<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997.
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition period from to
Commission File No. 1-7134
MERCURY AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
New York 11-1800515
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5456 McConnell Avenue, Los Angeles, CA 90066
(Address of principal executive offices) (Zip Code)
(310) 827-2737
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
<TABLE>
<CAPTION>
Number of Shares Outstanding
Title As of November 1, 1997
----- ----------------------
<S> <C>
Common Stock, $.01 Par Value 7,130,351
</TABLE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,813,000 $ 2,889,000
Cash- restricted (Note 3) 1,000,000 7,000,000
Trade accounts receivable, net of allowance for doubtful
accounts of $2,342,000 at 9/30/97 and $1,875,000 at 6/30/97 (Note 3) 41,717,000 43,924,000
Notes receivable - current portion 1,839,000 1,939,000
Inventories, principally aviation fuel 2,939,000 1,948,000
Prepaid expenses and other current assets 4,251,000 2,705,000
------------ ------------
Total current assets 54,559,000 60,405,000
PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated
depreciation and amortization of $26,025,000 at 9/30/97 and
$25,180,000 at 6/30/97 (Note 4) 29,403,000 24,834,000
NOTES RECEIVABLE, net of current portion 535,000 956,000
OTHER ASSETS 5,992,000 6,110,000
DEFERRED INCOME TAXES 332,000 332,000
------------ ------------
$ 90,821,000 $ 92,637,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,400,000 $ 16,937,000
Accrued expenses and other current liabilities 2,701,000 4,475,000
Current portion of long-term debt 2,485,000 1,878,000
------------ ------------
Total current liabilities 22,586,000 23,290,000
LONG-TERM DEBT (Note 4) 17,439,000 15,195,000
CONVERTIBLE SUBORDINATED DEBENTURES 28,115,000 28,115,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Note 6):
Preferred Stock - $.01 par value; authorized 3,000,000 shares;
no shares outstanding
Common Stock - $ .01 par value; authorized 18,000,000 shares;
outstanding 7,370,551 shares 9/30/97;
outstanding 7,524,651 shares 6/30/97 73,000 75,000
Additional paid-in capital 20,369,000 20,796,000
Retained Earnings 2,981,000 5,907,000
Notes receivable from sale of stock-officers (662,000) (662,000)
Cumulative translation adjustment (80,000) (79,000)
------------ ------------
Total stockholders' equity 22,681,000 26,037,000
------------ ------------
$ 90,821,000 $ 92,637,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996
-------------------------------
<S> <C> <C>
Sales and Revenues:
Sales $ 54,428,000 $ 56,851,000
Service revenues 14,737,000 12,532,000
------------ ------------
69,165,000 69,383,000
Costs and Expenses:
Cost of sales 48,420,000 52,657,000
Operating expenses 13,721,000 11,154,000
------------ ------------
62,141,000 63,811,000
------------ ------------
Gross Margin (Excluding depreciation and amortization) 7,024,000 5,572,000
------------ ------------
Expenses (Income):
Selling, general and administrative 1,386,000 1,474,000
Provision for bad debts 453,000 272,000
Depreciation and amortization 1,166,000 809,000
Interest expense 856,000 797,000
Interest income (228,000) (132,000)
Loss resulting from bankruptcy of customer (Note 3) 7,050,000
------------ ------------
10,683,000 3,220,000
------------ ------------
(Loss) Income Before (Credit) Provision for Income Taxes (3,659,000) 2,352,000
(Credit) Provision for Income Taxes (1,464,000) 940,000
------------ ------------
Net (Loss) Income ($ 2,195,000) $ 1,412,000
============ ============
Net (Loss) Income Per Share (Note 5):
Primary ($0.29) $0.18
============ ============
Fully Diluted ($0.29) $0.15
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1997 1996
--------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($2,195,000) $1,412,000
Adjustments to derive cash flow from
Operating activities:
Bad debt expense 7,253,000 272,000
Depreciation and amortization 1,166,000 809,000
Amortization of officers' loans 39,000 39,000
Changes in operating assets and liabilities:
Trade and other accounts receivable (46,000) (9,846,000)
Inventories (991,000) (34,000)
Prepaid expenses and other current assets (1,546,000) 250,000
Accounts payable 463,000 6,212,000
Income taxes payable 755,000
Accrued expenses and other current liabilities (1,774,000) (1,330,000)
---------- ----------
Net cash provided by (used in) operating activities 2,369,000 (1,461,000)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash-pledged certificates of deposit 1,000,000
Decrease in notes receivable 521,000 179,000
Addition to other assets (37,000) (760,000)
Acquisition of business, net of cash acquired (4,350,000)
Additions to property, equipment and leaseholds (1,370,000) (699,000)
---------- ----------
Net cash provided by (used in) investing activities 114,000 (5,630,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long -term debt 897,000
Reduction of long-term debt (1,399,000) (633,000)
Payment of dividend on common stock (94,000) (76,000)
Repurchase and retire common stock (1,066,000) (228,000)
Proceeds from issuance of common stock 4,000
---------- ----------
Net cash used in financing activities (2,559,000) (36,000)
---------- ----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (76,000) (7,127,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,889,000 11,820,000
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,813,000 $4,693,000
========== ==========
CASH PAID DURING THE PERIOD:
Interest $1,400,000 $1,311,000
Income taxes $129,000 $185,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Notes Payable for the acquisition of assets (Note 4) $4,250,000 $3,900,000
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Note 1 - Basis of Presentation:
The accompanying unaudited financial statements reflect all
adjustments (consisting of normal, recurring accruals only) which are necessary
to fairly present the results for the interim periods. Such financial statements
have been prepared in accordance with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X and therefore do not include all the information or
footnotes necessary for a complete presentation. They should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
June 30, 1997 and the notes thereto. The results of operations for the three
months ended September 30, 1997 are not necessarily indicative of results for
the full year.
Note 2 - Income Taxes:
Income taxes have been computed based on the estimated annual
effective income tax rate for the respective years.
Note 3 -Restricted Cash:
Western Pacific Airlines, Inc. (WPAI) made a scheduled $1,000,000
payment in September 1997. On October 5, 1997, WPAI filed bankruptcy under
Chapter 11 and, as a result, the Company has written off $5,000,000 of
certificates of deposit which were pledged to guarantee a bank loan to WPAI. In
addition, the Company has written off $2,050,000 of accounts receivable due from
WPAI.
Note 4 - Long-Term Debt:
On July 29, 1997, the Company completed the acquisition of
certain assets of an FBO located in Nashville, Tennessee. The purchase price for
the assets was $4,250,000 paid in cash and has been allocated to Property,
Equipment and Leaseholds. Subsequent to the acquisition, the Company borrowed
$4,250,000 under its Senior Credit facility. This term loan requires monthly
principal payments of $47,000 plus interest at LIBOR plus 1.75% and is due in
October 2001.
5
<PAGE> 6
Note 5- Earnings Per Share:
Primary ( loss ) income per common share is computed by dividing
net income by the weighted average number of common stock and common stock
equivalents outstanding during the period including stock options when dilutive.
Fully diluted ( loss ) income per share is computed by dividing net income by
the weighted average number of common shares and common stock equivalents.
Common stock equivalents include stock options and shares resulting from the
assumed conversion of subordinated debentures, when dilutive.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
Fully diluted Primary Fully diluted Primary
------------- ------- ------------- -------
<S> <C> <C> <C> <C>
Weighted average number of
common shares outstanding during
the period 7,502,000 7,502,000 7,560,000 7,560,000
Common Stock equivalents resulting
from the assumed exercise of stock
options -- -- 289,000 289,000
Common shares resulting from the
assumed conversion of debentures -- -- 4,019,000 --
----------- ----------- ----------- -----------
Weighted average number of
common and common equivalent
shares outstanding during the period 7,502,000 7,502,000 11,868,000 7,849,000
=========== =========== =========== ===========
Net (Loss) Income $(2,195,000) $(2,195,000) $ 1,412,000 $ 1,412,000
Interest expense, net of tax, on
Convertible Debenture -- -- 345,000 --
----------- ----------- ----------- -----------
Adjusted (Loss) Income $(2,195,000) $(2,195,000) $ 1,757,000 $ 1,412.000
----------- ----------- ----------- -----------
Common and common share
equivalents 7,502,000 7,502,000 11,868,000 7,849,000
( Loss ) Earnings per share ($.29) ($.29) $.15 $.18
=========== =========== =========== ===========
</TABLE>
Note 6- Stockholdings' Equity:
During the period ended September 30, 1997, the Company
repurchased 154,100 shares of its common stock at a cost of approximately
$1,066,000 which was charged to: Common Stock $2,000; Additional paid in capital
$427,000; and Retained Earnings $637,000.
6
<PAGE> 7
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of operations-comparison of the Three Months ended September 30, 1997
and September 30, 1996.
The following tables set forth, for the periods indicated, the revenues and
gross margin for each of the Company's four operating units, as well as selected
other financial statement data.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
( $ In millions)
1997 1996
---- ----
Amount % of Total Amount % of Total
------ Revenues ------ Revenues
-------- --------
<S> <C> <C> <C> <C>
Revenues:
Fuel Sales and Service $48.3 69.9% $54.3 78.3%
FBOs 11.2 16.2% 6.6 9.4%
Cargo Operations 4.8 6.9% 4.9 7.1%
Government Contract Services 4.8 7.0% 3.6 5.2%
--- ---- --- ----
Total Revenue $69.2 100.0% $69.4 100.0%
===== ====== ===== ======
Amount % of Unit Amount % of Unit
------ Revenues ------ Revenues
-------- --------
Gross Margin (1):
Fuel Sales and Services $2.3 4.8% $2.3 4.3%
FBOs 2.2 19.7% 1.0 15.6%
Cargo Operations 1.4 28.9% 1.5 30.4%
Government Contract Services 1.1 23.0% 0.8 20.2%
--- ----- --- -----
Total Gross Margin $7.0 10.2% $ 5.6 8.0%
==== ===== ===== ====
Amount % of Total Amount % of Total
------ Revenues ------ Revenues
-------- --------
Selling general and administrative $1.4 2.0% $1.5 2.1%
Provision for bad debts 0.4 0.7% 0.3 0.4%
Depreciation and amortization 1.2 1.7% 0.8 1.2%
Loss resulting from bankruptcy of
customer 7.1 10.2%
Interest expense and other 0.6 0.9% 0.7 0.9%
----- ----- ---- ----
( Loss ) Income before Income taxes (3.7) (5.3)% 2.4 3.4%
(Credit) Provision for Income Taxes (1.5) (2.1)% 1.0 1.4%
----- ----- ---- ----
Net (Loss) Income $(2.2) (3.2)% $1.4 2.0%
===== ===== ==== ====
</TABLE>
(1) Gross margin as used here and throughout Management's Discussion excludes
depreciation and amortization and selling, general and administrative
expense.
7
<PAGE> 8
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996.
Revenue fell by less than 1% to $69.2 million in the current period from $69.4
million a year ago. Gross margin increased 26.1% to $7.0 million in the current
period from $5.6 million a year ago.
Revenues from fuel sales and services represented 69.9% of total revenues in the
current period compared to 78.3% of total revenues a year ago. Revenues from
fuel sales and services fell 11.0% to $48.3 million from $54.3 million last
year. The decline in revenues from fuel sales and services was due primarily to
a decrease in the price of fuel . Gross margin from fuel sales and service was
$2.3 million in both periods. Revenues and operating income from fuel sales and
services included the activities of Mercury's contract fueling business, as well
as activities from a number of other commercial services including the provision
of certain refueling services, non-aviation fuel brokerage and other services
managed at LAX as part of Mercury's fuel sales services operations.
Revenues from FBOs increased by 70.5% in the current period to $11.2 million
from $6.6 million a year ago due to the addition of new locations in fiscal
1997. Gross margin increased 115.8% in the current period to $2.2 million from
$1.0 million last year. The increase was attributable primarily to higher
revenues due for the most part to the addition of new locations and higher per
gallon fuel margins.
Revenues from cargo operations in the current period decreased 2.2% to $4.8
million from $4.9 million a year ago. This decrease was due in part to a decline
in revenues from Floracool and due in part to the closing of the San Francisco
warehouse facility during fiscal 1997. A portion of Floracool's revenue decline
was due to the loss of a significant customer effective April 1, 1997. Gross
margin from cargo operations in the current period decreased 7.0% to $1.4
million from $1.5 million in the year ago period primarily due to lower
activities.
Revenues from government contract services increased 35.2% in the current period
to $4.8 million from $3.6 million in the year ago period. The increase in
revenues from government contract services was due primarily to the addition of
a contract to service fourteen locations in Central and South America effective
June 1997 and to the addition of Monterey in fiscal 1997 which contract was then
terminated during the September 1997 quarter. Gross margin from government
contract services in the current period increased 54.1% to $1.1 million from
$0.8 million last year due to higher revenues and improved margins.
Selling, general and administrative expenses in the current period decreased
6.0% to $1.386 million from $1.474 million in last year's period due primary to
lower professional fees and lower compensation expense.
Provision for bad debts increased by 66.5% in the current period to $.453
million from $.272 million a year ago reflecting a higher reserve rate based on
recent experience.
Depreciation and amortization expense increased 44.1% in the current period to
$1.166 million from $.809 million a year ago primarily due to acquisitions of
FBO locations during the past twelve months .
Interest expense increased by 7.4% in the current period to $.856 million from
$.797 million a year ago due to higher average outstanding bank borrowings.
Interest income increased 72.7% in the current period to $.228 million from
$.132 million in the year ago period due primarily to restricted cash balances
invested in certificates of deposit in the current period.
Loss resulting from the bankruptcy of a customer was $7,050,000 in the current
period and was related to the bankruptcy filing by Western Pacific Airlines,
Inc. (WPAI) on October 5, 1997. The charge includes a $5 million reduction in
restricted cash and approximately $2,050,000 accounts receivable write off. The
restricted cash consisted of pledged certificates of deposit which guaranteed
bank loans to WPAI.
Income tax credit approximated 40.0% of pre-tax loss in the current period and
income tax expense approximated 40% of pretax income a year ago, reflecting the
expected effective annual tax rate.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES:
Mercury has historically financed its operations primarily through operating
cash flow and bank debt. Additionally in February 1996, the Company issued $28
million of convertible subordinated debentures. Mercury's cash balance at
September 30, 1997 totaled $2,813,000.
Net cash provided by operating activities totaled $2,369,000 during the period
ended September 30, 1997. During this period, the primary sources of net cash
provided by operating activities was the non-cash charge for bad debt expense of
$7,253,000 and depreciation and amortization of $1,166,000. The non-cash charge
for bad debt expense of $7,253,000 included a $5,000,000 reduction in restricted
cash, a write off of $1,800,000 in accounts receivable and $453,000 increase in
allowance for doubtful accounts. The primary uses of cash for operating
activities in this period was a net loss of $2,195,000, a decrease in accrued
expenses and other current liabilities of $1,774,000, an increase in prepaid
expenses and other current assets of $1,546,000 and an increase in inventories
of $991,000.
Net cash provided by investing activities totaled $114,000 during the current
period. The primary source of cash from investing activities included a
reduction of $1,000,000 in restricted cash and a decrease in notes receivable of
$521,000.The primary use of cash from investing activities included additions to
property, equipment and leaseholds of $1,370,000.
Net cash used in financing activities totaled $2,559,000 during the current
period. The primary use of cash from financing activities from July 1997 through
September 1997 was the reduction in long-term debt of $1,399,000 and repurchases
of 154,100 shares of common stock totaling $1,066,000 or $6.92 per share.
Subsequent to September 30, 1997, the Company repurchased 240,200 shares of its
common stock at a total cost of approximately $1,416,000 or $5.90 per share.
Management is currently authorized by Mercury's board of directors and under
Mercury's loan agreements to repurchase up to an additional approximately
$518,000 in Common Stock.
The Company's Senior unsecured bank credit facility consists of a $25,000,000
Revolver and various term facilities. At September 30, 1997, there was no
outstanding balance under the Revolver and the balance of the term loans
totalled $10,850,000. Under the debt covenants with its senior bank group, the
Company is required to be profitable on a quarterly basis which covenant the
banks waived for the quarter ended September 30, 1997.
Absent a major prolonged surge in oil prices or a capital intensive acquisition,
the Company believes its operating cash flow, revolver, vendor credit and cash
balance will provide it with sufficient liquidity during the next twelve month.
In the event that fuel prices increase significantly for an extended period of
time, the Company's liquidity could be adversely affected unless the Company is
able to increase vendor credit or increase lending limits under its revolving
credit facility. The company believes, however its revolver and vendor credit
should provide it with sufficient liquidity in the event of a major temporary
surge in oil prices.
The Company has the following significant contracts or commitments for the
purchase of equipment or installation of facilities. The Company is party to a
lease and various contracts pursuant to which it will remodel and reconstruct a
174,000 square foot cargo warehouse at a cost of approximately $8,500,000. To
date, the Company has spent approximately $2.2 million on this project. The
Company has also entered into a new lease with respect to the Burbank,
California FBO. Pursuant to the terms of the lease, the Company will construct
new hangar and terminal space and refurbish some of its existing space at a cost
of approximately $5.0 million. Upon completion of the construction, the
Company's lease will be extended through April 2025. Under the terms of its
lease for an FBO presently under construction in Charleston, South Carolina, the
Company will fund a portion of the construction cost, currently estimated at
$800,000. The Company will fund these projects, at least on an interim basis,
from its existing lines of credit.
9
<PAGE> 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mercury Air Group, Inc.
Registrant
/s/ SEYMOUR KAHN
----------------------------------
Seymour Kahn
Chairman and Chief
Executive Officer
/s/ RANDY AJER
----------------------------------
Randy Ajer
Secretary/Treasurer
Chief Accounting Officer
Date: November 7, 1997
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENTS
OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN FORM 10-Q FOR
THE PERIOD ENDED SEPTEMBER 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,813
<SECURITIES> 1,000
<RECEIVABLES> 45,898
<ALLOWANCES> 2,342
<INVENTORY> 2,939
<CURRENT-ASSETS> 54,559
<PP&E> 55,428
<DEPRECIATION> 26,025
<TOTAL-ASSETS> 90,821
<CURRENT-LIABILITIES> 22,586
<BONDS> 45,554
0
0
<COMMON> 73,000
<OTHER-SE> 22,608
<TOTAL-LIABILITY-AND-EQUITY> 90,821
<SALES> 54,428
<TOTAL-REVENUES> 69,165
<CGS> 48,420
<TOTAL-COSTS> 62,141
<OTHER-EXPENSES> 10,683
<LOSS-PROVISION> 453
<INTEREST-EXPENSE> 856
<INCOME-PRETAX> (3,659)
<INCOME-TAX> (1,464)
<INCOME-CONTINUING> (2,195)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,195)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
