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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q

(Mark One)

þ
    
    Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934


For the quarterly period ended December 31, 2003


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


For the transition period from            to


Commission File No. 1-7134

Mercury Air Group, Inc.

(Exact name of registrant as specified in its charter)


Delaware(State or other jurisdiction of
incorporation or organization)
    
    11-1800515(I.R.S. Employer
Identification Number)5456 McConnell Avenue
Los Angeles, CA(Address of principal executive offices)
    
    90066(Zip Code)


Registrants telephone number, including area code:
(310) 827-2737

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
þ No o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o
No þ

Indicate the number of shares outstanding of each of the issuers classes
of common equity, as of the latest practicable date.

Number of Shares OutstandingTitle
    
    as of January 7, 2004Common Stock, $0.01 Par Value
    
    2,954,818




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TABLE OF CONTENTS



|                               |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|                               | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 2. Change in Securities, Use of Proceeds, and Issuer Purchases of Equity                
|                               | Item 3. Default Upon Senior Securities                                                       
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                               | Item 5. Other Information                                                                    
|                               | Item 6. Exhibits and Exhibit List                                                            
|EXHIBIT 4.27                  
|EXHIBIT 4.28                  
|EXHIBIT 4.29                  
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32.1                  
|EXHIBIT 32.2                  



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PART I  FINANCIAL INFORMATION




Item 1.Financial Statements




MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

December 31,
    
    June 30,2003
    
    2003(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    3,387,000
    
    
    $
    2,802,000Trade accounts receivable, net of allowance for doubtful accounts of $2,054,000 and
$2,006,000 at December 31 and June 30, 2003, respectively
    
    
    52,036,000
    
    
    
    46,753,000Inventories, principally aviation fuel
    
    
    4,034,000
    
    
    
    4,422,000Prepaid expenses and other current assets
    
    
    5,276,000
    
    
    
    5,241,000Deferred income taxes
    
    
    1,339,000
    
    
    
    901,000Total current assets
    
    
    66,072,000
    
    
    
    60,119,000PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated depreciation and amortization
of $64,829,000 and $61,061,000 at December 31 and June 30, 2003, respectively
    
    
    57,649,000
    
    
    
    58,844,000NOTES RECEIVABLE, net of allowance for doubtful accounts of $457,000 and $509,000 at
December 31 and June 30, 2003, respectively
    
    
    1,239,000
    
    
    
    1,815,000DEFERRED INCOME TAXES
    
    
    2,847,000
    
    
    
    2,284,000GOODWILL
    
    
    4,389,000
    
    
    
    4,389,000OTHER INTANGIBLE ASSETS, NET
    
    
    883,000
    
    
    
    1,033,000OTHER ASSETS, NET
    
    
    3,937,000
    
    
    
    4,471,000TOTAL ASSETS
    
    $
    137,016,000
    
    
    $
    132,955,000LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    37,349,000
    
    
    $
    34,677,000Accrued expenses and other current liabilities
    
    
    12,334,000
    
    
    
    9,554,000Current portion of long-term debt
    
    
    4,143,000
    
    
    
    4,194,000Total current liabilities
    
    
    53,826,000
    
    
    
    48,425,000LONG-TERM DEBT
    
    
    23,273,000
    
    
    
    25,501,000SENIOR SUBORDINATED NOTE
    
    
    23,533,000
    
    
    
    23,445,000SUBORDINATED NOTE
    
    
    3,586,000OTHER LONG TERM LIABILITIES
    
    
    1,265,000
    
    
    
    608,000DEFERRED RENT
    
    
    1,571,000
    
    
    
    1,885,000MINORITY INTEREST
    
    
    195,000
    
    
    
    180,000Total liabilities
    
    
    107,249,000
    
    
    
    100,044,000COMMITMENTS AND CONTINGENCIES (Note 5)MANDATORILY REDEEMABLE PREFERRED STOCK, Series A  $0.01 par value; 1,000,000 shares
authorized; 462,627 shares outstanding at December 31 and June 30, 2003
    
    
    500,000
    
    
    
    481,000STOCKHOLDERS EQUITY:Preferred
Stock  $0.01 par value; authorized 2,000,000 shares; no shares
outstandingCommon Stock  $0.01 par value; authorized 18,000,000 shares; 2,954,818 and
3,293,568 shares outstanding at December 31 and June 30, 2003, respectively
    
    
    30,000
    
    
    
    33,000Additional paid-in capital
    
    
    20,726,000
    
    
    
    22,496,000Retained earnings
    
    
    12,181,000
    
    
    
    14,018,000Accumulated other comprehensive income (loss)
    
    
    62,000
    
    
    
    (86,000
    )Notes receivable from officers
    
    
    (3,732,000
    )
    
    
    (4,031,000
    )Total stockholders equity
    
    
    29,267,000
    
    
    
    32,430,000Total liabilities, mandatorily redeemable preferred stock and stockholders equity
    
    $
    137,016,000
    
    
    $
    132,955,000


See accompanying notes to consolidated financial statements.

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MERCURY AIR GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Six Months Ended
    
    Three Months EndedDecember 31,
    
    December 31,2003
    
    2002
    
    2003
    
    2002(Unaudited)
    
    (Unaudited)Sales and revenues:Sales
    
    $
    167,865,000
    
    
    $
    175,336,000
    
    
    $
    89,289,000
    
    
    $
    89,886,000Service revenues
    
    
    47,035,000
    
    
    
    46,521,000
    
    
    
    24,598,000
    
    
    
    24,076,000Total sales and revenues
    
    
    214,900,000
    
    
    
    221,857,000
    
    
    
    113,887,000
    
    
    
    113,962,000Costs and expenses:Cost of sales
    
    
    147,585,000
    
    
    
    156,247,000
    
    
    
    78,599,000
    
    
    
    80,213,000Operating expenses
    
    
    53,688,000
    
    
    
    52,772,000
    
    
    
    28,376,000
    
    
    
    26,861,000Total costs and expenses
    
    
    201,273,000
    
    
    
    209,019,000
    
    
    
    106,975,000
    
    
    
    107,074,000Gross margin (excluding
depreciation and
amortization)
    
    
    13,627,000
    
    
    
    12,838,000
    
    
    
    6,912,000
    
    
    
    6,888,000Expenses (income):Selling, general and
administrative
    
    
    5,040,000
    
    
    
    5,241,000
    
    
    
    2,765,000
    
    
    
    2,651,000Provision for bad debts
    
    
    60,000
    
    
    
    759,000
    
    
    
    (323,000
    )
    
    
    407,000Depreciation and amortization
    
    
    4,279,000
    
    
    
    4,049,000
    
    
    
    2,108,000
    
    
    
    1,998,000Interest expense
    
    
    4,525,000
    
    
    
    2,915,000
    
    
    
    1,931,000
    
    
    
    1,533,000Hambro settlement costs
    
    
    1,799,000
    
    
    
    
    
    
    
    1,799,000Debt extinguishment costs
    
    
    
    
    
    
    1,733,000
    
    
    
    
    
    
    
    1,208,000Interest income
    
    
    (245,000
    )
    
    
    (50,000
    )
    
    
    (32,000
    )Total expenses (income)
    
    
    15,458,000
    
    
    
    14,647,000
    
    
    
    8,248,000
    
    
    
    7,797,000Loss before income tax provision
(benefit)
    
    
    (1,831,000
    )
    
    
    (1,809,000
    )
    
    
    (1,336,000
    )
    
    
    (909,000
    )Income tax provision (benefit)
    
    
    (12,000
    )
    
    
    (624,000
    )
    
    
    181,000
    
    
    
    (313,000
    )Net loss
    
    $
    (1,819,000
    )
    
    $
    (1,185,000
    )
    
    $
    (1,517,000
    )
    
    $
    (596,000
    )Accrued preferred stock dividends
    
    
    (19,000
    )
    
    
    
    
    
    
    (9,000
    )Net loss applicable to common
stockholders
    
    $
    (1,838,000
    )
    
    $
    (1,185,000
    )
    
    $
    (1,526,000
    )
    
    $
    (596,000
    )Net loss per common share:Basic:
    
    $
    (0.56
    )
    
    $
    (0.37
    )
    
    $
    (0.47
    )
    
    $
    (0.18
    )Diluted:
    
    $
    (0.56
    )
    
    $
    (0.37
    )
    
    $
    (0.47
    )
    
    $
    (0.18
    )


See accompanying notes to consolidated financial statements.

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MERCURY AIR GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months EndedDecember 31,2003
    
    2002(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,819,000
    )
    
    $
    (1,185,000
    )Adjustments to derive cash flow from operating activities:Bad debt expense
    
    
    60,000
    
    
    
    759,000Depreciation and amortization
    
    
    4,279,000
    
    
    
    4,049,000Deferred income taxes
    
    
    (1,001,000
    )
    
    
    3,000Deferred rent
    
    
    (314,000
    )
    
    
    257,000Compensation expense related to remeasurement of stock options
    
    
    
    
    
    
    318,000Executive loan amortization
    
    
    194,000
    
    
    
    202,000Write-down of note receivable from officer
    
    
    105,000Hambro settlement costs
    
    
    1,799,000Amortization of senior subordinated note discount
    
    
    88,000
    
    
    
    176,000Loss (gain) on retirement of assets
    
    
    (1,000
    )
    
    
    27,000Write-off of deferred financing costs
    
    
    
    
    
    
    1,733,000Minority interest
    
    
    15,000Changes in operating assets and liabilities:Trade and other accounts receivable
    
    
    (5,343,000
    )
    
    
    (5,151,000
    )Inventories
    
    
    388,000
    
    
    
    (998,000
    )Prepaid expenses and other current assets
    
    
    (35,000
    )
    
    
    (123,000
    )Accounts payable
    
    
    2,672,000
    
    
    
    76,000Accrued expenses and other current liabilities
    
    
    3,437,000
    
    
    
    (1,866,000
    )Net cash provided by (used in) operating activities
    
    
    4,524,000
    
    
    
    (1,345,000
    )CASH FLOWS FROM INVESTING ACTIVITIES:Decrease in restricted cash
    
    
    
    
    
    
    3,780,000Decrease (increase) in other assets
    
    
    252,000
    
    
    
    (1,164,000
    )Decrease in notes receivable
    
    
    576,000
    
    
    
    86,000Proceeds from sale of property
    
    
    9,000
    
    
    
    35,000Additions to property, equipment and leaseholds
    
    
    (2,638,000
    )
    
    
    (3,551,000
    )Net cash used in investing activities
    
    
    (1,801,000
    )
    
    
    (814,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase (decrease) in debt instruments
    
    
    (2,278,000
    )
    
    
    800,000Early retirement of debt
    
    
    
    
    
    
    (13,285,000
    )Proceeds from refinancing
    
    
    
    
    
    
    16,923,000Capitalization of deferred financing costs
    
    
    
    
    
    
    (3,351,000
    )Repurchase of common stock
    
    
    
    
    
    
    (370,000
    )Proceeds from issuance of preferred stock
    
    
    
    
    
    
    259,000Proceeds from exercise of stock options
    
    
    14,000
    
    
    
    58,000Net cash provided by (used in) financing activities
    
    
    (2,264,000
    )
    
    
    1,034,000Effect of exchange rate changes on cash
    
    
    126,000
    
    
    
    (45,000
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    585,000
    
    
    
    (1,170,000
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,802,000
    
    
    
    5,565,000CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    3,387,000
    
    
    $
    4,395,000CASH PAID DURING THE PERIOD FOR:Interest
    
    $
    2,952,000
    
    
    $
    2,630,000Income taxes
    
    $
    726,000
    
    
    $
    4,670,000


See accompanying notes to consolidated financial statements.

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MERCURY AIR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(Unaudited)

Note 1  General

Business

Mercury Air Group, Inc. (the Company), a Delaware Corporation, was
organized in 1956 and provides a broad range of services to the aviation
industry through four principal operating units: Mercury Air Centers, Inc.
(Air Centers), Mercury Air Cargo, Inc. (Air Cargo), MercFuel, Inc.
(MercFuel) and Maytag Aircraft Corporation (Maytag), a provider of
government contract services. The Air Centers operations consist of aviation
fuel sales, commercial aircraft refueling operations (into-plane), aircraft
ground support services, aircraft hangar services, secured aircraft parking
(aircraft tie-down services) and aircraft maintenance at certain Air Center
locations, known as Fixed Based Operations (FBOs), for commercial, private,
general aviation and United States Government aircraft (collectively FBO
services). Air Cargos operations consist of cargo handling, the sale of cargo
capacity on other airlines (Cargo Space Logistics), and general cargo sales
agent services. MercFuels operations consist of the sale and delivery of fuel,
primarily aviation fuel, to domestic and international commercial airlines,
corporate aviation and air freight airlines. Maytags government contract
services consist of the following services primarily for agencies of the United
States Government: aircraft refueling and fuel storage operations, base
operations support (BOS) services, air terminal and ground handling services
and weather observation and forecasting services.

On October 28, 2003, the Company announced that it had entered into a
definitive agreement, subject to the Companys stockholders approval,
completion of due diligence, and regulatory agencies approvals and consents,
to sell 100% of the outstanding common stock of Air Centers to Allied Capital
Corporation (Allied) for $70 million, subject to adjustments (the FBO
Sale). In accordance with the terms of the definitive agreement, as amended,
closing of this transaction is to occur on or before May 14, 2004.
The Company currently expects to close the FBO Sale either late in
the Companys third quarter or early in the Companys
fourth quarter of fiscal 2004.

Risks and Uncertainties

On October 28, 2003 the Company announced that it had entered into a
definitive agreement for Allied to purchase 100% of the outstanding common
stock of Air Centers from the Company, subject to, among other things, the
Companys stockholders approval, completion of due diligence and regulatory
agency approvals (the Definitive Agreement). The purchase price for the Air
Centers is $70 million, subject to adjustment for, among other things, working
capital and for certain FBO capital expenditures made by the Company. At the
close of the FBO Sale, $8.3 million from the sale proceeds will be deposited
into an escrow account pending the award of a new lease for the FBO located at
Atlantas Hartsfield International Airport. In accordance with the terms of the
Definitive Agreement the closing date for the FBO Sale was to be December 31,
2003 with Allied having the right to extend the closing date through March 31,
2004. On December 5, 2003, the Company and its lenders under the Senior
Secured Credit Facility (the Lenders) executed the Fifth Amendment to the
Loan and Security Agreement and Forebearance Agreement (the Forebearance
Agreement), which was amended on February 16, 2004. Among other things, the Company requested the Lenders and the
Lenders agreed to forebear from exercising their rights and remedies under the
Senior Secured Credit Facility for the following events of default, as defined
in the Loan and Security Agreement: (1) the Companys failure to deliver its
annual audited financial statements for fiscal year 2003 within the prescribed
time-frame allowed; (2) the formation of a subsidiary, Mercury Air Center -
Long Beach, without the prior consent of the lenders; (3) the Companys
failure to deliver supplemental schedules to J. H. Whitney as required under
the terms of the $24 million Senior Secured 12% Note; and (4)
the Companys failure to achieve the EBITDA financial covenant
for the twelve month period ended December 31, 2003. The Forebearance
Agreement, as amended, states that the Lenders agree, for a limited time but no later than
April 14, 2004, to forebear from exercising their rights and remedies under the
Senior Secured Credit Facility with respect to the events of default noted
above. The Company and
Allied have amended the Definitive Agreement whereby the closing date of the
FBO Sale is to occur on or before May 14, 2004. If the FBO Sale does not
close by April 14, 2004, the Company and the Lenders will need to amend the FBO
Sale closing date in the Forebearance Agreement or the Lenders would have the
right to exercise their rights and remedies under the Senior Secured Credit
Facility with respect to the events of default noted above.

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On January 20, 2004, the Los Angeles World Airports (LAWA) Board of
Commissioners approved a rental increase for one of Air Cargos warehouse
facilities located at Los Angeles International Airport (the Avion Warehouse)
that is effective retroactive to June 18, 2001. The monthly rent will increase
to $251,000, an increase of $64,000, or 25.4%, from the previous monthly rent
of $187,000. The total amount of the retroactive portion of the rental increase
from June 18, 2001 to January 31, 2004 is $2,002,000 (the Retroactive
Increase), which will be partially offset by recoverable retroactive sublease
rental income of $850,000. The provisions of the rental increase allow for the
Retroactive Increase to be paid by the Company in monthly installments of
$75,000, including interest, over the remaining term of the lease, which is due
to expire on June 17, 2006. As of December 31, 2003, the Company has accrued
$1,143,000 for the Retroactive Increase. Of this amount, $113,000 was recorded
in each of the Companys first two quarters of fiscal 2004.

Accounts receivable is comprised primarily of trade receivables from
customers and is net of an allowance for doubtful accounts. The Companys
credit risk is based in part on the following: 1) substantially all receivables
are related to the aviation industry, 2) there is a concentration of credit
risk as there are several customers who at any time have significant balances
owed to the Company, and 3) significant balances are owed by certain customers
that are not adequately capitalized. In addition, significantly higher fuel
prices for extended periods of time may have a negative impact on the aviation
industry as it substantially increases airlines operating expenses. Smaller
airlines with lower levels of capital may be more seriously impacted. The
Company assesses its credit portfolio on an ongoing basis and establishes
allowances which it believes are adequate to absorb potential credit problems
that can be reasonably anticipated.

The Company purchases fuel from a limited number of suppliers. If the
Companys relationship with any of these key suppliers terminates, the Company
may not be able to obtain a sufficient quantity of fuel on favorable terms or
may experience difficulty in obtaining fuel from alternative suppliers.
Furthermore, difficulties faced by these suppliers or fuel shortages or the
inability to obtain fuel from alternate sources at acceptable prices and terms,
could impair the Companys ability to sell fuel to its customers at competitive
prices and terms.

Basis of Presentation

The accompanying unaudited financial statements of Mercury Air Group, Inc.
and subsidiaries (the Company) have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments consisting of normal recurring adjustments and
accruals necessary for a fair presentation have been reflected in these
financial statements. Operating results for the quarter are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2004 due to seasonal and other factors. In order to maintain consistency
and comparability between periods presented, certain prior period amounts have
been reclassified to conform to the current period presentation. The
accompanying financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes thereto included in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2003.

New Accounting Pronouncements

On April 30, 2003, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities. This
standard amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. The provisions of this statement are generally
effective for contracts entered into or modified after June 30, 2003. The
Company adopted SFAS No.149 on July 1, 2003 with no material impact on the
Companys consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). This interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest entities. Under
current practice, two enterprises generally have been included in consolidated
financial statements because one enterprise controls the other through voting
interests. FIN 46 defines the concept of variable interests and requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
the parties involved. This interpretation applies immediately to variable
interest entities created after January 31, 2003. It applies in the first
fiscal year or interim period beginning after December 15, 2003, to variable
interest entities considered to be a special purpose entity (SPE) in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
For non-SPE variable interest entities acquired before February 1, 2003, the
interpretation must be adopted no later than the first interim or annual period
ending after March 15, 2004. The interpretation may be applied prospectively
with a cumulative-effect

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adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
The Company is currently evaluating the potential impact of the adoption of FIN
46.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,
which establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires classification of financial instruments within its scope as a
liability, including financial instruments issued in the form of shares that
are mandatorily redeemable, because those financial instruments are deemed to
be, in essence, obligations of the issuer. SFAS No. 150 is
effective for the Company for the interim period ending
March 31, 2004. The Company does not expect that the
adoption of this standard will have a material impact on its consolidated
financial statements.

Note 2  Stock-Based Employee Compensation

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. The Company
has elected to continue utilizing the intrinsic value method to account for
stock-based compensation as allowed by SFAS No. 123, Accounting for
Stock-Based Compensation.

SFAS No. 148 also amends the disclosure requirements of SFAS No. 123, to
require disclosure in both interim and annual financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. SFAS No. 148 is effective for the
Companys fiscal year ended June 30, 2003 and for interim financial statements
beginning January 1, 2003.

The Company has five stock option plans. As permitted under SFAS No. 123,
the Company measures compensation expense related to employee stock options
granted utilizing the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations under the intrinsic value method. The following
table illustrates the pro forma effect on the net loss if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.

Six Months Ended
    
    Three Months EndedDecember 31,
    
    December 31,2003
    
    2002
    
    2003
    
    2002Net loss, as reported
    
    $
    (1,819,000
    )
    
    $
    (1,185,000
    )
    
    $
    (1,517,000
    )
    
    $
    (596,000
    )Add stock-based employee compensation
expense included in net loss, net of
tax
    
    
    123,000
    
    
    
    340,000
    
    
    
    61,000
    
    
    
    66,000Less total stock based employee
compensation determined under the fair
value based method for all awards, net
of tax
    
    
    (59,000
    )
    
    
    (285,000
    )
    
    
    (27,000
    )
    
    
    (87,000
    )Pro forma net loss
    
    $
    (1,755,000
    )
    
    $
    (1,130,000
    )
    
    $
    (1,483,000
    )
    
    $
    (617,000
    )Basic net loss per share  as reported
    
    $
    (0.56
    )
    
    $
    (0.37
    )
    
    $
    (0.47
    )
    
    $
    (0.18
    )Basic net loss per share  pro forma
    
    $
    (0.54
    )
    
    $
    (0.35
    )
    
    $
    (0.46
    )
    
    $
    (0.19
    )Diluted net loss per share  as reported
    
    $
    (0.56
    )
    
    $
    (0.37
    )
    
    $
    (0.47
    )
    
    $
    (0.18
    )Diluted net loss per share  pro forma
    
    $
    (0.54
    )
    
    $
    (0.35
    )
    
    $
    (0.46
    )
    
    $
    (0.19
    )


Note 3  Bad Debt Expense

During the second quarter of fiscal 2004, the Company reversed previously
established bad debt reserves as a result of better than expected customers
collections experience over the past three quarters. This reversal resulted in
a reduction of bad debt expense of $323,000 for the second quarter of fiscal
2004 and a provision for bad debt expense of $60,000 for the first six months
of fiscal 2004.

Note 4  Income Taxes

Income taxes have been computed based on the estimated annual effective income
tax rates for the respective periods. The following is a reconciliation of the
federal statutory rate to the Companys effective tax rate on pretax loss:

7



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##### Table of Contents



Six Months Ended
    
    Three Months EndedDecember 31,
    
    December 31,2003
    
    2002
    
    2003
    
    2002Federal tax (benefit) at statutory rate
    
    
    (34.0
    %)
    
    
    (34.0
    %)
    
    
    (34.0
    %)
    
    
    (34.0
    %)State
income tax benefit, net of federal income tax
    
    
    (5.0
    )
    
    
    (2.7
    )
    
    
    (5.0
    )
    
    
    (2.7
    )Non-deductible Hambro settlement costs
    
    
    38.3
    
    
    
    
    
    
    
    52.5Non-deductible expenses, other
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    1.9Other, net
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3Effective income tax rate
    
    
    (0.7
    %)
    
    
    (34.5
    %)
    
    
    13.5
    %
    
    
    (34.5
    %)


The Hambro settlement costs of $1,799,000 recognized by the Company in
the second quarter of fiscal 2004 is not deductible in the determination of
taxable income resulting in a permanent book to tax difference. The difference
results in an increase in the income tax provision of $702,000 for the three
and six month periods ended December 31, 2003.

Note 5  Litigation

The Company is a defendant in certain litigation arising in the normal
course of business. In the opinion of management, the ultimate resolution of
such litigation will not have a material effect on its consolidated financial
statements. Reference is made to the Companys Quarterly Report
on Form 10-Q for the period ended
September 30, 2003 for additional legal matters with respect to which no
material developments have occurred in the current quarter.

Note 6  Debt

On December 30, 2002, the Company entered into a loan and security
agreement (the Facility), refinancing its senior secured credit facilities
with Foothill Capital Corporation (Foothill), a division of Wells Fargo Bank,
for a five-year term.

The Facility provides a total of up to $42.5 million in revolving and term
loans. The term loan is for an amount equal to $12.5 million, while the
revolving loan is for an amount not to exceed 85% of Eligible Accounts
Receivable (as defined in the loan agreement), subject to certain limitations.
The term loan is payable in $1.0 million installments each April
1 and October 1 and in $0.5 million installments each July 1 and December 31, until paid in
full. Amounts repaid under the term loan increase the maximum availability
under the revolving loan. The Facility also provides for the issuance of
certain letters of credit. The terms of the Facility requires that the Company
maintain a minimum availability on the revolving line of credit of $2.5
million. As of December 31, 2003, the Company had $7.1 million of availability
on the revolving line of credit. The amount of the available revolving credit
line fluctuates on a daily basis dependent upon the amount of Eligible
Receivables and the amount of letters of credit outstanding and the amount of
outstanding cash borrowings against the revolving credit facility.

The Facility may be terminated on December 23, 2005, if the Note is not
paid in full or refinanced, on terms acceptable to Foothill, prior to October
31, 2005. The Facility is collateralized by substantially all of the assets of
the Company and its subsidiaries. The Facility contains provisions that require
the maintenance of certain financial ratios including minimum EBITDA levels,
minimum fixed charge coverage ratios, and maximum annual capital expenditure
levels. In addition, under the Facility, the Company is prohibited from paying
non-intercompany cash dividends.

On
December 5, 2003, as amended on February 16, 2004, the
Company and its lenders under the Senior Secured Credit Facility
executed the Fifth Amendment to the Loan and Security Agreement and
Forebearance Agreement (the Forebearance Agreement).
Among other things, the Company requested the lenders and the lenders
agreed to forebear from exercising their rights and remedies under
the Senior Secured Credit Facility for the following events of
default, as defined in the Loan and Security Agreement: (1) the
Companys failure to deliver its annual audited financial
statements for fiscal 2003 within the prescribed time-frame allowed;
(2) the formation of a subsidiary, Mercury Air
Center  Long Beach, without the prior consent of the
lenders; (3) the Companys failure to deliver supplemental
schedules to J. H. Whitney as required under the terms of
the $24 million Senior Secured 12% Note; and (4) the
Companys failure to achieve the EBITDA financial covenant for
the twelve month period ended December 31, 2003. The
Forebearance Agreement, as amended, states that the lenders agree,
for a limited time but no later than April 14, 2004, to
forebear from exercising their rights and remedies under the Senior
Secured Credit Facility with respect to the events of default noted
above. The Company and Allied have amended the Definitive Agreement
whereby the closing date of the FBO Sale is now on a date on or prior
to May 14, 2004. If the FBO Sale does not close by
April 14, 2004, the Company and the Lenders will need to amend
the FBO Sale closing date in the Forebearance Agreement or the
Lenders would have the right to exercise their rights and remedies
under the Senior Credit Facility with respect to the events of
default noted above.

On October 28, 2003, Allied acquired the $24 million Senior Subordinated
12% Note (the Note), as amended on December 30, 2002 from J. H. Whitney Co.
Mezzanine Fund and waived certain provisions of the Note, which would have
required the Company to provide the Noteholder with the following: 1) if the
principal amount outstanding on the Note was not prepaid in full by December
31, 2003, the Noteholder would have been entitled to warrants to acquire from
the Company, for a nominal amount, 5% of the then outstanding shares of the
Companys common stock and 2) if the principal amount outstanding on the Note
exceeded $12 million on December 31, 2003 the Noteholder would have been
entitled to: a) a second set of warrants to acquire from the Company, for a
nominal amount, 5% of the then outstanding shares of the Companys common stock
and b) an additional Note in the original principal amount of $5 million. The
Note, subordinated to the Facility, is collateralized by the Companys assets.
Interest on the Note is due and payable at the end of each calendar quarter
and, effective January 2004 and continuing through June 2004, the interest rate
will increase by 1% per month up to a maximum total interest rate of 18% with
the amount of interest in excess of 12% being added to the principal of the
Note at the end of each calendar month. The Note matures on December 31, 2005.

8



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##### Table of Contents



The Note contains covenants that, among other matters, limit senior
indebtedness, the payment of dividends, and limits the disposition of assets
and the maintenance of certain financial measurements including EBITDA
requirements and limits on capital expenditures.

On December 12, 2003, the Company issued three promissory notes for an
aggregate principal amount of $3,586,000 (the Hambro Notes). The Hambro
Notes, subordinated to the Facility and the Note, accrue interest at the rate
of 12% per annum increasing to 16% per annum for any amount of unpaid principal
after June 30, 2004. The Hambro Notes mature at the earlier of (1) the
ninetieth day following payment in full of the Facility and the termination of
commitments for the Lenders to provide financing under the Facility or (2)
March 31, 2006, provided that if the Facility matures on December 31, 2007 then
such date shall be March 31, 2008.

Note 7  Hambro Settlement
Costs

On December 12, 2003, the Company entered into a settlement agreement (the
Hambro Settlement) relating to litigation with J O Hambro Capital Management
and certain of its affiliates and private clients (collectively J O Hambro)
whereby the Company issued three promissory notes for an aggregate principle
amount of $3,586,000 (the Hambro Notes) in exchange for the following, among
other things: (1) the release of certain claims by J O Hambro; (2) the
Companys agreement to dismiss litigation against J O Hambro; (3) the Companys
agreement not to institute certain litigation against J O Hambro and certain
other parties; (4) reimbursement of certain costs associated with the pending
litigation and the defense preparation for anticipated litigation between the
parties; and (5) the purchase of 343,600 shares of the Companys common stock
in exchange for the Hambro Notes. The settlement cost of $1,799,000 recognized
in the second quarter of fiscal 2004 represents the difference between the face
value of the Hambro Notes and the trading value of the shares of common stock
acquired by the Company on the day of the Hambro Settlement.

Note 8  Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares and potential common
shares except for amounts that are antidilutive. Potential common shares
include stock options and shares resulting from the assumed conversion of
subordinated debentures, when dilutive.

Six Months Ended
    
    Three Months EndedDecember 31, 2003
    
    December 31, 2002
    
    December 31, 2003
    
    December 31, 2002Diluted
    
    Basic
    
    Diluted
    
    Basic
    
    Diluted
    
    Basic
    
    Diluted
    
    BasicWeighted average number of common
shares outstanding during the period
    
    
    3,283,385
    
    
    
    3,283,385
    
    
    
    3,237,500
    
    
    
    3,237,500
    
    
    
    3,268,211
    
    
    
    3,268,211
    
    
    
    3,243,000
    
    
    
    3,243,000Common share equivalents resulting
from the assumed exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average number of common
and common equivalent shares
outstanding during the period
    
    
    3,283,385
    
    
    
    3,283,385
    
    
    
    3,237,500
    
    
    
    3,237,500
    
    
    
    3,268,211
    
    
    
    3,268,211
    
    
    
    3,243,000
    
    
    
    3,243,000


Note 9  Segment Reporting

The Company discloses segment information in accordance with SFAS No. 131,
Disclosure About Segments of an Enterprise and Related Information, which
requires companies to report selected segment information on a quarterly basis
and to report certain entity-wide disclosures about products and services,
major customers and material countries in which the entity holds assets and
reports revenues. The operating segments reported below are the segments of the
Company for which operating results are evaluated regularly by management in
deciding how to allocate resources and in assessing performance. Intersegment
sales are not significant.

The Company operates and reports its activities through four principal
units: 1) Fuel Sales, 2) Fixed Based Operations, 3) Cargo Operations and 4)
Government Contract Services.

9



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##### Table of Contents



Government
    
    CorporateFixed Base
    
    Cargo
    
    Contract
    
    orFuel Sales
    
    Operations
    
    Operations
    
    Services
    
    Unallocated
    
    Total(Dollars in Thousands)Quarter Ended December 31, 2003Sales and revenues
    
    $
    74,901
    
    
    $
    23,450
    
    
    $
    10,683
    
    
    $
    5,915
    
    
    $
    (1,062
    )
    
    $
    113,887Gross margin
    
    
    1,874
    
    
    
    3,084
    
    
    
    523
    
    
    
    1,431
    
    
    
    
    
    
    
    6,912Depreciation and amortization
    
    
    119
    
    
    
    1,319
    
    
    
    459
    
    
    
    79
    
    
    
    132
    
    
    
    2,108Capital expenditures
    
    
    2
    
    
    
    1,349
    
    
    
    26
    
    
    
    89
    
    
    
    12
    
    
    
    1,478Segment assets
    
    
    29,788
    
    
    
    59,864
    
    
    
    18,979
    
    
    
    10,489
    
    
    
    17,896
    
    
    
    137,016Quarter Ended December 31, 2002Sales and revenues
    
    $
    75,041
    
    
    $
    23,882
    
    
    $
    9,154
    
    
    $
    6,314
    
    
    $
    (429
    )
    
    $
    113,962Gross margin
    
    
    1,451
    
    
    
    2,941
    
    
    
    1,300
    
    
    
    1,196
    
    
    
    
    
    
    
    6,888Depreciation and amortization
    
    
    54
    
    
    
    1,328
    
    
    
    546
    
    
    
    90
    
    
    
    (20
    )
    
    
    1,998Capital expenditures
    
    
    6
    
    
    
    2,652
    
    
    
    
    
    
    
    
    
    
    
    283
    
    
    
    2,941Segment assets
    
    
    34,346
    
    
    
    60,244
    
    
    
    16,241
    
    
    
    11,564
    
    
    
    16,515
    
    
    
    138,910Six Months Ended December 31, 2003Sales and revenues
    
    $
    139,890
    
    
    $
    45,983
    
    
    $
    19,577
    
    
    $
    11,742
    
    
    $
    (2,292
    )
    
    $
    214,900Gross margin
    
    
    3,300
    
    
    
    6,288
    
    
    
    1,296
    
    
    
    2,743
    
    
    
    
    
    
    
    13,627Depreciation and amortization
    
    
    234
    
    
    
    2,699
    
    
    
    917
    
    
    
    160
    
    
    
    269
    
    
    
    4,279Capital expenditures
    
    
    639
    
    
    
    1,834
    
    
    
    38
    
    
    
    106
    
    
    
    21
    
    
    
    2,638Segment assets
    
    
    29,788
    
    
    
    59,864
    
    
    
    18,979
    
    
    
    10,489
    
    
    
    17,896
    
    
    
    137,016Six Months Ended December 31, 2002Sales and revenues
    
    $
    145,614
    
    
    $
    47,708
    
    
    $
    16,444
    
    
    $
    12,520
    
    
    $
    (429
    )
    
    $
    221,857Gross margin
    
    
    3,071
    
    
    
    5,914
    
    
    
    1,704
    
    
    
    2,149
    
    
    
    
    
    
    
    12,838Depreciation and amortization
    
    
    108
    
    
    
    2,581
    
    
    
    1,092
    
    
    
    181
    
    
    
    87
    
    
    
    4,049Capital expenditures
    
    
    6
    
    
    
    3,176
    
    
    
    65
    
    
    
    
    
    
    
    304
    
    
    
    3,551Segment assets
    
    
    34,346
    
    
    
    60,244
    
    
    
    16,241
    
    
    
    11,564
    
    
    
    16,515
    
    
    
    138,910


Gross margin is used as the measure of profit and loss for segment
reporting purposes as it is viewed by key decision makers as the principal
operating indicator in measuring segment profitability. The key decision makers
also view bad debt expense as an important measure of profit and loss. The
predominant component of bad debt expense relates to Fuel Sales. Bad debt
expense (benefit) for Fuel Sales was approximately $(519,000) and $339,000 for
the quarters ended December 31, 2003 and 2002, respectively; total bad debt
expense (benefit) was $(323,000) and $407,000 in the quarters ended December
31, 2003 and 2002, respectively. Bad debt (benefit) expense for Fuel Sales was
approximately $(180,000) and $632,000 for the six month periods ended December
31, 2003 and 2002, respectively; total bad debt expense was $60,000 and
$759,000 for the six month periods ended December 31, 2003 and 2002,
respectively.

Note 10  Comprehensive Loss

Comprehensive loss is summarized as follows:

Six Months Ended
    
    Three Months EndedDecember 31,
    
    December 31,2003
    
    2002
    
    2003
    
    2002Net loss
    
    $
    (1,819,000
    )
    
    $
    (1,185,000
    )
    
    $
    (1,517,000
    )
    
    $
    (596,000
    )Foreign currency translation adjustment
    
    
    148,000
    
    
    
    (45,000
    )
    
    
    140,000
    
    
    
    (6,000
    )Comprehensive loss
    
    $
    (1,671,000
    )
    
    $
    (1,230,000
    )
    
    $
    (1,377,000
    )
    
    $
    (602,000
    )


Note 11  Related Party Transactions

CFK Partners and CFK Realty Partners, LLC are entities consisting of three
of the Companys directors, one of whom also serves as the Companys Chief
Executive Officer and another who serves as Chairman of the Board and another
who serves as outside counsel on various general corporate legal matters. In
addition, CFK Partners also owns approximately 24.5% of the Companys issued
and outstanding common and preferred stock.

In January 2002, the Company sold the land and the office building which
houses its corporate headquarters to CFK Realty Partners, LLC (CFK Realty)
for $4,200,000, consisting of $2,800,000 in cash and a note receivable of
$1,400,000. The note accrues interest at 5% and contains provisions whereby CFK
Realty can elect to extend the maturity date in one year increments through
December 31, 2004. The note had an original maturity date of December 31, 2002.
In early December 2003, the Company received notification from CFK Realty that
it was exercising its right to extend the maturity date of the note for an
additional one year period.

10



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##### Table of Contents



Concurrently with the sale, the Company also entered into a ten-year lease
of the property for a monthly rental amount of approximately $37,000. CFK
Realty financed the purchase of the building through a $3.2 million loan. CFK
Realty is included in the Companys consolidated financial statements included
herein.

The Company and its Chairman (collectively, the Members) each own an
equity interest in MercMed LLC (MercMed) of 64.94% and 35.06%, respectively.
Accordingly, MercMed has been included in the Companys consolidated financial
statements and the liability to the minority interest has also been reflected
in the consolidated balance sheets. Minority interest on the Companys consolidated balance
sheet represents the minority members equity in MercMed. MercMed was formed
for the purpose of owning and operating an aircraft for the Members. On March
27, 2003, MercMed obtained new financing for the aircraft which is a 15-year
loan with the interest rate being fixed for the initial 36-month period. At the
end of the initial 36-month period, the interest rate will be reviewed and
fixed at the then Federal Home Loan Banks regular three-year interest rate
plus 275 basis points. Each of the Members are guarantors of this note. The
outstanding principal amount of the loan as of December 31, 2003 was $683,000.

The Company uses the services of the legal firm McBreen and Kopko (the
Firm) for various general corporate legal matters. Mr. Frederick H. Kopko,
Jr., a partner of the Firm, is a member of the Companys Board of Directors and
is a partner with CFK Partners. For the six month periods ended December 31,
2003 and 2002, the Company paid the Firm $481,000 and $215,000, respectively,
for legal services rendered. For the three month periods ended December 31,
2003 and 2002, the Company paid the Firm $339,000 and $81,000, respectively.

11



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##### Table of Contents






Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations

Results
of Operations Comparison of the three months ended December 31,
2003 and December 31, 2002 and comparison of the six months ended December 31,
2003 and December 31, 2002.

The following tables set forth, for the periods indicated, the revenues
and gross margin for each of the Companys four operating units, as well as
selected other financial statement data.

Six Months Ended December 31,
    
    Three Months Ended December 31,2003
    
    2002
    
    2003
    
    2002% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    TotalAmount
    
    Revenues
    
    Amount
    
    Revenues
    
    Amount
    
    Revenues
    
    Amount
    
    Revenues($ in thousands)Revenues:Fuel sales
    
    $
    139,890
    
    
    
    65.1
    %
    
    $
    145,614
    
    
    
    65.6
    %
    
    $
    74,901
    
    
    
    65.7
    %
    
    
    75,041
    
    
    
    65.9
    %FBOs
    
    
    45,983
    
    
    
    21.4
    
    
    
    47,708
    
    
    
    21.5
    
    
    
    23,450
    
    
    
    20.6
    
    
    
    23,882
    
    
    
    21.0Cargo operations
    
    
    19,577
    
    
    
    9.1
    
    
    
    16,444
    
    
    
    7.4
    
    
    
    10,683
    
    
    
    9.4
    
    
    
    9,154
    
    
    
    8.0Government contract services
    
    
    11,742
    
    
    
    5.5
    
    
    
    12,520
    
    
    
    5.6
    
    
    
    5,915
    
    
    
    5.2
    
    
    
    6,314
    
    
    
    5.5Intercompany eliminations (2)
    
    
    (2,292
    )
    
    
    (1.1
    )
    
    
    (429
    )
    
    
    (0.1
    )
    
    
    (1,062
    )
    
    
    (0.9
    )
    
    
    (429
    )
    
    
    (0.4
    )Total Revenue
    
    $
    214,900
    
    
    
    100.0
    %
    
    $
    221,857
    
    
    
    100.0
    %
    
    $
    113,887
    
    
    
    100.0
    %
    
    
    113,962
    
    
    
    100.0
    %


% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofUnit
    
    
    
    
    
    Unit
    
    
    
    
    
    Unit
    
    
    
    
    
    UnitAmount
    
    Revenues
    
    Amount
    
    Revenues
    
    Amount
    
    Revenues
    
    Amount
    
    RevenuesGross Margin(1):Fuel sales
    
    $
    3,300
    
    
    
    2.4
    %
    
    $
    3,071
    
    
    
    2.1
    %
    
    $
    1,874
    
    
    
    2.5
    %
    
    $
    1,451
    
    
    
    1.9
    %FBOs
    
    
    6,288
    
    
    
    13.7
    
    
    
    5,914
    
    
    
    12.4
    
    
    
    3,084
    
    
    
    13.2
    
    
    
    2,941
    
    
    
    12.3Cargo operations
    
    
    1,296
    
    
    
    6.6
    
    
    
    1,704
    
    
    
    10.4
    
    
    
    523
    
    
    
    4.9
    
    
    
    1,300
    
    
    
    14.2Government contract services
    
    
    2,743
    
    
    
    23.4
    
    
    
    2,149
    
    
    
    17.2
    
    
    
    1,431
    
    
    
    24.2
    
    
    
    1,196
    
    
    
    18.9Total Gross Margin
    
    $
    13,627
    
    
    
    6.3
    %
    
    $
    12,838
    
    
    
    5.8
    %
    
    $
    6,912
    
    
    
    6.1
    %
    
    $
    6,888
    
    
    
    6.0
    %


% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    TotalAmount
    
    Revenues
    
    Amount
    
    Revenues
    
    Amount
    
    Revenues
    
    Amount
    
    RevenuesSelling, general and
administrative
    
    $
    5,040
    
    
    
    2.3
    %
    
    $
    5,241
    
    
    
    2.4
    %
    
    $
    2,765
    
    
    
    2.4
    %
    
    $
    2,651
    
    
    
    2.3
    %Provision for bad debts
    
    
    60
    
    
    
    0.0
    
    
    
    759
    
    
    
    0.3
    
    
    
    (323
    )
    
    
    (0.3
    )
    
    
    407
    
    
    
    0.4Depreciation and amortization
    
    
    4,279
    
    
    
    2.0
    
    
    
    4,049
    
    
    
    1.8
    
    
    
    2,108
    
    
    
    1.9
    
    
    
    1,998
    
    
    
    1.8Interest expense and other
    
    
    4,280
    
    
    
    2.0
    
    
    
    2,865
    
    
    
    1.3
    
    
    
    1,899
    
    
    
    1.7
    
    
    
    1,533
    
    
    
    1.3Hambro settlement costs
    
    
    1,799
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1,799
    
    
    
    1.6Debt extinguishment costs
    
    
    
    
    
    
    
    
    
    
    1,733
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    1,208
    
    
    
    1.1Loss
before income tax provision (benefit)
    
    
    (1,831
    )
    
    
    (1.0
    )
    
    
    (1,809
    )
    
    
    (0.8
    )
    
    
    (1,336
    )
    
    
    (1.2
    )
    
    
    (909
    )
    
    
    (0.8
    )Income
tax provision (benefit)
    
    
    (12
    )
    
    
    (1.0
    )%
    
    
    (624
    )
    
    
    (0.3
    )
    
    
    181
    
    
    
    (0.1
    )
    
    
    (313
    )
    
    
    (0.3
    )Net loss
    
    
    (1,819
    )
    
    
    (1.0
    )%
    
    
    (1,185
    )
    
    
    (0.5
    )%
    
    
    (1,517
    )
    
    
    (1.3
    )%
    
    
    (596
    )
    
    
    (0.5
    )%Accrued preferred stock dividends
    
    
    (19
    )
    
    
    (0.0
    )%
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (0.0
    )%Net loss applicable to common stockholders
    
    $
    (1,838
    )
    
    
    (1.0
    )%
    
    $
    (1,185
    )
    
    
    (0.5
    )%
    
    $
    (1,526
    )
    
    
    (1.3
    )%
    
    $
    (596
    )
    
    
    (0.5
    )%




---

|(1) |  | Gross margin as used here and throughout Managements Discussion includes
certain selling, general and administrative costs which are charged
directly to the operating units, but excludes depreciation and
amortization expenses and selling, general and administrative expense.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Three Months Ended December 31, 2003 Compared to December 31, 2002

Revenue for the Company in the second quarter of fiscal 2004 was $113,887
thousand, which is virtually unchanged from revenue of $113,962 thousand
reported for the second quarter of fiscal 2003. Gross margin increased by 0.4%
to $6,912 thousand in the second quarter of fiscal 2004 from $6,888 thousand
reported in the second quarter of fiscal 2003. The increase in gross margin
reflected improved performances as discussed below at the Companys Fuel Sales,
Air Centers, and Maytag Government Contract Services Operations segments off
set by a decline in the Air Cargo Operating Segment.

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##### Table of Contents



MercFuel, the Companys fuel sales business, generated revenue of $74,901
thousand in the current period, a decrease of $140 thousand or 1.9% from last
years revenue of $75,041 thousand. The decrease in revenue was primarily due
to lower sales volume offset by higher average fuel sales prices. Fuel sales
volume was 70.8 million gallons in the second quarter of fiscal 2004, a
decrease of 7.3 million gallons from the same period of fiscal 2003 resulting
in a reduction in sales revenue of $7.0 million. The decline in sales volume is
due to the cessation of business by National Airlines, Inc. (National), a
customer of MercFuel since May 1999, on November 6, 2002. Sales volume to
National in the second quarter of fiscal 2003 was 8.0 million gallons providing
revenue of $7.2 million. Excluding the sales volume to National from MercFuels
total sales volume in the second quarter of fiscal 2003, second quarter 2004
sales volume increased 0.7 million gallons, or 1.0%, from last year. The
average sales price in the second quarter of fiscal 2004 was $1.057 per gallon,
an increase of $0.097 per gallon from the same period of last year resulting in
an increase in revenue of $6.8 million due to higher average sales prices. The
higher average sales price is due to higher worldwide petroleum prices.
MercFuels revenues represented 65.7% of the Companys total revenue in the
current period compared to 65.9% of the Companys total revenue in the
comparable prior year quarter. MercFuels gross margin from fuel sales was
$1,874 thousand, or $0.043 per gallon, in the current period compared with
$1,421 thousand, or $0.035 per gallon, in the same period last year. The
increase in gross margin was primarily due to higher realized margins for fuel
sales in the Commercial Airline market, where the average margin per gallon
increased to $0.038 per gallon in the second quarter of fiscal 2004 from $0.028
per gallon last year.

The Companys Air Centers business segment had revenue of $23,450 thousand
in the second quarter of fiscal year 2004, a decrease of $432 thousand or 1.8%
from last years second quarter revenue of $23,882 thousand. The revenue
decrease was mainly due to lower revenue of $0.5 million in maintenance
activities in the Air Center operations. The Air Centers aviation fuel sales
volume in the second quarter of fiscal 2004 was 8.0 million gallons with an
average sales price of $1.94 per gallon as compared to last years second
quarter sales volume of 8.4 million gallons with an average sales price of
$1.82 per gallon. The higher average sales price was mainly due to higher
worldwide petroleum prices. Air Centers gross margin increased by $143
thousand or 4.9% in the current period to $3,084 thousand from $2,941 thousand
due to lower expenses of $146 thousand resulting from the Companys cost
reduction initiatives in fiscal 2003.

The Companys Air Cargo operations had revenue of $10,683 thousand in the
second quarter of fiscal 2004, an increase of $1,529 thousand or
16.7% from revenue of $9,154 thousand in the second quarter of fiscal 2003. The increase in
revenue is mainly due to improvements in cargo management of $0.1 million and
cargo marketing services of $2.0 million offset by a decline in cargo handling
of $0.5 million. The increase in cargo marketing services represents increased
activity generated by the Mercury World Cargo division, which sells Cargo
capacity under Mercurys own airway bill. Gross margin from Air Cargo
operations in the current period decreased by $777 thousand, or 59.8%, to $523
thousand from $1,300 thousand in the year ago period due primarily to the
accrual of employee severance costs of $0.3 million in the second quarter of
fiscal 2004.

The Companys Government Contract Services segment had revenue of $5,915
thousand in the second quarter of fiscal 2004, a decrease of $399 thousand or
6.3% from revenue of $6,314 thousand in the second quarter of fiscal 2003. The
revenue decrease is primarily due to the decreased revenue from the Weather
Data Services contracts in the amount of $0.2 million and the loss of one
refueling contract, which generated revenue of $0.2 million last year. Gross
margin in the current period increased by $235 thousand or 19.6% to $1,431
thousand from $1,146 thousand last year due to recovery of a wage determination
on the Westover contract.

Selling, general and administrative expenses in the current quarter
increased by $114 thousand, or 4.3%, to $2,765 thousand from $2,651 thousand in
last fiscal years second quarter primarily due to higher professional fees
associated with the re-audit of the Companys financial statements for fiscal
2002 and 2001 of $311 thousand and higher legal fees associated with the Hambro
Settlement of $138 thousand.

The
Company realized a benefit of $323 thousand for bad debts in the
second quarter of fiscal 2004 as a result of better than expected customer
collections experience over the past three quarters resulting in the reversal
of previously established bad debt reserves as compared to bad debt
expense of $407 thousand for the second quarter of fiscal 2003.

Depreciation and amortization expense was $2,108 thousand in the current
period compared to $1,998 thousand a year ago.

Interest expense and other was $1,899 thousand in the second quarter of
fiscal 2004, an increase of $366 thousand from the same period last year. The
increase was due to the accrual in the second quarter of fiscal 2004 of $288
thousand for the debt premiums and increased debt service costs associated with
the Companys Senior Secured Credit Facility entered into on December 30, 2002
as compared to the debt service costs associated with the previous Senior
Secured Credit Facility.

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##### Table of Contents



The Company recognized settlement expense of $1,799 thousand in the second
quarter of fiscal 2004 associated with the Hambro Settlement. The settlement
expense represents the difference between the face value of the Hambro Notes
and the trading value of the shares of common stock acquired by the Company on
the settlement date. See further discussion of the settlement in the
discussion of liquidity and capital resources which follows.

In fiscal 2003, the company wrote-off unamortized deferred debt issuance
costs of $1,208 thousand in the second quarter of fiscal 2003 due to the
Companys debt restructuring in December 2002.

The settlement cost of $1,799 thousand recognized by the Company in the
second quarter of fiscal 2004 is not deductible in determining taxable income
resulting in a permanent book to tax difference. As a result, the Companys
taxable income is higher than the Companys loss before income tax provision by
$1,799 thousand increasing the Companys income tax provision by $702 thousand
to $181 thousand.

Six Months Ended December 31, 2003 Compared to December 31, 2002

Revenue for the Company for the first six months of fiscal 2004 was
$214,900 thousand, which decreased by 3.1% from revenue of $221,857 thousand
reported for the first six months of fiscal 2003. The decrease in revenue is
due primarily to lower MercFuel revenue of $5,724 thousand. Gross margin
increased by 6.2% to $13,627 thousand in the first six months of fiscal 2004
from $12,838 thousand reported in the first six months of fiscal 2003. The
increase in gross margin is due to improved performances at the Companys Air
Centers, MercFuel and Maytag Government Contract Services Operations segments.

MercFuel, the Companys fuel sales business, generated revenue of $139,890
thousand in the current period, a decrease of $5,724 thousand or 3.9% from last
years revenue of $145,614 thousand. The decrease in revenue was primarily due
to lower sales volume partially offset by higher average fuel sales prices.
Fuel sales volume was 135.1 million gallons in the first six months of fiscal
2004, a decrease of 23.1 million gallons from the same period of fiscal 2003
resulting in a reduction in sales revenue of $21.3 million. The decline in
sales volume is due to the cessation of business by National Airlines, Inc.s
(National), a customer of MercFuel since May 1999, on November 6, 2002. Sales
volume to National in fiscal 2003, through November 6, 2003, was 28.9 million
gallons, resulting in revenue of $24.7 million. Excluding the sales volume to
National from MercFuels total sales volume for the first half of fiscal 2003,
first half 2004 sales volume increased 5.8 million gallons, or 4.5% from last
year. The average sales price in the first six months of fiscal 2004 was $1.04
per gallon, an increase of $0.115 per gallon from the same period of last year
resulting in an increase in revenue of $15.3 million due to higher average
sales prices. The higher average sales price is due to higher worldwide
petroleum prices. MercFuels revenues represented 65.1% of the Companys total
revenue in the current period compared to 65.6% of revenue in the comparable
prior year. MercFuels gross margin was $3,300 thousand in the current
period compared with $3,071 thousand in the same period last year, of which
$0.4 million was generated from sales to National. The average gross margin
per gallon sold in the first six months of fiscal year 2004 was $0.0387 per gallon
as compared to $0.0341 for the same period last year.

The Companys Air Centers business segment had revenue of $45,983 thousand
in the first six months of fiscal 2004, a decrease of $1,725 thousand or 3.6%
from last years first six months revenue of $47,708 thousand. The revenue
decrease was mainly due to lower revenue of $1.5 million in maintenance
activities in the Air Center operations. The Air Centers aviation fuel sales
volume in the first half of fiscal 2004 was 15.7 million gallons with an
average sales price of $1.92 per gallon as compared to last years first half
sales volume of 17.1 million gallons with an average sales price of $1.76 per
gallon. The higher average sales price was mainly due to slightly higher
worldwide petroleum prices. Air Centers gross margin increased by $374
thousand or 6.3% in the current period to $6,288 thousand from $5,914 thousand
last year due to the Companys cost reduction initiatives implemented in fiscal
2003.

The Companys Air Cargo operations had revenue of $19,577 thousand in the
first six months of fiscal 2004, an increase of $3,133 thousand or 19.1% from
revenue of $16,444 thousand in the first six months of fiscal 2003. The
increase in revenue is mainly due to improvements in cargo management of $0.3
million and cargo marketing services of $2.9 million. Gross margin from Air
Cargo operations in the current period decreased by $408 thousand, or 23.9%, to
$1,296 thousand from $1,704 thousand in the year ago period due primarily to
the accrual of employee severance cost of $0.3 million in fiscal 2004.

The Companys Government Contract Services segment had revenue of $11,742
thousand in the first six months of fiscal 2004, a decrease of $778 thousand or
6.2% from revenue of $12,520 thousand in the first six months of fiscal 2003.
The revenue decrease is primarily due to decreased revenue from Weather Data
Services contracts in the amount of $0.5 million and the loss of one refueling
contract, which generated revenue of $0.5 million last year. Gross margin in
the current period increased by $593 thousand or 27.6% to $2,743 thousand from
$2,149 thousand last year due to the recovery of a wage determination in fiscal
2004 for the Companys

14



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##### Table of Contents



Westover contract and the establishment of a legal reserve for settlement
of a labor dispute on the Companys Patrick Air Force Base contract in fiscal
2003.

Selling, general and administrative expenses for the year decreased by
$201 thousand, or 3.9%, to $5,040 thousand from $5,241 thousand in last years
first six months primarily due to a $318 thousand expense relating to the
extension of the term for certain stock options in the prior year.

Provision for bad debts was $60 thousand in the current period, compared
to $759 thousand from the prior year. The reduction reflects better than
expected customer collections experience over the past three quarters resulting
in the reversal during the second quarter of fiscal year 2004 of $323,000 in
previously recognized bad debt expense.

Depreciation and amortization expense was $4,279 thousand in the current
period compared to $4,049 thousand a year ago.

Interest expense and other was $4,280 thousand in the first six months of
fiscal 2004, an increase of $1,415 thousand from the same period last year, due
to the accrual in fiscal 2004 of $1,150 thousand for the debt premiums and the
increased debt servicing costs associated with the Companys Senior Secured
Credit Facility entered into on December 30, 2002 as compared with the
Companys previous Senior Secured Credit Facility.

The Company recognized settlement expense of $1,799 thousand in the second
quarter of fiscal 2004 associated with the Hambro Settlement. The settlement
expense represents the difference between the face value of the Hambro Notes
and the trading value of the shares of common stock acquired by the Company on
the settlement date. See further discussion of the settlement in the
discussion of liquidity and capital resources which follows.

The Company wrote off unamortized deferred financing costs of $1,733
thousand in the first six months of fiscal 2003 due to the Companys debt
restructuring in December 2002.

The settlement cost of $1,799 thousand recognized by the Company in the
second quarter of fiscal 2004 is not deductible in determining taxable income
resulting in a permanent book to tax difference. As a result, the Companys
taxable loss is lower than the book loss before income tax benefit for the six
month period ended December 31, 2003 by $1,799 thousand reducing the Companys
income tax benefit in fiscal 2004 by $702 thousand to $12 thousand.

Liquidity and Capital Resources

As of December 31, 2003, the Companys cash and cash equivalents were $3.4
million, an increase of $0.6 million as compared to cash and cash equivalents
of $2.8 million as of June 30, 2003.

Cash provided by operating activities for the six month period ended
December 31, 2003 was $4.5 million as compared to cash used for operating
activities of $1.3 million in the first half of fiscal 2003. The change in
operating assets and liabilities for the first six months of fiscal 2004
resulted in an increase of $1.1 million as compared to a decrease of $8.1
million in the first six months of fiscal 2003, which reflects a payment of
$4.5 million for income taxes primarily due to the sale of the Bedford FBO.

During the first six months of fiscal 2004, the Company used $1.8 million
in investing activities primarily due to additions to property, equipment and
leaseholds of $2.6 million, offset by a $0.8 million reduction in notes
receivable and other assets. This compares to cash used in investing activities
of $0.8 million during the first six months of fiscal 2003 resulting from the
reduction in restricted cash of $3.7 million, established to pay for the
estimated income tax obligation from the sale of the Bedford FBO, partially
offset by capital expenditures of $3.6 million. The Companys financing
activities resulted in a net cash outlay of $2.3 million during the first six
months primarily associated with the scheduled repayment of debt, as compared
to net cash generated from financing activities for the first six months of
fiscal 2003 of $1.0 million.

On December 30, 2002, the Company entered into a loan and security
agreement with Foothill Capital Corporation (Foothill), now known as Wells
Fargo Foothill, a division of Wells Fargo Bank (the Facility), as agent for
the lenders party thereto, refinancing its senior collateralized credit
facilities for a five-year term. In addition, the Company and J.H. Whitney Co.
Mezzanine Fund entered into agreements amending the terms of the subordinated
note (the Whitney Note), which will mature on December 31, 2005. The initial
funding from the facility and the amendments to the subordinated note was
completed on December 30, 2002.

15



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##### Table of Contents



The Companys senior secured credit facility (Facility) consists of up
to $42.5 million in revolving and term loans. The term loan is currently for an
amount equal to $9.5 million, while the revolving loan is for an amount not to
exceed 85% of Eligible Accounts Receivable (as defined in the loan agreement),
subject to certain limitations. The term loan is payable in $1.0 million
installments each April 1 and October 1, beginning April 1, 2003 and in $0.5
million installments each July 1 and December 31, until paid in full. Amounts
repaid under the term loan increase the maximum availability under the
revolving loan. The Facility also provides for the issuance of certain letters
of credit. The terms of the Facility require that the Company maintain a
minimum availability on the revolving line of credit of $2.5 million. As of
December 31, 2003, the Company had $7.1 million of availability on the
revolving line of credit. The amount of available revolving credit line
fluctuates on a daily basis dependent upon the amount of Eligible Receivables,
the amount of letters of credit outstanding and the amount of outstanding cash
borrowings against the revolving credit facility.

The amended Whitney Note was in the form of a $24.0 million Senior
Subordinated 12% Note (the Note) with detachable warrants to purchase 251,563
shares of the Companys common stock exercisable through September 9, 2006 at
$6.10 per share as adjusted for the one-for-two stock split in July 2003. The
warrant exercise price was reduced from $11.00 per share. The Note is
collateralized by the Companys assets, subordinate to Foothills interest.
Warrants to purchase an additional 5% of the Companys common stock,
exercisable for nominal consideration, would have been issuable if the
principal amount of the Note was not prepaid by December 31, 2003. Warrants to
purchase a second 5% of the Companys common stock, exercisable for nominal
consideration, along with an additional note in the original principal amount
of $5 million would also have been issued if the outstanding principal amount
of the Note was greater than $12 million after December 31, 2003. However, on
October 28, 2003 the Company announced that Allied had acquired the Note from
Whitney and waived the provisions for the additional warrants equivalent to 10%
of the Companys outstanding common stock and the additional $5 million note.
Beginning January 2004 and continuing through June 2004, the interest rate will
increase by 1% per annum each month up to a maximum rate of 18%. As of December
31, 2003, the Company had accrued $2,875 thousand associated with the Note
premiums, of which $1,150 thousand was accrued during the first four months of
fiscal 2004, up until the time that Allied acquired the Note from J.H. Whitney
Co. The amended note contains similar covenants as the original Note, including
covenants that, among other matters, limit senior indebtedness, the payment of
dividends, and the disposition of assets. The revised covenants also include
minimum EBITDA requirements and capital expenditure limitations.

The Facility may be terminated on December 23, 2005, if the Note is not
paid in full or refinanced, on terms acceptable to Foothill, prior to October
31, 2005. The Facility is collateralized by substantially all of the assets of
the Company and its subsidiaries. The Facility contains provisions that require
the maintenance of certain financial ratios including minimum EBITDA levels,
minimum fixed charge coverage ratios, and maximum annual capital expenditure
levels. In addition, under the Facility, the Company is prohibited from paying
non-intercompany cash dividends.

On October 28, 2003, the Company also announced the FBO Sale, for which
closing is, among other things, contingent upon:
1) stockholder approval; 2) the completion of due diligence; and 3) regulatory
agencies approvals and consents. The proceeds from the FBO Sale are subject to
the establishment of an escrow account in the amount of $8.3 million to be
distributed at the earlier of the award of a long term lease to Allied for the
FBO at the Hartsfield Airport or in five equal annual installment payments
starting at the first anniversary date of the close of the FBO Sale if the Air
Centers lease for the Hartsfield FBO is not terminated earlier, reimbursement
for certain FBO capital expenditures made by the Company, minimum working
capital amounts at closing and other customary terms and conditions. The
Company has received consent for the FBO Sale from its Senior Lenders. In
accordance with the terms of the definitive agreement, as amended, the FBO Sale
is to close on or before May 14, 2004.

On
December 5, 2003, as amended on February 16, 2004, the Company and its lenders under the Senior Secured
Credit Facility executed the Fifth Amendment to the Loan and Security Agreement
and Forebearance Agreement (the Forebearance Agreement). Among other things,
the Company requested the lenders and the lenders agreed to forebear from
exercising their rights and remedies under the Senior Secured Credit Facility
for the following events of default, as defined in the Loan and Security
Agreement: (1) the Companys failure to deliver its annual audited financial
statements for fiscal 2003 within the prescribed time-frame allowed; (2) the
formation of a subsidiary, Mercury Air Center  Long Beach, without the prior
consent of the lenders; (3) the Companys failure to deliver supplemental
schedules to J. H. Whitney as required under the terms of the $24 million
Senior Secured 12% Note; and (4)  the Companys failure to
achieve the EBITDA financial covenant for the twelve month period
ended December 31, 2003. The Forebearance Agreement, as amended, states that the lenders
agree, for a limited time but no later than April 14, 2004, to forebear from
exercising their rights and remedies under the Senior Secured Credit Facility
with respect to the events of default noted above. The Company and Allied have amended the Definitive
Agreement whereby the closing date of the FBO Sale is now on a date
on or prior to May 14, 2004. If the
FBO Sale does not close by April 14, 2004, the Company and the Lenders will
need to amend the FBO Sale closing date in the Forebearance Agreement or the
Lenders would have the right to exercise their rights and remedies under the
Senior Secured Credit Facility with respect to the events of default noted
above.

16



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##### Table of Contents



On December 12, 2003, the Company entered into a settlement agreement (the
Hambro Settlement) relating to litigation with J O Hambro Capital Management
and certain of its affiliates and private clients (J O Hambro) whereby the
Company issued three promissory notes for an aggregate principle amount of
$3,586,000 (the Hambro Notes) in exchange for the following, among other
things: (1) the release of certain claims by J O Hambro; (2) the Companys
agreement to dismiss litigation against J O Hambro; (3) the Companys agreement
not to institute certain litigation against J O Hambro and certain other
parties; (4) reimbursement of certain costs associated with the pending
litigation and the defense preparation for anticipated litigation between the
parties; and (5) the purchase of 343,600 shares of the Companys common stock
in exchange for the Hambro Notes. The Hambro Notes: 1) are subordinated to the
Senior Secured Credit Facility and to the Senior Subordinated Note; 2) are due
on the earlier of (a) the ninetieth day following payment in full of the Senior
Secured Credit Facility and the termination of commitments for the Senior
Secured Lender to provide financing under the Senior Secured Credit Facility;
or (b) March 31, 2006, provided that if the Senior Secured Credit Facility
Matures on December 31, 2007 then such date shall be March 31, 2008; and 3)
bear and accrue interest at the rate of 12% per annum commencing on December
31, 2003 but will increase to 16% per annum for any amount of unpaid principal
after June 30, 2004.

At the close of the FBO Sale, the Company estimates gross sales proceeds
of $73.1 million. The Company intends to use these proceeds to: 1) prepay the
outstanding principal amount on the Senior Secured Term Loan of $10 million; 2)
repay all outstanding cash advances on the Revolving Line of Credit; 3) pay all
accrued interest, fees and expenses associated with the Senior Secured Credit
Facility; 4) provide cash collateral for the outstanding Letters of Credit of
approximately $16.0 million; 5) prepay the outstanding principal amount on the
Allied Note; 6) pay all accrued interest, fees and expenses associated with the
Allied Note; 7) establish an escrow account for the FBO at the Hartsfield
Airport in the amount of $8.3 million; 8) repay the outstanding principal
amount due on the J. O. Hambro Note of $3.6 million; 9) repay all accrued
interest on the Hambro Notes; and 10) pay all commissions, fees and expenses
associated with the sale transaction. After settlement of the all of the
obligations noted above, the Company estimates that the transaction will result
in surplus cash proceeds of approximately $5.6 million, of which an estimated
$1.5 million will be required to settle the Companys current income tax
obligation associated with the FBO Sale although the exact amount of the
surplus cash proceeds will be dependent upon many factors including, but not
limited to, the date of closing.

The Company is currently evaluating new credit facilities to support the
Companys expansion of its remaining three business lines and to support the
Companys Letters of Credit requirements thereby releasing the cash collateral
of approximately $16 million to be used for working capital requirements and
general corporate purposes.

In January 2004 the Companys wholly owned subsidiary, Maytag Aircraft
Corporation, located in Colorado Springs, Colorado, was awarded the United
States Air Mobility Command (AMC) contract to provide Air Terminal and Ground
Handling Services at Kuwait International Airport. Under the terms of the
contract, Maytag Aircraft Corporation will provide air terminal and ground
handling services for the Air Mobility Command, working U.S. Government owned
or operated aircraft and U.S. Government sponsored foreign aircraft requiring
such services at Kuwait International Airport/Al Mubarek Air Base. This
contract is effective April 1, 2004 through September 30, 2004 with four
one-year option periods making the full term of this $18 million contract
effective through September 30, 2008. This contract represents a continuum of
air terminal and ground handling services provided by Maytag Aircraft
Corporation to AMC since August of 2000. The services include operating the
air terminal operations center (information control, load planning, capability
forecasting, and ramp coordination), and providing aircraft services (cargo
processing, aircraft loading and unloading, cleaning, and catering), ground
services (marshalling, material handling, baggage handling, and all related
connect/disconnect services), passenger services, information systems, and
equipment maintenance.

Critical Accounting Policies

Managements beliefs regarding critical accounting policies have not
changed significantly from those discussed in Item 7 of the Companys Annual
Report on Form 10-K for the fiscal year ended June 30, 2003.




Item 3.Quantitative and Qualitative Disclosure About Market Risk

There has been no material change during the six months ended December 31,
2003 from the disclosures regarding market risk presented in the Companys
Annual Report on Form 10-K for the fiscal year ended June 30, 2003.

17



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##### Table of Contents






Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on evaluations as of December 31, 2003, our principal executive
officer and principal financial officer, with the participation of our
management team, have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC.

Changes in Internal Controls

There were no significant changes in our internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date of their most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Forward-Looking Statements

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




PART II  OTHER INFORMATION




Item 1.Legal Proceedings

The Company is a defendant in certain litigation arising in the normal
course of business. In the opinion of management, the ultimate resolution of
such litigation will not have a material effect on its consolidated financial
statements. Reference is made to the Companys Quarterly Report
on Form 10-Q for the period ended
September 30, 2003 for additional legal matters with respect to which no
material developments have occurred in the current quarter.

18



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##### Table of Contents






Item 2.Change in Securities, Use of Proceeds, and Issuer Purchases of Equity

Securities

ISSUER PURCHASES OF EQUITY SECURITIES

(d) Maximum Number(c) Total Number of
    
    (or ApproximateShares (or Units)
    
    Dollar Value) ofPurchased as Part
    
    Shares (or Units)(a) Total Number of
    
    (b) Average Price
    
    of Publicly
    
    that May Yet BeShares (or Units)
    
    Paid per Share (or
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Purchased
    
    Unit)
    
    Programs
    
           Plans or ProgramsMonth #1
October 1, 2003
to
October 31, 2003
    
    
    0
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMonth
#2
November 1, 2003
to
November 30, 2003
    
    
    0
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMonth
#3
December 1, 2003
to
December 31, 2003
    
    
    343,600
    
    
    $
    10.44
    (1)
    
    
    343,600
    (2)
    
    
    0Total




---

|(1) |  | Represents principal amount of Hambro Notes, divided by number of shares
of Mercury common stock purchased by the Company. The Hambro Notes were
issued in exchange for the following, among other things: (1) the release
of certain claims by J O Hambro; (2) the Companys agreement to dismiss
litigation against J O Hambro; (3) the Companys agreement not to
institute certain litigation against J O Hambro and certain other parties;
(4) reimbursement of certain costs associated with the pending litigation
and the preparation for anticipated litigation between the parties; and
(5) the issuance of 343,600 shares of Mercury common stock.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | This transaction was publicly reported on Form 8-K dated December 15,
2003. No other shares will be purchased pursuant to this transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  




Item 3.Default Upon Senior Securities

On December 5, 2003, the Company
and its Lenders under the Senior Secured Credit Facility, executed
the Fifth Amendment to Loan and Security Agreement and Forebearance
Agreement (the Forebearance Agreement). In accordance
with the terms of the Forebearance Agreement, as amended on
February 16, 2004, the Lenders agreed to forebear from
exercising their rights and remedies under the Senior Secured Credit
Facility for the following events of default, as defined in the Loan
and Security Agreement: (1) the Companys failure to
deliver its annual audited financial statements for fiscal year 2003
within the prescribed time-frame allowed; (2) the formation of a
subsidiary, Mercury Air Center  Long Beach, without the prior
consent of the Lenders; (3) the Companys failure to
deliver supplemental schedules to J. H. Whitney as required
under the terms of the $24 million Senior Secured 12% Note; and
(4) the Companys failure to achieve the EBITDA financial
covenant for the twelve month period ended December 31, 2003.
The Forebearance Agreement, as amended, states that the Lenders
agree, for a limited time but no later than April 14, 2004, to
forebear from exercising their rights and remedies under the Senior
Secured Credit Facility with respect to the events of default noted
above. The Company and Allied have amended the Definitive Agreement
whereby the closing date of the FBO Sale is to occur on or before
May 14, 2004. If the FBO Sale does not close by April 14,
2004, the Company and the Lenders will need to amend the FBO Sale
closing date in the Forebearance Agreement or the Lenders would have
the right to exercise their rights and remedies under the Senior
Secured Credit Facility with respect to the events of default noted
above.




Item 4.Submission of Matters to a Vote of Security Holders

None




Item 5.Other Information

None

19



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Item 6.Exhibits and Exhibit List

(a) Exhibits and Reports onForm 8-K:

ExhibitNo.
    
    Description2.1
    
    Agreement and Plan of Merger adopted January 9, 2001.(17)2.2
    
    Certificate of Merger.(17)2.3
    
    Stock Purchase Agreement Dated as of October 28, 2003. By and Among Allied Capital Corporation, Mercury Air
Centers, Inc. and Mercury Air Group, Inc.(28)3.1
    
    Certificate of Incorporation.(17)3.2
    
    Amended and Restated Bylaws of Mercury Air Group, Inc. adopted December 7, 2002.(25)3.3
    
    Certificate of Designations of Series A 8% Cumulative Convertible Preferred Stock.(27)4.1
    
    Loan Agreement between California Economic Development Financing Authority and Mercury Air Group, Inc.
relating to $19,000,000 California Economic Development Financing Authority Variable Rate Demand Airport
Facilities Revenue Bonds, Series 1998 (Mercury Air Group, Inc. Project) dated as of April 1, 1998.(2)4.2
    
    Securities Purchase Agreement dated September 10, 1999 by and among Mercury Air Group, Inc. and J.H. Whitney
Mezzanine Fund, L.P.(12)4.3
    
    Amendment No. 1 dated as of September 30, 2000 by and between J.H. Whitney Mezzanine, L.P. and Mercury Air
Group, Inc. to the Securities Agreement.(16)4.4
    
    Waiver and Consent Agreement dated as of December 29, 2000 among Mercury Air Group, Inc. and J.H. Whitney
Mezzanine Fund, L.P.(17)4.5
    
    Waiver and Consent Agreement dated as of July 2, 2001 among Mercury Air Group, Inc. and J.H. Whitney
Mezzanine Fund, L.P.(18)4.6
    
    Waiver Agreement dated as of September 25, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine
Fund, L.P.(18)4.7
    
    Amendment No. 2 dated as of September 30, 2001 by and between J.H. Whitney Mezzanine Fund, L.P. and Mercury
Air Group, Inc. to the Securities Purchase Agreement.(19)4.8
    
    Waiver Agreement dated as of November 26, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine,
L.P.(21)4.9
    
    Waiver Agreement dated as of December 21, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine,
L.P.(21)4.10
    
    Waiver Agreement dated as of June 26, 2002 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine, L.P.(24)4.11
    
    Amendment No. 3 to Securities Purchase Agreement by and between Mercury Air Group, Inc. and J.H. Whitney
Mezzanine Fund, L.P. dated as of December 30, 2002.(26)4.12
    
    Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Warrant dated September 10, 1999.(26)4.13
    
    Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Senior Subordinated Promissory Note dated September
10, 1999.(26)4.14
    
    Security Agreement by and between Mercury Air Group, Inc. and each of its subsidiaries hereto as Obligors
and J.H. Whitney Mezzanine Fund, L.P. as the Lenders, dated as of December 30, 2002.(26)4.15
    
    Subordination Agreement among J.H. Whitney Mezzanine Fund, L.P. Foothill Capital Corporation, as Agent and
Mercury Air Group, Inc. and certain of its subsidiaries signatory thereto, dated as of December 30,
2002.(26)4.16
    
    Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group, Inc. and
certain subsidiaries signatory thereto, dated as of December 30, 2002.(26)4.17
    
    First Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air
Group, Inc. and certain of its subsidiaries, dated March 12, 2003.(30)4.18
    
    Second Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air
Group, Inc. and certain of its subsidiaries, dated March 31, 2003.(30)4.19
    
    Third Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air
Group, Inc. and certain of its subsidiaries, dated July 16, 2003.(30)4.20
    
    Fourth Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air
Group, Inc. and certain of its subsidiaries, dated August 1, 2003.(30)4.21
    
    Amendment No. 4 to Securities Purchase Agreement by and between Mercury Air Group, Inc. and Allied Capital
Corporation, as Assignee of J.H. Whitney Mezzanine Fund, L.P. dated as of October 28, 2003(28)4.22
    
    Assignment of Note dated as of October 28, 2003 between Allied Capital Corporation and J.H. Whitney
Mezzanine Fund, L.P.(28)4.23
    
    Second Amended and Restated Allied Capital Corporation 12% Senior Subordinated Promissory Note dated
September 10, 1999(28)4.24
    
    Second Amended and Restated Allied Capital Corporation Warrant dated October 28, 2003(28)4.25
    
    Securities Purchase Agreement dated as of October 28, 2003 by and among J.H. Whitney Mezzanine Fund, L.P.
and J.H.


20



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##### Table of Contents



Whitney Mezzanine Debt Fund, L.P., Allied Capital Corporation and Mercury Air Group, Inc.(28)4.26
    
    Second Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Warrant dated October 28, 2003(28)4.27
    
    Fifth Amendment to Security and Loan Agreement and Forbearance Agreement dated as of December 5, 2003 by and
among Wells Fargo Foothill, Mercury Air Group, Inc. and certain of its subsidiaries.4.28
    
    Amendment to Stock Purchase Agreement by and Among Allied Capital Corporation, Mercury Air Centers, Inc. and
Mercury Air Group, Inc. dated as of December 10, 2003.4.29
    
    Amendment to Stock Purchase Agreement by and Among Allied Capital Corporation, Mercury Air Centers, Inc. and
Mercury Air Group, Inc. dated as of January 14, 2004.10.1
    
    Mercury Air Group, Inc.s 1990 Long-Term Incentive Plan.(4)*10.2
    
    Mercury Air Group, Inc.s 1990 Directors Stock Option Plan.(1)*10.3
    
    Memorandum Dated September 15, 1997 regarding Summary of Officer Life Insurance Policies with Benefits
Payable to Officers or Their Designated Beneficiaries.(8)*10.4
    
    Non-Qualified Stock Option Agreement dated March 21, 1996, by and between Frederick H. Kopko and Mercury Air
Group, Inc.(6)*10.5
    
    Mercury Air Group, Inc.s 1998 Long-Term Incentive Plan.(10)*10.6
    
    Mercury Air Group, Inc.s 1998 Directors Stock Option Plan.(10)*10.7
    
    Revolving Credit and Term Loan Agreement dated as of March 2, 1999 by and among Mercury Air Group, Inc., The
Banks listed on Schedule 1 thereto, and The Fleet National Bank f/k/a BankBoston, N.A., as Agent.(11)10.8
    
    First Amendment to Revolving Credit and Term Loan Agreement dated as of September 10, 1999.(14)10.9
    
    Second Amendment to Revolving Credit and Term Loan Agreement dated as of March 31, 2000.(14)10.10
    
    Third Amendment, Waiver and Consent to Revolving Credit and Term Loan Agreement dated as of August 11,
2000.(14)10.11
    
    The Companys 401(k) Plan consisting of CNA Trust Corporation. Regional Prototype Defined Contribution Plan
and Trust and Adoption Agreement.(14)*10.12
    
    Employment Agreement dated July 31, 2000 between the Company and Dr. Philip J. Fagan.(15)*10.13
    
    Fourth Amendment to Revolving Credit and Term Loan Agreement dated as of November 14, 2000.(16)10.14
    
    Amendment No. 1 to Mercury Air Group, Inc. 1998 Long-Term Incentive Option Plan as of August 22, 2000.(16)*10.15
    
    Amendment No. 1 to Mercury Air Group, Inc. 1998 Directors Stock Option Plan as of August 22, 2000.(16)*10.16
    
    Limited Waiver letter Agreement to Revolving Credit and Term Loan Agreement dated as of September 21,
2001.(18)10.17
    
    Fifth Amendment to Revolving Credit and Term loan Agreement dated as of September 21, 2001.(18)10.18
    
    Limited Consent letter Agreement to Revolving Credit and Term Loan Agreement dated as of September 30,
2001.(19)10.20
    
    Limited waiver and Consent to Revolving Credit and Term Loan Agreement dated as of December 31, 2001.(21)10.21
    
    2002 Management Stock Purchase Plan.(22)10.22
    
    Amended and Restated Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Joseph A.
Czyzyk.(22)*10.23
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Wayne J. Lovett(22)*10.24
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and John Enticknap(22)*10.25
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Mark Coleman(22)*10.26
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Steven S. Antonoff(22)*10.27
    
    Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Robert Schlax(22)*10.28
    
    Limited waiver and Consent to Revolving Credit and Term Loan Agreement dated as of June 27, 2002.(24)10.29
    
    Sale-Leaseback agreement made by and between CFK Realty Partners, LLC and Mercury Air Group, Inc. dated
December 15, 2001.(24)10.30
    
    Amendment to Sale-Leaseback agreement made by and between CFK Realty Partners, LLC and Mercury Air Group,
Inc.(24)10.31
    
    Promissory Note by CFK Partners, LLC in favor of Mercury Air Group, Inc.(24)10.32
    
    Limited Waiver and Consent to Revolving Credit and Term Loan Agreement dated as June 27, 2002.(24)10.33
    
    Amendment No. 1 to Amended and Restated Employment Agreement dated May 22, 2002 between Mercury Air Group,
Inc. and Joseph A. Czyzyk.*(24)10.34
    
    Lease dated December 31, 2001 by and between CFK Realty Partners, LLC. and Mercury Air Group, Inc.(30)10.35
    
    Settlement Agreement dated December 12, 2003 by and among (i) J O Hambro Capital Management Group Limited,
(ii) J O Hambro Capital Management Limited, (iii) American Opportunity Trust PLC, (iv) The Trident North
Atlantic Fund, and (v) Mercury Air Group, Inc.(29)31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Section 906 Certification of Chief Executive Officer32.2
    
    Section 906 Certification of Chief Financial Officer99.1
    
    Partnership Agreement dated as of July 27, 2000 of CFK Partners by and among Philip J. Fagan, M.D.,
Frederick H. Kopko, Jr. and Joseph A. Czyzyk.(13)


21



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##### Table of Contents





---

|*    |  | Denotes managements contract or compensation plan or arrangement.                                                                                                                      
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(1)  |  | Such document was previously filed as Appendix A to the Companys Proxy
Statement for the December 10, 1993 Annual Meeting of Stockholders and is
incorporated herein by reference.     
|    
|(2)  |  | All such documents were previously filed as Exhibits to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and are
incorporated herein by reference.      
|    
|(3)  |  | All such documents were previously filed as Exhibits to the Companys
Registration Statement No. 33-39044 on Form S-2 and are incorporated
herein by reference.                         
|    
|(4)  |  | Such document was previously filed as Appendix A to the Companys Proxy
Statement for the December 2, 1992 Annual Meeting of Stockholders.                                              
|    
|(5)  |  | All such documents were previously filed as Exhibits to the Companys
Registration Statement No. 33-65085 on Form S-1 and are incorporated
herein by reference.                         
|    
|(6)  |  | All such documents were previously filed as Exhibits to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and are
incorporated herein by reference.      
|    
|(7)  |  | All such documents were previously filed as Exhibits to the Companys
Report on Form 8-K filed September 13, 1996 and are incorporated herein by
reference.                             
|    
|(8)  |  | Such document was previously filed as an Exhibit to the Companys Annual
Report on Form 10-K for the year ended June 30, 1997 and is incorporated
herein by reference.                  
|    
|(9)  |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 1998 and are
incorporated herein by reference.           
|    
|(10) |  | Such document was previously filed as Appendix A to the Companys Proxy
Statement for the December 3, 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.      
|    
|(11) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and are
incorporated herein by reference.    
|    
|(12) |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 1999 and are
incorporated herein by reference.           
|    
|(13) |  | Such document was previously filed as an Exhibit to the Companys current
Report on Form 8-K on August 11, 2000 and is incorporated herein by
reference.                                
|    
|(14) |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2000 and is
incorporated herein by reference.            
|    
|(15) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and
are incorporated herein by reference.
|    
|(16) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended December 31, 2000 and
are incorporated herein by reference. 
|    
|(17) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and are
incorporated herein by reference.    
|    
|(18) |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2001 and are
incorporated herein by reference.           

22



---



##### Table of Contents





---

|(19) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and
are incorporated herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(20) |  | Such document was previously filed as Appendix A to the Companys Proxy
Statement for the November 7, 2001 Annual Meeting of Stockholders and is
incorporated herein by reference.      
|    
|(21) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 and
are incorporated herein by reference. 
|    
|(22) |  | Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on June 5, 2002 and is incorporated herein by
reference.                                   
|    
|(23) |  | Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on July 11, 2002 and is incorporated herein by
reference.                                  
|    
|(24) |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2002 and are
incorporated herein by reference.           
|    
|(25) |  | Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on December 7, 2002 and is incorporated herein by
reference.                               
|    
|(26) |  | Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on December 30, 2002 and is incorporated herein by
reference.                              
|    
|(27) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and are
incorporated herein by reference.    
|    
|(28) |  | Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on October 28, 2003 and is incorporated herein by
reference.                               
|    
|(29) |  | Such document was previously filed as an Exhibit to the Companys Current
Report on Form 8-K on December 12, 2003 and is incorporated herein by
reference.                              
|    
|(30) |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2003 and are
incorporated herein by reference.           

23



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##### Table of Contents



(b) Reports on Form 8-K:

A Form 8-K was filed dated October 14, 2003, reporting on Item 5, Other
Events and Regulation FD Disclosure reporting, among other things, that the
Company would delay the filing of its Annual Report on Form 10-K for its fiscal
year ended June 30, 2003. No financial statements were filed with this
report.

A Form 8-K was filed dated October 28, 2003 reporting on Item 5, Other
Events and Regulation FD Disclosure and Item 7, Financial Statements and
Exhibits, as to the Companys restructuring of debt and definitive agreement to
sell the Companys wholly-owned subsidiary, Mercury Air Centers, Inc., to
Allied Capital Corporation. No financial statements were filed with this
report.

A Form 8-K was filed dated November 11, 2003 reporting on Item 5, Other
Events and Regulation FD Disclosure reporting that the Company had informed the
American Stock Exchange (the Exchange) that the Company required additional
time to file its Annual Report on Form 10-K for the fiscal year ended June 30,
2003 with the Securities and Exchange Commission and that the Company also did
not expect to meet the SEC filing deadline of its Quarterly Report on Form 10-Q
for the period ended September 30, 2003 due on November 14, 2003. No financial
statements were filed with this report.

A Form 8-K was filed dated November 25, 2003 reporting on Item 9,
Regulation FD Disclosure, that the American Stock Exchange (the Exchange),
among other things, (1) accepted the Companys plan to regain compliance with
the Exchanges continuing listing standards and (2) that management had
recommended to the Companys Audit Committee of the Board of Directors that it
engage its current independent accountants to conduct and complete a re-audit
of its financial statements for the previous two fiscal years ended June 30,
2002 and 2001. No financial statements were filed with this report.

A Form 8-K was filed dated December 2, 2003 reporting on Item 12,
Disclosure of Results of Operations and Financial Condition, that the Companys
management recommended to its audit committee that it engage its current
independent public accountants to re-audit its financial statements for the
previous two fiscal years ended June 30, 2002 and 2001, and that the Companys
2003 Annual Report on 10-K is expected to include a restated balance sheet and
restated statements of operations and cash flows for the fiscal year ended June
30, 2002. No financial statements were filed with this report.

A Form 8-K was filed dated December 3, 2003 reporting on Item 12,
Disclosure of Results of Operations and Financial Condition, as to its
preliminary results of operations and financial condition for the three-month
period ended September 30, 2003. Unaudited financial statements for such
period were filed with this report.

A Form 8-K was filed dated December 15, 2003 reporting on Item 5, Other
Events and Regulation FD Disclosure, announcing that the Company had entered
into a settlement agreement relating to litigation with J O Hambro Capital
Management Group Limited and certain of its affiliates and private clients
(collectively J O Hambro). No financial statements were filed with this
report.

24



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

MERCURY AIR GROUP, INC.
Registrant/s/ Joseph CzyzykJoseph CzyzykChief Executive Officer/s/ Robert SchlaxRobert SchlaxChief Financial Officer
(Principal Financial Officer)Date: February 17, 2004


25