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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 Form 10-Q  [X]
    
    Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended September 30, 2004[  ]
    
    Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934For 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. Employerincorporation or organization)
    
    Identification Number)5456 McConnell AvenueLos Angeles, CA
    
    90066(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
(310) 827-2737 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
[    ]
No [X] 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 OutstandingTitle
    
    as of November 08, 2004Common Stock, $0.01 Par Value
    
    3,056,355




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TABLE OF CONTENTS PART IItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    19PART IIItem 1. Legal Proceedings
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Default Upon Senior Securities
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders

    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    21Signatures
    
    
    27Exhibit 10.39Exhibit 10.40Exhibit 10.41Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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PART I  FINANCIAL INFORMATION 
 Item 1.Financial Statements MERCURY AIR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30,
    
    June 30,2004
    
    2004(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    12,297,000
    
    
    $
    4,690,000Restricted cash
    
    
    
    
    
    
    15,414,000Trade accounts receivable, net of allowance for doubtful accounts of $1,892,000 and
$1,556,000 at September 30 and June 30, 2004, respectively
    
    
    55,911,000
    
    
    
    50,974,000Inventories
    
    
    2,869,000
    
    
    
    1,165,000Prepaid expenses and other current assets
    
    
    7,874,000
    
    
    
    5,696,000Deferred income taxes
    
    
    1,450,000
    
    
    
    1,451,000TOTAL CURRENT ASSETS
    
    
    80,401,000
    
    
    
    79,390,000PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated depreciation and amortization
of $25,194,000 and $24,836,000 at September 30 and June 30, 2004, respectively
    
    
    8,025,000
    
    
    
    10,349,000NOTES RECEIVABLE, net of allowance for doubtful accounts of $973,000 and $1,025,000
at September 30 and June 30, 2004, respectively
    
    
    516,000
    
    
    
    521,000DEFERRED INCOME TAXES
    
    
    611,000
    
    
    
    611,000GOODWILL
    
    
    4,403,000
    
    
    
    4,389,000OTHER INTANGIBLE ASSETS, NET
    
    
    650,000
    
    
    
    700,000RESTRICTED CASH
    
    
    9,062,000
    
    
    
    8,989,000OTHER ASSETS, NET
    
    
    1,218,000
    
    
    
    1,008,000TOTAL ASSETS
    
    $
    104,886,000
    
    
    $
    105,957,000LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    38,857,000
    
    
    $
    33,552,000Accrued expenses and other current liabilities
    
    
    7,448,000
    
    
    
    11,825,000Current portion of long-term debt
    
    
    54,000
    
    
    
    139,000TOTAL CURRENT LIABILITIES
    
    
    46,359,000
    
    
    
    45,516,000LONG-TERM DEBT
    
    
    14,850,000
    
    
    
    17,790,000DEFERRED GAIN
    

    
    10,224,000
    
    
    
    8,130,000OTHER LONG TERM LIABILITY
    
    
    502,000
    
    
    
    669,000DEFERRED RENT
    
    
    1,100,000
    
    
    
    1,257,000MINORITY INTEREST
    
    
    
    
    
    
    182,000TOTAL LIABILITIES
    
    
    73,035,000
    
    
    
    73,544,000MANDATORILY REDEEMABLE PREFERRED STOCK: Series A  $0.01 par value; 1,000,000 shares
authorized; 462,627 shares outstanding at September 30 and June 30, 2004,
respectively
    
    
    527,000
    
    
    
    518,000STOCKHOLDERS EQUITY:Preferred stock  $0.01 par value; authorized 2,000,000 shares; no shares outstandingCommon stock  $0.01 par value; authorized 18,000,000 shares; 2,804,885 and
2,954,819 shares outstanding at September 30 and June 30, 2004, respectively
    
    
    28,000
    
    
    
    30,000Additional paid-in capital
    
    
    19,929,000
    
    
    
    20,737,000Retained earnings
    
    
    14,650,000
    

    
    
    14,596,000Accumulated other comprehensive income (loss)
    
    
    68,000
    
    
    
    (46,000
    )Treasury stock, 27,500 and 24,500 shares at September 30 and June 30, 2004,
respectively
    
    
    (140,000
    )
    
    
    (120,000
    )Notes receivable from officers
    
    
    (3,211,000
    )
    
    
    (3,302,000
    )TOTAL STOCKHOLDERS EQUITY
    
    
    31,324,000
    
    
    
    31,895,000TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
    
    $
    104,886,000
    
    
    $
    105,957,000
 See accompanying notes to consolidated financial statements. 3




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MERCURY AIR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months EndedSeptember 30,2004
    
    2003(Unaudited)Sales and revenues:Sales
    
    $
    108,934,000
    
    
    $
    64,990,000Service revenues
    
    
    16,557,000
    
    
    
    14,720,000Total sales and revenues
    
    
    125,491,000
    
    
    
    79,710,000Costs and expenses:Cost of sales
    
    
    106,040,000
    
    
    
    62,449,000Operating expenses
    
    
    15,160,000
    
    
    
    13,750,000Total costs and expenses
    
    
    121,200,000
    
    
    
    76,199,000Gross margin (excluding depreciation and
amortization)
    
    
    4,291,000
    
    
    
    3,511,000Expenses (income):Selling, general and administrative
    
    
    2,711,000
    
    
    
    2,281,000Provision for bad debts
    
    
    277,000
    
    
    
    360,000Depreciation and amortization
    
    
    635,000
    
    
    
    713,000Interest expense
    
    
    327,000
    
    
    
    260,000Interest and other income
    
    
    (223,000
    )
    
    
    (209,000
    )Asset impairment loss
    
    
    626,000Total expenses (income)
    
    
    4,353,000
    
    
    
    3,405,000Income (loss) from continuing operations before
minority interest and income tax expense
    
    
    (62,000
    )
    
    
    106,000Minority interest
    
    
    181,000
    
    
    
    6,000Income from continuing operations before income
tax expense
    
    
    119,000
    
    
    
    112,000Income tax expense
    
    
    55,000
    
    
    
    44,000Income from continuing operations, net of taxes
    
    
    64,000
    
    
    
    68,000Loss from discontinued operation, net of tax
benefit of $237,000 for the three months ended
September 30, 2003
    
    
    
    
    
    
    (370,000
    )Net income (loss)
    
    
    64,000
    
    
    
    (302,000
    )Accrued preferred stock dividends
    
    
    9,000
    
    
    
    9,000Net income (loss) applicable to common stockholders
    
    $
    55,000
    
    
    $
    (311,000
    )Income (loss) per common share:Basic:From continuing operations, net of taxes
    
    $
    0.02
    
    
    $
    0.02From discontinued operations, net of taxes
    
    
    
    
    
    
    (0.12
    )Net income (loss) per share
    
    $
    0.02
    
    
    $
    (0.10
    )Diluted:From continuing operations, net of taxes
    
    $
    0.02
    
    
    $
    0.02From discontinued operations, net of taxes
    
    
    
    
    
    
    (0.12
    )Net income (loss) per share
    
    $
    0.02
    
    
    $
    (0.10
    )
 See accompanying notes to consolidated financial statements. 4




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MERCURY AIR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months EndedSeptember 30,2004
    
    2003(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    64,000
    
    
    $
    (302,000
    )Adjustments to derive cash flow from operating activities:Provision for bad debts
    
    
    277,000
    
    
    
    383,000Depreciation and amortization
    
    
    635,000
    
    
    
    2,171,000Deferred income taxes
    
    
    
    
    
    
    (222,000
    )Deferred rent
    
    
    (324,000
    )
    
    
    (157,000
    )Executive loan amortization
    
    
    91,000
    
    
    
    101,000Minority interest
    
    
    (181,000
    )
    
    
    4,000Other non-cash items
    
    
    33,000Asset impairment loss
    
    
    626,000Amortization of senior subordinated note discount
    
    
    
    
    
    
    44,000Changes in operating assets and liabilities:Trade and other accounts receivable
    
    
    (5,996,000
    )
    
    
    (2,388,000
    )Inventories
    
    
    (1,704,000
    )
    
    
    197,000Prepaid expenses and other current assets
    
    
    (1,366,000
    )
    
    
    1,533,000Accounts payable
    
    
    5,305,000
    
    
    
    (143,000
    )Accrued expenses and other current liabilities
    
    
    (4,377,000
    )
    
    
    942,000Net cash provided by (used in) operating activities
    
    
    (6,917,000
    )
    
    
    2,163,000CASH FLOWS FROM INVESTING ACTIVITIES:Decrease in restricted cash
    
    
    15,358,000Decrease (increase) in other assets
    
    
    (248,000
    )
    
    
    125,000Decrease in notes receivable
    
    
    634,000
    
    
    
    306,000Proceeds from sale of property
    
    
    2,000Additions to property, equipment and leaseholds
    
    
    (447,000
    )
    
    
    (1,160,000
    )Net cash provided by (used in) investing activities
    
    
    15,299,000
    
    
    
    (729,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net reduction of debt instruments
    
    
    (16,000
    )
    
    
    (768,000
    )Repurchase of common stock
    
    
    (830,000
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    14,000Net cash used in financing activities
    
    
    (846,000
    )
    
    
    (754,000
    )Effect of exchange rate changes
    
    
    71,000
    
    
    
    8,000NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    7,607,000
    
    
    
    688,000CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    4,690,000
    
    
    
    2,802,000CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    12,297,000
    
    
    $
    3,490,000CASH PAID DURING THE PERIOD FOR:Interest
    
    $
    244,000
    
    
    $
    1,527,000Income taxes
    
    $
    1,610,000
    
    
    $
    349,000
 See accompanying notes to consolidated financial statements. 5




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MERCURY AIR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited) Note 1  General Business Mercury Air Group, Inc. (the Company), a Delaware corporation, was
organized in 1956 and provides a broad range of services to the aviation
industry through three principal operating units which are all wholly owned
subsidiaries of the Company: MercFuel, Inc. (MercFuel), a Delaware
corporation, Mercury Air Cargo, Inc. (Air Cargo), a California corporation,
and Maytag Aircraft Corporation (Maytag), a Colorado corporation. MercFuels
operations consist of the sale and delivery of fuel, primarily aviation fuel,
to domestic and international commercial airlines, fractional jet ownership
companies, corporate aviation fleets and air cargo companies. Air Cargos
operations consist of cargo handling, the sale of cargo capacity on other
airlines (Cargo Space Logistics), and general cargo sales agent services.
Maytag is a provider of governmental contract services performing aircraft
refueling and fuel storage operations, base operations support (BOS)
services, air terminal and ground handling services and weather observation and
forecasting services primarily for agencies of the government of the United
States of America. Through April 12, 2004, the Company operated a fourth operating unit,
Mercury Air Centers, Inc. (Air Centers). Air Centers operations consisted of
aviation fuel sales, aircraft refueling operations (into-plane), aircraft
ground support services, aircraft hangar services, aircraft parking (aircraft
tie-down services) and aircraft maintenance at certain Air Center locations,
known as Fixed Based Operations (FBOs). On April 12, 2004 (the FBO Sale
Closing Date), following stockholder approval, the Company sold all of Air
Centers outstanding common stock to Allied Capital Corporation (Allied) for
$76,349 thousand subject to adjustments for, among other things, Air Centers
net working capital as of the FBO Sale Closing Date and the distribution of
funds from an escrow account established at closing associated with the Air
Centers Hartsfield International Airport FBO (the Hartsfield FBO). The
assets sold through the sale of the stock of Air Centers (the FBO Sale)
consist of all of the assets of the Companys FBO business excluding the
Companys FBO at the Long Beach Airport which the Company has retained and
continues to operate. As used in this Quarterly Report on Form 10-Q, the term Company or
Mercury refers to Mercury Air Group, Inc. and, unless the context otherwise
requires, its subsidiaries. The Companys principal executive offices are
located at 5456 McConnell Avenue, Los Angeles, California, 90066 and its
telephone number is (310) 827-2737. Forward-Looking Statements This Quarterly Report on Form 10-Q and the information incorporated by
reference in it includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We intend the forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements in these sections.
All statements regarding our expected financial position and operating results,
our business strategy, our financing plans and forecasted demographic and
economic trends relating to our industry are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as may, will, anticipate, estimate, expect or intend and similar
expressions. These statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or
achievements to be materially different from the results, performance or
achievements expressed or implied by the forward-looking statements. We cannot
promise you that our expectations in such forward-looking statements will turn
out correct. Factors that impact such forward-looking statements include, but
are not limited to, quarterly fluctuations in results; the management of
growth; fluctuations in world oil prices, interest rates or foreign currency;
changes in political, economic, regulatory or environmental conditions; the
loss of key customers, suppliers or members of senior management; uninsured
losses; competition; credit risk associated with accounts receivable; and other
risks detailed in this Quarterly Report on Form 10-Q and in our other
Securities and Exchange Commission filings. We undertake no obligation to
update or revise publicly any forward-looking statements, whether as a result
of new information, future events, or otherwise. 6




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Risks and Uncertainties Accounts receivable is comprised primarily of trade receivables from
customers and is net of an allowance for doubtful accounts. The Companys
credit risk is based in part on the following: 1) substantially all receivables
are related to the aviation industry, 2) there is a concentration of credit
risk as there are several customers who at any time have significant balances
owed to the Company, and 3) significant balances are owed by certain customers
that are not adequately capitalized. In addition, significantly higher fuel
prices for extended periods of time may have a negative impact on the aviation
industry as it substantially increases airlines operating expenses. Smaller
airlines with lower levels of capital may be more seriously impacted. The
Company assesses its credit portfolio on an ongoing basis and establishes
allowances which it believes are adequate to absorb potential credit problems
that can be reasonably anticipated. The Company purchases aviation fuel from a limited number of suppliers. If
the Companys relationship with any of these key suppliers terminates, the
Company may not be able to obtain a sufficient quantity of aviation fuel on
favorable terms or may experience difficulty in obtaining aviation fuel from
alternative suppliers. Furthermore, difficulties faced by these suppliers or
aviation fuel shortages or the inability to obtain aviation fuel from alternate
sources at acceptable prices and terms could impair the Companys ability to
sell aviation fuel to its customers at competitive prices and terms. The Company may experience decreases in future sales volume and margins as
a result of deterioration in the world economy, or in the aviation industry,
and continued conflicts and instability in the Middle East, Asia and Latin
America, as well as a result of potential future terrorist activities and
possible military retaliation. Through the Companys first quarter of fiscal
2005, petroleum product prices, including aviation fuel, have either achieved
or been close to historical high levels. This sustained price level places
additional financial burden on many of the Companys customers. If the
Companys customers are not able to pass on the higher petroleum product prices
to its customers, they may experience financial hardship which may result in
the Company experiencing longer collection terms, which will place additional
financial burden on the Company, or higher level of uncollectible accounts. Basis of Presentation The accompanying unaudited financial statements of the Company have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments consisting of normal
recurring adjustments and accruals necessary for a fair presentation have been
reflected in these financial statements. Operating results for the quarter are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2005 due to seasonal and other factors. In order to
maintain consistency and comparability between periods presented, certain prior
period amounts have been reclassified to conform to the current period
presentation. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
thereto included in the Companys Annual Report on Form 10-K for the fiscal
year ended June 30, 2004. Note 2  Stock-Based Employee Compensation The Company has four stock option plans. As permitted under Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), and as amended by SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS No. 148) the
Company measures compensation expense related to employee stock options granted
utilizing the intrinsic value method as prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. The following table illustrates the pro forma effect
on net income (loss) if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation. 7




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Three Months EndedSeptember 30,2004
    
    2003Net income (loss), as reported
    
    $
    64,000
    
    
    $
    (302,000
    )Add stock-based employee compensation expense
included in net income (loss), net of tax
    
    
    48,000
    
    
    
    62,000Less total stock based employee compensation
determined under the fair value based method for
all awards, net of tax
    
    
    (9,000
    )
    
    
    (32,000
    )Pro forma net income (loss)
    
    $
    103,000
    
    
    $
    (272,000
    )Basic net income (loss) per share  as reported
    
    $
    0.02
    
    
    $
    (0.10
    )Basic net loss income (loss) per share  pro forma
    
    $
    0.03
    
    
    $
    (0.09
    )Diluted net income (loss) per share  as reported
    
    $
    0.02
    
    
    $
    (0.10
    )Diluted net income (loss) per share  pro forma
    
    $
    0.03
    
    
    $
    (0.09
    )
 Note 3  Income Taxes Income tax expense has been computed based on the estimated annual
effective income tax rate for the respective periods adjusted for significant
events that have occurred during the respective periods that are not expected
to recur in future periods. The effective income tax rate for income from
continuing operations was 46.4% and 39.0% for the three month periods ended
September 30, 2004 and 2003, respectively. Note 4  Litigation On May 1, 2002, the Company received a notice of violation (NOV) from
the Environmental Protection Agency (EPA) for the Air Centers Fort Wayne,
Indiana facility alleging that the Companys spill prevention, control and
countermeasure plan (SPCC Plan) did not meet certain federal regulations. On
March 14, 2003, the Company received a NOV from the EPA alleging certain
deficiencies in the Companys SPCC Plan for the Air Centers Fort Wayne,
Indiana facility, submitted to the EPA in November 2002. The Company believes
that it has resolved all deficiencies except for alleged deficiencies related
to: 1) secondary containment for refueling trucks, and 2) secondary containment
for discrete fuel loading areas. Pursuant to an agreement detailed in a letter
submitted to the EPA on April 16, 2003, the Company has been permitted to
suspend modifications to its SPCC Plan regarding the installation of secondary
containment for its refueling trucks, pending resolution of federal regulatory
issues associated with secondary containment for such trucks. The EPA has also
extended national compliance with regulations related to discrete loading areas
until November 15, 2004. Further, the EPA announced in a Federal Register
notice dated June 28, 2004, 69 Fed. Reg. 38297 that the EPA is considering a
proposal to amend 40 CFR 112 to address, among other things, the applicability
of the rule to mobile/portable containers. The Stock Purchase Agreement between the Company and Allied dated as of
October 28, 2003 regarding the sale of all of the outstanding stock owned by
the Company in Air Centers (the Air Centers SPA), provides that the Company
shall be responsible for compliance, for a period of eighteen months subsequent
to the FBO Sale Closing Date, for any required secondary containment (as the
term is defined in the Air Centers SPA) required by any applicable
governmental authority requiring secondary containment pursuant to
environmental law for extended or overnight fuel truck parking at any FBO
comprising the FBO business on the FBO Sale Closing Date. In the opinion of
management, the ultimate resolution of this matter is not expected to have a
material effect on the Companys results of operations, cash flow or financial
position. On November 26, 2003, Signature Flight Support Corporation filed a
complaint against Air Centers and Allied in federal court as a result of the
FBO Sale alleging: 1) breach of contract and tortious interference with
contract against Allied; 2) interference with prospective economic advantage
against Allied; and 3) unfair business practices against the Company and
Allied. The Company believes that the allegations are without merit and is in
the process of preparing a response. The Company has agreed to indemnify Allied
and its affiliates (including, without limitation, Air Centers after the
closing of the FBO Sale), directors, officers, agents, employees and
controlling persons from certain liabilities, obligations, losses or expenses
to which Allied may become subject as a result of the complaint. On August 4,
2004 the parties participated in a court ordered mediation session and were not
able to resolve their differences. On September 22, 2004 Signature also filed
an action in the Superior Court of the State of California for the County of
Los Angeles against Mercury Air Group, Inc. and Joe Czyzyk arising out of the
same transaction that is at issue in the federal action. In the opinion of
management, the ultimate resolution of these complaints is not expected to have
a material effect on the Companys results of operations, cash flows or
financial position. 8




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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 material effect on the Companys
results of operations, cash flows or financial position. Reference is made to
the Companys Annual Report on Form 10-K for the period ended June 30, 2004 for
additional legal matters with respect to which no material developments have
occurred in the current quarter. Note 5  Restricted Cash Restricted cash consists of cash held for specific purposes and not
available for general use by the Company. Restricted cash as of September 30,
2004 is comprised of: 1) $768 thousand on deposit with Wells Fargo Foothill as
reserve for outstanding letters of credit fees; and 2) $8,294 thousand for an
escrow account established on the FBO Sale Closing Date associated with the
Hartsfield FBO (the Harstfield Escrow Account). The funds held in the
Hartsfield Escrow Account are to be distributed to either one or both of the
Company and Allied over a period not to exceed five years from the FBO Sale
Closing Date dependent upon the award of a new lease at the Hartsfield
International Airport in Atlanta for a new FBO. Dependent upon the effective
date of the new lease and the terms and conditions of the new lease, the
Company may be entitled to all, some or none of the amount deposited into the
Hartsfield Escrow Account at closing. On October 11, 2004, the city of Atlanta notified Air Centers that it
planned on entering into lease negotiations with a different company for the
new FBO at the Hartsfield International Airport. The Company and Air Centers
are reviewing the viability of a protest if a final lease is awarded to a third
party. If a new FBO lease at the Hartsfield International Airport is not
awarded to Air Centers, the amount remaining undistributed in the Hartsfield
Escrow Account on the date that Air Centers ceases operating the Hartsfield FBO
will be distributed to Allied. Although no assurance can be given by the
Company that Air Centers will be operating the Hartsfield FBO on April 12,
2005, if Air Centers is still operating the Hartsfield FBO under the existing
lease terms and conditions on April 12, 2005, the Company will be entitled to
receive $1,654 thousand from the Hartsfield Escrow Account. Note 6  Debt On July 29, 2004, the Company and Bank of America, N.A. (Bank of
America) entered into a three-year $30,000 thousand revolving line of credit
(the B of A Credit Facility) collateralized by all of the assets of the
Company, the terms of which were amended effective November 1, 2004. In
accordance with the terms of the loan agreement, as amended, the revolving line
of credit is used as collateral for any letter of credit issued by the Company
and for general working capital needs. Upon the effective date of the B of A
Credit Facility, $15,414 thousand of cash deposited by the Company as
collateral for outstanding letters of credit and reported as restricted cash on
the Companys balance sheet at June 30, 2004 was released to the Company for
general corporate purposes. As of September 30, 2004, the Company had $29,574
thousand of revolving credit line available under the B of A Credit Facility,
net of applicable reserves, of which $15,539 thousand was reserved for issued
and outstanding letters of credit and $14,035 thousand was available and
undrawn. However, based on the terms of the First Amendment to Loan Agreement
dated as of November 1, 2004 (the First Amendment), the amount available and
undrawn as of September 30, 2004 was $11,223 thousand. The amount of credit
available to the Company on the B of A Credit Facility, as amended, is
determined monthly and is equal to the lesser of 1) sum of : a) 80% of the
balance due on Domestic Eligible Receivables less b) $2,000 thousand; and 2)
$30,000 thousand. The B of A Credit Facility, as amended, contains certain
financial covenants limiting the amount the Company can expend annually for
capital expenditures to $2,000 thousand. The B of A Credit Facility, as
amended, also prohibits the repurchase of stock and the payment of cash
dividends, except for cash dividends in an amount not to exceed $17,500
thousand by June 30, 2005. The Company is also required to maintain certain
financial targets for tangible net worth and fixed charges. The Company is in
compliance with all of the terms and conditions of the B of A Credit Facility. On October 6, 2004 the Company declared a one-time special dividend of
$17,500 thousand. After receiving consent from Bank of America and executing
the First Amendment, this one-time special cash dividend was paid on November
5, 2004. Please refer to Note 13  Subsequent Events for additional
information on this dividend. On November 1, 2004, the Company and Bank of America entered into a Letter
of Credit and Reimbursement Agreement (the LOC and Reimbursement Agreement)
relating to the outstanding tax exempt bonds issued in 1998 pursuant to a loan
agreement between the Company and the California Economic Development Financing
Authority (CEDFA). As of November 1, 2004, the outstanding principal amount
of the bonds outstanding was $14,000 thousand. In accordance with the terms of
the LOC and Reimbursement Agreement, Bank of America has issued an irrevocable
direct pay letter of credit to the trustee for the bondholders in an amount of
$14,161 thousand (the CEDFA LOC) that replaced the previously existing
irrevocable direct pay letter of credit of the same amount issued by Wells
Fargo Bank, N.A. on behalf of the Company, which was cancelled simultaneously
with the issuance of the CEDFA LOC. In addition to the issuance of the CEDFA
LOC, the LOC and Reimbursement Agreement requires the Company to 9




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call for redemption bonds in the principal amount of $500 thousand on each
of April 1 and October 1 commencing on April 1, 2005. The CEDFA LOC was issued
by Bank of America as part of the B of A Credit facility. On November 2, 2004, the Company requested and received a cash advance on
the B of A Credit Facility in the amount of $10,000 thousand. The funds
received as a cash advance were used to fund the one-time special cash dividend
and to meet on-going working capital requirements. After taking this cash
advance into consideration, the Company had $1,223 thousand available and
undrawn on the B of A Credit Facility. Note 7  Impairment of Long-Lived Assets The Company owns a 69.6% equity interest in MercMed LLC (MercMed), which
was formed in 1998 for the purpose of owning and operating an aircraft for the
MercMed members. As a result of the age of the MercMed aircraft, changes in
Federal Aviation Administration requirements restricting the altitude at which
the MercMed aircraft can fly, the popularity of fractional jet ownership versus
outright aircraft ownership and the technological advancements in aircraft
design and construction, it was determined that the current market value of the
MercMed aircraft was below the carrying value of the aircraft on MercMeds
financial records. During the first quarter of fiscal 2005, the book value of
the MercMed aircraft was adjusted to reflect the current market value as
determined by the MercMed members, which was determined to be $532 thousand.
This adjustment to market value resulted in an asset impairment loss of $626
thousand. The financial records of MercMed are included in the Companys
consolidated financial statements for the reporting periods and as of the
balance sheet dates included in this quarterly report on Form 10-Q. The
minority members interest in MercMed is reported as minority interest on the
Companys consolidated balance sheet and the minority members share of
MercMeds operating results is reported as minority interest on the Companys
consolidated statement of operations. For additional information on MercMed,
please see Note 13  Subsequent Events. Note 8  Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
share is computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares and dilutive
common stock equivalents. Common stock equivalents include stock options and
shares resulting from the assumed conversion of subordinated debentures, when
dilutive. Three Months Ended
    
    Three Months EndedSeptember 30, 2004
    
    September 30, 2003Diluted
    
    Basic
    
    Diluted
    
    BasicWeighted average number of common stock
outstanding during the period
    
    
    2,774,600
    
    
    
    2,774,600
    
    
    
    3,236,800
    
    
    
    3,236,800Income from continuing operations, net of taxes
    
    $
    64,000
    
    
    $
    64,000
    
    
    $
    68,000
    
    
    $
    68,000Preferred stock dividends
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000Loss from discontinued operation, net of
taxes
    
    
    
    
    
    
    
    
    
    
    (370,000
    )
    
    
    (370,000
    )Adjusted net income (loss) applicable to common
stockholders
    
    $
    55,000
    
    
    $
    55,000
    
    
    $
    (311,000
    )
    
    $
    (311,000
    )Income (loss) per share:From continuing operations, net of taxes
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.02From discontinued operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.12
    )
    
    
    (0.12
    )Net income (loss) per share
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    (0.10
    )
    
    $
    (0.10
    )
 Note 9  Segment Reporting The Company discloses segment information in accordance with SFAS No. 131,
Disclosure About Segments of an Enterprise and Related Information, which
requires companies to report selected segment information on a quarterly basis
and to report certain entity-wide disclosures about products and services,
major customers and material countries in which the entity holds assets and 10




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reports revenues. The operating segments reported below are the segments
of the Company for which operating results are evaluated regularly by
management in deciding how to allocate resources and in assessing performance. The Company operates and reports its activities through three principal
units: MercFuel, Air Cargo and Maytag. Air Centers was sold on April 12, 2004.
As a result, Air Centers historical operating results have been reclassified
as discontinued operations. The segment data included below has been restated
to exclude amounts related to the Air Centers. TotalCorporate
    
    ContinuingMercFuel
    
    Air Cargo
    
    Maytag
    
    And Other
    
    OperationsQuarter Ended September 30, 2004Revenues
    
    $
    108,804
    
    
    $
    11,190
    
    
    $
    5,363
    
    
    $
    134
    
    
    $
    125,491Gross margin
    
    
    1,640
    
    
    
    1,326
    
    
    
    1,311
    
    
    
    14
    
    
    
    4,291Depreciation and amortization
    
    
    121
    
    
    
    384
    
    
    
    81
    
    
    
    49
    
    
    
    635Capital expenditures
    
    
    328
    
    
    
    73
    
    
    
    1
    
    
    
    45
    
    
    
    447Goodwill
    
    
    
    
    
    
    1,266
    
    
    
    3,137
    
    
    
    
    
    
    
    4,403Segment assets
    
    
    48,926
    
    
    
    14,218
    
    
    
    8,922
    
    
    
    32,820
    
    
    
    104,886Quarter Ended September 30, 2003Revenues
    
    $
    64,990
    
    
    $
    8,894
    
    
    $
    5,826
    
    
    
    
    
    
    $
    79,710Gross margin
    
    
    1,426
    
    
    
    773
    
    
    
    1,312
    
    
    
    
    
    
    
    3,511Depreciation and amortization
    
    
    115
    
    
    
    458
    
    
    
    81
    
    
    $
    59
    
    
    
    713Capital expenditures
    
    
    637
    
    
    
    12
    
    
    
    17
    
    
    
    9
    
    
    
    675Goodwill
    
    
    
    
    
    
    1,252
    
    
    
    3,137
    
    
    
    
    
    
    
    4,389Segment assets
    
    
    28,104
    
    
    
    16,864
    
    
    
    11,068
    
    
    
    18,369
    
    
    
    74,405
 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 MercFuel. Bad debt expense
for MercFuel was approximately $149,000 and $326,000 for the quarters ended
September 30, 2004 and 2003, respectively; total bad debt expense was $277,000
and $360,000 in the quarters ended September 2004 and 2003, respectively. Note 10  Comprehensive Income (Loss) Comprehensive income (loss) is summarized as follows: Three Months EndedSeptember 30,2004
    
    2003Net income (loss)
    
    $
    64,000
    
    
    $
    (302,000
    )Foreign currency translation adjustment
    
    
    114,000
    
    
    
    8,000Comprehensive income (loss)
    
    $
    178,000
    
    
    $
    (294,000
    )
 Note 11  Related Party Transactions CFK Partners was a partnership consisting of three of the Companys
directors, one of whom also serves as the Companys Chief Executive Officer,
another who served as Chairman of the Board of Directors and the third who
serves as a director and is the Companys primary outside legal counsel. In
July 2004, after the retirement of Dr. Fagan as the Companys Chairman of the
Board of Directors, Dr. Fagan withdrew as a member of CFK Partners. The
remaining members of CFK Partners, now known as CK Partners, are the Companys
Chief Executive Officer and one of the members of the Companys Board of
Directors. As of September 30, 2004, CK Partners owned approximately 32% of the
Companys outstanding common stock. Pursuant to the terms of Dr. Fagans contract with the Company, upon Dr.
Fagans retirement as Chairman of the Board of Directors in July 2004, the
Company paid Dr. Fagan a bonus and severance payment of $1,890 thousand. This
amount was accrued at June 30, 2004. In January 2002, the Company sold the land and office building which
houses its corporate headquarters to CFK Realty Partners, LLC (CFK Realty)
for $4,200 thousand, consisting of $2,800 thousand in cash and a note
receivable of $1,400 thousand. The note accrued interest at 5% and contained
provisions whereby CFK Realty could elect to extend the maturity date in
one-year increments through December 31, 2004. The note had an original
maturity date of December 31, 2002. In early December 2002 and 2003, the
Company received notification from CFK Realty that it was exercising its right
to extend the maturity date of the note for an additional one year period.
Concurrently with the sale, the Company also entered into a twenty-year lease
of the property for a 11




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##### Table of Contents



monthly rental amount of approximately $37 thousand. During fiscal 2003,
the Company expended $275 thousand for leasehold improvements on its corporate
headquarters. This amount is being amortized over the office lease term. CFK
Realty financed the purchase of the headquarters through a $3,200 thousand
loan. In July 2004, CFK Realty was restructured whereby Dr. Fagan, the retired
Chairman of the Companys Board of Directors, became the sole member of CFK
Realty. Effective July 2004, CFK Realty is no longer considered a related party
and the financial statements of CFK Realty are no longer included in the
Companys consolidated financial statements. The Company uses the services of the legal firm McBreen and Kopko (the
Firm) for various general corporate legal matters. Mr. Frederick H. Kopko,
Jr., a partner of the Firm, is a member of the Companys Board of Directors and
is a member of CK Partners. For the three month periods ended September 30,
2004 and 2003, the Company paid the Firm $240 thousand and $142 thousand,
respectively, for legal services rendered by the Firm. Note 12  Discontinued Operations On April 12, 2004, after receiving approval from the Companys
stockholders at the Annual Stockholders meeting, the Company sold all of the
outstanding common stock of Air Centers to Allied with the Company receiving
total consideration for the sale in cash at closing of $76,349 thousand subject
to adjustments for, among other things, Air Centers net working capital as of
the FBO Sale Closing Date and the distribution of funds from the Hartsfield
Escrow Account. The following are the results of operations of Air Centers for the three
months ended September 30, 2003 Total sales and revenue
    
    $
    22,533,000Gross margin
    
    $
    3,204,000Loss before income tax benefit
    
    $
    (607,000
    )Income tax benefit
    
    $
    237,000Net loss
    
    $
    (370,000
    )
 Note 13  Subsequent Events On October 6, 2004, the Company announced that its Board of Directors
declared a one-time special cash dividend totaling $17,500 thousand, that would
be payable on a pro rata basis to holders of record of its common stock as of
the close of business on October 18, 2004. The dividend was paid on November 5,
2004. Based on 3,056,355 shares of its common stock outstanding as of the close
of business on October 18, 2004, the dividend payable per common share was
$5.70. The amount payable per share of common stock is net of the mandatory
dividend payments of approximately $70 thousand on the Companys outstanding
Series A 8% Cumulative Convertible Preferred Stock (the Preferred Stock) as
of the dividend payment date of November 5, 2004. This one-time special cash
dividend was funded, in part, by a cash advance on the B of A Credit Facility
in the amount of $10,000 thousand. On October 27, 2004, the Company announced that the Company and Bank of
America executed the First Amendment to the Loan Agreement effective November
1, 2004 (the First Amendment) that amends certain terms and conditions to the
Loan Agreement dated as of July 29, 2004 between the Company and Bank of
America. The Loan Agreement, as amended by the First Amendment, will expire on
July 31, 2007, or earlier under certain conditions, and provides for cash
advances and letters of credit up to the lesser of $30,000 thousand or the sum
of 1) 80% of the balance due on Domestic Eligible Receivables (as defined in
the Loan Agreement) less 2) $2,000 thousand. Amounts due and outstanding on the
Loan Agreement will continue to bear interest equal to Bank of Americas Prime
Rate. The Loan Agreement, as amended by the First Amendment, contains certain
financial covenants which will require the Company to maintain: 1) a minimum
amount of Tangible Net Worth, as defined in the First Amendment and 2) a
minimum Basic Fixed Charge Ratio, as defined in the First Amendment. The First
Amendment also limits the amount the Company can expend during any fiscal year
on capital expenditures to $2,000 thousand and prohibits the repurchase of
stock and the payment of cash dividends, except for cash dividends in an amount
not to exceed $17,500 thousand to be paid by June 30, 2005. In October 2004, the Company issued 278,970 shares of common stock due to
the exercise of outstanding common stock warrants and stock options, including
226,407 shares of common stock issued to Allied upon their exercise of
outstanding common stock warrants. As a result of the exercise of these options
and warrants, in exchange for the issuance of the 278,970 shares of common
stock, the Company received proceeds of $1,687 thousand. 12




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##### Table of Contents



On November 1, 2004, the Company and Bank of America entered into the LOC
and Reimbursement Agreement relating to the outstanding tax exempt bonds issued
in 1998 pursuant to a loan agreement between the Company and CEDFA. As of
November 1, 2004, the outstanding principal amount of the bonds outstanding was
$14,000 thousand. In accordance with the terms of the LOC and Reimbursement
Agreement, Bank of America has issued the CEDFA LOC to the trustee of the
bondholders that replaced the previously existing irrevocable direct pay letter
of credit of the same amount issued by Wells Fargo Bank, N.A. on behalf of the
Company, which was cancelled simultaneously upon the issuance of the CEDFA LOC.
In addition to the issuance of the CEDFA LOC, the LOC and Reimbursement
Agreement requires the Company to call for redemption bonds in the principal
amount of $500 thousand on each of April 1 and October 1 commencing on April 1,
2005. The CEDFA LOC was issued by Bank of America as part of the B of A Credit
Facility. On November 2, 2004 the Company requested and received a cash advance of
$10,000 thousand from the B of A Credit Facility. The funds received as a cash
advance were used to fund the one-time special cash dividend and to meet
on-going working capital requirements. After taking this cash advance into
consideration, the Company had $1,223 thousand available and undrawn on the B
of A Credit Facility. On November 10, 2004, the Company, upon authorization from the Companys
Board of Directors, entered into an agreement to sell all of its rights, title
and interest in MercMed to Dr. Fagan. In accordance with the agreement between
the Company and Dr. Fagan, the Company has agreed to pay for certain costs
incurred by MercMed prior to October 1, 2004 and to provide Dr. Fagan with jet
fuel in an amount not to exceed $75 thousand over a five year period. Dr. Fagan
has agreed to pay the debt service costs, including the outstanding principal
associated with MercMeds loan and to hold the Company harmless in regard to
this loan. During the first quarter of fiscal 2005, the Company recognized an
asset impairment loss of $626 thousand associated with the aircraft owned by
MercMed . On November 10, 2004, the Company, upon authorization from the Companys
Board of Directors, entered into an amended lease agreement with CFK Realty
associated with the office building housing the Companys headquarters (the
McConnell Lease) and amended the terms of the note receivable due from CFK
Realty (the CFK Realty Note). The amended terms of the McConnell Lease, which
were effective retroactively to July 1, 2004, provide for a ten-year lease with
CFK Realty having the right, after the refinancing of its existing loan secured
by the office building, to request the Company to vacate the facility at the
end of five years without any additional obligation from the Company with CFK
Realty continuing to honor the terms of any sublease the Company may have
arranged under the McConnell Lease. The monthly lease rate remains unchanged
from the original lease at $37 thousand. The Company also agreed to amend the
terms of the CFK Realty Note to reduce the principal amount of the note to $779
thousand, from the previous principal amount of $1,400 thousand plus accrued
interest of $179 thousand, at an interest rate of 4% per annum. The CFK Realty
Note is payable on December 31, 2009. 13




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##### Table of Contents



Item 2.Managements Discussion and Analysis of Financial Condition and
Results of Operations Results of Operations Comparison of the three month periods ended September
30, 2004 and September 30, 2003 The following tables set forth, for the periods indicated, the revenue and
gross margin for each of the Companys three operating units included in
continuing operations, as well as selected other financial statement data. Three Months Ended September 30,2004
    
    2003% of Total
    
    
    
    
    
    % of TotalAmount
    
    Revenues
    
    Amount
    
    Revenues($ in thousands)Revenues:MercFuel
    
    $
    108,804
    
    
    
    86.7
    %
    
    $
    64,990
    
    
    
    81.5
    %Air Cargo
    
    
    11,190
    
    
    
    8.9
    
    
    
    8,894
    
    
    
    11.2Maytag
    
    
    5,363
    
    
    
    4.3
    
    
    
    5,826
    
    
    
    7.3Other
    
    
    134
    
    
    
    0.1Total revenues
    
    $
    125,491
    
    
    
    100.0
    %
    
    $
    79,710
    
    
    
    100.0
    %% of Unit
    
    
    
    
    
    % of UnitAmount
    
    Revenues
    
    Amount
    
    RevenuesGross margin(1):MercFuel
    
    $
    1,640
    
    
    
    1.5
    %
    
    $
    1,426
    
    
    
    2.2
    %Air Cargo
    
    
    1,326
    
    
    
    11.9
    
    
    
    773
    
    
    
    8.7Maytag
    
    
    1,311
    
    
    
    24.4
    
    
    
    1,312
    
    
    
    22.5Other
    
    
    14
    
    
    
    10.8Total gross margin
    
    $
    4,291
    
    
    
    3.4
    %
    
    $
    3,511
    
    
    
    4.4
    %% of Total
    
    
    
    
    
    % of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesExpenses (Income):Selling, general and
administrative expenses
    
    $
    2,711
    
    
    
    2.2
    %
    
    $
    2,281
    
    
    
    2.9
    %Provision for bad debts
    
    
    277
    
    
    
    0.2
    
    
    
    360
    
    
    
    0.4Depreciation and amortization
    
    
    635
    
    
    
    0.5
    
    
    
    713
    
    
    
    0.9Interest expense and other
    
    
    104
    
    
    
    0.1
    
    
    
    51
    
    
    
    0.1Asset impairment loss
    
    
    626
    
    
    
    0.5Total expenses (income)
    
    
    4,353
    
    
    
    3.5
    
    
    
    3,405
    
    
    
    4.3Income (loss) from
continuing operations before
minority interest and income
tax expense
    
    
    (62
    )
    
    
    (0.1
    )
    
    
    106
    
    
    
    0.1Minority interest
    
    
    181
    
    
    
    0.2
    
    
    
    6
    
    
    
    0.0Income from continuing
operations before income tax
expense
    
    
    119
    
    
    
    0.1
    
    
    
    112
    
    
    
    0.1Income tax expense
    
    
    55
    
    
    
    0.0
    
    
    
    44
    
    
    
    0.0Income from continuing
operations, net of taxes
    
    
    64
    
    
    
    0.1
    
    
    
    68
    
    
    
    0.1Loss from discontinued
operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    (370
    )
    
    
    (0.5
    )Net income (loss)
    
    $
    64
    
    
    
    0.1
    %
    
    $
    (302
    )
    
    
    (0.4
    )%
   (1)
    
    Gross margin as used here and throughout Managements Discussion includes
certain selling, general and administrative costs which are charged directly to
the operating units, but excludes depreciation and amortization expenses and
selling, general and administrative expenses. 14




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Three Months Ended September 30, 2004 Compared to September 30, 2003 The Company reported net income of $64 thousand or $0.02 per basic and
diluted share in the first quarter of fiscal 2005, $4 thousand less than the
income from continuing operations, net of taxes, reported for the same period
last year of $68 thousand, or $0.02 per basic and diluted share. For the first
quarter of fiscal 2004, the Company reported a net loss of $302 thousand, or
$0.10 per basic and diluted share, which included a loss from discontinued
operations, net of taxes, of $370 thousand, or $0.12 per basic and diluted
share. Revenue from continuing operations for the Company in the first quarter
of fiscal 2005 was $125,491 thousand, which increased by $45,781 thousand or
57.4% from revenue from continuing operations of $79,710 thousand reported for
the first quarter of fiscal 2004. Gross margin from continuing operations
increased by $780 thousand or 22.2% to $4,291 thousand in the first quarter of
fiscal 2005 from $3,511 thousand reported in the first quarter of fiscal 2004. MercFuel, the Companys aviation fuel sales business, generated revenue of
$108,804 thousand in the first quarter of fiscal 2005 on sales volume of 74,429
thousand gallons, as compared to revenue of $64,990 thousand on sales volume of
64,270 thousand gallons in the first quarter of fiscal 2004. Following is a
comparison of MercFuels sales information for the first quarter of fiscal 2005
and 2004, respectively: Three Months EndedSeptember 30,2004
    
    2003Commercial SalesRevenue ($000)
    
    $
    85,724
    
    
    $
    52,396Volume (thousand gallons)
    
    
    63,616
    
    
    
    56,281Corporate Aviation/Fractional JetRevenue ($000)
    
    $
    23,080
    
    
    $
    12,594Volume (thousand gallons)
    
    
    10,813
    
    
    
    7,989MercFuel TotalRevenue ($000)
    
    $
    108,804
    
    
    $
    64,990Volume (thousand gallons)
    
    
    74,429
    
    
    
    64,270Gross margin ($000)
    
    $
    1,640
    
    
    $
    1,426
 Revenue for MercFuels commercial segment increased $33,328 thousand in
the first quarter of fiscal 2005 to $85,724 thousand on sales volume of 63,616
thousand gallons. The increased revenue for the commercial segment is due to
higher average petroleum product prices resulting from concerns of oil supply
disruptions due to the Iraq war, crude oil supply disruptions from the Gulf of
Mexico due to hurricane activity and from increased worldwide demand for
petroleum products due to an improving worldwide economy. MercFuels commercial
segments average sales price in the first quarter of fiscal 2005 increased
44.7% over the first quarter of fiscal 2004s average sales price. The
increased average sales price in the first quarter of fiscal 2005, as compared
to the first quarter of fiscal 2004, represents increased revenue of
approximately $26,499 thousand. MercFuels commercial sales volume increased in
the first quarter of fiscal 2005 to 63,616 thousand gallons, an increase of
7,335 thousand gallons, or 13.0%, from MercFuels first quarter of fiscal
2004s commercial sales volume of 56,281 thousand gallons. The increased sales
volume in the first quarter of fiscal 2005, as compared to the first quarter of
fiscal 2004, represents increased revenue of approximately $6,829 thousand. Revenue for MercFuels corporate/fractional jet ownership segment was
$23,080 thousand on sales volume of 10,813 thousand gallons in the first
quarter of fiscal 2005, an increase of $10,486 thousand, or 83.3%, and 2,824
thousand gallons, or 35.3%, from the first quarter of fiscal 2004s revenue of
$12,594 thousand on sales volume of 7,989 thousand gallons. The increase in
sales revenue is due to the increase in worldwide petroleum product prices,
increased use of private aircraft for both business and personal travel and
MercFuels strategic focus on this business segment. The average sales price
for aviation jet fuel in the corporate/fractional jet ownership segment in the
first quarter of fiscal 2005 increased 35.4% as compared to the first quarter
of fiscal 2004 equating to increased revenue of approximately $6,034 thousand.
The increased sales volume equates to an increase in revenue of approximately
$4,452 thousand. MercFuels cost of aviation fuel was $105,967 thousand in the first
quarter of fiscal 2005 which represents an increase of 69.7% from MercFuels
cost of aviation fuel in the first quarter of fiscal 2004 of $62,449 thousand.
The average cost of aviation fuel per gallon increased 46.5% in the first
quarter of fiscal 2005 to $1.424 per gallon. The increase in the average cost
of aviation fuel per gallon equates to an increase in the cost of aviation fuel
of $33,643 thousand. The increase in the volume of aviation fuel purchased
resulted in an increase in the cost of aviation fuel of $9,875 thousand.
MercFuels operating expenses, excluding the cost of aviation 15




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##### Table of Contents



fuel, was $1,197 thousand in the first quarter of fiscal 2005, an increase
of $82 thousand from the first quarter of fiscal 2004s operating expense
excluding aviation fuel cost of $1,115 thousand. Air Cargos revenue was $11,190 thousand in the first quarter of fiscal
2005, an increase of $2,296 thousand, or 25.8%, from the first quarter of
fiscal 2004 revenue of $8,894 thousand resulting in gross margin of $1,326
thousand in the first quarter of fiscal 2005, an increase of $553 thousand from
last years gross margin of $773 thousand. Three Months EndedSeptember 30,2004
    
    2003Revenue ($000)Cargo handling
    
    $
    7,141
    
    
    $
    6,459Cargo logistics services
    
    
    2,899
    
    
    
    1,340Cargo general sales agent services
    
    
    1,150
    
    
    
    1,095Air Cargo total
    
    $
    11,190
    
    
    $
    8,894Gross margin ($000)Cargo handling
    
    $
    995
    
    
    $
    769Cargo logistics services
    
    
    661
    
    
    
    356Cargo general sales agent services
    
    
    74
    
    
    
    (17
    )Cargo administrative
    
    
    (404
    )
    
    
    (335
    )Air Cargo total
    
    $
    1,326
    
    
    $
    773
 The cargo handling segment reported revenue of $7,141 thousand in the
first quarter of fiscal 2005, an increase of $682 thousand, or 10.6%, from the
first quarter of fiscal 2004 revenue of $6,459 thousand. Cargo handlings gross
margin in the first quarter of fiscal 2005 was $995 thousand, an increase of
$226 thousand, or 29.4%, from the first quarter of fiscal 2004 gross margin of
$769 thousand. The improved results are mainly due to increased cargo handling
volume as a result of an improved worldwide economy and Air Cargos focus on
cost control. The cargo logistics services segment reported revenue of $2,899 thousand
in the first quarter of fiscal 2005, an increase of $1,559 thousand from the
first quarter of fiscal 2004 revenue of $1,340 thousand. The increased revenue
in the first quarter of fiscal 2005 is mainly due to the increased business
activity associated with Air Cargos Mercury World Cargo (MWC) operation.
Cargo logistics services segments gross margin in the first quarter of fiscal
2005 increased $305 thousand from the first quarter of fiscal 2004 to $661
thousand. The increased gross margin is due to the increased business activity
associated with various airline management contracts and MWC operations. The cargo general sales agent (GSA) services segment reported revenue of
$1,150 thousand in the first quarter of fiscal 2005, an increase of $55
thousand from the first quarter of fiscal 2004 revenue of $1,095 thousand. The
GSA services gross margin in the first quarter of fiscal 2005 was $74
thousand, an increase of $91 thousand from the first quarter of fiscal 2004
loss of $17 thousand. The increase in GSAs gross margin is due to Air Cargos
focus on cost control. Air Cargos administrative expenses in the first quarter of fiscal 2005
were $404 thousand, an increase of $69 thousand from last year. Maytag reported revenue of $5,363 thousand in the first quarter of fiscal
2005, a reduction of $463 thousand from the first quarter of fiscal 2004
revenue of $5,826 thousand. Maytags first quarter of fiscal 2005 gross margin
was $1,311 thousand, essentially unchanged from the first quarter of fiscal
2004 gross margin of $1,312 thousand. Three Months EndedSeptember 30,2004
    
    2003Revenue ($000)Refueling
    
    $
    1,909
    
    
    $
    2,148Air Terminal
    
    
    1,857
    
    
    
    1,975BOS
    
    
    1,295
    
    
    
    1,399Weather Data
    
    
    294
    
    
    
    293Other
    
    
    8
    
    
    
    11Total Maytag
    
    $
    5,363
    
    
    $
    5,826
 16




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##### Table of Contents



The decrease in Maytags revenue is due to the non-renewal of one
refueling contract in the first quarter of fiscal 2005 and the non-renewal of
one refueling contract and one BOS contract during fiscal 2004. Bad debt expense for continuing operations in the first quarter of fiscal
2005 totaled $277 thousand or 0.22% of total revenue from continuing operations
as compared to $360 thousand or 0.45% of total revenue from continuing
operations in the first quarter of fiscal 2004. The Company experienced no
significant individual write-offs during the first quarter of either fiscal
2005 or 2004. Selling, general and administrative (G&A) expenses in the first quarter
of fiscal 2005 amounted to $2,711 thousand, an increase of $430 thousand or
18.9% from the first quarter of fiscal 2004 expenses of $2,281 thousand. The
increase in G&A expenses is mainly due to increased legal expenses. The Company
expects that certain G&A expenses will increase in fiscal 2005 as compared to
fiscal 2004 as the Company maintains compliance with the requirements of the
Sarbanes-Oxley Act of 2002. Depreciation and amortization expense from continuing operations was $635
thousand in the current period as compared to $713 thousand last year. Interest and other expense from continuing operations in the current
period was $104 thousand, an increase of $53 thousand from last years interest
and other expense from continuing operations of $51 thousand. The Company recognized an impairment loss associated with the MercMed
aircraft in the amount of $626 thousand in the first quarter of fiscal 2005 as
the result of asset impairment valuation. For more detailed information on this
transaction, please refer to Note 7  Impairment of Long-lived Assets. The Company recorded income of $181 thousand from minority interest
associated with MercMed in the first quarter of fiscal 2005 as compared to
income of $6 thousand in the first quarter of fiscal 2004. The increase in
income from minority interest is due to the recognition of the MercMeds
minority members share of the impairment loss associated with the MercMed
asset. The effective income tax rate in the first quarter of fiscal year 2005 was
46.4% compared to 39% in the same period last year. The higher effective income
tax rate in the current period is due to a higher effective state income tax
rate. The Company may experience decreases in future sales volume and margins as
a result of deterioration in the world economy, or in the aviation industry,
and continued conflicts and instability in the Middle East, Asia and Latin
America, as well as a result of potential future terrorist activities and
possible military retaliation. Through the Companys first quarter of fiscal
2005, petroleum product prices, including aviation fuel, have either achieved
or been close to historical high levels. This sustained price level places
additional financial burden on many of the Companys customers. If the
Companys customers are not able to pass on the higher petroleum product prices
to its customers, they may experience financial hardship which may result in
the Company experiencing longer collection terms, which will place additional
financial burden on the Company, or higher level of uncollectible accounts. Liquidity and Capital Resources As of September 30, 2004, the Companys cash and cash equivalents were
$12,297 thousand, an increase of $7,607 thousand from cash and cash equivalents
of $4,690 thousand as of June 30, 2004. Net cash used in operations in the first quarter of fiscal 2005 was $6,917
thousand, as compared to net cash generated from operations of $2,163 thousand
in the first quarter of fiscal 2004. The net cash used in operations in the
first quarter of fiscal 2005 include payments of $1,890 thousand associated
with the retirement of the Chairman of the Board, $615 thousand associated with
a settlement agreement with David H. Murdock and related parties (Murdock),
and $1,610 thousand associated with the Companys income tax obligations
primarily due to the FBO sale. In addition, the change in operating assets and
liabilities in the first quarter of fiscal 2005 required $2,802 thousand of
cash. The cash required for the change in operating assets and liabilities is
primarily due to the increase in petroleum product prices resulting in higher
working capital requirements for the Company, as the Company generally has
shorter payment terms for its fuel supply than the terms the Company extends to
its customers. In the first quarter of fiscal 2005, the Company generated $15,299
thousand of cash from investing activities as compared to $729 thousand used in
the first quarter of fiscal 2004. On July 29, 2004, the effective date of the
senior secured credit facility with Bank of America, N.A. (Bank of America),
$15,414 thousand of the LOC Reserve became unrestricted as the outstanding
letters of credit issued on behalf of the Company by Bank of America were
secured by the collateral base of the Bank of America Credit Facility. The
Company also expended $447 thousand for additions to property, equipment and
leaseholds in the first quarter of fiscal 2005. 17




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##### Table of Contents



The Company used $846 thousand in financing activities in the first
quarter of fiscal 2005 primarily due to the purchase of 150,000 shares of the
Companys common stock for $6.00 per share in accordance with the settlement
agreement with Murdock. On July 29, 2004, the Company and Bank of America entered into a
three-year $30,000 thousand revolving credit line (the B of A Credit
Facility) collateralized by all of the assets of the Company, the terms of
which were amended effective November 1, 2004. In accordance with the terms of
the loan agreement, as amended, the revolving line of credit is used as
collateral for any letters of credit issued by the Company and for general
working capital needs. Upon the effective date of the B of A Credit Facility,
$15,414 thousand of cash deposited by the Company as collateral for outstanding
letters of credit and reported as restricted cash on the Companys balance
sheet at June 30, 2004 was released to the Company for general corporate
purposes. As of September 30, 2004, the Company had $29,574 thousand of
revolving credit line available under the B of A Credit Facility, net of
applicable reserves, of which $15,539 thousand was reserved for issued and
outstanding letters of credit and $14,035 thousand was available and undrawn.
However, based on the terms of the First Amendment to Loan Agreement dated as
of November 1, 2004, the amount available and undrawn as of September 30, 2004
was $11,223 thousand. The amount of credit available to the Company on the B
of A Credit Facility, as amended, is determined monthly and is equal to the
lesser of 1) sum of : a) 80% of the balance due on Domestic Eligible
Receivables less b) $2,000 thousand; and 2) $30,000 thousand. The B of A
Credit Facility, as amended, contains certain financial covenants limiting the
amount the Company can expend annually for capital expenditures to $2,000
thousand. The B of A Credit Facility, as amended, also prohibits the repurchase
of stock and the payment of cash dividends, except for cash dividends in an
amount not to exceed $17,500 thousand by June 30, 2005. The Company is also
required to maintain certain financial targets for tangible net worth and
fixed charges. The Company is in compliance with all of the terms and
conditions of the B of A Credit Facility. On October 6, 2004, the Company announced that its Board of Directors
declared a one-time special cash dividend totaling $17,500 thousand, that would
be payable on a pro rata basis to holders of record of its common stock as of
the close of business on October 18, 2004. The dividend was paid on November 5,
2004. Based on 3,056,355 shares of its common stock outstanding as of the close
of business on October 18, 2004, the dividend payable per common share was
$5.70. The amount payable per share of common stock was net of the mandatory
dividend payments of approximately $70 thousand on the Companys outstanding
Series A 8% Cumulative Convertible Preferred Stock (the Preferred Stock) as
of the dividend payment date of November 5, 2004. On November 2, 2004 the Company requested and received a cash advance of
$10,000 thousand from the B of A Credit Facility. The funds received as a cash
advance were used to fund the one-time special cash dividend and to meet
on-going working capital requirements. After taking this cash advance into
consideration, the Company had $1,223 thousand available and undrawn on the B
of A Credit Facility. On November 1, 2004, the Company and Bank of America entered into the LOC
and Reimbursement Agreement relating to the outstanding tax exempt bonds issued
in 1998 pursuant to a loan agreement between the Company and CEDFA. As of
November 1, 2004, the outstanding principal amount of the bonds outstanding was
$14,000 thousand. In accordance with the terms of the LOC and Reimbursement
Agreement, Bank of America has issued the CEDFA LOC that replaced the
previously existing irrevocable direct pay letter of credit issued by Wells
Fargo Bank, N.A. on behalf of the Company, which was simultaneously cancelled
upon issuance of the CEDFA LOC. In addition to the issuance of the CEDFA LOC,
the LOC and Reimbursement Agreement requires the Company to call for redemption
bonds in the principal amount of $500 thousand on each of April 1 and October 1
commencing on April 1, 2005. The CEDFA LOC was issued by Bank of America as
part of the B of A Credit facility. Critical Accounting Policies Managements beliefs regarding critical accounting policies have not
changed significantly from those discussed in Item 7 of the Companys Annual
Report on Form 10-K for the fiscal year ended June 30, 2004. 
 Item 3.Quantitative and Qualitative Disclosures About Market Risk There has been no material change during the quarter ended September 30,
2004 from the disclosures regarding market risk presented in the Companys
Annual Report on Form 10-K for the fiscal year ended June 30, 2004. 18




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##### Table of Contents



Item 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures Based on evaluations as of September 30, 2004, our principal executive
officer and principal financial officer, with the participation of our
management team, have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC. Changes in Internal Control over Financial Reporting During the period covered by this quarterly report on Form 10-Q, the
Company has not made any changes to its internal control over financial
reporting (as referred to in paragraph 4(c) of the Certifications of the
Companys principal executive officer and principal financial officer included
as exhibits to this report) that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial
reporting. 
 PART II  OTHER INFORMATION 
 Item 1.Legal Proceedings On May 1, 2002, the Company received a notice of violation (NOV) from
the Environmental Protection Agency (EPA) for the Air Centers Fort Wayne,
Indiana facility alleging that the Companys spill prevention, control and
countermeasure plan (SPCC Plan) did not meet certain federal regulations. On
March 14, 2003, the Company received a NOV from the EPA alleging certain
deficiencies in the Companys SPCC Plan for the Air Centers Fort Wayne,
Indiana facility, submitted to the EPA in November 2002. The Company believes
that it has resolved all deficiencies except for alleged deficiencies related
to: 1) secondary containment for refueling trucks, and 2) secondary containment
for discrete fuel loading areas. Pursuant to an agreement detailed in a letter
submitted to the EPA on April 16, 2003, the Company has been permitted to
suspend modifications to its SPCC Plan regarding the installation of secondary
containment for its refueling trucks, pending resolution of federal regulatory
issues associated with secondary containment for such trucks. The EPA has also
extended national compliance with regulations related to discrete loading areas
until November 15, 2004. Further, the EPA announced in a Federal Register
notice dated June 28, 2004, 69 Fed. Reg. 38297 that the EPA is considering a
proposal to amend 40 CFR 112 to address, among other things, the applicability
of the rule to mobile/portable containers. The Air Centers SPA provides that the Company shall be responsible for
compliance, for a period of eighteen months subsequent to the FBO Sale Closing
Date for any required secondary containment (as the term is defined in the Air
Centers SPA) required by any applicable governmental authority requiring
secondary containment pursuant to environmental law for extended or overnight
fuel truck parking at any FBO comprising the FBO business on the FBO Sale
Closing Date. In the opinion of management, the ultimate resolution of this
matter is not expected to have a material effect on the Companys results of
operations, cash flow or financial position. On November 26, 2003, Signature Flight Support Corporation filed a
complaint against Air Centers and Allied in federal court as a result of the
FBO Sale alleging: 1) breach of contract and tortious interference with
contract against Allied; 2) interference with prospective economic advantage
against Allied; and 3) unfair business practices against the Company and
Allied. The Company believes that the allegations are without merit and is in
the process of preparing a response. The Company has agreed to indemnify Allied
and its affiliates (including, without limitation, Air Centers after the
closing of the FBO Sale), directors, officers, agents, employees and
controlling persons from certain liabilities, obligations, losses or expenses
to which Allied may become subject as a result of the complaint. On August 4,
2004 the parties participated in a court ordered mediation session and were not
able to resolve their differences. On September 22, 2004 Signature also filed
an action in the Superior Court of the State of California for the County of
Los Angeles against Mercury Air Group, Inc. and Joe Czyzyk arising out of the
same transaction that is at issue in the federal action. In the opinion of
management, the ultimate resolution of these complaints is not expected to have
a material effect on the Companys results of operations, cash flows or
financial position. 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 material effect on the Companys
results of operations, cash flows or financial 19




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##### Table of Contents



position. Reference is made to the Companys Annual Report on Form 10-K
for the period ended June 30, 2004 for additional legal matters with respect to
which no material developments have occurred in the current quarter. 
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds  (a)
    
    None(b)
    
    None(c)
    
    Issuer Purchases of Equity Securities: (d) MaximumNumber (orApproximate Dollar(a) Total
    
    
    
    
    
    (c) Total Number of
    
    Value) of Shares (orNumber of
    
    
    
    
    
    Shares (or Units)
    
    Units) that May YetShares (or
    
    (b) Average Price
    
    Purchased as Part of
    
    Be Purchased UnderUnits)
    
    Paid per Share
    
    Publicly Announced
    
    the Plans orPeriod
    
    Purchased
    
    (or Unit)
    
    Plans or Programs
    
    ProgramsMonth #1
July 1, 2004 to July 31, 2004
    
    
    150,000
    
    
    $
    6.00
    
    
    
    N/A
    
    
    
    N/AMonth #2
August 1, 2004 to August 31, 2004
    
    
    0
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMonth #3
September 1, 2004 to September 30, 2004
    
    
    3,000
    
    
    
    6.55
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    153,000
    
    
    $
    6.01
 The B of A Credit Facility, as amended, prohibits the repurchase of stock
and the payment of cash dividends, except for cash dividends in an amount not
to exceed $17,500 thousand by June 30, 2005. 
 Item 3.Default Upon Senior Securities None 
 Item 4.Submission of Matters to a Vote of Security Holders None 
 Item 5.Other Information None 20




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##### Table of Contents



Item 6.Exhibits ExhibitNo.
    
    Description
 2.1
    
    Stock Purchase Agreement Dated as of October 28, 2003. By and Among Allied Capital Corporation,
Mercury Air Centers, Inc. and Mercury Air Group, Inc.(28)2.2
    
    Amendment to Stock Purchase Agreement by and Among Allied Capital Corporation, Mercury Air
Centers, Inc. and Mercury Air Group, Inc. dated as of December 10, 2003.(31)2.3
    
    Amendment to Stock Purchase Agreement by and Among Allied Capital Corporation, Mercury Air
Centers, Inc. and Mercury Air Group, Inc. dated as of January 14, 2004.(31)2.4
    
    Amendment to Stock Purchase Agreement by and Among Allied Capital Corporation, Mercury Air
Centers, Inc. and Mercury Air Group, Inc. dated as of February 13, 2004. (32)2.5
    
    Settlement Statement dated as of April 12, 2004.(33)2.6
    
    Closing Escrow Agreement dated as of April 5, 2004 among Allied and Wachovia Bank National, as
escrow agent. (33)3.1
    
    Certificate of Incorporation.(17)3.2
    
    Amended and Restated Bylaws of Mercury Air Group, Inc. adopted December 7, 2002.(25)3.3
    
    Certificate of Designations of Series A 8% Cumulative Convertible Preferred Stock.(27)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)4.7
    
    Amendment No. 2 dated as of September 30, 2001 by and between J.H. Whitney Mezzanine Fund, L.P.
and Mercury Air Group, Inc. to the Securities Purchase Agreement.(19)4.8
    
    Waiver Agreement dated as of November 26, 2001 among Mercury Air Group, Inc. and J.H. Whitney
Mezzanine, L.P.(21)4.9
    
    Waiver Agreement dated as of December 21, 2001 among Mercury Air Group, Inc. and J.H. Whitney
Mezzanine, L.P.(21)4.10
    
    Waiver Agreement dated as of June 26, 2002 among Mercury Air Group, Inc. and J.H. Whitney
Mezzanine, L.P.(24)4.11
    
    Amendment No. 3 to Securities Purchase Agreement by and between Mercury Air Group, Inc. and J.H.
Whitney Mezzanine Fund, L.P. dated as of December 30, 2002.(26)4.12
    
    Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Warrant dated September 10, 1999.(26)4.13
    
    Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Senior Subordinated Promissory Note dated
September 10, 1999.(26)


21



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##### Table of Contents



ExhibitNo.
    
    Description
 4.14
    
    Security Agreement by and between Mercury Air Group, Inc. and each of its subsidiaries hereto as
Obligors and J.H. Whitney Mezzanine Fund, L.P. as the Lenders, dated as of December 30, 2002.(26)4.15
    
    Subordination Agreement among J.H. Whitney Mezzanine Fund, L.P. Foothill Capital Corporation, as
Agent and Mercury Air Group, Inc. and certain of its subsidiaries signatory thereto, dated as of
December 30, 2002.(26)4.16
    
    Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group, Inc.
and certain subsidiaries signatory thereto, dated as of December 30, 2002.(26)4.17
    
    First Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and
Mercury Air Group, Inc. and certain of its subsidiaries, dated March 12, 2003.(30)4.18
    
    Second Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and
Mercury Air Group, Inc. and certain of its subsidiaries, dated March 31, 2003.(30)4.19
    
    Third Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and
Mercury Air Group, Inc. and certain of its subsidiaries, dated July 16, 2003.(30)4.20
    
    Fourth Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and
Mercury Air Group, Inc. and certain of its subsidiaries, dated August 1, 2003.(30)4.21
    
    Amendment No. 4 to Securities Purchase Agreement by and between Mercury Air Group, Inc. and
Allied Capital Corporation, as Assignee of J.H. Whitney Mezzanine Fund, L.P. dated as of October
28, 2003(28)4.22
    
    Assignment of Note dated as of October 28, 2003 between Allied Capital Corporation and J.H.
Whitney Mezzanine Fund, L.P.(28)4.23
    
    Second Amended and Restated Allied Capital Corporation 12% Senior Subordinated Promissory Note
dated September 10, 1999(28)4.24
    
    Second Amended and Restated Allied Capital Corporation Warrant dated October 28, 2003(28)4.25
    
    Securities Purchase Agreement dated as of October 28, 2003 by and among J.H. Whitney Mezzanine
Fund, L.P. and J.H. Whitney Mezzanine Debt Fund, L.P., Allied Capital Corporation and Mercury Air
Group, Inc.(28)4.26
    
    Second Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Warrant dated October 28, 2003(28)4.27
    
    Fifth Amendment to Security and Loan Agreement and Forbearance Agreement dated as of December 5,
2003 by and among Wells Fargo Foothill, Mercury Air Group, Inc. and certain of its
subsidiaries.(31)4.28
    
    Amendment letter to Forbearance Term and New Covenant Default dated as of February 16, 2004. (32)10.1
    
    Mercury Air Group, Inc.s 1990 Long-Term Incentive Plan.(4)*10.2
    
    Mercury Air Group, Inc.s 1990 Directors Stock Option Plan.(1)*10.3
    
    Memorandum Dated September 15, 1997 regarding Summary of Officer Life Insurance Policies with
Benefits Payable to Officers or Their Designated Beneficiaries.(8)*10.4
    
    Non-Qualified Stock Option Agreement dated March 21, 1996, by and between Frederick H. Kopko and
Mercury Air Group, Inc.(6)*10.5
    
    Mercury Air Group, Inc.s 1998 Long-Term Incentive Plan.(10)*10.6
    
    Mercury Air Group, Inc.s 1998 Directors Stock Option Plan.(10)*10.7
    
    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)10.8
    
    First Amendment to Revolving Credit and Term Loan Agreement dated as of September 10, 1999.(14)10.9
    
    Second Amendment to Revolving Credit and Term Loan Agreement dated as of March 31, 2000.(14)10.10
    
    Third Amendment, Waiver and Consent to Revolving Credit and Term Loan Agreement dated as of
August 11, 2000.(14) 22




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##### Table of Contents



ExhibitNo.
    
    Description
 10.11
    
    The Companys 401(k) Plan consisting of CNA Trust Corporation. Regional Prototype Defined
Contribution Plan and Trust and Adoption Agreement.(14)*10.12
    
    Employment Agreement dated July 31, 2000 between the Company and Dr. Philip J. Fagan.(15)*10.13
    
    Fourth Amendment to Revolving Credit and Term Loan Agreement dated as of November 14, 2000.(16)10.14
    
    Amendment No. 1 to Mercury Air Group, Inc. 1998 Long-Term Incentive Option Plan as of August 22,
2000.(16)*10.15
    
    Amendment No. 1 to Mercury Air Group, Inc. 1998 Directors Stock Option Plan as of August 22,
2000.(16)*10.16
    
    Limited Waiver letter Agreement to Revolving Credit and Term Loan Agreement dated as of September
21, 2001.(18)10.17
    
    Fifth Amendment to Revolving Credit and Term loan Agreement dated as of September 21, 2001.(18)10.18
    
    Limited Consent letter Agreement to Revolving Credit and Term Loan Agreement dated as of
September 30, 2001.(19)10.19
    
    Limited waiver and Consent to Revolving Credit and Term Loan Agreement dated as of December 31,
2001.(21)10.20
    
    2002 Management Stock Purchase Plan.(22)10.21
    
    Amended and Restated Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and
Joseph A. Czyzyk.(22)*10.22
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Wayne J. Lovett.(22)*10.23
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and John Enticknap. (22)*10.24
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Mark Coleman.(22)*10.25
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Steven S. Antonoff.
(22)*10.26
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Robert Schlax.(22)*10.27
    
    Limited waiver and Consent to Revolving Credit and Term Loan Agreement dated as of June 27,
2002.(24)10.28
    
    Sale-Leaseback agreement made by and between CFK Realty Partners, LLC and Mercury Air Group, Inc.
dated December 15, 2001.(24)10.29
    
    Amendment to Sale-Leaseback agreement made by and between CFK Realty Partners, LLC and Mercury
Air Group, Inc.(24)10.30
    
    Promissory Note dated July 1, 2004 by CFK Realty Partners, LLC in favor of Mercury Air Group, Inc.(24)10.31
    
    Limited Waiver and Consent to Revolving Credit and Term Loan Agreement dated as June 27, 2002.(24)10.32
    
    Amendment No. 1 to Amended and Restated Employment Agreement dated May 22, 2002 between Mercury
Air Group, Inc. and Joseph A. Czyzyk.*(24)10.34
    
    Settlement Agreement dated December 12, 2003 by and among (i) J O Hambro Capital Management Group
Limited, (ii) J O Hambro Capital Management Limited, (iii) American Opportunity Trust PLC, (iv)
The Trident North Atlantic Fund, and (v) Mercury Air Group, Inc.(29)10.35
    
    Settlement Agreement by and between: 1) David H. Murdock as trustee of the David H. Murdock
Living Trust dated May 28, 1996, as amended, d/b/a Pacific Holding Company and using nominee
PCS001 and 2) Mercury Air Group, Inc. dated July 16, 2004. (34)10.36
    
    Loan Agreement dated as of July 29, 2004 by and among Bank of America N.A., Mercury Air Group,
Inc. and certain subsidiaries. (35)10.37
    
    First Amendment to Loan Agreement by and among Bank of America, N.A., Mercury Air Group, Inc. and
certain subsidiaries. (37)10.38
    
    Letter of Credit and Reimbursement Agreement as of November 1, 2004 between Mercury Air Group,
Inc. and Bank of America. (38) 23




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##### Table of Contents



ExhibitNo.
    
    Description
 10.39
    
    Amended and Restated Lease entered into as of November 10, 2004 and effective as of July 1, 2004
by and between CFK Realty Partners, LLC. and Mercury Air Group, Inc.10.40
    
    Amendment No. 2 to Amended and Restated Employment Agreement by and between Mercury Air Group,
Inc. and Joseph A. Czyzyk.*10.41
    
    Agreement entered into on November 10, 2004 and effective on October 28, 2004 by and between
Mercury Air Group, Inc. and Dr. Philip J. Fagan31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Section 906 Certification of Chief Executive Officer32.2
    
    Section 906 Certification of Chief Financial Officer99.1
    
    Amended and Restated Partnership Agreement dated as of July 30, 2004 of CK Partners by and among
Frederick H. Kopko, Jr. and Joseph A. Czyzyk. (36)   *
    
    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 Stockholders and is
incorporated herein by reference.(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 Stockholders.(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 are
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 Stockholders and is
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 are
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 are
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. 24




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##### Table of Contents



(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.(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
are 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, 2000 and
are 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 are
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 are
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 September 30, 2001 and
are incorporated herein by reference.(20)
    
    Such document was previously filed as Appendix A to the Companys Proxy
Statement for the November 7, 2001 Annual Meeting of Stockholders and is
incorporated herein by reference.(21)
    
    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
are incorporated herein by reference.(22)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on June 5, 2002 and is incorporated herein by
reference.(23)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on July 11, 2002 and is incorporated herein by
reference.(24)
    
    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, 2002 and are
incorporated herein by reference.(25)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on December 7, 2002 and is incorporated herein by
reference.(26)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on December 30, 2002 and is incorporated herein by
reference.(27)
    
    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, 2003 and are
incorporated herein by reference.(28)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on October 28, 2003 and is incorporated herein by
reference.(29)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on December 12, 2003 and is incorporated herein by
reference.(30)
    
    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, 2003 and are
incorporated herein by reference.(31)
    
    All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended December 30, 2003 and
are incorporated herein by reference.(32)
    
    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, 2004 and are
incorporated herein by reference.(33)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K filed on April 22, 2004 and dated April 12, 2004 and is
incorporated herein by reference.(34)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on July 16, 2004 and is incorporated herein by
reference. 25




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##### Table of Contents



(35)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on July 30, 2004 and is incorporated herein by
reference.(36)
    
    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, 2004 and are
incorporated herein by reference.(37)
    
    Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on October 27, 2004 and is incorporated herein by
reference.(38)
    
    Such document was previously filed as an Exhibit to the Companys
Current Report on Form 8-K on November 1, 2004 and
incorporated herein by reference. 26




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##### Table of Contents



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 CzyzykJoseph CzyzykChief Executive Officer/s/ Robert SchlaxRobert SchlaxChief Financial Officer(Principal Financial Officer)
 Date: November 12, 2004 27