<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, 1999
[ ] 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.
Number of Shares Outstanding
Title As of November 1, 1999
----- ----------------------
Common Stock, $.01 Par Value 6,684,765
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, JUNE 30,
1999 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,912,000 $ 4,797,000
Trade accounts receivable, net of allowance for doubtful accounts
of $2,188,000 at 9/30/99 and $1,953,000 at 6/30/99 53,300,000 50,134,000
Notes receivable - current portion 555,000 555,000
Inventories, principally aviation fuel 2,274,000 1,892,000
Prepaid expenses and other current assets 2,434,000 2,603,000
------------ ------------
Total current assets 63,475,000 59,981,000
CASH-RESTRICTED 579,000 785,000
PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated
depreciation and amort. of $37,932,000 (9/30/99); $35,787,000 (6/30/99) 55,931,000 56,110,000
NOTES RECEIVABLE 364,000 454,000
OTHER ASSETS (Note 3) 10,629,000 9,972,000
------------ ------------
$130,978,000 $127,302,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 26,568,000 $ 21,312,000
Accrued expenses and other current liabilities 4,833,000 6,241,000
Income taxes payable 197,000
Current portion of long-term debt 6,001,000 6,806,000
------------ ------------
Total current liabilities 37,599,000 34,359,000
LONG-TERM DEBT 39,166,000 44,285,000
DEFERRED INCOME TAXES 223,000 223,000
SENIOR SUBORDINATED NOTE (Note 3) 24,000,000
CONVERTIBLE SUBORDINATED DEBENTURES (Note 3) 19,852,000
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 5):
Preferred Stock - $.01 par value; authorized 3,000,000 shares;
no shares outstanding
Common Stock - $.01 par value; authorized 18,000,000 shares; outstanding
6,684,765 shares 9/30/99;
outstanding 6,641,175 shares 6/30/99 67,000 66,000
Additional paid-in capital 20,191,000 19,873,000
Retained earnings 10,632,000 9,543,000
Accumulated other comprehensive income (238,000) (237,000)
Notes receivable from sale of stock (662,000) (662,000)
------------ ------------
Total stockholders' equity 29,990,000 28,583,000
------------ ------------
$130,978,000 $127,302,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Sales and Revenues:
Sales $53,040,000 $34,835,000
Service revenues 21,600,000 17,765,000
-----------------------------
74,640,000 52,600,000
Costs and Expenses:
Cost of sales 45,747,000 27,929,000
Operating expenses 19,746,000 17,015,000
-----------------------------
65,493,000 44,944,000
-----------------------------
Gross Margin (Excluding depreciation
and amortization) 9,147,000 7,656,000
-----------------------------
Expenses (Income):
Selling, general and administrative 1,845,000 1,742,000
Provision for bad debts 359,000 451,000
Depreciation and amortization 2,358,000 1,831,000
Interest expense 1,251,000 984,000
Interest income (55,000) (66,000)
-----------------------------
5,758,000 4,942,000
-----------------------------
Income Before Provision for Income Taxes 3,389,000 2,714,000
Provision for Income Taxes 1,322,000 1,055,000
-----------------------------
Net Income Before Extraordinary Item 2,067,000 1,659,000
-----------------------------
Extraordinary Item (Note 3) (Less applicable
income taxes of $625,000 (9/99); $98,000 (9/98) (978,000) (153,000)
-----------------------------
Net Income $ 1,089,000 $ 1,506,000
=============================
Net Income (Loss) Per Common Share (Note 4):
Basic:
Before extraordinary item $ 0.31 $ 0.24
Extraordinary item (0.15) (0.02)
-----------------------------
Net income $ 0.16 $ 0.22
=============================
Diluted:
Before extraordinary item $ 0.25 $ 0.18
Extraordinary item (0.11) (0.01)
-----------------------------
Net income $ 0.14 $ 0.17
=============================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,089,000 $ 1,506,000
Non-cash component of extraordinary charge 823,000 165,000
Adjustments to derive cash flows from operating activities:
Depreciation and amortization 2,358,000 1,831,000
Provision for bad debts 359,000 451,000
Amortization of officers' loans 10,000 10,000
Changes in operating assets and liabilities:
Trade and other accounts receivable (3,525,000) (2,801,000)
Inventories (382,000) (2,000)
Prepaid expenses and other current assets 169,000 35,000
Accounts payable 5,256,000 312,000
Income taxes payable 197,000 (443,000)
Accrued expenses and other current liabilities (1,408,000) (1,753,000)
------------ -----------
Net cash provided by (used in) operating activities 4,946,000 (689,000)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash-tax exempt bond 206,000 3,856,000
Decrease (increase) in notes receivable 90,000 (1,025,000)
Increase to other assets (1,679,000) (165,000)
Acquisition of businesses, net of cash acquired (2,500,000)
Additions to property, equipment and leaseholds (1,990,000) (3,880,000)
------------ -----------
Net cash used in investing activities (3,373,000) (3,714,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 6,150,000
Reduction of long-term debt (5,924,000) (781,000)
Reduction of convertible subordinated debentures (19,534,000) (3,250,000)
Proceeds from senior subordinated note 24,000,000
Repurchase of common stock (4,355,000)
------------ -----------
Net cash used in financing activities (1,458,000) (2,236,000)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 115,000 (6,639,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,797,000 7,836,000
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,912,000 $ 1,197,000
============ ===========
CASH PAID DURING THE YEAR:
Interest $ 2,089,000 $ 1,570,000
Income taxes $ 266,000 $ 1,498,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 124,224 shares of common stock for the acquisition of assets $ 1,000,000
of Weather Data
Conversion of 318 debentures into 43,590 shares of common stock
(Note 5) $ 318,000
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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, 1999 and the notes thereto. The results of operations for the three
months ended September 30, 1999 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 - SENIOR SUBORDINATED NOTE/EXTRAORDINARY ITEM:
On September 10, 1999, the Company issued, in a private
placement, $24,000,000 Senior Subordinated 12% Notes ("the Note") due 2006 with
detachable warrants to acquire 503,126 shares of the Company's common stock
exercisable at $6.50 per share for seven years. Proceeds of the Note were used
to redeem the Company's 7 3/4% convertible subordinated debentures due February
1, 2006 at 104% of the principal amount plus accrued interest and pay expenses
of the transaction as follows:
<TABLE>
<S> <C>
Principal balance of Debentures redeemed $19,509,000
Redemption premium of 4% 780,000
Accrued Interest 164,000
Placement fees, legal fees and other expenses of
transaction capitalized as other assets 1,750,000
Cash received 1,797,000
-----------
Proceeds $24,000,000
===========
</TABLE>
As a result of this transaction the company posted an extraordinary
charge of $978,000 in the current period net of a $625,000 tax benefit. The
extraordinary charge includes the redemption premium of $780,000 plus write off
of capitalized fees of $823,000.
5
<PAGE> 6
NOTE 4 - EARNINGS PER SHARE:
Basic income per common share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted 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, 1999 September 30, 1998
Diluted Basic Diluted Basic
------- ----- ------- -----
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding during the period 6,651,000 6,651,000 6,835,000 6,835,000
Common stock equivalents resulting from the
assumed exercise of stock options 315,000 -- 362,000 --
Common shares resulting from the
assumed conversion of debentures 2,206,000 -- 3,897,000 --
---------- ---------- ----------- ----------
Weighted average number of common and
common equivalent shares outstanding
during the period 9,172,000 6,651,000 11,094,000 6,835,000
---------- ---------- ----------- ----------
Net income before extraordinary item 2,067,000 2,067,000 1,659,000 1,659,000
Interest expense, net of tax, on convertible
debentures 193,000 -- 335,000 --
---------- ---------- ----------- ----------
Adjusted income before extraordinary item 2,260,000 2,067,000 1,994,000 1,659,000
Extraordinary item (978,000) (978,000) (153,000) (153,000)
---------- ---------- ----------- ----------
Adjusted net income $1,282,000 $1,089,000 $ 1,841,000 $1,506,000
========== ========== =========== ==========
Common and common share equivalents 9,172,000 6,651,000 11,094,000 6,835,000
Earnings (Loss) per share:
Before extraordinary item $ .25 $ .31 $ .18 $ .24
Extraordinary item (.11) (.15) (.01) (.02)
---------- ---------- ----------- ----------
Net income $ .14 $ .16 $ .17 $ .22
========== ========== =========== ==========
</TABLE>
NOTE 5 - STOCKHOLDER EQUITY:
During the period ended September 30, 1999, 318,000
convertible subordinated debentures were converted at $7.29456 per share into
43,590 shares of the Company's common stock.
NOTE 6 - SUBSEQUENT EVENT:
On October 22, 1999, the Company acquired certain assets of
Air Tulsa, Inc., an FBO located in Tulsa, Oklahoma, and commenced operations.
Included in the acquisition are tangible refueling assets utilized in the FBO
business, customer contracts, inventory, prepaid expenses and a sublease for the
entire duration of the master lease. Total consideration was $2.4 million in
cash which the Company funded under its acquisition line. The agreement includes
a second closing to occur within eighteen months and will include the purchase
of hangars, buildings and the master lease for a cash consideration of $3.8
million. The Company's Senior lenders have agreed to fund the second closing
under the acquisition line.
6
<PAGE> 7
On October 5, 1999, the Company acquired the FBO operations and certain
assets of Charleston Equity, Inc, a South Carolina corporation, for $700,000
cash. The assets include the FBO operations at Charleston International Airport
and John's Island Executive Airport in South Carolina.
NOTE 7 - LITIGATION:
In connection with the Chapter 7 bankruptcy filing for Western Pacific
Airlines, Inc. ("WPAI") the Company received a letter, dated August 25, 1999,
from the bankruptcy trustee's attorneys making a formal demand for recovery of
alleged preference payments of approximately $11.4 million. This amount
represents cash received for payment of fuel and sales during the 90 days prior
to WPAI's initial bankruptcy filing. The Company believes this claim is without
merit and the entire amount is defensible based on the transaction 1) having
been a substantially contemporaneous exchange for value, 2) being made in the
ordinary course of business, and 3) involving an exchange for new value.
Accordingly, the Company believes no provision is required.
NOTE 8 - SEGMENT REPORTING:
The Company operates and reports it's activities through four principal
units: 1) Fuel Sales and Services, which also includes RPA, 2) Fixed Based
Operations, 3) Cargo Operations, and 4) Government Contract Services.
<TABLE>
<CAPTION>
Government
Fuel Sales Fixed Base Cargo Contract
(Dollars in Thousands) and Services Operations Operations Services Total
<S> <C> <C> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 1999
Revenues $44,096 $15,182 $ 8,319 $ 7,043 $ 74,640
Gross Margin 2,021 2,711 2,954 1,461 9,147
Depreciation and Amortization 219 998 913 228 2,358
Capital Expenditures 1,635 347 8 1,990
Segment Assets 60,670 24,551 28,509 17,248 130,978
QUARTER ENDED SEPTEMBER 30, 1998
Revenues $27,702 $13,287 $ 5,680 $ 5,931 $ 52,600
Gross Margin 1,941 3,134 1,228 1,353 7,656
Depreciation and Amortization 333 561 748 189 1,831
Capital Expenditures 155 3,031 359 335 3,880
Segment Assets 46,376 22,257 24,696 16,795 110,124
</TABLE>
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.
NOTE 9 - COMPREHENSIVE INCOME:
For the periods presented, adjustments to derive comprehensive income
were insignificant.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of operations-comparison of the Three Months ended September 30, 1999
and September 30, 1998.
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)
1999 1998
---- ----
% of Total % of Total
Amount Revenues Amount Revenues
------ -------- ------ --------
<S> <C> <C> <C> <C>
Revenues:
Fuel Sales and Services(2) $44.1 59.1% $27.7 52.7%
FBOs(2) 15.2 20.3 13.3 25.2
Cargo Operations 8.3 11.1 5.7 10.8
Government Contract Services 7.0 9.5 5.9 11.3
----- ----- ----- -----
Total Revenue $74.6 100.0% $52.6 100.0%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
% of Unit % of Unit
Amount Revenues Amount Revenues
------ -------- ------ --------
<S> <C> <C> <C> <C>
Gross Margin(1):
Fuel Sales and Services(2) $2.0 4.6% $1.9 7.0%
FBOs(2) 2.7 17.9 3.1 23.6
Cargo Operations 3.0 35.5 1.2 21.6
Government Contract Services 1.5 20.7 1.4 22.8
---- ---- ---- ----
Total Gross Margin $9.1 12.3% $7.7 14.6%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
% of Total % of Total
Amount Revenues Amount Revenues
------ -------- ------ --------
<S> <C> <C> <C> <C>
Selling general and administrative $ 1.8 2.5% $1.7 3.3%
Provision for bad debts .4 .5 .5 .9
Depreciation and amortization 2.4 3.2 1.8 3.5
Interest expense and other 1.2 1.6 .9 1.7
----- ---- ---- ---
Income before income taxes 3.4 4.5 2.7 5.2
Provision for income taxes 1.3 1.8 1.1 2.0
----- ---- ---- ---
Net Income before extraordinary item 2.1 2.8 1.7 3.2
----- ---- ---- ---
Extraordinary item (1.0) (1.3) (.2) (.3)
----- ---- ---- ---
Net income $ 1.1 1.5% $1.5 2.9%
===== === ==== ===
</TABLE>
(1) Gross margin as used here and throughout Management's Discussion excludes
depreciation and amortization and selling, general and administrative
expense.
(2) A number of other commercial services including the provision of certain
refueling services and other services managed at LAX were reclassified into
the FBO division from fuel sales and services during this period on a
retroactive basis.
8
<PAGE> 9
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998.
Revenue increased by 41.9% to $74.6 million in the current period from $52.6
million a year ago. Gross margin increased 19.5% to $9.1 million in the current
period from $7.7 million a year ago.
Revenues from fuel sales and services represented 59.2% of total revenues in the
current period compared to 52.7% of total revenues a year ago. Revenues from
fuel sales and services increased 59.1% to $44.1 million from $27.7 million last
year. The increase in revenues from fuel sales and services was due to an
increase of 28% in the volume of fuel sold and an increase of 27% in the price
of fuel. Gross margin from fuel sales and services was $2.0 million in the
current period compared with $1.9 million last year however, as a percentage of
revenue, gross margin declined to 4.6% in the current period from 7% last year
due to higher fuel prices resulting in lower per gallon margin and a decline in
gross margin from RPA, the Company's airline information software company.
Revenues and gross margin from fuel sales and services included the activities
of Mercury's contract fueling business as well as revenues from RPA. Revenues
from RPA were $1.1 million in the current period compared with $1.2 million last
year and gross margin was a loss of $.2 million due to higher operating expenses
in the current period compared to gross margin of $.1 million last year.
Revenues from FBOs increased by 14.3% in the current period to $15.2 million
from $13.3 million a year ago due to higher fuel prices and the addition of
Jackson and Charleston locations in fiscal 1999. Gross margin decreased 13.5% in
the current period to $2.7 million from $3.1 million last year. The decrease was
attributable to an increase in the price of fuel, all of which could not be
passed on to customers, fuel volume decline at LAX and higher operating expenses
at Burbank since opening its new facility in February 1999.
Revenues from cargo operations in the current period increased 46.5% to $8.3
million from $5.7 million a year ago. This increase was due to an increase in
Space brokerage revenue and cargo handling revenues at LAX. Gross margin from
cargo operations in the current period increased 140.6% to $3.0 million from
$1.2 million in the year ago period primarily due to increased space brokerage
revenues, higher cargo handling revenue and elimination of losses at the Miami
cargo location, Floracool, which was disposed of during fiscal 1999.
Revenues from government contract services increased 18.7% in the current period
to $7.0 million from $5.9 million in the year ago period. The increase in
revenues from government contract services was due primarily to the addition of
the Weather Data contracts as of August 1, 1998 and increased revenues from the
base housing contract in Japan. Gross margin from government contract services
in the current period increased 8.0% to $1.5 million from $1.4 million last year
due to higher revenues.
Selling, general and administrative expenses in the current period increased
5.9% to $1.8 million from $1.7 million in last year's period due primarily to
higher compensation expense.
Depreciation and amortization expense increased 28.8% in the current period to
$2.4 million from $1.8 million a year ago primarily due to the Burbank FBO
expansion during fiscal 1999, acquisitions of Jackson and Charleston in fiscal
1999 and various capital expenditures.
9
<PAGE> 10
Interest expense increased by 27.1% in the current period to $1.3 million from
$1.0 million a year ago due to higher average outstanding bank borrowings .
Income tax expense approximated 39% of pre-tax income in both periods reflecting
the expected effective annual tax rate.
LIQUIDITY AND CAPITAL RESOURCES:
Mercury has historically financed its operations primarily through operating
cash flow, bank debt and various public and private placements of bonds and
subordinated debt. Mercury's cash balance at September 30, 1999 was $4,912,000.
Net cash provided by operating activities totaled $4,946,000 for the period
ended September 30, 1999. During this period, the primary sources of net cash
provided by operating activities was net income plus depreciation and
amortization totaling $3,447,000 and an increase in accounts payable of
$5,256,000 due primarily to higher fuel costs. The primary uses of cash from
operating activities in this period was an increase in trade and other accounts
receivable of $3,525,000, due to higher sales and revenues, and a decrease in
accrued expenses and other current liabilities of $1,408,000.
Net cash used in investing activities totaled $3,373,000 during the current
period. The primary use of cash from investing activities included additions to
property, equipment and leaseholds of $1,990,000 and an increase in other assets
of $1,679,000.
Net cash used in financing activities totaled $1,458,000 during the current
period. The primary use of cash from financing activities from July 1999 through
September 1999 was the reduction in convertible subordinated debentures of
$19,534,000 and reduction of long-term debt totalling $5,924,000. The primary
source of cash from financing activities were proceeds from the Senior
Subordinated Note totaling $24,000,000.
On September 10, 1999, the Company redeemed $19,509,000 principal balance of
convertible subordinated debentures plus a redemption premium of 4% totalling
$780,000. Financing of the redemption was accomplished by issuing a $24,000,000
Senior Subordinated Note due in September 2006. The Note pays interest quarterly
at the per annum rate of 12%. In connection with the issuance of the Note, the
Company issued warrants to purchase 503,126 shares of common stock exerciseable
at $6.50.
The Company's senior secured bank credit facility consists of a $40,000,000
Revolver, a term loan with an outstanding balance of $23,000,000 at September
30, 1999 and a $15,000,000 acquisition facility which had no outstanding
borrowings at September 30, 1999. At September 30, 1999, there was $2,000,000
outstanding under the Revolver.
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.
10
<PAGE> 11
Pursuant to an asset purchase agreement the Company acquired certain assets of
an FBO located in Tulsa, Oklahoma for $2.4 million cash from Air Tulsa, Inc. on
October 22, 1999. The company used its acquisition facility to fund the
transaction. In a second step to this transaction, the company will acquire the
leasehold and buildings for $3.8 million during the next eighteen months which
will also be funded under the acquisition line.
The Company has begun construction of a 30,000 square foot hangar at its FBO in
Bedford, Massachusetts at an estimated cost of $3.8 million. The Company expects
to fund this from its acquisition line.
YEAR 2000 ISSUE
The Company has established a year 2000 compliance plan that is
substantially complete. The compliance plan primarily involves information
technology, facilities and equipment and major suppliers. To date, the Company
has spent approximately $80,000 on reprogramming and software and hardware
upgrades relating to year 2000 remediation. Total costs related to year 2000
compliance are estimated at $100,000.
The Company's year 2000 compliance efforts include assessment of at
risk systems and technology as well as remediation and testing of affected
systems. Remediation of the Company's primary computer systems and other
critical systems was completed in December 1998. The final assessment of all
other technology used by the Company was essentially complete by September 1999.
The remediation of these areas is expected to be completed by November 1999. The
Company does not believe that year 2000 issues affecting it facilities and
equipment are substantial. The Company, however, conducts most of its business
on airport properties and, as such, is dependent on various third parties to
complete aspects of year 2000 compliance which will ensure that airport
operations are not significantly impacted or interrupted. The Company's major
suppliers and third parties were surveyed for year 2000 compliance. While the
Company has no reason to believe that year 2000 compliance by these third
parties will not be substantially completed on time, the Company can give no
assurance to that effect. With respect to major suppliers, the Company believes
year 2000 compliance issues will not affect its ability to continue purchasing
jet fuel in sufficient quantities, given the number of alternative sources.
A majority of the Company's services are dependent on human resources
and commodities that are not technology driven; therefore, contingencies
relating to year 2000 issues will not have a large bearing on operations. While
not expected, any delays or failures resulting from a year 2000 compliance
problem could affect the Company's ability to bill customers timely and process
vendor payments. Because of uncertainties, the actual effects of year 2000
issues on the Company may be different from its current assessment.
11
<PAGE> 12
ITEM 3A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company currently utilizes no material derivative financial
instruments which expose the Company to significant market risk. However, the
Company's cash flow, earnings, and the fair value of its debt, may be adversely
effected due to changes in interest rates with respect to its long-term debt.
The table below presents principal cash flows and related weighted average
interest rates of the Company's long-term debt at September 30, 1999 by expected
maturity dates. Weighted average variable rates are based on rates in effect at
September 30, 1999. These rates should not be considered a predictor of actual
future interest rates.
Expected Maturity Date
<TABLE>
<CAPTION>
June-00 June-01 June-02 June-03 June-04 Thereafter Total Fair Value
--------- --------- --------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Senior Subordinated Note 0 0 0 0 0 24,000,000 24,000,000 24,000,000
Average Interest Rate 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%
Fixed Rate Other Debt 301,000 326,000 310,000 326,000 199,000 249,000 1,711,000 1,711,000
Average Interest Rate 8.25% 8.30% 8.39% 8.52% 8.83% 9.14% 8.57%
Variable Rate Tax
Exempt Bonds(1) 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 13,000,000 18,000,000 18,000,000
Average Interest Rate 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
Variable Rate Other Debt(2) 3,859,000 4,626,000 5,126,000 5,625,000 6,220,000 25,456,000 25,456,000
Average Interest Rate 7.25% 7.25% 7.25% 7.25% 7.25% 7.25% 7.25%
</TABLE>
(1) The interest rate is based upon a weekly remarketing of the bonds.
(2) Consists of debt under which interest rates will fluctuate based upon
changes in the prime rate or LIBOR.
In making its determination as to the balance of fixed and variable
rate debt, the Company considers the interest rate environment (including
interest rate trends), borrowing alternatives and relative pricing. The Company
periodically monitors the balance of fixed and variable rate debt, and can make
appropriate corrections either pursuant to the terms of debt agreements or
through the use of swaps and other financial instruments.
12
<PAGE> 13
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q which are
not historical facts are forward-looking statements. In addition, Mercury, from
time-to-time, makes forward-looking statements concerning its expected future
operations and performance and other developments. Such forward-looking
statements are necessarily estimates reflecting Mercury's best judgment based
upon current information and involve a number of risks and uncertainties, and
there can be no assurance that other factors will not affect the accuracy of
such forward-looking statements. While it is impossible to identify all such
factors, factors which could cause actual results to differ materially from
those estimated by Mercury include, but are not limited to, risks associated
with acquisitions, the financial condition of customers, non-renewal of
contracts, government regulation, as well as operating risks, general conditions
in the economy and capital markets, and other factors which may be identified
from time-to-time in Mercury's Securities and Exchange Commission filings and
other public announcements.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In connection with the Chapter 7 bankruptcy filing for Western Pacific
Airlines, Inc. ("WPAI") the Company received a letter, dated August 25, 1999,
from the bankruptcy trustee's attorneys making a formal demand for recovery of
alleged preference payments of approximately $11.4 million. This amount
represents cash received for payment of fuel and sales during the 90 days prior
to WPAI's initial bankruptcy filing. The Company believes this claim is without
merit and the entire amount is defensible based on the transaction 1) having
been a substantially contemporaneous exchange for value, 2) being made in the
ordinary course of business, and 3) involving an exchange for new value.
Accordingly, the Company believes no provision is required.
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. (a) Exhibit list and exhibits attached
(b) Reports on Form 80K (None)
<TABLE>
<CAPTION>
6(a)
Exhibit
No. Description
- ------- -----------
<S> <C>
1.1 Underwriting Agreement for the Company's $25,000,000 7-3/4%
Convertible Subordinated Debentures due February 1, 2006(11)
3.1 Restated Certificate of Incorporation(4)
3.2 Form of Amendment to Restated Certificate of Incorporation creating
the Series A 8% Convertible Cumulative Redeemable Preferred Stock(4)
3.3 Form of Amendment to Restated Certificate of Incorporation declaring
the Separation Date for the Series A 8% Convertible Redeemable
Preferred Stock(5)
3.4 Bylaws of the Company(4)
3.5 Amendment to Bylaws of the Company(10)
3.6 Amendment to Bylaws of the Company adopted on December 3, 1998
4.1 Form of Indenture between Mercury Air Group, Inc. and IBJ Schroder
Bank & Trust Company(11)
4.2 Negotiable Promissory Note, dated as of June 21, 1996, from Mercury
Air Group, Inc. to Raytheon Aircraft Services, Inc.(13)
</TABLE>
14
<PAGE> 15
<TABLE>
<S> <C>
4.3 Legend Agreement, dated as of August 29, 1996 between Mercury Air
Group, Inc. and Raytheon Aircraft Services, Inc.(13)
10.1 Employment Agreement dated December 10, 1993 between the Company and
Seymour Kahn(8)
10.2 Stock Purchase Agreement between the Company, SK Acquisition, Inc.,
Randolph E. Ajer, Kevin J. Walsh, Grant Murray and Joseph Czyzyk(2)
10.3 Company's 1990 Long-Term Incentive Plan(6)
10.4 Company's 1990 Directors Stock Option Plan(1)
10.5 Lease for 6851 West Imperial Highway, Los Angeles, California(4)
10.6 Memorandum Dated September 15, 1997 regarding Summary of Officer Life
Insurance Policies with Benefits Payable to Officers or Their
Designated Beneficiaries(15)
10.7 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans
for Seymour Kahn, Joseph Czyzyk and Randolph E. Ajer(10)
10.8 Memorandum dated September 15, 1995 regarding Summary of Bonus Plans
for Kevin Walsh and William Silva(10)
10.9 The Company's 401(k) Plan consisting of LCI Actuaries, Inc. Regional
Prototype Defined Contribution Plan and Trust and Adoption
Agreement(7)
10.10 Non-Qualified Stock Option Agreement by and between the Company and
Seymour Kahn dated January 21, 1993(7)
10.11 Stock Purchase Agreement among the Company, SK Acquisition, Inc. and
William L. Silva dated as of August 9, 1993(8)
10.12 Stock Exchange Agreement dated as of November 15, 1994 between Joseph
Czyzyk and the Company(9)
10.13 Employment Agreement dated November 15, 1994 between the Company and
Joseph Czyzyk(16)
10.14 Non-Qualified Stock Option Agreement dated August 24, 1995, by and
between S.K. Acquisition and Mercury Air Group, Inc.(12)
10.15 Non-Qualified Stock Option Agreement dated March 21, 1996, by and
between Frederick H. Kopko and Mercury Air Group, Inc.(12)
10.16 Credit Agreement by and among Sanwa Bank California, Mellon Bank,
N.A., The First National Bank of Boston and Mercury Air Group, Inc.
dated March 14, 1997(14)
10.17 First Amendment to Credit Agreement and Related Loan Documents dated
as of November 1997, by and among Sanwa Bank California, Mellon Bank,
N.A., BankBoston, N.A. and Mercury Air Group, Inc.(16)
10.18 First Amendment of 1998 to Credit Agreement and Other Loan Documents
dated as of April 1, 1998, by and among Sanwa Bank California, Mellon
Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.(3)
10.19 Second Amendment of 1998 to Credit Agreement and Other Loan Documents
dated as of April 1998, by and between Sanwa Bank California, Mellon
Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.(16)
10.20 Third Amendment of 1998 to Credit Agreement and Other Loan Documents
dated as of August 31, 1998, by and between Sanwa Bank California,
Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.(16)
10.21 Loan Agreement between California Economic Development Financing
Authority and Mercury Air Group, Inc. relating to $19,000,000
California Economic Development Financing Authority Variable Rate
Demand Airport Facilities Revenue Bonds, Series 1998 (Mercury Air
Group, Inc. Project) dated as of April 1, 1998(3)
10.22 Reimbursement Agreement dated as of April 1, 1998, by and among Sanwa
Bank California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air
Group, Inc.(3)
10.23 First Amendment to Reimbursement Agreement and Other L/C Documents as
of August 31, 1998, by and between Sanwa Bank California, Mellon Bank,
N.A., BankBoston, N.A. and Mercury Air Group, Inc.(16)
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
10.24 Fourth Amendment of 1998 to Credit Agreement and Other Loan Documents
by and between Sanwa Bank California, Mellon Bank, N.A., BankBoston,
N.A. and Mercury Air Group, Inc. dated September 15, 1998(17)
10.25 Second Amendment to Reimbursement Agreement and Other L/C Documents by
and between Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A.
and Mercury Air Group, Inc. dated September 15, 1998(17)
10.26 Company's 1998 Long-Term Incentive Plan(18)
10.27 Company's 1998 Directors Stock Option Plan(18)
10.28 Amendment to Employment Agreement by and between Mercury Air Group,
Inc. and Joseph A. Czyzyk dated October 15, 1998(19)
10.29 Amendment No. 2 to Employment Agreement by and between Mercury Air
Group, Inc. and Joseph A. Czyzyk dated April 12, 1999(19)
10.30 First Amendment of 1999 to Credit Agreement and Other Loan Documents
dated as of December 31, 1998 by and between Sanwa Bank California,
Mellon Bank, N.A. and BankBoston, N.A. and Mercury Air Group, Inc.(19)
10.31 Third Amendment to Reimbursement Agreement and Other L/C Documents
dated as of December 31, 1998 by and between Sanwa Bank California,
Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.(19)
10.32 Revolving Credit and Term Loan Agreement dated as of March 2, 1999 by
and among Mercury Air Group, Inc., The Banks listed on Schedule 1
thereto, and BankBoston, N.A., as Agent(19)
10.33 Securities Purchase Agreement dated September 10, 1999 by and among
Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P.(20)
</TABLE>
- --------------------------------
(1) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 10, 1993 Annual Meeting of Shareholders and is
incorporated herein by reference.
(2) Such document was previously filed as an Exhibit to the Company's Current
Report on Form 8-K dated December 6, 1989 and is incorporated herein by
reference.
(3) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and are
incorporated herein by reference.
(4) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-39044 on Form S-2 and are incorporated
herein by reference.
(5) Such document was previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and is
incorporated herein by reference.
(6) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 2, 1992 Annual Meeting of Shareholders.
(7) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993 and are
incorporated herein by reference.
(8) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994 and are
incorporated herein by reference.
16
<PAGE> 17
(9) Such document was previously filed as an Exhibit to the Company's Current
Report on Form 8-K dated November 15, 1994 and is incorporated herein by
reference.
(10) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995 and are
incorporated herein by reference.
(11) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-65085 on Form S-1 and are incorporated
herein by reference.
(12) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and are
incorporated herein by reference.
(13) All such documents were previously filed as Exhibits to the Company's
Report on Form 8-K filed September 13, 1996 and are incorporated herein by
reference.
(14) Such document was previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and is
incorporated herein by reference.
(15) Such document was previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997 and is incorporated
herein by reference.
(16) All such documents were previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998 and is
incorporated herein by reference.
(17) Such document was previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998 and
is incorporated herein by reference.
(18) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 3, 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
(19) All such documents were previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
(20) All such documents were previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1999 and is
incorporated herein by reference.
17
<PAGE> 18
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/ JOSEPH CZYZYK
-------------------------------------------
Joseph Czyzyk
Chief Executive Officer
/s/ RANDY AJER
-------------------------------------------
Randy Ajer
Principal Financial and Accounting Officer
Date: November 09, 1999
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF SEPTEMBER 30, 1999 AND THE CONSOLIDATED STATEMENTS
OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN FORM 10-Q FOR
THE PERIOD ENDED SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,912
<SECURITIES> 0
<RECEIVABLES> 56,043
<ALLOWANCES> 2,188
<INVENTORY> 2,274
<CURRENT-ASSETS> 63,475
<PP&E> 93,863
<DEPRECIATION> 37,932
<TOTAL-ASSETS> 130,978
<CURRENT-LIABILITIES> 37,599
<BONDS> 63,166
0
0
<COMMON> 67
<OTHER-SE> 29,923
<TOTAL-LIABILITY-AND-EQUITY> 130,978
<SALES> 53,040
<TOTAL-REVENUES> 74,640
<CGS> 45,747
<TOTAL-COSTS> 65,493
<OTHER-EXPENSES> 5,758
<LOSS-PROVISION> 359
<INTEREST-EXPENSE> 1,251
<INCOME-PRETAX> 3,389
<INCOME-TAX> 1,322
<INCOME-CONTINUING> 2,067
<DISCONTINUED> 0
<EXTRAORDINARY> 928
<CHANGES> 0
<NET-INCOME> 1,089
<EPS-BASIC> .16
<EPS-DILUTED> .14
</TABLE>
