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                                                                    EXHIBIT 10.3



                           EMPLOYEE MATTERS AGREEMENT

                                     BETWEEN

                             MERCURY AIR GROUP, INC.

                                       AND

                                 MERCFUEL, INC.


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                                TABLE OF CONTENTS

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<S>     <C>                                                                               <C>
ARTICLE I - DEFINITIONS......................................................................1

        Section 1.1   401(k).................................................................1

        Section 1.2   Affiliate..............................................................1

        Section 1.3   Agreement..............................................................1

        Section 1.4   Ancillary Agreements...................................................1

        Section 1.5   Assets.................................................................2

        Section 1.6   COBRA..................................................................2

        Section 1.7   Code...................................................................2

        Section 1.8   Disability Plan........................................................2

        Section 1.9   Distribution...........................................................2

        Section 1.10  Distribution Agreement.................................................2

        Section 1.11  Distribution Date......................................................2

        Section 1.12  DOL....................................................................2

        Section 1.13  ERISA..................................................................2

        Section 1.14  FMLA...................................................................2

        Section 1.15  General Assignment and Assumption Agreement............................2

        Section 1.16  Group Insurance Policies...............................................2

        Section 1.17  Group Life Plan........................................................2

        Section 1.18  HCFA...................................................................3

        Section 1.19  Health and Welfare Plans...............................................3

        Section 1.20  Health Plans...........................................................3
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<S>     <C>                                                                                <C>
        Section 1.21  HMO....................................................................3

        Section 1.22  HMO Agreements.........................................................3

        Section 1.23  IPO....................................................................3

        Section 1.24  IPO Closing Date.......................................................3

        Section 1.25  IPO Registration Statement.............................................3

        Section 1.26  IRS....................................................................3

        Section 1.27  Liabilities............................................................3

        Section 1.28  Master Transitional Services Agreement.................................4

        Section 1.29  Material Feature.......................................................4

        Section 1.30  MAG....................................................................4

        Section 1.31  MAG Employee...........................................................4

        Section 1.32  MAG Group..............................................................4

        Section 1.33  MAG Stock Value........................................................4

        Section 1.34  MAG Terminated Employee................................................4

        Section 1.35  MercFuel...............................................................4

        Section 1.36  MercFuel Business......................................................4

        Section 1.37  MercFuel Claims........................................................4

        Section 1.38  MercFuel Employee......................................................4

        Section 1.39  MercFuel Group.........................................................5

        Section 1.40  MercFuel Stock Value...................................................5

        Section 1.41  MercFuel Terminated Employee...........................................5

        Section 1.42  MercFuel Transferred Employee..........................................5

        Section 1.43  Option.................................................................6
</TABLE>



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<TABLE>
<S>     <C>                                                                                <C>
        Section 1.44  Outsource..............................................................6

        Section 1.45  Participating Company..................................................6

        Section 1.46  Person.................................................................6

        Section 1.47  Plan...................................................................6

        Section 1.48  Post-Distribution Period...............................................6

        Section 1.49  QDRO...................................................................6

        Section 1.50  QMCSO..................................................................6

        Section 1.51  Ratio..................................................................6

        Section 1.52  Record Date............................................................7

        Section 1.53  Restricted Stock.......................................................7

        Section 1.54  Revenue................................................................7

        Section 1.55  SEC....................................................................7

        Section 1.56  Separation.............................................................7

        Section 1.57  Separation Date........................................................7

        Section 1.58  Subsidiary.............................................................7

        Section 1.59  Tax Sharing Agreement..................................................7

        Section 1.60  Workers' Compensation Plan.............................................7

ARTICLE II - GENERAL PRINCIPLES..............................................................8

        Section 2.1   Assumption of MercFuel Liabilities.....................................8

        Section 2.2   Establishment of MercFuel Plans........................................8

        Section 2.3   MercFuel Under No Obligations to Maintain Plans........................8

        Section 2.4   MercFuel's Participation in MAG Plans..................................9

        Section 2.5   Terms of Participation by MercFuel Transferred Employees in
</TABLE>



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<S>     <C>                                                                                <C>
                      MercFuel Plans.........................................................9

        Section 2.6   Non-U.S. Employee Matters.............................................10

ARTICLE III - DEFINED CONTRIBUTION PLAN.....................................................10

        Section 3.1   401(k) Plan...........................................................10

ARTICLE IV - HEALTH AND WELFARE PLANS.......................................................11

        Section 4.1   Health Plans as of the Distribution Date..............................11

        Section 4.2   Health Plans from the Separation Date through the Distribution Date...13

        Section 4.3   Group Life Plan.......................................................13

        Section 4.4   Long-Term Disability Plan.............................................14

        Section 4.5   COBRA.................................................................14

        Section 4.6   Leave of Absence Plans and FMLA.......................................14

        Section 4.7   Workers' Compensation Plan............................................15

        Section 4.8   Administrative Services...............................................16

ARTICLE V - EQUITY AND OTHER COMPENSATION...................................................16

        Section 5.1   Bonus Plan............................................................16

        Section 5.2   MAG Options...........................................................16

        Section 5.3   Administrative Services...............................................17

ARTICLE VI - ADMINISTRATIVE PROVISIONS......................................................17

        Section 6.1   Master Transitional Services Agreement................................17

        Section 6.2   Payment of Liabilities, Plan Expenses and Related Matters.............17

        Section 6.3   Transitional Staffing Services........................................18

        Section 6.4   Sharing of Participant Information....................................18

        Section 6.5   Reporting and Disclosure Communications to Participants...............18
</TABLE>



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<S>     <C>                                                                                <C>
        Section 6.6   Audits Regarding Vendor Contracts.....................................19

        Section 6.7   Employee Identification Numbers.......................................19

        Section 6.8   Beneficiary Designation...............................................19

        Section 6.9   Requests for IRS and DOL Opinions.....................................19

        Section 6.10  Fiduciary Matters.....................................................19

        Section 6.11  Consent of Third Parties..............................................19

ARTICLE VI - EMPLOYMENT-RELATED MATTERS.....................................................20

        Section 7.1   Terms of MercFuel Employment..........................................20

        Section 7.2   HR Data Support Systems...............................................20

        Section 7.3   Non-Solicitation of Employees.........................................20

        Section 7.4   Employment of Employees with U.S. Work Visas..........................20

        Section 7.5   Confidentiality and Proprietary Information...........................20

        Section 7.6   Personnel Records.....................................................21

        Section 7.7   Medical Records.......................................................21

        Section 7.8   Unemployment Insurance Program........................................21

        Section 7.9   Non-Termination of Employment; No Third-Party Beneficiaries...........21

        Section 7.10  Employment Litigation.................................................22

ARTICLE VIII - GENERAL PROVISIONS...........................................................22

        Section 8.1   Effect if IPO and/or Distribution Does Not Occur......................22

        Section 8.2   Relationship of Parties...............................................22

        Section 8.3   Affiliates............................................................22

        Section 8.4   Incorporation of Distribution Agreement Provisions....................22

        Section 8.5   Governing Law.........................................................23
</TABLE>



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<S>     <C>                                                                                <C>
        Section 8.6   Assignment............................................................23

        Section 8.7   Severability..........................................................23

        Section 8.8   Interpretation........................................................23

        Section 8.9   Amendment.............................................................23

        Section 8.10  Termination...........................................................23

        Section 8.11  Conflict..............................................................24

        Section 8.12  Counterparts..........................................................24
</TABLE>




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                           EMPLOYEE MATTERS AGREEMENT

        This EMPLOYEE MATTERS AGREEMENT is entered into as of ___________, 2001,
and effective as of _________, 2001 (the "Effective Date"), between Mercury Air
Group, Inc., a Delaware corporation ("MAG"), and MercFuel, Inc., a Delaware
corporation ("MercFuel"). Capitalized terms used herein and not otherwise
defined, shall have the respective meanings assigned to them in Article I
hereof.

        WHEREAS, the Board of Directors of MAG has determined that it is in the
best interests of MAG and its stockholders to separate MAG's existing businesses
into two (2) independent businesses;

        WHEREAS, in furtherance of the foregoing, MAG and MercFuel have agreed
to enter into this Agreement to allocate between them Assets, Liabilities and
responsibilities with respect to certain employee compensation, benefit plans,
programs and arrangements, and certain employment matters; and

        NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

        Wherever used in this Agreement, the following terms shall have the
meanings indicated below, unless a different meaning is plainly required by the
context. The singular shall include the plural, unless the context indicates
otherwise. Headings of sections are used for convenience of reference only, and
in case of conflict, the text of this Agreement, rather than such headings,
shall control.

        Section 1.1 401(k) Plan. "401(k) Plan", when immediately preceded by
"MAG," means the MAG 401(k) Plan, a defined contribution plan. When immediately
preceded by "MercFuel," "401(k) Plan" means the defined contribution plan to be
established by MercFuel pursuant to Section 2.2 and Article III.

        Section 1.2 Affiliate. "Affiliate" means, with respect to any specified
Person, means any entity that Controls, is Controlled by, or is under common
Control with such Person. For this purpose, "Control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such entity, whether through ownership of voting
securities or other interests, by control, or otherwise.

        Section 1.3 Agreement. "Agreement" means this Employee Matters
Agreement, including all the Schedules hereto, and all amendments made hereto
from time to time.

        Section 1.4 Ancillary Agreements. "Ancillary Agreements" means all of
the underlying agreements, documents and instruments referred to, contemplated
by, or made a part of the Distribution Agreement.


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        Section 1.5 Assets. "Assets" is defined in Section 4.4 of the General
Assignment and Assumption Agreement.

        Section 1.6 COBRA. "COBRA" means the continuation coverage requirements
for "group health plans" under Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended from time to time, and as codified in
Code Section 4980B and ERISA Sections 601 through 608.

        Section 1.7 Code. "Code" means the Internal Revenue Code of 1986, as
amended from time to time.

        Section 1.8 Disability Plan. "Disability Plan," when immediately
preceded by "MAG," means the MAG Disability Plan which consists of the MAG
Short-Term Disability Plan and the MAG Long-Term Disability Plan. When
immediately preceded by "MercFuel," "Disability Plan" means the MercFuel
Short-Term Disability Plan and the MercFuel Long-Term Disability Plan, to be
established by MercFuel pursuant to Sections 2.2 and 4.5.

        Section 1.9 Distribution. "Distribution" means MAG's pro rata
distribution to the holders of its common stock, $.01 par value, approximately 6
months following the IPO, of all the shares of MercFuel common stock owned by
MAG.

        Section 1.10 Distribution Agreement. "Distribution Agreement" means the
Master Distribution Agreement, dated as of _______, 2001, and effective as of
_____________, of which this is Exhibit E thereto.

        Section 1.11 Distribution Date. "Distribution Date" means the date that
the Distribution is effective.

        Section 1.12 DOL. "DOL" means the United States Department of Labor.

        Section 1.13 ERISA. "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended from time to time.

        Section 1.14 FMLA. "FMLA" means the Family and Medical Leave Act of
1993, as amended from time to time.

        Section 1.15 General Assignment and Assumption Agreement. "General
Assignment and Assumption Agreement" means the Ancillary Agreement attached as
Exhibit C to the Distribution Agreement.

        Section 1.16 Group Insurance Policies. "Group Insurance Policies" is
defined in Subsection 4.1(c)(i) and Schedule 4.1(c)(i).

        Section 1.17 Group Life Plan. "Group Life Plan," when immediately
preceded by "MAG," means the MAG Group Life Plan. When immediately preceded by
"MercFuel", "Group Life Plan" means the group life plan to be established by
MercFuel pursuant to Sections 2.2 and 4.3.


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        Section 1.18 HCFA. "HCFA" means the United States Health Care Financing
Administration.

        Section 1.19 Health and Welfare Plans. "Health and Welfare Plans", when
immediately preceded by "MAG," means the MAG Health Plans and the health and
welfare plans listed on Schedule 4.2(a) established and maintained by MAG for
the benefit of eligible employees of the MAG Group, and such other welfare plans
or programs as may apply to such employees as of the Distribution Date. When
immediately preceded by "MercFuel," "Health and Welfare Plans" means the
MercFuel Health Plans and the health and welfare plans to be established by
MercFuel pursuant to Section 2.2, Article IV, and Schedule 4.1(a).

        Section 1.20 Health Plans. "Health Plans" when immediately preceded by
"MAG," means the medical, HMO, vision, and dental plans and any similar or
successor Plans established and maintained by MAG. When immediately preceded by
"MercFuel," "Health Plans" means the medical, HMO, vision and dental plans to be
established by MercFuel pursuant to Section 2.2 and Article IV.

        Section 1.21 HMO. "HMO" means a health maintenance organization that
provides benefits under the MAG Health Plans or the MercFuel Health Plans.

        Section 1.22 HMO Agreements. "HMO Agreements" is defined in Subsection
4.1(c)(ii) and Schedule 4.1(c)(ii).

        Section 1.23 IPO. "IPO" means the initial public offering of MercFuel
common stock pursuant to a registration statement on Form S-1 or similar
registration of MercFuel stock under Section 12 of the 1933 Act pursuant to the
Securities Act of 1933, as amended.

        Section 1.24 IPO Closing Date. "IPO Closing Date" means the closing of
the IPO, which is currently scheduled to occur prior to ___________.

        Section 1.25 IPO Registration Statement. "IPO Registration Statement"
means the registration statement on Form S-1 pursuant to the Securities Act of
1933 as amended, previously filed with the SEC, which, when effective, will
register the shares of common stock of MercFuel to be issued in the IPO,
together with all amendments thereto.

        Section 1.26 IRS. "IRS" means the United States Internal Revenue
Service.

        Section 1.27 Liabilities. "Liabilities" means all debts, liabilities,
guarantees, assurances, commitments, and obligations, whether fixed, contingent
or absolute, asserted or unasserted, matured or unmatured, liquidated or
unliquidated, accrued or not accrued, known or unknown, due or to become due,
whenever or however arising (including, without limitation, whether arising out
of any Contract or tort based on negligence or strict liability) and whether or
not the same would be required by generally accepted accounting principles to be
reflected in financial statements or disclosed in the notes thereto. For this
purpose, "Contract" means any contract, agreement, lease, license, sales order,
purchase order, instrument or other commitment that is binding on any Person or
any part of its property under applicable law.


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        Section 1.28 Master Transitional Services Agreement. "Master
Transitional Services Agreement" means the Ancillary Agreement which is Exhibit
G to the Separation Agreement.

        Section 1.29 Material Feature. "Material Feature" means any feature of a
Plan that could reasonably be expected to be of material importance, in the
aggregate, to the sponsoring employer or the participants (or their dependents
or beneficiaries) of that Plan, which could include, depending on the type and
purpose of the particular Plan, the class or classes of employees eligible to
participate in such Plan, the nature, type, form, source, and level of benefits
provided under such Plan, the amount or level of contributions, if any, required
to be made by participants (or their dependents or beneficiaries) to such Plan,
and the costs and expenses incurred by the sponsoring employer or Participating
Companies for implementing and/or maintaining such Plan.

        Section 1.30 MAG. "MAG" means Mercury Air Group, Inc., a Delaware
corporation. In all such instances in which MAG is referenced in this Agreement,
it shall also be deemed to include a reference to each member of the MAG Group,
unless it specifically provides otherwise; MAG shall be solely responsible to
MercFuel for ensuring that each member of the MAG Group complies with the
applicable terms of this Agreement.

        Section 1.31 MAG Employee. "MAG Employee" means an individual who, on
the Distribution Date, is: (a) either actively employed by, or on leave of
absence from, the MAG Group; (b) a MAG Terminated Employee; or (c) an employee
or group of employees designated as MAG Employees by MAG and MercFuel, by mutual
agreement.

        Section 1.32 MAG Group. "MAG Group" means MAG and each Subsidiary and
Affiliate of MAG (or any predecessor organization thereof).

        Section 1.33 MAG Stock Value. "MAG Stock Value" means the closing
per-share price of MAG common stock as listed on the American Stock Exchange on
the last trading day before the Distribution Date.

        Section 1.34 MAG Terminated Employee. "MAG Terminated Employee" means
any individual who is a former employee of the MAG Group and who, on the
Distribution Date, is not a MercFuel Transferred Employee.

        Section 1.35 MercFuel. "MercFuel" means MercFuel, Inc., a Delaware
corporation. In all such instances in which MercFuel is referred to in this
Agreement, it shall also be deemed to include a reference to each member of the
MercFuel Group, unless it specifically provides otherwise; MercFuel shall be
solely responsible to MAG for ensuring that each member of the MercFuel Group
complies with the applicable terms of this Agreement.

        Section 1.36 MercFuel Business. "MercFuel Business" means the business
and operations of MercFuel.

        Section 1.37 MercFuel Claims. "MercFuel Claims" is defined in Subsection
4.8(a).

        Section 1.38 MercFuel Employee. "MercFuel Employee" means any individual
who is: (a) either actively employed by, or on leave of absence from, the
MercFuel Group on the


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Separation Date; (b) either actively employed by, or on leave of absence from,
the MAG Group as either part of a work group or organization, or common support
function that, at any time after the Separation Date and before the Distribution
Date, moves to the employ of the MercFuel Group from the employ of the MAG
Group; (c) a MercFuel Terminated Employee; (d) employed by the MercFuel Group;
(e) any other employee or group of employees designated as MercFuel Employees
(as of the specified date) by MAG and MercFuel by mutual agreement; or (f) an
alternate payee under a QDRO, alternate recipient under a QMCSO, beneficiary,
covered dependent, or qualified beneficiary (as such term is defined under
COBRA), in each case, of an employee or former employee, described in
Subsections 1.43(a) through (e) with respect to that employee's or former
employee's benefit under the applicable Plan(s) (unless specified otherwise in
this Agreement, such an alternate payee, alternate recipient, beneficiary,
covered dependent, or qualified beneficiary shall not otherwise be considered a
MercFuel Employee with respect to any benefits he or she accrues or accrued
under any applicable Plan(s), unless he or she is a MercFuel Employee by virtue
of Subsections 1.37(a) through (e)).

        Section 1.39 MercFuel Group. "MercFuel Group" means MercFuel and each
Subsidiary and Affiliate of MercFuel immediately after the Separation Date and
each Person that becomes a Subsidiary or Affiliate of MercFuel after the
Separation Date.

        Section 1.40 MercFuel Stock Value. "MercFuel Stock Value" means the
opening per-share price of MercFuel common stock as listed on the American Stock
Exchange, the Nasdaq National Market, the Nasdaq Small Cap Market, or in the
over-the-counter market, as applicable, on the first trading day after the
Distribution Date.

        Section 1.41 MercFuel Terminated Employee. "MercFuel Terminated
Employee" means any individual who is: (a) a former employee of the MAG Group
who was terminated from the MercFuel Business on or before the Separation Date;
or (b) a former employee of the MercFuel Group. Notwithstanding the foregoing,
"MercFuel Terminated Employee" shall not, unless otherwise expressly provided to
the contrary in this Agreement, include: (a) an individual who is a MAG Employee
at the Distribution Date; or (b) an individual who is otherwise a MercFuel
Terminated Employee, but who is subsequently employed by the MAG Group prior to
the Distribution Date.

        Section 1.42 MercFuel Transferred Employee. "MercFuel Transferred
Employee" means any individual who, as of the Distribution Date, is: (a) either
actively employed by, or on a leave of absence from, the MercFuel Group; (b) a
MercFuel Terminated Employee; (c) an employee or group of employees designated
by MAG and MercFuel, by mutual agreement, as MercFuel Transferred Employees; or
(d) an alternate payee under a QDRO, alternate recipient under a QMCSO,
beneficiary, covered dependent, or qualified beneficiary (as such term is
defined under COBRA), in each case, of an employee or former employee, described
in Subsections 1.37(a) through (c) with respect to that employee's or former
employee's benefit under the applicable Plan(s) (unless specified otherwise in
this Agreement, such an alternate payee, alternate recipient, beneficiary,
covered dependent, or qualified beneficiary shall not otherwise be considered a
MercFuel Transferred Employee with respect to any benefits he or she accrues or
accrued under any applicable Plan(s), unless he or she is a MercFuel Transferred
Employee by virtue of Subsections 1.37(a) through (d)). An employee may be a
MercFuel Transferred Employee pursuant to this Section regardless of whether
such employee is, as of the


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<PAGE>   13

Distribution Date, alive, actively employed, on a temporary leave of absence
from active employment, on layoff, terminated from employment, retired or on any
other type of employment or post-employment status relative to a MAG Plan, and
regardless of whether, as of the Distribution Date, such employee is then
receiving any coverage under or benefits from a MAG Plan.

        Section 1.43 Option. "Option," when immediately preceded by "MAG", means
an option to purchase MAG common stock pursuant to a Stock Plan. When
immediately preceded by "MercFuel," "Option" means an option to purchase
MercFuel common stock pursuant to a Stock Plan.

        Section 1.44 Outsource. "Outsource" is defined in Section 4.8(c).

        Section 1.45 Participating Company. "Participating Company" means: (a)
MAG; (b) any Person (other than an individual) that MAG has approved for
participation in, has accepted participation in, and which is participating in,
a Plan sponsored by MAG; and (c) any Person (other than an individual) which, by
the terms of such Plan, participates in such Plan or any employees of which, by
the terms of such Plan, participate in or are covered by such Plan.

        Section 1.46 Person. "Person" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization, and a governmental
entity or any department, agency or political subdivision thereof.

        Section 1.47 Plan. "Plan" means any plan, policy, program, payroll
practice, arrangement, contract, trust, insurance policy, or any agreement or
funding vehicle providing compensation or benefits to employees, former
employees, directors or consultants of MAG or MercFuel.

        Section 1.48 Post-Distribution Period. "Post-Distribution Period" means,
for each designated Plan, the period beginning as of the Distribution Date and
ending on the date that no member of the MercFuel Group is using MAG benefit
delivery and administrative services with respect to that Plan.

        Section 1.49 QDRO. "QDRO" means a domestic relations order which
qualifies under Code Section 414(p) and ERISA Section 206(d) and which creates
or recognizes an alternate payee's right to, or assigns to an alternate payee,
all or a portion of the benefits payable to a participant under the MAG 401(k)
Plan.

        Section 1.50 QMCSO. "QMCSO" means a medical child support order which
qualifies under ERISA Section 609(a) and which creates or recognizes the
existence of an alternate recipient's right to, or assigns to an alternate
recipient the right to, receive benefits for which a participant or beneficiary
is eligible under any of the Health Plans.

        Section 1.51 Ratio. "Ratio" means the ratio determined by dividing the
MercFuel Stock Value by the MAG Stock Value.


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        Section 1.52 Record Date. "Record Date" means the close of business on
the date to be determined by the Board of Directors of MAG as the record date
for determining the stockholders of MAG entitled to receive shares of common
stock of MercFuel in the Distribution.

        Section 1.53 Restricted Stock. "Restricted Stock", when immediately
preceded by "MAG", means shares of MAG common stock that are subject to transfer
restrictions or to employment and/or performance vesting conditions, pursuant to
a MAG Stock Plan. When immediately preceded by "MercFuel," "Restricted Stock"
means shares of MercFuel common stock that are subject to transfer restrictions
or to employment and/or performance vesting conditions, pursuant to a MercFuel
Stock Plan.

        Section 1.54 Revenue. "Revenue" means net revenue as determined in
accordance with generally accepted accounting principles.

        Section 1.55 SEC. "SEC" means the United States Securities and Exchange
Commission.

        Section 1.56 Separation. "Separation" means the contribution and
transfer from MAG to MercFuel, and MercFuel's receipt and assumption of,
directly or indirectly, substantially all of the Assets and Liabilities
currently associated with the MercFuel Business and the stock, investments or
similar interests currently held by MAG in subsidiaries and other entities that
conduct such business.

        Section 1.57 Separation Date. "Separation Date" means the effective date
and time of each transfer of property, assumption of liability, license,
undertaking, or agreement in connection with the Separation which date was 12:01
a.m., Pacific Time, January 1, 2001.

        Section 1.58 Subsidiary. "Subsidiary" of any person means a corporation
or other organization, whether incorporated or unincorporated, of which at least
a majority of the securities or interest having by the terms thereof ordinary
voting power to elect at least a majority of the board of directors or others
performing similar functions with respect to such corporation or other
organization, is directly or indirectly owned or controlled by such Person or by
any one or more of its Subsidiaries, or by such Person and one or more of its
Subsidiaries; provided, however that no Person that is not directly or
indirectly wholly-owned by any other Person shall be a Subsidiary of such other
Person unless such other Person controls, or has the right, power or ability to
control that Person. Unless the context otherwise requires, reference to MAG and
its Subsidiaries shall not include the subsidiaries of MAG that will be
transferred to MercFuel after giving effect to the Separation.

        Section 1.59 Tax Sharing Agreement. "Tax Sharing Agreement" means the
Ancillary Agreement, which is Exhibit F to the Separation Agreement.

        Section 1.60 Workers' Compensation Plan. "Workers' Compensation Plan"
when immediately preceded by "MAG" means the MAG Workers' Compensation Plan,
comprised of the various arrangements established by a member of the MAG Group
to comply with the workers' compensation requirements of the states in which the
MAG Group conducts business.


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<PAGE>   15

When immediately preceded by "MercFuel", "Workers' Compensation Plan" means the
workers' compensation program to be established by MercFuel pursuant to Section
4.8.

                                   ARTICLE II
                               GENERAL PRINCIPLES

        Section 2.1 Assumption of MercFuel Liabilities. Except as specified
otherwise in this Agreement or as mutually agreed upon by MercFuel and MAG from
time to time, effective as of Separation Date, MercFuel hereby assumes and
agrees to pay, perform, fulfill and discharge, in accordance with their
respective terms, all of the following: (a) all Liabilities of, or relating to,
MercFuel Employees or MercFuel Transferred Employees, in each case relating to,
arising out of, or resulting from future, present or former employment with the
MercFuel Business (including Liabilities relating to, arising out of, or
resulting from MAG Plans and MercFuel Plans); (b) all Liabilities relating to,
arising out of, or resulting from any other actual or alleged employment
relationship with the MercFuel Group; and (c) all other Liabilities relating to,
arising out of, or resulting from obligations, liabilities and responsibilities
expressly assumed or retained by the MercFuel Group, or a MercFuel Plan pursuant
to this Agreement. Except as specified otherwise in this Agreement or as
otherwise mutually agreed upon by MAG and MercFuel from time to time, MAG shall
transfer to MercFuel amounts equal to trust assets, insurance reserves, and
other related assets as consistent with the applicable Plan transition that
relates to, arises out of, or results from MercFuel's pro rata interest in each
MAG Plan.

        Section 2.2 Establishment of MercFuel Plans.

               (a) Health and Welfare Plans. Except as specified otherwise in
        this Agreement, effective as of the Distribution Date (or such other
        date(s) as MAG and MercFuel may mutually agree), MercFuel shall adopt
        the MercFuel Health and Welfare Plans. Except as otherwise specified in
        this Agreement, to the extent administratively and financially
        practicable, each of the foregoing MercFuel Plans as in effect as of the
        Distribution Date (or such other date(s) as MAG and MercFuel may
        mutually agree), shall be comparable in the aggregate in all Material
        Features to the corresponding MAG Plan as in effect as of such agreed
        upon date.

               (b) 401(k) Plan. Except as specified otherwise in this Agreement,
        effective as of the Distribution Date (or such other date(s) as MAG and
        MercFuel may mutually agree), MercFuel shall adopt the MercFuel 401(k)
        Plan. Except as otherwise specified in this Agreement, to the extent
        administratively and financially practicable, each MercFuel Plan in
        effect as of the Distribution Date (or such other date(s) as MAG and
        MercFuel may mutually agree), shall be comparable in the aggregate in
        all Material Features to the corresponding MAG Plan in effect as of such
        agreed upon date.

        Section 2.3 MercFuel Under No Obligation to Maintain Plans. Except as
specified otherwise in this Agreement, nothing in this Agreement shall preclude
MercFuel, at any time after the Distribution Date, from amending, merging,
modifying, terminating, eliminating, reducing, or otherwise altering in any
respect any MercFuel Plan, any benefit under any MercFuel Plan or any trust,
insurance policy or funding vehicle related to any MercFuel Plans, or


                                      -8-
<PAGE>   16

any employment or other service arrangement with MercFuel Employees or vendors
(to the extent permitted by law).

        Section 2.4 MercFuel's Participation in MAG Plans.

               (a) Participation in MAG Plans. Except as specified otherwise in
        this Agreement or as MAG and MercFuel may mutually agree, MercFuel
        shall, until the Distribution Date, continue to be a Participating
        Company in the MAG Plans to the extent that MercFuel has not established
        a corresponding Plan. Effective as of any date on or after the
        Separation Date and before the Distribution Date (or such other date(s)
        as MAG or MercFuel may mutually agree), any member of the MercFuel Group
        not described in the preceding sentence may, at its request and with the
        consent of MAG and MercFuel, become a Participating Company in any or
        all of the MAG Plans, to the extent that MercFuel has not yet
        established a corresponding Plan.

               (b) MAG's General Obligations as Plan Sponsor. To the extent that
        MercFuel is a Participating Company in any MAG Plan, MAG shall continue
        to administer, or cause to be administered, in accordance with its terms
        and applicable law, such MAG Plan, and shall have the sole and absolute
        discretion and authority to interpret the MAG Plan, as set forth
        therein. MAG shall not amend any Material Feature of any MAG Plan in
        which MercFuel is a Participating Company, except to the extent: (i)
        such amendment would not materially affect any coverage or benefits of
        MercFuel Employees or MercFuel Transferred Employees under such Plan;
        (ii) MercFuel shall consent to such amendment and such consent shall not
        be unreasonably withheld; or (iii) such amendment is necessary or
        appropriate to comply with applicable law.

               (c) MercFuel's General Obligations as Participating Company.
        MercFuel shall perform, with respect to its participation in the MAG
        Plans, the duties of a Participating Company as set forth in each such
        Plan or any procedures adopted pursuant thereto, including (without
        limitation): (i) assistance in the administration of claims, to the
        extent requested by the claims administrator of the applicable MAG Plan;
        (ii) full cooperation with MAG Plan auditors, benefit personnel and
        benefit vendors; (iii) preservation of the confidentiality of all
        financial arrangements MAG has or may have with any vendors, claims
        administrators, trustees, service providers or any other entity or
        individual with whom MAG has entered into an agreement relating to the
        MAG Plans; and (iv) preservation of the confidentiality of participant
        information (including, without limitation, health information in
        relation to FMLA leaves) to the extent not specified otherwise in this
        Agreement.

               (d) Termination of Participating Company Status. Except as
        otherwise may be mutually agreed upon by MAG and MercFuel, effective as
        of the Distribution Date or such other date as MercFuel establishes a
        corresponding Plan (as specified in Section 2.2 or otherwise in this
        Agreement), MercFuel shall automatically cease to be a Participating
        Company in the corresponding MAG Plan.

        Section 2.5 Terms of Participation by MercFuel Transferred Employees in
MercFuel Plans.


                                      -9-
<PAGE>   17

               (a) Non-Duplication of Benefits. Except as specified otherwise in
        this Agreement, as of the Distribution Date, or other later date that
        applies to the particular MercFuel Plan established thereafter, the
        MercFuel Plans shall be, with respect to MercFuel Transferred Employees,
        in all respects the successors in interest to, and shall not provide
        benefits that duplicate benefits provided by, the corresponding MAG
        Plans. MAG and MercFuel shall agree on methods and procedures, including
        amending the respective Plan documents, to prevent MercFuel Employees
        from receiving duplicate benefits from the MAG Plans and the MercFuel
        Plans.

               (b) Service Credit. Except as specified otherwise in this
        Agreement, with respect to MercFuel Transferred Employees, each MercFuel
        Plan shall provide that all service, all compensation and all other
        benefit-affecting determinations that, as of the Distribution Date, were
        recognized under the corresponding MAG Plan shall, as of the
        Distribution Date, receive full recognition and credit and be taken into
        account under such MercFuel Plan to the same extent as if such items
        occurred under such MercFuel Plan, except to the extent that duplication
        of benefits would result. Notwithstanding the foregoing, MAG and
        MercFuel shall recognize service with either MAG or MercFuel that was
        recognized as of the Distribution Date, except to the extent provided in
        Subsection 2.5(a) above. The service crediting provisions shall be
        subject to any respectively applicable "service bridging," "break in
        service," "employment date," or "eligibility date" rules under the
        MercFuel Plans and the MAG Plans.

               (c) Assumption of Liabilities. Except as specified otherwise in
        this Agreement (including, without limitation, the exception applicable
        to self-insured Health Plans), the provisions of this Agreement for the
        transfer of Assets relating to MAG Plans to MercFuel and/or the
        appropriate MercFuel Plans are based upon the understanding of the
        parties that MercFuel and/or the appropriate MercFuel Plan will assume
        all Liabilities of the corresponding MAG Plan to or relating to MercFuel
        Transferred Employees, as provided for herein. If any such Liabilities
        are not effectively assumed by MercFuel and/or the appropriate MercFuel
        Plan, then the amount of transferred Assets shall be recomputed
        accordingly, taking into account the retention of such Liabilities by
        such MAG Plan, and Assets shall be transferred from MercFuel and/or the
        appropriate MercFuel Plan to MAG and/or the appropriate MAG Plan so as
        to place MercFuel and/or the appropriate MercFuel Plan in the position
        it would have been in had the initial Asset transfer been made in
        accordance with such recomputed amount of assets.

        Section 2.6 Non-U.S. Employment Matters. MercFuel and MAG each intend
that matters, issues, or Liabilities relating to, arising out of, or resulting
from non-U.S.-related employment matters be handled in a manner that is
consistent with comparable U.S. matters, issues, or Liabilities as reflected in
this Agreement (to the extent permitted by applicable law or as otherwise
specified in the applicable Section or Schedule thereto).

                                   ARTICLE III
                            DEFINED CONTRIBUTION PLAN

        Section 3.1 401(k) Plan.


                                      -10-
<PAGE>   18

               (a) 401(k) Plan. Effective as of the Distribution Date (or such
        other date as MAG and MercFuel may mutually agree), MercFuel shall
        establish, or cause to be established, a separate plan or trust, which
        is intended to be tax-qualified under Code Section 401(a), to be exempt
        from taxation under Code Section 501(a)(1), and to form the MercFuel
        401(k) Plan.

               (b) 401(k) Plan: Assumption of Liabilities and Transfer of
        Assets. Effective as of the Distribution Date (or such other date as MAG
        and MercFuel may mutually agree): (i) the MercFuel 401(k) Plan shall
        assume and be solely responsible for all Liabilities relating to,
        arising out of, or resulting from MercFuel Transferred Employees under
        the MAG 401(k) Plan; and (ii) MAG shall cause the accounts of the
        MercFuel Transferred Employees under the MAG 401(k) Plan that are held
        by its related trust, whether vested or unvested, to be transferred to
        the MercFuel 401(k) Plan and its related trust, and MercFuel shall cause
        such transferred accounts to be accepted by such Plan and its related
        trust. In MAG's discretion, amounts may be in cash or in kind or a
        combination; except following in kind: (A) MAG stock; (B) MercFuel
        stock; (C) promissory notes reflecting plan loans to MercFuel
        executives. Effective as of the Distribution Date (or such other date as
        MAG and MercFuel may mutually agree), MercFuel shall use its
        commercially reasonable best efforts to enter into agreements
        satisfactory to MercFuel to accomplish such assumption and transfer, the
        maintenance of the necessary participant records, the appointment of
        _______________ as the initial trustees under the MercFuel 401(k) Plan,
        and the engagement of _______________ as the initial recordkeeper under
        the MercFuel 401(k) Plan. MercFuel and MAG each agree to use their
        commercially reasonable best efforts to accomplish this 401(k) Plan and
        related trust spin-off.

               (c) 401(k) Plan: Stock Considerations. As a result of the
        spin-off of the MAG 401(k) Plan and to the extent that immediately prior
        to such time, the MAG 401(k) Plan continues to consist of MAG employer
        securities, then the resulting MAG 401(k) Plan and MercFuel 401(k) Plan
        shall both consist in part of MAG and MercFuel employer securities.
        MercFuel and MAG shall assume sole responsibility for ensuring that
        their respective company stock funds, and underlying employer securities
        held in each such fund, are maintained in compliance with all
        requirements of the SEC.

               (d) No Distribution to MercFuel Transferred Employees. The MAG
        401(k) Plan and the MercFuel 401(k) Plan shall provide that no
        distribution of account balances shall be made to any MercFuel
        Transferred Employee on account of the MercFuel Group ceasing to be an
        Affiliate of the MAG Group as of the Distribution Date.

                                   ARTICLE IV
                            HEALTH AND WELFARE PLANS

        Section 4.1 Health Plans as of the Distribution Date.

               (a) MercFuel Health Plans. As of the Distribution Date (or such
        other date(s) as MAG and MercFuel may mutually agree), MercFuel shall
        have established the MercFuel Health Plans listed on Schedule 4.1(a)
        and, correspondingly, MercFuel shall cease to be a Participating Company
        in the MAG Health Plans. MercFuel shall be solely responsible


                                      -11-
<PAGE>   19

        for the administration of the MercFuel Health Plans, including the
        payment of all employer-related costs in establishing and maintaining
        the MercFuel Health Plans, and for the collection and remittance of
        employee premiums, subject to Section 6.2.

               (b) Pending Treatments. Notwithstanding Subsection 4.1(a) above,
        all treatments which have been pre-certified for or are being provided
        to a MercFuel Transferred Employee as of the Distribution Date shall be
        provided without interruption under the appropriate MAG Health Plan (to
        the extent such continued treatment is not provided under a MercFuel
        Health Plan) until such treatment is concluded or discontinued, pursuant
        to applicable Health Plan rules and limitations, but MercFuel shall
        continue to be responsible for all Liabilities relating to, arising out
        of, or resulting from such on-going treatments as of the Distribution
        Date.

               (c) Vendor Arrangements. MAG shall use its commercially
        reasonable best efforts for and on behalf of MercFuel to procure,
        effective as of the Distribution Date (or such other date(s) as MAG and
        MercFuel may mutually agree): (i) Group Insurance Policies, which are
        comparable in the aggregate in all Material Features to the Group
        Insurance Policies entered into by MAG, as set forth in Schedule
        4.1(c)(i) (the "Group Insurance Policies"); and (iii) an HMO Agreement
        which is comparable in the aggregate in all Material Features to the HMO
        Agreement entered into by MAG, as set forth in Schedule 4.1(c)(ii) (the
        "HMO Agreement"). In each case, MercFuel shall, as of the Distribution
        Date (or such other date as MAG and MercFuel may mutually agree),
        establish, adopt and/or implement such contracts, agreements or
        arrangements. MercFuel may, at such future date after the Distribution
        Date, elect to discontinue such contracts, agreements or arrangements in
        accordance with Section 2.3.

               (d) Continuance of Elections, Co-Payments and Maximum Benefits.

                      (i) As of the Distribution Date and for the remainder of
               the plan year in which the Distribution Date occurs (or such
               other period as MAG and MercFuel may mutually agree), MercFuel
               shall make its commercially reasonable best efforts to cause the
               MercFuel Health Plans to recognize and maintain all coverage and
               contribution elections made by MercFuel Employees and MercFuel
               Transferred Employees under the MAG Health Plans and apply such
               elections under the MercFuel Health Plans for the remainder of
               the period or periods for which such elections are by their terms
               applicable. The transfer or other movement of employment between
               MAG to MercFuel at any time upon or before the Distribution Date
               shall neither constitute nor be treated as a "status change" or
               termination of employment under the MAG Health Plans or the
               MercFuel Health Plans.

                      (ii) On and after the Distribution Date, MercFuel shall
               cause the MercFuel Health Plans to recognize and give credit for
               (A) all amounts applied to deductibles, out-of-pocket maximums,
               co-payments and other applicable benefit coverage limits with
               respect to which such expenses have been incurred by MercFuel
               Transferred Employees under the MAG Health Plans for the
               remainder of the calendar year in which the Distribution Date
               occurs, and (B) all benefits


                                      -12-
<PAGE>   20

               paid to MercFuel Transferred Employees under the MAG Health Plans
               for purposes of determining when such persons have reached their
               lifetime maximum benefits under the MercFuel Health Plans.

               (e) HCFA. As of the Distribution Date (or such other date as MAG
        and MercFuel may mutually agree), MercFuel shall assume all Liabilities
        relating to, arising out of, or resulting from claims, if any, under the
        HCFA data match reports that relate to MercFuel Transferred Employees.

        Section 4.2 Health Plans from the Separation Date through the
Distribution Date. Except as otherwise agreed by MAG and MercFuel, for the
period beginning with the Separation Date and ending on the Distribution Date
(or such other period as MAG and MercFuel may mutually agree), MercFuel shall be
a Participating Company in the MAG Health Plans listed on Schedule 4.2(a). MAG
shall administer claims incurred under the MAG Health Plans by MercFuel
Employees before the Distribution Date but only to the extent that MercFuel has
not, before the Distribution Date, established and assumed administrative
responsibility for a corresponding Health Plan. Any determination made or
settlements entered into by MAG with respect to such claims shall be final and
binding. MAG shall retain financial and administrative ("run-out") Liability and
all related obligations and responsibilities for all claims incurred by MercFuel
Transferred Employees before the Distribution Date (or such other date(s) as MAG
and MercFuel may mutually agree), including any claims that were administered by
MAG as of, on, or after the Distribution Date (or such other date(s) as MAG and
MercFuel may mutually agree). Except as set forth in the preceding sentence,
MercFuel shall reimburse MAG for any and all direct and indirect costs and
expenses associated with its participation in the MAG Health Plans, subject to
Section 6.2.

        Section 4.3 Group Life Plan.

               (a) MercFuel's Participation in MAG Group Life Plan. MercFuel
        shall, until the Distribution Date (or such other date as MAG and
        MercFuel may mutually agree), continue to be a Participating Company in
        the MAG Group Life Plan. MercFuel shall cease to be a Participating
        Company in the MAG Group Life Plan coincident with MercFuel's
        establishment of the MercFuel Group Life Plan (or, if none, MercFuel's
        written notice to MAG of its withdrawal as a Participating Company in
        the MAG Group Life Plan). MercFuel shall reimburse MAG for any and all
        direct and indirect costs and expenses associated with its participation
        in the MAG Group Life Plan, subject to Section 6.2.

               (b) MercFuel's Establishment of MercFuel Group Life Plan. MAG
        shall make its commercially reasonable best efforts to procure an
        arrangement on behalf of MercFuel for a Group Life Plan which shall be
        comparable in the aggregate in all Material Features to the MAG Group
        Life Plan as are financially, administratively and legally practicable.
        If MAG procures such an arrangement, MercFuel will not unreasonably
        withhold its consent to adopt such an arrangement to constitute the
        MercFuel Group Life Plan. MercFuel will reimburse MAG for its direct and
        indirect costs and expenses associated with its procurement,
        preparation, and implementation of the MercFuel Group Life Plan, subject
        to Section 6.2.


                                      -13-
<PAGE>   21

        Section 4.4 Long-Term Disability Plan. MercFuel shall, until the
Distribution Date (or such other date as MercFuel and MAG may mutually agree),
continue to be a Participating Company in the MAG Long-Term Disability Plan. MAG
shall use its commercially reasonable best efforts for and on behalf of MercFuel
to procure, effective as of the Distribution Date (or such other date as MAG and
MercFuel may mutually agree), a MercFuel Long-Term Disability Plan. MercFuel
will reimburse MAG for any and all direct and indirect costs and expenses
associated with its participation in the MAG Long-Term Disability Plan and MAG's
assistance in procuring, preparing, and implementing the MercFuel Long-Term
Disability Plan, subject to Section 6.2.

        Section 4.5 COBRA. MAG shall be responsible through the Distribution
Date (or such other date as MAG and MercFuel may mutually agree), for compliance
with the health care continuation coverage requirements of COBRA and the MAG
Health and Welfare Plans with respect to MercFuel Employees and qualified
beneficiaries (as such term is defined under COBRA). MercFuel shall be
responsible for providing MAG with all necessary employee change notices and
related information for covered dependents, spouses, qualified beneficiaries (as
such term is defined under COBRA), and alternate recipients pursuant to QMCSO,
in accordance with applicable MAG COBRA policies and procedures. As soon as
administratively practicable after the Distribution Date (or such other date as
MAG and MercFuel may mutually agree), MAG shall provide MercFuel (through hard
copy, electronic format, or such other mechanism as is appropriate under the
circumstances), with a list of all qualified beneficiaries (as such term is
defined under COBRA) that relate to the MercFuel Group and the relevant
information pertaining to their coverage elections and remaining COBRA time
periods. Effective as of the Distribution Date (or such other date as MAG and
MercFuel may mutually agree), MercFuel shall be solely responsible for
compliance with the health care continuation coverage requirements of COBRA and
the MercFuel Health and Welfare Plans for MercFuel Transferred Employees and
their qualified beneficiaries (as such term is defined under COBRA); provided,
however, MercFuel may elect to retain MAG's services in such manner and for such
period as MAG and MercFuel may mutually agree to assist it with COBRA
administration and MercFuel will reimburse MAG for its costs and expenses
associated with such administration, subject to Section 6.2.

        Section 4.6 Leave of Absence Plans and FMLA.

               (a) Allocation of Responsibilities After Distribution Date.
        Effective as of the Distribution Date (or such other date as MAG and
        MercFuel may mutually agree): (i) MercFuel shall adopt Leave of Absence
        Plans which shall be comparable in the aggregate in all Material
        Features to the MAG Leave of Absence Plans as in effect on the
        Distribution Date (or such other date as MAG and MercFuel may mutually
        agree); (ii) MercFuel shall honor all terms and conditions of leaves of
        absence which have been granted to any MercFuel Employee under a MAG
        Leave of Absence Plan or FMLA before the Distribution Date by MAG,
        including such leaves that are to commence after the Distribution Date
        (or such other date as MAG and MercFuel may mutually agree); and (iii)
        MercFuel shall recognize all periods of service of MercFuel Employees
        and MercFuel Transferred Employees with the MAG Group, as applicable, to
        the extent such service is recognized by the MAG Group for the purpose
        of eligibility for leave entitlement under the MAG Leave of Absence
        Plans and FMLA; provided, however, that


                                      -14-
<PAGE>   22

        no duplication of benefits shall, to the extent permitted by law, be
        required by the foregoing.

               (b) Disclosure. Before the Distribution Date (or such other date
        as MAG and MercFuel may mutually agree), MAG shall provide to MercFuel
        copies of all records pertaining to the MAG Leave of Absence Plans and
        FMLA with respect to all MercFuel Employees and MercFuel Transferred
        Employees to the extent such records have not been previously provided.

        Section 4.7 Workers' Compensation Plan.

               (a) Assumption of MAG and MercFuel Workers' Compensation Plan
        Liabilities by MercFuel. Effective as of the Separation Date, MercFuel
        shall assume and be solely responsible for all Liabilities relating to,
        arising out of, or resulting from their claims by MercFuel Employees and
        MercFuel Transferred Employees employment with the MercFuel Business
        ("MercFuel Claims") whether incurred before or after the Separation
        Date.

               (b) Participation in the MAG Workers' Compensation Plan. MercFuel
        shall, until the Distribution Date (or such other date as MercFuel and
        MAG may mutually agree), continue to be a Participating Company in the
        MAG Workers' Compensation Plan. MAG shall continue to administer, or
        cause to be administered, the MAG Workers' Compensation Plan in
        accordance with its terms and applicable law. MercFuel shall fully
        cooperate with MAG and its insurance company in the administration and
        reporting of MercFuel Claims under the MAG Workers' Compensation Plan.
        Any determination made, or settlement entered into, by or on behalf of
        MAG or its insurance company with respect to MercFuel claims under the
        MAG Workers' Compensation Plan shall be final and binding. MercFuel
        shall reimburse MAG and its insurance company for any and all direct and
        indirect costs related to the MercFuel claims or MercFuel's
        participation in the MAG Workers' Compensation Plan, including, but not
        limited to loss costs, claims administration fees, legal expenses,
        premium audits, and retrospective premium adjustments, subject to
        Section 6.2. MAG shall transfer to and reimburse MercFuel any assets
        related to the MercFuel claims or MercFuel's participation in the MAG
        Workers' Compensation Plan, including, but not limited to, loss
        reserves, premium audits, and retrospective premium adjustments.

               (c) Outsourcing of MercFuel Workers' Compensation Plan Claims.
        MercFuel shall have the right to transfer the administration of MercFuel
        Claims incurred under the MAG Workers' Compensation Plan to a third
        party administrator, vendor, or insurance company ("Outsource").
        MercFuel shall promptly notify MAG of its intent to transfer such
        claims, including the material terms and conditions of the transfer
        before the effective date thereof. MAG, upon the request of MercFuel,
        shall use its commercially reasonable best efforts to procure such
        Outsourcing on behalf of MercFuel, assist MercFuel in the transition to
        Outsourcing, and provide MercFuel with any information that is in the
        possession of MAG and is reasonably available and necessary to obtain
        such Outsourcing.


                                      -15-
<PAGE>   23

               (d) Establishment of the MercFuel Workers' Compensation Plan. As
        of the Distribution Date, MercFuel shall be responsible for complying
        with the workers' compensation requirements of the states in which the
        MercFuel Group conducts business and for obtaining and maintaining
        insurance programs for its risk of loss. Such insurance arrangements
        shall be separate and apart from the MAG Workers' Compensation Plan.
        Notwithstanding the foregoing, MAG, upon the request of MercFuel, shall
        use its commercially reasonable best efforts to procure workers'
        compensation insurance policies on behalf of MercFuel, assist MercFuel
        in the transition to its own separate insurance program, and provide
        MercFuel with any information that is in the possession of MAG and is
        reasonably available and necessary to either obtain insurance coverages
        for MercFuel or to assist MercFuel in preventing unintended
        self-insurance, in whatever form.

        Section 4.8 Administrative Services. To the extent not provided
otherwise in this Article, MAG shall provide certain administrative services to
MercFuel in conjunction with both the MAG and MercFuel Health and Welfare Plans
in such manner and for such period as MAG and MercFuel may mutually agree.
MercFuel shall reimburse MAG for any and all direct and indirect costs and
expenses related thereto, subject to Section 6.2.

                                    ARTICLE V
                          EQUITY AND OTHER COMPENSATION

        Section 5.1 Bonus Plan. Employees of the MercFuel Business (including,
for this purpose, any employees of MAG who are designated as employees of the
MercFuel Business for purposes of the Separation) shall cease their
participation in the MAG Bonus Plan in the quarter ending prior to the
Distribution Date (or such other date as MAG and MercFuel may mutually agree).
Any bonus pool, or portion thereof, that has been finally determined by MAG in
its discretion or accrued for under the MAG Bonus Plan for the benefit of, or
that is allocable to, employees of the MercFuel Business (including for this
purpose, any employees of MAG who are designated as employees of the MercFuel
Business for purposes of the Separation) shall be paid to such Employees
pursuant to the terms and conditions of the MAG Bonus Plan, except that such
payment shall be made on the Distribution Date (or such other date as MAG and
MercFuel may mutually agree). Effective as of the Distribution Date (or such
other date as MAG and MercFuel may mutually agree), MercFuel shall establish the
MercFuel Bonus Plan for MercFuel Employees and MercFuel Transferred Employees
for MercFuel fiscal period(s) beginning on and after the Distribution Date (or
such other date as MAG and MercFuel may mutually agree), to be administered by
the Compensation Committee of the MercFuel Board of Directors.

        Section 5.2 MAG Options.

               (a) Option Assumption by MercFuel. At the Distribution Date (or
        such other date as MAG and MercFuel may mutually agree), 100 percent of
        each outstanding MAG Option held by MercFuel Transferred Employees,
        whether vested or unvested, shall be, in connection with the
        Distribution, assumed by MercFuel. MercFuel shall replace 100 percent of
        the total intrinsic value of each MAG Option held by MercFuel
        Transferred Employees as of the Distribution Date (or such other date as
        MAG and MercFuel may


                                      -16-
<PAGE>   24

        mutually agree) by offering options to purchase MercFuel stock mirroring
        the provisions of the then existing MAG Options. Each MAG Option so
        assumed by MercFuel shall continue to have, and be subject to, the same
        terms and conditions set forth in the MAG Stock Plans and as provided in
        the respective option agreements governing such MAG Option as of the
        Distribution Date (or such other date as MAG and MercFuel may mutually
        agree), except that (i) such MAG Option shall be exercisable for that
        number of whole shares of MercFuel common stock equal to the quotient of
        the number of shares of MAG common stock that were issuable upon
        exercise of such MAG Option as of the Distribution Date divided by the
        Ratio, rounded down to the nearest whole number of shares of MercFuel
        common stock, and (ii) the per share exercise price for the shares of
        MercFuel common stock issuable upon exercise of such assumed MAG Option
        shall be equal to the product determined by multiplying the exercise
        price per share of MAG common stock at which such MAG Option was
        exercisable as of the Distribution Date by the Ratio, rounded up to the
        nearest whole cent.

               (b) Assumption Criteria. It is the intention of MAG and MercFuel
        that the assumption of MAG Options by MercFuel pursuant to Subsection
        5.2(a) meet the following criteria: (i) the aggregate intrinsic value of
        the assumed MAG Options immediately after the assumption is not greater
        than such value immediately before the assumption; (ii) with respect to
        each such assumed MAG Option, the ratio of the exercise price per share
        to the MercFuel Stock Value of the assumed MAG Options immediately after
        the assumption is not less than the ratio of the exercise price per
        share to the MAG Stock Value immediately before the assumption; and
        (iii) the vesting and option term of the assumed MAG Options shall not
        be changed.

               (c) Certain Non-U.S. Optionees. Except as may otherwise be agreed
        upon by MAG and MercFuel and/or as set forth in Schedule 5.2, this
        Section 5.2 shall govern the treatment of MAG Options held by non-U.S.
        MercFuel Transferred Employees, if any.

        Section 5.3 Administrative Services. To the extent not provided
otherwise in this Article, MAG shall provide certain administrative services to
MercFuel in conjunction with both the MAG and MercFuel Stock Plans in such
manner and for such period as MAG and MercFuel may mutually agree. MercFuel
shall reimburse MAG for any and all direct and indirect costs and expenses
related thereto, subject to Section 6.2.

                                   ARTICLE VI
                            ADMINISTRATIVE PROVISIONS

        Section 6.1 Master Transitional Services Agreement. On or prior to the
Distribution Date (or such other date as MercFuel and MAG may mutually agree),
MAG and MercFuel may enter into a Master Transitional Services Agreement
covering the provisions of interim services, including financial, accounting,
legal, benefits-related and other services by MAG to MercFuel or, in certain
circumstances, vice versa, if appropriate or necessary.

        Section 6.2 Payment of Liabilities, Plan Expenses and Related Matters.


                                      -17-
<PAGE>   25

               (a) Expenses and Costs Chargeable to a Trust. Effective as of the
        Separation Date, MercFuel shall pay its share of any contributions made
        to any trust maintained in connection with a MAG Plan while MercFuel is
        a Participating Company in that MAG Plan.

               (b) Contributions to Trusts. With respect to MAG Plans to which
        MercFuel Employees and MercFuel Transferred Employees make
        contributions, MAG shall use reasonable procedures to determine MercFuel
        Assets and Liabilities associated with each such Plan, taking into
        account such contributions, settlements, refunds and similar payments.

               (c) Allocation of Costs and Expenses. Except as otherwise
        provided in this Agreement, the Master Transitional Services Agreement,
        or in any underlying transitional services schedule between MAG and
        MercFuel (as contemplated in Section 6.1) relating to the Separation,
        the IPO, or the Distribution, all costs and expenses of the parties
        hereto in connection with the Separation, the IPO (including
        underwriting discounts and commissions), and the Distribution and costs
        and expenses of the parties hereto in connection with the Separation
        shall be allocated between MercFuel and MAG. MercFuel and MAG shall each
        be responsible for their own internal fees, costs and expenses incurred
        in connection with the Separation and the Distribution.

        Section 6.3 Transitional Staffing Services. MAG will provide certain
transitional staffing services and other services as MAG and MercFuel may
mutually agree, as set forth on Schedule 6.3; provided, however, that for
purposes of the Workers' Compensation Plan (as set forth in Section 4.8) the
Transitional Staffing Services Agreement for finance shall control, to MercFuel
in such manner and for such period as MAG and MercFuel may mutually agree.

        Section 6.4 Sharing of Participant Information. In addition to the
responsibilities and obligations of MAG and MercFuel specified in Exhibit I to
the Separation Agreement, MAG and MercFuel shall share, or cause to be shared,
all participant information that is necessary or appropriate for the efficient
and accurate administration of each of the MAG Plans and the MercFuel Plans
during the respective periods applicable to such Plans as MercFuel and MAG may
mutually agree). MAG and MercFuel and their respective authorized agents shall,
subject to applicable laws of confidentiality and data protection, be given
reasonable and timely access to, and may make copies of, all information
relating to the subjects of this Agreement in the custody of the other party or
its agents, to the extent necessary or appropriate for such administration.

        Section 6.5 Reporting and Disclosure Communications to Participants.
While MercFuel is a Participating Company in the MAG Plans, MercFuel shall take,
or cause to be taken, all actions necessary or appropriate to facilitate the
distribution of all MAG Plan-related communications and materials to employees,
participants and beneficiaries, including (without limitation) summary plan
descriptions and related summaries of material modification(s), summary annual
reports, investment information, prospectuses, notices and enrollment material
for the MAG Plans and MercFuel Plans. MercFuel shall reimburse MAG for the costs
and expenses relating to the copies of all such documents provided to MercFuel,
except to the extent such costs are charged pursuant to Section 6.2 (or are
otherwise addressed in this Agreement) or pursuant to an Ancillary Agreement.
MercFuel shall assist MAG in complying with all reporting


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<PAGE>   26

and disclosure requirements of ERISA, including the preparation of Form Series
5500 annual reports for the MAG Plans, where applicable.

        Section 6.6 Audits Regarding Vendor Contracts. From the period beginning
as of the Separation Date and ending on such date as MAG and MercFuel may
mutually agree, MAG and MercFuel and their duly authorized representatives shall
have the right to conduct joint audits with respect to any vendor contracts that
relate to both the MAG Health and Welfare Plans and the MercFuel Health and
Welfare Plans. The scope of such audits shall encompass the review of all
correspondence, account records, claim forms, canceled drafts (unless retained
by the bank), provider bills, medical records submitted with claims, billing
corrections, vendor's internal corrections of previous errors and any other
documents or instruments relating to the services performed by the vendor under
the applicable vendor contracts. MAG and MercFuel shall agree on the performance
standards, audit methodology, auditing policy and quality measures, reporting
requirements, and the manner in which costs and expenses incurred in connection
with such audits will be shared.

        Section 6.7 Employee Identification Numbers. Until the Distribution Date
(or such other period as MAG and MercFuel may mutually agree), MAG and MercFuel
shall not change any employee identification numbers assigned by MAG. MAG and
MercFuel mutually agree to establish a policy pursuant to which employee
identification numbers assigned to either employees of MAG or MercFuel shall not
be duplicated between MAG and MercFuel.

        Section 6.8 Beneficiary Designation. Subject to Section 6.11, all
beneficiary designations made by MercFuel Employees and MercFuel Transferred
Employees for the MAG Plans shall be transferred to and be in full force and
effect under the corresponding MercFuel Plans, in accordance with the terms of
each such applicable MercFuel Plan, until such beneficiary designations are
replaced or revoked by the MercFuel Employees and MercFuel Transferred Employee
who made the beneficiary designation.

        Section 6.9 Requests for IRS and DOL Opinions. MAG and MercFuel shall
make such applications to regulatory agencies, including the IRS and DOL, as may
be necessary or appropriate. MercFuel and MAG shall cooperate fully with one
another on any issue relating to the transactions contemplated by this Agreement
for which MAG and/or MercFuel elects to seek a determination letter or private
letter ruling from the IRS or an advisory opinion from the DOL.

        Section 6.10 Fiduciary Matters. MAG and MercFuel each acknowledge that
actions contemplated to be taken pursuant to this Agreement may be subject to
fiduciary duties or standards of conduct under ERISA or other applicable law,
and that no party shall be deemed to be in violation of this Agreement if such
party fails to comply with any provisions hereof based upon such party's good
faith determination that to do so would violate such a fiduciary duty or
standard.

        Section 6.11 Consent of Third Parties. If any provision of this
Agreement is dependent on the consent of any third party (such as a vendor) and
such consent is withheld, MAG and MercFuel shall use their commercially
reasonable best efforts to implement the applicable provisions of this
Agreement. If any provision of this Agreement cannot be implemented due to


                                      -19-
<PAGE>   27

the failure of such third party to consent, MAG and MercFuel shall negotiate in
good faith to implement the provision in a mutually satisfactory manner.

                                   ARTICLE VII
                           EMPLOYMENT-RELATED MATTERS

        Section 7.1 Terms of MercFuel Employment. All basic terms and conditions
of employment for MercFuel Employees and MercFuel Transferred Employees
including, without limitation, their pay and benefits in the aggregate, shall,
to the extent legally and practicably possible, remain substantially the same
through the Distribution Date as the terms and conditions that were in place
when the MercFuel Employee or MercFuel Transferred Employee was employed by the
MAG Group, as applicable. Notwithstanding the foregoing, MercFuel Employees and
MercFuel Transferred Employees may be required to execute a new agreement
regarding confidential information and proprietary developments in a form
approved by MercFuel by the Separation Date. In addition, nothing in the
Separation Agreement, this Agreement, or any Ancillary Agreement should be
construed to change the at-will status of the employment of any of the employees
of the MAG Group or the MercFuel Group.

        Section 7.2 HR Data Support Systems. MAG shall provide human resources
data support for MercFuel Employees and MercFuel Transferred Employees through
the Distribution Date (or such other period as MAG and MercFuel may mutually
agree), subject to the Master Transitional Services Agreement.

        Section 7.3 Non-Solicitation of Employees. Subject to Section 4.12 of
the Separation Agreement, MAG and MercFuel each agree not to solicit or recruit,
without the other party's express written consent, the other party's employees
for a period of two (2) years following the Distribution Date. Notwithstanding
the foregoing, this prohibition on solicitation does not apply to actions taken
by a party either:

               (a) solely as a result of an employee's affirmative response to a
        general recruitment effort carried out through a public solicitation or
        general solicitation, or (b) as a result of an employee's initiative.

        Section 7.4 Employment of Employees with U.S Work Visas. MercFuel
Employees with U.S. work visas authorizing them to work for MercFuel will
continue to hold work authorization for the MercFuel Group after the Separation
Date. MercFuel will request amendments to the nonimmigrant visa status of
MercFuel Employees and MercFuel Transferred Employees with U.S. work visas
authorizing them to work for MAG, excluding the MercFuel Group, to request
authorization to work for MercFuel.

        Section 7.5 Confidentiality and Proprietary Information. No provision of
the Separation Agreement or any Ancillary Agreement shall be deemed to release
any individual for any violation of the MAG non-competition guideline or any
agreement or policy pertaining to confidential or proprietary information of any
member of the MAG Group, or otherwise relieve any individual of his or her
obligations under such non-competition guideline, agreement, or policy.


                                      -20-
<PAGE>   28

        Section 7.6 Personnel Records. Subject to applicable laws on
confidentiality and data protection, MAG shall deliver to MercFuel prior to the
Distribution Date (or such other date as MAG and MercFuel may mutually agree),
personnel records of MercFuel Employees and MercFuel Transferred Employees to
the extent such records relate to MercFuel Employees' and MercFuel Transferred
Employees' active employment by, leave of absence from, or termination of
employment with MercFuel. MercFuel shall fully reimburse MAG for any and all
direct and indirect costs and expenses associated with such delivery, subject to
Section 6.2.

        Section 7.7 Medical Records. Subject to applicable laws on
confidentiality and data protection, MAG shall deliver to MercFuel prior to the
Distribution Date (or such other date as MAG and MercFuel may mutually agree),
medical records of MercFuel Employees and MercFuel Transferred Employees to the
extent such records (a) relate to MercFuel Employees' and MercFuel Transferred
Employees' active employment by, leave of absence from, or termination of
employment with MercFuel, and (b) are necessary to administer and maintain
employee benefit plans, including Health Plans and Workers' Compensation Plan
and for determining eligibility for paid and unpaid Leaves of Absence for
medical reasons. MercFuel shall fully reimburse MAG for any and all direct and
indirect costs and expenses associated with such delivery, subject to Section
6.2.

        Section 7.8 Unemployment Insurance Program.

               (a) Claims Administration Through Distribution Date. Unless
        otherwise directed by MercFuel, MAG shall use its commercially
        reasonable best efforts to cause MercFuel to receive service from MAG's
        third party unemployment insurance administrator through the
        Distribution Date (or such other date as MAG and MercFuel may mutually
        agree). MercFuel shall reimburse MAG for its allocable share of fees
        paid and related costs and expenses by MAG to its third party
        unemployment insurance administrator for services rendered during such
        period, pursuant to the Master Transitional Services Agreement. MercFuel
        shall cooperate with the unemployment insurance administrator by
        providing any and all necessary or appropriate information reasonably
        available to MercFuel.

               (b) Claim Administration Post-Distribution Date. Before the
        Distribution Date, MAG shall use its commercially reasonable best
        efforts for and on behalf of MercFuel to procure an agreement with its
        third party unemployment insurance administrator comparable in the
        aggregate in all Material Features to the MAG third party unemployment
        insurance agreement, including, without limitation, administration of
        all unemployment compensation claims of MercFuel Transferred Employees
        and MercFuel Employees, regardless of whether such claims were filed
        before, on, or after the Distribution Date. MercFuel shall not
        unreasonably withhold its consent to adopt such an agreement with such
        administrator. MercFuel shall reimburse MAG for any and all direct and
        indirect costs and expenses associated with such procurement, subject to
        the Master Transitional Services Agreement.

        Section 7.9 Non-Termination of Employment; No Third-Party Beneficiaries.
No provision of this Agreement, the Distribution Agreement, or any Ancillary
Agreement shall be construed to create any right or accelerate entitlement to
any compensation or benefit whatsoever


                                      -21-
<PAGE>   29

on the part of any MercFuel Employee, MercFuel Transferred Employee or other
former, present or future employee of MAG or MercFuel under any MAG Plan or
MercFuel Plan or otherwise. Without limiting the generality of the foregoing:
(a) neither the Distribution or Separation, nor the termination of the
Participating Company status of MercFuel or any member of the MercFuel Group
shall cause any employee to be deemed to have incurred a termination of
employment; and (b) no transfer of employment between MAG and MercFuel before
the Distribution Date shall be deemed a termination of employment for any
purpose hereunder.

        Section 7.10 Employment Litigation.

               (a) Claims to be Transferred to MercFuel and/or Jointly Defended
        by MAG and MercFuel. On or before the Distribution Date, MAG and
        MercFuel will enter into a written agreement that specifies the legal
        responsibility and accompanying Liability for identified claims of
        MercFuel.

               (b) Unscheduled Claims. MercFuel shall have the sole
        responsibility for all employment-related claims regarding MercFuel
        Employees and MercFuel Transferred Employees that exist, or come into
        existence, on or after the Separation Date relating to, arising out of,
        or resulting from their employment with the MercFuel Business or the
        MercFuel Group.

                                  ARTICLE VIII
                               GENERAL PROVISIONS

        Section 8.1 Effect if IPO and/or Distribution Does Not Occur. Subject to
Section 8.10, if the IPO and/or Distribution does not occur, then all actions
and events that are, under this Agreement, to be taken or occur effective as of
the IPO Closing and/or Distribution Date, or otherwise in connection with the
IPO and/or Distribution, shall not be taken or occur except to the extent
specifically agreed by MercFuel and MAG.

        Section 8.2 Relationship of Parties. Nothing in this Agreement shall be
deemed or construed by the parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
parties, the understanding and agreement being that no provision contained
herein, and no act of the parties, shall be deemed to create any relationship
between the parties other than the relationship set forth herein.

        Section 8.3 Affiliates. Each of MAG and MercFuel shall cause to be
performed and hereby guarantee the performance of any and all actions of the MAG
Group or the MercFuel Group, respectively.

        Section 8.4 Incorporation of Distribution Agreement Provisions. The
following provisions of the Distribution Agreement are hereby incorporated
herein by reference, and unless otherwise expressly specified herein, such
provisions shall apply as if fully set forth herein (references in this Section
to an "Article" or "Section" shall mean Articles or Sections of the Distribution
Agreement, and, except as expressly set forth below, references within the
material incorporated herein by reference shall be references to the
Distribution Agreement): Section 3.4 (relating to Agreement for Exchange of
Information); Section 3.9 (relating to Dispute Resolution); and Article IV
(relating to Covenants and Other Matters).


                                      -22-
<PAGE>   30

        Section 8.5 Governing Law. To the extent not preempted by applicable
federal law, including, without limitation, ERISA, the Code and applicable
securities laws, this Agreement shall be governed by, construed and interpreted
in accordance with the laws of the State of California, irrespective of the
choice of law principles of the State of California, as to all matters,
including matters of validity, construction, effect, performance and remedies.

        Section 8.6 Assignment. This Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective legal representatives
and successors, and nothing in this Agreement, express or implied, is intended
to confer upon any other Person any rights or remedies of any nature whatsoever
under or by reason of this Agreement. This Agreement may be enforced separately
by each member of the MAG Group and each member of the MercFuel Group. Neither
party may assign this Agreement or any rights or obligations hereunder, without
the prior written consent of the other party, and any such assignment shall be
void; provided, however, either party may assign this Agreement to a successor
entity in conjunction with such party's reincorporation.

        Section 8.7 Severability. If any term or other provision of this
Agreement is determined to be invalid, illegal or incapable of being enforced by
any rule of law or public policy, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is not
affected in any manner materially adverse to either party. Upon such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible and in an acceptable manner to the end that transactions contemplated
hereby are fulfilled to the fullest possible extent.

        Section 8.8 Interpretation. The headings contained in this Agreement or
any Schedule hereto and in the table of contents to this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized term used in any Schedule but
not otherwise defined therein shall have the meaning assigned to such term in
this Agreement. When a reference is made in this Agreement to an Article,
Section or Schedule, such reference shall be to an Article of, Section of, or
Schedule to this Agreement unless otherwise indicated.

        Section 8.9 Amendment. The Board of Directors of MercFuel and MAG may
mutually agree to amend the provisions of this Agreement at any time or times,
for any reason, either prospectively or retroactively, to such extent and in
such manner as the Boards mutually deem advisable. Each Board may delegate its
amendment power, in whole or in part, to one or more Persons or committees as it
deems advisable. No change or amendment will be made to this Agreement, except
by an instrument in writing signed by authorized individuals.

        Section 8.10 Termination. This Agreement may be terminated at any time
before the Distribution Date by mutual consent of MAG and MercFuel. In the event
of termination pursuant to this Section, no party shall have any liability of
any kind to the other party.


                                      -23-
<PAGE>   31

        Section 8.11 Conflict. In the event of any conflict between the
provisions of this Agreement and the Separation Agreement, any Ancillary
Agreement, or Plan, the provisions of this Agreement shall control.

        Section 8.12 Counterparts. This Agreement, including the Schedules
hereto and the other documents referred to herein, may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same agreement.




                                      -24-
<PAGE>   32

        IN WITNESS WHEREOF, each of the parties have caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized on the day and
year first above written.


MERCURY AIR GROUP, INC.,
a Delaware corporation


By:
   ------------------------------

Its:

MERCFUEL, INC.,
a Delaware corporation


By:
   ------------------------------

Its:




                                      -25-
<PAGE>   33


                                  SCHEDULE 2.7


                           NON-U.S. EMPLOYMENT MATTERS







                                      -26-