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, 2001
[ ] 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)
Delaware 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 9, 2001
----- ----------------------------
Common Stock, $0.01 Par Value 6,577,380
PART 1- FINANCIALS INFORMATION
Item 1. Financial Statements
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, JUNE 30,
ASSETS 2001 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 875,000 $ 3,886,000
Trade accounts receivable, net of allowance for doubtful accounts
of $2,097,000 at 9/30/01 and $1,653,000 at 6/30/01 51,224,000 55,040,000
Inventories, principally aviation fuel 4,382,000 4,069,000
Prepaid expenses and other current assets 3,593,000 2,882,000
Net assets of discontinued operations (Note 2) 60,000 4,338,000
------------- -------------
Total current assets 60,134,000 70,215,000
PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated
depreciation and amortization of $53,277,000 at 9/30/01 and $52,165,000
at 6/30/01 70,859,000 71,779,000
OTHER ASSETS 8,926,000 9,140,000
------------- -------------
$ 139,919,000 $ 151,134,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 25,981,000 $ 31,668,000
Accrued expenses and other current liabilities 6,285,000 10,357,000
Income tax payable 538,000 96,000
Current portion of long-term debt 7,296,000 7,461,000
------------- -------------
Total current liabilities 40,100,000 49,582,000
LONG-TERM DEBT 42,062,000 44,560,000
DEFERRED INCOME TAXES 392,000 380,000
SENIOR SUBORDINATED NOTE (Note 5) 23,077,000 23,030,000
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Preferred Stock - $0.01 par value; authorized 3,000,000 shares;
no shares outstanding
Common Stock - $ 0.01 par value; authorized 18,000,000 shares;
outstanding 6,576,680 shares at 9/30/01 and 6/30/01 66,000 66,000
Additional paid-in capital 21,442,000 21,442,000
Retained earnings 13,541,000 12,835,000
Cumulative translation adjustment (Note 7) (228,000) (228,000)
Notes receivable from sale of stock (533,000) (533,000)
------------- -------------
Total stockholders' equity 34,288,000 33,582,000
------------- -------------
$ 139,919,000 $ 151,134,000
============= =============
See accompanying notes to consolidated financial statements
F-2
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2001 2000
------------- -------------
Sales and Revenues:
Sales $ 80,443,000 $ 89,676,000
Service revenues 23,309,000 21,719,000
------------- -------------
103,752,000 111,395,000
------------- -------------
Costs and Expenses:
Cost of sales 70,419,000 80,810,000
Operating expenses 25,587,000 21,559,000
------------- -------------
96,006,000 102,369,000
------------- -------------
Gross Margin (Excluding depreciation
and amortization) 7,746,000 9,026,000
------------- -------------
Expenses (Income):
Selling, general and administrative 1,948,000 2,032,000
Provision for bad debts 585,000 799,000
Depreciation and amortization 2,477,000 2,483,000
Interest expense 1,526,000 1,928,000
Interest income (17,000) (30,000)
------------- -------------
6,519,000 7,212,000
------------- -------------
Income from Continuing Operations Before
Provision for Income Taxes 1,227,000 1,814,000
Provision for Income Taxes 479,000 707,000
------------- -------------
Income from Continuing Operations 748,000 1,107,000
(Loss) Income from Discontinued Operations
net of income tax (benefit) charge of
($27,000) in 2001 and $31,000 in 2000 (42,000) 49,000
------------- -------------
Net Income $ 706,000 $ 1,156,000
============= =============
Net Income Per Common Share (Note 6):
Basic:
From Continuing Operations $ 0.11 $ 0.17
(Loss) Income from Discontinued Operations (0.01) 0.01
Net income 0.11 0.18
Diluted:
From Continuing Operations $ 0.11 $ 0.16
(Loss) Income from Discontinued Operations (0.01) 0.01
Net income 0.10 0.17
See accompanying notes to consolidated financial statements
F-3
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 706,000 $ 1,156,000
Less: (Loss) income from discontinued operations (42,000) 49,000
------------ ------------
Income from continuing operations 748,000 1,107,000
Adjustments to derive cash flow from operating activities:
Bad debt expense 585,000 799,000
Depreciation and amortization 2,477,000 2,483,000
Deferred income taxes 12,000 6,000
Amortization of senior subordinated note discount 47,000 46,000
Changes in operating assets and liabilities:
Trade and other accounts receivable 3,231,000 (14,092,000)
Inventories (313,000) (598,000)
Prepaid expenses and other current assets (711,000) 859,000
Accounts payable (5,687,000) 16,211,000
Income taxes payable 442,000 310,000
Accrued expenses and other current liabilities (4,072,000) (131,000)
------------ ------------
Net cash (used in) provided by operating activities (3,241,000) 7,000,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in other assets (17,000) 416,000
Acquisition of businesses (10,400,000)
Additions to property, equipment and leaseholds (1,326,000) (889,000)
------------ ------------
Net cash used in investing activities (1,343,000) (10,873,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 11,440,000
Reduction of long-term debt (2,663,000) (7,212,000)
Reduction of note receivable from sale of stock 75,000
Proceeds from exercise of stock options 187,000
------------ ------------
Net cash (used in) provided by financing activities (2,663,000) 4,490,000
------------ ------------
Net cash provided by (used in) discontinued operations 4,236,000 (71,000)
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (7,247,000) 617,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,886,000 2,143,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 875,000 $ 2,689,000
============ ============
CASH PAID DURING THE PERIOD:
Interest $ 1,498,000 $ 1,611,000
Income taxes (refunded) $ (753,000)
See accompanying notes to consolidated financial statements
F-4
MERCURY AIR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
NOTE 1 -- GENERAL:
BUSINESS:
Mercury Air Group, Inc., a Delaware corporation, provides a broad range
of services to the aviation industry through four principal operating units:
fuel sales and services, cargo operations, fixed base operations and U.S.
government contract services. Fuel sales include the sale of fuel and delivery
of fuel primarily to domestic and international commercial airlines, business
aviation and air freight airlines. Cargo operations consist of cargo handling,
space logistics operations and general cargo sales agent services. Fixed base
operations ("FBOs") include fuel sales, into-plane services, ground support
services, aircraft hangar and tie-down facilities and maintenance at certain
locations for commercial, private, general aviation and military aircraft.
Government contract services consist of aircraft refueling and fuel storage
operations, base operating support (BOS) services, air terminal and ground
handling services and weather observation and forecasting services performed
principally for agencies of the United States government. Additionally, the
Company had a fifth operating unit, RPA Airline Automation Services, Inc.
("RPA") which was sold on July 3, 2001 and is classified as a discontinued
operation (see note 2).
MERCFUEL, INC:
On March 7, 2001, the Company announced its plan to create an
independent publicly traded company, MercFuel, Inc. ("MercFuel"). MercFuel was
organized in Delaware on October 27, 2000 as a wholly owned subsidiary of the
Company. On January 1, 2001, the Company transferred to MercFuel, the assets and
liabilities of its Fuel Sales division. On April 30, 2001, MercFuel agreed to
sell 239,942 shares of common stock in a private placement at a per share price
of $4.35, the net proceeds of which were $860,000. The sale will be consummated
at such time as the Company's lenders consent to that offering. On May 15, 2001,
the Company contributed $4.0 million of equity to MercFuel in the form of
cancellation of intercompany debt payable to the Company. On May 16, 2001 and
amended twice thereafter, MercFuel filed a registration statement related to the
proposed sale of 1,200,000 shares of common stock (excluding 180,000 shares to
cover over-allotments and an option issued to the underwriter to purchase
120,000 shares, exercisable one year after the effective date of the offering at
a price equal to 140% of the initial public offering price). There is no
assurance the Company will complete the initial public offering, however, if the
initial public offering is completed the Company will own at least 80.1% of
MercFuel's outstanding common stock. The Company currently intends, subject to
satisfactory resolution of certain conditions, to distribute (the
"Distribution") all of the shares of MercFuel common stock that the Company owns
to the Company's stockholders no earlier than six months after MercFuel's
initial public offering. The distribution is subject to consent by the Company's
senior and subordinated note holders.
5
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, 2001 and
the notes thereto. The results of operations for the three months ended
September 30, 2001 are not necessarily indicative of results for the full year.
NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interest method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." The Company has elected to adopt SFAS No. 142 on July 1,
2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS. No. 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company has not yet determined what impact the adoption will have on its
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This new statement also supersedes certain aspects of
APB Opinion No 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," with regard to reporting the effects of a
disposal of a segment of a business and will require expected future operating
losses from discontinued operations to be reported in discontinued operations in
the period incurred (rather than as of the measurement date as presently
required by APB Opinion No 30). In addition, more dispositions may qualify for
discontinued operations treatment. The provisions of this statement are required
to be applied on July 1, 2002. The Company has not yet determined what effect
this statement will have on its financial statements.
6
NOTE 2 -- DISCONTINUED OPERATIONS:
On July 3, 2001, the Company completed the sale of its subsidiary, RPA
Airline Automation Services, Inc. ("RPA"), which provides airline revenue
accounting and management information software consisting of proprietary
software programs which are marketed to foreign and domestic airlines. The
Company has reclassified its consolidated financial statements to reflect the
sale of RPA and to segregate the revenues, direct costs and expenses (excluding
allocated costs), assets and liabilities, and cash flows of RPA. The net
operating results, net assets and net cash flows of this business have been
reported as "Discontinued Operations" in the accompanying consolidated financial
statements.
THREE MONTHS ENDED
SEPTEMBER 30,
2000
------------------
Service revenues $1,406,000
Operating expense 1,244,000
----------
Gross margin 162,000
----------
Other expense 82,000
----------
Income before income taxes 80,000
Income tax 31,000
----------
Net income $ 49,000
==========
JUNE 30, 2001
-------------
Current assets $4,324,000
Total assets 5,292,000
Current and total liabilities 954,000
Net assets of discontinued operations 4,338,000
NOTE 3 -- INCOME TAXES:
Income taxes have been computed based on the estimated annual effective
income tax rate for the respective periods.
NOTE 4 -- LITIGATION:
On March 16, 2001, the bankruptcy court approved a settlement related to
preference payments received in connection with the Chapter 7 bankruptcy filing
for Western Pacific Airlines, Inc., ("WPAI"). The settlement consists of ten
quarterly payments of $175,000, four of which have been made with the unpaid
balance secured by a letter of credit. During the quarter ended December 31,
2000 the Company recorded a charge to bad debt expense equal to the present
value of the payments, $1.6 million. The outstanding balance on September 30,
2001 was approximately $979,000.
In February 2001, the Company received notice of a complaint filed by
the Chapter 7 Trustee for Tower Air in regard to a preference action. In July
2001, the Company settled this matter for $1.0 million. In accordance with the
terms of the settlement, the Company paid $750,000 subsequent to June 30, 2001
and will pay the balance in ten monthly installments of $25,000 each. As of
September 30, 2001, the unpaid note balance was $225,000 and is secured by a
letter of credit.
7
In April 2000, Mercury filed a collection action against AER Global
Logistics ("AER") in the state of New York. AER filed a counterclaim for $1.0
million alleging among other things, tortious interference with contract.
Mercury believes that this claim is without merit, and accordingly, does not
believe this matter will have a significant impact on it financial position or
operating results.
On April 3, 2001 Mercury received notice of an action filed by Skylink
Express, Inc. in the Superior Court of Justice Ontario, Canada against Excel
Cargo, Inc. and others for damages to aircraft occurring in November 30, 1999
and January 10, 2000 at Mirabel International Airport Quebec for a total amount
of $2.5 million Canadian ($1.65 million U.S.) plus interest and fees. Mercury
does not believe the outcome of this claim will have a significant impact on its
financial position or operating results.
In October 2001, Mercury received notice that the California Court of
Appeals had rejected its appeal in the matter of Koye Fernandez v. Mercury Air
Group, Inc. The case is currently on appeal to the California Supreme Court.
Mercury does not believe the outcome of this claim will have a significant
impact on its financial position or operating results.
The Company is also a defendant in certain litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of such litigation will not have a significant effect on the financial
statements.
NOTE 5 -- DEBT:
On September 10, 1999, the Company issued, in a private placement, a
$24.0 million senior Subordinated 12% Note ("the Note") due 2006 with detachable
warrants to purchase 503,126 shares of the Company's common stock exercisable at
$6.50 per share for seven years. On November 16, 2001, the agreement was amended
to reduce the exercise price to $5.50 per share. The Note agreement contains
covenants that, among other matters, limit senior indebtedness, the disposition
of assets and unfunded capital expenditures. The covenants also included a ratio
test for interest coverage, leverage, fixed charge coverage and debt service. On
November 16, 2001 and effective September 30, 2001, the Company received a
waiver pertaining to the interest coverage test and the agreement was amended by
reducing the ongoing interest coverage test.
NOTE 6 -- 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 potential common shares. Potential common
shares include stock options and shares resulting from the assumed conversion of
subordinated debentures, when dilutive.
8
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
------------------------- -------------------------
Diluted Basic Diluted Basic
--------- --------- --------- ---------
Weighted average number of common
Shares outstanding during the period 6,577,000 6,577,000 6,501,000 6,501,000
Common share equivalents resulting from
the assumed exercise of stock options 163,000 -- 205,000 --
Common shares resulting from the assumed
conversion of debentures 36,000 -- 51,000 --
--------- --------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding
during the period 6,776,000 6,577,000 6,757,000 6,501,000
========= ========= ========= =========
NOTE 7 -- SEGMENT REPORTING:
The Company operates and reports its activities through four principal
units: 1) Fuel Sales, 2) Fixed Based Operations, 3) Cargo Operations and 4)
Government Contract Services. Additionally, the Company had a fifth operating
unit, RPA, which was sold on July 3, 2001. As a result, RPA's historical
operating results have been reclassified as a discontinued operations. The
segment data for the quarter ended September 30, 2000 included below has been
restated to exclude amounts related to the RPA business unit.
GOVERNMENT CORPORATE
FUEL FIXED BASE CARGO CONTRACT OR
SALES OPERATIONS OPERATIONS SERVICES UNALLOCATED TOTAL
------- ---------- ---------- ---------- ----------- -------
(DOLLARS IN THOUSANDS)
QUARTER ENDED SEPTEMBER 30, 2001
Revenues $64,500 $23,962 $ 7,138 $ 8,152 $103,752
Gross Margin 1,839 3,446 434 2,027 7,746
Depreciation and Amortization 15 1,343 760 193 $ 166 2,477
Capital Expenditures 1,225 97 4 1,326
Segment Assets 26,870 44,451 33,873 22,143 12,522 139,859
QUARTER ENDED SEPTEMBER 30, 2000
Revenues $73,146 $23,890 $ 7,059 $ 7,300 $111,395
Gross Margin 2,023 3,745 1,722 1,536 9,026
Depreciation and Amortization 15 1,281 801 216 $ 170 2,483
Capital Expenditures 37 11,237 69 (54) 11,289
Segment Assets 36,505 33,784 32,461 19,243 29,670 151,663
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. Bad debt expense for Fuel
Sales was approximately $485,000 and $699,000; total bad debt expense was
$585,000 and $799,000 in the quarter ending September 2001 and September 2000,
respectively.
NOTE 8 -- COMPREHENSIVE INCOME:
For the periods presented, adjustments to derive comprehensive income
from net income were insignificant.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of operations-comparison of the three months ended September 30, 2001
and September 30, 2000. The following tables set forth, for the periods
indicated, the revenues and gross margin for each of the Company's four
operating units, as well as selected other financial statement data.
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
($ IN MILLIONS)
------------------------------------------------
2001 2000
--------------------- ---------------------
% OF TOTAL % OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES
------ ---------- ------ ----------
Revenues:
Fuel Sales $ 64.5 62.1% $ 73.1 65.7%
FBOs 24.0 23.1 23.9 21.4
Cargo Operations 7.1 6.9 7.1 6.3
Government Contract Services 8.2 7.9 7.3 6.6
------ ------ ------ ------
Total Revenue $103.8 100.0% $111.4 100.0%
====== ====== ====== ======
% of Unit % of Unit
Amount Revenues Amount Revenues
------ ---------- ------ ----------
Gross Margin(1):
Fuel Sales $ 1.8 2.9% $ 2.0 2.8%
FBOs 3.5 14.4 3.8 15.7
Cargo Operations 0.4 6.1 1.7 24.4
Government Contract Services 2.0 24.9 1.5 21.0
------ ------ ------ ------
Total Gross Margin $ 7.7 7.5% $ 9.0 8.1%
====== ====== ====== ======
% of Total % of Total
Amount Revenues Amount Revenues
------ ---------- ------ ----------
Selling, general and administrative $ 1.9 1.9% $ 2.0 1.8%
Provision for bad debts 0.6 0.6 0.8 0.7
Depreciation and amortization 2.4 2.4 2.5 2.2
Interest expense and other 1.5 1.5 1.9 1.7
------ ------ ------ ------
Income from continuing operations
before tax 1.3 1.2 1.8 1.6
Provision for income taxes 0.5 0.5 0.7 0.6
------ ------ ------ ------
Income from continuing operations 0.8 1.2 1.1 1.0
(Loss) income from discontinued operations (0.1) -- 0.1 0.1
------ ------ ------ ------
Net Income $ 0.7 0.7% $ 1.2 1.0%
====== ====== ====== ======
(1) Gross margin as used here and throughout Management's Discussion excludes
depreciation and amortization and selling, general and administrative
expense.
10
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SEPTEMBER 30, 2000
Revenue decreased by 6.9% to $103.8 million in the current period from $111.4
million in the prior year due to lower fuel prices in the current period. Gross
margin decreased 14.2% to $ 7.7 million in the current period from $9.0 million
a year ago, primarily due to a decline in Cargo operations and higher operating
costs.
Revenues from fuel sales represented 62.1% of total revenues in the current
period compared to 65.7% of revenues a year ago. Revenues from fuel sales
decreased 11.8% to $64.5 million from $73.1 million last year. The decrease from
fuel sales was due to a decrease of 18% in the price of fuel sold, partially
offset by an increase of 7.5% in volume sold. Gross margin from fuel sales was
$1.8 million in the current period compared with $2.0 million last year
primarily due to lower per gallon margins in the current period caused by a
change in the customer mix. Following September 11th, for several days, the
Company's operations were partially shutdown and sales were negligible as
airlines were not flying. As a result, fuel volumes were lower by approximately
18% in September compared with the previous two months. Since that time volumes
have returned closer to normal levels. Revenues and gross margin from fuel sales
includes the activities of Mercury's contract fueling business.
Revenues from FBOs were $24.0 million in the current period compared to $23.9
million a year ago. Gross margin decreased 8.0% in the current period to $3.5
million from $3.8 million last year. The gross margin decrease was primarily
caused by the impact the events of September 11th had on operations in the month
of September with lower sales volume combined with fixed costs. In September,
the volume of fuel sold was down approximately 28% compared to the first two
months of the period. Since September, volumes have returned closer to normal
levels. Additionally, revenues in the current period were favorably impacted by
the addition of Birmingham in September 2000.
Revenues from cargo operations were $7.1 million in both periods. Gross margin
from cargo operations in the current period decreased 74.8% to $0.4 million from
$1.7 million in the year ago period due to higher operating costs, primarily
labor and lease costs, associated with cargo handling and general sales agency
(GSA). The Company's operations in Atlanta were impacted by higher lease costs
associated with a new facility and lower revenues primarily caused by the loss
of an account which had represented approximately 30% of its revenues in the
year ago period and none in the current period. Revenues from existing customers
at the Company's LAX operations for both warehouse and GSA were lower compared
to last year due to a softer marketplace while operating expenses rose. New GSA
accounts were added during fiscal 2001 subsequent to September 2000 which offset
lower revenues from existing customers, but operating expenses increased
correspondingly. Revenues in September 2001 approximated revenues in the first
two months of the quarter and have remained relatively constant since. The Cargo
business has been impacted by a slowdown in worldwide cargo tonnage and
shipments.
Revenues from government contract services increased 11.7% in the current period
to $8.2 million from $7.3 million in the year ago period due to new contracts
added in fiscal 2001 and in the current period, partially offset by lower
weather observation and forecasting revenues from fewer contracts and the loss
of the Yokota, Japan contract in September 2001 which provided $1.8
11
million or 25.0% of total revenues during the quarter ended September 30, 2000
and $5.1 million or 17.6% of total revenues during fiscal year 2001. Gross
margin from government contract services in the current period increased 32.0%
to $2.0 million from $1.5 million last year due to higher revenues and higher
margins.
Selling, general and administrative expenses in the current quarter decreased
4.1% to $1.9 million from $2.0 million in last year's quarter due to the cost of
repurchasing certain options in the year ago period, partially offset by higher
professional fees in the current period.
Provision for bad debts decreased 26.8% in the current period to $0.6 million
from $0.8 million a year ago primarily due to lower sales in the current period.
Depreciation and amortization expense was $2.4 million in the current period
compared to $2.5 million a year ago.
Interest expense decreased by 20.9% in the current period to $1.5 million from
$1.9 million a year ago due lower interest rates.
Income tax expense approximated 39% of pre-tax income in both periods reflecting
the expected effective annual tax rate.
Loss from discontinued operations was $42,000 in the current period net of a tax
benefit of $27,000 and was related to the sale of property which was included in
net assets of discontinued operations at June 30, 2001. Income from discontinued
operations of $49,000, net of income taxes of $31,000, in the year ago period
was related to RPA's operations.
LIQUIDITY AND CAPITAL RESOURCES:
The events of September 11, 2001 have had a significant impact on the aviation
industry and, as a result, have impacted the Company's operations as well. In
the first few days following September 11th, revenue from the Company's fuel
sales, cargo and FBO operations were negligible. At this time, the Company's
operations are returning to normal levels. In view of the uncertainty of the
ultimate impact upon the aviation industry, the long-term impact to the
Company's customers and operations cannot be determined at this time.
On March 7, 2001, the Company announced its plan to create an independent
publicly traded company, MercFuel, Inc. MercFuel, Inc. was organized in Delaware
on October 27, 2000 as a wholly owned subsidiary of the Company. On January 1,
2001, the Company transferred to MercFuel, Inc. the assets and liabilities of
its Fuel Sales division. On April 30, 2001, MercFuel, Inc. agreed to sell
239,942 shares of common stock in a private placement at a per share price of
$4.35, the net proceeds of which are $860,000. The sale will be consummated at
such time as the Company's lenders consent to that offering. On May 15, 2001,
the Company contributed $4.0 million of equity to MercFuel, Inc. in the form of
cancellation of intercompany debt payable to the Company. On May 16, 2001 and
amended twice thereafter, MercFuel filed a registration statement related the
proposed sale of 1,200,000 shares of common stock (along with an additional
180,000 shares to cover over-allotments and an option issued to the underwriter
to purchase 120,000 shares, exercisable one year after the effective date of the
offering at a price equal to 140% of the initial public offering price). There
can be no assurance that the Company will be able to complete the
12
initial public offering, however, if the offering is completed, the Company will
own at least 80.1% of MercFuel's outstanding common stock. The Company currently
intends, subject to satisfactory resolution of certain conditions, to distribute
(the "Distribution") all of the shares of MercFuel common stock that the Company
owns to the Company's stockholders no earlier than six months after MercFuel's
initial public offering. The Distribution is subject to consent by the Company's
senior and subordinated debt holders.
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, 2001 was $875,000.
Net cash used in operating activities was $3.2 million for the period ended
September 30, 2001. During this period, the primary sources of net cash provided
by operating activities was income from continuing operations plus depreciation
and amortization totaling $3.2 million and a decrease in accounts receivable of
$3.2 million. The primary use of cash from operating activities in this period
was a decrease in accounts payable of $5.7 million and a decrease in accrued
expenses and other current liabilities of $4.1 million.
Net cash used in investing activities was $1.3 million during the current period
primarily due to additions to property, equipment and leaseholds.
Net cash used in financing activities was $2.7 million during the current period
due to a reduction in long-term debt.
Net cash provided by Discontinued Operations was $4.2 million in the current
period primarily due to the sale of RPA on July 3, 2001.
The Company's senior secured bank credit facility consists of a $35.0 million
Revolver, a term loan with an outstanding balance of $11.2 million at September
30, 2001 and an acquisition facility with an outstanding balance of $17.4
million at September 30, 2001. At September 30, 2001, there was $2.5 million
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. These facilities mature in March 2004. In
connection with the proposed Distribution, the Company had executed term sheets
with two financial institutions to replace its senior credit facility. These
term sheets included a $20.0 million revolving credit facility which would be
entered into by MercFuel, Inc. and a $60.0 million facility which would be
entered into by the Company. These term sheets have expired due to various
delays and it is uncertain at this time whether the lenders will agree to renew
or replace these term sheets given the environment in the credit markets since
September 11, 2001.
On September 10, 1999, the Company issued, in a private placement, a $24.0
million senior Subordinated 12% Note ("the Note") due 2006 with detachable
warrants to purchase 503,126 shares of the Company's common stock exercisable at
$6.50 per share for seven years. On November 16, 2001, the Company agreed to
reduce the exercise price to $5.50 per share. The Note agreement contains
covenants that, among other matters, limit senior indebtedness, the disposition
of assets and unfunded capital expenditures. The covenants also included a ratio
test
13
for interest coverage, leverage, fixed charge coverage and debt service. On
November 16, 2001 and effective September 30, 2001, the Company received a
waiver pertaining to the interest coverage test and the agreement was amended by
reducing the ongoing interest coverage test.
On September 26, 2001, the Company announced that it had agreed to enter into a
financing arrangement to issue convertible subordinated debentures for a total
amount of $110.0 million discounted to $71.9 million, with funding expected to
occur in October 2001 of approximately $25.0 million and the balance within one
year. As of this date, the funding has not occurred and the Company believes
that such funding will not occur.
On August 10, 2001, MercFuel, Inc. entered into an agreement with a provider of
hardware and software applications ("System Provider"), for the development and
exclusive license of an aviation fuel management system. The agreement requires
MercFuel, Inc. to enter into a non-interest bearing note in the amount of
$750,000, payable in 24 equal monthly payments beginning in August 2002 (the
present value of which is $640,000, assuming an imputed interest rate of 8%).
The note is convertible, at MercFuel's option, at any time after the
Distribution into 125,000 shares of MercFuel common stock. MercFuel is also
required to attempt to register the shares. In addition, if MercFuel does not
complete an offering of its common shares by December 31, 2001, the agreement
shall be terminated.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
There has been no material change during the quarter ended September 30,
2001 from the disclosures regarding market risk presented in the Company's
Annual Report on Form 10-K for the year ended June 30, 2001.
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.
14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On March 16, 2001, the bankruptcy court approved a settlement related to
preference payments received in connection with the Chapter 7 bankruptcy filing
for Western Pacific Airlines, Inc., ("WPAI"). The settlement consists of ten
quarterly payments of $175,000, four of which have been made with the unpaid
balance secured by a letter of credit. During the quarter ended December 31,
2000 the Company recorded a charge to bad debt expense equal to the present
value of the payments, $1.6 million. The outstanding balance on September 30,
2001 was approximately $979,000.
In February 2001, the Company received notice of a complaint filed by
the Chapter 7 Trustee for Tower Air in regard to a preference action. In July
2001, the Company settled this matter for $1.0 million. In accordance with the
terms of the settlement, the Company paid $750,000 subsequent to June 30, 2001
and will pay the balance in ten monthly installments of $25,000 each. As of
September 30, 2001, the unpaid note balance was $225,000 and is secured by a
letter of credit.
In April 2000, Mercury filed a collection action against AER Global
Logistics ("AER") in the state of New York. AER filed a counterclaim for $1.0
million alleging among other things, tortious interference with contract.
Mercury believes that this claim is without merit, and accordingly, does not
believe this matter will have a significant impact on it financial position or
operating results.
On April 3, 2001 Mercury received notice of an action filed by Skylink
Express, Inc. in the Superior Court of Justice Ontario, Canada against Excel
Cargo, Inc. and others for damages to aircraft occurring in November 30, 1999
and January 10, 2000 at Mirabel International Airport Quebec for a total amount
of $2.5 million Canadian ($1.65 million U.S.) plus interest and fees. Mercury
does not believe the outcome of this claim will have a significant impact on its
financial position or operating results.
In October 2001, Mercury received notice that the California Court of
Appeals had rejected its appeal in the matter of Koye Fernandez v. Mercury Air
Group, Inc. The case is currently on appeal to the California Supreme Court.
Mercury does not believe the outcome of this claim will have a significant
impact on its financial position or operating results.
The Company is also a defendant in certain litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of such litigation will not have a significant effect on the financial
statements.
15
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
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger adopted January 9, 2001.(17)
2.2 Certificate of Merger.(17)
3.1 Bylaws of Company adopted January 9, 2001.(17)
3.2 Certificate of Incorporation.(17)
4.1 Loan Agreement between California Economic Development Financing
Authority and Mercury Air Group, Inc. relating to $19,000,000
California Economic Development Financing Authority Variable Rate
Demand Airport Facilities Revenue Bonds, Series 1998 (Mercury Air
Group, Inc. Project) dated as of April 1, 1998.(2)
4.2 Securities Purchase Agreement dated September 10, 1999 by and
among Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund,
L.P.(12)
4.3 Amendment No. 1 dated as of September 30, 2000 by and between J.H.
Whitney Mezzanine, L.P. and Mercury Air Group, Inc. to the
Securities Agreement.(16)
4.4 Waiver and Consent Agreement dated as of December 29, 2000 among
Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P.(17)
4.5 Waiver and Consent Agreement dated as of July 2, 2001 among
Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P.(18)
4.6 Waiver Agreement dated as of September 25, 2001 among Mercury Air
Group, Inc. and J.H. Whitney Mezzanine Fund, L.P.(18)
10.1 Company's 1990 Long-term Incentive Plan.(4)*
10.2 Company's 1990 Directors Stock Option Plan.(1)*
10.3. Lease for 6851 West Imperial Highway, Los Angeles, California.(3)
16
10.4 Memorandum Dated September 15, 1997 regarding Summary of Officer
Life Insurance Policies with Benefits Payable to Officers or Their
Designated Beneficiaries.(8)*
10.5 Employment Agreement dated November 15, 1994 between the Company
and Joseph Czyzyk.(9)*
10.6 Non-Qualified Stock Option Agreement dated March 21, 1996, by and
between Frederick H. Kopko and Mercury Air Group, Inc.(6)*
10.7 Company's 1998 Long-Term Incentive Plan.(10)*
10.8 Company's 1998 Directors Stock Option Plan.(10)*
10.9 Amendment to Employment Agreement by and between Mercury Air
Group, Inc. and Joseph A. Czyzyk dated October 15, 1998.(11)*
10.10 Amendment No. 2 to Employment Agreement by and between Mercury Air
Group, Inc. and Joseph A. Czyzyk dated April 12, 1999.(11)*
10.11 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.(11)
10.12 First Amendment to Revolving Credit and Term Loan Agreement dated
as of September 10, 1999.(14)
10.13 Second Amendment to Revolving Credit and Term Loan Agreement dated
as of March 31, 2000.(14)
10.14 Third Amendment, Waiver and Consent to Revolving Credit and Term
Loan Agreement dated as of August 11, 2000.(14)
10.15 The Company's 401(k) Plan consisting of CNA Trust Corporation.
Regional Prototype Defined Contribution Plan and Trust and
Adoption Agreement.(14)*
10.16 Amendment No. 3 to Employment Agreement by and between Mercury Air
Group, Inc. and Joseph A. Czyzyk dated September 11, 2000.(15)*
10.17 Employment Agreement dated July 31, 2000 between the Company and
Dr. Philip J. Fagan.(15)*
10.18 Fourth Amendment to Revolving Credit and Term Loan Agreement dated
as of November 14, 2000.(16)
10.19 Amendment No. 1 to Mercury Air Group, Inc. 1998 Long-Term
Incentive Option Plan as of August 22, 2000.(16)*
10.20 Amendment No. 1 to Mercury Air Group, Inc. 1998 Directors Stock
Option Plan as of August 22, 2000.(16)*
10.21 Limited Waiver letter Agreement to Revolving Credit and Term Loan
Agreement dated as of September 21, 2001.(18)
10.22 Fifth Amendment to Revolving Credit and Term Loan Agreement dated
as of June 7, 2001.
99.1 Partnership Agreement dated as of July 27, 2000 of CFK Partners by
and among Philip J. Fagan, M.D., Frederick H. Kopko, Jr. and
Joseph A. Czyzyk.(13)
* 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.
17
(2) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and are
incorporated herein by reference.
(3) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-39044 on Form S-2 and are incorporated
herein by reference.
(4) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 2, 1992 Annual Meeting of Shareholders.
(5) All such documents were previously filed as Exhibits to the Company's
Registration Statement No. 33-65085 on Form S-1 and are incorporated
herein by reference.
(6) All such documents were previously filed as Exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and are
incorporated herein by reference.
(7) All such documents were previously filed as Exhibits to the Company's
Report on Form 8-K filed September 13, 1996 and are incorporated herein by
reference.
(8) Such document was previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997 and is incorporated
herein by reference.
(9) All such documents were previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998 and is
incorporated herein by reference.
(10) Such document was previously filed as Appendix A to the Company's Proxy
Statement for the December 3, 1998 Annual Meeting of Shareholders and
incorporated herein by reference.
(11) All such documents were previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
(12) All such documents were previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1999 and is
incorporated herein by reference.
(13) Such document was previously filed as an Exhibit to the Company's current
Report on Form 8-K on August 11, 2000 and is incorporated herein by
reference.
(14) All such documents were previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 2000 and is
incorporated herein by reference.
18
(15) All such documents were previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and
incorporated herein by reference.
(16) All such documents were previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 and
incorporated herein by reference.
(17) All such documents were previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and
incorporated herein by reference.
(18) All such documents were previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 2001 and is
incorporated herein by reference.
(b) Reports on Form 8-K:
None
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 14, 2001
20