<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


(Mark One)

[X]     Annual report pursuant to section 13 or 15(d) of the Securities Exchange
        Act of 1934

        For the Fiscal Year ended June 30, 2001

[ ]     Transition report pursuant to section 13 or 15(d) of the Securities
        Exchange Act of 1934

        For the transition period from ___________ to ___________

        Commission file number: 1-7134

                             MERCURY AIR GROUP, INC.
             (Exact Name of Registrant as Specified in Its Charter)

            DELAWARE                                 95-4836590
 (State or Other Jurisdiction of        (I.R.S. Employer Identification Number)
  Incorporation or Organization)

              5456 McConnell Avenue, Los Angeles, California 90066
--------------------------------------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (310) 827-2737

Securities Registered Pursuant to Section 12(b) of the Act:


<TABLE>
<CAPTION>
                                                Name of Each Exchange on
        Title of Each Class                         Which Registered
        -------------------                     ------------------------
<S>                                            <C>
     Common Stock - Par Value $.01              American Stock Exchange
                                                 Pacific Stock Exchange
</TABLE>

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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [ ] No [X.]

        As of September 26, 2001, 6,576,680 shares of the Registrant's Common
Stock were outstanding. Of these shares, 2,058,113 shares were held by persons
who may be deemed to be affiliates. The 4,518,567 shares held by non-affiliates
as of September 26, 2001 had an aggregate market value (based on the closing
price of these shares on the American Stock Exchange of $4.50 a share) of
$20,335,552. As of September 26, 2001, there were no non-voting shares of common
stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement which is to be distributed in connection
with the Annual Meeting of Shareholders to be held in November 2001 are
incorporated by reference into Part III of this Form 10-K.


--------------------------------------------------------------------------------
                   (The Exhibit Index May Be Found at Page 34)


<PAGE>   2

                                     PART I


ITEM 1. BUSINESS

        Mercury Air Group, Inc., a Delaware Corporation, was organized in 1956
and provides a broad range of services to the aviation industry through four
principal operating units: fuel sales, cargo operations, fixed base operations
and U.S. government contract services. Fuel sales include the sale of fuel and
delivery of fuel primarily to domestic and international commercial airlines,
business aviation and air freight airlines. Cargo operations consist of cargo
handling, space logistics operations and general cargo sales agent services.
Fixed base operations ("FBOs") include fuel sales, into-plane services, ground
support services, aircraft hangar and tie-down facilities and maintenance at
certain locations for commercial, private, general aviation and military
aircraft. Government contract services consist of aircraft refueling and fuel
storage operations, base operating support (BOS) services, air terminal and
ground handling services and weather observation and forecasting services
performed principally for agencies of the United States government.
Additionally, the Company had a fifth operating unit, RPA Airline Automation
Services, Inc. ("RPA") which was sold on July 3, 2001 and is shown as a
discontinued operation. As a result, RPA's current and historical operating
results have been reclassified as a discontinued operation. As used in this
Annual Report, 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.

        NARRATIVE DESCRIPTION OF THE BUSINESS

        The events of September 11, 2001 have had a significant impact on the
aviation industry and, as a result, have impacted the Company's operations as
well. In the first few days following September 11, revenue from the Company's
fuel sales, cargo and FBO operations were negligible. Since that time, the
Company's operations have begun to return to normal. In view of the uncertainty
of the ultimate impact upon the aviation industry, the long-term impact to the
Company's operations cannot be determined at this time.

        On March 7, 2001, the Company announced its plan to create an
independent publicly-traded company, MercFuel, Inc. MercFuel, Inc. was organized
in Delaware on October 27, 2000 as a wholly owned subsidiary of the Company. On
January 1, 2001, the Company transferred to MercFuel, Inc. the assets and
liabilities of its Fuel Sales division. On April 30, 2001, MercFuel, Inc. agreed
to sell 239,942 shares of common stock in a private placement at a per share
price of $4.35, the net proceeds of which are $860,000. The sale will be
consummated at such time as the Company's lenders consent to that offering. On
May 15, 2001, the Company contributed $4.0 million of equity to MercFuel, Inc.
in the form of cancellation of intercompany debt payable to the Company. On May
16, 2001, MercFuel filed a registration statement related to the proposed sale
of 1,200,000 shares of common stock (along with an additional 180,000 shares to
cover over-allotments and an option issued to the underwriter to purchase
120,000 shares, exercisable one year after the effective date of the offering at
a price equal to 140% of the initial public offering price). There can be no
assurance that the Company will be able to complete the initial public offering,
however, if the offering is completed, the Company will own at least 80.1% of
MercFuel's common stock. The Company currently intends, subject to satisfactory
resolution of certain conditions, to distribute (the "Distribution") all of the
shares of MercFuel common stock that the Company owns to the Company's
stockholders no earlier than six months after MercFuel's initial public
offering. The Distribution is subject to consent by the Company's subordinated
debt holder.

        FUEL SALES

        The Fuel Sales division facilitates the management and distribution of
aviation fuel for Mercury's airline customers which the major suppliers
typically do not service. In this way, Mercury serves as a reseller from major
oil companies to air carriers, affording oil companies access to these carriers
without their assumption of the credit risk for these fuel purchases. Mercury
competes based on quality of its service and by offering a combination of
favorable pricing and credit terms, and a real time analysis of the
availability, quantity and price of fuel in airports and terminals worldwide. As
a result of higher volume and higher fuel prices, Mercury's revenue from fuel
sales and services as a percentage of revenue increased to 66.6% of total
Company revenue in fiscal 2001 from 60.7% in fiscal 2000.

        Mercury believes that many of the major oil companies have limited
infrastructure to support small to medium sized and emerging carriers. With over
22 years of experience in the jet fuel reselling industry, Mercury has
established significant contracts with smaller and medium sized commercial
carriers and business fleet managers. Mercury's resale service provides an
established distribution point for oil company sales efforts worldwide and
offers them access to markets which they do not directly serve. Additionally,
Mercury assumes the administrative cost which would otherwise be borne by fuel
suppliers and Mercury typically assumes the credit risks for fuel sales. Mercury
believes its experience in the jet fuel reselling industry allows it to assess
those risks in a more efficient manner. In addition, major oil companies
typically do not wish to bear these credit risks.



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        In many cases, small to medium sized commercial carriers and business
fleet managers are required to pay higher spot retail prices for fuel at the
terminals they service. Mercury provides 24-hour single source coordinated fuel
supply and delivery on a national and international basis. Mercury has a network
of over 400 third party locations nationally and 1,000 locations internationally
through which customers can purchase fuel. As a result, Mercury is able to
provide its customers with consistent fuel costs from terminal to terminal which
reduces arbitrary and opportunistic pricing characteristics associated with spot
fuel sales. Further, Mercury believes its scale of operations and the fact that
large oil companies are willing to extend to Mercury credit that they will not
extend to smaller airlines allows the purchase of fuel on more favorable price
and credit terms than would be available to most of Mercury's customers on an
individual basis.

        Mercury has automated its Internet process to provide online pricing,
fuel location and ordering information and Mercury intends to upgrade this
system to include online invoicing and ordering capability. This operation
offers Mercury's customers the ability to streamline the fuel purchase process
and reduce internal costs dedicated to fuel logistics by providing a single
source through which fuel sales can be made and automatically released to the
business jet customer.

        Mercury has no long-term written agreements or other understandings with
any of its Fuel Sales customers, other than National Airlines, Inc. (National
Airlines filed for bankruptcy protection on December 6, 2000 and the Company
continues to sell fuel to National Airlines on a secured basis, under the
auspices of the bankruptcy court), that relate to future purchases, so purchases
by Mercury's customers can be reduced or terminated upon short notice at any
time.

        Mercury believes its success in attracting customers has been due, in
part, to its willingness to extend credit on an unsecured basis to customers,
which would otherwise be required to prepay or post letters of credit with their
suppliers of fuel and related services. Mercury recognizes that active
management of its credit risk is essential to the Company's success. The
Company's sales executives and their staff meet regularly to evaluate credit
exposure, in the aggregate and by individual credit. Mercury's credit committees
are responsible for approving credit limits above certain amounts, and setting
and maintaining credit standards and ensuring the overall quality of the credit
portfolio. Mercury also maintains credit risk insurance for certain qualified
accounts.

        Mercury purchases fuel at current market prices from a number of major
oil companies and certain independent and state owned oil companies based on the
expected requirements of its customers. From time-to-time, Mercury will commit
to purchase a fixed volume of fuel, at a fixed price, over a fixed period of
time, at agreed upon locations based on selected customers' corresponding
purchase commitments. Mercury's terms of payment generally range from 10 to 30
days for most of its fuel purchases, except for bulk purchases, which generally
are payable in shorter time periods. Mercury has agreements with certain
suppliers under which Mercury purchases a minimum amount of fuel each month at
prices which approximate current market prices. Mercury makes occasional spot
purchases of fuel to take advantage of market differentials. In order to meet
customer supply requirements, Mercury carries limited inventories at numerous
locations. Due to the nature of Mercury's business, the volume of Mercury's
aviation fuel inventories will fluctuate.

        Outside of the United States, Mercury does not maintain fuel inventory,
rather, Mercury arranges to have fuel delivered directly into the customer's
aircraft on an into-plane basis. In the United States, sales are either made on
an into-plane basis directly into a customer's aircraft with fuel provided by
the Company's suppliers or fuel is delivered from the Company's inventory.
Inventory is held at multiple locations in the United States and inventory
levels are kept at an operating minimum. Mercury has arrangements with its
suppliers and other third parties for the storage and delivery of fuel and
related aviation services.

        Mercury purchases its fuel from suppliers worldwide. For the year ended
June 30, 2001, approximately 28% of its jet fuel purchases were made from
British Petroleum and approximately 12% were made each from Tosco and ARCO. ARCO
is affiliated with British Petroleum. Mercury's cost of fuel is generally tied
to market-based formulas. Mercury is currently extended unsecured credit for its
fuel purchases. If Mercury's relationship with any of these key suppliers
terminates, Mercury may not be able to obtain a sufficient quantity of fuel on
favorable terms. Mercury may experience difficulty and delays in obtaining fuel
from alternative sources of supply. Furthermore, financial or other difficulties
faced by these suppliers, fuel shortages or significant changes in demand for
fuel could limit the availability of fuel.

        Mercury's fuel supply contracts may generally be canceled by either
party with no further obligations. In some cases, Mercury has monthly purchase
requirements which are established based on historical volumes of fuel purchased
by Mercury. Such fuel purchase history may result in the seller agreeing to
provide a monthly allocation to Mercury such that the seller agrees to dedicate
a portion of its available fuel for Mercury's requirements. Mercury benefits
from such an allocation because, during periods of short fuel supply, reductions
in supply are generally made first to those buyers who have not been given any
allocation. To maintain dedicated



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allocations of fuel, Mercury usually purchases fuel at levels approximating the
allocated amount. However, Mercury is not obligated to purchase any fuel under
such an allocation. Currently, the monthly allocations from Mercury's fuel
suppliers represent only a small portion of Mercury's monthly supply
requirements.

        In fiscal 2001, average per gallon fuel cost rose 21% compared to
average fuel cost in 2000. In fiscal 2000, average per gallon fuel cost rose 58%
compared to average fuel cost in fiscal 1999. Although Mercury believes that
there are currently adequate aviation fuel supplies, events outside the
Company's control have in the past resulted and could in the future result in
spot shortages or further rapid increases in fuel costs. Although Mercury has
generally been able to pass through rising fuel costs to its customers, extended
periods of high fuel costs could adversely affect its ability to purchase fuel
in sufficient quantities because of credit limits placed on the Company by its
fuel suppliers.

        FIXED BASE OPERATIONS

        Mercury currently provides FBO services at 19 airports throughout the
United States. For the year ended June 30, 2001, FBO operations comprised 20.8 %
of the total Company revenue. At each FBO, Mercury maintains administrative
offices; conducts retail fuel sales and refueling operations which service
principally corporate and private aircraft ("general aviation") and to some
extent commercial airlines; acts as a landlord for office, aircraft tie-down and
hangar space tenants; and provides aircraft maintenance at a few select
locations. The FBOs operate refueling vehicles and maintain fuel storage tanks
as required to support into-plane and fuel sales activities. The FBO facilities
and the property on which operations are conducted are leased from the
respective airport authorities. Fifteen of Mercury's FBOs are currently directly
owned by the Company, the remaining FBOs are owned by Mercury Air Centers, Inc.
("Air Centers") which is a wholly owned subsidiary of the Company.

        The Company's FBO operations have grown principally as a result of the
acquisition of additional operations or locations as well as facility
enhancements at existing locations. In fiscal 2001, the Company acquired the
assets of an FBO located in Birmingham, Alabama at a cost of approximately $6.6
million, which the Company funded under its existing senior credit facilities.
Also, in fiscal 2001, the Company acquired additional assets related to the
Tulsa, Oklahoma FBO for a cash consideration of $3.8 million which the Company
funded under its existing senior credit facilities. In fiscal 2000, the Company
acquired assets of several FBO's located in Fort Wayne, Indiana; Tulsa,
Oklahoma; and at Charleston International Airport and John's Island Executive
Airport in South Carolina. In fiscal 1999, the Company acquired certain assets
of an FBO located in Jackson, Mississippi. In fiscal 1998, the Company entered
into a new lease for its Burbank FBO pursuant to which it constructed 3 new
hangars and built an executive terminal and refurbished certain existing
facilities. Also in fiscal 1998, the Company acquired certain assets of an FBO
located in Nashville, Tennessee. In fiscal 1997, the Company entered into an
agreement to operate an FBO, which opened in November 1998, in Charleston, South
Carolina. Also in fiscal 1997, the Company acquired certain assets of six FBO's
from Raytheon Aircraft Services, Inc. and acquired an FBO in Fresno, California.
Management intends to continue pursuing FBO acquisitions and facility
enhancements to the extent permitted under its credit facilities but no
assurance can be given that acquisition or enhancement opportunities will be
available at prices which will maintain existing levels of profitability or be
approved under its credit facilities.

        CARGO OPERATIONS

        The Company's cargo operations are conducted through its wholly-owned
subsidiary, Mercury Air Cargo, Inc. ("MAC"), which provides the following
services: cargo handling, space logistics and general cargo sales agent
services. Cargo operations comprised 6.6% of total Company revenue for the year
ended June 30, 2001. Each of MAC's services facilitates the movement of domestic
and international cargo. Accordingly, results for MAC's operations depend, in
part, on certain economic factors which affect the volume of cargo transported
throughout the world.

        Cargo Handling

        MAC provides domestic and international air cargo handling, air mail
handling and bonded warehousing. MAC is one of only 4 non-airline providers of
contractual cargo containerization and palletization for domestic and
international airlines and cargo airlines at Los Angeles International Airport
(LAX). MAC specializes in consolidating smaller parcels into air cargo pallets
and breaking down shipping containers for sea-to-air and air-to-air transfers.

        MAC handles cargo at LAX, William B. Hartsfield International Airport
(ATL), Dorval International Airport (YUL), Mirabel International Airport (YMX)
and Lester B. Pearson International Airport (YYZ). In March 1998, MAC expanded
its cargo handling operations by acquiring the assets of Intermodal Services,
Inc. located in Atlanta, Georgia. In April 1998, MAC completed construction and
commenced operation of a 174,000 square foot warehouse at LAX under a five year
lease which was subsequently



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extended to June 2006. MAC is currently the largest independent cargo handling
company at LAX. In February 2001, MAG entered into a new ten year lease for a
104,646 square foot warehouse and operations area at Atlanta Hartsfield Airport.
At the same time MAC closed down its former warehouse in Atlanta. MAC competes
in the cargo handling business based on quality and price of service. Long term
growth in MAC's cargo handling operations can only be realized by maintaining
existing locations and obtaining new locations or by expanding current
facilities.

        Space Logistics

        MAC brokers cargo space on transcontinental flights within the United
States and on international flights to Europe, Asia, the Middle East, Australia,
Mexico and Central and South America. Space logistics involves contracting for
bulk cargo space on airlines and selling that space to customers with shipping
needs. MAC has established a network of shipping agents who assist in obtaining
cargo for shipment on space purchased from airlines, and who facilitate the
delivery and collection of freight charges for cargo shipped by MAC.

        On June 1, 2001, MAC entered into a one year renewal of its contract to
purchase all of South African Airlines ("SAA") cargo capacity on its passenger
flights from the United States and Canada to South Africa. MAC's one year
commitment for these routes is approximately $6.2 million.

        Unlike an air cargo airline which operates its own aircraft, MAC's space
logistics business purchases committed cargo space on scheduled airline flights
or supplemental flights at negotiated rates. MAC is thereby able to profit from
the sale of cargo transportation space worldwide without the fixed overhead
expense of operating aircraft. In some instances, MAC has entered into fixed
minimum commitments for cargo space in order to obtain exclusive or preferred
rights to broker desirable cargo space profitably and may do so in the future.
With its volume of cargo space purchases and its ability to negotiate among
airlines, MAC adds value for its customers and is able to attract business by
offering favorable pricing to the domestic and international freight forwarding
community. MAC records revenue as the difference between the cost of the space
and the amount at which the space is resold.

        General Sales Agent Services

        MAC also serves as general cargo sales agent directly and through its
subsidiaries, Hermes Aviation, Inc., Hermes Aviacion de Mexico, S.A. de C.V. and
Aero Freightways, Inc. of Canada for airlines in the Far East, Canada, Mexico,
Central and South America and in the United States. In this capacity, MAC sells
the transportation of cargo on client airlines' flights, using the client
airlines' own air waybills. MAC earns commissions from the airlines for selling
their cargo space. As with its space logistics operations, the growth potential
for MAC's general cargo sales agent business is not limited by requirements for
physical facilities or by requirements for additional capital investments.

        Air Mercury

        Using its part 135, cargo airline certificate, Air Mercury is able to
enter into interline agreements with other airlines around the world. Using the
Air Mercury airway bill as the cargo transportation document and the other
airline's cargo capacity, MAC is able to provide a service for both freight
forwarders and airlines. Effectively, Air Mercury provides a secondary brand to
airlines which prefer not to utilize their own brand for discounted freight.

        GOVERNMENT CONTRACT SERVICES

        Mercury conducts its government contract services through its wholly
owned subsidiary, Maytag Aircraft Corporation ("Maytag"), which is headquartered
in Colorado Springs, Colorado. Maytag provides aircraft refueling, air terminal
services, base operating support services, and weather observation and
forecasting services in 17 countries on four continents.

        Aircraft Refueling

        Maytag provides aircraft refueling and related services at 15 United
States military bases, including fourteen in the United States and one in
Greece. Maytag's refueling contracts generally have a term of four years, with
expiration dates ranging from February 2002 to January 2005. Refueling contracts
provide a firm-fixed price for specified services. Under the terms of its
refueling contracts, Maytag supplies all necessary personnel and equipment to
operate government-owned fuel storage facilities and provides 24-hour



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refueling services for a variety of aircraft for the military. All fuel handled
in these operations is government owned. In connection with its government
contract refueling business, Maytag owns and operates a fleet of refueling
trucks and other support vehicles.

        Air Terminal Services

        Maytag provides air terminal and ground handling services to the United
States Government at 19 locations under seven contracts. Six contracts cover
three U.S. military bases in Alaska, Japan, and Korea, and three international
airports in Japan, Korea, and Kuwait. Maytag also has one contract servicing
international airports in Latin America. Air terminal services contracts are
generally for a base period of up to one year, with government options for
multiple one-year extension periods. The expiration date for all of Maytag's air
terminal contracts is presently September 2002. Air terminal contracts provide a
firm-fixed price for specified services. Discretionary performance-based awards
are also available at the five Pacific Rim locations. Air terminal and ground
handling services include the loading and unloading of passengers and cargo,
transient alert, and flight planning services

        Base Operating Support Services

        Maytag provides base operating support (BOS) services at Niagara Falls,
NY, Westover, MA, Youngstown, OH, Willow Grove, PA Air Reserve Facilities and
Patrick Air Force Base on a subcontracted basis. Under the terms of the
subcontracts, Maytag provides, at a firm-fixed price, multi-function services,
including fuel management, traffic management, airfield management, air terminal
operations, vehicle operations and maintenance services, and meteorological
services. Contract expirations range from September 2001 through March 2002,
with two to four pre-priced one-year options.

        Weather Observation and Forecasting Services

        Maytag provides weather observation and/or weather forecasting services
at 17 locations within the United States pursuant to 10 contracts with the
United States Government and certain local governmental agencies. This includes
one weather observation and forecasting contract and 9 weather observation
contracts. The Weather Data contracts provide firm fixed prices for specified
services and are generally for a base period of one year, with multiple one-year
options at the government's election. Some of Weather Data's existing contracts
were extended for a one year period ending September 30, 2001, with remaining
extension options ranging up to two periods on a majority of the contracts.

        All of Maytag's government contracts are subject to competitive bidding.
Refueling, air terminal, and weather forecasting contracts are generally awarded
to the offeror with the proposal that represents the "best value" to the
government. In a "best value" competition, the proposals are evaluated on the
basis of price, past performance history of the offeror, and the merit of the
technical proposal, creating a more subjective process. Weather observation
contracts are generally awarded to the offeror with the lowest priced
technically acceptable proposal. A significant contract, Yokota, Japan, which
provided revenue of $5.1 million or 17.6% of Maytag's total revenues during
fiscal year 2001, terminated in September 2001 and was not renewed.

        Maytag's contracts are all subject to termination at the discretion of
the United States Government, in whole or in part. Termination of a contract may
occur if the United States Government determines that it is in its best interest
to discontinue the contract, in which case closure costs will be paid to Maytag.
Termination may also occur if Maytag defaults under a contract. Maytag has never
experienced any such default termination.

        RPA

        On July 3, 2001, the Company sold substantially all of the assets of RPA
Airline Automation Services (now Jupiter Airlines Automation Services, Inc.) for
cash consideration of $3.6 million. The Company realized a loss of approximately
$0.5 million on the sale of discontinued operations.

        MAJOR CUSTOMERS

        During fiscal 2001, EVA Airways Corporation accounted for approximately
12% of cargo operations revenue, National Airlines, Inc. represented
approximately 22% of fuel sales revenue and approximately 14% of consolidated
revenue and AirTran Airways, Inc. represented approximately 20% of fuel sales
revenue and approximately 14% of consolidated revenue. During fiscal 2001,
government contract services consisted entirely of revenues from agencies of the
United States Government. No other customers accounted for over 10% of Mercury's
consolidated revenue or 10% of revenues for any of the four reporting units.



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        The Company does business with a number of foreign airlines, principally
in the sale of aviation fuels. For the most part, such sales are made within the
United States and utilize the same assets and generally the same personnel as
are utilized in the Company's domestic business. Revenues related to these
foreign airlines amounted to approximately 18%, 25% and 29% of consolidated
revenues for the years ended June 30, 2001, 2000 and 1999, respectively.

        In May 1999, Mercury entered into a fuel management contract with
National Airlines, Inc., pursuant to which Mercury began selling fuel to
National Airlines, Inc. and managing their fuel requirement at all National
Airlines, Inc. locations. On December 6, 2000, National Airlines filed for
bankruptcy protection. Mercury continues to sell fuel to National on a secured
basis, under the auspices of the bankruptcy court.

        SEASONAL NATURE OF BUSINESS

        Mercury's commercial fuel sales, FBOs and aircraft support operations
are seasonal in nature, being relatively stronger during the months of April
through December in its fueling operations and FBOs than during the winter
months due in part to weather conditions, and increased during summer months due
in part to additional commercial and charter flights. MAC's cargo business is
lower during the months of January and February and increases March through
December. The cargo business is affected by the patterns of international trade.
Operations at military facilities are not seasonal.

        POTENTIAL LIABILITY AND INSURANCE

        Mercury's business activities subject it to risk of significant
potential liability under federal and state statutes, common law and contractual
indemnification agreements. Mercury reviews the adequacy of its insurance on an
on-going basis. Mercury believes it follows generally accepted standards for its
lines of business with respect to the purchase of business insurance and risk
management practices. The Company purchases airport liability and general and
auto liability in amounts which the Company believes are adequate for the risks
of its business.

        COMPETITION

        The Fuel Sales division of Mercury competes with approximately five
independent fuel suppliers, of which the largest is World Fuel Services
Corporation. Additionally, the division competes with other aircraft support
companies which maintain their own sources of aviation fuel. Many of the
divisions competitors have greater financial, technical and marketing resources
than Mercury. In addition, certain airlines provide cargo and fueling services
comparable to those furnished by Mercury. At LAX Mercury competes with, in
addition to the airlines, 3 fuel delivery providers and with 3 non-airline
entities with respect to air cargo handling business. Generally, FBOs have a
minimum of one competitor at each airport as well as national multi-location
chains. Mercury has many principal competitors with respect to government
contracting services including certain small disadvantaged businesses which
receive a ten percent cost advantage with respect to certain bids and set asides
of certain contracts. Recently the FBO market has seen the emergence of
increased competition among several national FBO chains owned by major
corporations whose total sales and financial resources exceed those of Mercury.
Substantially all of Mercury's services are subject to competitive bidding.
Mercury competes on the basis of price, prior relationship to the customer and
credit terms.

        ENVIRONMENTAL MATTERS

        Mercury must continuously comply with federal, state and local
environmental statutes and regulations associated with its fuel storage tanks.
These requirements include, among other things, tank and pipe testing for
integrity and soil sampling for evidence of leaking and remediation of detected
leaks and spills. Other than the $3.4 million spent during the 1999 fiscal year
to comply with certain federal mandates regarding below ground fuel tanks, there
have been no material capital expenditures nor has there been a material
negative impact on Mercury's earnings or competitive position in performing such
compliance and related remediation work. In late 1998, Mercury, and many other
companies operating on Southern California airports received notice of potential
violations of California Environmental Protection Agency - Air Resources Board
regulations. This notice alleged that such companies had violated the act by
fueling airport service vehicles with Jet A fuel. Mercury immediately brought
all of its operations into full compliance with all applicable regulations and
has entered into a settlement agreement with the state of California. In
addition, it has undertaken a review of federal and state regulations to insure
future compliance. The Company has agreed to provide certain environmental
remediation on property formerly leased by the Company in Anaheim, California.
The Company terminated operations on this leased property in fiscal 1987 at
which time a closure letter was in effect. The Company has installed an approved
remediation system at a cost of approximately $78,000 and expects to incur
maintenance cost for a period of between 6 and 24 months of $4,500 per month.



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Mercury knows of no other basis for any notice of violation or cease and
abatement proceeding by any governmental agency as a result of failure to comply
with applicable environmental laws and regulations.

EMPLOYEES

        As of August 31, 2001, Mercury employed 1,736 full-time and 223
part-time persons in its following operating units: fuel sales, 35 full-time and
1 part-time persons; corporate, 47 full-time persons; cargo operations, 555
full-time persons; FBOs, 734 full-time and 17 part-time persons; and government
contract services, 365 full-time and 205 part-time persons. Maytag has
collective bargaining agreements which affect approximately 132 employees in its
weather and base support operations. Management believes that, in general,
wages, hours, fringe benefits and other conditions of employment offered
throughout Mercury's operations are at least equivalent to those found elsewhere
in its industry and that its general relationship with its employees is
satisfactory




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ITEM 2. PROPERTIES

        Listed below are the significant properties leased or owned by Mercury
as of June 30, 2001:


<TABLE>
<CAPTION>
                                  LEASED OR         ANNUAL       EXPIRATION OF       ACTIVITY AT                FACILITY
      LOCATION                      OWNED           RENTAL           LEASE            FACILITY                 DESCRIPTION
------------------------          ----------       --------      -------------    --------------          -----------------------
<S>                               <C>             <C>           <C>              <C>                     <C>
CORPORATE HEADQUARTERS
5456 McConnell                      Owned          N/A           N/A              Landlord, executive     22,500 sq.ft.
Los Angeles, CA (1)                                                               and support             building
                                                                                  personnel offices

MAYTAG OPERATIONS
6145 Lehman Drive, Suite            Owned          N/A           N/A              Landlord, executive     8,000 sq.ft.
300                                                                               and support             offices
Colorado Springs, CO (2)                                                          personnel offices

FLORIDA BUILDINGS
129 S.W. 36th Court                 Owned          N/A           N/A              Land                    10,846 sq. ft.
Miami, FL  (4)

101 S.W. 36th Court                 Owned          N/A           N/A              Land                    7,210 sq. ft.
Miami, FL (4)

119 S.W. 36th Court                 Owned          N/A           N/A              Office Building         1,401 sq. ft.
Miami, FL (4)

115 S.W. 36th Court                 Owned          N/A           N/A              Office Building         3,865 sq. ft.
Miami, FL (4)

2000 N.W. 89th PL                   Owned          N/A           N/A              Office Building         22,400 sq. ft.
Miami, FL (3)                                                                                             Office Building

HARTSFIELD ATLANTA INT'L
AIRPORT
Cargo Building "A" South            Leased         $924,061      February 2011    Cargo handling          60,597 sq. ft. of cargo
Cargo Area                                                                        warehouse with          warehouse facility
                                                                                  offices                 with 9,785 of Office
                                                                                                          Space on 2.4 acres
                                                                                                          of land
LOS ANGELES INT'L AIRPORT
6851 W. Imperial                    Leased         $754,000      Month-to-month   Cargo hangar, with      5.4054 acres of land
Highway,                                                                          offices and             containing 54,915
Los Angeles, CA (6)                                                               executive offices       sq. ft. of warehouse
                                                                                  rented to customers     space, 7,800 sq.ft. of
                                                                                                          office space,2,250 sq. ft.
                                                                                                          maintenance
                                                                                                          shop area, 100,000 gallon
                                                                                                          fuel storage
                                                                                                          area,400 sq. ft. of wash
                                                                                                          rack area and
                                                                                                          400 sq. ft. of a sewage
                                                                                                          disposal unit area

6040 Avion Drive                    Leased         $2,232,000    June 2006        Cargo handling          207,000 sq.ft. offices and
Los Angeles, CA                                                                   warehouse with          cargo
                                                                                  offices                 warehouse facility

LESTER B. PEARSON INT'L
AIRPORT
Building D                          Leased         $378,000      Month-to-month   Cargo handling          28,445 sq. ft. warehouse
Toronto, AMF                                                                      warehouse with          space and 5,721
Ontario                                                                           offices                 sq. ft. of offices

Concession 6                        Leased         $121,800      November 2010    Cargo handling          9,000 sq. ft. office space
East Hurontario St. (4)                                                           warehouse with          and 48,360 sq.
                                                                                  offices                 ft. of warehouse space
</TABLE>



                                       9
<PAGE>   10

<TABLE>
<CAPTION>
                                  LEASED OR         ANNUAL       EXPIRATION OF       ACTIVITY AT                FACILITY
      LOCATION                      OWNED           RENTAL           LEASE            FACILITY                 DESCRIPTION
------------------------          ----------       --------      -------------    --------------          -----------------------
<S>                               <C>             <C>           <C>              <C>                     <C>
DORVAL INT'L AIRPORT
800 Stuart Graham Blvd.             Leased         $489,000      November 2007    Cargo handling          51,000 sq.ft. warehouse
South                                                                             warehouse with          and 2,432 sq.ft.
Dorval, Quebec (5)                                                                offices                 of office space

MIRABEL INT'L AIRPORT
12005, Rue Cargo                    Leased         $83,000       November 2005    Cargo handling          12,500 sq.ft. warehouse
A-3, Suite 102                                                                    warehouse with
Mirabel, Quebec                                                                   offices

LOS ANGELES INT'L AIRPORT
7000 World Way West Los             Leased         $375,600      Month-to-month   Service and             2,000 sq.ft. of executive
Angeles, CA                                                                       refueling of private    terminal on
                                                                                  aircraft                1.93 acres

ONTARIO INT'L AIRPORT
2161 East Avion                     Leased         $225,000      April 2008       Landlord, service       60,000 sq.ft. of
Ontario, CA                                                                       and refueling of        offices and hangars on
                                                                                  commercial and          15.4 acres
                                                                                  private aircraft

1150 S. Vineyard                    Leased         $144,000      November 2001    Landlord, service       32,400 sq. ft. of office
Ontario, CA                                                                       and refueling of        and hangars space
                                                                                  commercial and          and 2.35 acres of aircraft
                                                                                  private aircraft        and vehicle
                                                                                                          parking

BAKERSFIELD AIRPORT
1550 Skyway Drive                   Leased         $138,000       May  2020       Landlord, service       Executive offices,
Bakersfield, CA (5)                                                               and refueling of        terminal and hangars
                                                                                  commercial and          on 6.14 acres
                                                                                  private aircraft

BURBANK-GLENDALE-
PASADENA AIRPORT
4301/4405/4407/4409/4411            Leased         $1,626,000    April  2025      Landlord, service       156,200 sq. ft. of
/4531 Empire Avenue                                                               and refueling of        offices, hangars, and
10660/10670/10700/10750/                                                          commercial and          shop facilities
10760/10800/10820                                                                 private aircraft
Sherman Way,                                                                                              74,612 sq. ft. of offices,
Burbank, CA                                                                                               hangars and
                                                                                                          shop facilities on 16.3
                                                                                                          acres

6920 Vineland Ave. No.              Leased         $164,000      Month to month   Landlord, service       5,200 sq. ft. of offices,
Hollywood, CA                                                                     and refueling of        hangars and
                                                                                  commercial and          shop facilities
                                                                                  private aircraft

CHARLESTON INTERNATIONAL
AIRPORT
6060 S Aviation Wy                  Leased         $170,000      August 2007      Terminal, office,       103,000 sq. ft. of
N. Charleston, SC                                                                 and hangars             Offices, hangars and
                                                                                                          parking area

6070 Perimeter.                     Leased         $21,000       Month-to-month   Building and hanger     Hangars, building, shop
N. Charleston, SC                                                                 space                   facilities and
                                                                                                          parking areas consisting
                                                                                                          of 6.6 acres

Johns Island Airport                Leased         $26,130       May 2004         Terminal, office,       285,200 sq. feet on
2700 Fort Trenholm                                                                and hanger space        6.54 acres
Johns Island, SC
</TABLE>


                                       10
<PAGE>   11


<TABLE>
<CAPTION>
                                  LEASED OR         ANNUAL       EXPIRATION OF       ACTIVITY AT                FACILITY
      LOCATION                      OWNED           RENTAL           LEASE            FACILITY                 DESCRIPTION
------------------------          ----------       --------      -------------    --------------          -----------------------
<S>                               <C>             <C>           <C>              <C>                     <C>
SANTA BARBARA MUNICIPAL
AIRPORT
404 Moffet Road                     Leased         $2,700        Month-to-month   Landlord, service,      8 T-Hangar space
Goleta, CA                                                                        maintenance, and        totaling
                                                                                  refueling of            28,413 sq. ft.
                                                                                  commercial and
                                                                                  private aircraft

404 Moffet Road                     Leased         $56,000       Month-to-month   Building space          9,360 sq. ft of building
Goleta, CA                                                                                                space
(Building 124 &126)

204 Moffett Place                   Leased         $30,000       Month-to-month   Building space and      10,370 sq. ft. office
Goleta, CA                                                                        parking spaces          space and 10
Building 121                                                                                              parking spaces

302 Moffet Place                    Leased         $41,500       Month-to-month   Building space          3,120 sq. ft
Goleta, CA                                                                                                office space
Building 122

FRESNO YOSEMITE INT'L
AIRPORT
5045 E. Anderson Avenue             Leased         $74,000       April 2020       Landlord, service       8.47 acres.
Fresno, CA(5)                                                                     and refueling of
                                                                                  commercial and
                                                                                  private aircraft

5045 E. Anderson Avenue             Leased         $67,000       August 2006      Terminal, office and    Hangars and offices on
Fresno, CA(5)                                                                     hangar facility         2.16 acres

5045 E. Anderson Avenue             Leased         $115,000      May 2005         Hangar and              22,000 sq.ft. office
Fresno, CA(5)                                                                     commercial office       space on 19.26 acres
                                                                                  space

WM. B. HARTSFIELD
INT'L AIRPORT
1200 Toffie Terrace                 Leased         $107,000      March 2002       Landlord, service       4,800 sq.ft. of offices
Atlanta, GA                                                                       and refueling of        and ramp area on
                                                                                  commercial and          11.2 acres
                                                                                  private aircraft

DEKALB-PEACHTREE
AIRPORT
1951 Airport Road                   Leased         $220,000      November 2006    Landlord, service       164,288 sq.ft. of offices
Atlanta, GA (5)                                                                   and refueling of        and hangars on
                                                                                  commercial and          22.46 acres
                                                                                  private aircraft

L.G. HANSCOM FIELD
AIRPORT
180 Hanscom Drive                   Leased         $333,000      May 2012         Landlord, service,      329,284 sq. ft.  of
Bedford, MA (5)                                                                   maintenance and         offices, terminal,
                                                                                  refueling of            hangars, and land.
                                                                                  commercial and
                                                                                  private aircraft

RENO CANNON INT'L
AIRPORT
655 So. Rock Blvd.                  Building       $22,000       June 2017        Landlord, service       33,000 sq.ft. of
Reno, NV                            owned, land                                   and refueling of        hangars and
                                    rented                                        commercial, private     administrative building
                                                                                  and military aircraft   on 23.7 acres of
                                                                                                          land
</TABLE>



                                       11
<PAGE>   12

<TABLE>
<CAPTION>
                                  LEASED OR         ANNUAL       EXPIRATION OF       ACTIVITY AT                FACILITY
      LOCATION                      OWNED           RENTAL           LEASE            FACILITY                 DESCRIPTION
------------------------          ----------       --------      -------------    --------------          -----------------------
<S>                               <C>             <C>           <C>              <C>                     <C>
ADDISON AIRPORT
4400 Glenn Curtiss Dr.              Leased         $314,000      September 2021   Landlord, service       49,472 sq. ft. of offices
Dallas, TX  (5)                                                                   and refueling of        and hangars on
                                                                                  commercial and          2.80 acres
                                                                                  private aircraft

4400 Glenn Curtiss Dr.              Leased         $56,000       June 2022        Landlord, service       57,949 sq.ft. of offices
Dallas, TX  (5)                                                                   and refueling of        and hangar space
                                                                                  commercial and          on 6.28 acres
                                                                                  private aircraft

4400 Glenn Curtiss Dr.              Leased         $9,000        July 2021        Landlord, service       12,600 sq.ft. of offices
Dallas, TX  (5)                                                                   and refueling of        and hangar space
                                                                                  commercial and
                                                                                  private aircraft

4400 Glenn Curtis Dr.               Leased         $28,000       Month-to-month   Fuel farm
Dallas, TX (5)

CORPUS CHRISTI
355 Pinson Drive                    Leased         $19,000       October 2009     Landlord, service       66,096 sq.ft. of
Corpus Christi, TX (5)                                                            and refueling of        offices and hangars on
                                                                                  commercial and          6.69 acres
                                                                                  private aircraft

NASHVILLE INT'L AIRPORT
635 Hangar Lane                     Leased         $350,000      June 2012        Landlord, service       Office and hangars on
Nashville, TN                                                                     and refueling of        38.69 acres
                                                                                  commercial and
                                                                                  private aircraft

JACKSON INT'L
AIRPORT
110 S. Hangar Drive                 Leased         $112,000      February 2006    Landlord, service       Office and hangars on 7
Jackson, MS  39208 (5)                                                            and refueling of        acres
                                                                                  commercial and
                                                                                  private aircraft

TULSA INT'L
AIRPORT
7500 E. Apache                      Leased         $73,000       April 2019       Landlord, service       Office and hangars on
Tulsa, OK 74115                                                                   and refueling of        11.23 acres
Hangar 1&2                                                                        commercial and
                                                                                  private aircraft

7500 E. Apache                      Leased         $22,000       April 2019       Landlord, service       Land consisting of 5.23
Tulsa, OK 74115                                                                   and refueling of        acres
Hangar 22 & 26                                                                    commercial and
                                                                                  private aircraft

7500 E. Apache                      Leased         $62,000       June 2011        Landlord, service       Office and hangars on
Tulsa, OK 74115                                                                   and refueling of        5.23 acres
Hangar 22 & 26                                                                    commercial and
                                                                                  private aircraft

7500 E. Apache                      Leased         $11,000       June 2007        Landlord, service       Hangar space on 6.18
Tulsa, OK 74115                                                                   and refueling of        acres
Hangar 18                                                                         commercial and
                                                                                  private aircraft

7500 E. Apache                      Leased         $36,000       Month-to-month   Landlord, service       Hangar space on 14,000
Tulsa, OK 74115                                                                   and refueling of        sq. ft.
Hangar 4                                                                          commercial and private
                                                                                  aircraft
</TABLE>



                                       12
<PAGE>   13


<TABLE>
<CAPTION>
                                  LEASED OR         ANNUAL       EXPIRATION OF       ACTIVITY AT                FACILITY
      LOCATION                      OWNED           RENTAL           LEASE            FACILITY                 DESCRIPTION
------------------------          ----------       --------      -------------    --------------          -----------------------
<S>                               <C>             <C>           <C>              <C>                     <C>
FORT WAYNE AIRPORT
Fort Wayne- Allen County            Leased         $21,400       December 2003    Aircraft parking        Ramp space on 142,491
Airport Authority                                                                                         sq. ft. of land
Ramp

Fort Wayne-Allen County             Leased         $44,000       December 2003    Landlord, service       Office, hangars, and ramp
Airport Authority                                                                 and refueling of        space on 172,734  sq. ft
Hangar 37,41, 41A                                                                 commercial and          of land
Building 28                                                                       private aircraft

Fort Wayne-Allen County             Leased         $68,000       December 2003    Landlord, service       234,451 sq. ft. of
Airport Authority                                                                 and refueling of        office, hangar, parking
Hangar 40, 43                                                                     commercial and          and ramp space
                                                                                  private aircraft

Fort Wayne-Allen County             Leased         $58,500       November 2004    Landlord, service       49,500 sq. ft of hangar,
Airport Authority                                                                 and refueling of        ramp and parking space
Hangar 42                                                                         commercial and
                                                                                  private aircraft

Fort Wayne-Allen County             Leased         $40,400       October  2016    Landlord, service       Aircraft hangar space
Airport Authority                                                                 and refueling of        consisting of
Hangar 45                                                                         commercial and          53,658 sq. ft.
                                                                                  private aircraft

Fort Wayne-Allen County             Leased         $8,600        August  2002     Landlord, service       Aircraft hangar space
Airport Authority                                                                 and refueling of        consisting of 4,000
Hangar D                                                                          commercial and          sq. ft.
                                                                                  private aircraft

Fort Wayne-Allen County             Leased         $2,100        Month-to-month   Landlord, service       2,500 sq. ft. of Aircraft
Airport Authority                                                                 and refueling of        hangar space
T-Hangar                                                                          commercial and
                                                                                  private aircraft

Fort Wayne-Allen County             Leased         $21,400       November 2004    Landlord, service       115,128 sq. ft.  of space
Airport Authority                                                                 and refueling of        used for parking, ramp
Parcel No. 1,2, & 3                                                               commercial and          and hangar space
                                                                                  private aircraft

Fort Wayne-                         Leased         $100          December 2005    Landlord, service       Fuel Farm Consisting of
Allen County Airport                                                              and refueling of        57,000 sq. ft.
Authority                                                                         commercial and
                                                                                  private aircraft

BIRMINGHAM AIRPORT

Birmingham Airport                  Leased         $155,000      August 2021      Landlord, service       Office, hangar, storage,
                                                                                  and refueling of        and ramp space on 29.30
                                                                                  commercial and          acres
                                                                                  private aircraft
</TABLE>

(1)     This property was purchased in April 1994 for $1,800,000 and is subject
        to a first mortgage to Sanwa Bank in the sum of $332,000 at June 30,
        2001 repayable in equal monthly installments of principal of $9,750,
        plus interest at 7.5% per annum, the last payment due in April 2004.

(2)     This property was purchased in May 1995 for $515,000 and is subject to a
        first mortgage to U.S. Bank in the sum of $323,000 at June 30, 2001
        repayable with interest at 9% in equal monthly installments of
        approximately $4,450, the last payment due May 2010.

(3)     Leased to SITA Information Networking Computing USA, Inc. until December
        31, 2002.

(4)     Leased to R&M Investment Corporation under a lease dated July 2, 1999
        with an option to purchase.

(5)     The leasehold interest is subject to security interest granted to Fleet
        National Bank f/k/a Bank Boston.

(6)     Commencing January 2000 and continuing on a month-to-month basis
        thereafter until not later than December 31, 2004.



                                       13
<PAGE>   14

        At most commercial airports where Mercury operates FBOs, Mercury
maintains its own fuel storage capabilities. The following table summarizes
Mercury's existing fuel storage facilities.

<TABLE>
<CAPTION>
                                                                  APPROXIMATE
                                                                   CAPACITY
               LOCATION                                            (GALLONS)
               --------                                    ----------------------------
<S>                                                        <C>
               Los Angeles, California                     311,000(UG)
               Bakersfield, California                     98,000(62,000 AG; 36,000 UG)
               Burbank, California                         --(1)
               Santa Barbara, California                   --(2)
               Reno, Nevada                                99,000(AG)
               Ontario, California                         88,000(UG)
               Dallas, Texas                               57,000(UG)(3)
               Corpus Christi, Texas                       25,000(AG)
               Atlanta, Georgia (Hartsfield)               48,000(AG)
               Atlanta, Georgia (Peachtree)                48,000(AG)
               Fresno, California                          73,000(AG)
               Bedford, Massachusetts                      30,000(AG)
               Nashville, Tennessee                        37,000(AG)
               Charleston, South Carolina                  38,000(AG)
               Jackson, Mississippi                        43,000(AG)(4)
               Tulsa, Oklahoma                             126,000 (UG)
               Fort Wayne, Indiana                         171,000 (AG)
               John's Island, South Carolina               18,000(UG)
               Birmingham, Alabama                         145,500 (AG)
</TABLE>

(AG) = Above-ground fuel storage (UG) = Under-ground fuel storage

(1) Consortium fuel farm used as an alternative.

(2) Interim operations without a fuel farm, new above ground fuel farm approved
and will be installed within 12 months.

(3) Facility owned by a third-party.

(4) Presently use a third party tank form consortium, for balance of
requirement.

        Management believes that Mercury's property and equipment are adequate
for its present business needs. Mercury fully utilizes the real properties it
owns or leases for its business. Mercury's operating profits are substantially
dependent on a number of its leased facilities which enjoy strategic airport
locations and could be adversely affected by a failure to obtain alternative
facilities or renew a lease at expiration.

ITEM 3. LEGAL PROCEEDINGS.

        On March 16, 2001, the bankruptcy court approved a settlement related to
preference payments received in connection with the Chapter 7 bankruptcy filing
of Western Pacific Airlines, Inc ("WPAI"). The settlement consists of ten
quarterly payments of $175,000, two of which were made in the current fiscal
year with the unpaid balance secured by a letter of credit. The Company has
recorded a charge to bad debt expense equal to the present value of the
payments, $1.6 million. The outstanding balance at June 30, 2001 was $1.3
million.

        In November 1999, Mr. Perez, formerly the President of RPA, filed a
lawsuit alleging violations of his employment contract between the Company, RPA
and Mr. Perez asserting, among other things, constructive termination. During
the quarter ended March 31, 2001, this suit was dismissed.

        In February 2001, Mercury received notice of a complaint filed by the
Chapter 7 Trustee for Tower Air, Inc. in regard to a preference action. In July
2001, the Company settled this matter for $1.0 million. In accordance with the
terms of the settlement, the Company paid $750,000 subsequent to June 30, 2001
and will pay the balance in ten monthly installments of $25,000 each. At June
30, 2001, the unpaid settlement balance was $750,000 and the unpaid note
balance, which is secured by a letter of credit, was $250,000.



                                       14
<PAGE>   15

        In April 2000, Mercury filed a collection action against AER Global
Logistics ("AER") in the state of New York. AER filed a counterclaim for $1.0
million alleging among other things, tortuous interference with contract.
Mercury believes that this claim is without merit, and accordingly, does not
believe this matter will have a significant impact on its financial position or
operating results.

        On April 3, 2001 Mercury received notice of an action filed by Skylink
Express, Inc. in the Superior Court of Justice Ontario, Canada against Excel
Cargo, Inc. and others for damages to aircraft occurring on November 30, 1999
and January 10, 2000 at Mirabel International Airport Quebec for a total amount
of $2.5 million Canadian ($1.7 million U.S.) plus interest and fees. Mercury
does not believe the outcome of this claim will have a significant impact on its
financial position or operating results.

        The Company is also a defendant in certain litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of such litigation will not have a significant effect on the financial
statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        None.



                                       15
<PAGE>   16

                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        Mercury's Common Stock is listed and traded on the AMEX under the Symbol
"MAX". The table below sets forth, for the quarterly periods indicated, the high
and low closing sale prices per share of Common Stock

<TABLE>
<CAPTION>
                                                                       HIGH              LOW
                                                                     --------         --------
<S>                                                                 <C>              <C>
               FISCAL 2001:
               Quarter ended September 30, 2000 .........            $   7.19         $   6.00
               Quarter ended December 31, 2000 ..........                6.50             4.56
               Quarter ended March 31, 2001 .............                6.95             4.75
               Quarter ended June 30, 2001 ..............                7.39             5.37
               FISCAL 2000:
               Quarter ended September 30, 1999 .........            $   7.63         $   6.13
               Quarter ended December 31, 1999 ..........                8.25             5.63
               Quarter ended March 31,2000 ..............                9.50             6.13
               Quarter ended June 30, 2000 ..............                7.75             4.63
</TABLE>

        As of September 18, 2001 there were approximately 333 holders of record.

ITEM 6. SELECTED FINANCIAL DATA

        The following selected consolidated financial data for each of the five
years ended June 30 have been derived from the audited consolidated financial
statements of Mercury. The information set forth below should be read in
conjunction with the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                      YEAR ENDED JUNE 30,
                                         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                       2001            2000          1999           1998            1997
                                                     ---------      ---------      ---------      ---------      ---------
<S>                                                 <C>            <C>            <C>            <C>            <C>
    Operating Data
    Sales and Revenues                               $ 478,446      $ 334,333      $ 218,272      $ 238,490      $ 279,380
    Costs and Expenses                                 443,504        299,919        187,052        210,562        256,310
                                                     ---------      ---------      ---------      ---------      ---------
     Gross Margin                                       34,942         34,414         31,220         27,928         23,070
    Selling, General and Administrative Expenses         7,929          7,223          7,118          6,161          6,296
    Provision for Bad Debts                              3,425          5,408          1,721          1,971          1,810
    Depreciation and  Amortization                      10,008          9,162          8,297          4,982          3,953
    Loss Resulting from Bankruptcy of a Customer           300             --             --          7,050             --
    Interest Expense                                     7,184          6,293          4,379          3,540          3,393
    Other (Income) Expense,  net                           (48)          (133)          (178)          (589)           370
                                                     ---------      ---------      ---------      ---------      ---------
    Income before Income Taxes                           6,144          6,461          9,883          4,813          7,248
    Provision for Income Taxes                           2,397          2,520          3,854          1,877          2,869
                                                     ---------      ---------      ---------      ---------      ---------
    Income from continuing operations                    3,747          3,941          6,029          2,936          4,379
    (Loss) income from discontinued operations            (858)          (933)           393             91             --
    Loss on sale of discontinued operations               (477)            --             --             --             --
    Extraordinary Item                                      --           (979)          (483)            --             --
                                                     ---------      ---------      ---------      ---------      ---------
    Net Income                                       $   2,412      $   2,029      $   5,939      $   3,027      $   4,379
                                                     ---------      ---------      ---------      ---------      ---------
    Net Income Per Share:
    Basic:

      From continuing operations                     $    0.57      $    0.60      $    0.90      $    0.42      $    0.58
      (Loss) income from discontinued operations         (0.13)         (0.14)          0.06             --             --
      Loss on sale of discontinued operations            (0.07)            --             --             --             --
      Extraordinary item                                    --          (0.15)         (0.07)            --             --
                                                     ---------      ---------      ---------      ---------      ---------
      Net  income                                    $    0.37      $    0.31      $    0.89      $    0.42      $    0.58
                                                     ---------      ---------      ---------      ---------      ---------
    Diluted:
      From continuing operations                     $    0.56      $    0.55      $    0.69      $    0.38      $    0.49
      (Loss) income from discontinued operations         (0.13)         (0.12)          0.04             --             --
      Loss on sale of discontinued operations            (0.07)            --             --             --             --
      Extraordinary item                                    --          (0.13)         (0.05)            --             --
                                                     ---------      ---------      ---------      ---------      ---------
      Net  income                                    $    0.36      $    0.30      $    0.68      $    0.38      $    0.49
                                                     ---------      ---------      ---------      ---------      ---------
</TABLE>


                                       16
<PAGE>   17


<TABLE>
<CAPTION>
                                                                           AT JUNE 30,
                                              --------------------------------------------------------------------
    BALANCE SHEET DATA                          2001           2000           1999           1998           1997
                                              --------       --------       --------       --------       --------
<S>                                           <C>            <C>            <C>            <C>            <C>
    Total Assets                              $151,134       $134,454       $126,534       $111,118       $ 92,637
    Short-Term Debt (including current
      portion of long-term debt)                 7,461          6,936          6,806          3,732          1,878
    Long-Term Debt                              44,560         42,358         44,285         30,619         15,195
    Subordinated Debt                           23,030         22,844             --             --             --
    Convertible Subordinated Debentures             --             --         19,852         28,090         28,115
    Dividends per Common Share                      --             --             --           .013          .0425
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

        RESULTS OF OPERATIONS - FISCAL 2001, 2000 AND 1999

        The following tables set forth, for the periods indicated, the revenue
and gross margin for each of the Company's four operating units included in
continuing operations, as well as selected other financial statement data.


<TABLE>
<CAPTION>
                                                                         YEAR ENDED JUNE 30,
                                                                           ($ IN MILLIONS)
                                               ---------------------------------------------------------------------------
                                                      2001                       2000                        1999
                                               --------------------       --------------------       ---------------------
                                                             % OF                       % OF                       % OF
                                                             TOTAL                      TOTAL                      TOTAL
                                               AMOUNT      REVENUES       AMOUNT      REVENUES       AMOUNT       REVENUES
                                               ------      --------       ------      --------       ------       --------
<S>                                            <C>         <C>            <C>         <C>            <C>          <C>
            Revenues:
            Fuel Sales                         $318.8         66.6%       $202.8         60.7%       $111.3         51.0%
            FBOs                                 99.5         20.8          73.7         22.0          53.9         24.6
            Cargo Operations                     31.3          6.6          32.5          9.7          27.7         12.7
            Government Contract Services         28.8          6.0          25.3          7.6          25.4         11.7
                                               ------       ------        ------       ------        ------       ------
              Total Revenues                   $478.4          100%       $334.3          100%       $218.3          100%
                                               ======       ======        ======       ======        ======       ======
</TABLE>


<TABLE>
<CAPTION>
                                                             % OF                       % OF                       % OF
                                                             UNIT                       UNIT                        UNIT
                                               AMOUNT      REVENUES       AMOUNT      REVENUES       AMOUNT       REVENUES
                                               ------      --------       ------      --------       ------       --------
<S>                                           <C>         <C>            <C>         <C>            <C>          <C>
            Gross Margin (1):
            Fuel Sales                         $  7.4          2.3%       $  7.9          3.9%       $  8.9          8.0%
            FBOs                                 15.0         15.1          11.5         15.6          11.3         21.0
            Cargo Operations                      6.8         21.6          10.0         30.7           5.7         20.7
            Government Contract Services          5.7         19.7           5.0         19.9           5.3         20.8
                                               ------       ------        ------       ------        ------       ------
                Total Gross Margin             $ 34.9          7.3%       $ 34.4         10.3%       $ 31.2         14.3%
                                               ======       ======        ======       ======        ======       ======
</TABLE>

<TABLE>
<CAPTION>
                                                             % OF                       % OF                       % OF
                                                             TOTAL                      TOTAL                      TOTAL
                                               AMOUNT      REVENUES       AMOUNT      REVENUES       AMOUNT       REVENUES
                                               ------      --------       ------      --------       ------       --------
<S>                                           <C>         <C>            <C>         <C>            <C>          <C>
            Selling, General and
              Administrative                   $  7.9          1.7%       $  7.2          2.2%       $  7.1          3.3%
            Provision for Bad Debts               3.4          0.7           5.4          1.6           1.7          0.8
            Depreciation and Amortization        10.0          2.1           9.2          2.7           8.3          3.8
            Interest Expense and Other            7.5          1.6           6.2          1.8           4.2          1.9
            Income from continuing operations
              before Income Taxes                 6.1          1.3           6.4          1.9           9.9          4.5
            Provision for Income Taxes            2.4          0.5           2.5          0.8           3.9          1.8
                                               ------       ------        ------       ------        ------       ------
            Income from continuing
              Operations                          3.7          0.8           3.9          1.2           6.0          2.8
            (Loss) income from discontinued
               operations                        (0.8)        (0.2)         (0.9)        (0.3)          0.4          0.2
            Loss on sale of discontinued
               Operations                        (0.5)        (0.1)
            Extraordinary Items                    --           --          (1.0)        (0.3)         (0.5)        (0.2)
                                               ------       ------        ------       ------        ------       ------
            Net Income                         $  2.4          0.5%       $  2.0          0.6%       $  5.9          2.7%
                                               ======       ======        ======       ======        ======       ======
</TABLE>


(1) Gross Margin as used here and throughout Management's discussion includes
certain selling, general and administration costs which are charged directly to
the operating units, but excludes depreciation and amortization expenses and
Selling, General and Administrative Expenses.



                                       17
<PAGE>   18

Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000

        Revenue increased 43.1% to $478.4 million in fiscal 2001 from $334.3
million in fiscal 2000 due to higher fuel prices and higher volume of fuel sold.
Gross margin increased 1.5% to $34.9 million in fiscal 2001 from $34.4 million
in fiscal 2000.

        Revenue from fuel sales represented 66.6% of total revenue in fiscal
2001 compared to 60.7% of total revenue in fiscal 2000. Revenue from fuel sales
increased 57.1% to $318.8 million in fiscal 2001 from $202.8 million in fiscal
2000. The increase in revenue from fuel sales was due to an increase of 18% in
the average price of fuel sold and an increase of 33% in the volume of fuel
sold. Volume increased in the current year due to a significant new customer
added in September 2000. Gross margin from fuel sales decreased by 5.0% to $7.4
million in fiscal 2001 from $7.9 million in fiscal 2000 due to higher operating
expenses primarily related to legal and professional fees associated with
customer bankruptcy litigation and costs associated with the proposed
distribution. Revenues and gross margin from fuel sales includes the activities
of Mercury's contract fueling business.

        Revenue from FBOs increased in fiscal 2001 by 35.0% to $99.5 million
from $73.7 million in fiscal 2000. The increase in revenue in fiscal 2001 was
primarily due to the addition of FBOs in Birmingham, Alabama in September 2000
and Fort Wayne, Indiana in May 2000 in addition to higher fuel prices. Gross
margin increased 30.3% in fiscal 2001 to $15.0 million from $11.5 million in
fiscal 2000 based on higher revenues. Gross margin as a percentage of revenue
decreased in fiscal 2001 to 15.1% from 15.6% in fiscal 2000 primarily due to
higher fuel prices.

        Revenue from Cargo operations decreased 3.5% in fiscal 2001 to $31.3
million from $32.5 million in fiscal 2000. The decrease was primarily
attributable to a reduction in space brokerage revenue, primarily related to the
Tower Air bankruptcy which occurred during the third quarter of fiscal 2000, and
partially offset by higher handling revenue. Gross margin decreased 32.2% in
fiscal 2001 to $6.8 million from $10.0 million in fiscal 2000, primarily due to
lower space brokerage revenue and higher cargo handling costs.

        Revenue from government contract services increased 13.8% to $28.8
million from $25.3 million in the year ago period. The increase in revenues from
government contract services was primarily due to the addition of new contracts
during the last twelve months and higher revenue from the Yokota, Japan
contract. Partially offsetting this were two refueling contracts lost and lower
Weather Observation and Forecasting revenue, based on a lower number of
contracts. Gross margin from government contract services in the current period
increased 12.7% to $5.7 million from $5.0 million last year due to higher
revenues. A significant contract, Yokota, Japan, which provided $5.1 million of
revenue or 17.6% of Maytag's total revenues during fiscal year 2001, terminated
in September 2001 and was not renewed.

        Selling general and administrative expenses in the current period
increased 9.8% to $7.9 million from $7.2 million in the year ago period. The
increase was primarily due to higher professional fees primarily related to
costs incurred in litigation settlements and other legal fees.

        Provision for bad debts decreased 36.7% in fiscal 2001 to $3.4 million
from $5.4 million in fiscal 2000 primarily due to the write off of Tower's
receivable balance of $2.7 million in the year ago period (as a result of its
bankruptcy). The provision in the current year includes $1.6 million which is
attributable to a legal settlement with WPAI and $1.0 million which is
attributable to a legal settlement with Tower, both of which related to alleged
preference payments made to the Company prior to bankruptcy filings. These
amounts were partially offset by $1.0 million in bad debt recoveries related to
a former customer. Future periods may continue to be impacted by higher reserve
requirements.

        Depreciation and amortization expense increased 9.2% to $10.0 million
from $9.2 million a year ago. The increase is primarily related to the Fort
Wayne and Birmingham FBO acquisitions and various capital expenditures during
the past year.

        Interest expense and other (net) increased 20.7% in fiscal 2001 to $7.5
million from $6.2 million in fiscal 2000 due to higher initial interest rates
and higher average outstanding borrowings. Additionally the Company wrote-off
its investment in National Airlines due to the bankruptcy filing of National
Airlines in December 2000.

        Income tax expense approximated 39.0% of pretax income in both fiscal
2001 and fiscal 2000 reflecting the expected effective annual income tax rate.



                                       18
<PAGE>   19

        On July 3, 2001 the Company sold RPA, its airline software services
subsidiary. As a result, RPA's historic operating results (and loss on sale)
have been classified as discontinued operations. In 2001, the loss on
discontinued operations consisted of operating losses of $0.8 million (net of
income tax benefit of $0.5 million) and loss on sale of $0.5 million (net of
income tax benefit of $0.3 million). For the year ended June 30, 2000, RPA
incurred operating losses of $0.9 million (net of income tax benefit of $0.6
million). For the year ended June 30, 1999, RPA had operating income of $0.4
million (net of income tax expense of $0.3 million).

        Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30,
1999

        Revenue increased 53.2% to $334.3 million in fiscal 2000 from $218.3
million in fiscal 1999 due to higher fuel prices and higher volume of fuel sold.
Gross Margin increased 10.2% to $34.4 million in fiscal 2000 from $31.2 million
in fiscal 1999.

        Revenue from fuel sales represented 60.7% of total revenue in fiscal
2000 compared to 51.0% of total revenue in fiscal 1999. Revenue from fuel sales
increased 82.3% to $202.8 million in fiscal 2000 from $111.3 million in fiscal
1999 due to higher fuel prices and higher volume of fuel sold. The increase in
revenue from fuel sales was due to an increase of 22.3% in volume of fuel sold
and an increase of 43.0% in the average price of fuel sold. Gross margin from
fuel sales decreased by 11.3% to $7.9 million in fiscal 2000 from $8.9 million
in fiscal 1999 primarily due to lower per gallon margins caused by rising fuel
prices. Revenues and gross margin from fuel sales includes the activities of
Mercury's contract fueling business.

        Revenue from FBOs increased in fiscal 2000 by 36.9% to $73.7 million
from $53.9 million in fiscal 1999. The increase in revenue in fiscal 2000 was
primarily due to the addition of FBOs in Tulsa, Oklahoma; Charleston and John's
Island, South Carolina; and Fort Wayne, Indiana in addition to higher fuel
prices. Gross margin increased 2.1% in fiscal 2000 to $11.5 million from $11.3
million in fiscal 1999. Gross margin as a percentage of revenue decreased in
fiscal 2000 to 15.6% from 21.0% in fiscal 1999 due to higher fuel prices and
lower per gallon fuel margins.

        Revenue from Cargo operations increased 17.1% in fiscal 2000 to $32.5
million from $27.7 million in fiscal 1999. The increase was primarily
attributable to higher space brokerage revenue and higher handling revenue at
LAX. Gross margin increased 73.5% in fiscal 2000 to $10.0 million from $5.7
million in fiscal 1999. The increase in gross margin in fiscal 2000 was
primarily due to higher space brokerage revenue, higher handling revenues at LAX
and elimination of losses at the Miami cargo location, which was sold in March
1999.

        Revenue from government contract services declined marginally in fiscal
2000 to $25.3 million from $25.4 million in fiscal 1999. Gross margin from
government contract services declined in fiscal 2000 by 5.0% to $5.0 million
from $5.3 million in fiscal 1999 primarily due to lower margins from Weather
Data contracts.

        Selling general and administrative expenses increased by 1.5% to $7.2
million in fiscal 2000 from $7.1 million in fiscal 1999.

        Provision for bad debts increased 214.2% in fiscal 2000 to $5.4 million
from $1.7 million in fiscal 1999 due to the write off of Tower's receivable
balance of $2.7 million (as a result of its bankruptcy), significantly higher
sales in fiscal 2000 and greater exposure due to significantly higher fuel
prices during fiscal 2000 which has created a greater risk of loss due to
potential bad debts related to certain airline accounts.

        Depreciation and amortization expense increased 10.4% in fiscal 2000 to
$9.2 million from $8.3 million in fiscal 1999 primarily due to the Burbank FBO
expansion during fiscal 1999, acquisitions of Jackson and Charleston FBOs in
fiscal 1999, acquisition of Tulsa FBO in October 1999 and various capital
expenditures.

        Interest expense (net) increased 46.6% in fiscal 2000 to $6.2 million
from $4.2 million in fiscal 1999 due to higher interest rates and higher average
outstanding borrowings.

        Income tax expense approximated 39.0% of pretax income in both fiscal
2000 and fiscal 1999 reflecting the expected effective annual income tax rate.



                                       19
<PAGE>   20

        The extraordinary item of $979,000 in fiscal 2000 consisted of charges
associated with the redemption of the Company's 7 3/4% convertible subordinated
debentures in September 1999. The charge includes a $780,000 redemption premium
plus write off of capitalized fees of $824,000 less the related tax benefit of
$625,000. The extraordinary item of $483,000 in fiscal 1999 consisted of a
charge of $792,000 related to the cost of repurchasing and retiring convertible
subordinated debentures in excess of par value plus write off of related bond
issuance costs net of the related income tax benefit of $309,000.

        LIQUIDITY AND CAPITAL RESOURCES

        The events of September 11, 2001 have had a significant impact on the
aviation industry and, as a result, have impacted the Company's operations as
well. In the first few days following September 11, revenue from the Company's
fuel sales, cargo and FBO operations were negligible. Since that time, the
Company's operations have begun to return to normal. In view of the uncertainty
of the ultimate impact upon the aviation industry, the long term impact to the
Company's operations cannot be determined at this time.

        On March 7, 2001, the Company announced its plan to create an
independent publicly traded company, MercFuel, Inc. MercFuel, Inc. was organized
in Delaware on October 27, 2000 as a wholly owned subsidiary of the Company. On
January 1, 2001, the Company transferred to MercFuel, Inc. the assets and
liabilities of its Fuel Sales division. On April 30, 2001, MercFuel, Inc. agreed
to sell 239,942 shares of common stock in a private placement at a per share
price of $4.35, the net proceeds of which are $860,000. The sale will be
consummated at such time as the Company's lenders consent to that offering. On
May 15, 2001, the Company contributed $4.0 million of equity to MercFuel, Inc.
in the form of cancellation of intercompany debt payable to the Company. On May
16, 2001, MercFuel filed a registration statement related the proposed sale of
1,200,000 shares of common stock (along with an additional 180,000 shares to
cover over-allotments and an option issued to the underwriter to purchase
120,000 shares, exercisable one year after the effective date of the offering at
a price equal to 140% of the initial public offering price). There can be no
assurance that the Company will be able to complete the initial public offering,
however, if the offering is completed, the Company will own at least 80.1% of
MercFuel's outstanding common stock. The Company currently intends, subject to
satisfactory resolution of certain conditions, to distribute (the
"Distribution") all of the shares of MercFuel common stock that the Company owns
to the Company's stockholders no earlier than six months after MercFuel's
initial public offering. The Distribution is subject to consent by the Company's
subordinated debt holder.

        Mercury has historically financed its operations primarily through
operating cash flow, bank debt and various public and private placement of bonds
and subordinated debt. Mercury's cash balance at June 30, 2001 was $3.9 million.

        Net cash provided by operating activities was $13.5 million, during
fiscal 2001. The primary source of net cash provided by operating activities was
net income before loss from discontinued operations plus depreciation and
amortization totaling $13.8 million, bad debt expense of $3.4 million, an
increase in accounts payable of $5.9 million and an increase in accrued expense
and other current liabilities of $4.7 million. The primary use of cash from
operating activities was an increase in trade and other accounts receivable of
$14.1 million.

        Net cash used in investing activities was $15.4 million during fiscal
2001. The primary uses of cash from investing activities included $6.5 million
in additions to property, equipment and leaseholds and $10.4 million in
acquisitions of businesses, net of cash acquired.

        Net cash provided by financing activities was $3.2 million during fiscal
2001. The primary source of cash from financing activities during this period
was proceeds from long-term debt of $12.0 million. The primary use of cash from
financing activities was the reduction of long-term debt of $9.2 million.

        Net cash provided by Discontinued Operations was $0.4 million in fiscal
2001.

        On September 10, 1999, the Company issued, in a private placement, $24.0
million Senior Subordinated 12% Note ("the Note") due 2006 with detachable
warrants to acquire 503,126 shares of the Company's common stock exercisable at
$6.50 per share for seven years. Proceeds of the Note were used primarily to
redeem $19.5 million of the Company's 7 3/4% convertible subordinated debentures
due February 1, 2006 plus a redemption premium of 4% totaling $780,000, pay
accrued interest and pay expenses of the transaction. The Note balance is net of
warrants valued at $1.3 million less $336,000 amortized as interest expense in
fiscal 2000 and 2001.



                                       20
<PAGE>   21

        On March 2, 1999, the Company entered into an $80.0 million senior
secured credit facility with a consortium of four banks. At June 30, 2001, this
facility includes up to $35.0 million Revolving Credit ("Revolving Credit"), a
term loan with a balance of $15.2 million ("Term Loan") and an acquisition
facility with a balance of $18.2 million ("Acquisition Facility"). These
facilities mature in March 2004. The Term Loan is payable over five years in
quarterly installments of principal of $1.0 million in year one with quarterly
installments increasing each year thereafter by $125,000 with a final
installment in March 2004. Balances outstanding under the Revolving Credit and
Acquisition Facility will be due in March 2004. Interest rates may vary
depending upon the Company's leverage ratio. Currently the interest rate is
equal to the Eurodollar rate plus 2.5% or the Banks base rate (equivalent to the
prime rate which was 7.0 % at June 30, 2001). At June 30, 2001 current portion
of long-term debt pertaining to this facility is $5.1 million and long-term debt
includes $10.1 million of the Term Loan and $18.2 million of the Acquisition
Facility.

        On April 2, 1998, the Company raised $19.0 million from a tax exempt
bond financing pursuant to a loan agreement between the Company and the
California Economic Development Financing Authority, ("CEDFA"). These funds were
obtained to finance the Company's LAX Cargo warehouse expansion and expansion of
its Burbank FBO. The loan carries a variable rate which is based on a weekly
remarketing of the tax exempt bonds issued by CEDFA. Since the issuance of the
bond, the per annum interest rate has averaged 3.15% through June 30, 2001. The
Company's senior bank group has issued a one-year, renewable letter of credit in
the amount of approximately $16.8 million to secure the Company's obligations
under the loan agreement. Principal payments of $500,000 are payable
semi-annually with a redemption of $4.0 million at the end of the fifteenth
year. At June 30, 2001, the balance was $16.0 million.

        On September 26, 2001, the Company announced they have agreed to enter
into a financing arrangement to issue convertible subordinated debentures. These
convertible subordinated debentures are expected to have a principal amount of
$110.0 million, discounted to $71.9 million and are expected to yield 11.7% to
maturity (which includes interest paid at the rate of 7% per annum on the
principal amount plus amortization of the discount). The convertible
subordinated debentures can be convertible into Mercury Air Group's common
stock, subsequent to September 30, 2004, at $21.50 per share. The funding of
this arrangement is expected to occur at different intervals with $25.0 million
($38.5 million principal) to fund in October 2001 and the remaining amount to be
funded within one year. The Company anticipates using the proceeds from the sale
of these debentures to repay the Company's subordinated indebtedness,
restructure the Company's senior indebtedness, and for any potential future
acquisitions.

        In connection with the proposed Distribution, the Company has executed
term sheets with two financial institutions to replace its senior credit
facility. The new agreements include a $20.0 million revolving senior credit
facility which will be entered into by MercFuel, Inc. and a $60.0 million
facility which will be entered into by the Company. The revolving credit
facility will be secured by substantially all of MercFuel, Inc.'s assets. The
revolving credit facility will mature in two-to-four years, at MercFuel, Inc.'s
option. and will be subject to certain financial covenants, including
maintenance of a minimum level of tangible net worth. The Company's facility
will mature in March 2006 and will include a term loan of $35.0 million and a
revolver of $25.0 million. The facility will be secured by substantially all of
the Company's assets excluding MercFuel assets, and will be subject to certain
financial covenants, including maintenance of minimum net worth, maximum
leverage ratio, minimum fixed charge coverage ratio and minimum quick ratio.

        Mercury generally purchases fuel using credit terms which on average are
shorter than the credit terms Mercury generally offers its customers. As a
result, Mercury requires access to sufficient credit facilities which may need
to increase in the future as Mercury expands its operations. The amount of
working capital consumed by Mercury's accounts receivable has depended and will
depend primarily on the quantity of fuel sold, the price of fuel, Mercury's
extension of credit, customer compliance with Mercury's credit terms and credit
terms provided by Mercury's suppliers. Any increase in the quantity or price of
fuel sold, any increase in credit extended, any reduction in credit terms
provided by Mercury's suppliers or any substantial customer noncompliance with
credit terms will result in a corresponding increase in Mercury's need for
working capital. Under these circumstances, Mercury's liquidity could be
adversely affected unless Mercury is able to increase vendor credit or increase
lending limits under the Company's revolving credit facility. Mercury believes,
however, that the Company's current financing arrangements and vendor credit
should provide the Company with sufficient liquidity in the event of a continued
major temporary surge in oil prices. However, to the extent that credit
facilities are utilized to fund working capital requirements Mercury will incur
additional interest expense.

        The Company's accounts receivable balance was $55.0 million at June 30,
2001. Accounts receivable is comprised primarily of trade receivables from
customers and is net of an allowance for doubtful accounts. Mercury's credit
risk is based in part on the following: 1) substantially all receivables are
related to a single industry (aviation), 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.

        The fuel sales division accounted for approximately 67% of the total
Company revenue in fiscal 2001. For the year ended June 30, 2001, sales to
certain fuel sales customers make up approximately 39% of the Company's total
accounts receivable due from what the Company defines as smaller and generally
less well-established or well-capitalized airlines, including certain foreign,
regional, commuter and start-up airlines, which may be less creditworthy than
larger, well-established and well-capitalized airlines. These customers are more
affected by fluctuations in the economy in general and in the aviation industry
specifically. For example, a material rise in the price of aviation fuel tends
to more adversely impact these types of customers. To the extent that Mercury's
airline



                                       21
<PAGE>   22

customers are not able to immediately adjust their business operations to
reflect increased operating costs, they could take relatively longer to pay the
Company's accounts receivable. Such payment delays would further increase
Mercury's working capital demands. In some cases, the impact of such economic
fluctuations could materially impair the financial stability of an airline
customer such that it would be unable to pay amounts owed to the Company and
could result in such airline customer filing for bankruptcy protection. In that
event, Mercury could incur significant losses related to the uncollectability of
the receivables. Mercury has incurred in the past and is likely to continue to
incur losses as the result of the business failure of a customer. Mercury
assesses its credit portfolio on an ongoing basis and establishes allowances
which the Company believes are adequate to absorb potential credit problems that
can be reasonably anticipated. This assessment includes an analysis of past due
accounts as well as a review of accounts with significant balances. Reserves are
established for all or some portion of past due balances based upon various
factors including the extent of delinquency, financial conditions of delinquent
customers and amounts of insurance and collateral, if any.

        Accounts receivable days outstanding were 42 days and 45 days as of June
30, 2001 and 2000, respectively. Accounts receivable days outstanding have
historically been impacted by a high volume of fuel sales to customers with
extended payment terms. However, during the current period, the Company added a
large customer, AirTran Airways, whose terms are prepaid. The terms of the
prepayment provide for weekly payments equal to the following weeks' estimated
sales. This prepaid customer accounted for approximately 14% of the Company's
consolidated revenue for the year ended June 30, 2001. During the year, the
Company also reduced the maximum amount of available credit to National Airlines
based on their volume of fuel purchased. These factors significantly reduced the
accounts receivable days outstanding.

        The Company's recurring capital expenditure requirements have been
related to the acquisition of refueling and ground handling equipment for both
commercial and government contract services operations. During fiscal 1999, 2000
and 2001, respectively, the Company spent approximately $2.1 million, $2.7
million and $840,000 to purchase refueling and ground handling equipment for its
commercial and government contract services operations. During the last three
fiscal years, the Company has also made substantial expenditures to acquire and
construct facilities and businesses to expand its operations. On August 1, 1998,
Maytag acquired thirty-eight government contracts and related assets from
Weather Data for $2.5 million in cash and $1.0 million in stock (subsequently
increased by 22,565 shares in September 1999 since the market value of the
shares originally issued was less then $1.0 million on August 1, 1999). On
November 30, 1998, the Company acquired substantially all the assets of an FBO
in Jackson, Mississippi for $4.5 million in cash. In April 2000, the company
acquired the assets of an FBO located in Fort Wayne, Indiana for $3.9 million in
cash which was funded under its acquisition line. In October 1999, the Company
acquired assets of an FBO in Tulsa, Oklahoma for $2.4 million in cash which was
funded under its acquisition line. A second part to this closing occurred in
July 2000 for $3.8 million which was funded under the company's acquisition
line. In October 1999, the company acquired certain FBO assets at Charleston
International Airport and John's Island Executive Airport in South Carolina for
$700,000 in cash which was funded under its acquisition line. In September 2000,
the company acquired the Birmingham, Alabama FBO assets from Raytheon Aircraft
Services for $6.6 million in cash, which was funded from its acquisition line.

        On August 10, 2001, MercFuel, Inc. entered into an agreement with a
provider of hardware and software applications ("System Provider"), for the
development and exclusive license of an aviation fuel management system. The
agreement requires MercFuel, Inc. to pay the System Provider $25,000 by October
1, 2001, and enter into a non-interest bearing note in the amount of $750,000,
payable in 24 equal monthly payments beginning in August 2002 (the present value
of which is $640,000, assuming an imputed interest rate of 8%). The note is
convertible, at MercFuel's option, at any time after the Distribution into
125,000 shares of MercFuel common stock. MercFuel is also required to attempt to
register the shares. In addition, if MercFuel does not complete an offering of
its common shares by December 31, 2001, the agreement shall be terminated.

        In fiscal 1998, the Company began construction of a new FBO operation in
Burbank, California at a cost of approximately $11.2 million, $1.8 million spent
in fiscal 2000, $7.2 million spent in fiscal 1999 and $2.2 million spent in
fiscal 1998. This project was completed in fiscal 2000. The Company also
retrofitted or replaced a number of fuel farms during fiscal 1999 at a cost of
approximately $3.4 million.



                                       22
<PAGE>   23

        Absent a major prolonged surge in oil prices, currently unforeseen
impact resulting from the events of September 11, 2001, or a capital intensive
acquisition, the Company believes its operating cash flow, senior credit
facility, vendor credit and cash balance will provide it with sufficient
liquidity during the next twelve months. In the event that fuel prices increase
significantly for an extended period of time, the Company's liquidity could be
adversely affected unless the Company is able to increase vendor credit or
increase lending limits under its revolving credit facility. The Company
believes, however, its Revolver and vendor credit should provide it with
sufficient liquidity in the event of a major temporary surge in oil prices.

        Inflation

        The Company believes that inflation has not had a significant effect on
its results of operations during the past three fiscal years.

        Forward-Looking Statements

        Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. In addition, Mercury, from
time-to-time, makes forward-looking statements concerning its expected future
operations and performance and other developments. Such forward-looking
statements are necessarily estimates reflecting Mercury's best judgment based
upon current information and involve a number of risks and uncertainties, and
there can be no assurance that other factors will not affect the accuracy of
such forward-looking statements. While it is impossible to identify all such
factors, factors which could cause actual results to differ materially from
those estimated by Mercury include, but are not limited to, risks associated
with acquisitions, the financial condition of customers, non-renewal of
contracts, government regulation, as well as operating risks, general conditions
in the economy and capital markets, and other factors which may be identified
from time-to-time in Mercury's Securities and Exchange Commission filings and
other public announcements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

        The Company does not currently utilize material derivative financial
instruments which expose the Company to significant market risk. However, the
Company's cash flow, earnings, and the fair value of its debt, may be adversely
effected due to changes in interest rates with respect to its long-term debt.
The table below presents principal cash flows and related weighted average
interest rates of the Company's long-term debt at June 30, 2001 by expected
maturity dates. Weighted average variable rates are based on rates in effect at
June 30, 2001. These rates should not be considered a predictor of actual future
interest rates.

<TABLE>
<CAPTION>
                                                            Expected Maturity Date

                       JUNE-02       JUNE-03       JUNE-04     JUNE-05       JUNE-06     THEREAFTER      TOTAL       FAIR VALUE
                      ---------     ---------    -----------  ----------    ---------    ----------   -----------   -----------
<S>                   <C>           <C>          <C>          <C>           <C>          <C>          <C>           <C>
Fixed Rate
Subordinated Note             0             0              0           0            0   $24,000,000   $24,000,000   $24,000,000
Average Interest
Rate                       12.0%         12.0%          12.0%       12.0%        12.0%         12.0%         12.0%
Fixed Rate Other
Debt                 $  311,000    $  326,000    $   199,000  $   26,000   $   26,000   $   200,000   $ 1,088,000   $ 1,088,000
 Average Interest
Rate                       8.39%         8.52%          8.83%       9.14%        9.14%         9.14%         8.80%
Variable Rate
Tax Exempt Bonds(1)  $1,000,000    $1,000,000    $ 1,000,000  $1,000,000   $1,000,000   $11,000,000   $16,000,000   $16,000,000
 Average
Interest Rate              3.20%         3.20%          3.20%       3.20%        3.20%         3.20%         3.20%
Variable Rate
Other Debt(2)        $5,125,000    $5,625,000    $22,654,000           0            0             0   $33,404,000   $33,404,000
 Average
Interest Rate              6.25%         6.25%          6.25%          0            0             0          6.25%
</TABLE>

(1) The interest rate is based upon a weekly remarketing of the bonds.

(2) Consists of debt under which interest rates will fluctuate based upon
changes in the prime rate or LIBOR.

        In making its determination as to the balance of fixed and variable rate
debt, the Company considers the interest rate environment (including interest
rate trends), borrowing alternatives and relative pricing. The Company
periodically monitors the balance of fixed and variable rate debt, and can make
appropriate corrections either pursuant to the terms of debt agreements or
through the use of swaps and other financial instruments


                                       23
<PAGE>   24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        See Part IV, Item 14, pages F1 through F20 immediately following.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

        None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

        Reference is made to the information set forth under the caption
"Election of Directors" of the Company's Proxy Statement for the annual meeting
scheduled in November 2001 (the "Proxy Statement") for a description of the
directors and executive officers of the Company, which information is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

        Reference is made to the information set forth under the caption
"Executive Compensation" of the Proxy Statement, which information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        Reference is made to the table, including the footnotes thereto, set
forth under the caption "Election of Directors" of the Proxy Statement, for
certain information respecting ownership of stock of the Company by management
and certain shareholders, which table and footnotes are incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        Reference is made to the information set forth under the caption
"Certain Transactions" of the Proxy Statement for certain information with
respect to relationships and related transactions, which information is
incorporated herein by reference.


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:

(a) (1) Financial Statements

<TABLE>
<S>                                                                                                                           <C>
   Independent Auditors' Report..............................................................................................  F-1
   Consolidated Balance Sheets as of June 30, 2001 and 2000..................................................................  F-2
   Consolidated Statements of Income for each of the three years in the period ended June 30, 2001...........................  F-3
   Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2001.......................  F-4
   Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 30, 2001.............  F-5
   Notes to Consolidated Financial Statements for the three years ended June 30, 2001........................................  F-6

(a) (2) Supplemental Schedule for each of the three years in the period ended
June 30, 2001:

   Schedule II - Valuation and Qualifying Accounts........................................................................... F-20
</TABLE>

        All other items are not included in this Form 10-K either because they
are not applicable or are included in the information as set forth in the
Consolidated Financial Statements or in the Notes to Consolidated Financial
Statements.



                                       24
<PAGE>   25

Item 14 (a) Exhibits and Exhibit List
        (b) Reports on Form 8-K


<TABLE>
<CAPTION>
 EXHIBIT
    NO.                             DESCRIPTION
---------                           -----------
<S>          <C>
   2.1        Agreement and Plan of Merger adopted January 9, 2001. (17)

   2.2        Certificate of Merger. (17)

   3.1        Bylaws of Company adopted January 9, 2001. (17)

   3.2        Certificate of Incorporation. (17)

   4.1        Loan Agreement between California Economic Development Financing
              Authority and Mercury Air Group, Inc. relating to $19,000,000
              California Economic Development Financing Authority Variable Rate
              Demand Airport Facilities Revenue Bonds, Series 1998 (Mercury Air
              Group, Inc. Project) dated as of April 1, 1998. (2)

   4.2        Securities Purchase Agreement dated September 10, 1999 by and
              among Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund,
              L.P. (12)

   4.3        Amendment No. 1 dated as of September 30, 2000 by and between J.H.
              Whitney Mezzanine, L.P. and Mercury Air Group, Inc. to the
              Securities Agreement. (16)

   4.4        Waiver and Consent Agreement dated as of December 29, 2000 among
              Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P. (17)

   4.5        Waiver and Consent Agreement dated as of July 2, 2001 among
              Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P

   4.6        Waiver Agreement dated as of September 25, 2001 among Mercury Air
              Group, Inc. and J.H. Whitney Mezzanine Fund, L.P.

   10.1       Company's 1990 Long-Term Incentive Plan. (4)*

   10.2       Company's 1990 Directors Stock Option Plan. (1)*

   10.3       Lease for 6851 West Imperial Highway, Los Angeles, California. (3)

   10.4       Memorandum Dated September 15, 1997 regarding Summary of Officer
              Life Insurance Policies with Benefits Payable to Officers or Their
              Designated Beneficiaries. (8)*

   10.5       Employment Agreement dated November 15, 1994 between the Company
              and Joseph Czyzyk. (9)*

   10.6       Non-Qualified Stock Option Agreement dated March 21, 1996, by and
              between Frederick H. Kopko and Mercury Air Group, Inc. (6) *

   10.7       Company's 1998 Long-Term Incentive Plan. (10) *

   10.8       Company's 1998 Directors Stock Option Plan. (10) *

   10.9       Amendment to Employment Agreement by and between Mercury Air
              Group, Inc. and Joseph A. Czyzyk dated October 15, 1998. (11) *

   10.10      Amendment No. 2 to Employment Agreement by and between Mercury Air
              Group, Inc. and Joseph A. Czyzyk dated April 12, 1999. (11) *

   10.11      Revolving Credit and Term Loan Agreement dated as of March 2, 1999
              by and among Mercury Air Group, Inc., The Banks listed on Schedule
              1 thereto, and The Fleet National Bank f/k/a BankBoston, N.A., as
              Agent. (11)

   10.12      First Amendment to Revolving Credit and Term Loan Agreement dated
              as of September 10, 1999. (14)

   10.13      Second Amendment to Revolving Credit and Term Loan Agreement dated
              as of March 31, 2000. (14)

   10.14      Third Amendment, Waiver and Consent to Revolving Credit and Term
              Loan Agreement dated as of August 11, 2000. (14)

   10.15      The Company's 401(k) Plan consisting of CNA Trust Corporation.
              Regional Prototype Defined Contribution Plan and Trust and
              Adoption Agreement. (14)*

   10.16      Amendment No. 3 to Employment Agreement by and between Mercury Air
              Group, Inc. and Joseph A. Czyzyk dated September 11, 2000. (15)*

   10.17      Employment Agreement dated July 31, 2000 between the Company and
              Dr. Philip J. Fagan. (15)*

   10.18      Fourth Amendment to Revolving Credit and Term Loan Agreement dated
              as of November 14, 2000. (16)
</TABLE>



                                       25
<PAGE>   26

<TABLE>
<CAPTION>
 EXHIBIT
    NO.                             DESCRIPTION
---------                           -----------
<S>          <C>
   10.19      Amendment No. 1 to Mercury Air Group, Inc. 1998 Long-Term
              Incentive Option Plan as of August 22, 2000. (16)*

   10.20      Amendment No. 1 to Mercury Air Group, Inc. 1998 Directors Stock
              Option Plan as of August 22, 2000. (16)*

   10.21      Limited Waiver letter Agreement to Revolving Credit and Term Loan
              Agreement dated as of September 21, 2001.

   10.22      Agreement with Management & Report Technologies, Inc. (22)

   22.1       Subsidiaries of Registrant.

   23.1       Consent of Deloitte & Touche, LLP with respect to incorporation of
              their report on the audited financial statements contained in this
              Annual Report on Form 10-K in the Company's Registration Statement
              on Form S-8 (Registration Statement No. 33-69414).

   99.1       Partnership Agreement dated as of July 27, 2000 of CFK Partners by
              and among Philip J. Fagan, M.D., Frederick H. Kopko, Jr. and
              Joseph A. Czyzyk. (13)
</TABLE>

----------

      * Denotes managements contract or compensation plan or arrangement.

        (1)     Such document was previously filed as Appendix A to the
                Company's Proxy Statement for the December 10, 1993 Annual
                Meeting of Shareholders and is incorporated herein by reference.

        (2)     All such documents were previously filed as Exhibits to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                March 31, 1998 and are incorporated herein by reference.

        (3)     All such documents were previously filed as Exhibits to the
                Company's Registration Statement No. 33-39044 on Form S-2 and
                are incorporated herein by reference.

        (4)     Such document was previously filed as Appendix A to the
                Company's Proxy Statement for the December 2, 1992 Annual
                Meeting of Shareholders.

        (5)     All such documents were previously filed as Exhibits to the
                Company's Registration Statement No. 33-65085 on Form S-1 and
                are incorporated herein by reference.

        (6)     All such documents were previously filed as Exhibits to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                March 31, 1996 and are incorporated herein by reference.

        (7)     All such documents were previously filed as Exhibits to the
                Company's Report on Form 8-K filed September 13, 1996 and are
                incorporated herein by reference.

        (8)     Such document was previously filed as an Exhibit to the
                Company's Annual Report on Form 10-K for the year ended June 30,
                1997 and is incorporated herein by reference.

        (9)     All such documents were previously filed as an Exhibit to the
                Company's Annual Report on Form 10-K for the year ended June 30,
                1998 and is incorporated herein by reference.

        (10)    Such document was previously filed as Appendix A to the
                Company's Proxy Statement for the December 3, 1998 Annual
                Meeting of Shareholders and incorporated herein by reference.

        (11)    All such documents were previously filed as an Exhibit to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                March 31, 1999 and incorporated herein by reference.

        (12)    All such documents were previously filed as an Exhibit to the
                Company's Annual Report on Form 10-K for the year ended June 30,
                1999 and is incorporated herein by reference.



                                       26
<PAGE>   27

        (13)    Such document was previously filed as an Exhibit to the
                Company's current Report on Form 8-K on August 11, 2000 and is
                incorporated herein by reference.

        (14)    All such documents were previously filed as an Exhibit to the
                Company's Annual Report on Form 10-K for the year ended June 30,
                2000 and is incorporated herein by reference.

        (15)    All such documents were previously filed as an Exhibit to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2000 and incorporated herein by reference.

        (16)    All such documents were previously filed as an Exhibit to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                December 31, 2001 and incorporated herein by reference.

        (17)    All such documents were previously filed as an Exhibit to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                March 31, 2001 and incorporated herein by reference.

        (18)    Such document was previously filed as an Exhibit to the
                Company's Amendment No. 2 in Registration Statement No.
                33-60992 on Form S-1 and is incorporated herein by reference.

    (b) Reports on Form 8-K:

        None



                                       27
<PAGE>   28

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of Los
Angeles, State of California, on September 27, 2001.


                                       MERCURY AIR GROUP, INC.


                                       By: /s/ Philip J. Fagan, Jr., M.D
                                           ------------------------------------
                                           Philip J. Fagan, Jr., M.D
                                           Chairman of the Board

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated:

Signers:

Chairman of the Board


<TABLE>
<S>                                                      <C>
/s/ Philip J. Fagan, Jr. M.D.
----------------------------------------
Philip J. Fagan, Jr., M.D.                                Dated:  September 27, 2001
Chairman of the Board


Principal Executive Officer and Director:


/s/ Joseph Czyzyk
----------------------------------------
Joseph Czyzyk                                             Dated:  September 27, 2001
Chief Executive Officer and Director


Principal Financial and Accounting Officer:


/s/ Randolph E. Ajer
----------------------------------------
Randolph E. Ajer                                          Dated: September 27, 2001
Executive Vice President and Treasurer


Additional Directors:


/s/ Frederick H. Kopko, Jr.
----------------------------------------
Frederick H. Kopko, Jr.                                   Dated:  September 27, 2001
Director

/s/ Robert L. List
----------------------------------------
Robert L. List                                            Dated:  September 27, 2001
Director

/s/ Harold Bowling
----------------------------------------
Harold Bowling                                            Dated:  September 27, 2001
Director
</TABLE>



                                       28
<PAGE>   29

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Mercury Air Group, Inc.
Los Angeles, California

We have audited the accompanying consolidated balance sheets of Mercury Air
Group, Inc. and subsidiaries as of June 30, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 2001. Our audits also included
the financial statement schedule listed in the Index at Item 14. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mercury Air Group, Inc. and
subsidiaries as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

Deloitte & Touche LLP

Los Angeles, California
September 26, 2001



                                      F-1
<PAGE>   30

                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                              JUNE 30,              JUNE 30,
                                                                                2001                  2000
                                                                            -------------        -------------
<S>                                                                         <C>                  <C>
                                     ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                 $   3,886,000        $   2,081,000
  Trade accounts receivable, net of allowance for doubtful accounts
      of  $1,653,000 at 6/30/01 and $2,291,000 at 6/30/00                      55,040,000           44,415,000
  Inventories, principally aviation fuel                                        4,069,000            3,428,000
  Prepaid expenses and other current assets                                     2,882,000            2,904,000
  Net assets of discontinued operations (Note 2)                                4,338,000            6,071,000
                                                                            -------------        -------------
    Total current assets                                                       70,215,000           58,899,000
PROPERTY, EQUIPMENT AND LEASEHOLDS , net of
  accumulated depreciation and amortization of $52,165,000 at 6/30/01
  and $43,397,000 at 6/30/00 (Note 3, 7, and 10)                               71,779,000           63,965,000
OTHER ASSETS, net (Notes 4 and 10)                                              9,140,000           11,590,000
                                                                            -------------        -------------
                                                                            $ 151,134,000        $ 134,454,000
                                                                            =============        =============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                          $  31,764,000        $  25,840,000
  Accrued expenses and other current liabilities (Note 5)                      10,357,000            5,701,000
  Current portion of long-term debt (Note 7)                                    7,461,000            6,936,000
                                                                            -------------        -------------
  Total current liabilities                                                    49,582,000           38,477,000

LONG-TERM DEBT (Notes 7 and 8)                                                 44,560,000           42,358,000
DEFERRED INCOME TAXES (Note 6)                                                    380,000              110,000
SENIOR SUBORDINATED NOTES (Note 8)                                             23,030,000           22,844,000
COMMITMENTS AND CONTINGENCIES  (Note 11)

STOCKHOLDERS' EQUITY (Note 9):
    Preferred Stock - $.01 par value;  authorized 3,000,000 shares;
       no shares outstanding
    Common Stock -  $.01 par value; authorized 18,000,000 shares;
      Outstanding 6,576,680 shares at 6/30/01;
      Outstanding 6,472,955 shares at 6/30/00                                      66,000               64,000
    Additional paid-in capital                                                 21,442,000           21,014,000
    Retained earnings                                                          12,835,000           10,423,000
    Accumulated other comprehensive income                                       (228,000)            (228,000)
    Notes receivable from sale of stock                                          (533,000)            (608,000)
                                                                            -------------        -------------
         Total stockholders' equity                                            33,582,000           30,665,000
                                                                            -------------        -------------
                                                                            $ 151,134,000        $ 134,454,000
                                                                            =============        =============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-2
<PAGE>   31

                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                                      YEAR ENDED JUNE 30,
                                                                    -------------------------------------------------------
                                                                        2001                 2000                  1999
                                                                    -------------        -------------        -------------
<S>                                                                 <C>                  <C>                  <C>
Sales and Revenues:
  Sales                                                             $ 385,868,000        $ 254,474,000        $ 144,972,000
  Service revenues                                                     92,578,000           79,859,000           73,300,000
                                                                    -------------        -------------        -------------
                                                                      478,446,000          334,333,000          218,272,000
                                                                    -------------        -------------        -------------
Costs and Expenses:
  Cost of sales                                                       347,456,000          223,053,000          115,416,000
  Operating expenses                                                   96,048,000           76,866,000           71,636,000
                                                                    -------------        -------------        -------------
                                                                      443,504,000          299,919,000          187,052,000
                                                                    -------------        -------------        -------------
       Gross Margin (Excluding depreciation
            and amortization)                                          34,942,000           34,414,000           31,220,000
                                                                    -------------        -------------        -------------
Expenses (Income):
  Selling, general and administrative                                   7,929,000            7,223,000            7,118,000
  Provision for bad debts                                               3,425,000            5,408,000            1,721,000
  Depreciation and amortization                                        10,008,000            9,162,000            8,297,000
  Interest expense                                                      7,184,000            6,293,000            4,379,000
  Loss on investment                                                      300,000                   --                   --
  Interest income                                                         (48,000)            (133,000)            (178,000)
                                                                    -------------        -------------        -------------
                                                                       28,798,000           27,953,000           21,337,000
                                                                    -------------        -------------        -------------
Income from Continuing Operations Before Provision for
  Income Taxes and Extraordinary Item                                   6,144,000            6,461,000            9,883,000
Provision for Income Taxes (Note 6)                                     2,397,000            2,520,000            3,854,000
                                                                    -------------        -------------        -------------
Income from Continuing Operations                                       3,747,000            3,941,000            6,029,000
Discontinued Operations (Note 2):
  (Loss) income from discontinued operations, net of income
   tax (benefit) charge of ($548,000) in 2001, ($597,000) in
   2000 and $251,000 in 1999                                             (858,000)            (933,000)             393,000
   Loss on sale of discontinued operations, net of income tax
   benefit of $305,000                                                   (477,000)                  --                   --
                                                                    -------------        -------------        -------------
Income before Extraordinary Item                                        2,412,000            3,008,000            6,422,000
Extraordinary item less applicable income tax benefit of
  $625,000 and $309,000 (Note 8)                                               --             (979,000)            (483,000)
                                                                    -------------        -------------        -------------
Net Income                                                          $   2,412,000        $   2,029,000        $   5,939,000
                                                                    =============        =============        =============
Net Income Per Common Share (Note 13):
   Basic:
      From Continuing Operations                                    $        0.57        $        0.60        $        0.90
      (Loss) income from Discontinued Operations                            (0.13)               (0.14)                0.06
      Loss on sale of discontinued operations                               (0.07)                  --                   --
                                                                    -------------        -------------        -------------
      Income before Extraordinary Item                                       0.37                 0.46                 0.96
      Extraordinary Item                                                       --                (0.15)               (0.07)
                                                                    -------------        -------------        -------------
      Net Income                                                    $        0.37        $        0.31        $        0.89
                                                                    =============        =============        =============
   Diluted:
      From Continuing Operations                                    $        0.56        $        0.55        $        0.69
      (Loss) income from Discontinued Operations                            (0.13)               (0.12)                0.04
      Loss on sale Discontinued Operations                                  (0.07)                  --                   --
                                                                    -------------        -------------        -------------
      Income before Extraordinary Item                                       0.36                 0.43                 0.73
      Extraordinary Item                                                       --                (0.13)               (0.05)
                                                                    -------------        -------------        -------------
      Net Income                                                    $        0.36        $        0.30        $        0.68
                                                                    =============        =============        =============
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>   32

                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW



<TABLE>
<CAPTION>
                                                                                       YEAR ENDED JUNE 30,
                                                                         ------------------------------------------------
                                                                             2001              2000              1999
                                                                         ------------      ------------      ------------
<S>                                                                      <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                             $  2,412,000      $  2,029,000      $  5,939,000
  Less: Income (loss) from discontinued operations
    before extraordinary Item                                              (1,335,000)         (933,000)          393,000
                                                                         ------------      ------------      ------------
  Income from continuing operations                                         3,747,000         2,962,000         5,546,000
  Non-cash component of extraordinary charge                                                    824,000           566,000
  Adjustments to derive cash flow from operating activities:
      Bad debt expense                                                      3,425,000         5,408,000         1,721,000
      Depreciation and amortization                                        10,008,000         9,162,000         8,297,000
      Deferred income taxes                                                   270,000          (113,000)           27,000
      Compensation expense related to remeasurement
          of stock options                                                                       64,000
      Amortization of Senior Subordinated Note discount                       186,000           150,000
  Changes in operating assets and liabilities:
      Trade and other accounts receivable                                 (14,050,000)       (3,940,000)      (11,807,000)
      Inventories                                                            (641,000)       (1,536,000)         (353,000)
      Prepaid expenses and other current assets                                22,000           565,000          (197,000)
      Accounts payable                                                      5,924,000         4,564,000         5,276,000
      Income taxes payable                                                                     (941,000)       (1,643,000)
      Accrued expenses and other current liabilities                        4,656,000           192,000           567,000
                                                                         ------------      ------------      ------------
          Net cash provided by operating activities                        13,547,000        17,361,000         8,000,000
                                                                         ------------      ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Restricted cash-tax exempt bond                                                               785,000         8,376,000
  Increase to other assets                                                  1,499,000        (1,533,000)         (237,000)
  Acquisition of businesses, net of cash acquired (Note 10)               (10,400,000)       (7,000,000)       (7,000,000)
  Additions to property, equipment and leaseholds                          (6,471,000)      (10,626,000)      (15,074,000)
                                                                         ------------      ------------      ------------
          Net cash used in investing activities                           (15,372,000)      (18,374,000)      (13,935,000)
                                                                         ------------      ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from long-term debt                                             11,969,000        10,648,000        34,050,000
  Reduction of long-term debt                                              (9,242,000)      (12,445,000)      (17,310,000)
  Capitalized loan fee                                                                       (1,802,000)
  Payment received from notes receivable - officers                            75,000            54,000
  Reduction of convertible subordinated debentures                                          (19,534,000)       (8,188,000)
  Repurchase of common stock                                                                 (1,856,000)       (4,682,000)
  Proceeds from senior subordinated note                                                     24,000,000
  Proceeds from issuance of common stock                                      430,000                             145,000
                                                                         ------------      ------------      ------------
          Net cash  provided by (used in) financing activities              3,232,000          (935,000)        4,015,000
                                                                         ------------      ------------      ------------

Net Cash  provided by (used in) Discontinued Operations                       398,000          (461,000)         (526,000)

NET (DECREASE) INCREASE IN CASH AND
  CASH EQUIVALENTS FROM CONTINUING OPERATIONS                               1,407,000        (1,948,000)       (1,920,000)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                2,081,000         4,490,000         6,936,000
                                                                         ------------      ------------      ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                   $  3,886,000      $  2,081,000      $  4,490,000
                                                                         ============      ============      ============

CASH PAID DURING THE PERIOD:
  Interest                                                               $  7,306,000      $  6,821,000      $  4,568,000
  Income taxes                                                           $      3,000      $  2,309,000      $  5,412,000

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES:
    Issuance of 124,224 shares of common stock in fiscal 1999 and an
      additional 22,565 shares in fiscal 2000 for acquisition of
      assets of Weather Data (note 10)                                                     $    158,000      $  1,000,000
   Conversion of 50 debentures into 6,854 shares of common stock                                             $     50,000
   Conversion of 318 debentures into 43,590 shares of common stock                         $    318,000
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>   33

                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999



<TABLE>
<CAPTION>
                                                                                                        ACCUMULATED
                            COMMON STOCK                    ADDITIONAL                       NOTES         OTHER
                              NUMBER OF                      PAID-IN        RETAINED       RECEIVABLE   COMPREHENSIVE  COMPREHENSIVE
                               SHARES          AMOUNT        CAPITAL        EARNINGS        OFFICERS       INCOME         INCOME
                            ------------   ------------   ------------   ------------   ------------   -------------  ------------
<S>                        <C>            <C>            <C>            <C>            <C>            <C>             <C>
BALANCE, JUNE 30, 1998         7,082,753   $     71,000   $ 20,465,000   $  6,415,000   $   (662,000)  $   (239,000)     2,867,000
  Net income                                                                5,939,000                                 $  5,939,000
  Repurchase of common
     stock                      (641,781)        (6,000)    (1,865,000)    (2,811,000)
  Common stock issued
     on exercise of
     Options                      69,125                       144,000
  Common stock issued
     in acquisition              124,224          1,000        999,000
  Common stock issued
     on conversion of
     debentures                    6,854                        50,000
  Tax benefit from
     exercises of
     stock options                                              80,000
  Foreign currency
     adjustment                                                                                               2,000          2,000
                            ------------   ------------   ------------   ------------   ------------   ------------   ------------
BALANCE, JUNE 30, 1999         6,641,175         66,000     19,873,000      9,543,000       (662,000)      (237,000)     5,941,000
                                                                                                                      ============
  Net income                                                                2,029,000                                 $  2,029,000
  Repurchase of
     common stock               (234,375)        (2,000)      (705,000)    (1,149,000)
  Reduction of note
     receivable from
     sale of stock                                                                            54,000
  Foreign currency
     adjustment                                                                                               9,000          9,000
  Common stock issued
     on conversion of
     debentures                   43,590                       318,000
  Common stock issued
     in acquisition               22,565                       158,000
  Warrants issued in
     connection with
     Senior
     Subordinated Note                                       1,306,000
  Value of remeasured
     stock options                                              64,000
                            ------------   ------------   ------------   ------------   ------------   ------------   ------------
BALANCE, JUNE 30, 2000         6,472,955         64,000     21,014,000     10,423,000       (608,000)      (228,000)     2,038,000
  Net income                                                                2,412,000                                    2,412,000
  Common stock issued
     on exercise of
     options                     103,725          2,000        428,000
  Reduction of note
     receivable from
     sale of stock                                                                            75,000
                            ------------   ------------   ------------   ------------   ------------   ------------   ------------
BALANCE, JUNE 30, 2001         6,576,680   $     66,000   $ 21,442,000   $ 12,835,000   $   (533,000)  $   (228,000)  $  2,412,000
                            ============   ============   ============   ============   ============   ============   ============
</TABLE>



                                       F-5
<PAGE>   34

                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                         THREE YEARS ENDED JUNE 30, 2001


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

        BUSINESS

        Mercury Air Group, Inc., a Delaware corporation, provides a broad range
of services to the aviation industry through four principal operating units:
fuel sales and services, cargo operations, fixed base operations and U.S.
government contract services. Fuel sales include the sale of fuel and delivery
of fuel primarily to domestic and international commercial airlines, business
aviation and air freight airlines. Cargo operations consist of cargo handling,
space logistics operations and general cargo sales agent services. Fixed base
operations ("FBOs") include fuel sales, into-plane services, ground support
services, aircraft hangar and tie-down facilities and maintenance at certain
locations for commercial, private, general aviation and military aircraft.
Government contract services consist of aircraft refueling and fuel storage
operations, base operating support (BOS) services, air terminal and ground
handling services and weather observation and forecasting services performed
principally for agencies of the United States government. Additionally, the
Company had a fifth operating unit, RPA Airline Automation Services, Inc.
("RPA") which was sold on July 3, 2001 and is classified as a discontinued
operation (see note 2).

        MERCFUEL, INC.

        On March 7, 2001, the Company announced its plan to create an
independent publicly traded company, MercFuel, Inc. ("MercFuel"). MercFuel was
organized in Delaware on October 27, 2000 as a wholly owned subsidiary of the
Company. On January 1, 2001, the Company transferred to MercFuel, the assets and
liabilities of its Fuel Sales division. On April 30, 2001, MercFuel agreed to
sell 239,942 shares of common stock in a private placement at a per share price
of $4.35, the net proceeds of which were $860,000. The sale will be consummated
at such time as the Company's lenders consent to that offering. On May 15, 2001,
the Company contributed $4.0 million of equity to MercFuel in the form of
cancellation of intercompany debt payable to the Company. On May 16, 2001,
MercFuel filed a registration statement related to the proposed sale of
1,200,000 shares of common stock (excluding 180,000 shares to cover
over-allotments and an option issued to the underwriter to purchase 120,000
shares, exercisable one year after the effective date of the offering at a price
equal to 140% of the initial public offering price). There is no
assurance the Company will complete the initial public offering, however, if the
initial public offering is completed the Company will own at least 80.1% of
MercFuel's outstanding common stock. The Company currently intends, subject to
satisfactory resolution of certain conditions, to distribute (the
"Distribution") all of the shares of MercFuel common stock that the Company owns
to the Company's stockholders no earlier than six months after MercFuel's
initial public offering.

        PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements include the accounts of Mercury
Air Group, Inc. and its subsidiaries. All material intercompany transactions and
balances have been eliminated.

        CASH AND CASH EQUIVALENTS

        Cash equivalents consist of short-term, highly liquid investments that
are readily convertible into cash and were purchased with maturities of three
months or less.

        INVENTORIES

        Inventory is stated at the lower of aggregate cost (first-in, first-out
method) or market.

        PROPERTY, EQUIPMENT AND LEASEHOLDS

        Property, equipment and leaseholds are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful life of the
related asset (3-25 years) and over the lesser of the lease term or useful life
for leasehold improvements.



                                      F-6
<PAGE>   35

        COST IN EXCESS OF NET ASSETS ACQUIRED

        Cost in excess of net assets acquired is being amortized using the
straight-line method over the estimated lives ranging from ten to forty years.
The Company assesses recoverability on a periodic basis. Factors included in
evaluating recoverability include historical earnings and projected future
earnings of the related operations.

        FOREIGN CURRENCY TRANSLATION

        Assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at the exchange rate prevailing at the balance
sheet date and, where appropriate, at historical rates of exchange. Income and
expense accounts are translated at the weighted average rate in effect during
the year. The aggregate effect of translating the financial statements of the
foreign subsidiary is included in other comprehensive income. Foreign exchange
gains (losses) were not significant during the years presented.

        REVENUE RECOGNITION

        Revenues are recognized upon delivery of product or completion of
service. The Company's contracts with the U.S. Government are subject to profit
renegotiation. To date the Company has not been required to adjust profits
arising out of U.S. Government contracts.

        INCOME TAXES

        Deferred income tax assets and liabilities are recognized based on
differences between the financial statement and income tax basis of assets and
liabilities using presently enacted income tax rates.

        FAIR VALUE OF FINANCIAL INSTRUMENTS

        The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable and payable, and debt instruments. The book
values of all financial instruments, other than debt instruments, are
representative of their fair values due to their short-term maturity. The book
values of the Company's debt instruments are considered to approximate their
fair values because the interest rates of these instruments are based on current
rates offered to the Company or, in the case of publicly traded debt, based upon
quoted market prices.

        IMPAIRMENT OF LONG-LIVED ASSETS

        The Company reviews for impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Measurement of
an impairment loss is based on the estimated fair value of the asset.

        USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the reporting
period. Actual results could differ from those estimates.

        NEW ACCOUNTING PRONOUNCEMENTS

        On July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which establishes accounting and reporting standards for derivative
instruments and for hedging activities. The statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. There was no
effect of adoption at July 1, 2000. At June 30, 2001, there were no outstanding
derivative instruments.

        In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interest method.



                                      F-7
<PAGE>   36

        In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." The Company is required to adopt SFAS No. 142 on July 1,
2002, however, the Company may elect to adopt SFAS 142 on July 1, 2001. SFAS No.
142 requires, among other things, the discontinuance of goodwill amortization.
In addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS. No. 142 also requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company has
not yet determined what impact the adoption will have on its financial
statements.

        RECLASSIFICATIONS

        Certain reclassifications were made to prior year statements to conform
to the June 30, 2001 presentation.

        RISKS AND UNCERTAINTIES

        The events of September 11, 2001 have had a significant impact on the
aviation industry and, as a result, has impacted the Company's operations as
well. In the first few days following September 11, revenue from the Company's
fuel sales, cargo and FBO operations were negligible. Since that time, the
Company's operations have begun to return to normal. In view of the uncertainty
of the ultimate impact upon the aviation industry, the long-term impact to the
Company's operations cannot be determined at this time.

        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 a single industry, aviation, 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 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. During the
year ended June 30, 2001, per gallon fuel cost increased by approximately 21%.
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 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 fuel on favorable terms or
may experience difficulty in obtaining fuel from alternative suppliers.
Furthermore, difficulties faced by these suppliers or fuel shortages or the
inability to obtain fuel from alternate sources at acceptable prices and terms,
could impair the Company's ability to sell fuel to its customers at competitive
prices and terms.

NOTE 2 - DISCONTINUED OPERATIONS

        On July 3, 2001, the Company completed the sale of its subsidiary, RPA
Airline Automation Services, Inc. ("RPA"), which provides airline revenue
accounting and management information software consisting of proprietary
software programs which are marketed to foreign and domestic airlines. The
Company has reclassified its consolidated financial statements to reflect the
sale of RPA and to segregate the revenues, direct costs and expenses (excluding
allocated costs), assets and liabilities, and cash flows of RPA. The net
operating results, net assets and net cash flows of this business have been
reported as "Discontinued Operations" in the accompanying consolidated financial
statements.



                                      F-8
<PAGE>   37

        Pursuant to the agreement to which the sale was made, the Company
received a cash purchase price of $3.6 million. The Company realized a loss on
the sale of $477,000 (net of an income tax benefit of $305,000). Summarized
financial information for the discontinued operations is as follows:

<TABLE>
<CAPTION>
                                                                    FISCAL YEAR ENDED JUNE 30,
                                                        ---------------------------------------------------
                                                         2001 (1)              2000                1999
                                                        -----------         -----------         -----------
<S>                                                     <C>                 <C>                 <C>
               Service revenues                         $ 4,224,000         $ 4,409,000         $ 6,403,000
               Operating expense                          4,334,000           5,710,000           5,600,000
                                                        -----------         -----------         -----------
               Gross (loss) margin                         (110,000)         (1,301,000)            803,000
                                                        -----------         -----------         -----------

               Other Expense                              1,296,000             229,000             159,000
                                                        -----------         -----------         -----------
               (Loss) Income before income taxes         (1,406,000)         (1,530,000)            644,000
               Income tax (benefit) charge                 (548,000)           (597,000)            251,000
                                                        -----------         -----------         -----------
               Net (loss) income                        $  (858,000)        $  (933,000)        $   393,000
                                                        ===========         ===========         ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                      JUNE 30
                                                            ----------------------------
                                                               2001              2000
                                                            ----------        ----------
<S>                                                         <C>               <C>
               Current Assets                               $4,324,000        $4,887,000
               Total Assets                                  5,292,000         6,732,000
               Current and Total Liabilities                   954,000           661,000

               Net assets of discontinued operations         4,338,000         6,071,000
</TABLE>

        The Company retained certain assets and liabilities owned by RPA,
principally land and building with a net carrying value of $697,000. The Company
has listed the land and building for sale and expects the net proceeds from the
sale to approximate the carrying value.

NOTE 3 - PROPERTY, EQUIPMENT AND LEASEHOLDS:

        Property, equipment and leaseholds consist of the following:


<TABLE>
<CAPTION>
                                                                                  JUNE, 30
                                                                     -----------------------------------
                                                                          2001                  2000
                                                                     -------------         -------------
<S>                                                                  <C>                   <C>
               Land, buildings and leasehold improvements            $  86,691,000         $  73,409,000
               Equipment, furniture and fixtures                        32,096,000            30,631,000
               Construction in progress                                  5,157,000             3,322,000
                                                                     -------------         -------------
                                                                       123,944,000           107,362,000

               Less accumulated depreciation and amortization          (52,165,000)          (43,397,000)
                                                                     -------------         -------------
                                                                     $  71,779,000         $  63,965,000
                                                                     =============         =============
</TABLE>

NOTE 4 - OTHER ASSETS:

        Other assets consists of the following:


<TABLE>
<CAPTION>
                                                                            JUNE, 30
                                                                  ------------------------------
                                                                     2001                2000
                                                                  -----------        -----------
<S>                                                               <C>                <C>
               Cost in excess of net assets acquired - net        $ 5,191,000        $ 5,632,000
               Capitalized loan fees - net (Note 7)                 2,233,000          2,393,000
               Covenants not to compete - net                         383,000            583,000
               Other                                                1,333,000          2,982,000
                                                                  -----------        -----------
                                                                  $ 9,140,000        $11,590,000
                                                                  ===========        ===========
</TABLE>



                                      F-9
<PAGE>   38

        Cost in excess of net assets acquired and covenants not to compete have
resulted from various acquisitions and are being amortized using the
straight-line method over periods ranging from five to forty years. Accumulated
amortization related to cost in excess of net assets acquired was $1,460,000 and
$1,485,000 at June 30, 2001 and 2000, respectively. Accumulated amortization
related to covenants not to compete was $617,000 and $417,000 at June 30, 2001
and 2000, respectively.

        Capitalized loan fees represent cost incurred in connection with
outstanding debt and are being amortized over the term of the debt.

        In 1994, an executive officer of the Company purchased 151,250 shares of
the Company's stock from a company owned by the then Chairman at $1.98 per
share, pursuant to a Stock Purchase Agreement. The officer paid $30,000 in cash
and the remaining purchase price of $270,000 was paid over a five year period
ending in 1998. As part of the agreement, the Company loaned the executive the
$270,000. Beginning in 1996, one fifth of the amount loaned, or $54,000, was
forgiven annually through the year ended June 30, 2000. The amount subject to
forgiveness of $270,000 was treated as additional compensation expense over the
seven-year period from the date of the agreements through 2000.

NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

        Accrued expenses and other current liabilities consist of the following:


<TABLE>
<CAPTION>
                                                   JUNE, 30
                                         ------------------------------
                                            2001                2000
                                         -----------        -----------
<S>                                      <C>                <C>
               Salaries and wages        $ 2,977,000        $ 3,077,000
               Other                       7,380,000          2,624,000
                                         -----------        -----------
                                         $10,357,000        $ 5,701,000
                                         ===========        ===========
</TABLE>

NOTE 6 - INCOME TAXES:

        The provision for taxes on income consists of the following:


<TABLE>
<CAPTION>
                                                                   YEAR ENDED JUNE 30,
                                                  ---------------------------------------------------
                                                      2001               2000                 1999
                                                  -----------         -----------         -----------
<S>                                               <C>                 <C>                 <C>
               Federal, current                   $ 1,855,000         $ 2,235,000         $ 3,134,000
               State, current                         272,000             398,000             693,000
                                                  -----------         -----------         -----------
                                                    2,127,000           2,633,000           3,827,000
               Deferred, primarily federal            270,000            (113,000)             27,000
                                                  -----------         -----------         -----------
               Provision                            2,397,000           2,520,000           3,854,000
               Discontinued operations               (853,000)           (597,000)            251,000
               Extraordinary item                          --            (625,000)           (309,000)
                                                  -----------         -----------         -----------
                Net Provision                     $ 1,544,000         $ 1,298,000         $ 3,796,000
                                                  ===========         ===========         ===========
</TABLE>

        Major components of deferred income tax (assets) and liabilities were as
follows:


<TABLE>
<CAPTION>
                                                                           JUNE 30,
                                                                   ---------------------------
                                                                     2001               2000
                                                                   ---------         ---------
<S>                                                                <C>               <C>
               Depreciation/amortization                           $ 909,000         $ 683,000
               Prepaid expenses                                      695,000           322,000
               State income taxes                                    (90,000)         (222,000)
               Allowance for doubtful accounts                      (645,000)         (888,000)
               Capital loss                                         (642,000)         (276,000)
               Cash to accrual basis conversion as a result
                 of previous acquisition                                  --           329,000
                Other                                                153,000           162,000
                                                                   ---------         ---------
                                                                   $ 380,000         $ 110,000
                                                                   =========         =========
</TABLE>


                                      F-10
<PAGE>   39
        The reconciliation of the federal statutory rate to the Company's
effective tax rate on income is summarized as follows:


<TABLE>
<CAPTION>
                                                         YEAR ENDED JUNE 30,
                                                    ------------------------------
                                                    2001         2000         1999
                                                    ----         ----         ----
<S>                                                <C>          <C>          <C>
               Computed "expected" tax rate         34.0%        34.0%        34.0%
               State income taxes, net of
                  Federal income tax benefit         5.0%         5.0%         5.0%
                                                    ----         ----         ----
               Effective rate                       39.0%        39.0%        39.0%
                                                    ====         ====         ====
</TABLE>

NOTE 7 - LONG-TERM:

      Long-term debt consists of the following:


<TABLE>
<CAPTION>
                                                                                                           JUNE 30,
                                                                                                 ------------------------------
                                                                                                    2001               2000
                                                                                                 -----------        -----------
<S>                                                                                              <C>                <C>
Notes payable to banks                                                                           $33,404,000        $29,803,000

Tax exempt bond pursuant to a loan agreement between the Company and the
California Economic Development Financing Authority ("CEDFA"). Repayment terms
consist of semi-annual principal payments of $500,000 with a redemption of $4
million at the end of the fifteenth year (2013). The loan carries a variable
rate which is based on a weekly remarketing of the bonds. The rate at June 30,
2001 was 2.6%. In addition, a letter of credit has been issued by the Company's
Senior lender to guaranty the credit at an annual cost of approximately 1.9% of
the principal                                                                                     16,000,000         17,000,000

Notes payable to trustees for bankrupt airlines                                                    1,529,000

Mortgages payable to financial institution in aggregate monthly principal installments of
$14,197 plus interest at 7.5% to 9% per annum, collateralized by land and buildings,
maturing in April 2004 through May 2010                                                              655,000            796,000

Convertible subordinated debentures payable to seller of Excel Cargo in
monthly installments of $13,810 including interest at 8.5%, collateralized by
property acquired, maturing in September 2003                                                        350,000            480,000

Other                                                                                                 83,000          1,215,000
                                                                                                 -----------        -----------
                                                                                                  52,021,000         49,294,000
Less current portion                                                                               7,461,000          6,936,000
                                                                                                 -----------        -----------
                                                                                                 $44,560,000        $42,358,000
                                                                                                 ===========        ===========
</TABLE>

        Notes Payable to banks consists principally of a credit facility (the
"Credit Facility") which provides for a term loan (the "Term Loan"), an
acquisition line (the "Acquisition Line") and a revolving line of credit ("the
Revolver"). The Credit Facility expires in March 2004. Borrowings under the Term
Loan were $15.3 million and $19.9 million at June 30 2001 and 2000,
respectively. Principal payments are payable in quarterly installments of $1.3
million as of June 30, 2001, increasing $125,000 annually. The Acquisition Line
permits borrowings of up to $18.5 million. Outstanding borrowings under the
Acquisition Line were $18.1 million and $9.9 million at June 30, 2001 and 2000,
respectively. Principal is due in March 2004. The Revolver permits borrowings of
up to $35.0 million. There were no outstanding borrowings under the Revolver at
both June 30, 2001 and 2000. Interest under the credit facility accrues at
LIBOR+2.50% (6.25% based on 30 day LIBOR rates in effect at June 30, 2001).



                                      F-11
<PAGE>   40

        Certain debt agreements contain provisions that require the maintenance
of certain financial ratios, minimum tangible net worth (as defined), minimum
profitability levels, maximum leverage and minimum debt service coverage and
quick ratios and limitations on annual capital expenditures. Additionally, the
Company is prohibited from paying dividends in excess of $400,000 per fiscal
year. At June 30, 2001, the Company received a waiver from its senior lender as
it had violated its quarterly profitability covenant.

        Notes payable to trustees for bankrupt airlines results from settlements
with two bankrupt airlines. On March 16, 2001, the bankruptcy court approved a
settlement related to preference payments received in connection with the
Chapter 7 bankruptcy filing of Western Pacific Airlines, Inc. ("WPAI"). The
settlement consists of ten quarterly payment of $175,000, two of which were made
in the current fiscal year with the unpaid balance secured by a letter of
credit. The Company has recorded a charge to bad debt expense equal to the
present value of the payments, $1.6 million. The outstanding balance was $1.3
million at June 30, 2001. In February 2001, the Company received notice of a
complaint filed by the Chapter 7 Trustee for Tower Airlines in regard to a
preference action. In July 2001, the Company settled this matter for $1.0
million. In accordance with the terms of the settlement, the Company paid
$750,000 subsequent to June 30, 2001 and will pay the balance in ten monthly
installments of $25,000 each. At June 30 2001, the unpaid settlement balance of
$750,000 is included in accrued expenses and the unpaid note balance of $250,000
is included in notes payable. The note is secured by a letter of credit.

        Long-term debt payable subsequent to June 30, 2001 is as follows:

<TABLE>
<S>                                      <C>
                  2002                    $ 7,461,000
                  2003                      7,455,000
                  2004                     23,853,000
                  2005                      1,026,000
                  2006                      1,026,000
               Thereafter                  11,200,000
                                          -----------
                                          $52,021,000
                                          ===========
</TABLE>

NOTE 8 - SENIOR SUBORDINATED NOTES/EXTRAORDINARY ITEM:

        On September 10, 1999, the Company issued, in a private placement, $24.0
million Senior Subordinated 12% Notes ("the Note") due 2006 with detachable
warrants to acquire 503,126 shares of the Company's common stock exercisable at
$6.50 per share for seven years. The Note agreement contains covenants that,
among other matters, limit senior indebtedness, the disposition of assets and
unfunded capital expenditures. The covenants also include ratio tests for
interest coverage, leverage, fixed charge coverage and debt service. The Company
received a waiver from the note holder as of June 30, 2001 for covenant
violations pertaining to interest coverage.

        Proceeds of the Note were used to redeem the remaining $19.5 million of
the Company's 7 3/4% convertible subordinated debentures due February 1, 2006 at
104% of the principal amount plus accrued interest and pay expenses of the
transaction as follows:


<TABLE>
<S>                                                                                     <C>
            Principal balance of Debentures redeemed                                     $ 19,509,000
            Redemption premium of 4%                                                          780,000
            Accrued Interest                                                                  164,000
            Placement fees, legal fees and other expenses of transaction
              capitalized as other assets                                                   1,750,000
            Cash received                                                                   1,797,000
                                                                                         ------------
            Proceeds                                                                     $ 24,000,000
            Valuation of warrants credited to additional paid-in-capital                   (1,306,000)
            Warrants amortized as interest expense through June 30, 2001                      336,000
                                                                                         ------------
            Senior Subordinated Note                                                     $ 23,030,000
                                                                                         ============
</TABLE>

        As a result of this transaction the Company recorded an extraordinary
charge of $979,000 in fiscal 2000 (net of a $625,000 income tax benefit). The
extraordinary charge consists of the redemption premium of $780,000 plus the
write off of capitalized fees of $824,000.



                                      F-12
<PAGE>   41
      During the year ended June 30, 1999 the Company repurchased debentures in
the open market. The excess of cost over par value plus bond issuance costs was
$675,000. In addition, during fiscal 1999 the Company terminated its prior
credit facility resulting in the write off of related deferred financing costs
of $117,000. The aggregate charge of $792,000, net of tax benefits of $309,000,
has been classified as an extraordinary item.

NOTE 9 - EMPLOYEE STOCK OPTION PLANS:

      The Company has the following stock option plans, the 1990 Long-Term
Incentive Plan ("1990 Incentive Plan"), the 1990 Directors Stock Option Plan
("1990 Directors Plan"), the 1998 Long-Term Incentive Plan ("1998 Incentive
Plan") and the 1998 Directors Stock Option Plan ("1998 Directors Plan"). The
Company has reserved 837,000 shares related to the Incentive Plans and 587,000
shares related to the Directors Plans. The Company has also reserved 7,000
shares for special option grants made outside the plans. Options granted
pursuant to the plans and special grants are generally made at the fair market
value of such shares on the date of grant and generally vest over twelve months.
The contractual lives of the options are generally ten years.

      The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Had
compensation cost for stock options been calculated using the fair value
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
would have approximated the pro forma amounts indicated in the following table:

<TABLE>
<CAPTION>
                                               2001          2000          1999
                                            ----------    ----------    ----------
<S>                                         <C>           <C>           <C>
Net income - as reported                    $2,412,000    $2,029,000    $5,939,000
Net income - pro forma                       2,209,000     1,877,000     5,840,000
Basic earnings per share - as reported             .37           .31           .89
Basic earnings per share - proforma                .34           .29           .88
Diluted earnings per share - as reported           .36           .30           .68
Diluted earnings per share - pro forma             .33           .27           .67
</TABLE>

      The weighted average fair value of options granted in 2001, 2000 and 1999
is estimated as $2.60, $3.45 and $3.00 respectively, on the date of grant using
the Black-Scholes option pricing model using the following weighted average
assumptions.

<TABLE>
<CAPTION>
                                              2001          2000        1999
                                             -------       -------     -------
<S>                                          <C>           <C>         <C>
       Expected life                         5 years       5 years     5 years
       Expected volatility                        43%           38%         34%
       Risk free interest rate                  4.90%         6.19%       5.78%
       Dividend yield                              0%            0%          0%
</TABLE>

A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
                     WEIGHTED          LONG-TERM          WEIGHTED          DIRECTOR'S        WEIGHTED        SPECIAL
                      AVERAGE          INCENTIVE       AVERAGE OPTION      STOCK OPTION        AVERAGE        OPTION
                   OPTION PRICES         PLANS             PRICES             PLANS         OPTION PRICES     GRANTS
                   -------------       ----------      --------------      ------------     -------------    ---------
<S>                <C>                 <C>             <C>                 <C>              <C>              <C>
Outstanding
June 30, 1998          $4.03             262,897           $4.53              317,625          $ 2.21         203,500
Granted                 7.56             138,361              --                   --              --              --
Exercised               3.78             (17,125)             --                   --           1.542         (52,000)
Cancelled               6.30             (14,000)             --                                   --
                                         -------                              -------                         -------
Outstanding
June 30, 1999           5.25             370,133            4.53              317,625            2.43         151,500
Granted                8.125              65,300            7.75               40,000              --              --
Exercised                 --                  --              --                   --              --              --
Cancelled               7.87             (20,303)             --                                   --
                                         -------                              -------                         -------
Outstanding
June 30, 2000           5.60             415,130            4.89              357,625            2.43         151,500
Granted                6.125              46,400            5.73               90,000
Exercised                                                   5.36              (45,375)           3.20         (58,350)
Repurchased                                                                                     1.542         (86,275)
Cancelled               7.60             (13,000)           7.13              (35,125)
                                         -------                              -------                         -------
Outstanding
June 30, 2001          $5.59             448,530           $4.82              367,125          $ 7.18           6,875
                                         =======                              =======                         =======
</TABLE>


                                      F-13
<PAGE>   42
      A summary of information about stock options issued and outstanding
pursuant to the Incentive Plan, Directors Plan and special option grants at June
30, 2001 is as follows:

<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                 ----------------------------------------    -----------------------
                                                              WEIGHTED                  WEIGHTED
                     SHARES               WEIGHTED            AVERAGE      SHARES       AVERAGE
  EXERCISE       OUTSTANDING AT      AVERAGE CONTRACTUAL      EXERCISE   EXERCISABLE    EXERCISE
 PRICE RANGE         6/30/01            REMAINING LIFE         PRICE      AT 6/30/01     PRICE
--------------   ----------------    --------------------     --------   -----------    --------
<S>              <C>                 <C>                      <C>        <C>            <C>
$1.236 - 2.436       218,397                 1.4               $1.70       218,397       $1.70
 3.669 - 5.750       236,375                 6.7                5.55       156,375        5.50
 6.090 - 7.182       209,958                 6.2                6.49       147,539        6.63
 7.75 - 8.4375       157,800                 8.1                8.13       157,800        8.13
                     -------                                   -----       -------       -----
                     822,530                                   $5.26       680,111       $5.14
                     =======                                   =====       =======       =====
</TABLE>

      In March 2000, the Board of Directors extended the termination date of
options for 38,875 shares held by an officer and a Director. This resulted in
compensation expense of $64,000.

      During fiscal 1996, the Company sold 137,500 shares of its common stock to
two officers for $812,500. The officers each paid $40,000 in cash and issued
promissory notes of $732,500 for the balance of the purchase price. The notes
are payable over ten years and due in fiscal year 2006. As of June 30, 2001,
$533,000 remained outstanding.

NOTE 10 - ACQUISITIONS:

      The Company has acquired various businesses during the years reported. All
such acquisitions have been accounted for under the purchase method of
accounting. Pro forma disclosure has not been provided as the aggregate annual
purchases have not been material. The following describes the various purchases.

      Fiscal 2001

      On September 1, 2000, the Company acquired the assets of an FBO in
Birmingham, Alabama from Raytheon Aircraft Services, Inc. ("RAS") for $6.6
million in cash funded under the Company's acquisition line. The acquisition was
accounted for under the purchase method of accounting. The purchase price was
allocated principally to Property, Equipment and Leaseholds. At June 30, 2000,
Other Assets included a $1.5 million cash deposit paid to RAS towards the
purchase price.

      In July 2000, the Company purchased hangers, buildings and leaseholds at
its Tulsa, Oklahoma FBO and paid $3.8 million cash which was borrowed from its
acquisition line.

      Fiscal 2000

      On April 21, 2000, the Company acquired certain assets of an FBO located
in Fort Wayne, Indiana ("FWAS") for $3,900,000 in cash. The Company utilized
borrowing available under its acquisition line to fund the purchase. The
purchase price was allocated primarily to Property, Equipment and Leaseholds
with an amount also allocated to inventories.

      On October 22, 1999, the Company acquired certain assets of Air Tulsa,
Inc., an FBO located in Tulsa, Oklahoma. Assets acquired included refueling
equipment and tank farms utilized in the FBO business, as well as inventories,
prepaid expenses and a sublease. The agreement also includes a non-compete with
the seller. Total consideration was $2.4 million which the Company initially
paid in cash and which was subsequently funded by borrowings available under its
acquisition line. The agreement included a second closing to occur within
eighteen months to include the purchase of hangars, buildings and the leasehold
for additional cash consideration of $3.8 million. This transaction was
completed in July 2000. The Company utilized borrowing under its acquisition
line to fund this amount.

      On October 5, 1999, the Company acquired certain FBO assets of Charleston
Equities, Inc. for $700,000 in cash. The purchase consolidated the leasehold at
Charleston International Airport and includes the leasehold at John's Island
Executive Airport.


                                      F-14
<PAGE>   43
      Fiscal 1999

      Effective November 30, 1998 the Company acquired substantially all the
assets of Jackson Air Center in Mississippi for $4,500,000 in cash. The Company
borrowed $2.8 million in term debt under its senior credit facility and the
balance was funded from borrowings under its revolver. The purchase price has
been allocated primarily to Property, Equipment and Leaseholds ($4,195,000) with
the balance to inventories and accounts payable.

      On August 1, 1998, the Company acquired the weather observation and
forecasting and air traffic control government contracts and related assets of
Weather Data Services, Inc. for $3.5 million, which consisted of $2.5 million in
cash and $1.0 million of the Company's stock. The purchase price has been
allocated to intangible assets. During fiscal 2000, as part of the agreement,
the Company issued an additional 22,565 shares of the Company's stock valued at
$158,000.

NOTE 11- COMMITMENTS AND CONTINGENCIES:

      PROPOSED DISTRIBUTION OF MERCFUEL

      The Company believes, based in part on an opinion of its tax advisors,
that although the matter is not free from doubt, the contribution by the Company
of certain assets and liabilities to MercFuel in exchange for common stock of
MercFuel, which is to be followed by the proposed Distribution, should be
treated as a reorganization within the meaning of Section 368(a)(1) (D) of the
Internal Revenue Code of 1986 (the "Code"), as amended, and the Distribution
should qualify as a tax-free distribution under Section 355 of the Code. It
should be noted that the application of Section 355 of the Code to the
Distribution is complex and may be subject to differing interpretation. If the
Distribution does not qualify as a tax-free distribution under Section 355 of
the Code, then: (i) the Company would recognize capital gain equal to the
difference between the fair market value of the MercFuel common stock on the
date of the Distribution and the Company's tax basis; and (ii) the Distribution
may be taxable to individual stockholders, depending on their individual tax
basis.

      For purposes of governing certain of the ongoing relationships subsequent
to the proposed Distribution, the Company and MercFuel intend to enter into a
Master Distribution Agreement, along with key related agreements, which will be
effective as of the closing date of the initial public offering of the MercFuel
common stock (except for a transitional services agreement, which will be
effective at the time of the Distribution).

      LEASES

      The Company is obligated under noncancellable operating leases. Certain
leases include renewal clauses and require payment of real estate taxes,
insurance and other operating costs. Total rental expense on all such leases for
the fiscal years 2001, 2000 and 1999 was $10,133,000, $8,640,000 and $8,037,000,
respectively, which is net of sublease income of approximately $332,000
annually. The minimum annual rentals on all noncancellable operating leases
having a term of more than one year at June 30, 2001 are as follows:

<TABLE>
<S>    <C>                                               <C>
       2002                                              $ 10,096,000
       2003                                                 9,995,000
       2004                                                 9,926,000
       2005                                                 9,485,000
       2006                                                 8,933,000
         Thereafter                                        59,386,000
                                                         ------------
           Total minimum payment required                $107,821,000
                                                         ============
</TABLE>

      PURCHASE COMMITMENTS

      On June 1, 2001, the Company's cargo unit entered into a one-year renewal
of its contract to purchase all of South African Airlines cargo capacity on its
passenger flights from the United States and Canada to South Africa. MAC's
one-year commitment for these routes is approximately $6.2 million.

      On August 10, 2001, the MercFuel entered into an agreement with a provider
of hardware and software applications ("System Provider"), for the development
and exclusive license of an aviation fuel management system. The agreement
requires MercFuel to pay the System Provider $25,000 by October 1, 2001, and
enter into a non-interest bearing note in the amount of $750,000, payable in 24
equal monthly payments beginning in August 2002 (the present value of which is
$640,000, assuming an imputed interest rate of


                                      F-15
<PAGE>   44
8%). The note is convertible, at MercFuel's option, at any time after the
Distribution into 125,000 shares of MercFuel common stock. MercFuel is also
required to attempt to register the shares. In addition, if MercFuel does not
complete an offering of its common shares by December 31, 2001, the agreement
shall be terminated.

      LITIGATION

      On March 16, 2001, the bankruptcy court approved a settlement related to
preference payments received in connection with the Chapter 7 bankruptcy filing
of Western Pacific Airlines, Inc ("WPAI"). The settlement consists of ten
quarterly payments of $175,000, two of which were made in the current fiscal
year with the unpaid balance secured by a letter of credit. The Company has
recorded a charge to bad debt expense equal to the present value of the
payments, $1.6 million. The outstanding balance of $1.3 million at June 30, 2001
was included in current and long-term debt.

      In November 1999, Mr. Perez, formerly the President of RPA, filed a
lawsuit alleging violations of his employment contract between the Company, RPA
and Mr. Perez asserting, among other things, constructive termination. During
the quarter ended March 31, 2001, this suit was dismissed.

     In February 2001, the Company received notice of a complaint filed by the
Chapter 7 Trustee for Tower Air in regard to a preference action. In July 2001,
the Company settled this matter for $1.0 million. In accordance with the terms
of the settlement, the Company paid $750,000 subsequent to June 30, 2001 and
will pay the balance in ten monthly installments of $25,000 each. At June 30,
2001, the unpaid settlement balance of $750,000 is included in accrued expenses
and the unpaid note balance of $250,000, which is secured by a letter of credit,
is included in the current portion of long-term debt.

     In April 2000, Mercury filed a collection action against AER Global
Logistics ("AER") in the state of New York. AER filed a counterclaim for $1.0
million alleging among other things, tortuous interference with contract.
Mercury believes that this claim is without merit, and accordingly, does not
believe this matter will have a significant impact on its financial position or
operating results.

      On April 3, 2001 Mercury received notice of an action filed by Skylink
Express, Inc. in the Superior Court of Justice Ontario, Canada against Excel
Cargo, Inc. and others for damages to aircraft occurring in November 30, 1999
and January 10, 2000 at Mirabel International Airport Quebec for a total amount
of $2.5 million Canadian ($1.65 million U.S.) plus interest and fees. Mercury
does not believe the outcome of this claim will have a significant impact on its
financial position or operating results.

      The Company is also a defendant in certain litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of such litigation will not have a significant effect on the financial
statements.

      RELATED PARTY TRANSACTION

      The Company and its Chairman each own a 50% interest in an LLC that owns
and operates a corporate airplane. The Company contributed capital to the LLC of
$137,000 each in fiscal 2001 and fiscal 2000. Amounts paid to the LLC by the
Company for the use of the airplane were insignificant in both years. The
Company is a guarantor on a note payable to a financial institution which funded
the purchase of the aircraft. The principal balance of the note as of June 30,
2001 was $1.0 million.

      The Company paid $317,000, during fiscal 2001 to McBreen & Kopko related
to legal services. Frederick H. Kopko, Jr., a partner of McBreen & Kopko, is a
member of the Company's board of directors. In addition, Mr. Kopko is a partner
in CFK partners, the Company's largest shareholder.

NOTE 12 - MAJOR CUSTOMERS AND FOREIGN CUSTOMERS:

      National Airlines, Inc. represented approximately 14% and 11% of
consolidated revenue for fiscal 2001 and 2000, respectively and AirTran Airways
represented approximately 14% of consolidated revenue for fiscal 2001.
Government contract services consists of revenues from agencies of the United
States government. Revenue from this segment represented 6.0%, 7.6% and 11.7% of
the Company's consolidated revenues for fiscal 2001, 2000 and 1999,
respectively. No other customers accounted for over 10% of Mercury's
consolidated revenues.


                                      F-16
<PAGE>   45
      The Company does business with a number of foreign airlines, principally
in the sale of aviation fuels. For the most part, such sales are made within the
United States and utilize the same assets and generally the same personnel as
are utilized in the Company's domestic business. Revenues related to these
foreign airlines amounted to approximately 18%, 25% and 29% of consolidated
revenues for the years ended June 30, 2001, 2000 and 1999, respectively.

NOTE 13 - EARNINGS PER SHARE:

      Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.

      Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares and dilutive common stock equivalents.
Common stock equivalents include stock options and shares resulting from the
assumed conversion of subordinated debentures, when dilutive.

<TABLE>
<CAPTION>
                                             FISCAL YEAR                    FISCAL YEAR                     FISCAL YEAR
                                            JUNE 30, 2001                  JUNE 30, 2000                   JUNE 30, 1999
                                     ---------------------------     ---------------------------     -------------------------
                                       DILUTED          BASIC          DILUTED          BASIC          DILUTED        BASIC
                                     -----------     -----------     -----------     -----------     -----------    ----------
<S>                                  <C>             <C>             <C>             <C>             <C>            <C>
Weighted average number of
  common shares outstanding
  during the period                    6,531,000       6,531,000       6,565,000       6,565,000       6,651,000     6,651,000
Common stock equivalents
   resulting from the assumed
   exercise of stock options             176,000                         344,000                         356,000
Common shares resulting from
   the assumed conversion of
   debentures                             40,000                         590,000                       3,391,000
                                     -----------     -----------     -----------     -----------     -----------    ----------
Weighted average number of
   common and common equivalent
   shares outstanding during
   the period                          6,747,000       6,531,000       7,499,000       6,565,000      10,398,000     6,651,000
                                     -----------     -----------     -----------     -----------     -----------    ----------
Net income from continuing
   operations before
   extraordinary item                $ 3,747,000     $ 3,747,000     $ 3,941,000     $ 3,941,000     $ 6,029,000    $6,029,000
Add: Interest expense, net of
   tax, on convertible debentures         20,000                         185,000                       1,152,000
                                     -----------     -----------     -----------     -----------     -----------    ----------
Adjusted income from continuing
  operations                           3,767,000       3,747,000       4,126,000       3,941,000       7,181,000     6,029,000
Discontinued Operations:
  (Loss) Income from discontinued
    operations                          (858,000)       (858,000)       (933,000)       (933,000)        393,000       393,000
  Loss on sale of discontinued
    operations                          (477,000)       (477,000)
Extraordinary item                                                      (979,000)       (979,000)       (483,000)     (483,000)
                                     -----------     -----------     -----------     -----------     -----------    ----------
Adjusted net income                  $ 2,432,000     $ 2,412,000       2,214,000     $ 2,029,000     $ 7,091,000    $5,939,000
Common stock and common share
  Equivalents                          6,747,000       6,531,000       7,499,000       6,565,000      10,398,000     6,651,000
Earnings (Loss) per share:
From continuing operations           $      0.56     $      0.57     $      0.55     $      0.60     $      0.69    $     0.90
(Loss) Income from discontinued
  operations                               (0.13)          (0.13)          (0.12)          (0.14)           0.04          0.06
Loss on sale of discontinued
  operations                               (0.07)          (0.07)
                                     -----------     -----------     -----------     -----------     -----------    ----------
Income (Loss) before
  extraordinary item                        0.36            0.37            0.43            0.46            0.73          0.96
Extraordinary Item                                                         (0.13)          (0.15)          (0.05)        (0.07)
                                     -----------     -----------     -----------     -----------     -----------    ----------
Net Income                           $      0.36     $      0.37     $      0.30     $      0.31     $      0.68    $     0.89
                                     -----------     -----------     -----------     -----------     -----------    ----------
</TABLE>


                                      F-17
<PAGE>   46
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED):

<TABLE>
<CAPTION>
                                                                                           2001
                                                       ----------------------------------------------------------------------------
                                                       SEPTEMBER 30         DECEMBER 31            MARCH 31               JUNE 30
                                                       ------------         ------------         ------------          ------------
<S>                                                    <C>                  <C>                  <C>                   <C>
Sales and Revenues                                     $111,395,000         $134,094,000         $113,901,000          $119,056,000
Gross Margin                                              9,026,000           10,450,000            7,671,000             7,795,000

Income from continuing operations                         1,107,000            1,705,000              368,000               567,000
Net Income (Loss)                                         1,156,000            1,782,000              299,000              (825,000)
Net Income Per Share:
 Basic:

     From continuing operations                        $       0.17         $       0.26         $       0.06          $       0.09
     (Loss) Income from discontinued operations                0.01                 0.01                (0.01)                (0.14)
     Loss on sale of discontinued operations                     --                   --                   --                 (0.07)
                                                       ------------         ------------         ------------          ------------
     Income (Loss) before extraordinary item                   0.18                 0.27                 0.05                 (0.13)
     Extraordinary item                                          --                   --                   --                    --
                                                       ------------         ------------         ------------          ------------
     Net income (Loss)                                 $       0.18         $       0.27         $       0.05          $      (0.13)

 Diluted:

     From continuing operations                        $       0.16         $       0.25         $       0.06          $       0.08
     (Loss) Income from discontinued operations                0.01                 0.02                (0.01)                (0.13)
     Loss on sale of discontinued operations                     --                   --                   --                 (0.07)
                                                       ------------         ------------         ------------          ------------
     Income (Loss) before extraordinary item                   0.17                 0.27                 0.05                 (0.12)
     Extraordinary item                                          --                   --                   --                    --
                                                       ------------         ------------         ------------          ------------
     Net income (Loss)                                 $       0.17         $       0.27         $       0.05          $      (0.12)
</TABLE>

<TABLE>
<CAPTION>
                                                                                2000
                                                 ---------------------------------------------------------------------
                                                 SEPTEMBER 30        DECEMBER 31         MARCH 31           JUNE 30
                                                 ------------       ------------       ------------       ------------
<S>                                              <C>                <C>                <C>                <C>
Sales and Revenues                               $ 73,517,000       $ 82,715,000       $ 88,923,000       $ 89,178,000
Gross Margin                                        9,374,000          9,368,000          7,704,000          7,968,000

Income from Continuing Operations                   2,227,000          1,911,000           (981,000)           784,000
Net Income (Loss)                                   1,089,000          1,493,000         (1,282,000)           729,000
Net Income per Share:
 Basic:
    From continuing operations                   $       0.33       $       0.29       $      (0.15)      $       0.12
    Loss from discontinued operations                   (0.02)             (0.06)             (0.05)             (0.01)
    Loss on sale on discontinued operations                --                 --                 --                 --
                                                 ------------       ------------       ------------       ------------
    Income (Loss) before extraordinary item              0.31               0.22              (0.20)              0.11
    Extraordinary item                                  (0.15)                --                 --                 --
                                                 ------------       ------------       ------------       ------------
    Net Income (Loss)                            $       0.16       $       0.22       $      (0.20)      $       0.11
 Diluted:
    From continuing operations                   $       0.26       $       0.26       $      (0.15)      $       0.12
    Loss from discontinued operations                   (0.02)             (0.05)             (0.05)             (0.01)
    Loss on sale of discontinued operations                --                 --                 --                 --
                                                 ------------       ------------       ------------       ------------
    Income (Loss) before extraordinary item              0.25               0.21              (0.20)              0.11
    Extraordinary item                                  (0.11)                --                 --                 --
                                                 ------------       ------------       ------------       ------------
    Net income (Loss)                            $       0.14       $       0.21       $      (0.20)      $       0.11
</TABLE>


                                      F-18
<PAGE>   47
NOTE 15 - SEGMENT REPORTING:

      The Company operates and reports it's activities through four principal
units: 1) Fuel Sales, 2) Fixed Based Operations, 3) Cargo Operations and 4)
Government contract services. Additionally, the Company had a fifth operating
unit, RPA, which was sold on July 3, 2001 and shown as a discontinued operation.
As a result, RPA's historical operating results have been reclassified as a
discontinued operations. The segment data included below has been restated to
exclude amounts related to the RPA business unit.

<TABLE>
<CAPTION>
                                                                         GOVERNMENT   CORPORATE
                                    FUEL       FIXED BASE     CARGO       CONTRACT       OR
(DOLLARS IN THOUSANDS)              SALES      OPERATIONS   OPERATIONS    SERVICES    UNALLOCATED     TOTAL
-----------------------------      --------    ----------   ----------   ----------   -----------    --------
<S>                                <C>         <C>          <C>          <C>          <C>            <C>
2001
Revenues                           $318,857      $99,482      $31,337      $28,770                   $478,446
Gross Margin                          7,493       15,012        6,766        5,671                     34,942
Depreciation and Amortization            62        5,389        3,040          841      $   676        10,008
Capital expenditures                     14        4,462        1,884           77           34         6,471
Segment Assets                       35,608       69,779       17,642       11,907       11,860       146,796

2000
Revenues                           $202,906      $73,666      $32,474      $25,287                   $334,333
Gross Margin                          7,884       11,522        9,977        5,031                     34,414
Depreciation and Amortization            58        4,292        3,262          827      $   723         9,162
Capital expenditures                     92        8,796          756          965           17        10,626
Segment Assets                       28,421       31,248       31,616       19,391       17,707       128,383

1999
Revenues                           $111,296      $53,799      $27,741      $25,436                   $218,272
Gross Margin                          8,892       11,280        5,751        5,297                     31,220
Depreciation and Amortization            57        3,282        3,649          827      $   482         8,297
Capital expenditures                    687       12,940          551          497          399        15,074
Segment Assets                       30,408       21,485       24,293       16,780       27,025       119,991
</TABLE>

      Gross margin is used as the measure of profit and loss for segment
reporting purposes as it viewed by key decision makers as the principal
operating indicator in measuring segment profitability. The key decision makers
also view bad debt expense as an important measure of profit and loss. The
predominant component of bad debt expense relates to Fuel Sales. Bad debt
expense for Fuel Sales was approximately $3,025,000, $5,000,000 and $1,377,000;
total bad debt expense was $3,425,000, $5,408,000 and $1,721,000 in fiscal 2001,
fiscal 2000 and fiscal 1999, respectively.


                                      F-19
<PAGE>   48

                    MERCURY AIR GROUP, INC. AND SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                         THREE YEARS ENDED JUNE 30, 2001

<TABLE>
<CAPTION>
                                             BALANCE AT          CHARGED TO COSTS        DEDUCTIONS         BALANCE AT END
CLASSIFICATION                           BEGINNING OF PERIOD       AND EXPENSES             (a)                OF PERIOD
--------------                           -------------------     ----------------        -----------        ---------------
<S>                                      <C>                     <C>                     <C>                <C>
   2001
Allowance for doubtful accounts               $2,291,000             $3,425,000          $(4,063,000)          $1,653,000
                                              ==========             ==========          ===========           ==========
   2000
Allowance for doubtful accounts               $1,665,000             $5,408,000          $(4,782,000)          $2,291,000
                                              ==========             ==========          ===========           ==========
   1999
Allowance for doubtful accounts               $1,398,000             $1,721,000          $(1,454,000)          $1,665,000
                                              ==========             ==========          ===========           ==========
</TABLE>

(a)    Accounts receivable write-off



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