10-Q 1 a67200e10-q.txt FORM 10-Q 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.
Number of Shares Outstanding Title As of November 1, 2000 ----- ---------------------------- Common Stock, $.01 Par Value 6,531,305
2 PART 1 - FINANCIAL INFORMATION MERCURY AIR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
SEPTEMBER 30, JUNE 30, 2000 2000 ------------- ------------- 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 ============= =============
2 3 MERCURY AIR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2000 1999 ------------- ------------- 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 ------------- -------------
3 4 MERCURY AIR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, --------------------------------- 2000 1999 ------------ ------------ 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
4 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 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.
Three Months Ended Three Months Ended September 30, 2000 September 30, 1999 ------------------------------ ------------------------------- Diluted Basic Diluted Basic ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
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 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 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.
Government Fuel Sales Fixed Base Cargo Contract and Services Operations Operations Services RPA Total ------------ ---------- ---------- ---------- -------- -------- (Dollars in Thousands) 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
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 $4.5 million of its acquisition line debt. NOTE 10 - COMPREHENSIVE INCOME: For the periods presented, adjustments to derive comprehensive income from net income were insignificant. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of operations-comparison of the Three Months ended September 30, 2000 and September 30, 1999. The following tables set forth, for the periods indicated, the revenues and gross margin for each of the Company's five operating units, as well as selected other financial statement data.
Three Months Ended September 30, -------------------------------------------------------- ($ In millions) 2000 1999 ------------------------ ----------------------- % of Total % of Total Amount Revenues Amount Revenues ------ ---------- ------ --------- 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% ====== ====== ====== ======
% of Unit % of Unit Gross Margin (1): Amount Revenues Amount Revenues ------ --------- ------ --------- 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% ====== ====== ====== ======
% of Total % of Total Amount Revenues Amount Revenues ------ ---------- ------ ---------- 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% ====== ====== ====== ======
---------------------- (1) Gross margin as used here and throughout Management's Discussion excludes depreciation and amortization and selling, general and administrative expense. 9 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 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 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. 12 13 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 13 14
Exhibit No. Description ------- ----------- 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)*
14 15 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)
15 16 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)
----------------------- * 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. 16 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. 17 18 (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. 18 19 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 19