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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16, 2001
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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MERCFUEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 5172 95-4831828
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
5456 MCCONNELL AVENUE
LOS ANGELES, CALIFORNIA 90066
(310) 827-2737
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JOSEPH A. CZYZYK
MERCFUEL, INC.
5456 MCCONNELL AVENUE
LOS ANGELES, CALIFORNIA 90066
(310) 827-2737
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
FREDERICK H. KOPKO, JR., ESQ. THOMAS J. POLETTI, ESQ.
JAMES R. STERN, ESQ. PETER V. HOGAN, ESQ.
MCBREEN & KOPKO KIRKPATRICK & LOCKHART LLP
20 NORTH WACKER DRIVE 10100 SANTA MONICA BLVD.,
SUITE 2520 SEVENTH FLOOR
CHICAGO, ILLINOIS 60606 LOS ANGELES, CALIFORNIA 90067
TELEPHONE: (312) 332-6405 TELEPHONE: (310) 552-5000
FACSIMILE: (312) 332-2059 FACSIMILE: (310) 552-5001
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, $.01 par value(2)...... 1,380,000 shares $11.00 $15,180,000 $3,795
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Representative's Warrant............. One warrant $.001 $120 $1
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Common Stock, $.01 par value,
issuable upon exercise of the
Representative's Warrant(3)........ 120,000 shares $13.20 $1,584,000 $396
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Total........................................................................................ $4,192
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(1) Includes 180,000 shares of common stock which may be purchased by the
underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3) The representative's warrant is to be issued to the representative of our
underwriters.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SEC IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION MAY 16, 2001
1,200,000 SHARES
MERCFUEL, INC.
COMMON STOCK
We are offering 1,200,000 shares of our common stock. Prior to this offering,
there has been no public market for our common stock. We anticipate that the
initial public offering price will be between $9.00 and $11.00 per share.
We intend to apply to list our common stock on the American Stock Exchange under
the symbol "JET".
INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS MERCFUEL
--------------- ------------- -----------
Per Share............................................ $ $ $
Total................................................ $ $ $
We have granted the underwriters an option to purchase 180,000 additional shares
to cover over-allotments, if any. Delivery of the shares of common stock will be
made on or about , 2001.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
VMR CAPITAL MARKETS, U.S.
The date of this prospectus is , 2001
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TABLE OF CONTENTS
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and are seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as to
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Special Note Regarding Forward-Looking Statements........... 14
Our Separation from Mercury Air Group....................... 14
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 28
Management.................................................. 36
Arrangements Between MercFuel and Mercury Air Group......... 41
Principal Stockholder....................................... 47
Description of Capital Stock................................ 47
Shares Eligible for Future Use.............................. 50
Underwriting................................................ 51
Legal Matters............................................... 53
Experts..................................................... 53
Where You Can Find More Information......................... 53
Index to Financial Statements............................... F-1
UNTIL , 2001, 25 DAYS AFTER COMMENCEMENT OF THE OFFERING, ALL
DEALERS THAT BUY, SELL OR TRADE SHARES, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN
ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and our common stock being sold in this
offering and our historical financial statements and notes to those statements
included elsewhere in this prospectus.
MERCFUEL
We are an independent provider of fuel sales and services to the aviation
industry. Our customers include passenger, cargo and charter airlines as well as
business aviation customers. Our primary customers are small to medium sized
commercial carriers and business fleet managers not directly served by major oil
companies and other fuel suppliers. We plan to expand our sales efforts to
capture additional larger carriers.
We believe that we add value for our customers and are able to attract
business by providing high quality service and by offering a combination of
favorable pricing and credit terms. We believe that we also add value for our
suppliers, which are principally major oil companies, by facilitating the
management and distribution of aviation fuel for air carriers which the oil
companies typically do not service. We plan to initiate a fuel management system
which we believe will provide us with more efficient operations and improved
customer service. We provide 24-hour, single source, coordinated supply and
delivery on a worldwide basis as well as providing related support services.
Further, we believe our scale of operations and creditworthiness allow for the
purchase of fuel on more favorable price and credit terms than would be
available to most of our customers on an individual basis.
Our objective is to become the leading reseller of aviation fuel and
services to the commercial and business aviation markets. The key elements of
our strategy are described below.
- Attract Additional Commercial and Business Clients. Our goal is to
continue to support the major oil companies and other fuel suppliers by
providing and administering fuel to small and medium size carriers and
business fleet managers as well as expanding sales to larger carriers
both domestically and internationally.
- Minimize Exposure to Fuel Fluctuations. By arranging for the purchase of
fuel on an as-sold basis, and keeping inventory levels at an operating
minimum, we believe we reduce our exposure to market risk associated with
fuel price and demand volatility.
- Expand International Presence. We intend to expand our international
operations through relationships in strategically located countries and
regions throughout the world.
- Enhance Technology Offerings. Our proposed fuel management system is
designed to automate the purchase, delivery and settlement transaction
process which we intend to offer as a point-of-sale system to oil
companies, air carriers and refueling companies to better manage their
billing and supply process.
- Consummate Strategic Acquisitions. We intend to pursue the acquisition
of, or investment in complementary businesses, technologies, services or
products to expand our operations.
Our principal executive offices are located at 5456 McConnell Avenue, Los
Angeles, California 90066. Our telephone number is (310) 827-2737. We maintain a
website at www.mercfuel.com. Information on our website does not constitute part
of this prospectus.
OUR RELATIONSHIP WITH MERCURY AIR GROUP
We have operated as a division of Mercury Air Group, Inc. since 1979, and a
wholly-owned subsidiary, organized in Delaware, since October 27, 2000. On
January 1, 2001 Mercury Air Group contributed the assets and liabilities of its
fuel sales and services division to us. References to us prior to January 1,
2001, reflect the historic operating activities of Mercury Air Group's fuel
sales and services division.
We are currently a wholly-owned subsidiary of Mercury Air Group. After the
completion of this offering, Mercury Air Group will own 82.0% of the outstanding
shares of our common stock or 80.2% if the
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underwriters fully exercise their option to purchase additional shares in full.
Mercury Air Group currently plans to divest our shares following this offering,
but in no event earlier than six months following this offering, by distributing
all of the shares of our common stock owned by Mercury Air Group to the holders
of Mercury Air Group's common stock. However, Mercury Air Group is not obligated
to complete the distribution, and the distribution may not occur by the
anticipated time or at all. This distribution is contingent upon approval of
Mercury Air Group and its lenders and our obtaining adequate financing.
We intend to enter into agreements with Mercury Air Group related to the
separation of our business operations from Mercury Air Group and various interim
and ongoing relationships between us and Mercury Air Group.
The agreements regarding the separation of our business operations from
Mercury Air Group are described more fully in the section entitled "Arrangements
Between MercFuel and Mercury Air Group" included elsewhere in this prospectus.
The terms of these agreements, which will be negotiated in the context of a
parent-subsidiary relationship, may be more or less favorable to us than if they
had been negotiated with unaffiliated third parties. See "Risk Factors -- Risks
Related to Our Relationship with Mercury Air Group". The assets and liabilities
which were transferred to us on January 1, 2001 are described more fully in our
financial statements and notes to those statements that are also included
elsewhere in this prospectus.
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THE OFFERING
Common stock offered.......... 1,200,000 shares
Common stock to be outstanding
immediately after this
offering.................... 7,986,372 shares
Use of proceeds............... Repayment of our intercompany payable to
Mercury Air Group, capital expenditures and
working capital and general corporate purposes
Proposed AMEX symbol.......... JET
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The total number of shares of our common stock to be outstanding
immediately after this offering:
- is based on the actual number of shares of common stock outstanding as of
March 31, 2001;
- reflects the issuance of 239,942 shares of our common stock in a private
placement at a per share price of $4.35, which is to be consummated at
such time as Mercury Air Group's lenders consent to that offering and the
initial public offering; and
- excludes 1,000,000 shares of common stock reserved for future issuance
under our 2001 Stock Option Plan.
Unless otherwise specifically stated, all information in this prospectus:
- gives effect to an amendment to our certificate of incorporation in May
2001 effecting a 6,546.43 for-one stock split and increasing the number
of authorized shares of our common stock to 50,000,000 and our preferred
stock to 8,000,000;
- assumes the underwriters have not exercised their over-allotment option;
and
- assumes that the underwriters' representative has not exercised the
representative's warrant, which is a five-year warrant to purchase
120,000 shares of our common stock at an exercise price equal to 120% of
the initial public offering price, issuable to the representative upon
the closing of this offering.
In this prospectus, "MercFuel", "Company", "we", "us" and "our" each refers
to MercFuel, Inc., a Delaware corporation.
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SUMMARY FINANCIAL DATA
The following tables present our summary financial data. The data presented
in these tables are from "Selected Financial Data" and our historical financial
statements included elsewhere herein. You should read those sections for a
further explanation of the financial data summarized here.
The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented.
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
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1998 1999 2000 2000 2001
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Fuel sales.......................... $148,354 $111,638 $203,412 $149,224 $240,478
Cost of sales....................... 138,730 99,823 192,399 140,986 231,547
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Gross profit........................ 9,624 11,815 11,013 8,238 8,931
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Operating expenses:
Selling, general and
administrative.................... 3,567 4,418 4,506 3,163 3,817
Provision for bad debts............. 8,639 1,377 5,000 4,262 2,350
Depreciation........................ 14 57 58 41 46
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Total operating expenses............ 12,220 5,852 9,564 7,466 6,213
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Operating income (loss)............. (2,596) 5,963 1,449 772 2,718
Interest expense.................... 1,163 1,016 1,187 850 490
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Income (loss) before income taxes... (3,759) 4,947 262 (78) 2,228
Provision (benefit) for income
taxes............................. (1,466) 1,929 102 (30) 869
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Net income (loss)................... $ (2,293) $ 3,018 $ 160 $ (48) $ 1,359
======== ======== ======== ======== ========
Basic and diluted net income (loss)
per share......................... $ (0.35) $ 0.46 $ 0.02 $ (0.01) $ 0.21
======== ======== ======== ======== ========
Shares used in computing basic and
diluted net income (loss) per
share............................. 6,546 6,546 6,546 6,546 6,546
======== ======== ======== ======== ========
Unaudited pro forma basic and
diluted net income per share(1)... $ 0.08 $ 0.23
======== ========
Shares used in computing unaudited
pro forma basic and diluted net
income per share(1)............... 7,245 7,245
======== ========
AS OF MARCH 31, 2001
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ACTUAL PRO FORMA(2) AS ADJUSTED(3)
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(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital........................................ $ 8,553 $ 8,553 $14,728
Total assets........................................... 30,096 30,096 36,271
Due to Mercury Air Group............................... 8,785 4,785 --
Stockholder's equity................................... 65 4,065 15,025
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(1) Pro forma basic and diluted net income per share amounts are calculated
using the 6,546,430 shares outstanding at March 31, 2001. We have also
assumed for purposes of computing pro forma basic and diluted net income per
share that the $4,785,000 pro forma amount due to Mercury Air Group will be
paid from (a) the sale of 239,942 shares of common stock in a private
offering at $4.35 per share, the net
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proceeds of which are $960,000 and (b) the sale of 459,000 shares of common
stock, the net proceeds of which are calculated to be $3,825,000, based on
an assumed initial public offering price of $10.00 per share, reduced by the
estimated per share offering costs. In computing pro forma net income per
share, net income was increased $453,000 and $281,000 for the year ended
June 30, 2000 and the nine months ended March 31, 2001, respectively. The
increase in net income resulted from an assumed reduction of allocated
interest expense due to the reduction in the amount due to Mercury Air
Group.
We intend to enter into a transitional services agreement with Mercury Air
Group pursuant to which Mercury Air Group will provide us with transitional
services, systems and operational support operations, including data
processing and telecommunications services (such as voice telecommunications
and data transmission and information technology support services) for
functions including accounting, financial management, tax, payroll,
stockholder and public relations, legal, procurement, human resources and
other administrative functions. Mercury Air Group services provided to us
will be fixed at $70,000 per month. The agreement will become effective upon
the distribution of our common stock. Charges for these transitional
services have not been included in the computation of pro forma basic and
diluted net income per share as costs for such services have been allocated
to us in the historical financial statements and, therefore, would represent
duplicative charges in the pro forma computations.
(2) Pro forma amounts give effect to the capital contribution by Mercury Air
Group of $4.0 million in May 2001, in the form of cancellation of
intercompany debt owing to Mercury Air Group as though this action had been
taken as of March 31, 2001.
(3) As adjusted amounts give effect to the following actions as though these
actions had been taken as of March 31, 2001:
- our agreement to sell 239,942 shares of our common stock at a per
share price of $4.35, the net proceeds of which are $960,000. The sale
will be consummated at such time as Mercury Air Group's lenders
consent to that offering and the initial public offering;
- our sale of 1,200,000 shares of common stock in this offering at an
assumed initial public offering price of $10.00 per share, the net
proceeds of which are estimated to be $10.0 million after deducting
assumed underwriting discounts and estimated offering expenses payable
by us; and
- repayment of an intercompany payable to Mercury Air Group from a
portion of the net proceeds of this offering, which amount owed was
$4.8 million at March 31, 2001 pro forma.
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RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. The following risk factors should be considered carefully, in addition
to other information contained in this prospectus, in evaluating our business
prospects.
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL
WE HAVE NO HISTORY AS AN INDEPENDENT COMPANY. THIS FACTOR MAY MAKE OUR BUSINESS
MORE DIFFICULT TO EVALUATE.
We have historically operated as a division of Mercury Air Group. In
October 2000, we were incorporated in Delaware and are currently a wholly owned
subsidiary of Mercury Air Group. Upon completion of this offering, we will
become a public company. Therefore, we have no history as an independent
company. Our lack of independence may limit your ability to evaluate our
prospects due to:
- Our lack of historical financial data as an independent company and
- Our limited experience as an independent company in addressing emerging
trends that may affect our business.
OUR ABILITY TO CONSUMMATE FUEL SALES WOULD BE ADVERSELY AFFECTED BY A
SIGNIFICANT DECREASE IN THE AVAILABILITY, OR INCREASE IN THE PRICE, OF AVIATION
FUEL.
From June 1999 to June 2000, per gallon fuel costs rose approximately 67%
and led to a significant increase in bad debts due to the incidence of customer
bankruptcies. Fuel prices have continued to rise subsequent to fiscal 2000.
Events outside our control have in the past resulted and could in the future
result in spot shortages or further rapid increases in fuel costs. Extended
periods of high fuel costs could adversely affect our ability to purchase fuel
in sufficient quantities because of credit limits placed on us by our fuel
suppliers.
OUR FUEL SALES COULD BE ADVERSELY AFFECTED BY DETERIORATING ECONOMIC CONDITIONS.
The air transportation industry is highly sensitive to general economic
conditions. Our fuel sales could be adversely affected by a sustained economic
recession either in the United States or globally. In addition, financial
problems incurred by our commercial customers could affect the volume of
purchases these customers make from us or their ability to pay us for fuel
purchased. Significantly higher fuel prices for an extended period of time have
a negative impact on the aviation industry as it increases the operating
expenses of our airline customers.
BECAUSE A SUBSTANTIAL PORTION OF OUR ACCOUNTS RECEIVABLE ARE DUE FROM SMALLER
AND GENERALLY LESS WELL-ESTABLISHED OR WELL-CAPITALIZED AIRLINES, OUR BUSINESS
MAY BE HARMED IF THESE AIRLINES CANNOT MEET THEIR OBLIGATIONS TO US.
We typically sell aviation fuel on an unsecured basis with extended credit
terms. In addition, a substantial portion of our accounts receivable are due
from smaller and generally less well-established or well-capitalized airlines,
including certain foreign, regional, commuter and recently formed airlines,
which may be less creditworthy than larger, well-established and
well-capitalized airlines. These customers are more affected by fluctuations in
the economy in general and in the aviation industry specifically. Specifically,
a material rise in the price of aviation fuel tends to more adversely impact
these types of customers. To the extent that our airline customers were not able
to immediately adjust their business operations to reflect increased operating
costs, they could take relatively longer to pay our accounts receivable. Such
payment delays would further increase our working capital demands. In some
cases, the impact of such economic fluctuations could materially impair the
financial stability of an airline customer such that it would be unable to pay
amounts owed to us and could result in such airline customer filing for
bankruptcy protection. In that event, we could incur significant losses related
to the uncollectability of the receivables. We have incurred in the past and are
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likely to continue to incur losses as the result of the business failure of a
customer. In this regard, it should be noted that we continue to supply jet fuel
to National Airlines which filed for bankruptcy protection on December 6, 2000.
Sales to National Airlines accounted for approximately 18% of our fuel sales in
fiscal 2000. The liquidation of National Airlines, or the failure of another
relatively large customer or a number of smaller customers would impact our
earnings and could cause our stock price to decline.
OUR FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS.
Approximately 26% of our fuel sales for fiscal 2000 were generated from
foreign-based customers headquartered in Asia, Europe, Latin America and the
Caribbean. We frequently grant foreign customers extended credit terms, which
may result in proportionately larger receivable balances for a given quantity of
fuel sales. To the extent such customers are also large fuel purchasers, our
credit exposure to a single customer may be relatively large. Although invoices
are usually denominated in U.S. dollars and as our fuel is generally sold in the
United States, foreign customers may have difficulty in paying such invoices in
the event of the devaluation of their national currency. In addition, if a
foreign customer fails to abide by its contractual commitments, our legal
remedies may not be as effective as they would be in collecting from domestic
customers. Finally, operations in certain foreign countries may subject us to
the risk of social or economic unrest, possibly jeopardizing our operations in
such countries.
WE WILL NEED ADDITIONAL WORKING CAPITAL IF WE CONTINUE TO SELL MORE FUEL OR IF
THE PRICE OF FUEL CONTINUES TO INCREASE.
We require substantial working capital to finance accounts receivable
generated from fuel sales operations. The amount of working capital consumed by
these accounts receivable has depended and will depend primarily on the quantity
of fuel sold, the price of the fuel, our extension of credit and customer
compliance with credit terms. Any increase in fuel quantity or price or in
credit extended, or any substantial customer noncompliance with credit terms,
will result in a corresponding increase in the aggregate accounts receivable
balance, thereby requiring us to employ additional working capital. The quantity
and price of fuel we have sold has increased substantially in the last 18
months. At the current level of fuel sales, if the price of aviation fuel were
to further materially increase for a sustained period, we might have to
reallocate funds from business expansion to meet working capital demand, or
alternatively, we could be forced to curtail fuel sales or change the credit
terms granted to our customers, which could reduce our earnings and jeopardize
established customer relationships.
CONSOLIDATION IN THE AVIATION FUEL AND AVIATION INDUSTRY MAY IMPACT THE
AVAILABILITY OF FUEL AND OUR CREDIT AVAILABILITY.
We could be adversely affected by industry consolidation, on the customer
side, because of increased merger activity in the airline industry and, on the
supply side, because of increased competition from the larger oil companies who
would choose to directly market to smaller and medium-sized airlines or to
provide less advantageous credit and price terms to us.
WE MAY BE SUBJECT TO EXPOSURE DUE TO POSSIBLE ENVIRONMENTAL CLAIMS.
We utilize subcontractors which provide various services to customers,
including into-plane fueling at airports and transportation and storage of fuel.
We are subject to possible claims by customers, regulators and others who may be
injured by a spill or other accident. An uninsured claim arising out of our
activities, if successful and of sufficient magnitude, will hurt our business.
In addition, we may be held liable for damages to natural resources arising out
of such events. Although we generally require our subcontractors to carry
liability insurance, not all subcontractors carry adequate insurance coverage.
Our liability insurance policy does not cover the acts or omissions of our
subcontractors. If we are held responsible for any liability caused by our
subcontractors, and such liability is not adequately covered by the
subcontractor's insurance and is of sufficient magnitude, we would suffer
damages. In addition, our domestic and international fueling activities
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also subjects us to the risks of significant potential liability under state,
federal and international statutes, common law and indemnification agreements.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY, OUR RESULTING LOSS OF COMPETITIVE
POSITION COULD RESULT IN FEWER CUSTOMER ORDERS, REDUCED MARGIN AND LOSS OF
MARKET SHARE.
We are in direct competition with major oil companies, major airlines and
other independent fuel suppliers, such as World Fuel Services Corporation, and
with other aircraft support companies which maintain their own sources of
aviation fuel. Many of our competitors have greater financial, technical and
marketing resources than us. There can be no assurance that we will be able to
compete successfully with existing or new competitors.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY
SHORTAGES OR PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
We typically purchase our fuel through purchase orders, and in general we
have no guaranteed supply arrangements with any of our suppliers. We currently
purchase from a limited source of suppliers. For the nine months ended March 31,
2001, 27% of our jet fuel purchases were made from BP P.L.C., commonly known as
British Petroleum, and 12% were made from each of Tosco Corporation and ARCO.
For the year ended June 30, 2000, 17% were made from each of British Petroleum
and Tosco Corporation, 13% were made from ARCO and 12% were made from Texaco,
Inc. ARCO is affiliated with British Petroleum. If our relationship with any of
these key suppliers terminates, we may not be able to obtain a sufficient
quantity of fuel on favorable terms. We may experience difficulty and delays in
obtaining fuel from alternative sources of supply. Furthermore, financial or
other difficulties faced by these suppliers, fuel shortages or significant
changes in demand for fuel could limit the availability of fuel. Any
interruption or delay in the supply of fuel, or the inability to obtain fuel
from alternate sources at acceptable prices and within a reasonable amount of
time, would impair our ability to meet scheduled fuel deliveries to our
customers and could cause customers to cancel orders.
WE COULD BE ADVERSELY AFFECTED IF SOME OR OUR KEY CUSTOMERS REDUCED OR
TERMINATED THEIR PURCHASES FROM US OR DID NOT PAY THEIR OBLIGATIONS TO US.
Our largest customers for the nine months ended March 31, 2001 were
National Airlines, which accounted for approximately 22% of fuel sales, and
AirTran Airways which accounted for approximately 19% of fuel sales. For the
year ended June 30, 2000, National Airlines accounted for approximately 18% of
fuel sales and Tower Air represented approximately 10% of fuel sales. We have no
long-term written agreements or other understandings with any of our customers
that relate to future purchases, so purchases by these customers or any others
could be reduced or terminated upon short notice at any time. A substantial
reduction or a termination of purchases by any of our largest customers would
harm us financially.
Our sales are typically made on credit, with terms that vary depending upon
the customer and other factors. While we attempt to carefully monitor the
creditworthiness of our customers and distributors, we bear the risk of their
inability to pay our receivables and of any delay in payment. A business failure
by any of our largest customers would harm us financially.
RISKS RELATED TO OUR STRATEGY AND MARKET
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR FUEL MANAGEMENT STRATEGY.
In order to design, develop, and implement our fuel management strategy, we
will need to recruit and retain qualified individuals. There can be no assurance
that we will be able to recruit and retain such individuals, that we will be
able to successfully design such architecture, or that such architecture will be
able to be developed on an economical basis. In addition, because we are unable
to accurately predict the cost of development of our fuel management strategy,
the development of this strategy may exceed our budget, resulting in an adverse
impact on our earnings or financial condition.
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We may be unable to develop and introduce our fuel management strategy in a
timely manner or in response to changing market conditions or client
requirements.
We anticipate that we will face the following challenges to our ability to
introduce our fuel management strategy:
- inadequate development of the necessary infrastructure;
- resistance by suppliers and customers to the introduction of new
technology and procedural changes;
- problems related to the development of technology which may be necessary
for the software to work on various computer operating systems;
- problems meeting customer and supplier concerns related to accuracy,
security and auditing of data;
- competition from others' technology; or
- possible changes in governmental regulation.
WE MAY REQUIRE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS.
We believe our capital requirements may vary greatly from quarter to
quarter, depending on, among other things, changes in working capital, capital
expenditures, fluctuations in our operating results, financing activities,
acquisitions and investments, and receivables management. We believe that the
proceeds from this offering, along with our future cash flow from operations,
will be sufficient to satisfy our working capital, capital expenditures, and
research and development requirements for the foreseeable future. However, we
may require or choose to obtain additional debt or equity financing in order to
finance acquisitions or other investments in our business. Future equity
financings would be dilutive to the existing holders of our common stock. Future
debt financings could involve restrictive covenants. We will likely not be able
to obtain financing with terms as favorable as those that Mercury Air Group
could obtain.
WE MAY HAVE DIFFICULTY MANAGING OUR EXPANDING OPERATIONS, WHICH MAY HARM OUR
BUSINESS.
A key part of our strategy is to grow our business; however, our growth has
placed a significant strain on our managerial and operational resources. To
manage our growth, we must continue to improve our financial and management
controls, reporting systems and procedures. We may not be able to do so
successfully.
IF WE ARE UNABLE TO FIND SUITABLE ACQUISITION CANDIDATES, OUR GROWTH COULD BE
IMPEDED.
A component of our growth strategy is the acquisition of, or investment in,
complementary businesses, technologies, services or products. In pursuing
acquisition and investment opportunities, we may be in competition with other
companies having similar growth and investment strategies. Competition for these
acquisitions or investment targets could also result in increased acquisition or
investment prices and a diminished pool of businesses, technologies, services or
products available for acquisition or investment.
Performance problems with an acquired business, technology, service or
product could also have a material adverse impact on our reputation as a whole.
In addition, any acquired business, technology, service or product could
significantly underperform relative to our expectations.
COMPETITION FOR EXPERIENCED PERSONNEL IS INTENSE AND OUR INABILITY TO RETAIN KEY
PERSONNEL COULD INTERRUPT OUR BUSINESS AND ADVERSELY AFFECT OUR GROWTH.
Our future success depends, in significant part, upon the continued service
and performance of our senior management and other key personnel, in particular
Eric Beelar, our President. Losing the services of Mr. Beelar may impair our
ability to effectively deliver our services and manage our company, and to carry
out our business plan. In addition, we need to recruit and retain a Chief
Executive Officer to replace Joseph Czyzyk, who intends to devote his time fully
to the business of Mercury Air Group within approximately one year of the
offering. There can be no assurance that we will be able to find a replacement
for Mr. Czyzyk. Competition for qualified personnel in the fuel sales and
services industry is intense and we may not be
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successful in attracting and retaining qualified personnel. There may be only a
limited number of persons with the requisite skills to serve in this and other
management positions and it may become increasingly difficult to hire these
persons.
RISKS RELATED TO OUR RELATIONSHIP WITH MERCURY AIR GROUP
OUR STOCK PRICE MAY DECLINE AND WE WILL NOT BE ABLE TO OPERATE OUR BUSINESS
WITHOUT MERCURY AIR GROUP'S CONTROL IF MERCURY AIR GROUP DOES NOT COMPLETE ITS
DISTRIBUTION OF OUR COMMON STOCK.
Mercury Air Group has advised us that it currently intends to distribute to
its stockholders all of our common stock by the later of the receipt of approval
from Mercury Air Group's lenders or six months after this offering, although it
is not obligated to do so. There are various conditions to the completion of the
distribution and we cannot assure you as to whether or when it will occur. If
the distribution does occur, we may not obtain the benefits we expect as a
result of this distribution, including direct access to capital markets, better
incentives for employees, greater strategic focus, facilitated customer
relationships and future partnerships and increased speed and responsiveness. In
addition, until this distribution occurs, the risks discussed below relating to
Mercury Air Group's control of us and the potential business conflicts of
interest between Mercury Air Group and us will continue to be relevant to our
stockholders.
WE WILL BE CONTROLLED BY MERCURY AIR GROUP AS LONG AS IT OWNS A MAJORITY OF OUR
COMMON STOCK, AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF
STOCKHOLDER VOTING DURING SUCH TIME.
After the completion of this offering, Mercury Air Group will own 82.0% of
our outstanding common stock or 80.2% if the underwriters exercise their option
to purchase additional shares in full. As long as Mercury Air Group owns a
majority of our outstanding common stock, Mercury Air Group will continue to be
able to elect our entire board of directors and to remove any director, with or
without cause, without calling a special meeting. Investors in this offering
will not be able to affect the outcome of any stockholder vote prior to the
planned distribution of our stock to the Mercury Air Group stockholders. As a
result, Mercury Air Group will control all matters affecting us, including:
- the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers;
- the allocation of business opportunities that may be suitable for us and
Mercury Air Group;
- any determinations with respect to mergers and other business
combinations;
- our acquisition or disposition of assets;
- our financing;
- changes to the agreements providing for our separation from Mercury Air
Group;
- the payment of dividends on our common stock; and
- determinations with respect to our tax returns.
MERCURY AIR GROUP COULD SELL A CONTROLLING INTEREST IN US TO A THIRD PARTY
PREVENTING THE PLANNED DISTRIBUTION OF OUR COMMON STOCK.
Mercury Air Group has agreed with the underwriters not to offer or sell any
shares of our common stock for a period of 180 days after the date of this
prospectus, without the prior written consent of the underwriters. After the
180-day period, however, Mercury Air Group is not prohibited from selling a
controlling interest in us to a third party. A sale of a controlling interest in
us by Mercury Air Group would prevent the distribution of our shares to Mercury
Air Group's stockholders as currently planned and could have a depressive effect
of the market price of our common stock. Moreover, because Mercury Air Group can
dispose of all or a portion of its ownership of our common stock at some future
date, it may transfer a controlling interest in us without allowing you to
participate or realize a premium.
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SUBSTANTIAL SALES OF COMMON STOCK MAY OCCUR IN CONNECTION WITH THE DISTRIBUTION,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Mercury Air Group currently plans to distribute to its stockholders all of
the shares of our common stock it owns after this offering, but in no event
before the later of the receipt of approval of its lenders or six months after
this offering. If Mercury Air Group completes the distribution, substantially
all of these shares would be eligible for immediate resale in the public market.
Any sales of substantial amounts of common stock in the public market, or the
perception that such sales might occur, whether as a result of this distribution
or otherwise, could harm the market price of our common stock. We are unable to
predict whether significant amounts of common stock will be sold in the open
market in anticipation of, or following, this distribution or whether a
sufficient number of buyers will be in the market at that time.
UNTIL WE ESTABLISH SEPARATE CREDIT FACILITIES, WE WILL NEED TO RELY ON MERCURY
AIR GROUP'S BANK FINANCINGS TO FUND OUR FUTURE CAPITAL REQUIREMENTS.
Prior to the distribution, we will rely on Mercury Air Group's bank
financings to fund, in part, our operations. Since these facilities determine
the amount of available borrowings on a consolidated basis, we may not be able
to draw on the facilities if Mercury Air Group's financial condition is
adversely affected. In addition, because we are a guarantor of Mercury Air
Group's credit facilities, there could be conflict of interest between Mercury
Air Group and its other affiliates on one hand and us on the other hand with
regard to the availability of credit. Due to Mercury Air Group's control of us,
this conflict of interest may not be resolved in a manner favorable to us.
Moreover, following the distribution, Mercury Air Group will no longer provide
us access to these funds to finance our working capital or other cash
requirements. We cannot assure you that we will have sufficient financing or
that financing from other sources, if needed, will be available on favorable
terms or at all.
CROSS-DEFAULT OBLIGATIONS CURRENTLY EXIST BETWEEN US AND MERCURY AIR GROUP,
WHICH MAY REQUIRE US TO INDEMNIFY MERCURY AIR GROUP IN CERTAIN CIRCUMSTANCES.
We are a guarantor under Mercury Air Group's existing bank indebtedness.
Therefore, we are required to guarantee certain indebtedness incurred by Mercury
Air Group. This guarantee will, in all likelihood, not be released until the
distribution. Any demand on this guarantee could harm our business financially.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
Our historical financial information included in this prospectus has been
carved out from Mercury Air Group's consolidated financial statements and may
not accurately reflect what our financial position, results of operations and
cash flows would have been had we been a separate, stand-alone entity during the
periods presented. Mercury Air Group did not account for us as, and we were not
operated as, a single, stand-alone entity for the periods presented. In
addition, the historical information is not necessarily indicative of what our
results of operations, financial position and cash flows will be in the future.
We have not made adjustments to reflect significant changes that may occur in
our cost structure, funding and operations as a result of our separation from
Mercury Air Group, including changes in our employee base, changes in our tax
structure and increased costs associated with being a public company.
WE HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH MERCURY AIR GROUP WITH
RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS, AND BECAUSE OF MERCURY AIR
GROUP'S CONTROLLING OWNERSHIP, WE MAY NOT RESOLVE THESE CONFLICTS ON THE MOST
FAVORABLE TERMS TO US.
Conflicts of interest may arise between Mercury Air Group and us in a
number of areas relating to our past and ongoing relationships, including:
- labor, tax, employee benefits, indemnification and other matters arising
from our separation from Mercury Air Group;
- sales or distributions by Mercury Air Group of all or any portion of its
ownership interest in us; and
- the nature, quality and pricing of transitional services Mercury Air
Group has agreed to provide.
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We may not be able to resolve any potential conflicts, and even if we do,
the resolution may be less favorable than if we were dealing with an
unaffiliated party. The agreements we have entered into with Mercury Air Group
may be amended upon agreement between the parties while we are controlled by
Mercury Air Group. Mercury Air Group may be able to require us to agree to
amendments to these agreements that may be less favorable to us than the current
terms of the agreements.
OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST BECAUSE OF
THEIR OWNERSHIP OF MERCURY AIR GROUP COMMON STOCK.
Many of our directors and executive officers have a substantial amount of
their personal financial portfolios in Mercury Air Group common stock and
options to purchase Mercury Air Group common stock. Their options to purchase
Mercury Air Group common stock may not convert into options to purchase our
common stock if the distribution does not occur. Ownership of Mercury Air Group
common stock by our directors and officers could create, or appear to create,
potential conflicts of interest when directors and officers are faced with
decisions that could have different implications for Mercury Air Group and us.
IF THE TRANSITIONAL SERVICES BEING PROVIDED TO US BY MERCURY AIR GROUP ARE NOT
SUFFICIENT TO MEET OUR NEEDS, OR IF WE ARE NOT ABLE TO REPLACE THESE SERVICES
AFTER OUR AGREEMENTS WITH MERCURY AIR GROUP EXPIRE, WE WILL BE UNABLE TO MANAGE
CRITICAL OPERATIONAL FUNCTIONS OF OUR BUSINESS.
Mercury Air Group will provide transitional services to us, including
services for functions including accounting, financial management, tax, payroll,
stockholder and public relations, legal, procurement and other administrative
functions.
Although Mercury Air Group will be contractually obligated to provide us
with these services, these services may not be provided at the same level as
when we were a part of Mercury Air Group, and we may not be able to obtain the
same benefits. We will also lease and sublease office space from Mercury Air
Group. These transitional services and leasing arrangements generally have a
term of one year following the distribution of our common stock. After the
expiration of these various arrangements, we may not be able to replace the
transitional services or enter into appropriate leases in a timely manner or on
terms and conditions, including cost, as favorable as those we will receive from
Mercury Air Group.
These arrangements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
Mercury Air Group. The prices charged to us under these agreements may be lower
than the prices that we may be required to pay third parties for similar
services or the costs of similar services if we undertake them ourselves.
RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK
THE LEAD UNDERWRITER OF THIS OFFERING LACKS UNDERWRITING EXPERIENCE
While certain of the officers of the lead underwriter of this offering, VMR
Capital Markets, U.S., have significant experience in corporate financing and
the underwriting of securities and VMR Capital Markets, U.S. has co-managed
underwritten public offerings in the past, VMR Capital Markets, U.S. has limited
experience acting as lead underwriter in underwritten public offerings.
Accordingly, there can be no assurance that the lead underwriter's limited
public offering experience will not affect this offer of our common stock and
subsequent development or a trading market, if any.
OUR SECURITIES HAVE NO PRIOR MARKET, AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE OFFERING.
Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. The market price of our
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common stock could be subject to significant fluctuations after this offering.
Among other factors that could affect our stock price are:
- quarterly variations in our operating results;
- changes in revenue or earnings estimates or publication or research
reports by analysts;
- speculation in the press or investment community;
- strategic actions by us or our competitors, such as acquisitions or
restructurings;
- actions by institutional stockholders;
- general market conditions; and
- domestic and international economic factors unrelated to our performance.
The stock markets have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our common stock.
In particular, we cannot assure you that you will be able to resell your shares
at or above the initial public offering price, which will be determined by
negotiations between the representatives of the underwriters and us.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT
ACQUISITION OF US, WHICH COULD DECREASE THE VALUE OF YOUR SHARES.
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it harder for a third party to acquire us without the
consent of our board of directors, although these provisions have little
significance while we are controlled by Mercury Air Group. These provisions
include a classified board of directors and provisions requiring a larger than
majority vote of our directors or stockholders for certain transactions. In
addition, our board of directors has the right to issue preferred stock without
stockholder approval, which could be used to dilute the stock ownership of a
potential hostile acquirer. Delaware law also imposes some restrictions on
mergers and other business combinations between us and any holder of 15% or more
of our outstanding common stock. Although we believe these provisions provide
for an opportunity to receive a higher bid by requiring potential acquirers to
negotiate with our board of directors, these provisions apply even if the offer
may be considered beneficial by some stockholders.
PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE DILUTION IN NET TANGIBLE
BOOK VALUE PER SHARE.
Purchasers of our common stock in this offering will experience immediate
dilution of $8.12 in net tangible book value per share based upon an assumed
initial public offering price of $10.00 per share.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates", "believes", "plans",
"expects", "future", "intends", and similar expressions to identify these
forward-looking statements. Our actual results could differ materially from the
results contemplated by these forward-looking statements due to a number of
factors, including those discussed in "Risk Factors", "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this prospectus. This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates regarding the growth of
our markets. Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause our actual results, as well as
those of the markets we serve, levels of activity, performance, achievements and
prospects to be materially different from those expressed or implied by the
forward-looking statements. Those risks, uncertainties and other factors
include, among others, those identified in "Risk Factors" and elsewhere in this
prospectus.
OUR SEPARATION FROM MERCURY AIR GROUP
OVERVIEW
We are currently a wholly-owned subsidiary of Mercury Air Group. After the
completion of this offering, Mercury Air Group will own 82.0% of our outstanding
common stock or 80.2% if the underwriters exercise their over-allotment option
to purchase additional shares in full. Until Mercury Air Group holds less than a
majority of the voting power of our outstanding common stock, Mercury Air Group
will be able to control the vote on all matters submitted to stockholders,
including the election of directors and the approval of extraordinary corporate
transactions.
THE PLANNED DISTRIBUTION BY MERCURY AIR GROUP OF OUR COMMON STOCK
Mercury Air Group has advised us that it plans to distribute to its
stockholders all of our common stock that it owns, after this offering, but in
no event before the later of the receipt of approval of its lenders or six
months after this offering, although it is not obligated to do so. There are,
however, various conditions to the completion of the distribution and we cannot
assure you as to whether or when it will occur.
These conditions include:
- the relative market prices of our common stock and Mercury Air Group's
common stock;
- the obtaining of acceptable and sufficient financing to fund our
anticipated level of operations;
- the absence of any court orders or regulations prohibiting or restricting
the completion of the distribution; and
- other conditions affecting our business or that of Mercury Air Group.
BENEFITS OF THE SEPARATION
We believe that we will realize benefits from our complete separation from
Mercury Air Group, including the following:
Greater Strategic Focus. Our focus will be on developing our fuel sales
and services business and on structuring our fuel management initiative. This
effort will be supported by our own board of directors, management team and
employees.
Better Incentives for Employees and Greater Accountability. We expect the
motivation of our employees and the focus of our management will be strengthened
by incentive compensation programs tied to the market performance of our common
stock. The separation will enable us to offer our employees compensation
directly linked to the performance of our business, which we expect will enhance
our ability to attract and retain qualified personnel.
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More Direct Access to Capital Markets. As a separate company, we will have
more direct access to the capital markets to issue debt or equity securities and
to grow through acquisitions.
TRANSFER AND TRANSITIONAL ARRANGEMENTS
On January 1, 2001, the transfer date, Mercury Air Group transferred to us
assets, and we assumed liabilities relating to our business. In addition, we and
Mercury Air Group intend to enter into agreements, generally effective on the
date of distribution of our common stock, providing for various interim and
ongoing relationships between us and Mercury Air Group.
All of the agreements providing for these relationships will be made in the
context of a parent-subsidiary relationship and will be negotiated in the
overall context of our complete separation from Mercury Air Group. We believe
the terms of these agreements will be fair, however, terms of these agreements
may be more or less favorable to us than if they had been negotiated with
unaffiliated third parties.
CONTINUING FINANCIAL ARRANGEMENTS WITH MERCURY AIR GROUP AND PROPOSED FINANCING
Until the distribution date, we will continue to be a guarantor under
Mercury Air Group's financing arrangements. We are currently negotiating a $20.0
million senior credit facility in the form of a revolving loan to be secured by
substantially all of our assets. The revolving loan will mature in either two,
three, four or five years from the date of closing of the loan, at our option.
The revolving loan would be subject to certain financial covenants, including
maintenance of a minimum level of tangible net worth. The consummation of the
revolving loan will be subject to certain conditions precedent, including our
having a minimum of $5.0 million in the aggregate of unrestricted cash or cash
equivalents on hand and/or available credit capacity, after reserving for those
amounts necessary to maintain current liabilities reasonably within terms, and
our having a minimum of $4.0 million in equity at the time of the closing of the
revolving loan. There is no assurance that this financing will be attained.
In addition, Mercury Air Group has agreed, if required, to guaranty our
obligations with our fuel suppliers for a period of up to six months from the
distribution date.
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USE OF PROCEEDS
We estimate that our net proceeds from this offering will be approximately
$10.0 million, based on an assumed initial public offering price of $10.00 per
share and after deducting assumed underwriting discounts and estimated offering
expenses payable by us. We intend to use the proceeds of this offering for:
- repayment of an intercompany payable to Mercury Air Group bearing
interest at 8.5% per annum, payable on demand. This amount, outstanding
as of March 31, 2001, was $3.8 million after a capital contribution by
Mercury Air Group in May 2001 in the form of cancellation of intercompany
debt of $4.0 million and the expected net proceeds of $960,000 from the
intended sale of 239,942 shares of our common stock, which sale will be
consummated at such time as Mercury Air Group's lenders consent to that
offering and the initial public offering;
- capital expenditures of approximately $2.5 million over the 12 months
following the closing of this offering to support our fuel management
strategy; and
- working capital and general corporate purposes.
We may use a portion of the net proceeds allocated to working capital and
general corporate purposes to acquire businesses, products or technologies that
are complementary to our business although we have no definitive plan to do so
at this time. The amounts actually expended for these purposes will vary
significantly depending on a number of factors, including revenue growth, if
any, and planned geographic expansion into targeted markets.
Pending the use of such net proceeds for the above purposes, we intend to
invest such funds in marketable, investment-grade securities, certificates of
deposit or direct or guaranteed obligations of the U.S. Government.
DIVIDEND POLICY
We currently intend to retain any future earnings to fund the development
and growth of our business. Under Mercury Air Group's existing credit
facilities, we are prohibited from paying any dividends to our stockholders. We
do not anticipate paying any cash dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2001. Our
capitalization is presented:
- on an actual basis;
- on a pro forma basis to give effect to a capital contribution by Mercury
Air Group of $4.0 million in May 2001 in the form of cancellation of
intercompany debt owing to Mercury Air Group as if such action has been
taken as of March 31, 2001;
- on an as adjusted basis to give effect to the agreement to the sale of
239,942 shares of our common stock at a per share price of $4.35, the net
proceeds of which are $960,000. The sale will be consummated at such time
as Mercury Air Group's lenders consent to that offering and the initial
public offering;
- on an as adjusted basis to give effect to the sale of 1,200,000 shares of
common stock in this offering at an assumed initial offering price of
$10.00 per share, the net proceeds of which are estimated to be $10.0
million after deducting the assumed underwriting discounts and estimated
offering expenses payable by us; and
- on an as adjusted basis to give effect to the repayment of the amount due
to Mercury Air Group from a portion of the net proceeds of this offering,
which amount owed was $4.8 million as of March 31, 2001 pro forma.
AS OF MARCH 31, 2001
----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS EXCEPT SHARE DATA)
Due to Mercury Air Group.................................... $8,785 $4,785 $ --
====== ====== =======
Stockholder's equity:
Preferred stock, $0.01 par value, 8,000,000 shares
authorized, none issued actual, pro forma and as
adjusted............................................... -- -- --
Common Stock, $0.01 par value, 50,000,000 shares
authorized, 6,546,430 issued actual and issued pro
forma, 7,986,372 issued as adjusted.................... $ 65 $ 65 $ 80
Additional paid-in capital................................ 4,000 14,945
------ ------ -------
Total stockholder's equity and capitalization............... $ 65 $4,065 $15,025
====== ====== =======
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DILUTION
Our net tangible book value at March 31, 2001 was $65,000 or $0.01 per
share. Our pro forma net tangible book value per share was $0.62 and is
determined by dividing our pro forma tangible net worth by the number of shares
outstanding at March 31, 2001. Pro forma tangible net worth is total tangible
net assets less total liabilities after giving effect to a capital contribution
by Mercury Air Group of $4.0 million in the form of cancellation of intercompany
debt owing to Mercury Air Group as if such action had been taken as of March 31,
2001.
Dilution in as adjusted net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the private offering and the as adjusted net
tangible book value per share of our common stock immediately afterwards. After
giving effect to the following:
- our agreement to sell 239,942 shares of our common stock in a private
placement at a per share price of $4.35, the net proceeds of which are
$960,000. The sale will be consummated at such time as Mercury Air
Group's lenders consent to that offering and the initial public offering,
and
- our sale of 1,200,000 shares of common stock in this offering at an
assumed initial offering price of $10.00 per share, the net proceeds of
which are estimated at $10.0 million after deducting assumed underwriting
discounts and estimated offering expenses payable by us.
Our as adjusted net tangible book value at March 31, 2001 would have been
approximately $15.0 million, or $1.88 per share. This represents an immediate
increase in pro forma tangible book value of $1.14 per share to our existing
stockholders and an immediate dilution in as adjusted net tangible book value of
$8.12 per share to new investors purchasing shares of common stock in this
offering. The following table illustrates this dilution per share:
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of March 31,
2001...................................................... $0.62
As adjusted net tangible book value per share attributable
to the sale of 239,942 shares in the private placement.... 0.12
Increase in pro forma book value per share attributable to
new investors............................................. 1.14
-----
As adjusted, net tangible book value per share after this
offering and the private placement........................ 1.88
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 8.12
======
The discussion and table above assumes no issuance of shares reserved for
future issuance under our 2001 Stock Option Plan. As of March 31, 2001, there
were no options outstanding to purchase shares of our common stock. To the
extent that any options are granted and exercised, there will be further
dilution to new investors.
The following table sets forth, as of March 31, 2001 on the as adjusted
basis described above, the differences between the number of shares of common
stock purchased from us, the total price paid and the average price per share
paid by our existing stockholders (which includes the shares issuable pursuant
to the private placement and the $4.0 million capital contribution of Mercury
Air Group), and by the new investors in this offering at an assumed initial
public offering price of $10.00 per share, before deducting estimated
underwriting discounts and commissions and offering expenses payable by us.
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------ AVERAGE PRICE
STOCKHOLDER NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
- ----------- --------- ---------- ----------- ---------- -------------
Existing stockholders.................. 6,786,372 85% $ 5,108,748 30% $ 0.75
New investors.......................... 1,200,000 15% $12,000,000 70% $10.00
--------- --- ----------- ---
Total........................ 7,986,372 100% $17,108,748 100%
========= === =========== ===
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If the underwriters' option to purchase additional shares is exercised in
full, the following will occur:
- the number of shares of common stock held by our existing stockholders
will decrease to 80.2% of the total number of shares of common stock
outstanding; and
- the number of shares held by new investors will be increased to 1,380,000
shares or 19.8% of the total number of shares of our common stock
outstanding after this offering.
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SELECTED FINANCIAL DATA
The following tables present our selected financial data. The information
set forth below should be read together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our historical
financial statements included herein. Our statement of operations data set forth
below for each of the years in the three-year period ended June 30, 2000 and our
balance sheet data as of June 30, 1999 and 2000 have been derived from our
audited financial statements included herein. The statement of operations data
for the years ended June 30, 1996 and 1997 and the balance sheet data as of June
30, 1996, 1997 and 1998 and as of March 31, 2000 are derived from our unaudited
financial data that is not included herein. The statement of operations data for
the nine months ended March 31, 2000 and 2001 and the balance sheet data as of
March 31, 2001 have been derived from unaudited financial statements included
herein and, in the opinion of management, include all adjustments, consisting
only of normal recurring accruals, that are necessary for a fair presentation of
our financial position and results of operations for these periods. The
historical financial information may not be indicative of our future performance
and does not reflect what our financial position and results of operations would
have been had we operated as a separate, stand-alone entity during the periods
presented.
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Fuel sales......................... $172,357 $201,002 $148,354 $111,638 $203,412 $149,224 $240,478
Cost of sales...................... 162,844 191,371 138,730 99,823 192,399 140,986 231,547
-------- -------- -------- -------- -------- -------- --------
Gross profit....................... 9,513 9,631 9,624 11,815 11,013 8,238 8,931
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Selling, general and
administrative................... 3,838 3,769 3,567 4,418 4,506 3,163 3,817
Provision for bad debts............ 750 2,200 8,639 1,377 5,000 4,262 2,350
Depreciation....................... 12 12 14 57 58 41 46
-------- -------- -------- -------- -------- -------- --------
Total operating expenses........... 4,600 5,981 12,220 5,852 9,564 7,466 6,213
-------- -------- -------- -------- -------- -------- --------
Operating income................... 4,913 3,650 (2,596) 5,963 1,449 772 2,718
Interest expense................... 1,703 1,693 1,163 1,016 1,187 850 490
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes............................ 3,210 1,957 (3,759) 4,947 262 (78) 2,228
Provision (benefit) for income
taxes............................ 1,274 775 (1,466) 1,929 102 (30) 869
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................. $ 1,936 $ 1,182 $ (2,293) $ 3,018 $ 160 $ (48) $ 1,359
======== ======== ======== ======== ======== ======== ========
Basic and diluted net income (loss)
per share........................ $ 0.30 $ 0.18 $ (0.35) $ 0.46 $ 0.02 $ (0.01) $ 0.21
======== ======== ======== ======== ======== ======== ========
Shares used in computing basic and
diluted net income (loss) per
share............................ 6,546 6,546 6,546 6,546 6,546 6,546 6,546
======== ======== ======== ======== ======== ======== ========
Unaudited pro forma basic and
diluted net income per
share(1)......................... $ 0.08 $ 0.23
======== ========
Shares used in computing unaudited
pro forma basic and diluted net
income per share(1).............. 7,245 7,245
======== ========
AS OF JUNE 30, AS OF MARCH 31,
----------------------------------------------- -----------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital........................... $22,035 $19,942 $13,946 $16,834 $10,342 $11,765 $ 8,553
Total assets.............................. 33,045 32,985 25,227 31,052 28,946 35,617 30,096
Due to Mercury Air Group.................. 22,081 19,980 14,003 17,521 10,575 12,003 8,785
Stockholder's equity...................... -- -- -- -- -- -- 65
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- ---------------
(1) Pro forma basic and diluted net income per share amounts are calculated
using the 6,546,430 shares outstanding at March 31, 2001. We have also
assumed for purposes of computing pro forma basic and diluted net income per
share that the $4,785,000 pro forma amount due to Mercury Air Group will be
paid from 1) the sale of 239,942 shares of common stock in a private
offering at $4.35 per share, the net proceeds of which are $960,000 and 2)
the sale of 459,000 shares of common stock, the net proceeds of which are
calculated to be $3,825,000, based on an assumed initial public offering
price of $10.00 per share, reduced by the estimated per share offering
costs. In computing pro forma net income per share, net income was increased
$453,000 and $281,000 for the year ended June 30, 2000 and the nine months
ended March 31, 2001, respectively. The increase in net income resulted from
an assumed reduction of allocated interest expense due to the reduction in
the amount due to Mercury Air Group.
We intend to enter into a transitional services agreement with Mercury Air
Group pursuant to which Mercury Air Group will provide us with transitional
services, systems and operational support operations, including data
processing and telecommunications services (such as voice
telecommunications and data transmission and information technology support
services) for functions including accounting, financial management, tax,
payroll, stockholder and public relations, legal, procurement, human
resources and other administrative functions. Mercury Air Group services
provided to us will be fixed at $70,000 per month. The agreement will
become effective upon the distribution of our common stock. Charges for
these transitional services have not been included in the computation of
pro forma basic and diluted net income per share as costs for such services
have been allocated to us in the historical financial statements and,
therefore, would represent duplicative charges in the pro forma
computations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with "Selected Financial Data" and
our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those presented under
"Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We are an independent provider of fuel sales and services to the aviation
industry. We have operated as a division of Mercury Air Group since 1979 and a
wholly-owned subsidiary, organized in Delaware, since October 27, 2000. Our fuel
sales consists of contract fueling and related fuel management services. We do
not currently provide fuel management services independent of fuel sales. Sales
of aviation fuel are made primarily to domestic and international airlines and
air freight companies. We also provide fuel to large corporate aircraft
operators and third parties.
Determination of Gross Profit
Gross profit consists of fuel sales less cost of sales. Our cost of sales
consists of the cost of fuel. Various factors including the price of fuel, the
volatility of the price of fuel, over-all business mix and specific major
accounts which are attracted, retained or lost during a given period will affect
our gross profit.
Availability of Fuel
From June 1999 to June 2000, per gallon fuel costs rose 67%. From June 30,
2000 to March 31, 2001, per gallon fuel costs rose 5%. However, during this nine
month period, per gallon fuel costs rose as much as 40% before falling to
current levels. Although we believe that there are currently adequate aviation
fuel supplies, events outside our control have in the past resulted and could in
the future result in spot shortages or further rapid increases in fuel costs.
Although we have generally been able to pass through rising fuel costs to our
customers, extended periods of high fuel costs could adversely affect our
ability to purchase fuel in sufficient quantities because of credit limits
placed on us by our fuel suppliers.
We purchase 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 our customers. From time-to-time, we will commit to
purchase a fixed volume of fuel, at a fixed price, over a fixed period of time,
at agreed upon locations based on selected customers' corresponding purchase
commitments. Our terms of payment generally range from 10 to 30 days for most of
our fuel purchases, except for bulk purchases, which generally are payable in
shorter time periods. We have agreements with certain suppliers under which we
purchase a minimum amount of fuel each month at prices which approximate current
market prices. We make occasional spot purchases of fuel to take advantage of
market differentials. In order to meet customer supply requirements, we carry
limited inventories at numerous locations. Due to the nature of our business,
the volume of our aviation fuel inventories will fluctuate.
Our fuel supply contracts may generally be canceled by either party with no
further obligations. In some cases, we have monthly purchase requirements which
are established based on historical volumes of fuel purchased by us. Such fuel
purchase history may result in the seller agreeing to provide a monthly
allocation to us such that the seller agrees to dedicate a portion of its
available fuel for our requirements. We benefit 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, we usually purchase fuel at levels approximating
the allocated amount. However, we are not obligated to purchase any fuel under
such an allocation. Currently, the monthly allocations from our fuel suppliers
represent only a small portion of our total monthly supply requirements.
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Liquidity Risk
We generally purchase fuel using credit terms which on average are shorter
than the credit terms we generally offer our customers. As a result, we require
access to sufficient credit facilities which may need to increase in the future
as we expand our operations. The amount of working capital consumed by our
accounts receivable has depended and will depend primarily on the quantity of
fuel sold, the price of fuel, our extension of credit, customer compliance with
our credit terms and credit terms provided by our suppliers. Any increase in the
quantity or price of fuel sold, any increase in credit extended, any reduction
in credit terms provided by our suppliers or any substantial customer
noncompliance with credit terms will result in a corresponding increase in our
need for working capital. Under these circumstances, our liquidity could be
adversely affected unless we are able to increase vendor credit or increase
lending limits under Mercury Air Group's revolving credit facility. We believe,
however, that Mercury Air Group's current financing arrangements (and the
availability under the terms of our proposed bank financing arrangement) and
vendor credit should provide us with sufficient liquidity in the event of a
continued major temporary surge in oil prices. However, to the extent that
credit facilities are utilized to fund working capital requirements we will
incur additional interest expense.
Credit Risk
A substantial portion of our accounts receivable are due from smaller and
generally less well-established or well-capitalized airlines, including certain
foreign, regional, commuter and start-up airlines, which may be less
creditworthy than larger, well-established and well-capitalized airlines. These
customers are more affected by fluctuations in the economy in general and in the
aviation industry specifically. For example, a material rise in the price of
aviation fuel tends to more adversely impact these types of customers. To the
extent that our airline customers are not able to immediately adjust their
business operations to reflect increased operating costs, they could take
relatively longer to pay our accounts receivable. Such payment delays would
further increase our working capital demands. In some cases, the impact of such
economic fluctuations could materially impair the financial stability of an
airline customer such that it would be unable to pay amounts owed to us and
could result in such airline customer filing for bankruptcy protection. In that
event, we could incur significant losses related to the uncollectability of the
receivables. We have incurred in the past and are likely to continue to incur
losses as the result of the business failure of a customer. We assess our credit
portfolio on an ongoing basis and establish allowances which we believe are
adequate to absorb potential credit problems that can be reasonably anticipated.
This assessment includes an analysis of past due accounts as well as a review of
accounts with significant balances. Reserves are established for all or some
portion of past due balances based upon various factors including the extent of
delinquency, financial conditions of delinquent customers and amounts of
insurance and collateral, if any.
Our accounts receivable balance was $27.1 million at March 31, 2001 and
$25.4 million at June 30, 2000. Accounts receivable is comprised primarily of
trade receivables from customers and is net of an allowance for doubtful
accounts. Our credit risk is based in part on the following: 1) substantially
all receivables are related to a single industry (aviation), 2) there is a
concentration of credit risk as there are several customers who at any time have
significant balances owed to us, and 3) significant balances are owed by certain
customers that are not adequately capitalized.
Accounts receivable days outstanding were 31 days as of March 31, 2001 and
59 days as of March 31, 2000. Such amounts were 46 days as of June 30, 2000, 89
days as of June 30, 1999 and 55 days as of June 30, 1998. Accounts receivable
days outstanding have historically been impacted by a high volume of fuel sales
to customers with extended payment terms. However, during the current period, we
added a large customer whose terms are prepaid and we also reduced the maximum
amount of available credit to National Airlines based on their volume of fuel
purchased. These factors significantly reduced the accounts receivable days
outstanding.
Significant Customers
Our largest customers for the nine months ended March 31, 2001 were
National Airlines and AirTran Airways, which accounted for 22% and 19% of fuel
sales, respectively. For the year ended June 30, 2000,
23
27
National Airlines represented 18% of fuel sales and Tower Air, Inc. represented
10% of fuel sales. We have no long-term written agreements or other
understandings with any of our customers that relate to future purchases, so
purchases by these customers or any others could be reduced or terminated upon
short notice at any time.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consists of personnel costs
for our sales force and our executive and administrative staff, professional
fees and overhead expenses including rent, utilities, insurance, business taxes
and travel. We expect that our selling, general and administrative expenses will
increase as we expand our operations.
Basis of Presentation
Our financial statements have been carved out from the consolidated
financial statements of Mercury Air Group using the historical results of
operations and historical basis of the assets and liabilities of the fuel sales
and services division of Mercury Air Group. The financial statements also
include allocations to us of certain Mercury Air Group corporate assets,
liabilities and expenses, including centralized legal, accounting, employee
benefits, and other Mercury Air Group corporate and infrastructure costs. The
expense allocations have been determined from an analysis of Mercury Air Group's
operating and corporate departments and are generally based on the percentage of
our operating income before depreciation, indirect selling, general and
administrative expenses and certain specifically identified bad debt expenses to
Mercury Air Group's operating income before depreciation and amortization and
indirect selling, general and administrative expenses.
The financial information presented in this prospectus may not be
indicative of our financial position, results of operations or cash flows which
may occur in the future nor is it necessarily indicative of what our financial
position, results of operations or cash flows would have been had we been a
separate, stand-alone entity for the periods presented. The financial
information presented in this prospectus does not reflect the many significant
changes that will occur in our funding and operations as a result of us becoming
a stand-alone entity.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
The following table sets forth, for the periods indicated, our fuel sales
and gross profit as well as selected other financial statement data.
NINE MONTHS ENDED MARCH 31,
(DOLLARS IN MILLIONS)
--------------------------------------------
2001 2000
-------------------- --------------------
% OF TOTAL % OF TOTAL
AMOUNT FUEL SALES AMOUNT FUEL SALES
------ ---------- ------ ----------
Fuel sales.................................. $240.5 100.0% $149.2 100.0%
Cost of sales............................... 231.6 96.3 141.0 94.5
------ ----- ------ -----
Gross profit................................ 8.9 3.7 8.2 5.5
Selling, general and administrative......... 3.8 1.6 3.1 2.1
Provision for bad debts..................... 2.4 1.0 4.3 2.9
Interest expense and other.................. 0.5 0.2 0.9 0.6
------ ----- ------ -----
Income (loss) before income taxes........... 2.2 0.9 (0.1) (0.1)
Provision (benefit) for income taxes........ 0.8 0.4 -- --
------ ----- ------ -----
Net income (loss)........................... $ 1.4 0.6% $ (0.1) (0.1%)
====== ===== ====== =====
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Nine Months Ended March 31, 2001 Compared to March 31, 2000
Fuel sales increased by 61.2% to $240.5 million in the current period from
$149.2 million a year ago. The increase in fuel sales was due to an increase of
24% in the average price of fuel sold and an increase of 29% in the volume of
fuel sold. Volume increased in the current period due to a significant new
customer added in September 2000. Gross profit increased by 8.4% to $8.9 million
in the current nine month period from $8.2 million a year ago due to an increase
of 29% in the volume of fuel sold.
Selling, general and administrative expenses in the current period
increased 20.7% to $3.8 million from $3.1 million in last year's period due
primarily to higher legal fees. Selling, general and administrative expense
includes an allocation from Mercury Air Group of $0.7 million in the current
nine month period and $0.9 million in the year ago period.
Provision for bad debts decreased 44.9% in the current period to $2.4
million from $4.3 million a year ago due to the write off of Tower Air's
receivable balance of $2.7 million in the year ago period (as a result of its
bankruptcy). The provision in the current period includes $1.6 million which is
attributable to a legal settlement with Western Pacific Airlines, Inc. This
amount was partially offset by $0.9 million in bad debt recoveries related to a
former customer. Future periods may continue to be impacted by higher reserve
requirements.
Interest expense (net) decreased by 42.4% in the current period to $0.5
million from $0.9 million a year ago due to lower average outstanding amounts
due to Mercury Air Group, which is the basis on which interest expense is
allocated to MercFuel.
Income tax expense 39.0% of pre-tax income in the current period and income
tax benefit 39.0% of pre-tax loss in the year ago period reflecting the expected
effective annual income tax rate.
RESULTS OF OPERATIONS -- FISCAL 2000, 1999 AND 1998
The following table sets forth, for the periods indicated, our fuel sales
and gross profit, as well as selected other financial statement data.
YEAR ENDED JUNE 30,
(DOLLARS IN MILLIONS)
--------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT FUEL SALES AMOUNT FUEL SALES AMOUNT FUEL SALES
------ ---------- ------ ---------- ------ ----------
Fuel sales........................ $203.4 100.0% $111.6 100.0% $148.3 100.0%
Cost of sales..................... 192.4 94.6 99.8 89.4 138.7 93.5
------ ----- ------ ----- ------ -----
Gross profit...................... 11.0 5.4 11.8 10.6 9.6 6.5
Selling, general and
administrative.................. 4.5 2.2 4.4 3.9 3.6 2.4
Provision for bad debts........... 5.0 2.5 1.4 1.3 8.6 5.8
Interest expense and other........ 1.2 0.6 1.1 1.0 1.2 0.8
------ ----- ------ ----- ------ -----
Income (loss) before income
taxes........................... 0.3 0.1 4.9 4.4 (3.8) (2.5)
Provision (benefit) for income
taxes........................... 0.1 -- 1.9 1.7 (1.5) (1.0)
------ ----- ------ ----- ------ -----
Net income (loss)................. $ 0.2 0.1% $ 3.0 2.7% $ (2.3) (1.5)%
====== ===== ====== ===== ====== =====
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Fuel sales increased 82.2% to $203.4 million in fiscal 2000 from $111.6
million in fiscal 1999 due to higher fuel prices and higher volume of fuel sold.
Gross profit decreased 6.8% to $11.0 million in fiscal 2000 from $11.8 million
in fiscal 1999. The increase in fuel sales was due to an increase of 22.3% in
volume of fuel sold and an increase of 43.0% in the average price of fuel sold.
The decrease in gross profit was primarily due to lower per gallon margins
caused by rising fuel prices.
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Selling, general and administrative expenses increased by 2.0% to $4.5
million in fiscal 2000 from $4.4 million in fiscal 1999. Selling, general and
administrative expenses includes an allocation from Mercury Air Group of $1.3
million in fiscal 2000 and $1.5 million in fiscal 1999.
Provision for bad debts increased 263.1% in fiscal 2000 to $5.0 million
from $1.4 million in fiscal 1999 due to the write off of Tower Air's receivable
balance of $2.7 million (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 created a greater risk of loss due to potential
bad debts related to certain airline accounts.
Interest expense (net) increased 16.8% in fiscal 2000 to $1.2 million from
$1.1 million in fiscal 1999 due to higher interest rates in fiscal 2000.
Interest expense is allocated from Mercury Air Group based upon our average
working capital requirements.
Income tax expense was 39.0% of pretax income in both fiscal 2000 and
fiscal 1999 reflecting our effective annual income tax rate.
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Fuel sales decreased 24.7% to $111.6 million in fiscal 1999 from $148.3
million in fiscal 1998, primarily due to lower fuel prices and lower fuel
volume. Gross profit increased 22.8% to $11.8 million in fiscal 1999 from $9.6
million in fiscal 1998. Volume declined approximately 32 million gallons all of
which was related to the bankruptcy filing of Western Pacific Airlines. Average
fuel prices decreased 12% in fiscal 1999 as compared to fiscal 1998.
Selling, general and administrative expenses in fiscal 1999 increased 23.9%
to $4.4 million from $3.6 million in fiscal 1998. Selling, general and
administrative expenses includes an allocation from Mercury Air Group of $1.5
million in fiscal 1999 compared to $1.0 million in fiscal 1998. In addition,
higher charges were incurred in fiscal 1999 for compensation, insurance and
credit card fees.
Provision for bad debts in fiscal 1999 declined 84.1% to $1.4 million from
$8.6 million in fiscal 1998 primarily due to a loss of $7.1 million from Western
Pacific Airline's bankruptcy, which is included in fiscal 1998, and lower bad
debt allowance requirements attributable in part to lower fuel sales.
Interest expense (net) in fiscal 1999 decreased 12.6% to $1.1 million from
$1.2 million in fiscal 1998 primarily due to lower average outstanding amounts
due to Mercury Air Group and lower interest rates.
Income tax expense was 39.0% of pretax income for fiscal 1999 and income
tax benefit was 39.0% of pretax loss for fiscal 1998, reflecting our effective
annual income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through operating
cash flow and advances from Mercury Air Group. Our cash balance at March 31,
2001 and at June 30, 2000 was zero in both periods. The amount due to Mercury
Air Group was $8.8 million and $10.6 million at each of March 31, 2001 and June
30, 2000. Mercury Air Group has historically financed our operations primarily
through its bank financing arrangements, the collateral for which includes our
assets.
Until the distribution date, we will continue to be a guarantor under
Mercury Air Group's financing arrangements. We are currently negotiating a $20.0
million senior credit facility in the form of a revolving loan to be secured by
substantially all of our assets. The revolving loan will mature in either two,
three, four or five years from the date of closing of the loan, at our option.
The revolving loan would be subject to certain financial covenants, including
maintenance of a minimum level of tangible net worth. The consummation of the
revolving loan will be subject to certain conditions precedent, including our
having a minimum of $5.0 million in the aggregate of unrestricted cash or cash
equivalents on hand and/or available credit capacity, after reserving for those
amounts necessary to maintain current liabilities reasonably within terms, and
our having a minimum of $4.0 million in equity at the time of the closing of the
revolving loan. There is no assurance that this financing will be obtained.
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30
In addition, Mercury Air Group has agreed, if required, to guaranty our
obligations with our fuel suppliers for a period of up to six months from the
distribution date.
We have agreed to sell 239,942 shares of our common stock at a per share
price of $4.35 in a private placement. This sale is to be consummated at such
time as Mercury Air Group's lenders consent to that offering and the initial
public offering.
Net cash provided by operating activities was $3.2 million during the nine
months ended March 31, 2001 and $6.7 million during fiscal 2000. During the nine
months ended March 31, 2001, the primary sources of net cash provided by
operating activities were net income plus depreciation totaling $1.4 million,
bad debt expense of $2.4 million, a decrease in inventories of $0.7 million, an
increase in accounts payable of $0.7 million and an increase in accrued expenses
of $2.2 million. The primary use of cash from operating activities during the
nine month period ended March 31, 2001 was an increase in trade accounts
receivable of $4.1 million, due to higher sales. During fiscal 2000, the primary
sources of net cash provided by operating activities were bad debt expense of
$5.0 million and an increase in accounts payable of $4.6 million. The primary
use of cash from operating activities during fiscal 2000 was an increase in
trade accounts receivable of $3.1 million.
Net cash used in investing activities was $14,000 during the nine months
ended March 31, 2001 due to an increase in property and equipment. Net cash
provided by investing activities was $0.4 million during fiscal 2000 primarily
from the sale of property.
Net cash used in financing activities was $3.2 million during the nine
months ended March 31, 2001 and $7.1 million during fiscal 2000, due to a
reduction in the advance to Mercury Air Group.
We plan to incur approximately $2.5 million over the 12 months following
the closing of this offering related to the design and development of our fuel
management strategy.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
NEW ACCOUNTING PRONOUNCEMENTS -- On July 1, 2000, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Their was no effect of adoption at July 1, 2000 was
insignificant. At March 31, 2001, there were no outstanding derivative
contracts.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, which provided the staff's views in applying
generally accepted accounting principles to selected revenue issues. There was
no impact of implementing Staff Accounting Bulletin No. 101.
INFLATION
We believe that inflation has not had a significant effect on our results
of operations during the past three fiscal years.
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31
BUSINESS
INDUSTRY BACKGROUND
Jet fuel resellers are generally independent third parties that purchase
fuel from major oil companies and independent fuel suppliers and resell fuel to
commercial airlines, business aircraft management companies and air freight
companies. Jet fuel reselling is a byproduct of the United States oil embargo
and ensuing energy crisis in 1979. At that time, the major oil companies
initiated a fuel allocation program pursuant to which many smaller and regional
domestic and international airlines were unable to access sufficient supplies of
jet fuel. Resellers took the initiative to find additional sources of fuel for
these carriers and have become the suppliers to many of those airlines which the
oil companies no longer directly serve.
We believe that the current and expected growth in commercial and business
aviation presents significant opportunities for jet fuel resellers. According to
the Federal Aviation Administration, domestic and international passenger
enplanements, which are passenger boardings, are expected to increase at an
annual rate of 3.9% between 1997 and 2008 and forecasts that through 2008 annual
growth in passenger miles will average 4.2%. The Federal Aviation Administration
forecasts that by 2008 there will be nearly 10 million more annual aircraft
operations, which are aircraft flight segments, than the 63 million operations
at the end of 2000. The Boeing Corporation forecasts that 29,500 more commercial
aircraft will be manufactured between 2000 and 2006. In addition, emerging
countries tend to form their own airlines and most third world countries tend to
establish private airline companies to compliment their existing and national
carriers. Furthermore, air cargo carriers are expanding or being formed to
address the needs of the global economy requiring timely delivery of raw
materials and products.
As for business aviation, the popularity of business aircraft has increased
as more companies realize the efficiency and productivity of owning and
operating their own planes or having fractional ownership of business jets.
Fractional ownership is where companies or individuals own a fraction of an
aircraft and receive management and pilot services associated with the
aircraft's operations. According to the National Business Aviation Association,
the number of domestic corporate flight departments has grown from 6,584 in 1991
to 9,317 in 2000. According to the National Business Aviation Association, the
worldwide business jet fleet has more than doubled since 1980. In addition,
fractional aircraft ownership allows companies that have never before owned a
business aircraft to experience many of the efficiencies of business aviation
quickly and without the typical overhead considerations associated with
traditional flight departments. It also allows existing flight departments to
supplement their current aircraft when needed. According to the National
Business Aviation Association, the number of companies and individuals using
fractional ownership grew from 2,591 in 1999 to 3,694 in 2000.
INEFFICIENCIES OF JET FUEL RESALES
Commercial and general aviation jet fuel purchases and dispensement occurs
at airports and fuel terminals throughout the world. Jet fuel resellers contract
directly with the oil company or jet fuel supplier to purchase the fuel and with
third party refueling companies handling large commercial aircraft at commercial
airports and fuel terminals or with third parties known as fixed base
operations, for the actual dispensing of the fuel to the customer. Fixed base
operations are third parties that typically handle all other aircraft such as
commuter, business and private jets. Typical commercial or business jet fuel
resale transactions are as follows:
- Deliveries from Reseller Inventory. In some cases, the jet fuel reseller
has previously contracted with the fuel supplier for the delivery of fuel
to a third party refueling company or fixed base operation. These third
parties store the fuel for the jet fuel reseller as the reseller's
inventory. In these instances, the third party that delivers the fuel
into the wing of the aircraft customer forwards a paper record of the
transaction to the jet fuel reseller. The reseller then forwards an
invoice to the aircraft customer.
- Into-plane Deliveries. Into-plane deliveries are fuel sales where the
sale of fuel is made from the fuel supplier's inventory maintained at the
airport or fuel terminal. In these instances, either the fuel supplier or
a third party refueling company delivers the fuel into the wing of the
aircraft customer and the sale of fuel is consummated at that point. The
refueling company, if used, forwards the paper
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record of the transaction to the fuel supplier and in either case the
fuel supplier forwards the paper record to the fuel reseller for payment.
The fuel reseller then forwards an invoice to the air carrier.
Each of these methods is a labor intensive and time consuming process that
is subject to delays, inefficiencies and mistakes. At times customers and
resellers are inaccurately billed for the amount of fuel sold. In addition, the
use of paper documents delays the payment by the jet fuel reseller to the
supplier in the case of into-plane deliveries. Also, commercial and business
customers typically do not receive bills from the jet fuel reseller until
between 7 to 30 days after fuel is sold, which delays payments and affects the
jet fuel reseller's cash flow.
In general, the aviation industry is capital intensive and highly
leveraged. Recognizing the financial risks of the airline industry, large major
oil companies generally refrain from extending unsecured lines of credit to
smaller domestic and foreign airlines as well as charter and air-cargo airlines
and avoid doing business with those airlines directly. Consequently, most
carriers are required to post a cash collateralized letter of credit or prepay
for fuel purchases from major oil companies. This impacts the airlines' working
capital and hampers the ability of many carriers to operate efficiently. In the
alternative, many smaller carriers or business fleet managers are required to
pay spot retail prices at the terminal or airport at which they refuel. This
typically results in the carrier paying a higher price for fuel which in turn
affects the operational efficiency of the carrier or operator.
THE MERCFUEL SOLUTION
We believe that our fuel sales and services offer commercial and business
aircraft a more effective alternative to conventional retail purchases of jet
fuel. As an increasing number of commercial and business air carriers and
business aircraft managers and jet fuel suppliers, such as major oil companies,
continue to outsource their fuel purchasing and marketing needs, we believe our
value added services have become an integral part of these industries' trend
towards eliminating non-core functions. Major oil companies use our global
sales, marketing and financial infrastructure to sell jet fuel to a diverse,
international purchasing community. End customers use our real time analysis of
the availability quantity and price of fuel in airports and terminals worldwide
to maximize their competitive position. Our fuel sales and related fuel
management services offer the following significant benefits to both jet fuel
suppliers and purchasers:
Benefits to Jet Fuel Suppliers
- Access to Larger Customer Basis. We believe that many of the major oil
companies have limited infrastructure to support small to medium sized
and emerging carriers. With over 22 years of experience in the jet fuel
reselling industry, we have established significant contacts with smaller
and medium sized commercial carriers and business fleet managers. Our
resale service provides an established distribution point for oil company
sales efforts worldwide and offers them access to markets which they do
not directly serve.
- More Efficient Pricing and Inventory Mechanisms. Our proposed fuel
management system is designed to automate the traditional paper-based jet
fuel distribution, inventory and selling process, allowing more efficient
and timely pricing and management of jet fuel inventories. We expect our
automated pricing mechanism to allow suppliers to improve the
productivity of their jet fuel sales process by reducing the time
consuming and labor intensive activities associated with conventional jet
fuel sales.
Benefits to Commercial and Business Customers
- More Efficient Pricing. In many cases, small to medium sized commercial
carriers and business fleet managers are required to pay higher spot
retail prices for fuel at the terminals they service. We provide 24-hour
single source coordinated fuel supply and delivery on a national and
international basis. We have a network of over 400 third party locations
nationally and 1,000 locations internationally through which customers
can purchase fuel. As a result, we are able to provide our customers with
consistent fuel costs from terminal to terminal which reduces arbitrary
and opportunistic pricing characteristics
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associated with spot fuel sales. Further, we believe our scale of
operations and credit-worthiness allows the purchase of fuel on more
favorable price and credit terms than would be available to most of our
customers on an individual basis.
- Improved Purchase Terms. We believe that the lack of available credit to
customers is a significant barrier to reselling jet fuel. In response to
this need, we offer the ability for our customers to purchase fuel on
credit through our in-house credit system. We believe the availability of
credit allows customers to better manage cash available for operations,
especially with the high cost of fuel associated with airline operations,
and represents a competitive advantage.
- Automation of Fuel Sales Process. We have automated our Internet process
to provide online pricing, fuel location and ordering information and we
intend to upgrade this system to include online invoicing ordering
capability. This operation offers our customers the ability to streamline
the fuel purchase process and reduce internal costs dedicated to fuel
logistics by providing a single source through which fuel sales can be
made and automatically released to the business jet customer.
BUSINESS STRATEGY
Our objective is to become the leading reseller of aviation fuel and
services to the commercial and business aviation markets. The key elements of
our strategy are described below.
- Attract Additional Commercial and Business Clients. We believe that the
recent growth in commercial and business aircraft usage and sales
provides increased opportunities for our fuel sales and management
services and that we are well positioned to serve these markets. Our goal
is to continue to support the major oil companies and other fuel
suppliers by providing and administering fuel to small and medium size
carriers and business fleet managers as well as expanding sales to larger
carriers both domestically and internationally.
- Minimize Exposure to Fuel Fluctuations. The majority of our resales of
jet fuel are made on an into-plane delivery basis. By arranging for the
purchase of fuel on an as-sold basis, and keeping inventory levels at an
operating minimum, we believe we reduce our exposure to market risk
associated with fuel price and demand volatility.
- Expand International Presence. We intend to expand our international
operations through relationships in strategically located countries and
regions throughout the world. Many of our existing customers have
international operations and we intend to leverage our domestic
relationships with them to assist them with their fuel sales and services
overseas. We believe that by expanding our international operations, we
can more rapidly expand our customer and supplier base on an
international basis.
- Enhance Technology Offerings. We plan to expand our Internet presence to
attract a broader base of business, including advertising to attract a
larger share of fractional aircraft ownership companies. In addition, our
proposed fuel management system is designed to automate the purchase,
delivery and settlement transaction process which we intend to offer as a
point-of-sale system to oil companies, air carriers refueling companies
and fixed based operations to better manage their billing and supply
process.
- Consumate Strategic Acquisitions. A component of our growth strategy is
the acquisition of, or investment in, complementary businesses,
technologies, services or products.
CUSTOMERS AND SUPPLIERS
Customers
Our customers include passenger, cargo and charter airlines as well as
business aviation customers. Our primary customers are small to medium sized
commercial carriers and business fleet managers not directly served by major oil
companies and other fuel suppliers. We plan to expand our sales efforts to
capture additional larger carriers.
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The following is an alphabetical list of our top 10 commercial and business
fleet customers by dollar volume of purchases from us during the nine months
ended March 31, 2001:
AirTran Airways
China Eastern Airlines, Inc.
EGL, Inc.
Executive Jet, Inc.
Kitty Hawk, Inc.
National Airlines, Inc.
Pacific Air Cargo
STAF Airlines
Tam Linhan Aereas, S.A.
VARIG Brazilian Airlines
Through our offices located in the United States and England, we provide
our customers global market data and rapid access to quality and competitively
priced jet fuel, 24-hours a day, every day of the year. The cost of fuel is a
major component of a carrier's or business fleet manager's operating overhead.
Therefore, the need for cost effective and professional fueling services is
essential.
We believe our success in attracting customers has been due, in part, to
our willingness to extend credit on an unsecured basis to customers, which would
otherwise be required to prepay or post letters of credit with their suppliers
of fuel and related services. We recognize that active management of our credit
risk is essential to our success. Our sales executives and their staff meet
regularly to evaluate credit exposure, in the aggregate and by individual
credit. Our credit committees are responsible for approving credit limits above
certain amounts, and setting and maintaining credit standards and ensuring the
overall quality of the credit portfolio. We also maintain credit risk insurance
for certain qualified accounts.
Suppliers
We purchase our fuel from suppliers worldwide. For the nine months ended
March 31, 2001, 27% of our jet fuel purchases were made from British Petroleum
and 12% were made from each of Tosco and ARCO. For the year ended June 30, 2000,
17% were made from each of British Petroleum and Tosco, 13% were made from ARCO
and 12% were made from Texaco. ARCO is affiliated with British Petroleum. Our
cost of fuel is generally tied to market-based formulas. While we are usually
extended unsecured trade credit for our fuel purchases, certain suppliers
require a letter of credit.
Outside of the United States, we do not maintain fuel inventory and arrange
to have the fuel delivered directly into the customer's aircraft on an
into-plane basis. In the United States, sales are either made on an into-plane
basis directly into a customer's aircraft with fuel provided by our suppliers or
fuel is delivered from our inventory. Inventory is held at multiple locations in
the United States and inventory levels are kept at an operating minimum. We have
arrangements with our suppliers and other third parties for the storage and
delivery of fuel and related aviation services.
SALES AND MARKETING
We currently market our fuel sales and services through our internal sales
force. Our sales force interacts with our established commercial and business
carriers and markets our fuel sales and services to well-defined market
segments. We strive to identify and target within the purchasing operations of
potential customers who are the decision-makers who choose whether to utilize
our services. We believe our level of customer service, years of experience in
the industry and reputation are significant factors in retaining existing
customers and attracting new clients.
Our sales and marketing approach is designed to create awareness of the
benefits and advantages of our fuel sales and services. We are active in
industry trade shows and other available public forums.
We intend to expand our international operations through selected targeted
marketing to international carriers.
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LOGISTICS AND FUEL MANAGEMENT STRATEGY
Logistics
Our fuel sales and services are conducted from our offices in Texas,
California, Pennsylvania, Florida and London, England.
Our operations in Houston are responsible for the coordination of corporate
fuel sales and delivery domestically and internationally, as well as general
sales and marketing. Our Los Angeles office is primarily responsible for
commercial fuel sales, billing and reconciliation of fuel inventory activity.
Our offices in Pennsylvania and Florida prepare backup for billing for high fuel
volume customers. Our office in London is responsible for fuel sales in Europe
and the Middle East and for coordinating these international fuel supply
requirements.
Fuel Management Strategy
In addition to services currently provided, management has begun an
initiative to design and institute an electronic fuel management system to
provide value to fuel suppliers and additional services to air carriers by
providing an automated point-of-sale system to manage airline, supplier and
fueler information for supply inventory, billing and settlement management. This
system will allow the various non-linked components of the aircraft fueling
industry to communicate on a real time basis.
The envisioned solution will include multiple channels of access for
suppliers and customers. Once the internal processes (credit approval, service
authorization, invoice generation, and issue slip reconciliation) are completed,
suppliers will be able to receive authorization to provide service to us through
fax, e-mail, web site or electronic file transfer, based on how they do
business. They will provide proof of delivery through the interaction channel
that best suits their business.
On the customer side, it is intended that clients will be able to place
orders, designate special requirements at worldwide locations, print invoices,
receive confirmations, approve payments, review prices and contracts through
whatever channel of interaction best suits the client's business process.
Our fuel management strategy is designed to provide flexibility to both the
suppliers and customers that interact with us. By implementing systems that
define the process, we believe that we will be able to manage larger accounts,
potentially acting as an outsourcing agent to large oil companies wishing to
focus on their core business. We believe that automating several channels of
interaction that standardize data for input and output to and from our processes
will have the following benefits:
- improve the efficiency of completing transactions;
- increase the reliability of the reconciliation, invoicing and credit
management processes; and
- offer customers flexible and customizable means for conducting business.
We believe this strategy will allow us to:
- open new revenue opportunities;
- expand in existing and new geographic markets; and
- establish additional and broaden existing strategic relationships.
COMPETITION
The market for jet fuel reselling is highly competitive. We are in direct
competition with major oil companies, major airlines and other independent fuel
suppliers, such as World Fuel Services Corporation, and with other aircraft
support companies which maintain their own sources of aviation fuel. Many of our
competitors have greater financial, technical and marketing resources than us.
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We cannot assure you that we will be able to compete successfully against
current and potential competitors and, as a result, we may experience a loss of
customers, reduced operating margins or increased operating costs, any of which
could harm our business.
REGULATION
Our activities are subject to substantial regulation by federal, foreign,
state and local government agencies. The principal laws and regulations
affecting our business and the markets we serve are as follows:
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 establishes a program for federally directed response or remedial actions
with respect to the uncontrolled discharge of hazardous substances, pollutants
or contaminants, including waste oil, into the environment. The law authorizes
the federal government either to seek a binding order directing responsible
parties to undertake such actions or authorizes the federal government to
undertake such actions and then to seek compensation for the cost of clean-up
and other damages from potentially responsible parties. Congress established a
federally managed trust fund, commonly known as the Superfund, to fund response
and remedial actions undertaken by the federal government. The trust fund is
used to fund federally conducted actions when no financially able or willing
responsible party has been found.
The Superfund Amendments and Re-Authorization Act of 1986 adopted more
detailed and stringent standards for remedial action at Superfund sites, and
clarified provisions requiring damage assessments to determine the extent and
monetary value of injury to natural resources. This legislation also provides a
separate funding mechanism for the clean up of underground storage tanks.
The Resource Conservation and Recovery Act of 1976 established a
comprehensive regulatory framework for the management of hazardous waste at
active facilities. This legislation sets up a "cradle-to-grave" system for the
management of hazardous waste, imposing upon all parties who generate,
transport, treat, store or dispose of waste, above certain minimum quantities,
requirements for performance, testing and record keeping. The Resource
Conservation and Recovery Act of 1976 also requires permits for construction,
operation and closure of facilities and requires 30 years of post-closure care
and monitoring. The legislation was amended in 1984 to increase the scope of the
regulation of small quantity waste generators and waste oil handlers and
recyclers; require corrective action at hazardous waste facilities (including
remediation at certain previously closed solid waste management units); phase in
restrictions on disposal of hazardous waste; and require the identification and
regulation of underground storage tanks containing petroleum and certain
chemicals.
The Clean Air Act of 1970, as amended in 1977, was the first major federal
environmental law to establish National Ambient Air Quality Standards for
certain air pollutants, which are to be achieved by the individual states
through State Implementation Plans. The legislation typically attempts to meet
ambient standards by regulating the quantity and quality of emissions from
specific industrial sources. For toxic emissions, the Act authorizes the
Environmental Protection Agency to regulate emissions from industrial facilities
directly. The Environmental Protection Agency also directly establishes
emissions limits for new sources of pollution, and is responsible for ensuring
compliance with air quality standards. The Clean Air Act Amendments of 1990
place the primary responsibility for the prevention and control of air pollution
upon state and local governments. The 1990 amendments require regulated emission
sources to obtain operating permits, which could impose emission limitations,
standards, and compliance schedules.
The Clean Water Act of 1972, as amended in 1987, establishes water
pollutant discharge standards applicable to many basic types of manufacturing
plants and imposes standards on municipal sewage treatment plants. The
legislation requires states to set water quality standards for significant
bodies of water within their boundaries and to ensure attainment and/or
maintenance of those standards. Most industrial and government facilities must
apply for and obtain discharge permits, monitor pollutant discharges, and under
certain conditions reduce certain discharges.
The Safe Drinking Water Act, as amended in 1986, regulates public water
supplies by requiring the Environmental Protection Agency to establish primary
drinking water standards. These standards are likely to
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be further expanded under the Environmental Protection Agency's evolving
groundwater protection strategy which is intended to set levels of protection or
clean-up of the nation's groundwater resources. These groundwater quality
requirements will then be applied to facilities subject to the Resource
Conservation and Recovery Act of 1976 and sites subject to Superfund liability,
and remedial action will be required for releases of contaminants into
groundwater.
The National Pollutant Discharge Elimination System, a program promulgated
under the Clean Water Act, permits states to issue permits for the discharge of
pollutants into the waters of the United States in lieu of federal Environmental
Protection Agency regulation. State programs must be consistent with minimum
federal requirements, although they may be more stringent. Permits are required
under this legislation for, among other things, certain industrial discharges of
storm water.
The Oil Pollution Act of 1990 imposes liability for oil discharges, or
threats of discharge, into the navigable waters of the United States on the
owner or operator of the responsible vessel or facility. Oil is defined to
include oil refuse and oil mixed with wastes other than dredged spoil, but does
not include oil designated as a hazardous substance under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980. This legislation
requires the responsible party to pay all removal costs, including the costs to
prevent, minimize or mitigate oil pollution in any case in which there is a
discharge or a substantial threat of an actual discharge of oil. In addition,
the responsible party may be held liable for damages for injury to natural
resources, loss of use of natural resources and loss of revenues from the use of
such resources.
Many states have been authorized by the Environmental Protection Agency to
enforce regulations promulgated under federal programs. In addition, there are
numerous state and local authorities that regulate the environment, some of
which impose stricter environmental standards than federal laws and regulations.
Some states, including Florida, have enacted legislation which generally
provides for registration, recordkeeping, permitting, inspection, and reporting
requirements for transporters, collectors and recyclers of hazardous waste and
waste oil. The penalties for violations of state law include injunctive relief,
recovery of damages for injury to air, water or property and fines for
non-compliance. In addition, some local governments have established local
pollution control programs, which include environmental permitting, monitoring
and surveillance, data collection and local environmental studies.
Many foreign governments impose laws and regulations relating to the
protection of the environment and the discharge of pollutants in the
environment. Such laws and regulations could impose significant liability on us
for damages, clean-up costs and penalties for discharges of pollutants in the
environment, as well as injunctive relief. In addition, some foreign government
agencies have established pollution control programs, which include
environmental permitting, monitoring and surveillance, data collection and
environmental impact assessments.
In addition to the regulations set forth above, our operations are affected
by various federal and state taxes imposed on the purchase and sale of aviation
fuel products in the United States. Federal law imposes a manufacturer's excise
tax on sales of aviation fuel. Sales to aircraft engaged in foreign trade are
exempt from this tax. These exemptions may be realized either through tax-free
or tax-reduced sales, if the seller qualifies as a producer under applicable
regulations, or, if the seller does not so qualify, through a tax-paid sale
followed by a refund to the exempt user. Several states, where we sell aviation
fuel, impose excise and sales taxes on fuel sales; certain of our sales qualify
for full or partial exemptions from these state taxes.
EMPLOYEES
As of May 1, 2001, we had 32 full-time employees. None of our employees are
represented by unions and there have not been any work stoppages at any of our
facilities. We believe that our relationship with our employees is satisfactory.
FACILITIES
Our principal executive offices are located in approximately 5,000 square
feet of office space in Los Angeles, California, the facility in which the
offices are located is owned by Mercury Air Group. We also
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have an office in Miami, Florida in a facility owned by Mercury Air Group. We
sublease these office spaces on an informal month-to-month basis from Mercury
Air Group and plan on entering into formal sublease agreements prior to this
offering. We also lease office space on an informal month-to-month basis in
Houston, Texas, Hershey, Pennsylvania and London, England from unaffiliated
parties. We plan on entering into formal lease agreements prior to this
offering.
We believe that our existing facilities are adequate for our current needs
and that additional space will be available as needed.
LEGAL PROCEEDINGS
In the ordinary course of business, we may be subject to claims, lawsuits
and other legal proceedings. We are not currently a party to any material legal
proceedings.
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MANAGEMENT
The following table sets forth our executive officers and directors, their
ages and the positions they hold:
NAME AGE POSITION
- ---- --- --------
Joseph A. Czyzyk..................... 53 Chairman of the Board and Chief
Executive Officer
Eric Beelar.......................... 36 President and Director
John Condie.......................... 43 Chief Financial Officer
Navin Vithal......................... 38 Secretary
Jeffrey R. Wescott................... 43 Director
George Grkinich, Jr.................. 31 Director
Joseph A. Czyzyk has served as our Chairman of the Board and Chief
Executive Officer since our inception, has been President and a Director of
Mercury Air Group since November 1994 and has served as Mercury Air Group's
Chief Executive Officer since December 1998. Mr. Czyzyk also served as President
of Mercury Air Group's fuel sales and services division from August 1985 until
August 1988, and President of Mercury Air Cargo, Inc. from August 1988 until
August 1997. Mr. Czyzyk served as an Executive Vice President of Mercury Air
Group from November 1990 through November 1994.
Eric Beelar has served as our President and as a director since our
inception. Mr. Beelar has been employed by Mercury Air Group since 1989. He
served as manager of the fuel sales and services division of Mercury Air Group
from 1989 to 1996, at which time he was appointed to his current position as
vice president of the fuel sales and services division. At the date of this
offering, Mr. Beelar will resign from Mercury Air Group and will be employed by
us full-time.
John Condie has served as our Chief Financial Officer since our inception.
Mr. Condie has been controller for Mercury Air Group since September 1996. From
1995 to 1996, Mr. Condie was a CPA with the accounting firm Glantz & Black in
Los Angeles, California. From 1987 to 1995, Mr. Condie was controller for
Litigation Sciences, Inc. Previously, from 1983 to 1986, Mr. Condie was a CPA
with the accounting firm Deloitte Haskins and Sells.
Navin Vithal has served as our Secretary since our inception. Mr. Vithal
has been employed in the legal department of Mercury Air Group since 1999. From
1996 to 1999, Mr. Vithal was employed by American International Immigration
Services Limited in Los Angeles, California.
Jeffrey R. Wescott has served as a director since our inception. Mr.
Wescott is a Senior Vice President of Bank of America in Chicago since April
2000. From January 1998 to April 2000, Mr. Wescott was employed by Bank of
America as a Vice President. From March 1995 to 1998, was with the Financial
Relations Board as a Financial Public Relations Advisor. Mr. Wescott has worked
for a number of financial institutions including Continental Illinois National
Bank, Citicorp North America and Bank of America.
George R. Grkinich, Jr. has served as a director since our inception. Mr.
Grkinich is a manager and co-founder of Worldwide Financial Management Group,
LLC, an organization which offers investment and business guidance to
professional athletes in the United States and abroad. Prior to his founding of
Worldwide Financial Management Group, LLC in 1996, Mr. Grkinich worked with Mark
J. Matsock & Associates in the insurance and banking industries.
Within a year following the date of distribution of our common stock, we
intend to replace Mr. Czyzyk as Chief Executive Officer but retain Mr. Czyzyk as
Chairman of the Board. There can be no assurance that we will be able to recruit
and retain a qualified individual to replace Mr. Czyzyk in that position.
BOARD OF DIRECTORS
Our board of directors currently consists of four members. We intend to
appoint two additional directors to our board of directors prior to completion
of this offering. Our board of directors is divided into three
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classes, each serving staggered three-year terms. Mr. Grkinich has been
designated Class I Director whose term expire at the 2002 annual meeting of
stockholders. Mr. Wescott has been designated Class II Director, whose term
expires at the 2003 annual meeting of stockholders. Mr. Czyzyk and Mr. Beelar
have been designated Class III Directors, whose terms expire at the 2004 annual
meeting of stockholders. This classification of our board of directors may delay
or prevent a change in control of our company or our management.
Our board of directors appoints our executive officers on an annual basis
to serve until their successors have been elected and qualified. There are no
family relationships among any of our board of directors or officers.
DIRECTOR COMPENSATION
We do not currently plan on compensating our directors for attending our
board or committee meetings, but we do plan on reimbursing directors for their
reasonable travel expenses incurred in connection with attending these meetings.
AUDIT COMMITTEE
Our audit committee will consist of three independent directors who will
review our auditing, accounting, financial reporting and internal control
functions and makes recommendations to our board of directors for the selection
of independent accountants. In addition, the committee monitors the quality of
our accounting principles and financial reporting, our compliance with foreign
trade regulations as well as the independence of and the non-audit services
provided by our independent accountants. In discharging its duties, the audit
committee:
- reviews and approves the scope of the annual audit and the independent
accountant's fees;
- meets independently with our internal auditing staff, our independent
accountants and our senior management; and
- reviews the general scope of our accounting, financial reporting, annual
audit and internal audit program, matters relating to internal control
systems as well as the results of the annual audit.
COMPENSATION COMMITTEE
Our compensation committee will consist of three independent directors who
will determine, approve and report to the board on all elements of compensation
for our elected officers including targeted total cash compensation and
long-term equity based incentives.
SECURITY OWNERSHIP OF MERCURY AIR GROUP COMMON STOCK OF OUR PRINCIPAL
STOCKHOLDERS AND MANAGEMENT
We are a wholly-owned subsidiary of Mercury Air Group and therefore, none
of our officers, directors or director nominees own any of our common stock. To
the extent our directors and officers own shares of Mercury Air Group common
stock at the time of the distribution, they will participate in the distribution
on the same terms as other holders of Mercury Air Group common stock.
The following table sets forth certain information as of March 31, 2001,
with respect to Mercury Air Group common stock beneficially owned by: (a) each
of our directors; (b) each officer named in the Summary Compensation Table; (c)
our directors and executive officers, as a group; and (d) all persons known to
us to be the beneficial owners of more than five percent of Mercury Air Group's
outstanding common stock. The total number of shares of Mercury Air Group common
stock outstanding as of March 31, 2001 was 6,546,430.
The stock ownership information includes current stockholders and shares
with respect to which the named individual has the right to acquire beneficial
ownership under options exercisable or other securities convertible within 60
days. The stock ownership information does not include, however, options to
purchase
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our common stock granted or to be granted as set forth above under "2001 Stock
Option Plan", "Non-Employee Directors Stock Option Plan", or "Grants of Stock
Options".
SHARES OF
COMMON STOCK PERCENT
NAME AND ADDRESS(1) BENEFICIALLY OWNED OWNERSHIP
- ------------------- ------------------ ---------
CFK Partners................................................ 2,023,921(2) 29.6%
John Condie................................................. 13,861(3) *
Joseph Czyzyk............................................... 2,023,921(4) 29.6%
Eric Beelar................................................. 115,687(5) 1.8%
Navin Vithal................................................ -- --
Philip J. Fagan, Jr., M.D................................... 2,023,921(6) 29.6%
1130 West Olive Avenue
Burbank, CA 9150
Frederick H. Kopko, Jr. .................................... 2,023,921(7) 29.6%
20 North Wacker Drive
Suite 2520
Chicago, IL 60606
Jeffrey R. Wescott.......................................... -- --
231 South LaSalle Street
Chicago, IL 60697
George R. Grkinich, Jr...................................... -- --
36 South Pennsylvania Avenue
Suite 290
Indianapolis, IN 46204
FMR Corp.................................................... 542,940(8) 8.3%
82 Devonshire Street
Boston, MA 02109
J.H. Whitney Mezzanine Fund, L.L.P.......................... 503,126(9) 7.1%
177 Broad Street
Stanford, CT 06901
All directors and executive officers as a group
(6 persons)............................................... 1,738,711(10) 31.3%
- ---------------
* Less than 1%
(1) Unless otherwise indicated in the table, the address for each of the
individuals named in the table is 5456 McConnell Avenue, Los Angeles,
California 90066.
(2) Consists of (a) 1,140,780 shares beneficially owned by CFK Partners, a
partnership consisting of Mr. Joseph A. Czyzyk, Dr. Philip J. Fagan, and
Mr. Frederick H. Kopko, Jr., (b) 91,000 shares and options to acquire
146,125 shares owned by Dr. Philip J. Fagan, (c) options to acquire 107,625
shares owned by Mr. Frederick H. Kopko, Jr., and (d) 538,391 shares owned
by Mr. Czyzyk, including options to acquire 31,460 shares, 764 shares held
by Mr. Czyzyk as custodian for his children, and 3,228 shares held by Mr.
Czyzyk's wife as custodian for their children.
(3) Includes stock options to acquire 13,600 shares.
(4) Mr. Czyzyk owns 538,931 shares, including options to acquire 31,460
additional shares, 764 shares held by Mr. Czyzyk, as custodian for his
children, and 3,228 shares held by Mr. Czyzyk's wife as custodian for their
children, as to which Mr. Czyzyk disclaims beneficial ownership. CFK
Partners holds a proxy to vote all shares owned by Mr. Czyzyk. Also
includes shares held by CFK Partners (see note 2 above).
(5) Includes stock options to acquire 34,375 shares.
(6) Dr. Fagan owns 91,000 shares and options to acquire 146,125 additional
shares. CFK Partners holds a proxy to vote all shares owned by Dr. Fagan.
Also includes shares held by CFK Partners (see note 2 above).
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(7) Mr. Kopko owns options to acquire 107,625 shares. CFK Partners holds a
proxy to vote all shares owned by Mr. Kopko. Also includes shares held by
CFK Partners (see note 2 above).
(8) Based on publicly available information reported on February 14, 2000,
Fidelity Management & Research Company, a wholly-owned subsidiary of FMR
Corp., is a beneficial owner of 542,940 shares as a result of acting as an
investment advisor to various investment companies. In addition, FMR Corp.
and Edward C. Johnson 3d, each has sole power to dispose of 542,940 shares
owned by the various investment companies for which FMR Corp. acts as an
investment advisor. Through their ownership of voting common stock and the
execution of stockholder's voting agreement, Abigail P. Johnson and other
members of the Johnson family may be deemed to be a controlling group with
respect to FMR Corp.
(9) Based on publicly available information reported September 10, 1999, J.H.
Whitney Mezzanine Fund, L.L.P., is the beneficial owner of 503,126 shares
which consist of 503,126 shares issuable upon exercise of warrants
exercisable within 60 days from the date hereof.
(10) Includes stock options to acquire 333,185 shares.
EXECUTIVE COMPENSATION
The following table sets forth compensation information for our chief
executive officer and our other executive officers whose salary and bonus
compensation from Mercury Air Group and its subsidiaries exceeded $100,000 for
the fiscal year ended June 30, 2000. None of these individuals held any stock
options or were granted any stock options to purchase shares of our common stock
during the year ended June 30, 2000. All information set forth in this table
reflects compensation earned by these individuals for services with Mercury and
its subsidiaries for the fiscal year ended June 30, 2000.
LONG-TERM COMPENSATION
-------------------------
AWARDS PAYOUTS
ANNUAL ---------- ------------
COMPENSATION SECURITIES LONG-TERM
NAME AND PRINCIPAL FISCAL -------------------- UNDERLYING COMPENSATION ALL OTHER
POSITION YEAR(1) SALARY($) BONUS($) OPTIONS(#) PAYOUTS($) COMPENSATION($)
- ------------------ ------- --------- -------- ---------- ------------ ---------------
Joseph A. Czyzyk.......... 2000 278,694 150,000 -0- -0- 980(2)
Chairman of the Board 1999 278,694 155,000 -0- -0- 980
and Chief Executive 1998 331,371 71,000 -0- -0- 723
Officer
Eric Beelar............... 2000 200,000 200,000 -0- -0- 4,200(3)
President 1999 200,000 124,993 -0- -0- 4,200(3)
1998 144,000 193,864 -0- -0- 4,200(3)
John Condie............... 2000 96,593 6,600 -0- -0- -0-
Chief Financial Officer 1999 88,867 5,500 -0- -0- -0-
1998 83,069 5,000 -0- -0- 300(4)
- ---------------
(1) The period July 1, 1997 through June 30, 1998 is referred to as Fiscal Year
1998, the period July 1, 1998 through June 30, 1999 is referred to as Fiscal
Year 1999 and the period July 1, 1999 through June 30, 2000 is referred to
as Fiscal Year 2000.
(2) Consists of 401(k) contributions and life insurance premiums in the amounts
of $300 and $680, respectively.
(3) Consists of a car allowance.
(4) Consists of a 401(k) contribution.
2001 STOCK OPTION PLAN
Our board of directors adopted the 2001 Stock Option Plan in May 2001, and
our stockholder initially approved our 2001 Stock Option Plan in May 2001. Our
2001 Stock Option Plan provides for the grant of incentive stock options to our
employees, and for the grant of nonstatutory stock options to our employees and
non-employee directors.
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Number of Shares of Common Stock Available under the 2001 Stock Option
Plan. A total of 1,000,000 shares of our common stock are reserved for issuance
pursuant to our 2001 Stock Option Plan. No options to acquire shares of our
common stock were issued and outstanding as of that date.
Administration of the 2001 Plan. Our board of directors or a committee of
our board will administer the 2001 Stock Option Plan. In the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, the committee will consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The administrator
has the power to determine the terms of the options granted, including the
exercise price, the number of shares subject to each option, the exercisability
of the options and the form of consideration payable upon exercise.
Options. The administrator determines the exercise price of options
granted under our 2001 Stock Option Plan, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code and all incentive stock options, the
exercise price must at least be equal to the fair market value of our common
stock on the grant date. The term of an incentive stock option may not exceed
ten years, except that with respect to any participant who owns 10% of the
voting power of all classes of our outstanding capital stock, the term must not
exceed five years and the exercise price must at least equal 110% of the fair
market value on the grant date. The administrator determines the term of all
other options.
After termination of one of our employees or directors, he or she may
exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for 3 months. However, an option may never be
exercised later than the expiration of its term.
Transferability of Options. Our 2001 Stock Option Plan generally doesn't
allow for the transfer of options and only the optionee may exercise an option
during his or her lifetime.
Adjustments upon Merger or Asset Sale. Our 2001 Stock Option Plan provides
that in the event of our merger with or into another corporation or a sale of
substantially all of our assets, the successor corporation will assume or
substitute an equivalent award for each option. If following such an assumption
or substitution, the holder of an option is terminated without cause within 12
months following a change of control, then the vesting and exercisability of 50%
of the then unvested shares subject to his or her option shall accelerate. If
the outstanding options are not assumed or substituted for in connection with a
merger or sale of assets, the administrator will provide notice to the optionee
that he or she has the right to exercise the option as to all of the shares
subject to the option, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option
will terminate upon the expiration of the 15-day period.
Amendment and Termination of our 2001 Stock Option Plan. Our 2001 Stock
Option Plan will automatically terminate in 2011, unless we terminate it sooner.
In addition, our board of directors has the authority to amend, suspend or
terminate our 2001 Stock Option Plan, provided it does not adversely affect any
option previously granted under our 2001 Stock Option Plan.
GRANTS OF STOCK OPTIONS
It is anticipated that, effective on the date of distribution of our common
stock, Joseph A. Czyzyk will be granted options to purchase a total of 200,000
shares of our common stock, and that certain other officers and directors will
be granted options to purchase a total of 300,000 shares of our common stock,
all exercisable at the market price at the time of issuance. It is intended that
all of such options will be granted under the 2001 Stock Option Plan. We reserve
the right to issue additional options pursuant to or apart from these plans at
our sole discretion.
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ARRANGEMENTS BETWEEN MERCFUEL AND MERCURY AIR GROUP
We have provided below a summary description of the master distribution
agreement along with the key related agreements which will be entered into
between Mercury Air Group and us, effective as of the closing day of the
offering, except for the transitional services agreement, which will be
effective at the date of distribution.
THE TRANSFER DATE
The asset transfer occurred on January 1, 2001. On that date, assets and
liabilities related to our business were transferred to us from Mercury Air
Group.
MASTER DISTRIBUTION AGREEMENT
The master distribution agreement will contain the key provisions relating
to the distribution of our shares to Mercury Air Group stockholders. The various
ancillary agreements that are exhibits to the distribution agreement and which
detail the various interim and ongoing relationships between Mercury Air Group
and us include:
- a technology ownership and license agreements;
- an employee matters agreement;
- a tax sharing agreement;
- a transitional services agreement;
- a real estate matters agreement;
- a confidential disclosure agreement; and
- an indemnification and insurance matters agreement.
To the extent that the terms of any of these ancillary agreements conflict
with the distribution agreement, the terms of these agreements will govern.
These agreements are described more fully below.
The Distribution. Mercury Air Group intends to distribute the remaining
shares of our common stock that Mercury Air Group holds to Mercury Air Group
stockholders on a pro rata basis after this offering, but in no event before the
later of the receipt of approval of Mercury Air Group's lenders or six months
after this offering. We will prepare an information statement with Mercury Air
Group and send it to Mercury Air Group stockholders before the distribution
becomes effective. The information statement will inform the stockholders of the
distribution and its specifics. Mercury Air Group may, in its sole discretion,
change the distribution date to a date later than six months from the effective
date of this offering. Mercury Air Group intends to consummate the distribution
only if the following conditions are met, any of which may be waived by Mercury
Air Group:
- acceptable bank financing must be in effect;
- all required government approvals must be in effect;
- no legal restraints must exist preventing this distribution; and
- nothing must have happened in the intervening time between this offering
and the date of distribution, including a future change in market or
economic conditions or in Mercury Air Group's or our business and
financial condition, that causes Mercury Air Group's board of directors
to conclude that the distribution is not in the best interest of Mercury
Air Group or Mercury Air Group's stockholders.
Covenants Between Mercury Air Group and MercFuel. In addition to signing
documents that transfer control and ownership of various assets and liabilities
of Mercury Air Group relating to our business, we have agreed with Mercury Air
Group to enter into a transitional service agreement, exchange information,
engage in auditing practices and resolve disputes in particular ways.
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Transitional Service Agreement. We intend to enter into a transitional
service agreement with Mercury Air Group covering the provision of various
transitional services, including financial, legal, accounting, customer service,
human resources administration, purchasing, facilities and information
technology services by Mercury Air Group to us. These services will generally be
provided for $70,000 per month. The agreement will become effective upon the
distribution of our common stock. The transitional service agreement has a term
of one year or less from the effective date of distribution.
Information Exchange. We will agree with Mercury Air Group to share
information relating to governmental, accounting, contractual and other similar
requirements of our ongoing businesses, unless the sharing would be commercially
detrimental. In furtherance of this, both Mercury Air Group and we intend to
agree as follows:
- Each party will maintain adequate internal accounting to allow the other
party to satisfy its own reporting obligations and prepare its own
financial statements.
- Each party will retain records beneficial to the other party for a
specified period of time. If the records are going to be destroyed, the
destroying party will give the other party an opportunity to retrieve all
relevant information from the records, unless the records are destroyed
in accordance with adopted record retention policies.
- Each party will use commercially reasonable efforts to provide the other
party with directors, officers, employees, other personnel and agents who
may be used as witnesses in and books, records and other documents which
may reasonably be required in connection with legal, administrative or
other proceedings.
Auditing Practices. So long as Mercury Air Group is required to
consolidate our results of operations and financial position, we intend to agree
to:
- not select a different independent accounting firm from that used by
Mercury Air Group without Mercury Air Group's consent;
- use reasonable commercial efforts to enable our auditors to date their
opinion on our audited financial statements on the same date as Mercury
Air Group's auditors date their opinion on Mercury Air Group's financial
statements;
- exchange all relevant information needed to prepare financial statements;
- grant each other's internal auditors access to each other's records; and
- notify each other of any change in accounting principles.
Dispute Resolution. If problems arise between us and Mercury Air Group, we
intend to agree to the following procedures:
- The parties will make a good faith effort to first resolve the dispute
through negotiation.
- If negotiations fail, the parties agree to attempt to resolve the dispute
through non-binding mediation.
- If mediation fails, the parties can resort to binding arbitration. In
addition, nothing prevents either party acting in good faith from
initiating litigation at any time if failure to do so would cause serious
and irreparable injury to one of the parties or to others.
No Representations and Warranties. Neither party has made or intends to
make any promises to the other regarding:
- the value of any asset that Mercury Air Group has transferred to us;
- whether there is a lien or encumbrance on any asset Mercury Air Group has
transferred to us; or
- the legal sufficiency of any conveyance of title to any asset Mercury Air
Group has transferred to us.
No Solicitation. Each party will agree not to directly solicit or recruit
employees of the other party without the other party's consent for two years
after the distribution date. However, this prohibition does not apply to general
recruitment efforts carried out through public or general solicitation or where
the solicitation is employee-initiated.
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Expenses. All of the costs and expenses related to this offering as well
as the costs and expenses related to the separation and distribution will be
allocated between us and Mercury Air Group. It is anticipated that we will bear
the costs and expenses associated with this offering and Mercury Air Group will
bear the costs and expenses associated with the distribution. We will each bear
our own internal costs incurred in consummating these transactions.
ASSIGNMENT AND ASSUMPTION OF ASSETS AND LIABILITIES
Effective January 1, 2001, Mercury Air Group transferred to us all assets
and liabilities associated with our business, including:
- all assets reflected on our balance sheet as of December 31, 2000, minus
any assets disposed of after December 31, 2000,
- all written off, expensed or fully depreciated assets that would have
appeared on our balance sheet as of December 31, 2000 if we had not
written off, expensed or fully depreciated them;
- all assets that our business primarily uses as of January 1, 2001 but are
not reflected in our balance sheet as of December 31, 2000 due to mistake
or omission;
- all supply, vendor, capital, equipment lease or other contracts that
relate primarily to our business, including contracts representing
obligations reflected on our balance sheet as of December 31, 2000;
- all computers, desks, equipment and other assets used primarily by
employees of Mercury Air Group who will become our employees due to the
separation;
- specified rights under existing insurance policies; and
- other specified assets.
The assets listed above comprise all business operations whose financial
performance is reflected in our financial statements for the period ended
December 31, 2000.
Assumption of Liabilities. Effective on January 1, 2001, we assumed
liabilities from Mercury Air Group, to the extent that these liabilities were,
prior to January 1, 2001, liabilities held by Mercury Air Group related to our
business.
Excluded Liabilities. We did not assume specified liabilities, including:
- any liabilities that would otherwise have been allocated to us but which
were covered by Mercury Air Group's insurance policies, unless we were a
named insured under such policies; and
- other specified liabilities.
Obtaining Approvals and Consents. Mercury Air Group and we will use all
reasonable efforts to obtain any required consents, substitutions or amendments
required to novate or assign all rights and obligations under any contracts that
were or will be transferred in the separation.
Expenses. We intend to pay all costs of the transfer of assets from
Mercury Air Group to us incurred on or after January 1, 2001, including:
- moving expenses;
- transfer taxes;
- expenses related to notices to customers, suppliers and other third
parties;
- fees related to the transfer or issuance of licenses, permits and
franchises;
- fees and expenses related to the assignment or transfer of contracts,
agreements and intellectual property; and
- costs related to the transfer of any employee.
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MASTER TECHNOLOGY OWNERSHIP AND LICENSE AGREEMENT
The master technology ownership and license agreement, or the master
technology agreement will allocate rights in technology including patents,
patent applications and invention disclosures. In the master technology
agreement, Mercury Air Group will confirm that we own all technology developed
by us and, to the extent that any such technology is registered in Mercury Air
Group's name or to the extent Mercury Air Group otherwise has any ownership
rights in that technology, Mercury Air Group will assign it to us. Mercury Air
Group will not restrict our right to use the assigned or jointly owned
technology. In the event of an acquisition of either party, the acquired party
may assign the master technology agreement to its acquirer. Nothing in the
master technology agreement limit or facilitate Mercury Air Group's right to
compete with us. However, the technology agreements will give us control over
the intellectual property needed for Mercury Air Group to compete with us, thus
requiring Mercury Air Group to independently develop technology before it
competes with us.
EMPLOYEE MATTERS AGREEMENT
We intend to enter into an employee matters agreement with Mercury Air
Group to allocate assets, liabilities and responsibilities relating to our
current and former employees and their participation in the benefits plans,
including stock plans, that Mercury Air Group currently sponsors and maintains.
All our eligible employees will continue to participate in the Mercury Air
Group benefits plans on comparable terms and conditions to those for Mercury Air
Group employees until the distribution date or until we establish benefit plans
for our employees, or elect not to establish comparable plans, if it is not
legally or financially practical. We intend to establish our own benefit program
no later than the date of distribution.
Once we establish our own benefits plans, we may modify or terminate each
plan in accordance with the terms of that plan and our policies. None of our
benefit plans will provide benefits that overlap benefits under the
corresponding Mercury Air Group benefit plan at the time of the distribution. We
expect that each of our benefit plans will provide that all service,
compensation and other benefit determinations that, as of the time of
distribution, were recognized under the corresponding Mercury Air Group benefits
plan will be taken into account under our corresponding benefit plan.
Assets relating to the employee liabilities will be transferred to us or
our related plans and trusts from trusts and other funding vehicles associated
with Mercury Air Group's benefits plans.
TAX SHARING AGREEMENT
We intend to enter into a tax sharing and indemnification agreement with
Mercury Air Group, which will allocate tax liabilities between Mercury Air Group
and us and address several other tax matters such as responsibility for filing
tax returns, control of and cooperation in tax litigation and qualification of
the distribution as a tax-free transaction. Generally, Mercury Air Group will be
responsible for taxes that are allocable to periods prior to the transfer date,
and each of Mercury Air Group and we will be responsible for its own tax
liabilities (including its allocable share of taxes shown on any consolidated,
combined or other tax return filed by Mercury Air Group) for periods after the
transfer date. The tax sharing and indemnification agreement will prohibit
Mercury Air Group and our company from taking actions that could jeopardize the
tax-free treatment of the distribution, and will require Mercury Air Group and
us to indemnify each other for any taxes or other losses that result from these
actions. In addition, other events over which we do not have control may also
give rise to our indemnification obligation.
TRANSITIONAL SERVICES AGREEMENT
The transitional services agreement will govern the provision of
transitional services by Mercury Air Group and us to each other, on an interim
basis, until one year after the distribution of our common stock, unless
extended, for specific services or otherwise indicated in the agreement. The
agreement will provides for transitional services, systems and support to our
operations, including data processing and telecommunications services (such as
voice telecommunications and data transmission and information technology
support
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services) for functions including accounting, financial management, tax,
payroll, stockholder and public relations, legal, procurement, human resources
and other administrative functions. Mercury Air Group services provided to us
will be fixed at $70,000 per month. The master transitional services agreement
also covers the provision of additional transitional services identified from
time to time after the distribution that were inadvertently or unintentionally
omitted from the specified services, or that are essential to effectuate an
orderly transition under the distribution agreement, so long as the provision of
such services would not significantly disrupt Mercury Air Group's operations or
significantly increase the scope of its responsibility under the agreement.
REAL ESTATE MATTERS AGREEMENT
Effective January 1, 2001, Mercury Air Group either transferred to or
agreed to share with us certain leased properties relating to our business. The
real estate matters agreement will formalize real estate matters relating to the
Mercury Air Group leased properties that Mercury Air Group has transferred to or
shares with us. The agreement will describe the manner in which Mercury Air
Group has transferred to or shares with us various leased properties, including
the following types of transactions:
- assignments to us of Mercury Air Group's leases for specified leased
properties;
- subleases to us of portions of specified properties leased by Mercury Air
Group; and
- short-term licenses between Mercury Air Group and us permitting
short-term occupancy of selected leased sites.
The real estate matters agreement will includes a description of each
property transferred to or shared with us for each type of transaction. The
standard forms of the proposed transfer documents, such as lease, sublease and
license, will be contained in schedules.
The real estate matters agreement will also will require both parties to
use reasonable efforts to obtain any landlord consents required for the proposed
transfers of leased sites, including our paying commercially reasonable consent
fees, if required by the landlords, and our agreeing to provide the security
required under the applicable leases.
The real estate matters agreement will also give the parties the right to
change the allocation and terms of specified sites by mutual agreement based on
changes in the requirements of the parties. The real estate matters agreement
will provides that all reasonable costs required to effect the transfers,
including landlord consent fees and landlord attorneys' fees, will be paid by
Mercury Air Group.
MASTER CONFIDENTIAL DISCLOSURE AGREEMENT
The master confidential disclosure agreement will provide that both parties
agree not to disclose confidential information of the other party except in
specific circumstances. Mercury Air Group and us will also agree not to use this
information in violation of any use restrictions in one of the other written
agreements between us.
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
General Release of Pre-Transfer Claims. Effective as of the transfer date,
subject to specified exceptions, we will release Mercury Air Group and its
affiliates, agents, successors and assigns, and Mercury Air Group will release
us, and our affiliates, agents, successors and assigns, from any liabilities
arising from events occurring on or before the transfer, including events
occurring in connection with the activities to implement the transfer and the
distribution. This provision will not impair a party from enforcing the
distribution agreement, any ancillary agreement or any arrangement specified in
any of these agreements.
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Indemnification. The indemnification and insurance matters agreement will
also contains provisions governing indemnification. In general, we have agreed
to indemnify Mercury Air Group and its affiliates, agents, successors and
assigns from all liabilities arising from:
- our business, any of our liabilities or any of our contracts; and
- any breach by us of the distribution agreement or any ancillary
agreement.
Mercury Air Group has agreed to indemnify us and our affiliates, agents,
successors and assigns from all liabilities arising from:
- Mercury Air Group's business other than our business; and
- any breach by Mercury Air Group of the separation agreement or any
ancillary agreement.
These indemnification provisions do not apply to amounts collected from
insurance. The agreement will also contain provisions governing notice and
indemnification procedures.
Liability Arising form This Prospectus. We will bear any liability arising
from any untrue statement of a material fact or any omission of a material fact
in this prospectus.
Insurance Matters. The agreement will also contains provisions governing
our insurance coverage from the transfer date until the distribution. In
general, we will agree to reimburse Mercury Air Group for premium expenses
related to insurance coverage during this period. Prior to the distribution,
Mercury Air Group will maintain insurance policies on our behalf. We will work
with Mercury Air Group to secure additional insurance if desired and cost
effective.
Environmental Matters. Mercury Air Group will agree to indemnify us and
our affiliates, agents, successors and assigns from all liabilities arising from
environmental conditions existing as of the transfer date at facilities
transferred to us, or which arise out of operations occurring before the
transfer date at these facilities. Further, Mercury Air Group will agree to
indemnify us and our affiliates, agents, successors and assigns from all
liabilities arising from environmental conditions caused by operations occurring
at any time, whether before or after the transfer date, at any Mercury Air Group
facility.
We will agree to indemnify Mercury Air Group and its affiliates, agents,
successors and assigns from all liabilities arising from environmental
conditions caused by operations after the transfer date at any of the facilities
transferred to us, and from environmental conditions at our facilities arising
from an event that occurs on or after the transfer date.
Each party will be responsible for all liabilities associated with any
environmental contamination caused by that party post-transfer date.
Assignment. The indemnification and insurance matters agreement will not
be assigned by either party without prior written consent.
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PRINCIPAL STOCKHOLDER
Prior to this offering all of the outstanding shares of our common stock
are owned by Mercury Air Group. After the completion of this offering, Mercury
Air Group will own 82.0% of the outstanding shares of our common stock or 80.2%
if the underwriters fully exercise their option to purchase additional shares in
full. None of our executive officers, directors or director nominees currently
owns any shares of our common stock, but those who own shares of Mercury Air
Group common stock will be treated on the same terms as other holders of Mercury
Air Group stock in any distribution by Mercury Air Group. See "Security
Ownership of Principal Stockholders and Management" for a description of the
ownership of Mercury Air Group stock by our directors and executive officers.
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 50,000,000 shares of common stock, $0.01 par
value, and 8,000,000 shares of undesignated preferred stock, $0.01 par value.
The following description of our capital stock is subject to our certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the provision of
applicable Delaware law.
COMMON STOCK
Prior to this offering and the private placement, there are 6,546,430
shares of common stock outstanding, all of which were held of record by Mercury
Air Group.
Holders of our common stock are entitled to one vote for each share on all
matters voted on by stockholders.
All shares of our common stock to be distributed will be fully paid and
nonassessable. Holders of our common stock do not have any subscription,
redemption or conversion privileges. Subject to the preferences or other rights
of any of our preferred stock that may be issued from time to time, holders of
our common stock are entitled to participate ratably in dividends on the our
common stock as are declared by the board of directors. Holders of our common
stock are entitled to share ratably in all assets available for distribution to
stockholders in the event of our liquidation or dissolution, subject to
distribution of the preferential amount, if any, to be distributed to holders of
our preferred stock.
PREFERRED STOCK
Our board of directors has the authority, without any vote or action by the
stockholders, to issue preferred stock from time to time in one or more series.
Our board of directors is authorized to determine the number of shares and
designation of any series of our preferred stock and the dividend rights,
dividend rate, conversion rights and terms, voting rights (full or limited, if
any), redemption rights and terms, liquidation preferences and sinking fund
terms of any series of our preferred stock. Issuances of our preferred stock
would be subject to the applicable rules of the NASD or other organizations on
whose systems our stock may then be quoted or listed. Depending upon the terms
of our preferred stock established by the board of directors, any or all series
of our preferred stock could have preference over our common stock with respect
to dividends and other distributions and upon our liquidation. Issuance of any
such shares with voting powers, or issuance of additional shares of our common
stock, would dilute the voting power of our outstanding common stock.
NO PREEMPTIVE RIGHTS
No holder of any of our capital stock has any preemptive right to subscribe
for or purchase any of our securities of any class or kind.
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TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company, Brooklyn, New York, is our the
transfer agent and registrar for our common stock.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation and bylaws are designed to discourage
certain types of transactions that may involve an actual or threatened change of
control of us and to encourage any person who might seek to acquire control of
us to negotiate with the our board of directors. We believe that generally the
interests of our stockholders would be served best if any change in control
results from negotiations with our board of directors of the proposed terms,
such as the price to be paid, the form of consideration and the anticipated tax
effects of the transaction.
The provisions described herein are designed to reduce our vulnerability to
an unsolicited proposal for a takeover of us that does not contemplate the
acquisition of all our outstanding shares of capital stock at an adequate price
or is otherwise unfair to our stockholders or an unsolicited proposal for the
restructuring or sale of all or part of us. We believe that, as a general rule,
such proposals would not be in the best interests of us and our stockholders.
However, to the extent that these provisions do not discourage takeover
attempts, they could make it more difficult to accomplish transactions that are
opposed by the incumbent board of directors and could deprive stockholders of
opportunities to realize temporary takeover premiums for their shares or other
advantages that large accumulations of stock would provide.
NUMBER OF DIRECTORS; REMOVAL; VACANCIES
Our bylaws provide that the number of directors shall not be less than
three. The exact number of directors is set in accordance with the bylaws by
resolution from time to time of a majority of our entire board of directors.
Interim vacancies on our board of directors or vacancies created by an increase
in the number of directors, may be filled by a majority of the directors then in
office.
Our certificate of incorporation and bylaws also provide that the board be
divided into three classes. Class I directors serve for a term ending at the
first annual meeting after the date of distribution, Class II directors serve
for a term ending at the second annual meeting held after the date of
distribution, and Class III directors serve for a term ending at the third
annual meeting after the date of distribution. Moreover, as is permitted under
Delaware law corporation only in the case of a corporation having a classified
board, the certificate of incorporation and the bylaws provide that directors
may be removed only for cause.
SUPERMAJORITY VOTING REQUIREMENTS
In order to approve our transactions involving merger, consolidation, or
sale or other transfer of all or substantially all of our assets (whether in one
transaction or a series of transactions), or to amend certain provisions of our
certificate of incorporation, including the provisions involving the classified
board of directors and the supermajority voting requirements, our certificate of
incorporation requires the approval of either:
(i) an affirmative vote of at least 75% of the members of the board of
directors and 50% of the voting stock held by our stockholders, or
(ii) an affirmative vote of at least 50% of the members of the board of
directors and at least 75% of the voting stock held by our stockholders.
STOCKHOLDER ACTION
Delaware law permits stockholder action without a meeting upon the written
consent of holders of outstanding stock having not less than the minimum number
of votes that would be necessary to authorize such action at a meeting at which
all shares entitled to vote thereon were present and voted, unless the
certificate of incorporation provides otherwise. Because our certificate of
incorporation does not prohibit
48
52
stockholder action by consent, a small number of our stockholders will have the
ability to approve certain matters without a stockholder vote.
PREFERRED STOCK AND ADDITIONAL COMMON STOCK
Under our certificate of incorporation, our board of directors has
authority to provide by resolution for issuance of shares of one or more series
of preferred stock. Our board of directors is authorized to fix by resolution
the terms and conditions of each series. The board of directors also may issue
additional shares of authorized but unissued shares of our common stock.
We believe that the availability of our preferred stock will provide us
with increased flexibility to facilitate possible future financings and
acquisitions and will allow us to better meet other corporate needs that might
arise. The authorized shares of our preferred stock, as well as authorized but
unissued shares of our common stock, will be available for issuance without the
expense and delay of stockholder action, unless stockholder action is required
by applicable law or the rules of the NASD or other stock exchange or
organization on which any class of our stock may then be quoted or listed.
These provisions give our board of directors the power to approve the
issuance of a series of preferred stock, or additional common stock, with terms
that could either impede or facilitate the completion of a merger, tender offer
or other takeover attempt. For example, the issuance of new shares might impede
a business combination if the terms of those shares include series voting rights
that would enable a holder to block business combinations, or the issuance of
new shares might facilitate a business combination if those shares have general
voting rights sufficient to cause an applicable percentage vote required to be
satisfied. Our board of directors will make any determination regarding issuance
of additional shares based on its judgment as to the best interest of its
stockholders, customers, employees or other constituencies.
CONTROL SHARE ACQUISITION STATUTE
We are subject to Section 203 of the Delaware General Corporation Law.
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless (i) prior to such date, the board of directors of the
corporation approves either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock excluding certain shares held by employee director and
employee stock plans, or (iii) on or after the consummation date, the business
combination is approved by the board of directors and by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder. For purposes of Section 203, a "business combination"
includes, among other things, a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is generally a person who, together with affiliates and
associates, owns (or within three years, owned) 15% or more of the corporation's
voting stock.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145(a) of the Delaware General Corporation Law provides in relevant
part that "a corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful." With respect to
derivative actions, Section 145(b) of the Delaware General Corporation Law
provides in relevant part that "[a] corporation shall have power to indemnify
any person who was or is a party or is
49
53
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its
favor...[by reason of his service in one of the capacities specified in the
preceding sentence] against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was bought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper".
Our certificate of incorporation provides that to the fullest extent
permitted by the Delaware law, none of our directors shall be personally liable
to us or our stockholders for monetary damages for breach of fiduciary duty as a
director. Our certificate of incorporation also provides that no amendment or
repeal of such provision shall apply to or have any effect on the right to
indemnification permitted thereunder with respect to claims arising from acts or
omissions occurring in whole or in part before the effective date of such
amendment or repeal whether asserted before or after such amendment or repeal.
Our bylaws provide that we shall indemnify to the full extent authorized by
law each of our directors and officers against expenses incurred in connection
with any proceeding arising by reason of the fact that such person is or was an
agent of the corporation.
SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of our common stock sold in this offering will be freely
tradeable without restriction under the Securities Act, except for any shares
which may be acquired by an affiliate of ours, as that term is defined in Rule
144 under the Securities Act. Persons who may be deemed to be affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with, us and may include our directors and officers as
well as our significant stockholders, if any.
Mercury Air Group currently plans to complete its divestiture of Mercury
Air Group by distributing all of the shares of our common stock owned by Mercury
Air Group to the holders of Mercury Air Group's common stock after this
offering, but in no event before the later of the receipt of approval by Mercury
Air Group's lenders or six months after this offering. Shares of our common
stock distributed to Mercury Air Group stockholders in the distribution
generally will be freely transferable, except for shares of common stock
received by persons who may be deemed to be affiliates. Persons who are
affiliates will be permitted to sell the shares of common stock that are issued
in this offering or that they receive in the distribution only through
registration under the Securities Act, or under an exemption from registration,
such as the one provided by Rule 144.
The shares or our common stock held by Mercury Air Group before
distribution and the shares of common stock sold in the private placement upon
consent of Mercury Air Group's lenders to that offering and the initial public
offering are deemed "restricted securities" as defined in Rule 144, and may not
be sold other than through registration under the Securities Act or under an
exemption from registration, such as the one provided by Rule 144. Mercury Air
Group, and our directors, officers and stockholders have agreed not to offer or
sell any shares of our common stock, subject to exceptions, for a period of 180
days after the date of this prospectus, without the prior written consent of the
underwriters.
We will grant shares of our common stock pursuant to the 2001 Stock Option
Plan subject to restrictions. See "Management -- Incentive Plans -- 2001 Stock
Option Plan". We currently expect to file a registration statement under the
Securities Act to register shares reserved for issuance under the 2001 Stock
Option Plan. Shares issued pursuant to awards after the effective date of the
registration statement, other than shares issued to affiliates, generally will
be freely tradeable without further registration under the Securities Act.
Shares issued pursuant to any vested and exercisable options of Mercury Air
Group converted into our options will also be freely tradeable without
registration under the Securities Act after the effective date of the
registration statement. See "Management -- Treatment of Mercury Air Group
Options".
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UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement, the underwriters named below, for which VMR Capital Markets, U.S.
acting as representative, have agreed to purchase from us the respective number
of shares of common stock set forth opposite each underwriter's name:
NAME OF UNDERWRITER NUMBER OF SHARES
- ------------------- ----------------
VMR Capital Markets, U.S. .................................. 1,200,000
---------
Total.................................................. 1,200,000
=========
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of certain legal matters by their counsel
and other conditions. The nature of the underwriters' obligations is that they
are obligated to purchase and pay for all the shares of common stock offered
hereby, if any shares are purchased. However, the underwriters are not required
to take or pay for the shares covered by the underwriters' over-allotment option
described below.
The underwriters propose initially to offer stock directly to the public at
the public offering price set forth on the cover page of this prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. Any underwriter may allow, and such dealers may re-allow, a concession of
not in excess of $ a share to other underwriters or to certain dealers.
After the initial offering of the shares, the offering price and other selling
terms may be changed by the representatives of the underwriters. The
representatives have advised us that the underwriters do not expect sales to
accounts for which any of the underwriters will exercise discretion as to such
sale to exceed 5% of the total number of shares offered hereby.
We have granted to the underwriters an option, exercisable for 45 days from
the date of this prospectus, to purchase up to 180,000 additional shares at the
initial public offering price, less the underwriting discounts, all as set forth
on the cover page of this prospectus. The underwriters may exercise such option
only to cover over-allotments made in connection with the sale of common stock
in this offering. To the extent this option is exercised, each underwriter will
become obligated, subject to limited conditions, to purchase approximately the
same percentage of additional shares of common stock as the number listed next
to the underwriter's name in the preceding table bears to the total number of
shares of common stock listed next to the names of all underwriters in the
preceding table. If the underwriters' option is exercised in full, the total
price to the public would be $13.8 million, the total underwriters' discounts
and commissions would be $1.38 million and total proceeds to us would be $11.5
million.
We intend to apply to list our common stock on the American Stock Exchange
under the symbol "JET".
Each of Mercury Air Group and our executive officers, directors and other
security holders has agreed that they will not, without the prior written
consent of the representative (which consent may be withheld in its sole
discretion) dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing to a date 180 days after such date.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Upon completion of this offering, we will sell to the representative for
$100 a warrant to purchase 120,000 shares of common stock. The representative's
warrant will become exercisable one year after the effective date of this
offering at a per share exercise price equal to 120% of the initial public
offering price and will expire five years from the effective date of this
offering. The representative's warrant and underlying shares of common stock
will be restricted from sale, transfer, assignment or hypothecation for a period
of one year from the date
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55
of this prospectus, except to the representatives, underwriters, selling group
members and their officers or partners. During the exercise period, holders of
the representative's warrants are entitled to certain demand and incidental
rights with respect to the shares of common stock issuable upon exercise of the
representative's warrant. The common stock issuable on exercise of the
representative's warrant is subject to adjustments in certain events to prevent
dilution.
We will pay the representative a nonaccountable expense allowance of 3.0%
of the gross proceeds of the offering, of which an aggregate of $50,000 has been
paid to date. The nonaccountable expense allowance will include proceeds from
the over-allotment option, if exercised. The representative's expenses in excess
of these legal fees and the nonaccountable expense allowance will be borne by
the representative.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the American Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor the underwriters can predict the effect that the
transactions described above may have on the price of the common stock. In
addition, neither we nor the underwriters represent that the underwriters will
engage in such transactions. If commenced, such transactions may be discontinued
at any time without notice. It is anticipated that certain of the underwriters
will make a market in the common stock on completion of this offering, as
permitted by applicable law. The underwriters are not obligated to make a market
in the common stock and if they do so may discontinue making a market at any
time. There is no assurance an active trading market will ever develop for the
common stock.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering,
including the representative. The representative may agree to allocate a number
of shares to underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by the underwriters that will make
Internet distributions on the same basis as other allocations.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between the representative and us. The principal factors considered in
determining the initial public offering price will include:
- the information set forth in this prospectus and otherwise available;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and demand for, publicly traded stock of
generally comparable companies.
The estimated initial public offering price range set forth on the cover
page of this preliminary prospectus is subject to change as a result of market
conditions and other factors.
Mercury Air Group and Mercfuel have had prior financial or investment
transactions with VMR Capital Markets, U.S. In December 2000, VMR Capital
Markets, U.S. was engaged by Mercury Air Group to provide
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56
financial advisory and investment banking services for 36 months pursuant to
which Mercury Air Group agreed to issue to VMR Capital Markets, U.S. warrants to
purchase 200,000 shares of its common stock at a per share exercise price of
$5.625 per share and paid VMR Capital Markets, U.S. aggregate cash fees of
$45,000. None of such services were related to this offering. In addition, VMR
Capital Markets, U.S. acted as the placement agent with respect to the private
offering of 239,942 shares of our common stock at a price of $4.35 per share,
such sale to be consummated at the time as Mercury Air Group's lenders consent
to that offering and the initial public offering. An affiliate of VMR Capital
Markets, U.S. has agreed to purchase 114,943 shares in this private placement.
In connection with this private placement we paid VMR Capital Markets, U.S. a
sales commission of $83,980.
LEGAL MATTERS
The validity of the common stock offered hereby and other legal matters
will be passed upon for us by McBreen & Kopko, Chicago, Illinois. Frederick H.
Kopko, Jr., a partner of McBreen & Kopko, beneficially owns 2,023,921 shares of
the common stock of Mercury Air Group. Legal matters will be passed upon for the
underwriters by Kirkpatrick & Lockhart LLP, Los Angeles, California.
EXPERTS
The financial statements as of June 30, 2000 and 1999, and for each of the
three years in the period ended June 30, 2000, included in this prospectus and
the related financial statement schedules included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits and
schedules to the registration statement. Some items are omitted in accordance
with the rules and regulations of the SEC. For further information about
Mercfuel and its common stock, reference is made to the registration statement
and the exhibits and any schedules to the registration statement. Statements
contained in this prospectus as to the contents of any contract of other
document referred to are not necessarily complete and in each instance, if the
contract or document is filed as an exhibit, reference is made to the copy of
the contract or other documents filed as an exhibit to the registration
statement, each statement being qualified in all respects by such reference. A
copy of the registration statement, including the exhibits and schedules to the
registration statement, may be read and copied at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov, from which interested persons can electronically access the
registration statement, including the exhibits and any schedules to the
registration statement.
As a result of this offering, we will become subject to the full
information requirements of the Securities Exchange Act of 1934, as amended. We
will fulfill our obligations with respect to those requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain an Internet
site at http://www.mercfuel.com. Our website and the information contained
therein or connected thereto shall not be deemed to be incorporated into this
prospectus or the registration statement of which it forms a part.
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT................................ F-2
FINANCIAL STATEMENTS:
Balance Sheets as of June 30, 2000 and 1999............... F-3
Statements of Operations for the Years Ended June 30,
2000, 1999, and 1998................................... F-4
Statements of Cash Flows for the Years Ended June 30,
2000, 1999, and 1998................................... F-5
Notes to Financial Statements............................. F-6
UNAUDITED FINANCIAL STATEMENTS:
Balance Sheet as of March 31, 2001........................ F-13
Statements of Operations for the Nine Months Ended March
31, 2001 and 2000...................................... F-14
Statements of Cash Flows for the Nine Months Ended March
31, 2001 and 2000...................................... F-15
Notes to Financial Statements............................. F-16
F-1
58
INDEPENDENT AUDITORS' REPORT
MercFuel, Inc.:
We have audited the accompanying balance sheets of MercFuel, Inc. (the
"Company") as of June 30, 2000 and 1999, and the related statements of
operations and cash flows for each of the three years in the period ended June
30, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 2000 and 1999,
and the results of its operations and its cash flows for each of the three years
in the period ended June 30, 2000 in conformity with accounting principals
generally accepted in the United States of America.
Deloitte & Touche LLP
Los Angeles, California
March 7, 2001
(May 15, 2001 as to Note 12)
F-2
59
MERCFUEL, INC.
BALANCE SHEETS
JUNE 30, 2000 AND 1999
2000 1999
----------- -----------
ASSETS
CURRENT ASSETS:
Trade accounts receivable, net of allowance for doubtful
accounts of $2,106,000 and $1,652,000 at June 30, 2000
and 1999 (Notes 2 and 4)............................... $25,370,000 $27,248,000
Inventories (Note 2)...................................... 1,868,000 1,058,000
Prepaid expenses and other current assets (Notes 1 and
3)..................................................... 654,000 1,415,000
Deferred income taxes (Notes 2 and 7)..................... 821,000 644,000
----------- -----------
Total current assets.............................. 28,713,000 30,365,000
----------- -----------
PROPERTY AND EQUIPMENT, Net of accumulated depreciation of
$128,000 and $106,000 at June 30, 2000 and 1999,
respectively (Notes 2 and 5).............................. 233,000 687,000
----------- -----------
TOTAL....................................................... $28,946,000 $31,052,000
=========== ===========
LIABILITIES
CURRENT LIABILITIES:
Accounts payable.......................................... $17,294,000 $12,725,000
Accrued expenses (Note 6)................................. 1,077,000 806,000
----------- -----------
Total current liabilities......................... 18,371,000 13,531,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
Due to MAG (Note 1)....................................... 10,575,000 17,521,000
----------- -----------
TOTAL............................................. $28,946,000 $31,052,000
=========== ===========
See notes to financial statements.
F-3
60
MERCFUEL, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
2000 1999 1998
------------ ------------ ------------
FUEL SALES (Notes 2 and 10)...................... $203,412,000 $111,638,000 $148,354,000
COST OF SALES (Note 11).......................... 192,399,000 99,823,000 138,730,000
------------ ------------ ------------
GROSS PROFIT..................................... 11,013,000 11,815,000 9,624,000
------------ ------------ ------------
EXPENSES:
Selling, general, and administrative (Note
1).......................................... 4,506,000 4,418,000 3,567,000
Bad debt expense (Notes 4 and 9)............... 5,000,000 1,377,000 8,639,000
Depreciation................................... 58,000 57,000 14,000
Interest expense, net (Note 1)................. 1,187,000 1,016,000 1,163,000
------------ ------------ ------------
Total expenses......................... 10,751,000 6,868,000 13,383,000
------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES.......................................... 262,000 4,947,000 (3,759,000)
PROVISION (BENEFIT) FOR INCOME TAXES (Notes 2 and
7)............................................. 102,000 1,929,000 (1,466,000)
------------ ------------ ------------
NET INCOME (LOSS)................................ $ 160,000 $ 3,018,000 $ (2,293,000)
============ ============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
(Note 2)....................................... $ 0.02 $ 0.46 $ (0.35)
============ ============ ============
SHARES USED IN COMPUTING BASIC AND DILUTED INCOME
(LOSS) PER SHARE (Notes 2 and 12).............. 6,546,430 6,546,430 6,546,430
============ ============ ============
See notes to financial statements.
F-4
61
MERCFUEL, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 160,000 $ 3,018,000 $(2,293,000)
Adjustments to derive cash flows from operating
activities:
Gain on sale of property....................... (44,000) -- --
Depreciation................................... 58,000 57,000 14,000
Provision for bad debts........................ 5,000,000 1,377,000 8,639,000
Deferred income taxes.......................... (177,000) (10,000) 78,000
Changes in operating assets and liabilities:
Trade accounts receivable.................... (3,122,000) (6,286,000) (473,000)
Inventories.................................. (810,000) (94,000) 288,000
Prepaid expenses and other current assets.... 761,000 (182,000) (755,000)
Accounts payable............................. 4,569,000 2,540,000 (2,309,000)
Accrued expenses............................. 271,000 (233,000) 528,000
----------- ----------- -----------
Net cash provided by operating
activities.............................. 6,666,000 187,000 3,717,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............... (92,000) (687,000) (33,000)
Proceeds from sale of property.................... 532,000 -- --
----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. 440,000 (687,000) (33,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES --
Advances (to) from MAG............................ (7,106,000) 500,000 (3,684,000)
----------- ----------- -----------
NET INCREASE IN CASH................................ -- -- --
CASH, BEGINNING OF YEAR............................. -- -- --
----------- ----------- -----------
CASH, END OF YEAR................................... $ -- $ -- $ --
=========== =========== ===========
See notes to financial statements.
F-5
62
MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 2000
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION -- On March 7, 2001, Mercury Air Group, Inc. ("MAG") announced
its plan to create an independent publicly-traded company, MercFuel, Inc.
("MercFuel" or the "Company"). MercFuel was organized in Delaware on October 27,
2000 as a wholly owned subsidiary of MAG. The accompanying financial statements
represent the historical operating results of MAG's fuel sales and services
division, the assets and liabilities of which were transferred to the Company by
MAG effective as of January 1, 2001 (the "Transfer Date"). It is MAG's intent to
complete an initial public offering of MercFuel, after which it will own at
least 80.1% of MercFuel's outstanding common stock. MAG currently intends,
subject to the satisfactory resolution of certain conditions, to distribute all
of the shares of common stock that MAG owns to MAG's stockholders (the
"Distribution") no earlier than six months after MercFuel's initial public
offering.
MercFuel operates in one industry segment: the sale and delivery of
aviation fuel to commercial, air courier and commuter airlines, and to general
aviation aircraft.
BASIS OF PRESENTATION -- Assets, liabilities, revenues, and expenses are
determined on a specific identification basis, except for certain selling,
general, and administrative expenses, interest expense and prepaid insurance.
COST ALLOCATIONS TO MERCFUEL -- The following summarizes the assumptions
used by management in allocating costs to MercFuel. Management believes the
assumptions and allocations were made on a reasonable basis; however, these
costs do not necessarily reflect those which would have been or will be incurred
by the Company on a stand-alone basis. Accordingly, the accompanying financial
statements may not necessarily be indicative of the conditions that would have
existed, or the results of operations that would have occurred, if the Company
had operated as a stand-alone entity.
Selling, General, and Administrative Expenses -- Selling, general, and
administrative expenses have been determined on both a specific
identification basis and an allocation basis. Allocated amounts are
determined from an analysis of MAG's operating and corporate departments
and are generally based on the percentage of MercFuel's operating income
before depreciation, indirect selling, general and administrative expenses
and certain specifically identified bad debt expenses to MAG's operating
income before depreciation and amortization and indirect selling, general
and administrative expenses. Amounts allocated to MercFuel from MAG for
such items were $1,284,000, $1,495,000, and $980,000 for 2000, 1999, and
1998, respectively.
Interest Expense -- Interest expense is allocated based on MercFuel's
estimated working capital requirements for each year presented. Interest
expense is computed by applying MAG's incremental borrowing rate to
MercFuel's working capital requirements.
Prepaid Insurance -- Prepaid insurance is allocated using the same
allocation method used to determine selling, general, and administrative
expenses.
Due to MAG -- The operations of MercFuel have historically been
financed by advances from MAG, which are classified as due to MAG in the
accompanying balance sheets. Accordingly, separate statements of divisional
equity have not been included.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION -- Revenues are recognized upon delivery of fuel.
INVENTORIES -- Inventories consist of aviation fuel and are stated at the
lower of aggregate cost (first-in, first-out method) or market.
F-6
63
MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful life of the related asset, generally three-to-five years.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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 during the reporting period. Actual results could differ
from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS -- The Company evaluates long-lived assets
for impairment, based on undiscounted cash flows, 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 estimated fair
value of the asset.
INCOME TAXES -- Deferred income tax assets and liabilities are recognized
based on differences between the financial statement and income tax bases of
assets and liabilities using presently enacted income tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The fair value of financial
instruments, principally accounts receivable and payable, closely approximates
their carrying value because of their short-term nature.
RISKS AND UNCERTAINTIES -- Accounts receivable is comprised primarily of
trade receivables from customers and is net of an allowance for doubtful
accounts. MercFuel's credit risk is based in part on the following: 1)
substantially all receivables are related to a single industry (aviation), 2)
there is a concentration of credit risk as there are several customers who at
any time have significant balances owed to MercFuel, and 3) significant balances
are owed by certain customers that are not adequately capitalized. In addition,
significantly higher fuel prices for extended periods of time have a negative
impact on the aviation industry as it substantially increases airlines'
operating expenses. Smaller airlines with lower levels of capital may be more
seriously impacted. During the period from June 30, 1999 to June 30, 2000, there
was a significant rise in the per gallon cost of fuel. The Company assesses its
credit portfolio on an ongoing basis and establishes allowances which it
believes are adequate to absorb potential credit losses that can be reasonably
anticipated.
In the event that fuel prices increase significantly for an extended period
of time, MercFuel's liquidity may be adversely affected unless MercFuel is able
to increase vendor credit or MAG has the credit availability to advance
additional funds to MercFuel.
STOCK COMPENSATION -- MAG generally issues stock options to employees with
grant prices equal to the fair value of the underlying security at the date of
grant. Compensation expense related to the stock options, if any, is recognized
in accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
See Note 8 for information regarding the pro forma effect on operations of
recognizing compensation cost based on the estimated fair value of the stock
options granted, as required by Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
NET INCOME (LOSS) PER SHARE -- All of the outstanding common stock of
MercFuel is owned by MAG. Basic and diluted net income (loss) per share amounts
are computed by dividing the net income (loss) for the period by the common
shares outstanding after the split of the 1,000 shares of MercFuel common stock
held by MAG into 6,546,430 shares as discussed in Note 12.
NEW ACCOUNTING PRONOUNCEMENTS -- On July 1, 2000, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of
F-7
64
MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
financial position and measure those instruments at fair value. There was no
effect of adoption at July 1, 2000. At March 31, 2001, there were no outstanding
derivative contracts.
NEW ACCOUNTING PRONOUNCEMENTS -- In December 1999, the Securities and
Exchange Commission ("SEC") released Staff Accounting Bulletin No. 101 ("SAB
101"), which provided the SEC's views in applying generally accepted accounting
principles to selected revenue issues. There was no impact of implementing SAB
101.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following as of
June 30:
2000 1999
-------- ----------
Fuel taxes........................................... $260,000 $1,011,000
Deposits............................................. 355,000 368,000
Prepaid insurance and other.......................... 39,000 36,000
-------- ----------
Total...................................... $654,000 $1,415,000
======== ==========
4. LOSSES RESULTING FROM CUSTOMER BANKRUPTCIES
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.
The aggregate expense of $7,050,000 was charged directly to bad debt expenses in
the accompanying statement of operations for the year ended June 30, 1998. See
Note 9 for information regarding litigation related to WPAI.
On February 29, 2000, Tower Air, Inc. ("Tower") filed for bankruptcy
protection under Chapter 11 and, as a result, the Company wrote off $2,700,000
of accounts receivable due from Tower. Tower subsequently ceased operations in
October 2000. The amount was charged directly to bad debt expense in the
accompanying statement of operations for the year ended June 30, 2000.
During the year ended June 30, 1999, MAG invested $300,000 in National
Airlines, Inc. ("National"), a start-up airline based in Las Vegas, Nevada (such
investment has not been allocated to MercFuel). In May 1999, MAG entered into a
fuel management contract with National, pursuant to which MercFuel began selling
fuel to National. During the year ended June 30, 2000, National represented
approximately 18.0% of MercFuel's fuel sales. On December 6, 2000, National
filed for bankruptcy protection. MercFuel continues to sell fuel to National on
a secured basis, under the auspices of the bankruptcy court. No provision for
bad debts has been made for trade receivables from National.
F-8
65
MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of June 30:
2000 1999
--------- ---------
Fuel trucks.......................................... $ -- $ 523,000
Office equipment and furniture....................... 54,000 47,000
Computer equipment................................... 226,000 181,000
Software............................................. 81,000 42,000
--------- ---------
361,000 793,000
Less accumulated depreciation........................ (128,000) (106,000)
--------- ---------
Total...................................... $ 233,000 $ 687,000
========= =========
6. ACCRUED EXPENSES
Accrued expenses consist of the following as of June 30:
2000 1999
---------- --------
Fuel and other related taxes......................... $1,041,000 $765,000
Payroll and other.................................... 36,000 41,000
---------- --------
Total...................................... $1,077,000 $806,000
========== ========
7. INCOME TAXES
MercFuel's taxable income (loss) is included in MAG's U.S. and state income
tax returns. For financial reporting purposes, MercFuel has provided for income
taxes (benefit) on a separate-company basis. Income tax expense is summarized as
follows:
YEAR ENDED JUNE 30,
--------------------------------------
2000 1999 1998
--------- ---------- -----------
Federal, current...................... $ 224,000 $1,609,000 $(1,246,000)
State, current........................ 55,000 330,000 (298,000)
--------- ---------- -----------
279,000 1,939,000 (1,544,000)
Deferred, primarily federal........... (177,000) (10,000) 78,000
--------- ---------- -----------
Provision (Benefit)................... $ 102,000 $1,929,000 $(1,466,000)
========= ========== ===========
Major components of deferred income tax assets as of June 30, were as
follows:
2000 1999
-------- --------
Allowance for doubtful accounts........................ $821,000 $644,000
-------- --------
$821,000 $644,000
======== ========
F-9
66
MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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%
===== ===== =====
8. INCENTIVE PLAN
MAG has stock option plans under which MercFuel employees have historically
been granted options to purchase common stock. Options granted pursuant to the
plans have been made at the fair market value of such shares on the date of the
grant and generally vest over twelve months. The contractual lives of the
options are ten years.
A summary of options held by MercFuel employees under the MAG plans is as
follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
MAG SHARES PRICE
---------- --------
Outstanding June 30, 1997............................. 39,375 $6.05
Granted............................................... 12,500 7.88
Exercised............................................. (2,000) 5.60
------ -----
Outstanding June 30, 1998, 1999, and 2000............. 49,875 $6.51
====== =====
WEIGHTED
SHARES AVERAGE WEIGHTED SHARES WEIGHTED
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
AT JUNE 30, REMAINING EXERCISE AT JUNE 30, EXERCISE
EXERCISE PRICE RANGE 2000 LIFE PRICE 2000 PRICE
- -------------------- ----------- ----------- -------- ----------- --------
$6.09....................... 34,375 5 $6.09 34,375 $6.09
5.60....................... 3,000 6 5.60 3,000 5.60
7.88....................... 12,500 8 7.88 12,500 7.88
As permitted under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," MercFuel has elected to follow
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations in accounting for stock-based awards
to employees. Under APB 25, MercFuel recognizes no compensation expense with
respect to such awards.
Pro forma information regarding net income (loss) and earnings per share is
required by SFAS 123. This information is required to be determined as if
MercFuel had accounted for stock-based awards to its employees under the fair
value method of SFAS 123. The fair value of the options reported below has been
estimated at the date of grant using the Black-Scholes option pricing model with
the following 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-10
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MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require input of highly
subjective assumptions, including the expected stock price volatility. The
weighted-average estimated fair value of MAG employee stock options granted
during fiscal 2000, 1999, and 1998 was $3.45, $3.00, and $2.13 per share,
respectively. Because MAG options held by MercFuel employees have
characteristics significantly different than those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of these
options.
For purposes of pro forma disclosures under SFAS 123, the estimated fair
value of the options is assumed to be amortized to expense over the options'
vesting period. Pro forma information related to the MAG options held by
MercFuel employees is as follows:
2000 1999 1998
-------- ---------- -----------
Net income (loss) -- as reported............... $160,000 $3,018,000 $(2,293,000)
Net income (loss) -- pro forma................. $160,000 $3,003,000 $(2,308,000)
Basic and diluted net income (loss) per share:
As reported.................................. $ 0.02 $ 0.46 $ (0.35)
Pro forma.................................... $ 0.02 $ 0.46 $ (0.35)
9. COMMITMENTS AND CONTINGENCIES
In December 2000, MAG and the bankruptcy court agreed to a settlement
related to preference payments received in connection with the Chapter 7
bankruptcy filing for WPAI subject to the bankruptcy court's final approval. The
settlement consists of 10 quarterly payments of $175,000, with the unpaid
balance secured by a letter of credit. Payments are expected to begin upon
approval of the settlement by the bankruptcy court. Subsequent to June 30, 2000,
MercFuel recorded a provision for bad debts for an amount equal to the present
value of the payments, $1.6 million. This charge was partially offset by a
recovery of approximately $900,000 from a former customer.
In February 2001, MAG received notice of a complaint filed by Charles A.
Stanziale, Jr., as Chapter 7 Trustee for Tower Air, Inc. in regards to a
preference action for approximately $3.6 million. Costs of this complaint will
be allocated to the Company. The MAG believes that it has substantial defenses
in this case and, accordingly, the Company does not believe this matter will
have a significant impact on its financial position or operating results.
The Company believes, based in part on an opinion of its tax advisors, that
although the matter is not free from doubt, the contribution by MAG of certain
assets and liabilities to MercFuel in exchange for common stock of MercFuel,
followed by the Distribution, should be treated as a reorganization within the
meaning of Section 368(a)(1)(D) of the Internal Revenue Code of 1986 (the
"Code"), as amended, and the Distribution should qualify as a tax-free
distribution under Section 355 of the Code. It should be noted that the
application of Section 355 of the Code to the Distribution is complex and may be
subject to differing interpretation. If the Distribution does not qualify as a
tax-free distribution under Section 355 of the Code; then: (i) MAG would
recognize capital gain equal to the difference between the fair market value of
the MercFuel common stock on the date of the Distribution and MAG's tax basis in
such stock; and (ii) the Distribution may be taxable to individual stockholders,
depending on their individual tax basis. In addition, the Company has agreed to
indemnify MAG in the event the Distribution is not tax-free to MAG or its
stockholders because of actions taken by the Company or because of failure to
take various actions, to be set forth in a tax sharing agreement with MAG.
Certain of the events that could trigger this obligation may be beyond the
Company's control. In particular, the transaction may be taxable if the
Distribution is deemed to be part of a plan in which one or more persons acquire
directly or indirectly stock representing a 50% or greater
F-11
68
MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
interest in either MAG or the Company. If such stock is acquired within the
four-year period beginning two years before and ending two years after the
Distribution, the Distribution and acquisition will be presumed to be part of
the same plan.
MAG has a credit agreement with a consortium of banks, the collateral for
which includes the assets of MercFuel. MAG's bank debt has not been allocated to
MercFuel. However, MAG's interest expense has been allocated (see Note 1 for a
discussion of the allocation method).
10. MAJOR CUSTOMERS AND FOREIGN CUSTOMERS
National and Tower Air, Inc. ("Tower") represented approximately 18.0% and
10.0% of total revenue for fiscal 2000, respectively. Tower also accounted for
approximately 15.0% of total revenue for fiscal 1999. WPAI represented
approximately 15.0% of total revenue for fiscal 1998. No other customers
accounted for over 10% of MercFuel's revenue in fiscal 2000, 1999, and 1998.
The Company sells aviation fuel to a number of foreign airlines. 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 26.0%, 33.0%, and 36.0% of total revenues for the years ended June
30, 2000, 1999, and 1998, respectively.
11. RELATED PARTY TRANSACTIONS
MAG provides fuel storage and fuel delivery services to MercFuel at certain
airports within the United States. Amounts paid to MAG for these services were
$809,000, $602,000, and $352,000 for 2000, 1999, and 1998, respectively. These
amounts are included in cost of sales in the accompanying statements of
operations.
12. SUBSEQUENT EVENT
On March 15, 2001, the Company's Board of Directors and sole stockholder
approved the split of 1,000 shares of the Company's common stock held by MAG
into 6,546,430 shares. On May 15, 2001, the Company amended the Certificate of
Incorporation which is required to appropriately effect the stock split. All
share and per share amounts have been adjusted to give effect to the conversion
of shares.
In connection with the decision to complete an initial public offering of
MercFuel, the Company agreed to sell 239,942 shares of common stock at a per
share price of $4.35, the net proceeds of which are $960,000. The sale will be
consummated at such time as MAG's lenders consent to the Offering and the
initial public offering. On May 15, 2001, the Company's board of directors
authorized the filing of this registration statement related to 1,500,000 shares
of the Company's common stock.
F-12
69
MERCFUEL, INC.
BALANCE SHEET
(UNAUDITED)
MARCH 31,
2001
-----------
ASSETS
CURRENT ASSETS:
Trade accounts receivable, net of allowance for doubtful
accounts of $2,341,000 at March 31, 2001............... $27,145,000
Inventories............................................... 1,147,000
Prepaid expenses and other current assets (Note 1)........ 594,000
Deferred income taxes (Note 2)............................ 913,000
-----------
Total current assets.............................. 29,799,000
PROPERTY AND EQUIPMENT, Net of accumulated depreciation of
$174,000 at March 31, 2001................................ 201,000
OTHER LONG TERM ASSETS...................................... 96,000
-----------
TOTAL....................................................... $30,096,000
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $17,966,000
Accrued expenses.......................................... 3,280,000
-----------
Total current liabilities......................... 21,246,000
-----------
COMMITMENTS AND CONTINGENCIES (Note 3)
DUE TO MAG (Note 1)......................................... 8,785,000
-----------
STOCKHOLDER'S EQUITY:
Preferred stock -- $0.01 par value; authorized 8,000,000
shares; no shares outstanding..........................
Common stock -- $0.01 par value; authorized 50,000,000
shares; outstanding 6,546,430 shares as of March 31,
2001 (Note 3).......................................... 65,000
Additional paid-in capital................................
-----------
Total stockholder's equity........................ 65,000
-----------
TOTAL....................................................... $30,096,000
===========
See notes to unaudited financial statements.
F-13
70
MERCFUEL, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
2001 2000
------------ ------------
FUEL SALES.................................................. $240,478,000 $149,224,000
COST OF SALES............................................... 231,547,000 140,986,000
------------ ------------
GROSS PROFIT................................................ 8,931,000 8,238,000
------------ ------------
EXPENSE:
Selling, general and administrative (Note 1).............. 3,817,000 3,163,000
Bad debt expense.......................................... 2,350,000 4,262,000
Depreciation.............................................. 46,000 41,000
Interest expense, net (Note 1)............................ 490,000 850,000
------------ ------------
Total expense..................................... 6,703,000 8,316,000
------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............. 2,228,000 (78,000)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 869,000 (30,000)
------------ ------------
NET INCOME (LOSS)........................................... $ 1,359,000 $ (48,000)
============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE (Note 1)...... $ 0.21 $ (0.01)
SHARES USED IN COMPUTING BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE (Notes 1 and 3)................................. 6,546,430 6,546,430
See notes to unaudited financial statements.
F-14
71
MERCFUEL, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss)......................................... $ 1,359,000 $ (48,000)
Adjustments to derive cash flows from operating
activities:
Gain on sale of property............................... -- (44,000)
Depreciation........................................... 46,000 41,000
Provision for bad debts................................ 2,350,000 4,262,000
Deferred income taxes.................................. (92,000) (397,000)
Changes in operating assets and liabilities:
Trade accounts receivable............................ (4,125,000) (9,267,000)
Inventories.......................................... 721,000 (600,000)
Prepaid expenses and other current assets............ 60,000 988,000
Accounts payable..................................... 672,000 10,289,000
Accrued expenses..................................... 2,203,000 (206,000)
----------- -----------
Net cash provided by operating activities......... 3,194,000 5,018,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (14,000) (80,000)
Proceeds from sale of property............................ -- 532,000
----------- -----------
Net cash (used in) provided by investing
activities..................................... (14,000) 452,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES --
Repayment of advances to MAG.............................. (2,929,000) (5,470,000)
Dividend.................................................. (155,000) --
Deferred offering costs................................... (96,000) --
----------- -----------
Net cash used in financing activities............. (3,180,000) (5,470,000)
NET INCREASE IN CASH........................................ -- --
CASH, BEGINNING OF THE PERIOD............................... -- --
----------- -----------
CASH, END OF THE PERIOD..................................... $ -- $ --
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Contribution of capital resulting from the conversion of
1,000 shares of MercFuel's common stock held by MAG into
6,546,430 shares effective May 15,2001.................... $ 65,000
F-15
72
MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
1. GENERAL
ORGANIZATION -- On March 7, 2001, Mercury Air Group, Inc. ("MAG") announced
its plan to create an independent publicly-traded company, MercFuel, Inc.
("MercFuel" or the "Company"). MercFuel was organized in Delaware on October 27,
2000 as a wholly owned subsidiary of MAG. The accompanying financial statements
represent the historical operating results of MAG's fuel sales and services
division, the assets and liabilities of which were transferred to the Company by
MAG effective as of January 1, 2001 (the "Transfer Date"). It is MAG's intent to
complete an initial public offering of MercFuel, after which it will own at
least 80.1% of MercFuel's outstanding common stock. MAG currently intends,
subject to the satisfactory resolution of certain conditions, to distribute all
of the shares of common stock that MAG owns to MAG's stockholders (the
"Distribution") no earlier than six months after MercFuel's initial public
offering.
MercFuel operates in one industry segment: the sale and delivery of
aviation fuel to commercial, air courier and commuter airlines, and to general
aviation aircraft.
BASIS OF PRESENTATION -- The accompanying unaudited financial statements as
of March 31, 2001 and for the nine months ended March 31, 2001 and 2000 reflect
all adjustments (consisting of normal, recurring accruals only) which are
necessary to fairly present the results for the interim periods. Such financial
statements have been prepared in accordance with Rule 10-01 of Regulation S-X
and, therefore, do not include all the information or footnotes necessary for a
complete presentation. They should be read in conjunction with the Company's
audited financial statements. The results of operations for the nine months
ended March 31, 2001 are not necessarily indicative of results for the full
year.
NET INCOME (LOSS) PER SHARE -- All of the outstanding common stock of
MercFuel is owned by MAG. Basic and diluted net income (loss) per share amounts
are computed by dividing the net income (loss) for the period by the common
shares outstanding after the split of the 1,000 shares of MercFuel common stock
held by MAG into 6,546,430 shares as discussed in Note 3.
NEW ACCOUNTING PRONOUNCEMENTS -- On July 1, 2000, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. There was no effect of adoption at July 1, 2000. At March 31,
2001, there were no outstanding derivative contracts.
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 principles to selected revenue issues.
There was no impact of implementing SAB 101.
COST ALLOCATIONS TO MERCFUEL -- The following summarizes the assumptions
used by management in allocating costs to MercFuel. Management believes the
assumptions and allocations were made on a reasonable basis; however, these cost
do not necessarily reflect those which would have been or will be incurred by
the Company on a stand-alone basis. Accordingly, the accompanying financial
statements may not necessarily be indicative of the conditions that would have
existed, or the results of operations that would have occurred, if the Company
had operated as a stand-alone entity.
Selling, General, and Administrative Expenses -- Selling, general, and
administrative expenses have been determined on both a specific
identification basis and an allocation basis. Allocated amounts are
determined from an analysis of MAG's operating and corporate departments
and are generally based on the percentage of MercFuel's operating income
before depreciation, indirect selling, general and administrative expenses
and certain specifically identified bad debt expenses to MAG's operating
income
F-16
73
MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
before depreciation and amortization and indirect selling, general and
administrative expenses. Amounts allocated to MercFuel from MAG for such
items were $739,000 and $927,000 for the nine months ended March 31, 2001
and 2000, respectively.
Interest Expense -- Interest expense is allocated based on MercFuel's
estimated working capital requirements for each year presented. Interest
expense is computed by applying MercFuel's working capital requirements to
MAG's incremental borrowing rate.
Prepaid Insurance -- Prepaid insurance is allocated using the same
allocation method used to determine selling, general, and administrative
expenses.
Due to MAG -- The operations of MercFuel have historically been
financed by advances from MAG, which are classified as due to MAG in the
accompanying balance sheets. Accordingly, separate statements of divisional
equity have not been included.
MAJOR CUSTOMERS -- National Airlines and AirTran Airways represented
approximately 22% and 19% of total fuel sales for the nine month period ended
March 31, 2001. No other customers accounted for over 10% of MercFuel's sales
during the period.
2. COMMITMENTS AND CONTINGENCIES
On March 16, 2001, the Bankruptcy court approved a settlement related to
preference payments received in connection with the Chapter 7 bankruptcy filing
for Western Pacific Airlines, Inc., ("WPAI"). The settlement consists of ten
quarterly payments of $175,000, two of which were made in the current period,
with the unpaid balance secured by a letter of credit. The Company has recorded
a charge to bad debt expense equal to the present value of the payments, $1.6
million. This was partially offset by approximately $900,000 in bad debt
recoveries from a former customer.
In February 2001, MAG received notice of a complaint filed by Charles A.
Stanziale, Jr., as chapter 7 Trustee for Tower Air, Inc. in regards to a
preference action for approximately $3.6 million. Cost of this complaint will be
allocated to the Company. MAG believes that it has substantial defenses in this
case and, accordingly, does not believe this matter will have a significant
impact on its financial position or operating results.
The Company believes, based in part on an opinion of its tax advisors, that
although the matter is not free from doubt, the contribution by MAG of certain
assets and liabilities to MercFuel in exchange for common stock of MercFuel,
followed by the Distribution, should be treated as a reorganization within the
meaning of Section 368(a)(1)(D) of the Internal Revenue Code of 1986 (the
"Code"), as amended and the Distribution should qualify as a tax-free
distribution under Section 355 of the Code. It should be noted that the
application of Section 355 of the Code to the Distribution is complex and may be
subject to differing interpretation. If the Distribution does not qualify as a
tax-free distribution under Section 355 of the Code; then: (i) MAG would
recognize capital gain equal to the difference between the fair market value of
the MercFuel common stock on the date of the Distribution and MAG's tax basis in
such stock; and (ii) the Distribution may be taxable to individual stockholders,
depending on their individual tax basis. In addition, the Company has agreed to
indemnify MAG in the event the Distribution is not tax-free to MAG or its
stockholders because of actions taken by the Company or because of failure to
take various actions, to be set forth in a tax sharing agreement with MAG.
Certain of the events that could trigger this obligation may be beyond the
Company's control. In particular, the transaction may be taxable if the
Distribution is deemed to be part of a plan in which one or more persons acquire
directly or indirectly stock representing a 50% or greater interest in either
MAG or the Company. If such stock is acquired within the four-year period
beginning two years before and ending two years after the Distribution, the
Distribution and acquisition will be presumed to be part of the same plan.
F-17
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MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SUBSEQUENT EVENTS
On March 15, 2001, the Company's Board of Directors and sole stockholder
approved the split of 1,000 shares of the Company's common stock held by MAG
into 6,546,430 shares. On May 15, 2001, the Company amended the Certificate of
Incorporation which is required to appropriately effect the stock split.
In connection with the decision to complete an initial public offering of
MercFuel, the Company agreed to sell 239,942 shares of common stock at a per
share price of $4.35, the net proceeds of which are $960,000. The sale will be
consummated at such time as MAG's lenders consent to the offering and the
initial public offering. On May 15, 2001, the Company's Board of Directors
authorized the filing of this registration statement related to 1,500,000 shares
of the Company's common stock.
The Company intends to adopt a 2001 Stock Option Plan (the "Plan"). The
Plan will provide for the grant of incentive stock options to employees and for
the grant of nonstatutory stock options to employees and non-employee directors.
The Company has reserved 1,000,000 shares of common stock for issuance under the
Plan. No options to acquire shares of common stock were issued and outstanding
as of March 31, 2001. The Company's Board of Directors will determine the terms
of the options granted, including the exercise price, the number of shares
subject to each option, the exercisability of the options and the form of
consideration payable upon exercise.
It is anticipated that, effective on the Distribution Date, MercFuel will
grant options to purchase 500,000 shares of common stock, at an exercise price
equal to the fair market price at the date of grant. In addition, it is
anticipated that the options to purchase 49,875 shares of MAG common stock
currently held by MercFuel employees will be converted into options to acquire
an equivalent number of shares of MercFuel. The exercise price is expected to be
adjusted using a conversion formula based on the relative values of MAG and
MercFuel on the Distribution Date. It is expected that the resulting MercFuel
options will maintain the original vesting provisions and option period.
For purposes of governing certain of the ongoing relationships between
MercFuel and MAG, the Company and MAG intend to enter into a Master Distribution
Agreement, along with key related agreements, which will be effective as of the
closing day of the initial public offering, except for the transitional services
agreement, which will be effective at the Distribution Date.
MASTER TECHNOLOGY OWNERSHIP AND LICENSE AGREEMENT -- Under the master
technology ownership and license agreement, the Company will own all technology
developed by the Company, and MAG will assign to the Company all technology
registered under the name MAG.
EMPLOYEE MATTERS AGREEMENT -- MercFuel and MAG intend to enter into an
employee matters agreement to allocate assets, liabilities, and responsibilities
relating to current and former employees of MercFuel and their participation in
the benefit plans, including stock option plans, that MAG currently sponsors and
maintains. Pursuant to the agreement, all eligible MercFuel employees will
continue to participate in the MAG benefit plans on comparable terms and
conditions to those for MAG employees until the Distribution Date or until the
Company establishes independent benefit plans.
MercFuel expects that each MercFuel benefits plan will provide that all
service, compensation, and other benefit determinations that, as of the
Distribution, were recognized under the corresponding MAG benefits plan will be
taken into account under the MercFuel benefits plan.
TAX SHARING AGREEMENT -- MercFuel and MAG intend to enter into a tax
sharing and indemnification agreement whereby, generally, MAG will be
responsible for taxes that are allocable to periods prior to the Transfer Date,
and each of MAG and MercFuel will be responsible for their own tax liabilities
(including their allocable share of taxes shown on any consolidated, combined,
or other tax return filed by MAG) for periods after the Transfer Date. The tax
sharing and indemnification agreement will prohibit MAG and MercFuel
F-18
75
MERCFUEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
from taking actions that could jeopardize the tax-free treatment of the
Distribution, and will require MAG and MercFuel to indemnify each other for any
taxes or other losses that result from these actions.
TRANSITIONAL SERVICES AGREEMENT -- The transitional services agreement will
govern the provision of transitional services by MAG and the Company to each
other, on an interim basis, until one year after the Distribution. The agreement
provides for transitional services, systems and support to the Company's
operations, including data processing and telecommunications services (such as
voice telecommunications and data transmission and information technology
support services) for functions including accounting, financial management, tax,
payroll, stockholder and public relations, legal, procurement, human resources
and other administrative functions. MAG services provided to MercFuel will be
fixed at $70,000 per month.
REAL ESTATE MATTERS AGREEMENT -- The real estate matters agreement will
formalize real estate matters relating to the MAG leased properties that MAG has
either transferred to or shared with the Company as of the Transfer Date. The
agreement includes a description of each property to be transferred to or shared
with MercFuel for each type of transaction. The agreement also provides that all
reasonable costs required to effect the transfers, including landlord consent
fees and landlord attorneys' fees, will be paid by MAG.
MASTER CONFIDENTIAL DISCLOSURE AGREEMENT -- The master confidential
disclosure agreement will provide that MercFuel and MAG agree not to disclose
confidential information of the other party except in specific circumstances.
MAG and MercFuel will also agree not to use this information in violation of any
use restrictions in one of the other written agreements between them.
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT -- Effective as of the
Transfer Date, both MAG and MercFuel will agree to release each other from any
liabilities arising from events occurring in connection with the activities to
implement the Transfer and the Distribution. Additionally, both MercFuel and MAG
have agreed to indemnify each other from all liabilities arising from each
company's respective business and any breach of the Distribution Agreement or
ancillary agreement.
The agreement will also contain provisions governing the Company's
insurance coverage from the Transfer Date until the Distribution Date. In
general, MercFuel will reimburse MAG for premium expenses related to insurance
coverage during this period. Prior to the Distribution, MAG will maintain
insurance policies on the Company's behalf.
Additionally, MAG has agreed to indemnify the Company from all liabilities
arising from environmental conditions existing as of the Transfer Date at
facilities transferred to the Company, or which arise out of operations
occurring before the Transfer Date at these facilities, and the Company has
agreed to indemnify MAG from all liabilities arising from environmental
conditions caused by operations after the Transfer Date at any of the facilities
transferred to the Company, and from environmental conditions at the Company's
facilities arising from an event that occurs on or after the Transfer Date.
Further, MAG will agree to indemnify the Company from all liabilities arising
from environmental conditions caused by operations occurring at any time,
whether before or after the Transfer Date, at any MAG facility.
F-19
76
MERCFUEL, INC.
77
MERCFUEL, INC.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by us in connection with the registration of
the Shares is as follows:
SEC Registration Fee........................................ $4,192
NASD Filing Fee............................................. 2,018
AMEX Listing Fee............................................ *
Accounting Fees and Expenses................................ *
Transfer Agent Fees......................................... *
Premium for Directors and Officers' Insurance............... *
Legal Fees and Expenses, including Blue Sky Fees and
Expenses.................................................. *
Printing Costs.............................................. *
Miscellaneous Expenses...................................... *
------
Total.................................................. $ *
======
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) As permitted by Delaware law, our certificate of incorporation
eliminates the liability of directors to us or our stockholders for monetary
damages for breach of fiduciary duty as directors, except to the extent
otherwise required by Delaware law.
(b) Our certificate of incorporation provides that we will indemnify each
person who was or is made a party to any proceeding by reason of the fact that
such person is or was a director or officer of the company against all expense,
liability and loss reasonably incurred or suffered by such person in connection
therewith to the fullest extent authorized by Delaware law. Our bylaws provide
for a similar indemnity to our directors and officers to the fullest extent
authorized by Delaware law.
(c) We expect to maintain liability insurance for our officers and
directors.
(d) Our certificate of incorporation also gives us the ability to enter
into indemnification agreements with each of our directors and officers. We
intend to enter into indemnification agreements with certain of our directors
and officers, which provide for the indemnification of our directors or officers
against any and all expenses, judgments, fines, penalties and amounts paid in
settlement, to the fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by any one of our directors, officers
or controlling persons in the successful defense of any action, suit or
proceeding) is asserted against us by such director, officer or controlling
person in connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-1
78
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its incorporation and organization in October 2000, the
Registrant issued 1,000 shares of its common stock to Mercury Air Group, Inc.
for an aggregate of $10. In May 2001, the Registrant effected a 6,546.43-for-one
stock split of its outstanding common stock. The Registrant believes that the
initial issuance was exempt under Section 4(2) of the Securities Act as a
transaction not involving any public offering. Registrant believes that the
stock split was either not a "sale" of securities pursuant to the Securities Act
or exempt under Section 3(a)(9) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement with VMR Capital Markets,
U.S.*
3.1 Certificate of Incorporation of MercFuel, Inc.*
3.2 Bylaws of MerFuel, Inc.*
4.1 Form of Common Stock Certificate*
5.1 Opinion of McBreen & Kopko*
10.1 2001 Stock Option Plan.*
10.2 Form of Stock Option Agreement under 2001 Stock Option Plan*
10.3 Master Separation and Distribution Agreement*
10.4 General Assignment and Assumption Agreement*
10.5 Master Technology Ownership and License Agreement*
10.6 Employee Matters Agreement*
10.7 Tax Sharing Agreement*
10.8 Master Transactional Services Agreement*
10.9 Real Estate Matters Agreement*
10.10 Master Confidential Disclosure Agreement*
10.11 Indemnification and Insurance Matters Agreement*
23.1 Independent Auditors' Consent and Report on Schedules
23.4 Consent of McBreen & Kopko (included as part of Exhibit
5.1)*
24.1 Power of Attorney (included as part of the original
signature page)
- ---------------
* To be filed by amendment.
(b) Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the provisions described above in Item 24, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by a director, officer or controlling person in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-2
79
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
80
SIGNATURES
Pursuant to the requirement of the Securities Act of 1933, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on the 15th day of May, 2001.
MercFuel, Inc.
By: /s/ JOSEPH A. CZYZYK
------------------------------------
Joseph A. Czyzyk
Chairman, President and Chief
Executive Officer
We, the undersigned directors and officers of MercFuel, Inc., do hereby
constitute and appoint Joseph A. Czyzyk our true and lawful attorney-in-fact and
agent, with full power to sign for us or any of us in our names and in any and
all capacities, any and all amendments (including post-effective amendments) to
this Registration Statement, or any related registration statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto and other documents
required in connection therewith, and with full power to do any and all acts and
things in our names and in any and all capacities, which such attorney-in-fact
and agent may deem necessary or advisable to enable MercFuel, Inc. to comply
with the Securities Act of 1933, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission, in connection with this
Registration Statement; and we hereby do ratify and confirm all that the such
attorney-in-fact and agent shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ JOSEPH A. CZYZYK Chief Executive Officer and Director May 15, 2001
- ------------------------------------------ (Principal Executive Officer)
Joseph A. Czyzyk
/s/ ERIC BEELAR President and Director May 15, 2001
- ------------------------------------------
Eric Beelar
/s/ JOHN CONDIE Chief Financial Officer May 15, 2001
- ------------------------------------------ (Principal Accounting and Financial
John Condie Officer)
/s/ JEFFREY R. WESCOTT Director May 15, 2001
- ------------------------------------------
Jeffrey R. Wescott
/s/ GEORGE GRKINICH, JR. Director May 15, 2001
- ------------------------------------------
George Grkinich, Jr.
II-4
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MERCFUEL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND DEDUCTIONS AT END OF
CLASSIFICATION OF PERIOD EXPENSES (A) PERIOD
- -------------- ------------ ---------- ----------- ----------
2000
Allowance for doubtful accounts........ $1,652,000 $5,000,000 $(4,546,000) $2,106,000
========== ========== =========== ==========
1999
Allowance for doubtful accounts........ $1,625,000 $1,377,000 $(1,350,000) $1,652,000
========== ========== =========== ==========
1998
Allowance for doubtful accounts........ $1,797,000 $8,639,000 $(8,811,000) $1,625,000
========== ========== =========== ==========
- ---------------
(a) Accounts receivable write-off
82
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
Form of Underwriting Agreement with VMR Capital Markets,
1.1 U.S.*
3.1 Certificate of Incorporation of MercFuel, Inc.*
3.2 Bylaws of MerFuel, Inc.*
4.1 Form of Common Stock Certificate*
5.1 Opinion of McBreen & Kopko*
10.1 2001 Stock Option Plan.*
10.2 Form of Stock Option Agreement under 2001 Stock Option Plan*
10.3 Master Separation and Distribution Agreement*
10.4 General Assignment and Assumption Agreement*
10.5 Master Technology Ownership and License Agreement*
10.6 Employee Matters Agreement*
10.7 Tax Sharing Agreement*
10.8 Master Transactional Services Agreement*
10.9 Real Estate Matters Agreement*
10.10 Master Confidential Disclosure Agreement*
10.11 Indemnification and Insurance Matters Agreement*
23.1 Independent Auditors' Consent and Report on Schedules
Consent of McBreen & Kopko (included as part of Exhibit
23.4 5.1)*
Power of Attorney (included as part of the original
24.1 signature page)
- ---------------
* To be filed by amendment.