmental
department, commission, board, bureau, agency or instrumentality which would in
any way affect title to such real property or the leased property.
5.11 TAXES.
(a) Each of the Company and its Subsidiaries has filed all
material Tax Returns that it was required to file. All such Tax Returns were
correct and complete in all material respects. All material Taxes owed by the
Company or any of its Subsidiaries (whether or not shown on any Tax Return) have
been paid. There is currently pending no claim made by a Governmental Authority
in a jurisdiction where the Company or any of its Subsidiaries does not file Tax
Returns that the Company or any of its Subsidiaries is or may be subject to
taxation by that jurisdiction. There are no Liens on any of the assets of the
Company or any of its Subsidiaries that arose in connection with any failure (or
alleged failure) to pay any Tax.
(b) Each of the Company and its Subsidiaries has withheld and
paid all material Taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, independent contractors, creditor,
stockholder, or other third party.
(c) Neither the Company nor any of its Subsidiaries expects any
Governmental Authority to assess any additional Taxes in any material amount for
any period for which Tax Returns have been filed. There is no dispute or claim
concerning any Tax liability of the Company or any of its Subsidiaries either
(i) claimed or raised by any Governmental Authority in writing or (ii) as to
which the Company has knowledge based upon personal contact with any agent of
such authority.
(d) Neither the Company nor any of its Subsidiaries has any
liability for the Taxes of any person or entity other than the Company and its
Subsidiaries (i) under Reg. Section1.1502-6 (or any similar provision of state,
local or foreign law), (ii) as a transferee or successor, (iii) by contract, or
(iv) otherwise.
24
<PAGE> 25
5.12 SEC REPORTS; FINANCIAL CONDITION.
(a) The Company has timely filed all SEC Reports and has made
available to the Purchaser each SEC Report. The SEC Reports of the Company,
including, without limitation, any financial statements or schedules included or
incorporated therein by reference, (i) comply in all material respects with the
requirements of the Exchange Act or the Securities Act or both, as the case may
be, applicable to those SEC Reports and (ii) did not at the time they were filed
contain any untrue statement of a material fact or omit to state a material fact
required to be stated or necessary in order to make the statements made in those
SEC Reports, in light of the circumstances under which they were made, not
misleading. No Subsidiary of the Company is subject to the periodic reporting
requirements of the Exchange Act or is otherwise required to file any documents
with the Commission or any national securities exchange or quotation service or
comparable Governmental Authority.
(b) Each of the consolidated balance sheets of the Company and
its Subsidiaries and the related consolidated statements of income,
stockholders' equity and cash flow, together with the notes thereto, which are
included in or incorporated by reference into the SEC Reports of the Company
fairly present, in all material respects, the financial position of the Company
and each of its Subsidiaries as of the respective dates thereof, and the results
of operations and cash flows of the Company and each of its Subsidiaries as of
the respective dates or for the respective periods set forth therein, all in
conformity with GAAP consistently applied during the periods involved, except as
otherwise set forth in the notes thereto and subject, in the case of unaudited
quarterly financial statements, to normal year-end audit adjustments.
(c) The Pro Forma Balance Sheet delivered to the Purchaser sets
forth the assets and liabilities of the Company and each of its Subsidiaries on
a pro forma consolidated basis after taking into account the consummation of the
transactions contemplated in this Agreement as of the Closing Date in question.
The Pro Forma Balance Sheet has been prepared by the Company in accordance with
GAAP, consistently applied, and fairly presents in all material respects the
assets and liabilities of the Company and its Subsidiaries on a consolidated
basis, reflecting the consummation of the transactions contemplated in this
Agreement and based on the assumptions set forth therein as of the Closing Date.
(d) The projections of the Company and its Subsidiaries on a
consolidated basis heretofore delivered to the Purchaser (i) were prepared by
the Company in the ordinary course of its operations consistent with past
practice, (ii) are the most current projections prepared by the Company relating
to the periods covered thereby, and (iii) are based on assumptions which were
reasonable when made and such assumptions and projections are reasonable on the
date hereof. Neither the Company nor any of its Subsidiaries has delivered to
any Person any later dated projections.
5.13 ERISA -- PROHIBITED TRANSACTIONS. The execution and delivery of the
Transaction Documents, the purchase and sale of the Securities hereunder and the
consummation
25
<PAGE> 26
of the transactions contemplated hereby and thereby will not result in any
prohibited transaction within the meaning of Section 406 of ERISA or Section
4975 of the Code.
5.14 DISCLOSURE.
(a) Agreement and Other Documents. This Agreement, together with
all exhibits and schedules hereto, and the agreements, certificates and other
documents furnished to the Purchaser by the Company and its Subsidiaries at the
Closing, do not contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which they were made, not
misleading.
(b) Material Adverse Effects. There is no fact known to the
Company, which the Company has not disclosed to the Purchaser in writing which
materially adversely affects or, insofar as the Company can reasonably foresee,
could materially adversely affect, the Condition of the Company or the ability
of the Company or any of its Subsidiaries to perform its obligations under the
Transaction Documents, or any agreement or other document contemplated thereby
to which it is a party.
5.15 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since March 31, 1999, except
as set forth on Schedule 5.15, neither the Company nor any of its Subsidiaries
has (i) issued any stock, bonds or other corporate securities, (ii) borrowed any
amount or incurred any liabilities (absolute or contingent), other than in the
ordinary course of business, in excess of $250,000 in the aggregate, (iii)
discharged or satisfied any Lien or incurred or paid any obligation or liability
(absolute or contingent), other than in the ordinary course of business, in
excess of $250,000 in the aggregate, (iv) declared or made any payment or
distribution to stockholders or purchased or redeemed any shares of its capital
stock or other securities, (v) mortgaged, pledged or subjected to Lien any of
its assets, tangible or intangible, other than as contemplated in clause (iii)
of this Section 5.15. (vi) sold, assigned or transferred any of its tangible
assets, or canceled any debts or claims, (vii) sold, assigned or transferred any
patents, trademarks, trade names, copyrights, trade secrets or other intangible
assets material to the Condition of the Company, (viii) suffered any non-insured
losses of property, or waived any rights of substantial value, (ix) suffered any
material adverse change in the Condition of the Company, (x) entered into any
transaction, other than in the ordinary course of business, involving
consideration in excess of $250,000 except as otherwise contemplated hereby, or
(xi) entered into any agreement or transaction, or amended or terminated any
agreement, with an Affiliate. To the knowledge of the Company, no material
adverse change in the Condition of the Company is threatened or reasonably
likely to occur.
5.16 ENVIRONMENTAL MATTERS. Except as described on Schedule 5.16:
(a) The property, assets and operations of the Company and its
Subsidiaries are and have been in compliance with all applicable Environmental
Laws, except where the failure to so comply would not, either singly or in the
aggregate, materially adversely affect the Condition of the Company; there are
no Hazardous Materials stored or otherwise located in, on or
26
<PAGE> 27
under any of the property or assets of the Company or its Subsidiaries,
including, without limitation, the groundwater, except in compliance with
applicable Environmental Laws; and there have been no releases or, to the
knowledge of the Company, threatened releases of Hazardous Materials in, on or
under any property adjoining any of the property or assets of the Company or its
Subsidiaries which have not been remediated to the satisfaction of the
appropriate Governmental Authorities and in compliance with Environmental Laws.
(b) None of the property, assets or operations of the Company or
its Subsidiaries is the subject of any federal, state or local investigation
evaluating whether (i) any remedial action is needed to respond to a release or
threatened release of any Hazardous Materials into the environment except, in
each case, where such remedial action if determined to be necessary could not
have a material adverse effect on the Condition of the Company, or (ii) any
release or threatened release of any Hazardous Materials into the environment is
in contravention of any Environmental Law except, in each case, where such
release or threatened release could not have a material adverse effect on the
Condition of the Company.
(c) Neither the Company nor any of its Subsidiaries has received
any notice or claim, nor are there pending, or to the knowledge of the Company
threatened or reasonably anticipated, lawsuits or proceedings against any of
them, with respect to violations of an Environmental Law or in connection with
the presence of or exposure to any Hazardous Materials in the environment or any
release or threatened release of any Hazardous Materials into the environment,
which lawsuits or proceedings, if determined adversely to the Company or such
Authority, could have a material adverse effect on the Condition of the Company.
(d) Neither the Company nor its Subsidiaries is or was the owner
or operator of any property which (i) pursuant to any Environmental Law has been
placed on any list of Hazardous Materials disposal sites, including, without
limitation, the "National Priorities List" or "CERCLIS List," (ii) has, or had,
any subsurface storage tanks located thereon, or (iii) has ever been used as or
for a waste disposal facility, a mine, a gasoline service station or, other than
for petroleum substances stored in the ordinary course of business, a petroleum
products storage facility.
(e) Neither the Company nor any of its Subsidiaries has any
present or contingent liability in connection with the presence either on or off
the property or assets of the Company or its Subsidiaries of any Hazardous
Materials in the environment or any release or threatened release of any
Hazardous Materials into the environment, which liability could have a material
adverse effect on the Condition of the Company.
5.17 INVESTMENT COMPANY/GOVERNMENT REGULATIONS. The Company is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended. Neither the Company nor its Subsidiaries is subject to regulation
under the Public Utility Holding Company Act of 1935, as amended, the Federal
Power Act, the Interstate Commerce Act, or any federal or state statute or
regulation limiting its ability to incur Indebtedness.
27
<PAGE> 28
5.18 SUBSIDIARIES.
(a) Schedule 5.18 sets forth a complete and accurate list of all
of the Subsidiaries of the Company together with their respective jurisdictions
of incorporation or organization. All of the outstanding shares of capital stock
or, or other equity interests in, the Subsidiaries are validly issued, fully
paid and nonassessable. Except as set forth on Schedule 5.18, as of the Closing
Date, all of the outstanding shares of capital stock of, or other ownership
interests in, each of the Subsidiaries are owned by the Company or by a wholly
owned Subsidiary free and clear of any Liens. No Subsidiary has outstanding
options, warrants, subscriptions, calls, rights, convertible securities or other
agreements or commitments obligating the Subsidiary to issue, transfer or sell
any securities of the Subsidiary.
(b) Except as set forth on Schedule 5.18 and except for the
Subsidiaries of the Company, the Company does not own of record or beneficially,
directly or indirectly, (i) any shares of outstanding capital stock or
securities convertible into capital stock of any other corporation, and (ii) any
equity, voting or participating interest in any limited liability company,
partnership, joint venture or other non-corporate business enterprises.
5.19 CAPITALIZATION.
(a) As of the Closing Date, the authorized capital stock of the
Company consists of 18,000,000 shares of Common Stock, of which 6,641,175 shares
are issued and outstanding and 3,000,000 shares of Preferred Stock, of which no
shares are issued and outstanding. The Company has approximately 140,100 shares
of capital stock held in treasury. As of the Closing Date, after giving effect
to the transactions contemplated hereby and in the other Transaction Documents,
there will be: (i) 6,707,334 shares of Common Stock issued and outstanding
(inclusive of 22,565 shares to be issued to the shareholders of Weather Data and
43,594 shares to be issued upon conversion of Debentures); (iii) 503,126 shares
of Common Stock reserved for issuance upon exercise of the WMF Warrant; and
(iii) 839,551 shares of Common Stock reserved for issuance pursuant to the
exercise of stock options issuable in accordance with the terms of one or more
stock option plans of the Company existing on the date hereof ("MANAGEMENT
OPTIONS"). The Warrant, the Management Options and all outstanding shares of
capital stock of the Company have been duly authorized by all necessary
corporate action. All outstanding shares of capital stock of the Company are,
and the shares of Common Stock issuable upon exercise of the Warrant and the
Management Options, when issued, will be, validly issued, fully paid and
nonassessable and the issuance of foregoing has not been or will not be, as the
case may be, subject to preemptive rights in favor of any Person. Schedule 5.19
provides an accurate list as of the Closing Date, after giving effect to the
transactions contemplated hereby and the other Transaction Documents of all of
the holders of warrants, options, rights and securities convertible into capital
stock, together with the number of shares of capital stock to be issued upon the
exercise or conversion of such warrants, options, rights and convertible
securities.
28
<PAGE> 29
(b) Except as set forth on Schedule 5.19, on the Closing Date,
except for the Warrant and the Management Options, there will be no outstanding
securities convertible into or exchangeable for capital stock of the Company or
any of its Subsidiaries or options, warrants or other rights to purchase or
subscribe to capital stock of the Company or any of its Subsidiaries or
contracts, commitments, agreements, understandings or arrangements of any kind
to which the Company or any of its Subsidiaries is a party relating to the
issuance of any capital stock of the Company or any of its Subsidiaries, any
such convertible or exchangeable securities or any such options, warrants or
rights.
5.20 PRIVATE OFFERING. No form of general solicitation or general
advertising was used by the Company or any of its Subsidiaries, or their
respective representatives in connection with the offer or sale of the
Securities. No registration of the Securities or Common Stock issuable upon the
exercise of the Warrant pursuant to the provisions of the Securities Act or the
state securities or "blue sky" laws will be required for the offer, sale or
issuance of the Securities pursuant to this Agreement or of the Common Stock
issuable upon the exercise of the Warrant. The Company agrees that neither it,
nor anyone acting on its behalf, will offer or sell the Securities or any other
security so as to require the registration of the Securities or Common Stock
issuable upon the exercise of the Warrant pursuant to the provisions of the
Securities Act or any state securities or "blue sky" laws, unless such
Securities or Common Stock issuable upon the exercise of the Warrant are so
registered.
5.21 BROKER'S, FINDER'S OR SIMILAR FEES. Except as provided in Section
2.4 or as set forth on Schedule 5.21 there are no brokerage commissions,
finder's fees or similar fees or commissions payable in connection with the
transactions contemplated hereby based on any agreement, arrangement or
understanding with the Company or any of its Subsidiaries, or any action taken
by any such Person.
5.22 LABOR RELATIONS. Neither the Company nor any of its Subsidiaries
has committed or is engaged in any unfair labor practice. Except as set forth on
Schedule 5.22, there is (a) no unfair labor practice complaint pending or
threatened against the Company or any of its Subsidiaries before the National
Labor Relations Board and no grievance or arbitration proceeding arising out of
or under collective bargaining agreements is so pending or threatened, (b) no
strike, labor dispute, slowdown or stoppage pending or threatened against the
Company or any of its Subsidiaries, (c) no union representation question
existing with respect to the employees of the Company or any of its Subsidiaries
and no union organizing activities are taking place, and (d) no employment
contract with any employee or independent contractor of the Company or any
Subsidiary. The Company and each Subsidiary is in compliance in all material
respects with all federal, state or other applicable laws respecting employment
and employment practices, terms and conditions of employment and wages and
hours. Except as set forth on Schedule 5.22, neither the Company, nor any of its
Subsidiaries, is a party to any collective bargaining agreement.
5.23 EMPLOYEE BENEFIT PLANS.
29
<PAGE> 30
(a) Employee Benefit Plans and Liabilities. Neither the Company
nor any ERISA Affiliate has contributed to nor has any actual or contingent,
direct or indirect, liability in respect of any employee benefit plan (as
defined in Section 3(3) of ERISA) or other employee benefit arrangement
(collectively, the "PLANS"), within the five-consecutive-year period immediately
preceding the first day of the year in which the Closing Date occurs other than
those liabilities with respect to such Plans specifically described on Schedule
5.23(a). Schedule 5.23(a) sets forth all Plans. At no time during such five year
period has the Company or any ERISA Affiliate participated in or contributed to
any Multiemployer Plan, nor during such period has the Company or any ERISA
Affiliate had an obligation to participate in or contribute to any such
Multiemployer Plan. No agreement subject to section 4204 of ERISA has been
entered into in connection with the transactions contemplated in this Agreement.
There are no outstanding material liabilities of the Company or any ERISA
Affiliate to any employee benefit plans previously maintained by the Company or
any ERISA Affiliate, and the Company is not aware of any potential liabilities
in connection therewith. There are no actions, suits or claims, other than for
benefits in the ordinary course, pending or, to the knowledge of the Company,
threatened against the Company, an ERISA Affiliate or the Plans which might
subject the Company or any ERISA Affiliate to any material liability. The
Company has delivered to the Purchaser accurate and complete copies of all of
the Plans.
(b) Plan Compliance. The Company and each of its Subsidiaries is
in compliance in all material respects with all reporting, disclosure and
registration requirements applicable to it under the Code, ERISA and all federal
and state securities laws, and Department of Labor, Internal Revenue Service and
Commission rules and regulations promulgated thereunder, with respect to all of
the Plans, and is not subject to any material liability, whether asserted or
not, for any penalties to any Governmental Authority for late filing of any
return, report or other governmental filing. No civil or criminal action brought
pursuant to the provisions of Title I, Subtitle B, Part 5 of ERISA or any other
federal or state law is pending or threatened against any fiduciary of the
Plans. No Plan, or any fiduciary thereof, has been, or is currently, the direct
or indirect subject of an audit, investigation or examination by any
Governmental Authority. All of the Plans comply currently, and have complied at
all times (and all former Plans have complied at all times in the past), both as
to form and operation, in all material respects, with their terms and with all
Requirements of Law. Each of the Plans maintained by the Company or any
Subsidiary that is an "employee benefit pension plan" (within the meaning of
Section 3(2)(A) of ERISA) has obtained a favorable determination (covering all
changes or amendments applicable under Requirements of Law) from the Internal
Revenue Service as to its qualification under Sections 401(a) and 501(a) of the
Code or is within the remedial amendment period (as provided in Section 401(b)
of the Code) for making any required changes or amendments, and nothing has
occurred before or after the date of each such determination letter as would
adversely affect such qualification. All amounts that are currently owing to
Plan participants (including, without imitation, former Plan participants), or
contributions required to be made to the Plans have been timely paid or
contributed with respect to all periods prior to the Closing Date or provided
for by adequate reserves on the Pro Forma Balance Sheet.
30
<PAGE> 31
(c) Prohibited Transactions. Except as set forth on Schedule
5.23(c), no Plan, nor any related trust, nor the Company, nor any Subsidiary
thereof, nor any trustee, administrator or other "party in interest" or
"disqualified person" (within the meaning of Section 3(14) of ERISA or Section
4975(e)(2) of the Code, respectively) with respect to the Plans, has engaged in
any nonexempt "prohibited transaction" (within the meaning of Section 406 of
ERISA or Section 4975(c) of the Code, respectively) with respect to the
participation of Company or any of its Subsidiaries therein, which could subject
any of the Plans or related trusts, or any trustee, administrator or other
fiduciary of any such Plan, or the Company, any Subsidiary of the Company or the
Purchaser, or any other party dealing with the Plans, to the penalties or excise
tax imposed on prohibited transactions by Section 502 of ERISA or Section 4975
of the Code which could have a material adverse effect on the Condition of the
Company.
(d) COBRA. Except as set for on Schedule 5.23(d), the Company
and each of its Subsidiaries has complied with the continuation coverage
requirements of group health plans provided in Section 4980B of the Code,
Sections 601 et seq. of ERISA, the Family and Medical Leave Act of 1994, and the
regulations promulgated thereunder, and (ii) there are no individual claims by
any employee of the Company or any Subsidiary for any illness or accident which
is expected to exceed $75,000 in health related costs to the Company or any
Subsidiary within the twelve (12)-month period following the Closing Date.
(e) Miscellaneous. Neither the Company, its Subsidiaries, nor
any Plan provides for or promises retiree, medical, disability or life insurance
benefits to any current or former employee, officer or director of the Company
or any of its Subsidiaries, other than continuation coverage required by section
4980B of the Code. Neither the Company nor any of its Subsidiaries is a party to
or obligated under any agreement, plan, contract or other arrangements that will
result, separately or in the aggregate, in the payment of any "excess parachute
payment" within the meaning of section 280G of the Code.
5.24 PATENTS, TRADEMARKS, ETC. The Company and its Subsidiaries own or
are licensed or otherwise have the right to use all patents, trademarks, service
marks, trade names, copyrights, licenses, franchises and other rights
(collectively, the "RIGHTS") being used to conduct their businesses as now
operated. Schedule 5.24 sets forth a complete list of licenses or other or other
Contractual Obligations relating to the Company's and its Subsidiaries' Rights
and of registrations of patents, trademarks, service marks and copyrights
including any applications therefor constituting such Rights. No Right or
product, process, method, substance or other material presently sold by or
employed by the Company or any of its Subsidiaries, or which the Company or any
of its Subsidiaries contemplates selling or employing, infringes upon the Rights
that are owned by others. No litigation is pending and no claim has been made
against the Company or any of its Subsidiaries or, to the knowledge of the
Company, is threatened, contesting the right of the Company or any of its
Subsidiaries to sell or use any Right or product, process, method, substance or
other material presently sold by or employed by the Company or any of its
Subsidiaries. Neither the Company nor any of its Subsidiaries has asserted any
claim of infringement, misappropriation or misuse by any Person of any Rights
owned by the Company or any of its Subsidiaries or to which
31
<PAGE> 32
any of them have exclusive use. Except as set forth on Schedule 5.24, no
employee, officer or consultant of the Company or any of its Subsidiaries has
any proprietary, financial or other interest in any Rights owned or used by the
Company or its Subsidiaries in their businesses. Except as set forth on Schedule
5.24, neither the Company nor any of its Subsidiaries has any obligation to
compensate any Person for the use of any Rights and neither the Company nor any
of its Subsidiaries has granted any license or other right to use any of the
Rights of the Company or it Subsidiaries, whether requiring the payment of
royalties or not. The Company and its Subsidiaries have taken all reasonable
measures to protect and preserve the security, confidentiality and value of
their Rights, including trade secrets and other confidential information. All
trade secrets and other confidential information of the Company and its
Subsidiaries are presently valued and protectible and are not part of the public
domain or knowledge, nor have they been used, divulged or appropriated for the
benefit of any Person other than the Company or its Subsidiaries or otherwise to
the detriment of the Company or its Subsidiaries. No employee or consultant of
the Company or its Subsidiaries has used any trade secrets or other confidential
information of any other Person in the course of his work for the Company or its
Subsidiaries. No patent, invention, device, principle or any statute, law, rule,
regulation, standard or code is pending or proposed which would restrict the
Company's or any Subsidiary's ability to use any of the Rights.
5.25 POTENTIAL CONFLICTS OF INTEREST. Except as set forth on Schedule
5.25, no officer, director or, to the knowledge of the Company, stockholder or
other security holder of the Company or any of its Subsidiaries: (a) owns,
directly or indirectly, any interest in (excepting less than 5% stock holdings
for investment purposes in securities of publicly held and traded companies), or
is an officer, director, employee or consultant of, any Person that is, or is
engaged in business as, a competitor, lessor, lessee, supplier, distributor,
sales agent or customer of, or lender to or borrower from, the Company or any of
its Subsidiaries; (b) owns, directly or indirectly, in whole or in part, any
tangible or intangible property that the Company or any of its Subsidiaries uses
in the conduct of business; or (c) has any cause of action or other claim
whatsoever against, or owes or has advanced any amount to, the Company or any of
its Subsidiaries, except for claims in the ordinary course of business such as
for accrued vacation pay, accrued benefits under employee benefit plans, and
similar matters and agreements existing on the date hereof.
5.26 TRADE RELATIONS. Set forth on Schedule 5.26 is a true and correct
list of the twenty largest customers of the Company and the Subsidiaries taken
as a whole in terms of sales during the twelve-month period ended June 30, 1999,
and a list of the ten largest suppliers to the Company and the Subsidiaries
taken as a whole in terms of purchases during the twelve-month period ended June
30, 1999. There exists no actual or, to the knowledge of the Company, threatened
termination, cancellation or limitation of, or any adverse modification or
change in, the business relationship of the Company, its Subsidiaries or their
business with any customer or any group of customers whose purchases are
individually or in the aggregate material to the business of the Company or any
such Subsidiary, or with any material supplier, and there exists no present
condition or state of facts or circumstances that would materially adversely
affect the Condition of the Company or prevent the Company or its Subsidiaries
from conducting their business after the
32
<PAGE> 33
consummation of the transactions contemplated by this Agreement, in
substantially the same manner in which such business has heretofore been
conducted.
5.27 OUTSTANDING BORROWINGS. Schedule 5.27 lists (i) the amount of all
Outstanding Borrowings of the Company and its Subsidiaries (other than
Indebtedness under this Agreement) as of the Closing, (ii) the Liens that relate
to such Outstanding Borrowings and that encumber the assets of the Company and
its Subsidiaries, (iii) the name of each lender thereof, and (iv) the amount of
any unfunded commitments available to the Company or any Subsidiary in
connection with any Outstanding Borrowings.
5.28 MATERIAL CONTRACTS. Neither the Company nor any Subsidiary is a
party to any Contractual Obligation, or is subject to any charge, corporate
restriction, judgment, injunction, decree, or Requirement of Law, materially
adversely affecting the Condition of the Company. Schedule 5.28 lists all
contracts, agreements, commitments and other Contractual Obligations of the
Company and its Subsidiaries as of the Closing Date, whether written or oral,
other than (a) the Transaction Documents, (b) purchase orders in the ordinary
course of business, and (c) any other contracts, agreements, commitments and
other Contractual Obligations of the Company or any Subsidiary that do not
extend beyond one year and involve the receipt or payment of not more than
$500,000. Each of the contracts, agreements, commitments and other Contractual
Obligations of the Company and its Subsidiaries required to be set forth on
Schedule 5.28 is in full force and effect. The Company has satisfied in full or
provided for all of its liabilities and obligations under each Material Contract
requiring performance prior to the date hereof in all material respects, and is
not in default under any of them, nor, to the knowledge of the Company, does any
condition exist that with notice or lapse of time or both would constitute such
a default. To the knowledge of the Company, no other party to any such Material
Contract is in default thereunder, nor does any condition exist that with notice
or lapse of time or both would constitute such a default.
5.29 INSURANCE. Schedule 5.29 accurately summarizes all of the insurance
policies or programs of the Company and each Subsidiary in effect as of the date
hereof, and indicates the insurer's name, policy number, expiration date, amount
of coverage, type of coverage, annual premiums, exclusions and deductibles, and
also indicates any self-insurance program that is in effect. All such policies
are in full force and effect, are underwritten by financially sound and
reputable insurers, are sufficient for all applicable Requirements of Law and
otherwise are in compliance with the criteria set forth in Section 8.8 hereof.
All such policies will remain in full force and effect and will not in any way
be affected by, or terminate or lapse by reason of any of the transactions
contemplated hereby.
5.30 SOLVENCY. The Company and its Subsidiaries, taken as a whole, are
Solvent.
5.31 LOCATION OF ASSETS. The chief executive offices of the Company and
its Subsidiaries and the books and records of the Company and its Subsidiaries
concerning its accounts (as such term is defined in the Uniform Commercial Code)
are located only at the address set forth
33
<PAGE> 34
on Schedule 5.31 identified as such, and the only other places of business and
locations of assets of the Company and its subsidiaries, if any, are the
addresses set forth on Schedule 5.31.
5.32 YEAR 2000 COMPLIANCE. To the Company's knowledge, after due inquiry
of its suppliers and customer and analysis of its telecommunications and data
processing systems, (i) all computer software or hardware, and (ii) all
electronic devices embedded within its telecommunications and data processing
systems, owned or used by the Company or any of its Subsidiaries, or licensed by
the Company or any of its Subsidiaries, as licensor or as licensee, other than
any shrinkwrap software available to retail customers generally, is "Year 2000
Compliant" (as hereinafter defined), except as disclosed on Schedule 5.32
attached hereto. For purposes of this Agreement, "Year 2000 Compliant" shall
mean (i) all such software or hardware shall operate in four-digit year format,
without errors in the recognition, calculation and processing of date data
relating to century recognition, leap years, single and multi-century formulae,
date values and interfaces of date-related functionalities; (ii) all date
processing shall be conducted in a four-digit year format and all date sorting
that includes a "year field" or "year category" shall be based upon a four-digit
year format; and (iii) any date arithmetic programs or calculators in the
software or hardware shall operate in accordance with the related user
documentation in the Year 2000, and the years following, without degrading
functionality or performance.
5.33 REDEMPTION.
(a) The redemption of the Debentures (i) has been duly
authorized by all necessary corporate action; (ii) does not and will not
contravene the terms of the Certificate of Incorporation or By-Laws of the
Company, or any amendment thereof; (iii) does not and will not (A) conflict
with, contravene, result in any violation or breach of or default under (with or
without the giving of notice on the lapse of time or both), (B) create in any
other Person a right or claim of termination or amendment, or (C) require
modification, acceleration or cancellation of, any Contractual Obligation of the
Company or any of its Subsidiaries; and (iv) does not and will not result in the
creation of any Lien (or obligation to create a Lien) against any property,
asset or business of the Company or any of its Subsidiaries.
(b) All action in connection with the redemption by the Company
of the Debentures has been taken in accordance with the terms and provisions of
the Debentures and Indenture, and all applicable Requirements of Law.
ARTICLE 6
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants as follows:
34
<PAGE> 35
6.1 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and
performance by it of this Agreement: (a) is within its power and authority and
has been duly authorized by all necessary action; (b) does not contravene the
terms of its organizational documents or any amendment thereof; and (c) will not
violate, conflict with or result in any breach or contravention of any of its
Contractual Obligations, or any order or decree directly relating to it.
6.2 BINDING EFFECT. This Agreement has been duly executed and delivered
by it and this Agreement constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, or similar laws affecting
the enforcement of creditors' rights generally or by equitable principles
relating to enforceability.
6.3 NO LEGAL BAR. The execution, delivery and performance of this
Agreement by it will not violate any Requirement of Law applicable to it.
6.4 PURCHASE FOR OWN ACCOUNT. The Securities to be acquired by it
pursuant to this Agreement are being or will be acquired for its own account and
with no intention of distributing or reselling such securities or any part
thereof in any transaction that would be in violation of the securities laws of
the United States of America, or any state, without prejudice, however, to its
right at all times to sell or otherwise dispose of all or any part of the WMF
Note or the WMF Warrant, under an effective registration statement under the
Securities Act, or under an exemption from such registration available under the
Securities Act, and subject, nevertheless, to the disposition of its property
being at all times within its control. If the Purchaser should in the future
decide to dispose of any of the Securities, the Purchaser understands and agrees
that it may do so only in compliance with the Securities Act and applicable
state securities laws, as then in effect. It agrees to the imprinting of a
legend on certificates representing all of the Securities to the following
effect: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY
NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR
PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH
ACT AND SUCH LAWS."
6.5 ERISA. No part of the funds used by it to purchase the Securities
hereunder constitutes assets of any "employee benefit plan" (as defined in
Section 3(3) of ERISA) or "plan" (as defined in Section 4975 of the Code) listed
on Schedule 5.23.
6.6 BROKER'S, FINDER'S OR SIMILAR FEES. Except as set forth in Section
2.4 hereof, there are no brokerage commissions, finder's fees or similar fees or
commissions payable in connection with the transactions contemplated hereby
based on any agreement, arrangement or understanding with it or any action taken
by it.
35
<PAGE> 36
6.7 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENT. No approval,
consent, compliance, exemption, authorization, or other action by, or notice to,
or filing with, any Governmental Authority or any other Person in respect of any
Requirement of Law, and no lapse of a waiting period under a Requirement of Law,
is necessary or required in connection with the execution, delivery or
performance by it or enforcement against it of this Agreement or the
transactions contemplated hereby.
ARTICLE 7
INDEMNIFICATION
7.1 INDEMNIFICATION. In addition to all other sums due hereunder or
provided for in this Agreement, the Company agrees to indemnify and hold
harmless the Purchaser and its Affiliates and each of its officers, directors,
agents, employees, Subsidiaries, partners, members, attorneys, accountants and
controlling persons (each, an "Indemnified Party") to the fullest extent
permitted by law from and against any and all losses, claims, damages, expenses
(including, without limitation, reasonable fees, disbursements and other charges
of counsel and costs of investigation incurred by an Indemnified Party in any
action or proceeding between the Company (or any of its Subsidiaries) and such
Indemnified Party (or Indemnified Parties) or between an Indemnified Party (or
Indemnified Parties) and any third party or otherwise) or other liabilities,
losses, or diminution in value (collectively, "Liabilities") resulting from or
arising out of any breach of any representation or warranty, covenant or
agreement of the Company in this Agreement, the Registration Rights Agreement,
the Stockholders' Agreement, the Note, the Warrant, or the other Transaction
Documents, including without limitation, the failure to make payment when due of
amounts owing pursuant to this Agreement, the Note, or the other Transaction
Documents, on the due date thereof (whether at the scheduled maturity, by
acceleration or otherwise) or any legal, administrative or other actions
(including, without limitation, actions brought by any of the Purchaser, the
Company, any of its Subsidiaries or any holders of equity or indebtedness of the
Company or any of its Subsidiaries or derivative actions brought by any Person
claiming through or in the Company's or any Subsidiary's name), proceedings or
investigations (whether formal or informal), or written threats thereof arising
out of the Transaction Documents, the transactions contemplated thereby, or any
Indemnified Party's role therein or in the transactions contemplated thereby;
provided, however, that the Company shall not be liable under this Section 7.1
to an Indemnified Party: (a) for any amount paid by the Indemnified Party in
settlement of claims by the Indemnified Party without the Company's consent
(which consent shall not be unreasonably withheld), (b) to the extent that it is
finally judicially determined that such Liabilities resulted primarily from the
willful misconduct or gross negligence of such Indemnified Party or (c) to the
extent that it is finally judicially determined that such Liabilities resulted
primarily from the breach by such Indemnified Party of any representation,
warranty, covenant or other agreement of such Indemnified Party contained in
this Agreement; provided, further, that if and to the extent that such
indemnification is unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of such Liabilities which
shall be permissible under applicable laws. In connection with the obligation of
the Company to indemnify for expenses as set forth above, the Company further
agrees, upon presentation of appropriate invoices containing reasonable detail,
to reimburse each Indemnified Party
36
<PAGE> 37
for all such expenses (including, without limitation, fees, disbursements and
other charges of counsel and costs of investigation incurred by an Indemnified
Party in any action or proceeding between the Company (or any of its
Subsidiaries) and such Indemnified Party (or Indemnified Parties) or between an
Indemnified Party (or Indemnified Parties) and any third party or otherwise) as
they are incurred by such Indemnified Party; provided, however, that if an
Indemnified Party is reimbursed hereunder for any expenses, such reimbursement
of expenses shall be refunded to the extent it is finally judicially determined
that the Liabilities in question resulted primarily from (i) the willful
misconduct or gross negligence of such Indemnified Party or (ii) the breach by
such Indemnified Party of any representation, warranty, covenant or other
agreement of such Indemnified Party contained in this Agreement or any other
Transaction Document.
7.2 PROCEDURE; NOTIFICATION. Each Indemnified Party under this Article 7
will, promptly after the receipt of notice of the commencement of any action,
investigation, claim or other proceeding against such Indemnified Party in
respect of which indemnity may be sought from the Company under this Article 7,
notify the Company in writing of the commencement thereof. The omission of any
Indemnified Party so to notify the Company of any such action shall not relieve
the Company from any liability which it may have to such Indemnified Party
unless, and only to the extent that, such omission results in the Company's
forfeiture of substantive rights or defenses. In case any such action, claim or
other proceeding shall be brought against any Indemnified Party and it shall
notify the Company of the commencement thereof, the Company shall be entitled to
assume the defense thereof at its own expense, with counsel satisfactory to such
Indemnified Party in its reasonable judgment; provided, however, that any
Indemnified Party may, at its own expense, retain separate counsel to
participate in such defense. Notwithstanding the foregoing, in any action, claim
or proceeding in which the Company, on the one hand, and an Indemnified Party,
on the other hand, is, or is reasonably likely to become, a party, such
Indemnified Party shall have the right to employ separate counsel at the
Company's expense and to control its own defense of such action, claim or
proceeding if, in the reasonable opinion of counsel to such Indemnified Party, a
conflict or potential conflict exists between the Company, on the one hand, and
such Indemnified Party, on the other hand, that would make such separate
representation advisable; provided, however, that in no event shall the Company
be required to pay fees and expenses under this Article 7 for more than one firm
of attorneys in any jurisdiction in any one legal action or group of related
legal actions. The Company agrees that it will not, without the prior written
consent of the Purchaser, settle, compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding relating to
the matters contemplated hereby (if any Indemnified Party is a party thereto or
has been actually threatened to be made a party thereto) unless such settlement,
compromise or consent includes an unconditional release of the Purchaser and
each other Indemnified Party from all liability arising or that may arise out of
such claim, action or proceeding. The Company shall not be liable for any
settlement of any claim, action or proceeding effected against an Indemnified
Party without its written consent, which consent shall not be unreasonably
withheld. The rights accorded to Indemnified Parties hereunder shall be in
addition to any rights that any Indemnified Party may have at common law, by
separate agreement or otherwise.
37
<PAGE> 38
7.3 REGISTRATION RIGHTS AGREEMENT. Notwithstanding anything to the
contrary in this Article 7, the indemnification and contribution provisions of
the Registration Rights Agreement shall govern any claim made with respect to
registration statements filed pursuant thereto or sales made thereunder.
ARTICLE 8
AFFIRMATIVE COVENANTS
Until the payment by the Company of all principal of and interest on the
Note and all other amounts due to the Purchaser under this Agreement and the
other Transaction Documents, including, without limitation, all fees, expenses
and amounts due in respect of indemnity obligations under Article 7, the Company
hereby covenants and agrees with the Purchaser as follows:
8.1 FINANCIAL STATEMENTS AND OTHER INFORMATION. The Company shall
maintain, and cause each of its Subsidiaries to maintain, a system of accounting
established and administered in accordance with sound business practices to
permit preparation of financial statements in conformity with GAAP (it being
understood that monthly financial statements are not required to have footnote
disclosures). The Company shall deliver to the Purchaser each of the financial
statements and other reports described below (in each case, two (2) copies of
each such financial statement or report, as the case may be, shall be forwarded
to the attention of Mr. Daniel J. O'Brien, the Chief Financial Officer of the
Purchaser, or such other person as may be designated in writing by the Purchaser
from time to time):
(a) Monthly and Quarterly Financial Information.
(i) As soon as available and in any event within thirty
(30) days after the end of each month, the Company shall deliver
the consolidated balance sheet of the Company and its
Subsidiaries, as at the end of such month and the related
consolidated and consolidating statements of income for such
month and for the period from the beginning of the then current
fiscal year of the Company to the end of such month (and, with
respect to financial statements delivered for months that are
also the last month of any fiscal quarter, accompanied by the
related consolidated and consolidating statements of income for
such fiscal quarter); and
(ii) As soon as available and in any event within
forty-five (45) days after the end of each fiscal quarter, (A)
consolidated statements of stockholders' equity and cash flow
for such fiscal quarter and for the period from the beginning of
the then current fiscal year of the Company to the end of such
fiscal quarter; and (B) a schedule of the outstanding
Indebtedness for borrowed money of the Company and its
Subsidiaries describing in reasonable detail each such debt
issue or loan outstanding and the principal amount and amount of
accrued and unpaid interest with respect to each such debt issue
or loan.
38
<PAGE> 39
(b) Year-End Financial Information. As soon as available and in
any event within ninety (90) days after the end of the fiscal year of the
Company, the Company shall deliver (i) the consolidated balance sheets of the
Company and its Subsidiaries as at the end of such year and the related
consolidated statements of income, stockholders' equity and cash flow for such
fiscal year, (ii) a schedule of the outstanding Indebtedness for borrowed money
of the Company and its Subsidiaries describing in reasonable detail each such
debt issue or loan outstanding and the principal amount and amount of accrued
and unpaid interest with respect to each such debt issue or loan, and (iii) a
report with respect to the financial statements from Deloitte & Touche, LLP or
another "Big Five" firm of certified public accountants selected by the Company,
which report shall be issued pursuant to an audit conducted by such firm of
certified public accountants in conformity with GAAP. Such report shall contain
an "Unqualified" opinion (as such term is defined in AU Section 508.10 of the
American Institute of Certified Public Accountants Professional Standards).
Together with each delivery of financial statements of the Company and its
Subsidiaries pursuant to this subsection 8.1(b), the Company shall deliver to
the Purchaser a copy of a letter from the Company to such accounting firm, which
letter shall have been delivered to such accounting firm prior to its delivery
of such financial statements, stating that an intent of the Company in engaging
the accounting firm's professional services to prepare the audit report relating
to such financial statements was to benefit and influence the Purchaser and
their successors or assigns. Such letter shall state that the Purchaser intends
to rely on the audit report and the accounting firm's professional services
provided to the Company and its Subsidiaries.
(c) Company's Compliance Certificate. Together with each
delivery of financial statements of the Company and its Subsidiaries pursuant to
Sections 8.1(a) and 8.1(b) above, the Company shall deliver or cause to be
delivered a fully and properly completed compliance certificate (in
substantially the form attached hereto as Exhibit G (or in such other form or
substance as shall be satisfactory to the Purchaser) and referred to as a
"COMPLIANCE CERTIFICATE") signed by the chief executive officer or chief
financial officer of the Company. The Company and the Purchaser acknowledge and
agree that calculations of covenant compliance, with respect to the financial
covenants contained in Section 9.8 hereof and contained in any such compliance
certificate delivered for a month that is not the last month of a fiscal
quarter, will be for informational purposes only and shall not measure
compliance (or lack of compliance) with such financial covenants.
(d) Accountants' Reports. Promptly upon receipt thereof, the
Company shall deliver copies of all significant reports submitted by the
Company's firm of certified public accountants in connection with each annual,
interim or special audit or review of any type of the financial statements or
related internal control systems of the Company and its Subsidiaries made by
such accountants, including any comment letter submitted by such accountants to
managements in connection with their services.
(e) Management Reports. Together with each delivery of financial
statements of the Company and its Subsidiaries pursuant to subsections 8.1(a)
and 8.1(b), the Company will deliver a management report (i) describing the
operations and financial condition of
39
<PAGE> 40
the Company and its Subsidiaries for the month then ended and the portion of the
current fiscal year then elapsed (or for the fiscal year then ended in the case
of year-end financials), (ii) setting forth in comparative form the
corresponding figures for the corresponding periods of the previous fiscal year
and the corresponding figures from the most recent projections for the current
fiscal year delivered pursuant to subsection 8.1(f) and (iii) discussing the
reasons for any significant variations. The information above shall be presented
in reasonable detail and shall be certified by the chief financial officer of
the Company to the effect that such information fairly presents the results of
operations and financial condition of the Company and its Subsidiaries as at the
dates and for the periods indicated.
(f) Projections. No earlier than sixty (60) days prior nor later
than thirty (30) days prior to the end of each fiscal year beginning with the
current fiscal year, the Company shall prepare and deliver to the Purchaser
projections of the Company and its Subsidiaries for the next succeeding five
fiscal years, of which the projections for the next succeeding fiscal year shall
be on a quarter-to-quarter basis, and the projections for the remaining fiscal
years shall be on an annual basis, which projections in all cases shall include
a balance sheet as at the end of each relevant period and income statements and
statements of cash flows for each relevant period and for the period commencing
at the beginning of the fiscal year and ending on the last day of such relevant
period.
(g) SEC Filings and Press Releases. Promptly upon their becoming
available, the Company shall deliver copies of (i) all SEC Reports of the
Company and each Subsidiary, (ii) all financial statements, reports, notices and
proxy statements sent or made available by the Company or any of its
Subsidiaries to their security holders, (iii) all regular and periodic reports
and all registration statements and prospectuses, if any, filed by the Company
or any of its Subsidiaries with any securities exchange or with the Commission
or any governmental or private regulatory authority, and (iv) all press releases
and other statements made available by the Company or any of its Subsidiaries to
the public concerning material developments in the business the Company or any
of its Subsidiaries.
(h) Events of Default, Etc. Promptly upon the Company obtaining
knowledge of any of the following events or conditions, the Company shall
deliver copies of all notices given or received by the Company or any of its
Subsidiaries with respect to any such event or condition and a certificate of
the Company's Chief Executive Officer, Executive Vice President, Chief Financial
officer, or General Counsel, specifying the nature and period of existence of
such event or condition and what action the Company has taken, is taking and
proposes to take with respect thereto: (i) any condition or event that
constitutes a breach of any provision of this Agreement or any other Transaction
Document; (ii) any notice that any Person has given to the Company or any
Subsidiary, or any other action, taken with respect to a claimed default in any
agreement evidencing Indebtedness or any other material agreement to which the
Company or any Subsidiary is a party; or (iii) any event or condition that could
reasonably be expected to result in any material adverse effect on the Condition
of the Company.
40
<PAGE> 41
(i) Litigation. Promptly upon any officer of the Company
obtaining knowledge of (i) the institution of any action, suit, proceeding,
governmental investigation or arbitration against or affecting the Company or
any of its Subsidiaries or any property of the Company or any of its
Subsidiaries not previously disclosed by the Company to the Purchaser or (ii)
any material development in any action, suit, proceeding, governmental
investigation or arbitration at any time pending against or affecting the
Company or any of its Subsidiaries or any property of the Company or any of its
Subsidiaries which, in each such case, is reasonably possible to have a material
adverse effect on the Condition of the Company, the Company will promptly give
notice thereof to the Purchaser and provide such other information as may be
reasonably available to them to enable the Purchaser and its counsel to evaluate
such matter.
(j) Subsidiaries. Not less than fifteen (15) days prior to
creating a Subsidiary or acquiring the stock of, or other equity interests in, a
Person, such that such Person will become a Subsidiary, the Company shall notify
the Purchaser of the Company's or any of its Subsidiary's intention to create
such Subsidiary or acquire such stock or equity interests, and following such
notice such Subsidiary will not be created or acquired until the Company has
caused each Subsidiary to execute a joinder to this Agreement, and the other
Transaction Documents in form and substance satisfactory to the Purchaser.
(k) Supplemented Schedules; Notice of Corporate Changes.
Annually, concurrently with the delivery of the projections required by
subsection 8.1(f), the Company shall supplement in writing and deliver to the
Purchaser revisions of the Schedules annexed to this Agreement as if the
representations and warranties in this agreement were made as of such date to
the extent necessary to disclose new or changed facts or circumstances after the
Closing Date; provided that subsequent disclosures shall not constitute a cure
or waiver of any Event of Default resulting from the matters disclosed. The
Company shall provide prompt written notice to the Purchaser of (i) all
jurisdictions in which the Company or any of its Subsidiaries becomes qualified
after the Closing Date to transact business, and (ii) any material change after
the Closing Date in the authorized and issued capital stock or other equity
interests of the Company or any of its Subsidiaries or any other material
amendment to their charter, by-laws or other organizational documents, such
notice, in each case, to identify the applicable jurisdictions, capital
structures or amendments as applicable.
(l) No Defaults. The Company shall deliver to the Purchaser
concurrently with the delivery of the financial statements referred to in
Section 8.1(b), a certificate of the Company's Chief Financial Officer stating
that to his or her knowledge no Event of Default shall have occurred during the
period covered thereby, except as specified in such certificate.
(m) Other Information. With reasonable promptness, the Company
shall deliver such other information and data with respect to the Company or any
of its Subsidiaries as from time to time may be reasonably required by the
Purchaser.
41
<PAGE> 42
8.2 PRESERVATION OF CORPORATE EXISTENCE. The Company shall, and shall
cause each of its Subsidiaries to:
(a) preserve and maintain in full force and effect its corporate
(or, as applicable, limited liability partnership or other entity) existence;
(b) conduct its business in accordance with sound business
practices, keep its properties in good working order and condition (normal wear
and tear excepted), and from time to time make all needed repairs to, renewals
of or replacements of its properties (except to the extent that any of such
properties are obsolete or are being replaced) so that the efficiency of its
business operations shall be fully maintained and preserved; and
(c) file or cause to be filed in a timely manner all reports,
applications, estimates and licenses that shall be required by each Governmental
Authority, except to the extent the failure so to file would not, singly or in
the aggregate, have a material adverse affect on the Condition of the Company.
8.3 PAYMENT OF OBLIGATIONS. The Company shall, and shall cause each of
its Subsidiaries to, pay and discharge as the same shall become due and payable,
all their respective obligations and liabilities, including without limitation:
(a) all Tax liabilities, assessments and governmental charges or
levies upon it or its properties or assets, unless the same are being contested
in good faith by appropriate proceedings and adequate reserves in accordance
with GAAP are being maintained by the Company or such Subsidiary; and
(b) all lawful claims which the Company and each of its
Subsidiaries is obligated to pay, which are due and which, if unpaid, might by
law become a Lien upon its property, unless the same are being contested in good
faith by appropriate proceedings and adequate reserves in accordance with GAAP
are being maintained by the Company or such Subsidiary.
8.4 COMPLIANCE WITH LAWS. The Company shall comply, and shall cause each
of its Subsidiaries to comply, in all material respects with all Requirements of
Law and with the directions of each Governmental Authority having jurisdiction
over them or their business or property (including, without limitation, all
applicable Environmental Laws), except to the extent that the failure so to
comply would not, singly or in the aggregate, have a material adverse affect on
the Condition of the Company.
8.5 RESERVATION OF SHARES. The Company shall at all times reserve and
keep available out of its authorized capital stock, solely for the purpose of
issuance or delivery upon exercise of the WMF Warrant and the Management
Options, the maximum number of shares of capital stock that may be issuable or
deliverable upon such exercise or conversion, as the case may be (the
"EXERCISABLE SHARES"). The Exercisable Shares shall, when issued or delivered in
42
<PAGE> 43
accordance with the Warrant or the Management Options, as the case may be, be
duly and validly issued and fully paid and non-assessable. The Company shall
issue such capital stock in accordance with the provisions of the Warrant or the
Management Options, as the case may be, and shall otherwise comply, in each
case, with the terms thereof.
8.6 INSPECTION. The Company will permit, and will cause each of its
Subsidiaries to permit, representatives of the Purchaser to visit and inspect
any of their properties, to examine their corporate, financial and operating
records and make copies thereof or abstracts therefrom, and to discuss their
affairs, finances and accounts with their respective directors, officers and
independent public accountants, all at such reasonable times during normal
business hours and as often as may be reasonably requested, upon reasonable
advance notice; provided, however, that no such inspection, examination or
inquiry, the failure to conduct same, nor any knowledge of the Purchaser,
including, without limitation, any knowledge obtained by the Purchaser in
connection with any such inspection, investigation or inquiry, shall constitute
a waiver of any rights the Purchaser may have under any representation,
warranty, covenant, term or agreement under any of the Transaction Documents.
8.7 PAYMENT OF NOTE. The Company shall pay the principal of, interest on
and other amounts due in respect of, the Note on the dates and in the manner
provided in the Note.
8.8 INSURANCE. The Company and its Subsidiaries shall maintain or cause
to be maintained in good repair, working order and condition all material
properties used in their respective businesses and will make or cause to be made
all appropriate repairs, renewals and replacements thereof. The Company and its
Subsidiaries will maintain or cause to be maintained the insurance listed on
Schedule 5.29 in at least such amounts with such additions thereto as may be
appropriate for the business of the Company, with the insurers identified on
Schedule 5.29 or with financially sound and reputable insurers that have a
rating as established by Best's Rating Guide (or an equivalent rating with such
other publication of a similar nature as shall be in current use), at least as
high as the rating of the insurers with which the current policies are
maintained. All such insurance policies shall provide that they may not be
canceled unless the insurance carrier gives at least 30 days prior written
notice of such cancellation to the Purchaser.
8.9 BOOKS AND RECORDS. The Company shall, and shall cause each of its
Subsidiaries to, keep proper books of record and account, in which full and
correct entries shall be made of all financial transactions and the assets and
business of the Company and each of its Subsidiaries in accordance with GAAP
consistently applied to the Company and its Subsidiaries taken as a whole.
8.10 USE OF PROCEEDS. The Company shall use the proceeds of the sale of
Securities hereunder only as follows: (i) first, for the payment of fees and
expenses in connection with the transactions contemplated hereunder and in the
other Transaction Documents, (ii) second, for redemption of the outstanding
Debentures, including accrued and unpaid interest and the call
43
<PAGE> 44
premium of 4% therein, and the fees and expenses associated with such
redemption, and (iii) third, the balance, if any, for repayment of Indebtedness
under the Senior Credit Documents.
8.11 BOARD ATTENDANCE. The Company shall give Whitney and WMF notice of
(in the same manner as notice is given to directors), and permit one Person
designated by Whitney (or WMF) to attend as observer, all meetings of the
Company's Board of Directors and all executive and other committee meetings of
the Board of Directors and shall provide to Whitney and WMF the same information
concerning the Company, and access thereto, provided to members of the Company's
Board of Directors and such committees. The reasonable travel expenses incurred
by any such designee of Whitney (or WMF) in attending any board or committee
meetings shall be reimbursed by the Company to the extent consistent with the
Company's then existing policy of reimbursing directors generally for such
expenses.
8.12 GRANTING OF MANAGEMENT OPTIONS. If the Company grants options,
warrants or the right to acquire securities of the Company to employees,
directors or consultants in excess of the number of shares subject to Management
Options, the Company shall grant such options, warrants or other rights at an
exercise price per share of Common Stock equal to at least the per share fair
market value of the Common Stock (as determined by the Company's Board of
Directors) at the time of such grant or grants, as the case may be.
ARTICLE 9
NEGATIVE COVENANTS
Until the payment by the Company of all principal of and interest on the
Note and all other amounts due at the time of payment of such principal and
interest to the Purchaser under this Agreement and the other Transaction
Documents, including, without limitation, all fees, expenses and amounts due at
such time in respect of indemnity obligations under Article 7, the Company
hereby covenants and agrees with the Purchaser as follows:
9.1 FUNDAMENTAL CHANGES; CONSOLIDATIONS, MERGERS AND ACQUISITIONS. The
Company shall not, and shall not permit any of its Subsidiaries directly or
indirectly to: (a) amend, modify or waive any term or provision of its
Certificate of Incorporation, By-laws or other organizational or governing
agreements and documents, unless required by law; (b) enter into any transaction
of merger or consolidation; (c) liquidate, wind-up or dissolve itself (or suffer
any liquidation or dissolution); or (d) acquire by purchase or otherwise all or
any substantial part of the business or assets of any other Person other than
Permitted Acquisitions.
9.2 TRANSACTIONS WITH AFFILIATES. Except in the ordinary course of
business and consistent with past practices, the Company shall not, and shall
not permit any of its Subsidiaries to, (a) enter into any transaction or
agreement or other Contractual Obligation with, or make any payment (other than
pursuant to agreements existing on the date hereof or subsequently approved
44
<PAGE> 45
by the Purchaser) to, any Affiliate, (b) amend or terminate any existing
agreement with any Affiliate, (c) purchase from or provide to an Affiliate any
selling, general, management or administrative services, (d) directly or
indirectly make any sales to or purchases from an Affiliate or (e) increase the
compensation being paid to an Affiliate.
9.3 NO INCONSISTENT AGREEMENTS. None of the Company nor any of its
Subsidiaries shall enter into any Contractual Obligation or enter into any
amendment or other modification to any currently existing Contractual Obligation
of the Company, or any of their Subsidiaries, which by its terms restricts or
prohibits the ability of the Company to pay the principal of or interest on the
Note or to fully satisfy all of the obligations under the Transaction Documents
of the Company or any of its Subsidiaries.
9.4 LIMITATION ON INDEBTEDNESS. The Company shall not, and shall not
cause, suffer or permit any of its Subsidiaries to, directly or indirectly,
collectively and in the aggregate, issue, assume or otherwise incur any
Indebtedness, other than:
(a) Indebtedness created under this Agreement;
(b) (i) Senior Indebtedness, up to an aggregate outstanding
principal amount of $95,000,000, plus the amount of all obligations of the
Company or any of its Subsidiaries under any Interest Rate Protection Agreement
(as defined in the Subordination Agreement), (ii) amounts outstanding on the
date hereof under the Loan Agreement between California Economic Development
Financing Authority and the Borrower, and (iii) other Indebtedness, up to an
aggregate outstanding principal amount of $5,000,000, in each case including
without limitation the Indebtedness listed on Schedule 5.27;
(c) Non-current liabilities for post-employment healthcare and
other insurance benefits;
(d) Trade payables and accrued expenses, in each case arising in
the ordinary course of business;
(e) Indebtedness secured by a Lien permitted under Section 9.5;
(f) Indebtedness between and/or among the Company and its
Subsidiaries; provided that the obligations of such Indebtedness shall:
(i) be subordinated in right of payment to all
Indebtedness under the Note and this Agreement from and after
such time as any portion of the Indebtedness under the Note and
this Agreement shall become due and payable (whether at stated
maturity, by acceleration or otherwise); and
45
<PAGE> 46
(ii) have such other terms and provisions as the
Purchaser may reasonably require; and
(g) Refinancings, refundings or extensions of the foregoing;
provided, that any such refinancings, refundings or extensions shall not:
(i) exceed the principal amount permitted under Section
9.4(b) hereof;
(ii) shorten the maturity (or weighted average life to
maturity) of such Indebtedness or convert a revolving credit
facility into a facility which provides for the amortization of
principal;
(iii) increase the interest rate applicable to such
Indebtedness;
(iv) upon the occurrence and during the continuance of
an Event of Default, cause any covenants or undertakings
(whether affirmative or negative) of the Company or its
Subsidiaries in respect of such Indebtedness to be more
restrictive than such covenants or undertakings had been prior
to such refinancing, refunding or extension;
(v) facilitate the exercise or enforcement of any
remedies of any obligee of such Indebtedness in respect of any
default or event of default thereunder;
(vi) materially and adversely affect any obligations
under the Transaction Documents to the Purchaser; or
(vii) result in any amendments or modifications of any
of the subordination provisions applicable to such Indebtedness.
9.5 LIMITATION ON LIENS. The Company, will not, and will not permit any
of its Subsidiaries, directly or indirectly, to create, incur, assume or permit
to exist any Lien on or with respect to any property or asset (including,
without limitation, any document or instrument with respect to goods or accounts
receivable) of the Company or its Subsidiaries, whether now owned or hereafter
acquired, or any income or profits therefrom, except Permitted Encumbrances.
"PERMITTED ENCUMBRANCES" means the following:
(a) Liens for Taxes, assessments or other governmental charges
which are not yet due and payable or which are being contested in good faith
with a reserve or other appropriate provision having been made therefor;
(b) Liens of landlords, carriers, warehousemen, mechanics,
materialmen and other similar liens imposed by law, which are (i) incurred in
the ordinary course of business for sums not more than thirty (30) days
delinquent or which are being contested in good faith; provided
46
<PAGE> 47
that a reserve or other appropriate provision shall have been made therefor and
the aggregate amount of such Liens is less than $100,000 or (ii) were incurred
by any Person or in connection with any asset acquired in a Permitted
Acquisition; provided that any such Lien was incurred in the ordinary course of
business and is satisfied not more than thirty (30) days after the later of the
date of the Permitted Acquisition or the date the obligation giving rise to such
Lien became delinquent;
(c) Liens (other than any Lien imposed under or in connection
with ERISA) incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security, or to secure the performance of tenders, statutory obligations,
surety, stay, customs and appeal bonds, bids, leases, government contracts,
trade contracts, performance and return of money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(d) Deposits in an aggregate amount not to exceed $100,000, made
in the ordinary course of business to secure liability to insurance carriers;
(e) Liens for purchase money obligations to acquire assets;
provided that:
(i) each such Lien attaches to such asset concurrently
with or within 10 days after acquisition thereof;
(ii) does not exceed the purchase price of such asset;
and
(iii) the Indebtedness secured by all such Liens, shall
not exceed $5,000,000; and
(iv) each such Lien encumbers only the asset so
purchased;
(f) Any attachment or judgment Lien not constituting an Event of
Default;
(g) Leases or subleases granted to others not interfering in any
material respect with the business of the Company or any of its Subsidiaries;
(h) Easements, rights of way, restrictions and other similar
charges or encumbrances not interfering in any material respect with the
ordinary conduct of the business of the Company or any of its Subsidiaries;
(i) Liens securing Senior Indebtedness; and.
(j) Liens existing on the date hereof and renewals and
extensions thereof, which Liens are set forth on Schedule 5.27 hereto.
47
<PAGE> 48
9.6 DISPOSITIONS OF ASSETS. The Company will not, and will not permit
any of its Subsidiaries, directly or indirectly, to convey, sell (pursuant to a
sale/leaseback or otherwise), lease, sublease, transfer or otherwise dispose of,
or grant any Person an option to acquire, in one transaction or a series of
transactions, any of its property, business or assets, or the capital stock of
or other equity interests in any of its Subsidiaries, whether now owned or
hereafter acquired, except for:
(a) Bona fide sales of inventory, including real estate acquired
in the ordinary course of business, to customers for fair value in the ordinary
course of business and dispositions of obsolete equipment not used or useful in
the business;
(b) Asset Dispositions if all of the following conditions are
met:
(i) the market value of assets sold or otherwise
disposed of (by the Company and its Subsidiaries taken as a
whole) in any fiscal year do not exceed $500,000;
(ii) the Net Proceeds received is at least equal to the
fair market value of such assets;
(iii) at least 75% of the consideration received is
cash;
(iv) after giving effect to the sale or other
disposition of the assets included within the Asset Disposition
and the repayment of Indebtedness with the proceeds thereof, the
Company would be in compliance on a pro forma basis with the
covenants set forth in Section 9.8 hereof recomputed for the
most recently ended month for which information is available and
is in compliance with all other terms and conditions of this
Agreement; and
(v) no Event of Default then exists or shall result from
such sale or other disposition.
9.7 LIMITATIONS ON RESTRICTED PAYMENTS. The Company shall not, and shall
not permit any of its Subsidiaries to declare, or make any Restricted Payment,
other than so long as no Event of Default or event which with notice, the
passage of time or both would become an Event of Default, shall have occurred
and be continuing or would result there from, (a) Restricted Payments
constituting payment of dividends in respect of Common Stock of the Company not
to exceed $400,000 in any fiscal year of the Company; and (b) the repurchase or
redemption from employees of the Company or its Subsidiaries of Common Stock of
the Company or warrants to purchase Common Stock when such employees cease to be
employed by the Company or such Subsidiaries in an aggregate amount not to
exceed $250,000 in any fiscal year of the Company.
48
<PAGE> 49
9.8 FINANCIAL COVENANTS. The Company covenants and agrees that until
payment in full of all Indebtedness hereunder and under the Note, the Company
shall comply with and shall cause each of its Subsidiaries to comply with all
covenants in this Section 9.8 applicable to such Person. Compliance with the
covenants in this Section 9.8 shall be determined on a consolidated basis in
accordance with GAAP consistently applied, unless explicitly stated otherwise.
(a) Interest Coverage. The Company shall not permit Interest
Coverage for the Company and its Subsidiaries, on a consolidated basis, for any
twelve (12) month period ending on the last day of a fiscal quarter during any
of the periods set forth below to be less than the ratio set forth below for
such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date to and including June 30, 2000 3.125:1.00
July 1, 2000 to and including December 31, 2000 3.25:1.00
January 1, 2001 to and including June 30, 2001 3.50:1.00
July 1, 2001 to and including June 30, 2002 4.00:1.00
July 1, 2002 and thereafter 4.00:1.00
</TABLE>
"INTEREST COVERAGE" will be calculated as illustrated on Exhibit D.
(b) Fixed Charge Coverage. The Company shall not permit Fixed
Charge Coverage for the Company and its Subsidiaries, on a consolidated basis,
for any twelve (12) month period ending on the last day of a fiscal quarter to
be less than 1.00:1.00.
"FIXED CHARGE COVERAGE" will be calculated as illustrated on Exhibit D.
(c) Total Leverage Test. The Company shall not permit the ratio
of Total Funded Indebtedness as of the last day of any fiscal quarter during any
of the periods set forth below to EBITDA for the twelve (12) month period ending
on the last day of such fiscal quarter, with respect to the Company and its
Subsidiaries, on a consolidated basis, to be greater than the ratio set forth
below for such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date to and including March 31, 2000 4.50:1.00
April 1, 2000 to and including March 31, 2001 4.25:1.00
April 1, 2001 to and including March 31, 2002 4.00:1.00
April 1, 2002 and thereafter 3.75:1.00
</TABLE>
"TOTAL FUNDED INDEBTEDNESS" will be calculated as illustrated on Exhibit D.
(d) Unfunded Capital Expenditures. The Company shall not permit
aggregate Unfunded Capital Expenditures (as defined in Exhibit D) of the Company
and its Subsidiaries in any fiscal year to exceed $4,000,000.
49
<PAGE> 50
(e) Debt Service Ratio. The Company will not permit the ratio of
Operating Cash Flow to Total Debt Service for any twelve (12) month period
ending on the last day of a fiscal quarter during any of the periods set forth
below, with respect to the Company and its Subsidiaries, on a consolidated
basis, to be less than the ratio set forth below for such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date to and including June 30, 2001 1.10:1.00
July 1, 2001 and thereafter 1.15:1.00
</TABLE>
(f) Quick Ratio. The Company will not permit the ratio of (i)
Quick Assets to (ii) the sum of Current Liabilities and (B) to the extent not
included in Current Liabilities, the aggregate outstanding amount of all Loans
under the Senior Credit Documents (other than the Term Loan, the Acquisition
Loans and obligations in respect of the Letters of Credit, all as such terms are
defined in the Senior Credit Agreement) for the Company and its Subsidiaries on
a consolidated basis during the periods set forth below to be less than the
ratio set forth below for such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date to and including March 31, 2001 1.10:1.00
April 1, 2001 to and including March 31, 2002 1.15:1.00
April 1, 2002 to and including March 31, 2003 1.20:1.00
April 1, 2003 and thereafter 1.25:1.00
</TABLE>
9.9 EMPLOYEE BENEFIT PLANS. The Company shall not, and shall not permit
any of its Subsidiaries or any ERISA Affiliate, without the prior approval of
the Purchaser, (a) except in the ordinary cause of business and consistent with
past practice in connection with Plans disclosed on Schedule 5.23 to establish
or contribute to any employee benefit plan (within the meaning of Section 3(3)
of ERISA) or other employee benefit arrangement which (i) is subject to Title IV
of ERISA or is otherwise a Defined Benefit Plan, Multiemployer Plan or multiple
employer plan (within the meaning of Section 413(c) of the Code); or (ii)
provides post-retirement welfare benefits or "parachute payments" (within the
meaning of Section 280G(b) of the Code); or (b) to amend any Plan if the effect
of such amendment would cause such Plan to be a plan or arrangement described in
clause (a)(i) hereof or to provide any of the benefits described in clause
(a)(ii) hereof.
9.10 LIMITATION ON BUSINESS OF THE COMPANY. Neither the Company nor any
of its Subsidiaries shall engage in any business or transaction other than the
business in which it is currently engaged and the transactions contemplated by,
or permitted under, this Agreement.
9.11 INVESTMENTS. Except in the ordinary course of business and
consistent with past practices, the Company shall not, and shall not permit any
of its Subsidiaries, directly or indirectly, to make or own any Investment in
any Person except: (a) Investments in Cash Equivalents; (b) intercompany loans
and investments to the extent permitted under Section 9.2 or
50
<PAGE> 51
9.4; (c) loans and advances to employees for moving, entertainment, travel and
other similar expenses in the ordinary course of business not to exceed $500,000
in the aggregate at any time outstanding; and (d) Investments consisting of
minority interests in the capital stock or other equity interests of businesses
in the aviation industry not to exceed $1,000,000 in the aggregate at any time.
9.12 CONTINGENT OBLIGATIONS. The Company shall not, nor shall it permit
any of their Subsidiaries directly or indirectly to create or become or be
liable with respect to any Contingent Obligation except those; (a) resulting
from endorsements of negotiable instruments for collection in the ordinary
course of business; (b) arising under this Agreement; (c) existing on the
Closing Date and as described in Schedule 9.12 annexed hereto; (d) arising with
respect to customary indemnification and purchase price adjustment obligations
incurred in connection with any Asset Dispositions; (e) incurred in the ordinary
course of business with respect to surety and appeal bonds, performance and
return-of-money bonds and similar obligations not exceeding any time outstanding
$100,000 in aggregate liability; (f) incurred with respect to any Indebtedness
permitted pursuant to Section 9.4 hereof; (g) not otherwise permitted by clauses
(a) through (f) above so long as any such Contingent Obligations, in the
aggregate at any time outstanding do not exceed $250,000.
9.13 MANAGEMENT FEES AND CONSULTING FEES. The Company shall not, nor
shall it permit any of its Subsidiaries, directly or indirectly, to pay any
management, consulting or similar fees to any Affiliate or to any director,
officer or employee of the Company or any of its Subsidiaries except reasonable
director's fees and expenses and except as set forth on Schedule 9.13.
Notwithstanding the foregoing, no payments may be made with respect to any items
set forth on Schedule 9.13 upon the incurrence and during the continuation of an
Event of Default.
9.14 FISCAL YEAR. The Company and its Subsidiaries shall not change
their fiscal year without the prior consent of the Purchaser.
9.15 PRESS RELEASE; PUBLIC OFFERING MATERIALS. Neither the Company nor
any of its Affiliates shall, nor shall the Company or any of its Affiliates
permit any of their respective Subsidiaries to disclose the name of the
Purchaser or any of its Affiliates in any press release or in any prospectus,
proxy statement or other materials filed with the governmental entity relating
to a public offering of the capital stock or other equity interest of the
Company, any of its Affiliates or any of their respective Subsidiaries without
such Purchaser's or such Affiliate's prior written consent which shall not be
unreasonably withheld.
9.16 SUBSIDIARIES. Except as permitted in Section 8.1(j), the Company
shall not, nor shall any of the Subsidiaries be permitted to, directly or
indirectly, to establish, create or acquire any new Subsidiary.
9.17 NO NEGATIVE PLEDGES. Except pursuant to agreements entered into
from time to time with the creditors of the Senior Indebtedness, the Company
will not, and will not permit any of its Subsidiaries, directly or indirectly to
enter into or assume any agreement prohibiting the
51
<PAGE> 52
creation or assumption of any Lien upon its properties or assets, whether now
owned or hereafter acquired.
9.18 NO RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS TO THE COMPANY. Except
pursuant to the existing agreements with the creditors of the Senior
Indebtedness and except as otherwise provided herein, the Company will not, and
will not permit any of its Subsidiaries, directly or indirectly to create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of the Company or any such
Subsidiary to: (a) pay dividends or make any other distribution on any of such
Subsidiary's capital stock (or equity interest) owned by the Company or any
Subsidiary; (b) subject to subordination provisions for the benefit of the
Purchaser, pay any Indebtedness owed to the Company or any other Subsidiary; (c)
make loans or advances to the Company or any other Subsidiary; or (d) transfer
any of its property or assets to the Company or any other Subsidiary.
ARTICLE 10
PREPAYMENT
10.1 OPTIONAL PREPAYMENT. Subject to Section 7 of the Note, the Company
may prepay outstanding principal (together with accrued interest) on the Note in
accordance with the "OPTIONAL PREPAYMENT" provisions set forth in Section 4 of
the Note.
10.2 MANDATORY PREPAYMENT. Subject to Section 7 of the Note, the Company
shall prepay outstanding principal (together with accrued interest) on the Note
in accordance with the "MANDATORY PREPAYMENT" provisions set forth in Section 3
of the Note.
ARTICLE 11
MISCELLANEOUS
11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties made herein shall survive the execution and
delivery of this Agreement, any investigation by or on behalf of the Purchaser,
acceptance of the Securities and payment therefor, or termination of this
Agreement.
11.2 NOTICES. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telecopier (with receipt
confirmed), courier service or personal delivery:
(a) if to WMF:
52
<PAGE> 53
J. H. Whitney Mezzanine Fund, L.P.
177 Broad Street
Stamford, Connecticut 06901
Telecopier No.: (203) 973-1422
Attention: Mr. James H. Fordyce
Mr. Daniel J. O'Brien
with a copy to:
Morrison Cohen Singer & Weinstein, LLP
750 Lexington Avenue
New York, New York 10022
Telecopier No.: (212) 735-8708
Attention: David A. Scherl, Esq.
(b) if to the Company:
Mercury Air Group, Inc.
5456 McConnell Avenue
Los Angeles, CA 90066
Telecopier: (310) 827-0650
Attention: Mr. Joseph A. Czyzyk
Wayne J. Lovett, Esq.
with a copy to:
McBreen, McBreen & Kopko
20 North Wacker Drive, Suite 252
Chicago, Illinois 60606
Telecopier: (312) 332-2657
Attention: Frederick Kopko, Esq.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; when delivered by
courier, if delivered by commercial overnight courier service; if mailed, five
Business Days after being deposited in the mail, postage prepaid; or if
telecopied, when receipt is acknowledged.
11.3 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of the parties
hereto. Subject to applicable securities laws, the Purchaser may assign any of
their respective rights under any of the Transaction Documents to any Person and
any holder of the Note, the Warrant or the Common Stock issuable upon exercise
of the Warrant may assign, in whole or in part, the Note, or Warrant or the
Common Stock issuable upon exercise of the Warrant to any Person. The Company
may not assign any of its
53
<PAGE> 54
rights, or delegate any of its obligations, under this Agreement without the
prior written consent of the Purchaser, and any such purported assignment by the
Company without the written consent of the Purchaser shall be void and of no
effect. Except as provided in Article 7, no Person other than the parties hereto
and their successors and permitted assigns is intended to be a beneficiary of
any of the Transaction Documents.
11.4 AMENDMENT AND WAIVER.
(a) No failure or delay on the part of any of the parties hereto
in exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for in this Agreement are
cumulative and are not exclusive of any remedies that may be available to the
parties hereto at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this Agreement, and
any consent to any departure by any party from the terms of any provision of
this Agreement, shall be effective (i) only if it is made or given in writing
and signed by all of the parties hereto, and (ii) only in the specific instance
and for the specific purpose for which made or given. No amendment, supplement
or modification of or to any provision of this Agreement or any of the other
Transaction Documents, or any waiver of any such provision or consent to any
departure by any party from the terms of any such provision may be made orally.
Except where notice is specifically required by this Agreement, no notice to or
demand on the Company in any case shall entitle the Company to any other or
further notice or demand in similar or other circumstances.
11.5 SIGNATURES; COUNTERPARTS. Telefacsimile transmissions of any
executed original document and/or retransmission of any executed telefacsimile
transmission shall be deemed to be the same as the delivery of an executed
original. At the request of any party hereto, the other parties hereto shall
confirm telefacsimile transmissions by executing duplicate original documents
and delivering the same to the requesting party or parties. This Agreement may
be executed in any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
11.6 HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
11.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE (INCLUDING GIVING EFFECT TO GOL
SECTION 5-1401).
54
<PAGE> 55
11.8 DETERMINATIONS, REQUEST OR CONSENTS. All determinations, requests,
consents, waivers or amendments to be made by the Purchaser in its opinions or
judgments or with its approval or otherwise pursuant to the Transaction
Documents shall be made with respect to the WMF Note, by the holder of the WMF
Note, with respect to the WMF Warrant, by the holder of the WMF Warrant.
11.9 JURISDICTION, JURY TRIAL WAIVER, ETC.
(a) EACH PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY AGREES THAT
THE ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT,
THE NOTE, THE WARRANT OR ANY AGREEMENTS OR TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED
STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND HEREBY EXPRESSLY
SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES
THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH
COURTS ARE AN INCONVENIENT FORUM. EACH PARTY HEREBY IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION
OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 11.2, SUCH SERVICE TO
BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.
(b) EACH OF THE COMPANY AND ITS SUBSIDIARIES HEREBY WAIVES ITS
RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY
DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE WMF NOTE, THE WMF WARRANT OR ANY
OF THE OTHER TRANSACTION DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR
THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. EXCEPT AS
PROHIBITED BY LAW, EACH OF THE COMPANY AND ITS SUBSIDIARIES HEREBY WAIVES ANY
RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE
PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR
ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH OF THE COMPANY
AND ITS SUBSIDIARIES (I) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF
WMF HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT WMF WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT WMF
HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, AND THE OTHER TRANSACTION
DOCUMENTS TO WHICH THEY ARE PARTY BY, AMONG OTHER THINGS, THE WAIVERS AND
CERTIFICATIONS CONTAINED HEREIN.
11.10 SEVERABILITY. If any one or more of the provisions contained in
this Agreement, or the application thereof in any circumstance, is held invalid,
illegal or unenforceable
55
<PAGE> 56
in any respect for any reason, the validity, legality and enforceability of any
such provision in every other respect and of the remaining provisions hereof
shall not be in any way impaired, unless the provisions held invalid, illegal or
unenforceable shall substantially impair the benefits of the remaining
provisions of this Agreement. The parties hereto further agree to replace such
invalid, illegal or unenforceable provision of this Agreement with a valid,
legal and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such invalid, illegal or unenforceable
provision.
11.11 RULES OF CONSTRUCTION. Unless the context otherwise requires, "or"
is not exclusive, and references to sections or subsections refer to sections or
subsections of this Agreement.
11.12 ENTIRE AGREEMENT. This Agreement, together with the exhibits and
schedules hereto and the other Transaction Documents, is intended by the parties
as a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein and therein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein or therein. This Agreement, together with the exhibits and
schedules hereto, and the other Transaction Documents supersede all prior
agreements and understandings between the parties with respect to such subject
matter.
11.13 CERTAIN EXPENSES. The Company will pay all expenses of the
Purchaser (including, without limitation, fees, charges and disbursements of
counsel) in connection with any amendment, supplement, modification or waiver of
or to any provision of this Agreement or any of the other Transaction Documents
or any documents relating thereto (including, without limitation, a response to
a request by the Company for the Purchaser's consent to any action otherwise
prohibited hereunder or thereunder), or consent to any departure from, the terms
of any provision of this Agreement or such other documents.
11.14 PUBLICITY. Except as may be required by applicable law, none of
the parties hereto shall issue a publicity release or announcement or otherwise
make any public disclosure concerning this Agreement or the transactions
contemplated hereby, without prior approval by the other party hereto. If any
announcement is required by law to be made by any party hereto, prior to making
such announcement such party will deliver a draft of such announcement to the
other parties and shall give the other parties an opportunity to comment
thereon.
11.15 FURTHER ASSURANCES. Each of the parties shall execute such
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations, or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably required or desirable to carry out or to
perform the provisions of this Agreement, including without limitation, any
post-closing assignment(s) by the Purchaser of a portion of the Securities to a
Person not currently a party hereto. In connection with any such post-closing
assignment, the Company shall enter into an intercreditor
56
<PAGE> 57
agreement with WMF and any subsequent holders of the Notes, on terms and
conditions reasonably satisfactory to all parties thereto.
11.16 NO STRICT CONSTRUCTION. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement and the other
Transaction Documents. In the event an ambiguity or question of intent or
interpretation arises under any provision of this Agreement or any Transaction
Document, this Agreement or such other Transaction Document shall be construed
as if drafted jointly by the parties thereto, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement or any other Transaction Document.
[Signatures on next page]
57
<PAGE> 58
SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective officers hereunto duly authorized as
of the date first above written.
MERCURY AIR GROUP, INC.
By:
---------------------------------
Name:
Title:
J. H. WHITNEY MEZZANINE FUND, L.P.
By: Whitney GP, L.L.C.
By:
---------------------------------
Name:
A Managing Member
58
<PAGE> 1
Exhibit 22.1
SUBSIDIARY LIST
1. AEG Finance Corp, a Delaware corporation, wholly-owned by Maytag
Aircraft Corporation
2. Mercury Acceptance Corporation, Inc., a California corporation,
wholly-owned by Mercury Air Group, Inc.
3. Maytag Aircraft Corporation, a Colorado corporation, wholly-owned by
Mercury Air Group, Inc.
4. Mercury Air Cargo, Inc., a California corporation, wholly-owned by
Mercury Air Group, Inc.
5. Hermes Aviation, Inc., a California corporation, wholly-owned by Mercury
Air Cargo, Inc.
6. Pegasus de Mexico S.A. de C.V., a Mexican corporation, owned 99% by
Mercury Air Cargo, Inc. and 1% by Hermes Aviation, Inc.
7. Excel Cargo, Inc., a California corporation, wholly-owned by Mercury Air
Group, Inc.
8. Vulcan Aviation, Inc., a California corporation, wholly-owned by Mercury
Air Cargo, Inc.
9. Maytag Aircraft Corporation, a Cayman corporation, wholly-owned by
Maytag Aircraft Corporation.
10. Mercury Air Centers, Inc., a California corporation, wholly-owned by
Mercury Air Group, Inc.
11. RPA Airline Automation Services, Inc., a Florida corporation,
wholly-owned by Mercury Air Group, Inc.
12. Rene Perez Associates, Division El Salvador S.A. de C.V., an El
Salvadorian corporation, 99% owned by Rene Perez & Associates, Inc. and
1% owned by Mercury Air Group, Inc.
13. Aero Freightways, Inc, a Canadian corporation, wholly-owned by Excel
Cargo, Inc.
14. Hermes de Mexico S.A. de C.V., a Mexican corporation, owned 99% by
Mercury Air Cargo, Inc. and 1% by Hermes Aviation, Inc.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITOR'S REPORT
We consent to the incorporation by reference in Registration Statement No.
33-69414 of Mercury Air Group, Inc. on Form S-8 of our report dated September
14, 1999, appearing in this Annual Report on Form 10-K of Mercury Air Group,
Inc. for the year ended June 30, 1999.
Deloitte & Touche LLP
Los Angeles, California
September 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 4,797
<SECURITIES> 0
<RECEIVABLES> 52,642
<ALLOWANCES> 1,953
<INVENTORY> 1,892
<CURRENT-ASSETS> 59,981
<PP&E> 91,897
<DEPRECIATION> 35,787
<TOTAL-ASSETS> 127,302
<CURRENT-LIABILITIES> 34,359
<BONDS> 64,137
0
0
<COMMON> 66
<OTHER-SE> 28,517
<TOTAL-LIABILITY-AND-EQUITY> 127,302
<SALES> 144,972
<TOTAL-REVENUES> 224,675
<CGS> 115,416
<TOTAL-COSTS> 192,652
<OTHER-EXPENSES> 21,496
<LOSS-PROVISION> 1,721
<INTEREST-EXPENSE> 4,380
<INCOME-PRETAX> 10,527
<INCOME-TAX> 4,105
<INCOME-CONTINUING> 6,422
<DISCONTINUED> 0
<EXTRAORDINARY> (483)
<CHANGES> 0
<NET-INCOME> 5,939
<EPS-BASIC> .89
<EPS-DILUTED> .68
</TABLE>
