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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, 1995
/ / 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:
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------- ------------------------
Common Stock - Par Value $.01 American Stock Exchange
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
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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, 1995, 5,371,087 shares of the Registrant's Common
Stock were outstanding. Of these shares, 1,595,790 shares were held by persons
who may be deemed to be affiliates. The 3,775,297 shares held by nonaffiliates
as of September 20, 1995 had an aggregate market value (based on the closing
price of these shares on the American Stock Exchange of $8.50 a share) of
$32,090,024.50.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement which is to be distributed in
connection with the Annual Meeting of Shareholders to be held on December 4,
1995 are incorporated by reference into Part III of this Form 10-K.
(The Exhibit Index May Be Found at Page 21)
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PART I
ITEM 1. BUSINESS.
Mercury Air Group, Inc., a New York Corporation, provides a broad range
of services to the aviation industry through four principal operating units:
fuel sales and services, cargo operations, fixed base operations and government
contract services. Fuel sales and services include the sale of fuel and delivery
of fuel primarily to commercial airlines and air freight companies. Cargo
operations consist of cargo handling, space brokerage operations and general
cargo sales agent services. Fixed base operations ("FBO's") include fuel sales,
into-plane services, ground support services and aircraft hangar facilities and
tie-down facilities for commercial, private and other aircraft. Government
contract services principally consist of operating government-owned fuel depots
and refueling aircraft for the military. As used in this Annual Report, the term
"Company" or "Mercury" refers to Mercury Air Group, Inc. and, unless the context
otherwise requires, its subsidiaries. The Company's principal executive offices
are located at 5456 McConnell Avenue, Los Angeles, California 90066 and its
telephone number is (310) 827-2737.
A. NARRATIVE DESCRIPTION OF THE BUSINESS.
FUEL SALES AND SERVICES
Mercury's fuel sales consist of contract fueling and related fuel
management services. Sales of aviation fuel are made primarily to domestic and
international airline customers.
Contract fuel sales are generally made pursuant to verbal or
short-term contracts whereby Mercury provides fuel supply and, in most cases,
delivery to meet all or a portion of a customer's fuel supply requirements. To
facilitate its fuel sales business at locations where Mercury does not have
facilities, Mercury has developed an extensive network of third party delivery
and supply relationships which enable it to provide fuel to customers, on a
scheduled or ad hoc basis. Through these third party relationships, Mercury is
currently supplying fuel to customers at over 100 airports in the United States
and, to a lesser extent, internationally.
Mercury believes that it adds value for its customers and is able to
attract business by providing high quality service and by offering a combination
of favorable pricing and credit terms. Mercury provides 24-hour, single source,
coordinated supply and delivery on a national and international basis and
provides related support services. Mercury believes its scale of operations and
creditworthiness allow the purchase of fuel on more favorable price and credit
terms than would be available to most of its customers on an individual basis.
In general, the aviation industry is capital intensive and highly
leveraged. Recognizing the financial risks of the airline industry, major oil
companies often restrict or prohibit the extension of credit to smaller or less
well-capitalized airlines. Consequently, in order to obtain fuel from a major
oil company, many
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carriers must either post a letter of credit or prepay for fuel purchases. These
supply requirements can absorb a substantial portion of an airline's working
capital.
Mercury believes that the extension of credit to smaller or less
well-capitalized airlines represents a risk, but also is a contributing factor
in attracting and retaining customers. Accordingly, Mercury frequently extends
credit on an unsecured basis to customers which may exhibit a higher credit risk
profile and who may otherwise be required to prepay or post letters of credit
for fuel purchases. The amount of credit extended to any particular customer is
a subjective decision. Factors considered in credit decisions include the
customer's financial strength and payment history, competitive conditions in the
market, the expected productivity of the account and, with respect to domestic
accounts, the availability of credit insurance. Mercury considers its existing
credit portfolio to be of acceptable quality and, on an ongoing basis,
establishes allowances that in management's judgment are adequate to absorb
potential credit problems inherent in the portfolio.
Mercury purchases fuel at current market prices from a number of
independent and major oil companies based on the expected requirements of its
customers. Mercury's terms of payment range from ten to thirty days for most of
its fuel purchases except for bulk pipeline purchases which generally are
payable two days from invoice receipt. Mercury has agreements with certain
suppliers under which Mercury purchases a minimum amount of fuel each month at
prices which approximate current market prices. Mercury makes occasional spot
purchases of fuel to take advantage of market differentials. In order to meet
customer supply requirements, Mercury carries limited inventories at numerous
locations and two to three weeks inventory requirements at a few key pipeline
locations. Due to the nature of Mercury's business, the volume of Mercury's
aviation fuel inventories will occasionally fluctuate. Depending upon the price
and price movement of aviation fuel, such inventories may subject Mercury to a
risk of financial loss.
Mercury's fuel supply contracts may generally be canceled by either
party with no further obligations. In some cases, Mercury has monthly purchase
requirements which are established based on historical volumes of fuel purchased
by Mercury. Such fuel purchase history may result in the seller agreeing to
provide a monthly allocation to Mercury such that the seller agrees to dedicate
a portion of its available fuel for Mercury's requirements. Mercury benefits
from such an allocation because, during periods of short fuel supply, reductions
in supply are generally made first to those buyers who have not been given any
allocations. To maintain dedicated allocations of fuel, Mercury usually
purchases fuel at levels approximating the allocated amount. However, Mercury is
not obligated to purchase any fuel under an allocation. Currently, the monthly
allocations from Mercury's fuel suppliers represent only a small portion of
Mercury's total monthly supply requirements.
Mercury's consolidated fuel sales could be materially adversely
affected by a significant decrease in the availability, or increase in the price
, of aviation fuel. Consolidated fuel sales of $145.2 million in fiscal 1995 and
$69.0 million in fiscal 1994 represented approximately 79% and 67% of
consolidated revenues in fiscal 1995 and fiscal 1994, respectively. Although
Mercury believes that there are currently adequate aviation fuel supplies and
that aviation fuel supplies will generally remain available, events outside
Mercury's control have resulted and could result in spot shortages or rapid
increases in fuel costs. Although Mercury is generally able to pass through
rising fuel costs to its customers, extended periods of high fuel costs could
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adversely affect Mercury's ability to purchase fuel in sufficient quantities
because of credit limits placed on Mercury by its fuel suppliers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
In addition to contract fueling, Mercury considers a number of other
commercial activities which are headquartered at Los Angeles International
Airport ("LAX") as part of its fuel sales and services operations. These
activities include refueling services at LAX and John Wayne International
Airport in Santa Ana, California, the brokering of non-aviation fuel to the
industrial and commercial market place, the provision of air frame and power
plant mechanics to commercial airlines and the provision of cargo warehouse
manpower to a commercial airline. Refueling services at LAX and John Wayne
International Airport consist of the delivery of fuel by company owned trucks or
hydrant carts for a fee. Mercury also maintains fuel tanks at LAX to support its
fuel sales and refueling services.
CARGO OPERATIONS
The Company's cargo operations are conducted through its wholly owned
subsidiary, Mercury Air Cargo, Inc. ("MAC"), which provides the following
services: cargo handling, space brokerage and general cargo sales agent
services.
Cargo Handling. MAC provides domestic and international air cargo handling, air
mail handling and bonded warehousing. MAC is one of only two non-airline
providers of contractual cargo containerization and palletization for
international carriers and cargo shippers at LAX. MAC specializes in
consolidating smaller parcels into air cargo pallets and breaking down shipping
containers for sea-to-air and air-to-air transfers. In addition, MAC receives
cargo and loads pallets for shipping.
MAC's cargo handling operations occur primarily at LAX. In May 1994,
MAC expanded its cargo handling operations by opening an off-airport warehouse
in San Francisco, California. See "Properties". In July 1994, MAC opened a cargo
handling facility in Miami, Florida in conjunction with the hiring of a key
employee. Upon the departure of the key employee in March 1995, the Miami
facility was closed at minimal expense.
MAC is able to compete in the cargo handling business by offering
quality service from its strategically located LAX and San Francisco warehouse
facilities. At LAX, a portion of Mercury's cargo handling operations are
conducted in a facility subject to a month-to-month lease. Continuous long-term
growth in MAC's cargo handling operations can only be realized by maintaining
and expanding current warehouse facilities or by obtaining additional warehouse
facilities at LAX or new locations.
Space Brokerage. MAC brokers cargo space on international flights to Europe, the
Middle East, Mexico and Central and South America. Space brokerage involves
contracting for cargo space on airlines and subsequently, on MAC's own airway
bill, selling that space to customers with shipping needs. MAC has established a
network of shipping agents who assist in obtaining cargo for shipment on space
purchased from airlines, and who facilitate the delivery and collection of
freight charges for cargo shipped on MAC's airway bills.
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Unlike an air cargo company which operates its own aircraft, MAC's
space brokerage business utilizes otherwise unfilled cargo space on scheduled
airline flights. Accordingly, MAC is able to profit from the sale of cargo
transportation space worldwide without the fixed overhead expense of maintaining
aircraft. MAC purchases cargo space from a number of airlines worldwide. As a
result of its large volume of cargo space purchases and its ability to negotiate
among airlines, MAC adds value for its customers and is able to attract business
by offering favorable pricing. MAC's revenues are the difference between the
cost of the space and the amount at which the space is resold.
General Sales Agent Services. MAC also serves as general cargo sales agent for
airlines in the Far East, Mexico, Central and South America and in the United
States. In this capacity, MAC sells the transportation of cargo on client
airlines' flights, using the client airlines' own airway bills. MAC earns
commissions from the airlines for selling air cargo space. As with its space
brokerage operations, the growth potential for Mercury Air Cargo's general cargo
sales agent business is not limited by requirements for physical facilities or
by requirements for additional capital investments.
FIXED BASE OPERATIONS
Mercury currently provides FBO services at LAX; Cannon International
Airport in Reno, Nevada; Meadows Field Airport in Bakersfield, California;
Burbank-Glendale-Pasadena Airport in Burbank, California; and Santa Barbara
Municipal Airport in Santa Barbara, California. See "Properties." At each FBO,
Mercury maintains administrative offices; conducts retail fuel sales and
refueling operations which service principally corporate and private aircraft
("general aviation") and to some extent commercial airlines; and acts as a
landlord for office and aircraft tie-down space tenants and, except at LAX, for
hangar tenants. In addition, at Cannon International Airport, Mercury provides
ground handling services for commercial airlines.
Each FBO operates refueling vehicles and maintains fuel storage tanks
to support its into-plane and fuel sales activities. The FBO facilities and the
property on which their operations are conducted are leased from the respective
airport authorities. See "Properties."
During fiscal 1993, the Company acquired certain assets including
equipment and leasehold interests of two competing FBO's at Meadows Field
Airport to complement its existing FBO operation at that airport. During fiscal
1992, the Company acquired certain assets including equipment and a leasehold
interest of a competing FBO at Cannon International Airport in Reno, Nevada to
complement its existing FBO operation at that airport.
GOVERNMENT CONTRACT SERVICES
Mercury conducts its Government Contract Services business through its
subsidiary, Maytag Aircraft Corporation ("Maytag"). Headquartered in Colorado
Springs, Colorado, Maytag provides services at nineteen U.S. military bases,
primarily for the U.S. Navy, including sixteen in the United States and three
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additional bases in Greece, Japan and Bermuda. Maytag provides services to the
government pursuant to contracts for each base which run for one to four years.
Under most of these contracts, Maytag operates government-owned fuel depots and
services a variety of aircraft for the military. Under the terms of its
contracts, Maytag supplies all necessary personnel and equipment to provide 24-
hour refueling capability. All fuel handled in these operations is government
owned. In connection with its Government Contract Services business, Maytag owns
and operates a fleet of refueling trucks and other support vehicles.
The following table lists the bases which Maytag services, as of
September 15, 1995, and the expiration of each contract for each base.
Location Expiration Date of Contract
-------- ---------------------------
Bangor, WA September 1996 *
Bermuda September 1995
Fukuoka, Japan September 1996 **
Memphis, TN September 1995
Peterson, CO October 1995
Cherry Point, NC October 1995
North Island, CA December 1995
Washington, DC October 1995
Willow Grove, PA August 1996
Lakehurst, NJ September 1996
Souda Bay, Crete September 1996
Brunswick, ME October 1996
Pensacola, FL August 1997
Whidbey Island, WA August 1997
Fallon, NV September 1997
Whiting Field, FL September 1997
Yuma, AZ July 1998
Point Mugu, CA April 1999
El Centro, CA September 1999
* Contract to provide library services only.
** Contract to provide air terminal services only.
Maytag's government contracts are subject to competitive bidding, are
generally awarded on a firm fixed-price basis and are subject to termination at
the discretion of the United States Government in whole or in part. Termination
of a contract may occur if the United States Government determines that it is in
its best interest to discontinue the contract, in which case closure costs will
be paid to Maytag. Termination may also occur if Maytag defaults under a
contract. Maytag has never experienced any such default termination.
Maytag's government services business has been negatively impacted by
contract losses due to base closures, the loss of competitive bids, small
business contract set asides and internalization of the refueling function by
the United States military. Since June 30, 1994, ten contracts held by Maytag
have been terminated or are scheduled to be terminated, five of which were
terminated in fiscal 1995 and the balance of which are scheduled for termination
at the end of the first quarter or during the second quarter of fiscal
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1996. The five base contracts scheduled for termination are North Island, Cherry
Point, Peterson, Bermuda and Memphis. Maytag lost a bid to renew its refueling
contract at North Island, such contract expiring in December 1995. In addition,
the refueling contract at Cherry Point, which will expire in October 1995, has
not been renewed due to the Government's decision to perform the services with
military personnel. The contract at Peterson has been set aside for small
business effective October 1995. Two bases currently served by Maytag, Bermuda
and Memphis, are scheduled for closure in September 1995 under federal base
closure and realignment legislation. Based upon the July 13, 1995 presidential
approval of the Defense Base Closure and Realignment Commission recommendation,
no additional bases served by Maytag were selected for closure under the last
round of federally mandated base closures. The Company knows of no additional
plans by the United States Government to close bases.
Operating income from government services in fiscal 1995 included $1.4
million from the ten contracts which have been terminated or are scheduled for
termination.
Since June 30, 1994 Maytag was successful in its bid to renew four-year
contracts at Point Mugu and El Centro and acquired a new contract at Fukuoka,
Japan, which began in November 1994, to provide air terminal services.
RECENT DEVELOPMENTS
Excel Cargo
On August 1, 1995, Mercury executed a letter of intent to purchase
certain operating and other assets of Excel Cargo Inc., Excel Handling Inc. and
3087-1966 (Quebec) Inc. (the "Excel Parties"). Pursuant to the letter of intent,
the purchase price for the assets will be $2,015,632 (United States Dollars). In
addition, Mercury will assume certain liabilities in connection with the
transaction, including a line of credit, accounts payable, accrued expenses, and
long-term debt. Mercury estimates that the total liabilities assumed will be
approximately $727,000.
The letter of intent calls for Mercury to acquire the assets through
the issuance, by a wholly-owned subsidiary, of a convertible debenture in the
principal amount of $2,015,632, to be guaranteed by Mercury. The convertible
debenture will bear interest at the rate of 8.5%, will be payable over eight
years in equal monthly installments of principal and interest, and will be
convertible into Mercury's Common Stock at a conversion price of $12.00, or an
initial maximum of approximately 168,000 shares, subject to adjustment upon
certain events. In addition, the face amount of the convertible debenture will
be adjustable downward in the event the net worth of the assets acquired less
the liabilities assumed is less than zero and in the event the average pre-tax
earnings generated by the acquiring subsidiary during the three years following
the acquisition is less than a certain amount.
The letter of intent further provides for the employment of the former
President of each of the Excel Parties for three years, at $100,000 per year,
plus bonus. In addition, the Excel Parties and their affiliates have agreed not
to compete with Mercury or any of its affiliates in the cargo handling business
in Canada until February 1, 2000. Consummation of the acquisition is subject to,
among other things, due diligence investigation, approval of Mercury's board of
directors, other third-party approvals and negotiation and execution of a
definitive purchase agreement. If the transaction is consummated, Mercury has
agreed to pay
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$810,000 to certain third parties as finders' fees.
Houston and Miami Sales Offices
In October 1994, when a fuel sales competitor ceased operations,
Mercury opened fuel sales offices in Houston and Miami, hired the former
competitor's key sales personnel and attracted the former competitor's fuel
sales accounts. The opening of the Houston and Miami fuel sales offices
increased Mercury's gallons of fuel sold in fiscal 1995 by approximately 50%.
LAX Cargo Facility
In August 1995, Mercury Air Cargo expanded its cargo handling
operations at LAX by leasing, on a month-to-month basis, an additional 45,000
square foot hangar. See "Properties."
MAJOR CUSTOMERS
During fiscal 1995, no customer accounted for over 10% of Mercury's
consolidated revenues.
SEASONAL NATURE OF BUSINESS
Mercury's commercial fuel sales, FBOs and aircraft support operations
are seasonal in nature, being relatively stronger during the months of April
through September in its fueling operations and FBOs than during the months of
October through March. Commercial air traffic and traffic at the FBOs is reduced
during the winter months due in part to weather conditions and increased during
the summer months due in part to additional commercial flights and more
recreational flying. Mercury's cargo business is relatively stronger during the
months of October through March than during the months of April through
September. The cargo business is affected by the patterns for commercial and
retail inventory build-ups in international trade. Operations at military
facilities are not seasonal.
POTENTIAL LIABILITY AND INSURANCE
Mercury's business activities subject it to risk of significant
potential liability under Federal & 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 who maintain their own source of
aviation fuel and with other aircraft support companies whose total sales and
financial resources far exceed those of Mercury. In addition, certain airlines
provide cargo and fueling services comparable to those furnished by Mercury. At
LAX, Mercury competes with, in addition to the airlines, three independent fuel
delivery services providers and primarily with one non-airline entity with
respect to air cargo handling. Each FBO has a minimum of one
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competitor at each airport. Mercury has many principal competitors with respect
to Government contracting services including certain small disadvantaged
businesses which receive a ten percent (10%) cost advantage with respect to
certain bids and set asides of certain contracts. Substantially all Mercury's
services are subject to competitive bidding. Mercury competes on the basis of
price and quality of service.
ENVIRONMENTAL MATTERS
Mercury must continuously comply with federal, state and local
environmental statutes and regulations associated with its numerous underground
fuel storage tanks. These requirements include, among other things, tank and
pipe testing for tightness, soil sampling for evidence of leaking and
remediation of detected leaks and spills. Mercury has installed stringent
inventory systems for its underground storage tanks and has placed sensors
underground which detect leaking. Mercury's operations are subject to frequent
inspection by federal and local environmental agencies and local fire and
airline quality control departments. To date, there have been no material
capital expenditures nor has there been a material negative impact on Mercury's
earnings or competitive position in performing such compliance and related
remediation work. To date, Mercury has not received any notice of violation or
been subject to any cease and abatement proceeding by any governmental agency as
a result of failure to comply with applicable environmental laws and
regulations. Based on tests performed to date, Mercury knows of no basis for any
notice of violation or cease and abatement proceeding by any governmental
agency.
EMPLOYEES
As of September 15, 1995, Mercury employed 963 persons in its following
operating units: fuel sales and services, 228 persons; cargo handling, 228
persons; FBOs, 177 persons; and government contract service, 330 persons.
Mercury is in the process of negotiating collective bargaining agreements for
its military refueling operation at Brunswick, Maine and Point Mugu, California.
Management believes that, in general, wages, hours, fringe benefits and other
conditions of employment offered throughout Mercury's operations are at least
equivalent to those found elsewhere in its industry and that its general
relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
Mercury owns its executive offices, which consists of approximately
20,000 square feet, located at 5456 McConnell Avenue, Los Angeles, California.
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Listed below are the significant properties leased or owned by Mercury
as of September 15, 1995:
Leased Expiration Activity
Location or Annual of Conducted
and Type Owned Rental Lease at Facility Size
-------- ----- ------ ----- ----------- ----
6851 and 6805 W. Leased $416,000 December Executive offices and 60,000 sq. ft. on
Imperial Highway, Los 1999 cargo hangar, with 5.5 acres
Angeles, California offices and executive
(Two story office offices rented to
building and customers
hanger)(1)
5456 McConnell Owned N/A N/A Executive offices 20,000 sq. ft.
Los Angeles, brick building
California (2)
700 World Way West, Leased $296,000 December Service and refueling of 2,000 sq. ft. on
LAX (Executive 1998 private aircraft 1.93 acres
terminal) (1)
2601 East Plumb Lane, Leased $21,000 June 1997 Service, maintenance and 2,300 sq. ft.
Cannon International refueling of commercial executive terminal
Airport, Reno, Nevada and private aircraft and and 85,000 sq. ft.
(Cement block sublessor of building of hangar
building and and hangar space facilities
hangars)(1)
655 So. Rock Blvd., Building $11,000 June 2017 Service, maintenance and 23.7 acres of
Cannon International owned, refueling of commercial land; hangar and
Airport, Reno, Nevada land and private aircraft and administrative
(1) rented sublessor of building building
and hangar space consisting of
33,000 sq. ft.
1601 Skyway Drive and Leased $21,000 February Offices and refueling of 2,000 sq. ft.
Meadows Field Fuel 2008 commercial and private facility on 5
Parcels No. 9 and 10, aircraft acres
Meadows Field
Airport, Bakersfield,
California (1)
Meadows Field, Leased $44,000 February Landlord, service and 49,200 sq. ft.
Parcels 1-5 Meadows 2008 refueling of commercial building on 17.2
Field Airport, and private aircraft acres
Bakersfield,
California (3
buildings) (1)
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Leased Expiration Activity
Location or Annual of Conducted
and Type Owned Rental Lease at Facility Size
-------- ----- ------ ----- ----------- ----
Meadows Field, Hangar Leased $46,000 June 2001 Landlord, service and 30,000 sq. ft.
6 and Parcel A refueling of commercial hangar on 2.7
Meadows Field and private aircraft acres
Airport, Bakersfield,
California (4)
Meadows Field, Leased $21,000 April 1996 Landlord, service and 1,200 sq. ft.
Parcels 1 and 2 and refueling of commercial building on 10.86
Lease site 4 and 6 and private aircraft acres
Meadows Field
Airport, Bakersfield,
California
Meadows Field, Lease Leased $25,000 March 2015 Landlord, service and 35,940 sq. ft.
site 2 Meadows Field refueling of commercial executive terminal
Airport, Bakersfield, and private aircraft and hangar on 6.14
California (4) acres
Burbank-Glendale- Leased $158,000 July 2000 Landlord, service and 45,000 sq. ft.
Pasadena Airport, refueling of commercial
Burbank, California and private aircraft
(Aircraft facility)
Burbank-Glendale- Building $465,000 August 1999 Landlord, service and 106,000 sq. ft.
Pasadena Airport, owned, refueling of commercial
Burbank, California land and private aircraft
(Aircraft facility) leased
Burbank-Glendale- Leased $187,000 November Hangar Facility 5,200 sq. ft.
Pasadena Airport, 1999
Burbank, California
(Hangar)
Santa Barbara Leased $99,000 May 1996 Service, maintenance, 2,000 sq. ft.
Municipal Airport, and refueling of terminal; 2
Santa Barbara, commercial and private hangars totaling
California (Tie-down aircraft 13,120 sq. ft.
space and 3
buildings) (1)
6145 Lehman Drive, Owned N/A N/A Executive and support 8,000 sq. ft.
Suite 300, Colorado personnel offices;
Springs, Colorado landlord
(Brick block building
with furnished
offices) (3)
526 Forbes Blvd., San Leased $218,000 April 1999 Cargo handling with 45,403 sq. ft.
Francisco, California offices building
LAX (B-4 Hangar) 6401 Leased $540,000 Month-to- Hangar space 45,000 sq. ft.
West Imperial Hwy., month
Los Angeles,
California
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(1) The Leasehold interest is subject to a security interest granted to
Mercury's secured lender under its loan agreements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
(2) This property was purchased in April 1994 for $1,800,000 and is subject to
a first mortgage in the sum of $1,033,500 at June 30, 1995 repayable in
equal monthly installments of principal of $9,750, plus interest at 7.5%
per annum, the last payment due in April 2004.
(3) This property is subject to a first mortgage in the sum of $433,924 at June
30, 1995 repayable with interest at 9% in equal monthly installments of
approximately $4,450, the last payment due May 2010.
(4) This property is subject to a first mortgage in the sum of $1,017,063 at
June 30, 1995 repayable with interest at prime in equal monthly
installments, the last payment due in December 2004.
At each of the locations where Mercury conducts its business, including
six commercial locations and nineteen military locations, Mercury's operations
are dependent on a fleet of refueling vehicles. All locations utilize refueling
trucks for transporting and pumping fuel. At LAX, in addition to refueling
trucks, hydrant trucks are also maintained which pump fuel from underground
storage tanks directly into the aircraft. Mercury's owned equipment is subject
to a lien in favor of its secured lender. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
At commercial airports where Mercury operates FBOs, Mercury maintains
its own fuel storage capabilities which are principally located underground as
follows:
Approximate
Capacity
Location (gallons)
-------- ---------
LAX 312,000
Bakersfield 105,000
Burbank 119,000
Santa Barbara 35,000
Reno 100,000
Management believes that Mercury's property and equipment are adequate
for its present business needs. Mercury fully utilizes the real properties it
owns or leases for its business.
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incident to Mercury's business, Mercury
knows of no material litigation or administrative proceedings pending against
Mercury to which Mercury or any of its subsidiaries is a party or to which any
of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Mercury's Common Stock is listed and traded on the AMEX under the
Symbol "MAX". The table below sets forth, for the quarterly periods indicated,
the high and low closing sale prices per share of Common Stock. All per share
stock price information has been adjusted to reflect the June 16, 1995 ten
percent stock dividend.
High Low
---- ---
FISCAL 1994:
Quarter ended September 30, 1993............................... $3.41 $2.44
Quarter ended December 31, 1993................................ 3.64 2.78
Quarter ended March 31, 1994................................... 5.80 3.30
Quarter ended June 30, 1994.................................... 5.45 3.98
FISCAL 1995:
Quarter ended September 30, 1994............................... $6.36 $4.77
Quarter ended December 31, 1994................................ 7.05 5.00
Quarter ended March 31, 1995................................... 8.98 6.25
Quarter ended June 30, 1995.................................... 8.41 7.05
As of September 21, 1995, there were approximately 499 holders of record.
In December 1994, Mercury's Board of Directors adopted a quarterly dividend plan
of $.01 per common share in cash. The first such dividend was paid on February
1, 1995. Based upon the current number of shares of Common Stock outstanding and
assuming the quarterly amount of $.01 per share remains in effect, annual
dividend requirements will amount to approximately $220,000. Mercury intends to
review its dividend policy from time to time in light of Mercury's earnings,
financial condition and other relevant factors, including applicable covenants
in debt and other agreements. In this regard, as discussed in Note 9 of Notes to
Consolidated Financial Statements, certain of Mercury's loan agreements provide
for the maintenance of specified levels of working capital as well as
limitations on cash dividends.
13
15
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)
1995 1994 1993 1992 1991
-------- -------- ------- ------- -------
OPERATING DATA
--------------
REVENUES (1) $183,000 $103,069 $84,543 $71,746 $73,498
COSTS AND EXPENSES 166,427 90,404 75,640 65,254 65,589
OPERATING INCOME 16,573 12,665 8,903 6,492 7,909
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,363 4,261 3,879 3,731 3,435
DEPRECIATION AND AMORTIZATION 2,409 2,049 1,680 1,349 1,472
INTEREST EXPENSE 1,478 1,080 1,084 898 1,309
OTHER EXPENSE (INCOME) (2) 11 106 (1,103) (102) 59
INCOME BEFORE INCOME TAXES 7,312 5,169 3,363 616 1,634
PROVISION FOR INCOME TAXES 3,005 2,174 1,413 257 690
NET INCOME 4,307 2,995 1,950 359 944
NET INCOME PER COMMON SHARE
ON A FULLY DILUTED BASIS 0.76 0.59 0.39 0.01 0.38
WEIGHTED AVERAGE COMMON
OUTSTANDING SHARES 5,420,158 3,719,884 2,431,549 2,394,151 2,377,821
BALANCE SHEET DATA AT JUNE 30,
------------------ ------------------------------------------------------------------------
TOTAL ASSETS $54,210 $35,442 $31,800 $26,090 $22,370
SHORT-TERM DEBT (INCLUDING
CURRENT PORTION OF LONG-TERM
DEBT) 2,607 2,317 1,654 1,242 1,922
LONG-TERM DEBT AND REDEEMABLE
PREFERRED STOCK 17,104 8,650 9,821 7,299 4,941
DIVIDENDS PER COMMON SHARE 0.02 0.00 0.00 0.00 0.00
(1) Revenue consists of consolidated sales and revenues.
(2) Fiscal 1993 includes a pretax gain from legal judgment in the amount of
$1,060,000.
14
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FISCAL 1995, 1994 AND 1993.
The following tables set forth, for the periods indicated, the revenues and
operating income for each of the Company's four operating units, as well as
selected other financial statement data.
Year Ended June 30,
--------------------------------------------------------------------------
($ in millions) 1995 1994 1993
% of Total % of Total % of Total
Amount Revenues Amount Revenues Amount Revenues
--------------------------------------------------------------------------
Revenues:
Fuel Sales and Services (1) $ 141.8 77.5% $ 64.4 62.5% $ 52.9 62.5%
Cargo Operations 9.9 5.4% 7.0 6.8% 4.8 5.7%
Government Contract Services 15.6 8.5% 16.0 15.5% 12.4 14.7%
FBOs (1) 15.7 8.6% 15.7 15.2% 14.4 17.1%
-------- ----- -------- ----- ------- -----
Total Revenues $ 183.0 100.0% $ 103.1 100.0% $ 84.5 100.0%
======== ===== ======== ===== ======= =====
% of Unit % of Unit % of Unit
Amount Revenues Amount Revenues Amount Revenues
--------------------------------------------------------------------
Operating Income:
Fuel Sales and Services (1) $ 6.9 4.9% $ 3.0 4.7% $ 2.2 4.3%
Cargo Operations 2.8 28.5% 2.7 38.4% 1.6 33.1%
Government Contract Services 4.2 26.7% 4.0 25.0% 3.2 25.8%
FBOs (1) 2.7 17.1% 3.0 18.9% 1.9 12.8%
------- ---- ------- ---- ------ ----
Total Operating Income $ 16.6 9.1% $ 12.7 12.3% $ 8.9 10.5%
======= ==== ======= ==== ====== ====
% of Total % of Total % of Total
Amount Revenues Amount Revenues Amount Revenues
-----------------------------------------------------------------
Selling, General and Administrative $ 5.4 2.9% $ 4.3 4.1% $ 3.9 4.6%
Depreciation and Amortization 2.4 1.3% 2.0 2.0% 1.7 2.0%
Interest Expense and Other 1.5 0.8% 1.2 1.2%
------- --- ------ --- ------ ----
Income before Income Taxes 7.3 4.0% 5.2 5.0% 3.4 4.0%
Provision for Income Taxes 3.0 1.6% 2.2 2.1% 1.4 1.7%
------- --- ------ --- ------ ----
Net Income $ 4.30 2.4% $ 3.0 2.9% $ 2.0 2.3%
======= === ====== === ====== ====
(1) Amounts for fiscal 1993 and fiscal 1994 have been reclassified to conform
to the fiscal 1995 presentation.
15
17
Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1994
Revenue increased 77.6% to $183.0 million in fiscal 1995 from $103.1
million in fiscal 1994. Operating income increased 30.9% to $16.6 million in
fiscal 1995 from $12.7 million in fiscal 1994.
Revenues from fuel sales and services represented 77.5% of total
revenues in fiscal 1995 compared to 62.5% of total revenues in fiscal 1994.
Revenues from fuel sales and services in fiscal 1995 increased 120% to $141.8
million from $64.4 million in fiscal 1994. The increase in revenues from fuel
sales and services was primarily due to an increase in the number of gallons
sold as a result of the addition of a significant number of new accounts in
fiscal 1995. These new accounts were attributable in part to the opening of
sales offices in Houston and Miami in October 1994. Average fuel prices were
marginally higher in fiscal 1995 compared with fiscal 1994. Operating income
from fuel sales and services in fiscal 1995 increased 127.9% to $6.9 million
from $3.0 million in fiscal 1994. The increase in operating income from fuel
sales and services in fiscal 1995 compared to fiscal 1994 was attributable
primarily to an increase in fuel sales and, to a much lesser extent, a slight
improvement in per gallon margins. Revenues and operating income from fuel sales
and services include the activities of Mercury's contract fueling business, as
well as activities from a number of other commercial services including the
provision of certain refueling services, non-aviation fuel brokerage and other
services managed at LAX as part of Mercury's fuel sales and services operations.
Revenues from cargo operations in fiscal 1995 increased 41.8% to $9.9
million from $7.0 million in fiscal 1994. This increase was primarily due to a
general increase in the volume of business from existing accounts and the
addition of a new location in San Francisco. During the year, Mercury opened a
cargo operation in Miami; however, in March 1995, the operation was closed as a
result of the loss of a key employee. Operating income from cargo operations in
fiscal 1995 increased 5.5% to $2.8 million from $2.7 million in fiscal 1994. The
increase in operating income was significantly lower than the corresponding
revenue increase due to operating losses at the San Francisco and Miami
locations in fiscal 1995 and higher labor and other operating costs at LAX in
fiscal 1995 compared to fiscal 1994.
Revenues from government contract services in fiscal 1995 declined 2.6%
to $15.6 million from $16.0 million in fiscal 1994. Revenues from government
contract services in fiscal 1995 included $5.3 million from ten contracts, five
of which were terminated in fiscal 1995 and the balance of which are scheduled
for termination at the end of the first quarter or during the second quarter of
fiscal 1996. The decrease in revenues from governmental contract services in
fiscal 1995 compared to fiscal 1994 was primarily due to the contract
terminations during fiscal 1995, which terminations were only partially offset
by a new contract received in November 1994. Operating income from government
services in fiscal 1995 increased 4.1% to $4.2 million from $4.0 million in
fiscal 1994 due to lower operating expenses. Operating income from government
services in fiscal 1995 included $1.4 million from the ten contracts described
above which have or will be terminated. Mercury does not anticipate significant
charge-offs associated with the contract terminations described above.
Revenues from FBOs remained relatively constant in fiscal 1995 at $15.7
million compared to fiscal 1994, but operating income declined 9.0% from $3.0
million in fiscal 1994 to $2.7 million in fiscal 1995. The decline was primarily
attributable to a reduction in the volume of fuel sold, as well as lower per
gallon margins.
16
18
Selling, general and administrative expenses in fiscal 1995 increased
25.9% to $5.4 million from $4.3 million in fiscal 1994. The increase was
primarily due to an increase in the provision for bad debts. Provision for bad
debts increased to $905,000 in fiscal 1995 from $324,000 in fiscal 1994 due to a
significant increase in sales and accounts receivable. Excluding the provision
for bad debts, selling, general and administrative expenses in fiscal 1995
increased 13.2% to $4.5 million from $3.9 million in fiscal 1994, primarily due
to higher compensation expenses related to expansion of Mercury's business.
Depreciation and amortization expense in fiscal 1995 increased 17.6% to
$2.4 million from $2.0 million in fiscal 1994. The increase was primarily due to
$2.0 million of capital expenditures in fiscal 1995 and $5.0 million of capital
expenditures in fiscal 1994.
Interest expense in fiscal 1995 increased 36.9% to $1.5 million from
$1.1 million in fiscal 1994. The increase was due to higher interest rates and
significantly higher average outstanding bank borrowing in fiscal 1995 compared
to fiscal 1994. Interest income decreased in fiscal 1995 to $84,000 from
$140,000 in fiscal 1994 due to the declining principal balance of Mercury's
outstanding notes receivable.
Charges for minority interest in fiscal 1995 decreased to $95,000 from
$246,000 in fiscal 1994. The decrease was due to the acquisition of the
remaining minority interest's share of Mercury Air Cargo in November 1994. See
Note 4 of Notes to Consolidated Financial Statements.
Income tax expense approximated 41% of pre-tax income for fiscal 1995
and 42% for fiscal 1994, reflecting the expected effective annual tax rate.
Fiscal Year Ended June 30, 1994 Compared to the Fiscal Year Ended June 30, 1993
Consolidated revenues increased 21.9% to $103.1 million in fiscal 1994
from $84.5 million in fiscal 1993. Operating income increased 42.3% to $12.7
million in fiscal 1994 from $8.9 million in fiscal 1993.
Revenues from fuel sales and services represented 62.5% of total
revenues in both fiscal 1994 and fiscal 1993. Revenues from fuel sales and
services in fiscal 1994 increased 21.8% to $64.4 million from $52.9 million in
fiscal 1993. The increase in revenues from fuel sales and services was primarily
due to an increase in the number of gallons sold. On average, fuel prices were
approximately 13% lower in fiscal 1994 than during fiscal 1993. Operating income
from fuel sales and services in fiscal 1994 increased 34.4% to $3.0 million from
$2.2 million in fiscal 1993. The increase in operating income from fuel sales
and services in fiscal 1994 compared to fiscal 1993 was principally attributable
to the increase in fuel sales.
Revenues from cargo operations in fiscal 1994 increased 46.3% to $7.0
million from $4.8 million in fiscal 1993. This increase was primarily due to a
general increase in the volume of business from existing accounts and the
addition of one cargo handling account. Operating income from cargo operations
in fiscal 1994 increased 69.4% to $2.7 million from $1.6 million in fiscal 1993.
The increase in operating income was attributable to higher revenues.
17
19
Revenues from government contract services in fiscal 1994 increased
28.7% to $16.0 million from $12.5 million in fiscal 1993 due in part to the
addition of two contracts, one in October 1992 and one in September 1993, and in
part due to increased add-ons to existing contracts. Operating income from
government services in fiscal 1994 increased 24.4% to $4.0 million from $3.2
million in fiscal 1993 primarily due to higher revenues.
Revenues from Mercury's FBOs in fiscal 1994 increased 8.3% to $15.7
million from $14.4 million in fiscal 1993 due to an increase in fuel sales and
service revenues. Operating income from Mercury's FBOs increased by 59.6% to
$3.0 million in fiscal 1994 from $1.9 million in fiscal 1993. The increase was
primarily attributable to higher margins from fuel sales and, to a lesser
extent, a greater quantity of fuel sales.
Selling, general and administrative expenses in fiscal 1994 increased
9.8% to $4.3 million from $3.9 million in fiscal 1993. Excluding the provision
for bad debts, selling, general and administrative expenses in fiscal 1994
increased 13.6% to $3.9 million from $3.5 million in fiscal 1993, primarily due
to higher compensation expense. Included in selling, general and administrative
expenses in fiscal 1994 is a $324,000 provision for bad debts compared to
$414,000 in fiscal 1993.
Depreciation and amortization expense in fiscal 1994 increased 21.9% to
$2.0 million from $1.7 million in fiscal 1993. The increase was primarily due to
$5.0 million of capital expenditures in fiscal 1994 and $4.0 million of capital
expenditures in fiscal 1993.
Interest expense remained relatively constant in fiscal 1994 at $1.1
million compared to fiscal 1993. Interest income decreased 18.1% in fiscal 1994
to $140,000 from $171,000 in fiscal 1993 due to the declining principal balance
of Mercury's outstanding notes receivable.
Charges for minority interest in fiscal 1994 increased to $246,000 from
$128,000 in fiscal 1993. The increase was due to significantly higher income
generated by Mercury Air Cargo, 20% of which was owned by a minority
shareholder.
Income tax expense approximated 42% of pre-tax income for fiscal 1994
and fiscal 1993, reflecting the expected effective annual tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Mercury has historically financed its operations primarily through
operating cash flow and borrowings under its revolving line of credit (the
"Revolver"). Mercury's cash balance at June 30, 1995 totaled $831,000.
Net cash used in operating activities totaled $5,581,000 during fiscal
1995. During this period, the primary source of net cash provided by operating
activities was net income plus depreciation and amortization totaling $6,716,000
and an increase in accounts payable of $6,078,000. The primary use of cash for
operating activities in fiscal 1995 was an increase in accounts receivable of
$16,105,000 and an increase in inventories of $2,332,000.
18
20
Net cash provided by financing activities totaled $6,663,000 during
fiscal 1995. The primary source of cash from financing activities during this
period was borrowing under the Revolver of $10,118,000. The primary use of cash
in financing activities was the reduction in long term debt of $2,443,000 and
repurchases of common stock, including redemption by a subsidiary of a portion
of a minority stockholder's interest, totaling $1,925,000.
Mercury's Credit Facility consists of the Revolver and the Term Loan.
The Credit Facility is secured by substantially all of Mercury's assets. The
original principal balance of the Term Loan was $7,500,000, of which $4,752,000
was outstanding as of June 30, 1995. The Term Loan is amortized and paid on a
monthly basis and matures in August 1998. Pursuant to the Revolver, funds may be
obtained in an amount equal to the value of up to 85% of Mercury's eligible
receivables, as determined by the lender, up to an aggregate of $16,000,000 with
an initial term maturing in October 1997, subject to renewal by the parties. At
June 30, 1995, Mercury had approximately $10,118,000 of borrowing under the
Revolver and had approximately $3,000,000 of additional borrowing availability
based on the 85% of eligible receivables test. See Note 9 of Notes to
Consolidated Financial Statements.
During fiscal 1995, Mercury repurchased 236,300 shares of Common Stock
at a total cost of approximately $1,474,000. Management is currently authorized
by Mercury's board of directors and under Mercury's loan agreements to
repurchase up to an additional approximately $1,060,000 in Common Stock. During
fiscal 1995, Mercury received approximately $379,000 from the exercise of
Underwriter Warrants and stock options which resulted in the issuance of 128,532
shares of Common Stock. Subsequent to June 30, 1995, the Company repurchased an
additional 155,420 shares of Common Stock at a cost of approximately $820,000.
Historically, the Company's capital expenditure requirements have been
related to refueling and ground handling equipment for both commercial and
government service operations. In fiscal 1994, the Company spent approximately
$2,400,000 for equipment requirements related to new and existing contracts and
to purchase equipment previously held under noncancelable operating leases.
During fiscal 1994, the Company also acquired a 20,000 square foot building for
its headquarters at a cost of approximately $1,800,000. In addition, the Company
invested nearly $800,000 to acquire a leasehold interest at its Bakersfield FBO.
In fiscal 1995, the Company purchased a building in Colorado Springs at a cost
of $500,000 to relocate its government services headquarters. The Company also
invested nearly $700,000 for computer equipment and to remodel and furnish its
Los Angeles headquarters building. In addition, the Company spent approximately
$700,000 to purchase refueling and ground equipment for its commercial, FBO and
government service operations.
The Company's accounts receivable grew from $17,164,000 at June 30,
1994 to $33,269,000 at June 30, 1995, an increase of $16,105,000 with an
increase in accounts payable during the same period of only $6,078,000 to
$12,998,000 at June 30, 1995 from $6,920,000 at June 30, 1994. Accounts
receivable days outstanding for the quarter ended June 30, 1994 was 64 days
compared to 61 days for the quarter ended June 30, 1995 based upon consolidated
revenue for each period. Accounts receivable days outstanding are impacted by a
high volume of fuel brokerage which is reported in revenues on a net margin
basis and a high concentration of fuel sales to customers with extended payment
terms. Allowance for doubtful accounts increased to $610,000 at June 30, 1995
from $508,000 at June 30, 1994.
19
21
Absent a major prolonged surge in oil prices or a capital intensive
acquisition, the Company believes its operating cash flow, Revolver and vendor
credit will provide it with sufficient liquidity during the next twelve months.
In the event that fuel prices increase significantly for an extended period of
time, the Company's liquidity could be adversely affected unless the Company is
able to increase vendor credit or increase lending limits under its revolving
credit facility. The Company believes, however, its Revolver and vendor credit
should provide it with sufficient liquidity in the event of a major temporary
surge in oil prices.
Inflation
The Company believes that inflation has not had a significant effect on
its results of operations during the past three fiscal years.
Item 8. Financial Statements and Supplementary Data.
See Part IV, Item 14, pages F1 through F17 immediately following.
Item 9. Accounting and Financial Disclosure Disputes
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Reference is made to the information set forth under the caption
"Election of Directors" of the Company's Proxy Statement for the annual meeting
scheduled for December 4, 1995 (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.
20
22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(a)(1) Financial Statements
Independent Auditors' Report.......................................................................... F-1
Consolidated Balance Sheets as of June 30, 1995 and 1994.............................................. F-2
Consolidated Statements of Income for each of the three
years in the period ended June 30, 1995............................................................. F-3
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1995............................................................. F-4
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 30, 1995................................................ F-5
Notes to Consolidated Financial Statements for the three
years ended June 30, 1995........................................................................... F-6 to F-16
(a)(2) Supplemental Schedule for each of the three years in the period ended June 30, 1995:
Schedule II - Valuation and Qualifying Accounts....................................................... F-17
All other items are not included in this Form 10-K for the reason that
they are not applicable or are included in the information as set forth in the
Consolidated Financial Statements or in the Notes to Consolidated Financial
Statements.
21
23
(a) (3) Exhibits:
Exhibit
No. Description
3.1 Restated Certificate of Incorporation (4)
3.2 Form of Amendment to Restated Certificate of Incorporation creating
the Series A 8% Convertible Cumulative Redeemable
Preferred Stock (4)
3.3 Form of Amendment to Restated Certificate of Incorporation declaring
the Separation Date for the Series A 8% Convertible
Redeemable Preferred Stock (6)
3.4 Bylaws of the Company (4)
3.5 Amendment to Bylaws of the Company
10.1 Underwriter's Unit Warrant dated June 18, 1991 issued to Emanuel and
Company by the Company (4)
10.2 Employment Agreement dated December 10, 1993 between the Company and
Seymour Kahn (10)
10.3 Loan and Security Agreements among the Company, Maytag Aircraft
Corporation and Marine Midland Business Loans, Inc. dated
December 6, 1989 (2)
10.4 Stock Purchase Agreement between the Company, SK Acquisition, Inc.,
Randolph E. Ajer, Kevin J. Walsh, Grant Murray and Joseph Czyzyk (2)
10.5 Company's 1990 Long-Term Incentive Plan (7)
10.6 Company's 1990 Directors Stock Option Plan (1)
10.7 Lease for 6851 West Imperial Highway, Los Angeles, California (4)
10.8 Amendment to Loan Agreement and Security Agreement among the Company,
Maytag Aircraft Corporation and Marine Midland Business Loans, Inc.
dated October 2, 1990 (4)
10.9 Second Amendment to Loan and Security Agreement among the Company,
Maytag Aircraft Corporation and Marine Midland Business Loans, Inc.
dated April 18, 1991 (4)
10.10 Third Amendment to Loan and Security Agreement among the Company,
Maytag Aircraft Corporation and Marine Midland Business Loans, Inc.
dated June 1991 (5)
10.11 Amendment to Loan and Security Agreements and Term Notes dated as of
April 1, 1992 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. dated April 1, 1992(6)
10.12 Amendment to Loan and Security Agreements and Term Notes dated as of
April 1, 1992 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. (8)
10.13 Amendment to Loan and Security Agreements and Term Notes dated as of
December 21, 1992 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. (9)
10.14 Amendment to Loan and Security Agreements and Term Notes dated as of
August 30, 1993 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. (9)
22
24
10.15 Memorandum Dated September 15, 1995 regarding Summary of Officer Life
Insurance Policies with Benefits Payable to Officers or Their
Designated Beneficiaries
10.16 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans
for Seymour Kahn, Joseph Czyzyk and Randolph E. Ajer
10.17 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans
for Kevin Walsh and William Silva
10.18 The Company's 401(k) Plan consisting of LCI Actuaries, Inc. Regional
Prototype Defined Contribution Plan and Trust and Adoption
Agreement (9)
10.19 Amendment to Loan and Security Agreements and Term Notes dated as of
September 21, 1993 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. (9)
10.20 Non-Qualified Stock Option Agreement by and between the Company and
Seymour Kahn dated January 21, 1993 (9)
10.21 Non-Qualified Stock Option Agreement by and between the Company and
William G. Langton dated August 9, 1993(9)
10.22 Stock Purchase Agreement among the Company, SK Acquisition, Inc. and
William L. Silva dated as of August 9, 1993 (10)
10.23 Amendment to Loan and Security Agreements and Term Notes dated as of
September 21, 1993 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc.(10)
10.24 Amendment to Loan and Security Agreements and Term Notes dated as of
April 1, 1994 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. (10)
10.25 Stock Exchange Agreement dated as of November 15, 1994 between Joseph
Czyzyk and the Company (11)
10.26 Employment Agreement dated November 15, 1995 between the Company and
Joseph Czyzyk (12)
10.27 Amendment to Loan and Security Agreements and Term Notes dated as of
December 20, 1994 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. (12)
10.28 Amendment to Loan and Security Agreements and Term Notes dated as of
December 17, 1994 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc. (12)
10.29 Amendment to Loan and Security Agreements and Term Notes dated as of
June 12, 1995 among the Company, Maytag Aircraft Corporation and
Marine Midland Business Loans, Inc.
10.30 Loan and Security Agreement dated as of June 12, 1995 between Mercury
Air Cargo, Inc. and Marine Midland Business Loans, Inc.
10.31 Agreement dated August 1, 1995 between Mercury Air Group, Inc. and
Grant Murray
11.1 Computation of Earnings Per Share (3)
22.1 Subsidiaries of Registrant
23
25
23.1 Consent of Deloitte & Touche with respect to incorporation of 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-3 (Registration No. 33-346568) and the Company's Registration
Statement on Form S-8 (Registration Statement No. 33-69414)
- ---------------------------------
(1) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 10, 1993 Annual Meeting of Shareholders and is
incorporated herein by reference.
(2) Such document was previously filed as an Exhibit to the Company's Current
Report on Form 8-K dated December 6, 1989 and is incorporated herein by
reference.
(3) Such statement is included in Note 14 of Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K and is incorporated
herein by reference.
(4) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-39044 on Form S-2 and are incorporated herein
by reference.
(5) Such document was previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the year ended June 30, 1991 and is incorporated
herein by reference.
(6) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and are
incorporated herein by reference.
(7) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 2, 1992 Annual Meeting of Shareholders.
(8) Such document was previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the year ended June 30, 1992 and is incorporated
herein by reference.
(9) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993 and are
incorporated herein by reference.
(10) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994 and are
24
26
incorporated herein by reference.
(11) Such document was previously filed as an Exhibit to the Company's Current
Report on Form 8-K dated November 15, 1995 and is incorporated herein by
reference.
(12) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1995 and
are incorporated herein by reference.
(b) Reports on Form 8-K:
None.
(c) Identification of management contracts and compensatory plans and
arrangements:
Exhibits 10.2, 10.4, 10.5, 10.6, 10.15, 10.16, 10.17, 10.18, 10.20, 10.21,
10.22, 10.26 and 10.31 constitute the management contracts and compensatory
plans and arrangements required to be filed as exhibits to this Annual Report on
Form 10-K. Such documents are either filed as exhibits to this Annual Report on
Form 10-K or were previously filed as exhibits to the filings indicated in the
notes to Item 14(a) and are incorporated herein by reference.
25
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of Los
Angeles, State of California, on the 22nd day of September 1995.
MERCURY AIR GROUP, INC.
By: /s/ Seymour Kahn
_____________________
Seymour Kahn
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated:
Signatures
Principal Executive Officer:
/s/ SEYMOUR KAHN Dated: September 22, 1995
______________________________
Seymour Kahn
Chief Executive Officer and Director
Principal Chief Operating Officer and Director:
/s/ JOSEPH CZYZYK Dated: September 22, 1995
______________________________
Joseph Czyzyk
Chief Operating Officer and Director
Principal Financial and Accounting Officer:
/s/ RANDOLPH E. AJER Dated: September 22, 1995
______________________________
Randolph E. Ajer
Executive Vice President
Secretary and Treasurer
Additional Directors:
/s/ ROBERT L. LIST Dated: September 22, 1995
______________________________
Robert L. List
Director
/s/ PHILIP J. FAGAN, JR., M.D. Dated: September 22, 1995
______________________________
Philip J. Fagan, Jr., M.D.
Director
/s/ WILLIAM G. LANGTON Dated: September 22, 1995
______________________________
William G. Langton
Director
/s/ FREDERICK H. KOPKO, JR. Dated: September 22, 1995
______________________________
Frederick H. Kopko, Jr.
Director
26
28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Mercury Air Group, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Mercury Air
Group, Inc. and subsidiaries as of June 30, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1995. Our audits also included
the financial statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mercury Air Group, Inc. and
subsidiaries as of June 30, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1995 in conformity with generally accepted accounting principles. 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 15, 1995
29
PART I - FINANCIAL INFORMATION
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30 JUNE 30
1995 1994
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 831,000 $ 1,770,000
Trade accounts receivable, net of allowance for doubtful
accounts of $610,000 at 6/30/95 and $508,000 at 6/30/94(Note 9) 33,269,000 17,164,000
Notes receivable - current portion 50,000 185,000
Inventories (Notes 3 and 9) 3,283,000 951,000
Prepaid expenses and other current assets 1,822,000 1,297,000
------------ ------------
Total current assets 39,255,000 21,367,000
PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated
depreciation and amortization of $20,391,000 at 6/30/95 and
$18,277,000 at 6/30/94(Notes 5 and 9) 12,219,000 12,570,000
NOTES RECEIVABLE, net of current portion 136,000 186,000
OTHER ASSETS (Note 6) 2,600,000 1,319,000
------------ ------------
$ 54,210,000 $ 35,442,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,998,000 $ 6,920,000
Accrued expenses and other current liabilities (Note 7) 3,008,000 2,078,000
Income taxes payable (Note 8) 114,000 699,000
Current portion of long-term debt (Note 9) 2,607,000 2,317,000
------------ ------------
Total current liabilities 18,727,000 12,014,000
LONG-TERM DEBT (Note 9) 17,104,000 8,650,000
DEFERRED INCOME TAXES (Note 8) 8,000 218,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY(Note 4) 0 924,000
------------ ------------
Total liabilities 35,839,000 21,806,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (Notes 9, 10 and 11):
Preferred Stock - $.01 par value; authorized 3,000,000 shares;
no shares outstanding
Common Stock - $ .01 par value; authorized 9,000,000 shares;
outstanding 5,524,257 shares 6/30/95;
outstanding 4,905,779 shares 6/30/94 55,000 49,000
Additional Paid-in Capital 14,992,000 9,187,000
Retained Earnings 3,479,000 4,555,000
Treasury Stock - 35,200 shares of common stock 6/30/95;
32,000 shares of common stock 6/30/94 (155,000) (155,000)
------------ ------------
Total stockholders' equity 18,371,000 13,636,000
------------ ------------
$ 54,210,000 $ 35,442,000
============ ============
F-2
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended June 30
-------------------------------------------------------
1995 1994 1993
------------- ------------- -------------
Sales and Revenues (Note 13):
Sales $ 145,166,000 $ 68,991,000 $ 57,186,000
Service revenues 37,834,000 34,078,000 27,357,000
------------- ------------- -------------
183,000,000 103,069,000 84,543,000
------------- ------------- -------------
Costs and Expenses:
Cost of sales 132,838,000 61,060,000 50,804,000
Operating expenses 33,589,000 29,344,000 24,836,000
------------- ------------- -------------
166,427,000 90,404,000 75,640,000
------------- ------------- -------------
Operating Income 16,573,000 12,665,000 8,903,000
------------- ------------- -------------
Other Expenses (Income):
Selling, general and administrative (Note 6) 5,363,000 4,261,000 3,879,000
Depreciation and amortization 2,409,000 2,049,000 1,680,000
Interest expense 1,478,000 1,080,000 1,084,000
Interest income (84,000) (140,000) (171,000)
Minority interest (Note 4) 95,000 246,000 128,000
Gain-legal judgement (Note 2) (1,060,000)
------------- ------------- -------------
9,261,000 7,496,000 5,540,000
------------- ------------- -------------
Income Before Income Taxes 7,312,000 5,169,000 3,363,000
Provision for Income Taxes (Note 8) 3,005,000 2,174,000 1,413,000
------------- ------------- -------------
Net Income $ 4,307,000 $ 2,995,000 $ 1,950,000
============= ============= =============
Net Income applicable to Common Stock $ 4,307,000 $ 2,920,000 $ 1,496,000
============= ============= =============
Net Income Per Common Share and
Common Equivalent Share (Primary) (Note 14) $ 0.76 $ 0.75 $ 0.62
============= ============= =============
Net Income Per Common Share-Assuming
Full Dilution (Note 14) $ 0.76 $ 0.59 $ 0.39
============= ============= =============
Weighted Average Number of Shares of
Common Stock (Note 14) 5,420,158 3,719,884 2,431,549
============= ============= =============
F-3
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30
----------------------------------------------------
1995 1994 1993
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,307,000 $ 2,995,000 $ 1,950,000
Adjustments to derive cash flow from
operating activities:
Depreciation and amortization 2,409,000 2,049,000 1,680,000
Minority interest 95,000 246,000 128,000
Amortization of officers' loans 140,000 154,000 154,000
Increase (decrease) in deferred income taxes (210,000) (651,000) 229,000
Changes in operating assets and liabilities:
Trade and other accounts receivable (16,105,000) (474,000) (3,929,000)
Inventories (2,332,000) (103,000) 84,000
Prepaid expenses and other current assets (525,000) (304,000) 398,000
Accounts payable 6,078,000 150,000 459,000
Income taxes payable (368,000) 348,000 351,000
Accrued expenses and other current liabilities 930,000 (43,000) 162,000
------------ ------------ ------------
Net cash provided by (used in) operating activities (5,581,000) 4,367,000 1,666,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment 300,000
Decrease in notes receivable 185,000 677,000 261,000
Addition to other assets (632,000) (259,000) (265,000)
Additions to property, equipment and leaseholds (1,574,000) (1,933,000) (2,538,000)
------------ ------------ ------------
Net cash used in investing activities (2,021,000) (1,215,000) (2,542,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividend on common stock (100,000)
Proceeds from long-term debt 10,752,000 2,876,000 3,461,000
Reduction of long-term debt (2,443,000) (5,902,000) (1,952,000)
Payment of dividend on preferred stock (75,000) (454,000)
Issuance of common stock 379,000 3,097,000
Repurchase and retire preferred and common stock and warrants (1,475,000) (1,917,000) (50,000)
Redemption by subsidiary of common stock
owned by minority shareholder (450,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 6,663,000 (1,921,000) 1,005,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (939,000) 1,231,000 129,000
CASH AND CASH EQUIVALENTS, beginning of year 1,770,000 539,000 410,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 831,000 $ 1,770,000 $ 539,000
============ ============ ============
CASH PAID DURING THE YEAR:
Interest $ 1,478,000 $ 1,080,000 $ 1,084,000
Income taxes $ 3,607,000 $ 2,477,000 $ 645,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Direct financing for purchase of equipment and property $ 435,000 $ 2,518,000 $ 1,425,000
Cancellation of a note receivable and other assets as
consideration for the purchase of leasehold property $ 540,000
Issuance of 225,000 common shares in exchange for
the remaining minority interest of Mercury Air Cargo, Inc. $ 1,406,000
F-4
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES A
PREFERRED STOCK COMMON STOCK
---------------------------------------------- ADDITIONAL
NUMBER OF NUMBER OF PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
-------------------------------------------------------------------------
BALANCE, JUNE 30,1992 575,000 $ 6,000 2,206,191 $ 22,000 $ 7,049,000 $1,167,000
Net income 1,950,000
Series A Preferred Stock converted
into Common Stock (12,002) 48,008
Cash Dividend on Series A Preferred Stock (454,000)
Repurchase and retire Preferred Stock (4,000) (32,000) (17,000)
-------------------------------------------------------------------------
BALANCE, JUNE 30, 1993 558,998 6,000 2,254,199 22,000 7,017,000 2,646,000
Net income 2,995,000
Cash Dividend on Series A Preferred Stock (75,000)
Repurchase and retire Preferred Stock (80,256) (1,000) (640,000) (475,000)
Series A Preferred Stock converted into
Common Stock (478,742) (5,000) 1,914,968 19,000 (14,000)
Repurchase and retire Common Stock (169,200) (1,000) (264,000) (536,000)
Common Stock issued on exercise of
warrants and options 905,812 9,000 3,088,000
-------------------------------------------------------------------------
BALANCE, JUNE 30, 1994 0 0 4,905,779 49,000 9,187,000 4,555,000
Net income 4,307,000
Cash Dividend on Common Stock (100,000)
Repurchase and retire Common Stock (236,300) (2,000) (450,000) (1,022,000)
Common Stock issued on exercise of
warrants and options 128,532 1,000 378,000
Tax benefit from exercise of stock options 217,000
Common stock issued in exchange
for the remaining minority interest of Mercury
Air Cargo, Inc. 225,000 2,000 1,404,000
Issue 10% stock dividend 501,246 5,000 4,256,000 (4,261,000)
-------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 0 $ 0 5,524,257 $ 55,000 $14,992,000 $3,479,000
=========================================================================
COMMON STOCK
IN TREASURY
--------------------
NUMBER OF
SHARES AMOUNT
--------------------
BALANCE, JUNE 30,1992 32,000 ($ 155,000)
Net income
Series A Preferred Stock converted
into Common Stock
Cash Dividend on Series A Preferred Stock
Repurchase and retire Preferred Stock
--------------------
BALANCE, JUNE 30, 1993 32,000 (155,000)
Net income
Cash Dividend on Series A Preferred Stock
Repurchase and retire Preferred Stock
Series A Preferred Stock converted into
Common Stock
Repurchase and retire Common Stock
Common Stock issued on exercise of
warrants and options
--------------------
BALANCE, JUNE 30, 1994 32,000 (155,000)
Net income
Cash Dividend on Common Stock
Repurchase and retire Common Stock
Common Stock issued on exercise of
warrants and options
Tax benefit from exercise of stock options
Common stock issued in exchange
for the remaining minority interest of Mercury
Air Cargo, Inc.
Issue 10% stock dividend 3,200
--------------------
BALANCE, JUNE 30, 1995 35,200 ($ 155,000)
====================
F-5
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995
Note 1 - Summary of Significant Accounting Policies:
Business
Mercury Air Group, Inc. and subsidiaries (the "Company") are principally
engaged in the conduct of cargo handling, cargo general sales agency and
air cargo space brokerage, and the sale and delivery of aviation fuels to
commercial, air courier and commuter airlines, and to general aviation
aircraft. The Company also provides ground support services to U.S.
military aircraft.
Principles of Consolidation
The consolidated financial statements include the accounts of Mercury Air
Group, Inc.,and its subsidiaries. All material intercompany transactions
and balances have been eliminated.
Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments that are
readily convertible into cash and were purchased with maturities of three
months or less.
Inventories
Inventory amounts are stated at the lower of aggregate cost (first-in,
first-out method) or market.
Property, Equipment and Leaseholds
Property, equipment and leaseholds are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful life of
the asset (3-25 years) and over the lease life or useful life for leasehold
improvements, whichever is less.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired arose in the acquisitions of Maytag
Aircraft Corporation, a wholly-owned subsidiary, in 1984 and the minority
interest in Mercury Air Cargo, Inc. in November 1994. Such costs are being
amortized on the straight-line method over 40 years. The Company assesses
recoverability on a periodic basis. Factors included in evaluating
recoverability include historical earnings and projected future earnings of
the operations.
Revenue Recognition
Revenues are recognized upon delivery of product or completion of the
service. The Company's contracts with the U.S. Government are subject to
profit renegotiation. The Company has not been required to adjust profits
arising out of U.S. Government contracts to date.
F-6
34
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995
Income Taxes
Deferred tax assets and liabilities are recognized based on differences
between financial statement and tax basis of assets and liabilities using
presently enacted tax rates.
Income Per Share
Per share data is based on the weighted average number of shares
outstanding, after giving effect to the cumulative dividend on cumulative
preferred stock, and common stock equivalents, excluding those common stock
equivalents that would increase the income per share.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts
receivable and payable, and debt instruments. The book values of all
financial instruments, other than debt instruments, are representative of
their fair values due to their short-term maturity. The book values of the
Company's debt instruments are considered to approximate their fair values
because the interest rates of these instruments are based on current rates
offered to the Company.
Note 2 - Gain-Legal Judgement:
The Company recorded a pretax gain of $1,060,000 in fiscal 1993 related to
a recovery obtained from a legal judgement which arose following the
bankruptcy of a former significant customer.
Note 3 - Inventories:
June 30
-------
Inventories consist of the following: 1995 1994
---------- --------
Aviation fuel $3,166,000 $757,000
Supplies and parts 117,000 194,000
---------- --------
$3,283,000 $951,000
========== ========
Note 4 - Related Party Transactions:
Twenty percent of Mercury Air Cargo, Inc. ("MAC"), a subsidiary of the
Company, was owned by a company which is wholly-owned by an executive
officer of Mercury Air Group, Inc. The minority interest share in the net
income of MAC resulting from this ownership amounted to $95,000 (1995),
$246,000 (1994) and $128,000 (1993). In November 1994, the Company acquired
the remaining minority interest from the executive officer. The transaction
included a redemption of 5% in exchange for $450,000 in cash and
acquisition of the remaining 15% through the issuance of 247,500 common
shares (after adjustment for the 10% stock dividend) valued at $1,406,000
($5.68 per share) for a total consideration of $1,856,000. The acquisition
of the minority interest has been accounted for as a purchase and,
accordingly, the excess of the cost over the book value ($1,019,000) of the
shares acquired is included in other assets in the accompanying
consolidated balance sheet at June 30, 1995 (See note 6).
F-7
35
MERCURY AIR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995
Note 5 - Property, Equipment and Leaseholds:
Property, equipment and leaseholds consist of the following:
June 30
-------
1995 1994
----------- -----------
Land, buildings and leasehold improvements $16,187,000 $ 15,230,000
Equipment, furniture and fixtures 16,391,000 15,509,000
Construction in progress 32,000 108,000
----------- ------------
32,610,000 30,847,000
Less accumulated depreciation and amortization (20,391,000) (18,277,000)
----------- ------------
$12,219,000 $ 12,570,000
=========== ============
Note 6 - Other Assets:
Other assets consist of the following:
June 30
-------
1995 1994
---------- ----------
Cost in excess of net assets acquired $1,466,000 $ 665,000
Deferred lease cost 26,000 38,000
Other assets 698,000 404,000
Loans to officers 410,000 212,000
---------- ----------
$2,600,000 $1,319,000
========== ==========
Cost in excess of net assets acquired includes $823,000 which arose from
the Company's acquisition of the outstanding minority interest in MAC in
November 1994. (See note 4)
In 1991, four executive officers of the Company each agreed to purchase
110,000 (after adjustment for the 10% stock dividend) shares of the
Company's stock from a company owned by the Chairman and Chief Executive
Officer at $2.73 per share pursuant to a Stock Purchase Agreement
("Agreement"). The officers each paid $30,000 in cash, or $120,000, with
the remaining aggregate purchase price of $1,080,000 to be paid over a five
year period ending in 1996. As part of the Agreement to purchase the stock,
the Company agreed to loan the executives the $1,080,000 in quarterly
installments. Beginning in 1994, one fifth of the amount ultimately to be
loaned will be forgiven each year over a five year period ending in 1998
provided each of the officers remains in the employ of the Company.
In 1994, a fifth executive officer of the Company purchased 110,000 shares
(after adjustment for the 10% stock dividend) of the Company's stock from a
company owned by the Chairman and Chief Executive Officer at $2.73 per
share pursuant to a Stock Purchase Agreement similar to the agreements
above. The officer paid $30,000 in cash with the remaining purchase price
of $270,000 to be paid over a five year period ending in 1998.
F-8
36
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995
The Company agreed to loan the executive the $270,000 in quarterly
installments. Beginning in 1996, one fifth of the amount to be loaned, or
$54,000, will be forgiven each year over a five year period ending in 2000
provided the officer remains in the employ of the Company.
For accounting purposes, the amounts subject to forgiveness of $1,080,000
and $270,000 are being treated as additional compensation over the seven
year period from the date of the Agreements through 1998 and 2000,
respectively. The loans to officers are increased by actual amounts
advanced by the Company and are decreased annually, by one-seventh of the
amount to be forgiven, or approximately $154,000 through fiscal 1994 and
$140,000 in 1995. In July 1995, one of the executive officers resigned
resulting in the elimination of any future forgiveness with respect to that
officers loan. In August 1995, the Company repurchased this officers stock
for $453,000, less the balance outstanding on the loan.
Note 7 - Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities consist of the following:
June 30
-------
1995 1994
---------- ----------
Salaries and wages $1,918,000 $1,393,000
Other 1,090,000 685,000
---------- ----------
$3,008,000 $2,078,000
========== ==========
Note 8 - Income Taxes:
The provision for taxes on income from continuing operations consists of
the following:
Year ended June 30
------------------
1995 1994 1993
----------- ----------- -----------
Federal, current $2,565,000 $2,262,000 $ 944,000
State, current 650,000 563,000 240,000
---------- ---------- ----------
3,215,000 2,825,000 1,184,000
Deferred, primarily federal (210,000) (651,000) 229,000
---------- ---------- ----------
Net provision $3,005,000 $2,174,000 $1,413,000
========== ========== ==========
Deferred taxes arise from the recognition of certain items of revenue and
expense for tax purposes in years different from those in which they are
recognized in the financial statements.
F-9
37
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995
Major components of deferred tax assets and liabilities were as follows:
June 30
-------
1995 1994
---- ----
Depreciation/Amortization $150,000 $337,000
Deferred and Prepaid Expenses 275,000 258,000
State Income Taxes (209,000) (191,000)
Allowance for doubtful accounts (244,000) (186,000)
Miscellaneous 36,000
-------- --------
$ 8,000 $218,000
======== ========
The components of the deferred tax provision prior to the adoption of SFAS 109
consisted of:
Year ended June 30
------------------
1993
--------
Excess of book over tax depreciation $ (57,000)
Allowance for bad debts 96,000
Deferred expenses (79,000)
Amortization of officers loans (62,000)
Gain - legal judgement 445,000
State income taxes and miscellaneous (114,000)
--------
$ 229,000
=========
The reconciliation of the federal statutory rate to the Company's effective
tax rate on income is summarized as follows:
Year ended June 30
------------------
1995 1994 1993
---- ---- ----
Computed "expected" tax rate 34% 34% 34%
State income taxes, net of
federal income tax benefit 6 6 6
Other 1 2 2
-- -- --
Effective rate 41% 42% 42%
== == ==
F-10
38
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995
Note 9 - Long-term Debt:
Long-term debt consists of the following:
June 30
-------
1995 1994
----------- -----------
Notes payable to banks $14,870,000 $ 6,251,000
Installment notes, payable to financial
institutions in monthly installments
aggregating approximately $70,000 at
June 30, 1995 including interest from
7.23% to 11.85%, collateralized by
certain assets of the Company and
maturing from 1995 through 1999. 2,075,000 2,288,000
Mortgage payable to financial institution
in monthly principal installments of
$9,750 plus interest at 7.5% per annum,
collateralized by land and building,
maturing in April 2004. 1,034,000 1,151,000
Mortgage payable to financial institution in
monthly installments of $4,447 including
interest at 9% per annum, collateralized by
land and building, maturing in May 2010. 434,000 --
Note payable to seller of assets and
leasehold at Bakersfield, California
due in December 2004, interest at prime
(9.00% at June 30, 1995), collateralized
by property acquired, which is principally
a leasehold. 1,017,000 1,093,000
Note payable to seller of assets and
leasehold at Bakersfield, California
due in November 1997, interest at 10%. 126,000 169,000
Other 155,000 15,000
----------- -----------
19,711,000 10,967,000
Less current portion 2,607,000 2,317,000
----------- -----------
$17,104,000 $ 8,650,000
=========== ===========
F-11
39
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995
Notes payable to banks at June 30, 1995 consists of a term loan in the
amount of $4,752,000, which is payable in monthly payments of approximately
$125,000 plus interest at prime plus 3/4% or LIBOR + 2 1/4% and is
scheduled to mature in August 1998. At June 30, 1995 the Company also has a
revolving credit line that matures in October 1997, bears interest at prime
plus 1/2% or LIBOR + 2% and permits borrowing of up to $16,000,000 subject
to available eligible collateral. At June 30, 1995, there was approximately
$10,118,000 in outstanding borrowings. The term loan and line of credit are
collateralized by substantially all of the Company's assets.
Certain debt agreements contain provisions that require: the maintenance of
certain financial ratios, minimum tangible net worth (as defined) and
minimum working capital levels and limit payments of dividends on common
stock to $250,000 annually, annual capital expenditures and payments under
operating leases.
Long-term debt payable subsequent to June 30, 1995 is as follows:
1996 $ 2,607,000
1997 2,489,000
1998 12,277,000
1999 709,000
2000 249,000
Thereafter 1,380,000
---------
$19,711,000
===========
Note 10 - Series A Preferred Stock:
During fiscal 1994, 478,742 shares of Series A Preferred Stock were
converted into 1,914,968 shares of Common Stock. Also in fiscal 1994, the
Company repurchased and/or redeemed 80,256 shares of Series A Preferred
Stock at a cost of $1,115,000. In addition, 660,320 Series A and Series B
Warrants were exercised resulting in proceeds of $2,400,000 and the
remaining 18,680 Series A and Series B Warrants were redeemed at a cost of
$.10 per Warrant. As a result of these transactions, there are no remaining
outstanding shares of Series A Preferred Stock or Series A and Series B
Warrants as of June 30,1994.
F-12
40
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995
Note 11 - Common Stock:
The Company has 9,000,000 authorized shares of common stock having a par
value of $0.01 per share.
The Company has reserved 639,300 shares of common stock of which 242,800
shares relate to the 1990 Long-Term Incentive Plan; 286,500 shares relate
to the 1990 Directors' Stock Option Plan and 110,000 shares relate to a
special option grant made outside the Company's option plans.
A summary of stock option activity is as follows:
Director's
Long-Term Stock Option
Option Prices Incentive Plan Option Prices Plan
==================================================================
Outstanding July 1, 1992 2.25 - 3.38 135,000 1.875 - 3.00 60,000
Granted 2.125 135,000 2.125 30,000
Cancelled 2.25 - 3.38 (95,000)
------- -------
Outstanding June 30, 1993 2.125 - 3.38 175,000 1.875 - 3.00 90,000
Granted 3.688 25,000 3.688 40,000
Exercised 2.125 - 2.25 (32,500) 1.875 - 2.25 (13,000)
------- -------
Outstanding June 30, 1994 2.13 - 3.688 167,500 1.875 - 3.69 117,000
Granted 7.00 40,000
Exercised 2.125 - 2.25 (54,700) 2.125 - 3.00 (30,500)
------- -------
2.125 - 3.688 112,800 1.875 - 7.00 126,500
10% Stock Dividend 11,280 12,650
Outstanding June 30, 1995 1.93 - 3.35 124,080 1.70 - 6.36 139,150
======= =======
At June 30, 1995, options to purchase 95,150 shares at prices ranging from
$1.70 to $3.35 are exercisable under the Director's Stock Option Plan. All
of the options outstanding under the Long-Term Incentive Plan are
exercisable.
On January 21, 1993, a special option grant for 110,000 shares at $2.12 was
made and is exercisable at June 30, 1995. On August 9, 1993 a special
option grant for 11,000 shares at $2.84 was made and such option was
exercised in March, 1995.
F-13
41
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995
The Company has also reserved 18,335 shares of common stock for issuance
upon exercise of outstanding underwriter warrants which have an exercise
price of $3.44 per share and an expiration date of June 1996. During fiscal
1995, 33,332 warrants were exercised.
All amounts have been restated to include the 10% stock dividend paid on
June 16, 1995.
Note 12 - Commitments and Contingencies:
Leases
The Company is obligated under noncancellable operating leases. Certain
leases include renewal clauses and require payment of real estate taxes,
insurance and other operating costs. Total rental expense on all such
leases for the fiscal years 1995, 1994 and 1993 was approximately
$2,502,000, $2,265,000 and $2,596,000, respectively, net of sublease income
of approximately $230,000 annually. The minimum annual rentals on all
noncancellable operating leases having a term of more than one year at June
30, 1995 are as follows:
1996 $1,836,000
1997 1,836,000
1998 1,815,000
1999 1,686,000
2000 707,000
Thereafter 1,198,000
---------
Total minimum payments required $9,078,000
==========
Litigation
The Company is also a defendant in certain litigation arising in the normal
course of business. In the opinion of management, the ultimate resolution of
such litigation will not have a significant effect on the financial statements.
F-14
42
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995
Note 13 - Major Customers and Foreign Customers:
Revenues from the United States government amounted to approximately 9%,
16% and 15% for fiscal 1995, 1994 and 1993, respectively.
The Company does business with a number of foreign airlines, principally in
the sale of aviation fuels. For the most part, such sales are made within
the United States and utilize the same assets and generally the same
personnel as are utilized in the Company's domestic business. Revenues
related to these foreign airlines amounted to approximately 39%, 45% and
40% of consolidated revenues for the years ended June 30, 1995, 1994 and
1993, respectively.
Note 14 - Earnings Per Share:
Primary earnings per Common Share is computed by dividing net income
available to common stockholders, which gives effect to the cash portion of
the cumulative dividend on preferred stock, by the weighted average number
of common stock and common stock equivalents outstanding during the period.
Options granted to purchase 373,230 shares of common stock under the
Company's Long-Term Incentive Plan and Directors' Stock Option Plan at
exercise prices ranging from $1.70 to $6.36 were included as common stock
equivalents in fiscal 1995 for purposes of computing primary earnings per
share.
Fully Diluted Primary
------------- ---------
Weighted average number of common shares
outstanding during the period 5,420,158 5,420,158
Common stock equivalents resulting from the
assumed excercise of stock options 250,016 235,577
------- -------
Weighted average number of common and
common equivalent shares outstanding
during the period 5,670,174 5,655,735
========= =========
Weighted average outstanding shares and earnings per share have been
retroactively restated to include the 10% stock dividend paid on June 16,
1995 which amounted to the issuance of 501,246 shares.
F-15
43
MERCURY AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
THREE YEARS ENDED JUNE 30,1995
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED):
GROSS PROFIT EARNINGS PER SHARE
SALES AND (OPERATING FULLY
REVENUES INCOME) NET INCOME PRIMARY DILUTED
------------ ------------ ------------ -------- ---------
FISCAL YEAR JUNE 30, 1995
- -------------------------
FIRST QUARTER $ 35,554,000 $ 3,851,000 $ 1,002,000 $ 0.18 $ 0.18
SECOND QUARTER 49,165,000 4,444,000 1,200,000 0.21 0.21
THIRD QUARTER 50,002,000 4,038,000 1,003,000 0.18 0.18
FOURTH QUARTER 48,279,000 4,240,000 1,102,000 0.19 0.19
------------ ------------ ------------ -------- --------
FISCAL YEAR JUNE 30, 1995 $183,000,000 $ 16,573,000 $ 4,307,000 $ 0.76 $ 0.76
============ ============ ============ ======== ========
FISCAL YEAR JUNE 30, 1994
- -------------------------
FIRST QUARTER $ 24,982,000 $ 2,715,000 $ 597,000 $ 0.19 $ 0.12
SECOND QUARTER 26,668,000 3,165,000 817,000 0.31 0.17
THIRD QUARTER 26,613,000 3,349,000 819,000 0.14 0.15
FOURTH QUARTER 24,806,000 3,436,000 762,000 0.11 0.15
------------ ------------ ------------ -------- --------
FISCAL YEAR JUNE 30, 1994 $103,069,000 $ 12,665,000 $ 2,995,000 $ 0.75 $ 0.59
============ ============ ============ ======== ========
F-16
44
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED JUNE 30, 1995
ADDITIONS
------------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER ACCOUNTS- AT END
CLASSIFICATION OF PERIOD EXPENSES DESCRIBE DEDUCTIONS OF PERIOD
- -------------- ---------- ---------- --------------- ---------- ---------
1995
----
Allowance for doubtful accounts $508,000 $905,000 (d) ($803,000) (a) $610,000
======== ======== ============ ========= ========
1994
----
Allowance for doubtful accounts $ 83,000 $624,000 (c) ($199,000) (a) $508,000
======== ======== ============ ========= ========
1993
----
Allowance for doubtful accounts $294,000 $671,000 (b) ($882,000) (a) $ 83,000
======== ======== ============ ========= ========
(a) Accounts receivable write-off
(b) Included in the $671,000 is $414,000 charged to selling, general and
adminstrative expenses and $257,000 recorded as a reduction to revenues.
(c) Included in the $624,000 is $324,000 charged to selling, general and
administrative expenses and $300,000 recorded as a reduction to revenues.
(d) Amount charged to selling, general and administrative expense.
F-17