<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, 2000
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition period from to
Commission File 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, 2000
----- ----------------------------
<S> <C>
Common Stock, $.01 Par Value 6,531,305
</TABLE>
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,689,000 $ 2,143,000
Trade accounts receivable, net of allowance for doubtful accounts
of $3,400,000 at 9/30/00 and $2,550,000 at 6/30/00 61,956,000 48,320,000
Notes receivable - current portion 555,000 555,000
Inventories, principally aviation fuel 4,026,000 3,428,000
Prepaid expenses and other current assets 2,093,000 2,960,000
------------- -------------
Total current assets 71,319,000 57,406,000
PROPERTY, EQUIPMENT AND LEASEHOLDS (Note 5),
net of accumulated depreciation and
amortization of $46,073,000 at 9/30/00 and $43,792,000 at 6/30/00 74,116,000 65,133,000
NOTES RECEIVABLE 306,000 309,000
OTHER ASSETS (Notes 5 and 6) 11,597,000 12,267,000
============= =============
$ 157,338,000 $ 135,115,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 42,296,000 $ 26,111,000
Accrued expenses and other current liabilities 6,122,000 6,091,000
Income tax payable 310,000
Current portion of long-term debt 5,893,000 6,936,000
------------- -------------
Total current liabilities 54,621,000 39,138,000
LONG-TERM DEBT (Note 9) 47,629,000 42,358,000
DEFERRED INCOME TAXES 116,000 110,000
SENIOR SUBORDINATED NOTE 22,890,000 22,844,000
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 4):
Preferred Stock - $.01 par value; authorized 3,000,000 shares;
no shares outstanding
Common Stock - $.01 par value; authorized 18,000,000 shares; outstanding
6,531,305 shares at 9/30/00;
outstanding 6,472,955 shares at 6/30/00 65,000 64,000
Additional paid-in capital 21,200,000 21,014,000
Retained earnings 11,578,000 10,423,000
Cumulative translation adjustment (228,000) (228,000)
Notes receivable from sale of stock (533,000) (608,000)
------------- -------------
Total stockholders' equity 32,082,000 30,665,000
------------- -------------
$ 157,338,000 $ 135,115,000
============= =============
</TABLE>
2
<PAGE> 3
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Sales and Revenues:
Sales $ 89,676,000 $ 53,040,000
Service revenues 23,125,000 21,600,000
------------- -------------
112,801,000 74,640,000
------------- -------------
Costs and Expenses:
Cost of sales 80,810,000 45,747,000
Operating expenses 22,803,000 19,746,000
------------- -------------
103,613,000 65,493,000
------------- -------------
Gross Margin (Excluding depreciation
and amortization) 9,188,000 9,147,000
------------- -------------
Expenses (Income):
Selling, general and administrative 2,032,000 1,845,000
Provision for bad debts 799,000 359,000
Depreciation and amortization 2,559,000 2,358,000
Interest expense 1,950,000 1,251,000
Interest income (46,000) (55,000)
------------- -------------
7,294,000 5,758,000
------------- -------------
Income Before Provision for Income Taxes 1,894,000 3,389,000
Provision for Income Taxes (Note 2) 738,000 1,322,000
------------- -------------
Net Income Before Extraordinary Item 1,156,000 2,067,000
Extraordinary Item net of applicable
income tax benefit of $625,000 0 (978,000)
------------- -------------
Net Income $ 1,156,000 $ 1,089,000
------------- -------------
Net Income Per Common Share (Note 3):
Basic:
Before extraordinary item $ 0.18 $ 0.31
Extraordinary item -- (0.15)
------------- -------------
Net income $ 0.18 $ 0.16
------------- -------------
Diluted:
Before extraordinary item $ 0.17 $ 0.25
Extraordinary item -- (0.11)
------------- -------------
Net income $ 0.17 $ 0.14
------------- -------------
</TABLE>
3
<PAGE> 4
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,156,000 $ 1,089,000
Non-cash component of extraordinary charge 823,000
Adjustments to derive cash flow from operating activities:
Bad debt expense 799,000 359,000
Depreciation and amortization 2,559,000 2,358,000
Deferred income taxes 6,000
Amortization of officers' loans 10,000 10,000
Amortization of senior subordinated note discount 46,000
Changes in operating assets and liabilities:
Trade and other accounts receivable (14,435,000) (3,525,000)
Inventories (598,000) (382,000)
Prepaid expenses and other current assets 867,000 169,000
Accounts payable 16,185,000 5,256,000
Income taxes payable 310,000 197,000
Accrued expenses and other current liabilities 31,000 (1,408,000)
------------ ------------
Net cash provided by operating activities 6,936,000 4,946,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Reduction in restricted cash-tax exempt bond 206,000
Decrease in notes receivable 3,000 90,000
Decrease (Increase) in other assets 406,000 (1,679,000)
Acquisition of businesses (10,400,000)
Additions to property, equipment and leaseholds (889,000) (1,990,000)
------------ ------------
Net cash used in investing activities (10,880,000) (3,373,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 11,440,000
Reduction of long-term debt (7,212,000) (5,924,000)
Reduction of note receivable from sale of stock 75,000
Reduction of convertible subordinated debentures (19,534,000)
Proceeds from senior subordinated note 24,000,000
Proceeds from exercise of stock options 187,000
------------ ------------
Net cash provided by (used in) financing activities 4,490,000 (1,458,000)
------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 546,000 115,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,143,000 4,797,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,689,000 $ 4,912,000
============ ============
CASH PAID DURING THE PERIOD:
Interest $ 1,611,000 $ 2,089,000
Income taxes (refunded) $ (753,000) $ 266,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of 318 debentures into 43,590 shares of common stock $ 318,000
</TABLE>
4
<PAGE> 5
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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, 2000 and
the notes thereto. The results of operations for the three months ended
September 30, 2000 are not necessarily indicative of results for the full year.
NEW ACCOUNTING PRONOUNCEMENTS:
On July 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Heding Activities," which establishes accounting and reporting standards for
derivative instruments and for hedging activities. The statement requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
cumulative effect of adoption at July 1, 2000 was insignificant. At September
30, 2000, there were no outstanding derivative contracts.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), which provided the staff's views in
applying generally accepted accounting principles to selected revenue issues.
SAB 101, as amended, is required to be implemented by the Company during the
quarter ended June 30, 2001. The Company does not believe that the impact of
implementing SAB 101 will be material.
NOTE 2 - INCOME TAXES:
Income taxes have been computed based on the estimated annual effective income
tax rate for the respective periods.
5
<PAGE> 6
NOTE 3- EARNINGS PER SHARE:
Basic earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares and common stock equivalents. Common share
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, 2000 September 30, 1999
------------------------------ -------------------------------
Diluted Basic Diluted Basic
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding during the period 6,501,000 6,501,000 6,651,000 6,651,000
Common share equivalents resulting
from the assumed exercise of stock options 205,000 -- 315,000 --
Common shares resulting from the
assumed conversion of debentures 51,000 -- 2,206,000 --
----------- ----------- ----------- -----------
Weighted average number of common
and common equivalent shares
outstanding during the period 6,757,000 6,501,000 9,172,000 6,651,000
----------- ----------- ----------- -----------
Net income before extraordinary item 1,156,000 1,156,000 2,067,000 2,067,000
Interest expense, net of tax, on
convertible debentures 6,000 -- 193,000 --
----------- ----------- ----------- -----------
Adjusted income before extraordinary item 1,162,000 1,156,000 2,260,000 2,067,000
Extraordinary item -- -- (978,000) (978,000)
----------- ----------- ----------- -----------
Adjusted net income $ 1,162,000 $ 1,156,000 $ 1,282,000 $ 1,089,000
Common and common share equivalents 6,757,000 6,501,000 9,172,000 6,651,000
Earnings (Loss) per share:
Before extraordinary item $ .17 $ .18 $ .25 $ .31
Extraordinary item -- -- (.11) (.15)
----------- ----------- ----------- -----------
Net income $ .17 $ .18 $ .14 $ .16
=========== =========== =========== ===========
</TABLE>
NOTE 4 - STOCKHOLDERS' EQUITY:
During the period ended September 30, 2000, 58,350 common shares were
issued from the exercise of options totalling $187,000. In addition, options to
purchase 86,275 shares were repurchased by the Company in September 2000 at a
cost of $428,000 and charged to expense.
NOTE 5 - ACQUISITIONS:
On September 1, 2000, the Company acquired certain assets of an FBO
located in Birmingham, Alabama, from Raytheon Aircraft Services, Inc. (RAS) for
$6.6 million in cash, which was funded under the Company's acquisition line. The
acquisition was accounted for under the purchase method of accounting. Included
in the acquisition are tangible refueling assets utilized in the FBO business,
leasehold and leasehold improvements and a sublease for the entire duration of
the master lease. The consideration of $6.6 million has been allocated to
Property, Equipment and Leaseholds. The consideration included a deposit of $1.5
million which was classified in Other Assets at June 30, 2000.
6
<PAGE> 7
In July 2000, the Company purchased hangers, buildings and leaseholds at
its Tulsa, Oklahoma FBO and paid $3.8 million cash which was borrowed from its
acquisition line.
NOTE 6- OTHER ASSETS:
Other Assets include $1 million related to an investment made by the
Company on September 1, 2000 for a 49% interest in a start-up cargo company. The
investment will be accounted for using the equity method of accounting.
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. Subsequently the trustee filed suit in the
United States District Court for the District of Colorado on October 1, 1999.
The Company believes it has strong defenses based on the transaction 1) being
made in the ordinary course of business, and 2) involving an exchange for new
value. At the same time, Mercury received notice of a claim by the trustee for
$1.1 million against Compass Bank for funds paid pursuant to a loan between
Compass and WPAI, which the Company guaranteed. The trustee also filed suit in
this case on October 1, 1999. The Company has undertaken to defend this matter
and believes it has strong defenses based on the transaction being made in the
ordinary course of business. Accordingly, based upon the facts currently
available, the Company believes that no provision is required nor does it
believe this matter will have a significant effect on the financial statements.
In October 1999, Mr. Rene Perez, formerly the president of RPA, notified
the Company of certain alleged violations of his employment contract dated
February 28, 1998 between the Company, RPA and Mr. Perez asserting among other
things constructive termination. The Company subsequently filed a suit seeking
declaratory relief regarding the employment contract in the United States
District Court for Northern California (San Francisco) in November 1999. The
Company subsequently amended, on November 30, 1999, that suit as a result of its
investigation seeking damages against Mr. Perez. This case was transferred to
the United States District Court for the Southern District of New York (New York
City) on March 27, 2000. Mr. Perez filed a lawsuit, which was filed in November
1999 and served in December 1999, in the Circuit Court of the 11th Judicial
Circuit in Dade County, Florida seeking damages in excess of the jurisdictional
limit. This case is now in the discovery phase. The Company believes that the
claims of Mr. Perez are without merit and accordingly, no provision is required
nor does it believe this matter will have a significant effect on the financial
statements.
7
<PAGE> 8
NOTE 8 - SEGMENT REPORTING:
The Company operates and reports it's activities through five principal
units: 1) Fuel Sales and Services, 2) Fixed Based Operations, 3) Cargo
Operations, 4) Government Contract Services, and 5) RPA.
<TABLE>
<CAPTION>
Government
Fuel Sales Fixed Base Cargo Contract
and Services Operations Operations Services RPA Total
------------ ---------- ---------- ---------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 2000
Revenues $ 73,146 $ 23,890 $ 7,059 $ 7,300 $ 1,406 $112,801
Gross Margin 2,023 3,745 1,722 1,536 162 9,188
Depreciation and Amortization 186 1,281 801 216 75 2,559
Capital Expenditures 37 11,237 69 (54) 11,289
Segment Assets 65,975 33,784 32,461 19,243 5,675 157,338
QUARTER ENDED SEPTEMBER 30, 1999
Revenues $ 42,973 $ 15,182 $ 8,319 $ 7,043 $ 1,123 $ 74,640
Gross Margin 2,248 2,711 2,954 1,461 (227) 9,147
Depreciation and Amortization 166 998 913 228 53 2,358
Capital Expenditures 1,635 347 8 1,990
Segment Assets 53,542 24,551 28,509 17,248 7,128 130,978
</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. The key decision makers also view
bad debt expense as an important measure of profit and loss. The predominant
component of bad debt expense relates to Fuel Sales and Services. Bad debt
expense for Fuel Sales and Services was approximately $699,000 and $259,000;
total bad debt expense was $799,000 and $359,000 in the quarter ending September
2000 and September 1999, respectively.
NOTE 9 - LONG-TERM DEBT:
During the period ending September 30, 2000, the Company borrowed
$11,440,000 under its acquisition line to fund, 1) the Birmingham, Alabama FBO
acquisition in September 2000 ($6.6 million), 2) the Tulsa, Oklahoma, FBO
acquisition in July 2000 ($3.8 million) and 3) a hangar project in Bedford,
Massachusetts ($1,040,000). Additionally, during this period the Company paid
down $4.5 million of its acquisition line debt.
NOTE 10 - COMPREHENSIVE INCOME:
For the periods presented, adjustments to derive comprehensive income
from net income were insignificant.
8
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of operations-comparison of the Three Months ended September 30, 2000
and September 30, 1999. The following tables set forth, for the periods
indicated, the revenues and gross margin for each of the Company's five
operating units, as well as selected other financial statement data.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------------
($ In millions)
2000 1999
------------------------ -----------------------
% of Total % of Total
Amount Revenues Amount Revenues
------ ---------- ------ ---------
<S> <C> <C> <C> <C>
Revenues:
Fuel Sales and Services $ 73.1 64.8% $ 43.0 57.6%
FBOs 23.9 21.2 15.2 20.3
Cargo Operations 7.1 6.3 8.3 11.1
Government Contract Services 7.3 6.5 7.0 9.5
RPA 1.4 1.2 1.1 1.5
------ ------ ------ ------
Total Revenue $112.8 100.0% $ 74.6 100.0%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
% of Unit % of Unit
Gross Margin (1): Amount Revenues Amount Revenues
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Fuel Sales and Services $ 2.0 2.8% $ 2.2 5.2%
FBOs 3.8 15.7 2.7 17.9
Cargo Operations 1.7 24.4 3.0 35.5
Government Contract Services 1.5 21.0 1.5 20.7
RPA 0.2 11.5 (0.2) (20.2)
------ ------ ------ ------
Total Gross Margin $ 9.2 8.1% $ 9.1 12.3%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
% of Total % of Total
Amount Revenues Amount Revenues
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Selling general and administrative $ 2.0 1.8% $ 1.8 2.5%
Provision for bad debts .8 .7 .4 .5
Depreciation and amortization 2.6 2.3 2.4 3.2
Interest expense and other 1.9 1.7 1.2 1.6
------ ------ ------ ------
Income before income taxes 1.9 1.7 3.4 4.5
Provision for income taxes .7 .7 1.3 1.8
------ ------ ------ ------
Net income before extraordinary item 1.2 1.0 2.1 2.8
Extraordinary item -- -- (1.0) (1.3)
------ ------ ------ ------
Net income $ 1.2 1.0% $ 1.1 1.5%
====== ====== ====== ======
</TABLE>
----------------------
(1) Gross margin as used here and throughout Management's Discussion
excludes depreciation and amortization and selling, general and
administrative expense.
9
<PAGE> 10
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999
Revenue increased by 51.1% to $112.8 million in the current period from $74.6
million a year ago. Approximately 73% of the revenue increase was due to higher
fuel prices impacting commercial and FBO fuel sales. The balance of the revenue
increase was primarily from higher commercial and FBO fuel volume. Gross margin
increased marginally to $9.2 million in the current period from $9.1 million a
year ago.
Revenues from fuel sales and services represented 64.8% of total revenues in the
current period compared to 57.6% of total revenues a year ago. Revenues from
fuel sales and services increased 70.2% to $73.1 million from $43.0 million last
year. The increase in revenues from fuel sales and services was due to an
increase of 48% in the price of fuel sold and an increase of 14% in the volume
of fuel sold. Gross margin from fuel sales and services was $2.0 million in the
current period compared with $2.2 million last year and, as a percentage of
revenue, gross margin declined to 2.8% in the current period from 5.2% last year
due to higher fuel prices and lower per gallon margin. Revenues and gross margin
from fuel sales and services included the activities of Mercury's contract
fueling business and related fuel management services.
Revenues from FBOs increased by 57.4% in the current period to $23.9 million
from $15.2 million a year ago due to higher fuel prices and the addition of
Tulsa, Fort Wayne, Birmingham and Charleston locations, which were acquired
subsequent to the September 1999 quarter. Gross margin increased 38.1% in the
current period to $3.8 million from $2.7 million last year. The increase was
attributable in part to the new locations and in part to higher volumes and
margins at certain existing locations.
Revenues from cargo operations in the current period decreased 15.1% to $7.1
million from $8.3 million a year ago. Gross margin from cargo operations in the
current period decreased 41.2% to $1.7 million from $3.0 million in the year ago
period. Decreases in both revenues and gross margin were due to a reduction in
space brokerage revenue, due in part to loss of a contract with Tower Air, Inc.
which filed for bankruptcy in February 2000.
Revenues from government contract services increased 3.6% in the current period
to $7.3 million from $7.0 million in the year ago period. Gross margin from
government contract services in the current period increased 5.1% to $1.54
million from $1.46 million last year due to higher revenues.
Selling, general and administrative expenses in the current period increased
10.1% to $2.0 million from $1.8 million in last year's period due primarily to
higher professional fees and the cost of repurchasing stock options, offset in
part by lower compensation expense.
Provision for bad debts increased 122.6% in the current period to $0.8 million
from $0.4 million a year ago due to significantly higher sales in this period
and greater exposure due to significantly higher fuel prices which has created a
greater risk of loss due to potential bad debts related to certain airline
accounts. Future periods may continue to be impacted by higher reserve
requirements. Depreciation and amortization expense increased 8.5% in the
current period to $2.6 million from $2.4 million a year ago primarily due to the
four FBO acquisitions since September 1999 and various capital expenditures.
10
<PAGE> 11
Interest expense increased by 55.9% in the current period to $2.0 million from
$1.3 million a year ago due to higher average outstanding debt and higher
interest rates .
Income tax expense approximated 39% of pre-tax income in both periods reflecting
the expected effective annual tax rate.
Extraordinary item of $979,000 in last year's first quarter consisted of charges
associated with the redemption of the Company's 73/4% convertible subordinated
debentures in September 1999.
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, 2000 was $2,689,000.
Net cash provided by operating activities was $6,936,000 for the period ended
September 30, 2000. During this period, the primary sources of net cash provided
by operating activities was net income plus depreciation and amortization
totaling $3,715,000 and an increase in accounts payable of $16,185,000 due in
large part to higher fuel costs and higher volumes. The primary use of cash from
operating activities in this period was an increase in trade and other accounts
receivable of $14,435,000, due to higher sales and revenues.
Net cash used in investing activities was $10,880,000 during the current period.
The primary use of cash from investing activities included acquisition of
businesses of $10,400,000 and additions to property, equipment and leaseholds of
$889,000.
Net cash provided by financing activities was $4,490,000 during the current
period. The primary source of cash from financing activities from July 2000
through September 2000 was proceeds from long-term debt of $11,440,000. The
primary use of cash from financing activities was a reduction of long-term debt
of $7,212,000.
The Company's senior secured bank credit facility consists of a $35,000,000
Revolver, a term loan with an outstanding balance of $18,750,000 at September
30, 2000 and an acquisition facility with an outstanding balance of $16,868,000
at September 30, 2000. At September 30, 2000, there were no borrowings
outstanding under the Revolver. The agreement contains provisions that require
the maintenance of certain financial ratios including minimum tangible net
worth (as defined), minimum profitability levels, maximum leverage and minimum
debt service coverage and quick ratios and limitations on annual capital
expenditures. Additionally, the Company is prohibited from paying dividends in
excess of $400,000 per year.
On September 10, 1999, the Company issued, in a private placement, $24,000,000
Senior Subordinated 12% Note ("the Note") due 2006 with detachable warrants to
acquire 503,126 shares of the Company's common stock exercisable at $6.50 per
share for seven years. The Note agreement contains covenants that, among other
matters, limit senior indebtedness, the disposition of assets and unfunded
capital expenditures. The covenants also include a ratio test for interest
coverage, leverage, fixed charge coverage and debt service.
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.
11
<PAGE> 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
There has been no material change during the quarter ended September 30,
2000 from the disclosures regarding market risk presented in the Company's
Annual Report on Form 10-K for the year ended June 30, 2000.
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.
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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) Exhibits and Exhibit List
(b) Reports on Form 8-K
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<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation. (4)
3.2 Form of Amendment to Restated Certificate of Incorporation creating
the Series A 8% Convertible Cumulative Redeemable Preferred Stock.
(4)
3.3 Form of Amendment to Restated Certificate of Incorporation
declaring the Separation Date for the Series A 8% Convertible
Redeemable Preferred Stock. (5)
3.4 Bylaws of the Company. (4)
3.5 Amendment to Bylaws of the Company. (10)
3.6 Amendment to Bylaws of the Company adopted on December 3, 1998.
(19)
3.7 Amendment to Bylaws of the Company adopted on August 22, 2000
4.1 Form of Indenture between Mercury Air Group, Inc. and IBJ Schroder
Bank & Trust Company. (11)
4.2 Negotiable Promissory Note, dated as of June 21, 1996, from Mercury
Air Group, Inc. to Raytheon Aircraft Services, Inc. (13)
4.3 Legend Agreement, dated as of August 29, 1996 between Mercury Air
Group, Inc. and Raytheon Aircraft Services, Inc. (13)
4.4 Loan Agreement between California Economic Development Financing
Authority and Mercury Air Group, Inc. relating to $19,000,000
California Economic Development Financing Authority Variable Rate
Demand Airport Facilities Revenue Bonds, Series 1998 (Mercury Air
Group, Inc. Project) dated as of April 1, 1998. (3)
4.5 Securities Purchase Agreement dated September 10, 1999 by and among
Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P. (20)
10.1 Employment Agreement dated December 10, 1993 between the Company
and Seymour Kahn. (8)*
10.2 Stock Purchase Agreement between the Company, SK Acquisition, Inc.,
Randolph E. Ajer, Kevin J. Walsh, Grant Murray and Joseph Czyzyk.
(2)*
10.3 Company's 1990 Long-Term Incentive Plan. (6)*
10.4 Company's 1990 Directors Stock Option Plan. (1)*
10.5 Lease for 6851 West Imperial Highway, Los Angeles, California. (4)
10.6 Memorandum Dated September 15, 1997 regarding Summary of Officer
Life Insurance Policies with Benefits Payable to Officers or Their
Designated Beneficiaries. (15)*
10.7 Memorandum dated September 15, 1995 regarding Summary of Bonus
Plans for Seymour Kahn, Joseph Czyzyk and Randolph E. Ajer. (10)*
10.8 Memorandum dated September 15, 1995 regarding Summary of Bonus
Plans for Kevin Walsh and William Silva. (10)*
10.9 The Company's 401(k) Plan consisting of LCI Actuaries, Inc.
Regional Prototype Defined Contribution Plan and Trust and Adoption
Agreement. (7)*
10.10 Non-Qualified Stock Option Agreement by and between the Company and
Seymour Kahn dated January 21, 1993. (7)*
</TABLE>
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<TABLE>
<S> <C>
10.11 Stock Purchase Agreement among the Company, SK Acquisition, Inc.
and William L. Silva dated as of August 9, 1993. (8)*
10.12 Stock Exchange Agreement dated as of November 15, 1994 between
Joseph Czyzyk and the Company. (9)*
10.13 Employment Agreement dated November 15, 1994 between the Company
and Joseph Czyzyk. (16)*
10.14 Non-Qualified Stock Option Agreement dated August 24, 1995, by and
between S.K. Acquisition and Mercury Air Group, Inc. (12)*
10.15 Non-Qualified Stock Option Agreement dated March 21, 1996, by and
between Frederick H. Kopko and Mercury Air Group, Inc. (12)*
10.16 Credit Agreement by and among Sanwa Bank California, Mellon Bank,
N.A., The First National Bank of Boston and Mercury Air Group, Inc.
dated March 14, 1997. (14)
10.17 First Amendment to Credit Agreement and Related Loan Documents
dated as of November 1997, by and among Sanwa Bank California,
Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.
(16)
10.18 First Amendment of 1998 to Credit Agreement and Other Loan
Documents dated as of April 1, 1998, by and among Sanwa Bank
California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air
Group, Inc. (3)
10.19 Second Amendment of 1998 to Credit Agreement and Other Loan
Documents dated as of April 1998, by and between Sanwa Bank
California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air
Group, Inc. (16)
10.20 Third Amendment of 1998 to Credit Agreement and Other Loan
Documents dated as of August 31, 1998, by and between Sanwa Bank
California, Mellon Bank, N.A., BankBoston, N.A. and Mercury Air
Group, Inc. (16)
10.21 Reimbursement Agreement dated as of April 1, 1998, by and among
Sanwa Bank California, Mellon Bank, N.A., BankBoston, N.A. and
Mercury Air Group, Inc. (3)
10.22 First Amendment to Reimbursement Agreement and Other L/C Documents
as of August 31, 1998, by and between Sanwa Bank California, Mellon
Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc. (16)
10.23 Fourth Amendment of 1998 to Credit Agreement and Other Loan
Documents by and between Sanwa Bank California, Mellon Bank, N.A.,
BankBoston, N.A. and Mercury Air Group, Inc. dated September 15,
1998. (17)
10.24 Second Amendment to Reimbursement Agreement and Other L/C Documents
by and between Sanwa Bank California, Mellon Bank, N.A.,
BankBoston, N.A. and Mercury Air Group, Inc. dated September 15,
1998. (17)
10.25 Company's 1998 Long-Term Incentive Plan. (18)*
10.26 Company's 1998 Directors Stock Option Plan. (18)*
10.27 Amendment to Employment Agreement by and between Mercury Air Group,
Inc. and Joseph A. Czyzyk dated October 15, 1998. (19)*
10.28 Amendment No. 2 to Employment Agreement by and between Mercury Air
Group, Inc. and Joseph A. Czyzyk dated April 12, 1999. (19)*
10.29 First Amendment of 1999 to Credit Agreement and Other Loan
Documents dated as of December 31, 1998 by and between Sanwa Bank
California, Mellon Bank, N.A. and BankBoston, N.A. and Mercury Air
Group, Inc. (19)
10.30 Third Amendment to Reimbursement Agreement and Other L/C Documents
dated as of December 31, 1998 by and between Sanwa Bank California,
Mellon Bank, N.A., BankBoston, N.A. and Mercury Air Group, Inc.
(19)
</TABLE>
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<TABLE>
<S> <C>
10.31 Revolving Credit and Term Loan Agreement dated as of March 2, 1999
by and among Mercury Air Group, Inc., The Banks listed on Schedule
1 thereto, and The Fleet National Bank f/k/a BankBoston, N.A., as
Agent. (19)
10.32 First Amendment to Revolving Credit and Term Loan Agreement
dated as of September 10, 1999.(22)
10.33 Second Amended to Revolving Credit and Term Loan Agreement dated as
of March 31, 2000.(22)
10.34 Third Amendment, Waiver and Consent to Revolving Credit and Term
Loan Agreement dated as of August 11, 2000.(22)
10.35 The Company's 401(k) Plan consisting of CNA Trust Corporation.
Regional Prototype Defined Contribution Plan and Trust and Adoption
Agreement. (22)*
10.36 Amendment No. 3 to Employment Agreement by and between Mercury Air
Group, Inc. and Joseph A. Czyzyk dated September 11, 2000.*
10.37 Employment Agreement dated July 31, 2000 between the Company and
Dr. Philip J. Fagan.*
27 Financial Data Schedule.
99.1 Partnership Agreement dated as of July 27, 2000 of FK Partners by
and among Philip J. Fagan, M.D., Frederick H. Kopko, Jr., and
Joseph A. Czyzyk. (21)
</TABLE>
-----------------------
* Denotes managements contract or compensation plan or arrangement.
(1) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 10, 1993 Annual Meeting of Shareholders and
is incorporated herein by reference.
(2) Such document was previously filed as an Exhibit to the Company's
Current Report on Form 8-K dated December 6, 1989 and is incorporated
herein by reference.
(3) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and
are incorporated herein by reference.
(4) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-39044 on Form S-2 and are incorporated
herein by reference.
(5) Such document was previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and
is incorporated herein by reference.
(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.
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<PAGE> 17
(8) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994 and are
incorporated herein by reference.
(9) Such document was previously filed as an Exhibit to the Company's
Current Report on Form 8-K dated November 15, 1994 and is incorporated
herein by reference.
(10) All such documents were previously filed as Exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995 and are
incorporated herein by reference.
(11) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-65085 on Form S-1 and are incorporated
herein by reference.
(12) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and
are incorporated herein by reference.
(13) All such documents were previously filed as Exhibits to the Company's
Report on Form 8-K filed September 13, 1996 and are incorporated herein
by reference
(14) Such document was previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and
is incorporated herein by reference.
(15) Such document was previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997 and is incorporated
herein by reference.
(16) All such documents were previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998 and is
incorporated herein by reference.
(17) Such document was previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998
and is incorporated herein by reference.
(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
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.
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(20) All such documents were previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1999 and is
incorporated herein by reference.
(21) Such document was previously filed as an Exhibit to the Company's
current Report on Form 8-K on August 11, 2000 and is incorporated herein
by reference.
(22) 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
(b) Reports on Form 8-K:
A Form 8-K was filed on August 11, 2000 reporting on Item 1 of a change
in control of the Registrant. No financial statements were filed with
such report.
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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 13, 2000
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