10-K 1 a65898e10-k.txt FORM 10-K YEAR ENDING 06/30/2000 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, 2000 [ ] 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 Incorporation or Organization) Number)
5456 McConnell Avenue, Los Angeles, California 90066 ---------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (310) 827-2737 Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on Title of Each Class Which Registered ------------------- ----------------------------- Common Stock - Par Value $.01 American Stock Exchange Pacific Stock Exchange
2 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes No X. As of September 13, 2000, 6,472,955 shares of the Registrant's Common Stock were outstanding. Of these shares, 2,057,620 shares were held by persons who may be deemed to be affiliates. The 4,415,335 shares held by non-affiliates as of September 13, 2000 had an aggregate market value (based on the closing price of these shares on the American Stock Exchange of $6.625 a share) of $29,251,594. As of September 13, 2000, 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 14, 2000 are incorporated by reference into Part III of this Form 10-K. -------------------------------------------------------------------------------- (The Exhibit Index May Be Found at Page 34) 3 PART I ITEM 1. BUSINESS Mercury Air Group, Inc., a New York corporation since 1956, provides a broad range of services to the aviation industry through five (5) principal operating units: fuel sales and services, cargo operations, fixed base operations, U.S. government contract services and RPA Airline Automation Services, Inc.("RPA"). Fuel sales and services include the sale of fuel and delivery of fuel primarily to domestic and international commercial airlines, business aviation and air freight airlines. Cargo operations consist of cargo handling, space logistics operations and general cargo sales agent services. Fixed base operations ("FBOs") include fuel sales, into-plane services, ground support services, aircraft hangar and tie-down facilities and maintenance at certain locations for commercial, private, general aviation and military aircraft. Government contract services consist of aircraft refueling and fuel storage operations, base housing maintenance, base operating support (BOS) services, air terminal and ground handling services and weather observation and forecasting services performed principally for agencies of the United States government. RPA, a subsidiary of the Company, includes airline revenue accounting and management information software consisting of proprietary software programs which are marketed to foreign and domestic airlines. As used in this Annual Report, the term "Company" or "Mercury" refers to Mercury Air Group, Inc. and, unless the context otherwise requires, its subsidiaries. The Company's principal executive offices are located at 5456 McConnell Avenue, Los Angeles, California 90066 and its telephone number is (310) 827-2737. NARRATIVE DESCRIPTION OF THE BUSINESS FUEL SALES AND SERVICES Mercury's fuel sales consist of contract fueling and related fuel management services. Sales of aviation fuel are made primarily to domestic and international airlines and airfreight companies. Mercury also provides fuel to large corporate aircraft operators through third parties. As a result of higher volume and significantly higher fuel prices, Mercury's revenue from fuel sales and services as a percentage of revenue increased to 59.9% of total Company revenue in fiscal 2000 from 49.5% in fiscal 1999. Contract fuel sales are generally made pursuant to verbal or short-term contracts whereby Mercury provides fuel supply and, in most cases, delivery to meet all or a portion of a customer's fuel supply requirements at one or more locations. To facilitate its fuel sales business at locations where Mercury does not have facilities, Mercury has developed an extensive network of third party supply and delivery relationships which enable it to provide fuel to customers on a scheduled or ad hoc basis. Through these third party relationships, Mercury is currently supplying fuel to customers at airports throughout the United States and internationally. 2 4 Mercury believes that it adds value for its customers and is able to attract business by providing high quality service and by offering a combination of favorable pricing and credit terms. Mercury provides 24-hour, single source, coordinated supply and delivery on a national and international basis as well as providing related support services. Further, Mercury believes its scale of operations and creditworthiness allow the purchase of fuel on more favorable price and credit terms than would be available to most of its customers on an individual basis. Accordingly, Mercury frequently extends credit on an unsecured basis to customers which may exhibit a higher credit risk profile and who may otherwise be required to prepay or post letters of credit for fuel purchases. The amount of credit extended to any particular customer is a subjective decision. Customer credit terms range from prepayment to up to more than 60 days with certain accounts also subject to maximum credit line limitation. In certain instances, the Company will permit a customer to further defer payment on its account through an agreed upon payment schedule or execution of a promissory note with terms negotiated on a case-by-case basis. Factors considered in credit decisions include the customer's financial strength and payment history, competitive conditions in the market, the expected productivity of the account, the availability of credit insurance and collateral or guarantees given to secure the credit. Mercury provides fuel support operations for corporate and fractional ownership aircraft at numerous locations from its Houston facilities. This operation allows selected customers to purchase fuel at advantageous prices from a single source. This operation has grown and developed into a network of over 150 third-party locations in the United States and Europe where Mercury can provide fuel. The Company has automated this system to provide on-line pricing and location information on the internet under the domain name mercfuel.com and expects, at some future date, to include on-line ordering capability. The automated system is accessible only to customers who have been pre-approved for credit. Mercury has occasionally purchased equity positions in, made loans to or entered 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. In fiscal 1999 the Company invested $300,000 in National Airlines, a start-up airline based in Las Vegas, Nevada, which began operations on May 27, 1999. The Company has also entered into a fuel management contract with National. Sales to National accounted for approximately 10.6% of consolidated revenue in fiscal 2000. Mercury purchases fuel at current market prices from a number of major oil companies and certain independent and state owned oil companies based on the expected requirements of its customers. From time-to-time, Mercury will commit to purchase a fixed volume of fuel, at a fixed price, over a fixed period of time, at agreed locations based on selected customers' corresponding purchase commitments. Mercury's terms of payment generally range from ten to 3 5 thirty days for most of its fuel purchases, except for bulk pipeline purchases, which generally are payable two days from invoice receipt. Mercury has agreements with certain suppliers under which Mercury purchases a minimum amount of fuel each month at prices which approximate current market prices. Mercury makes occasional spot purchases of fuel to take advantage of market differentials. In order to meet customer supply requirements, Mercury carries limited inventories at numerous locations. Due to the nature of Mercury's business, the volume of Mercury's aviation fuel inventories will fluctuate. Mercury's fuel supply contracts may generally be canceled by either party with no further obligations. In some cases, Mercury has monthly purchase requirements which are established based on historical volumes of fuel purchased by Mercury. Such fuel purchase history may result in the seller agreeing to provide a monthly allocation to Mercury such that the seller agrees to dedicate a portion of its available fuel for Mercury's requirements. Mercury benefits from such an allocation because, during periods of short fuel supply, reductions in supply are generally made first to those buyers who have not been given any allocation. To maintain dedicated allocations of fuel, Mercury usually purchases fuel at levels approximating the allocated amount. However, Mercury is not obligated to purchase any fuel under such an allocation. Currently, the monthly allocations from Mercury's fuel suppliers represent only a small portion of Mercury's total monthly supply requirements. Mercury's consolidated fuel sales could be materially adversely affected by a significant decrease in the availability, or increase in the price of, aviation fuel. During fiscal 2000, the cost of fuel per gallon rose approximately 50% and led to a significant increase in bad debts due to the incidence of customer bankruptcies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 further 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, although this was not a factor in fiscal 2000 when fuel prices rose significantly. Various factors including the price of fuel, the volatility of the price of fuel, over-all business mix, customer profiles and specific major accounts which are attracted, retained or lost during a given period affect gross margin as a percentage of revenue for Mercury's fuel sales and services business. FIXED BASE OPERATIONS Mercury currently provides FBO services at nineteen (19) airports throughout the United States. For the year ended June 30, 2000 FBO operations comprised 21.7 % of the total Company revenue. At each FBO, Mercury maintains administrative offices; conducts retail fuel sales and refueling operations which service principally corporate and private aircraft ("general aviation") and to some extent commercial airlines; acts as a landlord for office, aircraft tie-down and hangar space tenants; and provides aircraft maintenance at a few select locations. The FBOs operate 4 6 refueling vehicles and maintain fuel storage tanks as required to support into-plane and fuel sales activities. The FBO facilities and the property on which operations are conducted are leased from the respective airport authorities. Fifteen of Mercury's FBOs are currently directly owned by the Company, the remaining FBOs are owned by Mercury Air Centers, Inc. ("Air Centers") which is a wholly owned subsidiary of the Company. The Company's FBO operations have grown principally as a result of the acquisition of additional operations or locations as well as facility enhancements at existing locations. In April 2000, the Company acquired assets of an FBO located in Fort Wayne, Indiana. In October 1999, the Company acquired assets of an FBO located in Tulsa, Oklahoma. Also in October 1999, the Company acquired FBO assets at Charleston International Airport and John's Island Executive Airport in South Carolina. In November 1998, the Company acquired certain assets of an FBO located in Jackson, Mississippi. In October 1997, the Company entered into a new lease for its Burbank FBO pursuant to which it has constructed 3 new hangars and built an executive terminal and refurbished certain existing facilities. In July 1997, the Company acquired certain assets of an FBO located in Nashville, Tennessee. In June 1997, the Company entered into an agreement to operate an FBO, which opened in November 1998, in Charleston, South Carolina. In December 1996, the Company acquired an FBO located in Fresno, California. In August and November 1996, the Company acquired certain assets of six FBOs from Raytheon Aircraft Services, Inc. In addition, in September 2000, the Company purchased the FBO assets of Raytheon Aircraft Services, Inc. Birmingham, Alabama location at a cost of approximately $6.6 million, which the Company funded under its existing senior credit facilities. Management intends to continue pursuing FBO acquisitions and facility enhancements to the extent permitted under its credit facilities but no assurance can be given that acquisition or enhancement opportunities will be available at prices which will maintain existing levels of profitability or be approved under its credit facilities. CARGO OPERATIONS The Company's cargo operations are conducted through its wholly-owned subsidiary, Mercury Air Cargo, Inc. ("MAC"), which provides the following services: cargo handling, space logistics and general cargo sales agent services. Cargo operations comprised 9.6% of total Company revenue for the year ended June 30, 2000. 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 four (4) non-airline providers of contractual cargo containerization and palletization for domestic and international airlines and cargo airlines at LAX. MAC specializes in consolidating smaller parcels into air cargo pallets and breaking down shipping containers for sea-to-air and air-to-air transfers. 5 7 MAC handles cargo at Los Angeles International Airport (LAX), William B. Hartsfield International Airport (ATL), and Dorval International Airport (YUL), Mirabel International Airport (YMX) and Lester B. Pearson International Airport (YYZ) in Canada. In March 1998, MAC expanded its cargo handling operations by acquiring the assets of Intermodal Services, Inc. located in Atlanta, Georgia. In April 1998, MAC completed construction and commenced operation of a 174,000 square foot warehouse at LAX under a five year lease which was subsequently extended to June 2006. MAC is currently the largest independent cargo handling company at LAX. In February 1999, MAC sold its unprofitable subsidiary Floracool, Inc. thereby ceasing cargo handling operations at Miami International Airport. MAC competes in the cargo handling business based on quality and price of service. Long term growth in MAC's cargo handling operations can only be realized by maintaining existing and obtaining new locations or expanding current facilities. Space Logistics MAC brokers cargo space on transcontinental flights within the United States and on international flights to Europe, Asia, the Middle East, Australia, Mexico and Central and South America. Space logistics involves contracting for bulk cargo space on airlines and selling that space to customers with shipping needs. MAC has established a network of shipping agents who assist in obtaining cargo for shipment on space purchased from airlines, and who facilitate the delivery and collection of freight charges for cargo shipped by MAC. As of June 1, 2000, MAC entered into a one year contract to purchase all of South African Airlines ("SAA") cargo capacity on its passenger flights from the United States and Canada to South Africa. MAC's one year commitment for these routes is approximately $5.7 million. Unlike an air cargo airline which operates its own aircraft, MAC's space logistics business purchases committed cargo space on scheduled airline flights or supplemental flights at a discount. MAC is thereby able to profit from the sale of cargo transportation space worldwide without the fixed overhead expense of operating aircraft. In addition to the relationships listed above, MAC purchases belly cargo space from a number of major airlines worldwide. In some instances, MAC enters into fixed minimum commitments for cargo space, in order to obtain exclusive or preferred rights to broker desirable cargo space profitably. With its large volume of cargo space purchases and its ability to negotiate among airlines, MAC adds value for its customers and is able to attract business by offering favorable pricing to the domestic and international freight forwarding community. MAC records revenue as the difference between the cost of the space and the amount at which the space is resold. On September 1, 2000, the Company acquired a 49% interest in Pacific Air Cargo, LLC, a start up company which sells cargo capacity on a leased Boeing 747 Freighter Aircraft to forwarders principally on Trans Pacific routes. 6 8 General Sales Agent Services MAC also serves as general cargo sales agent directly and through its subsidiaries, Hermes Aviation, Inc., Hermes Aviacion de Mexico, S.A. de C.V. and Aero Freightways, Inc. of Canada for airlines in the Far East, Canada, Mexico, Central and South America and in the United States. In this capacity, MAC sells the transportation of cargo on client airlines' flights, using the client airlines' own air waybills. MAC earns commissions from the airlines for selling their cargo space. As with its space logistics operations, the growth potential for MAC's general cargo sales agent business is not limited by requirements for physical facilities or by requirements for additional capital investments. GOVERNMENT CONTRACT SERVICES Mercury conducts its government contract services through its wholly owned subsidiary, Maytag Aircraft Corporation ("Maytag"), which is headquartered in Colorado Springs, Colorado. Maytag provides aircraft refueling, air terminal, base housing maintenance, base operating support, and weather data services. Aircraft Refueling Maytag provides aircraft refueling and related services at 11 United States military bases, including ten in the United States and one in Greece. Maytag's refueling contracts generally have a term of four years, with expiration dates ranging from October 2000 to January 2005. 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 provides 24-hour refueling services for a variety of aircraft for the military. All fuel handled in these operations is government owned. In connection with its government contract refueling business, Maytag owns and operates a fleet of refueling trucks and other support vehicles. Air Terminal Services Maytag provides air terminal and ground handling services to the United States Government at 18 locations under seven contracts. Six contracts cover three U.S. military bases in Alaska, Japan, and Korea, and three international airports in Japan, Korea, and Kuwait. Maytag also has one contract servicing 12 international airports in Latin America. Air terminal services contracts are generally for a base period of up to one year, with government options for multiple one-year extension periods. Expiration dates for Maytag's air terminal contracts range from November 2000 to September 2001. Air terminal contracts provide a firm-fixed price for specified services. Discretionary performance-based awards are also available at the five Pacific Rim locations. Air terminal and ground handling services include the loading and unloading of passengers and cargo, transient alert, and flight planning services. 7 9 Base Housing Maintenance Maytag provides base housing maintenance services at one United States military base in Japan under a contract which has been extended through January 2001, while the follow-on contract is being competed. The base housing maintenance contract provides for "indefinite quantity pricing" and fixed prices for specified services, with the actual quantities of each item determined by seasonally varying government delivery orders. Base housing maintenance services consist of change of occupancy maintenance for government-provided quarters, including basic interior maintenance, repair, painting, and cleaning. Base Operating Support Services Maytag provides base operating support (BOS) services at Niagara Falls, NY and Westover, MA Air Reserve Facilities on a subcontracted basis. Under the terms of the subcontracts, Maytag provides, at a firm-fixed price, multi-function services, including fuel management, traffic management, airfield management, vehicle operations and maintenance services, and meteorological services through March and February 2001, respectively, with four pre-priced one-year options. Additionally, Maytag expects to add two more BOS contracts (Youngstown, OH in October 2000 and Willow Grove, PA in November 2000) in Fiscal Year 2001. Weather Data Services Maytag provides weather observation and/or weather forecasting services at 29 locations within the United States pursuant to 19 contracts with the United States Government and certain local governmental agencies. This includes three weather observation and forecasting contracts and 16 weather observation contracts. The Weather Data contracts provide firm fixed prices for specified services and are generally for a base period of one year, with multiple one-year options at the government's election. Some of Weather Data's existing contracts were extended for a one year period ending September 30, 2001, with remaining extension options ranging up to two periods on a majority of the contracts. All of Maytag's government contracts are subject to competitive bidding. Refueling, base housing maintenance, air terminal, and weather forecasting contracts are generally awarded to the offeror with the proposal that represents the "best value" to the government. In a "best value" competition, the proposals are evaluated on the basis of price, past performance history of the offeror, and the merit of the technical proposal, creating a more subjective process. Weather observation contracts are generally awarded to the offeror with the lowest priced technically acceptable proposal. Maytag's contracts are all subject to termination at the discretion of the United States Government, in whole or in part. Termination of a contract may occur if the United States Government determines that it is in its best interest to discontinue the contract, in which case closure costs will be paid to Maytag. Termination may also occur if Maytag defaults under a contract. Maytag has never experienced any such default termination. 8 10 RPA RPA has developed a suite of proprietary software products which it markets to the aviation industry. Its principal products include software products for purchasing, maintenance and inventory ("PMI"), airline passenger revenue accounting ("PRA"), and airline financial accounting ("AFA"). These products have been designed to operate on the IBM AS/400 platform but will also operate in Unix and windows NT environments. RPA generates license fee revenue from the sale of its software packages and receives maintenance revenue from its ongoing support of these products. In addition, RPA generates consulting fees by assisting customers with software solutions and process consulting. Although RPA's software products can be utilized by major airlines, it generally markets it products and services to foreign airlines and domestic second tier and regional airlines. During fiscal 2000, RPA generated a loss of $1.3 million due to lower than expected license fees. RPA's success will depend upon its continuing product development efforts and expansion of its customer base. ACQUISITIONS BIRMINGHAM, ALABAMA FBO Effective September 1, 2000, the Company acquired the assets of an FBO located in Birmingham, Alabama for $6.6 million in cash from Raytheon Aircraft Services, Inc. The company funded the purchase price by borrowing from its acquisition line. FORT WAYNE, INDIANA FBO Effective April 21, 2000, the Company acquired the assets of an FBO located in Fort Wayne, Indiana for $3.9 million in cash. The Company funded the purchase price by borrowing from its acquisition line. TULSA, OKLAHOMA FBO On October 22, 1999, the Company acquired certain assets of Air Tulsa, Inc., an FBO located in Tulsa, Oklahoma. Assets acquired included refueling equipment and tank farms utilized in the FBO business, inventory, prepaid expenses and a sublease. The agreement also included a covenant not to compete. Total consideration was $2.4 million in cash which the Company funded under its acquisition line. The agreement included a second closing to occur within eighteen months of the first closing and included the purchase of hangars, buildings and the leasehold for an additional cash consideration of $3.8 million. The second closing took place in July 2000 and was funded under the Company's acquisition line 9 11 CHARLESTON AND JOHN'S ISLAND, SOUTH CAROLINA FBOS On October 5, 1999, the Company acquired certain FBO assets of Charleston Equities, Inc. for $700,000 cash. The purchase consolidated the leasehold at Charleston International Airport and includes the leasehold at John's Island Executive Airport. MAJOR CUSTOMERS During fiscal 2000, EVA Airways Corporation accounted for approximately 14% of cargo operations revenue, National Airlines, Inc. represented approximately 17% of fuel sales and services revenue and approximately 10.6% of consolidated revenue and Tower Air, Inc. represented approximately 10% of fuel sales and services revenue. Tower Air, Inc. filed for bankruptcy protection in February 2000 and is not expected to be a significant fuel sales customer in fiscal 2001. During fiscal 2000, 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 five reporting units. SEASONAL NATURE OF BUSINESS Mercury's commercial fuel sales, FBOs and aircraft support operations are seasonal in nature, being relatively stronger during the months of April through December in its fueling operations and FBOs than during the winter months due in part to weather conditions, and increased during summer months due in part to additional commercial and charter flights. MAC's cargo business is lower during the months of January and February and increases March through December. The cargo business is affected by the patterns of international trade. Operations at military facilities are not seasonal. POTENTIAL LIABILITY AND INSURANCE Mercury's business activities subject it to risk of significant potential liability under federal and state statutes, common law and contractual indemnification agreements. Mercury reviews the adequacy of its insurance on an on-going basis. Mercury believes it follows generally accepted standards for its lines of business with respect to the purchase of business insurance and risk management practices. The Company purchases airport liability and general and auto liability in amounts which the Company believes are adequate for the risks of its business. COMPETITION Mercury competes with major companies which maintain their own source of aviation fuel and with other aircraft support companies whose total sales and financial resources far exceed 10 12 those of Mercury. In addition, certain airlines provide cargo and fueling services comparable to those furnished by Mercury. At LAX Mercury competes with, in addition to the airlines, three (3) fuel delivery providers and with three (3) non-airline entities with respect to air cargo handling business. Generally, FBOs have a minimum of one competitor at each airport as well as national multi-location chains. Mercury has many principal competitors with respect to government contracting services including certain small disadvantaged businesses which receive a ten percent (10%) cost advantage with respect to certain bids and set asides of certain contracts. Recently the FBO market has seen the emergence of increased competition among several national FBO chains owned by major corporations whose total sales and financial resources exceed those of Mercury. Substantially all of Mercury's services are subject to competitive bidding. Mercury competes on the basis of price and quality of service. ENVIRONMENTAL MATTERS Mercury must continuously comply with federal, state and local environmental statutes and regulations associated with its numerous underground fuel storage tanks. These requirements include, among other things, tank and pipe testing for integrity, soil sampling for evidence of leaking and remediation of detected leaks and spills. Other than the $3.4 million spent during the 1999 fiscal year to comply with certain federal mandates regarding below ground fuel tanks (See Item 2 "Properties"), there have been no material capital expenditures nor has there been a material negative impact on Mercury's earnings or competitive position in performing such compliance and related remediation work. In late 1998, Mercury, and many other companies operating on Southern California airports received notice of potential violations of California Environmental Protection Agency - Air Resources Board regulations. This notice alleged that such companies had violated the act by fueling airport service vehicles with Jet A fuel. Mercury immediately brought all of its operations into full compliance with all applicable regulations and has entered into a settlement agreement with the state of California. In addition, it has undertaken a review of federal and state regulations to insure future compliance. The Company has received notice that it may be subject to environmental remediation obligations on property formerly leased by the Company in Anaheim, California. The Company terminated operations on this leased property in fiscal 1987 at which time a closure letter was in effect. While no assurances can be given, the Company does not expect to incur any material obligation pertaining to this matter. Mercury knows of no other basis for any notice of violation or cease and abatement proceeding by any governmental agency as a result of failure to comply with applicable environmental laws and regulations. EMPLOYEES As of August 31, 2000, Mercury employed 1,864 full-time and 340 part-time persons in its following operating units: fuel sales and services, 75 full-time persons; RPA, 62 full-time persons; cargo operations, 499 full-time and 4 part-time persons; FBOs, 652 full-time and 55 part-time persons; and government contract services, 576 full-time and 281 part-time persons. Maytag has collective bargaining agreements which affect approximately 120 employees in its weather and base support operations. 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. 11 13 ITEM 2. PROPERTIES. Listed below are the significant properties leased or owned by Mercury as of September 19, 2000:
LEASED ANNUAL EXPIRATION ACTIVITY AT FACILITY --------- -------- ------------ ---------------------- ---------------------------------- LOCATION OR OWNED RENTAL OF LEASE FACILITY DESCRIPTION ----------------------- --------- -------- ------------ ---------------------- ---------------------------------- CORPORATE HEADQUARTERS 5456 McConnell Owned N/A N/A Landlord, executive 22,500 sq.ft. building Los Angeles, California (1) and support personnel offices MAYTAG OPERATIONS 6145 Lehman Drive, Suite 300 Owned N/A N/A Landlord, executive 8,000 sq.ft. offices Colorado Springs, CO (2) and support personnel offices RPA BUILDINGS 129 S.W. 36th Court Miami, Owned N/A N/A Land 10,846 sq. ft. FL (5) 101 S.W. 36th Court Owned N/A N/A Land 7,210 sq. ft. Miami, FL (5) 119 S.W. 36th Court Owned N/A N/A Office Building 1,401 sq. ft. Miami, FL (5) 115 S.W. 36th Court Owned N/A N/A Office Building 3,865 sq. ft. Miami, FL (5) 2000 N.W. 89th PL Owned N/A N/A Office Building 22,400 sq. ft. Miami, FL Office Building HARTSFIELD ATLANTA INT'L AIRPORT 996 Toffie Terrace Leased $550,100 Month to month Cargo handling 71,100 sq. ft. of cargo warehouse Atlanta, GA (3) warehouse with facility with 3,350 sq. ft. of offices offices on 5.3 acres
12 14 Cargo Building "A" Leased $924,061 December 2010 Cargo handling 60,597 sq. ft. of cargo warehouse South Cargo Area (4) warehouse with offices facility with 9,785 of Office Space on 2.4 acres of land LOS ANGELES INT'L AIRPORT 6851 W. Imperial Highway, Leased $469,000 Month-to-month Cargo hangar, with 60,000 sq.ft. of offices and Los Angeles, CA offices and executive cargo warehouse facility on 5.5 . offices rented to acres customers 6060 Avion Drive Leased $2,097,000 June Cargo handling 207,000 sq.ft. offices and cargo Los Angeles, 2006 warehouse with offices warehouse facility CA LESTER B. PEARSON INT'L AIRPORT Building D Leased $378,000 Month to month Cargo handling 28,445 sq. ft. warehouse space Toronto, AMF warehouse with offices and 5,721 sq. ft. of offices Ontario Concession 6 Leased $121,800 November Cargo handling 9,000 sq. ft. office space and East Hurontario St. (4) 2010 warehouse with offices 48,360 sq. ft. of warehouse space DORVAL INT'L AIRPORT 800 Stuart Graham Blvd. South Leased $489,000 November Cargo handling 51,000 sq.ft. warehouse and 2,432 Dorval, Quebec (6) 2007 warehouse with offices sq.ft. of office space MIRABEL INT'L AIRPORT 12005, Rue Cargo Leased $83,000 November Cargo handling 12,500 sq.ft. warehouse A-3, Suite 102 2005 warehouse with offices Mirabel, Quebec LOS ANGELES INT'L AIRPORT 7000 World Way West Los Leased $333,000 Month-to-month Service and refueling 2,000 sq.ft. of executive Angeles, CA of private aircraft terminal on 1.93 acres
13 15 ONTARIO INT'L AIRPORT 2161 East Avion Leased $226,000 April Landlord, service and 60,000 sq. ft. of Ontario, CA 2008 refueling of offices and hangars on 15.4 commercial and private acres aircraft BAKERSFIELD AIRPORT 1550 Skyway Drive Leased $137,000 May Landlord, service and Executive offices, terminal and Bakersfield, CA (6) 2020 refueling of hangars on 6.14 acres commercial and private aircraft BURBANK-GLENDALE-PASADENA AIRPORT 4301/4405/4407/4409 Leased $1,604,000 April Landlord, service and 156,200 sq. ft. of offices, /4411/4531 2025 refueling of hangars, and shop facilities Empire Avenue commercial 74,612 sq. ft. of offices, 10660/10670/10700/10750 and private aircraft hangars and shop facilities on /10760/10800/10820 16.3 acres Sherman Way, Burbank, CA 6920 Vineland Ave. No. Leased $164,000 Month to month Landlord, service and 5,200 sq. ft. of offices, hangars Hollywood, CA refueling of and shop facilities commercial and private aircraft CHARLESTON INTERNATIONAL AIRPORT 6060 S Aviation Wy. Leased $161,160 August Terminal, office, and 103,000 sq. ft. of Offices, N. Charleston, SC 2007 hangars hangars and parking area 6070 Perimeter. Leased $11,680 November Building and hanger Hangars, building, shop N. Charleston, SC 2000 space facilities and parking areas Johns Island Airport Leased $26,130 May Terminal, office, and consisting of 6.6 acres 285,200 2700 Fort Trenholm 2004 hanger space sq. feet on 6.54 acres Johns Island, SC SANTA BARBARA MUNICIPAL AIRPORT 404 Moffet Road Leased $9,360 Month-to-month Landlord, service, 8 T-Hangar space totaling Goleta, CA maintenance, and 28,413 sq. ft. refueling of commercial and private aircraft
14 16 404 Moffet Road Leases $56,000 Month-to-month Building space 9,360 sq. ft of building space Goleta, CA (Building 124 &126) 204 Moffett Place Lease $28,920 Month-to-month Building space and 10,370 sq. ft. office space and Goleta, CA parking spaces 10 parking spaces Building 121 302 Moffet Place Lease $39,580 Month-to-month Building space 3,120 sq. ft office space Goleta, CA Building 122 FRESNO YOSEMITE INT'L AIRPORT 5045 E. Anderson Avenue Leased $74,000 April Landlord, service and 8.47 acres. Fresno, CA 2020 refueling of commercial and private aircraft 5045 E. Anderson Avenue Leased $3,000 February Landlord, service and 250 sq. ft. of general office/ Fresno, CA 2001 refueling of storage commercial and private aircraft 5045 E. Anderson Avenue Leased $67,000 August Terminal, office and Hangars and offices on 2.16 acres Fresno, CA 2006 hangar facility 5045 E. Anderson Avenue Leased $6,000 October Refueling of private 12,320 sq.ft. fuel farm Fresno, CA 2000 and commercial aircraft 5045 E. Anderson Avenue eased 115,000 May Hangar and commercial 22,000 sq.ft. office space on Fresno, CA 2005 office space 19.26 acres WM. B. HARTSFIELD INT'L AIRPORT 1200 Toffie Terrace Leased $107,000 March Landlord, service and 4,800 sq.ft. of offices and ramp Atlanta, GA 2002 refueling of area on 11.2 acres commercial and private aircraft DEKALB-PEACHTREE AIRPORT 1951 Airport Road Leased $219,000 November Landlord, service and 164,288 sq.ft. of offices and Atlanta, GA (6) 2006 refueling of hangars on 22.46 acres commercial and private aircraft
15 17 L.G. HANSCOM FIELD AIRPORT 180 Hamscom Drive Leased $332,465 May Landlord, service, 302, 078 sq. ft. of offices, Bedford, MA (6) 2012 maintenance and terminal, hangars, and land. refueling of commercial and private aircraft RENO CANNON INT'L AIRPORT 655 So. Rock Blvd. Reno, NV Building $13,000 June Landlord, service and 33,000 sq.ft. of hangars and owned,land 2017 refueling of administrative building on 23.7 rented commercial, private acres of land and military aircraft ADDISON AIRPORT 4400 Glenn Curtiss Dr. Leased $314,000 September Landlord, service and 49,472 sq. ft. of offices and Dallas, TX (6) 2021 refueling of hangars on 2.80 acres commercial and private aircraft 4400 Glenn Curtiss Dr. Leased $52,000 June Landlord, service and 57,949 sq.ft. of offices and Dallas, TX 2022 refueling of hangar space on 6.28 acres (6) commercial and private aircraft 4400 Glenn Curtiss Dr. Leased $8,000 July Landlord, service and 12,600 sq.ft. of offices and Dallas, TX 2021 refueling of hangar space (6) commercial and private aircraft 4400 Glenn Curtis Dr. Leased $28,000 December Fuel farm Dallas, TX (6) 2000 CORPUS CHRISTI 355 Pinson Drive Leased $19,000 October Landlord, service and 66,096 sq.ft. of Corpus Christi, TX (6) 2009 refueling of offices and hangars on 6.69 acres commercial and private aircraft NASHVILLE INT'L AIRPORT 635 Hangar Lane Leased $247,000 June Landlord, service and Office and hangars on 38.69 acres Nashville, TN 2012 refueling of commercial and private aircraft
16 18 JACKSON INT'L AIRPORT 110 S. Hangar Drive Leased $107,000 February Landlord, service and Office and hangars on 7 acres Jackson, MS 39208 (6) 2006 refueling of commercial and private aircraft TULSA INT'L AIRPORT 7500 E. Apache Leased $73,000 April Landlord, service and Office and hangars on 11.23 acres Tulsa, OK 74115 2019 refueling of Hangar 1&2 commercial and private aircraft 7500 E. Apache Leased $22,000 April Landlord, service and Land consisting of 5.23 acres Tulsa, OK 74115 Hangar 22 & 2019 refueling of 26 commercial and private aircraft 7500 E. Apache Leased $62,000 June Landlord, service and Office and hangars on 5.23 acres Tulsa, OK 74115 2011 refueling of Hangar 22 & 26 commercial and private aircraft 7500 E. Apache Leased $11,000 June Landlord, service and Hangar space on 6.18 acres Tulsa, OK 74115 2016 refueling of Hangar 18 commercial and private aircraft 7500 E. Apache Leased $36,000 January Landlord, service and Hangar space on 14,000 sq. ft. Tulsa, OK 74115 2001 refueling of Hangar 4 commercial and private aircraft FORT WAYNE AIRPORT Fort Wayne-Allen County Leased $43,650 December Landlord, service and Office, hangars, and ramp space Airport Authority 2003 refueling of on 172,734 sq. ft of land Hangar 37,41, 41A Building commercial and private 28 aircraft Fort Wayne-Allen County Leased $66,700 December Landlord, service and 234,451 sq. ft. of office, Airport Authority 2003 refueling of hangar, parking and ramp space Hangar 40, 43 commercial and private aircraft Fort Wayne-Allen County Leased $54,900 November Landlord, service and 49,500 sq. ft of hangar, ramp and Airport Authority 2004 refueling of parking space Hangar 42 commercial and private aircraft
17 19 Fort Wayne-Allen County Leased $40,400 October Landlord, service and Aircraft hangar space consisting Airport Authority 2016 refueling of of 53,658 sq. ft. Hangar 45 commercial and private aircraft Fort Wayne-Allen County Leased $8,600 August Landlord, service and Aircraft hangar space consisting Airport Authority 2002 refueling of of 4,000 sq. ft. Hangar D commercial and private aircraft Fort Wayne-Allen County Leased $2,100 Month to month Landlord, service and 2,500 sq. ft. of Aircraft hangar Airport Authority refueling of space T-Hangar commercial and private aircraft Fort Wayne-Allen County Leased $21,400 November Landlord, service and 115,128 sq. ft. of space used Airport Authority 2004 refueling of for parking, ramp and hangar Parcel No. 1,2, & 3 commercial and private space aircraft Fort Wayne- Leased $100 December Landlord, service and Fuel Farm Consisting of 57,000 Allen County Airport 2005 refueling of sq. ft. Authority commercial and private aircraft BIRMINGHAM AIRPORT Birmingham Airport Leased $140,400 August Landlord, service and Office, hangar, storage, and ramp 2021 refueling of space on 29.30 acres commercial and private aircraft
(1) This property was purchased in April 1994 for $1,800,000 and is subject to a first mortgage to Sanwa Bank in the sum of $449,000 at June 30, 2000 repayable in equal monthly installments of principal of $9,750, plus interest at 7.5% per annum, the last payment due in April 2004. (2) This property was purchased in May 1995 for $515,000 and is subject to a first mortgage to U.S. Bank in the sum of $347,000 at June 30, 2000 repayable with interest at 9% in equal monthly installments of approximately $4,450, the last payment due May 2010. (3) This lease is subject to the right of Delta to exercise an option to acquire the property upon a two-year notice. (4) Term date is subject to change upon completion of Tenant Improvements. (5) Leased to R&M Investment Corporation under a lease dated July 2, 1999 with an option to purchase. (6) The leasehold interest is subject to security interest granted to Fleet National Bank f/k/a Bank Boston. 18 20 At most commercial airports where Mercury operates FBOs, Mercury maintains its own fuel storage capabilities. Effective January 1, 2000, Mercury has replaced, retrofit or closed most of its existing underground fuel storage facilities in order to comply with applicable federal regulations. See "Business--Environmental Matters" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The following table summarizes Mercury's existing fuel storage facilities.
Approximate Capacity Location (gallons) ----------------------- ---------------------------- Los Angeles, California 311,000(UG)(1) Bakersfield, California 98,000(62,000 AG; 36,000 UG) Burbank, California --(2) Santa Barbara, California --(3) Reno, Nevada 99,000(AG)(4) Ontario, California 88,000(UG)(1) Dallas, Texas 57,000(UG)(5) Corpus Christi, Texas 25,000(AG)(4) Atlanta, Georgia (Hartsfield) 48,000(AG)(4) Atlanta, Georgia (Peachtree) 48,000(AG)(4) Fresno, California 73,000(AG) Bedford, Massachusetts 30,000(AG)(4) Nashville, Tennessee 37,000(AG) Charleston, South Carolina 38,000(AG) Jackson, Mississippi 43,000(AG)(6) Tulsa, Oklahoma 126,000 (UG)(4) Fort Wayne, Indiana 171,000 (AG)(4) John's Island, South Carolina 18,000(UG)(1) Birmingham, Alabama 145,500 (AG)(4)
(AG) = Above-ground fuel storage (UG) = Under-ground fuel storage (1) Retrofit of existing system. (2) System closed with consortium fuel farm used as an alternative. (3) Interim operations without a fuel farm, new above ground fuel farm approved and will be installed within 12 months. (4) No modification required. (5) Facility owned by a third-party who completed required modifications. (6) Presently use a third party tank form consortium, for balance of requirement. 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. 19 21 ITEM 3. LEGAL PROCEEDINGS. In connection with the Chapter 7 bankruptcy filing for Western Pacific Airlines, Inc., "WPAI", the Company received a letter, dated August 25, 1999, from the bankruptcy trustee's attorneys making a formal demand for recovery of alleged preference payments of approximately $11.4 million. This amount represents cash received for payment of fuel and sales during the 90 days prior to WPAI's initial bankruptcy filing. Subsequently the trustee filed suit in the United States District Court for the District of Colorado on October 1, 1999. The Company believes it has strong defenses based on the transaction 1) being made in the ordinary course of business, and 2) involving an exchange for new value. At the same time, Mercury received notice of a claim by the trustee for $1.1 million against Compass Bank for funds paid pursuant to a loan between Compass and WPAI, which the Company guaranteed. The trustee also filed suit in this case on October 1, 1999. The Company has undertaken to defend this matter and believes it has strong defenses based on the transaction being made in the ordinary course of business. In October 1999, Mr. Rene Perez, formerly the president of RPA, notified the Company of certain alleged violations of his employment contract dated February 28, 1998 between the Company, RPA and Mr. Perez asserting among other things constructive termination. The Company subsequently filed a suit seeking declaratory relief regarding the employment contract in the United States District Court for Northern California (San Francisco) in November 1999. The Company subsequently amended, on November 30, 1999, that suit as a result of its investigation seeking damages against Mr. Perez. This case was transferred to the United States District court for the Southern District of New York (New York City) on March 27, 2000. Mr. Perez filed a lawsuit, which was filed in November 1999 and served in December 1999, on the Circuit Court of the 11th Judicial Circuit in Dade County, Florida seeking damages in excess of the jurisdictional limit. This case is now in the discovery phase. The Company believes that the claims of Mr. Perez are without merit and that it has a strong case against Mr. Perez. Mercury filed a collection action against AER Global Logistics ("AER") in April 2000 in the state of New York. AER filed a counterclaim for $1,000,000 alleging among other things, tortious interference with contract. Mercury believes that this claim is without merit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 20 22 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
High Low --------- --------- FISCAL 2000: Quarter ended September 30, 1999 ................. $ 7.63 $ 6.13 Quarter ended December 31, 1999 .................. 8.25 5.63 Quarter ended March 31,2000 ...................... 9.50 6.13 Quarter ended June 30, 2000 ...................... 7.75 4.63 FISCAL 1999: Quarter ended September 30, 1998 ................. $ 8.19 $ 6.38 Quarter ended December 31, 1998 .................. 8.63 6.44 Quarter ended March 31,1999 ...................... 8.69 6.13 Quarter ended June 30, 1999 ...................... 6.88 6.25
As of September 18, 2000 there were approximately 336 holders of record. During fiscal 1998, Mercury paid approximately $94,000 representing one quarterly dividend at the rate of $.0125 per share. In September 1997, the Company's Board of Directors terminated the quarterly dividend plan in favor of allocating these funds towards repurchasing Company common shares in the open market. Mercury intends to review its dividend policy from time to time in light of Mercury's earnings, financial condition and other relevant factors, including applicable covenants in debt and other agreements. In this regard, Mercury's loan agreement with its lenders prohibits the payment of cash dividends in excess of $400,000 per year. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data for each of the five years ended June 30 have been derived from the audited consolidated financial statements of Mercury. The information set forth below should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. 21 23 YEAR ENDED JUNE 30, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998 1997 1996 -------- -------- -------- -------- --------- Operating Data Sales and Revenues $ 338,742 $ 224,675 $ 240,111 $ 279,380 $ 225,374 Costs and Expenses 305,629 192,652 211,981 256,310 206,960 -------- -------- -------- -------- --------- Gross Margin 33,113 32,023 28,130 23,070 18,414 Selling, General and Administrative Expenses 7,223 7,118 6,007 6,296 5,106 Provision for Bad Debts 5,408 1,721 1,971 1,810 945 Depreciation and 9,405 8,499 5,194 3,953 2,818 Amortization Loss Resulting from -- -- 7,050 -- -- Bankruptcy of a Customer Interest Expense 6,340 4,380 3,542 3,393 2,375 Other Expense (Income) (194) (222) (595) 370 (596) -------- -------- -------- -------- --------- Income before Income Taxes 4,931 10,527 4,961 7,248 7,766 Provision for Income Taxes 1,923 4,105 1,934 2,869 3,086 -------- -------- -------- -------- --------- Net Income Before Extraordinary Items 3,008 6,422 3,027 4,379 4,680 Extraordinary Item (979) (483) -- -- -- -------- -------- -------- -------- --------- Net Income $ 2,029 $ 5,939 $ 3,027 $ 4,379 $ 4,680 ======== ======== ========= ========= ========= Net Income Per Share: Basic: Before extraordinary item $ .46 $ 0.96 $ 0.42 $ 0.58 $ 0.63 Extraordinary item (.15) (.07) -- -- -- -------- -------- -------- -------- --------- Net income $ .31 $ 0.89 $ 0.42 $ 0.58 $ 0.63 ======== ======== ========= ========= ========= Diluted: Before extraordinary item $ .43 $ 0.73 $ 0.38 $ 0.49 $ 0.56 Extraordinary item (.13) (.05) -- -- -- -------- -------- -------- -------- --------- Net income $ .30 $ 0.68 $ 0.38 $ 0.49 $ 0.56 ======== ======== ========= ========= =========
22 24
------------------------------------------------------------------- AT JUNE 30, BALANCE SHEET DATA 2000 1999 1998 1997 1996 ------------------------------------------------------------------- Total Assets $135,115 $127,302 $111,741 $ 92,637 $ 79,123 Short-Term Debt (including current 6,936 6,806 3,732 1,878 2,555 portion of long-term debt) Long-Term Debt 42,358 44,285 30,619 15,195 6,893 Subordinated Debt 22,844 -- -- -- -- Convertible Subordinated Debentures -- 19,852 28,090 28,115 28,115 Dividends per Common Share -- -- .013 .0425 .0425
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS - FISCAL 2000, 1999 AND 1998 The following tables set forth, for the periods indicated, the revenue and gross margin for each of the Company's five operating units, as well as selected other financial statement data.
Year Ended June 30, ----------------------------------------------------------------- ($ in millions) ----------------------------------------------------------------- 2000 1999 1998 % of % of % of Total Total Total Amount Revenues Amount Revenues Amount Revenues ----------------------------------------------------------------- Revenues: Fuel Sales and Services (2) $ 202.8 59.9% $ 111.3 49.5% $ 148.2 61.7% FBOs 73.7 21.7 53.9 24.1 51.8 21.6 Cargo Operations 32.5 9.6 27.7 12.3 21.5 8.9 Government Contract Services 25.3 7.5 25.4 11.3 17.0 7.1 RPA (2) 4.4 1.3 6.4 2.8 1.6 0.7 -------- -------- -------- -------- -------- ------- $ 338.7 100% $ 224.7 100% $ 240.1 100% Total Revenues ======== ======== ======== ======== ======== =======
23 25
% of % of % of Unit Unit Unit Amount Revenues Amount Revenues Amount Revenues ------------------------------------------------------------------- Gross Margin (1): Fuel Sales and Services (2) $ 7.9 3.9% $ 8.9 8.0% $ 7.0 4.7% FBOs 11.5 15.6 11.3 21.0 11.1 21.3 Cargo Operations 10.0 30.7 5.7 20.7 5.3 24.8 Government Contract Services 5.0 19.9 5.3 20.8 4.5 26.7 RPA (2) (1.3) (29.5) 0.8 12.5 0.2 12.1 ------- ------- ------- ------- ------- ------- Total Gross Margin $ 33.1 9.8% $ 32.0 14.3% $ 28.1 11.7% ======= ======= ======== ======= ======= =======
% of % of % of Total Total Total Amount Revenues Amount Revenues Amount Revenues ------------------------------------------------------------------- Selling, General and $ 7.2 2.1% $ 7.1 3.2% $ 6.0 2.5% Administrative Provision for Bad Debts 5.4 1.6 1.7 0.8 2.0 0.8 Depreciation and Amortization 9.4 2.8 8.5 3.8 5.2 2.2 Loss Resulting from Bankruptcy -- -- -- -- 7.1 2.9 of a Customer Interest Expense and Other 6.2 1.8 4.2 1.9 2.9 1.3 Income before Income Taxes 4.9 1.5 10.5 4.7 4.9 2.1 Provision for Income Taxes 1.9 0.6 4.1 1.9 1.9 0.8 Net Income before Extraordinary Item 3.0 0.9 6.4 2.9 3.0 1.3 Extraordinary Items (1.0) (0.3) (0.5) (0.2) -- -- ------- ------- ------- ------- ------- ------- Net Income $ 2.0 0.6% $ 5.9 2.6% $ 3.0 1.3% ======= ======= ======== ======= ======= =======
(1) Gross Margin as used here and throughout Management's discussion excludes depreciation and amortization and selling, general and administrative expenses. (2) Revenue and gross margin for fuel sales and services in fiscal 1999 and fiscal 1998 has been adjusted to exclude RPA, which has been classified as a separate operating unit. Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999 Revenue increased 50.8% to $338.7 million in fiscal 2000 from $224.7 million in fiscal 1999 due to higher fuel prices and higher volume of fuel sold. Gross Margin increased 3.4% to $33.1 million in fiscal 2000 from $32.0 million in fiscal 1999. 24 26 Revenue from fuel sales and services represented 59.9% of total revenue in fiscal 2000 compared to 49.5% of total revenue in fiscal 1999. Revenue from fuel sales and services increased 82.3% in fiscal 2000 to $202.8 million from $111.3 million in fiscal 1999. The increase in revenue from fuel sales and services was due to an increase of 22.3% in volume of fuel sold and an increase of 43.0% in the price of fuel sold. Gross margin from fuel sales and services decreased by 11.3% to $7.9 million in fiscal 2000 from $8.9 million in fiscal 1999 primarily due to lower per gallon margins caused by rising fuel prices. Revenues and gross margin from fuel sales and services includes the activities of Mercury's contract fueling business and related fuel management services. Revenue from FBOs increased in fiscal 2000 by 36.9% to $73.7 million from $53.9 million in fiscal 1999. The increase in revenue in fiscal 2000 was primarily due to the addition of FBOs in Tulsa, Oklahoma; Charleston and John's Island, South Carolina; and Fort Wayne, Indiana in addition to higher fuel prices. Gross margin increased 2.1% in fiscal 2000 to $11.5 million from $11.3 million in fiscal 1999. Gross margin as a percentage of revenue decreased in fiscal 2000 to 15.6% from 21.0% in fiscal 1999 due to higher fuel prices and lower per gallon fuel margins. Revenue from Cargo operations increased 17.1% in fiscal 2000 to $32.5 million from $27.7 million in fiscal 1999. The increase was primarily attributable to higher space brokerage revenue and higher handling revenue at LAX. Gross margin increased 73.5% in fiscal 2000 to $10.0 million from $5.7 million in fiscal 1999. The increase in gross margin in fiscal 2000 was primarily due to higher space brokerage revenue, higher handling revenues at LAX and elimination of losses at the Miami cargo location, which was sold in March 1999. Revenue from government contract services declined marginally in fiscal 2000 to $25.3 million from $25.4 million in fiscal 1999. Gross margin from government contract services declined in fiscal 2000 by 5% to $5.0 million from $5.3 million in fiscal 1999 primarily due to lower margins from Weather Data contracts. Revenue from RPA declined 31.1% in fiscal 2000 to $4.4 million from $6.4 million in fiscal 1999 due to lower license fee revenues. Gross margin declined in fiscal 2000 to a loss of $1.3 million compared to gross margin of $0.8 million in fiscal 1999 based on lower revenue. RPA is a developer and installer of proprietary airline revenue accounting and related software. RPA's future success will depend upon its development of products and its ability to extend its customer base. Selling general and administrative expenses increased by 1.5% to $7.2 million in fiscal 2000 from $7.1 million in fiscal 1999. Provision for bad debts increased 214.2% in fiscal 2000 to $5.4 million from $1.7 million in fiscal 1999 due to a $2.7 million write off of Tower Air, Inc's receivable ( as a result of its bankruptcy), significantly higher sales in fiscal 2000 and greater exposure due to significantly higher fuel prices during fiscal 2000 which has created a greater risk of loss due to potential bad debts related to certain airline accounts. Future periods may continue to be impacted by higher reserve requirements. 25 27 Depreciation and amortization expense increased 10.7% in fiscal 2000 to $9.4 million from $8.5 million in fiscal 1999 primarily due to the Burbank FBO expansion during fiscal 1999, acquisitions of Jackson and Charleston FBOs in fiscal 1999, acquisition of Tulsa FBO in October 1999 and various capital expenditures. Interest expense (net) increased 47.8% in fiscal 2000 to $6.2 million from $4.2 million in fiscal 1999 due to higher interest rates and higher average outstanding borrowings. Income tax expense approximated 39.0% of pretax income in both fiscal 2000 and fiscal 1999 reflecting the expected effective annual income tax rate. The extraordinary item of $979,000 in fiscal 2000 consisted of charges associated with the redemption of the Company's 7 3/4% convertible subordinated debentures in September 1999. The charge includes a $780,000 redemption premium plus write off of capitalized fees of $824,000 less the related tax benefit of $625,000. The extraordinary item of $483,000 in fiscal 1999 consisted of a charge of $792,000 related to the cost of repurchasing and retiring convertible subordinated debentures in excess of par value plus write off of related bond issuance costs net of the related income tax benefit of $309,000. Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998 Revenue decreased 6.4% to $224.7 million in fiscal 1999 from $240.1 million in fiscal 1998, primarily due to lower fuel prices and lower fuel volume. However, gross margin increased 13.8% to $32.0 million in fiscal 1999 from $28.1 million in fiscal 1998. Revenue from fuel sales and services represented 49.5 % of total revenue in fiscal 1999 compared to 61.7% of total revenue in fiscal 1998. Revenue from fuel sales and services in fiscal 1999 decreased 24.9% to $111.3 million from $148.2 million in fiscal 1998. The decrease in revenue from fuel sales and services was due to a decrease in both the price of fuel and volume of fuel sold. Volume declined approximately 32 million gallons all of which was related to Western Pacific Airline, Inc. (WPAI). The loss of WPAI's business occurred in February 1998 when the carrier ceased operations. Average fuel prices decreased approximately 12% in fiscal 1999 as compared to fiscal 1998. Gross margin from fuel sales and services was $8.9 million in fiscal 1999 compared to $7.0 million in fiscal 1998 or, as a percentage of revenue, 8.0% in fiscal 1999 and 4.7 % in fiscal 1998. Higher per gallon fuel margins caused by lower fuel prices increased gross margin as a percentage of revenue in fiscal 1999 as compared to fiscal 1998. Revenue from FBOs in fiscal 1999 increased 3.8% to $53.9 million from $51.8 million in fiscal 1998. The increase in revenue from FBOs was primarily due to the addition of an FBO in Charleston, South Carolina in October 1998 and an FBO in Jackson, Mississippi in December 1998. Gross Margin from FBOs in fiscal 1999 increased 2.1% to $11.3 million from $11.1 million in fiscal 1998 due to higher per gallon fuel margins. Revenue from cargo operations in fiscal 1999 increased 28.9% to $27.7 million from $21.5 million in fiscal 1998. The increase was primarily attributable to higher cargo handling revenue at LAX due to the expansion of facilities which occurred during the fourth quarter or fiscal 1998, and the addition of the 26 28 Atlanta facility, which was acquired in April 1998. Gross margin from cargo operations in fiscal 1999 increased 7.7% to $5.7 million from $5.3 million in fiscal 1998 primarily due to higher handling revenue partially offset by increased losses at Floracool in Miami and lower space brokerage revenue. In March 1999, the Company sold its Miami cargo operations. Gross margin as a percentage of revenue in fiscal 1999 decreased to 20.7% from 24.8% in fiscal 1998 primarily due to higher losses in the Miami operations and lower space brokerage activity. Revenue from government contract services in fiscal 1999 increased 50% to $25.4 million from $17.0 million in fiscal 1998. The increase in revenue was due to the acquisition of Weather Data which was acquired on August 1, 1998. Gross margin from government contract services in fiscal 1999 increased 17% to $5.3 million from $4.5 million in fiscal 1998 primarily due to the addition of the Weather Data contracts. Gross margin as a percentage of revenue in fiscal 1999 declined to 20.8% from 26.7% in fiscal 1998 primarily due to the Weather Data contracts which operate at a lower margin. Revenue from RPA was $6.4 million in fiscal 1999 compared to $1.6 million recognized during the four month period subsequent to its acquisition in February 1998. Gross margin from RPA was $0.8 million in fiscal 1999 compared to $0.2 million in fiscal 1998. Selling, general and administrative expenses in fiscal 1999 increased 18.5% to $7.1 million from $6.0 million in fiscal 1998 primarily due to higher compensation expense. Provision for bad debts in fiscal 1999 declined 12.7% to $1.7 million from $2.0 million in fiscal 1998 reflecting lower bad debt allowance requirements attributable in part to lower fuel sales. Depreciation and amortization expense in fiscal 1999 increased 63.6% to $8.5 million from $5.2 million in fiscal 1998. The increase in the current period is related primarily to the LAX cargo warehouse added in April 1998, the Burbank FBO expansion substantially completed in February 1999 and acquisitions during the current fiscal year. Interest expense in fiscal 1999 increased 23.7% to $4.4 million from $3.5 million in fiscal 1998 primarily due to higher average outstanding borrowings in the current period. Interest income in fiscal 1999 decreased 62.7% to $0.2 million from $0.6 million in fiscal 1998 due to lower average notes receivable balances and lower balances of invested cash. Loss resulting from bankruptcy of customer of $7,050,000 in fiscal 1998 was due to WPAI's bankruptcy on October 5, 1997. Income tax expense approximated 39% of pretax income for both fiscal 1999 and fiscal 1998, reflecting the Company's effective income tax rate. The extraordinary item of $483,000 in fiscal 1999 consists of a charge of $792,000, primarily related to the cost of repurchasing and retiring convertible subordinated debentures in excess of par value plus the write off of related bond issuance costs, net of the related income tax benefit of $309,000. 27 29 LIQUIDITY AND CAPITAL RESOURCES Mercury has historically financed its operations primarily through operating cash flow, bank debt and various public and private placement of bonds and subordinated debt. Mercury's cash balance at June 30, 2000 was $2,143,000. Net cash provided by operating activities was $16,929,000 during fiscal 2000. The primary source of net cash provided by operating activities was net income plus depreciation and amortization totaling $11,434,000, bad debt expense of $5,408,000 and an increase in accounts payable of $4,799,000. The primary use of cash from operating activities was an increase in trade and other accounts receivable of $3,594,000. Net cash used in investing activities was $18,648,000 during fiscal 2000. The primary uses of cash from investing activities included $10,971,000 in additions to property, equipment and leaseholds, $7,000,000 in acquisitions of businesses, net of cash acquired and addition to other assets of $1,607,000. Net cash used in financing activities was $935,000 during fiscal 2000. The primary source of cash from financing activities during this period was proceeds from senior subordinated note of $24,000,000 and proceeds from long-term debt of $10,648,000. The primary use of cash from financing activities was the reduction in convertible subordinated debentures of $19,534,000 and reduction of long-term debt of $12,445,000 . On September 10, 1999, the Company issued, in a private placement, $24,000,000 Senior Subordinated 12% Note ("the Note") due 2006 with detachable warrants to acquire 503,126 shares of the Company's common stock exercisable at $6.50 per share for seven years. Proceeds of the Note were used primarily to redeem $19,509,000 of the Company's 7 3/4% convertible subordinated debentures due February 1, 2006 plus a redemption premium of 4% totaling $780,000, pay accrued interest and pay expenses of the transaction. The Note balance is net of warrants valued at $1,306,000 less $150,000 amortized as interest expense in fiscal 2000. On March 2, 1999, the Company entered into an $80,000,000 senior secured credit facility with a consortium of four banks. At June 30, 2000, this facility includes up to $40,000,000 Revolving Credit ("Revolving Credit"), a term loan with a balance of $19,875,000 ("Term Loan") and an acquisition facility of up to $18,000,000 ("Acquisition Facility"). These facilities mature in March 2004. The Term Loan is payable over five years in quarterly installments of principal of $1,000,000 in year one with quarterly installments increasing each year thereafter by $125,000 with a final installment in March 2004. Balances outstanding under the Revolving Credit and Acquisition Facility will be due in March 2004. Interest rates may vary depending upon the Company's leverage ratio, however, the cost has been the Eurodollar rate plus 1.75% or the Banks base rate (equivalent to the prime rate which is 9.5%). At June 30, 2000 current portion of long-term debt pertaining to this facility is $4,625,000 and long-term debt includes $15,250,000 of the Term Loan and $9,928,000 of the Acquisition Facility. Subsequent to June 30, 2000, the Acquisition line was increased to $23,000,00 and the Revolver was reduced to $35,000,000. On April 2, 1998, the Company raised $19.0 million from a tax exempt bond financing pursuant to a loan agreement between the Company and the California Economic Development Financing Authority, ("CEDFA"). These funds were obtained to finance the Company's LAX Cargo warehouse expansion and expansion of its Burbank FBO. The loan carries a variable rate which is based on a weekly remarketing 28 30 of the tax exempt bonds issued by CEDFA. Since the issuance of the bond, the per annum interest rate has averaged 3.15% through June 30, 2000. The Company's senior bank group has issued a one-year, renewable letter of credit in the amount of approximately $17.8 million to secure the Company's obligations under the loan agreement. Principal payments of $500,000 are payable semi-annually with a redemption of $4.0 million at the end of the fifteenth year. At June 30, 2000, the balance was $17.0 million. The Company's accounts receivable balance was $48,320,000 at June 30, 2000 and $50,134,000 at June 30, 1999. In addition, a note receivable of approximately $824,000 at June 30, 2000 is due from a former customer of the Company, Saeta, an Ecuadorian Airline, for the purchase of fuel. Due to political and financial crisis in Ecuador, Saeta has defaulted on its monthly payment obligation of approximately $48,000 since January 2000, with the exception of one $10,000 payment received in February 2000. The Company has initiated legal action and has obtained a default judgement against individual guarantors in the U.S. and is proceeding against Saeta in Ecuador. While no assurance can be given, the Company believes some portion of the note will ultimately be collected. Bad debt reserves will include a continuing assessment of the collectability of the Saeta note. Accounts receivable days outstanding for the quarters ended June 30, 2000 and June 30 1999 were 52 and 74 days, respectively, based upon consolidated revenue for each period. Accounts receivable days outstanding decreased primarily due to fuel sales and services revenue increasing to 59.9% of total revenue in fiscal 2000 from 49.5% in the year ago period. Accounts receivable days outstanding are impacted by a high volume of fuel brokerage which is reported in revenues on a net margin basis and a high concentration of fuel sales to customers with extended payment terms. Allowance for doubtful accounts increased to $2,550,000 at June 30, 2000 from $1,953,000 at June 30, 1999. From June 1999 to June 30, 2000, per gallon fuel costs rose approximately 67%. Significantly higher fuel prices for an extended period of time have a negative impact on the aviation industry as it increases the airlines operating expenses. Smaller, less well capitalized airlines may be more seriously impacted. The current fiscal year includes a bad debt expense of $5.4 million, including $2.7 million resulting from the bankruptcy of Tower Air, Inc., and an additional bad debt provision of $2.7 million due to higher fuel prices affecting the aviation industry. The bad debt provision in fiscal 1999 was $1.7 million. The increase in the general bad debt reserve resulted from significantly higher fuel prices during the current fiscal year which have created a greater risk of loss due to potential bad debts related to certain airline accounts. Future periods may continue to be impacted by higher reserve requirements related to potential bankruptcies. The Company's recurring capital expenditure requirements have been related to the acquisition of refueling and ground handling equipment for both commercial and government contract services operations. During fiscal 1998, 1999 and 2000, respectively, the Company spent approximately $3,000,000, $2,100,000 and $2,700,000 to purchase refueling and ground handling equipment for its commercial and government contract services operations. During the last three fiscal years, the Company has also made substantial expenditures to acquire and construct facilities and businesses to expand its operations. In July 1997, the Company acquired certain assets of an FBO located in Nashville, Tennessee for $4,250,000 cash. To fund this acquisition, the Company borrowed an additional $4,250,000 under its former credit facilities. During fiscal 1998, the Company spent approximately $9,600,000 to remodel and construct a cargo warehouse at LAX, $300,000 to pay for a portion of the construction of an FBO in Charleston, South Carolina, $422,000 to acquire the assets of a cargo handling operation at William B. Hartsfield International Airport in Atlanta, Georgia, and $4,220,000 ($3,000,000 in cash and $1,220,000 worth of Mercury Common Stock) to acquire the outstanding stock of RPA. On August 1, 1998, Maytag acquired thirty-eight government contracts and related assets from Weather Data for $2,500,000 in cash and $1,000,000 in stock (subsequently increased by 22,565 shares in September 1999 since the market value of the shares originally issued was less then $1.0 29 31 million on August 1, 1999). On November 30, 1998, the Company acquired substantially all the assets of an FBO in Jackson, Mississippi for $4,500,000 in cash. In April 2000, the company acquired the assets of an FBO located in Fort Wayne, Indiana for $3,900,000 in cash which was funded under its acquisition line. In October 1999, the company acquired assets of an FBO in Tulsa, Oklahoma for $2.4 million in cash which was funded under its acquisition line. A second part to this closing occurred in July 2000 for $3,800,000 which was funded under the company's acquisition line. In October 1999, the company acquired certain FBO assets at Charleston International Airport and John's Island Executive Airport in South Carolina for $700,000 in cash which was funded under its acquisition line. In fiscal 1998, the Company began construction of a new FBO operation in Burbank, California at a cost of approximately $11.2 million, $1.8 million spent in fiscal 2000, $7.2 million spent in fiscal 1999 and $2.2 million spent in fiscal 1998. This project was completed in fiscal 2000. The Company also retrofitted or replaced a number of fuel farms during fiscal 1999 at a cost of approximately $3.4 million. Absent a major prolonged surge in oil prices or a capital intensive acquisition, the Company believes its operating cash flow, senior credit facility, vendor credit and cash balance will provide it with sufficient liquidity during the next twelve months. In the event that fuel prices increase significantly for an extended period of time, the Company's liquidity could be adversely affected unless the Company is able to increase vendor credit or increase lending limits under its revolving credit facility. The Company believes, however, its Revolver and vendor credit should provide it with sufficient liquidity in the event of a major temporary surge in oil prices. Inflation The Company believes that inflation has not had a significant effect on its results of operations during the past three fiscal years. 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. 30 32 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company does not currently utilize 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, 2000 by expected maturity dates. Weighted average variable rates are based on rates in effect at June 30, 2000. These rates should not be considered a predictor of actual future interest rates. Expected Maturity Date
June-01 June-02 June-03 June-04 June-05 Thereafter Total Fair Value Fixed Rate 0 0 0 0 0 24,000,000 24,000,000 24,000,000 Senior Subordinated Note Average 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Interest Rate Fixed Rate Other 336,000 310,000 326,000 200,000 30,000 313,000 1,515,000 1,421,000 Debt Average 8.22% 8.39% 8.52% 8.83% 9.14% 9.14% 8.64% Interest Rate Variable Rate 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 12,000,000 17,000,000 17,000,000 Tax Exempt Bonds (1) Average 3.15% 3.15% 3.15% 3.15% 3.15% 3.15% 3.15% Interest Rate Variable Rate 5,600,000 5,126,000 5,625,000 14,428,000 0 0 30,779,000 30,779,000 Other Debt (2) Average 8.45% 8.45% 8.45% 8.45% 0 0 8.45% Interest 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. At June 30, 2000, the Company had a zero cost interest rate cap in place on $7 million of term debt which expired in August 2000. 31 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Part IV, Item 14, pages F1 through F23 immediately following. ITEM 9. ACCOUNTING AND FINANCIAL DISCLOSURE DISPUTES. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Reference is made to the information set forth under the caption "Election of Directors" of the Company's Proxy Statement for the annual meeting scheduled for December 14, 2000 (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. 32 34 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, 2000 and 1999...................................F-2 Consolidated Statements of Income for each of the three years in the period ended June 30, 2000.................................................F-3 Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2000.................................................F-4 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 30, 2000....................................F-5 Notes to Consolidated Financial Statements for the three years ended June 30, 2000...............................................................F-6 (a) (2) Supplemental Schedule for each of the three years in the period ended June 30, 2000: Schedule II - Valuation and Qualifying Accounts...........................................F-23
All other items are not included in this Form 10-K either because they are not applicable or are included in the information as set forth in the Consolidated Financial Statements or in the Notes to Consolidated Financial Statements. 33 35 Item 14 (a) Exhibits and Exhibit List (b) Reports on Form 8-K
(a) Exhibit No. Description 3.1 Restated Certificate of Incorporation. (4) 3.2 Form of Amendment to Restated Certificate of Incorporation creating the Series A 8% Convertible Cumulative Redeemable Preferred Stock. (4) 3.3 Form of Amendment to Restated Certificate of Incorporation declaring the Separation Date for the Series A 8% Convertible Redeemable Preferred Stock. (5) 3.4 Bylaws of the Company. (4) 3.5 Amendment to Bylaws of the Company. (10) 3.6 Amendment to Bylaws of the Company adopted on December 3, 1998. (19) 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) 4.4 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) 4.5 Securities Purchase Agreement dated September 10, 1999 by and among Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P. (20) 10.1 Employment Agreement dated December 10, 1993 between the Company and Seymour Kahn. (8) * 10.2 Stock Purchase Agreement between the Company, SK Acquisition, Inc., Randolph E. Ajer, Kevin J. Walsh, Grant Murray and Joseph Czyzyk. (2)* 10.3 Company's 1990 Long-Term Incentive Plan. (6)* 10.4 Company's 1990 Directors Stock Option Plan. (1)* 10.5 Lease for 6851 West Imperial Highway, Los Angeles, California. (4) 10.6 Memorandum Dated September 15, 1997 regarding Summary of Officer Life Insurance Policies with Benefits Payable to Officers or Their Designated Beneficiaries. (15)* 10.7 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans for Seymour Kahn, Joseph Czyzyk and Randolph E. Ajer. (10)* 10.8 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans for Kevin Walsh and William Silva.(10)* 10.9 The Company's 401(k) Plan consisting of LCI Actuaries, Inc. Regional Prototype Defined Contribution Plan and Trust and Adoption Agreement. (7)*
34 36 10.10 Non-Qualified Stock Option Agreement by and between the Company and Seymour Kahn dated January 21, 1993. (7)* 10.11 Stock Purchase Agreement among the Company, SK Acquisition, Inc. and William L. Silva dated as of August 9, 1993. (8)* 10.12 Stock Exchange Agreement dated as of November 15, 1994 between Joseph Czyzyk and the Company. (9)* 10.13 Employment Agreement dated November 15, 1994 between the Company and Joseph Czyzyk. (16)* 10.14 Non-Qualified Stock Option Agreement dated August 24, 1995, by and between S.K. Acquisition and Mercury Air Group, Inc. (12) * 10.15 Non-Qualified Stock Option Agreement dated March 21, 1996, by and between Frederick H. Kopko and Mercury Air Group, Inc. (12) * 10.16 Credit Agreement by and among Sanwa Bank California, Mellon Bank, N.A., The First National Bank of Boston and Mercury Air Group, Inc. dated March 14, 1997. (14) 10.17 First Amendment to Credit Agreement and Related Loan Documents dated as of November 1997, by and among Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc. (16) 10.18 First Amendment of 1998 to Credit Agreement and Other Loan Documents dated as of April 1, 1998, by and among Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc. (3) 10.19 Second Amendment of 1998 to Credit Agreement and Other Loan Documents dated as of April 1998, by and between Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc. (16) 10.20 Third Amendment of 1998 to Credit Agreement and Other Loan Documents dated as of August 31, 1998, by and between Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc. (16) 10.21 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) 10.22 First Amendment to Reimbursement Agreement and Other L/C Documents as of August 31, 1998, by and between Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc. (16) 10.23 Fourth Amendment of 1998 to Credit Agreement and Other Loan Documents by and between Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc. dated September 15, 1998. (17) 10.24 Second Amendment to Reimbursement Agreement and Other L/C Documents by and between Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc. dated September 15, 1998. (17) 10.25 Company's 1998 Long-Term Incentive Plan. (18) * 10.26 Company's 1998 Directors Stock Option Plan. (18) * 10.27 Amendment to Employment Agreement by and between Mercury Air Group, Inc. and Joseph A. Czyzyk dated October 15, 1998. (19) * 10.28 Amendment No. 2 to Employment Agreement by and between Mercury Air Group, Inc. and Joseph A. Czyzyk dated April 12, 1999. (19) *
35 37 10.29 First Amendment of 1999 to Credit Agreement and Other Loan Documents dated as of December 31, 1998 by and between Sanwa Bank California, Mellon Bank, N.A. and BankBoston, N.A. and Mercury Air Group, Inc. (19) 10.30 Third Amendment to Reimbursement Agreement and Other L/C Documents dated as of December 31, 1998 by and between Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc. (19) 10.31 Revolving Credit and Term Loan Agreement dated as of March 2, 1999 by and among Mercury Air Group, Inc., The Banks listed on Schedule 1 thereto, and The Fleet National Bank f/k/a BankBoston, N.A., as Agent. (19) 10.32 First Amendment to Revolving Credit and Term Loan Agreement dated as of September 10, 1999. 10.33 Second Amended to Revolving Credit and Term Loan Agreement dated as of March 31, 2000. 10.34 Third Amendment, Waiver and Consent to Revolving Credit and Term Loan Agreement dated as of August 11, 2000. 10.35 The Company's 401(k) Plan consisting of CNA Trust Corporation. Regional Prototype Defined Contribution Plan and Trust and Adoption Agreement. * 22.1 Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche, LLP with respect to incorporation of their report on the audited financial statements contained in this Annual Report on Form 10-K in the Company's Registration Statement on Form S-8 (Registration Statement No. 33-69414). 27 Financial Data Schedule 99.1 Partnership Agreement dated as of July 27, 2000 of FK Partners by and among Philip J. Fagan, M.D., Frederick H. Kopko, Jr., and Joseph A. Czyzyk. (21)
---------- * Denotes managements contract or compensation plan or arrangement. (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. 36 38 (6) Such document was previously filed as Appendix A to the Company's Proxy Statement for the December 2, 1992 Annual Meeting of Shareholders. (7) All such documents were previously filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1993 and are incorporated herein by reference. (8) All such documents were previously filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1994 and are incorporated herein by reference. (9) Such document was previously filed as an Exhibit to the Company's Current Report on Form 8-K dated November 15, 1994 and is incorporated herein by reference. (10) All such documents were previously filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1995 and are incorporated herein by reference. (11) All such documents were previously filed as Exhibits to the Company's Registration Statement No. 33-65085 on Form S-1 and are incorporated herein by reference. (12) All such documents were previously filed as Exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and are incorporated herein by reference. (13) All such documents were previously filed as Exhibits to the Company's Report on Form 8-K filed September 13, 1996 and are incorporated herein by reference (14) Such document was previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and is incorporated herein by reference. (15) Such document was previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1997 and is incorporated herein by reference. (16) All such documents were previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1998 and is incorporated herein by reference. (17) Such document was previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998 and is incorporated herein by reference. 37 39 (18) Such document was previously filed as Appendix A to the Company's Proxy Statement for the December 3, 1998 Annual Meeting of Shareholders and is incorporated herein by reference. (19) All such documents were previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference. (20) All such documents were previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1999 and is incorporated herein by reference. (21) Such document was previously filed as an Exhibit to the Company's current Report on Form 8-K on August 11, 2000 and is incorporated herein by reference. (b) Reports on Form 8-K: A Form 8-K was filed on August 11, 2000 reporting on Item 1 of a change in control of the Registrant. No financial statements were filed with such report. 38 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized in the City of Los Angeles, State of California, on September 27, 2000. MERCURY AIR GROUP, INC. By: /s/ Philip J. Fagan, Jr., M.D ------------------------------- Philip J. Fagan, Jr., M.D Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated: Signers: Chairman of the Board /s/ Philip J. Fagan, Jr. M.D. ----------------------------- Philip J. Fagan, Jr., M.D. Dated: September 27, 2000 Chairman of the Board Principal Executive Officer and Director: /s/ Joseph Czyzyk ----------------------------- Joseph Czyzyk Dated: September 27, 2000 Chief Executive Officer and Director Principal Financial and Accounting Officer: /s/ Randolph E. Ajer ----------------------------- Randolph E. Ajer Dated: September 27, 2000 Executive Vice President and Treasurer Additional Directors: /s/ Frederick H. Kopko, Jr. ----------------------------- Frederick H. Kopko, Jr. Dated: September 27, 2000 Director /s/ Robert L.List ----------------------------- Robert L. List Dated: September 27, 2000 Director /s/ Harold Bowling ----------------------------- Harold Bowling Dated: September 27, 2000 Director
39 41 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Mercury Air Group, Inc. Los Angeles, California We have audited the accompanying consolidated balance sheets of Mercury Air Group, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2000. Our audits also include the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30 2000 in conformity with accounting principles generally accepted in the United States of America. 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, CA September 27, 2000 F-1 42 MERCURY AIR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30, JUNE 30, 2000 1999 ------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 2,143,000 $ 4,797,000 Trade accounts receivable, net of allowance for doubtful accounts of $2,550,000 at 6/30/00 and $1,953,000 at 6/30/99 48,320,000 50,134,000 Notes receivable - current portion 555,000 555,000 Inventories, principally aviation fuel 3,428,000 1,892,000 Prepaid expenses and other current assets 2,960,000 2,603,000 ------------- ------------- Total current assets 57,406,000 59,981,000 CASH-RESTRICTED -- 785,000 PROPERTY, EQUIPMENT AND LEASEHOLDS (Notes 3,9 and 13), net of accumulated depreciation and amortization of $43,792,000 at 6/30/00 and $35,787,000 at 6/30/99 65,133,000 56,110,000 NOTES RECEIVABLE 309,000 454,000 OTHER ASSETS, net (Notes 4,9 and 13) 12,267,000 9,972,000 ------------- ------------- $ 135,115,000 $ 127,302,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 26,111,000 $ 21,312,000 Accrued expenses and other current liabilities (Note 5) 6,091,000 6,241,000 Current portion of long-term debt (Note 7) 6,936,000 6,806,000 ------------- ------------- Total current liabilities 39,138,000 34,359,000 LONG-TERM DEBT (Notes 7 and 9) 42,358,000 44,285,000 DEFERRED INCOME TAXES (Note 6) 110,000 223,000 SENIOR SUBORDINATED NOTE (Note 14) 22,844,000 CONVERTIBLE SUBORDINATED DEBENTURES (Note 14) 19,852,000 COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY (Note 8): Preferred Stock - $.01 par value; authorized 3,000,000 shares; no shares outstanding Common Stock - $ .01 par value; authorized 18,000,000 shares; outstanding 6,472,955 shares at 6/30/00; outstanding 6,641,175 shares at 6/30/99 64,000 66,000 Additional paid-in capital 21,014,000 19,873,000 Retained earnings 10,423,000 9,543,000 Accumulated other comprehensive income (228,000) (237,000) Notes receivable from sale of stock (608,000) (662,000) ------------- ------------- Total stockholders' equity 30,665,000 28,583,000 ------------- ------------- $ 135,115,000 $ 127,302,000 ============= =============
See accompanying notes to consolidated financial statements. F-2 43 MERCURY AIR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JUNE 30, ----------------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- Sales and Revenues: Sales $ 254,474,000 $ 144,972,000 $ 179,859,000 Service revenues 84,268,000 79,703,000 60,252,000 ------------- ------------- ------------- 338,742,000 224,675,000 240,111,000 ------------- ------------- ------------- Costs and Expenses: Cost of sales 223,053,000 115,416,000 155,191,000 Operating expenses 82,576,000 77,236,000 56,790,000 ------------- ------------- ------------- 305,629,000 192,652,000 211,981,000 ------------- ------------- ------------- Gross Margin (Excluding depreciation and amortization) 33,113,000 32,023,000 28,130,000 ------------- ------------- ------------- Expenses (Income): Selling, general and administrative 7,223,000 7,118,000 6,007,000 Provision for bad debts 5,408,000 1,721,000 1,971,000 Depreciation and amortization 9,405,000 8,499,000 5,194,000 Loss resulting from bankruptcy of customer (Note 2) 7,050,000 Interest expense 6,340,000 4,380,000 3,542,000 Interest income (194,000) (222,000) (595,000) ------------- ------------- ------------- 28,182,000 21,496,000 23,169,000 ------------- ------------- ------------- Income Before Provision for Income Taxes 4,931,000 10,527,000 4,961,000 Provision for Income Taxes (Note 6) 1,923,000 4,105,000 1,934,000 ------------- ------------- ------------- Net Income Before Extraordinary Item 3,008,000 6,422,000 $ 3,027,000 Extraordinary Item (Notes 6 and 14) Less applicable income tax benefit of $625,000, $309,000 (979,000) (483,000) ------------- ------------- ------------- Net Income $ 2,029,000 $ 5,939,000 $ 3,027,000 ------------- ------------- ------------- Net Income Per Common Share (Note 12): Basic: Before extraordinary item $ 0.46 $ 0.96 $ 0.42 Extraordinary item (0.15) (0.07) ------------- ------------- ------------- Net income $ 0.31 $ 0.89 $ 0.42 ------------- ------------- ------------- Diluted: Before extraordinary item $ 0.43 $ 0.73 $ 0.38 Extraordinary item (0.13) (0.05) ------------- ------------- ------------- Net income $ 0.30 $ 0.68 $ 0.38 ------------- ------------- -------------
See accompanying notes to consolidated financial statements. F-3 44 MERCURY AIR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED JUNE 30, -------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,029,000 $ 5,939,000 $ 3,027,000 Non-cash component of extraordinary charge 824,000 566,000 Adjustments to derive cash flow from operating activities: Bad debt expense 5,408,000 1,721,000 1,971,000 Depreciation and amortization 9,405,000 8,499,000 5,194,000 Loss resulting from bankruptcy of customer 7,050,000 Deferred income taxes (113,000) 27,000 (712,000) Compensation expense related to remeasurement of stock options 64,000 Amortization of Senior Subordinated Note discount 150,000 Changes in operating assets and liabilities: Trade and other accounts receivable (3,594,000) (13,468,000) 5,224,000 Inventories (1,536,000) (353,000) 409,000 Prepaid expenses and other current assets 584,000 (211,000) 495,000 Accounts payable 4,799,000 4,989,000 (860,000) Income taxes payable/receivable (941,000) (1,643,000) 1,148,000 Accrued expenses and other current liabilities (150,000) 999,000 237,000 ------------ ------------ ------------ Net cash provided by operating activities 16,929,000 7,065,000 23,183,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Decrease (Increase) in restricted cash-tax exempt bond 785,000 8,376,000 (9,161,000) Restricted cash - pledged certificates of deposit 1,000,000 Decrease (Increase) in notes receivable 145,000 (13,000) 2,899,000 Addition to other assets (1,607,000) (237,000) (906,000) Acquisition of businesses (7,000,000) (7,000,000) (6,145,000) Additions to property, equipment and leaseholds (10,971,000) (15,245,000) (16,784,000) ------------ ------------ ------------ Net cash used in investing activities (18,648,000) (14,119,000) (29,097,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividend on common stock (94,000) Proceeds from long-term debt 10,648,000 34,050,000 24,192,000 Reduction of long-term debt (12,445,000) (17,310,000) (9,182,000) Capitalized loan fee (1,802,000) Payment received from notes receivable - officers 54,000 Reduction of convertible subordinated debentures (19,534,000) (8,188,000) Repurchase of common stock (1,856,000) (4,682,000) (4,217,000) Proceeds from senior subordinated note 24,000,000 Proceeds from issuance of common stock 145,000 162,000 ------------ ------------ ------------ Net cash (used in) provided by financing activities (935,000) 4,015,000 10,861,000 ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,654,000) (3,039,000) 4,947,000 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,797,000 7,836,000 2,889,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,143,000 $ 4,797,000 $ 7,836,000 ============ ============ ============ CASH PAID DURING THE PERIOD: Interest $ 6,821,000 $ 4,568,000 $ 3,542,000 Income taxes $ 2,309,000 $ 5,412,000 $ 1,069,000 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of 124,224 shares of common stock in fiscal 1999 and an additional 22,565 shares in fiscal 2000 for acquisition of assets of Weather Data $ 158,000 $ 1,000,000 Conversion of 318 debentures into 43,590 shares of common stock $ 318,000 Direct financing for purchase of equipment and property $ 1,600,000 Issuance of stock for the acquisition fo RPA $ 1,220,000 Issuance of note payable for the acquisition of Aero Freightways Inc. $ 227,000 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 debentures into shares of common stock $ 50,000 $ 25,000
See accompanying notes to consolidated financial statements. F-4 45 MERCURY AIR GROUP, INC. AND SUBSIDIARIES CONSOLIDATE STATEMENTS OF STOCKHOLDERS' EQUITY JUNE 30, 2000
COMMON STOCK ----------------------- ADDITIONAL NUMBER OF PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS --------- ------- ----------- ----------- BALANCE, JUNE 30, 1997 7,524,651 $75,000 $20,796,000 $ 5,907,000 Net income 3,027,000 Cash dividend on common stock (94,000) Repurchase of common stock (639,325) (6,000) (1,786,000) (2,425,000) Common stock issued on exercise of warrants and options 34,000 - 162,000 Common stock issued in acquisition 160,000 2,000 1,218,000 Common stock issued on conversion of debentures 3,427 - 25,000 Tax benefit from exercises of stock options 50,000 Foreign currency adjustment --------- ------- ----------- ----------- BALANCE, JUNE 30, 1998 7,082,753 71,000 20,465,000 6,415,000 Net income 5,939,000 Repurchase of common stock (641,781) (6,000) (1,865,000) (2,811,000) Common stock issued on exercise of options 69,125 144,000 Common stock issued in acquisition 124,224 1,000 999,000 Common stock issued on conversion of debentures 6,854 50,000 Tax benefit from exercises of stock options 80,000 Foreign currency adjustment --------- ------- ----------- ----------- BALANCE, JUNE 30, 1999 6,641,175 66,000 19,873,000 9,543,000 Net income 2,029,000 Repurchase of common stock (234,375) (2,000) (705,000) (1,149,000) Payment received from notes receivable - officers Foreign currency adjustment Common stock issued on conversion of debentures 43,590 318,000 Common stock issued in acquisition 22,565 158,000 Warrants issued in connection with Senior Subordinated Note 1,306,000 Value of remeasured stock options 64,000 --------- ------- ----------- ----------- BALANCE, JUNE 30, 2000 6,472,955 $64,000 $21,014,000 $10,423,000 ========= ======= =========== ===========
ACCUMULATED NOTES OTHER RECEIVABLE COMPREHENSIVE COMPREHENSIVE OFFICERS INCOME INCOME ---------- ------------- ------------- BALANCE, JUNE 30, 1997 $(662,000) $(79,000) Net income $3,027,000 Cash dividend on common stock Repurchase of common stock Common stock issued on exercise of warrants and options Common stock issued in acquisition Common stock issued on conversion of debentures Tax benefit from exercises of stock options Foreign currency adjustment (160,000) (160,000) --------- -------- ---------- BALANCE, JUNE 30, 1998 (662,000) (239,000) 2,867,000 ========== Net income $5,939,000 Repurchase of common stock Common stock issued on exercise of options Common stock issued in acquisition Common stock issued on conversion of debentures Tax benefit from exercises of stock options Foreign currency adjustment 2,000 2,000 --------- -------- ---------- BALANCE, JUNE 30, 1999 (662,000) (237,000) 5,941,000 ========== Net income $2,029,000 Repurchase of common stock Payment received from notes receivable - officers 54,000 Foreign currency adjustment 9,000 9,000 Common stock issued on conversion of debentures Common stock issued in acquisition Warrants issued in connection with Senior Subordinated Note Value of remeasured stock options --------- -------- ---------- BALANCE, JUNE 30, 2000 $(608,000) $(228,000) $2,038,000 ========= ======== ==========
See accompanying notes to consolidated financial statements. F-5 46 MERCURY AIR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED JUNE 30, 2000 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 include fuel sales, into-plane, ground support and aircraft hangar and tie-down facilities; and the development and installation of aviation software. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Mercury Air Group, Inc. and its subsidiaries. All material intercompany transactions and balances have been eliminated. CASH AND CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash and were purchased with maturities of three months or less. Restricted cash consists of cash held by the trustee in connection with the CEDFA loan (See Note 7). 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 term or useful life for leasehold improvements. COST IN EXCESS OF NET ASSETS ACQUIRED Cost in excess of net assets acquired are being amortized using the straight-line method over the estimated lives ranging from ten to forty years. The Company assesses recoverability on a periodic basis. Factors included in evaluating recoverability include historical earnings and projected future earnings of the related operations. F-6 47 FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date and, where appropriate, at historical rates of exchange. Income and expense accounts are translated at the weighted average rate in effect during the year. The aggregate effect of translating the financial statements of the foreign subsidiary is included in other comprehensive income. Foreign exchange gains (losses) were not significant during the years presented. REVENUE RECOGNITION Revenues are recognized upon delivery of product or completion of service. The Company's contracts with the U.S. Government are subject to profit renegotiation. To date the Company has not been required to adjust profits arising out of U.S. Government contracts. INCOME TAXES Deferred income tax assets and liabilities are recognized based on differences between the financial statement and income tax basis of assets and liabilities using presently enacted income tax rates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable and payable, and debt instruments. The book values of all financial instruments, other than debt instruments, are representative of their fair values due to their short-term maturity. The book values of the Company's debt instruments are considered to approximate their fair values because the interest rates of these instruments are based on current rates offered to the Company or, in the case of publicly traded debt, based upon quoted market prices. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of an impairment loss is based on the fair values of the asset. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for derivative instruments and for hedging activities. It requires F-7 48 that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. SFAS 133, as amended by SFAS Nos. 137 and 138, is required to be adopted by the Company July 1, 2000. The Company does not believe that the impact of adopting this statement will be material. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101 ("SAB 101"), which provided the staff's views in applying generally accepted accounting principals to selected revenue issues. SAB 101, as amended, is required to be implemented by the Company during the quarter ended June 30, 2001. The Company does not believe that the impact of implementing SAB 101 will be material. RECLASSIFICATIONS Certain reclassifications were made to prior year statements to conform to the June 30, 2000 presentation. ACCOUNTS RECEIVABLE Accounts receivable is comprised primarily of trade receivables from customers and is net of an allowance for doubtful accounts. The Company's credit risk is based in part on, 1) primarily all receivables are related to one industry, aviation, 2) there are significant balances owed by certain customers, and 3) balances are owed by certain customers that are not adequately capitalized. The Company assesses its credit portfolio on an ongoing basis and establishes allowances which it believes are adequate to absorb potential credit problems that can be reasonably anticipated. NOTE 2 - LOSS RESULTING FROM BANKRUPTCY OF CUSTOMER: On October 5, 1997, Western Pacific Airlines, Inc. (WPAI) filed for bankruptcy protection under Chapter 11 and, as a result, the Company wrote off $5,000,000 of certificates of deposit which were pledged to guarantee a bank loan to WPAI. In addition, the Company wrote off $2,050,000 of accounts receivable due from WPAI. Effective February 5, 1998 WPAI ceased operations. NOTE 3 - PROPERTY, EQUIPMENT AND LEASEHOLDS: Property, equipment and leaseholds consist of the following:
JUNE, 30 --------------------------------- 2000 1999 ------------- ------------- Land, buildings and leasehold improvements $ 74,197,000 $ 63,206,000 Equipment, furniture and fixtures 31,406,000 28,286,000 Construction in progress 3,322,000 405,000 ------------- ------------- 108,925,000 91,897,000 Less accumulated depreciation and amortization (43,792,000) (35,787,000) ------------- ------------- $ 65,133,000 $ 56,110,000 ============= =============
F-8 49 NOTE 4 - OTHER ASSETS: Other assets consists of the following:
JUNE, 30 ---------------------------- 2000 1999 ----------- ----------- Cost in excess of net assets acquired - net $ 6,309,000 $ 6,672,000 Capitalized loan fees - net (Note 7) 2,393,000 1,715,000 Covenants not to compete - net 583,000 250,000 Other 2,982,000 1,335,000 ----------- ----------- $12,267,000 $ 9,972,000 =========== ===========
Cost in excess of net assets acquired and covenants not to compete have resulted from various acquisitions and are being amortized using the straight-line basis over periods ranging from five to forty years. Accumulated amortization related to cost in excess of net assets acquired was $1,598,000 and $1,142,000 at June 30, 2000 and 1999, respectively. Accumulated amortization related to covenants not to compete was $417,000 and $250,000 at June 30, 2000 and 1999, respectively. Capitalized loan fees represent cost incurred in connection with outstanding debt and are 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 then Chairman at $1.98 per share, pursuant to a Stock Purchase Agreement ("The 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 loaned the executives the $1,080,000. Beginning in 1994, one fifth of the amount loaned was forgiven annually over a five-year period ending in 1998. In 1994, a fifth executive officer of the Company purchased 151,250 shares of the Company's stock from a company owned by the then Chairman at $1.98 per share, pursuant to a Stock Purchase Agreement similar to the agreements above. The officer paid $30,000 in cash and the remaining purchase price of $270,000 was paid over a five year period ending in 1998. As part of the agreement, the Company loaned the executive the $270,000. Beginning in 1996, one fifth of the amount loaned, or $54,000, was forgiven annually over a five year period ending in 2000. The amounts subject to forgiveness of $1,080,000 and $270,000 were treated as additional compensation expense over the seven year periods from the date of the agreements through 1998 and 2000, respectively. Compensation expense related to the forgiveness of these loans was $39,000 in fiscal 2000, $39,000 in fiscal 1999 and $154,000 in fiscal 1998. F-9 50 NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES: Accrued expenses and other current liabilities consist of the following:
JUNE, 30 -------------------------- 2000 1999 ---------- ---------- Salaries and wages $3,077,000 $3,154,000 Other 3,014,000 3,087,000 ---------- ---------- $6,091,000 $6,241,000 ========== ==========
NOTE 6 - INCOME TAXES: The provision for taxes on income consists of the following:
YEAR ENDED JUNE 30, ---------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Federal, current $ 1,638,000 $ 3,385,000 $ 1,849,000 State, current 398,000 693,000 443,000 ----------- ----------- ----------- 2,036,000 4,078,000 2,292,000 Deferred, primarily federal (113,000) 27,000 (358,000) ----------- ----------- ----------- Provision, before extraordinary item 1,923,000 4,105,000 1,934,000 Extraordinary item (625,000) (309,000) ----------- ----------- ----------- Net Provision $ 1,298,000 $ 3,796,000 $ 1,934,000 =========== =========== ===========
Major components of deferred income tax (assets) and liabilities were as follows:
JUNE 30, ------------------------- 2000 1999 --------- --------- Depreciation/amortization $ 683,000 $ 200,000 Prepaid expenses 322,000 628,000 State income taxes (222,000) (222,000) Allowance for doubtful accounts (888,000) (764,000) Acquired from RPA - primarily conversion from cash to accrual basis accounting 329,000 658,000 Other (114,000) (277,000) --------- --------- $ 110,000 $ 223,000 ========= =========
F-10 51 The reconciliation of the federal statutory rate to the Company's effective tax rate on income is summarized as follows:
YEAR ENDED JUNE 30, --------------------------- 2000 1999 1998 ----- ----- ----- Computed "expected" tax rate 34.0% 34.0% 34.0% State income taxes, net of Federal income tax benefit 5.0% 5.0% 5.0% ----- ----- ----- Effective rate 39.0% 39.0% 39.0% ===== ===== =====
NOTE 7 - LONG-TERM AND SUBORDINATED DEBT: Long-term debt consists of the following:
JUNE 30, ---------------------------- 2000 1999 ----------- ----------- Notes payable to banks $29,803,000 $31,000,000 Installment notes, payable to financial institutions in monthly installments aggregating approximately $18,000 at June 30, 2000 including interest from 7.28% to 8.09%, collateralized by certain assets of the Company and maturing from 2000 through 2002. 134,000 229,000 Convertible subordinated debentures payable to seller of Excel Cargo in monthly installments of $13,810 including interest at 8.5%, collateralized by property acquired, maturing in September 2003 480,000 599,000 Tax exempt bond pursuant to a loan agreement between the Company and the California Economic Development Financing Authority ("CEDFA"). Repayment terms consist of semi-annual principal payments of $500,000 with a redemption of $4 million at the end of the fifteenth year (2013). The loan carries a variable rate which is based on a weekly remarketing of the bonds. The rate at June 30, 2000 was 4.4%. In addition, a letter of credit has been issued by the Company's Senior lender to guaranty the credit at an annual cost of approximately 1.9% of the principal 17,000,000 18,000,000 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 449,000 566,000 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 347,000 368,000 Other 1,081,000 329,000 ----------- ----------- 49,294,000 51,091,000 Less current portion 6,936,000 6,806,000 ----------- ----------- $42,358,000 $44,285,000 =========== ===========
F-11 52 Notes Payable to banks consists principally of a credit facility (the "Credit Facility") which provides for a term loan (the "Term Loan"), an acquisition line (the "Acquisition Line") and a revolving line of credit ("the Revolver"). The Credit Facility expires in March 2004. Borrowings under the Term Loan were $19,875,000 and $25,000,000 at June 30 2000 and 1999, respectively. Principal payments are payable in quarterly installments of $1,125,000 in fiscal 2001, increasing $125,000 annually. The Acquisition Line permits borrowings of up to $18,000,000 (increased from $15,000,000 during fiscal 2000). Outstanding borrowings under the Acquisition Line were $9,928,000 and zero at June 30, 2000 and 1999, respectively. Principal is due in March 2004. The Revolver permits borrowings of up to $40,000,000. Outstanding borrowings under the Revolver were zero and $6,000,000 at June 30, 2000 and 1999, respectively. Interest under the credit facility accrues at LIBOR+ 1.75% (8.34% to 8.56% based on 30, 60 and 90 day LIBOR rates in effect at June 30, 2000). Subsequent to June 30, 2000, the Acquisition Line was increased to $23,000,000 and the Revolver was reduced to $35,000,000. Certain debt agreements contain provisions that require the maintenance of certain financial ratios, minimum tangible net worth (as defined), minimum profitability levels, maximum leverage and minimum debt service coverage and quick ratios and limitations on annual capital expenditures. Additionally, the Company is prohibited from paying dividends in excess of $400,000 per fiscal year. At June 30, 2000, the Company received a waiver from its senior lender as it had violated the capital expenditure covenant. Long-term debt payable subsequent to June 30, 2000 is as follows: 2001 $6,936,000 2002 6,436,000 2003 6,951,000 2004 15,628,000 2005 1,030,000 Thereafter 12,313,000 ----------- $49,294,000 ===========
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 outstanding balance of these debentures, $19,509,000, were redeemed by the Company on September 10, 1999. (See Note 14). During fiscal year 1999 the Company repurchased 8,188 of these debentures ($1,000 par value) in the open market. The excess of cost over par value plus bond issuance costs was $675,000. On September 10, 1999 the Company redeemed the remaining outstanding debentures (See Note 14). In addition, during fiscal 1999 the Company terminated its prior credit facility resulting in the write off of related deferred financing costs of $117,000. The aggregate charge of $792,000, net of tax benefits of $309,000, has been classified as an extraordinary item. F-12 53 NOTE 8 - EMPLOYEE STOCK OPTION PLANS: The Company has the following stock option plans, the 1990 Long-Term Incentive Plan ("1990 Incentive Plan") , the 1990 Directors Stock Option Plan ("1990 Directors Plan"), the 1998 Long-Term Incentive Plan ("1998 Incentive Plan") and the 1998 Directors Stock Option Plan ("1998 Directors Plan"). The Company has reserved 848,000 shares related to the Incentive Plans and 632,000 shares related to the Directors Plans. The Company has also reserved 152,000 shares for special option grants made outside the plans. Options granted pursuant to the plans and special grants are generally made at the fair market value of such shares on the date of grant and generally vest over twelve months. The contractual lives of the options are generally ten years. The Company accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees". During fiscal 2000, 1999 and 1998 compensation expense attributable to stock options was $64,000, $0 and $0, respectively . Had compensation cost for stock options been calculated using the fair value provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have approximated the pro forma amounts indicated in the following table:
2000 1999 1998 ---------- ---------- ---------- Net income - as reported $2,029,000 $5,939,000 $3,027,000 Net income - pro forma $1,877,000 $5,840,000 $2,937,000 Basic earnings per share - as reported $.31 $.89 $.42 Basic earnings per share - proforma $.29 $.88 $.41 Diluted earnings per share - as reported $.30 $.68 $.38 Diluted earnings per share - pro forma $.27 $.67 $.37
The weighted average fair value of options granted in 2000, 1999 and 1998 is estimated as $3.45, $3.00 and $2.13 respectively, on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions.
2000 1999 1998 ------- ------- ------- Expected life 5 years 5 years 5 years Expected volatility 38% 34% 31% Risk free interest rate 6.19% 5.78% 5.25% Dividend yield 0% 0% 0%
F-13 54 A summary of stock option activity is as follows:
WEIGHTED LONG-TERM WEIGHTED DIRECTOR'S WEIGHTED SPECIAL AVERAGE INCENTIVE AVERAGE OPTION STOCK OPTION AVERAGE OPTION OPTION PRICES PLANS PRICES PLANS OPTION PRICES GRANTS Outstanding June 30, 1997 $3.99 274,272 $4.32 272,250 $2.21 203,500 -- -- Granted 5.75 13,000 5.75 60,500 -- -- Exercised 4.00 (18,875) 5.70 (15,125) -- -- -- Cancelled 6.454 (5,500) ------- ------- ------- Outstanding June 30, 1998 4.03 262,897 4.53 317,625 2.21 203,500 Granted 7.56 138,361 -- -- -- -- Exercised 3.78 (17,125) -- -- 1.542 (52,000) Cancelled 6.30 (14,000) -- -- ------- ------- ------- Outstanding June 30, 1999 5.25 370,133 4.53 317,625 2.43 151.500 Granted 8.125 65,300 7.75 40,000 -- -- Exercised -- -- -- -- -- -- Cancelled 7.87 (20,303) -- -- ------- ------- Outstanding June 30, 2000 5.60 415,130 4.89 357,625 2.43 151,500 ======= ======= =======
F-14 55 A summary of information about stock options issued and outstanding pursuant to the Incentive Plan, Directors Plan and special option grants at June 30, 2000, is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE EXERCISE WEIGHTED SHARES PRICE RANGE SHARES WEIGHTED AVERAGE EXERCISABLE WEIGHTED OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISE AT 6/30/00 AVERAGE EXERCISE 6/30/00 REMAINING LIFE PRICE PRICE -------------- -------------- ------------------- -------- ----------- ---------------- $1.236 - 2.436 317,647 2.4 $1.65 317,647 $1.65 3.669 - 5.750 247,125 6.1 5.14 247,125 5.14 6.090 - 7.182 184,183 6.3 6.64 151,314 6.71 7.75 - 8.4375 175,300 9.1 8.12 70,000 8.34 ------- ----- ------- ----- 924,255 $4.81 786,086 $4.32 ======= ===== ======= =====
In March 2000, the Board of Directors extended the termination date of options for 38,875 shares held by an officer and a Director. This resulted in compensation expense of $64,000. During fiscal 1996, the Company sold 137,500 shares of its common stock to two officers for $812,500. The officers each paid $40,000 in cash and issued promissory notes of $732,500 for the balance of the purchase price. The notes are payable over ten years and due in fiscal year 2006. As of June 30, 2000, $608,000 remained outstanding. NOTE 9 - ACQUISITIONS: The Company has acquired various businesses during the years reported. All such acquisitions have been accounted for under the purchase method of accounting. Pro forma disclosure has not been provided as the aggregate annual purchases have not been material. The following describes the various purchases. Fiscal 2000 On April 21, 2000, the company acquired certain assets of an FBO located in Fort Wayne, Indiana (FWAS) for a cash consideration of $3,900,000. The Company borrowed from its acquisition line to fund the purchase. The purchase price was allocated primarily to Property, Equipment and Leaseholds with a portion also allocated to inventories. On October 22, 1999, the Company acquired certain assets of Air Tulsa, Inc., an FBO located in Tulsa, Oklahoma. Assets acquired included refueling equipment and tank farms utilized in the FBO business, inventories, prepaid expenses and a sublease. The agreement also includes a non-compete with the seller. Total consideration was $2.4 million which the Company initially paid in cash and subsequently funded under its acquisition line. The agreement included a second closing to occur within eighteen months to include the purchase of hangars, buildings and the leasehold for an additional cash consideration of $3.8 million. This transaction was completed in July 2000 and the entire amount was also funded under the acquisition line. F-15 56 On October 5, 1999, the Company acquired certain FBO assets of Charleston Equities, Inc. for $700,000 in cash. The purchase consolidated the leasehold at Charleston International Airport and includes the leasehold at John's Island Executive Airport. Fiscal 1999 Effective November 30, 1998 the Company acquired substantially all the assets of Jackson Air Center in Mississippi for $4,500,000 in cash. The Company borrowed $2.8 million in term debt under its senior credit facility and the balance was funded from borrowings under its revolver. The purchase price has been allocated primarily to Property, Equipment and Leaseholds ($4,195,000) with the balance to inventories and accounts payable. On August 1, 1998, the Company acquired the weather observation and forecasting and air traffic control government contracts and related assets of Weather Data Services, Inc. for $3,500,000, which consisted of $2,500,000 in cash and $1,000,000 of the Company's stock. The purchase price has been allocated to intangible assets. During fiscal 2000, as part of the agreement, the Company issued an additional 22,565 shares of the Company's stock valued at $158,000. Fiscal 1998 On February 27, 1998, the Company acquired all the outstanding stock of Rene Perez and Associates, Inc. ("RPA"), a computer services company located in Miami, Florida, for $4,220,000. The purchase price consisted of $3,000,000 in cash and 160,000 shares of common stock valued at $1,220,000 based on a closing price of $7.625 per share. The 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 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. F-16 57 On July 9, 1997 the Company acquired the assets of an FBO located in Nashville, Tennessee. 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. 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 2000, 1999 and 1998 was $8,640,000, $8,037,000 and $6,832,000 respectively, which is 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, 2000 are as follows: 2001 $ 7,795,000 2002 8,182,000 2003 8,102,000 2004 8,045,000 2005 7,924,000 Thereafter 70,235,000 ------------ Total minimum payment required $110,283,000 ============
PURCHASE COMMITMENTS As of June 1, 2000, MAC entered into a one year contract to purchase all of South African Airlines cargo capacity on its passenger flights from the United States and Canada to South Africa. MAC's one year commitment for these routes is approximately $5.7 million. LITIGATION In connection with the Chapter 7 bankruptcy filing for WPAI, the Company received a letter, dated August 25, 1999, from the bankruptcy trustee's attorneys making a formal demand for recovery of alleged preference payments of approximately $11.4 million. This amount represents cash received for payment of fuel and sales during the 90 days prior to WPAI's initial bankruptcy filing. Subsequently the trustee filed suit in the United States District Court for the District of Colorado on October 1, 1999. The Company believes it has strong defenses based on the transaction 1) being made in the ordinary course of business, and 2) involving an exchange for new value. At the same time, Mercury received notice of a claim by the trustee for $1.1 million against Compass Bank for funds paid pursuant to a loan between Compass and WPAI, which the Company guaranteed. The trustee also filed suit in this case on October 1, 1999. The Company has undertaken to defend this matter and believes it has strong defenses based on the transaction being made in the ordinary course of business. Accordingly, based upon the facts currently available, the Company does not believe that a provision is required, nor does it believe this matter will have a significant effect on the financial statements. F-17 58 In October 1999, Mr. Rene Perez, formerly the president of RPA, notified the Company of certain alleged violations of his employment contract dated February 28, 1998 between the Company, RPA and Mr. Perez asserting among other things constructive termination. The Company subsequently filed a suit seeking declaratory relief regarding the employment contract in the United States District Court for Northern California (San Francisco) in November 1999. The Company subsequently amended, on November 30, 1999, that suit as a result of its investigation seeking damages against Mr. Perez. This case was transferred to the United States District court for the Southern District of New York (New York City) on March 27, 2000. Mr. Perez filed a lawsuit in November 1999 and was served in December 1999, on the Circuit Court of the 11th Judicial Circuit in Dade County, Florida seeking damages in excess of the jurisdictional limit. This case is now in the discovery phase. The Company believes that the claims of Mr. Perez are without merit and that it has a strong case against Mr. Perez. Accordingly, based upon the facts currently available, the Company does not believe that a provision is required, nor does it believe this matter will have a significant effect on the financial statements. Mercury filed a collection action against AER Global Logistics ("AER") in April 2000 in the state of New York. AER filed a counterclaim for $1,000,000 alleging among other things, tortious interference with contract. Mercury believes that this claim is without merit. Accordingly, based upon the facts currently available, the Company does not believe that a provision is required, nor does it believe this matter will have a significant effect on the financial statements. 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. RELATED PARTY TRANSACTION The Company and its Chairman each own a 50% interest in an LLC that owns and operates a corporate airplane. The Company contributed capital to the LLC of $137,000 and $113,000 in fiscal 2000 and fiscal 1999, respectively. Amounts paid to the LLC by the Company for the use of the airplane were insignificant in both years. The Company is a guarantor on a note payable to a financial institution which funded the purchase of the aircraft. The principal balance of the note as of June 30, 2000 was $1,164,000. NOTE 11 - MAJOR CUSTOMERS AND FOREIGN CUSTOMERS: National Airlines, Inc. represented approximately 10.6% of consolidated revenue for fiscal 2000. Government contract services consists of revenues from agencies of the United States government. Revenue from this segment represented 7.5%, 11.3% and 7.1% of the Company's consolidated revenues for fiscal 2000, 1999 and 1998, respectively. No other customers accounted for over 10% of Mercury's consolidated revenues. The Company does business with a number of foreign airlines, principally in the sale of aviation fuels. For the most part, such sales are made within the United States and utilize the same assets and generally the same personnel as are utilized in the Company's domestic business. Revenues related to these foreign airlines amounted to approximately 24%, 27% and 31% of consolidated revenues for the years ended June 30, 2000, 1999 and 1998, 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. F-18 59 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, 2000 JUNE 30, 1999 JUNE 30, 1998 -------------------------- -------------------------- ------------------------- DILUTED BASIC DILUTED BASIC DILUTED BASIC ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding during the period 6,565,000 6,565,000 6,651,000 6,651,000 7,244,000 7,244,000 Common stock equivalents resulting from the assumed exercise of stock options 344,000 356,000 348,000 Common shares resulting from the assumed conversion of debentures 590,000 3,391,000 3,932,000 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the period 7,499,000 6,565,000 10,398,000 6,651,000 11,524,000 7,244,000 ========== ========== ========== ========== ========== ========== Net income before extraordinary item 3,008,000 3,008,000 6,422,000 6,422,000 3,027,000 3,027,000 Add: Interest expense, net of tax, on convertible debentures 185,000 1,152,000 1,342,000 ---------- ---------- ---------- ---------- ---------- ---------- Adjusted income before extraordinary item 3,193,000 3,008,000 7,574,000 6,422,000 4,369,000 3,027,000 Extraordinary item (979,000) (979,000) (483,000) (483,000) ---------- ---------- ---------- ---------- ---------- ---------- Adjusted income $2,214,000 $2,029,000 $7,091,000 $5,939,000 $4,369,000 $3,027,000 Common stock and common share equivalents 7,499,000 6,565,000 10,398,000 6,651,000 11,524,000 7,244,000 Earnings (Loss) per share: Before extraordinary item $ .43 $ .46 $ .73 $ .96 $ .38 $ .42 Extraordinary item (.13) (.15) (.05) (.07) ---------- ---------- ---------- ---------- ---------- ---------- Net Income $ .30 $ .31 $ .68 $ .89 $ .38 $ .42 ========== ========== ========== ========== ========== ==========
NOTE 13 - SUBSEQUENT EVENT: On September 1, 2000, the Company acquired the assets of an FBO in Birmingham, Alabama from Raytheon Aircraft Services, Inc. (RAS) for $6.6 million cash funded under the Company's acquisition line. The purchase price was allocated principally to Property, Equipment and leaseholds. At June 30, 2000, Other Assets includes a $1.5 million cash deposit paid to RAS towards the purchase price. F-19 60 NOTE 14 - SENIOR SUBORDINATED NOTE/EXTRAORDINARY ITEM: On September 10, 1999, the Company issued, in a private placement, $24,000,000 Senior Subordinated 12% Notes ("the Note") due 2006 with detachable warrants to acquire 503,126 shares of the Company's common stock exercisable at $6.50 per share for seven years. Proceeds of the Note were used to redeem the Company's 7 3/4% convertible subordinated debentures due February 1, 2006 at 104% of the principal amount plus accrued interest and pay expenses of the transaction as follows: Principal balance of Debentures redeemed $ 19,509,000 Redemption premium of 4% 780,000 Accrued Interest 164,000 Placement fees, legal fees and other expenses of transaction Capitalized as other assets 1,750,000 Cash received 1,797,000 ------------ Proceeds $ 24,000,000 Valuation of warrants credited to additional paid in capital (1,306,000) Warrants amortized as interest expense 150,000 ------------ Senior Subordinated Note $ 22,844,000 ============
As a result of this transaction the Company posted an extraordinary charge of $979,000 in the fiscal 2000, which is net of a $625,000 income tax benefit. The extraordinary charge consists of the redemption premium of $780,000 plus write off of capitalized fees of $824,000. The Note agreement contains covenants that, among other matters, limit senior indebtedness, the disposition of assets and unfunded capital expenditures. The covenants also include ratio tests for interest coverage, leverage, fixed charge coverage and debt service. The Company received a waiver from the Note holder as of June 30, 2000 for covenant violations pertaining to unfunded capital expenditures, fixed charge coverage, debt service ratio and permitted acquisitions. F-20 61 NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED):
2000 -------------------------------------------------------------- SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ------------ ----------- ----------- ----------- Sales and Revenues $74,640,000 $83,533,000 $89,935,000 $90,634,000 Gross Margin 9,147,000 8,742,000 7,277,000 7,947,000 Net Income (Loss) Before Extraordinary Item 2,067,000 1,494,000 (1,282,000) 729,000 Net Income (Loss) 1,089,000 1,493,000 (1,282,000) 729,000 Net Income Per Share: Basic: Before Extraordinary Item $ .31 $ .22 $ (.20) $ .11 After Extraordinary Item .16 .22 (.20) .11 Diluted: Before Extraordinary Item .25 .21 (.20) .11 After Extraordinary Item .14 .21 (.20) .11
1999 -------------------------------------------------------------- SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ------------ ----------- ----------- ----------- Sales and Revenues $52,600,000 $56,665,000 $53,643,000 $61,767,000 Gross Margin 7,656,000 7,917,000 7,375,000 9,075,000 Net Income Before Extraordinary Item 1,659,000 1,827,000 1,144,000 1,792,000 Net Income 1,506,000 1,793,000 1,076,000 1,564,000 Net Income Per Share: Basic: Before Extraordinary Item $ 0.24 $ 0.28 $ 0.17 $ 0.27 After Extraordinary Item 0.22 0.27 0.16 0.24 Diluted: Before Extraordinary Item 0.18 0.21 0.14 0.20 After Extraordinary Item 0.17 0.20 0.13 0.18
F-21 62 NOTE 16 - SEGMENT REPORTING: The Company operates and reports it's activities through five principal units: 1) Fuel Sales and Services, 2) Fixed Based Operations, 3) Cargo Operations , 4) Government contract services, and 5) RPA.
Fuel Sales Fixed Base Cargo Government RPA Total (Dollars in Thousands) And Services Operations Operations Contract Services ----------------------------------------------------------------------------------------------------------------------------- 2000 Revenues $202,906 $ 73,666 $32,474 $ 25,287 $ 4,409 $338,742 Gross Margin 7,884 11,522 9,977 5,031 (1,301) 33,113 Depreciation and Amortization 780 4,292 3,262 827 244 9,405 Capital expenditures 109 8,796 756 965 345 10,971 Segment Assets 46,405 31,248 31,616 19,391 6,455 135,115 ----------------------------------------------------------------------------------------------------------------------------- 1999 Revenues $111,296 $ 53,799 $27,741 $ 25,436 $ 6,403 $224,675 Gross Margin 8,892 11,280 5,751 5,297 803 32,023 Depreciation and Amortization 540 3,282 3,649 827 201 8,499 Capital expenditures 1,083 12,940 551 497 174 15,245 Segment Assets 57,465 21,485 24,293 16,780 7,279 127,302 ----------------------------------------------------------------------------------------------------------------------------- 1998 Revenues $148,170 $ 51,838 $21,521 $ 16,961 $ 1,621 $240,111 Gross Margin 7,019 11,046 5,342 4,527 196 28,130 Depreciation and Amortization 725 2,691 1,161 559 58 5,194 Capital expenditures 2,582 3,260 10,461 1,957 124 18,384 Segment Assets 47,587 19,636 22,660 15,611 6,247 111,741
Gross margin is used as the measure of profit and loss for segment reporting purposes as it viewed by key decision makers as the principal operating indicator in measuring segment profitability. The key decision makers also view bad debt expense as an important measure of profit and loss. The predominant component of bad debt expense relates to Fuel Sales and Services. Bad debt expense for Fuel Sales and Services was approximately $5,000,000, $1,377,000 and $1,577,000; total bad debt expense was $5,408,000, $1,721,000 and $1,971,000 in fiscal 2000, fiscal 1999 and fiscal 1998, respectively. F-22 63 MERCURY AIR GROUP, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED JUNE 30, 2000
CLASSIFICATION BALANCE AT CHARGED TO COSTS DEDUCTIONS BALANCE AT END BEGINNING OF PERIOD AND EXPENSES (a) OF PERIOD 2000 Allowance for doubtful accounts $1,953,000 $5,408,000 $(4,811,000) $2,550,000 ========== ========== =========== ========== 1999 Allowance for doubtful accounts $1,686,000 $1,721,000 $(1,454,000) $1,953,000 ========== ========== =========== ========== 1998 Allowance for doubtful accounts $1,875,000 $1,971,000 $(2,160,000) $1,686,000 ========== ========== =========== ==========
(a) Accounts receivable write-off F-23