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UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 Form 10-K (Mark One)[X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the Fiscal Year ended June 30, 2004[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934For the
transition period from          
          to
 Commission file number: 1-71341 Mercury Air Group, Inc. (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    11-1800515(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)5456 McConnell AvenueLos Angeles, California
    
    90066(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code:
(310) 827-2737 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock  Par Value $.01
    
    American Stock ExchangePacific Stock Exchange
 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  [   ]   No  [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes  [X]   No  [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes  [   ]   No  [X] As of September 20, 2004, 2,804,855 shares of the Registrants Common
Stock were outstanding. Of these shares, 953,974 shares were held by persons
who may be deemed to be affiliates. The 1,850,911 shares held by non-affiliates
as of September 20, 2004 had an aggregate market value (based on the closing
price of these shares on the American Stock Exchange of $5.10 per share on
September 20, 2004) of $9,439,646. As of September 20, 2004 there were no
non-voting shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement which is to be distributed in connection
with the Annual Meeting of Stockholders scheduled to be held in November 2004
are incorporated by reference into Part III of this Form 10-K. (The Exhibit Index May Be Found at Page 29)




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer of Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KSIGNATURESREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF CASH FLOWSCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYNOTES TO CONSOLIDATED FINANCIAL STATEMENTSEX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1    Table of Contents  
 PART I 
 Item 1.Business Mercury Air Group, Inc. (the Company), a Delaware corporation was
organized in 1956 and provides a broad range of services to the aviation
industry through three principal operating units which are all wholly owned
subsidiaries of the Company: MercFuel, Inc. (MercFuel), a Delaware
corporation, Mercury Air Cargo, Inc. (Air Cargo), a California corporation,
and Maytag Aircraft Corporation (Maytag), a Colorado corporation. MercFuels
operations consist of the sale and delivery of fuel, primarily aviation fuel,
to domestic and international commercial airlines, fractional jet ownership
companies, corporate aviation fleets and air cargo companies. Air Cargos
operations consist of cargo handling, the sale of cargo capacity on other
airlines (Cargo Space Logistics), and general cargo sales agent services.
Maytag is a provider of governmental contract services performing aircraft
refueling and fuel storage operations, base operations support (BOS)
services, air terminal and ground handling services and weather observation and
forecasting services primarily for agencies of the government of the United
States of America. Through April 12, 2004, the Company operated a fourth operating unit, Mercury
Air Centers, Inc. (Air Centers). Air Centers operations consisted of
aviation fuel sales, aircraft refueling operations (into-plane), aircraft
ground support services, aircraft hangar services, aircraft parking (aircraft
tie-down services) and aircraft maintenance at certain Air Center locations,
known as Fixed Based Operations (FBOs). On April 12, 2004 (the FBO Sale
Closing Date), following stockholder approval, the Company sold all of Air
Centers outstanding common stock to Allied Capital Corporation (Allied)
for $76,349 thousand subject to adjustments for, among other things, Air
Centers net working capital as of the FBO Sale Closing Date and the
distribution of funds from an escrow account established at closing associated
with the Air Centers Hartsfield International Airport FBO (the Hartsfield
FBO). The assets sold through the sale of the stock of Air Centers consist of
all of the assets of the Companys FBO business excluding the Companys FBO at
the Long Beach Airport which the Company has retained and continues to operate.
For more detailed information on this transaction (the FBO Sale), please
refer to the section titled Mercury Air Centers, Inc. included in the Narrative
Description of the Business below. As used in this Annual Report, the term Company or Mercury refers to
Mercury Air Group, Inc. and, unless the context otherwise requires, its
subsidiaries. The Companys principal executive offices are located at 5456
McConnell Avenue, Los Angeles, California, 90066 and its telephone number is
(310) 827-2737. This Form 10-K and the information incorporated by reference in it
includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
We intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements
regarding our expected financial position and operating results, our business
strategy, our financing plans and forecasted demographic and economic trends
relating to our industry are forward-looking statements. These statements can
sometimes be identified by our use of forward-looking words such as may,
will, anticipate, estimate, expect or intend and similar expressions.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be
materially different from the results, performance or achievements expressed or
implied by the forward-looking statements. We cannot promise you that our
expectations in such forward-looking statements will turn out correct. Factors
that impact such forward-looking statements include, but are not limited to,
quarterly fluctuations in results; the management of growth; fluctuations in
world oil prices or foreign currency; changes in political, economic,
regulatory or environmental conditions; the loss of key customers, suppliers
or members of senior management; uninsured losses; competition; credit risk
associated with accounts receivable; and other risks detailed in this Form 10-K
and in our other Securities and Exchange Commission filings. We undertake no
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events, or otherwise. Narrative Description of the Business MercFuel, Inc. The Companys fuel sales operations are handled through MercFuel, Inc.
which was formed in October 2000 when the Company transferred all of its fuel
sale related assets and business activities to MercFuel. MercFuel facilitates
the management and distribution of aviation fuel serving as an aviation fuel
supplier and logistics manager for its customers, providing a reliable fuel
supply operation to its customer base while extending credit, mostly unsecured,
to its customers which may not otherwise be available to them if they were to
be supplied directly from the major oil companies. MercFuel also serves as a
reseller of aviation fuel for major oil companies, affording the oil companies
indirect access to certain customers without the credit risk or administrative
costs associated with the management of these customer accounts. MercFuel
competes based on the quality of its services by offering a combination of
reliable and timely supply, fuel 2




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supply logistics management, competitive pricing and credit terms, and a
real time analysis of the availability, quantity and pricing of fuel at
airports and terminals throughout the world. MercFuel works through third party
suppliers for fuel storage and into-plane delivery. MercFuel is the largest revenue generator for the Company with sales
revenue of $322,631 thousand in fiscal 2004, representing 83. 7% of the
Companys total revenue from continuing operations, an increase of $42,495
thousand from fiscal 2003. Sales volume in fiscal 2004 was 278,448 thousand
gallons, a reduction of 8,425 thousand gallons, or 2.9% from fiscal 2003. The
decline in MercFuels sales volume is primarily due to National Airlines, Inc.
(National) ceasing operations in November 2002. Year Ended June 30,2004
    
    2003
    
    2002(in thousands)Revenue
    
    $
    322,631
    
    
    $
    280,136
    
    
    $
    232,573Gallons Sold
    
    
    278,448
    
    
    
    286,873
    
    
    
    287,651
 The increase in revenue in fiscal 2004, as compared to fiscal 2003, is due
to increased aviation fuel prices, driven by the increase in worldwide
petroleum product prices, partially offset by the decline in sales volume.
MercFuels average realized sales price in fiscal 2004 was $1.1587 per gallon
as compared to $0.9765 per gallon in fiscal 2003. By leveraging its scale of operations, MercFuel is able to obtain credit
terms and competitive pricing from its suppliers which may not be afforded
MercFuels customers on an individual basis. Many of MercFuels suppliers,
which include some of the major oil companies, have opted either not to
directly supply nor extend credit to the customer base MercFuel serves,
providing MercFuel with a niche market while providing a sale outlet for
MercFuels suppliers. This arrangement allows MercFuel to offer more
competitive pricing and credit terms to its customers than they would
commercially be able to obtain directly from the major oil companies. With over 24 years of service in the aviation fuel reselling and
distribution industry, MercFuel has established itself as a reliable and price
competitive aviation fuel reseller which has resulted in the establishment of
significant contracts with commercial air carriers, fractional jet ownership
companies and corporate aviation fleet managers. MercFuels resale service
provides an established distribution network for oil companies worldwide and
provides MercFuels suppliers indirect access to certain markets and customers
while reducing their credit exposure. In addition, MercFuel provides the
administrative support required in serving this customer base which would
otherwise be required by the major oil companies and assumes the credit risk of
supplying this customer base. MercFuels experience in the aviation fuel
reselling industry allows it to assess those risks in a more effective and
efficient manner. For more information on MercFuels customers, please refer to
the section titled Major Customers and Foreign Customers included in this
Annual Report on Form 10-K. In many cases the small to medium sized commercial air carriers,
fractional jet ownership companies and corporate aviation fleet managers are
subject to securing aviation fuel supply on the spot fuel market, which can
vary significantly on a day-to-day basis. MercFuel provides a 24-hour, 365 days
per year single source coordinated distribution system on a national and
international basis through its network of over 400 third party supply
locations nationally and 1,000 international locations through which customers
can purchase fuel. As a result of this integrated network, MercFuel is able to
provide its customers with reliable and competitive fuel pricing from airport
to airport.. Through its automated on-line system, MercFuel provides its fractional jet
ownership and corporate aviation fleet customers with online pricing, fuel
location and ordering information. Accordingly, MercFuel is able to streamline
its customers fuel purchase process and reduce their administrative costs
associated with fuel logistics by providing a single source through which fuel
procurement can be arranged and automatically released to the business jet
customer. MercFuels continued success in attracting and retaining its customer base
is due, in part, to its willingness to extend credit on an unsecured basis to
many of its customers. MercFuel recognizes that active oversight and management
of credit risk is essential to the Companys success. The Companys executive
staff and MercFuel management meet regularly to assess and evaluate MercFuels
credit exposure, in the aggregate and by individual customer. The Companys
credit committee is responsible for approving credit lines above certain
pre-established amounts, and for setting and maintaining credit standards to
ensure overall credit quality and optimize its credit portfolio. MercFuel purchases aviation and other petroleum-based fuel at prices that
are generally tied to market based formulas from several major oil companies
and certain independent and state owned oil companies to meet the requirements
of its customers. From time-to-time, MercFuel will commit to purchase a fixed
volume of fuel, at a fixed price, over an established period of time to meet
selected customers purchase requirements at set locations. MercFuels payment
terms generally range from 10 to 20 days, except for bulk purchases which are 3




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generally payable in shorter periods. MercFuel has agreements with certain
suppliers under which MercFuel purchases a minimum amount of fuel each month at
prices which approximate the market price. MercFuel also makes occasional spot
purchases of fuel to take advantage of market differentials. To ensure supply
availability, MercFuel maintains limited inventories at various locations. The
amount of inventory held at any particular point in time varies depending on
market conditions. Outside of the United States of America, MercFuel does not maintain fuel
inventory, but arranges to have fuel delivered directly to its customers
aircraft through into-plane arrangements. Domestically, fuel sales are made on
either an into-plane basis where fuel is supplied directly into MercFuels
customers aircraft with fuel provided by MercFuels supplier or the fuel is
delivered from MercFuels inventory. While inventory is maintained at multiple
locations, inventory levels are maintained at minimum levels. If MercFuels relationship with any of its key suppliers were to terminate
or be temporarily suspended, MercFuel may not be able to obtain sufficient
quantity of aviation fuel on competitive terms to meet its customers demands.
MercFuel may encounter difficulty and/or delays in securing aviation fuel from
alternative sources. In addition, financial or supply disruptions encountered
by MercFuels suppliers could also limit the availability of fuel supplied to
MercFuel. For the fiscal year ended June 30, 2004, MercFuels average cost of fuel
was $1.1195 per gallon, an increase of $0.1809 cents per gallon, or 19.2% from
fiscal 2003. While MercFuel management believes that currently there are
adequate aviation fuel supplies to meet its customers needs, events outside of
MercFuels control have in the past resulted in, and could in the future result
in, spot shortages or rapid price changes. Although MercFuel has generally been
able to pass through fuel price changes to its customers, extended periods of
high fuel costs could adversely affect MercFuels ability to purchase fuel in
sufficient quantities because of credit limits placed on MercFuel by its fuel
suppliers and availability under the Companys credit facility. In addition,
continued high petroleum fuel prices could continue to have an adverse impact
on MercFuels customers increasing the Companys credit risk. Mercury Air Cargo, Inc. Air Cargo provides the following services: cargo handling, air cargo
logistics services, and general air cargo sales agent services. Air Cargos
financial performance is highly influenced by changes in the worldwide economy
and the amount of import/export business activity. As the general worldwide
economy improved during the past fiscal year, Air Cargo experienced increased
business activity in each of its primary businesses. Air Cargos revenue for
the fiscal year ended June 30, 2004 increased 21% from fiscal 2003 to $39,549
thousand, representing 10.3% of the Companys total revenue from continuing
operations. Air Cargos gross margin in fiscal 2004 was $1,800 thousand, a
decrease of $785 thousand from fiscal 2003. The increase in revenue is
primarily due to the operation of Mercury World Cargo, while the decrease in
margin is primarily due to the Skynet operations, which ceased operations in
May 2004, which had been part of the general sales agent services. For a more detailed
explanation of the primary factors contributing to Air Cargos financial
results, refer to the Managements Discussion and Analysis comparing the
financial results for fiscal 2004 to fiscal 2003 starting on page 15. Cargo Handling Air Cargo provides domestic and international air cargo handling, airmail
handling and bonded warehousing services (collectively Cargo Handling). Air
Cargo performs cargo handling services at Los Angeles International Airport
(LAX), William B. Hartsfield International Airport (ATL  Atlanta, GA), Dorval
International Airport (YUL  Montreal, Canada), Mirabel International Airport
(YMX  Montreal, Canada) and Lester B. Pearson International Airport (YYZ 
Toronto, Canada). In February 2001, Air Cargo subleased the warehouse facility
at ATL to Lufthansa Handling under the terms of a ten-year sublease of a 60,600
square foot warehouse and operations area. Air Cargo continues to provide
cargo handling at ATL utilizing Lufthansa Handling as a subcontract service
provider for the operations. In fiscal 2004, Cargo Handlings revenue
increased to $25,833 thousand, comprising 65.3% of Air Cargos revenue. Air Cargo provides cargo handling services at three warehouse locations at
LAX, making Air Cargo the largest independent cargo handling company at LAX and
one of a small number of non-airline air cargo service providers of contractual
cargo containerization and palletization for domestic and international
airlines as well as cargo airlines at the airport. The largest of Air Cargos
warehouses at LAX is a 174,000 square foot warehouse (the Avion Warehouse),
at which the Company completed an extensive renovation of a previously existing
airport facility and commenced operations in April 1998. The lease for this
warehouse facility is currently scheduled to expire in June 2006. Air Cargo competes in the cargo handling business based on the quality and
timeliness of the service it provides along with a competitive pricing
structure. Long-term growth in the cargo handling business will be realized by
continuing to add new customers to its existing cargo handling locations or by
increased volume from its existing customer base. During fiscal 2004, Air
Cargo executed a new five-year contract with its largest cargo-handling
customer, EVA Airways. 4




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Cargo Logistics Services Air
Cargos air cargo logistics services business (CLS) brokers cargo
space on flights within the United States and on international flights to
Europe, Asia, the Middle East, Australia, Mexico and Central and South America.
CLS contracts for bulk cargo space on airlines and sells that space to
customers with shipping needs. CLS has an established network of shipping
agents who assist in securing cargo for shipment on cargo space purchased from
various airlines, and who facilitate the delivery and collection of freight
charges for cargo shipped by Air Cargo. In fiscal 2004, CLSs revenue
increased to $8,867 thousand, comprising 22.4% of Air Cargos revenue. Air Cargos contract with South African Airways (SAA) to utilize all of
SAAs cargo capacity on its passenger flights from the United States to South
Africa was renewed for another year beginning in April 2004. Air Cargos
one-year commitment for these routes is approximately $4,715 thousand. This
contract allows Air Cargo to effectively arrange and schedule cargo shipments
and optimize the return to SAA and to its freight forwarders while providing a
reasonable margin to Air Cargo. Unlike a cargo airline, which operates its own aircraft, Air Cargos
logistics business arranges for the purchase of cargo space on scheduled
flights or supplemental flights at negotiated rates. Air Cargo is thereby able
to profit from the sale of air cargo space worldwide without the overhead cost
of owning and operating an aircraft. In some instances, Air Cargo has entered
into fixed minimum commitments for cargo space resulting in exclusive or
preferred rights to broker desirable cargo space profitably. Due to the large
volume of cargo space contracted, Air Cargo is able to secure air cargo space
at rates lower than an individual freight forwarder could arrange. Air Cargo
is then able to pass on these lower rates to its customers and still realize a
profit. Another service brand under the umbrella of CLS is Mercury World Cargo
(MWC). Using its Part 135 cargo airline certificate, which qualifies MWC as
an airline certified to transport cargo in accordance with Federal Aviation
Administration (the FAA) and Department of Transportation regulations, MWC
is able to enter into interline agreements (contracts between carriers for
transportation of cargo) with other airlines worldwide. MWC operates a small
plane under this certificate. Using the MWC airway bill (an airway bill is a
bill of lading for the airline industry) as the cargo transportation document
and the other airlines air cargo capacity, MWC is able to provide a service
for both freight forwarders and airlines. Effectively, MWC provides a
secondary brand to airlines that prefer not to utilize their own brand for
discounted freight. General Sales Agent Services Air Cargo also serves as a general sales agent (GSA) directly through
its subsidiaries, Hermes Aviation, Inc., Hermes Aviation de Mexico, S.A. de
C.V., and Hermes Aviation Canada for airlines in the Far East, Canada, Mexico,
Central, and South America and in the United States. In this capacity, Air
Cargo sells the transportation of cargo on its clients airline flights, using
its clients own airway bills. Air Cargo earns a commission from the airlines
for selling their cargo space. In fiscal 2004, GSAs revenue increased to
$4,849 thousand, comprising 12.3% of Air Cargos total revenue. As with its
space logistics business, the growth for Air Cargos GSA business is not
constricted by requirements for physical facilities or by large capital
commitments. Maytag Aircraft Corporation Maytag is headquartered in Colorado Springs, Colorado and provides
aircraft refueling, air terminal services, base operating support, and weather
forecasting and observation services for the government of the United States of
America in eighteen countries on four continents. During fiscal 2004,
Maytag had revenue of $23,281 thousand, representing 6.0% of the Companys
total consolidated revenue from continuing operations, from twenty-three contracts. As of June 30, 2004, Maytag has twenty-one contracts in effect.
For a more detailed explanation of some of the more significant events
impacting this business, please refer to the Managements Discussion and
Analysis starting on page 15. Aircraft Refueling Maytag provides aircraft refueling and related services at eleven military
bases in the United States of America, one in Greece, and one in Japan.
Maytags refueling contracts generally have a term of four years with extension
options, with expiration dates ranging from August 2004 to January 2008. One of
the contracts, which generated $2,177 thousand in revenue in fiscal 2004,
expired on August 31, 2004 without extension or renewal. Under the terms of its
refueling contracts, Maytag supplies all necessary personnel and equipment to
operate government-owned fuel storage facilities and provides 24-hour per day
365 days-per-year refueling services for a variety of United States of America
military and United States of America government contractor aircraft. All fuel
handled under these contracts are government owned. In connection with its
government contract refueling business, Maytag owns, leases, and operates a
fleet of refueling 5




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trucks and other support vehicles. For fiscal 2004, the aircraft refueling
contracts generated revenue of $8,439 thousand, a decrease of 3.0% from last
years refueling revenue of $8,703 thousand. Air Terminal Services Maytag provides air terminal and ground handling services to the
government of the United States of America at eighteen locations under five
contracts. The contracts cover two U.S. military bases (one each in Japan and
Korea) and sixteen international airports in Latin America, Japan, Korea and
Kuwait. Air terminal services contracts are generally for a base period of one
year, with government options for multiple one-year extension periods. The air
terminal contracts are scheduled to expire during September 2004, although
management believes the government will exercise its option to extend the
contracts for an additional year. Maytags multi-site Latin America air
terminal contract and Pacific Rim contracts have options to extend through
September 2005 and the Kuwait contract has options to extend through September
2008. Air terminal and ground handling services include the loading and
unloading of passengers and cargo, transient alert, and flight planning
services. For fiscal 2004, the air terminal services contracts generated
revenue of $7,675 thousand, a decrease of 6.4% from fiscal 2003 revenue of
$8,199 thousand. Base Operating Support Services Maytag provides base operating support (BOS) services, as a
subcontractor, at four locations in the United States of America. Under the
terms of the subcontracts, Maytag provides multi-function services, including
fuel management, traffic management, airfield management, air terminal
operations, vehicle operations and maintenance services, and meteorological
services. Contract expirations range from September 2004, for which management
believes the government will exercise its option to extend the contracts for an
additional year, to February 2005, with one to three pre-priced one-year
options, except for Westover, which expires in February 2005 and is up for
competitive bidding. For fiscal 2004, the BOS contracts generated revenue of
$5,963 thousand, an increase of 1.9% from fiscal 2003 revenue of $5,854
thousand. Other Business  Weather Data Services Maytag provides weather observation and/or forecasting services at five
locations within the United States of America pursuant to five contracts (the
Weather Data Contracts) with the government of the United States of America.
The Weather Data contracts are comprised of two weather observation and
forecasting contracts and three weather observation contracts. The Weather Data
Contracts provide firm fixed prices for specified services and are generally
for a base period of one year, with multiple one-year options at the election
of the governmental agencies of the United States of America. The Weather Data
Contracts for weather observation have an expiration date of September 30,
2004, for which management believes the government will exercise its option to
extend the contracts for an additional year in accordance with three
pre-priced option years. The Weather Data Contract for weather observation and
forecasting within the United States Air Force Academy expires in January 2005
and is scheduled for competitive bid. For fiscal 2004, the Weather Data
Contracts generated revenue of $1,165 thousand, a decrease of 27.9% from fiscal
2003 revenue of $1,615 thousand. Other Information Regarding Maytag All of Maytags contracts are subject to competitive bidding. Refueling,
air terminal, and weather forecasting contracts are generally awarded to the
offeror with the proposal that represents the best value to the government.
In a best value competition, the proposals are evaluated on the basis of
price, past performance history of the offeror, and the merit of the technical
proposal, creating a more subjective process. Weather Data Contracts are
generally awarded to the offeror with the lowest priced technically acceptable
proposal. Maytags contracts are all subject to termination at the discretion of the
government of the United States of America in whole or in part. Termination of
a contract may occur if the government of the United States of America
determines that it is in its best interest to discontinue the contract, in
which case closure costs will be paid to the Company. Termination may also
occur if Maytag defaults under a contract. The Company has never experienced
any such default termination. As Maytags business activities are associated with government contracts
that have set termination dates to enable the government to renew the contracts
through a competitive bid process, one of the Companys business activities is
the participation in the preparation and submission of contract bids for
contracts currently awarded to the Company and for new contracts that fit the
type of activities (refueling, base operating support, air terminal services
and weather observation and forecasting) in which the Company is involved. In
addition, the governmental agencies have the option to extend the expiration
dates of existing contracts at their discretion. Although there can be no
assurance, the Company believes the government of the United States of America
will exercise all options to extend the contracts. Maytag therefore will have a
continuing opportunity to renew the terms of existing contracts as they expire
and/or engage in new contract activities 6




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through a successful bidding process. However, as the awarding of
contracts is based upon the decision of the government agencys representative
for the contract bids submitted, the Company may not be able to retain existing
contracts upon expiration and may be unsuccessful in bidding on new contracts. Mercury Air Centers, Inc. On April 12, 2004, upon approval from the Companys stockholders at the
Annual Stockholders meeting, the Company sold all of the outstanding common
stock of Air Centers, which represented 100% of the then
outstanding common stock in Air Centers, to Allied with the Company receiving
total consideration for the sale in cash at closing of $76,349 thousand. The
final amount of the total consideration to be received by the Company from the
FBO Sale is dependent upon the determination of the amount of Air Centers net
working capital at the time of closing and the distribution of funds from the
escrow account established at closing for the Hartsfield FBO (the Hartsfield
Escrow). In accordance with the terms of the Stock Purchase Agreement (the
Air Centers SPA) entered into by the Company and Allied on October 28, 2003,
as amended from time to time, the Company and Allied agreed to the extent Air
Centers actual net working capital at closing exceeded $3,586 thousand, Allied
is obligated to pay the Company the excess amount or to the extent Air Centers
net working capital is less than $3,586 thousand, the Company is obligated to
pay Allied the deficiency. The parties also agreed to deposit $8,270 thousand
at closing to establish the Hartsfield Escrow to be distributed to the parties
over a period not to exceed five years from the FBO Sale Closing Date dependent
upon the award of a new lease at the Hartsfield International Airport in
Atlanta for a new FBO. Dependent upon the effective date of the new lease and
the terms and conditions of the new lease, the Company may be entitled to all,
some or none of the amount deposited into the Hartsfield Escrow at closing. The proceeds from the FBO Sale were used to: 1) prepay the outstanding
principal on the senior secured loan agreement due Wells Fargo Foothill
Company (the WFF Credit Facility) comprised of both a term loan and a
revolving credit facility, in the amount of $13,255 thousand; 2) pay accrued
interest and fees associated with the WFF Credit Facility of $203 thousand; 3)
establish a cash collateral account with Wells Fargo Foothill Company (WFF)
in the amount of $16,031 thousand in support of issued and outstanding letters
of credit issued under the terms of the WFF Credit Facility; 4) prepay the
outstanding principal, including the amount of accrued interest payable-in-kind
(PIK Interest), on the $24 million senior subordinated 12% note ( the Note)
of $24,120 thousand to Allied; 5) pay accrued interest and fees associated with
the Note of $141 thousand; 6) prepay the outstanding principal, including the
amount of accumulated PIK Interest, on three promissory notes issued by the
Company in accordance with a settlement agreement with J O Hambro Capital
Management and certain of its affiliates and clients (the Hambro Notes) in
the amount of $3,695 thousand; 7) pay accrued interest on the Hambro Notes in
the amount of $15 thousand; 8) establish the Hartsfield Escrow in the amount of
$8,270 thousand; and 9) pay for transaction related fees and expenses of $1,324
thousand. After satisfying the obligations noted above, the Company received
cash of $9,295 thousand. Major Customers and Foreign Customers Sales by MercFuel to AirTran Airways and NetJets represented approximately
27.5% and 10.0% of MercFuels total revenue, respectively, and
23.0% and 8.4%
of the Companys total consolidated revenue from continuing operations,
respectively, for fiscal 2004. During fiscal 2004, EVA Airways Corporation
accounted for approximately 12.2% of Air Cargos total revenue or 1.3% of the
Companys fiscal 2004 total consolidated revenue from continuing operations.
During fiscal 2004, Maytags revenue consisted entirely of revenues from
governmental agencies of the United States of America, which represented
approximately 6.0% of the Companys total consolidated revenue from continuing
operations. No other customer accounted for over 10% of the Companys total
consolidated revenue from continuing operations or 10% of revenues for any of
the three business units. The Company does business with a number of foreign airlines, principally
in the sale of aviation fuels. For the most part, such sales are made within
the United States of America 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 35%, 31% and 23% of the
Companys total consolidated revenue from continuing operations for the fiscal
years ended June 30, 2004, 2003 and 2002, respectively. National, a customer of MercFuel, ceased operations on November 6, 2002.
The Company had been providing fuel to National since May 1999. In December
2000, National filed for Chapter 11 bankruptcy protection and the Company
continued to sell fuel to National on a secured basis under the auspices of the
bankruptcy court. Sales to National represented approximately 7.3% and 17% of
the Companys consolidated revenue from continuing operations for fiscal 2003
and 2002, respectively. Due to the secured nature of MercFuels sales to
National, MercFuel incurred virtually no loss due to Nationals cessation of
operations. 7




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##### Table of Contents



Seasonal Nature of Business The Companys commercial fuel sales operation is seasonal in nature, being
relatively stronger during the months of April through December due in part to
additional commercial and charter flights during the vacation period and prior
to the holiday season. Air Cargos business is lower during the months of
January and February and increases from March through June and September
through December. The cargo business is affected by the fluctuations in
international trade. Operations at military facilities are not seasonal but may
vary with the needs of the military. Potential Liability and Insurance The Companys business activities subject it to risk of significant
potential liability under federal and state statutes, common law and
contractual indemnification agreements. The Company reviews the adequacy of its
insurance on an on-going basis. The Company believes it follows generally
accepted standards for its lines of business with respect to the purchase of
business insurance and risk management practices. The Company purchases airport
liability and general and auto liability in amounts which the Company believes
are adequate for the risks of its business. The Company has also agreed to indemnify, reimburse and hold harmless
Allied and its affiliates from and against certain liabilities in connection
with Air Centers previous operations and activities. For a description of
certain of such indemnification, see Environmental Matters on
page 9 and Item 3 Legal Proceedings on page 11. See
also page 33 of Exhibit 2.3. Competition MercFuel competes with approximately five independent fuel suppliers, of
which the largest is World Fuel Services Corporation. Additionally, MercFuel
competes with other aircraft support companies which maintain their own sources
of aviation fuel. Many of MercFuels competitors have greater financial,
technical and marketing resources than the Company. In addition, certain
airlines provide cargo services comparable to those furnished by Air Cargo. At
LAX, Air Cargo competes with, in addition to the airlines, three non-airline
entities with respect to the air cargo handling business. Maytag has many
principal competitors with respect to government contracting services,
including certain small disadvantaged businesses which receive a ten percent
cost advantage with respect to certain bids and set asides of certain
contracts. Substantially all of the Companys services are subject to
competitive bidding. The Company competes on the basis of price, quality of
service, historical relationships with customers, and credit terms. Environmental Matters The Company must continuously comply with federal, state and local
environmental statutes and regulations associated with its fuel storage tanks
and fueling operations. These requirements include, among other things, tank
and pipe testing for integrity and soil sampling for evidence of leaking and
remediation of detected leaks and spills. As a result of the FBO Sale, the
number of locations in which this type of environmental compliance applies has
been reduced to one. In early 2001, the Company agreed to provide certain environmental
remediation on property formerly leased by the Company in Anaheim, California.
The Company terminated operations on this leased property in fiscal 1987 at
which time a closure letter was in effect. The Company installed an approved
remediation system including but not limited to soil vapor extraction and
monitoring wells, and incurred costs of approximately $530,000 through June 30,
2004. On July 30, 2004 the Company received notice that no further remediation
action was required from the California Regional Water Quality Board. On May 1, 2002, the Company received a Notice of Violation (NOV) from
the United States Environmental Protection Agency, Region 5 (the EPA) for Air
Centers Fort Wayne, Indiana FBO facility alleging that the Companys Spill
Prevention, Control and Countermeasure Plan (SPCC Plan) did not meet certain
federal regulations. On March 14, 2003, the Company received an NOV from the
EPA alleging certain deficiencies in the SPCC Plan for Air Centers Fort Wayne,
Indiana FBO facility, submitted to the EPA in November 2002. The Company
believes that it has resolved all deficiencies except for alleged deficiencies
related to: 1) secondary containment for refueling trucks, and 2) secondary
containment for discrete fuel loading areas. Pursuant to an agreement detailed
in a letter submitted to the EPA on April 16, 2003, the Company has been
permitted to suspend modifications to its SPCC Plan regarding the installation
of secondary containment for its refueling trucks, pending resolution of
federal regulatory issues associated with secondary containment for such
trucks. The EPA has also extended national compliance with regulations related
to discrete loading areas until August 17, 2004. Further, the EPA announced in
a Federal Register notice dated June 28, 2004, 69 Fed. Reg. 38297 that the EPA
is considering a proposal to amend 40 CFR 112 to address, among other things,
the applicability of the rule to mobile/portable containers. 8




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##### Table of Contents



The Air Centers SPA provides that the Company is responsible for
compliance, for a period of eighteen months subsequent to the FBO
Closing Date,
for any required secondary containment (as the term is defined in the Air
Centers SPA) required by any applicable governmental authority requiring
secondary containment pursuant to Environmental Law for extended or overnight
fuel truck parking at any FBO comprising the FBO business on the FBO Closing
Date. In the opinion of management, the ultimate resolution of this matter is
not expected to have a material effect on the Companys results
of operations, cash
flows or financial position. There has been no material negative impact on the Companys earnings or
competitive position in performing such compliance and related remediation
work. The Company knows of no other basis for any notice of violation or cease
and abatement proceeding by any governmental agency as a result of failure to
comply with applicable environmental laws and regulations. Employees As of July 31, 2004, the Company employed 810 full-time and 239 part-time
persons in the following operating units: MercFuel, forty one full-time and
four part-time persons; Corporate, thirty-four full-time and one part-time
person; Air Cargo operations, 465 full-time and ninety-one part-time persons;
and Maytag, 270 full-time and 143 part-time persons. Maytag has collective
bargaining agreements which affect approximately 258 employees in its weather
and base support operations. Air Cargo has collective bargaining agreements
which affect approximately ninety-two employees in its ground handling
operations. Management believes that, in general, wages, hours, fringe benefits
and other conditions of employment offered throughout the Companys operations
are at least equivalent to those found elsewhere in its industry and that its
general relationships with its employees is satisfactory. 9




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##### Table of Contents



Item 2.Properties. Listed below are the significant properties leased or owned by the Company
as of June 30, 2004: LEASED
    
    ANNUAL
    
    EXPIRATION
    
    ACTIVITIES
    
    FACILITYLOCATION
    
    OR OWNED
    
    RENTAL
    
    OF LEASE
    
    AT FACILITY
    
    DESCRIPTIONCORPORATE HEADQUARTERS
    
    Leased
    
    $
    440,000
    
    
    December 2021
    
    Executive
    
    22,500 sq. ft.5456
McConnell Avenue
    
    
    
    
    
    
    
    
    
    
    
    and support
    
    building and parkingLos Angeles, CA(1)
    
    
    
    
    
    
    
    
    
    personnel offices
    
    spaceMAYTAG OPERATIONS
6145 Lehman Drive
    
    Owned
    
    
    N/A
    
    
    N/A
    
    Landlord, executiveand support
    
    8,000 sq. ft. ofofficesSuite 300
    
    
    
    
    
    
    
    
    
    
    
    personnel officesColorado Springs, CO(2)LOS ANGELES INTL AIRPORT

    
    Leased
    
    $
    823,000
    
    
    December 2004
    
    Cargo hangar, with
    
    70,245 sq. ft. of6851 W. Imperial Highway,
    
    
    
    
    
    
    
    
    
    
    
    offices and
    
    offices and cargoLos Angeles, CA


    
    
    
    
    
    
    
    
    
    
    
    executive offices
    
    warehouse facility onrented to customers
    
    5.4 acres600 Avion Drive

    
    Leased
    
    $
    3,006,000
    
    
    June 2006
    
    Cargo handling
    
    206,120 sq. ft. ofLos Angeles, CA
    
    
    
    
    
    
    
    
    
    
    
    warehouse with
    
    offices and cargooffices
    
    warehouse facilityATLANTA-HARTSFIELD

    
    Leased
    
    $
    924,000
    
    
    January 2011
    
    Landlord, cargo
    
    60,597 sq. ft. ofCargo Building A
    
    
    
    
    
    
    
    
    
    
    
    handling warehouse
    
    cargo warehouseSouth Cargo Area
    
    
    
    
    
    
    
    
    
    
    
    with offices
    
    facility with 9,785sq. ft. of officespace on 2.4 acres oflandLONG BEACH OPERATION
    
    Leased
    
    $
    101,000
    
    
    August 2013
    
    Service and
    
    5,100 sq. ft. of4100 Donald Douglas Drive
    
    
    
    
    
    
    
    
    
    
    
    refueling of
    
    offices and hangarLong Beach, CA
    
    
    
    
    
    
    
    
    
    
    
    commercial and
    
    spaceprivate aircraftLESTER B. PEARSON INTL AIRPORT
    
    Leased
    
    $
    858,000
    
    
    November 2010
    
    Cargo handling
    
    5,670 sq. ft. officeVista Cargo Center
    
    
    
    
    
    
    
    
    
    
    
    warehouse with
    
    space and 50,342 sq.6500 Silver Dart, Toronto
    
    
    
    
    
    
    
    
    
    offices
    
    ft. of warehouse spaceDORVAL INTL AIRPORT
    
    Leased
    
    $
    599,000
    
    
    November 2007
    
    Cargo handling
    
    51,000 sq. ft.800 Stuart Graham Blvd.
    
    
    
    
    
    
    
    
    
    
    
    warehouse with
    
    warehouse and 2,432South Dorval, Quebec
    
    
    
    
    
    
    
    
    
    
    
    offices
    
    sq. ft. of officespaceMIRABEL INTL AIRPORT
12005, Rue Cargo
    
    Leased
    
    $
    21,000
    
    
    August 2005
    
    Cargo handling
    
    1,200 sq. ft.A-3, Suite 102
    
    
    
    
    
    
    
    
    
    
    
    warehouse with
    
    warehouse and 570 sq.Mirabel, Quebec
    
    
    
    
    
    
    
    
    
    offices
    
    ft. of office space
  (1)
    
    This property was sold to CFK Realty Partners, LLC (CFK Realty), a
related party of the Company at the time of the sale, in January 2002,
however, the related assets are still reported on the Companys books
since CFK Realty is deemed to be a special purpose entity (SPE)
requiring the financial statements of CFK Realty to be consolidated with
those of the Company. In July 2004, CFK Realty underwent a restructuring
resulting in CFK Realty no longer being considered a related party of
the Company.
This restructuring did not impact the Companys consolidated financial
statements.(2)
    
    This property was purchased in May 1995 for $515 thousand and is
subject to a first mortgage to U.S. Bank in the sum of $252 thousand at
June 30, 2004, repayable with interest at 6.68% in equal monthly
installments of approximately $3,024, the last payment due May 2010. 
 Item 3.Legal Proceedings. On May 1, 2002, the Company received a notice of violation (NOV) from
the Environmental Protection Agency (EPA) for Air Centers Fort Wayne,
Indiana facility alleging that the Companys spill prevention, control and
countermeasure plan (SPCC Plan) did not meet certain federal regulations. On
March 14, 2003, the Company received an NOV from the EPA alleging certain
deficiencies in the Companys SPCC Plan for Air Centers Fort Wayne, Indiana
FBO facility submitted to the EPA in November 2002. The Company believes that
it has resolved all deficiencies except for alleged deficiencies related to: 1)
secondary containment for refueling trucks, and 2) 10




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##### Table of Contents



secondary containment for discrete fuel loading areas. Pursuant to an
agreement detailed in a letter submitted to the EPA on April 16, 2003, the
Company has been permitted to suspend modifications to its SPCC Plan regarding
the installation of secondary containment for its refueling trucks, pending
resolution of federal regulatory issues associated with secondary containment
for such trucks. The EPA has also extended national compliance with regulations
related to discrete loading areas until August 17, 2004. Further, the EPA
announced in a Federal Register notice dated June 28, 2004, 69 Fed. Reg. 38297
that the EPA is considering a proposal to amend 40 CFR 112 to address, among
other things, the applicability of the rule to mobile/portable containers. The Air Centers SPA provides that the Company shall be responsible for
compliance, for a period of eighteen months subsequent to the FBO Sale Closing
Date, for any required secondary containment (as the term is defined in the Air
Centers SPA) required by any applicable governmental authority requiring
secondary containment pursuant to environmental law for extended or overnight
fuel truck parking at any FBO comprising the Air Centers business on the FBO
Sale Closing Date. In the opinion of management, the ultimate resolution of
this matter is not expected to have a material effect on the Companys
results of operations, cash flows or financial position. On February 26, 2003 Robert Bosch filed an action in the United States
District Court, Eastern District of New York against Excel Cargo, Inc., a
wholly owned subsidiary of the Company, and others seeking $1.5 million in
damages for damaged cargo. On June 4, 2003 plaintiffs counsel agreed to
voluntarily dismiss Excel Cargo, Inc., without prejudice, from the lawsuit
conditioned on the production of information by Excel Cargo, Inc. To date,
plaintiff has not yet followed through. This matter is insured and is being
handled by insurance counsel. In the opinion of management, the ultimate
resolution of this matter is not expected to have a material effect on the
Companys operating results, cash flows or financial position. On April 16, 2003 the Plan Committee of Shuttle America Corp. filed an
Adversary Proceeding in the United States Bankruptcy Court, District of
Connecticut alleging preferential transfers in the amount of $995,000. The
parties reached a settlement agreement, which provided the Company to pay
Shuttle America $40,000. The settlement agreement was approved by the
bankruptcy court with the Company satisfying, subsequent to the bankruptcy
court approval, all outstanding obligations on this matter. On July 9, 2003 Central Insurance Company, LTD. filed an action in the
United States District Court Central District of California-Western Division,
against Air Cargo for damages paid to their assured United Microelectronics
Corp in the amount of $335,337. In May, 2004 this matter was dismissed without
cost to the Company. On
November 26, 2003, Signature Flight Support Corporation
(Signature) filed a
complaint against Air Centers and Allied alleging: 1) breach of contract and
tortuous interference with contract against Allied; 2) interference with
prospective economic advantage against Allied; and 3) unfair business practices
against the Company and Allied. Signature filed a similar action in
state court in September 2004. The Company believes that the allegations are
without merit and is in the process of preparing a response. The Company has
agreed to indemnify Allied and its affiliates (including, without limitation
Air Centers after the FBO Sale Closing Date), directors, officers, agents,
employees and controlling persons from certain liabilities, obligations, losses
or expenses to which Allied may become subject as a result of the complaint.
On August 4, 2004 the parties participated in a court ordered mediation session
and were not able to resolve their differences. In the opinion of management,
the ultimate resolution of this complaint will not have a material effect on
the Companys operating results, cash flows or financial position. The Company is also a defendant in certain litigation arising in the
normal course of business. In the opinion of management, the ultimate
resolution of such litigation will not have a material effect on the Companys
operating results, cash flows or financial position. 
 Item 4.Submission of Matters to a Vote of Security Holders. The
Company held its annual meeting of stockholders on April 12, 2004.
Reference is made to Item 4. Submission of Matters to a Vote of Security Holders
included in the Companys Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2004 for voting results and certain other
information regarding the annual meeting. 11




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##### Table of Contents



PART II 
 Item 5.Market for Registrants Common Equity, Related Stockholder Matters and
Issuer of Purchases of Equity Securities. The Companys common stock is listed and traded on the American Stock
Exchange (AMEX) under the Symbol MAX. The table below sets forth, for the
quarterly periods indicated, the high and low sales prices per share of common
stock during each full quarterly period. High
    
    LowFISCAL 2004:Quarter ended June 30, 2004
    
    $
    7.19
    
    
    $
    4.58Quarter ended March 31, 2004
    
    
    7.19
    
    
    
    5.00Quarter ended December 31, 2003
    
    
    6.85
    
    
    
    4.49Quarter ended September 30, 2003
    
    
    7.30
    
    
    
    6.20FISCAL 2003:Quarter ended June 30, 2003
    
    $
    8.18
    
    
    $
    5.70Quarter ended March 31, 2003
    
    
    7.40
    
    
    
    6.40Quarter ended December 31, 2002
    
    
    8.00
    
    
    
    5.00Quarter ended September 30, 2002
    
    
    9.10
    
    
    
    7.00
 As of September 20, 2004 there were approximately 326 holders of record.
The Company has not paid any cash dividends since the fiscal year ended June
30, 1998. On July 29, 2004, the Company entered into a new senior loan
agreement with Bank of America, N.A. which contains certain financial covenants
that, among other things, limit the amount of annual dividends and stock
repurchases to an amount not to exceed $4,600 thousand. Securities authorized for issuance under Equity Compensation Plans Number of securities to be
    
    Weighted-average
    
    Number of securities remainingissued upon exercise of
    
    exercise price of
    
    available for future issuanceoutstanding options,
    
    outstanding options,
    
    under equity compensation plansPlan Category
    
    warrants and rights
    
    warrants and rights
    
    (excl. securities
reflected in (a) or (b))Equity compensation
plans approved by
security holders
    
    
    551,473
    
    
    $
    10.62
    
    
    
    554,097Equity compensation
plans not approved
by security holders
    
    
    3,438
    
    
    $
    14.36
    
    
    
    0Total
    
    
    554,911
    
    
    $
    10.63
    
    
    
    554,097
 Stock prices have been adjusted retroactively to reflect the effect
of the one-for-two reverse stock split that was effective June 18, 2003. 12




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##### Table of Contents



Issuer Purchases of Equity Securities The following are the repurchases of the Companys common stock during
the fourth quarter of fiscal 2004: (d) Maximum Number (or(c) Total Number of
    
    Approximate DollarShares (or Units)
    
    Value) of Shares (or(a) Total Number of
    
    
    
    
    
    Purchased as Part of
    
    Units) that May Yet BeShares (or Units)
    
    (b) Average Price Paid
    
    Publicly Announced Plans
    
    Purchased Under thePeriod
    
    Purchased
    
    per Share (or Unit)
    
    or Programs
    
    Plans or ProgramsMonth #1
April 1, 2004
to
April 30, 2004
    
    
    14,500
    
    
    $
    6.17
    
    
    
    N/A
    
    
    
    N/AMonth #2
May 1, 2004
to
May 31, 2004
    
    
    0
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMonth #3
June 1, 2004
to
June 30, 2004
    
    
    0
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    14,500
    
    
    $
    6.17
 13




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##### Table of Contents



Item 6.Selected Financial Data. The following selected consolidated financial data for each of the five
years in the period ended June 30, 2004 have been derived from the Companys
audited consolidated financial statements. Certain reclassifications have been
made to reflect the revenues and costs relating to the Air Centers and RPA
operations as discontinued operations. The information set forth below should be read in conjunction with the
consolidated financial statements and notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Annual Report on Form 10-K. Year Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars in thousands, except per share data)INCOME STATEMENT DATAOperating dataSales and revenues
    
    $
    385,461
    
    
    $
    337,248
    
    
    $
    288,925
    
    
    $
    378,964
    
    
    $
    260,667Costs and expenses
    
    
    372,435
    
    
    
    324,139
    
    
    
    274,657
    
    
    
    359,711
    
    
    
    238,452Gross margin
    
    
    13,026
    
    
    
    13,109
    
    
    
    14,268
    
    
    
    19,253
    
    
    
    22,215Selling, general and administrative expenses
    
    
    12,885
    
    
    
    10,818
    
    
    
    11,771
    
    
    
    7,929
    
    
    
    7,223Provision for bad debts
    
    
    506
    
    
    
    1,192
    
    
    
    1,170
    
    
    
    3,665
    
    
    
    5,348Depreciation and amortization
    
    
    2,828
    
    
    
    2,782
    
    
    
    3,478
    
    
    
    3,942
    
    
    
    4,193Settlement costs
    
    
    2,414Interest expense
    
    
    972
    
    
    
    997
    
    
    
    1,097
    
    
    
    1,455
    
    
    
    628Other (income) expense, net
    
    
    (318
    )
    
    
    97
    
    
    
    987
    
    
    
    (48
    )
    
    
    (124
    )Write-off of deferred financing costs
    
    
    
    
    
    
    1,773Income (loss) before income taxes
    
    
    (6,261
    )
    
    
    (4,550
    )
    
    
    (4,235
    )
    
    
    2,310
    
    
    
    4,947Income tax
provision (benefit)
    
    
    (1,178
    )
    
    
    (1,567
    )
    
    
    (1,815
    )
    
    
    901
    
    
    
    2,292Income (loss) from continuing operations, net of taxes
    
    
    (5,083
    )
    
    
    (2,983
    )
    
    
    (2,420
    )
    
    
    1,409
    
    
    
    2,655Income (loss) from discontinued operations, net of taxes
    
    
    (1,803
    )
    
    
    185
    
    
    
    6,937
    
    
    
    1,480
    
    
    
    (10
    )Gain (loss) on sale of discontinued operations, net of taxes
    
    
    7,501
    
    
    
    
    
    
    
    
    
    
    
    (477
    )Extraordinary item, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (979
    )Net income
(loss) per share
    
    $
    615
    
    
    $
    (2,798
    )
    
    $
    4,517
    
    
    $
    2,412
    
    
    $
    1,666Income (loss) per share:Basic:From continuing operations, net of taxes
    
    $
    (1.67
    )
    
    $
    (0.92
    )
    
    $
    (0.74
    )
    
    $
    0.44
    
    
    $
    0.81From discontinued operations, net of taxes
    
    
    (0.59
    )
    
    
    0.06
    
    
    
    2.12
    
    
    
    0.45From gain (loss) on sale of discontinued operations, net of taxes
    
    
    2.45
    
    
    
    
    
    
    
    
    
    
    
    (0.15
    )Extraordinary item, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.30
    )Net income
(loss) per share
    
    $
    0.19
    
    
    $
    (0.86
    )
    
    $
    1.38
    
    
    $
    0.74
    
    
    $
    0.51Diluted:From continuing operations, net of taxes
    
    $
    (1.67
    )
    
    $
    (0.92
    )
    
    $
    (0.72
    )
    
    $
    0.42
    
    
    $
    0.76From discontinued operations, net of taxes
    
    
    (0.59
    )
    
    
    0.06
    
    
    
    2.07
    
    
    
    0.44From gain (loss) on sale of discontinued operations, net of taxes
    
    
    2.45
    
    
    
    
    
    
    
    
    
    
    
    (0.14
    )Extraordinary item, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.26
    )Net income
(loss) per share
    
    $
    0.19
    
    
    $
    (0.86
    )
    
    $
    1.35

    
    
    $
    0.72
    
    
    $
    0.50
 Please
refer to Item 7  Managements Discussion and Analysis
of Financial Condition and Results of Operations of this Annual
Report on Form 10-K for additional information regarding certain
transactions adversely impacting the Companys results from
continuing operations for fiscal 2004. At June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000BALANCE SHEET DATATotal assets
    
    $
    105,957
    
    
    $
    132,955
    
    
    $
    136,214
    
    
    $
    152,488
    
    
    $
    134,768Short-term debt (including
current portion of long-term
debt)
    
    
    139
    
    
    
    4,194
    
    
    
    14,677
    
    
    
    7,461
    
    
    
    6,936Long-term debt
    
    
    17,790
    
    
    
    25,501
    
    
    
    17,516
    
    
    
    44,560
    
    
    
    42,358Subordinated debt  current
    
    
    
    
    
    
    
    
    
    
    23,179Subordinated debt  long-term
    
    
    
    
    
    
    23,445
    
    
    
    
    
    
    
    23,030
    
    
    
    22,844
 14




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##### Table of Contents



Item 7.Managements Discussion and Analysis of Financial Condition and
Results of Operations. Results of Operations  Fiscal 2004, 2003 and 2002 The following tables set forth, for the periods indicated, the revenue and
gross margin for each of the Companys three operating units included in
continuing operations, as well as selected other financial statement data. Year Ended June 30,2004
    
    2003
    
    2002% of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    TotalAmount
    
    Revenues
    
    Amount
    
    Revenues
    
    Amount
    
    Revenues($ in thousands)Revenues:MercFuel
    
    $
    322,631
    
    
    
    83.7
    %
    
    $
    280,136
    
    
    
    83.1
    %
    
    $
    232,573
    
    
    
    80.5
    %Air Cargo
    
    
    39,549
    
    
    
    10.3
    
    
    
    32,691
    
    
    
    9.7
    
    
    
    28,124
    
    
    
    9.7Maytag
    
    
    23,281
    
    
    
    6.0
    
    
    
    24,421
    
    
    
    7.2
    
    
    
    28,228
    
    
    
    9.8Total revenues
    
    $
    385,461
    
    
    
    100
    %
    
    $
    337,248
    
    
    
    100
    %
    
    $
    288,925
    
    
    
    100
    %
 % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofUnit
    
    
    
    
    
    Unit
    
    
    
    
    
    UnitAmount
    
    Revenues
    
    Amount
    
    Revenues
    
    Amount
    
    RevenuesGross margin(1):MercFuel
    
    $
    6,080
    
    
    
    1.9
    %
    
    $
    5,926
    
    
    
    2.1
    %
    
    $
    6,581
    
    
    
    2.8
    %Air Cargo
    
    
    1,800
    
    
    
    4.6
    
    
    
    2,585
    
    
    
    8.0
    
    
    
    898
    
    
    
    3.2Maytag
    
    
    5,146
    
    
    
    22.1
    
    
    
    4,598
    
    
    
    18.8
    
    
    
    6,789
    
    
    
    24.1Total gross margin
    
    $
    13,026
    
    
    
    3.4
    %
    
    $
    13,109
    
    
    
    3.9
    %
    
    $
    14,268
    
    
    
    4.9
    %
 Year Ended June 30,2004
    
    2003
    
    2002% of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    TotalAmount
    
    Revenues
    
    Amount
    
    Revenues
    
    Amount
    
    Revenues($ in thousands)Selling, general and administrative expenses
    
    $
    12,885
    
    
    
    3.3
    %
    
    $
    10,818
    
    
    
    3.2
    %
    
    $
    11,771
    
    
    
    4.0
    %Provision for bad debts
    
    
    506
    
    
    
    0.1
    
    
    
    1,192
    
    
    
    0.4
    
    
    
    1,170
    
    
    
    0.4Depreciation and amortization
    
    
    2,828
    
    
    
    0.7
    
    
    
    2,782
    
    
    
    0.8
    
    
    
    3,478
    
    
    
    1.2Interest expense and other
    
    
    654
    
    
    
    0.2
    
    
    
    1,094
    
    
    
    0.3
    
    
    
    2,084
    
    
    
    0.7Settlement costs
    
    
    2,414
    
    
    
    0.6Write off of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    1,773
    
    
    
    0.5Loss from continuing operations before
income taxes
    
    
    (6,261
    )
    
    
    (1.6
    )
    
    
    (4,550
    )
    
    
    (1.3
    )
    
    
    (4,235
    )
    
    
    (1.4
    )Income tax benefit
    
    
    (1,178
    )
    
    
    (0.3
    )
    
    
    (1,567
    )
    
    
    (0.4
    )
    
    
    (1,815
    )
    
    
    (0.6
    )Loss from continuing operations, net of taxes
    
    
    (5,083
    )
    
    
    (1.3
    )
    
    
    (2,983
    )
    
    
    (0.9
    )
    
    
    (2,420
    )
    
    
    (0.8
    )Income (loss) from discontinued
operations, net of taxes
    
    
    (1,803
    )
    
    
    (0.5
    )
    
    
    185
    
    
    
    0.1
    
    
    
    6,937
    
    
    
    2.4Gain on sale of discontinued operations, net of taxes
    
    
    7,501
    
    
    
    2.0Net income (loss)
    
    $
    615
    
    
    
    0.2
    %
    
    $
    (2,798
    )
    
    
    (0.8
    )%
    
    $
    4,517
    
    
    
    1.6
    %
   (1)
    
    Gross margin as used here and throughout Managements Discussion and
Analysis includes certain selling, general and administrative costs
which are charged directly to the operating units, but excludes
depreciation and amortization expenses and selling, general and
administrative expenses. Fiscal year ended June 30, 2004 compared to fiscal year ended June 30,
2003 As a result of the Companys sale of all of the outstanding stock in Air
Centers in April 2004, the Companys fiscal 2004 financial results are
segregated between the results from continuing operations, comprised of the
Companys remaining three business segments, results from discontinued
operations and the gain from sale of discontinued operations. The following
discussion and analysis will include information on both the results from
continuing and discontinued operations. 15




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##### Table of Contents



The Company reported net income for fiscal 2004 of $615 thousand or $0.19
per basic and diluted share. This compares to a net loss of $2,798 thousand or
$0.86 per basic and diluted share for fiscal 2003. The following table reports
the segregation between results from continuing operations and discontinued
operations for each of the years presented: Fiscal 2004
    
    Fiscal 2003(in thousands of dollars)Income (loss) from:Continuing operations, net of taxes
    
    $
    (5,083
    )
    
    $
    (2,983
    )Discontinued operations, net of taxes
    
    
    (1,803
    )
    
    
    185Sale of discontinued operations, net of taxes
    
    
    7,501Net income
(loss) per share
    
    $
    615
    
    
    $
    (2,798
    )Income (loss) per common share
basic and diluted:Continuing operations, net of taxes
    
    $
    (1.67
    )
    
    $
    (0.92
    )Discontinued operations, net of taxes
    
    
    (0.59
    )
    
    
    0.06Sale of discontinued operations, net of taxes
    
    
    2.45Net income
(loss) per share
    
    $
    0.19
    
    
    $
    (0.86
    )
 The
loss from continuing operations for fiscal 2004 includes the
following significant items, for which additional information will be provided
further in this discussion, which adversely affected the income (loss) from
continuing operations:  1)
    
    $1,799 thousand net expense associated with the settlement agreement
relating to litigation with J O Hambro (the Hambro Settlement);2)
    
    $615 thousand net expense associated with the settlement agreement
with David H. Murdock and related parties (collectively Murdock):3)
    
    $1,680 thousand expense for contractual
termination benefits paid to the chairman of the board of directors upon
his retirement as chairman and director. MercFuel, the Companys aviation fuel sales operation, generated revenue
in fiscal 2004 of $322,631 thousand on sales volume of 278,448 thousand
gallons, as compared to revenue of $280,136 thousand on sales volume of 286,873
thousand gallons last year. Following is a comparison of MercFuels sales
information for fiscal 2004 and 2003: Fiscal 2004
    
    Fiscal 2003Commercial SalesRevenue ($000)
    
    $
    252,824
    
    
    $
    233,425Volume (thousand gallons)
    
    
    239,244
    
    
    
    258,455Corporate Aviation/Fractional JetRevenue ($000)
    
    $
    69,808
    
    
    $
    46,712Volume (thousand gallons)
    
    
    39,204
    
    
    
    28,418MercFuel TotalRevenue ($000)
    
    $
    322,631
    
    
    $
    280,136Volume (thousand gallons)
    
    
    278,448
    
    
    
    286,873Gross margin ($000)
    
    $
    6,080
    
    
    $
    5,926
 Revenue for MercFuels commercial segment increased $19,399 thousand in
fiscal 2004 to $252,824 thousand on sales volume of 239,244 thousand gallons.
The increased revenue for the commercial segment is due to higher average
petroleum product prices resulting from concerns of oil supply disruptions due
to the Iraq war and from increased worldwide demand for petroleum products due
to an improving worldwide economy. MercFuels commercial segments average
sales price in fiscal 2004 increased 17.0% over fiscal 2003s average sales
price. The increased average sales price in fiscal 2004, as compared to fiscal
2003, represents increased revenue of approximately $36,700 thousand.
MercFuels commercial sales volume decreased in fiscal 2004 to 239,244 thousand
gallons, a reduction of 19,211 thousand gallons, or 7.4%, from MercFuels
fiscal 2003 commercial sales volume of 258,455 thousand. The reduced sales
volume in fiscal 2004 is due to the cessation of business in fiscal 2003 by
National. MercFuel was supplying aviation fuel to National on a secured basis
under the auspices of the bankruptcy court through November 6, 2002, the day
National announced it was ceasing operations. MercFuels sales to National in
fiscal 2003 through November 6, 2002 were $24,737 thousand on 28,966 thousand
gallons. 16




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##### Table of Contents



Revenue for MercFuels corporate/fractional jet ownership segment was
$69,808 thousand on sales volume of 39,204 thousand gallons, an increase of
$23,096 thousand, or 49.4%, and 10,786 thousand gallons, or 38.0%, from fiscal
2003 revenue of $46,712 thousand on sales volume of 28,418 thousand gallons.
The increase in sales revenue is due to the increase in worldwide petroleum
product prices, increased use of private aircraft for both business and
personal travel and MercFuels strategic focus on this business segment. The
average sales price for aviation jet fuel in the corporate/fractional jet
ownership segment in fiscal 2004 increased 8.3% as compared to fiscal 2003
equating to increased revenue of approximately $5,400 thousand. The increased
sales volume equates to an increase in revenue of approximately $17,700
thousand. MercFuels cost of aviation fuel was $311,709 thousand in fiscal 2004
which represents an increase of 15.8% from MercFuels cost of aviation fuel in
fiscal 2003 of $269,239 thousand. The average cost of aviation fuel per gallon
increased 19.3% in fiscal 2004 to $1.120 per gallon. MercFuels operating
expenses, excluding the cost of aviation fuel, was $4,842 thousand in fiscal
2004, a reduction of $130 thousand from fiscal 2003 operating expense excluding
aviation fuel cost of $4,972 thousand. Air Cargos revenue was $39,549 thousand in fiscal 2004, an increase of
$6,858 thousand, or 21.0%, from fiscal 2003 revenue of $32,691 thousand
resulting in gross margin of $1,800 thousand in fiscal 2004, a reduction of
$785 thousand from last years gross margin of $2,585 thousand. Fiscal 2004
    
    Fiscal 2003Revenue ($000)Cargo handling
    
    $
    25,833
    
    
    $
    25,243Cargo logistics services
    
    
    8,867
    
    
    
    3,658Cargo general sales agent services
    
    
    4,849
    
    
    
    3,790Air Cargo total
    
    $
    39,549
    
    
    $
    32,691Gross margin ($000)Cargo handling
    
    $
    2,243
    
    
    $
    2,748Cargo logistics services
    
    
    1,734
    
    
    
    618Cargo general sales agent services
    
    
    (704
    )
    
    
    756Cargo
administrative
    
    
    (1,473
    )
    
    
    (1,537
    )Air Cargo total
    
    $
    1,800
    
    
    $
    2,585
 The cargo handling segment reported revenue of $25,833 thousand in fiscal
2004, an increase of $590 thousand, or 2.3%, from fiscal 2003 revenue of
$25,243 thousand. Cargo handlings gross margin in fiscal 2004 was $2,243
thousand, a decrease of $505 thousand from last years gross margin of $2,748
thousand. The primary cause of the decline in gross margin is due to increased
labor costs at Air Cargos Avion warehouse at the Los Angeles International
Airport. The cargo logistics services segment reported revenue of $8,867 thousand
in fiscal 2004, an increase of $5,209 thousand from fiscal 2003 revenue of
$3,658 thousand. The increased revenue in fiscal 2004 is due to the increased
business activity associated with Air Cargos Mercury World Cargo (MWC)
operation. Cargo logistics services segments gross margin in fiscal 2004
increased $1,116 thousand from fiscal 2003 to $1,734 thousand. The increased
gross margin is due to the increased business activity associated with MWC and
lower payroll related expenses. The cargo general sales agent (GSA) services segment reported revenue of
$4,849 thousand in fiscal 2004, an increase of $1,059 thousand from fiscal 2003
revenue of $3,790 thousand. The GSA services gross margin in fiscal 2004 was a
loss of $704 thousand as compared to a profit of $756 thousand in fiscal 2003.
The decrease in GSAs gross margin was associated with
GSAs parcel delivery services, which
ceased operations in May 2004. Air
Cargos administrative expenses for fiscal 2004 were $1,473 thousand,
a reduction of $64 thousand from last year. The fiscal 2004 expense includes
severance expense of $300 thousand associated with the termination of the chief
operating officer of Mercury Air Cargo in December 2003. 17




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##### Table of Contents



Maytag reported revenue of $23,281 thousand in fiscal 2004, a reduction of
$1,140 thousand from last years revenue of $24,421 thousand. Maytags fiscal
2004 gross margin was $5,146 thousand, an increase of $548 thousand from fiscal
2003 gross margin of $4,598. Fiscal 2004
    
    Fiscal 2003Revenue ($000)Refueling
    
    $
    8,439
    
    
    $
    8,703Air Terminal
    
    
    7,675
    
    
    
    8,199BOS
    
    
    5,963
    
    
    
    5,854Weather Data
    
    
    1,165
    
    
    
    1,615Other
    
    
    39
    
    
    
    50Total Maytag
    
    $
    23,281
    
    
    $
    24,421
 The decrease in Maytags revenue was due to the non-renewal of one
refueling contract in fiscal 2004, one refueling contract during fiscal 2003
and the non-renewal of one air terminal contract in fiscal 2004. Maytags fiscal 2004 gross margin was $5,146 thousand, an increase of $548
thousand or 11.9% from fiscal 2003 gross margin of $4,598 thousand. The
increased gross margin in fiscal 2004 was primarily due to the recovery of wage
increases on two contracts in fiscal 2004 of $259 thousand and the settlement
of a labor dispute on a BOS contract in fiscal 2003 of $250 thousand. Bad debt expense for continuing operations in fiscal 2004 totaled $506
thousand or 0.13% of total revenue from continuing operations as compared to
$1,192 thousand or 0.35% of total revenue from continuing operations in fiscal
2003. The Company experienced no significant individual write-offs during
either fiscal 2004 or 2003. Selling, general and administrative (G&A) expenses in fiscal 2004
amounted to $12,885 thousand, an increase of $2,067 thousand or 19% from the
fiscal 2003 expense of $10,818 thousand. The G&A expenses for fiscal 2004
includes $1,680 thousand for the severance payment to the retiring chairman of
the board of directors and increased audit fees of approximately $311 thousand
due to the re-audit of the Companys financial statements for fiscal 2002 and
2001. The Company expects certain G&A expenses to increase as
the Company maintains compliance with the
requirements of the Sarbanes-Oxley Act of 2002. Depreciation and amortization expense from continuing operations was
$2,828 thousand in the current period as compared to $2,782 thousand last year. Interest
and other expense from continuing operations in the current
period was $654 thousand, a decrease of $440 thousand from last years interest
and other expense from continuing operations of $1,094 thousand. The Company incurred settlement expenses of $2,414 thousand in fiscal 2004
associated with two settlements. Of this amount, $1,799 thousand was associated
with the Hambro Settlement agreement whereby the parties agreed to the
following: 1) Hambros agreement to release certain claims against the Company;
2) the Companys agreement to dismiss certain litigation against Hambro; 3) the
Companys agreement not to initiate certain litigation against Hambro; 4) the
reimbursement of certain costs incurred by Hambro associated with pending
litigation and the defense preparation; and 5) the purchase of 343,600 shares
of the Companys common stock owned by Hambro. The settlement expense
represents the difference between the total amount paid by the Company to
Hambro and the trading value of the Companys common stock purchased on the day
the settlement was made. Settlement expense of $615 thousand was associated
with the Murdock Settlement whereby the parties agreed: 1) to enter into a
mutual release of claims 2) to the payment of $525 thousand to Murdock for
reimbursement of all cost, fees and expenses incurred by Murdock in connection
with the settlement agreement and the due diligence investigation of the
Companys businesses; and 3) that the Company purchase 150,000 shares of
the Companys common stock owned by Murdock at $6.00 per share. The settlement
expense represents the difference between the total amount paid by the Company
to Murdock and the trading value of the Companys common stock purchased on the
day the settlement was made. In fiscal 2003, as a result of the restructuring of the Companys
long-term debt, the Company incurred debt extinguishment costs of $1,773
thousand. This is comprised of the unamortized portion of the deferred debt
issuance costs associated with the previous senior collateralized credit
facility and the subordinated note at the time of early extinguishment of this
debt and note amendment and expenses incurred associated with other refinancing
options that were not completed. Total income tax expense for fiscal 2004 was $2,481 thousand, segregated
by income taxes on the gain on the sale of Air Centers of $4,816 thousand, or
39.1% of the pre-tax gain, partially offset by an income tax benefit of $1,157
thousand, or 39.1%, on the loss from discontinued operations and by an income tax benefit of $1,178 thousand,
or 18.8%, on the loss from continuing operations. This compares 18




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##### Table of Contents



to an income
tax benefit of $1,470 thousand in fiscal 2003 representing an income benefit of
$1,567 thousand, or 34.4%, on the loss from continuing operations partially
offset by an income tax expense of $97 thousand, or 34.4%, on the income from
discontinued operations. The fiscal 2004 income tax benefit was adversely
affected by the non-deductibility for income tax purposes of certain
settlement costs incurred by the Company associated with the Hambro Settlement
and the Murdock Settlement. The total non-deductible settlement costs in
fiscal 2004 were $2,414 thousand. On April 12, 2004, upon approval from the Companys stockholders at the
Annual Stockholders meeting, the Company sold all of the outstanding common
stock of Air Centers, which represented 100% of the then
outstanding common stock in Air Centers, to Allied with the Company receiving
total consideration for the sale in cash at closing of $76,349 thousand.
Accordingly the Company classified all of the business activities associated
with the Air Centers and the debt service costs associated with the debt repaid
with the proceeds from the sale, as discontinued operations in the financial
statements. For fiscal 2004, the Company reported a net loss from discontinued
operations of $1,803 thousand, which includes pre-tax operating income from the
Air Centers of $3,107 thousand and other expenses, primarily interest expense
associated with the debt required to be repaid with the proceeds from the sale,
of $6,067 thousand. The net loss from discontinued operations for fiscal 2004
of $1,803 thousand compares to net income of $185 thousand in fiscal 2003. The
Air Centers had revenue and gross margin of $72,775 thousand and $7,375
thousand in fiscal 2004, respectively, through the FBO Sale Closing Date as
compared to revenue and gross margin of $96,249 thousand and $12,854 thousand,
respectively, for the full twelve months of fiscal 2003. Depreciation and
amortization expense was $4,169 thousand in fiscal 2004 through the FBO Sale
Closing Date as compared to $5,179 thousand for fiscal 2003. Interest expense
for the senior secured credit facility and the senior subordinated note for
fiscal 2004 was $6,067 thousand as compared to $6,959 thousand in fiscal 2003. The Company reported a net gain on the sale of Air Centers of $ 7,501
thousand. The Company may experience decreases in future sales volume and margins as
a result of deterioration in the world economy, or in the aviation industry,
and continued conflicts and instability in the Middle East, Asia and Latin
America, as well as a result of potential future terrorist activities and
possible military retaliation. In addition, world oil prices have been very
volatile over the last several years. The Company expects continued volatility
in world oil prices as a result of the instability in the Middle East. Since
fuel costs represent a significant part of an airline companys operating
expenses, volatility of fuel prices can adversely affect our customers
business and consequently our results of operations. Fiscal year ended June 30, 2003 compared to fiscal year ended June 30, 2002 Revenue from continuing operations for the Company was $337,248 thousand
in fiscal 2003, representing an increase of $48,323 or 16.7% from fiscal 2002
revenue from continuing operations of $288,925 thousand. The increase in
revenue was primarily attributable to higher MercFuel revenue due to higher
petroleum product commodity prices, resulting in an increase in revenue of
$48,195 thousand from fiscal 2002. In addition, Air Cargo had increased
revenues of $4,567 thousand. These gains were offset by reduced revenue of
$3,807 thousand for Maytag. Gross margin from continuing operations in fiscal
2003 was $13,109 thousand, representing a decline of $1,159 thousand, or 8.1%
from the gross margin realized in fiscal 2002 of $14,268 thousand. The lower
gross margin is primarily due to lower government contract business activity
during fiscal 2003 resulting in reduced gross margin of $2,191 thousand as
compared to fiscal 2002. MercFuel, the Companys fuel sales business, generated revenue in fiscal
2003 of $280,136 thousand, an increase of $47,563 thousand or 20.5% from fiscal
2002 revenue of $232,573 thousand. The increase in revenue was due to higher
average sales prices offset by a slightly reduced sales volume. The average
sales price in fiscal 2003 was $0.977 per gallon, an increase of 20.8% from the
fiscal 2002 average sales price of $0.809 per gallon, equating to higher
revenue of $48,195 thousand. Fuel sales volume in fiscal 2003 was 286,873
thousand gallons, a decrease of 778 thousand gallons from fiscal 2002 resulting
in lower revenue of $629 thousand. The higher average sales price is due to
higher average worldwide petroleum product prices. National, a customer of MercFuel, ceased operations on November 6, 2002.
MercFuel had been providing fuel to National since May 1999. In December 2000,
National filed for Chapter 11 bankruptcy protection and the Company continued
to sell fuel to National on a secured basis under the auspices of the
bankruptcy court. Sales to National for fiscal 2003 through November 5, 2002
were $24,737 thousand on a volume of 28,966 thousand gallons, as compared to
$49,085 thousand on a volume of 68,704 thousand gallons for the full twelve
months of fiscal 2002. As a result of the secured nature of the transactions,
the amount of loss on the cessation of business was negligible. MercFuels gross margin in fiscal 2003 was $5,926 thousand representing a
decline of $655 thousand or 10% from fiscal 2002. The average gross margin per
gallon sold in fiscal 2003 was $0.038 per gallon, essentially unchanged from
fiscal 2002. The decline in gross margin was primarily due to the lower sales
volume. 19




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##### Table of Contents



The Companys Air Cargo operations had revenue of $32,691 thousand in
fiscal 2003, an increase of $4,567 thousand or 16.2% from the fiscal 2002
revenue of $28,124 thousand. The increase in revenue is attributed to higher
revenue in the cargo handling operations, which had increased handling volume
due to the west coast dockworkers strike and due to improved import/export
activity. The Air Cargo segment generated gross margin of $2,585 thousand in fiscal
year 2003, an increase of $1,687 thousand or 188.9% from last years gross
margin of $898 thousand, primarily due to the subleasing of the Air Cargos
Atlanta warehouse facility to Lufthansa Handling starting in March 2002 which
improved margins by $1,243 thousand and higher margin of $617 thousand in Cargo
Space Logistics. Revenue from Maytag, the Companys government contract services business
segment, was $24,421 thousand in fiscal 2003, a decrease of $3,807 thousand or
13.5% from the fiscal 2002 revenue of $28,228 thousand. The decrease in
Maytags revenue was due to the loss of revenue of $1,396 thousand from the
Yokota, Japan contract, which expired in December 2001 at which time Maytag was
not awarded the contract renewal as a result of a competitive bid process. In
addition, Maytag lost refueling contracts in the prior year which provided
$2,061 thousand in revenue for fiscal 2002. In addition, revenue from Weather
Data Services contracts decreased during fiscal 2003 by $816 thousand. Air
terminal contract revenue of $8,199 thousand in fiscal 2003 revenues increased
slightly from $8,112 thousand in fiscal 2002 . Maytag had gross margin of $4,598 thousand in fiscal 2003, a decrease of
$2,191 thousand or 32.3% from the gross margin of $6,789 realized in fiscal
2002. The decrease in gross margin is primarily attributed to the loss of the
Yokota, Japan contract, lower margin on the Kuwait Air Terminal contract and a
reserve for a legal settlement of $250 thousand in fiscal 2003. Bad debt expense in 2003 totaled $1,192 thousand or 0.35% of total revenue
from continuing operations. This represents a $22 thousand increase from fiscal
year 2002 bad debt expense of $1,170 thousand which represented 0.40% of fiscal
2002 revenue from continuing operations. The Company experienced no
significant individual write-offs during fiscal 2003. Selling, general and administrative (G&A) expenses decreased in fiscal
2003 to $10,818 thousand, a decrease of $953 thousand or 8.1% from the fiscal
2002 expense of $11,771 thousand due to executive severance costs
incurred in fiscal 2002. Continuing depreciation and amortization expense was $2,782 thousand in
fiscal 2003 as compared to $3,478 thousand in fiscal 2002. The Company ceased the amortization of goodwill due to the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets effective as of July 1, 2002 which resulted in a
decrease in annual amortization expense of $0.4 million from the prior year. Interest
and other expense from continuing operations in fiscal 2003 was
$1,094 thousand, a decrease of $990 thousand from fiscal 2002 interest
and other expense from continuing operations of $2,084 thousand. In fiscal 2002, the Company wrote-off the deferred stock offering costs of
$985 thousand associated with the planned public and private offering of
MercFuel common stock. The Company decided not to undertake the offering due to
market uncertainties and general economic conditions at the time. As a result of the restructuring of the Companys long-term debt in fiscal
2003, the Company incurred debt extinguishment costs of $1,773 thousand. This
is comprised of the unamortized portion of the deferred debt issuance costs
associated with the previous senior collateralized credit facility and the
subordinated note at the time of early extinguishment of this debt, and note
amendment and expenses incurred associated with other refinancing options that
were not completed. The effective income tax benefit rate on the loss from continuing
operation for fiscal 2003 was 34.4% resulting in an income tax benefit on the
loss from continuing operations of $1,567 thousand. This compares to an
effective income tax benefit rate on the loss from continuing operations for
fiscal 2002 of 42.9% resulting in an income tax benefit of $1,815 thousand. The
lower effective income tax benefit rate in fiscal 2003, resulting in a lower
income tax benefit, is due to non-deductible expenses for tax purposes and a
lower effective state income tax benefit rate. The
Company reported income from discontinued operations, net of taxes, in fiscal
2003 of $185 thousand as compared to $6,937 thousand in fiscal
2002, which included $5,447 thousand from the gain on the sale of the Bedford
FBO. Revenue and gross margin from discontinued operations, which is comprised
primarily of Air Centers, was $96,249 thousand and $12,854 thousand in fiscal
2003, 20




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respectively, as compared to $94,417 thousand and $13,545 thousand,
respectively, in fiscal 2002. Depreciation and amortization expense was $5,179
thousand and $5,780 thousand in fiscal 2003 and fiscal 2002, respectively.
Interest expense associated with the senior credit facility and the senior
subordinated note was $6,959 thousand in fiscal 2003 as compared to $4,733
thousand in fiscal 2002. Liquidity and Capital Resources On April 12, 2004, after receiving approval from the Companys
stockholders at the Annual Stockholders meeting, the Company sold all of the
outstanding common stock of Air Centers, which represented 100% of
the then outstanding common stock in Air Centers, to Allied with the Company
receiving total consideration for the sale in cash at closing of $76,349
thousand (the FBO Sale). The final amount of the total consideration to be
received by the Company from the FBO Sale is dependent upon, among other
things, the determination of the amount of Air Centers net working capital at
the FBO Sales Closing Date and the distribution of funds from the Hartsfield
Escrow. In accordance with the terms of the Air Centers SPA, the Company and
Allied agreed to the extent Air Centers actual net working capital at closing
exceeded $3,586 thousand, Allied is obligated to pay the Company the excess
amount or to the extent Air Centers net working capital is less than $3,586
thousand, the Company is obligated to pay Allied the deficiency. The parties
also agreed to deposit $8,270 thousand at closing to establish the Hartsfield
Escrow to be distributed to the parties over a period not to exceed five years
from the FBO Sale Closing Date dependent upon the award of a new lease at the
Hartsfield International Airport in Atlanta for a new FBO. If Air Centers is
awarded the new lease, dependent upon the effective date and the terms and
conditions of the new lease, the Company may be entitled to all, some or none
of the amount deposited into the Hartsfield Escrow at closing. The proceeds from the FBO Sale were used to: 1) prepay the outstanding
principal on the WFF Credit Facility comprised of both a term loan and a
revolving credit facility, in the amount of $13,255 thousand; 2) pay accrued
interest and fees associated with the WFF Credit Facility of $203 thousand; 3)
establish a cash collateral account with WFF in the amount of $16,031 thousand
in support of issued and outstanding letters of credit issued under the terms
of the WFF Credit Facility; 4) prepay the outstanding principal, including the
amount of accrued interest payable-in-kind (PIK), on the Note of $24,120
thousand to Allied; 5) pay accrued interest and fees associated with the Note
of $141 thousand; 6) prepay the outstanding principal, including the amount of
accumulated PIK interest, on the Hambro Notes in the amount of $3,695 thousand;
7) pay accrued interest on the Hambro Notes in the amount of $15 thousand; 8)
establish the Hartsfield Escrow in the amount of $8,270 thousand; and 9) pay
for transaction related fees and expenses of $1,324 thousand. After satisfying
the obligations noted above, the Company received cash of $9,295 thousand. As a result of this transaction, the Company significantly reduced its
long-term debt and enhanced its financial position. Prior to the FBO Sale, the
Companys outstanding obligations associated with long term debt and the Hambro
Notes were $58,714 thousand. Immediately after the FBO Sale transaction, the
Companys long-term debt obligations were reduced to $19,018 thousand. As of
June 30, 2004 the outstanding principal amount of long-term debt, including the
current portion of long-term debt, was $17,929 thousand. As of June 30, 2004, the Companys unrestricted cash balance was $4,690
thousand, an increase of $1,888 thousand from June 30, 2003. Net cash used in operations in fiscal 2004 was $6,039 thousand, which
includes the net cash contributed from operations for Air Centers through the
FBO Sale Closing Date, as compared to cash provided by operating activities of
$4,807 thousand in fiscal 2003. The net cash used in operations for 2004 was
primarily due to the net loss from both continuing and discontinuing operations
and an increase in the Companys income tax obligations due to the FBO Sale. In
addition, primarily the result of higher petroleum product prices and the
resultant increase in trade receivables, the change in operating assets and
liabilities in fiscal 2004 required $3,738 thousand of cash. Primarily
as a result of the FBO Sale, the Company generated $45,463
thousand of cash from investing activities as compared to net cash used in
investing activities of $940 thousand in fiscal 2003. Proceeds from the sale
of properties and facilities in fiscal 2004 were $73,753 thousand, of which
$73,673 thousand were from the FBO Sale. From the FBO sale proceeds, $24,403
thousand was required to be deposited into restricted accounts as collateral
for outstanding letters of credit or for the Hartsfield Escrow. The Company
also expended $5,020 thousand for capital projects during fiscal 2004, of which
$3,836 thousand was invested in Air Centers assets. The Company used $37,576 thousand in financing activities in fiscal 2004,
due to the repayment of outstanding debt with proceeds from the FBO Sale, as
compared to the use of $6,784 thousand in financing activities in fiscal 2003.
With the proceeds from the FBO Sale, the Company prepaid the outstanding
principal amount of debt on the WFF Credit Facility of $13,255 thousand and
prepaid the outstanding principal on the Allied Note of $24,120 thousand,
including $120 thousand of capitalized interest. The Company also
purchased a total of 346,100 shares of outstanding common stock during fiscal 2004
for $1,824 thousand. On December 12, 2003, as part of the settlement agreement
entered into between the Company and J O Hambro Capital Management and certain
of its affiliates and private 21




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clients (J.O.
Hambro), the Company purchased
343,600 shares of common stock, which were then retired, from J O Hambro valued
at $1,787 thousand. On December 12, 2003, the Company entered into a settlement agreement (the
Hambro Settlement) relating to litigation with J O Hambro whereby the Company
issued three promissory notes for an aggregate principle amount of $3,586,000
(the Hambro Notes) in exchange for the following, among other things: 1) the
repurchase of 343,600 shares of the Companys common stock owned by J O Hambro;
2) reimbursement of certain costs associated with the mutual release of claims;
and 3) a standstill agreement associated with the pending lawsuits and
anticipated proxy solicitations. The Hambro Notes were: 1) subordinated to the
Senior Secured Credit Facility and to the Senior Subordinated Note; 2) due on
the earlier of (a) March 31, 2006, provided that if the Senior Secured Credit
Facility Matures on December 31, 2007 then such date shall be March 31, 2008 or
(b) the ninetieth day following payment in full of the Senior Secured Credit
Facility and the termination of commitments for the Senior Secured Lender to
provide financing under the Senior Secured Credit Facility; and 3) bear and
accrue interest at the rate of 12% per annum commencing on December 31, 2003.
On the FBO Sale Closing Date, the Company paid JO Hambro $3,710 thousand as
payment for all outstanding obligations associated with the Hambro Notes. On July 29, 2004, the Company and Bank of America, N.A. entered into a
three-year $30,000,000 revolving line of credit (the B of A Credit Facility)
collateralized by all of the assets of the Company. The revolving line of
credit will be used as collateral for any letters of credit issued by the
Company and for general working capital needs. Upon the effective date of the B
of A Credit Facility, $15,414 thousand of cash deposited by the Company as
collateral for outstanding letters of credit and reported as restricted cash on
the Companys balance sheet at June 30, 2004 was released to the Company for
general corporate purposes. As of the closing date of the B of A Credit
Facility, the Company had $29,238 thousand of revolving credit line available
to it of which $15,414 thousand was reserved for issued and outstanding letters
of credit and $13,824 thousand was available and undrawn. The amount of credit
available to the Company on the B of A Credit Facility is determined monthly
based on the amount of eligible customer receivables, as defined in the B of A
Credit Facility agreement, up to an amount not to exceed $30,000 thousand. The
B of A Credit Facility contains certain financial covenants limiting the amount
the Company can expend annually for cash dividends and/or stock repurchases and
for capital expenditures. The Company is also required to maintain certain
financial targets for tangible net worth, fixed charge and debt to worth
ratios. The Company has historically competed in a niche market where it generally
purchases fuel from major oil companies and refiners using credit terms, which
on average are shorter than the credit terms the Company offers its fuel
customers. Because of its bulk buying and credit worthiness the Company is able
to purchase fuel at a lower price than its customers. Typically, the Company
buys on terms that range from 3 days to 15 days and sells on terms that can
exceed 30 days. As a result, the Company requires adequate working capital and
access to sufficient credit facilities to meet the day-to-day working capital
requirements and to expand its existing operations. The amount of working
capital required by the Company has depended, and is expected to depend,
primarily on the price and quantity of aviation fuel bought and sold, the
Companys extension of credit to its customers, customers compliance with the
Companys credit terms and the credit terms extended to the Company by its
suppliers. Increases in the quantity and/or price of fuel sold or in the credit
terms extended to its customers and/or any reduction in credit terms extended
to the Company by its suppliers and/or any substantial customer noncompliance
with the Companys credit terms can result in an increase in the Companys
working capital requirements. Under these circumstances, the Companys
liquidity could be adversely affected unless the Company is able to increase
vendor credit or increase lending limits under the Companys revolving credit
facility. The Company believes, however, that its current financing
arrangements and vendor credit terms should provide the Company with sufficient
liquidity in the event of a temporary surge in fuel oil prices. However, to the
extent that the revolving credit facility or any other credit facility is used
to fund increased working capital requirements, the Company will incur
additional debt service costs. The Companys accounts receivable balance as of June 30, 2004 was $50,974
thousand. The Companys accounts receivable are primarily comprised of customer
trade receivables net of an allowance for doubtful accounts of $1,492 thousand.
The Companys credit risk is based in part on the following factors: 1) a
substantial portion of the customer trade receivables are related to a single
industry (aviation) and 2) at any given point in time, one or several customers
may owe a significant balance to the Company. At June 30, 2004, MercFuels
accounts receivable comprised approximately 68% of the Companys total
receivables. The Companys MercFuel operations accounted for approximately 83.7% of the
Companys total revenue from continuing operations in fiscal 2004. As of June
30, 2004, MercFuel trade receivables comprise approximately 68% of the
Companys total trade accounts receivable and are owed from what the Company
defines as smaller airlines, including certain foreign, cargo, regional,
commuter and start-up airlines. These customers are affected by volatility in
fuel prices and by fluctuations in the economy in general and in the aviation
industry specifically. To the extent that MercFuels airline customers are not
able to immediately adjust their business operations to reflect increased
operating costs, they could take relatively longer to pay the Companys
accounts receivable. Such payment delays would further increase the Companys working capital demands. In some cases, the impact of
existing, and potentially future, high aviation fuel prices along with and other economic fluctuations could materially
impair the financial stability of an airline customer 22




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such that it would be
unable to pay amounts owed to the Company and could result in the airline
customer filing for bankruptcy protection. In that event, Mercury could incur
significant losses related to the uncollectability of the receivables. The
Company has incurred in the past and is likely to continue to incur losses as
the result of the business failure of a customer. The Company assesses its
credit portfolio on an ongoing basis and establishes allowances which the
Company believes 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. Allowances
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. Accounts receivable
sales days outstanding for the three remaining
business units was 41.4 days and 43.8 days as of June 30, 2004 and 2003,
respectively, based on the average daily revenue for the fourth quarter of each
fiscal year. Accounts receivable days sales outstanding have historically been
impacted by a high volume of fuel sales to customers with extended payment
terms. However, during fiscal 2001, the Company added a large customer, AirTran
Airways, whose terms are prepaid. The terms of the prepayment provide for
weekly payments equal to the following weeks estimated sales. This prepaid
customer accounted for approximately 23.0% and 24.3% of the Companys
consolidated revenue from continuing operations for the fiscal years ended June
30, 2004 and 2003, respectively. The Companys capital expenditures in fiscal 2004 were $5,020 thousand,
which includes $3,836 thousand invested in Air Centers facilities prior to the
FBO Sale. In accordance with the terms of the Air Centers SPA, the Company
received additional cash consideration at closing of $3,349 thousand for
reimbursement of certain capital expenditures made by the Company associated
with two Air Center related projects. This compares with capital expenditures
in fiscal 2003 of $4,065 thousand, of which $3,675 thousand was associated with
the Air Centers operations, and $4,500 thousand in fiscal 2002, which includes
$3,954 thousand for the Air Centers. Capital expenditures excluding Air
Centers were $1,184 thousand, $390 thousand and $546 thousand in fiscal 2004,
2003 and 2002, respectively. The Company is currently assessing different options regarding the
utilization of the Companys excess cash to enhance stockholder value including
strategic acquisitions, reinvestment of the cash into current operations and
distributions to stockholders. The B of A Credit Facility limits the amount the
Company can expend on an annual basis for capital expenditures to $3,500
thousand for fiscal 2005 and for dividend and/or stock repurchases to $4,600
thousand. Absent a capital intensive acquisition, the Company believes that the
combination of its operating cash flows, availability under the B of A Credit
Facility, vendor credit and existing cash resources will provide it with
sufficient liquidity during the next twelve months. The Company believes the
availability under its B of A Credit and vendor credit should provide it with
sufficient liquidity in the event of a continued surge in oil prices. Contractual Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements The Companys significant contractual obligations and financial
commitments are summarized below. Additional information regarding the
Companys financial commitments can be found in Notes 9, 10 and
17 to the
Consolidated Financial Statements included in Item 15 of this Annual Report on
Form 10-K. Letters of Credit As of June 30, 2004, the Company had outstanding letters of credit in the
amount of $15,414 thousand. As of June 30, 2004, these letters of credits were
collateralized with cash deposited with the issuer of the letters of credit.
Upon the execution of the B of A Credit Facility, these letters of credit are
included as part of this credit facility, thereby eliminating the requirement
for the Company to post the LOC Collateral but reducing the cash availability
on the revolving line of credit. A letter of credit in support of the
tax-exempt bonds issued by the California Economic Development Financing
Authority (CEDFA) comprised $14,207 thousand of the outstanding letters of
credit as of June 30, 2004. 23




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Lease Commitments As of June 30, 2004, the Companys future minimum lease payments under
non-cancelable operating leases for rental properties with terms in excess of
one year were as follows: ThousandsFor the Fiscal Year Ending June 30,
    
    of dollars2005
    
    $
    7,1872006
    
    
    6,5812007
    
    
    3,2862008
    
    
    2,6682009
    
    
    2,402Thereafter
    
    
    5,376Total minimum payments
    
    $
    27,500
 As part of the Companys normal business practices, the Company enters
into site leases with the respective airport agencies for its Air Cargo
Operations. In addition, the Company enters into leases for fueling equipment
used in its MercFuel business. Long Term Debt As of June 30, 2004, the Company had long-term debt and notes payable,
including the current portion of principal due, in the amount of $17,929
thousand. Please refer to Notes 9 and 10 of the Companys Consolidated
Financial Statements for a description of the type of long term debt and notes
payable outstanding. The following is the principal payment schedule associated
with these obligations: ThousandsFor the Fiscal Year Ending June 30,
    
    of dollars2005
    
    $
    1392006
    
    
    1492007
    
    
    1602008
    
    
    1712009
    
    
    183Thereafter
    
    
    17,127Total minimum payments
    
    $
    17,929
 The Company has no off- balance sheet financing arrangements. Employment Contracts The Company currently has employment agreements with its: 1) President and
Chief Executive Officer (CEO); 2) Executive Vice President, General Counsel
and Secretary (General Counsel); and 3) Vice President of Finance, Treasurer
and Chief Financial Officer (CFO), and other business unit officers.
Following is a brief description of the terms and conditions of the key
employment contracts. The amended and restated employment agreement with the CEO dated as of May
22, 2002 is for a term ending on November 15, 2004, subject to automatic
one-year extensions starting on November 15, 2004 and on each successive
anniversary date unless either party gives 30 days notice of non-renewal. The
annual salary under this agreement is $520,000. The CEO is also eligible for an
annual bonus equal to: (i) 25% of the CEOs base compensation subject to the
Companys consolidated operating income before sales and general and
administrative expenses and depreciation (Adjusted EBIT) for the most recent
completed fiscal year exceeding the average of the Adjusted EBIT for the
immediately prior three fiscal years; and (ii) 4.166% of the amount by which
the Adjusted EBIT for the most recently completed fiscal year exceeds the
average Adjusted EBIT for the immediately prior three fiscal years. The CEO was
eligible to participate in the 2002 Management Stock Purchase Plan (the 2002
Plan), wherein the CEO was eligible to purchase up to 193,825 shares of the
Companys common stock from CFK Partners at a price of $15.00 per share, both
number of shares and price per share were adjusted for the one-for-two reverse
stock split effective June 18, 2003, such purchase being funded by a loan from
the Company. The CEO elected to participate in the 2002 Plan and purchased
193,825 shares of the Companys common stock, as adjusted for the stock split.
The CEOs obligation to repay the Company is forgiven ratably over a ten-year
period provided the CEO remains employed by the Company during such period. 24




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In the event the CEOs employment with the Company is terminated for
cause, the CEO will not be entitled to receive or be paid a bonus for the year
in which employment terminated. In the event the CEOs employment with the
Company is terminated without cause, the Company will be obligated to pay the
CEO the lesser of three years base compensation or the base compensation that
would have been paid to him over the remaining term of the CEOs employment
agreement, and a bonus for the fiscal year of employment termination in an
amount which would otherwise be paid to the CEO prorated over the days the CEO
was gainfully employed by the Company during the fiscal year in which the
employment termination occurred. The employment agreements for the General Counsel and the CFO dated as of
May 22, 2002 are each for a period ending on May 22, 2005 subject to automatic
one-year extensions starting on May 22, 2005 and each subsequent anniversary
date, unless either party gives a minimum 30 days notice of non-renewal. Under
the employment agreements the annual base salary for the General Counsel and
the CFO is $179,000 and $170,000, respectively. Both the General Counsel and
the CFO were eligible to participate in the 2002 Plan, wherein the General
Counsel was eligible to purchase up to 15,948 shares and the CFO was eligible
to purchase up to 12,500 shares of the Companys common stock from CFK Partners
for a price of $15.00 per share, all amounts as adjusted for the reverse stock
split, with such purchases being funded through a loan from the Company. Both
the General Counsel and the CFO elected to participate in the 2002 Plan and
purchased the maximum number of shares allotted. The obligations to repay the
Company are forgiven over a ten-year period, provided they each remained
employed by the Company during such period. In the event that either the General Counsels or the CFOs employment
with the Company is terminated for cause, or in the event of their death or
disability, all rights under the respective employment agreements will cease.
In the event that either the General Counsels or the CFOs employment with the
Company is terminated without cause, the Company will be obligated to pay the
respective individual the lesser of one-years base compensation or the base
compensation that would otherwise be paid to them over the remaining term of
the employment agreement, not to be less than the equivalent of six months base
compensation. In July 2004 the consulting agreement between the Company and the Chairman
of the Companys board of directors was terminated as a result of the
Chairmans retirement as Chairman and as a board of director. In accordance
with the terms of the consulting agreement with the Chairman, the Chairman
received a severance payment of $1,680 thousand upon his retirement. As of June 30, 2004, the following is the Companys future minimum
payments for these and other executive employment contracts, excluding
discretionary and performance-based bonuses: ThousandsFor the Fiscal Year Ending June 30,
    
    of dollars2005
    
    $
    639Total minimum payments
    
    $
    639
 Purchase Commitments Effective April 1, 2004, the Companys Air Cargo operations entered into a
one-year renewal of its contract to purchase all of South African Airlines
cargo capacity on its passenger flights from the United States and Canada to
South Africa. The commitment for this one-year contract is approximately $
4,715 thousand, which is essentially unchanged from the previous year. The Company currently has no fixed volume or fixed price purchase
commitments for aviation fuel, although the Company may, from time-to-time,
commit to such arrangements. Guarantees The Company is a guarantor on certain airport site and facility leases
associated with 11 of Air Centers FBO locations that were in effect as of the
FBO Sale Closing Date. As a condition of the sale, Allied agreed to fully
indemnify the Company from any and all costs associated with the pre-existing
guarantees while Air Centers and Allied use their best efforts to have the
Company removed as guarantor on these leases. As a result of the
indemnification provided by Allied, the Company does not believe any
claim being made on the Company as a result of these guarantees will have a
material affect on the Companys results of operations, cash flows or financial
position. 25




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Critical Accounting Policies and Estimates The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported therein, including the financial information reported in Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Estimates are based on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent form other sources. Actual
results reported in future periods may be based upon amounts which differ from
those estimates. The following represent what the Company believes are the
critical accounting policies most affected by significant management estimates
and judgments: Allowance for Doubtful Accounts The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon its
historical experience and any specific customer collection issues that have
been identified. Accounts receivable are reported net of the allowance for
amounts that may become uncollectable in the future. Such allowances can be
either specific to a particular customer or general to all customers. The
Company believes the level of the allowance for bad debts is reasonable based
on past experience and an analysis of the net realizable value of the Companys
trade receivables at June 30, 2004. However, the credit loss rate can be
impacted by adverse changes in the aviation industry, or changes in the
liquidity or financial position of its customers which could affect the
collectability of its accounts receivable and its future operating results. If
credit losses exceed established allowances, the Companys results of
operations and financial condition may be adversely affected. Contingencies The Company accounts for contingencies in accordance with Statement of
Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies.
SFAS No. 5 requires that the Company record an estimated loss from a loss
contingency when information available prior to issuance of the Companys
financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies such as legal matters requires significant judgment. Many of
these legal matters can take years to resolve. Generally, as the time period
increases over which the uncertainties are resolved, the likelihood of changes
to the estimate of the ultimate outcome increases. Management believes that the
accruals for loss contingencies are adequate. Revenue Recognition Revenues are recognized upon delivery of product or the completion of
service. For the sale of aviation fuel, revenue is recognized on the date the
aviation fuel is delivered into the aircraft. For fuel delivered on an
into-plane basis, revenue is recognized on the date the fuel is delivered into
the aircraft. Aircraft maintenance contracts are recognized as the labor and
maintenance is completed. Cargo handling revenue is recognized in the period
the cargo is shipped out of the Companys cargo warehouses. Space logistics and
general cargo sales agent services are recognized as revenue in the period that
the related flights occur or the commissions are earned. Revenue associated
with fixed rate fees of long-term service contracts is recognized on a
straight-line basis over the term of the contract. Revenue associated with the
variable rate fees of long-term contracts is recognized in the period in which
services are performed and completed. The Companys contracts with the
government of the United States of America are subject to profit renegotiation.
To date, the Company has not been required to adjust profits arising from such
contracts. Income Taxes Deferred income taxes are determined using the liability method. A
deferred tax asset or liability is determined based on the difference between
the financial statement and tax basis of assets and liabilities as measured by
the enacted tax rates that will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the deferred tax asset or
liability. If necessary, valuation allowances are established to reduce
deferred tax assets to their expected realizable values. Impairment of Long-Lived Assets and Goodwill Long-lived assets and goodwill are reviewed 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 but in any
event, no less than once per year. If this review indicates that the carrying
amount is not recoverable, the Company will recognize an impairment loss,
measured by the future 26




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discounted cash flow method. In July 2001, the Financial Accounting
Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets.
This statement was adopted by the Company on July 1, 2002. Under
this standard,
goodwill is no longer amortized, but is tested for impairment annually. In
accordance with this Statement, the Companys most recent assessment of
impairment of goodwill and other intangibles was completed in February 2004
with no adjustments to the amount of goodwill and intangible assets required. New Accounting Pronouncements On April 30, 2003, the Financial Accounting Standards Board (FASB)
issued SFAS No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities. This
standard amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. The provisions of this statement are generally
effective for contracts entered into or modified after June 30, 2003. The
Company adopted SFAS No.149 on July 1, 2003 with no material impact on the
Companys financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). This interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest entities. Under
current practice, two enterprises generally have been included in consolidated
financial statements because one enterprise controls the other through voting
interests. FIN 46 defines the concept of variable interests and requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
the parties involved. This interpretation applies immediately to variable
interest entities created after January 31, 2003. It applies in the first
fiscal year or interim period beginning after December 15, 2003, to variable
interest entities considered to be a special purpose entity (SPE) in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
For non-SPE variable interest entities acquired before February 1, 2003, the
interpretation must be adopted no later than the first interim or annual period
ending after March 15, 2004. The interpretation may be applied prospectively
with a cumulative-effect adjustment as of the date on which it is first applied
or by restating previously issued financial statements for one or more years
with a cumulative-effect adjustment as of the beginning of the first year
restated. The Company adopted FIN 46 during the quarter ended March 31, 2004 with
no material impact on the Companys financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,
which establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires classification of financial instruments within its scope as a
liability, including financial instruments issued in the form of shares that
are mandatorily redeemable, because those financial instruments are deemed to
be, in essence, obligations of the issuer. The Company adopted SFAS
No. 150 during the quarter ended March 31, 2004 with no material impact on the
Companys financial statements. Inflation The Company believes that inflation has not had a significant effect on
its results of operations during the past three fiscal years. Forward-Looking Statements This Form 10-K and the information incorporated by reference in it
includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
We intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements
regarding our expected financial position and operating results, our business
strategy, our financing plans and forecasted demographic and economic trends
relating to our industry are forward-looking statements. These statements can
sometimes be identified by our use of forward-looking words such as may,
will, anticipate, estimate, expect or intend and similar expressions.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be
materially different from the results, performance or achievements expressed or
implied by the forward-looking statements. We cannot promise you that our
expectations in such forward-looking statements will turn out correct. Factors
that impact such forward-looking statements include, but are not limited to,
quarterly fluctuations in results; the management of growth; fluctuations in
world oil prices or foreign currency; changes in political, economic,
regulatory or environmental conditions; the loss of key customers, suppliers
or members of senior management; uninsured losses; competition; credit risk
associated with accounts receivable; and other risks detailed in this Form 10-K
and in our other 27




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##### Table of Contents



Securities and Exchange Commission filings. We undertake no obligation to
update or revise publicly any forward-looking statements, whether as a result
of new information, future events, or otherwise. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk. The Company does not currently utilize material derivative financial
instruments which expose the Company to significant market risk. However, the
Companys cash flows, results of operations, and the fair value of its debt, may be adversely
affected due to changes in interest rates with respect to its long-term debt.
The table below presents principal cash flows and related weighted average
interest rates of the Companys long-term debt at June 30, 2004 by expected
maturity dates. Weighted average variable rates are based on rates in effect at
June 30, 2004. These rates should not be considered a predictor of actual
future interest rates. Expected Maturity DateJune-05
    
    June-06
    
    June-07
    
    June-08
    
    June-09
    
    Thereafter
    
    Total
    
    Fair ValueFixed Rate Other Debt
    
    $
    139,000
    
    
    $
    149,000
    
    
    $
    160,000
    
    
    $
    171,000
    
    
    $
    183,000
    
    
    $
    3,127,000
    
    
    $
    3,929,000
    
    
    $
    3,929,000Average Interest Rate
    
    
    6.93
    %
    
    
    6.93
    %
    
    
    6.94
    %
    
    
    6.95
    %
    
    
    6.95
    %
    
    
    7.17
    %
    
    
    7.12
    %Variable Rate Tax Exempt Bonds
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    14,000,000
    
    
    $
    14,000,000
    
    
    $
    14,000,000Average Interest Rate
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    0.972
    %
   (1)
    
    The interest rate on the variable rate tax exempt bonds is based upon a
weekly remarketing of the bonds. In making its determination as to the balance of fixed and variable rate
debt, the Company considers the interest rate environment (including interest
rate trends), borrowing alternatives and relative pricing. The Company
periodically monitors the balance of fixed and variable rate debt, and can make
appropriate corrections either pursuant to the terms of debt agreements or
through the use of swaps and other financial instruments. 
 Item 8.Financial Statements and Supplementary Data. See
Part IV, Item 15, pages F1 through F23 immediately following. 
 Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. None 
 Item 9A.Controls and Procedures. Evaluation of disclosure
controls and procedures. Based on the evaluation of our
disclosure controls and procedures (as defined in the Securities and
Exchange Act of 1934 Rules 13a-15 (e) and 15d-15 (3) required by
Securities Exchange Act Rules 13a-15 (b) or 15-d-15 (b)) the
Companys Chief Executive Officer and Chief Financial Officer have
concluded that as of the end of the period covered by this report the
Companys disclosure controls and procedures were effective. Changes in internal controls.There were no changes in the Companys
internal controls over financial reporting that occurred during our most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting. 
 Item 9B. Other Information. None 
 PART III 
 Item 10.Directors and Executive Officers of the Registrant. Reference is made to the information set forth under the caption Election
of Directors, Executive Officers, Compensation and Other Information and
Section 16 Disclosure of the Companys Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held in November 2004 (the 2004 Proxy
Statement) for a description of the directors and executive officers of the
Company, which information is incorporated herein by reference. 
 Item 11.Executive Compensation. Reference is made to the information set forth under the caption
Executive Compensation and Compensation of Directors of the 2004 Proxy
Statement, which information is incorporated herein by reference. 28




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##### Table of Contents



Item 12.Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters. Reference is made to the table, including the footnotes thereto, set forth
under the caption Principal Shareholders of the 2004 Proxy Statement for
certain information respecting ownership of stock of the Company by management
and certain shareholders, which table and footnotes are incorporated herein by
reference, and the table set forth under the
caption entitled Securities authorized for Issuance under Equity Compensation
Plans in Item 5 of Part II of this Form 10-K for certain information regarding Equity
Compensation Plans, which table is herein incorporated by
reference. 
 Item 13.Certain Relationships and Related Transactions. Reference is made to the information set forth under the caption Certain
Transactions and Compensation Committee Interlocks and
Insider Participation of the 2004 Proxy Statement for certain information with respect
to relationships and related transactions, which information is incorporated
herein by reference. 
 Item 14.Principal Accountant Fees and Services. Reference is made to the information set forth under the caption
Information Relating to the Corporations Independent Public Accountants of
the 2004 Proxy Statement for certain information with respect to principal
accountant fees and services which information is incorporated herein by
reference. 
 PART IV 
 Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) Financial StatementsReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of June 30, 2004 and 2003
    
    
    F-2Consolidated Statements of Operations for each of the three years in the period ended June 30, 2004
    
    
    F-3Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2004
    
    
    F-4Consolidated Statements of Stockholders Equity for each of the three years in the period ended June 30, 2004
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6(a)(2) Supplemental Schedule for each of the three years in the period ended June 30, 2004:Schedule II  Valuation and Qualifying Accounts
    
    
    F-23
 All other items are not included in this Annual Report on Form 10-K either
because they are not applicable or are included in the information as set forth in the Consolidated Financial Statements or in the Notes to Consolidated
Financial Statements. (a)(3) Exhibits and Reports on Form 8-K: ExhibitNo.
    
    Description2.1
    
    Stock Purchase Agreement Dated as of October 28, 2003. By and Among Allied Capital Corporation, Mercury Air
Centers, Inc. and Mercury Air Group, Inc.(28)2.2
    
    Amendment to Stock Purchase Agreement by and Among Allied Capital Corporation, Mercury Air Centers, Inc. and
Mercury Air Group, Inc. dated as of December 10, 2003.(31)2.3
    
    Amendment to Stock Purchase Agreement by and Among Allied Capital Corporation, Mercury Air Centers, Inc. and
Mercury Air Group, Inc. dated as of January 14, 2004.(31)2.4
    
    Amendment to Stock Purchase Agreement by and Among Allied Capital Corporation, Mercury Air Centers, Inc. and
Mercury Air Group, Inc. dated as of February 13, 2004. (32)2.5
    
    Settlement Statement dated as of April 12, 2004.(33)2.6
    
    Closing Escrow Agreement dated as of April 5, 2004 among Allied and Wachovia Bank National, as escrow agent. (33)3.1
    
    Certificate of Incorporation.(17)3.2
    
    Amended and Restated Bylaws of Mercury Air Group, Inc. adopted December 7, 2002.(25)3.3
    
    Certificate of Designations of Series A 8% Cumulative Convertible Preferred Stock.(27)
 29




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##### Table of Contents



ExhibitNo.
    
    Description4.1
    
    Loan Agreement between California Economic Development Financing Authority and Mercury Air Group, Inc. relating
to $19,000,000 California Economic Development Financing Authority Variable Rate Demand Airport Facilities
Revenue Bonds, Series 1998 (Mercury Air Group, Inc. Project) dated as of April 1, 1998.(2)4.2
    
    Securities Purchase Agreement dated September 10, 1999 by and among Mercury Air Group, Inc. and J.H. Whitney
Mezzanine Fund, L.P.(12)4.3
    
    Amendment No. 1 dated as of September 30, 2000 by and between J.H. Whitney Mezzanine, L.P. and Mercury Air
Group, Inc. to the Securities Agreement.(16)4.4
    
    Waiver and Consent Agreement dated as of December 29, 2000 among Mercury Air Group, Inc. and J.H. Whitney
Mezzanine Fund, L.P.(17)4.5
    
    Waiver and Consent Agreement dated as of July 2, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine
Fund, L.P.(18)4.6
    
    Waiver Agreement dated as of September 25, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund,
L.P.(18)4.7
    
    Amendment No. 2 dated as of September 30, 2001 by and between J.H. Whitney Mezzanine Fund, L.P. and Mercury Air
Group, Inc. to the Securities Purchase Agreement.(19)4.8
    
    Waiver Agreement dated as of November 26, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine, L.P.(21)4.9
    
    Waiver Agreement dated as of December 21, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine, L.P.(21)4.10
    
    Waiver Agreement dated as of June 26, 2002 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine, L.P.(24)4.11
    
    Amendment No. 3 to Securities Purchase Agreement by and between Mercury Air Group, Inc. and J.H. Whitney
Mezzanine Fund, L.P. dated as of December 30, 2002.(26)4.12
    
    Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Warrant dated September 10, 1999.(26)4.13
    
    Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Senior Subordinated Promissory Note dated September 10,
1999.(26)4.14
    
    Security Agreement by and between Mercury Air Group, Inc. and each of its subsidiaries hereto as Obligors and
J.H. Whitney Mezzanine Fund, L.P. as the Lenders, dated as of December 30, 2002.(26)4.15
    
    Subordination Agreement among J.H. Whitney Mezzanine Fund, L.P. Foothill Capital Corporation, as Agent and
Mercury Air Group, Inc. and certain of its subsidiaries signatory thereto, dated as of December 30, 2002.(26)4.16
    
    Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group, Inc. and certain
subsidiaries signatory thereto, dated as of December 30, 2002.(26)4.17
    
    First Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group,
Inc. and certain of its subsidiaries, dated March 12, 2003.(30)4.18
    
    Second Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group,
Inc. and certain of its subsidiaries, dated March 31, 2003.(30)4.19
    
    Third Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group,
Inc. and certain of its subsidiaries, dated July 16, 2003.(30)4.20
    
    Fourth Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group,
Inc. and certain of its subsidiaries, dated August 1, 2003.(30)4.21
    
    Amendment No. 4 to Securities Purchase Agreement by and between Mercury Air Group, Inc. and Allied Capital
Corporation, as Assignee of J.H. Whitney Mezzanine Fund, L.P. dated as of October 28, 2003(28)4.22
    
    Assignment of Note dated as of October 28, 2003 between Allied Capital Corporation and J.H. Whitney Mezzanine
Fund, L.P.(28)4.23
    
    Second Amended and Restated Allied Capital Corporation 12% Senior Subordinated Promissory Note dated September
10, 1999(28)4.24
    
    Second Amended and Restated Allied Capital Corporation Warrant dated October 28, 2003(28)4.25
    
    Securities Purchase Agreement dated as of October 28, 2003 by and among J.H. Whitney Mezzanine Fund, L.P. and
J.H. Whitney Mezzanine Debt Fund, L.P., Allied Capital Corporation and Mercury Air Group, Inc.(28)4.26
    
    Second Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Warrant dated October 28, 2003(28)4.27
    
    Fifth Amendment to Security and Loan Agreement and Forbearance Agreement dated as of December 5, 2003 by and
among Wells Fargo Foothill, Mercury Air Group, Inc. and certain of its subsidiaries.(31)4.31
    
    Amendment letter to Forbearance Term and New Covenant Default dated as of February 16, 2004. (32)10.1
    
    Mercury Air Group, Inc.s 1990 Long-Term Incentive Plan.(4)*10.2
    
    Mercury Air Group, Inc.s 1990 Directors Stock Option Plan.(1)*10.3
    
    Memorandum Dated September 15, 1997 regarding Summary of Officer Life Insurance Policies with Benefits Payable
to Officers or Their Designated Beneficiaries.(8)*10.4
    
    Non-Qualified Stock Option Agreement dated March 21, 1996, by and between Frederick H. Kopko and Mercury Air
Group, Inc.(6)*10.5
    
    Mercury Air Group, Inc.s 1998 Long-Term Incentive Plan.(10)*10.6
    
    Mercury Air Group, Inc.s 1998 Directors Stock Option Plan.(10)*10.7
    
    Revolving Credit and Term Loan Agreement dated as of March 2, 1999 by and among Mercury Air Group, Inc., The
Banks
 30




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##### Table of Contents



ExhibitNo.
    
    Descriptionlisted on Schedule 1 thereto, and The Fleet National Bank f/k/a BankBoston, N.A., as Agent.(11)10.8
    
    First Amendment to Revolving Credit and Term Loan Agreement dated as of September 10, 1999.(14)10.9
    
    Second Amendment to Revolving Credit and Term Loan Agreement dated as of March 31, 2000.(14)10.10
    
    Third Amendment, Waiver and Consent to Revolving Credit and Term Loan Agreement dated as of August 11, 2000.(14)10.11
    
    The Companys 401(k) Plan consisting of CNA Trust Corporation. Regional Prototype Defined Contribution Plan and
Trust and Adoption Agreement.(14)*10.12
    
    Employment Agreement dated July 31, 2000 between the Company and Dr. Philip J. Fagan.(15)*10.13
    
    Fourth Amendment to Revolving Credit and Term Loan Agreement dated as of November 14, 2000.(16)10.14
    
    Amendment No. 1 to Mercury Air Group, Inc. 1998 Long-Term Incentive Option Plan as of August 22, 2000.(16)*10.15
    
    Amendment No. 1 to Mercury Air Group, Inc. 1998 Directors Stock Option Plan as of August 22, 2000.(16)*10.16
    
    Limited Waiver letter Agreement to Revolving Credit and Term Loan Agreement dated as of September 21, 2001.(18)10.17
    
    Fifth Amendment to Revolving Credit and Term loan Agreement dated as of September 21, 2001.(18)10.18
    
    Limited Consent letter Agreement to Revolving Credit and Term Loan Agreement dated as of September 30, 2001.(19)10.19
    
    Limited waiver and Consent to Revolving Credit and Term Loan Agreement dated as of December 31, 2001.(21)10.20
    
    2002 Management Stock Purchase Plan.(22)10.21
    
    Amended and Restated Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Joseph A.
Czyzyk.(22)*10.22
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Wayne J. Lovett(22)*10.23
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and John Enticknap (22)*10.24
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Mark Coleman(22)*10.25
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Steven S. Antonoff (22)*10.26
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Robert Schlax(22)*10.27
    
    Limited waiver and Consent to Revolving Credit and Term Loan Agreement dated as of June 27, 2002.(24)10.28
    
    Sale-Leaseback agreement made by and between CFK Realty Partners, LLC and Mercury Air Group, Inc. dated December
15, 2001.(24)10.29
    
    Amendment to Sale-Leaseback agreement made by and between CFK Realty Partners, LLC and Mercury Air Group,
Inc.(24)10.30
    
    Promissory Note by CFK Partners, LLC in favor of Mercury Air Group, Inc.(24)10.31
    
    Limited Waiver and Consent to Revolving Credit and Term Loan Agreement dated as June 27, 2002.(24)10.32
    
    Amendment No. 1 to Amended and Restated Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc.
and Joseph A. Czyzyk.*(24)10.33
    
    Lease dated December 31, 2001 by and between CFK Realty Partners, LLC. and Mercury Air Group, Inc.(30)10.34
    
    Settlement Agreement dated December 12, 2003 by and among (i) J O Hambro Capital Management Group Limited, (ii)
J O Hambro Capital Management Limited, (iii) American Opportunity Trust PLC, (iv) The Trident North Atlantic
Fund, and (v) Mercury Air Group, Inc.(29)10.35
    
    Settlement Agreement by and between: 1) David H. Murdock as trustee of the David H. Murdock Living Trust dated
May 28, 1996, as amended, d/b/a Pacific Holding Company and using nominee PCS001 and 2) Mercury Air Group, Inc.
dated July 16, 2004; (34)10.36
    
    Loan Agreement dated as of July 29, 2004 by and among Bank of America N.A, Mercury Air Group, Inc. and certain
subsidiaries. (35)21.1
    
    Subsidiaries of Registrant.23.1
    
    Consent of PricewaterhouseCoopers
LLP with respect to incorporation of their report on the audited
financial statements included in this Annual Report on Form 10-K in
the Companys Registration Statement on Form S-8 (Registration
Statement No. 33-69414).31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Section 906 Certification of Chief Executive Officer32.2
    
    Section 906 Certification of Chief Financial Officer99.1
    
    Amended and Restated Partnership Agreement dated as of July 30, 2004 of CK Partners by and among Frederick H.
Kopko, Jr. and Joseph A. Czyzyk.
   *
    
    Denotes managements contract or compensation plan or arrangement.(1)
    
    Such document was previously filed as Appendix A to the Companys Proxy
Statement for the December 10, 1993 Annual Meeting of Stockholders and is
incorporated herein by reference.(2)
    
    All such documents were previously filed as Exhibits to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and are
incorporated herein by reference. 31




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##### Table of Contents



(3)
    
    All such documents were previously filed as Exhibits to the Companys
Registration Statement No. 33-39044 on Form S-2 and are incorporated
herein by reference.(4)
    
    Such document was previously filed as Appendix A to the Companys Proxy
Statement for the December 2, 1992 Annual Meeting of Stockholders.(5)
    
    All such documents were previously filed as Exhibits to the Companys
Registration Statement No. 33-65085 on Form S-1 and are incorporated
herein by reference.(6)
    
    All such documents were previously filed as Exhibits to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and are
incorporated herein by reference.(7)
    
    All such documents were previously filed as Exhibits to the Companys
Report on Form 8-K filed September 13, 1996 and are incorporated herein by
reference.(8)
    
    Such document was previously filed as an Exhibit to the Companys Annual
Report on Form 10-K for the year ended June 30, 1997 and is incorporated
herein by reference.(9)
    
    All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 1998 and are
incorporated herein by reference.(10)
    
    Such document was previously filed as Appendix A to the Companys Proxy
Statement for the December 3, 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.(11)
    
    All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and are
incorporated herein by reference.(12)
    
    All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 1999 and are
incorporated herein by reference.(13)
    
    Such document was previously filed as an Exhibit to the Companys current
Report on Form 8-K on August 11, 2000 and is incorporated herein by
reference.(14)
    
    All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2000 and is
incorporated herein by reference.(15)
    
    All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and
are incorporated herein by reference.(16)
    
    All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended December 31, 2000 and
are incorporated herein by reference.(17)
    
    All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and are
incorporated herein by reference.(18)
    
    All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2001 and are
incorporated herein by reference.(19)
    
    All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and
are incorporated herein by reference.(20)
    
    Such document was previously filed as Appendix A to the Companys Proxy
Statement for the November 7, 2001 Annual Meeting of Stockholders and is
incorporated herein by reference.(21)
    
    All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 and
are incorporated herein by reference. 32




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##### Table of Contents



(22)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on June 5, 2002 and is incorporated herein by
reference.(23)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on July 11, 2002 and is incorporated herein by
reference.(24)
    
    All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2002 and are
incorporated herein by reference.(25)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on December 7, 2002 and is incorporated herein by
reference.(26)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on December 30, 2002 and is incorporated herein by
reference.(27)
    
    All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and are
incorporated herein by reference.(28)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on October 28, 2003 and is incorporated herein by
reference.(29)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on December 12, 2003 and is incorporated herein by
reference.(30)
    
    All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2003 and are
incorporated herein by reference.(31)
    
    All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended December 30, 2003 and
are incorporated herein by reference.(32)
    
    All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and are
incorporated herein by reference.(33)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K filed on April 22, 2004 and dated April 12, 2004 and is
incorporated herein by reference.(34)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on July 16, 2004 and is incorporated herein by
reference.(35)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on July 30, 2004 and is incorporated herein by
reference. (b) Reports on Form 8-K: A Form 8-K was filed on April 22, 2004, dated April 12, 2004
reporting on Item 2. Acquisition or Disposition of Assets and Item 7.
Financial Statements and Exhibits, as to the closing of the transaction
with Allied Capital Corporation for the sale of the outstanding shares of
stock of the Companys wholly owned subsidiary Mercury Air Centers, Inc. A Form 8-K/A was filed on May 24, 2004 dated April 12, 2004 reporting
on Item 2. Acquisition or Disposition of Assets and Item 7. Financial
Statements and Exhibits, as to the closing of the transaction with Allied
Capital Corporation for the sale of all of the outstanding shares of stock
of the Companys wholly owned subsidiary Mercury Air Centers, Inc.
Proforma Financial Statements were included with this report. A Form 8-K was filed dated May 13, 2004 reporting on Item 7.
Financial Statements and Exhibits and Item 12. Disclosure of Results of
Operations and Financial Condition. 33




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##### Table of Contents



A Form 8-K was filed dated July 16, 2004 reporting on Item 5. Other
events and regulations FD disclosure and Item 7. Financial Statements and
Exhibits, as to the settlement agreement entered into with David H.
Murdock and related parties. A Form 8-K was filed dated July 23, 2004 reporting on Item 7.
Financial Statements and Exhibits and Item 9. Regulations FD disclosure,
as to the to the retirement of, and termination benefits paid to Philip J.
Fagan. A Form 8-K was filed dated July 30, 2004 reporting on Item 7.
Financial Statements and Exhibits and Item 9. Regulations FD disclosure,
as to the loan agreement and revolving line of credit entered into with
Bank of America, N.A. 34




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of Los
Angeles, State of California, on September 28, 2004. MERCURY AIR GROUP, INC.By:
    /s/ JOSEPH CZYZYKJoseph CzyzykActing Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated: Signers: /s/ JOSEPH CZYZYK
    
    Dated: September 28, 2004Joseph CzyzykActing Chairman of the Board and ChiefExecutive Officer/s/ ROBERT SCHLAX
    
    Dated: September 28, 2004Robert SchlaxChief Financial OfficerAdditional Directors:/s/ GARY J. FERACOTA
    
    Dated: September 28, 2004Gary J. FeracotaDirector/s/ FREDERICK H. KOPKO, JR.
    
    Dated: September 28, 2004Frederick H. Kopko, Jr.Director/s/ SERGEI KOUZMINE
    
    Dated: September 28, 2004Sergei KouzmineDirector/s/ MICHAEL J. JANOWIAK
    
    Dated: September 28, 2004Michael J. JanowiakDirector/s/ ANGELO PUSATERI
    
    Dated: September 28, 2004Angelo PusateriDirector
 35




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Mercury Air Group, Inc. In our opinion, the accompanying consolidated financial statements listed
in the index appearing under Item 15(a)(1) present fairly, in all material
respects, the financial position of Mercury Air Group, Inc. and its
subsidiaries (the Company) at June 30, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2004 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. As discussed in Note 4 to the consolidated financial statements, effective
July 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. Accordingly, the Company
ceased amortizing goodwill as of July 1, 2002.  PRICEWATERHOUSECOOPERS LLP Los Angeles, California
September 21, 2004 F-1




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##### Table of Contents



MERCURY AIR GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS June 30,
    
    June 30,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,690,000
    
    
    $
    2,802,000Restricted cash
    
    
    15,414,000Trade accounts receivable, net of allowance for doubtful accounts of $1,492,000 and
$1,767,000 at June 30, 2004 and 2003, respectively
    
    
    50,974,000
    
    
    
    46,753,000Inventories
    
    
    1,165,000
    
    
    
    4,422,000Prepaid
expenses and other current assets, net of allowance for doubtful
notes of $239,000 at June 30, 2003
    
    
    5,696,000
    
    
    
    5,241,000Deferred income taxes
    
    
    1,451,000
    
    
    
    901,000TOTAL CURRENT ASSETS
    
    
    79,390,000
    
    
    
    60,119,000PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated depreciation and amortization
of $24,836,000 and $61,061,000 at June 30, 2004 and 2003, respectively
    
    
    10,349,000
    
    
    
    58,844,000NOTES RECEIVABLE, net of allowance for doubtful notes of $1,025,000 and $509,000 at
June 30, 2004 and 2003, respectively
    
    
    521,000
    
    
    
    1,815,000DEFERRED INCOME TAXES
    
    
    611,000
    
    
    
    2,284,000GOODWILL
    
    
    4,389,000
    
    
    
    4,389,000OTHER INTANGIBLE ASSETS, NET
    
    
    700,000
    
    
    
    1,033,000RESTRICTED CASH
    
    
    8,989,000OTHER ASSETS, NET
    
    
    1,008,000
    
    
    
    4,471,000TOTAL ASSETS
    
    $
    105,957,000
    
    
    $
    132,955,000LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    33,552,000
    
    
    $
    34,677,000Accrued expenses and other current liabilities
    
    
    11,825,000
    
    
    
    9,244,000Current portion of long-term debt
    
    
    139,000
    
    
    
    4,194,000TOTAL CURRENT LIABILITIES
    
    
    45,516,000
    
    
    
    48,115,000LONG-TERM DEBT
    
    
    17,790,000
    
    
    
    25,501,000SENIOR SUBORDINATED NOTE
    
    
    
    
    
    
    23,445,000DEFERRED GAIN
    
    
    8,130,000OTHER LONG TERM LIABILITY
    
    
    669,000
    
    
    
    918,000DEFERRED RENT
    
    
    1,257,000
    
    
    
    1,885,000MINORITY INTEREST
    
    
    182,000
    
    
    
    180,000TOTAL LIABILITIES
    
    
    73,544,000
    
    
    
    100,044,000COMMITMENTS AND CONTINGENCIES (NOTE 17)MANDATORILY REDEEMABLE PREFERRED STOCK, Series A  $0.01 par value; 1,000,000 shares
authorized; 462,627 shares outstanding at June 30, 2004 and 2003
    
    
    518,000
    
    
    
    481,000STOCKHOLDERS EQUITY:Preferred Stock  $.01 par value; 2,000,000 shares authorized; no shares outstandingCommon Stock  $.01 par value; 18,000,000 shares authorized; 2,954,819 shares
outstanding at June 30, 2004; 3,293,568 shares outstanding at June 30, 2003
    
    
    30,000
    
    
    
    33,000Additional paid-in capital
    
    
    20,737,000
    
    
    
    22,496,000Retained earnings
    
    
    14,596,000
    
    
    
    14,018,000Accumulated other comprehensive income (loss)
    
    
    (46,000
    )
    
    
    (86,000
    )Treasury stock, 22,000 shares at June 30, 2004
    
    
    (120,000
    )Notes receivable from officers
    
    
    (3,302,000
    )
    
    
    (4,031,000
    )TOTAL STOCKHOLDERS EQUITY
    
    
    31,895,000
    
    
    
    32,430,000TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS
EQUITY
    
    $
    105,957,000
    
    
    $
    132,955,000
 See accompanying notes to consolidated financial statements. F-2




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##### Table of Contents



MERCURY AIR GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended June 30,2004
    
    2003
    
    2002Sales and revenues:Sales
    
    $
    322,631,000
    
    
    $
    280,136,000
    
    
    $
    232,573,000Service revenues
    
    
    62,830,000
    
    
    
    57,112,000
    
    
    
    56,352,000Total sales and revenues
    
    
    385,461,000
    
    
    
    337,248,000
    
    
    
    288,925,000Costs and expenses:Costs of sales
    
    
    311,728,000
    
    
    
    269,238,000
    
    
    
    221,668,000Operating expenses
    
    
    60,707,000
    
    
    
    54,901,000
    
    
    
    52,989,000Total costs and expenses
    
    
    372,435,000
    
    
    
    324,139,000
    
    
    
    274,657,000Gross margin (excluding depreciation and amortization)
    
    
    13,026,000
    
    
    
    13,109,000
    
    
    
    14,268,000Expenses (income):Selling, general and administrative
    
    
    12,885,000
    
    
    
    10,818,000
    
    
    
    11,771,000Provision for bad debts
    
    
    506,000
    
    
    
    1,192,000
    
    
    
    1,170,000Depreciation and amortization
    
    
    2,828,000
    
    
    
    2,782,000
    
    
    
    3,478,000Interest expense
    
    
    972,000
    
    
    
    997,000
    
    
    
    1,097,000Settlement costs
    
    
    2,414,000Interest income
    
    
    (318,000
    )
    
    
    (99,000
    )
    
    
    (68,000
    )Loss on sale of property
    
    
    
    
    
    
    
    
    
    
    70,000Expenses of discontinued stock offering
    
    
    
    
    
    
    
    
    
    
    985,000Write-off of deferred financing costs
    
    
    
    
    
    
    1,773,000Write-down of investments
    
    
    
    
    
    
    196,000Total expenses (income)
    
    
    19,287,000
    
    
    
    17,659,000
    
    
    
    18,503,000Loss from continuing operations before income tax benefit
    
    
    (6,261,000
    )
    
    
    (4,550,000
    )
    
    
    (4,235,000
    )Income tax benefit
    
    
    (1,178,000
    )
    
    
    (1,567,000
    )
    
    
    (1,815,000
    )Loss from
continuing operations, net of taxes
    
    
    (5,083,000
    )
    
    
    (2,983,000
    )
    
    
    (2,420,000
    )Discontinued operations:Income (loss) from discontinued operations, net of
income tax provision (benefit) of $(1,157,000), $97,000
and $4,636,000 in 2004, 2003 and 2002, respectively
    
    
    (1,803,000
    )
    
    
    185,000
    
    
    
    6,937,000Gain on sale of discontinued operations, net of income
tax provision of $4,816,000
    
    
    7,501,000Net income (loss)
    
    
    615,000
    
    
    
    (2,798,000
    )
    
    
    4,517,000Accrued preferred stock dividends
    
    
    (37,000
    )
    
    
    (19,000
    )Net income (loss) applicable to common stockholders
    
    $
    578,000
    
    
    $
    (2,817,000
    )
    
    $
    4,517,000Income (loss) per common share:Basic:From
continuing operations, net of taxes
    
    $
    (1.67
    )
    
    $
    (0.92
    )
    
    $
    (0.74
    )From
discontinued operations, net of taxes
    
    
    (0.59
    )
    
    
    0.06
    
    
    
    2.12From sale of
discontinued operations, net of taxes
    
    
    2.45Net income
(loss) per share
    
    $
    0.19
    
    
    $
    (0.86
    )
    
    $
    (1.38
    )Diluted:From
continuing operations, net of taxes
    
    $
    (1.67
    )
    
    $
    (0.92
    )
    
    $
    (0.72
    )From discontinued operations, net of taxes
    
    
    (0.59
    )
    
    
    0.06
    
    
    
    2.07From sale of discontinued operations, net of taxes
    
    
    2.45Net income
(loss) per share
    
    $
    0.19
    
    
    $
    (0.86
    )
    
    $
    1.35
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



MERCURY AIR GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended June 30,2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    615,000
    
    
    $
    (2,798,000
    )
    
    $
    4,517,000Add: Loss from discontinued operations (RPA)
    
    
    
    
    
    
    
    
    
    
    170,000Income (loss) from continuing operations
    
    
    615,000
    
    
    
    (2,798,000
    )
    
    
    4,687,000Adjustments to derive cash flows from operating activities:(Gain) loss on sale of facilities and properties
    
    
    (12,285,000
    )
    
    
    24,000
    
    
    
    (8,929,000
    )Bad debt expense
    
    
    652,000
    
    
    
    1,648,000
    
    
    
    1,358,000Depreciation and amortization
    
    
    7,306,000
    
    
    
    7,963,000
    
    
    
    9,258,000Deferred income taxes
    
    
    1,223,000
    
    
    
    (2,052,000
    )
    
    
    (1,757,000
    )Deferred rent
    
    
    (877,000
    )
    
    
    (58,000
    )
    
    
    589,000Compensation expense related to remeasurement of stock options
    
    
    
    
    
    
    318,000
    
    
    
    87,000Expense related to discount of executive stock purchase
    
    
    
    
    
    
    
    
    
    
    792,000Executive loan amortization
    
    
    549,000
    
    
    
    404,000
    
    
    
    34,000Amortization of senior subordinated note discount
    
    
    132,000
    
    
    
    266,000
    
    
    
    192,000Write off of deferred financing costs
    
    
    
    
    
    
    1,773,000Write down of investments
    
    
    
    
    
    
    196,000Amortization of deferred financing costs
    
    
    384,000
    
    
    
    558,000Executive compensation used to purchase preferred stock
    
    
    
    
    
    
    204,000Executive compensation used to exercise stock options
    
    
    
    
    
    
    174,000Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (13,335,000
    )
    
    
    (831,000
    )
    
    
    4,602,000Inventories
    
    
    433,000
    
    
    
    (1,437,000
    )
    
    
    1,084,000Prepaid expenses and other current assets
    
    
    (1,305,000
    )
    
    
    (2,198,000
    )
    
    
    (160,000
    )Accounts payable
    
    
    3,569,000
    
    
    
    (773,000
    )
    
    
    3,685,000Accrued expenses and other current liabilities
    
    
    6,900,000
    
    
    
    1,426,000
    
    
    
    (1,593,000
    )Net cash provided by (used in) operating activities
    
    
    (6,039,000
    )
    
    
    4,807,000
    
    
    
    13,929,000CASH FLOWS FROM INVESTING ACTIVITIES:Decrease (increase) in restricted cash
    
    
    (24,403,000
    )
    
    
    3,780,000
    
    
    
    (3,780,000
    )Increase in other assets
    
    
    (280,000
    )
    
    
    (1,080,000
    )
    
    
    (437,000
    )Decrease (increase) in notes receivable
    
    
    1,413,000
    
    
    
    343,000
    
    
    
    (78,000
    )Proceeds from sale of facilities and properties
    
    
    73,753,000
    
    
    
    82,000
    
    
    
    17,068,000Additions to property, equipment and leaseholds
    
    
    (5,020,000
    )
    
    
    (4,065,000
    )
    
    
    (4,500,000
    )Net cash provided by (used in) investing activities
    
    
    45,463,000
    
    
    
    (940,000
    )
    
    
    8,273,000CASH FLOWS FROM FINANCING ACTIVITIES:Net additions to (reduction of) debt instruments
    
    
    1,489,000
    
    
    
    (6,833,000
    )
    
    
    (19,828,000
    )Early retirement of debt
    
    
    (37,255,000
    )
    
    
    (13,285,000
    )Proceeds from refinancing
    
    
    
    
    
    
    16,923,000Repurchase of stock for executive plan
    
    
    
    
    
    
    
    
    
    
    (3,934,000
    )Increase in deferred financing costs
    
    
    
    
    
    
    (3,550,000
    )Repurchase of common stock
    
    
    (1,824,000
    )
    
    
    (370,000
    )
    
    
    (311,000
    )Proceeds from issuance of preferred stock
    
    
    
    
    
    
    259,000Proceeds from exercise of stock options
    
    
    14,000
    
    
    
    72,000Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    40,000Net cash used in financing activities
    
    
    (37,576,000
    )
    
    
    (6,784,000
    )
    
    
    (24,033,000
    )Effect of exchange rate changes on cash
    
    
    40,000
    
    
    
    154,000
    
    
    
    (88,000
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS
    
    
    1,888,000
    
    
    
    (2,763,000
    )
    
    
    (1,919,000
    )Net cash provided by discontinued operations (RPA)
    
    
    
    
    
    
    
    
    
    
    3,598,000CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    2,802,000
    
    
    
    5,565,000
    
    
    
    3,886,000CASH AND CASH EQUIVALENTS, END OF YEAR
    
    
    4,690,000
    
    
    $
    2,802,000
    
    
    $
    5,565,000CASH PAID DURING THE YEAR FOR:Interest
    
    $
    5,038,000
    
    
    $
    5,383,000
    
    
    $
    5,786,000Income taxes
    
    $
    997,000
    
    
    $
    5,176,000
    
    
    $
    470,000SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Adjustment of warrants on subordinated note
    
    
    
    
    
    
    
    
    
    $
    43,000Note receivable due to sale of property
    
    
    
    
    
    
    
    
    
    $
    570,000
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



MERCURY AIR GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Common StockAdditionalNumber of
    
    
    
    
    
    Paid-in
    
    RetainedShares
    
    Amount
    
    Capital
    
    EarningsBalances, June 30, 2001
    
    
    3,288,340
    
    
    $
    33,000
    
    
    $
    21,475,000
    
    
    $
    12,472,000Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,517,000Foreign currency
translation
adjustmentComprehensive incomeCommon stock issued on
exercise of options
    
    
    12,110
    
    
    
    
    
    
    
    40,000Note receivable from sale
of stockValue of remeasured stock
options
    
    
    
    
    
    
    
    
    
    
    110,000Repurchase of common stock
    
    
    (29,600
    )
    
    
    
    
    
    
    (194,000
    )
    
    
    (117,000
    )Executive compensation
related to 2002 Management
Stock Purchase Plan
    
    
    
    
    
    
    
    
    
    
    792,000Amortization of note from
executive stock planRevaluation of warrants
issued in connection with
Senior Subordinated Note
    
    
    
    
    
    
    
    
    
    
    43,000Balances, June 30, 2002
    
    
    3,270,850
    
    
    $
    33,000
    
    
    $
    22,266,000
    
    
    $
    16,872,000Comprehensive income (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,798,000
    )Foreign currency
translation adjustmentComprehensive lossCommon stock issued on
exercise of options
    
    
    73,568
    
    
    
    1,000
    
    
    
    245,000Remeasurement of stock
options
    
    
    
    
    
    
    
    
    
    
    318,000Amortization of note from
executive stock planRepurchase of common stock
    
    
    (50,850
    )
    
    
    (1,000
    )
    
    
    (333,000
    )
    
    
    (37,000
    )Accrual of preferred stock
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,000
    )Balances, June 30, 2003
    
    
    3,293,568
    
    
    $
    33,000
    
    
    $
    22,496,000
    
    
    $
    14,018,000Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    615,000Foreign currency
translation adjustmentComprehensive incomeCommon stock issued on
exercise of options
    
    
    4,851
    
    
    
    
    
    
    
    13,000Tax benefit on options
exercised
    
    
    
    
    
    
    
    
    
    
    26,000Write off of officer notes
receivable
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Amortization of note from
executive stock planRepurchase of common stock
    
    
    (343,600
    )
    
    
    (3,000
    )
    
    
    (1,783,000
    )Accrual of
preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 37,000
    )Balances, June 30, 2004
    
    
    2,954,819
    
    
    $
    30,000
    
    
    $
    20,737,000
    
    
    $
    14,596,000
   [Continued from above table, first column(s) repeated] AccumulatedNotes
    
    
    
    
    
    OtherReceivable
    
    Treasury
    
    ComprehensiveFrom Officers
    
    Stock
    
    Income (Loss)
    
    TotalBalances, June 30, 2001
    
    $
    (533,000
    )
    
    
    
    
    
    $
    (228,000
    )
    
    $
    33,219,000Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,517,000Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    (88,000
    )
    
    
    (88,000
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,429,000Common stock issued on
exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000Note receivable from sale
of stock
    
    
    (3,934,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,934,000
    )Value of remeasured stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,000Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (311,000
    )Executive compensation
related to 2002 Management
Stock Purchase Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    792,000Amortization of note from
executive stock plan
    
    
    32,000
    
    
    
    
    
    
    
    
    
    
    
    32,000Revaluation of warrants
issued in connection with
Senior Subordinated Note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,000Balances, June 30, 2002
    
    $
    (4,435,000
    )
    
    
    
    
    
    $
    (316,000
    )
    
    $
    34,420,000Comprehensive income (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,798,000
    )Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    230,000
    
    
    
    230,000Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,568,000
    )Common stock issued on
exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246,000Remeasurement of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318,000Amortization of note from
executive stock plan
    
    
    404,000
    
    
    
    
    
    
    
    
    
    
    
    404,000Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (371,000
    )Accrual of preferred stock
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,000
    )Balances, June 30, 2003
    
    $
    (4,031,000
    )
    
    
    
    
    
    $
    (86,000
    )
    
    $
    32,430,000Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    615,000Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    40,000Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    655,000Common stock issued on
exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,000Tax benefit on options
exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,000Write off of officer notes
receivable
    
    
    340,000
    
    
    
    (120,000
    )
    
    
    
    
    
    
    205,000Amortization of note from
executive stock plan
    
    
    389,000
    
    
    
    
    
    
    
    
    
    
    
    389,000Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,786,000
    )Accrual of preferred stock
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,000
    )Balances, June 30, 2004
    
    $
    (3,302,000
    )
    
    $
    (120,000
    )
    
    $
    (46,000
    )
    
    $
    31,895,000
 F-5




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##### Table of Contents



MERCURY AIR GROUP, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1  Nature of Business and Summary of Significant Accounting Policies: Business Mercury Air Group, Inc. (the Company), a Delaware Corporation, was
organized in 1956 and provides a broad range of services to the aviation
industry through three principal operating units which are all wholly owned
subsidiaries of the Company: MercFuel, Inc. (MercFuel), Mercury Air Cargo,
Inc. (Air Cargo), and Maytag Aircraft Corporation (Maytag). MercFuels
operations consist of the sale and delivery of fuel, primarily aviation fuel,
to domestic and international commercial airlines, fractional jet ownership
companies, corporate aviation fleets and air cargo companies. Air Cargos
operations consist of cargo handling, the sale of cargo capacity on other
airlines, and general cargo sales agent services. Maytag is a provider of
governmental contract services performing aircraft refueling and fuel storage
operations, base operations support (BOS) services, air terminal and ground
handling services and weather observation and forecasting services primarily
for agencies of the government of the United States of America. Through April 12, 2004, the Company operated a fourth operating unit,
Mercury Air Centers, Inc. (Air Centers). Air Centers operations consisted of
aviation fuel sales, aircraft refueling operations (into-plane), aircraft
ground support services, aircraft hangar services, aircraft parking (aircraft
tie-down services) and aircraft maintenance at certain Air Center locations,
known as Fixed Based Operations (FBOs). On April 12, 2004 (the FBO Sale
Closing Date), following stockholder approval, the Company sold all of Air
Centers outstanding common stock to Allied Capital Corporation (Allied).
The assets sold through the sale of the stock of Air Centers consist of all of
the assets of the Companys FBO business excluding the Companys FBO at the
Long Beach Airport, which the Company has retained and continues to operate. For
more detailed information on this transaction (the FBO Sale), please refer to
Note 2  Discontinued Operations. Summary of Significant Accounting Policies
Principles of Consolidation The consolidated financial statements include the accounts of Mercury Air
Group, Inc. and its wholly owned and majority owned subsidiaries. All material
intercompany transactions and balances have been eliminated. Cash and Cash Equivalents Cash equivalents consist of short-term, highly liquid investments that are
readily convertible into cash and were purchased with maturities of three
months or less. Inventories Inventories primarily consist of aviation fuel and are stated at the lower
of moving-average cost or market. Property, Equipment and Leaseholds Property,
equipment and leaseholds are recorded at cost. Depreciation and
amortization is
computed using the straight-line method over the estimated useful life of the
related asset or over the lesser of the lease term and useful life for
leasehold improvements. Expenditures incurred to maintain and repair property,
equipment and leaseholds are expensed as incurred. Expenditures which extend
the estimated useful life or improve productivity are charged to their
respective property accounts. Goodwill and Other Intangible Assets Acquisition cost in excess of the fair value of net assets acquired
under the purchase method is classified as goodwill. Effective July 1, 2002 the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. In accordance with SFAS No. 142,
goodwill and intangible assets with indefinite lives are no longer amortized,
but written down, as needed, based upon an impairment analysis that must occur
at least annually or sooner if an event occurs or circumstances change that
would more likely than not result in an impairment loss. All other intangible
assets are amortized over their estimated useful lives. F-6




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Impairment of Long-Lived Assets The Company reviews for impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. The carrying
value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flows from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair value of the long-lived
asset. Fair value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Losses on long-lived
assets to be disposed of are determined in a similar manner, except that fair
values are reduced for the cost of disposal. The cash flows used in such
analyses are typically derived from the expected cash flows associated with the
asset under review, which is determined from management estimates and judgments
of expected future results. Should the actual cash flows vary from the
estimated amount, a write-down of the asset may be warranted in a future
period. Stock Option Plans The Company has four stock option plans, which are more fully described in
Note 12. As permitted under SFAS No. 123, Accounting for Stock- Based
Compensation (SFAS No. 123), and as amended by SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure (SFAS No. 148) the
Company measures compensation expense related to employee stock options granted
utilizing the intrinsic value method as prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. The following table illustrates the pro forma effect
on net income (loss) if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation. Year Ended June 30,2004
    
    2003
    
    2002Net income (loss), as reported
    
    $
    615,000
    
    
    $
    (2,798,000
    )
    
    $
    4,517,000Add stock-based employee compensation expense
included in net income (loss), net of tax
    
    
    237,000
    
    
    
    473,000
    
    
    
    561,000Less total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of tax
    
    
    (85,000
    )
    
    
    (354,000
    )
    
    
    (1,193,000
    )Pro forma net income (loss)
    
    $
    767,000
    
    
    $
    (2,679,000
    )
    
    $
    3,885,000Basic net income (loss) per share  as reported
    
    $
    0.19
    
    
    $
    (0.86
    )
    
    $
    1.38Basic net income (loss) per share  pro forma
    
    
    0.24
    
    
    
    (0.82
    )
    
    
    1.18Diluted net income (loss) per share  as reported
    
    
    0.19
    
    
    
    (0.86
    )
    
    
    1.35Diluted net income (loss) per share  pro forma
    
    
    0.24
    
    
    
    (0.82
    )
    
    
    1.16
 The weighted average per share fair value of options granted in 2004, 2003
and 2002 is estimated as $2.65, $2.55 and $4.53, respectively, on the date of
grant using the Black-Scholes option pricing model using the following weighted
average assumptions. 2004
    
    2003
    
    2002Expected life
    
    5 years
    
    5 years
    
    5 yearsExpected volatility
    
    
    42
    %
    
    
    43
    %
    
    
    45
    %Risk free interest rate
    
    
    3.93
    %
    
    
    0.97
    %
    
    
    1.90
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 The effect of applying SFAS No. 123 may not be representative of the pro
forma effect in future years since additional options may be granted during
those future years and the assumptions may change. Operating Leases The Company leases substantially all of its facilities under long-term
operating leases. The majority of lease terms range from 2 to 20 years, and
typically the leases contain renewable options. Deferred Rent Deferred rent represents the cumulative effect of reduced rental payments
during the initial years for one of the Companys facility leases. The total
rental cost is being recognized on a straight-line basis over the life of the
lease. F-7




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Environmental Related Liabilities Liabilities related to environmental conditions that will result in future
expenditures are recorded when it is determined that such liabilities are
probable and the amount of the expenditures can be reasonably estimated. The
Company considers that an environmental liability has been incurred when an
environmental assessment or investigation has identified a condition that will
require remedial action for which the Company is responsible. The timing of the
recognition of the remediation costs is dependent upon the completion of the
assessment or evaluation and the commitment to an appropriate remedial action
plan. Liabilities associated with environmental remediation activities are not
discounted nor reduced by possible recoveries from third parties. Environmental related expenditures resulting from the Companys operations
are expensed when determined. Environmental related expenditures resulting from
operations prior to the time that the Company owned and/or operated the site or
that are deemed to create future benefits to the Company are capitalized. Foreign Currency Translation Assets and liabilities of the Companys foreign subsidiaries are
translated into U.S. dollars at the exchange rate prevailing at the balance
sheet date and, where appropriate, at historical rates of exchange. Income and
expense accounts are translated at the average exchange rate in effect
during the year. The aggregate effect of translating the financial statements
of the foreign subsidiaries is included in Accumulated other comprehensive
income (loss) in the statement of stockholders equity. Foreign exchange
transaction gains (losses) were not significant during the years presented. Revenue Recognition Revenues are recognized upon delivery of product or the completion of
service. For fuel delivered on an into-plane basis, revenue is recognized on
the date the fuel is delivered into the aircraft. Aircraft maintenance
contracts are recognized as the labor and maintenance is completed. Cargo
handling and storage revenue is recognized in the period the cargo is shipped
out of the Companys cargo warehouses. Space logistics and general cargo sales
agent services are recognized as revenue in the period that the related flights
occur or the commissions are earned. Revenue associated with fixed rate fees of
long-term service contracts is recognized on a straight-line basis over the
term of the contract. The Company reviews its fixed priced contracts on an
annual basis to determine whether it expects to incur losses over the remaining
term of the contract. If the Company expects to incur losses on a fixed price
contract, the loss is recognized in the period in which the determination is
made. Revenue associated with the variable rate fees of long-term contracts is
recognized in the period in which services are performed and completed. The
Companys contracts with the government of the United States of America are
subject to profit renegotiation. To date, the Company has not been required to
adjust profits arising from contracts with governmental agencies of the United
States of America. In certain cases, the Company sells aviation fuel to customers on a
prepaid basis. Revenue associated with these sales is recognized upon delivery
of the aviation fuel to the customer. Amounts received in excess of the amounts
recognized as revenue are reported as a current liability to the customer and
are reflected on the Companys balance sheet as Accrued expenses and other
current liabilities. Shipping and Handling Revenue reported by the Company includes all amounts billed to a customer
including applicable shipping and handling costs. In-bound freight and handling
costs, or costs incurred to transport product from the Companys supplier to
the Companys distribution point, are included as a component of product cost
and, if the product is held as inventory, included as a component of inventory
and expensed as cost of sales when delivered to the customer. Outbound freight
and handling costs, or costs incurred to transport product from the Companys
distribution point to the customer, is included as cost of sales in the period
in which the product is delivered to the customer. F-8




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Income Taxes Deferred income taxes are determined using the liability method. A
deferred tax asset or liability is determined based on the difference between
the financial statement and tax basis of assets and liabilities as measured by
the enacted tax rates that will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the deferred tax asset or
liability. If necessary, valuation allowances are established to reduce
deferred tax assets to their expected realizable values. Fair Value of Financial Instruments The Companys financial instruments consist primarily of cash and cash
equivalents, accounts receivables and payables, and debt instruments. The book
values of all financial instruments, other than debt instruments, are
representative of their fair values due to their short-term maturity. Use of Estimates in the Preparation of Financial Statements 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 for the reporting period. Actual results could differ from those
estimates. New Accounting Pronouncements On April 30, 2003, the Financial Accounting Standards Board (FASB)
issued SFAS No. 149, Amendment
of Statement No. 133 on Derivative Instruments and Hedging Activities. This
standard amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. The provisions of this statement are generally
effective for contracts entered into or modified after June 30, 2003. The
Company adopted SFAS No.149 on July 1, 2003 with no material impact on the
Companys financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), which was
subsequently revised in December 2003. This interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest entities. Under
current practice, two enterprises generally have been included in consolidated
financial statements because one enterprise controls the other through voting
interests. FIN 46 defines the concept of variable interests and requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
the parties involved. This interpretation applies immediately to variable
interest entities created after January 31, 2003. It applies in the first
fiscal year or interim period beginning after December 15, 2003, to variable
interest entities considered to be a special purpose entity (SPE) in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
For non-SPE variable interest entities acquired before February 1, 2003, the
interpretation must be adopted no later than the first interim or annual period
ending after March 15, 2004. The interpretation may be applied prospectively
with a cumulative-effect adjustment as of the date on which it is first applied
or by restating previously issued financial statements for one or more years
with a cumulative-effect adjustment as of the beginning of the first year
restated. The Company adopted FIN 46 during the quarter ended March 31, 2004 with
no material impact on the Companys financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,
which establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires classification of financial instruments within its scope as a
liability, including financial instruments issued in the form of shares that
are mandatorily redeemable, because those financial instruments are deemed to
be, in essence, obligations of the issuer. The Company adopted SFAS
No. 150 during the quarter ended March 31, 2004 with no material impact on the
Companys financial statements. Reclassifications Certain reclassifications were made to the prior years financial
statements to conform to the June 30, 2004 presentation. F-9




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##### Table of Contents



Risks and Uncertainties Accounts receivable is comprised primarily of trade receivables from
customers and is net of an allowance for doubtful accounts. The Companys
credit risk is based in part on the following: 1) substantially all receivables
are related to the aviation industry, 2) there is a concentration of credit
risk as there are several customers who at any time have significant balances
owed to the Company, 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 may 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. The
Company assesses its credit portfolio on an ongoing basis and establishes
allowances which it believes are adequate to absorb potential credit problems
that can be reasonably anticipated. The Company purchases aviation fuel from a limited number of suppliers. If
the Companys relationship with any of these key suppliers terminates, the
Company may not be able to obtain a sufficient quantity of aviation fuel on
favorable terms or may experience difficulty in obtaining aviation fuel from
alternative suppliers. Furthermore, difficulties faced by these suppliers or
aviation fuel shortages or the inability to obtain aviation fuel from alternate
sources at acceptable prices and terms could impair the Companys ability to
sell aviation fuel to its customers at competitive prices and terms. Seasonality The Companys commercial aviation fuel sales are seasonal in nature, being
relatively stronger during the months of April through December than during the
winter months due in part to weather conditions, and stronger during the summer
months due in part to additional commercial and charter flights. Air Cargos
business is lower during the months of January and February and increases from
March through June and September through December. The cargo business is
affected by the fluctuations in international trade. Operations at military
facilities are not seasonal but may vary with the needs of the military. Note 2  Discontinued Operations: On April 12, 2004, after receiving approval from the Companys
stockholders at the Annual Stockholders meeting, the Company sold all of the
outstanding common stock of Air Centers, which represented 100% of
the then outstanding common stock in Air Centers, to Allied with the Company
receiving total consideration for the sale in cash at closing of $76,349
thousand. The assets sold through the sale of the stock of
Air Centers consist of all of the assets of the Companys FBO business
excluding the Companys FBO at the Long Beach Airport which the Company will
retain and continue to operate. In December 2002, when the terms and
conditions of the $24 million Senior Subordinated 12% Note (the Note) were
amended, the terms of the amended Note contained punitive provisions if the
Company did not prepay the entire amount outstanding on the Note by December
31, 2003. Since that time, the Company assessed several options to raise the
capital required to prepay the Note to avoid being subject to those punitive
provisions. The Company proposed and the board of directors approved the FBO
Sale based on several factors including, but not limited to: 1) the terms of
the Note, as amended in December 2002 contained punitive provisions if the
Company did not prepay the entire amount due on the Note by December 31, 2003;
2) the Company was unable to raise capital in the financial market to prepay
the Note; and 3) the Company was not able to sell other assets to adequately
prepay the Note to avoid or eliminate those punitive provisions. The final amount of the total consideration to be received by the Company
from the FBO Sale is dependent upon, among other things, the determination of
the amount of Air Centers net working capital at the time of closing and the
distribution of funds from the escrow account established at closing for the
Hartsfield FBO (the Hartsfield Escrow). In accordance with the terms of the
Stock Purchase Agreement entered into by the Company and Allied on October 28,
2003, as amended from time to time, the Company and Allied agreed to the extent
Air Centers actual net working capital at closing exceeded $3,586 thousand,
Allied is obligated to pay the Company the excess amount or to the extent Air
Centers net working capital is less than $3,586 thousand, the Company is
obligated to pay Allied the deficiency. The parties also agreed to deposit
$8,270 thousand at closing to establish the Hartsfield Escrow to be distributed
to the parties over a period not to exceed five (5) years from the FBO Sale
Closing Date dependent upon the award of a new lease at the Hartsfield
International Airport in Atlanta for a new FBO. If Air Centers is awarded the
new lease, dependent upon the effective date and the terms and conditions of
the new lease, the Company may be entitled to all, some or none of the amount
deposited into the Hartsfield Escrow at closing. The proceeds from the FBO Sale were used to: 1) prepay the outstanding
principal on the Facility (See Note 9- Long Term Debt) due Wells Fargo Foothill
Company (Foothill) comprised of both a term loan and a revolving credit
facility, in the amount of $13,255 thousand; 2) pay accrued interest and fees
associated with the Facility of $203 thousand; 3) establish a cash collateral
with Foothill in the amount of $16,031 thousand in support of issued and
outstanding letters of credit issued under the terms of the Facility; 4) prepay
the outstanding principal, including the amount of accrued interest
payable-in-kind (PIK), on the Note of $24,120 thousand to Allied; 5) pay F-10




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##### Table of Contents



accrued interest and fees associated with the Note of $141 thousand; 6)
prepay the outstanding principal, including the amount of accumulated PIK
interest, on the Hambro Notes (See Note 16- Settlement Costs) in the amount of
$3,695 thousand; 7) pay accrued interest on the Hambro Notes in the amount of
$15 thousand; 8) establish the Hartsfield Escrow in the amount of $8,270
thousand; and 9) pay for transaction related fees and expenses of $1,324
thousand. After satisfying the obligations noted above, the Company received
$9,295 thousand. The Company reported a net gain on the FBO Sale of $7,501 thousand in
fiscal 2004. On July 3, 2001, the Company completed the sale of its subsidiary, RPA
Airline Automation Services, Inc. (RPA), which provided airline revenue
accounting and management information software consisting of proprietary
software programs which are marketed to foreign and domestic airlines. The following are the results of operations of discontinued business: Year Ended June 30,2004
    
    2003
    
    2002Total sales and revenue
    
    $
    72,775,000
    
    
    $
    96,249,000
    
    
    $
    94,417,000Gross margin
    
    
    7,375,000
    
    
    
    12,854,000
    
    
    
    13,545,000Income (loss) before income taxes
    
    $
    (2,960,000
    )
    
    $
    282,000
    
    
    $
    11,573,000Income tax provision (benefit)
    
    $
    (1,157,000
    )
    
    $
    97,000
    
    
    $
    4,636,000Net income (loss)
    
    $
    (1,803,000
    )
    
    $
    185,000
    
    
    $
    6,937,000
 Note 3  Property, Equipment and Leaseholds: Property, equipment and leaseholds consist of the following components: June 30,2004
    
    2003Land, buildings and leasehold improvements
    
    $
    17,842,000
    
    
    $
    88,706,000Equipment, furniture and fixtures
    
    
    17,343,000
    
    
    
    30,201,000Construction in progress
    
    
    
    
    
    
    998,00035,185,000
    
    
    
    119,905,000Less accumulated depreciation and amortization
    
    
    (24,836,000
    )
    
    
    (61,061,000
    )$
    10,349,000
    
    
    $
    58,844,000
 Property, equipment and leaseholds are depreciated or amortized primarily
on a straight-line basis over the lesser of their estimated useful lives or the
lease term. Useful lives for buildings and leasehold improvements range
from the lease term to 30 years and from 3 to 10 years for equipment, furniture
and fixtures. Depreciation and amortization expense for the continuing
property, equipment and leasehold improvements was $2,828 thousand, $2,782
thousand and $3,478 thousand in fiscal 2004, 2003 and 2002, respectively. Note 4  Goodwill and Other Intangible Assets: The following table presents the transitional disclosures for the years
ended June 30, 2004, 2003 and 2002 to reflect the adoption of SFAS No. 142 as
of July 1, 2002. Such disclosures add back goodwill amortization to the 2002
results to be comparable with the 2004 and 2003 results, which do not include
goodwill amortization. Year Ended June 30,2004
    
    2003
    
    2002Net income (loss), as reported
    
    $
    615,000
    
    
    $
    (2,798,000
    )
    
    $
    4,517,000Goodwill amortization net of tax
    
    
    
    
    
    
    
    
    
    
    248,000Net income (loss), as adjusted
    
    $
    615,000
    
    
    $
    (2,798,000
    )
    
    $
    4,765,000Diluted net income (loss) per share, as reported
    
    $
    0.19
    
    
    $
    (0.86
    )
    
    $
    1.35Diluted net income (loss) per share, as adjusted
    
    $
    0.19
    
    
    $
    (0.86
    )
    
    $
    1.42
 The Company had $700 thousand and $1,033 thousand of net intangible assets
at June 30, 2004 and 2003, respectively. Accumulated amortization for
intangible assets was $300 thousand and $967 thousand at June 30, 2004 and
2003, respectively. Intangible assets at June F-11




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30, 2004 consist of value allocated to the purchase of aviation fuel sales
contracts and are being amortized over five years. Amortization expense for
intangible assets was $200 thousand and $100 thousand for the years
ended June 30, 2004 and 2003, respectively. Estimated amortization expense in
each of the next five years is as follows: $200 thousand in 2005; $200 thousand
in 2006; $200 thousand in 2007; $100 thousand in 2008; and $0 in 2009. Note 5  Restricted Cash Restricted cash consists of cash held for specific purposes and not
available for general use by the Company. Restricted cash as of June 30, 2004
is comprised of: 1) $16,133 thousand on deposit as collateral for outstanding
letters of credit (LOC Reserve); and 2) $8,270
thousand for the Hartsfield Escrow. On July 29, 2004, the effective date of the senior secured credit facility
with Bank of America, N.A. (Bank of America), $15,414 thousand of the LOC
Reserve became unrestricted as the outstanding letters of credit issued on
behalf of the Company by Bank of America were secured by the collateral base of
the Bank of America Credit Facility. The Hartsfield Escrow is an escrow account established in accordance with
the terms of the FBO Sale agreement and will be distributed in part or in
whole, under certain conditions, over a period not to exceed five years from
the FBO Sale Closing Date dependent upon the award of a new lease at the
Hartsfield International Airport in Atlanta for a new FBO. If Air Centers is
awarded the new lease, dependent upon the effective date and the terms and
conditions of the new lease, the Company may be entitled to all, some or none
of the Hartsfield Escrow. Note 6  Other Assets: Other assets consist of the following components: June 30,2004
    
    2003Deferred loan fees, net
    
    $
    247,000
    
    
    $
    3,339,000Capitalized acquisition costs
    
    
    
    
    
    
    321,000Internally developed software
    
    
    453,000
    
    
    
    603,000Other
    
    
    308,000
    
    
    
    208,000$
    1,008,000
    
    
    $
    4,471,000
 Deferred loan fees represent costs incurred in connection with outstanding
debt and are being amortized over the term of the debt.
During fiscal 2004, the Company wrote off $2,549 thousand in deferred loan fees
related to debt retired with the proceeds from the FBO sale. Note 7  Accrued Expenses and Other Current Liabilities: Accrued expenses and other current liabilities consist of the following
components: June 30,2004
    
    2003Salaries, wages, and benefits
    
    $
    3,819,000
    
    
    $
    3,610,000Sales and fuel taxes
    
    
    1,988,000
    
    
    
    2,086,000Severance
payment
    
    
    1,890,000Legal accrual
    
    
    1,519,000
    
    
    
    80,000Insurance
premiums
    
    
    789,000
    
    
    
    361,000Note premium
    
    
    
    
    
    
    1,724,000Other
    
    
    1,820,000
    
    
    
    1,383,000$
    11,825,000
    
    
    $
    9,244,000
 F-12




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##### Table of Contents



Note 8  Income Taxes: The income tax provision (benefit) consists of the following components: Year Ended June 30,2004
    
    2003
    
    2002Current
income tax provision (benefit) from
continuing operationsFederal
    
    $
    (1,087,000
    )
    
    $
    157,000
    
    
    $
    725,000State and other
    
    
    234,000
    
    
    
    328,000
    
    
    
    163,000Total
current income tax provision (benefit)
    
    
    (853,000
    )
    
    
    485,000
    
    
    
    888,000Deferred
income tax provision (benefit)Federal
    
    
    (260,000
    )
    
    
    (1,594,000
    )
    
    
    (2,180,000
    )State and other
    
    
    (65,000
    )
    
    
    (458,000
    )
    
    
    (523,000
    )Total
deferred income tax benefit
    
    $
    (325,000
    )
    
    $
    (2,052,000
    )
    
    $
    (2,703,000
    )Total income
tax benefit from continuing
operations
    
    
    (1,178,000
    )
    
    
    (1,567,000
    )
    
    
    (1,815,000
    )Income tax provision on discontinued
operations
    
    
    3,659,000
    
    
    
    97,000
    
    
    
    4,636,000Total income tax provision (benefit)
    
    $
    2,481,000
    
    
    $
    (1,470,000
    )
    
    $
    2,821,000
 The following is a reconciliation of the federal statutory rate to the
Companys effective tax rate on pretax income (loss): Year Ended June 30,2004
    
    2003
    
    2002Continuing operations:Federal
income tax (benefit) at statutory rate
    
    $
    (2,129,000
    )
    
    $
    (1,547,000
    )
    
    $
    (1,440,000
    )State income
tax provision (benefit), net of federal benefit
    
    
    148,000
    
    
    
    (123,000
    )
    
    
    (118,000
    )Nondeductible
settlement costs
    
    
    821,000Other, net
    
    
    (18,000
    )
    
    
    103,000
    
    
    
    (257,000
    )Income tax benefit from continuing operations
    
    
    (1,178,000
    )
    
    
    (1,567,000
    )
    
    
    (1,815,000
    )Discontinued Operations:Federal
income tax at statutory rate
    
    $
    3,181,000
    
    
    $
    95,000
    
    
    $
    4,011,000State income tax, net of federal benefit
    
    
    484,000
    
    
    
    2,000
    
    
    
    459,000Other, net
    
    
    (6,000
    )
    
    
    
    
    
    
    166,000Income tax
provision on discontinued operations
    
    
    3,659,000
    
    
    
    97,000
    
    
    
    4,636,000Total income
tax provision (benefit)
    
    $
    2,481,000
    
    
    $
    (1,470,000
    )
    
    $
    2,821,000
 For
additional information on the non-deductible settlement costs, see
Note 16  Settlement Costs. Deferred tax assets
(liabilities) consist of the following components: June 30,2004
    
    2003Depreciation and amortization
    
    $
    (983,000
    )
    
    $
    645,000Prepaid expenses
    
    
    (593,000
    )
    
    
    (787,000
    )Executive note amortization
    
    
    769,000
    
    
    
    483,000State income taxes
    
    
    26,000
    
    
    
    21,000Allowance for doubtful accounts
    
    
    643,000
    
    
    
    987,000Deferred rent
    
    
    494,000
    
    
    
    740,000Installment sale deferral
    
    
    805,000
    
    
    
    420,000Accrued expenses
    
    
    978,000
    
    
    
    992,000Other
    
    
    (77,000
    )
    
    
    (316,000
    )$
    2,062,000
    
    
    $
    3,185,000
 F-13




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##### Table of Contents



Note 9  Long-Term Debt: Long-term debt consists of the following components: June 30,2004
    
    2003Tax exempt bond pursuant to a loan
agreement between the Company and the
California Economic Development
Financing Authority (CEDFA), with a
redemption of $14.0 million at the
end of the fifteenth year (2013). The
loan carries a variable rate which is
based on a weekly remarketing of the
bonds. The rate at June 30, 2004 was
1.1% per annum. In addition, a letter
of credit has been issued on behalf
of the Company to guarantee the
credit at an annual cost of
approximately 3.1% of the principal.
    
    $
    14,000,000
    
    
    $
    14,000,000Notes payable to banks
    
    
    
    
    
    
    11,588,000Note payable by CFK Realty to a bank
in monthly installments of $25,779
per month including interest at 7.5%
per annum collateralized by the
Companys corporate office, maturing
in December 2011 (See Note 18).
    
    
    3,010,000
    
    
    
    3,090,000Note payable by MercMed to a bank in
monthly installments of $5,778 per
month including interest at 5.59% per
annum, collateralized by an aircraft.
The rate is fixed for 36 months
through March 2006, at which time the
rate is adjusted at three-year
intervals, to the federal home loan
bank rate plus 275 basis point (See
Note 18).
    
    
    667,000
    
    
    
    696,000Mortgage payable to a financial
institution in monthly principal
installments of $3,024 at an interest
rate of 6.68% per annum,
collateralized by land and buildings,
maturing in May 2010.
    
    
    252,000
    
    
    
    267,000Convertible subordinated debentures
payable to seller of Excel Cargo in
monthly installments of $13,810
including interest at 8.5% per annum,
collateralized by property acquired,
which matured in September 2003.
    
    
    
    
    
    
    54,00017,929,000
    
    
    
    29,695,000Less current portion of long term debt
    
    
    139,000
    
    
    
    4,194,000$
    17,790,000
    
    
    $
    25,501,000
 Notes payable to banks at June 30, 2003 consisted of a loan and security
agreement (the Facility), entered into on December 30, 2002 with Wells Fargo
Foothill (WFF), a division of Wells Fargo Bank and Cerberus Partners for a
five year term expiring December 30, 2007 that replaced the Companys former
collateralized credit facilities. Outstanding borrowings under the Facility as
of June 30, 2003 consisted of a term loan and a revolving line of credit, in
the amount of $11,588 thousand. All outstanding obligations associated with
the Facility were fully satisfied with proceeds from the FBO Sale on April 12,
2004. The note payable by CFK Realty is collateralized by the building that is
the Companys corporate headquarters that has a net book value of $3,967
thousand at June 30, 2004. The note payable by MercMed is collateralized by an
aircraft that has a net book value as of June 30, 2004 of $1,167 thousand. The
mortgage payable is collateralized by land and a building that is the corporate
headquarters for Maytag and has a net book value of $415 thousand at June 30,
2004. The following are the annual maturities of long term debt for each of the
next five fiscal years and in total thereafter: 2005
    
    $
    139,0002006
    
    
    149,0002007
    
    
    160,0002008
    
    
    171,0002009
    
    
    183,000Thereafter
    
    
    17,127,000$
    17,929,000
 F-14




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##### Table of Contents



Note 10  Senior Subordinated Note: On September 10, 1999 the Company issued, in a private placement, a $24.0
million Senior Subordinated 12% Note (the Note) due in 2006 with detachable
warrants to acquire 251,563 shares of the Companys common stock originally
exercisable at $13.00 per share, as adjusted for the reverse stock split
effective June 18, 2003. The Note agreement was first amended on November 16,
2001, whereby the exercise price of the warrants was reduced to $11.00 per
share. The Note Agreement was then subsequently amended on December 30, 2002
whereby, among other things, the exercise price on the original stock warrants
was reduced to $7.484 per share. On October 28, 2003, the Company reduced the
exercise price on these original warrants to $6.10 per share in connection with
the acquisition of the Note by Allied on that date. The Note was retired on
April 12, 2004 utilizing proceeds from the FBO Sale. The
following were the components of the Note at June 30, 2003: 2003Senior Subordinated Note, before discount
    
    $
    24,000,000Valuation of warrants credited to additional paid-in-capital
    
    
    (1,427,000
    )Accumulated amortization of warrants
    
    
    872,000Senior Subordinated Note
    
    $
    23,445,000
 Note 11  Mandatorily Redeemable Preferred Stock: The Company issued 462,627 shares of Series A 8% Cumulative Convertible
Preferred Stock (the Preferred Stock) at a stated value of $1.00 per share
with a par value of $0.01 per share in December 2002 to investors having a
pre-existing relationship with the Company, comprised of customers and
employees. The issuance of the Preferred Stock occurred after the Company was
unable to drawdown on its then senior revolving credit facility. The shares of the Preferred Stock are convertible to common stock, at the
option of the stockholder, at a conversion price of $7.50 per share. Dividends
on the Preferred Stock accrue on an annual basis at an annual rate of 8.0% and
shall be fully cumulative and shall accrue whether or not they have been
declared and whether or not there are profits, surplus or other funds of the
Company legally available for the payment of dividends. Such dividends shall be
paid, either in cash or in-kind, at the election of the Company. Accrued
dividends at June 30, 2004 were $56,000. During a 30-day period immediately
following the third, fourth, fifth and each subsequent anniversary date of the
issuance of the Preferred Stock, both the Company and the stockholder have the
option to redeem the then outstanding shares of Preferred Stock for an amount
equal to $1.00 plus all accrued but unpaid dividends for each share of
Preferred Stock redeemed. The Company has the option, whether the Company or
the Stockholder exercised their redemption option, to pay all or part of the
redemption in shares of the Companys common stock. In the event of any
liquidation of the Company, the holders of Preferred Stock have a liquidation
preference over common stock, plus all declared but unpaid dividends. In the
event the assets are insufficient to cover the aforesaid amounts, the preferred
stockholders would share in the assets ratably in proportion to the full
preferential amount. Note 12  Employee Stock Option Plans: The Company has the following stock option plans: the 1990 Long-Term
Incentive Plan (1990 Incentive Plan); the 1990 Directors Stock Option Plan
(1990 Directors Plan); the 1998 Long-Term Incentive Plan (1998 Incentive
Plan); the 1998 Directors Stock Option Plan (1998 Directors Plan); and the
2001 Stock Incentive Plan (2001 Incentive Plan). The Company has reserved
864,816 shares related to the Incentive Plans and 240,754 shares related to the
Directors Plans. The Company has also reserved 3,438 shares for special option
grants made outside the Plans. Options granted pursuant to the Plans and
special grants are generally made at the fair market value of such shares on
the date of grant and generally vest over twelve months. The contractual lives
of the options are generally ten years. F-15




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##### Table of Contents



The following is a summary of stock option activity: Long-Term
    
    Weighted
    
    Directors
    
    Weighted
    
    Special
    
    Weighted
    
    2002
    
    WeightedIncentive
    
    Average
    
    Stock Option
    
    Average
    
    Option
    
    Average
    
    Management
    
    AveragePlans
    
    Option Prices
    
    Plans
    
    Option Prices
    
    Grants
    
    Option Prices
    
    Stock Plan
    
    Option PricesOutstanding at June 30, 2001
    
    
    224,265
    
    
    
    $11.19
    
    
    
    183,563
    
    
    
    $9.65
    
    
    
    3,438
    
    
    
    $14.36Granted
    
    
    250,000
    
    
    
    10.9
    
    
    
    5,000
    
    
    
    13.22
    
    
    
    
    
    
    
    
    
    
    
    68,448
    
    
    
    $15.00Exercised
    
    
    (12,225
    )
    
    
    3.26Cancelled
    
    
    (19,647
    )
    
    
    15.88
    
    
    
    (7,555
    )
    
    
    9.86Outstanding at June 30, 2002
    
    
    442,393
    
    
    
    11.04
    
    
    
    181,008
    
    
    
    9.74
    
    
    
    3,438
    
    
    
    14.36
    
    
    
    68,448
    
    
    
    15.00Granted
    
    
    30,000
    
    
    
    6.60Exercised
    
    
    (20,630
    )
    
    
    2.81
    
    
    
    (52,941
    )
    
    
    3.54Cancelled
    
    
    (49,599
    )
    
    
    13.60
    
    
    
    (27,563
    )
    
    
    12.96Outstanding at June 30, 2003
    
    
    402,164
    
    
    
    10.81
    
    
    
    100,504
    
    
    
    12.13
    
    
    
    3,438
    
    
    
    14.36
    
    
    
    68,448
    
    
    
    15.00Granted
    
    
    75,000
    
    
    
    6.19Exercised
    
    
    (4,851
    )
    
    
    2.81Cancelled
    
    
    (21,344
    )
    
    
    7.70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,500
    )
    
    
    15.00Outstanding at June 30, 2004
    
    
    450,969
    
    
    
    $10.28
    
    
    
    100,504
    
    
    
    $12.13
    
    
    
    3,438
    
    
    
    $14.36
    
    
    
    40,948
    
    
    
    $15.00
 The following is a summary of information about stock options issued and
outstanding pursuant to the Incentive Plan, Directors Plan and special option
grants at June 30, 2004: Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedShares
    
    Average
    
    Average
    
    Shares
    
    AverageOutstanding at
    
    Contractual
    
    Exercise
    
    Exercisable at
    
    ExerciseExercise Price Range
    
    June 30, 2004
    
    Remaining Life
    
    Price
    
    June 30, 2004
    
    Price$  2.806
-   6.600
    
    
    112,563
    
    
    
    9.23
    
    
    $
    6.07
    
    
    
    112,563
    
    
    $
    6.079.252 - 10.900
    
    
    247,626
    
    
    
    6.92
    
    
    
    10.79
    
    
    
    247,626
    
    
    
    10.7911.200 - 12.908
    
    
    133,140
    
    
    
    3.74
    
    
    
    11.92
    
    
    
    133,140
    
    
    
    11.9214.364 - 16.875
    
    
    102,530
    
    
    
    5.36
    
    
    
    15.30
    
    
    
    61,582
    
    
    
    15.51595,859
    
    
    
    6.38
    
    
    $
    10.93
    
    
    
    554,911
    
    
    $
    10.63
 The Company had shares exercisable under the various options plans of
476,106 and 381,828 at June 30, 2004 and 2003, respectively, at a weighted
average exercise price of $11.37 and $10.68, respectively. During fiscal 2003, the Company extended the termination dates of certain
stock options for an additional five years for 55,730 shares held by a
director, an officer, and several employees of the Company, resulting in
compensation expense of $318,000. No other terms were modified including the
vesting period or exercise price. During fiscal 2002, the Company extended the termination dates of certain
stock options for an additional five years for 16,625 shares held by an officer
and a director, resulting in compensation expense of $87,000. No other terms
were modified including the vesting period or exercise price. During fiscal 1996, the Company sold 68,750 shares of its common stock to
two officers for $812,500. The officers each paid $40,000 in cash and issued
promissory notes of $732,500 for the balance of the purchase price. The notes
are payable over ten years and due in fiscal 2006. As of June 30, 2004, $533
thousand remained outstanding. During fiscal 2002 in connection with the 2002 Management Stock Purchase
Plan, the Company loaned certain officers a total of $3,934 thousand to
purchase shares in the Companys stock from CFK Partners (see Note 18) at a
price of $15.00 per share, as adjusted for the one-for-two reverse stock split
effective June 18, 2003. The split adjusted trading price of the shares at that
time was $9.80 per share. Included in this amount was a full recourse loan of
approximately $2,907 thousand made to the Companys CEO (Full Recourse Note).
The remaining $1,027 thousand in loans (Non-Recourse Loans) to the other
executives of the Company are collateralized by the related common stock.
During fiscal 2002, the Company recorded a compensation charge of $792 thousand
in connection with these loans to reflect the benefit received by CFK Partners
represented by the purchase price paid for the shares in excess of the market
value of such shares at that time. The loans to the executives (including the
Full Recourse Note) were made pursuant to employment agreements and contain
provisions to be forgiven over either an eight-year or a ten-year period under
certain conditions. The Non-Recourse Loans are being accounted for as a
variable stock plan pursuant to APB Opinion No. 25, and the Full Recourse Note
is being accounted for as a fixed stock plan. Compensation expense will be
charged annually as the loans are forgiven. The amount of compensation expense
recorded in fiscal 2004, 2003 and 2002 associated with the forgiveness of the
loans was $388 thousand, $404 thousand and $34 thousand, respectively. F-16




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During fiscal 2004, two officers who participated in the 2002 Management
Stock Purchase Plan terminated employment with the Company. On the date of
their employment termination, their respective executive loans had not been
fully forgiven. In exchange for the forgiveness of the outstanding executive
loan amounts, the Company acquired 22,000 shares of the Companys common stock
from those officers. The Company is holding these shares of stock as treasury
stock at a cost of $120 thousand. The cost of the treasury shares was based on
the closing market price of the Companys common stock on the American Stock
Exchange on the date of their respective terminations of employment. The
difference between the value associated with the treasury stock and the
outstanding balance on these executive loans of $213 thousand was expensed. Note 13  Common stock purchase warrants The Note that the Company issued in 1999, which was repaid in full with
the proceeds from the FBO Sale, included detachable warrants to acquire 251,563
shares of the Companys common stock originally exercisable at $13.00 per
share. The Note agreement was amended on November 16, 2001, whereby the
exercise price was reduced to $11.00 per share, and again on December 30, 2002,
whereby the exercise price of the warrants was reduced to $7.484 per share. On
October 28, 2003, J H Whitney Mezzanine Fund, the originally holder of the
warrants, assigned warrants to acquire 226,407 shares of the Companys common
stock to Allied (the Allied Warrants) while retaining warrants to acquire
25,156 shares of the Companys common stock (the Whitney Warrants). At that
time, the Company reduced the exercise price for the Allied Warrants to $6.10
per common share. All of the outstanding warrants expire on September 9, 2006. Note 14  Acquisitions and Divestitures: On April 12, 2004, after receiving approval from the Companys
stockholders at the Annual Stockholders Meeting, the Company sold all of the
outstanding common stock of Air Centers, which represented 100% of
the then outstanding common stock in Air Centers, to Allied with the Company
receiving total consideration for the sale in cash at closing of $76,349
thousand. The assets sold through the sale of the stock of
Air Centers consist of all of the assets of the Companys FBO business
excluding the Companys FBO at the Long Beach Airport which the Company will
retain and continue to operate. The final amount of the total consideration to
be received by the Company from the FBO Sale is dependent upon, among other
things, the determination of the amount of Air Centers net working capital at
the time of closing and the distribution of funds from the Hartsfield Escrow.
In accordance with the terms of the Stock Purchase Agreement entered into by
the Company and Allied on October 28, 2003, as amended from time to time, the
Company and Allied agreed to the extent Air Centers actual net working capital
at closing exceeded $3,586 thousand, Allied is obligated to pay the Company the
excess amount or to the extent Air Centers net working capital is less than
$3,586 thousand, the Company is obligated to pay Allied the deficiency. The
parties also agreed to deposit $8,270 thousand at closing to establish the
Hartsfield Escrow to be distributed to the parties over a period not to exceed
five (5) years from the FBO Sale Closing Date dependent upon the award of a new
lease at the Hartsfield International Airport for a new FBO. If Air Centers is
awarded the new lease, dependent upon the effective date, terms and conditions
of the new lease, the Company may be entitled to none, some or all of the
Hartsfield Escrow. The proceeds from the FBO Sale were used to: 1) prepay the outstanding
principal on the Facility due Foothill
comprised of both a term loan and a revolving credit facility, in the amount of
$13,255 thousand; 2) pay accrued interest and fees associated with the Foothill
credit facility of $203 thousand; 3) establish a cash collateral with Foothill
in the amount of $16,031 thousand in support of issued and outstanding letters
of credit issued under the terms of the Foothill credit facility; 4) prepay the
outstanding principal, including the amount of accrued interest PIK on the Note of $24,120 thousand to Allied; 5) pay accrued interest
and fees associated with the Note of $141 thousand; 6) prepay the outstanding
principal, including the amount of accumulated PIK interest, on the Hambro
Notes in the amount of $3,695 thousand; 7) pay accrued interest on the Hambro
Notes in the amount of $15 thousand; 8) establish the Hartsfield Escrow in the
amount of $8,270 thousand; and 9) pay for transaction related fees and expenses
of $1,324 thousand. After satisfying the obligations noted above, the Company
received $9,295 thousand. In June 2002, the Company sold its FBO operations at Bedford,
Massachusetts for $15,500 thousand in cash, resulting in a pre-tax gain of
$8,929 thousand. Estimated taxes of $3,530 thousand for this sale were
transferred to a bank escrow account pending payment of the related federal and
state taxes or payment of bank debt. The remaining cash proceeds of $11,520
thousand were utilized to repay bank debt. Note 15  MercFuel Private Placement: On March 7, 2001, the Company announced its plan to create an independent
publicly traded company, MercFuel, Inc. MercFuel was organized in
Delaware on October 27, 2000 as a wholly owned subsidiary of the Company. On
January 1, 2001, the F-17




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##### Table of Contents



Company transferred to MercFuel the assets and liabilities of its Fuel
Sales division. On May 16, 2001, and amended twice thereafter, MercFuel filed a
registration statement related to the proposed offering. Due to market
conditions, the Company was not able to complete the offering. The Company
incurred $985 thousand of expenses associated with the offering and private
placement which were expensed during the second quarter of fiscal 2002. Note 16  Settlement Costs During fiscal 2004, the Company incurred settlement costs of $2,414
thousand associated with two items. In December 2003, the Company entered into a settlement agreement relating
to litigation with J O Hambro Capital Management and certain of its affiliates
and private clients (collectively J O Hambro) whereby the Company agreed to
pay J O Hambro $3,586,000 (the Hambro Settlement Amount) in exchange for the
following, among other things: (1) the release of certain claims by J O Hambro;
(2) the Companys agreement to dismiss litigation against J O Hambro; (3) the
Companys agreement not to institute certain litigation against J O Hambro and
certain other parties; (4) reimbursement of certain costs associated with the
pending litigation and defense preparation for anticipated litigation between
the parties; and (5) the purchase of 343,600 shares of the Companys common
stock (collectively referred to as the Hambro Settlement). The Hambro Settlement resulted in
settlement costs of $1,799 thousand, which is non-deductible for income tax
purposes, which represented the difference between the Hambro Settlement Amount
and the trading value of the shares of common stock acquired by the Company on
the day of the Hambro Settlement. In
July 2004, the Company entered into a settlement agreement with
David H. Murdock and related parties (collectively Murdock). The Company and
Murdock entered into a mutual release of claims whereby Murdock was
paid $525 thousand representing all costs, fees and expenses
incurred by Murdock in connection with this settlement agreement and due
diligence investigation of the Companys business and in consideration for
Murdocks execution of the mutual release of claims. In addition, Murdock
agreed to sell and the Company agreed to purchase 150,000 shares of the
Companys common stock, representing all of the Companys common stock owned by
Murdock, for $6.00 per share (collectively the Murdock Settlement). The
Murdock Settlement resulted in settlement costs of $615 thousand, which is not
deductible for income tax purposes, and represents the difference between the
total amount paid by the Company for the Murdock Settlement and the trading
value of the shares of common stock acquired by the Company on the day of the
Murdock Settlement. Note 17  Commitments and Contingencies: Leases The Company is obligated under noncancellable operating leases. Certain
leases include renewal clauses and require payment of real estate taxes,
insurance and other operating costs. Total rental expense for continuing
operations on all such leases for fiscal 2004, 2003 and 2002 was $6,806
thousand, $6,505 thousand and $4,699 thousand, respectively, which is net of
sublease rental income of approximately $63,000, $63,000 and $183,000 for
fiscal 2004, 2003 and 2002, respectively. The following are the minimum annual
rentals on all noncancellable-operating leases having a term of more than one
year at June 30, 2004: 2005
    
    $
    7,187,0002006
    
    
    6,581,0002007
    
    
    3,286,0002008
    
    
    2,668,0002009
    
    
    2,402,000Thereafter
    
    
    5,376,000Total minimum payments required
    
    $
    27,500,000
 Purchase Commitments On April 1, 2004, Air Cargo entered into a one-year renewal of its
contract to purchase all of South African Airlines cargo capacity on its
passenger flights from the United States and Canada to South Africa. Air
Cargos one-year commitment for these routes is approximately $4,715 thousand,
which is essentially unchanged from the previous year. F-18




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Guarantees The Company is a guarantor on certain airport site and facility leases
associated with eleven of Air Centers FBO locations that were in effect as of
the FBO Sale Closing Date. As a condition of the sale, Allied agreed to fully
indemnify the Company from any and all costs associated with the pre-existing
guarantees while Air Centers and Allied use their best efforts to have the
Company removed as guarantor on these leases. As a result of the
indemnification provided by Allied, the Company does not believe any
claim being made on the Company as a result of these guarantees will have a
material effect on the Companys results of operations, cash flows or
financial position. Litigation On May 1, 2002, the Company received a notice of violation (NOV) from
the Environmental Protection Agency (EPA) for the Air Centers Fort Wayne,
Indiana facility alleging that the Companys spill prevention, control and
countermeasure plan (SPCC Plan) did not meet certain federal regulations. On
March 14, 2003, the Company received a NOV from the EPA alleging certain
deficiencies in the Companys SPCC Plan for the Air Centers Fort Wayne,
Indiana facility, submitted to the EPA in November 2002. The Company believes
that it has resolved all deficiencies except for alleged deficiencies related
to: 1) secondary containment for refueling trucks, and 2) secondary containment
for discrete fuel loading areas. Pursuant to an agreement detailed in a letter
submitted to the EPA on April 16, 2003, the Company has been permitted to
suspend modifications to its SPCC Plan regarding the installation of secondary
containment for its refueling trucks, pending resolution of federal regulatory
issues associated with secondary containment for such trucks. The EPA has also
extended national compliance with regulations related to discrete loading areas
until August 17, 2004. Further, the EPA announced in a Federal Register notice
dated June 28, 2004, 69 Fed. Reg. 38297 that the EPA is considering a proposal
to amend 40 CFR 112 to address, among other things, the applicability of the
rule to mobile/portable containers. The FBO Sales Stock Purchase Agreement between the Company and Allied
provides that the Company shall be responsible for compliance, for a period of
eighteen months subsequent to the FBO Sale Closing Date for any required
secondary containment (as the term is defined in the Stock Purchase Agreement)
required by any applicable governmental authority requiring secondary
containment pursuant to environmental law for extended or overnight fuel truck
parking at any FBO comprising the FBO business on the FBO Sale Closing Date. In
the opinion of management, the ultimate resolution of this matter is not
expected to have a material effect on the Companys results of operations, cash
flows or financial position. On February 26, 2003, Robert Bosch filed an action in the United States
District Court, Eastern District of New York against Excel Cargo, Inc.
(Excel), a wholly owned subsidiary of the Company, and others seeking $1.5
million in damages for damaged cargo. On June 4, 2003 plaintiffs counsel
agreed to voluntarily dismiss Excel, without prejudice, from the lawsuit
conditioned on the production of information by Excel. To date, plaintiff has
not yet followed through. This matter is insured and is being handled by
insurance counsel. In the opinion of management, the ultimate resolution of
this matter is not expected to have a material effect on the Companys results
of operations, cash flows or financial position. On April 16, 2003, the Plan Committee of Shuttle America Corp. filed an
Adversary Proceeding in the United States Bankruptcy Court, District of
Connecticut alleging preferential transfers in the amount of $995 thousand. The
parties reached a settlement agreement, which provided the Company to pay
Shuttle America $40 thousand. The settlement agreement was approved by the
bankruptcy court with the Company satisfying, subsequent to the bankruptcy
court approval, all outstanding obligations on this matter. On July 9, 2003 Central Insurance Company, LTD filed an action in the
United States District Court Central District of California-Western Division,
against Air Cargo for damages paid to their assured United Microelectronics
Corp in the amount of $335,337. In May 2004, this matter was dismissed without
cost to the Company. On November 26, 2003, Signature Flight Support Corporation filed a
complaint against Air Centers and Allied alleging: 1) breach of contract and
tortious interference with contract against Allied; 2) interference with
prospective economic advantage against Allied; and 3) unfair business practices
against the Company and Allied. The Company believes that the allegations are
without merit and is in the process of preparing a response. The Company has
agreed to indemnify Allied and its affiliates (including, without limitation,
Air Centers after the closing of the FBO Sale), directors, officers, agents,
employees and controlling persons from certain liabilities, obligations, losses
or expenses to which Allied may become subject as a result of the complaint.
On August 4, 2004 the parties participated in a court ordered mediation session
and were not able to resolve their differences. In the opinion of management,
the ultimate resolution of this complaint is not expected to have a material effect on
the Companys results of operations, cash flows or financial position. F-19




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The Company is also a defendant in certain litigation arising in the
normal course of business. In the opinion of management, the ultimate
resolution of such litigation will not have a material effect on the Companys
results of operations, cash flows or financial position. Note 18  Related Party Transactions: CFK Partners was a partnership consisting of three of the Companys
directors, one of whom also serves as the Companys Chief Executive Officer and
another who serves as Chairman of the Board of Directors. In addition, CFK
Partners also owns approximately 30% of the Companys outstanding common stock.
In July 2004, after the retirement of Dr. Fagan as the Companys Chairman of
the Board of Directors, Dr. Fagan withdrew as a member of CFK Partners. The
remaining members of CFK Partners, now known as CK Partners, are the Companys
Chief Executive Officer and one of the members of the Companys board of
directors, who is also the Companys primary outside legal counsel. Pursuant
to the terms of Dr. Fagans contract with the Company, upon
Dr. Fagans retirement as Chairman of the Board of Directors in July 2004, the
Company paid Dr. Fagan a bonus and severance payment of $1,890 thousand. In January 2002, the Company sold the land and the office building which
houses its corporate headquarters to CFK Realty Partners, LLC (CFK Realty)
for $4,200 thousand, consisting of $2,800 thousand in cash and a note
receivable of $1,400 thousand. The note accrued interest at 5% and contained
provisions whereby CFK Realty could elect to extend the maturity date in
one-year increments through December 31, 2004. The note had an original
maturity date of December 31, 2002. In early December 2002, and again in 2003
the Company received notification from CFK Realty that it was exercising its
right to extend the maturity date of the note for an additional one year
period. Concurrently with the sale, the Company also entered into a twenty-year
lease of the property for a monthly rental amount of approximately $37
thousand. During fiscal 2003, the Company expended $275 thousand for leasehold
improvements on its corporate headquarters. This amount will be amortized over
the office lease term. CFK Realty financed the purchase of the headquarters
through a $3,200 thousand loan. In July 2004, CFK Realty was restructured
whereby Dr. Fagan, the retired Chairman of the Companys Board of Directors,
became the sole member of CFK Realty. The Company uses the services of the legal firm McBreen and Kopko (the
Firm) for various general corporate legal matters. Mr. Frederick H. Kopko,
Jr., a partner of the Firm, is a member of the Companys Board of Directors and
is a member of CK Partners. During fiscal 2004, 2003 and 2002, the Company
paid the Firm $916 thousand, $699 thousand, and $785 thousand, respectively,
for legal services rendered by the Firm. Note 19   Major Customers and Foreign Customers: AirTran Airways represented approximately 23%, 24% and 20% of the
Companys consolidated revenues from continuing operations for fiscal 2004,
2003 and 2002, respectively, with sales to NetJets comprising approximately 8%,
7% and 2% of the Companys consolidated revenues from continuing operations for
fiscal 2004, 2003 and 2002, respectively. Government contract services consist
of revenues from agencies of the government of the United States of America.
Revenue from this segment represented approximately 6%, 7% and 10% of the
Companys consolidated revenues from continuing operations for fiscal 2004,
2003 and 2002, respectively. National, a customer of MercFuel, ceased
operations on November 6, 2002. The Company had been providing fuel to National
since May 1999. In December 2000, National filed for Chapter 11 bankruptcy
protection and the Company continued to sell fuel to National on a secured
basis under the auspices of the bankruptcy court. Sales to National represented
approximately 7% and 17% of consolidated revenues from continuing operations
for fiscal 2003 and 2002, respectively. No other customers accounted for over
10% of the Companys consolidated revenues from continuing operations. The
Company does business with a number of foreign airlines, principally in the
sale of aviation fuels. For the most part, such sales are made within the
United States of America 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 35%, 31% and 23% of
consolidated revenues from continuing operations for fiscal 2004, 2003 and
2002, respectively. Note 20  Net Income (Loss) Per Share: Basic net income (loss) per common share is computed by dividing net
income (loss) available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number of
common shares and dilutive common stock equivalents. Common stock equivalents
include stock options and shares resulting from the assumed conversion of
subordinated debentures, when dilutive. F-20




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##### Table of Contents



The weighted average number of common shares outstanding and equivalent
common shares outstanding have been adjusted retroactively to reflect the
effect of the one-for-two reverse stock split that was effective June 18, 2003. Year Ended
    
    Year Ended
    
    Year EndedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2002Basic
    
    Diluted
    
    Basic
    
    Diluted
    
    Basic
    
    DilutedWeighted average number of common stock outstanding during
the period
    
    
    3,059,200
    
    
    
    3,059,200
    
    
    
    3,263,000
    
    
    
    3,263,000
    
    
    
    3,282,500
    
    
    
    3,282,500Common stock equivalents resulting from the assumed
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,500Common stock resulting from the assumed conversion of
debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,000Weighted average number of common and common equivalent
shares outstanding during the period
    
    
    3,059,200
    
    
    
    3,059,200
    
    
    
    3,263,000
    
    
    
    3,263,000
    
    
    
    3,282,500
    
    
    
    3,355,000Loss from
continuing operations, net of taxes
    
    $
    (5,083,000
    )
    
    $
    (5,083,000
    )
    
    $
    (2,983,000
    )
    
    $
    (2,983,000
    )
    
    $
    (2,420,000
    )
    
    $
    (2,420,000
    )Add:
Interest expense, net of taxes, on convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Adjusted
loss from continuing operations, net of taxes
    
    $
    (5,083,000
    )
    
    $
    (5,083,000
    )
    
    $
    (2,983,000
    )
    
    $
    (2,983,000
    )
    
    $
    (2,420,000
    )
    
    $
    (2,405,000
    )Preferred stock dividends
    
    
    (37,000
    )
    
    
    (37,000
    )
    
    
    (19,000
    )
    
    
    (19,000
    )Discontinued operations:Income
(loss) from discontinued operations, net of taxes
    
    
    (1,803,000
    )
    
    
    (1,803,000
    )
    
    
    185,000
    
    
    
    185,000
    
    
    
    6,937,000
    
    
    
    6,937,000Gain on sale
of discontinued operations, net of taxes
    
    
    7,501,000
    
    
    
    7,501,000Adjusted net income (loss) applicable to common stockholders
    
    $
    578,000
    
    
    $
    578,000
    
    
    $
    (2,817,000
    )
    
    $
    (2,817,000
    )
    
    $
    4,517,000
    
    
    $
    4,532,000Common stock and common stock equivalents
    
    
    3,059,200
    
    
    
    3,059,200
    
    
    
    3,263,000
    
    
    
    3,263,000
    
    
    
    3,282,500
    
    
    
    3,355,000Income (loss) per share:From
continuing operations, net of taxes
    
    $
    (1.67
    )
    
    $
    (1.67
    )
    
    $
    (0.92
    )
    
    $
    (0.92
    )
    
    $
    (0.74
    )
    
    $
    (0.72
    )From discontinued operations, net of taxes
    
    
    (0.59
    )
    
    
    (0.59
    )
    
    
    0.06
    
    
    
    0.06
    
    
    
    2.12
    
    
    
    2.07From sale of discontinued operations, net of taxes
    
    
    2.45
    
    
    
    2.45Net income (loss) per share
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    (0.86
    )
    
    $
    (0.86
    )
    
    $
    1.38
    
    
    $
    1.35
 Note 21  Segment Reporting: The Company operates and reports its activities through three principal
units: MercFuel, Air Cargo and Maytag. Air Centers was sold on April 12,
2004 and RPA, was sold on July 3, 2001. As a result, Air Centers and RPAs
historical operating results have been reclassified as discontinued operations.
The segment data included below has been restated to exclude amounts related to
the Air Centers. Corporateor
    
    Total Continuing
    
    DiscontinuedMercFuel
    
    Air Cargo
    
    Maytag
    
    Unallocated
    
    Operations
    
    Business
    
    Total2004Revenues
    
    $
    322,631
    
    
    $
    39,549
    
    
    $
    23,281
    
    
    
    
    
    
    $
    385,461
    
    
    
    
    
    
    $
    385,461Gross margin
    
    
    6,080
    
    
    
    1,800
    
    
    
    5,146
    
    
    
    
    
    
    
    13,026
    
    
    
    
    
    
    
    13,026Depreciation and amortization
    
    
    469
    
    
    
    1,725
    
    
    
    414
    
    
    
    220
    
    
    
    2,828
    
    
    
    4,478
    
    
    
    7,306Capital expenditures
    
    
    662
    
    
    
    63
    
    
    
    172
    
    
    
    287
    
    
    
    1,184
    
    
    
    3,836
    
    
    
    5,020Goodwill
    
    
    
    
    
    
    1,252
    
    
    
    3,137
    
    
    
    
    
    
    
    4,389
    
    
    
    
    
    
    
    4,389Total segment assets
    
    
    38,575
    
    
    
    14,631
    
    
    
    10,121
    
    
    
    42,630
    
    
    
    105,957
    
    
    
    
    
    
    
    105,9572003Revenues
    
    $
    280,136
    
    
    $
    32,691
    
    
    $
    24,421
    
    
    
    
    
    
    $
    337,248
    
    
    
    
    
    
    $
    337,248Gross margin
    
    
    5,926
    
    
    
    2,585
    
    
    
    4,598
    
    
    
    
    
    
    
    13,109
    
    
    
    
    
    
    
    13,109Depreciation and amortization
    
    
    318
    
    
    
    1,887
    
    
    
    349
    
    
    
    228
    
    
    
    2,782
    
    
    
    5,181
    
    
    
    7,963Capital expenditures
    
    
    7
    
    
    
    60
    
    
    
    4
    
    
    
    319
    
    
    
    390
    
    
    
    3,675
    
    
    
    4,065Goodwill
    
    
    
    
    
    
    1,252
    
    
    
    3,137
    
    
    
    
    
    
    
    4,389
    
    
    
    
    
    
    
    4,389Total segment assets
    
    
    29,460
    
    
    
    16,226
    
    
    
    10,773
    
    
    
    17,411
    
    
    
    73,870
    
    
    
    59,085
    
    
    
    132,955
 F-21




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##### Table of Contents



The
information provided above for Discontinued Business represents
the depreciation and amortization and capital
expenditures for Air Centers through the FBO Sale Closing Date for fiscal 2004. For fiscal 2003, the
information provided for Discontinued Business represents depreciation
and amortization and capital expenditures for the full year and the segment
assets as of June 30, 2003. Gross margin is used as the measure of profit and loss for segment
reporting purposes as it is viewed by key decision makers as the principal
operating indicator in measuring segment profitability. The key decision makers
also view bad debt expense as an important measure of profit and loss. The
predominant component of bad debt expense relates to MercFuel. Bad debt expense
for MercFuel was approximately $263 thousand, $1,060 thousand in fiscal 2004
and 2003, respectively; total bad debt expense for continuing operations, was
$506 thousand and $1,192 and in fiscal 2004 and 2003 respectively. Note 22  Quarterly Financial Data (Unaudited): September 30,
    
    December 31,
    
    March 31,
    
    June 30,2003
    
    2003
    
    2004
    
    2004Sales and revenues
    
    $
    79,710,000
    
    
    $
    91,499,000
    
    
    $
    103,781,000
    
    
    $
    110,471,000Gross margin
    
    
    3,511,000
    
    
    
    3,828,000
    
    
    
    2,732,000
    
    
    
    2,955,000Income (loss) from continuing operations, net of taxes
    
    
    68,000
    
    
    
    (1,248,000
    )
    
    
    (1,168,000
    )
    
    
    (2,735,000
    )Gain on
sale, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,501,000Loss from discontinued
operations, net of taxes
    
    
    (370,000
    )
    
    
    (269,000
    )
    
    
    (651,000
    )
    
    
    (513,000
    )Net income
(loss)
    
    
    (302,000
    )
    
    
    (1,517,000
    )
    
    
    (1,819,000
    )
    
    
    4,253,000Income (loss) per share:Basic:From continuing operations, net of taxes
    
    
    $0.02
    
    
    
    $(0.39
    )
    
    
    $(0.41
    )
    
    
    $(0.95
    )From gain on sale, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.59From discontinued operations, net of taxes
    
    
    (0.12
    )
    
    
    (0.09
    )
    
    
    (0.22
    )
    
    
    (0.18
    )Net income
(loss) per share
    
    
    $(0.10
    )
    
    
    $(0.48
    )
    
    
    $(0.63
    )
    
    
    $1.46Diluted:From
continuing operations, net of taxes
    
    
    $0.02
    
    
    
    $(0.39
    )
    
    
    $(0.41
    )
    
    
    $(0.95
    )From gain on sale, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.59From discontinued operations, net of taxes
    
    
    (0.12
    )
    
    
    (0.09
    )
    
    
    (0.22
    )
    
    
    (0.18
    )Net income
(loss) per share
    
    
    $(0.10
    )
    
    
    $(0.48
    )
    
    
    $(0.63
    )
    
    
    $1.46
 The
sum of the fiscal 2004 quarterly income (loss) per share does not
agree with the fiscal 2004 full year income (loss) per share due to
the purchase of 346,100 shares of common stock by the Company
during fiscal 2004. Included in the shares acquired by the Company is
the purchase of 343,600 shares of common stock purchased in
accordance with the Hambro Settlement as discussed in Note 16
 Settlement Costs. September 30,
    
    December 31,
    
    March 31,
    
    June 30,2002
    
    2002
    
    2003
    
    2003Sales and revenues
    
    $
    84,069,000
    
    
    $
    90,509,000
    
    
    $
    86,883,000
    
    
    $
    75,787,000Gross margin
    
    
    2,977,000
    
    
    
    3,947,000
    
    
    
    3,249,000
    
    
    
    2,936,000Loss from continuing operations, net of taxes
    
    
    (957,000
    )
    
    
    (834,000
    )
    
    
    (510,000
    )
    
    
    (683,000
    )Income (loss) from discontinued
operations, net of taxes
    
    
    368,000
    
    
    
    238,000
    
    
    
    (588,000
    )
    
    
    168,000Net loss
    
    
    (589,000
    )
    
    
    (596,000
    )
    
    
    (1,098,000
    )
    
    
    (515,000
    )Income (loss) per share:Basic:From continuing operations, net of taxes
    
    
    $(0.30
    )
    
    
    $(0.25
    )
    
    
    $(0.15
    )
    
    
    $(0.22
    )From discontinued operations, net of taxes
    
    
    0.12
    
    
    
    0.07
    
    
    
    (0.18
    )
    
    
    0.05Net loss per
share
    
    
    $(0.18
    )
    
    
    $(0.18
    )
    
    
    $(0.33
    )
    
    
    $(0.17
    )Diluted:From continuing operations, net of taxes
    
    
    $(0.30
    )
    
    
    $(0.25
    )
    
    
    $(0.15
    )
    
    
    $(0.22
    )From discontinued operations, net of taxes
    
    
    0.12
    
    
    
    0.07
    
    
    
    (0.18
    )
    
    
    0.05Net loss per
share
    
    
    $(0.18
    )
    
    
    $(0.18
    )
    
    
    $(0.33
    )
    
    
    $(0.17
    )
 F-22




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##### Table of Contents



MERCURY AIR GROUP, INC. AND SUBSIDIARIES
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended June 30, 2004 Balance at
    
    Charged to Costs
    
    Deductions
    
    Balance at EndClassification
    
    Beginning of Period
    
    And Expenses
    
    (a)
    
    of Period2004Allowance for doubtful accounts (b)
    
    $
    2,515,000
    
    
    $
    652,000
    
    
    $
    (650,000
    )
    
    $
    2,517,0002003Allowance for doubtful accounts (b)
    
    $
    1,583,000
    
    
    $
    1,648,000
    
    
    $
    (716,000
    )
    
    $
    2,515,0002002Allowance for doubtful accounts
    
    $
    1,653,000
    
    
    $
    1,358,000
    
    
    $
    (1,428,000
    )
    
    $
    1,583,000
   (a)
    
    The Deductions for fiscal 2004 includes $510,000 for the Air Centers on
the FBO Sale Closing Date. The other Deductions represent the accounts
receivable amounts written-off during the year.  (b)
    
    Inclusive of allowance for trade accounts receivable and notes
receivable. F-23