Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year ended June 30, 1998
[ ] 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
Pacific 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 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 22, 1998, 6,627,446 shares of the Registrant's Common
Stock were outstanding. Of these shares, 2,293,733 shares were held by persons
who may be deemed to be affiliates. The 4,333,713 shares held by non-affiliates
as of September 22, 1998 had an aggregate market value (based on the closing
price of these shares on the American Stock Exchange of $6.75 a share) of
$29,252,563. As of September 22, 1998, there were no non-voting shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement which is to be distributed in
connection with the Annual Meeting of Shareholders to be held on December 3,
1998 are incorporated by reference into Part III of this Form 10-K.
(The Exhibit Index May Be Found at Page 31)
2
PART I
ITEM 1. BUSINESS.
Mercury Air Group, Inc., a New York corporation since 1956, provides a
broad range of services to the aviation industry through four 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 domestic and international
commercial airlines and air freight companies. Cargo operations consist of cargo
handling, space logistics operations and general cargo sales agent services.
Fixed base operations ("FBOs") include fuel sales, into-plane services, ground
support services and aircraft hangar and tie-down facilities for commercial,
private, general aviation and military aircraft. Government contract services
consist of aircraft refueling and fuel farm operation, base housing maintenance,
air terminal operation, weather observation and forecasting and air traffic
control performed principally for agencies of the United States federal
government. In February 1998 consistent with management's goal of increasing
sales from the service sectors, the Company acquired Rene Perez & Associates,
Inc., a developer and installer of airline revenue accounting and related
software, to complement the operations of the existing business units. See
"Business--Recent Developments." As used in this Annual Report, the term
"Company" or "Mercury" refers to Mercury Air Group, Inc. and, unless the context
otherwise requires, its subsidiaries. The Company's principal executive offices
are located at 5456 McConnell Avenue, Los Angeles, California 90066 and its
telephone number is (310) 827-2737.
NARRATIVE DESCRIPTION OF THE BUSINESS
FUEL SALES AND SERVICES
Mercury's fuel sales consist of contract fueling and related fuel
management services. Sales of aviation fuel are made primarily to domestic and
international airline and air freight companies. Mercury also seeks to attract
corporate flight department aircraft as part of the customer base.
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 airports throughout the United States and at
several international airports.
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
2
3
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.
Mercury believes that the extension of credit to smaller, less
well-capitalized or less well-established airlines, including foreign, regional,
commuter and start-up 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 high
credit risk profile and who may otherwise be required to prepay or post letters
of credit for fuel purchases. The amount of credit extended to any particular
customer is a subjective decision. Customer credit terms range from prepayment
to up to 60 days with certain accounts also limited by maximum credit lines. In
certain instances, the Company will permit a customer to further defer payment
on its account through an agreed upon payment schedule or execution of a
promissory note with terms negotiated on a case-by-case basis. Factors
considered in credit decisions include the customer's financial strength and
payment history, competitive conditions in the market, the expected productivity
of the account, the availability of credit insurance and collateral or
guarantees given to secure the credit. On an ongoing basis, Mercury establishes
allowances that in management's judgment are adequate to absorb potential credit
problems reasonably anticipated in the portfolio.
Mercury occasionally purchases equity positions in, makes loans to or
enters into other financial transactions with certain airlines, particularly
start-up and foreign airlines, in order to initiate new or expand existing
customer relationships. The extent of the equity position, amount loaned or
other financial commitment undertaken is a subjective decision based upon
management's assessment of the future prospects of such airline and the
potential business opportunities with such airline for Mercury. Such
investments, however, may result in a financial loss to Mercury. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Mercury purchases fuel at current market prices from a number of
independent and major oil companies based on the expected requirements of its
customers. From time-to-time, Mercury will commit to purchase a fixed volume of
fuel, at a fixed price, over a fixed period of time, at agreed locations based
on selected customers' corresponding purchase commitments. As a result, Mercury
could incur financial loss if a customer with a fixed price contract defaults on
its purchase commitment, in connection with a bankruptcy or for any other
reason, at a time when prevailing market conditions do not permit resale of the
fuel at or above the fixed purchase price. 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. 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.
3
4
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 revenue from fuel sales and services constituted
approximately 65% to 75% of total revenue during the last two fiscal years.
Mercury's consolidated fuel sales could be materially adversely affected by a
significant decrease in the availability, or increase in the price of, aviation
fuel. Although Mercury believes that there are currently adequate aviation fuel
supplies and that aviation fuel supplies will generally remain available, events
outside Mercury's control have resulted and could result in spot shortages or
rapid increases in fuel costs. Although Mercury is generally able to pass
through rising fuel costs to its customers, extended periods of high fuel costs
could adversely affect Mercury's ability to purchase fuel in sufficient
quantities because of credit limits placed on Mercury by its fuel suppliers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Various factors including the
price of fuel, the volatility of the price of fuel, over-all business mix,
customer profiles and specific major accounts which are attracted, retained or
lost during a given period affect gross margin as a percentage of revenue for
Mercury's fuel sales and service business.
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. Subsequent to the February 1998 acquisition,
the activities of Rene Perez & Associates, Inc., a developer and installer of
airline revenue accounting and related software, have also been considered part
of the fuel sales and services unit. See "Business--Recent Developments."
4
5
FIXED BASE OPERATIONS
Mercury currently provides FBO services at thirteen (13) airports
throughout the United States. At each FBO, Mercury maintains administrative
offices; conducts retail fuel sales and refueling operations which service
principally corporate and private aircraft ("general aviation") and to some
extent commercial airlines; and acts as a landlord for office, aircraft tie-down
and hangar space tenants. 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 "Business--Properties."
The Company's FBO operations have grown principally as a result of
acquisition of additional operations or locations or facilities enhancements at
existing locations. In October 1997, the Company entered into a new lease for
its Burbank FBO pursuant to which it will construct new hangars and an executive
terminal and refurbish certain existing facilities. In July 1997, the Company
acquired certain assets of an FBO located in Nashville, Tennessee. In June 1997,
the Company entered into an agreement to operate an FBO, which is presently
under construction and expected to open in November 1998, in Charleston, South
Carolina. See "Business--Recent Developments." In December 1996, the Company
acquired an FBO located in Fresno, California. In August and November 1996, the
Company acquired certain assets of six FBOs from Raytheon Aircraft Services,
Inc. Management intends to continue pursuing FBO acquisitions and facility
enhancements but no assurance can be given that acquisition or enhancement
opportunities will be available at prices which will maintain existing
profitability.
CARGO OPERATIONS
The Company's cargo operations are conducted through its wholly-owned
subsidiary, Mercury Air Cargo, Inc. ("MAC"), which provides the following
services: cargo handling, space logistics and general cargo sales agent
services. Each of MAC's services facilitates the movement of domestic and
international cargo. Accordingly, results for MAC's operations depend, in part,
on certain economic factors which affect the volume of cargo transported
throughout the world.
Cargo Handling. MAC provides domestic and international air cargo handling, air
mail handling and bonded warehousing. MAC is one of only three non-airline
providers of contractual cargo containerization and palletization for
international carriers and 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, builds-up pallets and loads containers for shipping.
MAC handles cargo at LAX, Miami International Airport, William B.
Hartsfield International Airport (Atlanta, Georgia) and airports located in
Montreal and Toronto, Canada. In March 1998, MAC expanded its cargo handling
operations by acquiring the assets of Intermodal located in Atlanta, Georgia. In
April 1998, MAC completed construction and commenced operation
5
6
of a 174,000 square foot warehouse at LAX under a five year lease. See
"Business--Properties and Recent Developments." MAC competes in the cargo
handling business based on quality and price of service. Continuous, long-term
growth in MAC's cargo handling operations can only be realized by maintaining
existing and obtaining new locations or expanding current warehouse facilities.
Space Logistics. MAC brokers cargo space on international flights to Europe,
the Middle East, Australia, Mexico and Central and South America. Space
logistics involves contracting for cargo space on airlines and subsequently, on
MAC's own air waybills, 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 air waybills.
Unlike an air cargo company which operates its own aircraft, MAC's
space logistics 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 operating
aircraft. MAC purchases cargo space from a number of airlines worldwide. In some
instances, MAC enters into long-term, fixed minimum commitments for cargo space,
in order to obtain exclusive or preferred rights to broker desirable cargo
space. Consequently, MAC could lose money if it is unable to sell the committed
space profitably. With its large volume of cargo space purchases and its ability
to negotiate among airlines, MAC adds value for its customers and is able to
attract business by offering favorable pricing. MAC records revenues as the
difference between the cost of the space and the amount at which the space is
resold.
General Sales Agent Services. MAC also serves as general cargo sales agent for
airlines in the Far East, Canada, Mexico, Central and South America and in the
United States. In this capacity, MAC sells the transportation of cargo on client
airlines' flights, using the client airlines' own air waybills. MAC earns
commissions from the airlines for selling air cargo space. As with its space
logistics operations, the growth potential for MAC'S general cargo sales agent
business is not limited by requirements for physical facilities or by
requirements for additional capital investments.
GOVERNMENT CONTRACT SERVICES
Mercury conducts its government contract services business through its
subsidiary, Maytag Aircraft Corporation ("Maytag"), which is headquartered in
Colorado Springs, Colorado.
Maytag provides aircraft refueling and related services at twelve
United States military bases, including eleven in the United States and one in
Greece. Maytag's refueling contracts generally have a term of four years, with
expiration dates for current contracts ranging from September 1999 to November
2002. Refueling contracts provide a firm fixed-price for specified services.
Under the terms of its refueling contracts, Maytag supplies all necessary
personnel and equipment to operate government-owned fuel storage facilities and
to provide 24-hour refueling services for a variety of aircraft for the
military. All fuel handled in these operations is government owned. In
connection
6
7
with its government contract refueling business, Maytag owns and operates a
fleet of refueling trucks and other support vehicles.
In addition, Maytag provides air terminal services to the United States
Government at three United States military bases in Alaska, Japan and Korea and
at fifteen private, international airports in Japan, Korea, Central and South
America. Air terminal services contracts are generally for a base period of up
to one-year with government options for multiple one-year extension periods.
Maytag's six air terminal service contracts, one of which covers thirteen
locations in Central and South America, all expire September 1999, with either
one or two extension options remaining. Air terminal contracts provide a firm
fixed-price for specified services. Discretionary performance based awards are
also available at locations outside Central and South America. Air terminal
services include the loading and unloading of passengers and cargo, transient
alert and flight planning services.
Maytag also provides base housing maintenance services at one United
States military base in Japan under a contract which expires September 1999,
subject to a one-year extension at the government's option. The base housing
maintenance contract provides for "indefinite quantity pricing" or fixed prices
for specified goods and services, with the actual quantities of each item
required determined by seasonally varying government delivery orders. Base
housing maintenance services consist of change of occupancy maintenance for
government provided quarters, including basic interior maintenance, cleaning,
repair and painting.
Effective August 1, 1998, Maytag acquired the government contracts and
related assets of Weather Data Services, Inc. See "Business--Recent
Developments." The Weather Data business consists of weather observation,
weather forecasting and air traffic control services performed in various
combinations at sixty-two locations throughout the United States pursuant to
thirty-eight contracts with the United States government and certain local
governmental agencies. The Weather Data contracts are generally for a base
period of up to one-year, with multiple one-year extension options at the
government's election. Substantially all of Weather Data's existing contracts
have been extended for a one-year period ending September 1999, with remaining
one year extension options ranging from none to three. The Weather Data
contracts provide firm fixed-prices for specified services.
Maytag's government contracts are subject to competitive bidding.
Refueling, base housing maintenance and air terminal contracts are generally
awarded to the bidder with the proposal which represents the "best value" to the
government. Weather Data contracts have historically been awarded to the bidder
with the lowest priced technically acceptable proposal. Maytag anticipates that
Weather Data contracts will be awarded to some extent in the future on the basis
of "best value." In a "best value" competition, the proposals are evaluated on
the basis of price, prior performance history of the bidder and the merit of the
technical proposal, creating a more subjective process.
Maytag's contracts 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
7
8
costs will be paid to Maytag. Termination may also occur if Maytag defaults
under a contract. Maytag has never experienced any such default termination.
RECENT DEVELOPMENTS
LAX CARGO WAREHOUSE
On June 18, 1996, the Company entered into a five year lease with the
Los Angeles Department of Airports ("DOA") for a 174,000 square foot cargo
warehouse. The Company remodeled and reconstructed portions of this cargo
facility at a cost of approximately $9,600,000. The LAX warehouse facility
commenced operations in April 1998. During the first eighteen months of the
lease, the Company paid $50,000 annually in rent, following which rent increased
to $174,000 per month. Commencing with the nineteenth month, the DOA began
reimbursing the Company's construction costs through monthly rent credits at the
rate of approximately $123,000 per month up to approximately $7,400,000. If the
lease is not renewed after sixty months, the unreimbursed portion of
construction costs, up to the $7,400,000 maximum, will be paid by the DOA to
Mercury.
CHARLESTON FBO
In June 1997, the Company entered into a ten year operating agreement
with the Charleston Aviation Authority (the "Charleston Authority") pursuant to
which the Company obtained the right to operate an FBO at the Charleston
International Airport in Charleston, South Carolina for ten years. Under the
agreement, the Charleston Authority will construct an FBO facility, including
executive terminal, aircraft hangar, aircraft ramp and tie-downs. The Company
will pay a percentage of the construction costs, presently estimated at
$800,000, which will be amortized over twenty years. If the lease is not renewed
or terminates for any reason other than default by the Company, the unamortized
portion will be reimbursed to the Company. The Charleston FBO is presently
scheduled to open in November 1998.
ACQUISITION OF ASSETS OF WEATHER DATA SERVICES, INC.
On August 1, 1998, Mercury acquired thirty-eight government contracts
and related assets to perform a combination of weather observation, weather
forecasting and air traffic control services at sixty-two locations from Weather
Data Services, Inc., an Iowa Corporation ("Weather Data"), for $3,500,000,
including $2,500,000 in cash and $1,000,000 of the Company's Common Stock
(subject to increase by up to 39,130 shares to the extent that the market value
of the shares originally issued is less than $1,000,000 on August 1, 1999). The
Weather Data transaction was completed, subject to a rescission right, in the
event that the government does not consent to novation of 80% or more of the
government contract backlog on or before January 1, 1999. The Company's Common
Stock and $2,000,000 of the cash purchase price have been held in escrow to
secure the recission right. The Company has already obtained certain novation
consents and believes that the balance will be obtained by the January 1, 1999
deadline.
8
9
ACQUISITION OF RENE PEREZ & ASSOCIATES, INC.
On February 27, 1998, the Company acquired all of the outstanding
capital stock of Rene Perez & Associates, Inc., a Florida corporation ("RPA"), a
developer and installer of airline revenue accounting and related software,
located in Miami, Florida, for $4,220,000. The purchase price consisted of
$3,000,000 in cash and 160,000 shares of Mercury Common Stock valued at
$1,220,000 based on the closing price of $7.625 per share.
ACQUISITION OF ASSETS OF INTERMODAL
On March 31, 1998, the Company acquired the assets, including
leaseholds, contract rights, equipment and operating rights, of a cargo handling
company located at William B. Hartsfield International Airport in Atlanta,
Georgia from Corporate Express Delivery Leasing--Southeast, Inc. for $422,000 in
cash.
ACQUISITION OF AERO FREIGHTWAYS INC.
On January 16, 1998, the Company acquired all of the outstanding stock
of Aero Freightways Inc., a general cargo sales agent located in Ontario,
Canada. The purchase price consisted of a variable capital debenture with a face
value of $227,000 which is payable over three years.
BURBANK FBO
In October 1997, the Company entered into a new lease for its Burbank
FBO with the Burbank-Glendale-Pasadena Airport Authority. Pursuant to the terms
of the lease, the Company will construct new hangar and executive terminal
facilities and will refurbish some of its existing facilities at a cost of
approximately $9.0 million. Upon completion of the construction, the Company's
lease will be extended through 2025. The Company anticipates completion of the
new hangars in the spring of 1999 and the executive terminal in the summer of
1999.
MAJOR CUSTOMERS
During fiscal 1998, EVA Airways Corporation accounted for approximately
16% of cargo operations revenue and Western Pacific Airlines, Inc., which ceased
operations in February 1998, accounted for 15% of fuel sales and service
revenues. During fiscal 1998, government contract services consisted entirely of
revenues from agencies of the United States Government. No other customers
accounted for over 10% of Mercury's consolidated revenue or 10% of revenues for
any of the four operating units.
SEASONAL NATURE OF BUSINESS
Mercury's commercial fuel sales, FBOs and aircraft support operations
are seasonal in nature, being relatively stronger during the months of April
through September in its fueling operations and
9
10
FBOs than during the months of October through March. Commercial air traffic and
traffic at the FBOs is reduced during the winter months due in part to weather
conditions and increased during the summer months due in part to additional
commercial flights and more recreational flying. Mercury's cargo business is
relatively stronger during the months of October through March than during the
months of April through September. The cargo business is affected by the
patterns for commercial and retail inventory build-ups in international trade.
Operations at military facilities are not seasonal.
POTENTIAL LIABILITY AND INSURANCE
Mercury's business activities subject it to risk of significant
potential liability under federal and state statutes, common law and contractual
indemnification agreements. Mercury reviews the adequacy of its insurance on an
on-going basis. Mercury believes it follows generally accepted standards for its
lines of business with respect to the purchase of business insurance and risk
management practices. The Company purchases airport liability and general and
auto liability in amounts which the Company believes are adequate for the risks
of its business.
COMPETITION
Mercury competes with major companies which maintain their own source
of aviation fuel and with other aircraft support companies whose total sales and
financial resources far exceed those of Mercury. In addition, certain airlines
provide cargo and fueling services comparable to those furnished by Mercury. At
LAX, Mercury competes with, in addition to the airlines, three independent fuel
delivery services providers and primarily with one non-airline entity with
respect to air cargo handling. In Miami and for Canadian operations, Mercury
competes with airlines and several other non-airline entities for air cargo
handling business. Generally, FBOs have a minimum of one competitor at each
airport. Mercury has many principal competitors with respect to government
contracting services including certain small disadvantaged businesses which
receive a ten percent (10%) cost advantage with respect to certain bids and set
asides of certain contracts. Substantially all Mercury's services are subject to
competitive bidding. Mercury competes on the basis of price and quality of
service.
ENVIRONMENTAL MATTERS
Mercury must continuously comply with federal, state and local
environmental statutes and regulations associated with its numerous underground
fuel storage tanks. These requirements include, among other things, tank and
pipe testing for tightness, soil sampling for evidence of leaking and
remediation of detected leaks and spills. 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. Mercury knows of no basis for any notice of violation or cease
and abatement proceeding by any governmental agency as a result of failure to
comply with applicable environmental laws and regulations.
10
11
In order to comply with applicable federal standards for underground
fuel storage systems, the Company will either retrofit, replace or cease
operating all existing, owned underground fuel storage systems by January 1,
1999. Retrofit requirements include installation of cathodic protection, spill
containment and automatic shut-off devices. The Company will elect, to the
extent permitted by applicable regulations, to construct new, above-ground fuel
storage systems which the Company believes will be cost effective by rendering
inapplicable existing underground fuel storage taxes. The Company has developed
site specific plans and budgets for this compliance project which call for a
capital expenditure of approximately $2.5 million. The Company anticipates
completion of all contemplated fuel farm retrofit and replacement projects by
the January 1, 1999 deadline. Any unexpected delay, however, could require
closure of a fuel farm facility and adversely affect the Company's
profitability. See "Business--Properties." While the system retrofits and
replacements will reduce future environmental contamination risks, excavation
associated with the work may uncover previously unsuspected contamination which
may require remediation.
EMPLOYEES
As of August 31, 1998, Mercury employed 1241 full-time and 366
part-time persons in its following operating units: fuel sales and services, 264
full-time and 6 part-time persons; cargo handling, 299 full-time and 3 part-time
persons; FBOs, 299 full-time and 40 part-time persons; and government contract
service, 379 full-time and 317 part-time persons. Mercury is in the process of
negotiating a collective bargaining agreement for its government refueling
operation at Point Mugu, California. Maytag has collective bargaining agreements
which affect approximately 133 employees in its Weather Data operation.
Management believes that, in general, wages, hours, fringe benefits and other
conditions of employment offered throughout Mercury's operations are at least
equivalent to those found elsewhere in its industry and that its general
relationship with its employees is satisfactory.
ITEM 2. PROPERTIES.
Listed below are the significant properties leased or owned by Mercury
as of September 15, 1998:
LEASED
OR ANNUAL EXPIRATION FACILITY
LOCATION OWNED RENTAL OF LEASE ACTIVITY AT FACILITY DESCRIPTION
-------- ----- ------ -------- -------------------- -----------
CORPORATE
HEADQUARTERS
- ------------
5456 McConnell Owned N/A N/A Landlord, executive and 20,000 sq.ft.
Los Angeles, support personnel building
California (2) offices
11
12
MAYTAG OPERATIONS
6145 Lehman Drive, Owned N/A N/A Landlord, executive and 8,000 sq.ft. offices
Suite 300 support personnel
Colorado Springs, offices
CO (3)
RPA BUILDINGS
129 S.W. 36th Court Owned N/A N/A Land 10,846 sq. ft.
Miami, FL
101 S.W. 36th Court Owned N/A N/A Land 7,210 sq. ft.
Miami, FL
119 S.W. 36th Court Owned N/A N/A Office Building 1,401 sq. ft.
Miami, FL
115 S.W. 36th Court Owned N/A N/A Office Building 3,865 sq. ft.
Miami, FL
2000 N.W. 89th PL Owned N/A N/A Office Building 22,400 sq. ft.
Miami, FL (4) Office Building
HARTSFIELD ATLANTA
INT'S AIRPORT
996 Toffie Terrace Leased $550,100 May Cargo handling 71,100 sq. ft. of
Atlanta, GA (6) 2000 warehouse with offices cargo warehouse
facility with 3,350
sq. ft. of offices on
5.3 acres
LOS ANGELES INT'L
AIRPORT
6851 W. Imperial Leased $469,000 December Cargo hangar, with 60,000 sq.ft. of
Highway, 1999 offices and executive offices and cargo
Los Angeles, CA offices rented to warehouse facility
customers on 5.5 acres.
6060 Avion Drive Leased $2,088,000 June Cargo handling 174, 000 sq.ft.
Los Angeles, CA 2001 warehouse with offices offices and cargo
warehouse facility
12
13
LESTER B. PEARSON
INT'L AIRPORT
Building D Leased $144,000 month to Cargo handling 16,870 sq. ft.
Toronto, AMF month warehouse with offices warehouse space
Ontario and 4,556 sq. ft. of
offices
DORVAL INT'L AIRPORT
800 Stuart Graham Leased $474,000 November Cargo handling 51,000 sq.ft.
Blvd. South 2007 warehouse with offices warehouse and
Dorval, Quebec 2,432 sq.ft. of
office space
MIRABEL INT'L
AIRPORT
12005, Rue Cargo Leased $50,400 November Cargo handling 12,500 sq.ft.
A-3, Suite 102 2005 warehouse with offices warehouse
Mirabel, Quebec
MIAMI INT'L AIRPORT
2261 N.W. 66th Ave, Leased $683,000 September Cargo handling 47,500 sq.ft.
Bldg. 702 2001 warehouse with offices warehouse and
Miami, FL 43,200 sq.ft. of
office space
LOS ANGELES INT'L
AIRPORT
7000 World Way Leased $305,000 Month-to- Service and refueling of 2,000 sq.ft. of
West Los Angeles, Month private aircraft executive terminal
CA on 1.93 acres
ONTARIO INT'L
AIRPORT
2161 East Avion St. Leased $226,000 April Landlord, service and 60,000 sq.ft. of
Ontario, CA (1) 2008 refueling of commercial offices and
and private aircraft hangars on 15.4
acres
13
14
BAKERSFIELD AIRPORT
1601 Skyway Drive Leased $22,000 February Offices and refueling of 2,000 sq. ft.
Bakersfield, CA 2008 commercial and private building on 5.0
aircraft acres
1801 Skyway Drive Leased $44,000 February Landlord, service and Three buildings
Bakersfield, CA 2008 refueling of commercial totaling 49,200 sq.
and private aircraft ft. on 17.2 acres
1201 Skyway Drive Leased $46,000 June 2001 Landlord, service and 30,000 sq. ft.
Bakersfield, CA refueling of commercial hangar on 2.7
and private aircraft acres
1301 Skyway Drive Leased $21,000 Month-to- Landlord, service and 1,200 sq. ft.
Bakersfield, CA Month refueling of commercial building on 10.86
and private aircraft acres
1550 Skyway Drive Leased $25,000 March Landlord, service and 35,940 sq. ft.
Bakersfield, CA 2015 refueling of commercial executive offices
and private aircraft and terminal and
hangars on 6.14
acres
BURBANK-GLENDALE-
PASADENA AIRPORT
4301/4405/4407/440 Leased $1,391,661 December Landlord, service and 156,200 sq. ft. of
9/4411/4531 Empire 2000 refueling of commercial offices, hangars,
Avenue and private aircraft and shop facilities
10660/10670/10700/
10750/10760/10800/ 710,508 sq. ft. of
10820 Sherman offices, hangars
Way, Burbank, CA and shop facilities
(7) on 16.3 acres
6920 Vineland Ave. Leased $187,000 November Landlord, service and 5,200 sq. ft. of
No. Hollywood, CA 1999 refueling of commercial offices, hangars
and private aircraft and shop facilities
CHARLESTON
INTERNATIONAL
AIRPORT
6060 S Aviation Wy. Leased $161,160 August Terminal, office, and 9,000 sq. ft.
N. Charleston, SC 2007 hanger officer Building
(5) 35,000 sq. ft.
Aircraft Hanger
59,000 sq. ft.
parking lot
14
15
SANTA BARBARA
MUNICIPAL AIRPORT
404 Moffet Road Leased $103,000 Month-to- Landlord, service, 5,120 sq.ft.
Goleta, CA Month maintenance, and terminal office
refueling of commercial space and 2
and private aircraft hangars totaling
13,120 sq. ft.
FRESNO YOSEMITE
INT'L AIRPORT
5045 E. Anderson Leased $74,000 April 2020 Landlord, service and 8.47 acres.
Avenue refueling of commercial
Fresno, CA and private aircraft
5045 E. Anderson Leased $3,000 February Landlord, service and 250 sq. ft. of
Avenue 2001 refueling of commercial general
Fresno, CA and private aircraft office/storage
5045 E. Anderson Leased $67,000 August Terminal, office and Hangars and
Avenue 2006 hangar facility offices on 2.16
Fresno, CA acres
5045 E. Anderson Leased $6,000 October Refueling of private and 12,320 sq.ft. fuel
Avenue 2000 commercial aircraft farm
Fresno, CA
5045 E. Anderson Leased $115,000 May 2005 Hangar and commercial 22,000 sq.ft. office
Avenue office space space on 19.26
Fresno, CA acres
WM. B. HARTSFIELD
INT'L AIRPORT
1200 Toffie Terrace Leased $107,000 March Landlord, service and 4,800 sq.ft. of
Atlanta, GA (1) 2002 refueling of commercial offices and ramp
and private aircraft area on 11.2 acres
DEKALB-PEACHTREE
AIRPORT
1951 Airport Road Leased $210,000 November Landlord, service and 164,288 sq.ft. of
Atlanta, GA (1) 2006 refueling of commercial offices and
and private aircraft hangars on 22.46
acres
15
16
L.G. HANSCOM FIELD
AIRPORT
180 Hamscom Drive Leased $191,000 May 2012 Landlord, service, 5,000 sq. ft.
Bedford, MA (1) maintenance and terminal and 2
refueling of commercial hangars
and private aircraft totaling 36,000 sq.
ft. on 22.86 acres
RENO CANNON INT'L
AIRPORT
655 So. Rock Blvd. Building $12,000 June 2017 Landlord, service and 33,000 sq.ft. of
Reno, NV owned, refueling of commercial, hangars and
land private and military administrative
rented aircraft building on 23.7
acres of land
ADDISON AIRPORT
4400 Glenn Curtiss Leased $298,000 September Landlord, service and 49,472 sq. ft. of
Dr. 2021 refueling of commercial offices and
Dallas, TX (1) and private aircraft hangars on 2.80
acres
4400 Glenn Curtiss Leased $51,000 June 2022 Landlord, service and 57,949 sq.ft. of
Dr. refueling of commercial offices and hangar
Dallas, TX (1) and private aircraft space on 6.28
acres
4400 Glenn Curtiss Leased $8,000 July 2021 Landlord, service and 12,600 sq.ft. of
Dr. refueling of commercial offices and hangar
Dallas, TX (1) and private aircraft space
4400 Glenn Curtis Leased $28,000 December Fuel farm
Dr. 2000
Dallas, TX (1)
CORPUS CHRISTI
355 Pinson Drive Leased $19,000 October Landlord, service and 66,096 sq.ft. of
Corpus Christi, TX 2009 refueling of commercial offices and
(1) and private aircraft hangars on 6.69
acres
NASHVILLE INT'L
AIRPORT
635 Hangar Lane Leased $247,000 June 2012 Landlord, service and Office and hangars
Nashville, TN refueling of commercial on 38.69 acres
and private aircraft
16
17
(1) The leasehold interest is subject to a security interest granted to
Raytheon Aircraft Services, Inc. assigned to General Electric Capital
Corporation.
(2) This property was purchased in April 1994 for $1,800,000 and is subject to
a first mortgage in the sum of $ 682,500 at June 30, 1998 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 was purchased in May 19, 1995 for $515,000 and is subject to
a first mortgage in the sum of $387,000 at June 30, 1998 repayable with
interest at 9% in equal monthly installments of approximately $4,450, the
last payment due May 2010.
(4) This property was purchased in June 1998 for $2,000,000 and is subject to a
first mortgage in the sum of $1,600,000 at June 30, 1998 repayable in equal
monthly installments of principal of $13,333, plus interest at LIBOR plus
2% per annum, the last payment due in June 2008.
(5) This lease will go into effect once occupancy occurs.
(6) This lease is subject to the right of Delta to exercise an option to
acquire the property upon a two year notice.
(7) This lease is subject to an automatic extension of the initial term upon
substantial completion of construction. The automatic extension will extend
the term until April 2025.
At each of the locations where Mercury conducts its refueling
business, including thirteen commercial locations and twelve military locations,
Mercury's operations are dependent on a fleet of refueling vehicles. These
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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
At most commercial airports where Mercury operates FBOs, Mercury
maintains its own fuel storage capabilities. On or before January 1, 1999,
Mercury must replace, retrofit or close most of its existing underground fuel
storage facilities in order to comply with applicable federal
regulations.
See "Business--Environmental Matters" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The following table summarizes Mercury's existing and contemplated
fuel storage facilities.
17
18
Approximate Proposed
Capacity Upgrade
Location (gallons) (gallons)
- -------- ----------- ---------
Los Angeles, California 310,000(UG) 310,000(UG)(1)
Bakersfield, California 105,000(UG) 98,000(AG)
Burbank, California 119,000(UG) ----(2)
Santa Barbara, California 42,000(UG) ----(3)
Reno, Nevada 100,000(AG) 100,000(AG)(4)
Ontario, California 86,000(UG) 86,000(UG)(1)
Dallas, Texas 57,000(UG) 57,000(UG)(5)
Corpus Christi, Texas 22,000(AG) 22,000(AG)(4)
Atlanta, Georgia (Hartsfield) 48,000(AG) 48,000(AG)(4)
Atlanta, Georgia(Peachtree) 48,000(AG) 48,000(AG)(4)
Fresno, California 121,000(UG) 73,000(AG)
Bedford, Massachusetts 32,000(AG) 32,000(AG)(4)
Nashville, Tennessee --- 26,000(AG)
Charleston, South Carolina --- 25,000(AG)
(AG) = Above-ground fuel storage
(UG) = Under-ground fuel storage
(1) Retrofit of existing system.
(2) System will be closed with consortium fuel farm used as an alternative.
(3) Interim operations without a fuel farm pending determination of long-term
status of the location.
(4) No modification required.
(5) Facility owned by a third-party who will perform required modification, if
any.
Subject to completion of the fuel farm upgrade projects on schedule,
management believes that Mercury's property and equipment are adequate for its
present business needs. Mercury fully utilizes the real properties it owns or
leases for its business. Mercury's operating profits are substantially dependent
on a number of its leased facilities which enjoy strategic airport locations and
could be adversely affected by a failure to obtain alternative facilities or
renew a lease at expiration.
ITEM 3. LEGAL PROCEEDINGS.
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.
18
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Mercury's Common Stock is listed and traded on the AMEX under the
Symbol "MAX". The table below sets forth, for the quarterly periods indicated,
the high and low closing sale prices per share of Common Stock. All per share
stock price information has been adjusted to reflect the April 11, 1997 5-for-4
stock split.
High Low
---- ---
FISCAL 1998:
Quarter ended September 30, 1997............................... $ 7.38 $5.94
Quarter ended December 31, 1997................................ 7.50 5.38
Quarter ended March 31, 1998................................... 9.00 5.81
Quarter ended June 30, 1998.................................... 8.19 7.13
FISCAL 1997:
Quarter ended September 30, 1996............................... $ 6.40 $5.50
Quarter ended December 31, 1996................................ 6.30 5.50
Quarter ended March 31, 1997................................... 6.40 5.60
Quarter ended June 30, 1997.................................... 6.50 5.63
As of September 9, 1998, there were approximately 378 holders of record.
During Fiscal 1997, Mercury paid approximately $321,000, at the rate of
$.0125 per share, in quarterly dividends on its Common Stock. In September 1997,
the Company's Board of Directors terminated the quarterly dividend plan in favor
of allocating these funds towards repurchasing Company common shares in the open
market from time to time. Mercury intends to review its dividend policy from
time to time in light of Mercury's earnings, financial condition and other
relevant factors, including applicable covenants in debt and other agreements.
In this regard, Mercury's loan agreement with its lenders prohibits the payment
of cash dividends.
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
19
20
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)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
OPERATING DATA
SALES AND REVENUES $240,111 $279,380 $225,374 $183,000 $103,069
COSTS AND EXPENSES 211,981 256,310 206,960 166,427 90,404
------------ ------------ ------------ ------------ ------------
GROSS MARGIN 28,130 23,070 18,414 16,573 12,665
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,161 6,296 5,106 4,458 3,847
PROVISION FOR BAD DEBTS 1,971 1,810 945 905 414
DEPRECIATION AND AMORTIZATION 5,040 3,953 2,818 2,409 2,049
LOSS RESULTING FROM BANKRUPTCY 7,050 - - - -
OF A CUSTOMER
INTEREST EXPENSE 3,542 3,393 2,375 1,478 1,080
OTHER EXPENSE (INCOME) (595) 370 (596) 11 106
------------- ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,961 7,248 7,766 7,312 5,169
PROVISION FOR INCOME TAXES 1,934 2,869 3,086 3,005 2,174
------------ ------------ ------------- ------------- -------------
NET INCOME $3,027 $4,379 $4,680 $4,307 $2,995
============ ============ ============ ============ ============
NET INCOME PER SHARE:
BASIC $0.42 $0.58 $0.63 $0.58 $0.57
DILUTED $0.38 $0.49 $0.56 $0.55 $0.43
BALANCE SHEET DATA At June 30,
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS $111,741 $92,637 $ 79,123 $54,210 $35,442
SHORT-TERM DEBT (INCLUDING
CURRENT PORTION OF LONG-TERM
DEBT) 3,732 1,878 2,555 2,607 2,317
20
21
LONG-TERM DEBT 30,619 15,195 6,893 17,104 8,650
CONVERTIBLE SUBORDINATED
DEBENTURES 28,090 28,115 28,115 - -
DIVIDENDS PER COMMON SHARE - .0425 .0425 0.02 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS - FISCAL 1998, 1997 AND 1996.
The following tables set forth, for the periods indicated, the revenues and
gross margin for each of the Company's four operating units, as well as selected
other financial statement data.
Year Ended June 30,
-----------------------------------------------------------------------------------
($ in millions)
-----------------------------------------------------------------------------------
1998 1997 1996
% of % of % of
Amount Total Amount Total Amount Total
Revenues Revenues Revenues
----------- ------------ ---------- ------------ ---------- ----------
Revenues:
Fuel Sales and Services $156.5 65.2% $207.8 74.4% $178.6 79.3%
FBOs 45.1 18.8 36.5 13.1 17.4 7.7
Cargo Operations 21.5 8.9 18.8 6.7 15.5 6.9
Government Contract Services 17.0 7.1 16.3 5.8 13.8 6.1
------ ---- ------ ---- ------ ------
Total Revenues $240.1 100% $279.4 100% $225.4 100%
====== ==== ====== ==== ====== ======
Amount % of Unit Amount % of Unit Amount % of Unit
Revenues Revenues Revenues
----------- ------------ ---------- ------------ ---------- ----------
Gross Margin (1):
Fuel Sales and Services $ 8.6 5.5% $8.6 4.1% $ 7.9 4.4%
FBOs 9.7 21.5 6.2 16.8 2.8 16.0
Cargo Operations 5.3 24.8 5.0 26.9 4.7 30.5
Government Contract Services 4.5 26.7 3.3 20.5 3.0 21.7
----- ----- ----- ---- ----- ----
Total Gross Margin $28.1 11.7% $23.1 8.3% $18.4 8.2%
===== ===== ===== ==== ===== ====
21
22
% of % of % of
Amount Total Amount Total Amount Total
Revenues Revenues Revenues
----------- ------------ ---------- ------------ ---------- ----------
Selling, General and Administrative $6.2 2.6% $6.3 2.3% $5.1 2.3%
Provision for Bad Debts 2.0 .8 1.8 .6 0.9 0.4
Depreciation and Amortization 5.0 2.1 4.0 1.4 2.8 1.3
Loss Resulting from Bankruptcy of a 7.1 2.9
Customer
Interest Expense and Other 2.9 1.3 3.8 1.3 1.8 0.8
--- --- ---- ---- ----- ----
Income before Income Taxes 4.9 2.1 7.2 2.6 7.8 3.4
Provision for Income Taxes 1.9 .8 2.9 1.0 3.1 1.4
---- --- ---- ---- --- ----
Net Income $3.0 1.3% $4.4 1.6% $4.7 2.1%
==== === ==== ==== ==== ====
(1) Gross Margin as used here and throughout Management's discussion excludes
depreciation and amortization and selling, general and administrative expenses.
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Revenue decreased 14.1% to $240.1 million in fiscal 1998 from $279.4
million in fiscal 1997. Gross margin increased 21.9% to $28.1 million in fiscal
1998 from $23.1 million in fiscal 1997.
Revenues from fuel sales and services represented 65.2% of total
revenues in fiscal 1998 compared to 74.4% of total revenue in fiscal 1997.
Revenues from fuel sales and services in fiscal 1998 decreased 24.7% to $156.5
million from $207.8 million in fiscal 1997. The decrease in revenues from fuel
sales and services was due to a decrease in both the price of fuel and volume of
fuel sold. The volume of fuel sold declined as a result of the loss of Western
Pacific Airline, Inc's ("WPAI") business, which constituted 15% of fuel sales
and service revenue in both periods, in February 1998 when the carrier ceased
operations, and the loss of certain other customers. Average fuel prices
decreased approximately 14% in fiscal 1998 as compared to fiscal 1997. Gross
Margin from fuel sales and services was $8.6 million in fiscal 1998 and fiscal
1997. Gross margin as a percentage of revenue increased in fiscal 1998 to 5.5%
from 4.1% in fiscal 1997. Because the Company prices its fuel on a per gallon
basis, gross margin as a percentage of revenue was enhanced as a result of the
lower per gallon price of fuel in fiscal 1998 as compared to fiscal 1997 and due
to an absolute increase in average per gallon margins. Revenues and gross
margins from fuel sales and services include the activities of Mercury's
contract fueling business as well as activities from a number of other
commercial services including the provision of certain refueling services, non-
aviation fuel brokerage and other services managed at LAX as part of Mercury's
fuel sales and
22
23
service operations. In addition, fuel sales and services include the activities
of Mercury's wholly owned subsidiary, RPA, a developer and installer of airline
revenue accounting and related software, subsequent to its acquisition in
February 1998. Revenues from RPA in fiscal 1998 were approximately $1.6 million.
Revenues from FBOs in fiscal 1998 increased 23.5% to $45.1 million from
$36.5 million in fiscal 1997 and increased as a percentage of total revenues to
18.8% in fiscal 1998 from 13.1% in fiscal 1997. The increase in revenue for FBOs
was due to partial periods of revenue, as five FBOs were acquired in August
1996, one FBO was acquired in November 1996, one FBO was acquired in January
1997 and another FBO was acquired effective the beginning of fiscal 1998.
Revenues from these FBOs were included for all of fiscal 1998. The increase in
FBO revenue is consistent with the Company's goal of increasing the service
sectors of its business as a percentage of total revenue. Gross margin from FBOs
in fiscal 1998 increased 57.6% to $9.7 million from $6.2 million in fiscal 1997
due to higher revenues, higher per gallon fuel margins and lower fuel costs.
Revenues from Cargo operations in fiscal 1998 increased 14.4% to $21.5
million from $18.8 million in fiscal 1997. The increase was primarily
attributable to higher space brokerage activity. Gross margin from cargo
operations in fiscal 1998 increased 5.7% to $5.3 million from $5.0 million in
fiscal 1997. Gross margin decreased to 24.8% of revenue from 26.9% last year due
to higher operating costs in the warehouse operations, partially due to the
expansion of facilities in the current year at LAX and in Montreal. At LAX,
warehouse operating costs increased approximately 47% in the fourth quarter of
fiscal 1998 as compared with the fourth quarter of fiscal 1997, while revenue
rose only 18% in the comparable period. Growth of warehouse revenue at LAX will
depend upon adding new customers and increasing revenue from current customers
some of whom have experienced a reduction in the volume of cargo transported as
a result of the worldwide economic slow down.
Revenues from government contract services in fiscal 1998 increased
4.3% to $17.0 million from $16.3 million in fiscal 1997. The increase in revenue
was due to the Central and South American air terminal contract added in June
1997 and the Pacific air terminal contracts added in January 1998, offset
partially by the loss of contracts at Fallon, Nevada and Monterey, California
during fiscal 1998. Gross margin from government contract services in fiscal
1998 increased 35.9% to $4.5 million from $3.3 million in fiscal 1997 primarily
as a result of the addition of higher margin air terminal business contracts for
Central and South American and the Pacific Rim which replaced the two lower
margin refueling and base housing maintenance contracts which were lost.
Selling, general and administrative expenses in fiscal 1998 decreased
2.1% to $6.2 million from $6.3 million in fiscal 1997 due to lower compensation
expense.
Provision for bad debts in fiscal 1998 increased 8.9% to $1.97 million
from $1.81 million in fiscal 1997 reflecting a higher reserve rate based on
experience. This excludes the impact in fiscal 1998 of losses stemming from the
bankruptcy of WPAI.
23
24
Depreciation and amortization expense in fiscal 1998 increased 27.5% to
$5.04 million from $4.0 million in fiscal 1997 principally due to acquisition of
eight FBO locations since August 1996.
On October 5, 1997, WPAI filed bankruptcy, resulting in a $7,050,000
loss in fiscal 1998. The charge included a $5 million reduction in restricted
cash and approximately $2,050,000 write off of WPAI's account receivable. The
restricted cash consisted of pledged certificates of deposits which guaranteed
bank loans to WPAI.
Income tax expense approximated was 39.0% of pretax income for fiscal
1998 and 39.6% for fiscal 1997, reflecting the Company's effective income tax
rate.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Revenue increased 24.0% to $ 279.4 million in fiscal 1997 from $225.4
million in fiscal 1996. Gross margin increased 25.2% to $23.1 million in fiscal
1997 from $18.4 million in fiscal 1996.
Revenues from fuel sales and services represented 74.4% of total
revenues in fiscal 1997 compared to 79.3% of total revenues in fiscal 1996.
Revenues from fuel sales and services in fiscal 1997 increased 16.3% to $207.8
million from $178.6 million in fiscal 1996. The increase in revenues from fuel
sales and services was primarily due to an increase in the average price of fuel
during fiscal 1997. Average fuel prices increased approximately 12% in fiscal
1997 as compared to fiscal 1996. Gross margin from fuel sales and services in
fiscal 1997 increased 8.4% to $8.6 million from $7.9 million in fiscal 1996
primarily due to an increase in into-plane revenues. Because the Company prices
its fuel on a per gallon basis, the Company's gross margin as a percentage of
revenue for fuel sales and services declined from 4.4% in fiscal 1996 to 4.1% in
fiscal 1997 primarily due to an increase in the average price of fuel in fiscal
1997.
Revenues from FBOs in fiscal 1997 increased 110% to $36.5 million from
$17.4 million in fiscal 1996 and increased as a percentage of total revenues
from 7.7% of total revenues in fiscal 1996 to 13.1% in fiscal 1997. The increase
in revenue from FBOs was due to the acquisition of seven new locations in fiscal
1997. Gross margin from FBOs in fiscal 1997 increased 120.3% to $6.2 million
from $2.8 million in fiscal 1996 due to higher revenue.
Revenues from cargo operations in fiscal 1997 increased 21.3% to $18.8
million from $15.5 million in fiscal 1996. This increase was primarily due to a
general increase in the volume of business from existing handling accounts and
the addition of new locations in Montreal, Toronto and Miami throughout fiscal
1996. The assets of Excel Cargo, Inc. were acquired on September 30, 1995 with
operations in Montreal and Toronto in Canada. Floracool, Inc. was acquired in
January 1996 and operates in Miami, Florida. Gross margin from cargo operations
in fiscal 1997 increased 6.4% to $5.0 million from $4.7 million in fiscal 1996.
The increase in gross margin was
24
25
significantly lower than the corresponding revenue increase primarily due to
operating losses at the Miami location in fiscal 1997. In addition, effective
April 1, 1997, a significant cargo customer was lost. Revenues associated with
this customer were approximately $2.4 million during 1997.
Revenues from government contract services in fiscal 1997 increased
17.6% to $16.3 million from $13.8 million in fiscal 1996. The increase in
revenues from government contract services in fiscal 1997 compared to fiscal
1996 was primarily due to a contract addition in November 1996. Gross margin
from government services in fiscal 1997 increased 11.2% to $3.3 million from
$3.0 million in fiscal 1996 due to higher revenues.
Selling, general and administrative expenses in fiscal 1997 increased
23.4% to $6.3 million from $5.1 million in fiscal 1996. The increase was
primarily due to increases in compensation expense and professional fees.
Provision for bad debts increased to $1,810,000 in fiscal 1997 from
$945,000 in fiscal 1996 due primarily to the bankruptcy of an airline account in
the fourth quarter and higher revenue in fiscal 1997. Mercury periodically
adjusts its bad debt allowance rates based on actual loss experience.
Depreciation and amortization expense in fiscal 1997 increased 40.3% to
$4.0 million from $2.8 million in fiscal 1996. The increase was primarily due to
acquisitions of the seven FBO locations in fiscal 1997.
Interest expense in fiscal 1997 increased 42.9% to $3.4 million from
$2.4 million in fiscal 1996. The increase was due to significantly higher
average outstanding borrowings in fiscal 1997 compared to fiscal 1996, a portion
of which relates to the Company's $28 million convertible debenture offering in
February 1996 and borrowings used for acquisitions and additions to property,
equipment and leaseholds.
In fiscal 1997, the Company wrote off $750,000 related to two equity
investments in airlines, a substantial portion of which relates to an airline
bankruptcy in the fourth quarter.
Income tax expense was 39.6% of pre-tax income for fiscal 1997 and
39.7% for fiscal 1996, reflecting the Company's effective income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Mercury has financed its operations primarily through operating cash
flow, bank debt and the issuance of $19 million of tax exempt bonds in 1998 and
$28 million of convertible subordinated debentures in 1996.
25
26
Net cash provided by operating activities was $23,183,000 during fiscal
1998. The primary source of net cash provided by operating activities was net
income plus depreciation and amortization totaling $8,067,000, bad debt expense
totaling $9,021,000 and a reduction in trade and other accounts receivable of
$5,224,000. Bad debt expense includes loss resulting from bankruptcy of WPAI of
$7,050,000 plus provision for bad debts of $1,971,000.
Net cash used in investing activities was $24,847,000 during fiscal
1998. The primary uses of cash from investing activities included $16,784,000 in
additions to property, equipment and leaseholds and $9,161,000 in restricted
cash related to the tax exempt bonds. The primary source of cash provided by
investing activities was a reduction of $2,899,000 in notes receivable.
Net cash provided by financing activities was $6,611,000 during fiscal
1998. The primary source of cash from financing activities during this period
was borrowings of $19,942,000, principally from the issuance of tax exempt
bonds. The primary use of cash in financing activities
was the reduction in long-term debt of $9,182,000.
On April 2, 1998, the Company raised $19 million from a tax exempt bond
financing pursuant to a loan agreement between the Company and the California
Economic Development Financing Authority, ("CEDFA"). These funds are being used
to finance the Company's LAX Cargo warehouse expansion and expansion of its
Burbank FBO. See "Business--Recent Developments." At June 30, 1998, the Company
borrowed $9,889,000 of the bond proceeds related to costs incurred to date and
paid down a $4.4 million term loan. The loan carries a variable rate which is
based on a weekly remarketing of the tax exempt bonds issued by CEDFA. (Since
the issuance of the bond, the per annum interest rate has averaged 3.17% through
September 17, 1998). The Company's senior bank group has issued a one-year,
renewable letter of credit in the amount of approximately $19.3 million to
secure the Company's obligations under the loan agreement. The loan will be
repaid at the rate of $500,000 every six months with a redemption of $4 million
at the end of the fifteenth year.
In March 1997, the Company entered into a senior unsecured bank credit
facility consisting of a $25,000,000 Revolver and various term facilities. In
connection with the issuance of the tax exempt bonds, the Revolver was
subsequently reduced to $18.6 million and matures in October 1999. At June 30,
1998, Mercury had no outstanding borrowings under the Revolver. The principal
balance of the term loans at June 30, 1998 was approximately $ 5,736,000. The
term loans are amortized and paid on a monthly basis of approximately $79,000
plus interest and mature in October 2001.
In February 1996, the Company issued $28,115,000 principal amount of
7.75% convertible subordinated debentures due February 1, 2006. The debentures
are convertible into shares of the Company's common stock at a price of
$7.29456.
26
27
The Company's accounts receivable balance was $38,387,000 at June 30,
1998 and $43,924,000 at June 30, 1997. The accounts receivable balance declined
principally due to the reduction in fuel sales revenue. A note receivable of
approximately $940,000 at June 30, 1998 is due from an airline customer of the
Company for the purchase of fuel. The note bears interest at 9% per annum and is
due in monthly installments of principal and interest through December 1998.
Accounts receivable days outstanding for the quarters ended June 30, 1998 and
1997 were 70 as compared to 63 days based upon consolidated revenue for each
period. Accounts receivable days outstanding increased primarily due to fuel
sales and service revenue declining to 65.2% of total revenues in the fourth
quarter of fiscal 1998 from 74.4% in the year ago period. Accounts receivable
days outstanding are impacted by a high volume of fuel brokerage which is
reported in revenues on a net margin basis and a high concentration of fuel
sales to customers with extended payment terms. Allowance for doubtful accounts
decreased to $ 1,686,000 at June 30, 1998 from $1,875,000 at June 30, 1997.
The Company's recurring capital expenditure requirements have been
related to the acquisition of refueling and ground handling equipment for both
commercial and government contract service operations. During fiscal 1996, 1997
and 1998, respectively, the Company spent approximately $2,300,000, $1,800,000
and $3,000,000 to purchase refueling and ground handling equipment for its
commercial and government contract service operations. During the last three
fiscal years, the Company has also made substantial expenditures to acquire and
construct facilities and businesses to expand its operations. In fiscal 1996,
the Company spent approximately $1,900,000 for property and equipment in the
acquisition of assets of Excel Cargo, Inc. In fiscal 1997, the Company acquired
certain assets of six FBOs for $9,000,000, which consisted of $4,350,000 cash
and a promissory note in the principal amount of $4,650,000. In addition, in
January 1997, the Company purchased an FBO in Fresno, California for $2,800,000
cash. In July 1997, the Company acquired certain assets of an FBO located in
Nashville, Tennessee for $4,250,000 cash. To fund this acquisition, the Company
borrowed an additional $4,250,000 under its Term Loan facilities. During fiscal
1998, the Company spent approximately $9,600,000 to remodel and construct a
cargo warehouse at LAX, $300,000 to pay for a portion of the construction of an
FBO in Charleston, South Carolina, $422,000 to acquire the assets of a cargo
handling operation at William B. Hartsfield International Airport in Atlanta,
Georgia, and $4,220,000 ($3,000,000 in cash and $1,220,000 worth of Mercury
Common Stock) to acquire the outstanding stock of RPA, a developer and installer
of airline revenue accounting and related software. Effective August 1, 1998,
Maytag acquired thirty-eight government contracts and related assets from
Weather Data for $2,500,000 in cash and $1,000,000 in stock (subject to upward
adjustment to the number of shares issued based on the valuation one year
following the closing). See "Business-- Recent Developments."
During fiscal 1999, the Company has committed to build a new FBO
operation in Burbank, California at an estimated cost of $9,000,000. At June 30,
1998, approximately $2,200,000 of these costs had been incurred. See "Business
- -- Recent Developments." The Company will also retrofit or replace a number of
fuel farms during fiscal 1999 at an estimated cost of $2,500,000. See
27
28
"Business--Properties." Amounts drawn down in connection with the CEDFA bond
financing will be used to finance the Burbank FBO construction, while existing
lines of credit will finance the fuel
farm modifications.
Absent a major prolonged surge in oil prices or a capital intensive
acquisition, the Company believes its operating cash flow, senior credit
facility, vendor credit and cash balance will provide it with sufficient
liquidity during the next twelve months. In the event that fuel prices increase
significantly for an extended period of time, the Company's liquidity could be
adversely affected unless the Company is able to increase vendor credit or
increase lending limits under its revolving credit facility. The Company
believes, however, its Revolver and vendor credit should provide it with
sufficient liquidity in the event of a major temporary surge in oil prices.
Subsequent to June 30, 1998, the Company repurchased 580,000 shares of
common stock for approximately $4,256,000 and $1,000,000 of convertible
subordinated debentures. The Company presently has authority to purchase up to
$2,527,000 in additional shares of common stock under its existing board
resolutions and credit facilities and plans to engage in periodic
repurchases.
Inflation
The Company believes that inflation has not had a significant effect on
its results of operations during the past three fiscal years.
Year 2000 Issue
The Company has established a year 2000 compliance plan which is
substantially complete. The compliance program primarily involves information
technology, facilities and equipment and major suppliers of jet fuel. To date,
the Company has spent less than $100,000 and the total estimated cost related to
year 2000 compliance is approximately $100,000.
The Company has substantially completed a year 2000 compliance program
for information technology and is currently in the testing phase. All required
information technology changes are anticipated to be operational by the third
quarter of fiscal 1999. The Company does not believe that year 2000 issues
affecting its facilities and equipment are substantial. The Company, however,
conducts most of its business on airport properties and, as such, is dependent
on various third parties to complete aspects of year 2000 compliance which will
ensure that airport operations are not significantly impacted or interrupted.
While the Company has no reason to believe that year 2000 compliance by these
third parties will not be substantially completed on time, the Company can give
no assurance to that effect. With respect to major suppliers, the Company
believes year 2000 compliance issues will not affect its ability to continue
purchasing jet fuel in sufficient quantities, given the number of alternative
sources.
28
29
No contingency plans have been developed for information technology
since the Company believes that its compliance program will be completed timely.
Forward-Looking Statements
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. In addition, Mercury, from
time-to-time, makes forward-looking statements concerning its expected future
operations and performance and other developments. Such forward-looking
statements are necessarily estimates reflecting Mercury's best judgment based
upon current information and involve a number of risks and uncertainties, and
there can be no assurance that other factors will not affect the accuracy of
such forward-looking statements. While it is impossible to identify all such
factors, factors which could cause actual results to differ materially from
those estimated by Mercury include, but are not limited to, risks associated
with acquisitions, the financial condition of customers, non-renewal of
contracts, government regulation, as well as operating risks, general conditions
in the economy and capital markets, and other factors which may be identified
from time-to-time in Mercury's Securities and Exchange Commission filings and
other public announcements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company currently utilizes no material derivative financial
instruments which expose the Company to significant market risk. However, the
Company's cash flow, earnings, and the fair value of its debt, may be adversely
effected due to changes in interest rates with respect to its long-term debt.
The table below presents principal cash flows and related weighted average
interest rates of the Company's long-term debt at June 30, 1998 by expected
maturity dates. Weighted average variable rates are based on rates in effect at
June 30, 1998. These rates should not be considered a predictor of actual future
interest rates.
29
30
Expected Maturity Date
June-99 June-00 June-01 June-02 June-03 Thereafter Total Fair Value
------- ------- ------- ------- ------- ---------- ----- ----------
Fixed Rate
Convertible
Debenture 0 0 0 0 0 28,090,000 28,090,000 28,090,000
Average Interest
Rate 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
Fixed Rate Other
Debt 647,000 389,000 327,000 311,000 326,000 448,000 2,448,000 2,448,000
Average Interest
Rate 8.26% 8.19% 8.25% 8.49% 8.48% 8.93% 8.31%
Variable Rate Tax
Exempt Bonds (1) 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 14,000,000 19,000,000 19,000,000
Average Interest
Rate 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30%
Variable Rate
Other Debt (2) 2,085,000 2,128,000 2,175,000 2,080,000 1,903,000 2,532,000 12,903,000 12,903,000
Average Interest 7.73% 7.76% 7.78% 7.79% 7.78% 7.82% 7.76%
Rate
(1) The interest rate is based upon a weekly remarketing of the bonds.
(2) Consists of debt under which interest rates will fluctuate based upon
changes in the prime rate or LIBOR.
In making its determination as to the balance of fixed and variable
rate debt, the Company considers the interest rate environment (including
interest rate trends), borrowing alternatives and relative pricing. The Company
periodically monitors the balance of fixed and variable rate debt, and can make
appropriate corrections either pursuant to the terms of debt agreements or
through the use of swaps and other financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Part IV, Item 14, pages F1 through F20 immediately following.
ITEM 9. ACCOUNTING AND FINANCIAL DISCLOSURE DISPUTES.
None.
30
31
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, 1998 (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.
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, 1998 and 1997....................................F-2
Consolidated Statements of Income for each of the three
years in the period ended June 30, 1998...............................................F-3
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1998...............................................F-4
31
32
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 30, 1998..................................F-5
Notes to Consolidated Financial Statements for the three
years ended June 30, 1998.....................................................F-6 to F-19
(a) (2) Supplemental Schedule for each of the three years in the period ended
June 30, 1998:
Schedule II - Valuation and Qualifying Accounts............................................F-20
All other items are not included in this Form 10-K for the reason that
they are not applicable or are included in the information as set forth in the
Consolidated Financial Statements or in the Notes to Consolidated Financial
Statements.
(a) (3) Exhibits:
Exhibit
No. Description
1.1 Underwriting Agreement for the Company's $25,000,000 7-3/4% Convertible
Subordinated Debentures due February 1, 2006. (11)
3.1 Restated Certificate of Incorporation (4)
3.2 Form of Amendment to Restated Certificate of Incorporation creating the Series A 8%
Convertible Cumulative Redeemable Preferred Stock (4)
3.3 Form of Amendment to Restated Certificate of Incorporation declaring the Separation
Date for the Series A 8% Convertible Redeemable Preferred Stock (5)
3.4 Bylaws of the Company (4)
3.5 Amendment to Bylaws of the Company (10)
4.1 Form of Indenture between Mercury Air Group, Inc. and IBJ Schroder Bank & Trust
Company. (11)
4.2 Negotiable Promissory Note, dated as of June 21, 1996, from Mercury Air Group, Inc. to
Raytheon Aircraft Services, Inc. (13)
4.3 Legend Agreement, dated as of August 29, 1996 between Mercury Air Group, Inc. and
Raytheon Aircraft Services, Inc. (13)
10.1 Employment Agreement dated December 10, 1993 between the Company and Seymour
Kahn (8)
10.2 Stock Purchase Agreement between the Company, SK Acquisition, Inc., Randolph E.
Ajer, Kevin J. Walsh, Grant Murray and Joseph Czyzyk (2)
10.3 Company's 1990 Long-Term Incentive Plan (6)
10.4 Company's 1990 Directors Stock Option Plan (1)
10.5 Lease for 6851 West Imperial Highway, Los Angeles, California (4)
10.6 Memorandum Dated September 15, 1997 regarding Summary of Officer Life Insurance
Policies with Benefits Payable to Officers or Their Designated Beneficiaries (15)
10.7 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans for
32
33
Seymour Kahn, Joseph Czyzyk and Randolph E. Ajer (10)
10.8 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans for Kevin
Walsh and William Silva (10)
10.9 The Company's 401(k) Plan consisting of LCI Actuaries, Inc. Regional Prototype
Defined
Contribution Plan and Trust and Adoption Agreement (7)
10.10 Non-Qualified Stock Option Agreement by and between the Company and
Seymour Kahn dated January 21, 1993 (7)
10.11 Stock Purchase Agreement among the Company, SK Acquisition, Inc. and William L.
Silva dated as of August 9, 1993 (8)
10.12 Stock Exchange Agreement dated as of November 15, 1994 between Joseph
Czyzyk and the Company (9)
10.13 Employment Agreement dated November 15, 1994 between the Company and
Joseph Czyzyk
10.14 Non-Qualified Stock Option Agreement dated August 24, 1995, by and between S.K.
Acquisition and Mercury Air Group, Inc. (12)
10.15 Non-Qualified Stock Option Agreement dated March 21, 1996, by and between Frederick
H. Kopko and Mercury Air Group, Inc. (12)
10.16 Credit Agreement by and among Sanwa Bank California, Mellon Bank, N.A., The First
National Bank of Boston and Mercury Air Group, Inc. dated March 14, 1997. (14)
10.17 First Amendment to Credit Agreement and Related Loan Documents dated as
of November 1997, by and among Sanwa Bank California, Mellon Bank,
N.A., BankBoston, N.A. and Mercury Air Group, Inc.
10.18 First Amendment of 1998 to Credit Agreement and Other Loan Documents dated as of
April 1, 1998, by and among Sanwa Bank California, Mellon Bank, N.A., BankBoston,
N.A. and Mercury Air Group, Inc. (3)
10.19 Second Amendment of 1998 to Credit Agreement and Other Loan Documents
dated as of April 1998, by and between Sanwa Bank California, Mellon
Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.
10.20 Third Amendment of 1998 to Credit Agreement and Other Loan Documents
dated as of August 31, 1998, by and between Sanwa Bank California,
Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.
10.21 Loan Agreement between California Economic Development Financing Authority and
Mercury Air Group, Inc. relating to $19,000,000 California Economic Development
Financing Authority Variable Rate Demand Airport Facilities Revenue Bonds, Series
1998 (Mercury Air Group, Inc. Project) dated as of April 1, 1998. (3)
10.22 Reimbursement Agreement dated as of April 1, 1998, by and among Sanwa Bank
California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc. (3)
10.23 First Amendment to Reimbursement Agreement and Other L/C Documents as
of August 31, 1998, by and between Sanwa Bank California, Mellon Bank,
N.A., BankBoston, N.A. and Mercury Air Group, Inc.
21.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP with respect to incorporation of their
report on the audited financial statements contained in this Annual
Report on Form 10-K in the Company's Registration Statement on Form S-8
(Registration Statement No. 33-69414)
33
34
- ---------------------------------
(1) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 10, 1993 Annual Meeting of Shareholders and
is incorporated herein by reference.
(2) Such document was previously filed as an Exhibit to the Company's
Current Report on Form 8-K dated December 6, 1989 and is incorporated
herein by reference.
(3) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and
are incorporated herein by reference.
(4) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-39044 on Form S-2 and are incorporated
herein by reference.
(5) Such document was previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and
is incorporated herein by reference.
(6) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 2, 1992 Annual Meeting of Shareholders.
(7) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993 and are
incorporated herein by reference.
(8) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994 and are
incorporated herein by reference.
(9) Such document was previously filed as an Exhibit to the Company's
Current Report on Form 8-K dated November 15, 1994 and is incorporated
herein by reference.
(10) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995 and are
incorporated herein by reference.
(11) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-65085on Form S-1 and are incorporated
herein by reference.
(12) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and
are incorporated herein by reference.
(13) All such documents were previously filed as Exhibits to the Company's
Report on Form 8-K filed September 13, 1996 and are incorporated herein
by reference
34
35
(14) Such document was previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and
is incorporated herein by reference.
(15) Such document was previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997 and is
incorporated herein by reference.
(b) Reports on Form 8-K:
None.
(c) Identification of management contracts and compensatory plans and
arrangements:
Exhibits 10.1, 10.2, 10.3, 10.4, 10.6, 10.7, 10.8, 10.9, 10.10, 10.11,
and 10.13 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.
35
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of Los
Angeles, State
of California, on September 25, 1998.
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 and Director:
/s/ Seymour Kahn Dated: September 25, 1998
- ----------------------------------------------
Seymour Kahn
Chief Executive Officer and Director
Chief Operating Officer and Director:
/s/ Joseph Czyzyk Dated: September 25, 1998
- -------------------------------------------------
Joseph Czyzyk
Chief Operating Officer and Director
Principal Financial and Accounting Officer:
/s/ Randolph E. Ajer Dated: September 25, 1998
- ----------------------------------------------
Randolph E. Ajer
Executive Vice President, Secretary and Treasurer
Additional Directors:
/s/ Robert L. List Dated: September 25, 1998
- --------------------------------------------------
Robert L. List
Director
/s/ Philip J. Fagan, Jr., M.D. Dated: September 25, 1998
- --------------------------------------------
Philip J. Fagan, Jr., M.D.
Director
/s/ William G. Langton Dated: September 25, 1998
- --------------------------------------------
William G. Langton
Director
/s/ Frederick H. Kopko, Jr. Dated: September 25, 1998
- -------------------------------------------
Frederick H. Kopko, Jr.
Director
36
37
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Mercury Air Group, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Mercury Air
Group, Inc. and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1998. Our audits also included
the financial statement schedule listed in the Index at Item 14. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles. Also, in our
opinion such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Los Angeles, California
September 14, 1998
F-1
38
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30, JUNE 30,
1998 1997
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 7,836,000 $ 2,889,000
Cash- restricted (Note 15) 7,000,000
Trade accounts receivable, net of allowance for doubtful
accounts of $1,686,000 at 6/30/98 and $1,875,000 at 6/30/97 38,387,000 43,924,000
Notes receivable - current portion 940,000 1,939,000
Inventories, principally aviation fuel 1,539,000 1,948,000
Prepaid expenses and other current assets 2,275,000 2,705,000
------------ -----------
Total current assets 50,977,000 60,405,000
CASH- RESTRICTED (NOTE 15) 9,161,000
PROPERTY, EQUIPMENT AND LEASEHOLDS, net
(Notes 3 and 7 ) 44,252,000 24,834,000
NOTES RECEIVABLE, net of current portion 56,000 956,000
OTHER ASSETS (Note 4) 7,295,000 6,110,000
DEFERRED INCOME TAXES ( Note 6 ) 332,000
------------ -----------
$111,741,000 $92,637,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,403,000 $16,937,000
Accrued expenses and other current liabilities (Note 5) 5,242,000 4,475,000
Income taxes payable (Note 6) 1,409,000
Current portion of long-term debt (Note 7) 3,732,000 1,878,000
------------ -----------
Total current liabilities 26,786,000 23,290,000
LONG-TERM DEBT (Note 7) 30,619,000 15,195,000
DEFERRED INCOME TAXES (Note 6) 196,000
CONVERTIBLE SUBORDINATED DEBENTURES 28,090,000 28,115,000
COMMITMENTS AND CONTINGENCIES (Notes 10 and 13)
STOCKHOLDERS' EQUITY (Notes 7 and 8 ):
Preferred Stock - $.01 par value; authorized 3,000,000 shares;
no shares outstanding
Common Stock - $ .01 par value; authorized 18,000,000 shares;
outstanding 7,082,753 shares 6/30/98;
outstanding 7,524,651 shares 6/30/97 71,000 75,000
Additional paid-in capital 20,465,000 20,796,000
Retained earnings 6,415,000 5,907,000
Cumulative foreign currency translation adjustment (239,000) (79,000)
Notes receivable from sale of stock (662,000) (662,000)
------------ -----------
Total stockholders' equity 26,050,000 26,037,000
------------ -----------
$111,741,000 $92,637,000
------------ -----------
See accompanying notes to consolidated financial statements.
F-2
39
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JUNE 30,
--------------------------------------------
1998 1997 1996
------------- ------------- -------------
Sales and Revenues (Note 11):
Sales $179,859,000 $225,093,000 $182,674,000
Service revenues 60,252,000 54,287,000 42,700,000
------------ ------------ ------------
240,111,000 279,380,000 225,374,000
------------ ------------ ------------
Costs and Expenses:
Cost of sales 155,191,000 205,914,000 169,015,000
Operating expenses 56,790,000 50,396,000 37,945,000
------------ ------------ ------------
211,981,000 256,310,000 206,960,000
------------ ------------ ------------
Gross Margin (Excluding depreciation and amortization) 28,130,000 23,070,000 18,414,000
------------ ------------ ------------
Expenses (Income):
Selling, general and administrative (Note 4) 6,161,000 6,296,000 5,106,000
Provision for bad debts 1,971,000 1,810,000 945,000
Depreciation and amortization 5,040,000 3,953,000 2,818,000
Loss resulting from bankruptcy of customer (Note 2) 7,050,000
Interest expense 3,542,000 3,393,000 2,375,000
Interest income (595,000) (380,000) (322,000)
Loss on investments 750,000
Other income (274,000)
------------ ------------ ------------
23,169,000 15,822,000 10,648,000
------------ ------------ ------------
Income Before Income Taxes 4,961,000 7,248,000 7,766,000
Provision for Income Taxes (Note 6) 1,934,000 2,869,000 3,086,000
------------ ------------ ------------
Net Income $3,027,000 $4,379,000 $4,680,000
============ ============ ============
Net Income Per Share ( Note 12) :
Basic $0.42 $0.58 $0.63
Diluted $0.38 $0.49 $0.56
See accompanying notes to consolidated financial statements.
F-3
40
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
-----------------------------------------------------
1998 1997 1996
----------------- --------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,027,000 $4,379,000 $4,680,000
Adjustments to derive cash flow from
operating activities:
Depreciation and amortization 5,040,000 3,953,000 2,818,000
Bad debt expense 1,971,000 1,810,000 945,000
Loss resulting from bankruptcy of customer 7,050,000
Amortization of officers' loans 154,000 154,000 154,000
Increase (decrease) in deferred income taxes (712,000) (588,000) 248,000
Changes in operating assets and liabilities:
Trade and other accounts receivable 5,224,000 (4,357,000) (8,707,000)
Inventories 409,000 675,000 661,000
Prepaid expenses and other current assets 495,000 (551,000) (332,000)
Accounts payable (860,000) 1,857,000 1,614,000
Income taxes payable 1,148,000 (198,000) 84,000
Accrued expenses and other current liabilities 237,000 681,000 786,000
-------------- ------------ ------------
Net cash provided by operating activities 23,183,000 7,815,000 2,951,000
-------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash-tax exempt bond (9,161,000)
Restricted cash - pledged certificates of deposit 1,000,000 (7,000,000)
(Increase) decrease in notes receivable 2,899,000 (2,177,000) (532,000)
Addition to other assets (906,000) (437,000) (535,000)
Acquisition of businesses, net of cash acquired ( Note 9 ) (1,895,000) (7,150,000) (960,000)
Additions to property, equipment and leaseholds (16,784,000) (3,192,000) (2,516,000)
-------------- ------------ ------------
Net cash used in investing activities (24,847,000) (19,956,000) (4,543,000)
-------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from Convertible Debentures 26,280,000
Payment of dividend on common stock (94,000) (321,000) (233,000)
Proceeds from long-term debt 19,942,000 9,239,000 464,000
Reduction of long-term debt (9,182,000) (5,464,000) (13,316,000)
Notes receivable-officers 70,000
Issuance of common stock 162,000 42,000 206,000
Repurchase and retire common stock (4,217,000) (356,000) (820,000)
-------------- ------------ ------------
Net cash provided by financing activities 6,611,000 3,210,000 12,581,000
-------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,947,000 (8,931,000) 10,989,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,889,000 11,820,000 831,000
-------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $7,836,000 $2,889,000 $11,820,000
============== ============= ================
CASH PAID DURING THE YEAR:
Interest $3,542,000 $3,156,000 $1,515,000
Income taxes $1,069,000 $4,076,000 $2,671,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Direct financing for purchase of equipment and property $1,600,000
Issuance of stock for the acquisition of RPA (Note 9). $1,220,000
Issuance of Note Payable for the acquisition of Aero Freightways Inc. $227,000
Issuance of Notes Payable for the acquisition of assets ( Note 9 ) $4,250,000 $4,650,000 $2,016,000
Issuance of 137,500 common shares in exchange for notes receivable ( Note 8 ) $732,000
Reduction of debenture and property, equipment and leasehold due to
purchase price adjustment of Excel Cargo, Inc. ( Note 9 ) $800,000
Note receivable assigned to the Company in exchange for the
Company's certificates of deposit which was used to guaranty a
customer's debt. $1,000,000
Conversion of 25 debentures into 3,427 shares of common stock. 25,000
See accompanying notes to consolidated financial statements.
F-4
41
COMMON STOCK
---------------------- ADDITIONAL
NUMBER OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------------------------------------------------
BALANCE, JUNE 30, 1995 6,905,320 $70,000 $14,977,000 $3,479,000
Net income 4,680,000
Cash dividend on common stock (233,000)
Repurchase of common stock (194,275) (2,000) (387,000) (431,000)
Common stock issued on exercise of
warrants and options 44,188 1,000 125,000
Tax benefit from exercise of stock options 74,000
Issue 10% stock dividend 686,418 5,000 5,417,000 (5,423,000)
Retirement of treasury stock (123,000) (32,000)
Common stock sold to officers 125,000 1,000 812,000
Foreign currency adjustment
--------------------------------------------------
Balance, June 30, 1996 7,566,651 $75,000 $20,895,000 $2,040,000
--------------------------------------------------
Net income 4,379,000
Cash dividend on common stock (321,000)
Repurchase of common stock (59,500) (165,000) (191,000)
Common stock issued on exercise of
warrants and options 17,500 42,000
Tax benefit from exercise of stock options 24,000
Foreign currency adjustment
Payment received from notes receivable-officers
--------------------------------------------------
BALANCE, JUNE 30, 1997 7,524,651 $75,000 $20,796,000 $5,907,000
--------------------------------------------------
Net income 3,027,000
Cash dividend on common stock (94,000)
Repurchase of common stock (639,325) (6,000) (1,786,000) (2,425,000)
Common stock issued on exercise of
warrants and options 34,000 - 162,000
Common stock issued in acquisition 160,000 2,000 1,218,000
Common stock issued on conversion of debentures 3,427 - 25,000
Tax benefit from exercises of stock options 50,000
Foreign currency adjustment
--------------------------------------------------
BALANCE, JUNE 30, 1998 7,082,753 $71,000 $20,465,000 $6,415,000
--------------------------------------------------
COMMON STOCK CUMULATIVE
IN TREASURY FOREIGN
------------------- CURRENCY NOTES
NUMBER OF TRANSLATION RECEIVABLE
SHARES AMOUNT ADJUSTMENT OFFICERS
-------------------------------------------------------------------
BALANCE, JUNE 30, 1995 44,000 (155,000)
Net income
Cash dividend on common stock
Repurchase of common stock
Common stock issued on exercise of
warrants and options
Tax benefit from exercise of stock options
Issue 10% stock dividend
Retirement of treasury stock (44,000) 155,000
Common stock sold to officers (732,000)
Foreign currency adjustment (46,000)
-------------------------------------------------------------
Balance, June 30, 1996 ($46,000) ($732,000)
-------------------------------------------------------------
Net income
Cash dividend on common stock
Repurchase of common stock
Common stock issued on exercise of
warrants and options
Tax benefit from exercise of stock options
Foreign currency adjustment (33,000)
Payment received from notes receivable-officers 70,000
-------------------------------------------------------------
BALANCE, JUNE 30, 1997 ($79,000) ($662,000)
-------------------------------------------------------------
Net income
Cash dividend on common stock
Repurchase of common stock
Common stock issued on exercise of
warrants and options
Common stock issued in acquisition
Common stock issued on conversion of debentures
Tax benefit from exercises of stock options
Foreign currency adjustment (160,000)
-------------------------------------------------------------
BALANCE, JUNE 30, 1998 ($239,000) ($662,000)
-------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
42
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Mercury Air Group, Inc. and subsidiaries (the "Company") are
principally engaged in aviation services including: the conduct of cargo
handling, cargo general sales agency and air cargo space logistics; the sale and
delivery of aviation fuels to commercial, air courier and commuter airlines, and
to general aviation aircraft; the provision of ground support services to U.S.
military aircraft; Fixed Base Operations (FBO) services which includes fuel
sales, into-plane, ground support and aircraft hangar and tie-down facilities;
and the development and installation of aviation software.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Mercury
Air Group, Inc. and its subsidiaries. All material intercompany transactions and
balances have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments that
are readily convertible into cash and were purchased with maturities of three
months or less.
Restricted cash consists of certificates of deposits which have been
pledged to secure bank loans to two of the Company's customers at June 30, 1997
and, at June 30, 1998, cash held by the trustee in connection with the CEDFA
loan (See Note 15).
INVENTORIES
Inventory is stated at the lower of aggregate cost (first-in, first-out
method) or market.
PROPERTY, EQUIPMENT AND LEASEHOLDS
Property, equipment and leaseholds are recorded at cost. Depreciation
is computed using the straight-line method over the estimated useful life of the
related asset (3-25 years) and over the lesser of the lease life or useful life
for leasehold improvements.
F-6
43
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired are being amortized on the
straight-line method over 10- 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.
FOREIGN CURRENCY TRANSLATION.
Assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at the exchange rate prevailing at the balance
sheet date and, where appropriate, at historical rates of exchange. Income and
expense accounts are translated at the weighted average rate in effect during
the year. The aggregate effect of translating the financial statements of the
foreign subsidiary is included as a separate component of stockholders' equity.
Foreign exchange gains (losses) were not significant during the years presented.
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. To date the Company has not been required to adjust profits
arising out of U.S. Government contracts.
INCOME TAXES
Deferred income tax assets and liabilities are recognized based on
differences between financial statement and income tax basis of assets and
liabilities using presently enacted income tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable and payable, and debt instruments. The book values of all financial
instruments, other than debt instruments, are representative of their fair
values due to their short-term maturity. The book values of the Company's debt
instruments are considered to approximate their fair values because the interest
rates of these instruments are based on current rates offered to the Company.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the reporting
period. Actual results could differ from those estimates.
F-7
44
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes new standards for reporting and displaying
comprehensive income, its components and accumulated balances. In June 1997, the
Financial Accounting Standards Board issued SFAS No. 131, " Disclosures about
Segments of an Enterprise and Related Information." These statements are
effective for financial statements issued for periods beginning after December
15, 1997. The effect of adopting these statements will not be material to the
Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging activities." This statement will be effective January 1,
2000. The Company has not yet analyzed the impact of adopting this statement.
RECLASSIFICATIONS
Certain reclassifications were made to prior year statements to conform
to the current year presentation.
ACCOUNTS RECEIVABLE
Accounts receivable is comprised primarily of trade receivables from
customers and is net of an allowance for doubtful accounts of $1,686,000 and
$1,875,000 at June 30, 1998 and 1997, respectively. The Company's credit risk is
based in part on, 1) primarily all receivables are related to one industry,
aviation, 2) there are significant balances owed by certain customers, and 3)
balances are owed by certain customers who are not well capitalized. The Company
assesses its credit portfolio on an ongoing basis and establishes allowances
which it believes are adequate to absorb potential credit problems that can be
reasonably anticipated.
NOTE 2 - LOSS RESULTING FROM BANKRUPTCY OF CUSTOMER:
On October 5, 1997, Western Pacific Airlines, Inc. (WPAI) filed for
bankruptcy protection under Chapter 11 and, as a result, the Company has written
off $5,000,000 of certificates of deposit which were pledged to guarantee a bank
loan to WPAI. In addition, the Company has written off $2,050,000 of accounts
receivable due from WPAI. Effective February 5, 1998 WPAI ceased operations.
F-8
45
NOTE 3 - PROPERTY, EQUIPMENT AND LEASEHOLDS:
Property, equipment and leasehold consist of the following:
JUNE
----
1998 1997
----- ----
Land, buildings and leasehold improvements $44,766,000 $27,822,000
Equipment furniture and fixtures 26,159,000 21,862,000
Construction in progress 2,333,000 330,000
----------- -----------
73,258,000 50,014,000
Less accumulated depreciation and amortization (29,006,000) (25,180,000)
----------- -----------
$44,252,000 $24,834,000
=========== ===========
NOTE 4 - OTHER ASSETS:
Other assets consists of the following:
JUNE
----
1998 1997
----- ----
Cost in excess of net assets acquired, net $3,642,000 $2,593,000
Capitalized loan fees - net (Note 7) 1,965,000 1,654,000
Covenant not to compete - net 350,000 450,000
Other assets 1,215,000 1,217,000
Loans to officers 123,000 196,000
---------- ----------
$7,295,000 $6,110,000
========== ==========
Cost in excess of net assets acquired have resulted from various
acquisitions and are being amortized over periods ranging from ten to forty
years. Accumulated amortization was $598,000 and $460,000 at June 30, 1998 and
1997, respectively. Capitalized loan fees represent costs incurred in connection
with outstanding debt and is being amortized over the term of the debt.
In 1991, four executive officers of the Company each agreed to purchase
151,250 shares, an aggregate of 605,000 shares of the Company's stock from a
company owned by the Chairman and Chief Executive Officer at $1.98 per share
pursuant to a Stock Purchase Agreement
("Agreement").
The officers each paid $30,000 in cash, or $120,000 in the aggregate. The
remaining purchase price of $1,080,000 was paid over a five year period ending
in 1996. As part of the Agreement to purchase the stock, the Company agreed to
loan the executives the $1,080,000. Beginning in 1994, one fifth of the amount
loaned is being 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 151,250
shares of the Company's stock from a company owned by the Chairman and Chief
Executive Officer at $1.98 per share
F-9
46
pursuant to a Stock Purchase Agreement similar to the agreements above. The
officer paid $30,000 in cash with the remaining purchase price of $270,000 to be
paid over a five year period ending in 1998. The Company agreed to loan the
executive the $270,000 in quarterly installments. Beginning in 1996, one fifth
of the amount to be loaned, or $54,000, will be forgiven each year over a five
year period ending in 2000 provided the officer remains in the employ of the
Company.
The amounts subject to forgiveness of $1,080,000 and $270,000 are being
treated as additional compensation expense over the seven year period from the
date of the agreements through 1998 and 2000, respectively. The loans to
officers are increased by actual amounts advanced by the Company and are
decreased annually, by one-seventh of the amount to be forgiven, or
approximately $154,000 in 1996, $154,000 in fiscal 1997 and $154,000 in fiscal
1998.
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the
following:
JUNE
----
1998 1997
---- ----
Salaries and wages $1,808,000 $1,877,000
Other 3,434,000 2,598,000
---------- ----------
$5,242,000 $4,475,000
========== ==========
NOTE 6 - INCOME TAXES:
The provision for taxes on income consists of the following:
YEAR ENDED JUNE 30,
-------------------
1998 1997 1996
---- ---- ----
Federal, current $1,849,000 $2,908,000 $2,160,000
State, current 443,000 549,000 678,000
---------- ---------- ----------
2,292,000 3,457,000 2,838,000
Deferred, primarily federal (358,000) (588,000) 248,000
---------- ---------- ----------
Net provision $1,934,000 $2,869,000 $3,086,000
========== ========== ==========
Major components of deferred income tax (assets) and liabilities were as
follows:
F-10
47
AS OF JUNE 30,
--------------
1998 1997 1996
---- ---- ----
Depreciation / amortization (377,000) (118,000) 120,000
Prepaid expenses 333,000 375,000 578,000
State income taxes (202,000) (187,000) (230,000)
Allowance for doubtful accounts (678,000) (771,000) (324,000)
Acquired from RPA- primarily
conversion from cash to accrual
basis accounting 1,012,000 - -
Other 108,000 369,000 112,000
---------- --------- --------
$ 196,000 $(332,000) $256,000
========== ========= ========
The reconciliation of the federal statutory rate to the company's effective tax
rate on income is summarized as follows:
YEAR ENDED JUNE 30,
-------------------
1998 1997 1996
---- ---- ----
Computed "expected" tax rate 34.0% 34.0% 34.0%
State income taxes, net of
Federal income tax benefit 5.0% 5.6% 5.7%
Other - - -
---- ---- ----
Effective rate 39.0% 39.6% 39.7%
==== ==== ====
F-11
48
NOTE 7 - LONG-TERM AND SUBORDINATED DEBT:
Long - term debt consists of the following:
JUNE 30,
--------
1998 1997
---- ----
Note payable to bank $ 5,736,000 $ 7,733,000
Installment notes, payable to financial institutions in monthly
installments aggregating approximately $77,000 at June 30, 1998 including
interest from 7.23% to 8.63%, collateralized by certain
assets of the Company and maturing from 1998 through 2002. 2,366,000 2,238,000
Convertible subordinated debentures to seller of Excel Cargo in
monthly installments of $13,810 including interest at 8.5%,
collateralized by property acquired, maturing in September
2003. 708,000 810,000
Tax exempt bonds Pursuant to a loan agreement between the
Company and the California Economic Development Financing
Authority ("CEDFA"). Repayment terms consist of semi-annual
principal payments of $500,000 with a redemption of $4 million
at the end of the fifteenth year (2013). The loan carries a
variable rate which is based on a weekly remarketing of the bonds.
Since issuance, the per annum rate has averaged 3.17% thru 9/17/98. 19,000,000 -
Note payable to seller of assets and leaseholds of certain FBOs
in quarterly installments of $198,480 including interest at prime
collateralized by property acquired which is principally
leaseholds, due in July 2004. 3,732,000 4,191,000
Mortgage payable to financial institution in monthly principal
installments of $13,333 plus interest at LIBOR plus 2% ,
collateralized by land and building, maturing in June 2008. 1,600,000
Mortgage payable to financial institution in monthly principal
installments of $9,750 plus interest at 7.5% per annum,
collateralized by land and building, maturing in April 2004. 682,000 800,000
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. 387,000 404,000
Note payable to seller of assets and leasehold at FBO in Bakersfield California
in monthly installments of approximately $13,000 including interest at prime
(8.50% at June 30, 1997), collateralized by property acquired, which is
principally a leasehold, due in December 2004. Note was prepaid in 1998. - 869,000
Other 140,000 28,000
------- ------
34,351,000 17,073,000
Less current portion 3,732,000 1,878,000
--------- ---------
$30,619,000 $15,195,000
=========== ===========
Notes Payable to banks at June 30, 1998 consists principally of a term
loan in the amount of $5,736,000, which is payable in monthly payments of
approximately $79,000 plus interest at
F-12
49
LIBOR + 1.75% and is scheduled to mature in October 2001. At June 30, 1998 the
Company also has a revolving credit line that matures in October 1999, bears
interest at prime or LIBOR + 1.5% and permits borrowing of up to $18,600,000. At
June 30, 1998, there were no outstanding borrowings under the revolving credit
line.
Certain debt agreements contain provisions that require the maintenance
of certain financial ratios, minimum tangible net worth (as defined) and minimum
profitability levels and limitations on annual capital expenditures. Certain
loan agreements prohibit the payment of cash dividends.
Long-term debt payable subsequent to June 30, 1998 is as follows:
1999 $ 3,732,000
2000 3,518,000
2001 3,503,000
2002 3,392,000
2003 3,229,000
Thereafter 16,977,000
----------
$34,351,000
===========
On January 31, 1996, pursuant to a public offering, the Company issued
$28,115,000 principal amount of 7 3/4% convertible subordinated debentures due
February 1, 2006. The debentures are convertible into shares of the Company's
common stock at a price of approximately $7.30 per share. Costs and fees,
including underwriting discount and commissions, were $1,835,000 and are
included in other assets (See Note 4). Capitalized loan fees are being amortized
over the life of the debentures.
NOTE 8 - EMPLOYEE STOCK OPTION PLANS:
The Company has two stock option plans, the 1990 Long-Term Incentive
Plan ("Incentive Plan") and the 1990 Directors Stock Option Plan ("Directors
Plan"). The Company has reserved 284,000 shares related to the Incentive Plan
and 348,000 shares related to the Directors Plan. The Company also grants
options under special option grants made outside the plans and has reserved
204,000 shares related to these. Options granted pursuant to the plans and
special grants are generally made at the fair market value of such shares on the
date of grant and generally vest over twelve months. The contractual lifes of
the options are generally ten years.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25. Had compensation cost for stock option grants
been calculated using the fair value
F-13
50
provisions of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per share would
have approximated the pro forma amounts indicated in the following table:
1998 1997 1996
---- ---- ----
Net income - as reported $ 3,027,000 $4,379,000 $4,680,000
Net income - pro forma $ 2,937,000 $4,219,000 $4,433,000
Basic earnings per share - as reported $.42 $0.58 $0.63
Basic earnings per share - proforma $.41 $0.56 $0.60
Diluted earnings per share - as reported $.38 $0.49 $0.56
Diluted earnings per share - pro forma $.37 $0.47 $0.53
The weighted average fair value of each option granted in 1998, 1997 and 1996 is
estimated as $2.13, $2.07 and $2.74, respectively, on the date of grant using
Black - Scholes option pricing model with the following weighted average
assumptions.
1998 1997 1996
---- ---- ----
Expected life 5 year 5 years 5 years
Expected volatility 31% 28% 35%
Risk free interest rate 5.25 6.07 5.82
F-14
51
A summary of stock option activity is as follows:
LONG-TERM DIRECTOR'S
INCENTIVE STOCK OPTION SPECIAL OPTION
OPTION PRICES PLAN OPTION PRICES PLAN OPTION PRICES GRANTS
Outstanding June 30,
1995 1.544 - 2.68 139,387 1.36 - 5.09 159,775 1.542 137,500
Granted 6.09 - 7.182 95,000 7.182 55,500 3.669 -7.182 47,500
Cancelled 2.68 (13,750)
Exercised 1.544 (3,750) 1.544 - 5.09 (26,563)
------- --------
1.544 - 7.98 216,887 1.36 - 7.98 188,712 185,000
10% Stock dividend 23,260 20,288 18,500
Exercised (6,500) (7,375)
------- -------
Outstanding June 30,
1996 1.403 - 7.182 233,647 1.403 - 7.182 201,625 1.542 - 7.182 203,500
Granted 5.60 - 5.70 53,125 5.70 75,625
Exercised 1.491 - 1.754 (12,500) 4.626 (5,000)
-------- -------
Outstanding June 30,
1997 1.403 - 7.182 274,272 1.403 - 7.182 272,250 1.542 -7.182 203,500
Granted 5.75 10,000 5.75 60,500
Exercised 1.491 - 7.182 (18,875) 5.70 (15,125)
Cancelled 6.454 (10,500) ________
------- -------
Outstanding June 30,
1998 1.403 - 7.182 254,897 1.236 - 7.182 317,625 1.542 - 7.182 203,500
======= ======= =======
A summary of information about stock options issued and outstanding pursuant to
the Incentive Plan, Directors Plan and special option grants at June 30, 1998,
is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE SHARES AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE RANGE 6/30/98 REMAINING LIFE PRICE AT 6/30/98 PRICE
$1.236 - 2.436 379,897 4.2 $1.63 379,897 $1.63
3.669 - 5.750 247,125 7.8 5.16 176,625 4.89
6.090 - 7.182 149,000 7.5 6.76 149,000 6.760
------- --- ---- ------- ------
776,022 6.0 $3.78 705,522 $3.55
------- --- ------ ------- -----
During fiscal 1996, the Company sold 137,500 shares of its common stock to two
officers for $812,500. The officers each paid $40,000 in cash and issued
promissory notes for the balance of the purchase price which totalled $732,500.
In the fiscal year ended June 30, 1997, $70,000 of the principal was paid. The
notes are payable over ten years and due in 2006.
NOTE 9 - ACQUISITIONS:
On February 27, 1998, the Company acquired all the outstanding stock of
Rene Perez
F-15
52
and Associates, Inc. ("RPA"), a computer services company located in Miami,
Florida, for $4,220,000. The purchase price consisted of $3,000,000 in cash and
160,000 shares of common stock valued at $1,220,000 based on a closing price of
$7.625 per share. The purchase price has been allocated to assets and
liabilities as follows:
Cash $1,490,000
Accounts receivable 3,702,000
Prepaid expenses and other current assets 59,000
Property, equipment and leaseholds 919,000
Intangibles 716,000
Accounts payable and other current liabilities (724,000)
Income taxes payable (261,000)
Deferred income taxes payable (1,240,000)
Notes payable (441,000)
----------
Purchase price $4,220,000
==========
On March 31, 1998, the Company acquired the assets of a cargo handling
company located at Hartsfield Atlanta International Airport in Georgia from
Corporate Express Delivery Leasing Southeast, Inc. for $422,000 in cash. The
purchase price has been allocated to Property, Equipment and Leaseholds.
On January 16, 1998, the Company acquired all the outstanding stock of
Aero Freightways Inc., a general sales agency located in Ontario, Canada. The
purchase price consisted of a variable capital debenture with a face value of
$227,000 which is payable over three years.
On July 9, 1997 the Company acquired the assets of an FBO located in
Nashville, Tennessee. The purchase price of the assets was $4,250,000 paid in
cash and has been allocated to Property, Equipment and Leaseholds. The cash was
borrowed under the acquisition line from the Company's Banks.
In August 1996, the Company completed the acquisition of five FBO's
from Raytheon Aircraft services and a sixth FBO on November 15, 1996. The
purchase price for the assets was $9,000,000, which consisted of $4,350,000 in
cash and a promissory note in the amount of $4,650,000. The purchase price of
$9,000,000 was allocated to Property, Equipment and Leaseholds. The promissory
note bears interest at a bank's prime rate and is payable over eight years in
equal quarterly installments of principal and interest.
On December 30, 1996 the Company acquired all the outstanding stock of
Wofford Flying Services, an FBO located in Fresno, California for $2,800,000 in
cash. The purchase price has been
F-16
53
allocated to Property, Equipment and Leaseholds ($2,300,000) and a covenant not
to compete ($500,000) which is included in Other Assets.
In February 1996, the Company acquired all of the issued and outstanding stock
of Floracool, Inc., a cargo handling company in Florida, for $250,000 cash,
which included goodwill of $150,000.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
LEASES
The Company is obligated under noncancellable operating leases. Certain
leases include renewal clauses and require payment of real estate taxes,
insurance and other operating costs. Total rental expense on all such leases for
the fiscal years 1998, 1997 and 1996 was $6,832,000, $5,721,000 and $3,477,000,
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, 1998 are as follows:
1999 $ 7,488,000
2000 7,139,000
2001 6,797,000
2002 4,116,000
2003 3,876,000
Thereafter 52,409,000
-----------
Total minimum payment required $81,825,000
===========
In October 1997, the Company entered into a new lease for its Burbank
FBO with the Burbank-Glendale-Pasadena Airport Authority. Pursuant to the terms
of the lease, the Company will construct new hangar and executive terminal
facilities and will refurbish some of its existing facilities at a cost of
approximately $9.0 million. Upon completion of the construction, the Company's
lease will be extended through 2025. The Company anticipates completion of the
new hangars in the spring of 1999 and the executive terminal in the summer of
1999.
LITIGATION
The Company is also a defendant in certain litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of such litigation will not have a significant effect on the financial
statements.
NOTE 11 - MAJOR CUSTOMERS AND FOREIGN CUSTOMERS:
During fiscal 1998, no customer accounted for over 10% of Mercury's
consolidated revenues. However, during fiscal 1998, Western Pacific Airlines,
Inc. accounted for approximately 15% of Mercury's fuel sales and service
revenue. During fiscal 1998, EVA Airways Corporation accounted
F-17
54
for approximately 16% of cargo operations revenue. Government contract services
consists entirely of revenues from agencies of the United States government. No
other customers accounted for over 10% of Mercury's consolidated revenue or 10%
of revenues for any of the four operating units.
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 31%, 32% and 37% of
consolidated revenues for the years ended June 30, 1998, 1997 and 1996,
respectively.
NOTE 12 - EARNINGS PER SHARE:
Basic earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares and common stock equivalents. Common
stock equivalents include stock options and shares resulting from the assumed
conversion of subordinated debentures, when
dilutive.
FISCAL YEAR FISCAL YEAR FISCAL YEAR
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
DILUTED BASIC DILUTED BASIC DILUTED BASIC
Weighted average number of
common shares outstanding
during the period 7,244,000 7,244,000 7,526,000 7,526,000 7,455,000 7,455,000
Common stock equivalents
resulting from the assumed
exercise of stock options 348,000 319,000 318,000
Common shares resulting from
the assumed conversion of
debentures 3,932,000 3,947,000 1,665,000
---------- ---------- ---------- ========== ---------- ==========
Weighted average number of
common and common
equivalent shares outstanding
during the period 11,524,000 7,244,000 11,792,000 7,526,000 9,438,000 7,455,000
========== ========= ---------- --------- --------- =========
Net income $3,027,000 $3,027,000 $4,379,000 $4,379,000 $4,680,000 $4,680,000
Interest expense, net of tax, on
convertible debenture 1,342,000 1,348,000 581,000
---------- ---------- ---------- ========== ---------- ==========
Adjusted income $4,369,000 $3,027,000 $5,727,000 $4,379,000 $5,261,000 $4,680,000
---------- ---------- ---------- ---------- ---------- ----------
Common stock and common 11,524,000 7,244,000 11,792,000 7,526,000 9,438,000 7,455,000
share equivalents
Earnings per share $.38 $.42 $.49 $.58 $.56 $.63
==== ==== ==== ==== ==== ====
NOTE 13 - SUBSEQUENT EVENT:
On August 1, 1998, the Company acquired the weather observation and
forecasting and air traffic control government contracts and related assets of
Weather Data Services Inc. for
F-18
55
$3,500,000, which consisted of $2,500,000 in cash and $1,000,000 of the
Company's stock. The purchase price has been allocated to intangible assets
including contracts and goodwill.
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED):
EARNINGS (LOSS) PER SHARE
SALES AND GROSS NET INCOME
REVENUES MARGIN (LOSS) BASIC DILUTED
FISCAL YEAR JUNE 30, 1998
First Quarter $69,165,000 $7,024,000 $(2,195,000) $(.29) $(.29)
Second Quarter 68,655,000 7,353,000 2,027,000 .28 .21
Third Quarter 52,720,000 6,595,000 1,416,000 .20 .15
Fourth Quarter 49,571,000 7,158,000 1,779,000 .25 .18
FISCAL YEAR JUNE 30, 1997
First Quarter $69,383,000 $5,572,000 $1,412,000 $0.18 $0.15
Second Quarter 73,925,000 5,920,000 1,315,000 0.18 0.14
Third Quarter 72,457,000 5,667,000 1,134,000 0.15 0.13
Fourth Quarter 63,615,000 5,911,000 518,000 0.07 0.07
NOTE 15 - CASH RESTRICTED:
Restricted cash of $9,161,000 consists of tax exempt bond proceeds
pursuant to the CEDFA loan agreement in the amount of $19,000,000, less amounts
disbursed of $9,889,000, plus interest earned of approximately $50,000. Funds
are held by the Trustee and invested in short term tax free funds until
requisitioned by the Company for reimbursement of construction costs pertaining
to the LAX cargo warehouse expansion and expansion of its Burbank FBO.
Subsequent to June 30, 1998, the Company borrowed an additional $3,912,000 to
reimburse construction costs on the two projects.
F-19
56
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT
THREE YEARS ENDED JUNE 30, 1998
ADDITIONS
1 2
Balance at Charged to Charged to
beginning of costs and other accounts- Balance at
Classification period expenses describe Deductions end of period
1998
Allowance for
doubtful accounts $1,875,000 $1,971,000 $( 2,160,000)(a) $1,686,000
========== ========== ================ ==========
1997
Allowance for
doubtful accounts $809,000 $1,810,000 $(744,000) (a) $1,875,000
======== ========== ============== ==========
1996
Allowance for
doubtful accounts $610,000 $945,000 $(746,000) (a) $809,000
======== ======== ============== ========
(a) Accounts receivable write-off
F-20